Managing Sovereign Immunity Risk on a Transaction – What Commercial Parties Need to Know

Why does this matter?

Put simply, if a state or a state entity is immune from the jurisdiction of a foreign court¹ then, in the event of a default or other dispute, a commercial counterparty may be unable to secure any legal recourse against it, and, in particular, it may not be able to obtain a judgment against the state or state entity.  Further, even if a commercial party can secure a judgment or arbitral award against a state or state entity, it may be unable to enforce it against the state's assets because of immunity, potentially rendering any judgment or award pointless. A state's willingness to honour its commitments voluntarily may change as its economic circumstances or political leadership evolve.

In this update we:

• outline key risks facing commercial parties when transacting with a state or state entity and how best to mitigate those risks; and
• briefly consider the position of international organisations, such as multilateral development banks, many of whom have immunities and privileges under their constitutional documents and establishing treaties, as well as under domestic laws.

Another risk factor is expropriation, but we do not cover this topic in this bulletin.

Threshold question: which immunity laws apply?

National courts generally apply their own national immunity rules. 

Some courts may consider the provisions of the UN Convention on the Jurisdictional Immunities of States and their Property (2004) but this treaty is not yet in force.

The issue of a foreign sovereign's immunity may arise in a wide variety of disputes, including claims arising under contract as well as tort. In this bulletin we consider the position under UK² law as these rules would be applied by the English courts to disputes involving a foreign sovereign.  Such a situation may arise where there is an English jurisdiction clause in a contract where one party is a state or where a commercial party seeks to enforce its judgment/award against a foreign state's assets in the UK.

We also consider the position under US law³, as applied by the US federal and state courts. 

Sovereign immunity – emergence of the restrictive doctrine

In the nineteenth century, states enjoyed absolute immunity before foreign courts. Even where a dispute arose out of a commercial activity or relationship, a claimant/plaintiff could only bring a state before a national foreign court if the state consented to this (which, of course, rarely happened).  This approach reflected the basic principle of international law that all states are equal.⁴ Over the course of the twentieth century, due to the increased engagement of states in commercial activities, the doctrine of restrictive immunity emerged.  This approach was reflected in legislation and treaties: the European Convention on State Immunity (1972), the UK State Immunity Act (1978), the US Foreign Sovereign Immunities Act (1976), and the UN Convention (2004) referred to above.

Today, in most developed legal systems, a state's immunity is not absolute, but subject to certain important exceptions and limitations.  The scope and applicability of those exceptions and limitations to immunity are often complex and regularly litigated, often to the highest level. Interestingly, the PRC⁵ and Hong Kong have recently introduced a law revising the previous practice of affording absolute immunity to foreign states.

Immunity in the UK – overview

The immunity of foreign states and entities exercising sovereign authority under English law is principally dealt with by the UK State Immunity Act 1978 ('SIA').  Unless an exception applies, the SIA affords broad immunity to foreign states.

As a preliminary point, commercial parties should keep in mind that English law distinguishes between immunity from suit (adjudicative jurisdiction) and immunity from enforcement/ execution.  Importantly, any waiver of immunity from the court's adjudicative jurisdiction does not constitute a waiver of immunity from the court's enforcement immunity (i.e. immunity from execution).

In commercial transactions, three exceptions to immunity are commonly considered:

1. submission to the jurisdiction;
2. commercial transactions; and
3. proceedings related to arbitration.

There may be other applicable exceptions depending on the nature of the transaction e.g. there are specific exceptions relating to shipping or patents disputes but these matters are outside the scope of this bulletin.

We consider the three core exceptions briefly below.  References below are to sections in the SIA.

Key exceptions to immunity

1. Submission to the jurisdiction of the courts of the United Kingdom (s2(1))
   This is usually done by a state agreeing to submit to the jurisdiction of the English courts in a commercial contract (a choice of English law alone is insufficient to satisfy this test (s2(2)).
   
   
2. Where the dispute relates to a commercial transaction (s3(1)(a))
   The SIA defines 'commercial transaction' widely and includes (a) any contract for the supply of goods or services; (b) any loan or other transaction for the provision of finance and any guarantee or indemnity in respect of any such transaction or of any other financial obligation; and (c) any other transaction or activity (whether of a commercial, industrial, financial, professional or other similar character) (s3(3)). There are exceptions to the exception.

   Notwithstanding the helpful scope of this definition, even where a transaction on the face of it falls squarely within the exception, it remains prudent for commercial parties to seek to obtain an express waiver of immunity from a state counterparty.
   
   

3. Where proceedings relate to an arbitration (s9(1))
   The concept of immunity is not directly engaged in arbitration proceedings because these are private proceedings not involving the exercise of the court's jurisdiction.  However, immunity issues can arise if a party wishes to seek the assistance of the supervisory courts in relation to an arbitration A state can reserve its immunities and effectively disapply this exception (s9(2)).

Immunity in the US  – overview

The US Foreign Sovereign Immunities Act 1976 (FSIA) defines the rules on the immunity of foreign states, and their agencies and instrumentalities, before the US courts.  The FSIA has been amended several times, including provisions for exceptions to immunity for damages resulting from certain state-sponsored acts of terror⁶. The FSIA does not cover the immunity of individual state actors (e.g. diplomatic immunity), which remain governed by US common law.

Key exceptions to immunity under US law

A foreign state, including its agencies and instrumentalities, is presumed immune from the jurisdiction of US courts and cannot be forced to submit to the jurisdiction of those courts, unless a specific exception applies.⁷ These key exceptions include:

1. Waiver (28 U.S.C. §§ 1605(a)(1)): A waiver should be a clear and unambiguous manifestation of a sovereign's intent to waive its immunity.Many commercial contracts will contain such a waiver. Ideally, commercial parties will secure a waiver by a sovereign counterpart of its immunity from suit and execution (enforcement).
2. Commercial activity (28 U.S.C. §§ 1605(a)(2)): Where an action is based on 'a commercial activity carried on in the United States by the foreign State; or upon an act performed in the United States in connection with a commercial activity of the foreign State elsewhere; or upon an act outside the territory of the United States in connection with a commercial activity of the foreign State elsewhere and that act causes a direct effect in the United States'. This important exception to a foreign state's immunity requires a US nexus.
   Again, although a transaction may be manifestly commercial in nature, it is prudent for commercial parties to include a waiver in a contract with a sovereign (see 1).
3. Mandating arbitration (28 U.S.C. §§ 1605(a)(6)): Where an action is taken to require a foreign state to arbitrate pursuant to an agreement to which it is a party this constitutes an exception to immunity, provided certain conditions are satisfied. These conditions include if the arbitration is to take place in the United States, the agreement or the award is governed by a treaty in force in the United States dealing with recognition and enforcement of awards⁸ or the action in question relates to commercial activity in the United States.
4. Non-commercial torts 28 U.S.C. §§ 1605(a)(5)): This is a more unusual exception to immunity and, subject to certain exceptions, relates to a limited group of torts where damages are sought for 'personal injury or death, or damage to or loss of property' where the tortious acts of the foreign state occur within the US.

Who can claim state immunity under the UK SIA?

Immunities conferred by the SIA apply to any foreign state including '(a) the sovereign or other head of that State in his public capacity; (b) the government of that State; and (c) any department of that government'.  However, they do not apply to 'any entity (hereafter referred to as a 'separate entity') which is distinct from the executive organs of the government of the State and capable of suing or being sued' (s14(1)).

A separate entity is only immune if it satisfies a twofold test namely: '(a) the proceedings relate to anything done by it in the exercise of sovereign authority; and (b) the circumstances are such that a State …. would have been so immune'. (s14(2)).

In practice, this can be a difficult test to analyse and determine.  It generally involves an analysis of legal and factual issues and may require a detailed examination of the separate entity's status under local law as well as its activities.

Who can claim immunity under US FSIA?

The FSIA provides that a 'foreign state' includes a political subdivision of a state or an agency or instrumentality of a foreign state⁹.

Even if an entity has a separate legal personality from the state, it may be found to be part of the state (rather than an agent or instrumentality) if it is closely linked to the state.  For example, the armed forces of a state have been found to be part of the state (despite having separate legal personality) because their functions, which included the power to wage war, were 'necessary concomitants of sovereignty'.¹⁰.

To sustain a claim for immunity, an instrumentality or agency must have (i) separate legal personality, (ii) a close link with the foreign state, and (iii) not be incorporated in the US or a third state.

The position regarding the immunity of foreign officials which generally extends to heads of state and to individuals acting on behalf of a foreign government during their time in office is complicated (and not considered in this bulletin).

Enforcement against sovereign assets in the UK

The SIA provides wide-ranging immunities with respect to a sovereign's assets. 

Save where a state has provided written consent (waiver), the English court will not grant an injunction against a foreign state, nor will it make an order for specific performance or for the recovery of land or other property of that state (s13(2)(a)).  In 2023, the Court of Appeal confirmed a state's immunity from injunctive relief and specific performance, upholding a decision not to grant a final anti-suit injunction against Venezuela from pursuing proceedings (alleged to be in breach of a London arbitration clause) in Venezuela¹¹.

The SIA also provides immunity from enforcement action against a state's property (s13(2)(b)).  However, there is an exception to a state's enforcement immunity, namely, where property is "for the time being in use or intended for use for commercial purposes" (s13(4)).  Although this can be a helpful exception for commercial parties, in practice, complexities can arise¹².

The SIA confers particular protection from enforcement to central banks. It provides that a sovereign's enforcement immunity shall apply to a central bank's assets even though it may be a separate entity from the state (s14(4)).  It also provides a statutory presumption that central bank assets are not in use for commercial purposes, meaning the commercial purposes exception (outlined above) does not apply to central bank assets (s14(4)).

Enforcement against sovereign assets in the United States

The FSIA sets out certain exceptions to the immunity from execution of a foreign state's property.  In summary, to obtain an attachment against a foreign state's assets prior to judgment, a state must have waived its immunity in this regard and the attachment must be for the purposes of securing the satisfaction of a judgment against the state (28 U.S.C. §§ 1610(d)).

The position is more liberal for post-judgment execution against a state's property. This is permitted where there is a waiver or where that state property is used in the United States for the commercial activity upon which the claim is based (28 U.S.C. 1610(a)).

An agency or instrumentality of a foreign state engaged in commercial activity in the United States may be subject to attachment in aid of execution or to the execution of a judgment of the US court provided that it has waived its immunity from execution or the matter relates to action where it cannot claim jurisdictional immunity.  Unlike states, its property can be attached or executed against even if it is not linked to commercial activity in dispute (Compare 28 U.S.C. §§ 1610(a)(2) with 28 U.S.C. §§ 1610(b)(2)).

The position regarding central bank property is that assets of a central bank or monetary authority (terms that are not defined in the FSIA) are immune from execution if they are held for the central bank or monetary authorities own account.  28 U.S.C. §§ 161(b).  If an account is in the name of the central bank or monetary authority, it is presumed immune, although that presumption can be rebutted with evidence that the assets are not used for normal central bank functions.  The foreign sovereign also may waive immunity, but must do so expressly, referring specifically to the central bank or to particular funds.

Service

The UK SIA requires a claim form to be served on a state 'by being transmitted through the Foreign and Commonwealth Office to the Ministry of Foreign Affairs of the State'. (s12(1)).  An exception to this approach is where the state has appointed a process agent (s12(6)).

The US FSIA sets out rules relating to the service of US proceedings on a state.¹³ Different rules on service of process apply to instrumentalities and agencies to those applicable to foreign states.

International organisations

IOs are typically formed by treaty or other form of intergovernmental arrangement.  IOs, especially multilateral development banks, are increasingly seen on commercial transactions.  For example, they may provide guarantees in respect of a sovereign's borrowing or themselves finance or co-finance projects.  They may also be borrowers of loans or issuers of bonds for fundraising purposes.

IOs may enjoy immunities and privileges pursuant to their establishing treaties and/or their constitutional documents.  However, from an English law perspective at least, the critical issue is whether or not there is an applicable statutory instrument or order in council issued under the International Organisations Act 1968 ('IOA') in respect of that IO.  The statutory instruments/orders in council for different IOs vary and careful attention needs to be given to any immunities and privileges conferred on the IO and any applicable exceptions.  

From a US law perspective, the relevant legislation is the International Organizations Immunities Act 1945 ('IOIA'), which provides that 'international organizations' designated by the US president (or the statute itself) 'shall enjoy the same immunity from suit and every form of judicial process as is enjoyed by foreign governments'. In 2019, in a landmark decision¹⁴, the United States Supreme Court rejected an argument that IOs enjoyed the immunities afforded to sovereigns at the time of enactment (i.e. of an absolute nature) and, rather, found that international organizations had the 'same immunity as foreign governments have today under the FSIA'.  In other words, restrictive immunity applies¹⁵.

Managing immunity risk – the basics

Sovereign involvement on any deal may of course be readily apparent.  However, this is not always the case and commercial parties should always seek to assess whether any of its counterparties might seek to claim immunity.

When contracting with a sovereign, there may be intense negotiation on the disputes clause and waiver clause (or whether there should be one at all).

• Include a separate jurisdiction (right to sue) waiver and consent. Even if you believe that a commercial activity or other exception would likely apply, these exceptions can be uncertain and therefore the clarify of a waiver can be important. Further, if the contract calls for arbitration, having a waiver clarifying that courts may compel compliance with the arbitration obligation is also valuable.
• Include a separate and specific enforcement waiver/consent. Commercial parties should keep in mind that a submission to the jurisdiction of a particular court in a contract does not generally constitute a waiver by the state of immunity from enforcement against its assets. For this reason, commercial parties often seek an express consent to enforcement action and also seek to list other forms of relief they can seek from the courts. In addition to a general waiver, consider whether there are specific assets against which you may wish to enforce any judgment.
• Given that service through official channels can take time and be onerous, it is prudent for commercial parties to ask a state to specify a process agent and an agreed means of service on that agent (e.g. by regular email) in any contractual documentation.
• In the case of IOs, careful attention should be given to any statutory and treaty-based immunities (and exceptions thereto).
• The capacity and authority of the state, state entity or IO to enter into any transaction can also give rise to complexities on deals¹⁶. Local law advice may be required.
• It is vital to keep both a local and an international perspective. Immunity is dealt with by national courts according to the immunity rules applied by that court. While there are international treaties on immunities, it is important to consider the specific rules in the jurisdiction in which you are likely to be initiating action and then enforce any judgment or award.

How can Mayer Brown help?

Commercial entities: We have an experienced international team of sovereign experts, who regularly help commercial clients negotiate appropriate dispute clauses and waiver provisions on transactions.  We pride ourselves on working closely with deal teams, providing expert input that is highly attuned to market practice.  We also represent commercial parties in litigation and arbitration against states and state-owned entities. We can assist in bringing such actions and in enforcing judgements/arbitral awards against sovereigns, often even if a dispute clause is absent or far from ideal.

Sovereigns: We also have an impressive track record acting for states, state-owned entities and international organisations on transactions, helping them negotiate disputes clauses and, depending on the deal, preserving their immunities and privileges. We work hard to ensure the deal is documented appropriately.  We also act for states, state-owned entities and international organisations in litigation and arbitration, as well as working with states in the enforcement context to resist attempts to enforce against their assets.