Which assets?

Under the doctrine of sovereign immunity, a State cannot be subject to the jurisdiction of the courts of another State (jurisdictional immunity) and a State’s assets are generally immune from execution by courts of another State (execution immunity). In certain jurisdictions (e.g. China, Hong Kong), this immunity is absolute – albeit, at least in case of China, this is set to change soon.^[1] Most other jurisdictions follow the restrictive immunity approach, which allows for two key exceptions: (i) when a State waives its immunity; or (ii) when the assets against which execution is sought are used for a commercial purpose.

Under the first exception (waiver), there are two key requirements:

1. First, a waiver must ideally be express and in writing. However, this is not a complete procedural bar as several jurisdictions recognise an implied waiver of jurisdictional (but not execution) immunity based on the State’s consent to an arbitration agreement or a jurisdiction clause.
2. Second, waivers for jurisdictional and execution immunity must be separate, and the latter must specify the assets for which immunity is waived. In the absence of a specific waiver, courts may decline to attach such assets. For instance, in ThaiLao Lignite v. Government of the Lao People’s Democratic Republic, the Lao government expressly waived immunity to attachment and execution in its arbitration agreement, but did not designate specific assets for attachment. When the award holder sought to attach the Lao Central Bank’s assets, the English High Court found that the immunity over execution of the Bank’s assets had not been waived.^[2]

Under the second exception, sovereign immunity does not extend to State assets being used for a commercial purpose. What constitutes ‘commercial’ is defined by municipal law and varies across jurisdictions. However, it is generally determined by considering the current use of the asset (not its source or historical use). Further, while a profit-making motive is helpful to show commerciality, its absence is not dispositive. Applying these standards, activities such as sale and purchase of goods, real estate transactions, repayment of loans, corporate investments and employment contracts have been considered ‘commercial’, and funds used in those activities would not be immune. By contrast, assets used for governmental purposes, e.g., property used for diplomatic/ consular purposes, distributions from international organizations such the World Bank and central bank reserves, have been considered ‘sovereign’ assets and, accordingly, are immune from execution.

Whose assets?

The next step is to identify whose assets can be attached. The pool of commercial assets directly owned by States is limited as States seldom engage in commercial activities in their own name. Rather, they do so through State-Owned Entities (SOEs), incorporated as independent entities.

In order to reach assets of the SOEs located abroad, award holders must (i) pierce the corporate veil between the State and the SOE; and (ii) identify commercial assets owned by the SOE that are not immune.

The legal test to pierce corporate veil is again a question of municipal law and varies across jurisdictions. Typically, a party must demonstrate either or both of the following tests: first, that the SOE is an alter ego of the State (which entails a high threshold); and second, that the SOE was used as an instrument to hide fraud, abuse rights or violate public order.

Applying this test, the US Court of Appeals allowed an award holder to attach assets of a Venezuelan stateowned oil company on the basis that the company was an alter ego of the State.^[3] By contrast, the Quebec Court of Appeal recently vacated an attachment over funds of Air India (a State-owned airline) lying with the International Air Transport Association, which had been previously attached towards enforcement of an award against India.^[4] Although the alterego test was met, the Court did not find any evidence that Air India was used as an instrument to perpetuate fraud, abuse rights or violate public order, which was a requirement under Canadian law.

Locating and attaching assets

Given the challenges with attaching State assets, it is important for award holders to identify commercial assets of the State as early as possible. A preliminary step is to engage asset tracing agencies which can assist in locating commercial assets of the State (using the current and historical use patterns), as well as their liquidity and location, for targeted enforcement efforts.

Similarly, judicial discovery tools are critical to any enforcement strategy in identifying and attaching assets. For example, an asset tracing report may lack details of which specific State entity owns the asset – without which it is difficult to apply for an order of attachment. Further, assets tracers usually do not disclose sources and therefore, the information collected by an asset tracer may not be admissible as evidence before a court. By contrast, judicial discovery tools allow award-holders to obtain updated and actionable information about assets located within and outside that jurisdiction which can then be used to seek immediate attachment.

While the scope of discovery tools may vary across jurisdictions, they will typically allow the award-holder to: (i) compel disclosure of information about the assets and their location from States and third parties (e.g., through ex-parte Norwich Pharmacal orders, if fraud is suspected); and (ii) seek post-award and pre-award attachment over such assets. Although less common, preaward attachment is available in several jurisdictions if the applicant can show a risk of dissipation of assets.

Further, if State assets are available with third parties, turnover or garnishee orders can be used to compel such parties to deposit these assets with the court.

Key takeaways

While enforcement against sovereign debtors has its unique challenges, parties can benefit by adopting certain best practices

At the outset, at the stage of contracting, parties should negotiate waivers of jurisdictional and sovereign immunity in their contracts with States. As discussed above, these waivers should ideally be express, separate for jurisdictional and execution immunity, and specify assets for which enforcement immunity is waived. For this, it may be necessary to conduct preliminary due diligence on sovereign assets. Parties should also consider structuring their investments to take advantage of protections under the bilateral investment treaties with the host States – which can give them a remedy under the treaty, in parallel to any contractual remedies.

Once a dispute arises and before the award is rendered, parties should consider undertaking extensive due diligence on sovereign assets. If this exercise is delayed until after the award is issued, there is a risk that the State may dissipate assets or shift commercial assets to other governmental purposes to protect them from attachment before the award is rendered. Early due diligence will also help gather evidence for seeking immediate attachment once the award is issued, as well as tracking dissipation of assets in case the State takes steps to dissipate before the award is issued. Any evidence of dissipation could in turn prove vital in attachment proceedings.

Once the award is issued, parties must take immediate steps towards attachment of assets. The choice of enforcement jurisdiction should be determined after considering the location of assets as well as the relevant municipal law (including local rules on service, discovery, attachment and sovereign immunity). Even if the value of the attached assets is not sufficient to fully satisfy the award, the subsequent publicity and political pressure may create sufficient pressure to compel States to negotiate a favourable settlement. This can be further incentivised by asserting diplomatic pressure through the party’s home State. Lastly, parties may also consider monetising the award through alternative means, such as through sale of rights in the award or by obtaining funding for enforcement proceedings.

Footnote

[1] On 1 September 2023, China adopted the Foreign State Immunity Law, which states that from 1 January 2024, foreign States can be sued in Chinese courts in certain cases

[2] Thai-Lao Lignite v. Government of the Lao People’s Democratic Republic, [2013] EWHC 2466 (Comm).

[3] Crystallex Int’l Corp. v. Bolivarian Republic of Venezuela, 932 F.3d 126, 149–151 (3d Cir. 2019), cert. denied, 140 S. Ct. 2762 (2020).

[4] Air India, Ltd v. C. CC/Devas (Mauritius) Ltd., 2022 QCCA 1264; We understand that this judgment has been suspended pending an appeal to the Supreme Court of Canada, see Air India Ltd. v. C. CC/Devas (Mauritius) Ltd., 2022 QCCA 1439.

This article was originally published in ThoughtLeaders4 Disputes on 30 November 2023 Co-written by: Rishab Gupta, Of Counsel; Shreya Jain, Principal Associate. Click here for original article

Read Less-