• UK Supreme Court: Sovereign Immunity Judgment
  • August 4, 2011
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • Introduction

    A landmark decision of the Supreme Court (NML Capital Limited (Appellant) v Republic of Argentina (Respondent) [2011] UKSC 31) confirms that states cannot claim immunity when facing enforcement in England of foreign adverse judgments in commercial cases.

    It has long been established that foreign states cannot claim immunity from suit in the UK in proceedings arising from commercial transactions (such as raising finance on the international bond markets) and other activities engaged in otherwise than in the exercise of their sovereign authority. A recent Supreme Court decision has clarified a number of points of English procedural law concerning recognition and enforcement in England of foreign judgments against sovereign states.



    Practical implications

    The decision confirmed that overseas judgments against sovereign states (except for the judgments against sovereign states in their own courts) can be enforced in England under the Civil Jurisdiction and Judgments Act 1982 (the 1982 Act) similar to any other judgment, as long as they relate to a matter in which the sovereign state would not be able to claim state immunity pursuant to the State Immunity Act 1978 (the 1978 Act). In practical terms, this means most importantly in any commercial matters including raising finance.

    The decision will be welcomed by the international business community and is in line with the trend of restrictive approach to sovereign immunity necessitated by the need for countries to raise finance on the financial markets.

    One notable exception are foreign judgments rendered by the courts against their own states. Such judgments are expressly excluded from the scope of the 1982 Act. In light of the Court’s conclusions on the issue of interpretation of section 3 of the 1978 Act (discussed in more detail below), such judgments are unlikely to be recognised in the UK unless there is an express submission to the jurisdiction of the English courts for the purposes of enforcement. In practice, the investors will typically not opt to sue states in their own courts for a variety of reasons, and the present position under English law should be yet another factor to be taken into account.

    The decision gave effect to a broadly drafted clause in a sovereign bond (governed by New York law) which contained an express submission to jurisdiction of any competent court for the purposes of enforcement and waived any claims to immunity in that context. Given the widespread use of such clauses in international loan agreements and bond issues, the decision can serve as useful guidance when drafting and negotiating such clauses.



    Background and facts

    The decision relates to sovereign bonds issued by the Republic of Argentina (Argentina) in 2000 pursuant to a Fiscal Agency Agreement (FAA) with Bankers Trust Company. The terms governing the bonds were contained in both the FAA and the bonds themselves. Both were expressly governed by New York law. The FAA contained an express submission to the jurisdiction of New York courts. The bonds contained a clause by which Argentina agreed that a final judgment on the bonds could be enforced in any court which Argentina is subject to and  waived any immunity  for that purpose (the Submission Clause).

    In 2001 Argentina declared a moratorium on all its debt and underwent a large scale sovereign debt restructuring with the assistance of the IMF and the World Bank. Between June 2001 and September 2003 NML’s affiliates purchased (at a significant discount) bonds issued pursuant to the FAA for a total principal value of US$172,153,000. Instead of taking part in the restructuring, NML sought a payment of the principal amount of the bonds and outstanding interest in a Federal Court in New York and on 11 May 2006 obtained a summary judgment for the total amount of US$284,184,632.30. 

    In December 2006 NML sought to issue proceedings in the High Court to enforce the New York judgment in England. As there is no treaty between the United States and Great Britain for the mutual recognition and enforcement of judgments, a judgment creditor of a United States judgment must bring an action on the US judgment in the English courts. If successful, the resulting judgment can be then enforced in England.

    To initiate English court proceedings against a foreign sovereign state it is necessary to obtain the permission of the court to serve the claim out of the jurisdiction. The permission was granted and Argentina subsequently sought to set it aside. It failed at first instance. The Court of Appeal reversed the first instance decision and set aside the permission to serve Argentina with NML’s claim. At various stages of the proceedings NML relied on a number of arguments why Argentina was not entitled to state immunity. Three of those arguments were subject to the appeal to the Supreme Court.     



    Key issues

    The Supreme Court considered the following issues which were raised by the appeal:

    1. Whether in light of the answers to questions below, Argentina was entitled to claim state immunity in the enforcement proceedings.
    2. Whether the proceedings for recognition and enforcement of the New York court’s judgment were proceedings “relating to a commercial transaction” within the meaning of section 3 of the 1978 Act.
    3. Whether Argentina was prevented from claiming state immunity by section 31 of the 1982 Act.
    4. Whether the Submission and Waiver Clause in the bonds contained a valid submission to the jurisdiction of English courts within the meaning of section 2 of the 1978 Act.


    Decision

    1. Argentina was not entitled to claim state immunity

    The Supreme Court unanimously held that Argentina was not entitled to claim state immunity in the enforcement proceedings and allowed the appeal.

    2. Section 3 of the 1978 Act does not extend to enforcement of foreign judgments

    The 1978 Act contains the rules governing the circumstances in which foreign sovereign states can claim immunity from suit and execution before English courts. It was introduced to give effect to the European Convention on State Immunity, but the scope of the legislation was widened to make provision in relation to state immunity having effect on all states, not only those party to the Convention.

    Section 3(1) of the 1978 Act provides: “A state is not immune as respects proceedings relating to  - (a) a commercial transaction entered into by the state”. Section 3(c)(b) defines “commercial transaction” as including “any loan or other transaction for the provision of finance...”.

    The issue before the Supreme Court was whether the proceedings to enforce a foreign judgment could be considered as “proceedings relating to a commercial transaction” within the meaning of section 3, where it was common ground that the foreign judgment itself clearly resulted from such proceedings. This question was considered and answered in the negative (in one case obiter) in two previous authorities (the High Court decision AIC Ltd v Federal Government of Nigeria [2003] EWHC 1357 (QB) and the Court of Appeal decision Svenska Petroleum Exploration AB v Government of the Republic of Lithuania (No 2) [2005] EWHC 2437 (Comm)).

    The Supreme Court was divided on this issue. By a majority three to two the Supreme Court decided that section 3 of the 1978 Act did not extend to enforcement of foreign judgments. In similar vein to the previous authorities, the majority was reluctant to give section 3 a wide meaning. The parts of the judgment discussing issue (1) include some important observations of general interest regarding interpretation of statutes.

    3. Section 31 of the 1982 Act provides an alternative scheme for restricting state immunity in the case of foreign judgments

    The main purpose of the 1982 Act was to give effect to the Brussels Convention of 1968 which regulates jurisdiction and enforcement of judgments within the European Union. Section 31 of the 1982 Act provides: “(1) A judgment given by a court of an overseas country against a state other than the United Kingdom or the state to which that court belongs shall be recognised and enforced in the United Kingdom if and only if... (a) it would be so recognised and enforced if it had not been given against a state; and (b) that court would have had jurisdiction in the matter if it had applied rules corresponding to those applicable to such matters in the United Kingdom in accordance with sections 2 to 11 of the State Immunity Act 1978.” (emphasis added)

    The question before the Supreme Court was whether (as held by the Court of Appeal) this provision represented an additional requirement to the exemptions from immunity under the 1978 Act where an action was brought to enforce a foreign judgment. In other words, one would first have to show that section 31 of the 1982 Act was satisfied and then that the proceedings fell within the scope of the exemptions under the 1978 Act.

    This argument was rejected by the Supreme Court which unanimously decided that far from providing an additional hurdle, section 31 of the 1982 Act both reflects, and in part replaces, the exemptions from immunity contained in the 1978 Act. State immunity could not be raised as a bar to the recognition and enforcement of a foreign judgment if, under the principles of international law recognised in the UK, the state against whom the judgment was given was not entitled to immunity in respect of the claim.

    4. The Submission Clause amounted to a valid submission to the jurisdiction of English courts and waiver of immunity

    The issue before the Supreme Court was whether, on the true construction of the relevant provisions of the Submission Clause contained in the bonds, Argentina submitted to the jurisdiction of the English courts. The Clause was governed by New York law, which applies a narrow construction in favour of the state. It provided as follows:

    "...... The republic has in the fiscal agency agreement irrevocably submitted to the jurisdiction of any New York state or federal court sitting in the Borough of Manhattan ... and the courts of the republic of  Argentina  ('the specified courts') over any suit, action or proceeding against it or its properties, assets or revenues with respect to the securities of this series or the fiscal agency agreement (a 'related proceeding') ... The republic has in the fiscal agency agreement waived any objection to related proceedings in such courts whether on grounds of venue, residence or domicile or on the ground that the related proceedings have been brought in an inconvenient forum. The republic agrees that a final non-appealable judgment in any such related proceeding ('the related judgment') shall be conclusive and binding upon it and may be enforced in any specified court or in any other courts to the jurisdiction of which the republic is or may be subject (the 'other courts') by a suit upon such judgment."

    "To the extent that the republic or any of its revenues, assets or properties shall be entitled, in any jurisdiction in which any specified court is located, in which any related proceeding may at any time be brought against it or any of its revenues, assets or properties, or in any jurisdiction in which any specified court or other court is located in which any suit, action or proceeding may at any time be brought solely for the purpose of enforcing or executing any related judgment, to any immunity from suit, from the jurisdiction of any such court, from set-off, from attachment prior to judgment, from attachment in aid of execution of judgment, from execution of a judgment or from any other legal or judicial process or remedy, and to the extent that in any such jurisdiction there shall be attributed such an immunity, the republic has hereby irrevocably agreed not to claim and has irrevocably waived such immunity to the fullest extent permitted by the laws of such jurisdiction ... provided further that such agreement and waiver, in so far as it relates to any jurisdiction other than a jurisdiction in which a specified court is located, is given solely for the purpose of enabling the fiscal agent or a holder of securities of this series to enforce or execute a related judgment."

    The Supreme Court found that jointly and severally the two paragraphs of the Submission Clause amounted to an agreement on the part of Argentina to submit to the jurisdiction of English (and most likely other courts) for the purposes of enforcing a judgment on the bonds, and that the Submission Clause contained a clear waiver of immunity.