REUTERS | Murad Sezer

Botas v Tepe: state immunity in the context of arbitration enforcement

On 15 November 2018, in apparent disbelief at the deal which he had helped negotiate, the Secretary of State for Exiting the European Union, Dominic Raab, beat an impressive retreat into political oblivion.

When some of our politicians seem immune to their state responsibilities, what better time is there to consider the application of state immunity in the context of arbitration enforcement?

In the construction sphere, practitioners will frequently find themselves acting for or against entities that are owned by the state. This can pose problems when it comes to enforcement, as was made clear by the facts of Boru Hatlari Ile Petrol Tasima (Botas) v Tepe Insaat Sanayii AS.

Facts

The issue came before the Privy Council in a case involving Botas, a Turkish company specialising in the transportation of crude oil. Botas is owned by the Turkish state and has two subsidiary companies in Jersey: Turkish Petroleum International Ltd (TPIC) and Botas International Ltd (BIL). It was engaged as the main contractor for the construction and operation of the Baku-Tbilisi-Ceyhan (BTC) pipeline. Botas appointed Tepe Insaat Sanayyi AS (Tepe), as sub-contractors for part of the work. Tepe and Botas fell into dispute and Botas terminated the contract.

The dispute was referred to arbitration, and the tribunal found that Botas had repudiated the contract. Botas failed to make payment in accordance with the award. As such, Tepe sought enforcement, and successfully applied for an “arresting order” in Jersey against shares in TPIC and BIL. Botas appealed the arresting order on the grounds that the shares were immune from any process of enforcement under the State Immunity Act 1978 (as extended to Jersey) on the basis that the shares were the property of the Turkish state.

The general rule under English law is that states are immune. This immunity extends both to the adjudication of legal disputes in which states are involved and to interim and final enforcement actions against states and their property, unless certain exceptions apply.

In summary, sections 13 and 14 of the 1978 Act (as modified for Jersey) provide that the property of a state cannot be subject to any process for the enforcement of a judgment or arbitration (section 13(2)) unless the property against which enforcement is being made is being used, or intended to be used for commercial purposes (section 13(4)). Further, such immunity does 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…” (section 14).

It was common ground that Botas was a separate entity within the meaning of section 14.

Issues

There were two substantive legal issues in the case. The first was whether the shares in question were “state property”. Botas’ position was that the use or purpose of the asset alone was determinative of whether it was state property irrespective of whether or not it was, in fact, owned by the state. In this case, the shares were in BIL and TPIC who operated with obviously commercial purposes, but it was said that the shares themselves were not used for commercial purposes. The second issue was whether, if the starting point was whether the asset was state property, contrary to Botas’ primary position, the asset could not be enforced against whenever the state exercised control over it (irrespective of whether it was an asset in respect of which the state had a proprietary interest).

Decision

Botas’ appeal failed, with the Privy Council finding that it could not assert state immunity to prevent enforcement of the award.

Commercial purpose

The Privy Council held that the right approach was to first consider whether the property was owned by the state or a separate entity. To skip this step and assess entitlement to enforce based on whether the assets were used for commercial purposes would undermine the purpose of the statutory provision for separate entities to exist. In other words, it would effectively eliminate any difference between state property and a separate entity’s property.

State control over property

The Privy Council also dismissed this argument, concluding that, the state must have some proprietary interest for immunity to be conferred, otherwise it would be difficult for a creditor to enforce against state property where it was used for a commercial purpose: one of the key purposes of the Act.

Further, the court rejected a wider test of “property” based on international concepts. Enforcement under the Act concerns property recognised as capable of enforcement against under domestic law. The UN Convention on the Jurisdictional Immunities of States and Property (UN Convention) did not assist the Privy Council in the application of the State Immunity Act. As the Privy Council said: first, it post-dates the Act by at least ten years, and second, it is not yet in force. Ultimately, the Privy Council concluded that it was not clearly an authoritative restatement on customary international law.

Accordingly, the Turkish state did not have a proprietary interest over the assets. Therefore, the appeal was dismissed as this was insufficient to trigger immunity.

What are the lessons, then?

Greater clarity on state-backed companies

It is common in international arbitration to encounter companies which have some form of foreign state ownership. In Botas, the Privy Council made it clear that the assets of a state-owned enterprise do not automatically belong to a state. For state-backed companies to benefit from state immunity, the state must hold legal ownership over the assets in question. This will undoubtedly please creditors seeking to enforce awards.

The Privy Council’s decision indicates the importance of a fact-sensitive analysis; when contracting with a state-backed company, it is important to thoroughly assess the relationship between the state and the company, as well as to investigate its assets.

The importance of “separate entities”

Botas offers a warning to those who contract with foreign states. A commercial party has “no recourse” against the assets of a state, if in reality they have contracted with the separate entity. The distinction between “separate entities” and foreign states is clear in law. However, it is less clear in practice. Separate entities may have a close relationship with the state, and be subject to extensive control. Nevertheless, such bodies are not covered by state immunity unless they are acting “in exercise of sovereign authority”.

The relative weakness of the UN Convention

Botas is an emphatic statement that the UN Convention is not yet considered an “authoritative statement” by the English courts. The absence of ratification means that this instrument cannot be taken as a restatement of international law. Assessing claims of state immunity must start with the 1978 Act and the principles of statutory interpretation.

If in doubt, put in a clause

The involvement of state parties brings the risk of state immunity being raised. If in doubt, include a clause waiving the state’s immunity from suit and enforcement. This should extend to the property of the state and apply to both interim measures and final awards. An express waiver ensures that a commercial party does not waste time on a costly arbitration, only to find out that it cannot be enforced.

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this post on: