REUTERS | Rupak De Chowdhuri

Confirmed: foreign act of state doctrine applies in English arbitrations

Reliance Industries Ltd v Union of India concerned nine challenges brought under the English Arbitration Act 1996 (AA 1996) to an arbitral award, issued by a London seated UNCITRAL panel, in a dispute between two energy companies and the government of India over contracts for the exploitation of oil and gas. The claimants, who had roundly lost in the arbitration, relied on sections 67, 68 and 69 of the AA 1996, alleging variously that the tribunal had exceeded its jurisdiction, failed to address all issues and erred in law with regard to its approach to estoppel.

Dismissing all but one of the claimants’ complaints, Popplewell J underscored the difficult road to challenging arbitral awards under the AA 1996. While the judgment focused mostly on construing the award in light of the challenges, it is notable as the first decision to find that the foreign act of state doctrine applies to cases being heard by arbitral tribunals.

The foreign act of state doctrine

A relative of the doctrine of state immunity, the foreign act of state doctrine is a long-standing principle in Anglo-American jurisprudence which holds that a court “will not inquire into the legality of acts done by a foreign government against its own subjects in respect of property situated in its own territory” (per Russell LJ in Princess Paley Olga v Weisz).

The doctrine was given a fulsome treatment recently by the Supreme Court in in Belhaj v Straw. Lord Neuberger summarised that:

“… the Doctrine amounts to this, that the courts of the United Kingdom will not readily adjudicate upon the lawfulness or validity of sovereign acts of foreign states, and it applies to claims which, while not made against the foreign state concerned, involve an allegation that a foreign state has acted unlawfully.”

He found the doctrine to comprise up to four rules, including that the courts will not question the effect of a foreign state’s laws in relation to acts affecting property within the territory of that state (rule one), and that the courts will not question the effect of an act of a foreign state’s executive in relation to acts which within the territory of that state, at least insofar as it relates to property (rule two).

Challenge 6

The sixth challenge in Reliance Industries concerned withholdings by two government-nominated purchasers of portions of the payment for gas and oil supplied by the claimant. These parties had withheld the monies on the basis that they had been directed to do so by notices made pursuant to an office memorandum issued by the Indian Ministry of Petroleum and Natural Gas (the OM).

The claimants argued before the tribunal that the government was the principal debtor for the sales price for oil and gas supplied to these nominees, and that they were thus entitled to payment by the government. The government argued that the OM was an executive order passed as a legislative act, that the sovereign powers of the government were not curtailed by its agreement with the claimants and that the withholding was required by the law applicable in the territory and therefore beyond the scope of the tribunal. The tribunal agreed, finding that its jurisdiction was limited to questions under the relevant contract and did not extend to determining whether the government may expropriate substantive rights legislatively.

Before the High Court, the claimants argued inter alia that the foreign act of state principles of non-justiciability did not apply to arbitration. Popplewell J began by considering whether the matter would be justiciable if brought before a court, concluding that it fell squarely within Lord Neuberger’s first rule, as it is a “head on challenge to the validity of a sovereign legislative act of a foreign state in relation to property within its own territory”. He then turned to the question of whether the claim would nonetheless be arbitrable.

The claimants argued that the basis for the doctrine was that one sovereign state should not sit in judgment on the acts of another and that, unlike a court, an arbitral tribunal was not an organ of a sovereign state and its determination of the validity of the conduct of a sovereign party would thus not entail one sovereign calling into question the conduct of another, and that the rationale for the foreign act of state doctrine therefore does not apply to arbitration. The claimants relied on Yukos Capital v OJSC Rosneft Oil Co, wherein Rix LJ cited three US Supreme Court authorities from between 1897 and 1918 for historical reasons. Dismissing this argument, Popplewell J found (at paragraph 111):

“The scope of the various aspects of the doctrine and their juridical basis were comprehensively considered by the Supreme Court in Belhaj v Straw, and it is to that decision that I must turn for guidance. Only Lord Sumption (with whom Lord Hughes agreed) treated comity as an underlying rationale for all aspects of the doctrine, by virtue of the English courts being an organ of the United Kingdom. The other judgments suggest that whilst some aspects of the foreign act of state doctrine have as their basis the exercise of “judicial self-restraint”, those are not the aspects of the doctrine which are relevant to the current issue. Here I am concerned with the principle that the validity and effectiveness of legislative and executive acts of a sovereign state in relation to property within its jurisdiction is not justiciable. The majority of the judgments in Belhaj v Straw suggest that that is a hard-edged principle of English private international law, and that its rationale derives from the very concept of sovereignty which recognises the power and right of a state to determine the property rights of those whose property is situate within its territory.”

Popplewell J then turned to Republic of Serbia v ImageSat International NV, which the claimants took to stand for the proposition that justiciability in court differed from arbitrability before a tribunal. After noting that this aspect of the decision was in any event obiter, Popplewell J distinguished it on the basis that it was directed at whether the arbitrator had jurisdiction to determine who was party to the relevant contract (Serbia had said that it was not), and not whether a foreign act of state could be adjudicated on in the course of a reference to which it was accepted that the state was a party. Having found that the doctrine is a creature of private international law, and not merely of comity, Popplewell J concluded that there was no good reason why it should be of any less application before an arbitral tribunal than an English court. He therefore dismissed this portion of the challenge.

The case provides both a sterling example of the significant hurdles that claimants face in challenging awards under the AA 1996 and a welcome clarification of the applicability of the foreign act of state doctrine to arbitrations. Practitioners may also be interested in Popplewell J’s conclusion that the requirement that each party be given a “full” opportunity to present its case, found in the UNCITRAL Rules 1976, does not impose a higher burden than the “reasonable” opportunity of putting his case found in section 33 of the AA 1996, which is of course the language also used in the UNCITRAL Rules 2010.

Kirkland & Ellis Noah Stewart-Ornstein

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