20 March 2018
In the search for proceeds of fraud, the net is often cast widely. Defendants dragged into court in England & Wales have the small comfort of knowing that when an unmeritorious case is finally dismissed their legal costs should be met in part by the unsuccessful claimant and when an unwarranted injunction discharged some compensation for the damage caused can be ordered. What if the claimant is a foreign state? So much the better you may think, as they will be good for the money – but if they choose not to pay, the vindicated defendant may be left without recourse.
It is a generally accepted principle of international law that a sovereign state and its assets should be protected from attack by the courts of another state, except when the state ‘descends into the market place’ and acts as a commercial or private party. In England and Wales this is enshrined in the State Immunity Act 1978 which implemented into English law the provisions of the European Convention on State Immunity of 1972.
Immunity from jurisdiction is conferred by s1 of the Act and protects the foreign state, its head, its government and government departments. There are exceptions for commercial contracts, contracts of employment, merchant shipping, patents, and, naturally, express submissions to the jurisdiction of a foreign court. When a foreign state commences proceedings in the English court, or takes any substantive steps in proceedings against it, it is submitting to the English court’s jurisdiction. Although the English court is thus competent to make orders against the foreign state, the enforcement of those orders is curtailed by the additional immunity conferred by section 13 of the Act.
Under section 13 no relief may be granted against the foreign state by way of injunction, order for specific performance or recovery of land or other property. The property of the state is further protected by a prohibition against any process of enforcement of a judgment or arbitration award. There are two exceptions: a general exception where the state has waived immunity – but that requires an express waiver of the immunity of its property from enforcement not simply a submission to jurisdiction; and where the property is used for commercial purposes. That exception is only available in relation to EU Convention states where the judgment is final.
Where proceedings are continuing, the defendant may not be entirely without recourse, as the court’s case management powers can still be exercised. The Court of Appeal has held that an order for security for costs did not fall within s13 of the 1978 Act and if such an order is not met, a case can be stayed.
Where proceedings stem from commercial transactions a suitably broad and well-worded waiver may permit other parties to enforce against state property. Such express waivers are unlikely to be found in a claim involving fraud. In recent years a number of foreign governments have sought the assistance of the English courts to recover assets and money ‘misappropriated’ by former officials and heads of state. By launching proceedings here the foreign state waives its section 1 immunity but not its protection under section 13. A litigant seeking to enforce an order for payment against a foreign state thus needs to identify property, preferably within the jurisdiction, held by the state for commercial purposes. Property of the state’s central bank is deemed never to be held for commercial purposes by section 14. In a recent case against Kazakhstan, the English High Court held that the protection afforded to a central bank extended to any asset, real or personal, in which the central bank had ‘property’, whether a legal, equitable or contractual interest. It was noted that the purpose of this protection was to save the English court from the embarrassment of having to scrutinise the purpose for which central bank funds were held.
The purpose for which a state’s assets are held may be certified by the head of the state’s diplomatic mission in the UK. That certificate will be accepted as sufficient evidence of the purpose of the assets unless the other party can prove the contrary. In a case against the Republic of Colombia the House of Lords refused to allow enforcement against the bank account of the Colombian embassy as it could not be shown that the account was used, or intended to be used, solely for commercial transactions. Although the result came as a relief to the Foreign & Commonwealth Office at the time, it did leave judgment creditors with an insurmountable evidential burden.
In another jurisdiction the result may have been different: New York, for example, may have allowed enforcement against that portion of a bank account used for commercial purposes. But in an age where commercial creditors, such as hedge funds, may be tempted to call in and enforce ageing sovereign debt, states may well seek to protect their ‘commercial assets’ by keeping ownership within the protected, sovereign, bodies.