Clifford Chance

Court of Appeal affirms broad approach to construing waivers of sovereign immunity from execution

In a recent unanimous decision, the UK Court of Appeal in General Dynamics United Kingdom v the State of Libya rejected a claim of sovereign immunity from execution against a State's assets in London.

Background

A dispute arose out of a contract under which General Dynamics United Kingdom ("GDUK") agreed to supply Libya with military communications systems. The agreement contained an arbitration clause, which provided that the decision of the tribunal would be "final, binding and wholly enforceable". The agreement was governed by Swiss law. The arbitration clause referred disputes to ICC arbitration under the 1998 ICC Rules, Article 28(6) of which provides "Every award shall be binding on the parties. By submitting the dispute to arbitration under the Rules, the parties undertake to carry out any award without delay".

A duly constituted ICC tribunal issued an award in favour of GDUK for £16 million. Subsequently, pursuant to an application by GDUK, the High Court granted leave to enforce the award and granted a charging order over a stately 7-bedroom home in Hampstead, north London. Libya appealed that decision.

The question at first instance was whether Libya had consented—within the meaning section 13(3) of the State Immunity Act 1978—to execution against its property. The judge at first instance held that Libya had properly waived sovereign immunity from execution (as well as adjudication of disputes).

Libya's appeal

Libya appealed the first instance decision on two grounds, namely, that the judge had erred in: (i) the proper interpretation of section 13(3) of the State Immunity Act; and (ii) the proper construction of the arbitration clause.

As to the first ground, Libya argued that the judge erred in holding that "clear words" were not required for a State to give valid consent to execution against its property.

As to the second ground, Libya argued that the judge erred in holding that, on a proper construction of the arbitration clause, Libya had provided written consent to execution. Libya argued that the words in the arbitration clause that any award would be "wholly enforceable" is insufficient to waive sovereign immunity from execution. Instead, Libya argued that the phrase "wholly enforceable" solely operated as a waiver of immunity from adjudication but not execution.

Decision

The Court of Appeal was not convinced by those arguments.

In dismissing the appeal, the Court of Appeal held that section 13(3) of the State Immunity Act requires the court to determine whether and to what extent the State gave (expressed) its consent by construing the words used according to the law applicable to that exercise. (In this case, the governing law of the underlying contract was Swiss law.) The Court held there was no further restrictive requirement, such as any special form of language (i.e., using the express words "consent", "waiver" or "submit"), nor was there any additional requirement for "clear words". If the words, properly construed, demonstrate the giving/expression of consent, then that will suffice.

Once that question was settled, the Court of Appeal then turned to the second ground, being the construction of the underlying arbitration clause and whether it conveyed Libya's consent to execution against its property. On this aspect, the decision of the Court of Appeal, though unanimous, is of particular interest.

Lord Justice Phillips gave the lead judgment. In construing the underlying arbitration clause, Lord Justice Phillips stated that the agreement that any award be "final and binding" and "wholly enforceable" was sufficient to express consent to the adjudicative jurisdiction of the UK. However, the words "wholly enforceable", on their own, were insufficient to express consent to the UK's enforcement/execution jurisdiction. Instead, Lord Justice Phillips noted that the arbitration clause incorporated the 1998 ICC Rules, Article 28(6) of which placed an obligation on Libya and GDUK "to carry out any award without delay". Lord Justice Phillips noted that other major jurisdictions held that this had been interpreted as a waiver of execution immunity and agreed that the same result should be reached in the UK. His Honour therefore dismissed Libya's appeal.

The other two judges, Lord Justices Zacaroli and Lewison agreed with Lord Justice Phillips. However, in doing so, they took a broader approach to construing Libya's expression of consent than that of Lord Justice Phillips. Both agreed that the words "wholly enforceable" on their own did properly express Libya's consent to execution against its property. Both explained that those words must be interpreted as Libya's submission to the entire process of enforcement and execution.

Implications

The judgment will signal to award creditors that the UK remains a predictably favourable jurisdiction to enforce and execute arbitral awards against States. It also serves as a reminder that, when contracting with sovereign States, clear and unambiguous waivers of immunity from adjudication and execution are always advisable in any underlying agreements.

However, this decision sits within an unsatisfactorily fragmented patchwork of national laws and court decisions on sovereign immunity and its scope. While this particular decision ought to provide comfort to award creditors seeking execution against sovereigns in the UK, the same cannot be said of other (supposedly arbitration-friendly) jurisdictions. For example, a recent decision of the Federal Court of Australia (Republic of India v CCDM Holdings, LLC) took an almost polar opposite approach. The court found that India was immune from execution of an investor-State award rendered against it under the UNCITRAL Arbitration Rules (1976). Those rules (Article 32(2)) contain very nearly the same text as 1998 ICC Rules Article 28(6), which the UK Court of Appeal partly relied on in determining that Libya waived immunity (the parties undertaking to "carry out any award without delay"). In doing so, the Federal Court rendered a decision that goes against the reasoning of the Court of Appeal in GDUK v Libya. It also directly contradicts prior decisions of other popular arbitral seats in relation to the very same underlying investor-State award.

These and other decisions therefore serve as useful reminders that obtaining legal advice remains essential when dealing with sovereigns (both in a purely commercial but also investor-state context). This applies across all stages of any transaction or investment, including: drafting arbitration agreements and associated sovereign immunity waivers; forum selection in submitting any disputes to arbitration, and ultimately selecting appropriate jurisdictions for enforcement and execution.