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State_Actors_Sovereignty_SOCIAL

State Actors, Sovereignty and Securing Enforcement in Australia, Hong Kong and Singapore

In Short 

The Situation: Through the expansion of sovereign wealth funds, the promotion of domestic industries and the growing commercial activity of state-owned entities, state actors are becoming increasingly involved in the international economy. This blurring of the line between commercial and state actors brings the commercial power of private companies into direct conflict with the sovereignty of states and is an issue of which companies dealing with state actors should be aware. 

The Result: With increased interaction between commercial and state actors comes increased disputes between private companies and states/state-owned entities. In such disputes, the private company may have a right, whether under international law or by contractual arrangement, to initiate proceedings against the state. The state, however, may plead immunity from the proceedings under applicable domestic law and, if successful, ultimately render any resulting judgment or award unenforceable or ineffective.  

Looking Ahead: The crown and sovereign immunity regimes of the two main dispute hubs in Asia-Pacific—Hong Kong and Singapore—play a significant role in determining the rights aggrieved investors have against states. As another major common law jurisdiction, the approach to sovereign immunity in Australia, including the outcome of the cases currently before the Australian federal courts, is also key to understanding the options available to aggrieved investors in the region.

Background 

Heads of state and states themselves enjoy two distinct immunities. Crown immunity precludes heads of state from being bound by their own statutes. The immunity arose from the principle that "a sovereign can do no wrong" and was afforded to monarchs and passed onto the heads of state that replaced them.  

Sovereign immunity grants states, and certain state-owned entities, immunity from the jurisdiction of foreign courts. States originally enjoyed absolute sovereign immunity, which applies, without exception, where a defendant proves that it is part of a recognised state. As states became more engaged in foreign trade and adopted a more commercial character, courts in common law jurisdictions including England, Australia and Singapore developed exceptions to sovereign immunity and did not grant immunity from proceedings relating to a state's commercial transactions. This saw the development of the restrictive doctrine of sovereign immunity, according to which immunity is granted to states only where the proceedings in question relate to public acts of states in the exercise of their sovereign authority.  

Comparative Analysis of Crown and Sovereign Immunity 

Traditionally, absolute immunity protected states from the commencement of any suit against them. Legislators and courts in Asia-Pacific now take a spectrum of approaches to both crown and sovereign immunity. 

Immunity from Suit. Crown immunity provides that heads of state are immune from the law and the jurisdiction of the domestic courts in their own state. In Hua Tian Long (No. 2) [2010] 3 HKLRD 611, the Hong Kong Court of First Justice held that the crown immunity of the British Crown was passed onto the People's Republic of China ("PRC") at the handover in 1997. In contrast, Australia abrogated crown immunity with the Judiciary Act 1903 (Cth) and, like Singapore, grants immunity only in specific circumstances, such as acts or omissions by the Government or public officials in the exercise of their duties. 

In regards to sovereign immunity, the PRC and Hong Kong currently recognize the absolute form of immunity, whereas Australia and Singapore recognize restrictive immunity.  

In The Democratic Republic Congo v FG Hemisphere Associates LLC [2011] 14 HKCFAR 395 ("Congo Case"), the Hong Kong Court of Final Appeal held that the PRC's doctrine of absolute immunity applied in Hong Kong after the 1997 handover. It was not for Hong Kong's judiciary to apply a form of immunity that interfered with the power of the PRC to manage the foreign affairs of Mainland China and Hong Kong. This case turned upon the interpretation of the basic laws and status of Hong Kong as a Special Administrative Region as well as the contentious principle that the judiciary and the executive should speak with "one voice". For the PRC and Hong Kong, the threshold for immunity at the commencement of the suit is whether the state has a sufficient "degree of control" over the defendant for it to be considered a part of the state (see TNB Fuel v China National Coal [2017] HKCFI 1016).  

The Australian Federal Court applied a similar test in ACCC v PT Garuda Indonesia [2019] FCA 786. It held that Garuda Indonesia Airlines, which was 95% owned by Indonesia and had members of the Indonesian Government as four of its five board members, was sufficiently controlled by the state to be entitled to sovereign immunity. Unlike the Hong Kong courts, the Australian Federal Court applied restrictive immunity and held that, for immunity to be granted, the relevant acts of the state must have been pursued for sovereign ends and that price-fixing of commercial airline flights was no such end.  

Singapore, for its part, has enshrined the restrictive approach in legislation expressly precluding sovereign immunity in proceedings relating to commercial transactions (see section 5(1) of the State Immunity Act (Cap. 313) ("SIA")).  

Immunity from Enforcement of Arbitral Awards. Hong Kong and other jurisdictions with absolute immunity grant states the same immunity from enforcement proceedings as any other proceedings. Where an arbitral award has been rendered against a state or a state-owned entity, however, the party in whose favour the award was rendered may commence enforcement proceedings in a jurisdiction with restrictive immunity.  

In 2019, Eiser Infrastructure Ltd and Energia Solar Luxembourg S.A.R.L., and separately Infrastructure Services Luxembourg S.A.R.L. and Energia Termosolar B.V., applied to the Australian Federal Court to enforce arbitral awards arising from two International Centre for Settlement of Investment Disputes ("ICSID") proceedings in which Spain was found to have breached its obligations under the Energy Charter Treaty. Spain claimed immunity under the Australian Foreign States Immunities Act ("FSIA") 

In deciding the two applications together, Stewart J held that enforcement of arbitral awards is divided into three distinct phases: (i) recognition; (ii) enforcement (converting an arbitral award into a court judgment); and (iii) execution (seizing property of the award debtor to satisfy the court judgment). According to Stewart J's interpretation, section 9 of FSIA, which grants immunity to states from any proceedings in Australian courts, is curtailed by section 10, which stipulates that a state may waive its immunity by submitting to the jurisdiction of Australian courts.  

Justice Stewart held that in signing the ICSID Convention, which provides for the recognition and enforcement of arbitral awards, states submit to the jurisdiction of competent courts to issue judgments enforcing arbitral awards against them (i.e., enforcement proceedings). However, once an award has been converted to a domestic court judgment, the pecuniary obligations in the award are no longer under the auspices of the ICSID Convention or the arbitration proceedings to which the parties consented. The resultant judgment is in the hands of the judiciary, and execution of that judgment is governed by domestic law.  

Whether this remains the position in Australia will depend on the outcome of Spain's appeal, which is pending before the Full Court of the Federal Court, alongside an application for enforcement of a third ICSID award against Spain by Watkins Holding S.A.R.L. and Watkins (Ned) B.V. In contrast, the Singapore SIA provides that states are not immune from any proceeding in Singapore courts relating to an arbitration where the state has agreed in writing to submit the dispute to arbitration.  

Immunity from Execution Over State Property. Even if the defendant state is unable to establish immunity, it may be able to establish that its property should be immune from the execution of court judgments. Article 54 of the ICSID Convention leaves the execution of awards to domestic law. Under Australian and Singapore law, state property is immune from the coercive power of domestic courts (see section 32 of the FSIA and section 15(2)(b) of the SIA). Nonetheless, the immunity of a state's property in Australia and Singapore does not extend to its commercial property (see section 32 of the FSIA and sections 15(4) of the SIA).  

While the effect of the Congo Case and the application of absolute immunity mean that the question of the immunity of property no longer arises, prior to the handover, the Hong Kong common law also recognized the commercial property exception. In an appeal from the Hong Kong courts, the Privy Council held in Owners of the Philippine Admiral v Wallem Shipping (Hong Kong) [1977] A.C. 373 that a state-owned ship that had always operated as a merchant trading ship was not immune from enforcement of a writ against it, as the ship was used for a commercial and private purpose rather than a public purpose. The policy behind this exception derives from the same considerations underlying restrictive immunity—that it is unjust for a state to enter into a private transaction for commercial purposes and prevent the other party from seeking redress against it in respect of that commercial transaction/property.  

While the Australian FSIA defines "commercial property" as property "in use by the state substantially for commercial purposes", the Singapore SIA adopts a broader approach and also includes property "intended for use" for commercial purposes. Precisely which property falls within this exception is unclear. Reserves held in overseas banks for the trade of utilities and to strengthen Nauru's economy did not (see Firebird Global Master Fund v Republic of Nauru & Anor [2015] HCA 43).  

Likewise, prior to the issuance of the judgment by the Hong Kong Court of Final Appeal in the Congo Case, the Court of Appeal applied the restrictive doctrine of immunity and held that the commercial property exception did not apply to mining license fees held by the Democratic Republic of Congo in Hong Kong to support its state budgets (see FG Hemisphere Associates LLC v Democratic Republic of Congo [2010] HKCA 19).  

Singapore's case law on this exception has generally turned on whether the state had sufficient ownership over the property in question to claim immunity (see Republic of the Philippines v Maler Foundation and others [2008] 2 SLR where a debt in the hands of a third party was deemed not to be state property).  

It remains to be seen whether further clarity on this exception in Australia will be provided if Eiser Infrastructure is upheld and any of the investors involved seek to execute a judgment against Spain.  

Waiver. Lastly, a state may lose its right to claim immunity by acts or omissions amounting to a waiver, irrespective of whether the jurisdiction recognizes absolute or restrictive immunity.  

Singapore, like the United Kingdom, has enacted legislation deeming that a state waives sovereign immunity in respect of court proceedings relating to an arbitration by agreeing in writing to submit the relevant dispute to arbitration (see section 11 of the Singapore SIA).  

In the Congo Case, the Hong Kong courts held that the UK State Immunity Act did not apply in Hong Kong after the handover and that waiver requires an unequivocal submission to the jurisdiction of the Hong Kong courts. An agreement to submit a dispute to arbitration was considered irrelevant.  

The Australian courts have taken a similar though less strict view. Section 10 of the Australian FSIA provides that a state may waive its immunity by agreement. In Eiser Infrastructure, the Federal Court held that for the agreement to constitute a waiver under section 10 of the FSIA, it must be an agreement to submit to the jurisdiction of the Australian courts. Under the FSIA, an agreement includes "a treaty or other international agreement in writing". Accordingly, Spain's ratification of the ICSID Convention was considered a waiver of immunity from enforcement proceedings under Australian law. It was not, however, considered a waiver of immunity from execution proceedings as arbitral tribunals do not have coercive power over property and the ICSID Convention does not provide a basis under international law for the execution of arbitral awards.  

Under the Singapore SIA and the Australian FSIA, a state may also submit to the jurisdiction of a court by instituting proceedings or taking any step in proceedings (excluding claiming immunity or an interest in property). There is no clear definition of a "step in proceedings". Defendant states may be wary of applying for a court order and be conscious to reserve their rights in any proceedings, whether for a stay or enforcement (see WestLB AG v Philippine National Bank [2007] 1 SLR).  

Conclusion 

Crown and sovereign immunity go to the heart of the key issues surrounding the role of international law and the power of sovereign nations in a highly globalized and politicized market. As can be seen, crown and sovereign immunity is a minefield that brings complex legal issues and policy considerations to the forefront of each stage of an international dispute. It is one area of international law where the judiciary is in some ways asked to determine the extent to which its nation recognizes the sovereignty and statehood of other nations.  

As foreign investors and states continue to enter into commercial transactions and partner on projects, claims against states under investment treaties or contracts will continue to rise. The success of such claims may largely depend on issues concerning crown and sovereign immunity. Parties should therefore be aware of the immunity regimes in Asia-Pacific and any developments that may arise.

Three Key Takeaways 

  1. At the outset of a contractual relationship with a state or state-owned entity, parties should consider the different laws in Australia, Hong Kong and Singapore on crown and sovereign immunity to ensure that the choice of forum and law clauses provide adequate recourse against the state or state entity in the event of a dispute. In particular, parties should be aware that they may have a better chance of challenging claims of sovereign immunity in Singapore or Australia than in Hong Kong.  
  2. A new barrier to claims against states and their entities may arise at each stage of a dispute. Parties seeking to enforce arbitral awards in domestic courts should be wary of the nature of the transaction from which the dispute arose and the types of property that the defendant state holds in the jurisdiction in which the award may be enforced. 
  3. The law on crown and sovereign immunity continues to evolve. Parties should watch for any developments in international and domestic laws on waiver, the commercial property exception and other issues relating to these immunities.

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