This article focuses on some recent cases involving attempts by
private creditors to enforce judgments against state assets. It examines how
the international law rules on state immunity which permit enforcement
but only against assets used for commercial purposes have been applied in
domestic courts. In particular, it highlights an emerging trend in English cases
where “context” has been used to protect state assets from seizure. It considers
enforcement against the wider question of sovereign debt restructuring and
concludes that, apart from a few exceptions, courts are protecting state assets
despite increased pressure from creditors.
Most jurisdictions no longer recognise absolute sovereign immunity. Immunity
essentially extends to the governmental activities and not to the commercial activities
of a state. The potential injustice to private litigants of an unfettered application
of absolute immunity, the increasing involvement of states in commerce and a
growing number of sovereign defaults has led to the adoption of this restrictive
doctrine in respect of suit.
In contrast, possible international political ramifications and ingrained notions
of dignity and equality make it less acceptable as a matter of international comity
and law to curtail the immunity of a state when its assets are at risk of seizure.
As a result, states continue to benefit from virtually absolute immunity from
court-supervised execution or measures of constraint. The one, widely accepted,
restriction to such immunity is in relation to state assets which are being “used for
The scope and application of the commercial purposes test
is however uncertain and merits study.
Recent sovereign defaults in Argentina and potential defaults in Europe,
in the aftermath of the financial collapse of 2008, have highlighted the limited
right to redress in domestic courts afforded to private creditors (traditionally
banks and, increasingly, bond holders). As there is no international law
establishing an insolvency regime for states unable to pay their debts, states in
default cannot go into liquidation, the ultimate escape of the domestic debtor.
Creditors of states can either join in an orderly international rescheduling
effort or pursue a remedy in a domestic court.
There are not many examples of successful enforcement actions against state assets partly because most extraterritorial state assets are deposited in central banks, which benefit in general
from absolute immunity
or are held in the name of separate state entities.
wide immunity from judicial enforcement afforded to state assets also explains
the relatively few cases. But, as states have turned to world markets to fund
their development and financial institutions have been keen to lend, instances
of sovereign defaults have multiplied and creditors have increasingly sought
to recover through domestic courts.
Private creditors, who have successfully
sued foreign states, have turned their attention to enforcing these judgments
against state assets in municipal courts. So-called “professional litigators”
have commenced actions around the world highlighting the need for clarity
in this complex area.
An example of recent activity is that led by “vulture
funds”, entities which purchase deeply discounted sovereign debt in the hope
of recovering substantial sums against the debtor state and which has resulted,
at least in the US courts, in some startling moves to permit enforcement against
state assets and limit immunity.
Many commentators in this field have bemoaned the absence of redress for
unpaid creditors of sovereign states and highlighted failures to recover by successful
litigants. Fewer have written about why it is important for state assets to be
protected and why immunity remains a key international mechanism for stability.
Is exposing state assets which may be generated by bilateral or international aid
(for example) to domestic measures of constraint ultimately the best way forward?
Should assets purchased or built with international aid be liable to attachment? Is
the “commercial purposes” test the most appropriate in these circumstances? As
the test may be difficult to apply in respect of certain types of asset (notably bank
accounts) there is a risk that in the wrong hands the test may lead to attachment
arguably against international public policy and comity.
It is against this backdrop that this article examines recent domestic decisions
which suggest that an interesting trend is emerging whereby the English courts at
least take a wide view of the UK immunity legislation by making reference to the
“context” in which the litigation takes place which encompasses international policy
considerations. Courts are taking account of the wider concerns by interpreting the
“commercial purposes” test in English law by reference to the broader international
issues at stake which include a traditional deference towards foreign sovereigns.
As discussed below, this trend is replicated in France, in Australia and to a certain
extent in the United States.
In 1984, the English House of Lords decided in Alcom Ltd v Republic of
that a Colombian embassy bank account in London could not be
attached by a judgment creditor as the state enjoyed immunity from enforcement
in respect of accounts not “solely in use for commercial purposes”.
In 2012, the
Supreme Court decided in SerVaas v Rafidain Bankthat monies in an account
in London representing a debt due to the Republic of Iraq could not be attached
because the debt was not “currently in use” for commercial purposes.
“solely” and “currently” are not in the relevant legislation but the courts have
arguably “imported” them to give effect to international policy considerations.
Alcom was the first major decision to look at the then recently enacted immunity
from enforcement provisions of the UK State Immunity Act 1978. SerVaasis the
latest. This article will examine how in the years between the two cases the test for
enforcement against state assets has raised questions of interpretation which courts
have resolved by adopting a “purpose in context” test thus preserving state assets from attachment when it is arguably politically or diplomatically inappropriate to
allow seizure. English courts, while formally endorsing a strict approach to the
legislation, have used the “context” in which enforcement is sought in much the
same way as Lord Wilberforce used “context” in connection with immunity from
suit at common law in the crucial case of I Congreso del Partido in which he looked
beyond the commercial nature of the underlying transaction to the political (or
non-commercial) motivation for the breach, a test which has become known as the
“nature in context” test.
Before examining these recent English cases, this article
will outline the development of the doctrine of state immunity from enforcement in
international customary law and the domestic law of key states where similar trends