STATE INCAPACITY AND SOVEREIGN IMMUNITY

• Citation: (2014) 26 SAcLJ 942
• Date: 01 December 2014
• Published date: 01 December 2014

This article examines state incapacity and sovereign immunity in international arbitration. When a State is involved in international arbitration, it may raise the defence of state incapacity or sovereign immunity against petitions to compel arbitration, interim judicial orders in support of arbitration, and the enforcement of final arbitral awards. This article surveys the law on these issues in several key jurisdictions, including Singapore, the US and the UK, as well as before international tribunals.

I. Introduction

1 Global trade and commerce does not occur solely among private individuals and corporations. Nation-states, state-owned enterprises and sovereign wealth funds also directly participate in the international marketplace and enter into international commercial transactions. Whether today's cross-border transactions are strictly between private commercial actors or also involve sovereign states or entities acting on their behalf, their transaction agreements routinely contain arbitration clauses. If private entities who have signed contracts containing arbitration clauses refuse to arbitrate when a dispute later arises, most nations' courts will generally compel arbitration under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) and domestic legislation implementing its provisions.1 Likewise, when private entities refuse to honour final awards resulting from international arbitration

proceedings, national courts may typically be relied upon to recognise and enforce the award under the New York Convention and its domestic analogues.2 Unlike purely private commercial actors, however, sovereign entities may not find themselves fully subject to arbitration-related orders of national courts, either because they may be found to have lacked the legal capacity under their own domestic laws to consent to arbitration in the first place, or because they may succeed in raising sovereign immunity as an affirmative defence to the enforcement of arbitration agreements and awards.

2 This article examines how national courts and legislatures have attempted to balance the tension between, on the one hand, respecting the sovereignty of States and their proxies, such as state-owned enterprises and sovereign wealth funds, and, on the other hand, vindicating the legitimate expectations of their commercial partners by enforcing sovereign entities' agreements to arbitrate international business disputes, supporting arbitration proceedings through interim judicial measures, and recognising and enforcing final international arbitration awards. In what follows, we consider the initial, middle and terminal stages of international arbitration against sovereign entities and requests by the parties to national courts either to support or to interfere with the arbitration, all of which require courts to take into account special considerations and limitations relating to state sovereignty.

3 At the initial stage, if a sovereign government named as the respondent in a demand for arbitration refuses to submit to the jurisdiction of a duly-constituted arbitral tribunal, and the opposing party then seeks an order from a national court compelling the Government to arbitrate the dispute, the court must initially determine whether the State is validly bound by an arbitration clause. The State may raise the defence that the entity that signed the arbitration agreement lacked the legal capacity to bind the State, especially where the State has previously signalled through legislation that it disclaims any intention to be bound by arbitration agreements. Alternatively, a State may argue that it is entirely immune from the jurisdiction of the court where enforcement of the arbitration agreement is sought, and thus the court has no power to compel it to arbitrate, regardless of any arbitration agreement. Similar arguments may arise during or after international arbitration proceedings, when private claimants may seek provisional enforcement measures or enforcement of a final award against the State's assets in another nation's courts. Courts may thus have to decide whether foreign states are immune from both supervisory and enforcement jurisdiction in a variety of arbitration-related actions.

4 Although these strategic issues are not unfamiliar to practitioners and jurists, the lack of a uniform approach to them among both arbitral tribunals and national courts can leave parties without clear guidance about how to conduct their business dealings. The authors hope that this article will help to clarify the issues of state incapacity and sovereign immunity as they bear upon international arbitration agreements. Part I of the article discusses the basis for a State's legal capacity or incapacity to enter into an arbitration agreement. Part II discusses a State's sovereign immunity (or lack thereof) from foreign national courts' jurisdiction to bind it to an arbitration agreement at the initial stage of an arbitration, to resist interim judicial measures in support of ongoing arbitration proceedings, and to enforce resultant arbitral awards against it once arbitration proceedings have ended.

II. The capacity of sovereign entities to consent to arbitration

5 Private parties are generally free to submit their disputes to either national courts or arbitral tribunals. States and sovereign entities by contrast may be constrained from making this election by national constitutional or legislative provisions that restrict or remove their authority to enter into binding arbitration agreements.3 Such self-imposed restrictions on the ability of a State or sovereign entity to enter into arbitration agreements are commonly characterised as relating to “the State's capacity to enter into arbitration agreements”.4 A traditional view that a sovereign state should not be subject to any dispute resolution system that is not controlled by the State itself may be offered in support of a sovereign entity's defence of incapacity to avoid its own prior commitment to submit disputes to international arbitration.5 According to some commentators, States' efforts to pre-emptively

restrict the authority of their own governmental entities to enter into arbitration agreements are frequently motivated by a lingering distrust of commercial arbitration generally, or a perception of international commercial arbitration as favouring private parties from industrialised countries.6 This Part of the article examines the question of so-called “state incapacity to enter into arbitration agreements” by laying out the legal concept of capacity and examining its ambiguity as applied to sovereign entities. It then surveys the range of restrictive and permissive doctrinal approaches to state incapacity, providing a brief assessment of the current state of the law on state incapacity in various jurisdictions.

A. The concept of legal capacity and its ambiguity as applied to sovereign entities

6 Legal capacity, a familiar concept found in the private law of contract, refers to the ability of a natural or legal person to conclude and be party to an agreement, and it encompasses both the capacity to have rights and the capacity to exercise rights. If the parties to a purported contract lacked the legal capacity to enter into it from the outset, the contract may be deemed invalid. As the majority of national arbitration laws are silent on the notion of “capacity to arbitrate”, legal capacity in the arbitration arena appears to fall on the same footing as the general capacity to contract.7 Where private parties are concerned, the general rule is that any natural or legal person with the capacity to enter into a valid and binding contract also has the capacity to conclude a valid arbitration agreement.8

7 Sovereign entities sometimes attempt to establish their own legal incapacity by reference to national constitutional or legislative provisions that restrict their power to conclude binding arbitration agreements in efforts to avoid submitting disputes to arbitration pursuant to an otherwise-valid arbitration agreement. Such domestic legal restrictions were, until recently, understood as falling “clearly within the classic definitions of legal capacity”, a view that finds strong support in the language of the applicable legal instruments.9 For

example, the official French version of Art II of the European Convention on International Commercial Arbitration (“European Convention”) speaks of the “capacity of legal persons of public law to submit to arbitration” (“capacité des personnes morales de droit public de se soumettre à l'arbitrage”).10 In cases where the referral of disputes to arbitration is permitted but is made conditional upon certain legislative or regulatory authorisations, the issue can also be seen as implicating agency principles relating to the party's power or authority to enter into an arbitration agreement.11

8 However, domestic legal restrictions on the ability of state entities to enter into arbitration agreements are not invariably characterised as problems of incapacity. A growing number of courts and commentators have framed domestic restrictions on arbitration as relating to the question not of which parties have the power to elect an arbitral forum for dispute resolution, but of which disputes are capable of being resolved through that process — the arbitration-specific concept of “arbitrability”.12 Some commentators have propounded that arbitrability has an objective and a subjective aspect.13 In order for a dispute to be arbitrable, the agreement to arbitrate must, first, relate to a subject matter which is suitable for resolution by arbitration (objective arbitrability) and, second, involve parties who are entitled to submit their disputes to arbitration (subjective arbitrability). Because domestic legal provisions purporting to restrict capacity to arbitrate concern the kinds of...