ISSUES OF STATE SOVEREIGN AND STATE ENTITIES IN ARBITRATION

An Expert's View about Law and Compliance in Egypt

Posted on: 17 May 2010

Issue of state sovereign and state entities in international commercial arbitration and how the the rules solving that issue.

ELMH18027103 ISSUES OF STATE SOVEREIGN AND STATE ENTITIES IN INTERNATIONAL ARBITRATIONTE: A LOOK INTO INVESTOR-STA ARBITRATION      Abstract. Globalization and international trade have increased the number of international commercial arbitrations where the investor and state instrumentality are parties and bilateral investment treaties (BITs) between countries exist. Many of these arbitrations arise out of bilateral or multilateral investment treaties (MITs) and are resolved under the ICSID convention. A significant number arise as a result of disputes in infrastructure projects which have been funded by development banks. In such position, these cases may be resolved by ICC rules and it will be conducted in the same way as arbitrations between individuals. In addition, numerous countries adapt privatization1 policies which aim to transfer its public comp 2anies sector activities and functions to the private sector. This is done to encourage foreign investment. In that case, the state can waive its immunity by a concession agreement or by an arbitration clause. But in the same time they still control those entities. These policies lead to several changes which make it inflexible to conclude if the entities are independent according to its legal principle or are owned by the state. Moreover, the state may be entitled to claim under the sovereignty immunity principle against recognition and enforcement of the award. * The author is counselor at the State lawsuit Authority Egypt. Members of ABA and CBA. His practice focuses on business law and litigation, in both civil and common jurisdiction. He has served as counselor in a large number of cases involving States and private entities. He may be contacted at hassanels@hotmail.com. The views expressed in this article are the personal views of the author and do not necessarily reflect those of his Authority or his colleagues 1 There are many definitions for the privatization policy, in course of that thesis we prefer the definition which notified by invertors word. the process of moving from a government-controlled system to a privately run, for-profit system. 2 The word public company in that paper means the company owned by the Government, even after the privatization policy which is adopted by many countries. Most of companies act as a private one but deeply it is a state owned commercial entity. It s important to make the distinction between what public company means in North America and what it means in other countries. ELMH18027103 The purpose of this paper is to focus and highlight the issues in the area of sovereign, immunity and state-owned commercial entities in investor-state arbitration. One of the questions I hope to raise through this study is whether state sovereignty may affect the arbitration award. Another important question is whether there are several methods to determine if the state entities are truly independent under the constitutional principle of separation of powers or in reality they are under government control. Consequently, the state might be liable for the conduct of its instrumentality. As a result, whether a State is seeking immunity from jurisdiction or from execution against State-owned property, the State and its wholly owned or controlled entities are considered to be functionally the same. So, the activities of State enterprises are considered to be carried out by the State in its exercise of sovereign authority. Page 2 of 49 ELMH18027103 Table of Contents ________________________________________________________________________ TOPIC Page Number 1- Acknowledgments 4 2- Abbreviations 5 3- Abstract .. 6 4- Introduction . 7 (ii)Part one. A- State Sovereignty ...9 ? Sovereignty in common law .10 ? Sovereignty in civil law 10 ? Acta iure imperii 11 ? Acta iure gestions ...11 B-Jurisdictional immunity .1 3 ? The State View of Immunity 16 ? Commercial transactions... ... 16 ? The Meaning of Commercial Activity .18 C-The concept of Waiver of Immunity ..19 ? Effect of an arbitration agreement . .. ..19 ? The Waiver of Immunity in ICC Cases .20 ? The Waiver of Immunity in ICSID Cases ... ..21 (iii) Part two: A- The Meaning of Independent State Entities ..22 B - The different Approaches of Arbitral Tribunals ..24 1- The ICSID Convention ...29 2- The ILC Articles on Responsibility of States for Internationally Wrongful Acts 31 Page 3 of 49 ELMH18027103 Diagram for Wrongful Acts......................................................................................32 ? Concept Conduct of organs of a State . .33 ? Conduct of persons or entities exercising elements of Government Authority.....34 ? Conduct directed or controlled or carrying out by a state .. ..36 3- Investment Contracts and the Privacy of Municipal Investment Contracts ...38 ? Insufficiency of Circumstantial Evidence for State Involvement in Municipal Contracts . .. .40 ? Requirements As Treaty Based Claims: ....42 Conclusion ....43 Bibliography. . ..45 Page 4 of 49 ELMH18027103 ACKNOWLE DGEMENT I would like to express my appreciation to all those who gave me the possibility to complete this thesis. I want to thank the University of MontrØal faculty of law for giving me permission to commence this thesis in the first instance, to do the necessary research work and to use faculty data. I am deeply grateful to my supervisor Prof. Guy Lefebvre Associate Dean of development and planning and director of LL.M (Business Law in a Global Context) of university of MontrØal Faculty of Law. I have furthermore to thank Alexandre Stylios, Marie-Claude Rigaud from university of Montreal whose help and stimulating suggestions and encouragement helped me in all the time of research for and writing of this thesis. Especially, I would like to give my special thanks for Tarak Ragab who helped me complete this work. Page 5 of 49 ELMH18027103 Abbreviations International Center for Settlement of Investment Disputes ICSID International Chamber of Commerce ICC Untied Nation International Law commission ILC The Pakistan Water and Power Development Authority WAPDA The Promotion and Protection of Investments between the United Kingdom and Egypt dated June 11, 1975 IPPA The U.S. Foreign sovereign Immunities Act FSIA Bilateral investment treaty BITs International Council for Commercial Arbitration ICCA International court of justice ICJ International law Association ILA Multilateral investment treaties MITs Agreement on trade-Related investment Measures TRIMS The Egyptian General Company for Tourism and Hotels EGOTH Washington Convention on the Settlement of Investment Disputes Between States and National of Other states 1965 Washington convention New code of civil Procedure NCCP New York convention on the recognitions and enforcement of Foreign Arbitration Award 1958 New York convention Page 6 of 49 ELMH18027103 Introduction In certain regions of the world, it is universal that the state become involves in various commercial activities through State-owned commercial entities. State practices concerning sovereign immunity is so diverse that formulating rules of universal application is a very difficult task 3. This becomes even more challenging when state owned commercial entities are involved in international business. On the other hand, national investment laws are promoting the settlement of investment disputes to give confidence to investors and multinational companies to invest in the host state. Numerous scholars and academic writers gave special consideration to the case of sovereignty and state owned commercial entities, they noticed various criticisms for the states entities that may make the arbitration different in some ways from arbitration in which all parties are private commercial entities. The issues of sovereignty and state entities can raise complex issues, such as, under what 4 conditions a state may be held liable for the conduct of its entities. According to international investment treaties, when an award rendered against a state or its assets can the claimant arbitral party enforce the award? The international law rules addressing acceptance of conduct to a State, as reflected5 in the Article on Responsibility of S 6tates for international Wrongful Acts , adopted by the international law commission in 2001, provide that a State may be liable for the acts of its entities under certain conditions. The act endeavors to get to the bottom of sovereign States and their instrumentalities. Are they liable for their actions toward private parties 3 A.F.M. Maniruzzaman, State Enterprise Arbitratio n and Sovereign, immunity issues: A Look at Recent Trends dispute resolution journal , American Arbit ration Association Inc.oct 2005 page 2 parg 1. 4 Emmanuel Gaillard, Jennifer younan, State entitie s in international arbitration Juries Publishing, inc, iai series in international arbitration n4. Published June 2008 page 2 parg 1. 5 Emmanuel Gaillard, Jennifer younan, State entitie s in international arbitration Juries Publishing, inc, iai series in international arbitration n4. Published June 2008 page 2 parg 4. 6 International law commission (ILC), Responsibilit y of the States for Internationally wrongful Acts November 2001 Page 7 of 49 ELMH18027103 in international arbitration? There are mechanism 7s in place not only for adjudicating legal claims against them, but also for solving such issues. However, the current international legal framework to solve such issues of sovereign and state owned commercial entities is not far from adequate. The difficulties faced by private parties, who conduct business with state or state entities, are a matter that is growing significantly in light of globalization and the increasing of the international trade. While disputes against foreign sovereigns may once have been largely the concern of multinational corporations, there is now a much broader range of persons interacting with foreign sovereigns and state entities. In such position, the standard distinction under many dom 8estic laws is that the creditors may execute only on the state asset that are held for commercial pu 9rposes, but not for assetes used for sovereignty and or diplomatic activates. Traditionally, the risks encountered in international arbitrations involving states were connected with claims of immunity on the part of the state, either from jurisdiction or execution of an award, or both. The majority of the independent state entities do not have the sufficient financial capabilities to meet an award, however the state treasury has. This point is the main motive that urges claimants in most of the investor-state arbitration to argue that the states themselves are their real counterparties trying to impute the failure of the independent state entities to fulfill their contractual obligations to any kind of default from the part of the states such as bureaucracy, intended change of applicable laws, functional or structural state control over the independent state entity or the 7 George K. Foster, Collecting from Sovereignty : The Currently Legal formwork for enforcement arbitral award and court judgment against the states and their instrumentalities , and some proposal for its reform Arizona Journal of International & Comp arative Law page 1 para1 8 Id 9 id Page 8 of 49 ELMH18027103 disappearance of the independent state entity due to reorganizing policies adopted by the state. According to article 25 of the ICSID convention, the Centre has jurisdiction over a claim and there are certain requirements need to be satisfied. The ICSID jurisdiction rationed personae restrict the parties eligible for dispute resolution to a contracting state and a foreign investor. Thus, as regards ICSID jurisdiction, claimants always try to involve states, as their counterparties, in order to let ICSID have jurisdiction and to let tribunals have competence to rule on their claims. During the last two decade, the international legal framework successfully dealt with some issues of state instrumentalities such as impartiality, confidentiality of international arbitration, and in same point the jurisdiction immunity. In recent years, there have been considerable developments that have limited the effect of the various obstacles known to have historically stressed arbitrations involving states. These developments have been particularly significant in connection with the risk of immunity-based defenses invoked by the state or state entities. The purpose of this research is to explore sovereignty and state owned commercial entities in turn and to consider the impact of recent developments regarding these issues upon the continued development of internation 0al arbitration involving 1 states . That paper will notify in the part one the concept of the state sovereignty and the circumstance under which the state has to remove its jurisdictional immunity in case of commercial transactions. Part two explains the meaning of state entities alone with whether or not, there are a method in investor- State arbitration to determinate if the entities is truly independent or its organ of government. Part two 10 , Foreign Sovereign Immunity Act 1976 (U.S.) § 1603; Foreign State Immunities Acts 1985 (Aus.) § 3; ILC Rep. 1999, at 6, re art. 2,reformulated and suggested provision to the U.N. General Assembly, see Web site cited supra n. 3 Page 9 of 49 ELMH18027103 A- State Sovereignty11. Th 13e term sovereignty 12 permeates the language of law and politics . For a long time foreigner invertors and trades faced a serious and direct obstacle to judicial remedies for uncompensated expropriation14 and other harm suffered at the hands of host government. ? Sovereignty in common law The concept of sovereignty immunity in common law countries is defined by Thomas Hobbs address as follows: The sovereign of commonwealth, be at an assembly o r one man, is not subject to the civil laws. For having power to make and repeal laws, he may, when he plea seth, free himself from that subjection by repealing those laws that trouble him, and making of new: and consequently he was free befo 15re. ? Sovereignty in civil law Civil law holds to the same definition more or less. The development of the restrictive theory regardin g state immunity as in the Napoleonic system was created in the first decade of the nineteenth century. At that time, following the absolutist approach, no one could sue the state. However, there was a struggle for 11 The term sovereign, when used in this article as a noun, refers generally to any sovereign entity, whether a State or a State entity. 12 The English term sovereignty is derived from the French term souverain: "a supreme ruler not accountable to anyone, except perhaps to God." See FOWLER & BUNCK, ( discussing the etymology of the English word sovereign). Bodin.s analysis of the term .sovereignty. in his SIX BOOKS OF A OMMONWEALTH seems to lose something in translation. The English translation of the original French text offers a less otent restatement of Bodin.s analysis of sovereignty: .Sovereignty is the most high, absolute, and perpetual ower over the citizens and subjects in a Commonwealth.. See JEAN BODIN, THE SIX BOOKS OF A OMMONWEALTH 84 (Kenneth D. MacRae ed., Richard Knolles trans., 1962) [hereinafter SIX BOOKS].The original French text offers a clearer understanding of sovereignty, with punctuated emphasis (in its phrasing and deliberate capitalization) on its nature as .absolute. and .perpetual.: .La SOUVERAINET est la puissance abso lue & perpØtuelle d.une RØpublique.. See JEAN BODIN, LES SIX LIVRES DE LA REPUBLIQUE 122 (1576) [hereinafter SIX LIVRES].Shortly thereafter in the English translation, he expresses, .Sovereignty is not limited either in power, charge, or time.. See SIX BOOKS, supra note 8, at 85. The original French again gives the concept significantly more strength: .[La] souverainetØ n.est limitØe, ni en upissance, ni en charge, ni certain temps.. See SI X LIVRES, supra note 8, at 124. Regardless of the terminology he used or the language into which it is translated, to Bodin, the term .sovereignty.designates the existence of the highest unified power available to a State. State sovereign has including all the power such as jurisdiction immunity. 13 Winston P. Nagan, FRSA and Craig Hammer, the chan ging character of sovereignty in international law and international relations page 2 parg 3. 14 Christopher F. Dugass Dan and Noah D. rubins Inve sto state Arbitration Oxford University press page 14. 15 , Thomas Hobbes , leviathan (16600< chapter xxxvi 2 see also the western maid 257 U.S 418. the Authority that makes the law is itself superior to it Page 10 of 49 ELMH18027103 more than a century over the means for making the state responsible for its actions and wrong 16s . Historically, in the most common law countries, the doctrine of state immunity was absolute, which means that the state could not be forced to appear before any court or tribunal in any foreign jurisdiction or in any international courts. Over the last few decades, the theory of absolute state immunity wa s given away to the theory of restrictive state immunity . The approach related to absolute sovereign immunity is called structuralist (ratione personae), while th e approach related to restrictive 17 immunity is called functionalist (ratione materiae ). ? Acta iure imperii The state performs in the exercise of its sovereignty Functions. It is defined as Acts by right of dominion ". Activities of a governmental or public nature carried out by a foreign State or one of its subdivisions, which qualify for State immunity under the modern doctrine of restrictive foreign sovereign immun 18ity . Such acts include the performance and enforcement of legislation the state will have absolute in relation to such 19 acts. ? Acta iure gestions "Acts by right of management :. Activities of a com mercial nature carried out by a foreign State or one of its subdivisions or agencies, which acts are not immune from the jurisdiction and process of local courts under the modern doctrine of restrictive foreign sovereign immunity 20. 16 ,id 17 A.F.M. Maniruzzaman, State Enterprise Arbitratio n and Sovereign, immunity issues: A Look at Recent Trends dispute resolution journal , American Arbit ration Association Inc.oct 2005 page 78 parg. 18 http://www.mcgill.ca/maritimelaw/glossaries/conflictlaws/ See Tetley, M.L.C., 2 Ed., 1998 at pp. 1162, 1184. 19 Andrew Tweeddale, Karen Tweeddale, Arbitration of commercial disputes international and English law and practice Oxford University Press; edition one (Jan 22 2007) chapter 4 :the Arbitration Agreement and the parties page 134 parg 1 20 http://www.mcgill.ca/maritimelaw/glossaries/conflictlaws/ See Tetley, M.L.C., 2 Ed., 1998 at pp. 1162, 1184. Page 11 of 49 ELMH18027103 The structuralist approach still finds favor in s ome jurisdictions but the recent trend seems to be towards the functionalist approach21, which has little or no regard for the status of the State enterprise while the functionalist approach embodies the restrictive doctrine of sovereign immunity. According to the structuralist approach, the creation of a separate State entity gives rise to a belief that the entity is effectively separate from the State. Thus, the fact that a State entity has a distinct legal personality would defeat any claim to immunity. Communist and Socialist States follow this princip 22le . State corporations in these countries have hardly ever made claims to sovereign immunity because their character as separate legal entities was believed to keep out the danger that the foreign trade corporations would claim for themselves the immunities and prerogatives which belong to the State and its p 3roperty 2. Under the functionalist approach, when a State enterprise has a separate legal personality and it performs acts of a private or commercial nature, it cannot claim sovereign immunity. To functionalists, the status of the State enterprise is irrelevant; only the nature of its acts really matters for purposes of jurisdictional immun 4ity 2. Some state courts have taken a mixed approach in which structuralist considerations were initially taken into account, but the nature of the act usually was decisive for the purpose of deciding the immunity issue. This suggests that mixed approaches would likely roll in favor of the functionalist way. Modern legislation follows this pattern, seeming to do away with the structuralist approach and shifting markedly to purely functional consid 25erations. 21 A.F.M. Maniruzzaman, State Enterprise Arbitrati on and Sovereign, immunity issues: A Look at Recent Trends dispute resolution journal , America n Arbitration Association Inc.oct 2005 page 78. 22,id 23, Viktor Knapp, The Function, Organization and Activities of Foreign Trade Corporations in European Socialist Countries, in Sources of the Law of Inte rnational Trade 61, 63 (C.M. Schmitthoff, ed., Praeger 1964). 24 ,A.F.M. Maniruzzaman, State Enterprise Arbitratio n and Sovereign, immunity issues: A Look at Recent Trends dispute resolution journal , American Arbit ration Association Inc.oct 2005 page 79. 25 See, e.g., Foreign Sovereign Immunity Act 1976 (U.S.) § 1603; Foreign State Immunities Acts 1985 (Aus.) § 3; ILC Rep. 1999, at 6, re art. 2,reformulated and suggested provision to the U.N. General Assembly, see Web site cited supra n. 3. Page 12 of 49 ELMH18027103 The law involving to sovereignty may be found in statute, case, or treaties such as in England the state immunity Act 1978, while in France state sovereignty is found in the cases law 26. In the same time multilateral agreement could address the state immunity such as the European convention on state immunity 1972. The concept of sovereignty in general doesn t fear the foreign investors while the inefficient local courts and jurisdictional immunity may negatively affected the foreign investors. B- Jurisdictional immunity. Convention on Jurisdictional Immunities of States and their Property27, notify the jurisdictional immunity and the state immunity in as follow: Article (1) The present Convention applies to the immunity of a State and its property from the jurisdiction of the courts of another State. Article (5) State immunity A State enjoys immunity, in respect of itself and its property, from the jurisdiction of the courts of another State subject to the provisions of the present Convention. This indicates that the jurisdictional immunities of States and their property are generally accepted as a principle of customary international law, having in mind the principles of international law embodied28 in the Charter of the United Nations and the domestic constitution for each country. During the trade and globalization age taking into account developments in State practice with regard to the jurisdictional immunities of States and their property, it was essential to resolve the issue of jurisdictional immunity. At some stage, the issue of jurisdiction immunity will be mainly unimportant once the host country has entered into an arbitration agreement. This means that the state is 26 Andrew Tweeddale, Karen Tweeddale, Arbitration of commercial disputes international and English law and practice Oxford University Press; edition one (Jan 22 2007) chapter 4 :the Arbitration Agreement and the parties page 134 parg 1. 27 , United Nation Convention on Jurisdictional Immunities of State and Their Property2004, Adopted b y the General Assembly of the United Nations on 2 December 2004. Not yet in force. See General Assembly resolution 59/38, annex, Official Records of the General Assembly, Fifty-ninth Session, Supplement No. 49 (A/59/49). 28,id Page 13 of 49 ELMH18027103 g 29enerally accepted to remove immunity reading jurisdiction. That agreement will extend jurisdiction to the court of the seat. According to the article 9 (1) of the English State Immunity Act 1978: (1)Where a State has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration, the State is not immune as respects proceedings in the courts of the United Kingdom which relate to the arbitration. The aforementioned treats an agreement to arbitrate as an implied waiver of immunity30 the provision provided that when the state has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration , the state will not be immune in relations proceeding in the courts of England . Numerous countries adapted the same provision as arbitration agreements be present on a higher decisional level than jurisdiction agreem ents. It follows that the intention of the parties to terminate an arbitration agreement carries, by definition, a greater volitional intensity than the intention of the parties to con clude jurisdiction agreemen 31ts . In effect, the theory of greater volitional intensity of arbi tration agreements implies that there is a lower entrance to be met with regard to the conclusion of arbitration agreements than there is with regard to jurisdiction agreements. This essentially implies that the reality of an arbitration agreement should be presumed. The argument for the superiority of arbitration agreements and the ensuing argument for the presumption of their existence have been employed by national courts in cases of conflict between arbitration and jurisdiction agreements to favor the application of the former. On the other hand, in the state owned commercial entities, the state is able to challenge the jurisdiction of the arbitral tribunal. For instance, the state may claim that the parties signing the agreement didn t hav 32e capacity to bind it. 29 Andrew Tweeddale, Karen Tweeddale, Arbitration of commercial disputes international and English law and practice Oxford University Press; edition one (Jan 22 2007) chapter 4 :the Arbitration Agreement and the parties page 134 p 30 ,id, page 135 parge. 1 31Stavros Brekoulakis, The Notion of the Superiority of Arbitration Agreements over Jurisdiction Agreements: Time to Abandon It Journal of Internat ional Arbitration 2007 P 354 32 Andrew Tweeddale, Karen Tweeddale, Arbitration of commercial disputes international and English law and practice Oxford University Press; edition one (Jan 22 2007) chapter 4 :the Arbitration Agreement and the parties page 135 parg Page 14 of 49 ELMH18027103 The claim of immunity -considered as the ultimate weapon for a state attempting to remove itself from the arbitration process- is a risk33, whether it is a claim on immunity 34 from jurisdiction basis or immunity from execution basis. Prof. Dr. Karl-Heinz B ckstiegel summarized the is sue of immunity in the Following terms: As far as international commercial arbitration is concerned, arbitral tribunals and courts may decide on immunity in a different way with regard to, on one hand, the question whether a state party may not have to enter into an arbitration procedure due to its immunity and, on the other hand, whether that same state party may not be subject to enforcement of an arbitral award due to its immunity. Also, it may make a difference whether the state corporation has a separate legal personality from the state or not. And even if it does have a separate legal personality, it may make a difference whether it is a corporation in public law or a corporation in private law. And finally it may make a difference whether the contract and the arbitration only concerns commercial activities (acta jure gestiones) or whether it also deals with acts of public authority (acta jure imperii) as may often be the case in investment disputes.35 The abovementioned principle of immunity is of course inherent to the very nature of states and implies that states may seek to invoke their sovereignty as a shield against an arbitral tribunal s authority. In recent years, the question of immunity has evolved significantly, especially after many countries adapted the privatization policy, remarkably with respect to the issue of whether a state s immunity may be waived. For example, generally accepted today that when a state entities get into arbitration agreement immunity from jurisdiction is supposed to have been waived36, which means that An arbitration agreement is in direct contradiction with immunity from jurisdiction, and must 33 Richard Boivin, International Arbitration with States: An Overview of the Risks Journal of International Arbitration 19(4): 285 299, 2002. 200 2 Kluwer Law International. 34 Id 35 K.H. B ckstiegel, The Legal Rules Applicable in In ternational Commercial Arbitration Involving States or tatecontrolled Enterprises, in INTERNATIONAL ARBITRATION: 60 YEARS ON A LOOK AT THE FUTURE 117, 145 et seq.(ICC Publishing, 1984). See also generally I. PINGEL-LENUZZA, LES IMUNIT S DES ETATS EN DROIT INTERNATIONAL (Bruylan t, 1998). 36 ,Id Page 15 of 49 ELMH18027103 therefore be considered to be a waiver of that immunity by a state or public entity in question 37. Finally, it appears that the issue of immunity from jurisdiction is now well-settled, the same cannot as easily be said with respect to the issue of immunity from execution against arbitral awards. In their attempts to address this issue, many courts have embraced the traditional distinction between commercial and sovereign acts, therefore limiting enforcement of an arbitral award against a state s assets to those assets used for commercial activities, as opposed to sovereign ones. Sovereign assets are accordingly protected from enforcement actions unless the state at issue can be said to have waived its immunity from execution 38. For this reason, parties to state contracts have generally been advised to include expressive terms regarding the issue of immunity from execution39or to adapt an arbitration provision related to the state wave of immunity. ? The State View of Immunity Even the State that seeks immunity from jurisdiction or from execution against State- owned commercial entities, the State and its wholly owned or controlled enterprises consider themselves to be functionally the same, so that the activities of State enterprises are considered to be carried out by the State in its exercise of sovereign authority 40. The international community adapted the Convention on Jurisdictional Immunities of States 41 and their Property, with a purpose to formulate rules of international law on the topic of 37 , For a detailed discussion regarding the principle of competence-competence, see Fouchard Gaillard Goldman on International Commercial Arbitration 650 60 (E. Gaillard & J. Savage eds., Kluwer, 1999); see also W.L. Craig, W.W. Park & J. Paulson, international chamber of commerce arbitration 28.07 28.08 (3d ed., oceana publications, 2000). 38 , Richard Boivin, International Arbitration with Sta tes: An Overview of the Risks Journal of International Arbitration 19(4): 285 299, 2002. 200 2 Kluwer Law International 39 , Id 40 A.F.M. Maniruzzaman, State Enterprise Arbitr ation and Sovereign, immunity issues: A Look at Recent Trends dispute resolution journal , American , Arbitration Association Inc.oct 2005 page 41 , Convention on Jurisdictional Immunities of Stat es and their Property 2005, Text adopted by the International Law Commission at its forty-third session, in 1999, and submitted to the General Assembly as a part of the Commission s report covering the work of that session (at para. 28). The report, which also contains commentaries on the draft articles, appears in Yearbook of the International LawCommission, 1991, vol. II, Part Two. Page 16 of 49 ELMH18027103 jurisdictional immunities of state. Part111 addressed the proceeding in which state immunity can t be invoked as mentioned in Article 10 ? Commercial transactions 1. If a State engages in a commercial transaction with a foreign natural or juridical person and, by virtue of the applicable rules of private international law, relating to the commercial transaction fall within the jurisdiction of a court of another State, the State cannot invoke immunity from that jurisdiction in a proceeding arising out of that commercial transaction. 2. Paragraph 1 does not apply: (a) in the case of a commercial transaction between States; or (b) if the parties to the commercial transaction have expressly agreed otherwise. 3. Where a State enterprise or other entity established by a State which has an independent legal personality and is capable of: (a) suing or being sued; and (b) acquiring, owning or possessing and disposing of property, including property which that State has authorized it to operate or manage, is involved in a proceeding which relates to a commercial transaction in which that entity is engaged, the immunity from jurisdiction enjoyed by that State shall not be affected. The United Nations International Law Commission (ILC), which has made relentless efforts to codify the universally acceptable rules on State jurisdictional immunity over the last two 42 decades. Thus, the recent Convention on Jurisdictional Immunities of States and their Property, drawn on the ILC s final Draft Articles of 2003, defines the term State to include, inter alia, agencies or instrumentalities of the State or ot her entities, to the extent that they are entitled to reform and are actually performing acts in the exercise of sovereign 43 authority of the State. According to this definition, a legal action 42 , A.F.M. Maniruzzaman, State Enterprise Arbi tration and Sovereign, immunity issues: A Look at Recent Trends dispute resolution journal , America n Arbitration Association Inc.oct 2005 page 43 , Convention on Jurisdictional Immunities of Stat es and their Property Article 2 Use of terms 1. For the purposes of the present Convention:(a) court means any organ of a State, however named , entitled to exercise judicial functions; (b) State means: (i) the State and its various orga ns of government; (ii) constituent units of a federal State or political subdivisions of the State, which are entitled to perform acts in the exercise of sovereign authority, and are acting in that capacity; (iii) agencies or instrumentalities of Page 17 of 49 ELMH18027103 or arbitration commenced against a State agency, enterprise, or instrumentality would be considered to be against the State itself. However, this does not dispose of the issue of sovereign immunity when a State entity is a party to an international arbitration. The approach enshrined in the quoted ILC definition appears to be functional rather than structural, given the phrase to the extent that. As a result, no matter what the status of the State agency, instrumentality, or enterprise is vis- -vis the State, so long as the enterprise is entitled to perform and is performin g acts in the exercise of sovereign authority of the State, it can invoke the state s overeignty. As a result the concept of commercial activity is a corner stone to determinate state sovereignty. ? The Meaning of Commercial Activity Section 1603 44(d) defines a commercial activity as either a regula r course of commercial conduct or a particular commercial transaction or act. The commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose. "Commercial activity" is defined as "normal commercial conduct or an exacting commercial transaction o 45r act". The same definition makes clear that "[t]he commercial character of the activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose". The issue which the court must address is "whether the particular actions that the foreign state performs (whatever the motive behind them) are the type of actions by which a private party engages in trade and traffic or comm 46erce". A mere connection to a commercial activity does not, of itself, make an action commercial rather, the action must be "based the State or other entities, to the extent that they are entitled to perform and are actually performing acts in the exercise of sovereign authority of the State; (iv) representatives of the State acting in that capacity; (c) commercial transaction means: (i) any commercial contract or transaction for the sale of goods or supply of services; (ii) any contract for a loan or other transaction of a financial nature, including any obligation of guarantee or of indemnity in respect of any such loan or transaction; (iii) any other contract or transaction of a commercial, industrial, trading or professional nature, but not including a contract of employment of persons. 44 U.S. code collection Judiciary and judicial pro cedure. 45 , Clifford Chance, State immunity and State own ed Enterprises , December 2008, www.cliffordchance.com. 46 , Saudi Arabia v. Nelson, fn. 23 above, 360-361 (1993). See also Republic of Argentina v. Weltover, 504 US 607, at 614 (1992) (Supreme Court). Page 18 of 49 ELMH18027103 on" that commercial activity in the sense that one, but not necessary 47 all, of the elements of at least on 48e of the claims must consist of a commercial activity The U.S. Supreme Court has elaborated upon the standard as follows: [W]hen a foreign government acts, not as regulator of a market, but in the manner of a private player within it, the foreign sovereign s actions are commercial within the meaning of the FSIA. Moreover, because the Act provides that the commercial character of an act is to be determined by reference to its nature rather than its purpose, the question is not whether the foreign government is acting with a profit motive or instead with the aim of fulfilling uniquely sovereign objectives. Rather, the issue is whether the particular actions that the foreign state performs (whatever the motive behind them) are the type of actions by which a private party engages in trade and traffic or comm 49erce. As a result, the classic distinction under many domestic legal systems is that a judgment creditor may execute on State assets that are held for commercial purposes, but not on assets used for sovereign or diplomatic activities. A problem facing judgment creditors, however, ids those only commercial assets they are typically able to locate tend to be held no 50t by the state itself but by one or more of its entities C- The Concept of Waiver of Immunity A State or a State enterprise that is legally part of the State itself can waive immunity either expressly or implicitly by a concession agreemen 51t or an arbitration clause in a contract with another party. The ILC addressed the results of inter into arbitration agreement as shown in article 17 ? The Effect of an arbitration agreement 47 , Santos v. Compagnie Nationale Air France, 934 F 2d 890, at 893 (1991) (7th Circuit). 48 , BP Chemicals Ltd v. Jiangsu Sopo Corp., 285 F 3d 677, at 682 (8th Circuit). 49 ,Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 614 (1992) (citation omitted). 50 ,Emmanuel Gaillard, State entities in internation al Arbitration, page 3 parg1. 51 ,Concession agreement , A right granted by a government to a corporation. It specifies rules under which the company can operate locally. The Author surly that all the concession agreements in developing country must include waiver of immunity and tax breaks for the corporation, in order to keep them from moving to another jurisdiction. Page 19 of 49 ELMH18027103 If a State enters into an agreement in writing with a foreign natural or juridical person to submit to arbitration differences relating to a commercial transaction, that State cannot invoke immunity from jurisdiction before a court of another State which is otherwise competent in a proceeding which relates to: (a) the validity, interpretation or application of the arbitration agreement; (b) the arbitration procedure; or (c) the confirmation or the setting aside of the award, unless the arbitration agreement otherwise provides. The abovementioned shows that the waiver of state or state immunity from an arbitration clause must be presumed: it must be certain and va lid 52 specific and result from 53 action unequivocally showing the intention to waive. .Similar rule apply when the state sign an concession agreement or investment treaties. ? The Waiver of Immunity in ICC Cases A 54ccording to the Article 28(6) of new rules, this entered into force in 1998. Every Award shall be binding on the parties. By su bmitting the dispute to arbitration under these Rules, the parties undertake to carry out any Award without delay and shall be deemed to have waived their right to any form of recourse insofar as such waiver can validly be made. This was the solution later adapted by the court de cassation in Creighton v. Qatar, an arr?te de prin 55cipe render in July 6, 2000. In that case, a company, Creighton, had obtained two separate final awards against the state of Qatar in 1993, in trial related to the construction and maintenance of a hospital. Then, in order to enforce the awards, the company wanted garnishment of funds held on behalf of Qatar by a Qatari bank and by the Banque de france, as well as conservatory seizures of shareholder rights and securities belonging to the state. In a decision of June 11, 1998, the Paris Court of appeals, adhering56 to the principle expounded in the Eurod 57if case, confirmed the cancellation of 52 Emmanuel Gaillard, Jennifer younan, State entities in international arbitration Juris Publishing, i nc, iai series in international arbitration n4. Published June 2008 page121 parge 2. 53 id 54 Article 24(2) of the ICC Rules now is article 28(6) which entered to force in 1998. 55 Emmanuel Gaillard, Jennifer younan, State entities in international arbitration Juris Publishing, i nc, iai series in international arbitration n4. Published June 2008 page121 parge 2 56 id Page 20 of 49 ELMH18027103 these seizures ordered by the court of first instance of Paris on the grounds that it was not established that the state had waived its immunity from execution and that the acceptance o 8f an arbitration clause does not establish a presumption of such a waiv 5er . The court de cassation overruled the court of appeals decision on two grounds, first the principle of international law governing the immunity of foreign states. Second the article 28 (6) of the ICC rules it held, forcefully, that: The promise made by the state signing the arbitrat ion clause to carry the award in accordance with the article 24 of the rules of the Arbitration of the International Chamber o 59f Commerce is an implied waiver by the state of its immunity from execution In a decision dated December 12, 2001, the Paris court of appeals, on remand from the cour de cassation s July 6, 2000 decision in Creighton v. Qatar, then adopted an even more liberal solu 60tion. The clause in Article 24-2 (now Article 28-6) of the ICC Rules, emphasizing that the award is binding on the parties and that the parties undertake to carry it out without delay, is a rather stereotyped and, one may even say, superfluous provision, but for its psychological effect. It does not include any reference to the immunity from execution that a party may be entitled to invoke. To read a waiver of such immunity between the lines of this clause is a far-fetched interpretation. ? The Waiver of Immunity in ICSID Cases Waiving of immunity according to ICSID rules are as follows: in a bilateral investment treaty, a contracting State agrees to offer ICSID jurisdiction to nationals of the other 57, Case Paris , Apr. 21 1982 , RØpublique islamique d Iran v. Eurodif, 1982 REV,arb, 213 ( commentary by paris Bourel , Arbitrage international et immunity des etats etrangers. 58 Emmanuel Gaillard, Jennifer younan, State entiti es in international arbitration Juris Publishing, inc, iai series in international arbitration n4. Published June 2008 page123 parge 1 59, Creighton limited v. minister of finance and minister of Municipal affairs and agriculture of the state of Qatar (Creighton v. Qatar,) subject matter that a sovereignty state sing an ICC arbitration clause it thereby its immunity from execution . 60 Emmanuel Gaillard, Jennifer younan, State entities in international arbitration Juris Publishing, i nc, iai series in international arbitration n4. Published June 2008 page123 parge 1 Page 21 of 49 ELMH18027103 61 contracting state. One of these treaties, namely the Washington convention clearly 62 announces the binding to ICSID arbitration agreements. A dispute is then submitted to the center on the basis of a contract which was entered into with person other than the state, and which has allegedly been violated 63. Approval by a State enterprise to arbitration under the support of the International Centre for the Settlement of Investment Disputes (ICSID 64) A 65s a result, there is binding waiver of immunity from case. Nonetheless, in ICSID arbitration and international commercial arbitration generally, an undertaking by a State or a State enterprise to arbitrate is not itself a consent to court enforcement of the resultant award. Under the ICSID Convention (1965), the enforcement of an award is not automatic. Article 55 of the Convention clearly states that the provisions relating to the recognition and enforcement of an arbitral award in Article 54 shall not Be construed as derogating from the law in force i n any Contracting State relating to immunity of that State or of any foreign state from execution. Thus, participation by a State or a State company in an ICSID arbitration should not be interpreted as an implicit waiver of immunity from execution, since Article 55 conserve such immunity in no uncertain term. May a State or State enterprise expressly waive the claim of immunity from execution of an ICSID award in a contractual arbitration clause. This would depend on whether the law in force in the country where execution is sought permits such a waiver. Should State parties to the ICSID Convention act to ensure enforcement of Convention awards in their respective jurisdictions? Hazel Fox wisely suggests that they should. She says that States should ensure that their law on state immunity relating to enforcement of arbitral awards conforms to the minimum international standard. Conformation to this stand ard can be expected from States that act in good faith by taking legislative action to enforce it. Thus, in 1988 the U.S. Congress amended the 1976 Foreign Sovereign Immunities Act to provide 61 Jan Paulsson,, abitration without privity 10ICSID rev . 232 (1995) 62 Julian D.M lew, Contemporary problems in interna tional arbitration page 316 63 Ibrahim Fad Allah, Are State liable for the cond uct of their instrumentalities ICSID case law pa ge 22 para1. 64 A.F.M. Maniruzzaman, State Enterprise Arbitration and Sovereign, immunity issues: A Look at Recent Trends dispute resolution journal , American Arbitration Association Inc.oct 2005. 65 id Page 22 of 49 ELMH18027103 That an agreement to arbitrate constitutes a waive r of immunity in an action to enforce that agreement or the resultant award. Part two: state entities A- The Meaning of Independent State Entities: The term of an "enterprise" suggests an entity engaged in a trading activity. Such entities, and the interest which foreign sovereign States hold in them, may take many forms. As one commentator noted in 1985: "States differ as to how they choose to run and organize their economies and the extent to which they rely on the private market. Some States leave economic development primarily in the hands of the private market, (e.g. the United States); others rely on the private market but control it by regulation or direct participation in key sectors (e.g. Sweden). Still other States use a market approach for production and the means of distribution. Some States use non-market approaches for production and distribution (e.g. Yugoslavia). Finally, some States use non-market approaches for production and distribution (such as central economic planning) where all means of production are State property (e.g. the USSR and Chin 66a)." independent state entity means any entity constit uted or organized under related law, whether or not for profit, governmentally controlled either functionally, structurally or through ownership interests, by the state; and includes a corporation, trust, partnership, sole proprietorship, branch, joint venture, association, or other organization. Although the abovementioned definition is written with a significant clarity, it is important not to confuse some state organs that are required to act independently under the constitutional principle of separation of powers. That principle imposes that some state entities must act independently without any kind of control from their governments. 66 Clifford-chance, State immunity and state owned E nterprises Report prepared for the special Representative of the Un secretary General on bus iness and human rights. December 2008 http://www.business-humanrights.org/Documents/Clifford-Chance-State-immunity-state-owned- enterprises-Dec-2008.PDFReport prepared for the Special Represt Page 23 of 49 ELMH18027103 Parliaments, central banks and judicial authorities are impressive examples for this kind of entities. The acts of these entities are not expected to be problematic in the course of the international arbitration since they are not expected to be involved directly in an investment due to their political or judicial nature; however the meant independent state entities are those having commercial nature as we explained above. It is irrefutable that the independent state entities that are required to act independently under the constitutional principle of separation of powers are normally and legally indistinguishable parts of the state notwithstanding their independence, sine the functions carried out by these kinds of state entities are apparently governmental. In the Ad hoc Arbitration, Eureko B.V. v. Republic of Poland, one of the issues that were in question was whether the acts of the State Treasury were attributable to the State or not, the Tribunal held that: In brief, whatever may be the status of the State Treasury in Polish law, in the perspective of international law, which this Tribunal is bound to apply, the Republic of Poland is responsible to Eureko for the actions of the State Treasury. These actions, if they amount to internationally wrongful act, are clearly attributable to the Respondent and the Tribunal so find 67s B- The different Approaches of Arbitral Tribunals: The criteria of structural and functional control of the state over its independent state entities were recently adopted by the ICSID Tribunal in the award rendered on January 25, 2000 in ICSID Case No. ARB/97/7, Emilio Agustin Maffezini v. Kingdom of Spain. The Tribunal held that: for the determination of whether an entity was a state organ whose acts could be attributable to the state, two tests were required to be done; one of them is structural and the other is functional. According to the Tribunal s view, if on analyzing the structure of an entity it appears to be distinct from the state due to the usage of a corporate veil, the second examination 67 Ad hoc Arbitration, Eureko B.V. v. Republic of Poland, Partial Award and Dissenting Opinion, 19 August 2005, http://ita.law.uvic.ca/documents/Eureko-PartialAwardandDissentingOpinion.pdf Page 24 of 49 ELMH18027103 must be done to examine the functional status of this entity so that if it is entrusted with any governmental functions, it will necessarily be deemed to be a state organ whose acts are attributable to the state. In support to its view the tribunal cited the relevant Article of the ILC Articles on Responsibility of States for Internationally Wrong 68ful Acts and noted that the functional test was applied69, in respect of the definition of a national of a Contracting State, in the decision of the ICSID Tribunal on objections to jurisdiction in the case of Ceskoslovenska Obchodni Banka, A. S. v. the Slovak Republic, in which the Tribunal held that the fact of State ownership of the shares of the corporate entity was not sufficient to decide whether the Claimant had standing under the Convention as a national of a Contracting State as long as the activities themselves were essentially commercial rather than 70 governmental in nature. Indeed, the Tribunal provided two objective criteria that will necessarily help the other ICSID Tribunals to decide whether an act of an independent state entity is attributable to the state or not, however it obviously failed to determine clearly the rules and basis, that these structural and functional tests must be done in their conformity, i.e. whether the structural and functional tests must be done in conformity to the applicable national law of the host state, relevant customary international law rules or at the discretion of the tribunal etc. Indeed, arbitral tribunals had taken different positions while dealing with the question of whether the acts of independent state entities can possibly be attributed to states or not, however unlike the ICSID Tribunal in Emilio Agustin Maffezini v. Kingdom of Spain, 68 The International Law Commission (ILC) is a U.N. agency that was established in 1947. The mission of ILC is to contribute to codifying the existing customary law and to encourage the progressive development of international law. 69 ICSID Case No. ARB/97/7, Emilio Agustin Maffezini v. Kingdom of Spain, Decision on Jurisdiction, 25 January 2000, Paras 78-80. 70 ICSID Case No. ARB/97/4, Ceskoslovenska Obchodni Banka, A. S. v. the Slovak Republic Decision on Objections to Jurisdiction, May 24, 1999, ICSID Review, Foreign Investment Law Journal, Vol. 14, 1999, at p. 250. Page 25 of 49 ELMH18027103 the vast majority of the tribunals applied various tests to determine the status of the involved independent state entities in accordance to the internal laws of the host states. In Impregilo S.p.A. v. Islamic Republic of Pakistan, as examining the status of WAPDA71, the concerned independent State entity, the Tribunal, at the outset, noted that its examination would be conducted in accordance to the applicable internal law of Pakistan: The status of WAPDA as a party to the Contracts is a matter for the law of Pakistan, being both the law by which WAPDA was established and exists, and also the law governing the Con 72tracts. The Tribunal then proceeded to carry out some tests in harmony to the applicable domestic law of Pakistan in order to determine the status of WAPDA as state entity or independent. Moreover, The Tribunal adopted the criteria of whether the state practiced any structural control over WAPDA i.e. did the Pakistani government have the power to appoint any of WAPDA s officials or not, the Tribunal found that: WAPDA consists of a Chairman, and not more than th ree Members appointed by the overnment (Section 4). They receive such salary an d allowances and are subject to such conditions of service as may be prescribed by the Government (Section 5). Under Section 6 of the 1958 Act, the Government may remove the Chairman and any Member of the Board for various reasons, in particular if they become, in the opinion of the Government, incapable of discharging their responsibilities under the 1958 Act or if they have been declared to be disqualified for employment in, or have been dismissed from, the service of Pakistan 73. The Tribunal then examined the status of the personnel of WAPDA in order to determine Whether working for WAPDA would be deemed as working for Pakistan government or not, the Tribunal found that: "Service under the Authority is considered to be service of Pakistan and every person holding a post under the Authority, not being a person who is on deputation to the 71 WPDA, means the Water and Power Development Authority in Pakistan 72 ICSID Case No. ARB/03/3, Impregilo S.p.A. v. Islamic Republic of Pakistan, Decision on jurisdiction, 22 April 2005, para. 199. 73 Id para 202 Page 26 of 49 ELMH18027103 authority from any Province, shall be deemed to be a civil servant for the purposes of the Service Tribunals Act, 1973 (Section 17 (1-D)) and within the meaning of Section 21 of 74 the Pakistan Penal Code (Section 19(1)). The Tribunal also adopted the criterion of functional control i.e. whether Pakistan practiced any functional control over WAPDA or not, the Tribunal found that: The power and duties of the Authority are defined in Sections 8 to 16 of the Act. Under Section 8, the Authority shall prepare, for the ap proval of the Government a comprehensive plan for the development and utilization of the Water and Power resources of Pakistan . It also may frame schemes for a province or any part thereof, subject here again to approval by the Governmen 75t. Finally the Tribunal examined whether Pakistan practiced any financial control over WAPDA or not: The accounts of the Authority are audited by the Auditor General of Pakistan. The Auditor Report with the comments of the Authority is sent to the Government and the Authority shall carry out any directive issued by the Government for rectification of an audit objection . Each year, the Authority submits to the Government for approval a statement of the estimated receipts and expenditures in respect of the next financial year (Section 27 76). After performing all the abovementioned tests the Tribunal then weighed the result of these tests as follows: Although the Government of Pakistan exercises a strict control on WAPDA, in light of the terms of the 1958 Act that established it, the Tribunal considers that WAPDA is properly characterized as an autonomous corporate body, legally and financially distinct from Pakistan government body 77. In Wena Hotels Ltd. v. Egypt; the dispute arose out of agreements concluded between Wena Hotels Limited (a British Company), and the Egyptian Hotels Company, a State- owned Egyptian company, to develop and manage two hotels in Luxor and Cairo. Wena 74 Id, para. 202 75 Id, para. 204. 76 Id, para. 207. 77 Id, para. 209 Page 27 of 49 ELMH18027103 invoked the Agreement for the Promotion and Protection of Investments between Egypt and the United Kingdom ( Egypt-U.K. BIT ). Egypt ra ised four preliminary objections to the jurisdiction of the Tribunal and the admissibility of the claim, two of which it subsequently withdrew. Egypt?s second objection was that there was no legal dispute between the Claimant and the Respondent. The Tribunal first noted that the sole shareholder of EHC was Egypt and that EHC?s shareholder assembly was chaired by the Minister of Tourism and would be attended by several other government officials The Minister of Tourism also was responsible for the appointment of at least one half of the Board of Directors of EHC, and furthermore nominated EHC?s Chairman. The Tribunal also noted that the Minister of Tourism was also empowered to dismiss the chairman and the members of the Board of EHC if it appears that the continued presence of these persons would affect the proper functioning of the company. The Tribunal then reached the following conclusion: In sum, the Tribunal concludes that Egypt breached its obligations under Article 2(2) of the IPPA by failing to accord Wena?s investments in Egypt fair and equitable treatment and full protection and security. Even if the Egy ptian Government did not authorize or participate in the attacks, its failure to prevent the seizures and subsequent failure to protect Wena?s investments give rise to liability. The Tribunal also finds that Egypt?s actions amounted to an expropriation transferring control of the hotels from Wena to EHC without prompt, adequate and effective compens ation 78 In violation of Article 5 of the IPPA. 14 In the Annulment proceedings, the ad hoc Committee expressly upheld the Award. The ICSID ad hoc Committee rejected all of Egypt?s objections to the award of 8 December 2000 in Wena v. Egypt as unfounded. Egypt s grounds for annulment were revolving around the differentiation The Committee noted that: The Committee cannot ignore of course that there is a connection between the leases and the IPPA since the former were designed to operate und
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