State (immunity) of confusion: two contrasting decisions on the doctrine of state immunity

April 16, 2024

Two recent decisions of the Commercial Court relating to set aside applications of ICSID award registrations, although surprisingly similar in fact, came to very different conclusions on the operation of the doctrine of state immunity.

Back in May 2023, Mr Justice Fraser (as he then was) refused a set aside application of an order to register an arbitral award in the matter of Infrastructure Services Luxembourg S.À.R.L. v. Kingdom of Spain [2023] EWHC 1226 (Comm) (the ISL case). The underlying dispute concerned Spain's removal of tariff incentives that had been available for solar energy. The claimants successfully claimed that Spain had breached its obligation of fair and equitable treatment under the ECT and were awarded around EUR120 million in damages.

Then in January 2024, Mrs Justice Dias considered a set aside application along similar grounds in Border Timbers Limited v. Republic of Zimbabwe [2024] EWHC 58 (Comm) (Border Timbers). The arbitration, under a BIT between Switzerland and Zimbabwe, concerned the expropriation of land during Zimbabwe's controversial land reform programme. The claimants in this case were also successful and were awarded over US$125 million. The set aside application was similarly refused.

Two peas in a pod

The two decisions are similar in many ways. Both concerned applications to set aside orders registering ICSID awards under the Arbitration (International Investment Disputes) Act 1966 (the 1966 Act). In both cases, there had previously been challenges to jurisdiction, both before the tribunal and before an ICSID annulment committee on substantially the same grounds as the High Court applications. And, indeed, both set aside applications were dismissed.

More fundamentally, however, both applications raised the same ground for set aside (amongst others) - the doctrine of state immunity. In both cases, the State respondents claimed immunity under section 1(1) of the State Immunity Act 1978 (the SIA) and the claimants in both cases claimed that the exceptions in sections 2 and 9 of the SIA were triggered by the agreement to arbitrate in the respective treaties. Both States countered that these exceptions did not apply. In the case of Spain, this was because, they claimed, there was no valid arbitration agreement because of what has come to be known as the "intra-EU exception". On the other hand, Zimbabwe claimed that the dispute in question did not fall within the scope of the arbitration agreement.

Chalk and cheese

This is where the similarities end, however. Despite both judges ultimately refusing the applications, they arrived at their decisions by decidedly different routes.

Is a general waiver of state immunity equal to a specific submission to jurisdiction?

Section 2 of the SIA provides an exception to state immunity where the State has "submitted to the jurisdiction of the courts of the United Kingdom", whether "after the dispute" or by "prior written agreement".

In Border Timbers, Dias J found that section 2 was drafted with reference to specific proceedings before a specific court. This meant that, for the exception to be triggered, there must be a submission by the State in respect of the current proceedings. This specific submission, she found, was conceptually distinct from a general waiver such as that found in Article 54 of the ICSID Convention (the Convention). Despite accepting that this may be seen as undermining the object and purpose of the Convention, the judge found that the words in section 2 were clear. She cautioned that the section was of general application, stretching far beyond the "niche category of ICSID awards". She therefore found that the claimants had not made the case that this exception applied.

In the ISL case, on the other hand, Fraser J found that Article 54 constituted a "prior written agreement" to submit to the court's jurisdiction for the purposes of section 2. He stated that, if this were not the case, the 1966 Act would only allow for registration of ICSID awards to which the UK was a party. He described this as "an absurd result".

These two findings appear to be irreconcilable, with Dias J's decision representing a novel and perhaps surprising approach. An agreement to arbitrate under ICSID is either a submission to the jurisdiction of the English courts for the purposes of enforcement or not and the point will need to be addressed on appeal.

Can the court open up questions of jurisdiction in order to determine state immunity questions?

Section 9 of the SIA is a further exception to state immunity, also stemming from a State's prior submission to proceedings. Sometimes called the "arbitration exception", section 9(1) provides that "[w]here a State has agreed in writing to submit a dispute… to arbitration, the State is not immune as respects proceedings… which relate to the arbitration."

In Border Timbers, the claimants argued that section 9 applied because of an arbitration clause in the relevant BIT. They claimed that the decisions of the tribunal and the annulment committee (that the dispute did fall within the scope of the clause) was final and binding on the English courts.

Dias J, however, disagreed, finding that the court must come to its own conclusion independent of the decisions of the tribunal and annulment committee. She recognised the ICSID regime was designed to be "hermetically sealed", without recourse to appeals and challenges. However, she emphasised that unless the court was satisfied that there was in fact a valid and applicable arbitration agreement, "the hermetically sealed nature of the regime is neither here nor there". The judge therefore found that Zimbabwe was in principle entitled to raise jurisdictional objections in order to argue that the arbitration exception did not apply. As this was only a response to the preliminary question raised, she did not go on to consider whether those objections were valid.

In the ISL case, however, Fraser J emphasised that the court cannot review ICSID awards. He quoted investment law expert Professor Schreuer, as cited by the Supreme Court in Micula v. Romania [2020] UKSC 5, for the proposition that an ICSID award, once its authenticity has been ascertained, may not be re-examined on the basis of jurisdiction, merits or procedural propriety. However, when the judge came to decide on the section 9 exception, he considered at length Spain's arguments in relation to the applicability of the arbitration agreement in the ECT in order to reject the claims. This may look contradictory, but once such arguments have been raised by a party, they will be considered by the court under the English law principles of state immunity.

At what stage in proceedings are state immunity defences allowed?

Dias J in Border Timbers asked this unexpected question of the parties, which had not been raised by the parties. She found that there was an obligation in the Convention for Member States to recognise an ICSID award as binding and to enforce its pecuniary obligations, with "enforce" in this context meaning "according to an ICSID award the same status as a final judgment of the national court". She noted, on the other hand, that "questions of execution [were] to be governed by the domestic laws of the enforcing state."

On this basis, she found that, at the registration stage, there was no exercise of the court's adjudicative jurisdiction because the applicant was entitled to have the award registered, subject only to certain procedural requirements. She therefore concluded that the respondent State only joins the proceedings once the order granting registration of the award is served on it and therefore that "the doctrine of state immunity has no application at the anterior stage of registration". On the contrary, the State can only "assert immunity in relation to any further steps that the judgment creditor may seek to take to execute the award". Under this analysis, the State can only raise this defence, therefore, at the point of execution of the award and would not have the opportunity to raise the defence at an earlier stage.

In coming to her conclusion, she also relied on the procedural requirements for registration of ICSID awards under CPR 62.21. Unlike non-ICSID awards, there is no reference to a claim form or to service out of the jurisdiction; instead, only notice of the application is required to be given to the State. She also noted that certain provisions of the CPR giving the judgment debtor the right to apply to have the registration set aside are expressly excluded in relation to ICSID awards.

In the ISL case, although the judge drew a distinction between "adjudicative jurisdiction and enforcement jurisdiction", he considered that having the award recognised as if a judgment of the High Court was the first step in enforcement of the award and necessarily required the court to have adjudicative jurisdiction. He therefore decided the questions of state immunity as part of the application to set aside the order registering the award, considering that then was the appropriate time to do so.

Permission to appeal to the Court of Appeal has been granted in both of these cases. Some commentators have suggested that they could sensibly be heard together. Either way, let's hope that the appeals provide some clarity on these strikingly different decisions.