JUNE 2015
  • Enforcing Against State Assets: The Case for Restricting
    Private Creditor Enforcement and How Judges in
    England have Used “Context” When Applying the
    “Commercial Purposes” Test

    Katherine Reece Thomas

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.

state immunity from enforcement; state assets and attachment; judicial measures of constraint against state assets; sovereign debt; vulture funds; international insolvency; commercial purposes test for enforcement against state assets; customary international law on state immunity; the International Court of Justice on state immunity; US and European domestic law on enforcement; analysis of recent English cases; SerVaas; AIC; AIG; Orascom.
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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 commercial purposes”. 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. The 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 Colombia10 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. The words “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 have emerged.