Private Arbitration And Foreign Acts Of State.
Legal News & Analysis - Asia Pacific - India - Dispute Resolution
21 March, 2019
Reliance Industries Ltd and others -v- The Union of India  EWHC 822 (Comm)
The Anglo-American doctrine of foreign act of state was first articulated by a US court in 18971 (Underhill -v- Hernandez, 168 U.S. 250 (1897)). Underpinned by the concepts of mutual international respect and comity, the principle states that a court as an organ of government will not adjudicate on the legislative or executive acts of a foreign state done within its own territory. In contrast, in many jurisdictions, there are exceptions to state immunity in relation to commercial transactions and in the United Kingdom, this is enshrined in the State Immunity Act, 1978.
The doctrine in relation to court proceedings was most recently considered and clarified under English law by an expanded bench of the Supreme Court in the conjoined appeals of Belhaj and Another -v- Straw (Belhaj and Another -v- Straw; and Rahmatullay (No1) -v- Ministry of Defence and Another  UKSC 3). In Reliance Industries Ltd, a case concerning the contractual obligations of the Indian Government, the High Court has confirmed that the doctrine applies also to English arbitration. An agreement by a state to arbitrate therefore does not on its own mean that the tribunal has jurisdiction to determine the lawfulness or validity of sovereign acts carried out by that state.
This is a matter of English private international law which the tribunal is required to apply, and it is not dependent on being an organ of government.
Facts in the Reliance case
In 1994, the claimants entered into production sharing contracts (PSCs) with the Indian Government (‘the Government’) which granted the claimants exclusive rights as contractors to exploit petroleum resources from two areas off the west coast of India. The petroleum products were mostly sold to Government nominee entities. Various contractual disputes arose between the parties under the PSCs and in 2010, pursuant to English law arbitration clauses, the claimants commenced what was to be a lengthy and complex arbitration, which, to date, has resulted in five different awards.
A dispute centred around two occasions when the nominee companies withheld part of the price for the product after being directed to do so by the Government by way of notices issued pursuant to a Ministry of Petroleum office memorandum (‘the OM’). The claimants argued that they were entitled to claim the withheld sums from the Government on the grounds that it was a principal debtor under the PSCs. The Government in turn, argued that the OM was an executive order passed as a legislative act and that the sovereign powers of the Government were not curtailed by any provisions in the PSCs.
The OM stated, inter alia, that the Government or its nominees would withhold payments in the public interest and in order to protect its own interests in the event that statutory or contractual amounts due to it as calculated by contractors under the PSCs were not deposited in a timely manner as agreed.
The tribunal concluded that although the Government was the principal debtor under the PSCs and therefore prima facie liable to pay the sales price, it did not have jurisdiction to determine the question of whether the Government was entitled to direct its nominees to withhold any part of the payment that was otherwise due to the claimants.
The claimants applied to the High Court in London challenging that conclusion. The questions for the Court were:
- Do the issues around the withholding of payments to the claimants engage the foreign act of state doctrine such that they would be non-justiciable in court?
- If so, are they non-arbitrable in arbitration?
- If so, has the Government waived its right to contend that it is nonarbitrable as a result of submitting to the jurisdiction of the tribunal?
Although the claimants conceded that the OM was a valid legislative act, they challenged both the OM and the notices that followed as to their validity as executive acts: first, on the ground that the OM referred to sums due ‘as calculated by contractors’ but the withheld sums had been unilaterally calculated and demanded by the Government; and, second, that the Government could not rely on the notices and the OM as neither could validly or effectively deprive the claimants of what would otherwise be their rights under the PSCs. The Government argued that the notices had the force of extant law and were themselves executive i.e. sovereign acts. They were therefore protected by the act of state doctrine.
In respect of the validity of the OM, and the first question in issue, the court found that the claimants’ argument was ‘…a head on challenge to the validity of a sovereign legislative act of a foreign state in relation to property within its own territory’. However, the claimants’ arguments as to the applicability of the OM and notices was less clear cut: it was not that the OM could not lawfully have the effect argued for, simply that it did not, in fact, purport to have that effect, and this was, potentially, a construction point which was properly justiciable by a foreign domestic court. Nevertheless, this challenge to the validity and effectiveness of the notices was still also a challenge to the validity and effectiveness of the executive acts of a sovereign state in relation to property within its own territory, under the OM, and therefore the doctrine was engaged in respect of both points.
As to the second issue, the arbitrability of the claim, the court considered that it is a hard-edged principle of English private international law that a sovereign state’s executive acts in respect of property within its territory is non-justiciable. Its rationale derived from the very concept of sovereignty and there was no good reason why the principle should be any less applicable in arbitration.
In respect of the third question, the court did not accept the proposition that the Government had waived the application of the act of state doctrine or any objection to the tribunal’s jurisdiction simply by submitting to arbitration and/or had failed to state its objection timeously. Whilst the consensual nature of arbitration meant that the parties were free to submit whatever issues they wished to adjudication by an arbitration tribunal, the Court said that it would be perverse to conclude that merely by agreeing to arbitration a state has agreed that the principles of private international law should be dispensed with rather than applied.
The case highlights the difficulties faced by private parties who enter into a contractual relationship with a state when the act of state doctrine is engaged. Such parties may wish to ensure that their contract expressly provides that the act of state doctrine will not be invoked to defeat a liability that would otherwise exist. Further, since as a matter of English law, a state is immune from execution of an award or judgment against its assets (unless those assets are of a commercial nature), the contract should ideally provide, from the perspective of a private party for a waiver by the state of its immunity from execution, including prejudgment execution so as to permit the possibility of interim relief and the maintenance of the status quo, such as by a freezing injunction. A ‘stabilisation clause’ in the contract triggering a distinct liability to compensate the private party for losses arising under the contract from the consequences of a sovereign act may also operate to provide a measure of protection. Conversely, a state wishing to be free to protect its national interests as far as possible would seek to resist such provisions.
For further information, please contact:
Kamal Mukhi, Legal Director, Hill Dickinson