When do 'constituent territories' and their employees benefit from state immunity?

The State Immunity Act 1978 confers immunity on foreign states and certain state entities. It can therefore be an important consideration for those operating in the ENR sector, where contractual arrangements often involve states and state-owned entities.

The case of Dynasty Co for Oil and Gas Trading Ltd v Kurdistan Regional Government of Iraq arises out of two production sharing contracts entered into with the Kurdistan Regional Government of Iraq. It provides useful guidance as to how the principle of state immunity applies to constituent territories.

Key takeaways

State immunity can confer immunity not just on states but also on “separate entities”, which can include constituent territories of states, as well as their employees. This can be the case even where the constituent territory in question is acting without direct support or instruction from the state, provided the state’s constitution grants the constituent territory the right and power to act. Those that need to contract with states and state entities should seek protection at the time of contracting by including a carefully drafted waiver clause in their contracts.

Facts

The claimant (Dynasty) was an Iraqi company, formed in 2018 as a joint venture between two energy companies based in the Kurdistan Region of Iraq (the KRI)¹. The defendants were: (i) the government of the KRI, i.e. the Kurdistan Regional Government of Iraq (the KRG); and (ii) the former Minister for Natural Resources of the KRG, Dr Ashti Hawrami (Dr Hawrami).

On 1 March 2019 Dynasty entered into a Sale and Purchase Agreement (the SPA) with an international oil and gas company (the Seller) for the purchase of the Seller's interest in two oil and gas blocks within the KRI. Both blocks were the subject of production sharing contracts entered into (one in 2008 and one in 2011) between the KRG and entities later acquired (in whole or in part) by the Seller, under which the KRG's consent was required for a change of control. The SPA was governed by English law, subject to the exclusive jurisdiction of the English courts, and contained a provision requiring consent to be obtained from the KRG for Dynasty to take over the Seller's interest, failing which either party was entitled to terminate. In the event, consent was not forthcoming from the KRG and ultimately the Seller terminated the SPA. Dynasty then commenced proceedings against the KRG and Dr Hawrami in the English Commercial Court for wrongfully failing to provide consent.

This particular decision related to an application by Dr Hawrami seeking to challenge the English court’s jurisdiction, including on the basis that he was immune from suit under section 14 of the SIA.

The relevant provisions of the State Immunity Act 1978

The State Immunity Act 1978 (the SIA) is the English legislation giving force to the principle of international law known as State immunity, or sovereign immunity. State immunity generally grants immunity in two ways: (i) immunity from adjudication or suit (i.e. from being sued); and (ii) immunity from enforcement.

Section 1 of the SIA confers a general immunity on all foreign states, including immunity from both suit and enforcement. That immunity is subject to a number of exceptions,²  and it may also be waived by the state, either generally or in relation to a particular contract.

The definition of “state” in the SIA includes not just foreign states, but also the sovereign/head of that state, the government of that state, and any department of that government (section 14(1) SIA). The definition excludes “separate entities” which are “distinct from the executive organs of the government of the State and are capable of suing or being sued”. However, such “separate entities” can still benefit from immunity provided: (a) the proceedings relate to anything done by the separate entity “in the exercise of sovereign authority”; and (b) the circumstances are such that a state in the same position would have been immune (section 14(2) SIA).

Court’s decision

In the Dynasty case, it was accepted by both parties that the KRI, as a constituent territory of the State of Iraq, did not qualify as a “state” for the purposes of the SIA. However, Dr Hawrami sought to argue that the KRG, as the government of the KRI, was still immune from suit because it qualified as a “separate entity” for the purposes of section 14(2) SIA. In other words, because it was acting in the exercise of the sovereign authority of the State of Iraq. As an employee of the KRG, Dr Hawrami argued that he also benefitted from immunity.

The first question the court had to decide was therefore whether the KRG was acting in the exercise of the sovereign authority of the State of Iraq when it refused to grant consent for the change of control under the SPA.

Dynasty argued that it was not sufficient that the KRG had authority over oil and gas resources under the constitution of Iraq. Rather it was necessary to show that the KRG’s actions had “impleaded the state” (i.e. Iraq) itself, which meant showing that those actions were taken with instructions or support from Iraq. Since the KRI’s control over its own natural resources is a hotly contested topic within Iraqi politics, Dynasty argued that it could not be said that the KRG’s actions were carried out with the support of Iraq: the state of Iraq was thus not “impleaded”, and the KRG’s actions were therefore not exercised with sovereign authority.

The court accepted that the position for constituent territories like the KRI was somewhat different from most other “separate entities” (such as state-owned oil companies and national banks or airlines). Those other “separate entities” would not normally be exercising the sovereign authority of a state unless specifically instructed to do so by the government. However, the court held that it was quite possible for a state to allocate responsibility for a particular area to a constituent territory by way of its constitution. The court also pointed out that the fact that the government for the time being in control of the state (in this case Iraq) might oppose the exercise of its sovereign authority by the constituent territory (i.e. the KRI) was irrelevant. The political complexion of a government could change and what mattered was the sovereign authority of the state itself. As a result, the court concluded that “it is, in principle, open to a constituent territory to seek to show, by reference to the constitution of the relevant state, that it is exercising the sovereign authority of the state”.³

The key issue was therefore whether the KRG had, pursuant to the constitution of Iraq, the right and power to exercise Iraq’s authority in respect of the relevant acts. Following a detailed examination, with the help of leading experts, of the constitution of Iraq and its complex history, the court found that the constitution did indeed grant the KRG that right and power.

The court also held that Dr Hawrami himself benefitted from immunity. It cited a number of authorities confirming that servants or agents of both states (e.g. government officials) and “separate entities” (e.g. employees of state owned entities) also benefit from immunity, for the simple reason that claimants could otherwise circumvent State immunity by simply suing the individuals involved instead of the state. The Court further held that, for the same reason, this was also true where the “separate entity” is exercising sovereign authority pursuant to a constitutional allocation of authority.

Comment

Companies within the ENR sector will frequently encounter contractual arrangements which involve states, state-owned entities and other “separate entities”, including constituent territories like the KRI. The simplest and most effective way to avoid the issue of State immunity in the event that a dispute arises is to deal with it at the time of contracting by including a waiver clause in all transaction documents. However, such a clause must be carefully drafted to ensure it is effective. Some key considerations include:

1. The clause must be agreed by someone with sufficient authority to waive immunity as a matter of the local law of the relevant state.
2. The clause should make clear that it waives both immunity from suit and immunity from enforcement.
3. The clause should be agreed by all states and “separate entities” that are involved with the transaction, but also those which hold relevant assets, since these may be key when it comes to enforcing any judgment or award.
4. Where “separate entities” are involved, if possible the clause should expressly state that the entity in question is not exercising the sovereign authority of the state.
5. Before signing the contract take advice on the enforceability of the waiver clause in all jurisdictions where enforcement of any judgment or award would likely take place.

¹ The KRI is a federal region within the federal state of Iraq but, owing to the complex history of Iraq and the way its constitution was rewritten following the Gulf Wars and the overthrow of Saddam Hussein by the United States, it is largely autonomous including, crucially, retaining control over its own natural resources.
² These exceptions included: where the state has submitted to the jurisdiction of the English courts (section 2 SIA); where the underlying transaction was entered into for a commercial purpose (section 3); or where the assets against which enforcement is sought are in use or intended for use for commercial purposes (section 13(4)).
³ Judgment, paragraph 58.