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Brief Counsel

Show me the money: the sharp end of disputes with state entities

15 August 2012

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​Winning an international commercial dispute is one thing.  Recovering any monies owed can be quite another – as a recent saga played out by final courts in London and Hong Kong demonstrates. 

New Zealand companies contracting with foreign governments or state entities, including in PPP projects, need to understand their reduced leverage should a dispute arise. 

The message is simple: state immunity problems are very real, but commercial solutions can be found if they are identified and addressed at an early stage.

The context

FG Hemisphere Associates LLC (Hemisphere) is a Delaware corporation that invests in distressed assets, including complex litigation claims. 

In 2004 it purchased the assignment of two substantial International Chamber of Commerce arbitration awards (the Awards) validly made in 2003 against the Democratic Republic of the Congo (DRC), following arbitrations in Paris and Zurich respectively. 

The Awards had arisen from supply and financing contracts entered into by the DRC during the Mobutu era with the then Yugoslavian company Energoinvest DD to build a hydro-electricity facility and transmission lines.  To finance the works, Energoinvest DD extended credit to the DRC and to a state-owned electricity company, Société Nationale d’ Electricité (SNd’E).  But the DRC and SNd’E defaulted on their repayment obligations. 

Together the Awards were worth over US$20m, plus interest.  The question was against what DRC assets could Hemisphere enforce? 

  • In Hong Kong, Hemisphere sought money due to be paid, as entry fees for a mining project, by several Chinese companies to La Générale des Carrières et des Mines Sarl (Gécamines), a company with global interests wholly owned by the DRC.  The Hong Kong Court of Final Appeal, however, refused Hemisphere leave to enforce the arbitral awards against those assets as the DRC had absolute immunity from suit, which it had not waived.
  • In Jersey, Hemisphere sought to enforce against valuable shares Gécamines owned in a Jersey joint venture company.  Hemisphere sought both the shares and the income due to Gécamines under an associated sales contract.  The Privy Council, however, decided that Gécamines was not an organ of the DRC and so not liable for its debts.

What does this all mean?

Perhaps the first issue transnational lawyers will consider when contracting with states or state entities is whether, and to what extent, state immunities apply.  There are two basic doctrines of immunity:

  • absolute immunity, under which a court in one state will not determine matters, or seek to enforce process over assets, affecting the rights of another state (or state entity), and 
  • restricted immunity, under which the state (or state entity) does not have immunity where it is engaged in, or the relevant assets are being used for, purely commercial activities. 

The Hong Kong decision

This decision is notable because – due to the constitutional arrangements between Hong Kong and China – the Court of Final Appeal applied the doctrine of absolute, and not restrictive, immunity. 

As absolute immunity applied, Hemisphere needed to establish that the DRC had waived its immunity according to applicable common law principles.  Hemisphere needed to establish both that the DRC had waived: 

  • its immunity from jurisdiction in Hong Kong, and
  • separately, its immunity from execution over its property in Hong Kong. 

In argument limited by agreement to the first point, the Court found that the DRC had not waived immunity from jurisdiction.  Thus, the enforcement claim did not get past first base. 

The fact that the DRC submitted to arbitration did not assist as Hong Kong does not – unlike the United Kingdom, for instance – deem submission to arbitration to constitute a waiver in respect of related court proceedings.  Furthermore, the common law does not include any principles of implied waiver.  Accordingly, Hemisphere was prevented from attempting to execute the Awards using Hong Kong courts.

The Privy Council decision

Unlike Hong Kong, United Kingdom law – like New Zealand law – applies restrictive immunity.  Accordingly, even without waiver, enforcement is permitted in the United Kingdom against commercial assets owned by the DRC.  The question for the Privy Council was, however, whether Gécamines was the organ of, and could thus be equated with, the DRC. 

The Privy Council found that the issue was not determined by Gécamines being a separate entity, as such entities could be part of the state.  However, separation created a strong presumption that its distinct legal status should be respected.  Where a separate entity is formed for commercial purposes and the entity has its own management and budget, then even if constitutional and factual control rest with the State and the entity carries out sovereign functions, “quite extreme circumstances” would be needed to displace this presumption.  This logic indicates that assets held by New Zealand’s state-owned enterprises should be difficult to seize to satisfy any unpaid New Zealand government debt.

The Privy Council accordingly decided that Gécamines was not answerable for the DRC’s debts.  Its legal personality and commercial assets and business were substantively separate from the DRC.  Despite the DRC at times using Gécamines’ assets for the State’s benefit, that did not justify assimilating the two.

Lesson: take care in contracting with overseas governments or state entities

Both cases, especially when considered together, provide a salutary reminder of the practical difficulties facing parties needing to enforce their international judgments or awards against State assets.  Depending on the jurisdiction where the assets are based, a party may, even today, face the obstacle of absolute immunity.  In other jurisdictions, the focus will remain on the less difficult, but still onerous, task of providing that the relevant commercial assets substantively belong to the State.

For companies involved in significant cross-border activity with governments or state entities, it is important to consult an expert.  Commercial solutions to state immunity difficulties can be found if they are addressed early enough.  Common techniques include:

  • drafting effective waiver clauses into commercial contracts 
  • identifying in advance whether significant commercial assets are both held in appropriate jurisdictions, and likely to be recoverable 
  • using a bond or escrow mechanism to reduce the risk of uncompensated loss through contractual breach, and
  • taking out political risk or other insurance.  

If you have any questions, please contact the lawyers featured. Chapman Tripp thanks Emma Peart for her assistance in preparing this Brief Counsel.

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