Enforcing arbitral awards against a State – a further hurdle


Part of the success of arbitration as a dispute resolution mechanism is surely down to the relative ease of enforcing arbitral awards internationally.

At the heart of the enforcement regime is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, which requires all 168 parties to recognise foreign awards as binding and enforce them.

Pursuant to Part III of the Arbitration Act 1996, a successful party can apply to the court (without notice) for recognition or enforcement of an award. The court will then grant an enforcement order which must be served on the respondent, who then has a certain amount of time to try to set aside the order.

Whilst there are limited grounds (set out in section 103 of the Arbitration Act 1996) on which recognition or enforcement can be refused (such as incapacity, invalidity and serious procedural irregularity), enforcement remains (in general) straightforward. However, matters are considerably more difficult when seeking to enforce an award against a sovereign State.

Under the State Immunity Act 1978 (the SIA), the basic position is that a State is immune from the jurisdiction of the courts of the United Kingdom (jurisdictional immunity). This is caveated by section 9(1), which says that, if a State has agreed in writing to submit a dispute to arbitration, then the state is not immune in respect of those arbitration proceedings. However, the SIA goes on, at sections 13(2) and 13(4), to note that any property of the State cannot be subject to the process of enforcement of a judgment or arbitration award (enforcement immunity) unless the property is to be used for commercial purposes.

In effect, this leaves parties seeking to enforce against States with an uphill struggle, not least as it can be difficult to distinguish between assets held purely for a "commercial purpose" and those which are linked to a sovereign goal. Moreover, pursuant to section 13(5) of the SIA, the head of the State's diplomatic mission in the UK can issue a certificate stating that property is not intended for a commercial purpose. That certificate will be accepted as sufficient evidence of the non-commercial purposes, unless the contrary is proven (effectively, reversing the burden of proof on the enforcing party). 

A further challenge for enforcing parties has arisen out of the recent Supreme Court decision of General Dynamics United Kingdom Ltd v State of Libya [2021] UKSC 22. The case related to the enforcement of a £16 million award in General Dynamics' favour by an ICC arbitral tribunal in Geneva, following a contractual dispute relating to the supply of communications systems.

The award remained unsatisfied and General Dynamics applied to the High Court for an enforcement order, which Teare J duly made. Section 12(1) of the SIA required that "any writ or other document required to be served for instituting proceedings against a State shall be served by being transmitted through the Foreign and Commonwealth Office to the Ministry of Foreign Affairs of the State". However, Teare J relied on CPR 6.16 and the exceptional circumstances existing in Libya (which was in the midst of a civil war at the time, making it virtually impossible to reach the Ministry of Foreign Affairs) to grant General Dynamics permission to dispense with service of the arbitration claim form, the enforcement order and any other associated documents. Rather, the order required only that General Dynamics must courier the documents to three addresses connected with Libya. Libya was given a two-month window in which to apply to set aside the order.

 Libya (having been notified of the proceedings) then applied to have the service dispensation order set aside. Its application was successful at first instance, with Males LJ holding that the court had no power to dispense with service through the proper channels in such a case as section 12 of the SIA is a mandatory provision of legislation that could not be overridden by CPR 6.16.

General Dynamics successfully appealed to the Court of Appeal, which held that service did not have to take place through the FCDO because the document instituting the proceedings (the arbitration claim form) did not have to be served at all, and the document which did have to be served (the enforcement order) was not the document "instituting proceedings" and therefore did not fall within the remit of section 12. The Court of Appeal aptly explained that there are opposing policy considerations; one such important policy is that arbitration awards should be honoured and there should be limited obstacles to enforcement (especially when the State has participated in the proceedings). There is some force in the argument that, where a foreign state has fully participated in (or deliberately declined to participate in) proceedings in litigation or arbitration, it does not obviously need the protection of enforcement proceedings being transmitted through the FCDO.

Libya then appealed to the Supreme Court. By a majority of 3:2, the court allowed the appeal and held that:

  1. In cases where proceedings are instituted to enforce an award against a defendant State, and where no order has been made for the service of the arbitration claim form, the enforcement order itself should be considered the “document required to be served for instituting proceedings against a State” and SIA s12(1) therefore requires that service be effected through the FCDO. In such circumstances, service through the FCDO is "mandatory and exclusive".
  2. Assuming that the enforcement order was a document "required to be served", the court did not have the power to use CPR 6.16 to dispense with service, even in "exceptional circumstances". As a procedural court rule, CPR 6.16 could not override primary legislation (including SIA s12(1)).
  3. Contrary to General Dynamics' submissions, its right to a fair trial under Article 6 of the European Convention on Human Rights was not infringed by the court's interpretation and application of the SIA. Service through diplomatic channels is a well-established procedure for service on States, and as the only permitted method of service under the European Convention on State Immunity, compliance with it could not be a violation of Article 6.

The dissenting judges (Lord Stephens and Lord Briggs) were concerned with issues of access to justice, and felt strongly that SIA s12(1) should not be used to "bolster state immunity". Indeed, they considered that it was a "complete subversion of the purpose of section 12(1) SIA 1978 to treat the requirement for diplomatic service as enabling a State which is not (or arguably not) immune nonetheless to obtain it de facto by being obstructive about service." Like the Court of Appeal, the minority would have decided in Libya's favour in relation to issue (1) above.

Unfortunately, the Supreme Court's strict reading of the SIA creates a significant obstacle where the State cannot realistically be served by the FCDO. The decision makes it much easier for States to deliberately avoid enforcement action, including in circumstances such as those in General Dynamics, where, ironically, Libya had copies of all the relevant documents and engaged with the case but were unable to be effectively served. As a result of this case, the ease of enforcement of awards (being a key advantage of arbitration) has been further depleted where States are on the receiving end. 

This article has been co-written by Shelley Drenth (Senior Associate) and Rosie Morris (Solicitor)

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