[co-author: Ram Mashru]
Assets owned by a state-owned entity (SOE) are not “property of a State” and therefore not immune from enforcement under the State Immunity Act 1978 (SIA). This case has important implications for commercial parties contracting with SOEs: Botas Petroleum Pipeline Corporation v Tepe Insaat Sanayii AS [2018] UKPC 31
Tepe Insaat Sanayii AS (Tepe), a Turkish construction company, and Boru Hatlari Ile Petrol Tasima AS (Botas), a Turkish state-owned enterprise, entered into two construction contracts. Following Botas’ termination of those contracts, Tepe successfully brought arbitration proceedings against it, obtaining two ICC awards worth approximately USD 100 million (the Awards). Tepe subsequently sought to enforce the Awards against shares held by Botas in two Jersey subsidiaries (the Shares) (The SIA extends to Jersey, with minor modifications). It was common ground that Botas was a ‘separate entity’ within the meaning of s14 SIA and therefore unable to claim state immunity itself.
The Privy Council rejected Botas’ appeal against the decision of the Court of Appeal of Jersey, which had held that Tepe was entitled to enforce the Awards against the Shares. The appeal focused on whether the Shares were the property of Botas or whether, as alleged by Botas, they were “the property of the State [ie Turkey]” under s13(2)(b) SIA, and hence immune from enforcement.
Ownership of assets, not purpose of use, is key question
Botas’ first line of argument was that the “property of the State” should be interpreted by reference to whether the property was intended for commercial purpose as stated in s13(4) SIA (which operates as an exception to s13(2)(b)) (the Commercial Exception). The Privy Council disagreed. Whether assets are, in fact, the “property of the State” is a pre-condition to any consideration of whether the purpose of that property is commercial or sovereign. Otherwise, there would be no distinction between property owned by the State and that owned by SOEs in order to enable them to carry out their business. As the Shares are owned by Botas, and not Turkey, the Commercial Exception could not be applied.
“Property of a State” requires a proprietary or legal interest, not simply control or possession over the property
Botas’ second line of argument was that ‘property’ should be broadly interpreted to include, not only those assets in which the Turkish State enjoys a proprietary or legal interest, but also those over which it exercises significant control in terms of their use and disposition. Again, the Privy Council disagreed. For enforcement purposes, the nature of ownership of the ‘property of the State’ means only a proprietary or legal interest; mere possession or control over the property will not be sufficient. There must be a realisable value in the property against which execution can be carried out.
In this case, the Shares were held by and for Botas in Jersey, subject to Jersey law, and were capable of disposal. The fact that, under Turkish law, the Turkish State had “control” over the Shares, consisting of rights and obligations placed on Botas which affected Botas’ dealings with them, was irrelevant. The question of what constitutes ‘property’ is a question for the court of the jurisdiction where enforcement is sought since enforcement only relates to property recognised as such under domestic law.
Comment
Although the question as to who owns the assets (the State or the SOE) is likely to be a fact-specific one, commercial parties seeking to enforce awards or judgments can now be more certain that assets (and particularly shares) owned by SOEs are unlikely to benefit from immunity from execution. However, although the decision provides clarity on the ability to execute awards against SOE assets, it remains the case that it is always advisable for commercial parties contracting with SOEs to attempt to negotiate written consent to enforcement / execution (in addition to submission to jurisdiction language). In particular, the commercial party should seek the SOE’s consent to the enforcement of any order or judgment rendered in connection with any dispute arising out of the underlying contract, and to any relief granted by the English courts (including injunctions, specific performance and attachment). This may avoid an enforcing party having to go through the procedural and evidential hoops of establishing that the property against which enforcement is sought is indeed SOE property, rather than State property.
