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Sovereign Immunity refers to an international law principle that permits governments and their agencies to benefit from various immunities. The term sovereign immunity refers to immunity for a foreign state from the jurisdiction of the courts of another foreign state. Sovereign immunity applies to common law, civil law and other judicial systems. Absolute immunity was available to foreign states from the jurisdiction until the mid-Twentieth century. Due to multiplicity of business transaction between governments through state enterprises and private business entities, private business entities are trying to attack the shelter in the guise of sovereign immunities to safeguard their interest.
In response to the attacks made by the private business entities, certain governments have responded to it partially by adopting a “ restrictive approach” to foreign sovereign immunity. “ Restrictive approach” extends immunity to the states “ public acts “ and does not afford immunity to their” private acts” which comprises mainly commercial activities.
Thus, UK has codified the restrictive approach to state immunity through promulgation of ‘ State immunity Act of 1978” and U. S. A has promulgated “ Foreign Sovereign Immunities Act of 1976”. The European convention on State Immunity and an additional Protocol came in to effect in 1976.
To safeguard the multilateral treaties on foreign sovereign immunity issues, UN has passed “ the United Nations Convention on Jurisdictional Immunities of States and Their Property “. If United Nations treaty is approved and adopted by the various states in 2007, United Nations Convention may act as a novel international norm in the area of state immunity.
STATE’S INVOLVEMENT IN INTERNATIONAL BUSINESS:
A country may enter into commercial transaction through its business arms [State owned entities] in areas like nuclear energy, banking, oil exploration, power etc. Thus it has become necessary to have wide knowledge on state immunity as the area of business transactions entered by the States are keeping on expanding and likewise , the issues and disputes also is keeping on increasing in this arena.
In United States, the doctrine of sovereign immunity was recognised as early as 1812 in “ The Schooner Exchange v. McFadden “. In this case, American plaintiff claimed the ownership of an armed French ship which was berthed in United States then. Justice Marshall, citing the international custom, held that state immunity was applicable on the basis of “ perfect equality and absolute independence of sovereigns is available” . Later Supreme Court also concurred the decision of the Executive Branch and declined to grant permission for a United States court to have right over the French war ship. It is Justice Marshall, who sowed the seeds for the recognition of foreign sovereign immunity by noting the differentiation between an armed public vessel and private merchant vessels entering the United States for the purposes of business.
As per absolute or classical theory, a State can not, without its consent, be made as a respondent in the court of another sovereign state. As per newer or restrictive theory of sovereign immunity, immunity is recognised only in case of public acts and does not extended to private acts.
Dralle v. Republic of Czechoslovakia 
A German registered company had a branch in Bohemia. The German company also registered owner in Austria for the trade marks used in Austria. Later, Bohemian branch was nationalised. Thereafter, Czechs claimed the trade mark excluding Austrian use. Claims stated that practice has changed generally with their corresponding increase in commercial activity. Hence, US changed to restrictive theory in 1952.
The Council of Europe accomplished the first comprehensive multilateral treaty on foreign sovereign immunity namely the European Convention on State Immunity and Additional Protocol and this came in to force in 1976 in Eight European States, In 1976, U. S. A also promulgated FSIA which ensured the restrictive theory of sovereign immunity and made the U. S. A at par with the other developed nations in application of limited sovereign immunity approaches. [Foreign Sovereign Immunity Act].
Government corporations which carry out only commercial activities are not likely to enjoy sovereign immunity. However, a Central Bank of a country enjoys sovereign immunity. This is because, Central Bank carry out government functions like introduction of monetary policy on behalf of their government. As part of their function, they may invest the official reserves of their respective government. Sovereign immunity will be applied if a central bank of a country involves in investment activity on behalf of their respective government in other countries,
Sovereign immunity offers immunities from
- From trial for criminal offence under statute or under common law.
- From the jurisdiction of the local courts.
- From special privileges in case of legal action such as immunity from discoveries and interrogation.
- From the execution of judgments.
In UK, State Immunity Act of 1978 offers provision with respect to proceedings in the UK by or against other States to provide for the effect of any judgment given against the United Kingdom in the Courts of States who are parties to the European Convention on State Immunity. The UK Act also deals with respect to the immunities and rights and privileges of heads of State and for connected purposes.
Many corporations which engaged in foreign commercial operations with foreign, state -owned company business ventures have experienced difficulties while they dealing with such corporations. If any foreign, state –owned company could claim sovereign immunity in nay legal dispute, this has made the local companies in an awkward situation. This has forced the nations to review the sovereign immunity and resulted in adjusting their immunity laws to become preventive, embarking a legal distinction between official and commercial dealings with states.
Britain became alert in such transaction only after the case of Trendtex Trading Corporation v Central Bank of Nigeria. .
Trendtex case played important role in UK because only after this case, UK introduced restrictions to its sovereign immunity laws and also compelled it to pass the State Immunity Act in 1978.
State Immunity Act, 1978 of UK excluded immunity a variety of commercial / financial crimes and also “ personal injuries and damages to property” in the UK.
In, Sulaiman al –Adsani, in 1994, appealed against a High Court decision that government of UK was immune under State Immunity Act, 1978. He pleaded immunity should not be granted because inhumane torture at the hands of its state security services in Kuwait .
The Court of Appeal held that no sovereign immunity should be extended even under the State Immunity Act in respect of acts for torture in contravention of international law. The Court of Appeal also took note of the section 134 of the 1988 Criminal Justice Act which prescribes torture as an international crime, regardless of where in the globe it has occurred. However the judgment was reversed later and it was finally settled that if a British citizen tortured abroad by foreign state agents, he had no locus standi to get legal redress in UK.
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It is perplex why immunity had been applied in the Trendtex case so that the UK Company’s interest is protected in their commercial dealings abroad and why the same yard stick is not applied in protecting the UK citizens from torture abroad?
In another instance, KIO [Kuwait Investment Office] purchased about 22% stake in British Petroleum and it claimed immunity from UK taxes against this investment and total amount of tax lost in this way may run into billions each year.
In case of foreign bank with US branch and a particular account was being under the purview of banking secrecy law abroad and if US attorney compelled to reveal the details of the account holder as in the case of US v. Bank of Nova Scotia 691 F2d 1384 (11 th Cir 1982), the question arose whether it was reasonableness and balancing act from the side of US. But the pressure exerted from US seems to be predominantly practical and violated the sovereign immunity of the foreign bank in US which was bound by its own banking secrecy law.
In, Bropho v. State of Western Australia, it was held that requirement for either existence of a statutory exemption or strong underlying policy reasons in order for certain statutory corporations and authorities to access the benefits of sovereign immunity.
As per banking transactions are concerned, the following will have to be looked in to:
As regards to sovereign risk / immunity is concerned, the following should be considered.
- What are all the legal and practical problems concerned with country where lending has been made; whether sovereign immunity is available or not. What are the remedies available to the lending bankers when there is a political disturbance; the details of state succession and the act of State doctrine?
- What are all the legal safeguard available to protect the position of the banker within the documentation when negotiating and entering into a transaction with a sovereign state or state entity?
- Whether remedies and enforcement of remedies is available to the lending banker such as availability of specific performance and set-off facilities. What are all the legal hurdles concerned with rescheduling facility letters and term loan agreements to sovereign debtors.
- Whether the foreign state is capable of extending effective guarantees as collateral to the lending and protective clauses should be incorporated within the guarantees.
At this juncture, it is worthwhile to note the observation made by Scarman J in the Estate of Fuld,  that blind adherence to foreign law can never be needed of English Court. Rarely and exceptionally, provision of foreign statute is disregarded when it would lead to a result wholly alien to fundamental requirements of justice as administered by English Court.
English Court will not sit in judgment on the sovereign acts of a foreign government or state. Further, it will not adjudicate upon the validity, legality or acceptability of such acts, either under international law or domestic law. For an English court to do so would offend against the principle that the courts will not adjudicate upon the transactions of foreign states . This principle is inherent and not of discretionary and is the very nature of judicial process. [Buttes Gas and Oil Co v Hammer]. Lord Cross, in Oppenheimer v Cattermole, observed that English Court should give effect to clearly established rules of international law.
International law , on its part , recognises that a national court may properly refuse to give effect to legislative and other acts of foreign states which are in contravention of international law .[Oppenheim’s International Law , page 372].
Further as per U. S law, if foreign government signs an arbitration agreement, then it surrenders sovereign immunity and therefore may have judgment enforced against it.
In case of enforceability, the act of state doctrine plays an important role. U. S courts will not question the validity of official acts of foreign sovereign. [Allied Bank International]
Further, if payments are to be made in U. S against debt obligation, Act of State doctrine will not apply. Under these circumstances, U. S will only follow the foreign sovereign’s act if it does not collide with U. S policy. Unilateral state action infringes U. S policy of bilateral re-negotiation of loans.
The Foreign Sovereign Immunities Act, 1976, exclusively provides that foreign state shall be immune from the act of federal and state acts unless one of the exceptions applies:
- Exception: In case of any waiver to any suit or judgment.
- Commercial Exceptions; Example: Republic of Argentina.
-An act outside the U. S.
-Commercial activity – an activity that private parties can engage in –not government reason for acting.
-It has caused direct effect like payment due in U. S.
Comity Approach in Foreign Nation Judgment.
Hilton v. Guyot (US Supreme Court, 1895).
French plaintiff brought an action against two US citizens in New York Federal Court to enforce judgment against them. The appellant obtained judgment in French courts upon which $200, 000 remained outstanding. The defendant claimed that the plaintiff’s secured the French judgment by fraud. So, the main issue in this case was whether foreign judgment was enforceable in U. S? It was held that U. S did not recognise the French judgment due to reciprocity.
Somportex Ltd v. Philadelphia Chewing Gum Corp. (U. S Court of Appeals, 3 rd Circuit, 1971).
Somportex filed action petition in Queen’s Bench Division of High Court of England against Philadelphia for breach of contract. Extra-territorial service was based on English version of long –arm statutes applied in American States. Philadelphia appeared to contest jurisdiction. England enforced the jurisdiction. Philadelphia decided to take no further action in matter and Somportex obtained default judgment. The main issue of the case was whether English judgment should be enforceable in U. S. Finally, English judgment was enforced against US residents.
Libra Bank Ltd v. Banco National Costa Rica (US Court of Appeals, 2nd Circuit, 1982)
Plaintiff bank made $40 million loan to Banco Nacional . There was a specific waiver condition in the loan document of any immunity from legal proceedings in US. Defendant defaulted payment of loan and on promissory notes which acted as evidence on the default of loan repayment. Plaintiff Bank fetched an action against the defendant Banco Nacional and Sheriff seized the Banco Nacional property located within U. S. The issue in this case was whether loan document constituted explicit waiver of sovereign immunity. It was held Banco Nacional waived its sovereign immunity through explicit waiver.
Verlinden BV v. Central Bank of Nigeria (US Supreme Court, 1983)
In this case, the main issue was whether the question of sovereignty falls under federal subject for matter of jurisdiction is concerned. It was pleaded that action against foreign sovereigns in US courts raise sensitive issues concerning foreign relations of U. S and between the foreign states which were under litigation.
Thus, Federal government was concerned in developments which would harm cordial relations with other nations. To safeguard and promote such federal interests, Congress implemented its article 1 powers by passing statute expansively regulating the flexibility of foreign nations to US suits. District Courts should apply this statute in every action against foreign sovereigns as the subject matter of jurisdiction in any action depends upon existence of one of its specified exceptions.
In, Banco Nacional De Cuba v. Sabbatino (U. S Supreme Court, 1964), an American commodity broker made a purchase contract with Cuban subsidiary of U. S Corporation for Cuban sugar. By the time, President Eisenhower authorised by the Congress reduced the sugar quota allotted to Cuba. Aggrieved by this, Cuba issued a new law which authorised it to expropriate U. S corporate holdings in Cuba .
Commodity broker’s money was placed with court. The ruling by the District Court went in favour of defendant. The Court of Appeal also confirmed the decision of District Court. The Supreme Court reversed the judgment of Court of Appeal. Supreme Court held that act of State is permissible even if it violates the International law. Further, it held that act of State is not coerced by either intrinsic nature of sovereign authority or by some principle of international law. By ruling in favour of defendant, the executive branch contemplates to supervise the foreign affairs.
Alfred Dunhill of London v. Republic of Cuba[U. S Supreme Court]
Cuban government in 1960 confiscated business of five manufacturers of Cuban Cigars. The Plaintiff Dunhill owed some amount to confiscated companies during pre expropriation and post expropriation periods. Dunhill cleared his pre expropriation outstanding. The Share holders of the confiscated company argued that Cuban government should pay the pre expropriation amount paid by Dunhill to them as the Cuban government was entitled to receive only post expropriation amount. Finally, the Court declined to extend act of state doctrine to acts committed by foreign sovereign in course of purely commercial transactions as it had applied restrictive theory to this transaction.
WS Kirkpatrick & Co Inc v. Environmental Tectonics Corporation (U. S Supreme Court, 1990).
Facts of the case: Kirkpatrick Company CEO contracted with a Nigerian citizen to help them to influence Nigerian government officials for awarding the company to build Air Force base in Nigeria. An aggrieved unsuccessful bidder to the contract brought an action in U. S Court. Kirkpatrick Company claimed defence under the act of State doctrine. The main issue in this case was whether act of State doctrine restricts U. S Court from entertaining cause of action that does not rest upon asserted invalidity of official act of foreign sovereign. It was finally held by the Court that act of State doctrine does not hold good because validity of no foreign sovereign act was main issue of the case.
In, Loucks v Standard Oil Co of New York , it was observed that the court will exclude the foreign decree only when it would negate some fundamental principle of justice, some established conception of good morals and some traditional customs of the common weal.
From the discussion above, it is to be noted that sovereign immunity is available only to action of government. Further, it is imperative, that sovereign of immunity is not applicable to commercial transactions even if the same is entered by the Government. Further as per U. S law, if foreign government signs an arbitration agreement, then it surrenders sovereign immunity and therefore may have judgment enforced against it.
Thus, in sovereign immunity, Courts of one State generally have no jurisdiction to entertain suits against another state. It is to be noted that sovereign immunity is not applicable in the following situations.
- When there is no jurisdiction [ subject matter , in personam]
- If the litigation is based on principle of international law recognised in U. S by statute.
- As a defendant, states, themselves may claim sovereign immunity.
- If the transaction relates to commercial activity ran by the State, sovereign immunity does not apply.
Hence, banks should design their covenants in lending contracts so that the foreign state should not try to escape its liability by resorting to sovereign immunity like adding covenants such as international arbitration and conciliation efforts in case there is a failure by the business arms of foreign states.
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