Introduction

We considered the Act of State doctrine as well as State / Sovereign Immunity in resisting the enforcement of an international arbitration award in a previous post. One of the cases discussed was the Hong Kong Court of Final Appeal’s preliminary decision in Democratic Republic of the Congo v. FG Hemisphere Associates FACV Nos. 5, 6 & 7 of 2010 (final decision here).

By way of update, the Privy Council has just delivered its decision in La Generale des Carrieres et des Mines v F.G. Hemisphere Associates LLC (Jersey) [2012] UKPC 27, in which FG Hemisphere had sought to enforce the two foreign (Paris and Zurich) ICC awards against the assets of the appellant, La Générale des Carrières et des Mines Sarl (“Gécamines“), a Congo state-owned corporation in Jersey, a British Crown Dependency. The assets consisted of Gécamines’ shareholding in a Jersey joint venture company called Groupement pour le traitment du Terril de Lumumbashi Ltd  and the income flow due from that company to Gécamines under a contract.

This is the latest decision on when a state owned enterprise will be considered an “organ of state“, which would make it liable for the debts of the debtor state and allow the creditor to attach the state owned enterprise’s asset. Lord Mance, delivering the decision of the Privy Council, reversed the decisions of both the Royal Court and Court of Appeal of Jersey and held that Gécamines was not an organ of the state. Accordingly, the respondent, FG Hemisphere, was not entitled to enforce the two foreign ICC awards against Gécamines’s assets in Jersey.

As a preliminary point, readers may recall that under Singapore’s State Immunity Act (Cap. 313) a state owned entity (as a “separate entity”) will only be entitled to immunity if the proceedings relate to anything done by it in the exercise of sovereign authority and the circumstances are such that a State would have been so immune (see s. 16(2)). A “separate entity” is one which is “distinct from the executive organs of the government of the State and capable of suing or being sued” (see s. 16(1)).

Test for determining whether State Owned Enterprise is a Separate Entity

This decision of the Privy Council is of assistance in determining whether a state owned enterprise is a separate entity, or whether it is considered to be part of the state for purposes of immunity, liability and enforcement (see paragraph [28]). As the Privy Council held (at paragraph [29]), “[t]he assets [of the state owned enterprise] which are (subject to waiver and to the commercial use exception in s. 13(4) of the [United Kingdom’s State Immunity Act 1978]) protected by State immunity should be the same as those against which the State’s liability can be enforced“. This can be contrasted to the position of the South African Courts in which the test for immunity and separate entity are different and requires an “element of fraud or other improper conduct in the establishment or use of the company or the conduct of its affairs” before the assets of a state owned enterprise can be attached as an asset of the state (see paragraph [42]).

The test that the Privy Council adopted can be summarised as follows:

1. There is a strong presumption that a state owned enterprise is a separate entity where it has separate juridical status, especially where it has been formed as a separate juridical entity for “what on the face of it [are] commercial or industrial purposes, with its own management and budget“. This strong presumption is that “its separate corporate status should be respected, and that it and the State forming it should not have to bear each other’s liabilities“.

2. This presumption will take “extreme circumstances” to displace but “will be displaced if in fact the entity has, despite its juridical personality, no effective separate existence. But for the two to be assimilated generally, an examination of the relevant constitutional arrangements, as applied in practice, as well as of the State’s control exercised over the entity and of the entity’s activities and functions would have to justify the conclusion that the affairs of the entity and the State were so closely intertwined and confused that the entity could not properly be regarded for any significant purpose as distinct from the State and vice versa” (see paragraph [29]).

3. In this respect, even if an entity had separate juridical personality, it may still be considered an organ of the state if that entity performed the “traditional function of a sovereign – to maintain law and order – to conduct foreign affairs – and to see to the defence of the country” (at paragraph [25], citing Lord Denning in Trendtex Trading Corp v Central Bank of Nigeria [1977] 1 QB 529 at 555A).

4. Furthermore, even where there may be circumstances in which the court will allow a creditor of the state owned enterprise to look to the state for recourse because of the acts of the State, the converse is not automatically true i.e. that a creditor of the State may look to the state owned enterprise for recourse. This would depend on the circumstances (see paragraph [30]).

5. In this regard, the Privy Council accepted that “if an initial conclusion is reached that an entity is separate and distinct from the State, that may on particular facts be displaced by circumstances justifying lifting of the corporate veil, and it further considers…that the international element may raise different considerations in this context from those that would arise under purely domestic circumstances” (see paragraph [42]).

On the facts, the Privy Council decided that Gécamines was indeed a separate entity. The Privy Council reasoned as follows:

1. It was common ground that Gécamines was not a sham entity and was therefore a real and functioning corporate entity, having substantial assets and a substantial business including interests in over thirty joint ventures with outside concerns. It had its own budget and accounting, its own borrowings, its own debts and tax and other liabilities and its own differences with government departments. The Privy Council noted that at least one such department of the Congolese government (the Revenue) went from time to time to the lengths of enforcing tax claims by execution against Gécamines’ assets (at paragraph [70]).

2. Gécamines was not by reason of its functions or activities inseparable from the State and was an entity clearly distinct from the executive organs of the government of the State. The Privy Council stressed that even if Gécamines was, or perhaps became at some unspecified time, a State organ, that ought to be viewed against the backdrop that Gécamines was in other respects clearly established and acting as an ordinary mining company. Accordingly “it may have been a company which had or acquired governmental functions, but that does not mean that it was or was no longer a legal entity separate from the State” (at paragraph [71]) and that “there is in the Board’s view no justification for deriving from the instances of cases where Gécamines’ assets were used for the State’s benefit a conclusion that the two should for all purposes be assimilated” (at paragraph [74]).

3. The Privy Council also roundly rejected FG Hemisphere’s argument that the corporate veil should be lifted in the event that Gécamines was found to be a separate entity so as to enable Hemisphere to pursue Gécamines as well as the State. The Privy Council held that “this involve[d] a misapplication of any principles upon which the corporate veil may be lifted under domestic and international law” and that “[t]here is no basis for treating the State’s taking or Gécamines’ use of Gécamines’ assets for State purposes, at which Hemisphere directs vigorous criticism, as a justification for imposing on Gécamines yet further and far larger burdens in the form of responsibility for the whole of the debts of [Congo]. In international law as in domestic law, lifting the corporate veil must be a tailored remedy, fitted to the circumstances giving rise it” (at paragraph [77]).

 Conclusion

As an aside, we would note that one of the reasons why FG Hemisphere chose to sue in Jersey (a British Crown Dependency) as opposed to England proper is because of the UK’s Debt Relief (Developing Countries) Act 2010. More colloquially known as the “Vulture-Fund Act”, the Act seeks to “halt profiteering on Third World debt within the UK” and to “stop creditors, including so-called ‘Vulture Funds’, from using the UK courts to extract harsh and inequitable payments from poor countries from debts that companies may in some cases have bought for a fraction of the cost” (see press release from HM Treasury here). Congo would have had the benefit of the Act if FG Hemisphere had chosen to seek to enforce the ICC awards in England. In this respect, however, none of the states in Asia fall within this Act.

Nevertheless, it is worth iterating that companies doing business in the South East Asian, Asian Pacific and Greater Asian region may find themselves interacting with the state itself even in commercial matters. This is due to the prevalence of state owned enterprises, government linked entities and sovereign wealth funds in Asia.

We would reemphasize the takeaway point that when dealing with a state party or state owned enterprise, parties should take into account the jurisdictions where enforcement of any arbitral award is likely. And on that basis, it would be prudent for parties to take legal advice on the enforceability of awards against state parties or state owned enterprises in those likely jurisdictions for enforcement.