SOVEREIGN IMMUNITY IN COMMERCIAL TRANSACTIONS

Thursday, June 22, 2006
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SOVEREIGN IMMUNITY IN COMMERCIAL TRANSACTIONS
By Eunice Cross
 
South African parties who enter into commercial transactions with foreign states or government agencies face a wide range of political risks which could threaten their investment or project in the host country. If a party has an agreement with a foreign government agency, that agency may fail to meet its obligations or it may be prevented from performing its obligations due to an act of the host government. For example, in the latter instance, the host government could impose a ban on the export of certain crops due to the crop failure in the host country which could potentially place the supplier or government agency in breach (C Czarnikov Ltd v Cetrala Handlu Zagranicznego ‘Rolimplex’ (1978) 1 All ER 81). An attorney’s responsibility is to help its client(s) identify the potential risks (which are too numerous to mention and case specific) and draft clauses that would mitigate the risks and afford the clients the highest protection possible.
 
It would be difficult for a party to successfully institute legal proceedings against the foreign government if that government raises the defence of sovereign immunity, which is a grave consideration of international law. Sovereign immunity generally means that a sovereign (including its agents, its property and activities) is immune from the jurisdiction of the courts of another sovereign state. There are two important exceptions to sovereign immunity: (1) a foreign state will not be immune from the jurisdiction of municipal courts in proceedings relating to commercial transactions entered into by the State; and (2) a waiver of sovereign immunity.
 
Foreign authorities in commercial transactions
 
Two schools of thought emerged in international law regarding the applicability of sovereign immunity. The first school which existed pre- World War II, prior to the emergence of the socialist state and state owned trading corporations, advocated the principle of absolute immunity in terms of which immunity was granted to all acts of foreign sovereigns.
 
As governments and state corporations became more active in commercial activities, many Western states adopted the second school of thought, the principle of restrictive or qualified immunity.  According to this principle, immunity from the jurisdiction of municipal courts would be granted in respect of acts jure imperii (government public acts) and not in respect of jure gestionis (i.e. commercial activities).
 
The rationale for the adoption of the restrictive approach was best expressed by Lord Denning in Thai-Europe Tapioca Service v Government of Pakistan, The Harmattan (1975) 1 WLR 1485 at 1491F: “a foreign government which enters into an ordinary commercial transaction with a trader….must honour his obligations like other traders: and if it fails to do so it [should] be subject to the same laws and amenable to the same tribunals as they are.”  
The restrictive approach has gained wide support in treaties, domestic legislation and foreign tribunals. The United States codified the restrictive approach by passing the Foreign Sovereign Immunities Act of 1976 (“Act 1976”). Two years later the United Kingdom passed a similar legislation, the State Immunity Act of 1978 (“Act 1978”).  There still continued to be differences in the practice of states in applying the two approaches. It was this uncertainty in international law that prompted the introduction of the United Nations Convention on the Jurisdictional Immunities of States and Their Property in December 2004, which will come into force once it has been signed and ratified by 30 states. If this treaty is adopted, it may serve as the new international norm in the area of sovereign immunity.
 
South African courts generally followed English decisions upholding the absolute immunity approach. However, in Inter-Science Research and Development Services (Pty) Ltd v Republica Popular De Mocambique 1980 (2) SA 111, the restrictive approach was approved. The presiding judge, Margo J, said that it must be accepted that the rule of international law on sovereign immunity which prevails today is that reflected in the restrictive doctrine; international law forms part of our law; and there is no statute or principle of South African law in conflict with the doctrine. The court held that the Government of Mozambique was not entitled to immunity in respect of trading activities and ordered an attachment to satisfy the judgment.
 
Furthermore, the South African legislature approved the restrictive approach by passing the Foreign States Immunities Act of 1981 (“Act 1981”), which is modelled on Act 1978. In terms of this legislation, a foreign state shall not be immune from the jurisdiction of the courts of South Africa in proceedings relating to a commercial transaction entered into by a foreign state or an obligation of the foreign state which by virtue of a contract (whether a commercial transaction or not) falls to be performed wholly or partly in the South Africa. A commercial transaction means any contract for the supply of services or goods, any loan or other transaction for the provision of finance and any guarantee or indemnity in respect of such loan or financial obligation and any other transaction, whether commercial, industrial, financial, professional or other similar character in which it engages.
 
Waiver of Sovereign Immunity
 
Notwithstanding the exception that the transaction be a commercial in nature, it is best that an attorney acting for South African contractors or investors to insert and negotiate an express waiver of sovereign immunity clause such as the one below in international commercial contracts:
 
“In relation only to the execution by it of this Agreement and the exercise and performance by it of its rights and obligations under this Agreement, the [government agent, department, organ] unconditionally and irrevocably waives any sovereign immunity for itself from any suit, or other legal process…”
 
Under the Acts 1976, 1978 and 1981, sovereign immunity may be waived. Under Act 1981, a foreign state will have no immunity where it has expressly waived immunity after the dispute has arisen or by prior written agreement. A provision in an agreement that it is to be governed by the law of South Africa is not regarded as a waiver.
 
In contrast, under Act 1976, sovereign immunity may be impliedly waived where a foreign state has agreed to arbitration in another country and where a foreign state has agreed that the law of a particular country should govern. This leaves open the question as to what conduct is sufficient for a waiver of immunity by implication.
 
The open ended questions that arise from the waiver exception, are whether the signatory of an express waiver had actual or apparent authority to execute the waiver and what law would be applied when determining if the signatory had such authority.
 
Litigation against the South African government

In South Africa, any litigation against the South African is governed by the State Liability Act 20 of 1957 (“Act 1957”). In the Minister of Home Affairs and Another v American Ninja IV Partnership and Another 1993 (1) SA 257 (A), the court held that in the absence of any particular enabling statutory provision, the State’s power to contract is a common law prerogative. Where such contract is concluded the State exercises its powers with the concurrence of the persons affected and is liable under the Act 1957. Section 1 of Act 1957 provides that any claim against the State which would, if that claim had arisen against a person, be the ground of action, shall be cognisable by any competent court whether the claim arises out of any contract lawfully entered into or on behalf of the State or out of any wrong committed by an authorised servant if the State acting as such. In this case, the court held that a circular in terms of which the government would grant financial assistance comprising of tax conscessions and payment of subsidies to the producers was a bilateral commercial agreement, which was contractually binding on the government. Under Act 1957, the property of the South African government cannot be attached in execution but an amount required to satisfy the judgment may by paid out from the National or Provincial Revenue Fund.

 
Conclusion

 
We have established that (1) a foreign state cannot claim immunity from the jurisdiction of South African courts in legal proceedings which arise from a commercial transaction or if the immunity is waived by the foreign state; and (2) under Acts 1976 and 1978, the South African government cannot claim immunity from the respective jurisdictions on a similar basis and that it can be sued under Act 1957. If an attorney acts for foreign investors and/or contractors, experience has shown that the South African government is quite reluctant to provide a waiver of its sovereign immunity especially as in any event it loses its sovereign immunity by entering into a commercial transaction. It will not be surprising if foreign governments take the same view. Nevertheless, it is recommended that an attorney acting for South African contractors or investors include or negotiate the insertion of an express waiver of sovereign immunity clause in international commercial contracts. An express waiver provides certainty and will prevent costly and protracted litigation with foreign authorities relating to what constitutes commercial transactions which may differ from jurisdiction. In addition, an attorney must ensure that the person waiving sovereign immunity must have the authority to do so on behalf of the foreign state, perhaps through a warranty.