English court declines execution against state-owned property on grounds of immunity

In L R Avionics Technologies Limited v. The Federal Republic of Nigeria, Attorney General of the Federation of Nigeria [2016] EWHC 1761 (Comm), the English High Court has set aside a charging order enforcing an arbitral award and related foreign judgment made against the Federal Republic of Nigeria ("Nigeria"). The charging order had been issued over a property owned by Nigeria but leased to a private company to process Nigerian visa and passport applications. In reaching its decision, the Court followed recent case law on the circumstances in which it can be said that property is “in use or intended for use for commercial purposes” pursuant to section 13(4) of the State Immunity Act 1978 (“SIA“).

1. ​Background

The claimant, LR Avionics Technologies Ltd. (the "Claimant"), had entered into a contract with Nigeria for the supply of military equipment. The contract was governed by Nigerian law and provided for arbitration in Nigeria under domestic law. Following a dispute, an award was issued for damages and costs to the Claimant (without interest) (the "Award"). Following enforcement proceedings in Nigeria, the Federal High Court of Nigeria entered judgment in terms of the Award and also ordered the defendants to pay interest (the "Nigerian Judgment").

Nigeria did not comply with the Award or the Nigerian Judgment. As a consequence, the Claimant commenced proceedings in the UK to register the Award under s.101 of the Arbitration Act 1996, and the Nigerian Judgment under s.9 of the Administration of Justice Act 1920 (the "Administration of Justice Act").

The Claimant applied to the Court for an interim, and then a final, charging order against freehold office premises (the "Property") owned by Nigeria but leased to a company called Online Integrated Solutions Ltd ("OIS") for the purpose of providing visa and passport services in exchange for an annual rent of £150,000. Nigeria was served (albeit with some irregularities), but did not participate in the proceedings. Once the final charging order was obtained, the Claimant sought an order for sale of the property. At this stage Nigeria issued an application to discharge or set aside the final charging order, arguing that the Property was exempt from execution on the basis of state immunity.

2. The Decision

The Court identified three main "issues of substance" in connection with the question of whether the Property was immune from execution under the SIA. First, could the Award be enforced; second, could the Nigerian Judgment be enforced; and third, in the event that enforcement of the Award or Nigerian Judgment was permitted, was the Property being used for "commercial purposes" such that state immunity would not apply under s.13(4) of the SIA and a charging order could be made against it. The court also considered whether the Property formed part of the Nigerian diplomatic mission.

2.1 The scope of the "arbitration exception" under s.9 of the SIA

Under s.9 of the SIA, where a State has agreed in writing to submit disputes to arbitration, "the State is not immune as respects proceedings in the courts of the United Kingdom which relate to the arbitration".  The Court disposed of the first issue quickly by following established case law, to the effect that proceedings "which relate to the arbitration" include those for the recognition and enforcement of an award (Svenska Petroleum Exploration AB v. Government of the Republic of Lithuania [2006] EWCA Civ 1529 and NML Capital Ltd. v. Republic of Argentina [2011] UKSC 11). Accordingly, the Claimant was entitled to register the Award for recognition and enforcement.

2.2 Enforcement of the Nigerian Judgment

It remained material to determine this question because the Nigerian Judgment included interest, whereas the Award did not. English courts have considerable discretion under the Administration of Justice Act in relation to the enforcement of foreign judgments, and must consider whether enforcement of a foreign judgement would be "just and convenient". The Court accepted the Claimant's submission that the Nigerian Judgment was simply the conversion of an arbitral award into a judgment under a foreign statutory provision similar to s.66 of the Arbitration Act 1996. Accordingly, the Court held that these proceedings were all part of the process of enforcement of an award, and that its discretion should therefore be exercised in favour of enforcement of the judgment, for the same reasons as set out in Svenska and NML Capital.

2.3 Use of the Property for "commercial purposes"

However, the Court decided in favour of Nigeria on the third issue. Its decision turned on whether the Property was immune from execution, or whether the Property was "for the time being in use or intended for use for commercial purposes", such that the exception from immunity contained in s.13(4) of the SIA applied.

During the proceedings and pursuant to s.13(5) of the SIA, the Nigerian High Commissioner issued a certificate stating that the Property was "in use for Consular activities" and not for commercial purposes, which had the effect under the SIA of shifting the burden to the Claimant to prove the contrary.

The Claimant presented seven arguments in an attempt to demonstrate that the Property was being used for "commercial purposes". These included use of the Property by OIS, a private company, against payment of rent, OIS' partnerships with other national diplomatic missions, and the Property's availability (at one point in time) as a property which was available to rent on the open market. The Claimant submitted that OIS was therefore an agent which was operating on a commercial basis, and that this would satisfy the "commercial purposes" requirement under s.13(4) of the SIA.

The Court held that while OIS' operations would constitute a "typical commercial activity" from OIS' point of view, the Property was "being used for a consular activity" when viewed from the Nigerian High Commission's perspective. Noting the decision of the UK Supreme Court in SerVaas Incorporated, the Court observed that "the primary consideration must be the nature or character of the relevant activity". Although the Property may be connected with a commercial transaction (the contract for the supply of services by OIS to Nigeria), but the purpose for which it was in use was the provision of visa and passport services. This provision of consular services would constitute performance of a public function "regardless of whether that function is carried out by the defendant state itself or…an agent". Accordingly, the Court ruled that the Claimant had not discharged the burden upon it of proving that the Property was in use for commercial purposes, and set aside the charging order.

3. Comment

This case provides a useful illustration of the broad scope of the arbitration exception under the English law of sovereign immunity. It upholds the consistent line of case law that immunity will not apply to defeat enforcement proceedings in relation to an arbitral award, and also clarifies that the Court will likely exercise its discretion in favour of enforcing foreign judgments that have been entered in the terms of an arbitral award.

However, the case also highlights that recognition and enforcement of an arbitral award can be a pyrrhic victory if that Award cannot also be executed against that State's property. Notwithstanding the numerous links in this case between the Property and the private sector, the Court was clear that the Property ultimately was in use for public, consular, purposes, and should enjoy immunity.  

Here, the court continued the line of case law begun in Servaas Incorporated by interpreting the "commercial purposes" exception narrowly, thus demonstrating the difficulties associated with executing arbitral awards and court judgments against state-owned property. The Claimant's inability to proceed with execution in this case therefore highlights the importance of including a well-drafted waiver of state immunity in contracts which involve state parties to ensure that a clear written waiver for execution against State property is included, removing the need to rely upon the "commercial purposes" exception.

For further information, please contact Andrew Cannon, Partner, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.