Sovereign immunity in the DIFC Court

Last week, the Dubai International Financial Centre Court issued its decision in Pearl Petroleum Company Limited & Others v The Kurdistan Regional Government of Iraq. The Court upheld its earlier decision which recognised two LCIA arbitration awards totalling US$2 billion issued against the Kurdistan Regional Government of Iraq (the "KRG") and dismissed KRG's arguments (1) that the enforcement proceedings should be set aside on the ground that the Court did not have jurisdiction to make such orders against it, and (2) that the DIFC Court should not decide issues of immunity and its waiver.

1. Background

On 4 April 2007, KRG and Dana entered into a gas exploration and production contract governed by the law of England and Wales (the "Contract"). Dana later assigned 50% of its interest in the Contract to Crescent. In 2009, both Dana and Crescent assigned their interests in the Contract to Pearl.

Thereafter, a dispute arose between KRG and Pearl and, on 21 October 2013, Pearl began LCIA arbitration proceedings against the KRG. Ultimately the Tribunal issued two partial awards in Pearl's favour ordering the KRG to pay Pearl approximately US$ 2 billion plus interest.

Following this, Pearl filed an application in the DIFC Courts asking the DIFC Court to: (1) recognise the two LCIA awards; (2) enforce the two LCIA awards and (3) grant permission for alternative service of the order recognising and enforcing the two LCIA awards. Pearl could then enforce such an order in Iraq through the 1983 Riyadh Arab Agreement for Judicial Cooperation (the "Riyadh Convention").

On 29 May 2017, the DIFC Courts issued an ex parte order granting Pearl's application (the "Recognition Order").

2. The KRG's Appeal

On 3 July 2017, the KRG applied to set aside the Recognition Order relying on sovereign immunity as a defence to enforcement. The KRG also asserted that the DIFC Court did not have jurisdiction to issue the Recognition Order, as the sovereign immunity defence raised public policy questions which could only be determined by the UAE's federal legislature and courts in Abu Dhabi. In particular, KRG argued that the DIFC Court did not have jurisdiction to determine issues of immunity, the existence of the doctrine of sovereign immunity in the UAE and the DIFC, or its ambit or extent (whether absolute or restrictive) or any issues of waiver.

3. DIFC Decision

The DIFC Courts upheld the order recognising the LCIA awards for US$2 billion. (It set aside the order granting permission for alternative service, but that analysis is not the subject of this briefing).

Sovereign Immunity

The contract between Pearl and KRG was governed by the law of England and Wales and provided that “the KRG waives on its own behalf and that of [The Kurdistan Region of Iraq] any claim to immunity for itself and its assets”. KRG argued that the DIFC Court should not decide (1) whether sovereign immunity exists as a doctrine in the UAE and the DIFC, (2) what the extent of any such immunity might be and (3) any question of waiver; as these were questions to be determined at a federal level.

The DIFC Court however decided that it could enforce the Awards without having to address the nature and extent of sovereign immunity. The Court acknowledged that whether or not an entity is to be recognised as a state is a separate question, and whether the UAE recognises another state may be a matter of its foreign policy. However, there could be no doubt that the judiciary decides when it comes to construing a waiver. As the Court said "the proposition that the extent of the contractual waiver should be determined by any entity other than a court, when determining its own jurisdiction over a defendant is not tenable."

The Court examined the parties agreed waiver of immunity and held "where a clear and unequivocal waiver from suit and enforcement has been given in a contract, there is no good reason why effect should not be given to the words used. Where the construction is governed by English law and any relevant rules, customs or practices of International law, the conclusion which the DIFC court should reach is clear. Effect must be given to the plain words and they cannot be rendered meaningless by the means that the KRG suggest. To accede to the submission of KRG here would be to render the wording meaningless. It would destroy the bargain that the parties had made and enable a state or state body to succeed on an argument that it had expressly agreed not to run." In simple terms, there were no questions of sovereign immunity to refer to the federal legislature and courts, because any immunity which might have existed had been waived.

The Court also looked at the arbitration clause and declared "it is clear that the KRG entered into an agreement to arbitrate in London … and that in agreeing to London as the seat of the Arbitration, it also agreed to the English Court as the supervisory court. It was inherent in that agreement, in my judgment, that the KRG waived any immunity from the exercise of the Court’s supervisory powers under English law …" As a result, the DIFC Court has endorsed the principle followed in many other jurisdictions that, where a state has agreed to submit to arbitration, it has left itself open to the processes necessary to make the arbitration effective.

The decision also raised an interesting comparison between DIFC and Hong Kong. In support of its case, the KRG had relied on the decision of the Court of Final Appeal of the Hong Kong Special Administrative Region in Democratic Republic of the Congo v FG Hemisphere Associates LLC. In that case, the Hong Kong Court had held that the Democratic Republic of the Congo's defence of sovereign immunity raised questions of public policy which could only be decided by the Chinese legislature and referred the defence to the standing committee of the Chinese National People's Congress.

The DIFC Court found that the situation in the DIFC was very different. Hong Kong's Basic Law required that all issues of “acts of state such as defence and foreign affairs” were to be determined by the Peoples Republic of China. DIFC has no equivalent provision.

Therefore, as the KRG had expressly waived its right to rely on the sovereign immunity defence, the Recognition Order issued by the DIFC Courts against the KRG was upheld.

4. Conclusion

This decision sends a clear message that the DIFC Court will recognise and uphold properly drafted sovereign immunity waiver clauses allowing proceedings and enforcement to continue against states seeking to raise the defence contrary to the terms of the contract. As the DIFC Courts remain a conduit to enforcement in other jurisdictions, such as onshore in the UAE and Iraq, the certainty this decision provides is welcome news for anyone contracting with a sovereign entity.

As the DIFC Court decided that the waiver to immunity applied, it also decided that it did not need to determine whether the law of the DIFC or the UAE includes the concept of state or sovereign immunity. This was something which was debated at length in the proceedings and followers of this case were hoping to receive some clarity on this issue. It is unfortunate that the DIFC Court were unable to clarify the position. This will no doubt be the subject of another dispute in the future. Until then, this case highlights the importance of the drafting of sovereign immunity waiver clauses. In particular, it is essential that parties ensure that such clauses expressly exclude immunity from both suit and execution.

For more information, please contact Craig Shepherd, Partner, Michael Hartley, Associate, or your usual Herbert Smith Freehills contact.