English Court finds that the foreign act of state doctrine may apply to arbitration proceedings

In the decision of Reliance Industries Limited & Ors v The Union of India [2018] EWHC 822 (Comm) the English Commercial Court (the Court) considered a number of challenges to an arbitration award brought under sections 67, 68 and 69 of the Arbitration Act 1996 (the 1996 Act). In relation to certain of the challenges made under sections 67 and 68, the Court considered the doctrine of foreign act of state. The Court found that aspects of the doctrine are no less applicable to arbitration proceedings than litigation. It also held, obiter, that where parties including a foreign state ask a tribunal to determine the validity of that foreign state's act, there can be no objection to the tribunal doing so. Also obiter, the Court considered that a failure to raise act of state in objection to the determination of an issue which has been put to the tribunal, could constitute a waiver of that right to object.

The judgment provides some helpful clarification on the applicability of the foreign act of state doctrine to arbitration and may be of considerable significance to parties which contract with sovereign counterparts.

The Court also considered challenges to the Award under the 1996 Act on various other bases and, in doing so, reiterated the English court's reluctance to interfere with decisions of arbitral tribunals.  A separate blog post on these other aspects of the judgment can be found here.

Background and issues

A dispute between Reliance Industries Limited and BG Exploration and Production India Limited (the Claimants) and Union of India (the Government or the Defendant) arose under two production sharing contracts (PSCs) by which the Defendant granted to the Claimants the exclusive right to exploit certain petroleum resources. The petroleum was sold to two government nominees (the Nominees). On two occasions the Nominees were instructed to withhold payments by notices issued under an "Office Memorandum" issued by the Ministry of Petroleum and Natural Gas (the OM).

The Claimants' position regarding the OM developed over the course of the arbitration proceedings (the nature and timing of such development being relevant to the Court's decision, as described below). By the closing submissions in the arbitration its position was that the Defendant was not entitled to rely on the OM and the notices because: (i) the OM and notices were not applicable to the withholdings in question (the Applicability Argument); and (ii) the OM and notices could not effectively or validly deprive the Claimants of their rights under the PSCs because there was no constitutional power which had such an effect (the Validity Argument).

The Defendant submitted that the OM was an executive order passed by it as a legislative act, and the sovereign powers of the Defendant could not be curtailed by the PSCs: accordingly the withholding was pursuant to and required by applicable law in the territory. The Defendant contended that the question of whether the Government was entitled to withhold payment under the OM was non-arbitrable by reason of the foreign act of state doctrine, as recently articulated by the English Supreme Court in Belhaj and another v Straw and others and Rahmatullah (No 1) v Ministry of Defence and another [2017] UKSC 3. A separate blog post on this point can be found here.

The PSCs were governed by Indian law save that the arbitration agreement in each of them was governed by English Law. They provided for arbitration to be conducted in accordance with the UNCITRAL Arbitration Rules 1976 and the seat was agreed to be London.

The Tribunal's Award and the Claimants' Challenges

In its Award, the majority of the tribunal had concluded (Mr Leaver dissenting) that it did not have jurisdiction to determine the question of whether the OM permitted the Defendant to withhold any part of the sales price payments. This was because the legal basis of such withholdings was the OM and the tribunal's jurisdiction extended only to determining the rights and obligations of the parties under the PSC, not to the question raised by the Claimants that the OM cannot permit the Government to expropriate substantive rights under the PSC.

The Claimants challenged the tribunal's decision on jurisdiction under s67 of the 1996 Act, it being common ground that the concept of “substantive jurisdiction” includes the question of arbitrability. The Claimants also alleged a serious irregularity under s68(2)(d) of the 1996 Act on the basis that the tribunal, allegedly having jurisdiction to deal with the Defendant's defence, had failed to deal with this issue.

The Claimants contended that the tribunal did have jurisdiction to determine the issue of the Government's defence on this issue because:

• the foreign act of state principles of non-justiciability did not apply to arbitration;
• to the extent that the Government could have raised an act of state defence, it had waived any such objection by submitting to the arbitration and, in any event, by its failure to object timeously; and
• in any case, the issue before the tribunal was arbitrable (and would have been justiciable before a court) on the basis that it concerned construction and/or applicability of the OM, not its validity.

The Court's Decision

The Court dismissed the Claimants' challenges, finding that the tribunal was correct to decide that it lacked jurisdiction to determine issues relating to the sovereign acts of the Defendant.  It dealt with the issues under three headings.

1. Did the issues engage the foreign act of state doctrine such that they would be non-justiciable in court?

The Claimants' Validity Argument was non-justiciable because it challenged the constitutional power to make an order having the effect which the Government claimed for the OM, and therefore fell within the foreign act of state doctrine.

This was because:

(i) the case concerned legislative or executive acts of a foreign state in relation to the expropriation of property within its own jurisdiction – in that context, the Court will recognise, and will not question, the validity of the foreign state's acts (the first limb of the act of state doctrine articulated by Lord Neuberger in Belhaj).

(ii) the doctrine also includes the rule that the court will not question the effect of the executive acts of a foreign state in relation to property situate within its territory nor adjudicate on the lawfulness of those acts (the second rule articulated by Lord Neuberger in Belhaj).

Although less clear-cut, the Court considered that the Applicability Argument also fell within the scope of the foreign act of state doctrine. The Claimants challenged the validity of the notices on the basis that they could not have been issued pursuant to the OM because the scope of the OM did not extend to the withholdings. The Claimants contended this was a question of construction, which would be justiciable. However, the Court concluded that the challenge to the validity and effect of the notices was in fact a challenge to an executive act of the Defendant with regard to property within its territory – it required a determination in the Claimants' favour regarding the lawfulness of the notices as executive acts - and therefore fell within the second rule articulated by Lord Neuberger in Belhaj.

Having found that the issues were non-justiciable, the Court considered whether the withholding claim was, nevertheless, arbitrable.

2. Was the withholding claim arbitrable?

The Claimants contended that, even if non-justiciable, the claim was arbitrable on the basis that an arbitral tribunal is not an organ of a sovereign state, and the basis for foreign act of state doctrine (that one sovereign should not call into question the acts of another) did not apply to it.

The Court rejected this argument, referring to the scope and juridical basis for the doctrine as considered in Belhaj. Comity was only one of the bases for the doctrine and not the relevant basis for all aspects of it – in particular, it was not the relevant basis for considering the principle that the legislative and executive acts of a state in relation to property within its jurisdiction are not justiciable. The Court recognised that the majority of the judgments in Belhaj suggested that act of state is "a hard edged principle of English private international law, and that its rationale derives from the very concept of sovereignty which recognises the power and right of a state to determine the property rights of those whose property is situate within its territory". Arbitral tribunals are accordingly required to give effect to this principle when applying private international law.

3. Did the Government waive the right to object?

The Claimants submitted that the Defendant waived its ability to rely upon the foreign act of state doctrine (i) by agreeing to arbitration in a commercial contract; or (ii) by failing to object in a timely manner.

The Court found that the Defendant had not waived any right to object to the tribunal determining any act of state issues simply by entering into the arbitration agreement. A tribunal has jurisdiction to decide disputes in accordance with the relevant applicable principles of law. If the relevant applicable principles of private international law make an issue non-justiciable, such principles must be applied by the tribunal in the same way as the substantive and procedural law.

Nor had the Defendant waived its objection by failing to act timeously. Due to the procedural history of the contentions of the parties on the OM, the Defendant did not know and could not have reasonably known about the Claimants' position giving rise to the act of state doctrine until the exchange of written submissions in advance of a hearing in November 2014, at which point it expressed its jurisdictional objection.

The Court considered obiter that there was no bar in principle to foreign act of state being waived if parties to an arbitration, including the foreign state, expressly asked a tribunal to determine the validity of that foreign state's legislative act. This arose from the consensual nature of arbitration and was also supported by authority (The "Playa Larga" [1983] 2 Lloyd's Rep 171 and The Republic of Serbia v ImageSat International NV [2009] EWHC 2853 (Comm)). It followed that where parties submit a dispute to arbitration which potentially raises act of state, a state which fails to rely on act of state may be taken to have waived its right to do so. However, this was not the case here.

The Court also rejected the Claimants' contention that the tribunal had already determined that it had jurisdiction by its conclusions in other related awards.

Comment

The decision provides some helpful clarification on the applicability of the foreign act of state doctrine to arbitration. As such, it is significant for private parties who have entered into commercial contracts with state entities and serves as a useful reminder of the difficulties that private parties may face when disputes arise under such contracts. On the basis of the Court's obiter comments, in similar circumstances it may provide some protection to non-State actors expressly to grant the tribunal jurisdiction to adjudicate on acts of state in the arbitration agreement included in a contract with a state party, although this will of course be subject to considerations of negotiability.

For more information, please contact Adam Johnson QC, Partner, Andrew Cannon, Partner, Hannah Ambrose, Professional Support Consultant, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.