An assets action: English High Court dismisses state immunity arguments, issuing final charging orders in favour of arbitration award debt

In Zhongshan Fucheng Investment Co Ltd v The Federal Republic of Nigeria [2024] EWHC 1503 (Comm), the High Court of Justice for England and Wales (the "High Court") imposed final charging orders on residential properties owned by the Nigeria High Commission in London in satisfaction of an arbitration award, dismissing arguments that the property was not in commercial use and therefore enjoyed state immunity from execution. This decision demonstrates the straightforward approach the English courts take to enforcing arbitration awards and measures to recover the award debt, even when states are involved.

Background

Arbitration and the Enforcement Application

Zhongshan brought an investment treaty claim under the China-Nigeria bilateral investment treaty (the BIT) against Nigeria in relation to its subsidiary's investment in Ogun state. During the arbitration Nigeria made a number of challenges to the tribunal's jurisdiction, all of which were rejected. The arbitral tribunal found Nigeria liable for expropriation and other breaches of the BIT, ordering Nigeria to pay US$55.6 million in damages (the Award).

Zhongshan made a without notice summary application in the High Court to enforce the Award under s. 66 of the Arbitration Act 1996. As part of its application and in accordance with the requirement to provide full and frank disclosure, Zhongshan noted Nigeria might argue that it was immune from the court's jurisdiction under s. 1(2) of the State Immunity Act 1978 (SIA). However, Zhongshan highlighted s. 9(1) SIA, which creates an exception to state immunity from jurisdiction where court proceedings relate to an arbitration to which the state agreed in writing (in this case, the BIT). Zhongshan also acknowledged Nigeria might raise jurisdictional objections similar to those raised in the arbitration.

Enforcement Order

The High Court granted an enforcement order ex parte on 21 December 2021 (the Enforcement Order), accepting Zhongshan's argument that state immunity from jurisdiction was not applicable due to the exception in s. 9 SIA for court proceedings which relate to an arbitration (subject to Nigeria having the opportunity to apply to set aside the Enforcement Order). Nigeria was granted 74 days from service of the Enforcement Order to challenge it. It missed that deadline as well as a related deadline to file reply evidence, requesting several extensions of time. Only in its last application for an extension did Nigeria indicate that it might raise state immunity grounds.

The High Court rejected Nigeria's applications for extension. Applying the English court's test for relief from sanctions set out in Denton v White, the High Court found that no attempt had been made to bring the applications in time and that Nigeria committed a serious and deliberate breach of the deadlines. The High Court also dismissed Nigeria's argument that the court should have determined immunity fully of its own motion under s. 1(2) of the SIA even if the state did not appear in proceedings, ruling that her conclusion on state immunity was entitled to stand absent a timely challenge by Nigeria.

Nigeria sought permission to appeal on four grounds, including on the ground that the judge wrongly refused to give directions to determine whether state immunity under the SIA applied on the balance of probabilities. Permission to appeal was refused including because:

1. it was not arguable that the court is required to schedule a hearing to determine issues of state immunity in every case where it is sought to enforce an arbitration award against a state;
2. the judge complied with s. 1(2) of the SIA by considering the question of immunity at the time when she made her ex parte order and having concluded that there was a prima facie case that there was no immunity, she was entitled to make an order for the enforcement of the award coupled with a stay which enabled Nigeria to challenge the order; 
3. however, that challenge had to be made in accordance with the timetable set out in the court's procedural rules (which are more generous in the case of states);
4. as no such claim to immunity was made within the timetable, the High Court was entitled to proceed on the basis that there is no applicable immunity in this case and that the initial stay on the order for enforcement should no longer apply; and
5. the judge was right to apply the Denton criteria and there was no arguable basis for saying that she applied them incorrectly.  

Nigeria submitted an application to reopen that refusal of permission, prompting the Court of Appeal to rule on the matter in full.

On 20 July 2023, the Court of Appeal rejected the appeal ([2023] EWCA Civ 867), ruling that the judge was under no obligation to consider the application of state immunity of her own motion. She was therefore entitled to be satisfied that there was no arguable case for state immunity on the evidence that was before her at the stage when the Enforcement Order was handed down, subject to Nigeria having the opportunity to challenge the Enforcement Order. The Court of Appeal rejected Nigeria's argument that it would be a restriction of state immunity to not impose a duty on the first instance judge to investigate the application of state immunity when that application was either not made or was out of time, finding that it would be "pointless and absurd" for that to be the case. The usual procedural rules in terms of timeliness of applications apply equally to applications to raise state immunity issues. The decision of the High Court was entitled to stand, as Nigeria failed to make a timely application to set aside the Enforcement Order.

Final Charging Orders

Zhongshan applied for and was granted interim charging orders on 16 June 2023 and 18 August 2023 against two residential properties in Liverpool (the Properties). Nigeria did not pay the sums due under the Award, prompting Zhongshan to apply to the High Court to make the charging orders final. When a final charging order is granted against an asset, it becomes vulnerable, under certain circumstances, to an order for sale in satisfaction of the enforcement debt.

Nigeria contested the application on several grounds, including that the Properties were covered by state immunity from execution under s. 13 (2)(b) of the SIA, arguing that the exception for property "in use or intended for use for commercial purposes" (s. 13(4) of the SIA) did not apply. Pursuant to s. 13(5) of the SIA, the acting Head of Nigeria's High Commission in London provided a certificate to confirm the properties were available for providing consular services and residences for Nigerian officials (the Certificate). This created a rebuttable presumption against the use of the Properties for commercial purposes, which Nigeria argued Zhongshan failed to disprove. Further, Nigeria argued that any rent received from the Properties was below market rate and was used for maintaining the properties, and not for commercial purposes. Nigeria also argued that Zhongshan did not serve the interim charging orders in line with s. 12(1) of the SIA, which grants states additional protections in the service of documents "required to be served for instituting proceedings against a State".

On 14 June 2024, the High Court granted the final charging orders against the Properties (the Final Charging Orders), dismissing Nigeria's arguments. The Court ruled that the Properties were being let for residential tenancy to persons unconnected with Nigeria and its mission in the UK, which was a commercial transaction. Whether those Properties were available for consular services, as stated in the Certificate, was beside the point: the relevant "use" was the one at the time of the application. The Court rejected Nigeria's argument that the Properties were being used for consular purposes, as no consular activities were actually taking place on the premises, and the Properties had not been used for consular purposes since the end of the 1980s.

Notably, the Court also rejected the argument that the Properties were not being used for commercial purposes because the rent was below market rate. The Court ruled that whether a transaction was profit-making, though of potential evidential weight, was not decisive as to whether a transaction was commercial. The critical factor was that the state engaged in activity "otherwise than in the exercise of sovereign authority", and in letting out the properties Nigeria had acted in that manner.  Lastly, on the facts, the dilapidated state of one of the Properties cut across Nigeria's argument that the rent was used for maintenance, and not commercial purposes. The Court concluded that Zhongshan had rebutted the presumption against commercial use created by the Certificate, and the properties were covered by the commercial use exception under s. 13 (4) of the SIA. Therefore, they were not immune from execution. On the service point, the Court found that s. 12(1) of the SIA did not apply because the application for an interim charging order was considered a further step in the enforcement of the Award, not a new proceeding, meaning that the additional protections in s. 12(1) did not apply. Dismissing the remaining objections, the Court granted the Final Charging Orders.

Comment

This case exemplifies the robust and probing approach of the English courts to the claim of immunity of state assets from execution.

As demonstrated in this case, the English courts do not hesitate to apply the relevant exceptions to state immunity under the SIA, in this case the arbitration exception in s. 9 to state immunity from jurisdiction and the commercial purposes exception to state immunity from execution in s. 13(4). England & Wales is therefore a key jurisdiction for the enforcement of arbitration awards against States, as, provided the requisite exceptions apply, immunity will not in itself be an obstacle in enforcement or execution.