Given London’s position as a major financial centre particular emphasis has been placed on issues concerning enforcement against sums of money held by a bank for or on behalf of the State.
Some of the matters raised are also relevant considerations at the stage of negotiating a contract with a State entity if an arbitration agreement is to be included.
Preliminary point: enforcement and execution
Though the entire process is often referred to as enforcement, there are two distinct stages. At the first stage, recognition and enforcement, the court declares the award enforceable in the same way as if it was a judgment and/or enters judgment in terms of the award (see ss 66 and 101 of the Arbitration Act 1996).
At this stage it may not be necessary to show that there are assets within the jurisdiction. At the second stage steps need to be taken to execute the award against State assets within the jurisdiction.
In the case of an asset in the form of money held for or on behalf of a State by a bank the asset is a debt. As a matter of English law a bank account is a debt owed by the bank to the account holder. Where the asset is a debt the remedy sought at the execution stage is a third party debt order (CPR 72, previously called a garnishee order) whereby the court essentially orders the third party (the bank) to pay the award creditor instead of the State. For simplicity, reference is only made to enforcement herein. However in practice the difficulties referred to are likely to arise at the execution stage. This is because whether or not there are State assets within the jurisdiction is irrelevant insofar as the enforcement of awards under the New York Convention is concerned (Rosseel NV v Oriental Commercial & Shipping Co (UK) Ltd  2 Lloyd’s Rep. 625; Honeywell International Middle East Ltd v Meydan Group LLC  EWHC 1344 (TCC)). Given the number of signatories to the New York Convention, many awards where the seat of arbitration is outside of England are likely to qualify for enforcement under the New York Convention. Turning then to the potential difficulties.
Is the asset within the jurisdiction?
Firstly, the debt must be within the jurisdiction. In the case of money held by a bank on behalf of a State this will normally be a question of whether the account is held by a branch of the bank located within the jurisdiction of the English courts: See CPR 72.1 and Kuwait Oil Tanker Co SAK and Another v Qabazard  UKHL 31,  1 A.C. 300. This gives rise to obvious practical difficulties in circumstances where most commercial banks have branches around the world and banks are unlikely to wish to (or indeed be legally in a position to be able to) volunteer information about the location of a client’s accounts.
Is there an asset?
Secondly there must be an asset. This means that there must be money in the account at the time when the third party debt order is made (Re Greenwood  1 Ch 887). Again this gives rise to practical difficulties. For example, when coupon payments under sovereign bonds are paid through a London account the sums are likely to be in the account for a matter of days only before they are distributed to bondholders or forwarded on to a clearing system outside of the jurisdiction (such as Clearstream in Luxembourg or Euroclear in Belgium).
Identifying the timing of these payments causes obvious practical difficulties and an element of guesswork may be involved. Furthermore sometimes more than one bank (or more than one branch of a bank) has been appointed as a potential fiscal agent and, depending on the precise terms of the fiscal agency agreement the State may have the freedom to change its fiscal agent at any given point in time.
Is the asset an asset of the State?
Thirdly the asset must be an asset of the State. A bank account held in the name of the State (or the relevant organ of the State as explained below) is a clear example of an asset of the State.
However coupon payments under a sovereign bond issue are likely to be more complicated. Much will turn on the specific terms of the relevant fiscal agency agreement or trust deed in place. For example the contractual terms of the fiscal agency agreement may contain restrictions on the State’s ability to ask the fiscal agent to return sums once paid for forwarding on to bondholders.
This may render the debt a “flawed asset” which may in turn cause difficulties for the purposes of obtaining a third party debt order. A detailed analysis of the particular contractual provisions is required and in practice is difficult in circumstances where the applicable contractual arrangements are likely to be unknown to the award creditor.
Fourthly the debt must be an asset of the award debtor. The award debtor may be the State or a specific organ of the State. If an award is against a specific organ of the State, the asset must be held in the name of that organ of the State or in the name of another organ of the State if under its own laws the State is a unitary body: See s 14 State Immunity Act 1978 (SIA).
Whether or not the State is a single unitary body will of course depend on the content of foreign law and the approach will differ from jurisdiction to jurisdiction.
Is the asset immune from enforcement?
Fifthly the debt must not be immune from enforcement. The relevant provisions are set out in the SIA. The starting point is that all assets of the State are immune:
“the property of a State shall not be subject to any process for the enforcement of a judgment or arbitration award or, in an action in rem, for its arrest, detention or sale” (s 13(2)(b) SIA 1978).
However the SIA contains exceptions to this general rule.
Enforcement against state assets is allowed provided that the State (or the relevant organ of the State as the case may be) has expressly and in writing consented to its assets being subject to enforcement proceedings (s 13(3) SIA). Importantly simply agreeing to arbitrate is not enough. The State must have expressly (and in writing) consented to its assets being subject to enforcement proceedings (s 13(3) SIA).
Many arbitration agreements do not go far enough. Therefore award creditors must frequently look for other applicable exceptions to state immunity.
A commonly relied on exception is s 13(4) SIA whereby state immunity does not prevent the issue of any process in respect of property which is for the time being in use or intended for use for commercial purposes. Commercial purposes is defined at s 3(3) SIA as any contract for the supply of goods or services, any loan or other transaction for the provision of finance and any guarantee or indemnity in respect of any such transaction or of any other financial obligation, and any other transaction or activity (whether of a commercial, industrial, financial, professional or other similar character) into which a State enters or in which it engages otherwise than in the exercise of sovereign authority.
It is likely that at least some of the money passing through or held by commercial banks in England will fall within this meaning. However a degree of caution is required. For the reasons set out below it is not always clear whether the commercial purposes exception applies to a particular asset until the proceedings, and the arguments on both sides, are well advanced. Therefore it is advisable, when drafting contracts with States and state owned entities to include an express waiver of immunity against execution/enforcement rather than being left to rely on the other exceptions to state immunity if something goes wrong.
Commercial purposes exception
Turning then to the difficulties associated with the commercial purposes exception. The commercial purposes exception does not apply to the property of a State’s central bank or other monetary authority (s 14(4) SIA). Provided the central bank of a state is (under the state’s own laws) considered a separate entity from the State (as it will often be) it must independently have waived immunity against enforcement (s 14(4) SIA and Thai-Lao Lignite v Government of the Lao People’s Democratic Republic  EWHC 2466 (Comm)). Such a waiver may be rare in practice as States will understandably wish to protect their central bank’s funds and stability.
Furthermore, it is not always easy to identify the limits of “a central bank or other monetary authority” and therefore to know for certain whether a particular debt is wholly or partly that of “a central bank or other monetary authority”.
Aikens J recognised these difficulties in AIG v Kazakstan  1 WLR 1420 stating (at para 38):
“There is no handy definition of a central bank in either English law or public international law. The status of a central bank varies from state to state. However, the key characteristics and functions of a central bank are well known and clear. Fundamentally, a central bank is set up by a state with the duty of being the guardian and regulator of the monetary system and currency of that state both internally and internationally.”
It may also be difficult to know whether the commercial purposes exception applies before the State has put forward its evidence. The test is whether the property is for the time being in use or intended for use for commercial purposes – matters which the award creditor may know little if anything about.
For example in SerVaas v Rafidian (UKSC)  3 WLR 545 the party seeking enforcement had obtained default judgment against the Republic of Iraq. It had found assets in England in the form of money payable to Iraq by an Iraqi State-controlled bank with a branch in London. The debt consisted of commercial debts previously acquired by Iraq by way of assignment from creditors of the bank. However the Iraqi state intended to use the dividends to make payments to the Development Fund for Iraq established by the United Nations Security Council following the fall of Saddam Hussein’s regime. Therefore the assets were immune from enforcement. The source of the asset was commercial but their intended use was not.
Similarly, in the case of money in bank accounts, the relevant asset is the deposit held by the bank. All of the money in a given account, must for the time being be in use or intended for use for commercial purposes. This is likely to cause difficulties with accounts held in the name of a State (as opposed to funds passing through the bank as coupon payments under sovereign bonds for example) given that some of the money held in such an account may be used for diplomatic or other sovereign purposes. Even if the account is also used by the State for commercial purposes the entire account is immune from enforcement: See Alcom v Columbia  AC 580.
In conclusion, when an award creditor with an award against a State is looking for assets within the jurisdiction of the English courts, money held by a bank for or on behalf of the State is a likely candidate. However before commencing enforcement proceedings it is prudent for an award creditor to consider, whether, when and for how, long a bank will hold money for the State, whether that money can properly be described as an asset of the State or the correct organ of the State, whether the debt is located in England and whether it is in any event immune from enforcement.
The award creditor should be aware of these potential difficulties and, if possible seek to address them. The methods of addressing the various potential difficulties are beyond the scope of this article. For now it is simply noted that it may be possible to obtain freezing injunctions, asset disclosure orders and/or gagging orders to seek to protect the award creditor’s position pending the conclusion of enforcement proceedings and also to obtain further information about the assets held by the State within the jurisdiction.
Liisa Lahti is a barrister practising from Quadrant Chambers, Fleet Street, London. She has worked on Diag Human Se v Czech Republic  EWHC 1639 (Comm) which involved the enforcement of an award against a European State.
Email: firstname.lastname@example.org / http://www.quadrantchambers.com/people/1247/liisa-lahti