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State(-Owned Entity) Immunity? The Privy Council decides

With the recent judgment in Boru Hatlari Ile Petrol Tasima AS and Others v Tepe Insaat Sanayii AS, the Privy Council has addressed the uncommon situation of a claim to state immunity where enforcement is threatened by way of execution against property held by a State-Owned Entity (SOE), not property held by an organ of the State or the State itself.

While the Board heard the matter on appeal from the Jersey Court of Appeal, the decision is relevant in the Offshore world more generally given the focus of the judgment on “property of a state” within the meaning of section 13(2)(b) of the UK State Immunity Act 1978 (the Act) as extended by order to many Overseas Territories, including the BVI and the Cayman Islands (but not Bermuda or Anguilla).

Boru, a Turkish SOE, entered into a joint venture agreement with Tepe for the construction and operation of a pipeline. When Tepe subsequently obtained arbitration awards against Boru to the tune of over US$100 million (including interest), it sought to enforce the outstanding awards against shares held by Boru in two Jersey subsidiary companies.

Boru resisted enforcement relying on state immunity under the Act, as extended to Jersey and, in doing so, raised a number of novel arguments, including:

  1. Property of a state is determined by reference to its use. The issue is whether the assets are in use or intended for use for commercial or sovereign purposes, without regard as to whether the assets actually belong to the State or the SOE, a separate entity; and
    “Property of a state” is a concept which embraces situations in which a State has either possession or control but without a legal or proprietary interest in the assets in question.
  2. The Board rejected Boru’s arguments, finding that it was Boru’s case “that assets held by a separate entity for itself can represent property of the separate entity and, at the same time though in another sense, also property of the State.” Section 13(2)(b), as drafted, could not support this interpretation and there was “no call to read it, to preclude execution in the ordinary course against assets belonging to a separate entity on the ground of non-proprietary involvement by the State in the form of mere possession or control.”

While the decision is, perhaps, unsurprising as a matter of statutory interpretation, parties entering into joint ventures with foreign SOEs, which hold assets in the Cayman Islands or BVI, will be comforted by the line drawn by the Board regarding state immunity in this decision.

Analysing the Privy Council decision

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