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Sovereign Immunity and Dealing With Foreign States – High Court Ruling

The principle of sovereign immunity means that commercial dealings with foreign powers can be particularly hazardous. However, in a guideline decision, the High Court opened the way for a bank to seek enforcement of a $250 million debt against an African state and its government. 

A Middle Eastern bank issued proceedings in London after the government defaulted on a commercial loan, repayment of which had been guaranteed by the state. The loan agreement was governed by an English jurisdiction clause. However, the State Immunity Act 1978 required that the proceedings be served on the state via the Foreign and Commonwealth Office (FCO). 

By agreement between the state and the FCO, relevant documents were required to be legalised by the latter, and re-legalised by the state’s embassy in London, before they could then be sent to the British embassy in the state’s capital. Only then could they be finally served on the state’s Ministry of Foreign Affairs. Despite extensive efforts, the bank failed to comply in full with those procedural requirements, with the result that the proceedings had not been validly served. 

In coming to the bank’s aid, the Court took the exceptional step of dispensing with formal service of the documents. Staff at the state’s London embassy had refused to re-legalise or even receive them and the state had thus failed to cooperate with the procedure that it had itself agreed with the FCO. Parliament could not have intended to legislate in such a way as to enable a foreign state to frustrate service, and thus entirely avoid its legal obligations, by such withholding of cooperation. 

Whilst acknowledging the need for respectful dealings between sovereign powers, the Court noted that the state’s conduct appeared to be designed to delay, frustrate or thwart the proper legal process. It was clearly aware of the proceedings, but had failed to engage with them despite being afforded every opportunity to do so. 

In circumstances where the state had no real prospect of successfully defending the action, the bank was entitled to summary judgment in the full amount of its claim. The Court, however, required that the state’s government be notified of its decision through diplomatic channels prior to enforcement. That stay would also give the state time to respond to the proceedings or to apply to set aside the judgment. 

 

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