Sovereign immunity
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Why would an entity — regardless of its absolute executive power — think it should ever be entitled to claim immunity from suit or enforcement on a commercial contract?
There is no good reason, except “Percy, who’s Queen?”
What sovereign immunity is
Sovereign immunity comes in two varieties, both relating to forms of litigation:
- immunity from suit: wherein one cannot take court action for breach of contract against a sovereign at all[1]; and
- immunity from enforcement: having successfully taken court action for breach of contract against a sovereign somewhere else, one cannot then enforce that judgment against the sovereign’s assets by way of getting your money back.
What sovereign immunity isn’t
Sovereign immunity can’t immunise a sovereign against parts of a commercial contract it has already performed, since the aggrieved commoner doesn’t have to take action to recover sums it has already been paid. If the sovereign pays a sum owed, it stays paid. Immunity can’t help the sovereign here. It cannot — by legal means — recover moneys it has paid, except by way of court action, and doubtless your legal opinions will tell you that won’t work (and will operate to waive sovereign immunity anyway)[2].
In the context of an ISDA Master Agreement, therefore, all payments, collateral and initial margin a sovereign has already ponied up[3] before it decides to walk away, you get to keep. Your risk is the market movements from when the sovereign breaches your contract until you can close out your positions. Netting also works, because it is a self-help mechanism that doesn’t oblige you to take legal action to enforce it.
If the sovereign wants to dispute payments it has already made it can either (i) dangle your children over its crocodile pit and ask you what you plan to do — again this is extra-legal behaviour and the JC can’t really comment on it (other that to agree it is horrid); or (ii) proceed against you in a court of law in which case it will still need compelling arguments[4], which on our theory won’t exist and it will have waived its sovereign immunity QED.
So one can get a little hyperventilatey about sovereign immunity. It isn’t that bad. As long as you don’t mind your children being fed to crocodiles.
The Sovereign Immunity Act 1978
The Sovereign Immunity Act 1978[5], which provides (among other things) that a State is not immune as respects proceedings relating to a commercial transaction entered into by the State; or an obligation of the State which by virtue of a contract (whether a commercial transaction or not) falls to be performed wholly or partly in the United Kingdom.
The parties can contract out of this in writing. This can create problems for the verbally incontinent amongst our brethren.
It's a bit nuanced, but not much. The commercial contracts exception allows a sovereign to be sued in the UK courts, but other part of the Act protect it against injunctions, the enforcement of judgments and arbitral awards.
Contractual waiver of sovereign immunity
The great question of whether one should specifically exclude sovereign immunity from a commercial contract governed by English law.
Spoiler: No.
Twist: Industry-standard commercial contracts[6] do anyway. This creates more problems than it solves.
General
Waiving sovereign immunity is a faintly stupid thing to do if your commercial contract happens to be governed by English law, since the Sovereign Immunity Act 1978 excludes any immunity of a state to a commercial contract. Now, to be sure, here arises a great opportunity for the chicken lickens in your litigation department to pipe up. “What if,” they will say, “the sovereign ignores the exclusive jurisdiction clause, and takes action against you in its own court? What then, say ye?”
You got me. But hang on a minute: can you really launch an action in your own court and, by the same lights, claim immunity from suit? Is this not having your Brexit cake and eating it too? And even if it isn’t[7] we are talking here about a sovereign who has, with the complicity of its own court system, already ignored one term of your contract (exclusive jurisdiction). Why would it respect the rest any way?
Sovereign immunity and the Cassanova problem
The fact that (unless agreed otherwise) Sovereign Immunity generally doesn’t apply to commercial contracts doesn’t stop industry standard commercial contracts purporting nonetheless waive that immunity which, in a ghastly ironic turn, makes sovereign immunity more likely to apply. For you may be sure agents, when representing sovereigns, will protest they do not have their client’s authority to waive its sovereign privileges. They will find themselves compelled, by the terms of their agency, to insist the waiver is deleted.
Now in the architecture of the ISDA Master Agreement this involves writing in the Schedule, something like “Section 13(d) shall not apply to Party A or Party B”. Is this mere silence on the matter, or is it an explicit agreement to contract out of it?
Had the ISDA Master Agreement only had the sense to shut up about sovereign immunity in the first place, there would have been no problem: what the eye don’t see the chef gets away with.
This will still be the stance you find yourself having to adopt. “I am not agreeing that sovereign immunity applies,” you will find yourself maintaining to the insistent gaze of your credit officer. “I am simply not saying that it doesn’t apply.”
This falls short of what the Sovereign Immunity Act 1978 requires for sovereign immunity to kick in. Hold that confident smile until it hurts.
See also
- Waiver of immunities - ISDA
- Template:Cdeaprov - CDEA
- Waiver of Immunity - GMSLA
- Waiver of Immunity - GMRA
References
- ↑ Sovereign immunity does of course cover non-contractual disputes and infractions — the drunken ambassador who seeks to avoid prosecution for running over a local fishwife on his way back from a saucy cabaret is the paradigm case, but it is not relevant to the JC so we shall not speak of it.
- ↑ To be sure, a bossy sovereign can park its tanks on your lawn, waterboard you, and throw your children to its pet crocodiles, but this is a practical act, not a legal one and the JC cares not one whit for practical, extra-legal acts. What can one say about them, other than, “that was horrid”?
- ↑ Assuming you can persuade a sovereign to pony up initial margin of course.
- ↑ If the sovereign is in a developed country. If in Somalia, maybe not so much, but there your problem is not sovereign immunity so much as trading in Somalia.
- ↑ https://www.legislation.gov.uk/ukpga/1978/33
- ↑ E.g.,the ISDA Master Agreement and the 2010 GMSLA.
- ↑ SIT DOWN AT THE BACK with all your talk about counterclaims and enforcement of judgments.