At A Glance
State involvement in commercial transactions continues to increase and remains an area of distinct legal risk for commercial parties.
The nature of a state’s role on any transaction may vary and its interest in any deal may be direct or indirect. For example:
- a state may offer to guarantee a development project to reassure creditors;
- a government may issue debt instruments to the market to raise funds;
- a central bank may borrow funds to finance trade; or
- a state may seek to invest surplus revenues for the benefit of future generations through funds, perhaps using separate offshore structures.
In each of these instances, the issue of sovereign immunity may arise.
Why does this matter?
Put simply, if a state or a state entity is immune from the jurisdiction of a foreign court1 then, in the event of a default or other dispute, a commercial counterparty may be unable to secure any legal recourse against it, and, in particular, it may not be able to obtain a judgment against the state or state entity. Further, even if a commercial party can secure a judgment or arbitral award against a state or state entity, it may be unable to enforce it against the state’s assets because of immunity, potentially rendering any judgment or award pointless. A state’s willingness to honour its commitments voluntarily may change as its economic circumstances or political leadership evolve.
In this update we:
- outline key risks facing commercial parties when transacting with a state or state entity and how best to mitigate those risks; and
- briefly consider the position of international organisations, such as multilateral development banks, many of whom have immunities and privileges under their constitutional documents and establishing treaties, as well as under domestic laws.
Another risk factor is expropriation, but we do not cover...