25/10/2018

Privy Council rules that assets of State-owned entities not immune from enforcement

Botas Petroleum Pipeline Corporation v Tepe Insaat Sanayii AS [2018] UKPC 31

The Privy Council has issued a judgment with important implications for companies that do business with States and state-owned entities. The Privy Council held that State immunity does not extend to the property of state-owned entities (SOEs). Such property is not to be considered “property of a State” that is immune from enforcement.  

The case concerned a dispute between Tepe, a construction company based in Turkey, and crude oil transportation company Botaş, with which Tepe had entered into two contracts for the construction of the Baku-Tbilisi-Ceyhan (BTC) crude oil pipeline. Disputes arose when Botaş, a SOE of Turkey, terminated those contracts.

Those disputes were referred to separate arbitral proceedings seated in Paris under the rules of the International Chamber of Commerce (ICC), as provided for in the contracts. Both arbitral tribunals found that Botaş’ contractual terminations were unlawful and issued a number of awards in favour of Tepe worth approximately $96 million. Botaş unsuccessfully appealed some of the arbitration awards to the French courts, and failed to make any payments under any of the awards even after exhausting all avenues of appeal.

Botaş has two Jersey subsidiary companies, Turkish Petroleum International Company Ltd (TPIC) and Botaş International Ltd (BIL). Tepe had Botaş’ shares in each of these companies was arrested (initially on an interim basis) in order to satisfy the awards. Botaş objected on the grounds that Turkey has an interest in and/or control over the shares sufficient to engage State immunity.

In 2016, Jersey’s Royal Court held that a SOE cannot assert immunity over assets it owns, and such assets can be thus be used to satisfy an arbitral award. This was upheld by the Court of Appeal of Jersey. Botaş then obtained leave to appeal from the Privy Council.

Botaş maintained before the Privy Council first that the Jersey shares were the “property” of the Turkey because, although not legally or beneficially owned by Turkey, the shares were not used or intended for use for commercial purposes, and therefore were used for sovereign purposes and immune from execution. Botaş also argued that the extent of the control exercised by Turkey over the shares meant that they were, for the purposes of the UK State Immunity Act (SIA) (extended to Jersey by the State Immunity (Jersey) Order, 1985), to be treated as the property of the Turkish State.

The Privy Council rejected both arguments. First, it held that, if it were to ascertain whether assets were the property of a State by reference to the underlying purpose for which they were held, that would “tend to undermine the evident purpose behind the establishment of separate entities by states”. The distinction between an SOE and its assets on the one hand, and the State on the other, is a vital aspect of the SOE’s ability to conduct business.

To determine entitlement to state immunity by reference to whether assets were being used for commercial or sovereign purposes, without first considering whether the assets belonged to the SOE or the State, “would effectively eliminate any difference between assets held by the state and by a separate entity”.

The Privy Council rejected the second argument that the concept of “property of the State” should be wide enough to encompass situations where the State has no proprietary interest, but has possession or exercises some sort of control over the assets. The Privy Council confirmed that the nature of “ownership” of property under the relevant provision of the SIA must be of a quality against which a judgment creditor’s rights can be enforced. As it would not be possible to enforce against a State’s ability to control assets, this cannot be used to define whether or not an asset is the “property of the state”. The Privy Council rejected Botaş’ reliance on the United Nations Convention on the Jurisdictional Immunities of States and their Property (and academic commentary) to claim that the notion of “property of a State” encompasses possession or control. Instead, the Privy Council endorsed a more limited reading of “property of State” in section 13(2)(b) of the SIA as “legally ascertainable interests in the relevant asset”. The Privy Council emphasised that the question of what constitutes “property” is a question for the jurisdiction in which enforcement has been sought. It rejected Botaş’ argument that an autonomous international concept of “property” should be defined and applied.

The judgment endorses and protects the commercial advantages that are enjoyed by the State and SOEs due to their separate status.

The judgment has been reported on in GAR.

Philippa Webb of 20 Essex Street acted for Tepe, led by Stuart Catchpole QC of 39 Essex Chambers