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Dealing With a Foreign Government? Watch Out for State Immunity!

Commercial dealings with foreign governments can be lucrative and offer a welcome degree of financial security – but thorny issues of state immunity can arise when contracts do not run smoothly. Exactly that happened in one case in which the Kurdistan Regional Government of Iraq (KRG) claimed immunity against enforcement of a $100 million arbitration award.

Three companies were awarded exclusive rights by KRG to exploit two gas fields for a period of at least 25 years. The contractual relationships had been characterised by dispute for several years. Amongst other things, the companies claimed to have been underpaid by $1.12 billion. The companies had ultimately referred the matter to arbitrators after KRG declined to participate in mediation.

The arbitrators had made a peremptory order requiring KRG to pay $100 million to the companies. That sum was not forthcoming and the latter launched enforcement proceedings. KRG, as a constituent region of the Federal Republic of Iraq (FRI) was not itself a state. However, it was a ‘separate entity’ within the meaning of Section 14 of the State Immunity Act 1978 and claimed immunity from suit on that basis.

The High Court found that, in vesting long-term exploitation rights in the companies, KRG had engaged in an exercise of sovereign authority. However, KRG had at all times been acting in its own right, not as a representative of FRI, and the claim to sovereign immunity therefore failed. KRG had in any event submitted to the jurisdiction of the arbitrators and the balance of justice fell in favour of the enforcement of their award in full.