State-Owned Entities and Sovereign Immunity

As the world continues to become globalised and further interconnected, you may begin coming in contact with foreign companies – some of those companies may in fact be controlled or majority-owned by countries. This may have legal implications in how you deal with those companies and what happens when things go wrong – read on to see what those implications are and what can be done.

What is sovereign immunity?

Sovereign, or state immunity is the concept that states are not subject to the laws and courts of a country that they operate within – for example, it is often seen that the land that an embassy sits on technically is foreign land and so not subject to any local laws. There are two key implications:

  1. There is no jurisdiction for courts to hear any disputes; and
  2. Even if a court rules against a state or state-owned entity, the plaintiff might not be able to claim relief from that entity

The Aviation Industry Corporation of China Case

China’s largest aerospace and defence company has recently argued in the US that, being owned by a key Chinese government agency, they are entitled to legal immunity and therefore are not answerable to US law and their courts. The Chinese Foreign Ministry has spoken and demanded the US respect the integrity of Chinese companies broadly, however did not mention this case specifically. Other Chinese companies have employed this legal argument before and have been successful in the US.

What can be done?

With respect to immunity from jurisdiction, in most cases an agreement to arbitrate constitutes a waiver of that immunity, both in relation to the arbitral proceedings themselves and any ancillary proceedings in the national courts.

International arbitration courts, such as the International Centre for Settlement of Investment Disputes can help, but only if the State that owns the company is a party to the establishing convention. Whilst Australia is party to that convention, some significant economies that are not party or have not ratified it include Brazil, India, Mexico,Thailand, Russia and South Africa.

The Law in Australia

The courts in Australia, whilst respecting the international doctrine of sovereign immunity, have been willing to challenge that immunity in some cases. In 2009 the court held that PT Garuda Indonesia Pty Ltd, whilst falling into a separate entity category that gave them the right to immunity, were not protected as their conduct fell within the ‘commercial transaction’ exception under Australian law. In that respect, courts can prima facie find that state-owned entities will have immunity protection after considering:

  1. the ownership and control of the entity
  2. the functions performed by the entity, the foreign State’s purposes in supporting the entity, and
  3. the manner in which the entity conducts itself or its business.

Another Consideration

Just as working with any other company, there are a whole multitude of factors that need to be taken into account, including legal considerations. As companies continue to expand beyond their borders, you will be more likely to interact with international companies or you might want to expand yourself – it is then important to consider the implications of local laws and how sovereign immunity may impact on your operations.

Let us know your thoughts on State-Owned Entities and Sovereign Immunity by tagging us #lawpath or @lawpath.

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