International arbitration has always been acclaimed for the recognition of the binding nature of arbitral awards and their enforcement. It is particularly appealing for private parties entering into commercial transactions with States, predominantly for its potential to render an executable award across multiple jurisdictions which can be enforced through judicial pressure. However, this key attribute of international arbitration now stands uncertain with States increasingly invoking their principle of sovereign immunity as a defence to bar execution of awards rendered against them by arbitral tribunals.
The scenario envisages a foreign investor having an award rendered by an arbitral tribunal against a State. After the State’s refusal to comply with the award, the investor seeks to attach (claiming the property as collateral) the property of the State in its bid to enforce the award. However, the State might invoke its principle of absolute sovereign immunity, thereby insulating property located in its territory from attachment. In order to lift this insulation and make the property amenable for attachment, the investor is required to prove that the property sought to be attached is not sovereign, but commercial property. However, it is usually difficult, as would be evident from the following examples, for the investor to attach property of the State located in its own territory. The alternate solution is to consider properties of the State existing outside its territories, i.e. in third States, which do not uphold the doctrine of absolute sovereign immunity in their domestic laws. However, almost every State applies the doctrine of restricted, if not absolute, immunity. Thus, the investor would essentially be required to prove that the property it purports to attach for enforcement is commercial, and not sovereign.
The decision of the Hong Kong Court of Appeal in Democratic Republic of the Congo and Others v FG Hemisphere Associates LLC stands as a stark example of this scenario. The Court has held that a State entering into an arbitration agreement with a private individual submits only to the jurisdiction of the arbitrator and not to the jurisdiction of any given State, except the State exercising supervisory jurisdiction over the arbitration. Further, it has held that an award in a party’s favour only provides a right to apply for leave to enforce the award, not the actual enforcement. The consequence of this position is that if the private party seeks to enforce the award against a State in its court or a court in another jurisdiction where the State holds property, the State may invoke its immunity at the stage of execution of the award. In such circumstances, the only solution cited by the court for unfettered execution of arbitral awards is a waiver of its immunity by the State through an express provision in the arbitration agreement.
The decision comes as a major setback to private parties entering into agreements with States having property in or enterprises located in Hong Kong. If the decision gains ground, it effectively implies that a private party entering into agreement with the State of Hong Kong cannot enforce an award against the State for attachment of its property in Hong Kong. The State parties can conveniently brace themselves under the doctrine of State immunity from execution, leaving the winning party theoretically with an award in its favour but no practical remedy.
Facing similar heat in a BIT case of Sedelmayer v. The Russian Federation, Sedelmayer won an award against Russia in a case of expropriation. Russia was prohibited from claiming sovereign immunity in the preliminary proceedings because its signature to the BIT was held to constitute an effective waiver. In a surprising turn, however, the waiver was held not to cover execution proceedings. To execute the award, Sedelmayer subsequently filed a suit against claims held by Russian government against German airlines. However, the Higher Regional Court in Cologne denied execution on the ground that the “receivables” in these cases were immune because they were intended for sovereign, and not commercial purposes. Sedelmeyer then sought to execute against Russian assets in Berlin. However, this was also rejected as the property sought to be executed against, i.e. value added tax reimbursement claims due to the Russian embassy, were held to be immune under Russia’s sovereign authority. 
Moreover, on 1 July, 2011, the Swedish Supreme Court enforced the award in Sweden, holding that a building owned by Russia was amenable to execution proceedings. The Court dealt with a peculiar situation in which the building in question housed diplomats in 15 of its apartments. Though the Court held that the apartments were protected by diplomatic immunity, it held that the dominant use of the property was made for private and non-commercial purposes, and that a significant part of the use was not within Russia’s official activities. 
This decision of the Court falls in line with restrictive, and not absolute sovereign immunity. However, it is uncertain whether Sedelmayer would be able to enforce its claims for damages or extrapolate this ruling to its second claim.
The aforestated decisions reflect the possible hardship that might be undergone by private parties dealing with States that apply the doctrine of sovereign immunity in their jurisdictions, or in jurisdictions which hold the losing State party’s property and apply the principle of sovereign immunity. It is also difficult for the private party to prove the use of a State property as being not sovereign but commercial, considering the defence of non-disclosure of State information often –resorted to by States.
In the wake of invocation of sovereign immunity as a bar to execution, the glaring question in the face of arbitration and international trade today is – does this apparently inconsistent approach to absolute immunity from execution in different parts of the world/different legal systems create a real problem for international trade with State entities? If so, what is the solution?
It is essential that the contracting parties are aware that they might be unlikely to execute awards against a State party, such as that being the case in Hong Kong. One of the solutions, as suggested by the Hong Kong Court of Appeal, is seeking an express waiver by the State of its immunity. However, this position entails immense negotiation and a great degree of difficulty in bringing about a waiver by the State. What makes situations worse is the illusion of a waiver created by signing BITs, agreeing to institutional rules of enforcement such as the ICC, and being a party to the New York Convention (as the Sedelmayer case), which are later circumvented by courts upholding the supremacy of the sovereign immunity doctrine when it comes to the “execution” of the award. It might help to do a background study of assets of the State in different jurisdictions. However, this also bears a risk as assets can be moved between different jurisdictions.
On the international platform, the application of this doctrine might deter private parties from engaging in commercial transactions with certain States and thwart the promise of unencumbered enforcement which is the key benefit of international arbitration. As matters stand today, “immunity from execution does not remain the last bastion of State immunity”. The execution of arbitral awards remains illusory in the light of this ‘catch-all’ bar of sovereign immunity.
Kshama Loya, LLM
 Decision given on 8 June, 2011 (FACV Nos 5, 6 & 7 of 2010, ON APPEAL FROM CACV NOS 373 OF 2008 AND 43 OF 2009)
 2 Stockhom International Arbitration Review 37, 48, 72 (2005), available at http://www.sccinstitute.com/_upload/shared_files/artikelarkiv/sedelmayer_russian_federation.pdf
 Cologne Higher Regional Court, 6 October 2003, SchiedsVZ 2004, 99
 Kammergericht Berlin, 3 December 2003, SchiedsVZ 2004, 102
 Swedish Supreme Court Case No. O170-10, rendered on 1 July, 2011
 Jeremy Ostrander, The Last Bastion of Sovereign Immunity: A Comparative Look at Immunity from Execution of Judgments, 22 Berkeley Journal of International Law 541 (2004)