Law
State Immunity in Commercial Arbitration
Quick fact
Under the restrictive theory of state immunity, states are immune for sovereign acts but not for commercial activities. The US Foreign Sovereign Immunities Act codifies this, and also contains an arbitration exception that allows enforcement of arbitration agreements made with foreign states.
Why this is interesting
A state can sign a commercial contract, but if it defaults, can you sue it in arbitration? Surprisingly, the answer is not always 'yes'—and that's the puzzle.
Read the full explanation
Understanding State Immunity in Commercial Arbitration
State immunity is a principle of international law that protects states from being sued in foreign courts. This principle is rooted in the idea that sovereign states are equal, and one cannot assert jurisdiction over another. However, when a state enters the marketplace and signs contracts, it may be acting more like a private business than a sovereign. The restrictive theory distinguishes between two types of acts: 'acta jure imperii' (sovereign acts like declaring war or issuing laws) and 'acta jure gestionis' (commercial acts like buying goods or leasing property). In commercial arbitration, the question becomes: can a state claim immunity to avoid arbitration? The answer depends on the nature of the transaction and whether the state has explicitly waived immunity.
A deeper explanation
The key mechanism is the waiver of immunity, which can be explicit or implied. States can sign arbitration agreements clearly stating that they submit to arbitration and waive their immunity in any subsequent enforcement proceedings. Even without an explicit waiver, many courts apply the restrictive theory and find that by engaging in commercial arbitration, the state is implicitly waiving immunity for that transaction. International conventions, such as the UN Convention on Jurisdictional Immunities of States, support this by stating that a state cannot invoke immunity in a proceeding relating to a commercial transaction with a foreign private party. The practical effect is that states are held accountable in arbitration for their commercial activities, but they remain immune for sovereign acts, creating a fine line that tribunals and courts must draw.