Pearl v. KRG

26.Mr Pollock points out the detailed submissions that were made to the Tribunal prior to the 10 July Ruling by the Claimants and responded to in terms by the Respondent, some of which I have set out in paragraphs 6 to 8 above. The Arbitrators were certainly reminded of American Cyanamid principles, and Lord Hoffmann, unsurprisingly, referred to the balance of justice. However, it is entirely clear that they were being asked to make, and were considering, an interim measures order to preserve the arbitration and the subject matter of the claims. I refer in particular to paragraphs 12, 76 and 77 of the Claimants’ submissions, set out in paragraph 6 above, and paragraph 122 of the Respondent’s set out in paragraph 7. The Arbitrators did not spell out a reference to the “proper and expeditious conduct” of the arbitration, but they clearly concluded that it was appropriate that the status quo ante, whereby the Respondent paid for what was lifted, should be restored, and that that was necessary for Dana in particular to be able to continue with the arbitration and be in a position to obtain any relief. This was not an order on the basis of an assessment of the eventual outcome, but of a return to the status quo irrespective of the outcome. It is quite clear that clause 16(e) of the Heads of Agreement (set out in paragraph 3 above) was at the very forefront of the Arbitrators’ minds (see for example paragraph 9(21) above). Their Order was neither intended to nor did prejudge the merits, as Lord Hoffmann made clear (6 May 2014 Day 1/164), but it was effectively preserving the subject matter of the arbitration, namely the rights under the 25 year contract which the parties were disputing. When that order was not complied with, it is even plainer that a further order was required for the same purpose, and that the order and compliance with it were required for the “proper and expeditious conduct” of the arbitration. Lord Hoffmann concluded (21 September 2015 at 101/103) that the Arbitrators had jurisdiction to make the order, and I similarly conclude that this Court has jurisdiction to make a s.42 order to enforce it. The Court is not, as Lord Fraser would describe it, intervening in the arbitral process, but assisting the Arbitrators to enforce compliance with their orders.

27.The second ground upon which Mr Dunning challenges the making of a s.42 order is by reference to the need within s.41(5) for the Respondent to have been given an opportunity to show sufficient cause in respect of non-compliance. This contention is put in two ways:

i)First that if the order is now to be interpreted as one which required the Arbitrators to have been satisfied that the making of such order was for the proper and expeditious conduct of the arbitral proceedings or that the Respondent’s failure to comply with it was a failure to do all things necessary for the proper and expeditious conduct of the arbitration, that was not spelt out. If the basis for the Arbitrators’ conclusion was that if the order were not made Dana could be ‘driven from the judgment seat’, the Respondent would, and it is suggested could, have addressed that point, or at any rate addressed it differently from the manner in which they made the submissions they did. I am however entirely satisfied that the parties before the Arbitrators knew what the issues were, and knew that the Claimants’ case was that if the status quo ante of payment for the products were not restored there could be catastrophic effects, including the inability of the Claimants to proceed with the arbitration and/or the loss of the Claimants’ rights under the 25 year contract. Opportunity to make representations to the contrary was fully taken up by the Respondent.

ii)The second contention is by reference to the precise wording of the 17 October Ruling at paragraph 30. It is important to appreciate that the previous order of 10 July 2014 had not been complied with, and remained in force, and what the Arbitrators were attempting to do was to put the Claimants at least in part into the position they would have been in if the earlier order had been complied with. Mr Dunning complains that the order that was made effectively turned into a peremptory order after 30 days, without giving the Respondent any further opportunity to make submissions. However, it is quite clear that what it was, however phrased, was a peremptory order that was effectively suspended for 30 days, to give the Respondent a last opportunity to make payment before it took effect. All the submissions that could possibly have been expected had been made, and the position could only be exacerbated if there had still been no payment (as in fact was the case) after another 30 days. It is quite plain that the Respondent was given the fullest opportunity to show sufficient cause.

Issue 2

28.I turn to the question of state immunity, to which the Respondent submits that it is entitled as a separate entity (see paragraph 2 above). It consequently denies that the Claimants are entitled to any relief against it and asserts its own entitlement to a declaration pursuant to CPR Part 11. The relevant sections of the SIA are as follows:

i)The starting point is s.14:

“(1) The immunities and privileges conferred by this Part of this Act apply to any foreign or commonwealth State other than the United Kingdom; and references to a State include references to—

(a)the sovereign or other head of that State in his public capacity;

(b)the government of that State; and

(c)any department of that government,

but not to any entity (hereafter referred to as a “separate entity”) which is distinct from the executive organs of the government of the State and capable of suing or being sued.

(2) A separate entity is immune from the jurisdiction of the courts of the United Kingdom if, and only if—

(a)the proceedings relate to anything done by it in the exercise of sovereign authority; and

(b)the circumstances are such that a State (or, in the case of proceedings to which section 10 above applies, a State which is not a party to the Brussels Convention) would have been so immune.

(3) If a separate entity (not being a State’s central bank or other monetary authority) submits to the jurisdiction in respect of proceedings in the case of which it is entitled to immunity by virtue of subsection (2) above, subsections (1) to (4) of section 13 above shall apply to it in respect of those proceedings as if references to a State were references to that entity.

. . .

(5)Section 12 above applies to proceedings against the constituent territories of a federal State; and Her Majesty may by Order in Council provide for the other provisions of this Part of this Act to apply to any such constituent territory specified in the Order as they apply to a State.

(6)Where the provisions of this Part of this Act do not apply to a constituent territory by virtue of any such Order subsections

(2)and (3) above shall apply to it as if it were a separate entity.”

ii)Arbitration is provided for by s.9:

“(1) Where a State has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration, the State is not immune as respects proceedings in the courts of the United Kingdom which relate to the arbitration.”

iii)S.13 provides in material part as follows:

“(2) Subject to subsections (3) and (4) below—

(a)relief shall not be given against a State by way of injunction or order for specific performance or for the recovery of land or other property; and

(b)the property of a State shall not be subject to any process for the enforcement of a judgment or arbitration award or, in an action in rem, for its arrest, detention or sale.

(3)Subsection (2) above does not prevent the giving of any relief or the issue of any process with the written consent of the State concerned; and any such consent (which may be contained in a prior agreement) may be expressed so as to apply to a limited extent or generally; but a provision merely submitting to the jurisdiction of the courts is not to be regarded as a consent for the purposes of this subsection.”

iv)So far as material s.2 provides:

“(1) A State is not immune as respects proceedings in respect of which it has submitted to the jurisdiction of the courts of the United Kingdom.

(2) A State may submit after the dispute giving rise to the proceedings has arisen or by a prior written agreement; but a provision in any agreement that it is to be governed by the law of the United Kingdom is not to be regarded as a submission.”

29.The first group of questions is as follows:

i)Was the 25 year Heads of Agreement with the Claimants entered into by the KRG in the exercise of sovereign authority?

ii)Was that sovereign authority its own sovereign authority, or that of Iraq (see Issue 2(b) in paragraph 16 above).

iii)If so, pursuant s.14(2)(a) do these proceedings relate to anything done by KRG in the exercise of such sovereign authority?

I shall take the first two of these questions together.

Sovereign Authority

30.The locus classicus for discussion of this question, fittingly in these days in which Latin has, by virtue of the Times Latin crossword, seemingly returned to respectability, is the discussion of the difference between acts ‘jure gestionis’ and acts

‘jure imperii’, which Lord Wilberforce addressed in I Congreso del Partido [1983] 1 AC 244 at 262. He there translated them, in a way which is strangely not quite as helpful in English as in Latin, as the difference between a sovereign or public act and a private act, meaning an act of private law character such as a private citizen might have entered into. Lord Goff returned to what he called Lord Wilberforce’s “authoritative statement” in Kuwait Airways Corporation v Iraqi Airways Co

[1995] 1 WLR 1147 at 1158D, a case in which a plainly governmental act, being the expropriation of the Kuwait Airways fleet by the Government of Iraq, was followed by what were concluded to be commercial acts, namely the commercial running of those aircraft. Lightman J in In re Banco Nacional De Cuba [2001] 1 WLR 2039 relied upon the analysis by Lord Wilberforce and by Lord Goff, particularly at paragraph 28, where he concluded on the facts of that case:

“28. On the other hand BNC and BCC entered into what was in form a private law contract and completed it as such. There is no evidence that the sale was pursuant to any legislative or executive direction. In this respect the agreement is in a quite different position from the rest of the reorganisation which was effected by legislation. In the language of Lord Wilberforce in Congreso del Partido [1983] 1 AC 244, 263, everything was done as between vendor and purchaser: there was no exercise and no need for exercise of sovereign powers. The private law character of the transaction is not discoloured by the context in which the agreement was executed, i.e. the fact that the parties to it regarded the transfer of the shares to BCC as an obvious and necessary sequel to the statutory reorganisation. Nor is its private law character controverted by the purpose or motive behind the transaction of serving the interests of the state in

bringing to fruition the completion of the reorganisation of banking in the final form which it sought. I therefore hold that

BCC’s entry into the completion of the agreement were commercial rather than governmental (albeit the parties to the agreement were both state-owned entities) and that accordingly BCC enjoys no immunity in respect of the transaction in question.”

31.In Koo Golden East v Bank of Nova Scotia [2008] QB 733 Sir Anthony Clarke MR concluded at paragraphs 40-42 that the Central Bank of Mongolia was a separate entity within the meaning of the SIA and concluded that it entered into the contract with the claimant in the exercise of sovereign authority because “the purpose of the transactions included the refining of the gold and the placing of a quantity of refined gold on the unallocated account at the bank . . . for the purposes of increasing

Mongolia’s currency reserves”. Mr Pollock criticises this judgment because neither del Partido or Kuwait Airways, nor indeed Banco Nacional De Cuba were, it seems, cited.

32.Mr Dunning refers inter alia to the Recitals to the Heads of Agreement, including (A), (B), (C) and (F) set out in paragraph 3 above, and above all to paragraph 9 also there set out. Mr Hamlan, the Minister of Finance of the KRI has produced a witness statement, which explains the constitutional background:

“9. The Kurdistan Region is governed by the Presidency of the Kurdistan Region and the KRG. The capital city of the Kurdistan Region, and the seat of the KRG, is Erbil. The KRG was formed in 1992 by the Kurdistan National Assembly (later the Kurdistan Parliament), the first democratically-elected parliament in Kurdistan (and in Iraq). The KRG exercises executive power according to the Kurdistan Region’s laws, as enacted by the Kurdistan Parliament, and the Iraqi Federal

Constitution. The Council of Ministers performs the KRG’s executive functions. The Council is composed of the Prime Minister, the Deputy Prime Minister, and 22 further cabinet Ministers. The current government, led by Prime Minister Nechirvan Barzani, took office in June 2014.

10.The Iraqi Federal Constitution was negotiated in 2005. The Iraqi people ratified it by referendum on 15 October 2005 and it entered into force in 2006.

11.Iraq is a federal state. The Iraqi Federal Constitution describes a federal, de-centralized system of government. Sovereignty is shared between the federal government of Iraq, the KRG (which is recognised in Article 117 of the Iraqi Federal Constitution) and the various provinces or

“governorates” of Iraq. . .

12.The Kurdistan Region and the KRG have a special status under the Iraqi Federal Constitution. Article 117, First of the Iraqi Federal Constitution provides:

“This Constitution, upon coming into force, shall recognize the region of Kurdistan, along with its existing authorities, as a federal region.” . . .

13.Although the Iraqi Federal Constitution contemplates the creation of further regions as components of the federation, only the Kurdistan Region is recognised in the Iraqi Federal Constitution as a federal region exercising sovereign powers conferred under the Iraqi Federal Constitution.

14.The KRG is the lawful, democratically-elected government of the Kurdistan Region. It acts on behalf of the Kurdistan Region and has sovereign powers derived from and conferred by the Constitution. Article 121 First and Fifth of the Iraqi Federal Constitution provide:

“The regional powers shall have the right to exercise executive, legislative, and judicial powers in accordance with this Constitution, except for those authorities stipulated in the exclusive authorities of the federal government.” . . .

“The regional government shall be responsible for all the administrative requirements of the region, particularly the establishment and organization of the internal security forces for the region such as police, security forces, and guards of the region.” . . .

15. Further, Article 121, Second, states:

“In case of a contradiction between regional and national legislation in respect to a matter outside the exclusive authorities of the federal government, the regional power shall have the right to amend the application of the national legislation within that region.” . . .”

33.The other relevant Articles of the Constitution, not there expressly referred to, would appear to be as follows:

“Article 111:

Oil and gas are owned by all the people of Iraq in all the regions and governorates.

Article 112:

First: The federal government, with the producing governorates and regional governments, shall undertake the management of oil and gas extracted from present fields, provided that it distributes its revenues in a fair manner in proportion to the population distribution in all parts of the country, specifying an allotment for a specified period for the

damaged regions which were unjustly deprived of them by the former regime, and the regions that were damaged afterwards in a way that ensures balanced development in different areas of the country, and this shall be regulated by a law.

Second: The federal government, with the producing regional and governorate governments, shall together formulate the necessary strategic policies to develop the oil and gas wealth in a way that achieves the highest benefit to the Iraqi people using the most advanced techniques of the market principles and encouraging investment.

. . .

Article 115:

All powers not stipulated in the exclusive powers of the federal government belong to the authorities of the regions and governorates that are not organized in a region. With regard to other powers shared between the federal government and the regional government, priority shall be given to the law of the regions and governorates not organized in a region in case of dispute.”

34.It is common ground that there has been a dispute between the Federal Government of

Iraq (“FGI”) and the KRG as to who is entitled to control of Kurdistan’s oil and gas resources. Reza Mohtashami, of the Claimants’ solicitors, described this in part, in his second witness statement:

“23. It is public knowledge that since the coming into force in May 2006 of current Iraq Constitution (approved by national referendum in 2005) there have been important disagreements between the FGI and the KRG as to the control of Iraq’s oil and gas resources and how the revenues derived therefrom are to be shared. In summary, the FGI and the KRG disagree on many issues including: (a) the jurisdiction and power of the KRG to award petroleum contracts; (b) the scope of cooperation between the FG1 and the KRG in relation to the management of petroleum fields; and (c) the jurisdiction and power of the KRG to export petroleum produced in the Kurdistan Region. The dispute between the FGI and the KRG is pending before the Federal Supreme Court of Iraq and has been raised in several other legal fora in response to the

KRG’s attempts since 2014 to undertake petroleum exports independently of the FGI.

24. . . the FGI does not recognise the petroleum contracts granted by the KRG and considers the Federal Ministry of Oil and its subsidiary agency and marketing arm, the State Oil Marketing Organisation (SOMO), as the sole entity empowered to export petroleum produced anywhere in Iraq.”

The Claimants have exhibited a letter sent to Crescent by the Iraqi Federal Minister of Oil dated 17 December 2007 asserting that all contracts recently signed with the Ministry of Energy and Natural Resources of KRG without authorisation and approval of the Government of Iraq were “in violation of the prevailing Iraqi law”.

35.In the context of the dispute between the FGI and the KRG as to who was entitled to the oil fields, an opinion was produced by Professor James Crawford, giving his advice, which was in fact relied upon, as I understand it, by both parties before the Arbitrators. His advice includes the following paragraph:

“19. Article 112, First, regulates oil and gas “extracted from present fields”. It gives the federal government management powers in relation to that oil and gas, subject to three important qualifications. First, the management is to be undertaken “with the producing governorates and regional governments”, which I take to mean jointly and in cooperation with those governorates or governments or at least with their approval. Secondly, the joint management appears to be limited to oil and gas after it has been extracted, on which basis the management of the extraction and production process itself falls outside the federal joint management power. Joint federal power in respect of such oil and gas will be limited, presumably, to processing, transportation and export. Thirdly, revenues from present fields must be distributed in a fair manner, as stipulated in the Article.

20.On its ordinary interpretation, the term “present fields” means fields already under production. This is indicated by the word “extracted” and by the reference to “producing” governorates. The clear inference is that Article 112, First, covers oil and gas extracted from fields presently in production. By contrast, areas merely being explored, e.g. by seismic survey, are not “present fields”; indeed they are not fields at all but large tracts of territory, most or all of which will never produce any hydrocarbons. On this basis, fields not producing, developed or even discovered - and the oil and gas yet to be extracted from them - fall outside Article 112, First. They fall under the Constitution to be managed by the relevant regional government alone.

21.The time for determining whether a field is “present” or otherwise is the date of the entry into force of the Constitution (viz, 2006). I am instructed that at that date there were no producing fields in the present territory of the Kurdistan

Region, i.e. no “present fields” in the sense indicated above. It follows that the provision for joint management under Article 112, First, has no application. On the other hand there are oil and gas contracts with the KRG entered into prior to the coming into force of the Constitution and providing for future exploration, appraisal and, potentially, production. Under Article 141 all such contracts, entered into by Kurdistan since

1992, are considered valid in accordance with their terms (save and to the extent that they contradict some express provision of the Constitution).”

His Executive Summary includes the following:

“(1) Article 112 of the Constitution of Iraq gives only a qualified right to the Federal Government to

“undertake the management of oil and gas extracted from present fields”. This right is to be exercised “with the producing governorates and regional governments”, and is subject to a condition of fair distribution of revenue on a basis regulated by law. As to non-producing and future fields, there is under Article 112, Second, no federal right to manage, although regional management of such fields has to respect strategic policies to be formulated by the federal government “with” the KRG.

. . .

(3)The KRG is itself bound by Article 111: it is not open to it unilaterally and permanently to take over management of present (i.e. producing) fields in the absence of any arrangements for revenue sharing. As to fields other than present fields, the federal government has no unilateral rights under Article 112, Second, and in the absence of agreed strategic policies, the KRG is entitled to proceed in the exercise of its own constitutional authority and in compliance with its own constitutional duties.”

36.I reach the following conclusions. The Heads of Agreement relate to the grant for not less than 25 years of the right to operate the gas fields. It is not simply a contract for the sale of gas by a government to a commercial party, but the assignment of rights granted to the KRG under the Constitution to a third party. Mr Pollock submitted that the contract was simply “designed to ask us, and commercial operators, to carry out drilling, which is entirely a commercial operation, to build pipelines, a commercial operation, to get the gas up and to treat it, a commercial operation”. I note however that in Svenska Petroleum Exploration AB v The Government of the Republic of Lithuania [2007] QB 886, upon which both parties rely, Moore-Bick LJ, delivering the judgment of the Court considered, at paragraph 133, that although the first instance Judge (Gloster J) had pointed out that the agreement contained many of the hallmarks of a commercial transaction, “the fact that it relates to the exploitation of oil reserves within the territory of the state suggests that it involves an exercise by the state of its sovereign authority in relation to its natural resources and so falls outside the realm of activities which a private person might enter into.” Certainly, as Mr

Dunning points out, and as is apparent from the Constitution, the ownership and management of oil and gas is plainly vested in “the people of Iraq” and the respective

Governments, this is not simply a contract for sale, but a vesting of long-term rights, and the parties themselves thought it necessary to include in the Heads of Agreement

the waiver of immunity clause set out in paragraph 3 above. I am persuaded on balance that KRG entered into this agreement in the exercise of sovereign authority.

37.However it is quite clear that this was an exercise of the sovereign authority of the

KRG itself, not of Iraq. Professor Crawford’s advice creates a powerful case that it was only the “present fields”, i.e. the fields already producing at the date of the entry into force of the Constitution in 2006 (which applies to neither of these two fields), which vested in the FGI, and that the KRG has consequently at all times been acting in its own right. They would say so, and, because the FGI alleges that the KRG has had no right to do what they have done, the FGI would also assert that what was done was not done by way of exercise of the sovereign authority of Iraq. Consequently, as both parties before me accept that this is a necessary requirement (see paragraph 16 (Issue 2(b)) referred to above), the Respondent, as a separate entity, does not have the protection of s.14(2) of the SIA.

38.If I had reached a contrary conclusion in this regard, then I would have needed to have considered whether, within s.14(2), these proceedings relate to anything done by KRG in the exercise of sovereign authority. Mr Pollock refers to NML Capital Ltd v Republic of Argentina [2011] 2 AC 495. This was a case in which the cause of action relied upon in a fresh proceeding in the English Court was an action on a foreign judgment, being a final judgment in New York, which itself arose out of a commercial transaction. The Supreme Court decided by a majority that proceedings “relating to a commercial transaction”, within the meaning of s.3 of the SIA, did not extend to proceedings for the enforcement of a foreign judgment which itself related to a commercial transaction, and that the English proceedings for the enforcement of the judgment obtained by the claimant in New York related to that judgment, and not to the debt obligations upon which the New York proceedings were based. The careful logic of the majority is clear from the speech of Lord Mance at paragraphs 8586. It is plain that he addressed the difference between a cause of action on a foreign judgment, which normally precludes reinvestigation of the facts and law thereby decided, and a claim on a cause of action, which does involve establishing the facts constituting the cause of action; and that the underlying cause of action had merged in the foreign judgment. I am satisfied however that none of that careful logic applies to this case, which is an application to enforce a peremptory order of Arbitrators who are in the process of resolving the dispute relating to the rights of the parties under the Heads of Agreement. Had I concluded that the Heads of Agreement fell within the protection of the SIA, I would have had no difficulty in concluding that the application before me now relates to it.

If there was state immunity, has it in any event been lost by virtue of s.9 SIA?

39.S. 9 SIA:

i)The first question is whether the s.42 application is a proceeding in the Courts of the United Kingdom which relates to the arbitration. Direct assistance can be drawn from the judgment of Moore-Bick LJ in Svenska Petroleum referred to above. The question in that case specifically referred to an application to enforce an award as a judgment:

“117. Arbitration is a consensual procedure and the principle underlying section 9 is that, if a state has agreed to submit to arbitration, it has