Legality of waiver of sovereign immunity clauses in international contracts

So much frenzy and hysteria has gripped the intellectual and political space of Nigeria, and possibly beyond, over the clause waiving Nigeria’s sovereign immunity in the 2018 rail construction contract executed between the Federal Government of Nigeria and the Export-Import Bank of China. This piece seeks to clarify the issues surrounding the controversy.

The concept or doctrine of sovereign immunity, according to the US Supreme Court in Nevada vs. Hall, 440 U.S. 410, 414 (1979), is an amalgam of two quite distinct concepts. The Court reasoned thus: The doctrine of sovereign immunity is an amalgam of two quite different concepts, one applicable to suits in the sovereign’s own courts and the other suits in the courts of another sovereign.

One of the earliest judicial pronouncements on the subject matter is the US decision of Cohens vs. Virginia, 19 U.S. (6 Wheat.) 264, 411-2 (1821), where it was pronounced thus: The universally received opinion is that no suit can be commenced or prosecuted against the United States; the Judiciary Act does not authorize such suits.

In 1846, the US Supreme Court, in the case of United States vs. McLemore, 45 U.S. (4 How.) 286, 288 (1846), held affirmatively that the United States was only subject to a suit if it gave consent to it via legislation.

From the definition in Nevada vs. Hall, supra and the dictum in United States vs. McLemore, supra, therefore, sovereign immunity implies a sovereign State either invoking its sovereignty in order to escape from its legal obligations; or deciding to waive such immunity as an indication of its willingness to permit breach of such legal obligations to be tested in the law courts for judicial determination.

Even though the US Supreme Court overruled Nevada vs. Hall, supra, in Franchise Tax Board of California vs. Hyatt, 587 U.S. (2019), the definition in Nevada, supra, still stands. Indeed, that Court, in Hyatt’s case, did a deep historical incursion into the doctrine of sovereign immunity. Justice Thomas, who delivered the lead opinion of that Court, opined as follows: After independence, the States considered themselves fully sovereign nations. As the Colonies proclaimed in 1776, they were “Free and Independent States” with “full power to levy war, conclude peace, contract alliances, establish commerce, and do all other acts and things which Independent States may of right do”…. “An integral component” of the states’ sovereignty was “their immunity from private suits. Federal Maritime Comm’n v. South Carolina Ports Authority, 535 U.S. 743, 751-752 (2002).

After discussing other judicial decisions and legal and historical texts, Justice Thomas then held as follows: The Founders believed that both “common law sovereign immunity” and “law-of-nations sovereign immunity” prevented States from being amenable to process in any court without their consent…. The common law rule was that “no suit or action can be brought against the King, even in civil matters, because no court can have jurisdiction over him.” 1 W. Blackstone, commentaries on the Laws of England 235 (1765) (Black-stone). The law-of-nations rule followed from “the perfect equality and absolute independence of sovereigns” under that body of international law…. According to the founding era’s foremost experts on the law of nations,“ [i]t does not… belong to any foreign power to take cognizance of the administration of [another] sovereign, to set himself up for a judge of his conduct, and to oblige him to alter it”…. The founding generation thus took as given that States could not be haled involuntarily before each other’s courts.

Driving strength from the historical evolvement of sovereign immunity, therefore, some countries, like the UK, have enacted legislation guaranteeing sovereign immunity and exceptions thereto. For instance, section 13(2) of the Sovereign (or State) Immunity Act, 1978 of the UK, forbids any relief “by way of injunction or order or for specific performance or for the recovery of land or other property.” It further provides that “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.” And to agree with the historical cum judicial development of the concept, subsection (3) of that section provides the following exception: (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 purpose of this subsection.

The US version of this Act is the Foreign Immunities Act of 1976; and section 1605 is similar to the above section. Nigeria, unfortunately, has no such law.

The above provisions of the UK Act came up for interpretation in the case of Pearl Petroleum Co. Ltd. vs. The Kurdistan Regional Government of Iraq (2015) EWHC 3361 (Comm), where a similar waiver clause as the one under contention presently in Nigeria, was included in the contract agreement. Issues submitted before Mr. Justice Burton of the Commercial Court of the Queen’s Bench Division of the High Court bordered on whether the Kurdistan regional government of Iraq was a sovereign authority; and if so, whether “it was in the exercise of sovereign authority of the State (the Republic of Iraq) or of the respondent as a separate entity” that it entered into the contract, so as to be affected by section 13 of the Sovereign Immunity Act, 1978. Justice Burton said so much on sovereign immunity; but I will just quote the portion relevant to the waiver in that agreement, which was thus: The KRG waives on its own behalf and that of the KRG any claim of immunity for itself and assets.

His lordship concluded in paragraph 44 of his judgment that it is not necessary for a waiver clause to “spell out consent” as provided in section 13(2)(a) of the Act. He then reasoned thus: I conclude that if the respondent had been otherwise entitled to state immunity (which I have, as set out above, concluded it is not) the clause here in question would have been sufficient to amount to a waiver of immunity from suit, including an injunction, if I had not reached the conclusion I did reach in paragraph 41 above.

In A Company Ltd. vs. Republic of X (1990) 2 Lloyds Law Rep 520, the waiver clause was that “The Ministry of Finance hereby waives whatever defence it may have of sovereign immunity for itself or its property (present or subsequently acquired).” When a mareva injunction was sought against the said Ministry, it pleaded sovereign immunity. Saville, J., held that in view of the waiver clause above, there was “the agreement and consent of the State” that such an injunction could be sought and granted against it.

Similarly, the waiver of immunity clause in Sabah Shipyard (Pakistan) vs. Pakistan (2002) EWCA Civ. 1642 was to the effect that the defendant waived: Any right of immunity which it or any of its assets… now has or may in the future have in any jurisdiction… and… consents generally in respect of the enforcement of any judgment against it….

The English Court of Appeal, per Waller, LJ, held that the transaction in question was “an ordinary commercial transaction;” and that there was waiver of immunity against the injunction sought.

The cases cited above are intended to show, contrary to the grain of largely misunderstood public arguments in Nigeria and press hysteria that the Federal Government has ceded Nigeria’s sovereignty to China with respect to the loan agreements in question. Nothing could be farther from the truth. The lenders, to safeguard their commercial and financial interests – against the oft-flashed ‘sovereign immunity,’ which has an antiquated origin in the common law, inserted the ‘waiver of immunity’ clause in question, most likely. The question remains whether the Nigerian authorities exercised proper judgment in allowing this present waiver clause.

As shown in countless number of decisions, treacherous sovereigns, in a bid to escape from or avoid liability in international transactions, paraded the so called sovereign immunity doctrine and compelled the foreign commercial entities or other sovereigns to be subject to the discretion of the municipal courts of those host countries – resulting in grave international and diplomatic conundrums. That was why sovereign States started enacting legislation to regulate the existence of, and exceptions to, the doctrine sovereign immunity. I will, brevi muna, undertake a historical and legal perspective into this international frustration, occasioned by the ungentlemanly conduct of some sovereign States.

The 65th session of the United Nations General Assembly, in a bid to stem the rising embarrassment foisted on the international community by willy-nilly breaches of international obligations and the blocking of legal or judicial remedies in the name of sovereign or state immunity, adopted the UN Convention on Jurisdictional Immunities of States and their Property, 2004. Article 10 of the Convention provided expressly that State immunity cannot be invoked for commercial contracts – like the one under contention in Nigeria. This Convention was the product of about 27 years of hard research and work undertaken by the International Law Convention (ILC) – to underscore the seriousness of the issues involved. Unfortunately, only 28 countries signed the Convention as at 2007, the deadline for at least 30 countries to sign it – to make it binding. Only four African countries – Morocco, Madagascar, Senegal and Sierra Leone – signed it.

Even though Lord Sumption (lead opinion), of the UK Supreme Court, in Benkharbouche vs. Secretary of State for Foreign and Commonwealth Affairs (2017) UKSC 62, held in paragraph 39 that this Convention “has for the time being no binding effect qua treaty;” he further held that “so far as it seeks to codify existing customary international law, it is evidence of what [the] law is.”

The conclusion reached by the Master of the Rolls, Lord Denning, in another decision affecting the Nigerian Government and a foreign private company ought, with respect, to have provided a guide to the Nigerian officials in this contentious and controversial waiver of immunity clause. This was in the case of Trendtex Trading vs. Bank of Nigeria (1977) 1 QB 529, where he adopted his previous reasoning in Rahimtoola vs. Nizam of Hyderabad (1958) AC 379 at 442, thus: If the dispute brings into question, for instance, the legislative or international transactions of a foreign government, or the policy of its executive, the court should grant immunity if asked to do so, because it does not offend the dignity of a foreign sovereign to have the merits of such a dispute canvassed in the domestic courts of another country: but, if the dispute concerns, for instance, the commercial transactions of a foreign government (whether carried on by its own departments or agencies or by setting up separate legal entities), and it arises properly within the territorial jurisdiction of our courts, there is no ground for granting immunity.

His lordship further held at page 558 that “If a government department goes into the market places of the world and buys boots or cement – as a commercial transaction – that government department should be subject to all the rules of the market place. The seller is not concerned with the purpose to which the purchaser intends to put the goods.” He concluded that what was in issue here was a “straightforward commercial transaction,” and that the letter of credit in question was issued in London through a London Bank, hence: It is completely within the territorial jurisdiction of our courts. I do not think it is open to the Government of Nigeria to claim sovereign immunity in respect to it.

Since Nigerian officials were not to travel to China to ‘buy commodities,’ but the Chinese were/are to move to Nigeria to undertake the railway line, they ought to have insisted that no such waiver clause be included. But in that beggarly position of seeking for a foreign loan, the said officials qua the Nigerian Government can hardly be blamed for the waiver clause inserted in the agreement.

In AIC Ltd. vs. Federal Government of Nigeria (2003) EWHC 1357 (Queens Bench Division), the question was whether a judgment obtained by AIC in the Federal High Court of Nigeria against the Nigerian Government was registrable in the UK and enforceable as a judgment of the High Court thereof. The Federal Government of Nigeria argued that the Nigerian Government was immune from jurisdiction, by virtue of section 1 of the State Immunity Act, 1978 and that there was no waiver of that immunity. The High Court of the UK, in upholding the plea of immunity, reasoned that the “conclusion that the defendants are immune from the proceedings for the registration of the judgment in this country is unsurprising;” because the judgment sought to be registered related to “a purely domestic matter.”

The same decision was reached in LR Avionics Technologies Ltd. vs. Federal Republic of Nigeria (2016) EWHC 176 (Comm), Continental Transfer Technical Ltd. vs. FRN (2009) EWHC 2898 – where the English High Court set aside a charging order enforcing an arbitral award against the Government of Nigeria on the ground of state immunity.

In conclusion, given the sorry state of the Nigerian economy, no thanks to long and unbroken years of large-scale mismanagement, corruption and shameless theft, Nigeria had no chance or choice than to agree with the Chinese that the controversial waiver of immunity clause be included in the contract. This should teach the current and any future leadership of the country a lesson on the need for prudence and proper management of the country’s resources. However, the waiver clause does not amount to ceding Nigeria’s sovereignty as publicly misunderstood; rather, it amounts to waiver of immunity against the jurisdiction of courts when and if Nigeria defaults in repaying the loan.
Chief Hon (SAN), a constitutional lawyer and author writes from Abuja