NML Capital v Argentina [2011] UKSC 31

In this case, the Supreme Court had to decide whether NML, a vulture fund, was entitled to enforce a New York judgment ordering Argentina to make payment of the principal and interest due under sovereign bonds on which Argentina had defaulted in 2003. The Supreme Court's judgement that NML were entitled to enforce this action in the UK courts sheds light on the current standing of sovereign immunity under English law.

The background facts

In 1994, the Republic of Argentina issued a series of sovereign bonds subject to New York law pursuant to a fiscal agency agreement under which it agreed a waiver of immunity. The terms of the bonds provided that a final judgment in New York would be enforceable against the defendant in other courts in which it might be amenable to a suit on the judgment. Between June 2001 and September 2003, NML bought a number of bonds at a discounted rate. Argentina defaulted on the interest payments on its bonds and sought a general restructuring of its external debt, but NML refused to take part in any restructuring offer and commenced proceedings in New York seeking to recover principal and interest due under the bonds (US$284,184,632.30). On 18 December 2006, the US District Court of the Southern District of New York entered judgment against Argentina in favour of NML for the sum claimed.

NML sought and obtained permission from the High Court in London to serve proceedings out of the jurisdiction on Argentina. NML brought the claim for the enforcement of the New York judgment.

Argentina sought to set aside this order and to obtain a declaration that the Court had no jurisdiction in respect of the claim brought against it by NML, arguing that as a sovereign state, it was immune from suit under section 1 of the State Immunity Act 1978 (the "1978 Act") which says that a "state is immune from the jurisdiction of the courts of the UK except as provided in the following provisions of this Part of the Act."

At the hearing of that application, NML said that the New York court would have had jurisdiction in the matter, applying state immunity rules corresponding to those applicable in the United Kingdom, and therefore its judgment was recognised and enforceable in England under section 31(1) of the Civil Jurisdiction and Judgments Act 1982 (the "1982 Act") which provides for the circumstances in which a foreign judgment may be enforced in the UK against a state. NML also added that the terms applicable to the bonds meant that Argentina had submitted to the jurisdiction of the English court and thereby waived any immunity from suit.

The defendant contended that section 31 of the 1982 Act was concerned with the substantive merits of the claim and applied only if the English court otherwise had jurisdiction under one of the exceptions to state immunity in the 1978 Act.

The decisions of the High Court and Court of Appeal

At first instance, Mr. Justice Blair held that section 31 of the 1982 Act comprehensively dealt with the recognition and enforcement of the judgments of foreign courts against states and that Argentina was not entitled to claim sovereign immunity and dismissed the application. Argentina applied to set aside this order, arguing that as a sovereign state, it was immune from suit under section 1 of the State Immunity Act 1978, which grants a general immunity to states unless specific exceptions apply. The Court of Appeal (Aikens, Mummery and Elias LJJ) upheld this argument in February 2010.  NML appealed, and the Supreme Court was asked to rule on the following three principal arguments:

1. Was Argentina caught by section 3(1)(a) of the 1978 Act, which provides that sovereign states are not immune "as respects proceedings relating to a commercial transaction entered into by the State;"

2. Was Argentina caught by section 31 of the 1982 Act, which provides a further exception, namely that foreign judgments against a sovereign state would be enforceable through the English courts if two conditions were met: (a) the state in question would not have been immune if English law was applied (i.e. the 1978 Act), and (b) the judgment would otherwise satisfy the criteria for enforceability under English law; and

3. Under the terms of the bonds themselves, had Argentina waived immunity and submitted to the jurisdiction of national courts for the purposes of enforcement?

The Supreme Court Judgment

1. The Supreme Court judges were split 3-2 against NML on the first question. There was no dispute that the bonds between NML and Argentina constituted a commercial transaction, and no dispute that NML's action in New York constituted proceedings relating to a commercial transaction. The issue was whether the UK proceedings, for the enforcement of a foreign judgment, could also be said to be relating to a commercial transaction. Lords Phillips and Clarke felt they could, but Lords Mance, Collins and Walker favoured a narrower interpretation, based on the intention of Parliament at the time the 1978 and 1982 Acts was enacted and common practice at the time in the international loan and bond markets.

2. However, this disagreement was purely academic for the purposes of this case, since all the Justices agreed that section 31 of the 1982 Act did provide NML with an alternative route that it could rely on to lift Argentina's state immunity. Lord Phillips gave the following neat summary of the effect of section 31: "State immunity cannot be raised as a bar to the recognition and enforcement of a foreign judgment if, under the principles of international law recognised in this jurisdiction, the state against whom the judgment was given was not entitled to immunity in respect of the claim."

The question that should be asked in such cases is therefore, 'would I have been precluded by the 1978 Act from suing this state had I chosen to sue in the UK?' The answer in this case was no, because section 3(1)(a) of the 1978 Act would have stripped Argentina's immunity had NML sued on the bonds (i.e. brought the adjudicatory proceedings) in the UK.

3. On the third issue, the Justices were also unanimous in NML's favour. The terms of the bonds provided that "the related judgment shall be conclusive and binding upon Argentina and may be enforced in any specified court or in any other courts to the jurisdiction of which Argentina is or may be subject by a suit upon such judgment". As Lord Collins said, "Argentina agreed not to claim any immunity. The contrary conclusion of the Court of Appeal is not readily explicable."

Comment

The lessons of this case are clear: if you are seeking to contract with a sovereign state, you should ensure that the wording of your agreement contains an express waiver of sovereign immunity, both for adjudication, and for enforcement. If your agreement does not provide such a waiver and you still wish to enforce a foreign judgment against the state's assets in the UK, ask whether the state would have been immune under the 1978 Act if you had sued in the UK; if not, you may be able to use the section 31 of the 1982 Act route to lift immunity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.