Sovereign Immunity in Enforcement Proceedings – The decision of the German Supreme Court in Walter Bau vs. Government of Thailand
According to a study by the School of International Arbitration of the Queen Mary College, University of London over 90 % of the awards are complied with voluntarily. In recent years arbitral awards rendered against states or state parties have often resulted in multijurisdictional battles at the post award stage when the private party tried to enforce the award against the recalcitrant state party or execute into the property of the state party. The various decisions rendered by German and Swedish courts in the dispute between Mr. Sedelmayer and Russia or by French and English Courts in the dispute between Dallah and Pakistan are just two very prominent examples. They are a useful reminder that winning the arbitration may just be a start for a long lasting battle in the state courts.
The success of such battles often depends on the attitude taken by the relevant state courts to sovereign immunity and possible waivers thereof. That is one of the lessons the insolvency administrator of Walter Bau AG, a German construction company, had to learn recently when he tried to enforce an award rendered against Thailand. Notwithstanding certain particularities of the case, which are of no relevance for the present comment, the dispute itself is typical for this type of arbitrations resulting from investments by private investors which are frustrated by actions taken by the host state.
The dispute arose out of a contract for the construction and operation of a toll road to the central airport of Bangkok which the predecessor of Walter Bau AG concluded with the government of Thailand. The contract had been concluded though Walter Bau had never obtained the formally required “Certificate of Admission” from Thailand’s Ministry of Foreign Affairs. Equally the missing Certificate of Admission did not prevent Thai Board of Investment issued to issue several Certificates of Investment for the construction of the toll road. The operation of the toll road did not yield the anticipated revenues as Thailand refused to increase the toll to the level requested by the project company and allowed for the construction of alternative toll-free roads to the airport.
As a consequence, in 2005 Walter Bau started arbitration proceedings in Geneva against Thailand. It alleged that Thailand had through its actions breached the investment contract existing between the parties. The arbitration proceedings were based on Articles 8 and 10 of the German-Thailand BIT of 2002. The latter provided that also “approved investments” made before the BIT’s entry into force could benefit from the protection granted, in particular from Thailand’s offer to arbitrate any disputes arising from such investments. Thailand challenged the jurisdiction of the arbitral tribunal alleging that the underlying investment was not an approved investment in the sense of the Art. 8 BIT, as Walter Bau had never obtained the required Certificate of Admission. In a first award rendered in 2007 the arbitral tribunal rejected that challenge and decided that it had jurisdiction. Thailand did not challenge that award on jurisdiction in Switzerland but continued to participate in the arbitration. In its final award in 2009 the arbitral tribunal found Thailand liable to have breached the investment contract and ordered it to pay around 30 million Euros.
As Thailand did not voluntarily comply with the award Walter Bau initiated enforcement actions in the US and Germany. In both actions, which were supplemented by unsuccessful setting aside proceedings in Switzerland,  Thailand alleged that the arbitral tribunal lacked jurisdiction to decide the case and invoked inter alia its sovereign immunity. At first instance, the District Court for the Southern District of New York as well as the Kammergericht Berlin (KG Berlin), both rejected Thailand’s objections and declared the award enforceable. Thailand appealed in both cases complaining inter alia that the courts should have investigated in detail the existence of jurisdiction of the arbitral tribunal and its alleged waiver of immunity.
On 8 August 2012 the Court of Appeals for the Second Circuit upheld the decision of the District Court, criticizing the latter, however, for the general approach taken to Thailand’s objection to the tribunal’s jurisdiction. According to the Court of Appeals the District Court should have investigated in detail whether there was “clear and unmistakable evidence that the parties agreed that the scope of the arbitration agreement would be decided by the arbitrators” before adopting a deferential approach to the arbitral tribunal’s decision on its own jurisdiction. On the basis of the evidence before it the Court concluded that such evidence existed and did not investigate the findings of the arbitral tribunal any further. That decision raises interesting questions as to the scope of Kompetenz-Kompetenz at the enforcement stage which would justify a separate article. The focus of this contribution, however, will be the decision of the German Supreme Court (Bundesgerichtshof) in the matter rendered on 30 January 2013.
The decision is of particular interest because it addresses a number of questions relating to sovereign immunity in proceedings to have foreign awards declared enforceable. The Supreme Court made clear that according to the German understandings the proceedings for the recognition and enforcement of foreign awards under the New York Convention (NYC) are not yet part of the execution proceedings. They are still part of the adjudication proceedings albeit “adjudication proceedings sui generis”. In light of this classification the Supreme Court held that the sovereign immunity defense raised by Thailand would be determined on the basis of the rules on immunity from jurisdiction relevant for adjudication proceedings and not those on immunity from execution which apply in execution proceedings. As a consequence German courts could only assume jurisdiction to adjudicate over Thailand if the matter in dispute either concerned commercial activities of Thailand, the so called “acta iure gestiones” as opposed to “acta iure imperii”, or Thailand had waived its immunity. In its decision the Supreme Court could largely concentrate on the waiver exception. It was largely uncontested that the incriminated decisions by the Thai government concerned ”acta iure imperii” as they related to the country’s infrastructure.
In front of the KG Berlin Thailand had argued that in the case at hand the arbitration clause could not be considered to constitute a waiver of its sovereign immunity from adjudication as it did not cover the dispute between the parties. In its view the arbitration tribunal had misinterpreted the BIT by finding that the investment in the toll road constituted an “approved investment” in the sense of the BIT despite the lack of a Certificate of Admission. Pursuant to Thailand the KG Berlin was also not bound by the tribunal’s interim award on jurisdiction. Walter Bau still had to prove that a valid arbitration agreement existed between the parties concerning the investment in question.
The KG Berlin dealt with the sovereign immunity defense at the admissibility stage fairly superficially. It merely stated that Thailand had waived its immunity by having agreed to arbitrate under the BIT without going at that stage into any details whether the arbitration provision in the BIT covered the investment in dispute. A more detailed enquiry into the scope of the arbitration agreement only occurred at the merit stage in the context of whether Thailand could invoke the defenses under Art. V(1)(a)(c) NYC. The KG Berlin held in essences that while Thailand could in principle invoke the lack of a valid arbitration agreement as a defense against the enforcement of the award it was in the case at hand precluded from doing so because it had not attacked the tribunal’s interim award on jurisdiction.
Interesting is the court’s reasoning in this respect. It held first that the NYC itself does not contain an obligation to make use of the remedies against awards at the place of arbitration and could therefore not constitute the basis for precluding the defenses under Art. V(1)(a)(c) NYC. Such a preclusion provision is, however, contained in Art. V(1)(2) first sentence of the European Convention on International Commercial Arbitration of April 21, 1961 (European Convention – ECICA) to which Germany is a party. The court held the provision or at least the underlying idea to be applicable by virtue of Art. VII NYC which entitles a party to rely on more favorable provisions of a different enforcement regime. In the view of the KG Berlin Art. V ECICA constituted a part of the German enforcement regime and therefore prevented Thailand from relying on an alleged lack of the tribunal’s jurisdiction in the enforcement proceedings.
In deciding Thailand’s appeal against the decision the Supreme Court held in essence that in determining the admissibility of the enforcement action, i.e. whether Thailand is submitted to the jurisdiction of the German courts, the KG Berlin should have investigated in detail whether Thailand waived its immunity for the present dispute. That would have required an investigation by the KG Berlin whether the arbitration agreement contained in the BIT and forming the basis for the assumed waiver actually covered the investment or not. The Supreme Court held that in the context of the sovereign immunity defense reliance on preclusion arguments of the kind adopted by the KG Berlin is not possible. A waiver of sovereign immunity should not be assumed lightly but requires clear and unequivocal statements or behavior in this regard. As a consequence the Supreme Court set aside the decision by the KG Berlin and referred the case back to the court for an examination of whether the Thailand waived its immunity from jurisdiction.
Beyond its relevance for the particular dispute the decision of the Supreme Court contains a number of clarifications which may be relevant for the treatment of the waiver exception in future cases at least in Germany but potentially also in other countries.
The Supreme Court confirmed its jurisprudence concerning the general scope of the waiver of sovereign immunity contained in an arbitration agreement. On the one hand it is not limited to the arbitration proceedings as such but also extends to court proceedings in support of the arbitration at the adjudication stage. On the other hand the waiver contained in an ordinary arbitration agreement does not extend to execution proceedings for which an additional waiver would be necessary. In relation to the first statement, the Supreme Court was unfortunately not required to decide whether the waiver in general only extends to court proceedings at the place of arbitration or covers also court proceedings in a third country. In the Supreme Court’s view the BIT explicitly provided that in the present case the waiver contained in it also extended to enforcement proceedings in Germany. The court deduced that from a phrase in Art. 10(2) third sentence of the BIT according to which the “award will be enforced according to domestic law”. In the court’s view Thailand thereby submitted to all proceedings in Germany which are necessary for the enforcement of an award, i.e. in particular the proceedings for having foreign awards declared enforceable.
While such an interpretation is without doubts possible, it would have been preferable if the Supreme Court had used the opportunity to give a convincing ruling on the controversial question of whether the waiver of immunity contained in an arbitration agreement also covers enforcement proceedings in a third country. In the author’s view the answer can only be “yes”. Otherwise the waiver would be deprived of large parts of its effect in practice. As in the present case the place of arbitration is often chosen for its neutrality and the lack of any connection with either party. That has as a consequence that enforcement proceedings will necessarily be initiated in a different country. Thus, to be of any relevance in practice also the waiver should extend to such proceedings in a third country. Otherwise, a state party could easily circumvent its obligation, generally implied into the submission to arbitration, to comply with the award by invoking sovereign immunity in such enforcement proceedings.
Of greater relevance for the outcome of the case is the second determination of the Supreme Court in relation to the scope of the waiver. In principle it only states the obvious: the waiver of sovereign immunity only extends to those cases which are covered by the arbitration agreement. In so far it is surprising that the KG Berlin did not already at the admissibility stage really address the issue of the scope of the arbitration clause which was at the heart of Thailand’s defense. Instead it merely stated that the BIT contained an arbitration clause which could form the basis for a waiver without, however, determining whether the arbitration clause covered the dispute in question. It can only be assumed that the KG Berlin considered it sufficient to deal with the question at the merits stage when addressing the defenses under the New York Convention.
At first sight it does not appear to make a great difference at which stage of the enforcement proceedings the question is addressed: whether in the context of the admissibility of the action or in the context of its merits. Notwithstanding the different setting, the question as to whether the dispute is covered by a valid arbitration agreement involves as such largely the same analysis. In particular, it has to be determined first at both stages to which extent the state court is bound by the existing finding of the arbitral tribunal in this regard. However, the present case shows clearly that there may be different considerations involved at both stages in determining whether a party is precluded from raising the lack of a valid arbitration agreement.
Concerning the required standard of review both the KG Berlin and the Supreme Court came in principle to the same result. The enforcement court can in general review the findings of the arbitral tribunal as to its jurisdiction and is not bound by its factual or legal determinations. Germany was originally one of the countries which allowed for transferring to the arbitral tribunal not only the power to decide on its own jurisdiction in the first place but also the power to make that final determination of its jurisdiction, often referred to as absolute Kompetenz-Kompetenz. However, this jurisprudence has been abandoned with the adoption of the new arbitration law. As a consequence neither of the courts considered itself bound by the findings of the arbitral tribunal that the investment in question was an “approved investment” in the sense of the BIT. The Supreme Court considered in this respect a clause in the BIT to be irrelevant that the arbitral tribunal was to render a binding decision. In its view that clause only concerned disputes which were within the scope of the arbitration clause but not the question of whether the arbitral tribunal had jurisdiction.
In this respect the position of the German courts differs from that adopted by the American courts in the matter. In line with a dicta of the Supreme Court in First Options of Chicago vs. Kaplan the Court of Appeals for the Second Circuit came to the conclusion that the parties could largely transfer the final decision as to the arbitral tribunal’s jurisdiction to the arbitral tribunal itself. The consequence of such a referral is that the enforcement court is largely prevented from reviewing any factual or legal determinations by the tribunal in regard to its jurisdiction, i.e. the arbitrability of the dispute in the American terminology. The Court of Appeals considered that the parties in the present dispute had “clearly and unmistakably” done so by agreeing in their terms of reference on an application of the UNCITRAL Arbitration Rules. The latter provide in Art. 20 that the arbitral tribunal has the power to “rule on objections that it has no jurisdiction”. Following earlier decisions, the Court of Appeals considered that to be a clear empowerment of the tribunal to have a final say on its own jurisdiction. Notwithstanding the fact that the American decisions are not the focus of this blog it is submitted that such a view is based on a misunderstanding of the purposes of Art. 20 UNCITRAL Arbitration Rules and the different concepts of Komptenz-Kompetenz.
Where the German Supreme Court disagreed with the KG Berlin was the issue of the effect of the tribunal’s award on jurisdiction which Thailand did not challenge in Switzerland. In the context of commercial arbitration between private parties German courts have regularly considered private parties to be precluded from raising the lack of a valid arbitration agreement as a defense against the enforcement of awards in cases where the tribunal had rendered preliminary ruling on its jurisdiction which had not been attacked by that party within the time frame provided for such a remedy. The KG Berlin had transferred this jurisprudence to the sovereign immunity defense relying inter alia on a provision to this effect in the European Convention.
The Supreme Court rightly held that the European Convention as such could not be relied upon as Thailand is not a member to it. Furthermore, it held that the jurisprudence concerning the jurisdictional defense could not be applied in relation to the question of whether a state party waived its sovereign immunity. It confirmed its jurisdiction that such a waiver should only be assumed under narrow circumstances if the behavior of the state party clearly evidences a will to renounce it immunity. The court held that the mere non-use of remedies against an award on jurisdiction does not evidence such a will. Thus it referred the case back to the KG Berlin to determine whether the underlying investment was covered by the arbitration clause in the BIT.
Concerning the application of existing legal principles the decision of the Supreme Court is probably the most convincing of all the decisions rendered in the enforcement proceedings. However, one would have hoped for a more pro-enforcement view concerning the preclusion argument. The German Supreme Court is correct in its analysis that the arbitration agreement can only be considered to constitute a waiver for those disputes which it covers. However, that says nothing about a possible preclusion of the sovereign immunity defense. If the arbitral tribunal, rightly or wrongly, determines in an award on jurisdiction that it has jurisdiction also state parties should be obliged to make use of the remedies existing at the place of arbitration against such an award, at least in cases where the issue is not the existence of an arbitration agreement as such but merely its scope. If the state party entitled to sovereign immunity decides not to do so but continues to participate in the arbitration and to defend on the merits it should be considered to be also precluded with its immunity defense in enforcement proceedings. To what extent these considerations will influence the decision by the KG Berlin on the scope of the arbitration clause in the BIT remains to be seen.
Stefan Kröll, a former scholar-in-residence of the Center for Transnational Litigation and Commercial Law, is an independent arbitrator in Cologne and an honorary professor at Bucerius Law School. He is a visiting Reader at the School of International Arbitration at CCLS (Queen Mary, University of London) and a national correspondent for Germany to UNCITRAL for arbitration and international commercial law. He has published widely in the field of international commercial arbitration and commercial law, including inter alia the books “Comparative International Commercial Arbitration” (co-authored with Lew/Mistelis), and “Conflict of Law in Arbitration” (co-editor with Ferrari). Recently he has been retained by UNCITRAL as one of the three experts to prepare the Digest on the UNCITRAL Model Law on International Commercial Arbitration.
 2008 International Arbitration Study “Corporate Attitudes and Practices: Recognition and Enforcement of Foreign Awards”, available at: www.arbitrationonline.org/docs/IAstudy_2008.pdf.
 Final Arbitral Award Rendered in 1998 in an Ad Hoc Arbitration in Stockholm, Sweden, Observations by Walid Ben Hamida, by Stefan Kröll and Jörn Griebel, by Domenico di Pietro, Stockholm International Arbitration Review (SIAR) 2005-2 for the decisions in the setting aside proceedings in Sweden see SIAR 2005-2; see further for some of the enforcement actions in Germany Germany No. 72, Russian Federation v. Franz Sedelmayer (Germany), Oberlandesgericht [Court of Appeal], Frankfurt am Main, 26 W 101/02, 26 September 2002, XXX Yearbook Commercial Arbitration (2005) pp. 505 – 508; Germany No. 77, Franz Sedelmayer (Germany) v. State agency (Russian Federation), Oberlandesgericht [Court of Appeal], Cologne, 16 W 35/02, 6 October 2003, XXX Yearbook Commercial Arbitration (2005) pp. 541 – 546; Germany No. 91 / W1, Franz J. Sedelmayer (Germany) v. Russian Federation, Federal Republic of Germany, Bundesgerichtshof [Federal Supreme Court], 4 October 2005, XXXI Yearbook Commercial Arbitration (2006) pp. 698 – 706; Germany No. 92 / W2, Franz J. Sedelmayer (Germany) v. Russian Federation, Deutsche Lufthansa AG (Germany), Bundesgerichtshof [Federal Supreme Court], 4 October 2005, XXXI Yearbook Commercial Arbitration (2006) pp. 707 – 717; case summary with observation on the two Supreme Court decisions by Hilmar Raeschke-Kessler, published in SIAR 2006:1, available at: www.sccinstitute.com/filearchive/2/21311/franz_sedelmayer_v_russian_federation.pdf; for enforcement and execution proceedings in Sweden see the decision by the Swedish Supreme Court of 1 July 2011 – Mål nr Ö 170-10.
 For England see the decision by the Supreme Court Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan, Supreme Court, 3 November 2010, XXXVI Yearbook Commercial Arbitration (2011) pp. 357 – 362; for France see the decision of Court of Appeal in Paris, Government of Pakistan, Ministry of Religious Affairs v. Dallah Real Estate and Tourism Holding Company, Cour d’Appel, Paris, First Pole, First Chamber, 17 February 2011, XXXVI Yearbook Commercial Arbitration( 2011) pp. 590 – 593.
 For the ease of presentation in the following the claimant’s side, whether it is the insolvency administrator, the original contract party or Walter Bau AG itself will all be referred to as “Walter Bau”.
 See the decision by the Swiss Supreme Court, 23 July 2012 – Case No. 4 A_570/2011.
 In the German proceedings Thailand raised three additional defenses. First, it alleged that Walter Bau had not been party to the arbitration award. Second, it considered Walter Bau to be bound by an agreement with the purchaser of its interest in the project company, according to which the latter could request from Walter Bau to stop the arbitration proceedings which the purchaser had done. Third, it alleged that the award had been obtained fraudulently as Walter Bau had acted against that agreement with the purchaser.
 The Kammergericht Berlin is one of the 24 Higher Regional Courts, the second-highest instance on civil and commercial matters in the German court system. The Higher Regional Courts are competent in first instance for applications concerning the declaration of enforceability of arbitral awards (section 1062 (1) of the German Code of Civil Procedure).
 Case No.III ZB 40/12.
 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 330 U.N.T.S. 3.
 Decision of March 26, 2012, Case No. 20 Sch 10/11.
 European Convention on International Commercial Arbitration, April 21, 1961, 484 U.N.T.S. 349.
 514, U.S. 938, (944, 947)(1995).
 Additionally, the Swiss Supreme Court had to deal with the award in setting aside proceedings based on the above mentioned agreement with purchaser of Walter Bau’s interest in the project company that it would withdraw its claim in the arbitration; see Swiss Federal Tribunal, 23 July 2012 – Case No. 4 A_570/2011.