Pearl Petroleum Company Ltd & Ors v The Kurdistan Regional Government of Iraq

The Claimants (whom I shall call Pearl, Dana and Crescent) and the Respondent, the Kurdistan Regional Government of Iraq (“KRG”) are engaged in arbitration proceedings under the LCIA Rules, commenced in October 2013, in relation to disputes arising out of a contract (“the Heads of Agreement”) dated 4 April 2007. This is an application to the Court by the Claimants, for whom Mr Gordon Pollock QC and Mr Zachary Douglas QC appear, with the permission of the Arbitrators, (Lord Hoffmann, Lord Collins and Mr John Beechey), under s.42 of the Arbitration Act 1996 (“the 1996 Act”) for an order by the Court enforcing a peremptory order made against the Respondent by the Arbitrators on 17 October 2014, whereby the Respondent was ordered to pay to the Claimants the sum of US$100 million. The Respondent, for whom Graham Dunning QC and Anton Dudnikov appear, resists that application and cross-applies for a declaration pursuant to CPR Part 11 that it is immune from the jurisdiction of the court by virtue of the State Immunity Act 1978 (“the SIA”).

The Respondent is a constituent region of the Federal Republic of Iraq, and as such it is common ground that it is not itself a State, but is a separate entity within the meaning of s.14 SIA (and no Order in Council has been made giving it immunity as if it were a State pursuant to s.14(5) SIA). By the Heads of Agreement between the Respondent (“duly represented by the Minister of Natural Resources and the Prime Minister of Kurdistan”) and, initially, Dana (which subsequently transferred 50% of its interest in the Contract to Crescent, following which Dana and Crescent transferred their interests to Pearl, a Special Purpose Vehicle (“SPV”) owned between them), the parties agreed to the exploitation by the Claimants of two gas fields known as Khor Mor and Chemchemal, which are situated in the Kurdistan Region of Iraq (“the KRI”), of which the Respondent is the Government. The term of the contract was not less than 25 years. By 2008 the Khor Mor field had been developed and was producing gas and condensate and by 2011 it was also producing LPG.

There were the following material provisions of the Heads of Agreement. The recitals included the following:

The KRG, desirous of rapid and optimal economic development of the petroleum gas resources of the [KRI], gas-related industries, and job creation for the benefit of the people of Iraq and the [KRI], has declared its intention to associate and contract with Dana . . . to take the lead in the development of the gas resources of the [KRI], both for domestic gas utilization as a priority, as well as for export.”

Arbitration shall take place in London, England. The language to be used in any prior negotiation, mediation and in the arbitration shall be English. During the arbitration procedure and until the arbitral decision, neither entity shall act in a manner that may affect the rights of the other Party under these HoA . . . The arbitral award may include an award of specific performance and may be enforced by any court of competent jurisdiction, including the Kurdistan Region. Any award shall be expressed in US Dollars.”

Disputes arose in about 2009 between the parties relating to the nature and extent of the Claimants’ rights in relation to the two fields and the prices payable to the Claimants by the Respondent for condensate and LPG produced at Khor Mor and sold to the Respondent. The Claimants contended that by September 2013 the Respondent had underpaid for product produced and lifted in a sum of US$1.12 billion.

In 2013 the Claimants initiated mediation proceedings in accordance with clause 16 of the Heads of Agreement, and when the Respondent declined to participate in it, the Claimants commenced arbitration proceedings. The Respondent’s response to the mediation and arbitration was that instead of continuing to make relatively regular payments to the Claimants for the product produced and lifted, albeit on the Claimants’ case substantially short of what was due under the contract, the Respondent stopped making any payment, whilst continuing to require the Claimants to deliver up product. The structure of the contract was such that a quantity of gas which was produced was supplied free for the benefit of the Respondent, so that the only source of revenue from which the Claimants could recover their capital investment and their annual running costs was the revenue which they received from their produced condensate and LPG sold and lifted by the KRG, the by-products of the gas production. The sudden cessation of any payment was ascribed by the Respondent to the existence of counterclaims dating back in some cases to 2009.

On 21 March 2014 the Claimants applied to the Arbitrators for an interim measures order pursuant to Article 25 of the LCIA Rules, which provided, inter alia, for the Arbitrators to have the power on the application of any party “(c) to order on a provisional basis, subject to final determination in an award, any relief which the Arbitral Tribunal would have power to grant in an award, including a provisional order for the payment of money or the disposition of property as between any parties”. The application was that the Respondent be ordered to resume payments for product lifted, pending the resolution of the parties’ disputes. A major ground of this application was the serious financial damage which the Claimants alleged would be suffered by the Claimants, in the case of Dana involving potential bankruptcy, in the event that the Respondent continued with its refusal to make any payment for product which it lifted. The Claimants’ case was that by the making of an order for interim measures the Tribunal should restore the status quo by which the Respondent was paying for the condensate and LPG which it was lifting. I set out relevant passages from the Claimants’ application:

The Respondent joined issue with these contentions in its Response, and at the outset stated in paragraph 5:

In their Reply the Claimants contended as follows:

Following an oral hearing on 16 May 2014, the Tribunal issued a Ruling on Interim Measures on 10 July 2014 (“the 10 July Ruling”), whereby the Respondent was ordered to make payments as from 21 March 2014 at a rate which was designed to reflect the payments which had been made in the period prior to July 2013, which amounted to some 70% of the Claimants’ invoices for condensate and LPG. The Tribunal dealt with the question of the status quo as follows:

On it becoming immediately apparent to the Claimants that the Respondent was not intending to comply with the 10 July Ruling, on 23 July 2014 they applied to the Tribunal for a peremptory order, both as regards the payment of an immediate quantified sum and as regards future continuing payments; the Respondent then applied to discharge the Ruling.

Application and cross-application were heard at an oral hearing on 4 September 2014. The Arbitrators delivered a ruling on 17 October 2014 (“the 17 October Ruling”), dismissing the Respondent’s application to discharge, and ordering, on the Claimants’ application for a peremptory order, that the Respondent pay to the Claimants the sum of US$100 million within 30 days (in the terms of the order below set out). The Arbitrators stated (in material part):

No payment was made within 30 days, and so in accordance with the terms of the 17 October Order the peremptory order took effect. The Claimants sought and obtained, against opposition from the Respondent, the Tribunal’s permission pursuant to s.42(2)(b), to make the application now before me to enforce the peremptory order.

There have been developments since December 2014 while the parties have been resolving (with the assistance of the Court [2015] EWHC 68 (Comm)) defective service and then re-service, and preparing for, fixing and serving evidence for this hearing. The Respondent between September 2014 and 7 October 2015 permitted the Claimants to enter into local contracts for the sales of condensate and LPG, which thus earned them some income. However there was a Partial Final Award by the Arbitrators dated 30 June 2015, ruling on issues which they had heard between 20 and 24 April, and which reached conclusions as to certain of the rights of the parties, resulting in a finding of liability on the Respondent in respect of the claim, but no monetary award was to be made until after a further hearing, fixed for 21 September 2015, the award from which is awaited, as to whether, as against a sum of approximately US$1.9 billion in the Claimants’ favour there could be set off the counterclaims upon which the Respondent relied.

The making of this Partial Final Award on 30 June resulted in a letter from the Respondent dated 26 July to the Claimants, notifying them that the Respondent would no longer permit the Claimants to proceed with their arrangements for local sales, and intended to lift the condensate and LPG itself; and, by letter dated 4 September to the Claimants, the Respondent made clear that it did not accept that the Claimants had any entitlement to payment for the condensates and LPGs which it was to lift, because of the allegation that the Claimants had caused enormous damage to the Respondent through its breaches of the Heads of Agreement, such that it was not “obliged to pay for all petroleum products it lifts”. Meanwhile the Respondent confirmed, by various letters and public announcements in September 2015, that it was making and authorising payments to other international oil companies in substantial sums, because, as per an announcement by the Ministry of Natural Resources dated 7 September 2015, “regular payments will be made to allow the exporting companies to cover their ongoing expenses and plan for further investment in the oil field”.

No sum has been paid to the Claimants by the Respondent pursuant to the Heads of Agreement, or at all, since 7 October 2015, when the Respondent commenced lifting of, and receiving payment for, product. By letter dated 28 September 2015 sent to the Arbitrators, of which Mr Pollock was vigorously critical, the Respondent said that it would make payment to the Claimants if the Arbitrators agreed not to make an enforceable final payment award prior to the determination of the Respondent’s counterclaims:

The issues before me were as follows:

Was it a requirement of the making of a peremptory order that the Respondent had failed to comply with an order to do something necessary for the proper and expeditious conduct of the arbitration, and if so was that its purpose?

Was the Respondent given the opportunity to show sufficient cause for non-compliance before the making of the Order?

Do the proceedings relate to anything done by the Respondent in the exercise of sovereign authority (s.14(2) SIA).

If so, was it an exercise of sovereign authority of the State (the Republic of Iraq) or of the Respondent as a separate entity see paragraph 2 above. It is common ground that the former is necessary (BCCI vPrice Waterhouse (a firm)[1997] 4 All ER108 at 112 and Pocket Kings Ltd v Safenames Ltd[2009] EWHC 2529 (Ch)).

If so, were the circumstances such that a State would have been immune (s.14(2)(b) SIA)? The issues are whether, as a result of s.9 SIA (“where a State has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration, a State is not immune as regards proceedings in the courts of the United Kingdom which relate to the arbitration”) the Respondent is immune to these proceedings under s.42; and whether, by virtue of s.14(3) SIA, the Respondent is entitled to the protection of s.13(2)(a) SIA (“relief shall not be given against a State by way of injunction”) in respect of the s.42 order:

Has the Respondent submitted to the jurisdiction within s.14(3) by virtue of s.9, such as to retain the benefit of s.13 SIA?

Even if so, do s.42 proceedings fall within s.9 and are they covered by s.13(2)(a)?

Whether the Respondent has waived its immunity in respect of s.14(2) and, assuming it is entitled to such immunity, that granted by s.13(2)(a) by reference to s.13(3) SIA.

Mr Pollock’s case is that the peremptory order was made by the Arbitrators straightforwardly upon the basis that the Respondent has failed to comply with the 10 July Interim Measures Order without good or any cause. Mr Dunning submits that a s.42 order is only appropriate where the order of an arbitrator sought to be enforced was one which was made for the proper and expeditious conduct of the arbitral proceedings.

Mr Dunning’s starting point is s.39 of the 1996 Act, whereby:

In the event of non-compliance with an arbitrator’s order an arbitrator can make a peremptory order pursuant to the terms of s.41(5):

Mr Dunning submits however that this is not a sufficient consideration of the context of the 1996 Act. He points to the “General duty” of the parties under s. 40:

Accordingly in the consequential sub-clauses of s.41 which (by virtue of s.41(2)) apply “unless otherwise agreed by the parties”, powers are given to the tribunal. Consequently, although Mr Dunning did not expressly so submit, it must inevitably be that the words in s.41(5), which I have cited in paragraph 19 above, must be construed as dealing with where “a party fails to comply with any such order or directions of the tribunal” i.e. an order to do something “necessary for the proper and expeditious conduct of the arbitration”.

He refers to the words in Parliament (Hansard 5^th series vol 568 cols 761-764 (18 January 1996)) of Lord Fraser of Carmyllie, setting out the intention of the Bill as being to “curtail the ability of the court to intervene in the arbitral process except where the assistance of the court is clearly necessary to move the arbitration forward or where there has been a manifest injustice”. He also refers to the words of the Chartered Institute of Arbitrator’s PracticeGuideline 14, referring to one of the purposes of the 1996 Act having been to provide that “once there has been an initial breach of a procedural order without sufficient cause the tribunal may make a ‘peremptory order’ to the same effect”. He refers to s.41(6) of the 1996 Act, which provides for where a claimant fails to comply with a peremptory order of the Tribunal to provide security for costs and s.41(7), where the Tribunal may take various other steps where a party has failed to comply with any other kind of peremptory order. However it must be noted that such steps are expressly stated to be “without prejudice to s.42”.

As for the fact that there is an express power in s.39(2) to make a provisional order for the payment of money, Mr Dunning, when pressed as to what other payment of money (other than security for costs or interim payment of costs, which are expressly otherwise dealt with in the 1996 Act) would be on his case “necessary for the proper and expeditious conduct of the arbitral proceedings”, could not think of any. Nevertheless such an express proviso was in his submission required. He pointed to the words of Dyson J in Macob Civil Engineering Limited v Morrison Construction Limited[1999] CLC 739, where, in an adjudication covered by Part 2 of the Housing Grants, Construction and Re-Generation Act 1996, the Court was asked, pursuant to s.42, to enforce an adjudicator’s decision for payment of money under a construction contract. Dyson J described a s.42 order in such circumstances as a “mandatory injunction to enforce an adjudicator’s decision” (a description to which I shall return below) and he says (at paragraph 35) that “it would rarely be appropriate to grant injunctive relief to enforce an obligation on one contracting party to pay the other”. He stated (at paragraph 37) that “s.42 apart, the usual remedy for failure to pay in accordance with an adjudicator’s decision will be to issue proceedings claiming the sum due, followed by an application for summary judgment.” He continued:

It seems to me clear that Mr Dunning’s submissions go too far:

As Mr Pollock pointed out, Dyson J was dealing with a case where the adjudicator had concluded that a sum was due under the contract which could have been the subject of an application for summary judgment. That is not the case here. It is plain that this was not a provisional award, nor an interim payment. As was emphatically stated by Mr Pollock, the Arbitrators were not, as Mr Dunning contended, “enforcing a putative substantive obligation on an interim basis”.

There is no purpose in there having been an application under s.44 or s.37 for a mandatory injunction, when there had been a straightforward order made by the Arbitrators, after considering the matter in great depth and hearing detailed submissions, leading them to make an order by way of interim measures. In any event, from the point of view of enforcing compliance, a Court order under s.42 and an injunction under s.44 would have the same effect (and would lead to identical or similar remedies if not complied with).

Dyson J concluded that he was exercising a discretion not to make a s.42 order, not that he had no jurisdiction to make one.

As is clear from s.41(5), referred to above, it provides for the making of a peremptory order where there is a failure by a party to comply with “any order or directions of the tribunal”. Mr Dunning sought to point to s.41(1) as giving context. But that ignores s.40, upon which he relies for his argument, the General duty of parties. S.40(1) requires such parties to do “all things necessary for the proper and expeditious conduct of the arbitral proceedings” but that is then explained in terms in s.40(2), namely that “this includescomplying with . . . any order . . . of the tribunal” [my underlining].

I said above that Mr Dunning seemed to me to go too far. In this case the parties clothed the Arbitrators with a power to enforce their orders, if necessary by a peremptory order, and including an order for the payment of money. Although the proper and expeditious conduct of an arbitration would normally include the parties’ compliance with any order which the tribunal may make, nevertheless it is clear that, although arbitrators will in fact be making orders which they consider necessary for the proper and expeditious conduct of the arbitral proceedings, not every breach of every order will lead to a peremptory order – there must clearly be room for de minimis. I do not however consider that it is a requirement for arbitrators in making every order to spell out either that the order they are making is so necessary, or, once the order is made and a party persists in not complying with it, that it is necessary for the proper and expeditious conduct of the arbitration that the party should so comply. There is neither any need for arbitrators to spell out such words, nor (as so often has been said) a need for the Court to be astute to construe detailed reasons such as were here given by the Arbitrators in a context of assuming that experienced arbitrators are in some way failing to comply with their duty.

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.

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 inrespect of non-compliance. This contention is put in two ways:

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.

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.

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:

The starting point is s.14:

Arbitration is provided for by s.9:

S.13 provides in material part as follows:

So far as material s.2 provides:

The first group of questions is as follows:

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

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

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

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:

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.

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:

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

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:

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:

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.”

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.

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.

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 85-86. 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.

S. 9 SIA:

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:

Has the Respondent submitted to the Courts of the United Kingdom? This is only relevant to a sophisticated argument between the parties with regard to the effect of s.14(3). If the Respondent has submitted to the jurisdiction, as provided for by s.14(3), then though a separate entity, it is entitled to the protection of s.13. Mr Dunning submitted that it has submitted and Mr Pollock that it has not: he submitted that s.9 does not operate by virtue of any submission to the jurisdiction, but simply records a loss of immunity, as with ss. 5, 6, 7 and 8 SIA. If Mr Pollock be right, then s.14(3) does not engage, and thus, given that by virtue of s.9 SIA the Respondent has lost its immunity, and it is not a State, and so is thus not automatically entitled to s.13 protection, it would seem that as a separate entity in such circumstances it would not have the benefit of s.13. There is no direct authority on this point, and the silent assumption that s.13 would apply even where s.9 applies in, for example, Svenska Petroleum can be explained by the fact that the defendant in that case was a State, not a separate entity. However Mr Dunning draws my attention to academic authority that consent to submit to arbitration constitutes a submission to any proceedings brought in the United Kingdom Courts in relation to such an arbitration (Fox & Webb The Law of State Immunity (3^rd Ed) 188 and Dickinson: State Immunity at 4.069). It seems to me clear that it cannot have been intended to exclude a separate entity agreeing to arbitration from the protection of s.13, and I have no doubt that s.14(3) should be so construed.

The next question is whether, if I had found that the Respondent was entitled to state immunity but for its submission within the meaning of s.9, but was entitled to the protection of s.13, it could have claimed such protection. It is common ground that the present case does not relate in any way to s.13(2)(b): this is not an application to enforce an award. The question is whether, when s.13(2)(a) provides that “relief shall not be given against a State [or, on the assumptions found above, a separate entity] by way of injunction”, this application for an order of the Court under s.42 is for an injunction. It is obviously common ground that if there had been application under s.44 of the 1996 Act, that would have been for an injunction:

Mr Dunning relies on the words of Dyson J in Macob, which I have set out in paragraph 23 above. Dyson J described a s.42 order as a mandatory injunction in paragraph 35 and in paragraph 38 (3 times), and in paragraph 36, although he contrasted a s.42 order with an injunction granted pursuant to s.37 of the Supreme (now Senior) Courts Act 1981, he again described a s.42 order as a “mandatory injunction to enforce a payment obligation”. He plainly deprecated the use of such an order in the field of building contracts adjudication, not least in carrying with it the potential for contempt proceedings and, as I have said in paragraph 23 above, I understand that a s.42 order is no longer available within the Scheme for Construction Contracts. It is not clear whether there was any argument before him based upon any distinction between a s.42 order and a mandatory injunction. None appears in the course of his judgment: all that is said in paragraph 33 is that “there was some limited discussion as to whether, s.42 apart, the appropriate procedure was by way of writ and an application for summary judgment, or by way of a claim for a mandatory injunction”, so that it at least looks as though in the course of argument a s.42 order was not being equated with a mandatory injunction. However such was the decision of a Judge who was then in charge of the new Technology and Construction Court, albeit a first instance Judge.

Mr Pollock however relies upon the decision of the Court of Appeal, Soleh Boneh International Limited v Government of the Republic of Uganda[1993]2 Lloyd’s Law Rep 208 CA, in which Staughton LJ gave the judgment, with which Neill and Roach LJJ agreed. The Ugandan Government complained that an order requiring them to provide security of US$5 million, in return for obtaining an adjournment of enforcement proceedings, was an injunction, and relied upon s.13(2)(a). Its Counsel had pointed out that a copy of the order was endorsed with a penal notice, directed at the High Commissioner of Uganda in the United Kingdom personally. Staughton LJ accepted at 213 the Defendant’s contrary “robust” submission that the order was “plainly not an injunction”. He concluded that “in the context of s.13(2)(a). . . I would not hold that a simple order for the payment of money from no specified source is an injunction”. In case he was wrong, he varied the order, but his conclusion was in my judgment a binding finding of the Court of Appeal, and one directly applicable to this case.

I conclude that an application for a s.42 order is not an application for an injunction, such that s13(2)(a) would not have applied.

The third question relates to waiver. If there was statutory immunity and if s.13(2)(a) would otherwise apply, contrary to my findings in those regards, has the Respondent waived immunity by reference to the clause set out in paragraph 3 above? I repeat it here:

Mr Pollock refers to the decision of Saville J in A Company Ltd v Republic of X [1990] 2 Lloyds Law Rep 520. In that case there was a waiver to the effect: “The Ministry of Finance hereby waives whatever defence it may have of sovereign immunity for itself or its property (present or subsequently acquired)”. A Mareva injunction was sought against the defendant, which claimed sovereign immunity. Saville J concluded that the waiver “does amount to the agreement and consent of the State that its property can be made the subject of a Mareva injunction” (at 523). Mr Pollock submits that this is directly persuasive. Mr Dunning points out: (i) that Saville J may have been affected by the fact that, as he specifically stated at 523, the contract of which this waiver formed part was “undoubtedly a commercial bargain between the parties”: (ii) that a Mareva injunction does have an obvious impact upon a defendant’s property, such that it could be said to fall expressly within the wording: (iii) that Saville J said (also at 523) “it is not, of course, necessary to decide whether clause 6 does amount to consent to other forms of injunction”.

Mr Pollock refers to Sabah Shipyard (Pakistan) v Pakistan[2002] EWCA Civ 1643. The waiver clause there provided that the defendant “waives 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 . . . to the giving of any relief or the issue of any process in connection with such proceedings (including without limitation, the making, enforcement or execution against or in respect of any of its assets)”. In that case the Court of Appeal upheld an anti-suit injunction “to maintain the status quo pending judgment” (paragraph 23). Again this was a clause contained in what Waller LJ described as “an ordinary commercial transaction”; it is plain however that the Court concluded that, albeit not specifically mentioned in the relatively long list of examples, there was waiver of immunity in respect of an anti-suit injunction. Mr Dunning refers however to Arab Banking Court v International Tin Council [1986] Int LR 1 where the Defendant was found to be immune from a Mareva injunction. There was there a very general clause submitting to the jurisdiction of the English Courts, and Article 6(1)(a) of the International Tin Council (Immunities and Privileges) Order of 1972 provided that the Council was immune from suit and legal process except to the extent that “it shall have expressly waived its immunity in a particular case”. By reference to the then wording of Dicey & Morris, The Conflict of Laws (10^th Ed) Vol 1 p. 176 to the effect that “waiver of immunity from jurisdiction in civil or administrative proceedings does not imply waiver of immunity in respect of execution of the judgment, for which a separate waiver is required”, Steyn J concluded that what he called the “narrower construction” of the jurisdiction clause should be accepted.

There is no reported authority which suggests that which Mr Dunning was effectively submitting, namely what one might describe as ‘trifurcation’ of the question of immunity, by way of construing a waiver clause to see whether it covers what is now suggested to be three different matters, adjudication, s.13(2)(a) relief and execution. He referred to the passages in Fox & Webb and Dickinson, to which I have made reference above, and they all address the same point as was made by Steyn J by reference to the then edition of Dicey & Morris, namely a careful distinction between immunity from suit and immunity against execution. Plainly on any sensible construction of the waiver clause in the present case, it will be sufficient for that purpose. However Mr Dunning refers to the latest edition of Dicey, Morris & Collins:The Conflict of Laws(15^th ed) at 345, which reads as follows:

I do not conclude that it is necessary for a waiver to spell out consent in respect of s.13(2)(a) relief, which, although this is not addressed by Dicey extends, as set out in paragraph 42 above, considerably wider, beyond simply injunctive relief, to other kinds of ‘suit’. 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 in paragraph 41 above.

I turn finally to the question of my discretion, which both parties accept I have (see Issue 3 at paragraph 16 above), as to whether to make the order. Mr Dunning emphasises the view of Dyson J in Macob that a s.42 order for the payment of money should be rare – certainly in the field of building construction. Mr Pollock does not suggest that such an order should be frequent, but underlines that the particular facts of this case, and what he submits to be the egregious nature of the failure by the Respondent to comply with the orders of the Arbitrators in an ongoing arbitration, makes this exceptional.

Both counsel referred to the words of Teare J in Emmott, where he gives examples, at paragraph 62, of matters which the Court may consider, when exercising its discretion as to whether to enforce the Arbitrators’ order:

Mr Pollock submits that the Court should be supportive of the Arbitrators and not frustrate their intention. Mr Dunning, mindful of his arguments which I have addressed in Issue 1 above, submits that this should only be where the Arbitrators have acted for the purpose of the proper and expeditious conduct of the arbitration. As appears above, I am in any event satisfied that that was indeed the purpose of the Arbitrators.

Both sides accept that, subject to the question of change of circumstances, the court should not re-visit the argument before the Arbitrators provided that, as I am satisfied that they did here, the Arbitrators have addressed the correct questions. Mr Pollock submits that reconsideration should only arise where there has been an error of law or a serious irregularity by the Arbitrators i.e. something analogous to where the Court could intervene by reference to ss.67 or 68 of the 1996 Act. That does not seem to me to put the point in any different way.

I am entitled to consider any material change of circumstances.

I accept that other matters can be considered by the Court, such as have been canvassed before me (iv) the issue of sovereign immunity – now dealt with, (v) questions of the utility of any order, (vi) if appropriate, Act of State, (vii) comity.

I can deal shortly with (i) and (ii). I see no ground to interfere with or revisit the very carefully expressed reasoning of the Arbitrators and see no sign of any error or irregularity: I have already concluded that they addressed the correct questions.

With regard to (iii), and (vi), which I include here because it was not live before the Arbitrators:

It is suggested that there has been a change of circumstance by virtue of the fact that the Respondent’s counterclaims have been considered to be sufficiently arguable to be the subject of debate at the 21 September hearing as to whether they amount to or constitute a set-off. It is clear however that, not least because the Arbitrators had previously concluded that the counterclaims were sufficiently arguable not to be disposed of summarily, there has been no material change in the approach of the Arbitrators in accordance with their conclusions in the 10 July Ruling and the 17 October Ruling. The question which the Arbitrators resolved was the restoration of the status quo, irrespective of the defence of set-off, i.e. the requirement that the previous arrangement of the Respondent paying for what was lifted should be restored.

Mr Dunning submits that, on the evidence before me, there has been a change of circumstance in relation to the circumstances of the Claimants. I am satisfied, however, that the evidence before me does not show any improvement in the financial position of Dana (or of the SPV, Pearl). Indeed it seems clear that such financial position is more precarious because since the 17 October Ruling, as appears in paragraphs 14 and 15 above, the Respondent has shut off the source of payment to the Claimants which it had temporarily permitted.

Mr Dunning also relies on the position of the Respondent. The Respondent, which appears to continue to be deprived of resources from the FGI, has a continuing, and, no doubt, increasing, responsibility for arming the Peshmerga, its military arm, and coping with an increasing flood of refugees, quite apart from a budget deficit. Mr Dunning refers to paragraph 25 of the 17 October Ruling (set out in paragraph 11 above) in which the Arbitrators, while sympathising with the plight of the KRG, considered that they were “in no position to estimate the significance of these momentous events”, and that they lay outside the matters to which the Tribunal could conventionally have regard. The issue is whether, then or now, there are financial circumstances, possibly deteriorating such circumstances, which either the Arbitrators should have taken, or I should now take, into account. Mr Dunning places reliance on an Order dated 24 August 2015 by the Prime Minister of Kurdistan, which recorded a determination by the Council of Ministers that, in the light of the “strong and competing demands on the Kurdistan Region’s financial resourcesand the limitations on the financial resources available to the KRG”, the absence of a budgetary law for the two years of 2014 and 2015, the volatile national security situation and the continued budgetary dispute between the KRG and the FGI, “there are no funds available to allocate” to payment of the peremptory Order, and that “funds could not be paid to the above named companies without prejudicing the urgent demands on the KRG’s financial resources and priorities”. This, Mr Dunning submits, is a change of circumstance, equivalent to a subsequent Act of State, such as is referred to by Lord Hope in Kuwait Airways Corporation v Iraqi Airways Co (Nos 4 and 5)[2002] 2 AC 883 at 1108, being a “legislative or other governmental act . . . of a recognised foreign state or government within the limits of its own territory [which] the English Courts will not adjudicate upon, or call into question”. I agree however with Mr Pollock that he is not inviting me to take either of those courses. The Respondent’s Council of Ministers has concluded that there “are no funds available to allocate to the Payment”. The Arbitrators however plainly took notice, as do I, that in fact, had it so chosen, the Respondent could have secured payment to the Claimants without actually laying out any money themselves (see paragraphs 16 and 17 of the 17 October Ruling, set out in paragraph 11 above). The fact remains that, as set out in paragraph 14 above, since the 17 October Ruling and indeed since the Order by the Prime Minister of 24 August 2015, the Respondent has made and authorised very substantial payments to other international oil producers, but not to the Claimants. It is also noteworthy that the Respondent plainly was in a position to pay substantial monies to the Claimants in September 2015 when, as set out in paragraph 15 above, stating that it was only prepared to make payments if the Arbitrators agreed to the unorthodox step there proposed. There is no basis for any case, whether by way of change of circumstances or otherwise, for my taking a different view about the balance of justice in relation to the Respondent than was taken by the Arbitrators.

As to (v) utility, the Respondent says that it is apparent that the purpose of the Claimants is to seek to issue contempt proceedings, based upon a failure to comply with a s.42 order, if I make it, and that that would not lead anywhere because there will be no remedy available upon a committal for such contempt, and/or the individual, Dr. Hawrami, who it is suggested may be amenable to the jurisdiction of this Court, would be entitled to diplomatic immunity. In the absence of any likely available remedy on a contempt application, Mr Dunning submits that this is simply illegitimate pressure by the Claimants.

Mr Pollock however submits as follows:

Now is not the time to speculate as to what remedy may be available on a contempt application, if such becomes necessary.

No assumption should be made at this stage that the Respondent will in fact fail to comply with an order of the Commercial Court as done in relation to the orders of Arbitrators.

This is the only way to enforce the Arbitrators’ orders, which will otherwise remain uncomplied with.

He submits that it is more than likely that a public declaration by this Court of failure to comply and of non-payment will be of effect upon the Respondent, given its role and profile internationally.

Finally (vii) comity. Mr Dunning points to the fact that the Respondent is a friendly nation and an ally of this country, of whom, for good reason, laudatory things have been said by the House of Commons Foreign Affairs Committee. Comity is not usually used in this context: it is more usually applied in a situation in which the Court is pleased to pay deferential regard to the decisions of the Courts of other countries. It seems to me that this Court must do justice between the parties, and if a foreign State, or a foreign corporation, is friendly to this country, but is adjudicated by this Court to owe money or to have failed to comply with the order of an arbitrator or a Court, and not to have immunity, the political status of that defendant cannot stand in the way of justice.

For the reasons I have set out, the Respondent does not have state immunity in respect of the order sought, and I have jurisdiction to make that order, and in the exercise of my discretion I do so.