Wednesday, July 10, 2013

Bombay High Court on Sovereign Immunity

Earlier this year, the Bombay High Court decided an interesting question relating to proceedings against foreign-state owned corporations. Section 86 of the CPC provides that "No foreign State may be sued in any Court otherwise competent to try the suit except with the consent of the Central Government certified in writing by a Secretary to that Government". 'Foreign state' is defined for the purposes of this provision as "any State outside India which has been recognized by the Central Government" (section 87A). The question before the Bombay High Court in Qatar Airways v Shapoorji Pallonji was whether this provision applied to a suit against the state-owned Qatar Airways in relation to unpaid sums under a contract to carry out interior decorations in its offices.


Qatar Airways relied on previous cases involving state-owned airline companies to argue that its state-ownership was sufficient to attract section 86, and that the suit was not maintainable without the Central Government's consent. Not surprisingly, the High Court rejected this contention, not least because the Government had twice rejected the respondent's application for consent on the ground that section 86 did not apply to this case. The Additional Solicitor General also appeared in the High Court on behalf of the respondent, supporting the proposition that section 86 was inapplicable. Therefore, the High Court seems to have arrived at the correct (and possibly inevitable) conclusion that section 86 did not apply. The reasoning underlying this decision is however far less straightforward, and raises some important questions.

There appear to be two independent strands underlying the High Court's reasoning in Qatar Airways:

(1) Qatar Airways was an independent juristic entity, irrespective of its State ownership; and

(2) Qatar Airways was engaged in commercial activities in India, and the dispute here arose out of those commercial activities.

In relation to proposition (1), while it is accepted that Qatar Airways is a separate juristic entity, the decision does not address the issue of whether its ownership structure or other characteristics were such as would justify lifting the corporate veil and equating it with the foreign State which owned it. As previously discussed on this blog, Indian courts have been far more willing than their common law counterparts to lift the corporate veil. The complete absence of any discussion of this issue in this case is therefore surprising. The Delhi High Court in 2001, dealing with a case involving the Saudi Arabian Airlines, examined the ownership structure of the company and concluded that although it was a separate entity, it would be treated as a 'foreign state' for the purpose of section 86. It is unfortunately unclear why a similar examination was not carried out here, notwithstanding that the Court may nevertheless have arrived at the same conclusion.

More significant though is proposition (2), and whether it will start to gain wider currency after this decision of the Bombay High Court. The Court relied on obiter observations made by the Supreme Court in 2011 in Ethiopian Airlines, and observed that while the decision there was based primarily on the fact that the proceedings in question were not a 'suit' for the purposes of section 86, "the judgment of the Supreme Court does not rest only upon the inapplicability of the provisions of Section 86". The Bombay High Court therefore concludes that Qatar Airways' commercial activities were a relevant factor in determining whether it fell within the scope of section 86.

Unfortunately however, how this 'commercial activities' qualification fits with the language of section 86 is far from clear. The statute contains no exception to the consent requirement on the basis of the nature of the activities to which the suit relates. The only reference to the nature of the activities is in section 86(2)(b) which states that the Government may not grant consent unless the foreign state by itself or another, trades within the local limits of the jurisdiction of the Court. This is therefore a negative qualification restricting the power of the Central Government to grant consent, and is not an exception to the consent requirement. Therefore, the statutory position under Indian law appears to be that any suits against foreign states require the Central Government's consent, irrespective of the nature of its activities. If the entity in question is not a sovereign state (for instance, because it is an independent juristic entity, as in this case), then no such consent is required- again independent of the nature of its activities.

This position is markedly different from the position under English law, which grants only restrictive immunity to foreign states based on the nature of the activities in question. The Court of Appeal in 1977, in Trendtex Trading v Central Bank of Nigeria, had adopted the concept of 'restrictive sovereign immunity' into English law, and held that the availability of immunity would depend on the nature of the activities in question. This was codified into statute by section 3(1) of the State Immunity Act 1978, which provides that-

(1) A State is not immune as respects proceedings relating to—
(a) a commercial transaction entered into by the State; or
(b) an obligation of the State which by virtue of a contract (whether a commercial transaction or not) falls to be performed wholly or partly in the United Kingdom.

As is amply clear from a comparison of this provision with section 86 of the CPC, Indian law has not adopted this restrictive approach to sovereign immunity. More importantly, the language of section 86 does not provide Indian courts any flexibility in this regard. If it deems fit, the Central Government may well take a more proactive stance and grant consent readily for suits arising out of commercial activities of foreign state in India. However, beyond an examination of whether the entity being sued is a 'foreign state', section 86 does not allow Indian courts to consider the nature of the activities involved in determining whether such consent is required.

Therefore, while the decision of the Court in Qatar Airways may well be correct on its facts, and in keeping with an international preference for restrictive sovereign immunity, the judgment regretfully does not explain how its reasoning fits with the language of section 86. An explanation may be that it was considering the nature of the activities of Qatar Airways to determine if it was a 'foreign state' for section 86. While this is a possible explanation, it is not the most natural reading of the judgment and also creates problems of principle (in particular, as to how it relates to the corporate veil jurisprudence).

In sum, the decision leaves open three very important questions as to the scope of sovereign immunity in India:

(1) Do suits against foreign state-owned corporations arising out of their commercial activities never require the consent of the Central Government? Would the nature of the ownership and control of the corporation make a difference?

(2) Do suits against foreign states themselves arising out of their commercial activities in India not require the Central Government's consent?

(3) Is the nature of the activities of a foreign-state owned corporation operating in India a relevant criterion in determining whether it is a 'foreign state' for the purposes of section 86? If so, is this a criterion used for lifting the veil or is it a criterion to be used irrespective of whether the veil can be lifted in a given case?

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