Pearl Petroleum v Kurdistan Regional Govt of Iraq

JurisdictionEngland & Wales
JudgeBurton J
Judgment Date20 November 2015
CourtQueen's Bench Division (Commercial Court)
Date20 November 2015

England, High Court, Queen's Bench Division (Commercial Court).

(Burton J)

Pearl Petroleum Co. Ltd and Others
Kurdistan Regional Government of Iraq 1

State immunity — Jurisdictional immunity — Immunity from execution — State Immunity Act 1978 — Exercise of sovereign authority — Immunity of a separate entity under Section 14(2) of Act — Extent of protection provided under Section 13(2)(a) — Consent to submit to arbitration — Waiver of immunity — Relationship between Section 14(2) and Section 13(2)(a) of Act

Arbitration — Arbitration Act 1996 — London Court of International Arbitration Rules — Ruling on interim measures — Enforcement of a peremptory order — Jurisdiction to make an order under Section 42 of Arbitration Act — Proper and expeditious conduct of the arbitration — Cause for non-compliance with an order — Restoration of the status quo ante — Justiciable within an English court — Discretion of court to make an order

Economics, trade and finance — Heads of agreement — Oil exploitation in Kurdistan region of Iraq — Disputes concerning payment — The law of England

Summary:2The facts:—The claimants, the Pearl, Dana and Crescent companies, entered into an agreement with the respondent, the Kurdistan Regional Government of Iraq, to exploit two gas fields situated in the Kurdistan region of Iraq. It was common ground that the respondent, a constituent region of the Federal Republic of Iraq, was not itself a State but a separate entity within the meaning of Section 14(5) of the State Immunity Act 1978 (“the State Immunity Act”). The respondent granted one of the

claimants the exclusive right during the term of the Heads of Agreement to develop the fields and produce gas products within the area. A dispute arose in 2009 in relation to the price payable to the claimants for condensate and liquefied petroleum gas produced at the fields and sold to the respondent. The claimants contended that the underpaying had amounted to US $1.12 billion by September 2013. In 2013 the claimants initiated mediation proceedings, and when the respondent declined to participate in these, commenced arbitration proceedings. The respondent subsequently stopped making any payments, whilst continuing to require the claimants to deliver products.

In March 2014 the claimants applied to the arbitrators for an interim measures order, requesting that the respondent be ordered to resume payments for product lifted. The claimants alleged that serious financial damage would be suffered by them if the respondent continued to refuse to pay for the product. The claimants argued that an order for interim measures would restore the status quo. The respondent contended that the ordering of payments and of a mandatory injunction as an interim measure would prejudicially alter the status quo, and that it would entail pre-judgment of both the claimants' claims and the respondent's counterclaims.

The tribunal issued a ruling on interim measures on 10 July 2014. It became apparent to the claimants that the respondent was not intending to comply, and they applied to the tribunal for a peremptory order; the respondent then applied to discharge the ruling. The arbitrators delivered a ruling on 17 October 2014 (“the 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 in 30 days. If the sum remained unpaid after 30 days, a peremptory order would be made to the same effect. It was not paid, and so the peremptory order took effect.

The claimants applied to the Commercial Court to enforce the peremptory order, with the tribunal's permission, pursuant to Section 42(2)(b) of the Arbitration Act 1996 (“the Arbitration Act”).

Held:—The respondent did not have State immunity in respect of the order sought. The Court had jurisdiction to make the order, and in the exercise of its discretion it did so.

(1) The peremptory order was properly made within the jurisdiction of the arbitrators vested in them by Section 41 of the Arbitration Act and Article 25 of the London Court of International Arbitration Rules, 2014 (“the LCIA Rules”). There was jurisdiction to make an order under Section 42 of the Arbitration Act.

(a) The arbitrators had power to make a provisional order for the payment of money pursuant to Article 25 of the LCIA Rules. In the event of noncompliance with an arbitrator's order, the arbitrator could make a peremptory order pursuant to the terms of Section 41(5) of the Arbitration Act. Not every breach of every order could lead to a peremptory order—there had to be room for de minimis. It was not for the arbitrator to spell out that an order they were making was necessary for the “proper and expeditious conduct” of the arbitration. The order and compliance were required for the “proper and expeditious conduct” of the arbitration. The arbitrators had jurisdiction to make the order, and there was jurisdiction to make a Section 42 order to enforce it (paras. 17–26).

(b) The respondent had been given complete opportunity to show sufficient cause for non-compliance before the making of the order. The parties before the arbitrators knew what the issues were, and knew that the claimants' case was that if the status quo 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. The opportunity to make representations to the contrary was fully taken up by the respondent. The arbitrators in the October ruling were attempting to put the claimants at least in part into the position they would have been in if the earlier order had been complied with. The ruling 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 (para. 27).

(2) The respondent did not have immunity pursuant to the State Immunity Act.

(a) The proceedings related to the respondent's exercise of sovereign authority under Section 14(2) of the State Immunity Act. The Heads of Agreement related to the grant of rights to the gas fields: they were not simply a contract for the sale of gas by a government to a commercial party, but the assignment of rights granted to the respondent under the Constitution to a third party. They were jure imperii rather than jure gestionis (paras. 30–6).

(b) The exercise of sovereign authority was of the respondent, as a separate entity, not the Republic of Iraq. The respondent, as a separate entity, did not come under the protection of Section 14(2) of the State Immunity Act (paras. 37–8).

(c) The proceedings were initiated with the permission of the arbitrators, pursuant to the Arbitration Act, and related to the arbitration. Consent to submit to arbitration constituted a submission to any proceedings brought in the United Kingdom courts in relation to that arbitration. Section 14(3) of the State Immunity Act was therefore applicable, meaning that the applicant was entitled to the protection of Section 13 of the Act. However, an application for an order under Section 42 of the Arbitration Act was not an application for an injunction; therefore the respondent did not have the protection of Section 13(2)(a) of the State Immunity Act (paras. 39–41).

(d) The respondent had waived its immunity in respect of Section 14(2) of the State Immunity Act. This also meant it had waived its immunity against injunctive relief and the other forms of relief specified in Section 13(2)(a) of the Act. It was not necessary for a waiver to spell out consent in respect of Section 13(2)(a) relief (paras. 42–4).

(3) The discretion to make the order was used. Matters that could be considered, such as the proper and expeditious conduct of the arbitration, the addressing of the correct questions by the arbitrators, a material change of circumstance, sovereign immunity, utility, act of State and comity, were insufficient as reasons not to enforce the arbitrators' order (paras. 45–52).

The following is the text of the judgment of the Court:

Mr Justice Burton

1. 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 Bee-chey), 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”).

2. 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...

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