In order to minimize the risk of litigation arising from investments in the United States, sovereign wealth funds (“SWFs”) should take care to avoid inadvertent or unnecessary waiver of sovereign immunity–before they establish operational or investment management presence in the United States.
SWFs generally benefit from sovereign immunity in the United States under the Foreign Sovereign Immunities Act (“FSIA”). As an agency or instrumentality of foreign state, they are generally entitled to immunity from the jurisdiction of the U.S. courts. However, an SWF may lose or limit its sovereign immunity where the SWF: (1) is involved in “commercial activities” in or affecting the United States; or (2) waives sovereign immunity, either expressly or by implication.
Where an SWF loses its immunity via the “commercial activities” exception, for example by becoming a party to a commercial contract, the SWF’s exposure would normally be limited to actions based on the commercial activities connected to the U.S. Where an SWF explicitly waives immunity, its exposure could be broader. Thus, in any agreement under which an SWF agrees to waive sovereign immunity, the SWF should carefully circumscribe the scope of its waiver in order to preserve the advantages of sovereign status to the extent possible. Furthermore, waivers under FSIA do not require any connection with the United States to lose immunity. So with any waiver—express or implied—an SWF should try to limit its scope so as to avoid opening the door to potentially unrestricted liability in the United States.
To avoid waiver of sovereign immunity rights in the United States, SWFs should act whenever possible through properly constituted subsidiaries. Whether acting directly or through subsidiaries, SWFs should try to establish their US operations in such a manner that they avoid contractual language waiving immunity. If they cannot avoid waiver of immunity altogether, SWFs should seek to limit its scope with the following limitations:
- Limit waiver to jurisdictions in which the contract performance is taking place, i.e., to the state or states in which the contract is to be performed.
- Limit waiver to disputes arising from or relating to the contract in question, and with respect to claims by the other party to the contract, i.e., to the exclusion of claims by third parties, and only for disputes arising directly from the contract.
- Avoid language that infers or implies an agreement to be subject to the jurisdiction of state courts, e.g., agree only to jurisdiction before a federal court such as the US District Court for District of Columbia which has expertise on issues of sovereign immunity.
- Limit waiver to immunity from adjudication, as opposed to immunity from attachment or execution. That is, limit the waiver to adjudication of the dispute, excluding liens, attachments and other remedies in aid of enforcement.
- Limit an arbitration clause to outside the U.S. in agreements that otherwise have no connection to the U.S., i.e., specifically exclude the U.S. as a place for the arbitration to take place if there is no connection to the U.S.
SWFs can enjoy special protections and legal benefits under the FSIA as state owned entities. But imprecise and indolent establishment and maintenance of an SWFs’ US operations may expose the fund to otherwise avoidable liability in the United States.