SerVaas Incorporated v Rafidian Bank and others

Under section 13(4) of the State Immunity Act 1978, state property is susceptible to enforcement only where its current or intended use is for commercial purposes. The commercial origin of property, or its connection with a past commercial transaction, is insufficient.

The court must examine the use to which the state has put, or intends to put, the property. A debt is not used for the transaction from which it arose merely because it represents the proceeds of that transaction. Where a diplomatic certificate states that property is not used or intended for commercial purposes, the judgment creditor must rebut the statutory presumption. It cannot do so by relying only on the property’s commercial origin.

SerVaas obtained a French judgment against an Iraqi ministry arising from a commercial supply agreement and registered it for enforcement in England and Wales. Iraq had meanwhile acquired substantial claims against Rafidain Bank through a sovereign debt-restructuring scheme. Dividends payable on those claims were intended for transfer to the Development Fund for Iraq.

SerVaas sought a third-party debt order over those dividends. Iraq relied on sections 13(2)(b), 13(4) and 13(5) of the State Immunity Act 1978, together with a diplomatic certificate stating that the claims and their proceeds were neither used nor intended for commercial purposes.

Arnold J dismissed the application. The Court of Appeal, by a majority, dismissed SerVaas’s appeal: [2011] ECWA Civ 1256. The central issue before the Supreme Court was whether the commercial origin or acquisition of the claims meant that they were property in use for commercial purposes under section 13(4).

1. Appeal dismissed unanimously. Lord Clarke delivered the judgment, with which Lord Phillips, Lady Hale, Lord Sumption and Lord Reed agreed.

2. Section 13(4) of the State Immunity Act 1978 requires an assessment of the use to which the state has chosen to put the property. Its ordinary language does not require a retrospective examination of the transactions that created or generated that property. Parliament’s use of “in use or intended for use” contrasts with expressions such as “relating to” in section 3(1) and “in connection with” in section 10. A commercial relationship or connection is therefore insufficient: paras 15–17.

3. The distinction between origin and use was supported by Alcom Ltd v Republic of Columbia [1984] AC 580. A judgment creditor seeking execution against state property must establish the requisite present or intended commercial use. In the case of a bank account, this requires proof that the account was earmarked solely, subject to de minimis exceptions, for settling liabilities incurred in commercial transactions: paras 18–19.

4. The same inquiry applies whether the property is a debt or a bank account. Decisions under the comparable United States legislation also persuasively established that revenue generated by a commercial activity is not thereby used for that activity. Property is used commercially when it is put into service to carry out a commercial activity: paras 22–28.

5. Under section 13(5), the diplomatic certificate created a rebuttable presumption that the admitted claims were not in use or intended for commercial purposes. SerVaas could not rebut it. Iraq intended the dividends for the Development Fund for Iraq, a sovereign purpose. The admitted claims were merely the legal mechanism securing those dividends; separating the claims from their proceeds would be artificial: paras 30–32.

6. The fact that some claims had been acquired in exchange for bonds did not mean that they were in use for a transaction providing finance within section 3(3)(b). That method of acquisition was historical background and did not establish current or intended commercial use: para 33.

1. United Kingdom Supreme Court: The appeal was dismissed unanimously. The Court affirmed that the commercial origin of property was irrelevant to the inquiry under section 13(4) of the State Immunity Act 1978: [2012] UKSC 40.
2. Court of Appeal: By a majority, Stanley Burnton and Hooper LJJ, Rix LJ dissenting, the court dismissed SerVaas’s appeal from Arnold J and refused permission to appeal: [2011] ECWA Civ 1256.
3. High Court: Arnold J dismissed the application for a third-party debt order. He held that the admitted claims were immune from execution under sections 13(2)(b) and 13(4), but rejected Iraq’s reliance on article 9(1) of the Iraq (United Nations Sanctions) Order 2003.