By 16 February, 2021 0 Comments Read More →

Tajik Flag Carrier Beats Enforcement of Arbitral Award in Leasing Dispute

The US District Court for the District of Columbia has declined to enforce a $20 million arbitral award and granted Tajik Air’s motion to dismiss the award enforcement action on the jurisdictional grounds. The Court found it lacked personal jurisdiction over Tajik Air, the State-owned entity, pursuant to the Due Process Clause of the Fifth Amendment.

The decision illustrates the hurdles to enforcing an arbitral award against a foreign state-owned company, even when it carries out commercial activities.

Background of the underlying dispute

Shortly before the privatization of the State Unitary Aviation Enterprise Tajik Air (‘Tajik Air’) in 2009, it entered into two identical agreements with a Lithuanian company called AB Avia Asset Management for the dry lease of two Boeing aircraft. AB Avia Asset Management transferred all rights and obligations under the lease agreements to UAB Skyroad Leasing (‘Skyroad’).

The partners’ paths had soon diverged due to a dispute over alleged outstanding leasing payments and interest. In 2013, after Tajik Air started falling behind on the monthly lease payments, Skyroad initiated an arbitration before the Vilnius Court of Commercial Arbitration (‘VCCA’), resulting in an award of $2 million. When Tajik Air remained delinquent on payments and failed to return the aircraft at the end of the leases, Skyroad initiated a second arbitration proceeding in 2017, which resulted in an award in favour of Skyroad on all accounts, providing more than $20 million in damages, plus interest and legal costs.

In arbitration, Tajik Air challenged the jurisdiction of the arbitral tribunal on the basis of a Lithuanian law that prohibits a state enterprise from entering an arbitration agreement without the prior consent of the state. Specifically, it argued that the tribunal should declare the arbitration agreement invalid under Article 12(3) of the Law on Commercial Arbitration of the Republic of Lithuania, which provides that disputes involving “a state or municipal enterprise or an institution or organization” may not be referred to arbitration without the consent of the founder of such an entity. The tribunal found that the restrictions of Article 12(3) were “designed to apply to … Lithuanian State entities and institutions, … not … foreign ones” like Tajik Air, which constituted “an entity established under the laws of the Republic of Tajikistan”. Accordingly, the tribunal held that Article 12(3) had no bearing on the validity of the arbitration agreement in the case at bar.

After extensive efforts to get Tajik Air to pay the arbitral award to no avail, Skyroad initiated the enforcement action before a US District Court as an action against a foreign state or agency or instrumentality thereof. Tajik Air moved to dismiss the action on the ground of lack of personal jurisdiction.

Personal Jurisdiction Over Foreign States and State-Owned Enterprises

In the United States, foreign States are subject to suit before the US courts only as permitted under the Foreign Sovereign Immunities Act (FSIA). The statute generally requires a nexus between the lawsuit and the United States. Foreign governments are not considered “persons” entitled to U.S. Constitutional protections. In the context of a proceeding to enforce a foreign arbitral award, the fact that a foreign state is not a “person” for the purposes of the US Constitution means that the court may exercise jurisdiction and the action can proceed against a foreign government even if the government has no presence or property in the U.S. jurisdiction. 

The same is not true with respect to an agency or instrumentality of a foreign government.  An agency or instrumentality is presumed to be separate from the government, and it is entitled to due process protection under the Fifth Amendment. Such protection means that, unless the agent or instrumentality have sufficient minimum contacts with the United States, the court lacks personal jurisdiction over it.

To enforce a foreign arbitral award against an agency or instrumentality of a foreign State, a party seeking to enforce the award may overcome the presumption of separateness for the purposes of substantive liability by showing that a foreign government ‘so extensively controls [entity] that a relationship of principal and agent is created’ or that separate treatment of the entities ‘would work fraud or injustice’.

The decision of US District Court for the District of Columbia revolved around whether Tajik Air, incorporated under the laws of Tajikistan and fully owned by the state, was sufficiently separate from Tajik government to enjoy to due process protection under the Fifth Amendment.

The Court Concludes that it Lacks Personal Jurisdiction over Tajik Air

In the case at bar, the court presumed separate status of Tajik Air, as a wholly-owned corporate instrumentality of a foreign state, from its state owner and therefore its right to due process protections unless that presumption could be rebutted. Tajik Air underwent restructuring from a state enterprise to an open joint-stock company by a government resolution in 2009. According to its Articles of Association, the company is authorized to open bank accounts, operates on an independent balance sheet, and may acquire and exercise its proprietary rights and personal non-property rights, incur obligations and litigate. These features, the court said, constitute the ‘hallmark of separateness from a sovereign’ state.

Skyroad had argued, in particular, that the head of the legal department at Tajikistan’s ministry of transport initially represented Tajik Air in the arbitration proceedings.  The airline replied that Tajik Air hired and paid him in his personal capacity, not the government of Tajikistan. The judge called this ‘a modest mixing of government and corporate resources’.

The court found no evidence of exercising by the Tajik government a day-to-day control necessary to recognize Tajik Air as the instrumentality or an agent of the government.

Concluding remarks

While the majority of arbitral awards are satisfied voluntarily, on some occasions a party has to invoke external authority to collect the damages awarded. The task becomes more arduous when the enforcement is sought against a sovereign state or its instrumentalities. Most nations grant foreign states the presumption of immunity, thus denying that their domestic courts have jurisdiction to hear a dispute involving a foreign sovereign unless an exception to immunity exists. The decision at hand illustrates practical and legal barriers the parties frequently have to overcome at the enforcement stage.

About the Author:

Rinat Gareev currently holds a position of case counsel at the Russian Arbitration Center. He is a US-qualified attorney (admitted in New York), holds civil and common law degrees. Prior to joining the arbitral institution, Rinat has gained experience by working and training in leading arbitral institutions (AIAC (Malaysia), KCAB (South Korea), international organizations (UNCITRAL) and commercial firms in Russia, the United Kingdom, and the USA. Through Rinat's professional and educational experience, he has developed expertise in trade law, aviation law, arbitration and cross-border dispute resolution. He has published several papers in international and local journals on issues relating to cross-border dispute resolution and also provides expert opinions on various domestic and international law-related issues.

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