Two cases this year found a way around the 2008 ruling of European Court of Justice (ECJ) (now known as the Court of Justice of the European Union (CJEU)) that anti-suit injunctions could not be granted to restrain foreign court proceedings brought in another member state in breach of an arbitration agreement, which was deemed to be inconsistent with the Brussels Regulation (see Legal update, West Tankers ECJ judgment: full report). These provide comfort while we await the introduction of the Regulation reforms in 2015, which will go some way to dealing with the issue (see Article, Brussels Regulation reform: where does this leave arbitration?).

In West Tankers Inc v Allianz SpA and another [2012] EWCA Civ 27, West Tankers tried to circumvent the ECJ's ruling by seeking an order to enforce its award in the English courts. On 24 January 2012, the Court of Appeal affirmed the decision of the lower courts, endorsing an arbitral award that West Tankers had obtained in its favour (effectively a negative declaration as regards liability) in the face of a possible inconsistent Italian judgment (see Legal update, Court of Appeal confirms declaratory awards can be enforced under section 66 Arbitration Act 1996). The Court of Appeal confirmed that a declaratory award on the jurisdiction of an arbitral tribunal is enforceable, allowing judgment to be entered in the same terms as the award under section 66 of the Arbitration Act 1996 while the Italian proceedings remain pending, thereby securing the primacy of the award and acting as a "shield" against enforcement of a future conflicting judgment. The decision provides a possible alternative to the anti-suit injunction and goes some way to ensuring that arbitration agreements will be upheld. Parties facing parallel arbitration and court proceedings may well consider it worthwhile to race to obtain a substantive ruling.

In West Tankers Inc v Allianz SpA and another [2012] EWHC 854 (Comm), with the Italian court still to rule on jurisdiction, West Tankers sought an award of damages from the tribunal in respect of the costs of the Italian legal proceedings and an indemnity against any Italian judgment on the merits which exceeded the partial final award. The tribunal found that, further to the ECJ's judgment, it did not have jurisdiction to entertain a claim for equitable damages against the respondents for breach of the arbitration agreement. West Tankers appealed against that decision under section 69 of the Arbitration Act 1996, on the basis that the tribunal had erred in law in deciding that it lacked jurisdiction. In the High Court, Flaux J disagreed with the tribunal's interpretation of the ECJ's decision. He held that there is no principle of EU law that requires a tribunal to decline to entertain a claim for damages for breach of an arbitration agreement, even if the tribunal's award is inconsistent with the decision of an EU member state court (see Legal update, Tribunal not bound by principle of effective judicial protection (Commercial Court)). While the court in another member state cannot review the decision of the court first seised, an arbitral tribunal is not currently subject to the Brussels Regulation regime because of the "arbitration exception" in the Regulation (Article 1(2)(d)). The practical effect of this decision is that a party facing parallel proceedings in breach of an arbitration agreement can claim damages for the costs it is incurring as a result of the parallel proceedings.

For further information on the West Tankers dispute, see West Tankers v Allianz: case tracker.

On 16 May 2012, the Court of Appeal clarified this uncertain area of law, setting out a test by which to ascertain the law of the arbitration agreement where none is expressly stated (see Legal update, Sulamerica: full update on Court of Appeal decision on determining law of arbitration agreement). It upheld the High Court's decision that English law, the law of the seat, should apply in this instance, despite the fact that all other factors pointed to the law of Brazil. However, it explained that this need not necessarily be the case.

Until now, cases have been divided as to whether the arbitration agreement follows the law of the underlying contract or the law of the seat selected by the parties. This is significant because its law governs issues of the validity and effectiveness of the arbitration agreement, which is legally distinct or "separable" from the contract of which it forms a part. Giving the leading judgment in the Court of Appeal, Moore Bick LJ adopted a "three-stage enquiry" into express choice, implied choice and the closest and most real connection, acknowledging that the latter two stages will often merge into one another. The idea behind the "closest connection" test is that "if there is no express or implied choice of law, the arbitration agreement will be governed by the law with which the agreement has its closest and most real connection". In this case, the closest connection was to England, as the supervisory jurisdiction.

To avoid surprises, it is always worthwhile for parties to state the law they wish to apply. This will ensure that the agreed procedure for resolving disputes remains effective, including in circumstances that would render the substantive contract ineffective.

In July 2012, in La Générale des Carrières et des Mines v FG Hemisphere Associates LLC [2012] UKPC 27 (Gecamines), the Privy Council (the highest court of appeal for UK overseas territories and crown dependencies) made an important pronouncement as regards enforcing debts of the state against the assets of state-owned entities, for example in cases where a state is immune from enforcement or where state assets are not readily available (see Article, Liability of state-owned companies for debts of state: Gécamines v FG Hemisphere Associates LLC). State-owned entities may be a more ready source of funding than the state itself. For example, they may be active in more jurisdictions and have more diverse assets, in situations where assets of the state tend to be contained within the state itself (and so protected by the courts of that state).

The case arose from the efforts of FG Hemisphere (an investment fund specialising in "distressed debt") to enforce two arbitration awards against the Democratic Republic of Congo (DRC). The lower courts held that Gecamines was "at all material times an organ of and so to be equated with the DRC, its interests plainly subordinated to those of the Congolese State". However, the Privy Council, on the basis of the "separate entity" test contained in section 14 of the State Immunity Act, held that if the state-owned entity was a "separate entity" for those purposes (that is, if it was distinct from the executive organs of government and had legal personality), it would only be in "quite extreme circumstances" that the entity would be held to equate to the state, and so be liable for the debts of the state. The state would have to be "so closely intertwined and confused that the entity could not properly be regarded for any significant purpose as distinct from the State". The court then set about a detailed analysis of the factual interrelationship, looking at how the state had interfered with the management and running of Gecamines, and had even expropriated assets. However, the court held that this did not demonstrate a sufficiently close relationship.

The decision of the Privy Council clarifies the law in this area. As a result it will be very difficult to enforce the debts of a state against a state-owned entity. Therefore, when contracting with states, if enforcement is likely to be an issue, parties may wish to make a state-owned entity with a connection with the transaction, a party to the contract, or seek a guarantee from it.

In August 2012, in SerVaas Incorporated v Rafidain Bank and others [2012] UKSC 40, the Supreme Court provided guidance on the scope of the important "commercial purposes" exception from immunity from execution under the State Immunity Act (SIA). In particular, it clarified when it can be said that property is "in use or intended for use for commercial purposes" (section 13(4)). It confirmed that the origin of the property against which execution is sought is irrelevant (see Article, UK Supreme Court clarifies "commercial purposes" exception to state immunity: when enforcing against property, its origin is irrelevant).

SerVaas had obtained a judgment against Iraq which it sought to enforce in the UK against sums held on behalf of Iraq by Rafidain Bank (an Iraqi state-controlled bank with a branch in London). SerVaas applied for a third party debt order, that the Bank should pay to SerVaas sums otherwise payable to Iraq's UN established Development Fund. The head of mission of the Iraqi Embassy in London signed a certificate stating that the funds Iraq expected to receive were not intended for or in use for commercial purposes, creating a rebuttable presumption under the SIA.

The High Court and the Court of Appeal rejected SerVaas' application, holding that SerVaas had no real prospect of rebutting this presumption. The Supreme Court upheld the lower courts' decision. Under the commercial purposes exception, it was not the origin of the debt that was important, but rather the present and future use of the property. Its intended use (via the Development Fund for Iraq) was sovereign, not commercial, in nature, even though Rafidain conducted business as a commercial bank. To fall within the commercial purposes exception, an account would need to be "specifically earmarked by the foreign state solely for being drawn upon to settle liabilities incurred in commercial transactions".