Question

Please explain the influence and effect of state/sovereign immunity on international project finance guarantees? Your response should be 1000 words long and cited.

Answer 1

State or sovereign immunity is a principle of international law and a part of national law in some states. It advocates the sovereign rights of states which says that one state doesn’t have any right to judge the action of other states by the standards of its national law. It protects the state in two ways: by conferring i) immunity against adjudication (also known as immunity from suit), ii) immunity from execution.

If a party has immunity against adjugation, it must be prevented from considering case and awarding a judgement and declaration of obligation against it.

If the party has immunity against enforcement and execution, it means the court will prevent from recognising any foreign judgement against the party and the court will be prevented from making any arbitrary trial aganst the party.

Internationally the attitude against state immunity varries. Generally there are two approaches against state immunity. Those are : i) The absolute docterine and ii) The restrictive doctrine.

i) The absolute doctrine:

The absolute doctrine is the first approach and older approach against the state immunity. This doctrine is still practiced by some contries like China, Hong Kong. According to this doctrine, any proceeding against foreign states are inadmissible unless the state agree to waive the immunity.

ii) The restrictive doctrine:

This doctrine is made due to the increase in thye number of state involved in world trade activities. In this doctrine a distinction is drawn between acts of sovereign nature and acts of commercial nature. In this approach the states may claim immunity in respect of acts which are resulted from excercising sovereign power. Immunity is not available for commercial activities.

Though the restrictive approach is widely accepted, the immunity is continues to be tghe most unsettled area of international law and the scope of exceptions varry from state to state. hence in order to analyse the level of risk associated with investment in a particular state, it is important for a investor and risk assessor to understand which laws apply in order to determine whether the state is entitled to claim immunity.

On the other hand there are few projects which have uncertainty. The uncertainty may be in an extended time frame, scale of the project, technology associated with it, prospect of selling the goods. We can discuss it below:

i) Extended time frame:

A project with a huge time required in completion, may encounter many problems. The large the time frame of the project, the more the risk associated with it.

ii) Scale of the project:

A large scale project with a long time frme may encounter different financial and non financial problems.

iii) Technology associated:

A project which doesnot have a good technology base, always faces the probability of failure.

iv) Prospect of selling goods:

If the goods produced from a project donot have a good selling prospect, the project may not be a success.

Examples of such projects are cement plants, wind farms, port terminals etc.

Banks and other financial institutions donot wish to invest in the projects which is associated with greater risk appetite. With a project financing guarantee, the banks and financial institutions are guaranteed the portion of the loan by the risk assessing authorities. If something goes wrong while running of the project, risk assessing authority swill pay the compensation.

It is very obvious that risk assessing authorities should provide finance guarantee to the states which has strong immunity. The state which has a good immune and follows a investor friendly rule, should attract the investors as well as project finance gurantees. The risk assessing authorities should be aware of the rules of the immunity of the state before being agree to run project finance guarantee in the state.