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First formulated by a US court, the Anglo-American act-of-state doctrine states that the court as a body of power cannot render decisions regarding legislative/executive acts of a foreign state committed in its territory. At the same time, many legal systems exclude the immunity of states in relation to commercial transactions.

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In 1994, the plaintiffs entered into joint production agreements (PSCs) with the Indian government whereby they received exclusive rights for oil extraction in two areas off the west coast of India. Under the agreements, petroleum products were to be sold to companies nominated by the Indian government.

The reason for the dispute was two cases where nominee companies withheld part of the price of goods according to the memorandum of the Indian Petroleum Ministry. The plaintiffs claimed that they had the right to claim the withheld amounts from the government on the grounds that it was the government that was the principal debtor under the PSCs. In its turn, the Indian government argued that the memorandum is an executive decree adopted as a legislative act, which is why the powers of the government cannot be limited to any contract, including PSCs.

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According to the memorandum, the government is entitled to withhold payments in order to protect its own interests and the interests of the company, if the statutory or contractual amounts payable to it & calculated by the contractors within the framework of PSCs will not be transferred to it in time & in accordance with the agreement.

The court ruled that, although the government is the main debtor under the PSCs and should be responsible for recovering the amount withheld, it does not have jurisdiction to decide whether the government has the right to withhold any part of the payment the plaintiffs are owed.

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The plaintiffs appealed the decision with the Supreme Court in London, raising the following questions:

  • Are the issues related to payment withholdment considered as the act-of-state doctrine in the memorandum? And if they are, are they subject to legal action?
  • If so, are they subject to arbitration in England?
  • If so, was the Government entitled to waive the arbitration?

The Verdict

As regards the first issue, the Supreme Court in London ruled that the memorandum has the same legal force as the legislative act. It acts as an executive act of a sovereign state with respect to ownership of that state in its territory, thus falling under the doctrine.

As regards the second question, the Court ruled that, according to the principles of English international private law, executive acts of the government in respect of property in its territory are not subject to prosecution.

As regards the third question, the Court did not agree with the assertion that the government refused to apply act-of-state doctrine or object to the jurisdiction of the tribunal by submitting the case to arbitration.

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After reviewing this case we can conclude that entering into contractual relations with a state requires keeping in mind the act-of-state doctrine. To protect one’s own interests, one can directly stipulate in the contract that the said doctrine will not be used in dispute resolution to exclude government responsibility.

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