Originally from The American Review of International Arbitration (ARIA)

PREVIEW

ABSTRACT        

In an era increasingly dominated by unilateral sovereign actions, the validity of foreign acts of state emerges as a crucial issue in commercial disputes. The Act of State doctrine, which directs courts to treat such acts as legally operative, is traditionally viewed as a nebulous principle confined to the realm of litigation. Notwithstanding its historical roots in state immunity and international comity, Act of State is susceptible of extension to international commercial arbitration too. As a super choice-of-law rule, the doctrine reflects the primacy in the conduct of foreign relations that the constitutional principle of separation of powers vests in the political branches of government. No adjudicatory body—whether sovereign or private—may sit in judgment upon foreign acts of state where doing so would encroach upon this constitutionally protected domain. Accordingly, the Act of State doctrine may render claims challenging the validity of foreign acts non-arbitrable, regardless of the non-sovereign status of arbitral tribunals. This reality renews the importance of seat selection and domestic conflict of laws rules, as the Act of State doctrine—when part of the lex arbitri or lex fori—can dramatically undermine arbitration proceedings.

I.  INTRODUCTION

Following the tumultuous war period concluded with the Peace of Westphalen, countries agreed to shape an international order premised upon two fundamental cornerstones: sovereignty and territoriality. Ever since, states have been jealous of their sovereignty. To preserve this sovereignty-oriented international balance, state immunity has emerged as a rule of international law that shelters foreign sovereigns, their organs, and their officials against judicial proceedings in domestic courts.

But states are likewise uneasy about having courts of a foreign country scrutinize the lawfulness of their actions even when they are not directly involved as a party. Subjecting a foreign act of state to judicial scrutiny essentially places the sovereignty of the foreign state under the authority of the court’s country. This appears to run afoul of the foundational principle of sovereign equality among states. Therefore, domestic courts have traditionally sought ways to avoid passing judgment upon acts of foreign states even in disputes between private litigants.

In common-law countries, the courts’ reluctance to review the validity of acts of foreign sovereigns has been crystalized in the “Act of State” doctrine. While no clear consensus has emerged as to the existence of an analogous doctrine in the civil-law tradition, its operative gist is known and enforced in many civil-law jurisdictions. The Act of State doctrine—like state immunity—originated from the idea that domestic courts are state organs and must therefore accord respect to the acts of a foreign equal sovereign. Yet, unlike state immunity, the status of the Act of State doctrine has shifted over time, as states have gradually abandoned an international law interpretation in favor of a domestic law qualification.

The Act of State doctrine acquires particular importance in times of international turmoil, like the current ones. By virtue of their sovereignty, states have the power to adopt overreaching measures with dramatic impact on private parties and commercial transactions. This typically happens to address internal civil unrest, regime change, or foreign events. In today’s climate of mounting global tensions, relations among states have increasingly been dominated by unilateral assertions of sovereignty. These sovereign acts, such as economic sanctions, frequently disrupt commercial activities and can give rise to disputes between private parties. When the validity of such acts is called into question, the Act of State doctrine may be triggered.

The current geopolitical landscape provides glaring evidence. Against the backdrop of the Russo-Ukrainian war, in April 2024, President Putin signed an executive order directing that the assets of the Russian subsidiaries of two Western corporations be transferred to the temporary management of Gazprom, a state-owned Russian company.1F  While the executive order was justified by the Russian government as a lawful countermeasure against the European sanctions levied against Russian entities, its lawfulness has been fiercely disputed by many Western governments.  Because Gazprom has significant assets worldwide, the parent companies targeted by the Russian government might well attempt to litigate the validity of the Russian executive order.

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This article will proceed as follows. Section II traces the origins and outlines the scope of the Act of State doctrine, with particular attention to its emergence as a concept of public international law. Section III demonstrates that the doctrine has gradually evolved and been divested of any public international law dimension. Section IV illustrates the three legal justifications for the Act of State doctrine under domestic law—i.e., international comity, private international law, and constitutional separation of powers. Section V argues that the Act of State doctrine, operating as a rule of private international law rooted in constitutional separation of powers, should generally be extended to claims brought in international commercial arbitration. Section VI explores the practical consequence of the doctrine’s applicability to international arbitration claims, particularly the renewed importance of seat selection. Section VII provides closing remarks.