The Effect of State Immunity on Project
Finance Guarantees

Abstract

Among the political risks faced by project finance investors is state immunity, particularly in developing countries. Government support agreements, or state guarantees in short, are contractual commitments of the host government with project investors, provided to protect projects against risks of a political, administrative, and public management nature. Such guarantees cease to function when governments fail to fulfill their undertakings. When investors bring a lawsuit before a foreign court to seek redress, governments will very likely plead immunity. Historically, states could not realistically be sued abroad and there were no enforcement measures available for investors to gain relief. Given the fact that investors usually avoid the jurisdiction of local courts as a result of unfamiliarity with local procedures, partiality of those local courts, and corruption or unenforceability of rulings, what are their prospects of prevailing in a foreign forum? What happens if the government, in breach of a project guarantee agreement, exercises the defense of immunity? Will courts grant immunity to such state and refuse to have jurisdiction over the case? If not, will they be able to apply executive measures of constraint against the state’s property in favor of private party judgment creditors? The development of rules of state immunity has enabled the courts to de-immunize commercial acts of government, although enforcement of rulings to be backed up from state properties remains an obstacle to some extent.

TOPICS: Project finance, legal and regulatory issues for structured finance