Restrictive Approach to State Immunity – The Supreme Court of Sweden rules on the Sedelmayer case

On 1 July 2011 the Supreme Court of Sweden entertained the enforcement claim of Mr. Franz Sedelmayer and admitted execution of an arbitral award by means of distraint of rental income from a building located in Sweden, which had once been utilized by the USSR Trade Mission to Sweden (case no. Ö 170-10).

The background of the dispute dates back to 1990, when SGC, an American company owned by Mr. Sedelmayer, entered into negotiations with the Police Department of St. Petersburg (“GUVD”) regarding the supply of law enforcement equipment, services on training in using this equipment, and the establishment of a security agency. For that purpose, SGC and GUVD formed the joint stock company Kammenij Ostrov (‘KOC’) with a 50/50 shareholding structure. Mr. Sedelmayer was elected Director General of KOC and GUVD paid in a part of its share in the form of certain buildings to be used by KOC as well as by Mr. Sedelmayer and his family members. In 1996 these buildings were seized under a Decree of the President of Russia and transferred to a Russian state agency. Mr. Sedelmayer initiated arbitration with the Arbitration Institute of the Stockholm Chamber of Commerce based on the 1989 BIT between Germany and the USSR. In its subsequent award of 1998 the tribunal found that the pertinent state measures constituted expropriation and ordered Russia to pay compensation to Mr. Sedelmayer in the amount of USD 2,350,000 plus interest.

Russia refused to pay and challenged the award before the Swedish courts. In 2002 the challenge was denied. Mr. Sedelmayer then applied for enforcement of the award in Sweden. In the course of the enforcement proceedings, the enforcement authority found, among other things, that Russia was registered as the owner of real estate property in Sweden where approximately 60 individuals and two companies resided. A dispute arose as to whether the rental payments generated by Russia from this property could be subjected to enforcement. The enforcement authority denied this and refused enforcement in its decision of 9 May 2005. Mr. Sedelmeyer challenged this decision, which was first upheld by the District Court, and then overturned by the Court of Appeal, which ruled that the distraint of rental payments was admissible. Russia then appealed against this decision before the Supreme Court of Sweden.

The State argued that the building was a part of premises of Russia's Trade Delegation to Sweden. However, the Supreme Court, based on evidence submitted by Mr. Sedelmayer, found that the facility was actually used for commercial and not for sovereign purposes (i.e. generating rental income) and, therefore, did not fall within the ambit of the State’s immunity. This was supported by the fact that in 1976, the Soviet Trade Delegation had sent a notice to the Swedish Ministry for Foreign Affairs, informing that the delegation would vacate the premises in question and move to other premises.

The Supreme Court’s decision constitutes another brick in the diverse wall of rulings on the sensitive issue of the immunity of state property, often a core obstacle for foreign investors seeking enforcement of awards rendered against a State. The complexity of this issue and the divergency of approaches to it on an international level are reflected in the fact that the United Nations Convention on Jurisdictional Immunities of States and their Property of 2004, to which both Sweden and Russia are signatories, has not yet entered into force. The Supreme Court of Sweden endorsed the restrictive approach to state immunity, traditionally favored in Swedish judicial practice, namely that States enjoy immunity only in relation to property which is used by a State in exercising its sovereign functions, whereas property used for commercial purposes, albeit owned by the State, can be subject to enforcement.