Sovereign Immunity: When Your Counterparty Can Say “No Thanks” to Court

The Limits of Legal Protection

Securitisation deals are built on one comforting assumption: if someone doesn’t do what they’re supposed to, you can take them to court and sort it out – sue, enforce, maybe even seize an account or two. But that assumption starts to wobble when one party is a sovereign state – or a company happily tucked under its wing. In those cases, the rules are different – and not in a good way.

Sovereign immunity is the legal equivalent of “you can’t touch me,” allowing states (and often the companies they control) to sidestep lawsuits and shrug off enforcement in foreign courts. If it’s not dealt with properly, it can turn a carefully structured deal into a polite request the state is free to ignore.

This article explores what sovereign immunity is, why it matters in securitisation, and how lawyers and structurers try to manage it – without causing a diplomatic stir in the process.

What Sovereign Immunity Means

Sovereign immunity lets states operate outside the usual rules of enforcement. But what does that look like in practice?

There are two key parts:

• Immunity from jurisdiction – courts can’t hear a case against a sovereign state unless the state agrees to be sued (which, for obvious reasons, doesn’t happen often).
• Immunity from enforcement – even if you win, collecting what you’re owed might involve more politics than process.

These protections are written into national laws – like the UK’s State Immunity Act 1978 and the US Foreign Sovereign Immunities Act 1976. Both allow for exceptions, but the rules vary from one jurisdiction to another – and are not always reliable. A waiver that works in London might not mean much in Luxembourg. Or Lagos. Or Lima.

Why It Matters in Securitisation

Securitisation involves taking financial assets – things like loans, leases or receivables – and packaging them up into securities that are sold to investors. The entire structure depends on the assumption that the cashflows arrive on time – and you can enforce it if they don’t.

Sovereign immunity throws a spanner in the works when a state, or a state-owned enterprise (SOE) – a company directly owned or controlled by a government – is involved. That might happen if:

• The originator (the entity selling the assets into the deal) is a sovereign or SOE.
• The obligors (the borrowers or payers on the underlying assets) are sovereigns or SOEs.
• Key contracts – like sale agreements, servicing agreements, or guarantees – involve a ministry or other government bodies.
• The structure relies on recovering value from sovereign-owned assets.

If sovereign immunity hasn’t been waived or accounted for, the deal may look solid on paper but come unstuck when it’s supposed to deliver. In other words: good luck getting your money back.

Waiver of Immunity

Here’s the good news: The standard fix is a waiver. The bad news: not every waiver will hold up when tested. Some are barely more than decoration.

To be effective, a waiver must be:

• Express – no vague nods or broad intentions. It must be clearly written into the contract, covering both the right to sue (jurisdiction) and the right to enforce (asset seizure), including commercial assets.
• Properly drafted – not something you copy and paste from the last deal. The language must be specific, legally tested, and broad enough to hold up in court. Phrases like “to the fullest extent permitted by applicable law” may sound decorative – but they aren’t.
• Enforceable – even the best-drafted clause might be ignored in the wrong jurisdiction. Some courts won’t recognise waivers at all. Others protect certain assets – central bank reserves, embassies, anything vaguely considered in the “public interest”.

A signed waiver may look reassuring – but it means nothing if the court won’t back it when it counts.

The Commercial Activity Exception

Sovereign immunity doesn’t cover everything a state does. When a government raises capital, enters into financing, or otherwise behaves like a business, it may lose the legal protection it usually enjoys.

This is the commercial activity exception. Many jurisdictions – including the UK and US – recognise that if a state engages in commercial conduct, it can be treated like any other party. Selling receivables or issuing bonds will usually qualify.

But what counts as “commercial” varies. A court in London may reach a very different conclusion from one in Beijing. And even where the exception applies, enforcement can still be blocked – especially if the assets in question are off-limits or politically sensitive.

The exception helps – but only when supported by strong drafting, a suitable legal framework, and a court prepared to apply it.

Due Diligence Considerations

If a sovereign or SOE is involved, legal due diligence needs to go beyond box-ticking. You need to know exactly what you’re dealing with – and what you can’t touch.

Key things to look for:

• Legal status – Is the counterparty a sovereign, an SOE, or something in between? And how is it treated under the applicable law?
• Jurisdiction and enforcement – Will the chosen courts accept the case – and enforce the outcome? Some won’t.
• Waiver of immunity – Is there one? Is it properly drafted? Does it cover both being sued and enforcement? If not, it may not help when you need it.
• Asset protection – Could the receivables or collateral be shielded by sovereign immunity or public policy?

You can’t draft your way out of sovereign immunity – you need to spot the risks early and structure accordingly.

Structuring Solutions

Where sovereign immunity is in play, structure becomes defence. The goal isn’t to eliminate risk entirely – that’s rarely possible – but to contain it.

Typical tools include:

• Jurisdiction clauses – Choose courts (or arbitration forums) with a track record of handling sovereign disputes and clear enforcement rules. Predictability matters.
• Governing law – Use a legal system that recognises waivers and supports enforcement. English law is a frequent choice for good reason.
• Collateral arrangements – Avoid relying on sovereign-held assets in their home jurisdiction. Offshore accounts or diverted cashflows are usually safer.
• Credit support – Political risk insurance or guarantees from non-sovereign entities can provide an extra layer of protection – particularly where enforcement might be difficult or impossible.

None of this is bullet proof. But when used well, they can turn a no-go into a maybe – provided the structure is tight, and the sovereign doesn’t change its mind.

Case Studies: When Theory Meets Reality

These cases show what happens when sovereign immunity moves from fine print to front page.

(a) NML Capital Ltd v Republic of Argentina (US, 2012–2014)
NML Capital, a hedge fund, bought defaulted Argentine bonds and went after Argentina in the US courts. Argentina claimed immunity, but the court disagreed: issuing bonds was a commercial act. NML was allowed to enforce and trace Argentina’s global assets.

Takeaway: Act like a borrower, get treated like one. Even if you’re a sovereign.

(b) FG Hemisphere v Democratic Republic of Congo (Hong Kong, 2011)
An investor tried to enforce arbitral awards against the DRC in Hong Kong. The court sided with China’s approach – absolute immunity, no exceptions.

Takeaway: In some jurisdictions, it doesn’t matter how commercial the deal looks – immunity still applies.

(c) Donegal International v Republic of Zambia (UK, 2007)
Donegal bought distressed Zambian sovereign debt and sued in the UK. Zambia claimed immunity, but the court found the transaction was commercial and the waiver effective.

Takeaway: In the UK, a commercial transaction plus a clear waiver usually holds.

(d) Law Debenture Trust Corp v Ukraine (UK Supreme Court, 2023)
This case centred on a US$3 billion bond issued by Ukraine to Russia. Ukraine argued the bond had been issued under duress. Immunity wasn’t the key issue, but the case showed how sovereign politics can reshape legal arguments.

Takeaway: Immunity may not always decide the case – but it’s rarely far from view.

Taken together, these cases show that sovereign immunity doesn’t follow a script. Some courts will hold states to their commercial commitments. Others won’t get past the threshold. The difference often comes down to where you are, what the state was doing, and how well the deal was built to survive the fallout.

The Last Word

Securitisation depends on certainty – of payments, of enforcement, of legal rights that hold when tested. Sovereign immunity complicates that certainty. It doesn’t always block enforcement, but it can create gaps that no contract clause can fully close.

Whether you’re dealing with a state, an SOE, or a government agency dressed in corporate clothing, legal structure alone isn’t enough. You need the right court, the right law, and a clear-eyed view of enforcement risk.

Sovereigns don’t have to break the rules – they just get to play a different game.