The sovereign immunity question

Passions arise whenever the phrase “sovereign immunity” becomes the topic, more so if it involves the waiving of such. This is now the case in the loan agreement between the Duterte administration and China for Philippine infrastructure projects. Critics have questioned the provision in the contract wherein the government waives its sovereign immunity to be sued in case of disputes.

The “waiver of sovereign immunity” is, in fact, a fairly standard provision in loan contracts between foreign lenders and a sovereign state or its agencies (which by extension also have immunity from legal action).

For some other loans to governments and their instrumentalities, such waiver is implied in provisions that make the borrower subject to arbitration proceedings in case of disputes. A government allowing itself to be subjected to arbitration proceedings indicates its waiving of its sovereign immunity from suit.

The Supreme Court, in its decision in February 2012 saying Northrail project contractor China National Machinery & Equipment Corp. was not entitled to immunity from suit, pointed out that “(t)he mantle of State immunity cannot be extended to commercial, private and proprietary acts… a State may be said to have descended to the level of an individual and can thus be deemed to have tacitly given its consent to be sued when it enters into business contracts.” Loan contracts fall squarely as business contracts.

The Japan International Cooperation Agency, a major source of financial aid for the Philippines, has a specific provision on the waiving of sovereign immunity in its loan documents. It requires the borrower to “irrevocably waive (i) any and all of its privileges and sovereign immunities from and against any lawsuit and enforcement of arbitral award and (ii) any and all privileges and sovereign immunities on any of its properties from and against any attachment, enforcement and any other legal proceedings, both of which it may be entitled to as a legal defense under any applicable international or domestic law.”

This provision is designed to give creditors recourse against any arbitrary action by the borrowing government that will affect the repayment of its loans. Abrupt change in government through a military takeover is one example.

This was the reason why the clamor for then President Cory Aquino to unilaterally repudiate millions of dollars in questionable foreign loans contracted by the Marcos regime did not prosper. All her administration could do was renegotiate the terms of the loans, to seek relief such as lower interest and longer repayment periods.

Yes, borrowers do have a say in the terms and conditions of the loans they are seeking. Presidential spokesperson Salvador Panelo is simply wrong in saying that the Philippines could not do anything because China as the lender dictates the terms of the loan.

Borrowers are not helpless. The terms of any loan are negotiated between the lender and the borrower. If the borrower believes that the terms are disadvantageous to him, he can walk away and look elsewhere. China is not the only source of ODA loans.

However, the allocated ODA and other concessional funding for the Philippines from its traditional sources, Japan and the United States, is not infinite. There are dozens of other poorer countries in need of such financial assistance, more than a middle-income country such as ours.

The European Union (EU) is another major source of ODA, but the Philippines can’t go there now and seek financial help after President Duterte cursed and raised hell against EU officials for allegedly meddling in Philippine affairs, this after the EU raised concerns about the government’s bloody war on drugs.

Perhaps the current public concern over the waiving of sovereign immunity revolves around the fact that the lender is China, not any friendly state such as the Unites States or Japan. China is not an uninterested party in this case, having had a track record of undermining Philippine interests and coveting the country’s territory and resources.

However, the booby traps could be in other provisions in the Chinese loan agreement, not in the “waiver of sovereign immunity” clause. It’s in the Philippines’ loan contracts with other lenders from the United States and Japan, too.