The Criterion of Purpose Approach

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diplomatic functions. As a result, State B‘ court must take account of the whole context in which the claim against State A is made before exercising jurisdiction.

Certainly, there are some other refinements of nature test, but they are gradually eliminated from international practice over time. For example, some States usually take a measure of balance of interests as a means of nature test, by which the courts of these States ‗weigh the defendant State‘s interest in benefiting from immunity against the forum State‘s interest in exercising jurisdiction and the private party‘s interest in acquiring judicial relief.‘¹⁰⁴ Accompanied by the imprint of absolute State immunity, some States determine the grant or refusal of immunity by classifying the identity of the subject of immunity. The courts of these States differentiate transactions performed by States or governmental organs from transactions performed by State agencies or instrumentalities. If a transaction is performed by State agencies or instrumentalities rather than governmental organs, then it can be attributed to the commercial transaction. However, such refinements seem a bit obsolete.

As a matter of fact, there are various forms of performance of commercial transactions. In many cases, whether a contract or a transaction embraces commerciality is largely dependent on the discretion of the judiciary. In this process, the courts of forum State may consider the purpose of transactions and its effect on the nature of transactions. So the purpose approach is by no means thoroughly exclusive with nature approach, and sometimes it is an assistant of nature approach.

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practice of the State of the forum, that purpose is relevant to determining the non-commercial character of the contract or transaction.‖

As a way of limiting the scope of State immunity, the purpose approach appears earlier than the nature approach. It plays an important role in the time when the State function was confined to such public matters as executing the legal order, carrying out the foreign affairs or maintaining the armed force for the national defense. ¹⁰⁵ However, influenced by the ideology of socialism and the changes of State functions, States increasingly engaged in the field of autonomy of private law, so the purpose approach lost much of its validity. With the evolution of the doctrine of restrictive immunity, the criterion of ‗public purpose‘ has been excluded by degrees in the international practice. But until now the purpose approach did not die thoroughly.

The purpose approach demands for the courts of forum State to determine whether a transaction is commercial or not should take the motive or purpose of the transaction into account. If a transaction or contract apparently serves for political policy or public function, it should be excluded from the scope of commercial transaction.

The transactions between States and private parties are usually not same as commercial transactions between private parties. Indeed, many transactions in which States participate are not for profit, but for specific State function or to promote public interest. For example, some governmental activities, such as the governmental purchase of armaments, the lease of officials for the foreign embassy, the imports of grain and cotton to relief of the victims of a natural calamity and the purchase of medicines to prevent infectious diseases, often employ the appearance of commercial transactions. But those activities certainly assume governmental functions, so their purpose is different from the commercial transactions for profit. By the purpose test, some transactions or contracts in which States or governments involve should not be attributed to commerciality, because they are for the purpose of political domination or public service. From certain of States‘ perspective, it seems reasonable to invoke immunity for their activities for governmental purposes.

The purpose approach as a method to identify commercial transactions is broadly applied in States judicial practice. There are a lot of relevant examples. For instance, although the State Immunity Act of Canada adopted the nature approach in Article 2,

105 See: Xiaodong Yang, State Immunity in International Law, Cambridge University Press (2012), p. 98.

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but in the case of Re Canada Labour Code, the Canadian Supreme Court applied a purpose approach, because the purpose of an activity of US was relevant to the determination of the nature of that activity. In the opinion of the majority of judges,

―Nature and purpose are interrelated, so it is impossible to determine the former without considering the latter. The definition of commercial activity in the State Immunity Act does not preclude consideration of its purpose …… if consideration of purpose is helpful in determining the nature of an activity, then such considerations should be and are allowed under the Act.‖ ¹⁰⁶

As the case Re Canada Labor Code shows the purpose of State activity is usually interrelated with the nature of activity. It may be difficult to recognize the nature of State acts without examining the purpose. Moreover, sometimes a transaction may include a set of State conducts. In this context, it is impracticable to analyze the nature of every act. In fact, analysis of the purpose of the transaction is conducive to identification of the relevant conduct that is really related to the claims of litigation.

Some States claim to support the nature test as a mean of determining commerciality, but their practice is often contradictory to the statement. For example, in the comment from Italy on the draft articles of Convention on Jurisdictional Immunities of States and Their Property, Italy considers ‗the nature test to be in principle the sole criterion for determining the commercial character of a contract or transaction.‘¹⁰⁷ But in judicial practice, Italian courts generally employ the purpose test as a criterion for determining commerciality of a contract or transaction. In some cases, Italian courts conferred sovereign immunity on the respondent State, in that the respondent State‘s particular act was considered as having a sovereign nature for it purportedly fulfilled the political purposes or governmental aims.

Similarly, US Foreign Sovereign Immunities Act 1976 in Article 1603 (d) provides that,

―The commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose.‖

106 See: Re Canada Labour Code, Canada, Federal Court of Appeal, 1989, (1990) 1 FC 332. Also, Re Canada Labour Code (Unites States of America v. Public Service Alliance of Canada), Canada Supreme Court, (1992) 91 DLR (4^th) 449, 461.

107 See: Replies received from States, UN Doc. A/56/291/Add.1. p. 3.

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But the judiciary of US did not dogmatically apply the nature test persistently in practice. Actually, the US courts have ‗a great deal of latitude in determining what is a commercial activity for the purposes of the Act.‘¹⁰⁸ In the case De Sanchez v.

Banco Central de Nicaragua, the Fifth Circuit Appeal Court gave the immunity to Nicaragua for its refusal to honor a check which Nicaragua Central bank had issued to cover a private bank debt. The court held that the issuance of check was to control Nicaragua‘s reserves of foreign currency, so it is for the sovereign purpose. Then, the Fifth Circuit Appeal Court reasoned that,

‗Often, the essence of an act is defined by its purpose. Unless we can inquire into the purpose of such acts, we cannot determine their nature.‘¹⁰⁹

It would seem that, according to the opinion of the US court in this case, the nature test is in essence a purpose test. At least, to determine the nature of activities of a foreign State is dependent on the examination of purpose of those activities. From the case, it can be seen that, nature approach confirmed by Foreign Sovereign Immunities Act notwithstanding, the US courts did not thoroughly exclude the purpose test as a mean of determining commerciality of activities of foreign States.

The UK State Immunity Act did not mention the criterion for determination of a commercial transaction. The France‘s position on this issue is also ambivalent.¹¹⁰ On the one hand, France announced that commerciality is based on the nature of activities;

on the other hand, it expressed the opinion in judicial practice that ‗an act is considered as a governmental act if its purpose is the performance of a public service.‘¹¹¹

Objectively, the nature approach has more rationality. However, in view of the complexity of the cases, it is difficult to apply the nature approach persistently. As a result, the purpose approach becomes a complementary but effective method in determining the commerciality in a transaction or contract. Chinese government addressed necessity to retain the purpose approach in its reply to the draft articles of Convention on Jurisdictional Immunities of States and Their Property.

108 See: Hazel Fox CMG QC, The Law of State Immunity, 2^nd edition, Oxford University Press (2008), p.343.

109 See: De Sanchez v. Banco Central de Nicaragua, US, Court of Appeals, 770 F.2d 1385 (5^th Cir. 1985), at 1393.

110 See: Xiaodong Yang, State Immunity in International Law, Cambridge University Press (2012), p. 103.

111 See: Clerget v. Banque, France, (1969), 52 ILR 310, at 313.

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―…… The State cannot invoke immunity from that jurisdiction in a proceeding arising out of that commercial transaction. The government of China endorses this principle but, in determining whether a contract or transaction is a commercial transaction under the Convention, applying only the nature test is far from adequate. The purpose of the State for engaging in the transaction must also be considered. Adopting a rule on jurisdictional immunities of States and their property would no doubt provide protection for natural or juridical person involved in the transaction, but this should not jeopardize the public purpose of the State for engaging in the transaction. A balance must be struck between the nature test and the purpose test to protect the property of States used for public purposes under exceptional circumstances. It has been argued that the nature test is ambiguous, since it seems possible to identify certain public purposes in every transaction that is carried out by a State. In this respect, the Government of China believes that applying the nature test in no way provides additional protection for commercial transaction carried out by a State; its purpose is not to disregard the special interest of a State under exceptional circumstances, such as the procurement of food supplies to reliever a famine situation, purchase goods to revitalize an affected area, or supply medicaments to combat a spreading epidemic. The purpose test may not have clear and concise determining criteria as the nature test, but it is by no means impossible to apply. If, in practice, the purpose of a State engaging in a given commercial transaction is indeed relevant to the determination of the non-commercial nature of the contract or transaction, the defendant State should be given an opportunity to prove its case. The Government of China agrees in principle with the views of the purpose of the State for engaging in the transaction must also be considered …… The purpose test is a supplementary standard employed to minimize unnecessary disputes which could arise from differences in State practice if only the nature test is applied. Applying the purpose test would not hamper the flexibility of national courts in making judicial interpretations when dealing with relevant cases, but would provide guidance to Governments, courts and enforcement officials, and ensure

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that relevant factors concerning the contract or transaction are taken into consideration.‖¹¹²

Likewise, Japan also questioned the feasibility of applying the nature approach alone.

―Japan questions the sufficiency of the nature test in determining whether a certain contract or transaction is a commercial transaction.

Precedents in national legislations and court decisions also seem to indicate that there is little convergence on national practices on this issue. At this point, it seems most appropriate to leave it up to the discretion of national courts to decide what should be understood as a commercial transaction.‖¹¹³

So Japan endorsed that the UN Convention should leave some room for the discretion of national courts in determining whether a certain contract or transaction is a ‗commercial transaction‘. In view of this, the Japan‘s Act on the Civil Jurisdiction of Japan with respect to a Foreign State etc 2009 does not involve the standard to determine commercial transactions, but leaves it to the discretion of judicial authority.

As a matter of fact, the fissure between ‗nature test‘ and ‗purpose test‘ cannot be ignored in practice of States. This is mainly reflected in the divergent views between the developed States and the undeveloped States. Most developed States tend to adopt nature test to identify commerciality of transactions or contracts, because they are generally the foreign investors. The nature test greatly curtails the scope of State immunity, and reduces the risks of private party, so it would effectively protect the oversea interests of enterprises from the developed States. Contrarily, undeveloped States are usually the invested States: the recipient of foreign direct investment. They tend to adopt the purpose test so that they can make effective defense on the grounds of public purpose in the proceedings.

Consequently, the international community needs a consensus. As mentioned, the purpose test may not have clear and concise determining criteria as the nature test, but

‗a balance must be struck between the nature test and the purpose test to protect the property of States used for public purposes under exceptional circumstances.‘¹¹⁴ Therefore the UN Convention on State Immunity adopted the context approach that

112 See: Replies received from States, UN Doc. A/56/291, p. 3.

113 See: Replies received from States, UN Doc. A/56/291/Add. 2, p. 2.

114 See: Replies received from States, UN Doc. A/56/291/Add. 2, p. 3.

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mixed nature approach and purpose approach together for determination of commercial transactions.