Enforcing investment treaty awards
July 2018 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION
In the last 30 years, foreign investors have increasingly relied on investment treaty arbitration for settling disputes with host states. Driven by practical considerations, foreign investors presumably realised that investment treaty arbitration offered a number of concrete advantages. Indeed, it can provide a neutral, third-party dispute settlement mechanism. In addition, compared to litigation before national courts, investment treaty arbitration allows parties to exercise a higher degree of control over both the composition of the tribunal and the procedure used to resolve their dispute.
Crucially, investment treaty arbitration has also proven to be an effective way for foreign investors to obtain compensation for the violation of their rights by host states. This is, among other reasons, because the overwhelming majority of states have complied, and continue to comply, with investment treaty awards rendered against them.
In recent times, however, a number of states have refused to voluntarily satisfy adverse arbitral awards. This need not prevent a claimant investor from collecting the compensation to which it is entitled. Self-evidently, however, lack of voluntarily compliance with investment treaty awards makes it more cumbersome for claimant investors to obtain reparation. It also constitutes a powerful reminder of the importance of taking enforcement considerations into account even before the crystallisation of an investment dispute.
For example, recent developments show that investors relying on investment treaties involving European Union (EU) Member States may face significant obstacles in the enforcement of awards. Thus, in certain situations, foreign investors might want to consider restructuring their investments through companies incorporated outside of the EU in order to be able to rely on other investment treaties. Foreign investors also should take into account that the choice of the rules governing the arbitration proceedings may have a significant impact on the enforcement mechanisms to which they will be able to resort.
These mechanisms include those contained in the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention), the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and the Inter-American Convention on International Commercial Arbitration (the Panama Convention).
These three conventions contain provisions intended to enable enforcement of an arbitral award in the event that the losing party refuses to comply voluntarily with that award. For example, Article 54 of the ICSID Convention requires each contracting state to recognise ICSID awards as binding and to enforce the pecuniary obligations imposed by these awards within its territories as if they were a final judgment of a court in that state.
A party seeking enforcement of a non-ICSID award – such as an award rendered under the Additional Facility Rules or the UNCITRAL Arbitration Rules – will generally be able to rely on the New York Convention or on the Panama Convention. Under Article III of the New York Convention, contracting states have an obligation to recognise covered arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon. For its part, Article 4 of the Panama Convention provides that execution or recognition of a covered award may be ordered in the same manner as that of decisions handed down by national or foreign ordinary courts, in accordance with the procedural laws of the country where the award is to be executed and the provisions of international treaties.
However, unlike the ICSID Convention, the New York and Panama conventions expressly allow domestic courts to refuse enforcement of an award on the basis of a number of grounds, such as the invalidity of the arbitration agreement or public policy considerations. This means that enforcement of ICSID awards generally presents a number of advantages.
The above three conventions leave the execution of arbitral awards to domestic law, including with regard to sovereign immunity. Sovereign immunity seeks to facilitate “the performance of public functions by the State and its representatives by preventing them from being sued or prosecuted in foreign courts” (J Crawford, ‘Brownlie’s Principles of Public International Law’). It constitutes one of the most significant obstacles to obtaining satisfaction of an arbitral award from a respondent state. A favourable award may prove fruitless if the claimant investor is unable to locate assets that are not immune from execution. Therefore, in addition to the specific investment treaty and the arbitration rules on which they choose to rely, foreign investors should consider whether the respondent state has assets that are not immune from execution in jurisdictions with arbitration-friendly domestic legislation in force. That could significantly simplify the enforcement of the award.
Sovereign immunity is relevant at two stages of the enforcement process. First, it is relevant at the stage of recognition of the award, where a state may claim immunity from the jurisdiction of the domestic courts where recognition is sought. Second, it is relevant at the stage of execution of the award, where a state may claim immunity from having another jurisdiction attach, freeze or seize its assets. Courts in arbitration-friendly jurisdictions generally consider that a state’s consent to an arbitration proceeding, or its commitment to an enforcement regime like the New York Convention, constitutes a waiver of sovereign immunity from jurisdiction. But this waiver is rarely understood as implying a waiver of immunity from execution. Even in arbitration-friendly jurisdictions, execution is generally allowed only if the host state has expressly consented to the taking of such measure or if the property is specifically in use or intended for use by that state for other than government non-commercial purposes.
Therefore, if they suspect that the respondent state might not comply with a future adverse award voluntarily, foreign investors should conduct a forensic search of assets of that state that are used for commercial purposes. There are companies that specialise in asset-tracing. Used in combination with international law firms, engaging these companies – even before the issuance of the award – will likely facilitate enforcement of the award. When possible, foreign investors also should attempt to include a clause explicitly waiving immunity from execution in their contracts or arbitration agreements with host states. A number of arbitral institutions have recommended model clauses for that purpose, ICSID Model Clause 15, for instance.
In certain situations, it also is advisable for claimant investors to seek interim measures from domestic courts, such as freezing injunctions, in order to avoid the dissipation of state assets against which the award may be executed.
In ICSID annulment proceedings, the investor also may request that any stay of enforcement of the award be conditioned on the posting of security by the applicant state. If an annulment committee accepts that request and the annulment application fails, the successful investor would be able to enforce the award against the security. Article VI of the New York Convention provides for a similar mechanism with regard to setting aside proceedings.
Other options available to prevailing claimant investors to obtain at least partial reparation include trying to settle with the unsuccessful respondent state. Alternatively, they may explore the possibility of selling their arbitral awards to firms specialised in the business of acquiring awards with a view to engaging in enforcement proceedings in multiple jurisdictions. That said, these two options require that the claimant investor be willing to accept a lower amount than the amount granted in the relevant award.
Claimant investors may also try to obtain diplomatic protection from their home state. For example, the home state might be able to initiate inter-state arbitration proceedings against the host state under the applicable investment treaty or proceedings before the International Court of Justice under Article 64 of the ICSID Convention. These options, however, remain mainly theoretical. It is unlikely that a home state will be persuaded to initiate costly, lengthy, high-profile inter-state proceedings, which could damage its relationship with the respondent state, to protect the private interests of one of its nationals. Further, enforcement of the decision resulting from the inter-state proceedings could also face important challenges.
But there are other, more practical alternatives. For instance, home states have resorted to removing unilateral trade benefits and to voting against the extension of credit by international organisations as a means of inducing host states to comply with investment treaty awards. In 2011, the US started to vote against extending certain World Bank and Inter-American Development Bank loans to Argentina. Several states, including the UK, Germany and Spain subsequently joined the US. Similarly, in 2012, the US suspended Argentina’s preferential trade status under the Generalised System of Preferences in response to its failure to comply with awards rendered in favour of investors from the US. These political measures proved to be successful, with Argentina settling a number of awards in subsequent years.
A respondent state’s failure to comply with investment treaty awards may also negatively affect the political risk insurance offered by agencies such as the Overseas Private Investment Corporation, a US government agency that helps American businesses invest in emerging markets. This could affect foreign investment in the respondent state and, thus, induce it to comply with adverse awards.
In sum, a respondent state’s failure to comply with an adverse award is certainly not an insurmountable obstacle. Having enforcement considerations in mind at every step of the investment process, timely preparation, specialised knowledge and creative thinking will significantly increase the claimant investor’s chances of obtaining the compensation to which it is entitled under the award.
Robert G. Volterra is a principal and Álvaro Nistal is a senior associate at Volterra Fietta. Mr Volterra can be contacted on +44 (0)20 7380 3898 or by email: firstname.lastname@example.org. Mr Nistal can be contacted on +44 (0)20 7380 3538 or by email: email@example.com.
© Financier Worldwide
Robert G. Volterra and Álvaro Nistal