Obstacles to the enforcement of arbitral awards against States- an international perspective
In a world where investment arbitration is flourishing, the difficulties in enforcing arbitral awards against States remain a major concern. This piece looks to identify two of the main obstacles and looks at ways of overcoming these.
Framework for enforcing arbitral awards against States
While there are many systems under which enforcement may be sought against a State, the most common are enforcement under ICSID and under the New York Convention (“NYC”).
The ICSID Convention governs enforcement of all investment treaty arbitrations. There are limited grounds for challenging an ICSID award but the controversial “violation of public policy” is not one of the grounds. An award that is not challenged/ upheld during the challenge has to be enforced in a State as if it were a final judgment of a Court in that State (Article 54). However, Article 55 clearly implies that enforcement of an ICSID award in a State is subject to the domestic law on the issue of sovereign immunity in that State.
An arbitration award which falls under the NYC may also be against a state. An award may not be enforced in a State if it violates the “public policy” of that State (Article V(2)(b) of the NYC) . Furthermore, enforcement of an award under the NYC is also subject to the domestic sovereign immunity laws.
These (Sovereign Immunity and Public Policy) are among the primary obstacles that defendants face while enforcing awards against States. The latter is not specific to enforcement against a State party.
Furthermore, other dilatory tactics may also be used. For instance Article VI of the NYC provides that where an award is challenged at the seat of the arbitration, a stay may be obtained in another country that is a signatory to the NYC pending determination of an annulment application. However, this essay focuses on the two main impediments that exist with respect to enforcement of awards against States.
Obstacles within this framework.
Thus, the main obstacles to enforcement of an award against a State are
1. Sovereign immunity as provided for by the laws of the country where enforcement is sought.
Most countries have moved from a system of absolute sovereign immunity to restrictive sovereign immunity. In most jurisdictions, attachment of a sovereign State’s non-commercial property is not permitted. However, within the different regimes that incorporate this concept there are subtle differences to be noted. For instance, Section 3 of the UK Sovereign Immunity Act 1978 has a far narrower definition of “commercial property” compared to Section 1603 of the Foreign Sovereign Immunities Act of USA.
Execution is possible against non-commercial property only if the State has waived its sovereign immunity. Such a waiver can be contained in the treaty itself.
However, as laid down in LETCO v. Liberia and F G Hemisphere v Democratic Republic of Congo respectively a waiver of sovereign immunity at the dispute resolution stage or participation in an arbitration proceeding do not by themselves result in a waiver of sovereign immunity for the purpose of execution.
Courts are known to adopt a very pro-sovereign immunity approach. This is perhaps because they expect similar reciprocation from other States. A hint of the problems that sovereign immunity poses to successful litigants is elucidated by the enforcement proceedings of the Noga awards against Russia in France. Three different properties were sought to be attached: the Russian embassy bank accounts, a Russian ship and a Russian military plane. Despite the fact that the Russians had expressly waived their sovereign immunity with respect to execution, the execution was rather surprisingly unsuccessful.
The French Court held that bank accounts belonging to embassies were “diplomatic” assets and despite the broad wording of the waiver, it did not specifically refer to waiver of sovereign immunity with respect to “diplomatic” assets. Hence the waiver did not extend to the attachment of such assets.
The ship was not permitted to be attached on the basis that it was owned by a University which was distinct from the Russian Government. This was despite the fact that the Constitution of the University stated that all property owned by the University was owned by the Government.
The attachment of the airplanes was unsuccessful as pursuant to a tip-off the airplanes flew off before attachment.
What this episode indicates is that Courts often provide surprising logic to take a pro-sovereign immunity stance.
2. The public policy of the country where enforcement is sought
Art.V(2)(b) of the NYC provides that recognition and enforcement of an arbitral award may be refused if the competent court finds that recognition of enforcement would be “contrary to the public policy of that country”. Generally countries have construed “public policy narrowly”. The most notable is the US Supreme Court in Parsons and the ECJ in Krombach -v- Bamberski. However, you have decisions like that of the Turkish Court in Osuuskunta Matex VS v TEK General Directorate where the court refused to recognise an award rendered in Zurich on the basis that it perceived the tribunal to have failed to comply with the parties’ choice of procedural law and that this constituted a violation of public policy.
This problem of enforcement is not specific to enforcement of an award against a State and may be applicable against individual/ corporate defendants as well.
Methods of overcoming these obstacles
A practical solution to the issue of sovereign immunity is to include in the relevant contract or treaty with the state a clause expressly waiving immunity from execution. ICSID recommends a model clause to this effect. However, in the case of ICSID arbitration this is not in the individual litigants hands and is left to his home State. Often States are not comfortable with such clauses as they will end up being reciprocal in nature.
Moreover, even such clauses will not prevent Courts from taking stances like they took in the Noga awards enforcement case.
The solution to solve the “public policy” problem is to choose a jurisdiction for enforcement where “public policy” is given a narrow interpretation (like USA). However, this again is not possible at all times and depends on whether the defendant possesses assets in these jurisdictions.
To conclude, it is possible on some occasions for litigants to overcome the obstacles that are present while enforcing an award against States. Often, though, the story of the enforcement of Noga awards against Russia in France is repeated.