19 December 2011
Although planning for the potential difficulties in enforcing an arbitration award is sometimes neglected before an arbitration is initiated, reviewing such issues must be part of any overall assessment of the dispute.
A common belief is that awards rendered in proceedings held pursuant to the rules of the International Centre for Settlement of Investment Disputes (ICSID), as established by the 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention), are largely unaffected by such difficulties. The reality, however, is somewhat more complex. While enforcement issues do arise less frequently in ICSID arbitration, in certain situations states attempt to evade their obligations to enforce adverse awards, with mixed degrees of success.
On the positive side, the ICSID Convention contains commanding language obliging state parties to enforce the awards rendered under its auspices. Article 54 is particularly clear in this respect:
Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that Stat
The undertaking of contracting states to “enforce the pecuniary obligations” imposed by an ICSID award carries considerable weight. States considering whether or not to comply with ICSID awards are well aware that the ICSID Convention is a multilateral agreement signed by most countries in the world. More importantly, the ICSID Convention was negotiated and adopted under the aegis of the World Bank. The ICSID itself is an agency of the World Bank, and the Chairman of ICSID’s Administrative Council is the World Bank’s President. The intimate relationships between the ICSID and the World Bank weigh heavily in favor of the voluntary enforcement of ICSID awards by member states, particularly for those in need of support from one of the agencies of the World Bank Group.
The publication of the vast majority of arbitral awards in recent years, whether officially or unofficially, adds further pressure on a state to comply with the awards, as does the increasing frequency of participation by amicus curiae
and public hearings. As a result, the amount awarded against a state frequently becomes public knowledge. Similarly, public disclosure of states’ actions toward investors in breach of international law is detailed in awards that are easily available to all interested parties. These include multilateral or regional organizations, financial institutions and private lenders, non-governmental organizations (NGOs), media and similar entities. Disclosure to such parties builds pressure on exposed states and encourages them to enforce ICSID awards, particularly those states in need of international financial support.
Finally, the so-called “automatic” recognition of an ICSID award in all contracting states, “as if it were a final judgment of a court in that State” pursuant to Article 54, removes most grounds that a recalcitrant state might otherwise have to block enforcement of the award. Indeed, there is no legal seat of the arbitration in ICSID arbitration, contrary to commercial arbitration. Thus, the ICSID Convention eliminates any possibility for any challenge to the validity of an ICSID award anywhere in the world. All that remains is the annulment proceedings on limited grounds pursuant to Article 52 of the ICSID Convention, before an ad hoc
Committee created within the self-contained system of the Convention. Lengthy—and sometimes dilatory—proceedings in local courts to resist recognition of the award, are therefore impossible in ICSID arbitration. The fact that states may not resort to such proceedings, which sometimes are used abusively with guerilla-like tactics before their own courts or foreign courts, considerably diminishes the threats to the enforcement of the award.
The above legal considerations are confirmed by a statistical survey of the enforcement of awards. It is generally accepted that states have voluntarily complied with the vast majority of ICSID awards. With the exception of certain well-known instances discussed below, it seems that investors are rarely faced with difficulties in enforcing ICSID awards, including with so-called impecunious states.
Recent trends however, show that ICSID awards are not totally immune from enforcement difficulties.
As an initial matter, parties to ICSID arbitration now resort frequently to the annulment procedure of Article 52 of the ICSID Convention. In the past three years, 17 annulment requests have been filed with several other such procedures pending. In addition, ad hoc
committees constituted pursuant to Article 52 have recently been decried for a spate of annulments of awards. Most commentators have regretted this series of annulments, criticizing ad hoc
committees for going too far in the direction of a full-fledged re-trial of the case, as if it was an appeal procedure, while the ICSID Convention only provides for limited annulment grounds.
This does not mean that resorting to annulment proceedings necessarily implies difficulties in enforcing the award, if it survives the challenge. However, the overall duration of proceedings is extended, and the finality of ICSID awards is also affected. Also, most ad hoc
committees take the view that, upon the request of a party, annulment proceedings result in the stay of enforcement of the challenged award. In most cases, ad hoc
committees have rejected requests by investors to lodge bank guarantees by the state requesting the annulment and obtaining the stay of enforcement. As a result, enforcement becomes next to impossible for the duration of the annulment proceedings, although this was not necessarily intended in the ICSID Convention.
In addition, it is important to note that adherence to the ICSID Convention does not waive the states’ sovereign immunity on matters of enforcement. Article 55 of the ICSID Convention is very clear in this respect: “Nothing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign State from execution.”
Finally, Argentina has made headlines in the past few years for refusing to comply with ICSID awards rendered against it, despite the clear provisions of the ICSID Convention. This country, faced with dozens of ICSID matters, is currently putting to the test the strongly worded provisions of the ICSID Convention by requiring investors to seek recognition and enforcement of the ICSID award before its national courts pursuant to Argentine law. While this “resistance” by Argentina is understandable given the large and accumulating total of the awards outstanding against it, the result has been to bar Argentina from sources of international finance, a result that will become increasingly onerous as time goes on. As a result, it appears unlikely that states less able to survive without access to international financial sources will be inclined similarly to flout the provision for automatic enforcement in the ICSID Convention.
Despite these difficulties, ICSID arbitration remains a very important risk management tool for any party contemplating investment in foreign jurisdictions.