International Arbitration Enforcement

CENTRE FOR ENERGY, PETROLEUM AND MINERAL LAW AND POLICY

PROGRAMME: LL.M IN PETROLEUM LAW AND POLICY

COURSE: INTERNATIONAL ARBITRATION

STATES AND STATE ENTITIES: HOW ARE ARBITRAL AWARDS ENFORCED AGAINST THEM?

ABSTRACT: As number of international commercial arbitration expands the enforcement of arbitral awards increases but there are instances of awards not being paid for, voluntarily in some issues. A perceived advantage of international arbitration as compared with litigation is the transportability of arbitral awards under the Convention on the recognition and enforcement of foreign awards 1958- New York Convention or under the Washington Convention on the settlement of investment Disputes 1965- the ICSID Convention. This paper examines how arbitral awards can be enforced against States and State entities in the event of non- compliance and what redress is there if the unsuccessful party fails to pay, in particular if that party is a state. Then it will go ahead to look at the grounds of annulment as set out in Article 52(3) of the ICSID Convention.

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ABBREVIATIONS

AAA American Arbitration Association

IBA International Bar Association

BIT Bilateral Treaties

MIT Multilateral Treaties

ICC International Court of Arbitration

ICSID International Centre for Settlement of Investment Disputes

LCIA London Court of International Arbitration

UNCITRAL United Nations’ Commission on International Trade Law

WC Washington Convention

ECHR European Convention on Human Right

UNCREFA United Nations Convention on the Recognition and Enforcement of Foreign

Awards

UNCTD United Nations Conference on Trade and Development

FCN Friendship Commerce and Navigation

CHAPTER ONE

INTRODUCTION

A distinguished advantage of international arbitration as compared with litigation is the beatification of arbitral awards under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958(the New York Convention) or under the Washington Convention on the settlement of investment Disputes submitted to arbitration there under.

International arbitration has vastly developed business disputes as well are not left out with the globalization of business and the growth in international trade and investment around the globe. The attraction of international arbitration to parties from different countries and different cultures rests in the promise it offers for fair, efficient and settlement of their business disputes. As business increases, so are disputes arising every day in complex international transactions and investments. The Model Law has provided the need for national legislation in many countries, and has as well become the standard to judge the national legislation towards their acceptance to international arbitration as an alternative to national court jurisdiction for the settlement of international business disputes.

However, the ICSID Arbitration Rules which was first adopted in 1967 and revised in 1984 for international investment disputes involving member States. Under the Convention, the Contracting States takes an ICSID arbitral award as if it were a final judgment of a court in that State (article 52) and such an award can only be set aside by a three man committee which will be appointed by the Chairman of ICSID’s administrative council.

Meanwhile, New York Convention applies to arbitral awards rendered in a state other than the state where enforcement is sought it could be also known as foreign award by the enforcing state. At the time of its adherence, a member state can restrain and exclude the application of the convention to awards especially to those states that are not members of the Convention. It will also consider a situation where a State has entered into force but not passed through parliament. Can award be enforced?

“Most arbitral awards are voluntarily complied with and do not require judicial enforcement. It is only if an arbitral award can be adequately enforced, however, that a successful claimant can ensure that it will actually recover the damages awarded it”. Fortunately, as the courts have noted, there is an “oft-stated federal policy, embodied in the Federal Arbitration Act, 9 U.S.C. §1 et. seq., favouring the enforcement of arbitration agreements and the confirmation of arbitration awards.” Courts in the United States pursue a consistent, well articulated policy of recognizing and enforcing awards in both domestic and foreign arbitrations; in fact, arbitral proceedings are recognized and enforced in U.S. courts more readily than are foreign judgments.

The 1975 Inter- American Convention has been the principal source of authority in the recognition of foreign awards on International Commercial Arbitration in the United States.

However, this paper will go ahead to examine how an arbitral award can be enforced and what redress will be available if the unsuccessful party refused to pay, especially when the party is a state. The Legal frame work- the New York Convention and the ICSID Convention. It will go further to analyse the sovereign immunity due to a state, the public policy exceptions and annulment as well as the delay tactic to the award.

CHAPTER TWO

THE LEGAL FRAME WORK

2:1 New York Convention

The New York Convention came into force in 1958 and about 137 countries are contracting members, an awards made in the territory of any contracting state other than the one in which enforcement is sought (Article 1(1). Under Article 1(3), a contracting party can opt for the reciprocity reservation, whereby it will only apply the Convention to arbitral awards made in another contracting state.

The contracting states are suppose to recognise the award in Article 111 as binding and enforce it along side its domestic rules of procedure. The opposing party can challenge the enforcement of awards on a limited grounds and this can be seen in Article V (1) of the New York Convention and are listed below:

i) When the party is not capable or the arbitration agreement is invalid;

ii) when it has not followed the due process;

iii) when an award is set aside or not binding in the country where it was made;

iv) when the arbitral procedure and the composition of the arbitral tribunal is irregular.

However, a court can as well set aside enforcement on the grounds of public policy; this can be seen in Article V (2) of the New York Convention.

However, the New York Convention in Article VII.1 states that “the provisions of the present Convention shall not affect the validity of multilateral or bilateral agreements concerning the recognition and enforcement of arbitral awards entered into by the contracting states nor deprived any interested party of any right he may have to avail himself of the treaties of the country where such award is sought to be relied upon.”

This means in practice that, when it becomes necessary to enforce an arbitral awards in one or more states in which the losing party has (or is thought to have assets, it is wise to consider:

-whether, apart from the New York Convention, there exist any bilateral treaties under which recognition and enforcement of the award may be sought , on more favourable terms; and

-whether, irrespective of any treaties or conventions, the provision of the local law are themselves more favourable to the enforcement of international arbitral awards.

2:2 ICSID Convention

The ICSID arbitration involves a state as a party though the convention is subject to public policy as well as to domestic immunity. ICSID Convention excludes the application of national law and provides a detailed procedure for investment arbitration. Under ICSID Convention, there are about 143 parties. The international Centre for Settlement of investment Dispute administers legal disputes between states and foreign investors. National Law in most cases are not applicable in ICSID because there is no seat or place of arbitration in ICSID.

The ICSID Convention though acknowledged the existence and does not derogate from the law in force relating to the immunity of the state from execution though domestic law in any ICSID contracting state remains under negotiation. The ICSID Convention enforcement of award expects every contracting state under ICSID Convention to accept the award as if it were a final judgment of a court in that state. This is to say that enforcement of an ICSID award cannot be challenged in the courts of the enforcement country, save on the grounds of sovereign immunity. In Societe Ouest Africaine des Betons Industriels –v- State of Senegal, the French Cour de Cassation affirmed unequivocally that public policy (international or otherwise) was not an issue that the judge should consider when dealing with enforcement of ICSID awards.

CHAPTER THREE

SOVEREIGN IMMUNITY

Problems are most likely to arise when a winning party attempts to enforce and execute its award against a state or state entity.If the state concerned wishes to evade its obligations it may do so by claiming immunity from execution.A State is bound to comply with the treaties it has ratified.

“The Paris Court of Appeal noted that Article 24 of the said Rules merely contains an undertaking to voluntarily enforce the award and to recognize its binding nature, but does not include any reference to the issue of immunity”. “However, the opposite view was adopted in 1996 by the Court of Appeal of Rouen, which held that by submitting to arbitration (an ad hoc arbitration in that case), a State accepts the common rules of international trade and, thereby, waives its immunity from jurisdiction and – as required by good faith – from execution”.

However, the defences to recognition and enforcement of an international arbitral award, which are laid down in the New York Convention and the model law, have been considered. There is one standard form of defence, however, that is not mentioned in the convention or the model law but which may be encountered in practice. This is where the unsuccessful party is either a sovereign state or a state agency. This is the defence of sovereign immunity as it is sometimes known; and in essence, it means that a sovereign state cannot be compelled to submit to the jurisdiction of another state. “The sovereign was a definable person, to whom allegiance was due. As an integral part of this issue, the sovereign could not be made subject to the judicial processes of his country. It was only fitting that he could not be sued in foreign courts. “For private parties, being confronted with the last but often insurmountable obstacle of the State’s immunity from execution is obviously intolerable, and the scope of the State’s privilege may indeed be considered as excessive when the State has agreed to submit to arbitration and thereby to recognize the binding nature of the award.” However, once again, the method used by the French Court de Cassation in Creighton v. Qatar to circumvent the State’s immunity by means of an implied waiver is unconvincing and may have undesirable consequences.

“Although submission to arbitration implies that the parties recognize the binding nature of

the award and that they undertake to carry out their obligations there under, it is a matter

of a different order for a sovereign State to waive its immunity from execution”, thereby

submitting to enforcement measures on any of its assets by the authorities of any State

where enforcement may be sought.

Parties are to carry out the award that is binding on them without delay, this is stipulated in a clause in Article 24-2 (now Article 28-6) of the ICC Rules.

“What may have been decisive in Creighton v. Qatar is the fact, relied upon in Creighton’s

briefs, that Article 24 refers to the “enforceability” (caractère “exécutoire”) of the award”.

This is indeed the case, but it is only referred to in the title of Article 24 (“Finality and

Enforceability of award”) in practice, it shows that an award cannot be enforced without

State court’s intervention.

However, in a very recent case decision on the 10th August, 2000 (in, Embassy of the Russian Federation et al. v. Compagnie Noga d’importation et d’exportation), the Paris Court of Appeal made an interesting distinction. In that case, the State had signed not only an arbitration clause (Stockholm Chamber of Commerce), but also an express waiver “of any

right of immunity.” Nevertheless, the Court of Appeal held that such waiver did not

extend to the diplomatic immunities from execution guaranteed by the 1961 Vienna

Convention and by customary international law.

3:1 PUBLIC POLICY EXCEPTION

The principle of violation of public policy of the enforcing state in Article V.2 of the New York Convention and Article 36 of the UNCITRAL Model Law has long been grounds for refusing foreign awards enforcement and judgement.

Article V (2) (b) of the New York Convention entitles a court to refuse recognition and enforcement of an arbitral award if it would be contrary to the public policy (or ordre public) of the country in which it is sought.

Public policy varies from State to State and is enshrined with unpredictable definition. This encourages the unsuccessful party in the arbitration to resist enforcement of the award on grounds of public policy.

However, the public policy grounds for refusing enforcement are narrow and such challenges rarely successful.For example, an award requiring payment under a contract for assistance in obtaining a government contract in Algeria was enforced by the English Commercial Court, notwithstanding that the contract breached Algerian law.The English court found that there were no public policy grounds on which enforcement of the award could be refused, because the Swiss arbitral tribunal’s express finding that there had been no bribery or corrupt practice was “unchangeable”.The English court considered that whilst a tribunal applying English law might have arrived at a different conclusion,as a matter of policy of the upholding of international arbitral awards” the award should be enforced.In the United States, ‘enforcement of foreign arbitral awards may be denied on the basis only where enforcement could violate the forum state’s most basic notions of morality and justice’. Thus, the public policy defence is rarely invoked successfully in the US courts.Accordingly, a narrow reading of the public policy defence has been applied by the US courts, in line with the purpose of the New York Convention to remove obstacles to the enforcement of foreign arbitral awards.

3:2 ANNULMENTS

3:2:1 A delaying Tactic for ICSID Respondents?

In ICSID arbitration, there are grounds by which an annulment can be allowed and this is stipulated in Article 52(3) of ICSID Convention. These grounds are listed as follows:

i when the award could not state clearly the reason upon which is made;

ii when corruption is detected on the part of a member of the tribunal;

iii when the fundamental rule of procedure is not adhere to strictly;

iv when the tribunal is poorly constituted; or

v when the tribunal exceeds its powers.

Once the ad hoc committee detects any of the issues above, the dispute will be reheard by new ICSID tribunal. However, the application for annulment must be submitted within a specific time limit to the Secretary General of the committee. Upon receipt of the request the Chairman of the Administrative Council must forthwith appoint an ad hoc committee of three persons(which cannot include any member of the relevant tribunal or any national of the same nationality as either of the parties to the dispute or any tribunal member) to determine the annulment application. The annulment procedure can be used by an unsuccessful party as a delay tactic for an ICSID arbitration award. See the of CMS –V- Argentinawhere Argentina was successful in obtaining a continued stay of execution. The award boarders on economic crises which led to the repeal of currency convertibility laws and adoption of ‘pesification’ in early 2002. However, CMS argued that the provisional stay of enforcement in Argentina’s favour should not be continued ‘unless Argentina provides adequate assurance (such as the provision of an irrevocable and unconditional bank guarantee in favour of CMS) as to the payment of the award, should its application for annulment fail’.

3:2:2 Adjournments under Article VI of the New York Convention

Under Article VI of the New York Convention, enforcement of an arbitral award in any contracting state may be adjourned if the arbitral award is the subject of annulment proceedings in the courts of the seat of the arbitration.A court adjourning its decisions on enforcement under Article VI may order the party against whom enforcement is sought to give suitable security. Though, an annulment procedure is not provided in ICSID arbitration, the parties to commercial arbitration can apply for annulment in the court of the seat of arbitration. The enforcement of arbitral award could be delayed by this method.

CHAPTER FOUR

BILATERAL TREATIES

A number of nations have entered into bilateral treaties dealing principally or incidentally

with international arbitration.The United States has included an article relating to arbitration in many of its bilateral Friendship, Commerce and Navigation (“FCN”) treaties. However, the party seeking enforcement must satisfy three conditions: first, the other party must be a citizen of a signatory country; second, the award must be “final and enforceable” according to the laws of the country where it was made; and third, enforcement procedures must be brought before the proper court. A typical FCN treaty states that award must be enforced unless it contravenes the public policy of the forum. The enforcement of this provision by U.S. courts has been liberal. A valid foreign arbitral award has been in practice in U.S. even when there is no specific enforcement provision in the contract, nor convention or treaty in existence. Over the years, the practice of liberally enforcing foreign awards has been followed in cases in which jurisdiction over the U.S. party was properly obtained abroad.Generally stated, a U.S. court will enforce a foreign arbitral award if it is rendered in compliance with the law of the state where awarded. In one Latin American case, however, the court refused to enforce an award made in El Salvador on the basis that notice was insufficient under El Salvadorean law.

CHAPTER FIVE

CONCLUSION

Parties typically contract to arbitrate disputes in order to avoid the courts and to maintain

amicable and confidential relationships with their commercial partners.As noted at the outset, successful claimants must be certain that they will be protected and that an award can be adequately enforced. The clear pro-enforcement policy underlying the various conventions, treaties and judicial decisions referred to in this research should provide comfort to commercial contracting parties and ensure that arbitration continues to gain in popularity as a method of dispute resolution.

However, international arbitration is both a cause and an effect of the growth of international business – a cause, in that the existence of a fair and equally accessible system of dispute resolution is a factor reducing the risks of the transaction and therefore is a positive incentive in deciding whether to enter into a given transaction in the first place, and an effect, in that the growing volume of business and the increasing number of participants inevitably spawn an increasing number of disputes.

In a perfect world, where things are expected to go right, a properly rendered award should be respected. However, in our world of today, judgment debtors choose to ignore the awards for flimsy reasons. But their attitude towards award binding on them should and must stand; especially when the award is properly rendered it should be legally binding and enforceable both at the place and where the judgment debtor has assets. The New York Convention on the Recognition and Enforcement of International Arbitral Awards strives and adopted by so many countries, including Kazakhstan. It has gone a long way towards maintaining a standard to meet up with the provision provided in the Convention. Though, not all the state contracted to the Convention has been able to live up to the standard of the provision of the Convention. For instance: Russia has been a state where most cases are being frustrated on the grounds of public policy.

However, in most cases and in most jurisdictions, the Convention has been interpreted in a manner favourable to the recognition of arbitration awards. Indeed, according to a study made a few years ago covering a 22 year period through 1999, it appears that enforcement of foreign awards under the Convention has been granted in 90% of the total number of cases.

REFERENCE LIST

1.1. PRIMARY SOURCES

ICSID Convention, Regulations and Rules, 2006.

Washington Convention, 1998.

New York Convention 1958.

The law implementing the Convention (222USC paras.1650-1650a).

The European Convention on State Immunity 1972 (Articles 20 and 23).

United Nations Convention on the Regulation and Enforcement of foreign Arbitral Awards.

London Court of International Arbitration Rules.

International Court of Arbitration Rules.

1.2. SECONDARY SOURCES

BOOKS

Alan Redfern, and Hunter, M., Law and Practice of International Commercial Arbitration, Sweet & Maxwell, London, (1999).

Lew, D.M., Mistelis, L.A. and Kroll, S.M., Comparative International Commercial Arbitration, Kluwer Law International, (2003).

Redfern., A., and Hunter., M., Law and practice of International commercial Arbitration,

Sweet & Maxwell, London, (2004).

Bernini., and Van den Berg The Enforcement of Arbitral Awards against a State

“the Problem of Immunity from Execution”, in contemporary Problems in International Arbitration(Lew ed.,1986),p.359.

Oxford Dictionary of English, Oxford University Press, 2003.

1.3. CASES

Shearson/American Express, Inc., v. McMahon, 482 U.S. 220, 226 (1987).

Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp, 460 U.S. 1, 24 (1983).

Whirlpool Corp. v. Philips Elec., N.V., 848 F.Supp. 474, 478 (S.D.N.Y. 1994).

Wall Street Assocs., L.P. v. Becker Paribas, Inc., 818 F.Supp. 679, 682 (S.D.N.Y. 1993), aff’d, 27 F.3d 845 (2d Cir. 1994).

Cass. Ci v.1re, translated in 30ILM1167.

SOABI v. Senegal (1991)2 American Review of International Arbitration 354.

Islamic Republic of Iran et al. v. Eurodif et al., April 21, 1982, RCDIP 1983.101note Mayer, JDI 1983.145, note Oppetit.

Paris Court of Appeal (1st Ch. A), Case No. 2000/14157 (unpublished).

Omnium de Traitement et de Valorisatin SA v. Hilmarton Ltd (1999)2 All ER (Comm.) 146.

Regazzoni v. K.C. Sethia (1944)Ltd(1957)3 All ER 286 at 289.

Parsons & Whittemore Overseas Co. V. Socie’te’ Ge’nerale de l’lndustrie du Papier, 508F.2d 974(2d Cir.1974).

CMS v. Argentina (2006) ARB/01/81.

Landegger v. Bayerische Hypotheken and Wechsel Bank 357.supp.692(S.D.N.Y 1972).

1.4. ARTICLES

Saunders. M., & Solomon., C., Enforcement of arbitral awards against states and state entities,Vol.23,no.3 LCIA,2007.

BORN.,G., International Commercial Arbitration in the United States at 460(1994).

McLaughlin., J., Enforcement of Arbitral Awards under the New York Convention: Practice in U.S. Courts, International Commercial Arbitration at 275, 277 (1988).

Muller., R., Law on the New York Convention (2003)21 ASA Bulletin, unpublished.

Van de Berg, “Refusals of Enforcement under the New York Convention of 1958: The unfortunate Few”, in Arbitration in the next Decade-special supplement 1999, ICC International Court of Arbitration.

1.5. OTHERS

INTERNET

Oil, Gas &Energy Law Intelligence, Public Policy and the Enforcement of Arbitral Awards: Should there be a Global Standard? http://www.gasandoil.com/ogel/samples/freearticles/article_67.htm (last visited on 30 April 2008).

Enforcement of Arbitral Awards against Sovereign States: A new Milestone: Signing ICC Arbitration Clause Entails waiver of Immunity from Execution. Mealy’s international Arbitration Report, September,2000. Vol.15.no.9. http://www.salans.com/fileserver.aspx?oID=380&IID=o (last visited on 27 April 2008).

Enforcement of foreign Awards Acts 1996, chapter E-9.12of the States of Saskatchewan, 01/11/1996. Justice and Attorney General Government. http://www.justice.gov.sk.ca/Enforcement-of-foreign-Arbitral-Awards-Act-1996 (last visited on 2 May 2008).

Bishop., D., and Martin., E., Enforcement of Foreign Arbitral Awards http://www.kslaw.com/library/pdf/bishop6.pdf (last visited on 2 May 2008).