Enforcement of Investment Arbitration Awards in the Context of Protectionism and Backlash
By: Christy Chidiac
Geopolitical context and international arbitration are intertwined. Contemporary political events illustrate an undeniable retreat of the most developed nations towards protectionism. In reaction to Brexit, many commentators concluded that enforceability of international commercial arbitration awards is safe thanks to the applicability of the New York Convention. Conversely, even if the enforcement of ICSID investment arbitration awards is automatic due to Article 54 of the ICSID Convention, its execution may depend on States willingness to render it efficient through the diverse applicable national laws on immunity from execution. After all, this decision falls within States sovereignty, and at the heart of States decisions, lies public opinion. Public disapproval towards globalization goes hand in hand with the growing mistrust for foreign investment and investment arbitration, as showed by the European protests to the recourse of Investor State mechanism as part of the TTIP or CETA. In this context, arbitration mechanisms are related to globalization and corporation’s governance, hence the fundamental risk is that limitations on arbitration may become popular. As Professor David Caron Caron asserts, State acts to reform the investment treaty regime are a response to, or even a form of, backlash against that regime. Procedural reforms of investment arbitration in the past fifteen years focused on an increase of transparency, including possibilities for public hearings, and publication of arbitral documents. Additional substantive reforms also took place, with more detailed treaties provisions. Moreover, commercial arbitration is not immune from the risk of growing mistrust, as it may adjudicate for illegal activities for instance, under protection of confidentiality. These observations raise questions about the possibility of rendering international arbitration more democratic. Moreover, may public opinion and political context not only affect the transparency but also the efficiency of international arbitration mechanisms? If so, how should the effects of contextual fluctuations on arbitration efficiency be countered? The recent evolution of French legislation illustrates these issues.
Limitations on execution of ICSID arbitral awards
The ICSID Convention departed from the New York Convention’s recognition and enforcement procedure as it established an automatic system with no judicial review. Article 54 of the ICSID Convention requires each contracting State to recognize and enforce the pecuniary obligations in an ICSID award as if it were a final judgement of a court in that State. However, articles 54 (3) and 55 provide that even though State Parties to the ICSID Convention have waived immunity from jurisdiction, they have retained their immunity from execution as a matter of national law.
The United Nations Convention on Jurisdictional Immunities of States and their Property 2004 (the 2004 Convention) aims to enhance legal certainty and contribute to the harmonization of practice in the law on state immunity. France is a signatory to the 2004 Convention; however, it is not yet in force as the minimum number of signatories has not been reached. Absent uniform rules on execution such as those established by the 2004 Convention, the difference in national laws on state immunity from execution is suitable to forum shopping, which frustrate the ICSID Convention’s objective of offering an effective mechanism for the recognition and enforcement of arbitral awards. For now, the law of state immunity remains more a matter of comparative law then international law.
The Loi Sapin 2 restrictions on enforcement of arbitral awards
Article L.111-1-1 of the French Code of Civil Procedure for Enforcement now provides that enforcement measures relating to property belonging to a foreign State may be authorized only if the following cumulative conditions are met:
The State has expressly consented to the application of such measures;The State has reserved or assigned the property to the requesting party;Where a judgment or arbitral award has been made against the State concerned and the property in question is specifically used or intended for use by that State otherwise than for the purposes of public service;There is a relationship with the State entity against which the proceedings were instituted.
Furthermore, the Loi Sapin 2 introduced new restrictions relating to the enforcement of a claim against a foreign State on the initiative of the holder of a debt obligation (Article L. 213-1 A of the French Monetary and Financial Code) or any instrument or right with characteristics similar to a debt instrument (Article L. 211-41 of the same Code). These provisions are to prevent abusive proceedings from hedge funds acquiring claims against States in financial difficulty.
Most importantly, Loi Sapin 2 goes further than the 2004 Convention through introducing a new authorization procedure, which is necessary for any interim or compulsory enforcement action against property of a foreign State. This new procedure is intended to provide a filter for abusive creditor claims. It requires the creditor to seek an order from the court for an interim or enforcement measure against the foreign State. The order will be granted at the discretion of the court, which assesses the matter ex parte, to avoid concealment of the property. The burden is on the creditor to demonstrate that the property concerned is suitable for seizure. This new step restricts the enforcement of arbitral awards, and will certainly lengthen the time involved and introduce uncertainty in the recovery of claims against a foreign State.
To summarize, the new law aims to (i) clarify the changing case law on immunity from execution in France, from which could rise diplomatic disputes (ii) prevent abuse from hedge funds acquiring claims against States in financial difficulty. As to the third aim, concerning the authorization procedure, it should be noted that this reform intervenes (i) after the Yukos award of July 2014 granting 50 billion dollars to former shareholders of the company against Russia (ii) while seizure attempts are taking place in France against Russian properties, and a Russian diplomatic note was addressed in this regard to the French embassy.
To conclude, the provisions of Loi Sapin 2 should be considered when drawing up State immunity waiver clauses in contracts between private operators and host States. The new law complicates the execution procedure required to recover debts against foreign States, requiring prior auditing of claims and an analysis of the geopolitical situation of the concerned State. It shifted French law from investor-friendly to more protective of States assets. Indeed, French law shifted from a flexible one allowing forum shopping, to a restriction that goes even further than the 2004 Convention. Hence, the welcoming of enforcement of investment arbitration awards, and thus, efficiency of Investor-State dispute mechanism is restricted in France. It contrasts with the difficulty to challenge enforceability of commercial arbitration awards. This new law may be part of the States geopolitical situation and tendency to reform investment arbitration in response to backlash, especially considering diplomatic relations with Russia or the European protests on investment arbitration. It reflects how states sovereignty, which includes the safeguard of diplomatic relations and democracy, has a growing importance in the context of protectionism. How to limit the effects of contextual fluctuations on arbitration efficiency? Certainly, by giving effect to the 2004 Convention.