Recognition and Enforcement of Decisions

Abstract

A key issue for any dispute resolution mechanism is the question of effectiveness of decisions. This is ensured by the fact that these are not only final and binding (see paras. 469 et seqq.), but also legally enforceable if necessary.

A key issue for any dispute resolution mechanism is the question of effectiveness of decisions . This is ensured by the fact that these are not only final and binding (see paras. 469 et seqq.), but also legally enforceable if necessary.

The distinction between recognition and enforcement of decisions has little practical relevance,¹ especially because due to international enforcement mechanisms such as the ICSID Convention ² or the New York Convention ,³ no separate recognition procedure (in the sense of a double exequatur) is required for enforcement.

This enforceability could theoretically be ensured by international institutions (for example, measures of the UN Security Council for enforcing judgments of the ICJ),⁴ but is usually guaranteed through the support of state courts.

The prevailing model in investment arbitration is the recognition and enforcement of awards through state courts in third countries according to the provisions of the ICSID Convention or the New York Convention. Both conventions state that arbitral awards are final and binding on the specific parties to the dispute and that they can be recognised and enforced also in other states which are a party to the treaty, but were not involved in the investment dispute.

In practice, it often occurs that losing state parties do not comply with their obligations resulting from awards ; in such cases, the prevailing party often has the only a chance to successfully enforce the award if the assets of the losing party are located in a third state and can be accessed there via an enforcement procedure. Therefore, it would be useful for the MIC to have its own procedure permitting enforcement in third countries as well as in other MIC states at least. In addition, it must be examined whether the MIC can be designed in such a way that its decisions are considered as arbitral awards within the meaning of the ICSID Convention or the New York Convention . This would have the advantage that MIC decisions would be directly enforceable in the already numerous state parties to the two conventions and no separate or new enforcement mechanism would have to be created.

ICSID awards enjoy a particularly high level of enforceability. According to the ICSID Convention, ICSID awards have to be recognised as binding and their monetary content (namely compensation and damages) has to be enforced in a manner equivalent to a last-instance decision of its own state courts by all (currently 163⁵) parties to the ICSID Convention.⁶ This means that a review as to whether the content of the specific ICSID award is in accordance with the ordre public or similar concepts has to be omitted. The only permissible restriction of enforceability is the law of state immunity in enforcement proceedings.⁷

In contrast, non-ICSID awards are governed by the provisions of the New York Convention (when enforcing it in one of the current 160⁸ parties to the Convention). Non-ICSID awards include arbitral awards under the ICSID Additional Facility Rules,⁹ via the UNCITRAL Rules, according to the Rules of the ICC,¹⁰ the SCC¹¹ or the LCIA.¹²

Although investment arbitration awards are sometimes assumed to be “anational” or “internationalised” awards which have not been necessarily made in the territory of a party to the treaty, as non-domestic arbitral awards they are—according to predominant opinion—¹³ at least subject to the New York Convention (see paras. 526 et seqq.).¹⁴

Meanwhile, it is also largely agreed that investment arbitral awards, despite their special character (which often includes a review of sovereign state activities), have to be considered as “commercial” disputes for those states who have declared a corresponding reservation (see paras. 530 et seqq.)¹⁵ to the New York Convention .¹⁶ In particular, some investment protection agreements explicitly state this interpretation.¹⁷

Furthermore, investment arbitration based on treaties, according to which there is no written ex ante arbitration agreement between the parties to the dispute, but rather arbitration based on a claim according to the provisions of the investment protection treaty,¹⁸ is in practice not an obstacle to the requirement of a written agreement under the New York Convention.^{19 , 20}

Similarly like the ICSID Convention , the New York Convention obliges all parties to the agreement to recognise and enforce arbitral awards.²¹ Enforcement may be rejected by the restrictions of sovereign immunity. In addition, Article V NYC states more far-reaching exceptions, according to which a conflict with the ordre public , the invalidity of the arbitration agreement (for instance due to legal incapacity of the parties or another lack of will), a violation of the right to be heard, lack of jurisdiction of the tribunal, a flawed constitution of the arbitral tribunal or a lack of binding legal force and/or the annulment of the arbitral award according to the lex arbitri or the law of the state of residence can lead to the refusal of enforcement.²²

Although enforcement under the ICSID Convention has the advantage that the awards do not have to withstand a review by the executing State, the New York Convention is considered as an effective and established enforcement mechanism as well.

A substantive revision of the award is only permitted to a very limited extent in both conventions and the successful claimant only has to have the award being declared enforceable in the state of enforcement. Another advantage of the conventions is that there is already plenty of court practice. The respective enforcement courts could thus be guided by their experience and parties could to a certain extent rely on past cases.

Accordingly, qualifying decisions of the MIC as arbitral awards within the meaning of the ICSID Convention or the New York Convention would be useful in terms of effective enforceability. That could have prompted the EU Commission to describe the decisions of the permanent investment courts in CETA, the EU-Vietnam IPA and the TTIP draft as arbitral awards within the meaning of the ICSID Convention.

In the following paragraphs, it will therefore be examined to what extent the decisions of a permanent MIC can be qualified as arbitral awards in the sense of the ICSID Convention or the New York Convention.

However, it has to be pointed out at the outset, that in both the enforcement regime of the ICSID Convention as well as the New York Convention, the national courts having jurisdiction over enforcement are responsible for the interpretation and application of the conventions. Most of the terms of the conventions are defined by national law. Hence, there is no consistent interpretation and enforcement practice worldwide. The national conflict-of-law rules and the lex arbitri may also have an impact on the outcome of the application of the convention through the national courts. For this reason, the following statements always have to be understood with the proviso that an attempted enforcement of an MIC decision could be very different, depending on the state in which it is handed down.

7.1 Decisions of the MIC as Arbitral Awards Within the Meaning of the ICSID Convention

The provisions of the ICSID Convention outlined above clearly refer to “arbitral awards under this Convention”,²³ i.e. in order to benefit from the particularly effective enforcement regime of the ICSID Convention, it has to be an ICSID arbitral award.

It seems impossible that decisions of a permanent MIC could be considered as ICSID arbitral awards . The ICSID Convention provides a specific method for constituting the panels, certain rules of procedure, the exclusion of legal remedies such as appeals and similarly only very limited review mechanisms in the form of annulment procedures and interpretation and revision of arbitral awards.²⁴ The approaches discussed above of designing an MIC and its decisions contradict all these conditions, which have to be fulfilled to qualify a decision as an ICSID award.

However, it would be conceivable to consider the decisions of the MIC as an ICSID award after inter se modification of the ICSID Convention, thus as a modification only between those involved and not between all parties to the agreement. According to the principles codified in the VCLT, an inter se modification of a multilateral treaty between various states which agree to do so, requires that the other parties to the agreement are impaired neither in their rights nor in their obligations and that the modification is not incompatible with the object and purpose of the treaty as a whole.²⁵

Regarding the ICSID Convention , a modification would probably not affect the rights and obligations of other ICSID States, such that the assessment of the permissibility of the modification depends on what the exact object and purpose of the ICSID Convention is. If the object and purpose of the ICSID Convention is to provide a dispute settlement mechanism between investors and states, which can be inferred from Article 1 para. 2 ICSID Convention and not the specific form of dispute resolution in force, a modification for MIC decisions is likely to be allowed.²⁶ However, this is not undisputed²⁷; but even if an inter se modification of the ICSID Convention would be considered admissible, the resulting decisions could not be qualified as ICSID awards, rather at best as arbitral awards for the modifying parties; only they would be obliged to enforce it.

Therefore, it would be better to consider a general revision of the ICSID Convention in order to achieve a far-reaching enforceability of MIC decisions as ICSID arbitral awards . The ICSID Convention requires the consent of all parties for a revision of the Convention. For practical reasons, this consensus is very difficult to achieve.²⁸ Hence, it makes sense to examine the alternative of whether decisions of an MIC can be considered as arbitral awards within the meaning of the New York Convention and thus are subject to its recognition and enforcement regime.

7.2 Decisions of the MIC as Arbitral Awards Within the Meaning of the New York Convention

The decisions of the MIC would have to be arbitral awards under Article I NYC²⁹ in order to fall within the material scope of application of the New York Convention.³⁰ There is no single definition of the term “arbitral award”. Neither the New York Convention, nor the UNCITRAL Model Law³¹ contain a legal definition. The characterisation of a decision as an arbitral award thus falls within the competence of the courts having jurisdiction over enforcement or the respective national legal systems.³²

However, some similarities can be inferred from literature and court decisions on the definition of arbitral awards. In any case, the principle of “substance over form” prevails: the mere designation of a decision as such does not automatically make it an arbitral award.³³

The four constituent elements of an arbitral award are: (1) a voluntary submission of the parties (2) to a legally binding final dispute settlement (3) by a non-state decision-maker (4) which is constituted by arbitrators selected by the parties. The importance of this last element is considered diversely.³⁴ As the question whether a decision is an arbitral award under the New York Convention ultimately remains within the competence of the respective national courts having jurisdiction over enforcement, the possible enforceability of an MIC decision can only be tentatively assessed here.

7.2.1 Voluntary Submission by the Parties

Article I para. 2 NYC states that decisions which are enforceable under the New York Convention include those “to which the parties have submitted”. This voluntary submission is considered to be a significant difference between arbitration and compulsory court jurisdiction.³⁵

Party autonomy in arbitration proceedings, which manifests itself in a voluntary declaration of submission , proves to be a particularly important element of an arbitral award. Whether it is sufficient for such a declaration of submission that the parties fall within the scope of application of an international investment agreement, which compulsorily provides an arbitral tribunal for the purposes of dispute settlement, is controversial. An MIC would constitute such a compulsory dispute resolution system; investors, who fall within the scope of application of the respective agreement which provides for the dispute settlement jurisdiction of the MIC, could file claims against states only under the MIC system, without the individual investors having ever agreed to the MIC’s authority.³⁶ Whether an MIC decision derives from the voluntary submission of the parties would thus be one of the key points for the issue of enforceability under the New York Convention.

It is indisputable that the conclusion of an IIA which includes a general, compulsory dispute settlement system fulfils the requirement of voluntary submission in regard to the state party.³⁷ If an investor would like to file a claim against the state on the basis of an IIA and not under national law, the investor submits itself to one of the proposed dispute resolution mechanisms by bringing the dispute to arbitration. If this dispute settlement mechanism is the ICSID Convention, the resulting award can, according to prevailing opinion, also be enforced through the New York Convention and not just through the ICSID Convention.³⁸

However, it is considered controversial in the context of the IUSCT whether an investor voluntarily submits itself as soon as it assigns the case to an arbitration tribunal and thus whether the submission element of an arbitration award according to the New York Convention is fulfilled. Since US or Iranian investors in investment disputes against Iran or the US may bring a case only before the IUSCT and not before domestic courts of the two states respectively, both literature³⁹ and courts⁴⁰ have considered that the lack of alternative dispute resolution options could undermine the voluntary nature of the submission.

However, in the few cases in which the New York Convention was used for the enforcement of awards of the IUSCT and the characterisation of the decision as an arbitral award was discussed,⁴¹ the courts in general came to the conclusion that the submission of individual investors can be replaced through the consent of the respective government to settle disputes through the IUSCT⁴² or that bringing the case before the IUSCT by the investor is a voluntary submission.⁴³

One opinion in the literature suggests that the voluntary nature of submission should be sufficient for enforcement under the New York Convention as long as investors still have the choice between settling disputes through an international arbitral tribunal or national courts.⁴⁴ This opinion can be justified by the fact that the submission of investors under ICSID proceedings is considered to be sufficiently voluntary for the characterisation as an arbitral award under the New York Convention.

Therefore, it would be more likely that national courts consider the element of voluntary submission to be fulfilled if the MIC should leave domestic jurisdiction accessible to investors.

7.2.2 Final and Binding Dispute Resolution

The fact that an arbitral award under the New York Convention must result in a final and binding resolution of the dispute does not present any problems in the case of MIC decisions.⁴⁵ Arbitration is a genuine alternative to national jurisdiction. In arbitration, the parties expect a binding decision by a third, neutral party in a court-like procedure.⁴⁶ In contrast to this are, for example, mediation procedures or simple arbitration reports, which do not lead to arbitral awards and therefore would not be enforceable under the New York Convention.

In any case, an MIC, which should undoubtedly have court-like features, would fulfil the requirement that a third, neutral party renders a final resolution of a given dispute in a court-like procedure.

7.2.3 Non-State Decision-Makers

Both national court decisions and prevailing opinion in the literature agree that an essential characteristic of arbitral tribunals is their private, non-governmental nature, which distinguishes them from courts or governmental institutions.⁴⁷

This raises the question of whether the MIC should be considered as a public or private entity. Some authors draw parallels to the ICJ and ECtHR to show that while a permanent investment tribunal would not be an institution of state justice, it would certainly not be a “private” entity.⁴⁸ Others refer to the IUSCT as an institution sui generis.⁴⁹

A solution would be to give the MIC sufficient “private” elements to classify it as an arbitral tribunal under the New York Convention. For example, a permanent judiciary might conflict with the characterisation as a private entity. However, a list of specific candidates used in the election procedure of the judicial bench could solve this problem.⁵⁰ Here, this element of arbitration overlaps with the fourth element—the arbitrators selected by the parties—which will be discussed below (see paras. 517 et seqq.).

The MIC is not likely to be a less private entity than the IUSCT, whose nature as a state or private institution has not been addressed during enforcement procedures under the New York Convention.⁵¹ In states which enforce decisions of the IUSCT as arbitral awards according to the New York Convention, this element should therefore not be a problem. In general, this third element cannot be evaluated independently, but rather can only be clarified from the overlap and elaboration of the other elements.

7.2.4 Arbitrator Selection by the Parties

The last element of arbitral awards is not consistently given the same degree of attention within the literature.⁵²

If the MIC were to be permanently established and regulated by the member states only and if these states elected the judges exclusively, while investors had no impact on that process, one could doubt the private nature of such an institution. This is also a significant difference to ICSID procedures, whose decision-makers are at least private: both parties to the dispute, the respondent state and the investor, have the same influence on the constitution of the arbitrator’s bench.

Again, an examination of the IUSCT can be useful here. Iran, the US and the state-appointed arbitrators each select one third of the nine arbitrators.⁵³ Consequently, only the states, but not the investors, have an influence on the decision-makers in the IUSCT. In the rulings on the enforcement of IUSCT awards through the New York Convention, this arrangement of the arbitrator’s bench was not problematic.⁵⁴

It is also frequently argued that a modern definition of arbitration does not require the arbitrators being elected by the parties, since the focus would lie on the voluntary submission of the parties, as has already been confirmed by some arbitral tribunals.⁵⁵

One possibility of making the MIC more tribunal-like would be to use ad hoc judges appointed by the investors in each case in addition to the permanent judges appointed by the states (see para. 174). This arrangement would create space for party autonomy and might bring the character of the MIC closer to that of arbitral tribunals.

7.2.5 Foreign, Non-Domestic and Anational Awards

The definition of another element of Article I para. 1 NYC is relevant to the question of whether decisions by the MIC would be enforceable under the New York Convention: only awards “rendered in the territory of another State” (“foreign”) and those “not considered as domestic” (“non-domestic”) fall within the scope of application of the New York Convention.

Foreign arbitral awards follow the principle of territoriality: an arbitral award is foreign, as long as it has not been rendered in the territory of the state of enforcement; if the state of enforcement has not declared the reservation of reciprocity in accordance with Article I para. 3 NYC, the New York Convention is applicable universally, irrespective of the state of origin of the arbitral award or of the parties.⁵⁶ According to the prevailing view, an arbitral award is “made” in the state of the seat of the tribunal.⁵⁷

Thus, the question arises as to whether a decision by the MIC would be foreign in the case where the host state of the MIC is not the state of enforcement at the same time. In the context of the principle of territoriality, which only deals with the statutory geographical position of the tribunal,⁵⁸ such an interpretation may well be conceivable.⁵⁹

Arbitral awards are non-domestic if they were rendered according to the principle of territoriality in the state of enforcement, but national law was not applied. However, the definition of that term, which falls in the competence of the national courts, does not seem to be of much importance for the enforcement of MIC decisions in light of the existing jurisprudence—relevant cases that may be non-domestic are usually referred to as “anational ” or “delocalised”. The examination of jurisprudence and literature reveals that the question of whether or not the decision was rendered under domestic or foreign law would not be problematic for the enforcement of MIC decisions, but rather whether the decision was based on any national law and whether basing the decision on national law would be necessary.⁶⁰

Some authors,⁶¹ and judges especially in France⁶² and the US,⁶³ claim that IUSCT-awards are enforceable as anational awards under the New York Convention.⁶⁴ In any event, as discussed above, ICSID awards (as a sort of a national arbitration awards) may be enforced through the New York Convention.⁶⁵ Within the literature, it is therefore argued that there is no reason why the arbitral awards of an international arbitral tribunal should not be enforceable under the New York Convention.⁶⁶

Another way of reading the New York Convention would be that the grounds for refusal of enforcement are listed in one article only: Article V NYC. It explicitly states according to which legal system the individual exclusion criteria should be assessed. Article V NYC furthermore recognises the distinction between the law “of the country in which, or under the law of which [the arbitration award was rendered]”,⁶⁷ which could be taken as an indication that an arbitral award does not necessarily have to be made under the law of a particular country. With that argument, the US court in the Gould case came to the conclusion that the New York Convention ratione materiae is also applicable to anational arbitration awards, since in Art. V NYC, and also in Article I NYC, it does not presuppose a national nature of the arbitration award.

7.2.6 Litigation Between Natural or Legal Persons

There is consensus (also confirmed by the travaux preparatoires and court decisions) that the term “legal person” in Article I para. 1 NYC also includes legal persons of public law, for example states and international organisations.⁶⁸ The interpretation of this term should therefore not be a problem in the context of the enforcement of MIC decisions.⁶⁹

7.2.7 MIC as a “Permanent Arbitral Body” Under Article I Para. 2 NYC

Article I para. 2 NYC explicitly states that “not only awards made by arbitrators appointed for each case but also those made by permanent arbitral bodies to which the parties have submitted” are enforceable under the New York Convention.

Arbitral institutions such as the ICC,⁷⁰ the Arbitration Institute of the Finnish Central Chamber of Commerce⁷¹ and the Singapore International Arbitration Centre (SIAC),⁷² have already been subsumed under Article I para. 2 NYC as permanent arbitral bodies .⁷³ In the Gould case the IUSCT was regarded as a permanent arbitration tribunal under Article I para. 2 NYC. In any event, Article I para. 2 NYC makes it clear that the permanent existence of the MIC does not pose a problem for the enforceability of a decision according to the New York Convention.

7.2.8 Reservation on “Commercial Matters” Under Article I Para. 3 NYC

Under Article I para 3, the New York Convention explicitly provides two reservations that states may declare.⁷⁴ Many Member States have declared, by accession to the New York Convention, through a reservation under Article I para. 3 NYC, that they only enforce arbitral awards arising out of disputes over commercial matters under the New York Convention.⁷⁵ For this reason, it is equally relevant to the practical enforceability of MIC decisions under the New York Convention to identify which cases are considered to concern “commercial matters”. In concreto, the question arises as to whether “commercial matters ” can be construed as including investment disputes between states and investors or only matters of international commercial law between private individuals.

According to Article I para. 3 NYC, the definition of “commercial matters ” depends on the national law of the reserving state. Thus, until now, reservations on commercial matters have been interpreted widely by national courts; legal disputes between states and investors under an investment agreement have been subject to the same criteria for the classification as commercial matters as those between private individuals.⁷⁶ For example, the US has declared a reservation for commercial matters.⁷⁷ However, in cases concerning the enforcement of decisions by the IUSCT under the New York Convention in the US, this reservation has not been addressed. Therefore, it can be assumed that investment disputes between states and investors are also covered by the term “commercial matters”.⁷⁸

In any event, Canadian courts have acknowledged NAFTA investment awards under Chapter 11 NAFTA as awards concerning “commercial matters ” as defined by the UNCITRAL Model Law.⁷⁹ Furthermore, the Swedish Svea Court of Appeal has recognised the award in the case CME v. Czech Republic ⁸⁰ as “international commercial arbitration”.⁸¹

A possible reservation on commercial matters would therefore presumably not per se preclude enforcement of an MIC decision under the New York Convention.

7.3 Recognition and Enforcement of Decisions of the MIC

It follows from the preceding analysis that the enforcement of MIC decisions in third countries would not be possible through the ICSID Convention since its decisions do not constitute ICSID arbitration awards, due to the fact that the MIC and its procedures are designed in a manner differing from the ICSID Convention.

An enforcement according to the New York Convention would be legally conceivable; nevertheless, successful enforcement depends on the perspective of the specific national court having jurisdiction over enforcement. This can lead to divergent results, depending on the legal system. The main difficulties in recognition and enforcement of MIC decisions as arbitral awards could be the issue of “voluntary submission” to the MIC by both parties and the controversial enforceability of “anational decisions”.

Due to the legal uncertainty as to whether MIC decisions can be qualified as arbitral awards—whether according to the ICSID Convention or under the New York Convention—the best solution seems to be the imposition of an obligation to enforce within the MIC Statute, analogous to the provisions of the ICSID Convention. For the moment, this would mean that only the parties to the agreement would be bound by the MIC Statute. However, later on, with a wider acceptance of the MIC, this solution should be legally unequivocal.

Besides, a fund system could be set up in addition to an autonomous enforcement mechanism provided for in the MIC Statute. The IUSCT followed an interesting approach to ensure the enforcement of decisions of this tribunal. After the conclusion of the Algiers-Agreement, US$1 billion of Iranian assets in US bank accounts at the time of the hostage crisis after the storming of the US Embassy in Tehran in 1979 was paid into a “security account” as a fund for the satisfaction of US claims resulting from IUSCT decisions.⁸² In addition, Iran has been obliged to make additional payments to this account, so that the account balance never falls below US$500 million. Iran itself has had no access to this security account and therefore had to go through regular enforcement channels; however, Iran has so rarely been awarded damages that the bias of the IUSCT enforcement mechanism can be neglected.⁸³ Nevertheless, this enforcement mechanism has proven to be very efficient, which also explains the rarity of execution attempts under the New York Convention.⁸⁴ Certainly, it would not be easy to set up a comparable instrument for the MIC. Nevertheless, it would be worth considering the extent to which it would be possible to set up a fund for the settlement of claims for compensation arising from MIC decisions.

In this respect, one way of ensuring the prompt and effective enforcement of MIC judgments would be that the MIC members make a deposit into a fund . It should be determined whether the amount of the payment should be based on the member’s economic situation or whether all members should make equal payments. One argument against the latter alternative is that countries with higher economic output may benefit more from an MIC, since in absolute terms higher investments are likely to be made by investors in these countries. However, it cannot be assumed that the volume of foreign investments is directly proportional to the number of investment cases. Moreover, since the possible amount of damages for an MIC decision is not based on the economic strength of the respective state, economic performance as a basis for the financing of the fund does not seem to be an appropriate criterion.

The compensation of damages up to a certain maximum amount could immediately be paid from this fund to the winning investor. In that regard, a cap on the payout sum could be stipulated. In any case, the fund volume should never fall below a certain minimum sum; with 40 or more members, a sum in the single-digit millions of each member should be sufficient to keep the fund operational. At least, such a fund system could be used by SMEs as a special system of enforcement, so that their claims can be satisfied as soon as possible. The claim from the MIC judgment against the MIC member would then be transferred to the MIC itself.

Enforcement in the MIC system and the fund system should not be mutually exclusive. However, it could be considered that recourse to the fund system would only be possible if other forms of enforcement prove to be difficult.