Federal Court of Australia clarifies recognition and enforcement of foreign arbitral awards

In a unanimous decision (accessible here), the Full Federal Court of Australia has allowed (on a limited basis as explained below) an appeal by the Kingdom of Spain of the Federal Court decision in Eiser Infrastructure Limited v Kingdom of Spain [2020] FCA 157 (Eiser). The decision at first instance had allowed the recognition and enforcement of two awards issued in investor-state arbitrations conducted under the rules of the International Centre for Settlement of Investment Disputes (ICSID) (ICSID case numbers ARB/13/31 and ARB/13/36).¹

The Full Court’s decision clarifies the difference between recognition of an award and its enforcement,² and the implication of both on whether foreign states (such as the Kingdom of Spain) are immune from ICSID awards in Australia.

The result is that while awards may be recognised irrespective of whether the award is made against a state or private party, its enforcement will be subject to the rules of foreign state immunity against execution of awards against States.

This is the second set of decisions involving the enforcement of an ICSID award against a foreign state in Australia (the first being Lahoud v The Democratic Republic of Congo [2017] FCA 982 (Lahoud)). In Lahoud, issues of foreign state immunity were not raised (and so the award was enforced).

The decision – that while the award can be recognised, its enforcement is still subject to Spain’s immunity from execution – is significant for investors who might have considered the possibility of enforcing ICSID awards in Australia against a state that has assets in the jurisdiction.

Background

In arbitrations before ICSID Tribunals, certain investors in solar power and renewable resources projects successfully obtained awards against Spain under the fair and equitable treatment provisions in Art.10(1) of the Energy Charter Treaty, as a result of certain changes in the Spanish regulations applicable to renewable energy projects.

The investors sought recognition and enforcement of the awards in the Federal Court of Australia. At first instance, before a single judge of the Federal Court, Spain argued that it had foreign state immunity under section 9 of the Foreign States Immunities Act 1985 (Cth) (Immunities Act). The judge found, however, that as a Contracting State to the ICSID Convention, Spain had consented to the designated courts of other Contracting States, including Australia, recognising and enforcing arbitral awards against it. Accordingly, it had waived any right to claim immunity under the Immunities Act in such cases.

The judge :

1. granted leave for the investors to ‘enforce the [ICSID award]’; and
2. ordered the Kingdom of Spain pay the pecuniary penalties of the awards plus interest (being €128,000,000 and €101,000,000).

Spain appealed to the Full Federal Court of Australia on 20 March 2020.

The case before the Full Court

Spain maintained its argument from the trial that it was entitled to foreign state immunity under the Immunities Act. Simplifying matters, the Full Court established that:

3. the procedure for recognition of an award is not subject to the Immunities Act;
4. however, enforcement of an award following recognition is subject to a sovereign state’s rights of immunity from execution under the Immunities Act.

The Full Court noted that its consideration turned on the ‘linguistic or semantic’ differences between ‘recognition’ of an award on the one hand, and ‘enforcement’ and ‘execution’ on the other. The difference was outlined by the Full Court as follows:

Simplistically, recognition refers to the formal confirmation by a municipal court that an arbitral award is authentic and has legal consequences under municipal law.  Enforcement goes a step further.  It refers to the process by which a successful party seeks the municipal court’s assistance in ensuring compliance with the award (as recognised) and obtaining the redress to which it is entitled.  Execution refers to the formal process by which enforcement is carried out. 

The Full Court found that in light of that distinction between recognition and enforcement, and because the trial proceedings were for recognition only, the trial judge’s orders (set out in the background above) needed to be set aside. The parties were asked to draft orders which reflected this distinction, which, at the date of this article, have not been published.

Comment

The Full Court decision shifts the balance between investors and states in the enforcement of ICSID awards. In the wake of Lahoud and Eiser at first instance, investors with a favourable award against a state might have considered enforcing its award against a state that has assets in Australia.

The Full Court’s decision may make investors wary before trying to enforce a favourable foreign arbitral award in Australia against a state. Technically, given the distinction the Full Court has made between recognition and enforcement, an investor (or even a state itself) may still wish to commence proceedings for the recognition of any award (even if it cannot ultimately be enforced). The effect of recognition of an award as binding in Australia enlivens some procedural avenues in the Australian legal framework (such as rules against issues being re-litigated), although this is unlikely to appeal to investors looking to enforce their awards. Investors and states should carefully consider their options and the effect of seeking recognition and enforcement in light of the decision.

By Leon Chung, Guillermo Garcia-Perrote and William Hanna.

Endnotes

1. In Eiser (ARB/13/36), the substantive decision of the tribunal was annulled due to undisclosed ties between claimants' appointed arbitrator and claimants' quantum experts, on the grounds of improper constitution of the tribunal and a serious departure from a fundamental rule of procedure, with supplementary proceedings relating to that annulment now on foot. In ARB/13/31, an ad hoc Committee held a hearing on annulment in December 2020. A decision has not yet been issued.
2. There is discussion in the judgment about the differences between the words ‘enforcement’ and ‘execution’ of an award. The discussion was in part generated by the fact these two words are used in different parts of the English version of the ICSID Convention (presumably to connote different concepts), but the same word is used in the French and Spanish versions. This distinction was not material to the resolution of the ultimate issues in dispute and this article uses the words interchangeably.