Inside Arbitration: Risks and awards – Challenges of enforcement against states

Disputes involving state entities (be they a state itself, or entities owned or controlled by a state) present unique challenges, both from a legal and commercial perspective. These issues are particularly acute in cross border disputes and even more so when pursuing enforcement of arbitral awards (or court judgments for that matter). When pursuing enforcement of arbitral awards against state entities, it is common for state parties to deploy both procedural and substantive arguments to resist enforcement. As further discussed below, some of the tactics often exploited by state entities include: re-litigating issues in applications to set-aside the award and related enforcement proceedings; raising sovereign immunity arguments; and deploying domestic measures which may have the effect of frustrating or hindering enforcement of an award (eg, domestic court proceedings, legislative or regulatory measures, criminal investigations, etc.). It is therefore critical for award creditors to devise enforcement strategies that anticipate the tactics which states may use.

How things stand

Arbitral institutions dealing mainly with commercial arbitrations have reported that between 15% to 20% of recent cases involve state parties.¹ If we also consider investor-state arbitrations which concern claims by private parties against states pursuant to treaties or trade agreements administered by arbitral institutions such as the International Centre for Settlement of Investment Disputes (ICSID) and the Permanent Court of Arbitration, it becomes apparent that there are many arbitrations involving state entities. In our experience, state entities are less likely to comply with arbitral awards (therefore more likely to resist enforcement) than typical commercial parties. Data shows states have a low voluntary compliance rate with arbitral awards of around 30% in investor-state cases,² whereas the average rate of voluntary compliance in commercial arbitrations is around 75%.³

It is useful to examine the challenges of pursuing enforcement against state entities, which arise both from legal issues applying specifically to state entities (such as the doctrine of sovereign immunity) and commercial issues (such as the increased leverage state parties may have compared to private parties).

Non-compliance with awards

Although favourable awards against state entities can often prompt settlements, as a rule of thumb state entities do not comply with awards on a voluntary basis. 

It is therefore frequently necessary for parties prevailing in an arbitration to apply for enforcement of the award before domestic courts. Crucially, the question of where to enforce the award will be informed by two key factors. 

1. The location, nature and extent of the state party’s assets. This is where asset tracing investigations become relevant and often shape the enforcement strategy. 
2. The likelihood of the courts enforcing the award. This requires regard to the courts’ track record, pro-arbitration stance and local law nuances. 

Against this backdrop, we now discuss the tactics often deployed by states when resisting enforcement of awards, starting with challenges to unfavourable awards. How that challenge takes place depends on whether the award is enforceable under the New York Convention (signed up to by 178 state parties and requires states to recognise and enforce arbitration agreements and awards rendered in other contracting states); the ICSID Convention (signed up to by 158 contracting states and provides that the states are bound by arbitration awards settling disputes with private parties under the Convention); or some other instrument. 

With this in mind it is useful to consider whether insurance for the award should be sought at the outset or once a successful award has been rendered. There are a number of potential insurance options to cover the risks of an award being set-aside or annulled, or a party defaulting on the award.

Set-aside and resisting enforcement under the New York Convention

Generally speaking, under the New York Convention, parties may apply to the courts at the seat (or legal place) of the arbitration to set-aside an award, and to any courts of enforcement to refuse enforcement of the award, based on certain limited grounds. Since these grounds are narrow, state parties often seek to re-litigate issues in set-aside and enforcement proceedings, with the outcome depending on the track record of the relevant domestic courts, their pro-arbitration stance and local law nuances. 

To mitigate the risk of challenges and duplicative proceedings, award creditors can deploy a two-step strategy on enforcement. 

1. Seeking enforcement in a court that is known to adopt a pro-arbitration stance and is likely to reject spurious challenges. 
2. Deploying this first judgment in subsequent enforcement proceedings before other courts to defend any further challenges. 

The effect of the first judgment on other courts is a question of local law and practice. However, most courts will either find the judgment persuasive or preclusive. By way of example, a Singaporean court recently found that a state was precluded from raising arguments that the arbitral tribunal had exceeded its jurisdiction to support an application that an award be refused enforcement. This was because these arguments had already been rejected by a Swiss court in set-aside proceedings and the judgment resulted in an issue estoppel with negative res judicata effect as the grounds for challenging the award and parties were identical.⁴

This strategy is likely to be less effective where the grounds of challenge require application of domestic law, such as whether the award is contrary to the public policy of a particular country. For example, a Dutch court has recently refused to enforce an award against a state on the grounds of public policy in the Netherlands. This was despite a Swedish court rejecting an application to set-aside the same award on the basis that it was contrary to public policy in Sweden.⁵

Where there are concerns regarding potential dissipation or movement of assets by a state entity, another avenue to explore is seeking interim relief from the courts in the form of security for the award, asset freezing orders or orders to disclose the location of assets.

Annulment under the ICSID Convention 

States may apply to ICSID for an award to be annulled under the ICSID Convention based on certain limited grounds. Even though annulment applications are rarely successful (because of how narrow the grounds are for annulment) states regularly seek to annul unfavourable awards. This causes significant delay as the annulment process typically takes up to two years. 

In addition, notwithstanding the fact the ICSID Convention does not provide for any other avenue of challenge outside of annulment, states frequently seek to re-litigate arguments from annulment proceedings at the enforcement stage. Whether this strategy is successful will turn on the approach taken by domestic courts. Pro-arbitration courts generally give such tactics short shrift. A US court recently rejected a state’s challenge to enforcement of an ICSID award (following an unsuccessful annulment application) on the grounds of due process finding that all the enforcement court could (and should) do was assess whether the award was authentic and binding.⁶

To mitigate the risk associated with this delay, award creditors may seek to resist applications by the state to stay enforcement proceedings in local courts pending determination of the annulment application (although, success in this regard is not guaranteed). They may also seek orders that the state provide security for the award (plus interest and costs) if a stay of enforcement is granted by the enforcement courts,⁷ or the ad-hoc committee charged with determining any ICSID annulment application.⁸

State immunity 

States (and sometimes state entities) often seek to rely on sovereign immunity to shield themselves from foreign enforcement proceedings and their assets from execution, to varying degrees of success. 

Recent decisions by the courts in Australia, England and Wales have determined that sovereign immunity had been waived in respect of proceedings involving recognition and enforcement of ICSID awards by states that had ratified the ICSID Convention (although the waiver does not extend to execution against state property).⁹ Generally, "recognition" refers to a domestic court recognising an award as binding; "enforcement" refers to a court enforcing the pecuniary obligations in the award as if it were a judgment of the domestic court; and "execution" refers to the court process by which actual enforcement is carried out to obtain satisfaction of the pecuniary obligations through seizure of assets. Similarly, a US court found that a state had waived its rights to sovereign immunity in respect of award enforcement proceedings in other contracting parties to the New York Convention, by acceding to the Convention.¹⁰

While the scope of sovereign immunity is a question of local law, assets that are often presumed to be protected by sovereign immunity include property which is used for: 

• diplomatic functions; 
• military functions; and 
• the central bank or other monetary authority of the state, or part of the cultural heritage of the state.¹¹

However, these presumptions are not absolute and may be rebutted, for example if it can be proven that the disputed assets are not entitled to the state immunity protection due to the asset’s use or intended use in commercial activities.¹²

Domestic actions

State entities often deploy various tactics domestically in a bid to avoid payment of an award in substance or in effect. We discuss some of these tactics below.

Domestic courts refusing to enforce arbitral awards

The New York Convention and the ICSID Convention are powerful instruments for the enforcement of arbitral awards worldwide, and courts in key pro-arbitration jurisdictions continue to be reliable when it comes to ensuring effective enforcement of awards under these treaties. 

However, this is not the case in every jurisdiction and it is therefore essential to map out enforcement strategies accordingly. For example, the European Court of Human Rights recently held that an EU state had wrongfully refused to enforce an award against a state agency in contravention of the New York Convention and in doing so had breached the EU citizen’s right to peacefully enjoy its possessions.¹³

For recourse outside of the EU, the best hedge against the risk that the 'home' courts of the state or state entity will refuse to enforce an arbitral award is to seek enforcement in other jurisdictions where the state might hold assets. As noted above, asset tracing is often critical to inform the enforcement strategy. Importantly, even if an award has been set-aside at the seat, it may still be enforced in other jurisdictions. So, if the home courts of an award debtor have refused to enforce an award on a questionable basis, it may still be possible to enforce that award in another pro-arbitration country.

Criminal investigations

State entities have also sought to utilise criminal investigations against award creditors or their affiliates to delay the enforcement of arbitral awards or call into question the validity of the arbitral process. 

The best defence against these tactics at the enforcement stage is to put the state to strict proof to establish these issues were raised as soon as possible after the state became aware of the criminal investigations, and that the criminal investigations directly concern the rights and parties subject of the proceedings. By way of example, a state’s arguments concerning the illegality of an investment the subject of arbitral proceedings were rejected by the arbitral tribunal on the basis that the arguments were untimely and the evidence tendered was unpersuasive. This decision was affirmed by the Swiss courts in subsequent set-aside proceedings.¹⁴

Legislative and regulatory measures

States have also implemented domestic legislative and regulatory measures designed to frustrate the arbitration process. 

For instance, an investor has recently commenced investment arbitration proceedings claiming that a company in which the investor was a shareholder (which was the award creditor in an earlier ICSID arbitration) was placed into liquidation by a state to evade its payment obligations under the award.¹⁵

In another example, a state, following a recent string of successful arbitrations brought by one individual and related companies under an agreement with a minister of the government of that state, implemented legislation designed to deprive the agreement and the related arbitral awards of legal effect.¹⁶ This legislation was upheld by the highest courts of that state, and the individual concerned is reported to have commenced an investor-state arbitration on the basis that these actions breached the terms of an investment treaty. 

The best response to these types of domestic measures will turn on the nature of the measure and the potential avenues for recourse. It may be that the most appropriate way forward is to put diplomatic pressure on the state, test the validity of the measure in the courts, commence arbitration under an investment treaty, or a combination of those approaches. Another potential way to respond might involve assigning the award to a third party (such as an affiliate), to insulate the award from measures taken by a state against the award creditor. 

Key takeaways 

Award creditors should plan for the worst when it comes to enforcing arbitral awards against state entities and do so from the outset. While a state entity may be more likely to resist enforcement of arbitral awards than the average party to an arbitration and have more cards up their sleeves when it comes to doing so, it is possible to anticipate these plays and to mitigate the risks they present.

1. 2022 LCIA Annual Casework Report, p. 14; 2020 ICC Dispute Resolution Statistics Report, p. 11.
2. Academic Forum on ISDS, ‘Compliance with ISDS Awards: Empirical Perspectives and Reform Implications’ (11 November 2022), para 25.
3. Queen Mary University of London, ‘International Arbitration: Corporate attitudes and practices’ (2008), p. 8.
4. Deutsche Telekom AG v The Republic of India [2023] SGHC(I) 7, [150]-[153].
5. Stati and others v The Republic of Kazakhstan (Amsterdam District Court, 9 January 2023). C.f. Stati and others v The Republic of Kazakhstan (Svea Court of Appeal, 9 December 2016).
6. Valores Mundiales, S.L. and another v Bolivarian Republic of Venezuela (United States District Court for the District of Columbia, 15 May 2023).
7. See, for example, Micula v Romania [2018] EWCA Civ 1801, [245]-[248].
8. See, for example, Joseph C. Lemire v Ukraine ICSID Case No. ARB/06/18 (Decision on Ukraine’s Application for Annulment of the Award), [51].
9. Kingdom of Spain v Infrastructure Services Luxemborg S.A.R.L & Anor [2023] HCA 11, [75]; Infrastructure Services Luxembourg SARL & Anor v Kingdom of Spain (Rev1) [2023] EWHC 1226 (Comm) [112]-[115].
10. Pao Tatneft v Ukraine (United States Court of Appeals, 28 May 2019), p. 2.
11. United Nations Convention on Jurisdictional Immunities of States and Their Property (2 December 2004), Art. 21. Although this Convention is not yet in force, it can shed light on the content of customary international law: Jurisdictional Immunities of the State (Allemaigne v. Italie), Judgment, [2012] ICJ Reports 99, 128, [54], [66].
12. See for example, Ascom and others v The Republic of Kazakhstan and the National Bank of Kazakhstan (Supreme Court of Sweden, 18 November 2021) (at [40]-[41], [47]-[48]).
13. BTS Holding, A.S. v Slovakia (European Court of Human Rights, 30 June 2022), [71]-[72].
14. Deutsche Telekom AG v The Republic of India PCA Case No. 2014-10 (Interim Award, 13 December 2017), [115]-[119]; The Republic of India v Deutsche Telekom AG (First Civil Law Court of Switzerland, 11 December 2018).
15. CC/Devas (Mauritius) Ltd and others v The Republic of India, Notice of Arbitration (2 February 2022).
16. Iron Ore Processing (Mineralogy Pty. Ltd.) Agreement Amendment Act 2020 (WA).

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