ICSID publishes study on compliance with and enforcement of ICSID arbitration awards, revealing high satisfaction rates for award creditors

The International Centre for Settlement of Investment Disputes (ICSID) has recently published a comprehensive study based on an analysis of 565 arbitrations proceedings concluded under the ICSID Convention as of December 31, 2021, shedding light on a pivotal issue: the compliance with and enforcement of ICSID awards (the ICSID Paper). This blog post focuses on the ICSID Paper's key findings on this issue.

The analysis

ICSID publishes annual statistics on its caseload. However, the ICSID Paper focuses, for the first time, on the effect of, and compliance with, the awards resulting from that caseload, examining the 383 cases (68% of the total number of arbitrations), which resulted in an award, whether in favour of the investor or the host State. The remaining 32% cases were discontinued for various reasons, including pre-award settlement.

Of the 383 awards analysed, 253 (66%) involved financial obligations. The ICSID Paper accessed information on 251 of these awards: 151 awarded damages (“Damages Awards”), and an additional 80 awards did not grant damages but awarded costs related to the arbitration proceedings (“Costs Awards”).          

Voluntary compliance

The ICSID Paper highlights the system's effectiveness, noting that most awards were either voluntarily complied with or settled post-award. By June 2024, 66% of Damages Awards and 36% of Costs Awards had been voluntarily  paid by the losing party. The high rate of voluntary compliance can be attributed to several factors, according to the ICSID Paper: (i) the potential accrual of interest on outstanding awards, (ii) the desire to avoid additional enforcement costs and asset seizure, (iii) the impact of outstanding awards on the debtor's creditworthiness and credit rating, and (iv) the importance of voluntary compliance for states to maintain their international reputation and attract foreign investment. Non-compliance also breaches Article 53 of the ICSID Convention and may lead to diplomatic or state-to-state proceedings involving the investor's home State.

Enforcement measures before national courts

When awards are not voluntarily complied with, the award creditor may pursue judicial enforcement. This was common for Damages Awards (fewer than 3% of Damages Awards were not pursued to enforcement) but less common for Costs Awards (where 30% of Costs Awards were not pursued), particularly when the amounts involved were relatively small compared to the costs of enforcement proceedings. Most awards requiring enforcement were awards issued against States.

The ICSID Convention requires member States to recognise awards as final and binding and to enforce financial obligations as if they were final judgments of their courts. The ICSID Paper reviewed publicly available domestic court decisions and orders up to April 2024 and found that courts overwhelmingly recognise and enforce ICSID awards. The Paper finds that courts adhere to the principles of the Convention, dismiss sovereign immunity defences against the jurisdiction of an ICSID tribunal and also tend to dismiss immunity defences raised against enforcement and execution, except for assets related to acts of a governmental nature, for which outcomes are more diverse, depending on the applicable local legislation protecting such assets.

The ICSID Paper also notes a recent trend whereby States invoke other treaty obligations, such as EU law and sanctions regimes, to challenge awards and oppose enforcement, with varied outcomes.

In this enforcement context, the ICSID Paper indicates that enforcement proceedings before national courts were pursued:

• in relation to 31% of Damages Awards. As of June 2024, the outcome of the enforcement actions was available in relation to 23% of the actions: 73% were successful (i.e., the Award creditor considered itself satisfied through payment in 8 Awards), and 27% were unsuccessful (3 Awards); and
• in relation to 34% of Costs Awards. As of June 2024, the outcome of the enforcement actions was available in relation to 44% of the enforcement actions: 42% were successful (5 Awards), and 58% were unsuccessful (7 Awards).

The following table maps the ICSID Paper findings:

Comment

The ICSID Paper is of considerable interest, as this kind of information is rarely available. The data is helpful in informing arbitration users as to whether the time, money and efforts spent in arbitration proceedings may result in an effective compensation. Overall, this paper demonstrates that the ICSID Convention's compliance and enforcement regime is an effective one. Once a favourable outcome is achieved by a party, they have a high likelihood of a satisfactory outcome with respect to enforcement. The ICSID Paper’s analysis indicates that, excluding awards with pending enforcement outcomes, a satisfactory outcome was achieved for the award creditor in 97% of Damages Awards and 83% of Costs Awards. This was achieved through voluntary compliance, enforcement proceedings or the creditor’s own choice not to pursue enforcement (usually because enforcement would prove disproportionately cumbersome and costly when weighed against the potential recovery). These are particularly enlightening and useful findings for investors and will underscore the importance of ICSID arbitration as a reliable tool for resolving disputes arising from protected investments of particular importance in an era in which investment arbitration is subject to criticism.