“I’m finally getting my money!” This is the first thought that crosses someone’s mind when he or she receives a favorable arbitral award. Although in more than 90% of cases, international arbitral awards are said to be voluntarily complied with bythe losingparty,¹ in the remaining 10%, the prevailing party must enforce theaward.² Often, the non-prevailing party’s assets are located in its home jurisdiction, which was not the seat of the arbitration. In most such cases, the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (hereinafter “the New York Convention”)applies3. However, in some instances, the New York Convention does not apply. This is where matters become complicated.
A series of strategies has emerged in practice, allowing the prevailing party to recover its funds through other means. The prevailing party should therefore assess its case before selecting the appropriate tool to address its specific situation. The various tools available to the prevailing party are briefly outlined below.
1. Settlement
Enforcement proceedings can be lengthy and costly for both parties. Therefore, settlement may always be an option. The creditor would offer to abandon the enforcement proceedings in exchange for payment of a portion of the award by the debtor. Although it could be painful to forgo part of the amount awarded by the arbitral tribunal, it might be the sensible choice when enforcement proceedings result in even higher costs.
2. Sale of the award to a third party
When the prevailing party believes that enforcing the arbitral award will be a lengthy, complicated, and very costly process, it may attempt to sell the award—again, of course, at a discounted price. Indeed, initiating enforcement proceedings may in some cases be excessive when a party has already exhausted all of its financial resources in order to proceed with the arbitration.
Several companies, typically investment funds, specialize in this business. Other companies specialize in acting as intermediaries between prevailing parties and investors. Occasionally, such award sales come to light. For instance, in 2003, a Seychelles-based company purchased an award from a Czech company that had been rendered under the auspices of the Chamber of Commerce and Industry of Ukraine, againstUkraine.⁴
3. Investment Treaty Arbitration
When not only are the enforcement proceedings lengthy and complicated, but the jurisdiction where the losing party’s assets are located also wrongfully interferes with the enforcement of the award, the prevailing party has another option: to file an investment treaty claim directly against the State whose courts wrongfully refuse to enforce the arbitral award.
In fact, even if the jurisdiction in which enforcement of the award is sought is not a signatory to the New York Convention, that State will in most cases have adopted arbitration laws providing for the enforcement of foreign arbitral awards. Thus, when a bilateral or multilateral investment treaty has been concluded between the State where enforcement is sought and the home State of the prevailing party, the latter may use this mechanism to obtain compensation.
Under most treaties, the substantive protections provided include, among other things, a prohibition against direct or indirect expropriation without prompt and effective compensation and a guarantee of fair and equitable treatment, including protection against denial of justice by the courts of the hostState.⁵
In order to bring a claim against the State where enforcement is sought, the prevailing party must demonstrate that it has made an “investment” under the relevant treaty. An arbitral award may typically qualify as an “investment.” Indeed, many treaties define the term “investment” very broadly, including “every asset” and “claims to money, to other assets, or to any performance having economicvalue.”⁶ However, in the cases decided to date, tribunals have not considered arbitral awards to be investments in and of themselves, but rather to be the “crystallization” of the parties’ rights and obligations under the originalcontract. Hence, the prevailing party’s access to investment treaty arbitration will depend on whether the underlying contract, from which the award arose, constitutes an “investment” within the meaning of the relevant investment treaty.
As regards the grounds that the prevailing party may invoke, the latter may argue that it has been indirectly expropriated since the wrongful failure to enforce the arbitral award resulted in the reduction or elimination of the award’s value.
The prevailing party may also rely on the fair and equitable treatment (hereinafter “FET”) standard. In fact, the assessment of whether the FET standard has been breached focuses on the concept of legitimate expectations specific to eachcase8. In the view of many tribunals, the stability and predictability of the legal framework within which the investment is made form part of what the investor may legitimatelyexpect9.
4. Human Rights Courts
Another tool under public international law is available to the prevailing party to enforce the arbitral award: recourse to human rights courts established under human rights treaties, such as the European Court of Human Rights, the Inter-American Court of Human Rights, and the African Court on Human and Peoples’ Rights.
The prevailing party may bring claims before a human rights court on the following grounds: (i) interference with property or expropriation, and/or (ii) the right to a fair trial.
Any claim before these courts must be brought under their respective foundingtreaties.¹⁰ Typically, human rights treaties require the exhaustion of domestic remedies as a prerequisite for bringing a case before their respective courts. Therefore, the path is neither short nor easy.
5. Diplomatic Protection
The last tool is diplomatic protection.
Diplomatic protection is a general principle of international law, according to which individuals and legal entities lack the capacity to bring claims directly against States.
Consequently, their State of nationality must seek redress on theirbehalf11. Thus, an internationally wrongful act committed against a State’s national is, in reality, an injury to the State itself.
The means to be employed by the State could include direct negotiations, formal dispute settlement through arbitration or before the ICJ, retorsion—including certain forms of economic pressure—or the severance of diplomaticrelations.¹² The State could also resort to the threat of using countermeasures, such as the temporary non-performance of international obligations owed to the responsible State.
Although this tool exists not only in theory, there are no reported instances of a State exercising formal diplomatic protection on behalf of a frustrated award creditor.
In conclusion, it should be remembered that each case is unique and that often more than one tool will be available to the party seeking enforcement of an arbitral award. Consequently, it is necessary to analyze the facts of each case individually in order to assess the most effective strategy.
Detlev Kühner, Amany Chamieh
1 L. Mitselis & C. Baltag, Special Section on the 2008 Survey on Corporate Attitudes toward the Recognition and Enforcement of Arbitral Awards and Settlements in International Arbitration: Corporate Attitudes and Practices, 19 The American Review of International Arbitration 319, 339 (2008).
2 If there is any trend at all, it would be that parties are less willing to voluntarily comply with awards. It may therefore be assumed that the percentage of awards that are not voluntarily complied with may now exceed 10%.
3 As of today, the New York Convention has been signed and ratified by 156 states http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html Some signatory states to the New York Convention, such as India, are nevertheless known for not always taking an arbitration-friendly approach.
4 Regent Co. v. Ukraine , European Court of Human Rights, Application No. 773/03, 2008.
5 D. Brian King & Rahim Moloo, “Enforcement after Arbitration: Strategic Considerations and Forum Choice,” prepared for the conference on “Forum Shopping in the Context of International Commercial Arbitration,” NYU’s Center for Transnational Litigation and Commercial Law, 2013, p. 19.
6 See above, D. Brian King & Rahim Moloo, p. 20.
7 Saipem v. Bangladesh , ICSID Case No. ARB/05/07, June 30, 2009, para. 127:“The rights embodied by the ICC Awards are not created by the Award itself but arise from the Contracts. The ICC Award crystallized the “the parties’ rights and obligations under the original contract.”
8 A. Newcombe & L. Paradell, *Law and Practice of Investment Treaties: Standards of Treatment*, Kluwer Law Int’l, 2009, paras. 165-169.
9 Occidental Exploration and Production Co. v. The Republic of Ecuador , LCIA Case No. UN 3467, Final Award, July 1, 2004, para. 191.; National Grid P.L.C. v. the Argentine Republic , UNCITRAL, November 3, 2008, para. 173.
10 See above, D. Brian King & Rahim Moloo, p. 32.
11 Draft Articles on Diplomatic Protection, Article 1, Report of the ILC on its 58th Session, UN Doc. A/61/10, 2006: “Diplomatic protection consists of the invocation by a State, through diplomatic action or other means of peaceful settlement, of the responsibility of another State for an injury caused by an internationally wrongful act of that State against a natural or legal person who is a national of the former State, with a view to the fulfillment of such responsibility.”
12 Reed & Martinez, “Treaty Obligations to Honor Arbitral Awards and Diplomatic Protection,” in D. Bishop, *Enforcement of Arbitral Awards Against Sovereigns*, 2009, para. 23.