Daniel Allman January 19 2023 Impact of current geopolitical climate on award enforcement against states Norton Rose Fulbright | Arbitration & ADR - International Daniel Allman Arbitration & ADR IntroductionGeneral considerations in enforcing awards against statesEnforcing awards against frozen and seized assets of sanctioned persons tied to stateEnforcing awards against so-called "state sponsors of terrorism"CommentIntroductionEnforcing an arbitral award against a state presents unique challenges, distinct from the commercial arbitration sphere. Where a state fails to voluntarily comply with an arbitral award, award creditors face the daunting task of pursing enforcement against state assets wherever they may be found in the world, subject not only to the enforcing state's laws on award enforcement, but also its laws on state immunity. This has posed a perennial challenge for award creditors against Russia. The current geopolitical climate may, however, be changing that enforcement landscape.General considerations in enforcing awards against statesA recent survey of 170 arbitration cases found that award creditors against states ordered to pay damages began enforcement proceedings 40% of the time indicating that foreign investors are often required to pursue enforcement proceedings before national courts in order to secure the payment due to them. The time and cost of enforcement can both be high. The enforcement of an arbitral award involves an analysis of both national and international laws. National laws matter because courts apply domestic rules, which may include the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the New York Convention), when enforcing awards. Even when domestic rules include the New York Convention provisions, their interpretation and application can vary widely, particularly as regards the public policy exception to enforcement.International laws matter because they inform a state's rights and obligations, whether under treaty or at customary international law, that impact on award enforcement. For example, contracting states of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) are obligated to give effect to ICSID Convention awards as though they were final judgments of their national courts. Equally, states, including ICSID member states, benefit from rights of sovereign immunity including with respect to award enforcement. The ICSID Convention, in particular, gives precedence to the municipal law on sovereign immunities in the state where an investor seeks to enforce an award.Award enforcement against states therefore often pits an award creditor's rights to compensation against a state's right to be immune from the exercise of a foreign court's jurisdiction over it and/or the attachment of state assets. While jurisdictional immunity and execution immunity typically apply to sovereign acts or properties of a state, many states recognise exceptions in respect of commercial acts and properties. Some domestic laws on sovereign immunity, such as the Foreign Sovereign Immunities Act 1976 in the United States, also contain express exceptions in cases where a judgment presented for enforcement relates to a claim for acts of terrorism by a state designated as a state sponsor of terrorism.Even where an exception to state immunity may apply, award creditors may face protracted litigation seeking to enforce their award against some states, Russia being notable in this regard. In Franz Sedelmayer v Russian Federation,(1) a German investor who commenced arbitration proceedings against Russia in 1996, received an award in his favour in 1998, but spent the next 10 years seeking to enforce it due, in part, to the sovereign immunity defences raised by Russia.(For further details of the enforcement of awards under the ICSID Convention and the New York Convention, see "Recognition, Enforcement and Recovery of Investment Treaty Awards: Part I".)Enforcing awards against frozen and seized assets of sanctioned persons tied to stateThe result of Russia's invasion of Ukraine is a highly complex geopolitical environment with a potentially enormous impact on foreign investment in Russia and the surrounding region. Russia has international investment treaties in place with more than 60 countries. Many of those treaties include an arbitration mechanism whereby foreign investors with investments in Russian territory can bring claims against Russia seeking compensation in the event of losses caused by treaty violations.Two types of claims against Russia may be available to foreign investors under those treaties:claims related to investments in Russian territory (eg, in the event that assets are nationalised, funds transfers are suspended, or intellectual property rights eliminated); andclaims related to investments in Ukrainian territory that is occupied or purportedly annexed by Russia (eg, if assets are seized, destroyed, or otherwise made inaccessible by Russian forces or authorities in territory where Russia exercises effective control).While, historically, award enforcement against Russia has been fraught with difficulty, partly due to its assertions of sovereign immunity, the current geopolitical environment may be shifting the enforcement landscape.Recent measures by allied states in opposition to Russia's invasion of Ukraine invite consideration of whether (and, if so, how) frozen and seized assets may be subject to award enforcement proceedings. Accessing and attaching such assets would require consideration of the enforcing jurisdiction's sanctions rules in addition to the applicable award enforcement regime. A further question arises as to whether sovereign immunity defences would nevertheless be available to prevent enforcement.Enforcing awards against so-called "state sponsors of terrorism"Lithuania and Latvia have also both designated Russia as a state sponsor of terrorism and have called upon other North Atlantic Treaty Organization states to do the same. A US Senate bill introduced in September 2022 similarly proposes to designate Russia as a state sponsor of terrorism. Any such designation has significant consequences in these jurisdictions for whether sovereign immunity defences would be available to Russia to thwart the enforcement of arbitral awards.CommentForeign investors holding investments in Russia or Russian-occupied territory that are harmed by retaliatory measures in Russia or armed conflict in Ukraine should carefully assess whether they may have a treaty claim to seek redress for their losses, and take early and appropriate advice on such a claim. Funders should also carefully assess funding opportunities through a lens that takes account of the shifting enforcement landscape and its implications for long-term success in value recovery.For further information on this topic please contact Alison G FitzGerald, or Daniel Allman at Norton Rose Fulbright by telephone (+44 20 7283 6000) or email ([email protected] or [email protected]). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.Alexandra Redhead, trainee solicitor, and Sanika Kulkami, articling student, assisted with the preparation of this article. Endnotes(1) SCC, Arbitration Award (7 July 1998).