First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement. Where should investors enforce their ICSID awards after the US Court of Appeals for the Second Circuit said no to ex parte recognition? If you want a prompt judgment, file overseas—in particular in the United Kingdom or France, which have ex parte, summary recognition procedures. In the United States, it may be best to file in Washington, DC. As Steve Davidson will discuss on a panel today at 2018 CIArb Conference in Washington, sovereign immunity law in the United States has been in flux lately. Until June 2017, award-creditors could file in the United States District Court for the Southern District of New York (SDNY) and obtain prompt, ex parte recognition of ICSID awards as judgments. The Second Circuit in Mobil Cerro Negro, Ltd. v. Venezuela, 863 F.3d 96 (2d Cir. 2017) (“Mobil”) reversed an uninterrupted line of SDNY decisions that had allowed investors to recognize ICSID awards against foreign sovereigns ex parte. With that reversal, unless one wanted to seek ex parte recognition in another forum that has not ruled on the issue, the best forum to file in the US is likely Washington, DC, the default venue for cases against foreign sovereigns. No other Court of Appeals has ruled on this issue. Two district courts in the Eastern District of Virginia and the District of Columbia also held against ex parte procedures. Other jurisdictions in the US remain a possibility for bringing an ex parte action, though it could be difficult to persuade a court to reject the Second Circuit opinion. Once the award is confirmed and a judgment is entered, award-creditors can register the judgment in other jurisdictions, including New York, a creditor-friendly forum, pursuant to 28 U.S.C. § 1963 (registration of judgments for enforcement in other districts). The time it will now take to confirm an award should not be underestimated—serving process on a foreign sovereign can take three to six months or longer and sovereigns will now have an opportunity to challenge the sufficiency of service of process, among other issues a sovereign may raise, before an award is confirmed.
The International Centre for Settlement of Investment Disputes (ICSID) was formed in 1966 by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) under the auspices of the World Bank. ICSID provides a forum for investors to resolve disputes by arbitration against foreign sovereigns. More than 600 such cases have been administered by ICSID to date. The average length of an ICSID case is between 3-4 years, including the annulment phase.
Once an ICSID award is obtained, the award-creditor is often interested in converting that award into a judgment as quickly as possible. Until June 2017, award-creditors could file in the United States District Court for the Southern District of New York (SDNY) and obtain prompt, ex parte recognition of ICSID awards as judgments. The US Court of Appeals for the Second Circuit in Mobil Cerro Negro, Ltd. v. Venezuela, 863 F.3d 96 (2d Cir. 2017) (Mobil) reversed an uninterrupted line of SDNY decisions that had allowed investors to recognize ICSID awards against foreign sovereigns ex parte.
The Second Circuit held that the Foreign Sovereign Immunities Act (FSIA), which was passed in 1976 (after the ICSID Convention), is the only means by which to obtain jurisdiction over a foreign sovereign notwithstanding the fact that the ICSID Convention requires automatic enforcement of awards and no substantive defenses may be raised at the national court level in enforcement of an ICSID award. Accordingly, any investor who wishes to enforce an ICSID award in a New York court must commence a new action and follow the same procedures required by the FSIA for serving process on the foreign sovereign before a judgment can be entered. This requires not only filing a complaint but serving process on a foreign sovereign. Unless the investor and the foreign state agreed to a “special arrangement for service,” 28 U.S.C. 1608(a)(1), the investor will have to serve process via an international treaty, mail, or diplomatic channels as appropriate. This process can take several months if not longer and is not insignificant additional time on top of the ICSID process before an award is enforceable.
ExxonMobil had argued that the ICSID treaty and the statute Congress enacted to implement it, 22 U.S.C. § 1650a (1966), pre-dated the FSIA and continued independently to provide jurisdiction to enforce ICSID awards. The FSIA contains an express carve‐out for “existing international agreements,” which ExxonMobil argued applied to the ICSID Convention. Though the Second Circuit stated that “the question is not free from doubt,” it ultimately ruled that under Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 442 (1989), the carve-out only “applies when international agreements expressly conflict with the immunity provisions of the FSIA,” and that the ICSID Convention does not raise such an express conflict. Mobil, 863 F.3d at 114. ExxonMobil argued that the ICSID treaty contemplates summary, virtually automatic recognition with no substantive defenses, a process in express conflict with the “plenary proceeding” required by the Second Circuit under the FSIA, but that argument did not carry the day.
While rejecting the argument that § 1650a furnishes an independent jurisdictional basis for enforcing ICSID awards against foreign sovereigns, the Second Circuit interpreted § 1650a to require that ICSID awards be enforced through a plenary action on the award in US district court. Mobil, 863 F.3d at 124-25. The court found this requirement in § 1650a(a)’s requirement that an ICSID award’s pecuniary obligations “shall be enforced and shall be given the same full faith and credit as if the award were a final judgment of a [state court].” Id. at 119-20. The court rejected ExxonMobil’s argument that the “as if” clause’s reference to final state-court judgments simply clarified the statute’s reference to the “full faith and credit” required under Article IV, Section 1 of the Constitution, and instead interpreted the “as if” clause to require that ICSID awards be “enforced” in the same manner as state-court judgments in federal court, i.e., through a new action on the judgment as a debt. Id. at 117-18. The court turned away ExxonMobil’s argument, and the district court’s conclusion, that such a rare and potentially cumbersome procedure was at odds with the ICSID Convention’s contemplation of summary recognition of awards, and it overturned the district court’s previously common use of New York state judgment-enforcement law, which allows for ex parte recognition of other state court judgments was appropriate. Venezuela had also relied on precedent supporting its interpretation of the ICSID convention from the District of Columbia and the Eastern District of Virginia.
The US government filed an amicus brief siding with Venezuela.
The United States argued that the FSIA is the sole source of subject matter jurisdiction over an action to enforce an ICSID award against a foreign sovereign and its rules must be followed and that neither the ICSID Convention’s enabling statute nor the FSIA permits a federal court to “borrow” procedures from state law that permit an ex parte proceeding. The United States’ main policy concern was reciprocity. From the government’s perspective, it did not want to empower other foreign states to enter ex parte judgments against the United States without process. (These concerns ignore that other countries provide ex parte procedures to enforce ICSID awards and enforcing an arbitral award after years of proceedings is hardly unfair surprise.) Ultimately, the Second Circuit agreed with the United States and Venezuela and ruled against the investor-creditor.
The Second Circuit did not reach the issue of post-award interest, that had been briefed and argued. Mobil Cerro Negro, 863 F.3d at 125. The SDNY had entered a judgment applying the post-award rate set by the ICSID panel rather than applying the federal statutory post-judgment rate. The issue was fully presented to the Second Circuit but the panel demurred. The proper interest rate remains an issue for further litigation. ExxonMobil took the position that interest is a pecuniary obligation of the award and thus must be given full faith and credit in US courts as required by the ICSID statute. Venezuela argued that the federal statutory post-judgment rate applied. On this issue, the United States supported ExxonMobil’s position.
The Second Circuit’s ruling overturns what had been a growing and stable body of SDNY precedent governing enforcement of ICSID awards. In light of the ruling, award-creditors should consider whether New York remains a favorable forum to obtain their judgment. While New York provides robust remedies to creditors and can often be the location of non-immune, sovereign assets, award-creditors may want to proceed in Washington, DC first. Under the FSIA, Washington, DC is a default venue against foreign sovereigns, 28 U.S.C. § 1391(f), and proceeding there would be free from any venue challenge.
As a practical matter, the Second Circuit’s decision disadvantages investors who, after participating in lengthy arbitration proceedings and, in many cases, years of post-award proceedings, must then commence a plenary action with service of process in the United States to enforce an award. Serving process on a foreign state pursuant to the FSIA can often take three to six months or longer. Once service is accomplished, the foreign state will have sixty (60) days to respond even though it has no substantive defenses. In sum, the process for judgment-creditors will take longer—potentially much longer—than what the ICSID treaty contemplated, which is a disadvantage when, as is often the case, there are other creditors competing for priority to execute against a limited pool of assets. For example, in late October 2017, the Second Circuit dealt with an appeal that was virtually identical to those addressed in the Mobil case. In Micula v. Romania, the Second Circuit, following Mobil, vacated an ex parte judgment confirming an ICSID award. The Miculas commenced a plenary action in the district court in Washington, DC for confirmation of the ICSID award. Service was accomplished at the end of November 2017 and Romania filed a motion to dismiss for insufficient service of process in mid-January 2018. The motion has been fully briefed since early February and remains pending. On a more positive note, the process contemplated by the Second Circuit is new and unproven and we are hopeful that courts will develop summary-type procedures in recognizing ICSID awards.
Investors may have other options for immediate recognition of ICSID awards. Procedures in the courts of other countries, such as the United Kingdom or France, offer well-established, ex parte procedures to recognize ICSID awards as enforceable judgments in those countries. In this respect, the Second Circuit’s decision is at odds with the accepted practices of other ICSID member states, which more closely embody the original intent and understanding of the ICSID Convention.