You may have won the substantive hearing and secured your client a substantial arbitral award, but if the opposing party refuses to honour the award, the fight is not yet over. Unless an award is complied with or enforced (and the case of damages, collected), it has only limited reputational value.
The ability – practically and legally – to enforce an award is therefore key, and must be considered from the outset of a claim. This is so assets can be identified and, if possible, secured, and potential bars to enforcement can be avoided or risks minimised.
As an introduction to the September 2016 issue of Crossing Borders, which focuses on enforcement, this article provides a brief oversight of the key issues to keep in mind.
First, the vast majority of arbitral awards made are complied with voluntarily. In many cases, the parties have a continuing commercial relationship and wish to get on with business. This is the case even with large international awards. The last Queen Mary's Arbitration Survey to ask about enforcement, in 2008, found that 84% of participating counsel indicated that, in more than 76% of their arbitration proceedings, the non-prevailing party voluntarily complies with the arbitral award. Similarly, in relation to ICSID Reports, the UNCTAD reported in 2014 that most States had honoured their obligations in this regard.
Parties may come under commercial or reputational pressure to honour an award, especially States in high profile investment treaty arbitration cases. For ICSID (International Centre for the Settlement of Investment Disputes) awards, the 1966 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (the “ICSID Convention”), as well as many BITs, allow the exercise of diplomatic protection. Further, in many countries, arbitration is the only effective recourse a foreign investor may have against the state, so a reputation for non-compliance with awards can affect inward foreign investment. Argentina’s recently agreed and high profile settlement to pay UNCITRAL awards made in favour of BG Group and El Paso Corporation is part of a publicised plan by Argentina’s new president, Mauricio Macri, to improve Argentina’s reputation with large foreign investors and in response to the US's 2012 imposition of custom tariffs by way of diplomatic support for US companies with outstanding awards.
Second, and unlike court judgments, arbitral awards benefit from a number of international treaties providing effective and robust methods of enforcement. For ICSID awards, the ICSID Convention provides that awards are to be treated as final judgments of the court of the contracting State. Other international awards are highly likely to fall within the scope of the 1958 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” or “NYC”) which enables enforcement of an award in any of its 156 Contracting States. Sixty years on from its inception, the NYC is rightly regarded as one of the cornerstones of the success of international arbitration. Its only close equivalent in respect of court judgments, the Hague Convention of 30 June 1995 on Choice of Court Agreements (the “Hague Convention”), currently applies only between the EU, Mexico and Singapore. Although both the United States and the Ukraine have signed up, neither has yet ratified it. Further, while EU Member States enjoy extensive recognition and enforcement of judgments as between their courts, this ability depends on EU membership, meaning countries who seek to leave – such as Britain, face a number of uncertainties, as explained in “Plotting the course. Dealing with disputes – post Brexit vote".
Part of the New York Convention’s success is the relative simplicity with which it can be applied: enforcement cases are subject to normal procedural rules in the relevant state and the grounds under which a court can (but is not obliged to) refuse enforcement are limited to those set out clearly in Articles V(1) and V(2) of the New York Convention. The only formality with which the party seeking to enforce must comply with is to produce an original or certified copy of the award and of the original arbitration agreement. Domestic courts can of course decide to simplify the process even further as our case report from Spain shows.
Article V(1) of the New York Convention sets out grounds on which the respondent party may seek to rely on to resist enforcement and Article V(2) sets out two grounds which courts can invoke as a reason to refuse enforcement. Briefly, the grounds for refusal under Article V(1) are: (a) incapacity of a party or invalid arbitration agreement; (b) failure of due process in the proceedings, or the lack of notice given when the arbitrator was appointed; (c) circumstances where the tribunal has exceeded its authority or jurisdiction; (d) the composition of the arbitral authority or procedure is not in accordance with the arbitration agreement; and (e) the award has been superseded or set aside by the courts of the seat. The grounds of refusal which the courts may invoke under Article V(2) are: (a) the matter is not capable of settlement under arbitration according to the law of that country; or (b) the enforcement would be against public policy in that country. Importantly, courts may refuse to enforce awards on these grounds; they are never obliged to refuse enforcement. They must not refuse to enforce on any other grounds: these articles are the exhaustive list.
The straightforward process and clear list of grounds is not to say that enforcement is always quick and entirely predictable: different national courts of course apply the NYC differently.
Of all the grounds for non-enforcement, ground V(1)(e) (the award has been set aside or superseded by courts of the seat) has probably caused the most controversy and related case law in recent years. Some Courts (for example in France) typically allow such a “zombie” award to be enforced; whereas others take a more nuanced approach. The latest chapter in the Yukos saga was the setting aside in April 2016 by a court in The Hague of the US$ 50 billion+ Energy Charter Treaty awards obtained by Yukos against Russia in 2014 from a PCA Tribunal constituting Yves Fortier QC, Charles Poncet and Stephen Schwebel. Yukos has nevertheless pledged to continue its efforts to have the original award enforced, including in the US, but its lengthy battle for redress now faces further hurdles.
Outside of the NYC, there may be other local treaties or arrangements, such as that existing between the PRC and Hong Kong, which is explored by the article “One Arrangement, Two Systems: considerations when enforcing awards between Hong Kong and the PRC”. Finally, a party may be able to sue on the award in domestic courts as a contractual debt.
Third, respondent States and State entities may well seek to rely on sovereign immunity at the enforcement stage. The article “Enforcing against foreign State parties: Some lessons from abroad” looks at the issue in more detail. In short, enforcement can be made significantly more difficult when a sovereign body is involved. Parties should not attempt to enforce their award against, inter alia, the following assets: diplomatic buildings and property, central bank assets, military property, taxes or public payments and diplomatic missions. Courts will never, or very exceptionally, enforce against these classes of assets.
Finally, attitude is everything. It is trite to note that a party seeking to enforce in a pro-arbitration court will have more, and quicker, success than in a jurisdiction that is only just developing its arbitral jurisprudence, although both may be NYC Contracting States. Attitudes change quickly, however, as the success of recent reforms in the People’s Republic of China demonstrates. We have used our exclusive access to local data to undertake extensive research into the enforcement of foreign arbitral awards in the PRC to explore developments since China signed the NYC. See the results of our investigations in “Enforcing Foreign Arbitral Awards in China – A Review of the Past Twenty Years”. Our conclusions are broadly positive, as governmental steps to improve enforcement and collection appear to be bearing fruit. As ever, the key to success is having a well-drafted arbitration agreement that complies with local law requirements, and good procedural compliance throughout the arbitral process.
What then does the future hold for the enforcement of arbitral awards? We’ve already touched on the Hague Convention, but until it gains more ground, there is simply nothing to touch the NYC in terms of cross border enforcement. The enforceability of awards is one of the key reasons our clients chose arbitration and we see no reason for this to change in the foreseeable future.