In a ruling handed down on July 11, 2017, the United States Court of Appeals for the Second Circuit resolved a circuit split that had sown legal uncertainty on the correct procedure for the enforcement in the United States of awards rendered under the auspices of the International Centre for Settlement of Investment Disputes (ICSID).
In Mobil Cerro Negro Ltd et al v. Bolivarian Republic of Venezuela (2d Cir. 2017), a unanimous three-judge panel held that an ExxonMobil Corporation subsidiary could only enforce its USD 188 million ICSID award against Venezuela through the procedures set forth in the Foreign Sovereign Immunities Act (FSIA), and not—as the court below had held—through summary ex parte proceedings. The decision will likely have an impact on the reputation of the Southern District of New York's (SDNY) as a convenient enforcement forum for ICSID award creditors.
Framework for the enforcement of ICSID awards in the United States
The Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) provides the framework for the conduct of arbitration proceedings in disputes between Contracting States and investors that qualify as nationals of other Contracting States. Its legal regime is often characterized as "denationalized," because ICSID arbitrations are essentially exempt from the application of national arbitration laws and the review of national courts. The finality of ICSID awards, which are subject to review only in the self-contained system set out in the ICSID Convention, is a key advantage of ICSID arbitration.
Where national courts retain a measure of control is at the recognition and enforcement stage, which is necessary any time the losing party does not voluntarily comply with the terms of an ICSID award. Articles 53-55 of the ICSID Convention provide the enforcement regime applicable to ICSID awards, requiring that Contracting States enforce awards "as if [they] were a final judgment of a court in that State."
The ICSID Convention does not mandate a specific procedure for recognition or enforcement of ICSID awards; rather, the procedure for enforcement is governed by the laws of the country where enforcement is sought.
In the United States, the ICSID Convention is implemented through 22 U.S.C. § 1650a. The statute provides minimal guidance on how federal courts should convert an ICSID arbitration award into a federal court judgment. Although courts are directed to “enforce” and “giv[e] the same full faith and credit” to an ICSID award “as if the award were a final judgment of a court of general jurisdiction of one of the several States,” the statute does not address precisely how courts should go about doing so.
Adding to the complexity is the fact that ICSID awards, by definition, involve a foreign sovereign. Their recognition and enforcement therefore implicate the FSIA, which affords protections to foreign sovereigns, inter alia, in the execution of judgments.
Until recently, New York and the District of Columbia diverged on the recognition and enforcement of ICSID awards
In recent years, the ambiguity in §1650a, and its uncertain interplay with the FSIA, had resulted in a federal district court split on the correct procedure for enforcing ICSID awards in federal courts. The split turned on the ability of a district court, when presented with an ICSID award, to employ the ex parte procedures used for recognizing judgments of sister-state courts. Put differently, the question was whether it is appropriate for a district court to recognize and enforce an ICSID award on an ex parte basis without the award debtor having an opportunity to present a defense.
In a series of decisions, several courts of the SDNY answered in the affirmative, finding that a gap in §1650a justified borrowing the ex parte mechanism reserved for judgments of sister states. See, e.g., Mobile Cerro Negro, Ltd. v. Bolivarian Republic of Venezuela, 87 F. Supp. 3d 573 (S.D.N.Y. Feb. 13, 2015); Grenada v. Grynberg, No. 11 Misc. 45 (S.D.N.Y. Apr. 29, 2011); Siag v. Arab Republic of Egypt, No. M-82 (PKC), 2009 WL 1834562 (S.D.N.Y. June 19, 2009); Enron Corp. & Ponderosa Assets L.P. v. Argentine Republic, No. M-82 (S.D.N.Y. Nov. 20, 2007); Sempra Energy Int’l v. Argentine Republic, No. M-82 (S.D.N.Y. Nov. 14, 2007).
Many arbitration practitioners in New York applauded the SDNY's creditor-friendly trend of authority. In July 2012, the Committee on International Commercial Disputes at the New York City Bar Association published a report on the Recommended Procedures for Recognition and Enforcement of International Arbitration Awards Rendered Under the ICSID Convention. The committee argued that the diverging reasoning in some of the SDNY cases illustrated the need for standardized procedures for handling the recognition and enforcement of ICSID awards. It therefore recommended a streamlined process using ex parte proceedings and uniform procedures. This would, according to the committee, "bring uniformity and certainty to a process that currently is unclear, while simultaneously (i) fulfilling the stated goal of the ICSID Convention to ensure swift recognition and enforcement of ICSID awards without judicial oversight or interference, (ii) complying with the U.S. enabling legislation (22 U.S.C. §1650a), and (iii) following established procedures for recognition and enforcement under existing and applicable law."
In contrast, courts of the District of Columbia had been divided on the question. Some courts seemed to agree with the New York view that “ex parte proceedings suffice for recognition of ICSID arbitral award.” Miminco, LLC v. Democratic Republic of the Congo, No. CV 14-01987 (RC), 2015 WL 1061555 (D.D.C. Feb. 9, 2015). Others concluded that there was no statutory gap that justified borrowing ex parte recognition procedures from state law. Those courts held that award creditors must file a plenary proceeding to enforce an ICSID award and, if the award debtor is a foreign sovereign, must comply with service of process pursuant to the FSIA. Micula v. Romania, 104 F. Supp. 3d 42 (D.D.C. May 18, 2015).
In the latter case, following the decision of the D.C. District Court, the award creditors sought and obtained recognition of their ICSID award in the SDNY using ex parte procedures.
At the district court level, Mobil Cerro Negro appeared to go the expected New York route
Tuesday's Second Circuit ruling in Mobil Cerro Negro, Ltd. v. Bolivarian Republic of Venezuela ushers into New York federal courts the prevailing D.C. position favoring plenary over ex parte enforcement proceedings.
The case in Mobil Cerro Negro arises out of an investment dispute between Venezuela and subsidiaries of ExxonMobil Corporation (Mobil). On October 9, 2014, an ICSID tribunal, composed of Professor Gabrielle Kaufmann-Kohler and Dr. Ahmed Sadek El-Kosheri and presided over by Judge Gilbert Guillaume, awarded Mobil USD 1.6 billion dollars in damages for the nationalization of its Cerro Negro and La Ceiba oil development ventures in Venezuela. Venezuela Holdings and others v. the Bolivarian Republic of Venezuela, Award, October 9, 2014, ICSID Case No. ARB/07/27. This award was later reduced to USD 188 million by an ICSID annulment committee after it rejected nearly all of the award that concerned the Cerro Negro project.
Mobil sought to enforce the award in at the SDNY (Mobil Cerro Negro, Ltd. et al v. Bolivarian Republic of Venezuela, case number 1:14-cv-08163). Judge J. Paul Oetken held an ex parte hearing, granting Mobil's petition and entering a final judgment against Venezuela.
Venezuela moved to vacate the judgment for lack of jurisdiction under the FSIA.
Judge Paul Engelmayer rejected Venezuela’s argument, concluding that §1650a provided an exception to the FSIA's exclusive grant of subject matter jurisdiction, and finding that Mobil's ex parte application to recognize and enforce the ICSID award was not barred by the FSIA. In his decision, Judge Engelmayer emphasized prior Southern District of New York decisions which had used ex parte recognition procedures in relation to ICSID awards.
Judge Engelmayer's decision was welcome news to ICSID award creditors, who wished to avoid lengthy proceedings to satisfy awards that had been rendered in their favor.
Venezuela appealed to the Second Circuit. Over the course of the appeal, the U.S. Department of Justice filed an amicus curiae brief with the Second Circuit (signed by then-U.S. Attorney for the Southern District of New York, Preet Bharara), arguing that ex parte proceedings to recognize an arbitral award against a foreign state in the United States are not permitted under the FSIA – a statute containing “a comprehensive set of legal standards governing claims of immunity in every civil action against a foreign state.”
The Second Circuit ruling reverses the New York trend
The Second Circuit reversed the district court's decision. U.S. Circuit Judge Susan Carney, writing for the unanimous three-judge panel, rejected Mobil's argument that §1650a provides "an independent grant of subject-matter jurisdiction for actions against foreign sovereigns" and decided that "the FSIA provides the sole basis for subject-matter jurisdiction over actions to enforce ICSID awards against a foreign sovereign."
The Court set forth the procedure that ICSID award creditors must follow to enforce their awards against foreign sovereigns. The award creditor must "fil[e] a federal action on the award against the sovereign, serv[e] the sovereign with process in compliance with the FSIA, and mee[t] the FSIA’s venue requirements before seeking entry of a federal judgment, whether through a motion for judgment on the pleadings or for summary judgment.”
Public policy was evidently on the forefront of the court's mind. It noted that "applying the FSIA will facilitate national uniformity in procedure," and emphasized that "consistency as to enforcement seems to us importantly aligned with the values of predictability and federal control that foreign affairs demands and that the FSIA was designed to promote."
Thus, because Mobil had failed to comply with the FSIA’s notice requirements, the SDNY lacked jurisdiction over the petition to recognize and enforcement the ICSID award.
Implications of the Second Circuit ruling on the enforcement of ICSID awards
By overruling prior decisions in the SDNY, the Second Circuit has adopted an approach that falls more closely in line with District of Columbia. This approach guarantees foreign sovereigns the right to assert procedural defenses to enforcement, including lack of standing to enforce the award, res judicata, and time-bar.
In parallel, however, this will also likely result in lengthier and more complex proceedings to recognize and enforce ICSID awards. Courts of the SDNY will likely now require the same significant amount of time to convert an ICSID award into a judgment as the District of Columbia does: under the FSIA, service of process could take over six months, following which the state is entitled to 60 days to respond to the summons and complaint, culminating in a likely phase of motion practice on personal jurisdiction and other similar issues.
A carefully constructed enforcement strategy is therefore important, now more than ever, in order to increase the award creditor's likelihood of obtaining satisfaction of any ICSID award rendered against a foreign state.