Claudia Annacker, Laurie Achtouk-Spivak and Zeïneb Bouraoui, Cleary Gottlieb Steen & Hamilton LLP
This is an extract from the first edition of GAR’s The Guide to Challenging and Enforcing Arbitration Awards. The whole publication is available here.
Annulment of ICSID awards
Overview of grounds for annulment and statistics
Pursuant to Article 53(1) of the ICSID Convention, ICSID awards are not ‘subject to any appeal or to any other remedy except those provided for in this Convention’. The ICSID annulment regime was designed to balance the competing needs for the finality of awards and the necessity ‘to prevent flagrant cases of excess of jurisdiction and injustice’. The balance struck is reflected in Article 52(1) of the Convention, which limits the possibility to seek annulment of an ICSID award to five grounds:
(a) that the Tribunal was not properly constituted;
(b) that the Tribunal has manifestly exceeded its powers;
(c) that there was corruption on the part of a member of the Tribunal;
(d) that there has been a serious departure from a fundamental rule of procedure; or
(e) that the award has failed to state the reasons on which it is based.
Annulment under the Convention is thus not an appeal but an ‘extraordinary and narrowly circumscribed remedy’.
Ad hoc committee practice confirms the exceptional nature of the annulment mechanism. As at December 2018, the number of ICSID awards that had been rendered is 285. As at the same date, 66 annulment decisions had been issued. Only five ICSID awards were annulled in full, 12 were annulled in part and the vast majority were upheld.
Following mounting criticism that ad hoc committees have interpreted their functions too broadly, their practice has evolved towards a more restrictive approach to annulment. Whereas the annulment rate was at 13 per cent for the years 1971 to 2000, it dropped to 8 per cent for the years 2001 to 2010 and was as low as 3 per cent for the years 2011 to 2018. However, parties continue to seek annulment, with 52 per cent of all annulment applications having been registered since January 2011.
A party seeking the annulment of an ICSID award must submit an application in writing, addressed to the Secretary General of ICSID. Except when annulment is requested based on corruption on the part of a member of the tribunal, the application must be made within 120 days of the date on which the award was rendered.
The request for annulment must specify the grounds under Article 52(1) of the Convention on which it is based. Only ICSID awards are subject to annulment. Decisions on jurisdiction or liability – in cases of bifurcation – may only be challenged upon issuance of the final award. The Secretary General’s power to refuse registration is limited to applications filed after expiry of the time limit.
The ad hoc committee
Ad hoc committees are composed of three persons who are appointed by the chairman of the administrative council from the Panel of Arbitrators. Committee members cannot have the same nationalities as the parties or the original tribunal members, and cannot be designated to the Panel of Arbitrators by the state party to the dispute or the investor’s home state.
The Convention’s provisions on the procedural powers of an ICSID tribunal and the ICSID Arbitration Rules are generally applicable mutatis mutandis in annulment proceedings.
An ad hoc committee has the authority to annul an award, in whole or in part, on any of the grounds set forth in Article 52(1) of the Convention. An ad hoc committee is not empowered to decide the underlying dispute. Instead, if an award is annulled, the dispute may be submitted to a new ICSID tribunal upon request of either party.
The first ad hoc committee constituted under the Convention, the Klöckner I committee, considered that, ‘save under exceptional circumstances’, a finding of one of the grounds for annulment in Article 52(1) of the Convention requires it to annul the award. Later committees have generally held that they enjoy a measure of discretion in ‘refus[ing] to exercise [their] authority to annul an award where annulment is clearly not required to remedy procedural injustice and annulment would unjustifiably erode the binding force and finality of ICSID awards’. However, a number of committees have taken the view that if an error significantly affected the legal rights of the parties, such as a serious departure from a fundamental rule of procedure, they no longer have discretion not to annul.
Grounds for annulment
Improper constitution of a tribunal
Pursuant to Article 52(1)(a) of the Convention, annulment of an ICSID award may be sought on the ground that ‘the Tribunal was not properly constituted’.
Article 52(1)(a) has been rarely invoked: only 10 ad hoc committee decisions have addressed this annulment ground and none has annulled an ICSID award on the basis of this ground. Nine ad hoc committees rejected the applicant’s allegation that the arbitral tribunal had not been properly constituted, and one ad hoc committee annulled the award on the ground that the tribunal manifestly exceeded its powers, without addressing the challenge to the constitution of the arbitral tribunal.
The notion of ‘proper constitution’ of an arbitral tribunal has been interpreted as referring to the principles set forth in Chapter IV, Section 2 of the Convention that govern the constitution of the arbitral tribunal. Applicants on annulment have either challenged a decision on a previous request for disqualification made during the course of the arbitration or raised a ground for disqualification for the first time in the application for annulment.
Ad hoc committee practice
Ad hoc committees have rejected requests for annulment based on a circumstance that a party knew or should have known during the pendency of the arbitration, but failed to make an application for disqualification in a timely manner. Ad hoc committees have also refused to second-guess decisions on requests for disqualification of an arbitrator made during the pendency of the arbitration. For example, the Azurix v. Argentina committee rejected such a request, noting that it ‘cannot decide for itself whether or not a decision under Article 58 was correct, as this would be tantamount to an appeal against such a decision’.
Manifest excess of powers
Pursuant to Article 52(1)(b) of the Convention, a party may seek the annulment of an award on the ground that ‘the Tribunal has manifestly exceeded its powers’.
The drafting history of the Convention suggests that this ground for annulment was intended to apply ‘where a decision of the tribunal went beyond the terms of the compromise or compromissory clause’. Ad hoc committees have extended the scope of application of this ground to (1) lack of jurisdiction, (2) failure to exercise jurisdiction and (3) failure to apply the law applicable to the dispute.
An excess of powers must be manifest to give rise to annulment. The term ‘manifest’ was added to Article 52(1)(b) of the Convention upon a proposal by Germany to curtail the risk of frustration of awards. Most applications for annulment invoke manifest excess of powers, and most successful annulments are based on this ground. Ad hoc committees have annulled four awards in their entirety and six awards in part for manifest excess of powers.
Evolution of ad hoc committee practice
Ad hoc committees have grappled with the degree of scrutiny to be exercised in assessing whether an ICSID tribunal manifestly exceeded its powers. Specifically, some ad hoc committees have taken the view that to be ‘manifest’, the excess of powers must be flagrant or obvious. By contrast, other committees have considered that the excess of powers relates to the seriousness of the excess, rather than its clarity. A third category of annulment decisions attempts to reconcile these competing approaches. After noting that ‘a strict opposition between two different meanings of “manifest” – either “obvious” or “serious” – is an unnecessary debate’, the Soufraki v. United Arab Emirates committee, for example, required that ‘the excess of power should at once be textually obvious and substantively serious’.
Ad hoc committees have found a manifest excess of powers where the tribunal:
- awarded compensation for a portion of an investment that was beneficially owned by an investor not protected under the applicable bilateral investment treaty (BIT);
- held that the operation of a law firm qualified as an investment under Article 25 of the Convention and the applicable BIT;
- failed to exercise jurisdiction over BIT claims on the ground that it would have to address contractual issues that, according to a concession contract between the claimant and the respondent state, fell within the exclusive jurisdiction of the respondent state’s courts;
- declined jurisdiction on the ground that a maritime salvage contract does not qualify as an investment under Article 25 of the Convention;
- failed to apply the customary international law rule reflected in Article 25 of the International Law Commission’s Articles on State Responsibility (Necessity) as the proper law applicable to the analysis of the respondent state’s necessity defence; or
- reasoned that a finding of a breach of the applicable BIT was conditional upon the claimant’s exhaustion of local remedies.
Corruption on the part of a member of the tribunal
Article 52(1)(c) of the Convention allows a party to seek annulment of an ICSID award on the ground that ‘there was corruption on the part of a member of the Tribunal’. Attempts during the negotiations of the Convention to replace ‘corruption’ with ‘bias’, ‘misconduct’ or ‘lack of integrity’ did not succeed. An application on annulment must establish bias of a member of the tribunal owing to the acceptance of improper payment. To date, this ground has not been invoked in an ICSID annulment proceeding.
Serious departure from a fundamental rule of procedure
Pursuant to Article 52(1)(d), the annulment of an ICSID award may be sought on the ground that ‘there has been a serious departure from a fundamental rule of procedure’. The Convention does not define the term ‘fundamental rule of procedure’. The Convention’s drafting history shows that this ground was meant to cover principles of natural justice, namely principles essential to the integrity of the arbitral process, such as the parties’ right to be heard and the equal treatment of the parties.
Article 52(1)(d) is frequently invoked by applicants. Ad hoc committees have annulled one award in full, two awards in part and one supplemental decision and rectification on the basis of this ground.
Ad hoc committee practice
Not every violation of a rule of procedure justifies annulment of an award. Ad hoc committees apply a dual test to determine whether ICSID awards should be annulled under Article 52(1)(d) of the Convention: the rule of procedure must be fundamental and the violation must have been serious.
In line with the Convention’s travaux préparatoires, ad hoc committees have consistently held that fundamental rules of procedure are those that concern natural justice, such as the principle of equal treatment of the parties, the parties’ right to be heard, the independence and impartiality of the arbitral tribunal, deliberations among the members of the tribunal, or the proper handling of evidence and allocation of the burden of proof.
For an award to be annulled under Article 52(1)(d) of the Convention, the violation of a fundamental rule of procedure must be serious. A determination of the seriousness of a procedural violation is necessarily case-specific, requiring the committee to assess the conduct of the particular arbitral proceeding. Ad hoc committees are divided on the question of whether the violation of a fundamental rule of procedure must have had a material effect on the outcome of the case. Some ad hoc committees, such as the Wena Hotels v. Egypt committee, took the view that the violation of a fundamental rule of procedure is serious only if the tribunal would have reached a substantially different result had the rule been respected.
By contrast, other committees, such as the Occidental v. Ecuador committee, have held that an applicant is ‘not required to prove that the violation of the rule of procedure was decisive for the outcome, or that the applicant would have won the case if the rule had been applied’. Rather, it is sufficient that the violation had the potential to have a material effect on the outcome of the case.
Whether an applicant on annulment has to show that the departure of a fundamental rule of procedure had a material effect, or had the potential to have a material effect, on the outcome of the award will depend on the circumstances of the case. For example, the Kiliç v. Turkmenistan committee confirmed that if the tribunal violated a party’s right to be heard, it is sufficient for an ad hoc committee to rely on the potential material effect of the award since ‘it will never be known whether the tribunal would have decided differently had it heard the party in question’.
Failure to state reasons on which the award is based
Article 52(1)(e) of the Convention allows a party to an ICSID arbitration to seek the annulment of an award on the basis that ‘the award has failed to state the reasons on which it is based’. The Convention’s drafting history shows that a tribunal’s failure to address every issue submitted to it by the parties does not necessarily warrant annulment. Neither the Convention nor its drafting history provides further guidance as to when a failure to state reasons has occurred. Ad hoc committees have held that an ICSID tribunal fails to state reasons within the meaning of Article 52(1)(e) when: ‘(i) the failure to state reasons leaves the decision on a particular point essentially lacking in any expressed rationale, and that point was itself necessary to the tribunal’s decision, or (ii) the tribunal stated contradictory reasons that completely cancel each other out, leaving the award with a total absence of reasons’.
This ground for annulment was invoked in more than 95 per cent of the cases that led to a decision on annulment. The 63 applications for annulment that invoked a failure to state reasons resulted in two awards being annulled in full and eight in part.
Ad hoc committee practice
Ad hoc committees require that an award must, at a minimum, allow the parties to be in a position to understand the tribunal’s analysis of the facts and interpretation of the law in arriving at its ultimate conclusion. For example, the MINE v. Guinea committee stated that ‘the requirement to state reasons is satisfied as long as the award enables one to follow how the tribunal proceeded from Point A to Point B and eventually to its conclusion, even if it made an error of fact or of law’.
In assessing whether an award has failed to state the reasons on which it is based, early ad hoc committees reviewed the relevance of the reasons stated by the tribunal. These annulment decisions have been criticised for applying ‘excessively liberal standards of review’, which ‘may lead to the weakening of one of the principal salutary attributes of arbitration; namely, finality’. Subsequent ad hoc committees have clarified that ‘the adequacy of the reasoning is not an appropriate standard of review under Paragraph (1)(e), because it almost invariably draws an ad hoc committee into an examination of the substance of the tribunal’s decision, in disregard of the exclusion of the remedy of appeal by Article 53 of the Convention’. They do not review the reasons stated in an award other than to assess whether they are frivolous or contradictory.
Ad hoc committees have found a failure to state reasons where the arbitral tribunal has stated genuinely contradictory reasons in determining the method of calculation of damages and where the arbitral tribunal has failed to state reasons for its ‘broad interpretation’ of the umbrella clause of the applicable BIT. Ad hoc committees have also considered that, while a tribunal is not required to address each and every piece of evidence in the record, a tribunal’s total failure to discuss evidence upon which the parties placed significant emphasis warrants annulment of an award.
Setting aside of non-ICSID awards: a brief comparison
Non-ICSID awards are subject to being set aside by the courts of the seat of the arbitration. The arbitration law of the state of the seat determines the scope of review of non-ICSID awards and the degree of scrutiny exercised. In contrast to the self-contained ICSID regime, the standard of judicial review of non-ICSID awards may thus vary considerably.
The UNCITRAL Model Law on International Commercial Arbitration (the Model Law), which has been implemented by 80 states, sets forth six grounds for annulment, namely: (1) invalidity of the arbitration agreement; (2) the applicant was unable to present its case; (3) departure beyond the scope of the arbitration agreement; (4) irregularities in the composition of the tribunal or the arbitral procedure; (5) non-arbitrability of the dispute; or (6) violation of public policy.
A number of recent annulments of investment treaty awards by domestic courts show that domestic courts, unlike ad hoc committees, review de novo jurisdictional issues and may set aside awards on public policy grounds, in particular where fraud or corruption is at stake. In addition, unlike an ICSID award, which can no longer be enforced following its annulment, a non-ICSID award annulled by the courts of the seat of the arbitration may nonetheless be enforceable in some other jurisdictions.
Enforcement of ICSID awards
Compliance with ICSID awards
In the vast majority of cases, contracting states to the Convention have complied with ICSID awards. It has therefore rarely become necessary to compel compliance. However, an increasing number of ICSID awards have required enforcement efforts. For example, Argentina took the position that its obligation to satisfy an ICSID award was contingent upon the award creditor’s initiation of enforcement proceedings in Argentinian domestic courts. Ad hoc committees have rejected Argentina’s position. After the United States suspended Argentina’s trade status under the United States’ Generalized System of Preferences legislation, blocked the extension of loans by the World Bank and the Inter-American Development Bank, and threatened to block an agreement with the members of the Paris Club to restructure Argentina’s debt, Argentina entered into settlement agreements with several award creditors.
There are additional recent examples of non-compliance with ICSID awards. For example, Zimbabwe, the Democratic Republic of the Congo and Kazakhstan have failed to voluntarily comply with ICSID awards rendered against them. Enforcement proceedings were initiated against these countries, and while Kazakhstan and Zimbabwe appear to be making gradual payments in satisfaction of the award, the Democratic Republic of the Congo has not yet satisfied the award.
Recognition and enforcement of ICSID awards
The Convention’s simplified enforcement regime
The ICSID Convention establishes a simplified and accelerated regime for all awards rendered pursuant to the Convention, excluding awards rendered in ICSID Additional Facility arbitrations.
Article 53(1) of the Convention requires the parties to comply with and abide by the terms of an ICSID award. In addition, pursuant to Article 54(1), each contracting party must ‘recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State’. Commentators have interpreted Article 54(1) as leaving domestic courts with ‘no discretion to review the award once its authenticity has been established’, not even to ascertain compliance with domestic or international public policy.
The Convention thus insulates the enforcement of pecuniary obligations imposed by an ICSID award from the enforcement regime of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and the ICSID contracting states’ domestic enforcement legislation. The Vivendi v. Argentina committee emphasised that ‘one of the fundamental issues which the drafters of the ICSID Convention were keen to achieve was a total divorce from the recognition and enforcement system which prevailed under domestic laws or under the 1958 New York Convention’.
However, the recognition and enforcement of ICSID awards is not entirely insulated from the ICSID contracting parties’ domestic laws, including remedies available before domestic courts against final judgments. Pursuant to Article 54(3) of the Convention, the execution of ICSID awards is governed by ‘the laws concerning the execution of judgments in force in the State in whose territories such execution is sought’.
For example, in the United Kingdom, the enforcement of ICSID awards is governed by the Arbitration Act of 1966. Pursuant to Section 2 of the Arbitration Act, a registered ICSID award ‘shall, as respects the pecuniary obligations which it imposes, be of the same force and effect for the purposes of execution as if it had been a judgment of the High Court’. In the context of the Micula v. Romania case (discussed in further detail below), the England and Wales High Court (EWHC) explained that a ‘judgment of the High Court is subject to the EU Rules as to State aid’, adding that ‘national courts must, in particular, refrain from taking decisions which conflict with a decision of the Commission’. The EWHC, in staying the enforcement proceeding pending the resolution of the EU proceedings, emphasised that Article 54 of the Convention requires the United Kingdom to equate ICSID awards with final judgments of its own courts and that ‘a purely domestic judgment would be subject to the same limitation’.
The United States has implemented the Convention through the ICSID Enabling Statute, which provides that ‘[t]he pecuniary obligations imposed by an [ICSID] award shall be enforced and shall be given the same full faith and credit as if the award were a final judgment of a court of general jurisdiction of one of the several States’.
Although federal district courts have exclusive jurisdiction over the enforcement of ICSID awards (under 22 USC Section 1650(a)), the statute does not provide for a specific procedure to enforce ICSID awards. US courts have struggled with the interaction between the ICSID Enabling Statute and the Foreign Sovereign Immunity Act, which provides for uniform procedures on service over a foreign state and sets forth the legal standards governing claims of immunity. In particular, US courts have taken diverging approaches to whether or not summary ex parte procedures apply in relation to the enforcement of ICSID awards.
In addition, the full faith and credit status accorded to ICSID awards under 22 USC Section 1650(a) triggered a debate on whether ICSID awards are subject to review in the same manner as final US domestic state court judgments. So far, US courts have consistently taken the view that they are not authorised to engage in substantive review of ICSID awards and that the limited exceptions to the full faith and credit status are not applicable to ICSID awards.
Forced execution of ICSID awards
Article 55 of the Convention provides that ‘[n]othing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign State from execution’. Article 55 concerns the respondent state’s immunity from execution, as opposed to immunity from jurisdiction or the recognition proceedings, and significantly limits an award creditor’s ability to seize assets to execute an ICSID award.
In practice, when it comes to forcing execution, ICSID award creditors face hurdles similar to those faced by other state creditors, namely the difficulty in identifying commercial assets that are not immune from measures of constraint.
While Article 27(1) of the Convention prohibits a contracting state to the Convention from giving diplomatic protection in respect of a dispute that one of its nationals and another ICSID contracting state consented to submit to ICSID arbitration, the right to diplomatic protection revives in the event of non-compliance with an ICSID award. Diplomatic protection thus constitutes an alternative, non-judicial means to enforce an ICSID award. Although resort to diplomatic protection may supplement judicial enforcement, investors are generally reluctant to seek the assistance of their home states in enforcing an ICSID award.
Recognition and enforcement of non-ICSID awards: a brief comparison
The New York Convention governs the recognition and enforcement of non-ICSID foreign arbitral awards, and the enforcement of non-pecuniary obligations imposed by an ICSID award, in the 159 states that are party to the New York Convention.
Article V(1) of the New York Convention sets forth the sole grounds upon which a ‘competent authority where the recognition and enforcement is sought’ may refuse to recognise and enforce an arbitral award. The main difference between the New York Convention and the ICSID Convention enforcement regimes is that the former allows domestic courts to refuse recognition and enforcement on the basis of certain grounds that were intentionally excluded from the ICSID enforcement regime. Compared to the ICSID Convention, the New York Convention ‘leaves a substantial role for national law and national courts to play in the international arbitral process’.
Pursuant to Article V(1) of the New York Convention, a court may refuse recognition and enforcement of an investment treaty award on grounds that allow the courts of the seat of the arbitration to annul an award pursuant to Article 34 of the Model Law. In addition, a court may refuse to recognise and enforce an award that has not yet become binding on the parties, or has been set aside or suspended by the courts of the seat of the arbitration.
For instance, domestic courts have refused to enforce investment treaty awards pursuant to Article V of the New York Convention if the arbitral tribunal awarded damages to an investor who was involved in money laundering, on the ground that the recognition and enforcement of the award would be a ‘manifest and effective’ violation of international public policy. or if the award had been annulled at the seat of arbitration.
Conditional stay of enforcement of the award
An increasing number of applicants for annulment request a stay of enforcement of the award. Pursuant to Article 52(5), ‘[t]he Committee may, if it considers that the circumstances so require, stay enforcement of the award pending its decision’. The Convention does not expressly empower ad hoc committees to condition a stay of enforcement on the posting of a security. An increasing number of ad hoc committees has nonetheless done so, and the 2018 Proposals for Amendment of the ICSID Rules explicitly authorise an ad hoc committee to condition a stay of enforcement on any undertaking it deems appropriate.
Concerns have been expressed that if ad hoc committees were to stay the enforcement of ICSID awards without conditioning the stay on the posting of security, this would encourage an increase in the number of annulment applications, contrary to the exceptional nature of annulment under the Convention and the importance of the finality of the award. However, while there are various reasons justifying a conditional stay of enforcement, including to deter dilatory applications for annulment and to protect the award creditor against potential non-compliance, a general policy in favour of conditional stay may impair a party’s ability to contest the validity of an ICSID award.
Enforcement of investment treaty awards within the European Union
New challenges to the enforcement of ICSID awards rendered under BITs within the European Union (intra-EU BITs) will arise following the 6 March 2018 judgment of the Court of Justice of the European Union (CJEU) in Slovak Republic v. Achmea BV. The CJEU held that Articles 267 and 344 of the Treaty on the Functioning of the European Union preclude investor-state arbitration clauses in intra-EU BITs, such as the one in Article 8 of the Netherlands–Slovakia BIT.
The Achmea judgment may have far-reaching consequences for the enforcement of intra-EU ICSID awards, in particular before courts in EU Member State. The Micula v. Romania case exemplifies the hurdles that an investor may face in attempting to enforce an ICSID award that is considered to be incompatible with EU law. In 2013, the tribunal found that Romania’s revocation of an investment incentive scheme had breached the Sweden–Romania BIT and awarded compensation. The claimants moved to enforce the award in Belgium, France, Luxembourg, Romania, Sweden and the United Kingdom. In 2015, the European Commission issued a decision finding that the award constituted state aid, prohibiting Romania from paying the claimants the compensation awarded to them, and ordering Romania to recover any amounts already paid to claimants. The claimants’ attempts to enforce the ICSID award have so far been unsuccessful.
For example, the Brussels Court of First Instance held that ‘the decision of the European Commission . . . justifies non-compliance with the Award and thus makes the Award lose its (present) executory force. As a consequence, it makes its enforcement illegal’. The EWHC stayed the enforcement of the award on the ground that ‘the principle of sincere cooperation in Art. 4(3) TEU [Treaty on the Functioning of the European Union] . . . precludes national courts from taking decisions which conflict with a decision of the Commission’. The Court of Appeal of England and Wales confirmed the stay of enforcement until the General Court of the European Union issues its final judgment on the challenge of the European Commission’s Decision.
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