Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. [2021] FCAFC 3

Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. (No 3) [2021] FCAFC 112

The Full Court of the Federal Court of Australia, in a judgment dated 1 February 2021, confirmed that the Kingdom of Spain cannot rely on a plea of sovereign immunity against a party seeking to recognise an arbitral award in Australia under the Convention on the Settlement of Investment Disputes (“ICSID Convention”).[1] Spain was appealing a first instance Federal Court decision handed down on 24 February 2020 by Stewart J.[2]  Our summary of the first instance judgment of the Federal Court can be read in the Australia chapter of our 2020 Asia-Pacific Roundup.

The first judgment of the Full Court clarified that Arts 54 and 55 of the ICSID Convention contemplate two separate proceedings for recognition and enforcement of an arbitral award.  While foreign States may have immunity from execution (or enforcement) of such an award in Australia (by application of Art 55), they do not have immunity from its recognition. A State’s reliance on sovereign immunity in recognition proceedings before a competent court (such as in the case of Australia) is incompatible with its agreement to Art 54 under the ICSID Convention as the obligation to recognise an award under Art 54 is unaffected by questions of immunity from execution.[3]

As the initial proceedings before Stewart J of the Federal Court concerned recognition, the Full Court found that Spain, had waived its sovereign immunity as a Contracting Party to the ICSID Convention.  The appeal was however ultimately allowed on the limited basis that the orders made at first instance went beyond the scope of ‘recognition only’ proceedings.

In a recent second judgment which corrected the orders of Stewart J, the Full Court confirmed that Australia can meet its obligations as an ICSID Convention Contracting Party to recognise the pecuniary obligations of an ICSID award made against a foreign State as if it was the judgment of the Court, without any contravention of sovereign immunity over execution as provided under Art 55.

Background

In 2007, a number of financial incentives for renewable resources were put in place by the Spanish Government. These incentives were subsequently reversed after companies such as Eiser Infrastructure (“Eiser”) invested over 100 million Euro in solar power projects in Spain. Eiser then successfully obtained an ICSID award against Spain for its failure to accord fair and equitable treatment of the investors in breach of Art 10(1) of the Energy Charter Treaty.

Proceedings were brought by Eiser in the Federal Court of Australia seeking recognition of the ICSID award. Spain asserted Foreign State Immunity under section 9 of the Foreign States Immunities Act 1985 (Cth).

In the first instance decision of the Federal Court, Stewart J held that as Australia is a Contracting Party to the ICSID Convention, it is bound to recognise awards against other contracting countries to the Convention. Art 54(2) of the ICSID Convention concerns recognition and enforcement of an award made by a competent court. As Spain is a Contracting Party to the ICSID Convention, it could not rely on foreign state immunity laws to resist the recognition of the awards in Australia. The orders made by the Federal Court included that the investors may “enforce” the award.

Spain’s Appeal

Spain appealed the decision and argued that the proceedings brought by Eiser were recognition and enforcement proceedings, and that Art 55 of the ICSID Convention, which grants States immunity from “execution”, should be read as being inclusive of enforcement.

Spain accordingly argued it did not waive its right to immunity from execution by Art 54(2), and it should be entitled to rely upon the immunity conferred by section 9 of the Foreign States Immunities Act 1985 (Cth) in respect of the proceedings, which concerned both recognition and enforcement.

Judgment

The Full Court rejected Spain’s arguments for two reasons.

First, it was held that on proper construction, Art 54(1) and (2) of the ICSID Convention contemplate two distinct applications to a competent court (for recognition and enforcement) and that a party may seek recognition without seeking enforcement.  The recognition contemplated by Art 54(1) and (2) does not extend to execution from which there may be immunity under Art 55. Under Art 54, as Spain agreed that the Respondents may apply to Australia's Federal Court for recognition of the award, it must necessarily be taken to have waived its immunity from suit.

Second, the Full Court did not agree that the initial proceeding was for recognition and enforcement, finding that the initial proceedings was for recognition alone. The Full Court clarified that while recognition refers to the formal confirmation that an arbitral award is authentic and has legal consequences under domestic law, enforcement goes a step further and is the process by which a party seeks the court’s assistance to ensure compliance with the award (as recognised). Execution is the formal process by which enforcement is carried out. Once that distinction was made, the Court found the state immunity set out in Art 55 did not apply to exempt Spain from the recognition proceedings, as it only applied in instances of enforcement (or execution). The Full Court found Stewart J did not err in his ultimate conclusion that foreign state immunity was not available in the current proceeding.

Moreover, it was found that Art 55 immunity may not be invoked by Spain in the enforcement of or execution procedures for pecuniary obligations imposed by an award as if the award were a judgment of the court, as the recognition of the award by the Full Court is an exequatur order - (a procedure of making the award operative within the domestic legal system). Although this kind of an order may be described as part of the enforcement process at its commencement, it does not mean it is to be characterised as execution, to which Art 54(3) and 55 apply.[4]

The Full Court also held that s 35 of the International Arbitration Act 1974 (Cth) (“IAA”) is directed expressly to the implementation of Art 54, and under s 35(4) of the IAA, a party may seek what Australia has promised under Art 54, that is, leave to enforce the award as if it were a judgment or order of the Court. The practical purpose of these provisions when read together is, therefore, for a litigant to be put in a position of satisfaction: to be paid the debt now owing in domestic law by the recognition of the award.

The reason the appeal was stood over was for a further argument on the form of order for recognition of the award was because the  relief granted by Stewart J in the first instance went beyond a recognition only proceeding, with reference to the orders enforcing the award against Spain.[5]

Final Orders

At the hearing held on 25 May 2021, the Full Court treated the proceeding as a valid enforcement step and entered a favourable judgment for the respondent. The Full Court found that reflecting the terms of the award as pecuniary obligations is the most simple way to achieve the purpose of having the award recognised as if it were a judgement or order of the Court, and revised the Orders to reflect such a purpose.

Comment

This is the first time an Australian Court has clarified a two-step approach to recognition and enforcement of arbitral awards under the ICSID Convention, marking an important precedent to the approach the Court will take in the future when it comes to enforcing arbitral awards against States.

State parties need to be wary of relying on sovereign immunity in order to resist recognition of arbitral awards made against them under the ICSID Convention. Enforcing parties need to ensure that their application for recognition, in particular, the orders they seek, do not confuse recognition and enforcement.