The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards has many merits. However, in most jurisdictions, when it comes to enforcing an arbitral award against a non-paying or recalcitrant state or a state-owned entity, the road can be long and full of obstacles.
The introductory words to the convention set out the central obligation imposed on contracting states: to recognise foreign arbitral awards as binding and enforce them, where requested, under the lex fori. Each contracting state is free to determine the domestic procedural mechanisms to be followed (where the convention does not prescribe any requirement), although these should be in line with the purpose of the convention (ie, to encourage recognition and enforcement of awards in the greatest number of cases possible).
That purpose is enshrined in Articles III and VII(1) of the convention, which on the one hand aim to prohibit domestic law conditions on recognition and enforcement that are more stringent than those in the convention, but on the other hand allow domestic law provisions that give more favourable rights to a party seeking to enforce an award.
However, despite these good intentions, there are a number of practical difficulties surrounding the enforcement of arbitral awards against sovereign states.
These issues are perhaps best illustrated with the use of a hypothetical case study. The facts of the case are as follows: the claimant is a foreign private company which has made an in-country investment in a particular state. The respondent is the government of the country in which the investment was made (the state). A dispute has arisen in respect of the investment, which the company referred to arbitration seated in a convention state. The tribunal determines that it has jurisdiction and is validly constituted, and ultimately finds in the company's favour. The tribunal issues a large monetary award against the state, which it fails to pay. The company brings recognition and enforcement proceedings before the courts of another convention state with the aim of enforcing its award against the state's assets within that jurisdiction.
In most jurisdictions, awards are not directly enforceable, so parties will need to seek the assistance of domestic courts in order to do so.
The exhaustive grounds on which recognition or enforcement of a foreign award may be refused are set out in Article V of the convention. These include:
- incapacity – where a party to the arbitration agreement was under some incapacity;
- invalidity – where there was no valid arbitration agreement;
- lack of due process – where a party was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present its case;
- lack of jurisdiction – where the award deals with disputes beyond the scope of the submission to arbitration;
- serious procedural irregularity – where the composition of the tribunal or the arbitral procedure did not comply with the arbitration agreement or (failing such agreement) the law of the seat;
- finality – where the award is not yet binding or has been set aside or suspended at the seat;
- arbitrability – where the subject matter of the dispute is not capable of settlement by arbitration; and
- public policy – where it would be contrary to public policy to recognise or enforce the award.
Although these grounds are exhaustive and relatively limited, they provide a number of avenues for resisting or delaying enforcement. To complicate matters, many of the terms used (eg, 'incapacity' and 'proper notice') are not defined in the convention – so the question of what falls within these grounds must be hashed out by the domestic courts. As a result, a party can face a number of challenges to enforcement in each jurisdiction where enforcement is sought.
Jurisdiction – limits to 'competence-competence' doctrine The 'competence-competence' doctrine is a general principle of international arbitration which provides that a tribunal is empowered to determine its own jurisdiction to deal with the dispute.
However, this doctrine does not grant the tribunal exclusive power to deal with questions of its own jurisdiction. Importantly, it does not prevent any court where enforcement of the award is sought from re-examining the tribunal's jurisdiction. It is accepted that arbitrators cannot be the sole judges of their own jurisdiction – hence, lack of jurisdiction is one of the grounds for resisting enforcement under the convention. Therefore, jurisdiction issues may be raised both before the courts of the seat (if an action is brought to set aside the award) and the enforcing courts (if an action is brought to enforce the award). Should a court determine that the tribunal lacked jurisdiction, it may deem the award invalid and therefore unenforceable.
One frequently used tactical challenge to resist or delay enforcement of an award is a challenge to the validity or existence of the agreement to arbitrate. Usually, whether a valid arbitration agreement exists – and the scope of the agreement – is a jurisdictional issue dealt with by the tribunal. However, the issue can also be reopened by the courts, both at the seat and at the enforcement stage. A party is not required to challenge or appeal an award in the courts of the seat of arbitration before resisting enforcement elsewhere.
Other possible challenges on jurisdictional grounds include arguing that the award wrongly deals with matters outside the scope of the arbitration agreement or of the parties' submission to arbitration. Both of these issues go to the heart of the tribunal's jurisdiction. The latter is particularly dangerous – as any dispute resolution lawyer knows, the parties' claims and defences evolve during the course of proceedings. The danger is that they evolve to the extent that they fall outside the scope of the original submission to arbitration.
The key takeaway for parties is that the last word on jurisdiction does not necessarily fall to the tribunal. When a party comes before the courts seeking enforcement of an award, it may be met with a number of jurisdiction challenges, and these may involve the court reopening (albeit limited) issues of both fact and law. Enforcement can be delayed while the courts address such challenges.
State immunity In most jurisdictions, foreign states are granted certain immunities against proceedings brought against them before the courts of another state. However, there are certain exceptions to immunity, including where the state has waived it. As a result, states can challenge the existence of an arbitration agreement.
Another line of argument brought by states is that the state entity in question did not have the power to enter into an arbitration agreement on behalf of the state or the state is not a party to the agreement. This can also involve related incapacity arguments.
Returning to the hypothetical case study: the state argues that the company does not fall into the category of 'investor' under the Bilateral Investment Treaty in which the arbitration agreement is found. It therefore asserts that there is no valid agreement to arbitrate between the parties, and that in the absence of a valid arbitration agreement, the state is entitled to rely on its immunity from both suit and enforcement against assets. Notwithstanding the fact that the company has successfully proven once in the arbitration that it falls within the definition of investor, the state invites the court to re-examine these issues. The court finds that the question of whether the company is an investor under the Bilateral Investment Treaty comes down to interpretation, and it may therefore need to hear submissions on the issues. These can involve complex questions of law (international and treaty interpretation) and expert evidence.
Due process and procedural issues Enforcement can also be resisted on grounds that the arbitration procedure was improperly conducted or somehow defective. Challenges are commonly made to:
- the arbitrators – whether on grounds of lack of impartiality or bias, or because they lacked the skills prescribed in the arbitration agreement; and
- the arbitral process itself – for example, if a party was not afforded full opportunity to present its case or the tribunal breached the agreed rules of the arbitration.
Returning to the case study: the state alleges that the tribunal was biased because one of the arbitrators had previously been instructed by the firm acting for the claimant. It also argues that, as is clear from the award, the tribunal had failed to properly consider and give weight to the state's evidence on a particular issue. Further, the tribunal's case management decisions wrongly restricted the state's ability to properly present its case.
Finally, the state argues that the award itself should not be enforced because the investment in question was tainted by bribery and corruption, and the award therefore breaches public policy.
Finality It is not uncommon for states to challenge an award at the seat, seeking to have it annulled or set aside. This is particularly common where the seat chosen by the parties (often unwisely) is within the state's own jurisdiction. Different jurisdictions take different approaches to whether an award that has been annulled or set aside at the seat is still enforceable elsewhere.
Full and frank disclosure Whenever an enforcement order is made ex parte (ie, without notice to the other side), the applicant has a duty to inform the court of all relevant matters. This is known as giving full and frank disclosure. Relevant matters include anything that might affect the judge's decision to grant the order.
Practically speaking, this means that the applicant is obliged to draw the judge's attention to the nature of the arguments that the defendant is likely to pose, and the critical points for and against granting the application. It is not enough to rely on general points or exhibited documents; a party must be proactive in its disclosure of relevant issues. Failure to give full and frank disclosure may not only result in the enforcement order being set aside, but expose the party to costs sanctions.
Procedural and formality challenges There are also a number of procedural and formality challenges that a party might face when seeking to enforce an award. One example of a common area of procedural dispute is whether – as a matter of domestic law – a party has been adequately served with all necessary documents. Serving an order on a foreign state will frequently involve serving the state outside the jurisdiction of the enforcing courts.
The form and content of the order can also provide grounds for challenges to enforcement. Returning to the case study: the company successfully secures a court order recognising the award and that order is served on the state. However, this is not the end of the matter. The state argues that the enforcement order alone was not enough to effect service and that it should have been served with an arbitration claim form and corresponding acknowledgement of service (and all with official translations). It also argues that the form and content of the order was incorrect, and that the process for service was incorrectly followed. Such challenges further delay enforcement.
Arguably, these domestic procedural and formality requirements complicate enforcement beyond that prescribed in the convention – bearing in mind the convention's purpose of encouraging recognition and enforcement of awards in the greatest number of cases possible. However, the reality in most jurisdictions is that domestic procedural laws can complicate the enforcement process as well as allowing a state several opportunities to delay enforcement.
Limitation issues An enforcing party must also bear in mind that there will be limitation periods for enforcing awards. Should the party fail to apply for enforcement within the relevant period, it will face an argument that the enforcement proceedings are time barred. Complicating matters is that a party seeking to enforce against a State will often need to enforce the award in a number of jurisdictions. However, limitation periods vary quite significantly across jurisdictions.
Calculating the expiry date of relevant limitation periods can also lead to complications. Where the award does not specify a time limit for honouring the award, the court may need to imply a reasonable time within which the state had to comply, and therefore from when time runs for the purposes of limitation. These nuances must be considered carefully as soon as an award is obtained – if not in advance – and can prove to be a trap for parties unfamiliar with global enforcement.
Successfully obtaining a favourable award is not always the end of the matter. If the losing party fails to honour the award, the successful party will need to seek the assistance of domestic courts – often in several jurisdictions – to enforce the award. Further, even if unsuccessful, challenges to enforcement can prove costly and serve to delay enforcement, particularly when facing such challenges in each jurisdiction where enforcement is sought.
Enforcing parties should therefore be mindful of the jurisdiction-specific nuances of enforcing awards in different countries, as well as the tactics commonly used by recalcitrant parties to obstruct or delay enforcement.
For further information on this topic please contact Neil Q Miller at Norton Rose Fulbright LLP by telephone (+44 20 7283 6000) or email (firstname.lastname@example.org). The Norton Rose Fulbright LLP website can be accessed at www.nortonrosefulbright.com.
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