This article is an extract from The Investment Treaty Arbitration Review, 7th Edition. Click here for the full guide.
International arbitration awards rendered by international arbitration tribunals are final and binding on the parties to the dispute.2 However, because of ambiguity and human error – which can range from typographical errors to in-depth analysis of the legal issues in question – the finality of arbitral awards can be challenged by a number of instruments under both international conventions and national laws.3 Because international arbitral awards are generally not subject to appeals, there is a necessity for a mechanism that allows for the correction of truly egregious errors that put in jeopardy the legitimacy of the investor-state dispute settlement system (ISDS).4
Post-award remedies are available to the parties in investment treaty arbitration in accordance with the applicable arbitration rules, international treaties and national laws. The ICSID Convention and the UNCITRAL Model Law each provide for a variety of post-award remedies that include the annulment of the award.5
This chapter briefly describes the different mechanisms and grounds for annulment of international investment arbitration awards, with a specific review of recent decisions issued in this regard. Given the existence of a specific self-contained annulment mechanism in the ICSID Convention, we first address this mechanism and subsequently discuss the annulment of non-ICSID awards.
I Annulment under the ICSID Convention
Awards issued under the ICSID Convention are final and are only subject to the remedies provided for in Articles 50 to 52 of the Convention.6 Article 53 of the ICSID Convention excludes all other remedies not provided for in the Convention, including appeals.7
The existence of a specific annulment mechanism in the ICSID Convention emerges from one of the distinctive features of the ICSID system (i.e, that it is a delocalised arbitration that does not rely on the domestic courts of any particular state).8 Therefore, domestic courts cannot annul ICSID awards.9
Under the ICSID Convention, annulment was designed to confer a limited scope of review of the award to safeguard from violations of fundamental principles of law in the proceedings and not as a recourse to review the substance of the award.10 Article 52 of the ICSID Convention allows the parties to request the annulment of an award on the basis of five exhaustive grounds, that:
- the tribunal was not properly constituted;
- the tribunal manifestly exceeded its powers;
- there was corruption on the part of a member of the tribunal;
- there was a serious departure from a fundamental rule of procedure; or
- the award failed to state the reasons on which it was based.11
To request the annulment of an award, either party to the dispute may submit an application in writing within 120 days of issuance of the award to ICSID's secretary general. An ad hoc annulment committee composed of three members will be appointed by the chairman of ICSID's Administrative Council from ICSID's Panel of Arbitrators to decide the request for annulment.12
In the context of the ICSID Convention, annulment is considered as an exceptional remedy13 that in principle does not affect the enforcement of the award and the duty of the parties to comply with it. The initiation of annulment proceedings does not generally prevent a party from enforcing the award, unless a request to stay the enforcement of the award is submitted with the application for annulment. In these cases, the secretary general can provisionally stay the enforcement of the award until the ad hoc annulment committee rules on the request.14
The ad hoc committee may conclude that none of the grounds for annulment provided for in Article 52 of the ICSID Convention should prevail. Alternatively, the ad hoc committee may decide that the award shall be fully or partially annulled. If the award is annulled (either totally or partially), the parties may resubmit the same dispute for the decision of a new tribunal.15 An award that is annulled by an ad hoc committee ceases to be binding on the parties to the dispute.
Between 2011 and 2020, 225 awards were rendered under the ICSID Convention, and 88 applications for annulment were submitted before ICSID.16 Of those applications, 56 were rejected, 25 were discontinued and only seven succeeded in the annulment of the award in part or in full.17 In 2021, 31 awards were rendered and 13 applications for annulment were submitted, of which nine were rejected, three were discontinued and only one succeeded in the annulment of the award in part.18 Only a few cases have been resubmitted to a new tribunal.19
Grounds for annulment under ICSID Convention
Article 52(1) of the ICSID Convention provides an exhaustive list of the grounds for the annulment of investment arbitration awards, on which we briefly comment in this section.
Article 52(1)(a): That the tribunal was not properly constituted
This ground refers to the improper constitution of the tribunal and includes questions concerning the constitution of the tribunal and the arbitrators, such as their nationality and possible conflicts of interest of one or more of the arbitrators.
This ground of annulment has been rarely invoked in applications for annulment.20
On 11 June 2020, the ad hoc annulment committee in Eiser Infrastructure Limited and Energía Solar Luxembourg Sà rl v. The Kingdom of Spain21 (Eiser v. Spain) annulled the arbitral award because of an improper constitution of the tribunal and a serious departure from a fundamental rule of procedure.22
The ad hoc committee in Eiser v. Spain considered that (1) based on an objective assessment of the facts, a third party would find the relationship between an arbitrator with one of the experts had a manifest appearance of bias,23 (2) the failure to disclose this relationship by the arbitrator prevented the party from challenging him and from having an independent and impartial tribunal,24 and (3) this non-disclosed relationship may have had a material effect on the award.25
In Carnegie Minerals (Gambia) Limited v. Republic of The Gambia, the state filed an application for annulment before ICSID, alleging, among other grounds, that the tribunal was not properly constituted, given that the circumstances leading to the appointment of the second arbitrator unduly deprived the state of its right to appoint an arbitrator.26 The ad hoc committee rejected The Gambia's application for annulment, as it did not find that the tribunal had not been properly constituted, rather that tribunal was appointed in accordance with the agreement of the parties and that The Gambia had lost that opportunity to make the appointment.27 The ad hoc committee considered that annulling an award where its integrity has not been compromised by the grounds invoked for the challenge seemed to have little justification.28 The ad hoc committee added that even if it had found that the tribunal had not been properly constituted, it would have had to 'give serious consideration to whether it should exercise its discretion not to annul the award notwithstanding a finding that the appointment process had been defective'.29
Article 52(1)(b): That the tribunal manifestly exceeded its powers
This ground is one of the most commonly used in annulment requests against ICSID arbitral awards.30 To warrant annulment, the excess of powers must be manifest; that is, it must be obvious. The most common cases in which the manifest excess of powers has been alleged are that the tribunal (1) lacked jurisdiction, (2) failed to exercise jurisdiction where it did have jurisdiction, (3) failed to apply proper law or (4) applied the law erroneously.31
Some annulment decisions have found a manifest excess of powers by the tribunal because of a variety of actions. For example, in Venezuela Holdings, BV, et al. v. Venezuela (formerly Mobil Corporation, Venezuela Holdings, BV, et al. v. Venezuela), Venezuela applied to annul the ICSID award rendered in 2015 whereby ExxonMobil was awarded US$1.6 billion in damages, alleging a manifest excess of powers by the tribunal because of the incorrect application of the law.32 The ad hoc committee partially annulled the award by considering that the tribunal exceeded its powers, by applying customary international law to the case instead of the law mandated by the Netherlands–Venezuela bilateral investment treaty (BIT), which was the law agreed by the parties.33 The committee concluded that the tribunal based its decision on general propositions about the relationship between 'national law' and 'international law', which ended up foreclosing proper application of the BIT to the dispute.34
Furthermore, in Occidental v. Ecuador II, the state argued, inter alia, that the tribunal had manifestly exceeded its powers by exercising jurisdiction over one of the investments of the claimant.35 The reason was that, at the time of the alleged breach, the claimant owned only 60 per cent of one of the investments whose protection it was seeking, but the tribunal awarded Occidental compensation for 100 per cent of the lost value of the investment. On this ground, the ad hoc committee concluded that the tribunal had manifestly exceeded its powers by compensating Occidental for 100 per cent of the lost value of the investment, while 40 per cent of that amount did not belong to the investor protected under the BIT.36 Therefore, the committee partially annulled the award, reducing the amount of damages awarded to Occidental from US$2,359,500,000 to US$1,061,775,000.37
Article 52(1)(c): That there was corruption on the part of a member of the Tribunal
Corruption refers to improper conduct by the arbitrator that was induced by personal gain from one of the parties or an interested third party and as a consequence is biased in favour of that party.38 On this ground, corruption by a member of the tribunal has to be proven.39 Because the corrupt act may be found in a variety of time frames, an application for annulment on the ground of corruption must be made within 120 days of discovering the corruption, but in any case no later than three years after the award was rendered.40
This ground for annulment is rare and, to our knowledge, has not yet been invoked on an annulment application.
Article 52(1)(d): That there has been a serious departure from a fundamental rule of procedure
This is another commonly used ground in the application for annulment of ICSID awards. For an award to be annulled on this ground there has to be a serious deviation that affects a fundamental rule of procedure, meaning that not every departure from a rule of procedure merits annulment.41 Thus, the departure must be substantial and it must have had a material effect on the affected party because it was deprived of the benefits of the rule in question.42 In addition, because not every procedural rule is fundamental, the departure must be from basic standards of procedure such as due process, the right to the parties to be treated equally, the right to be heard, etc.43
This ground was invoked by Spain in its application for annulment of the Eiser v. Spain award. In this case, Spain alleged that the right to an independent and impartial tribunal is a fundamental rule of procedure and that, for the standard to be met, it was only necessary to demonstrate the potential effect that the departure had on the award.44 The ad hoc committee considered that independence and impartiality of an arbitrator is a fundamental rule of procedure.45 On that note, the committee concluded that the lack of disclosure by the arbitrator deprived Spain of the opportunity to challenge the arbitrator in the arbitration proceedings and from seeking the benefit and protection of an independent and impartial tribunal that the right to challenge is intended to provide, thereby also affecting Spain's right of defence and fair trial.46 Consequently, the committee concluded that there had been a serious departure from a fundamental rule of procedure by the arbitral tribunal and, therefore, annulled the award.47
Article 52(1)(e): That the award has failed to state the reasons on which it is based
This ground is premised on the right of the parties to know and understand the reasoning that led the tribunal to its conclusions on fact and law.48 An award could be annulled under this ground if there are insufficient reasons for the conclusions reached in an arbitral award; if the award contains contradictory reasons, given that 'two genuinely contradictory reasons cancel each other out';49 and if the award fails to deal with every question presented before the tribunal.50
II Annulment of non-ICSID investment awards
The annulment of non-ICSID investment awards follows the provisions for setting aside international arbitration awards.51 Under non-ICSID arbitration, the domestic review of arbitral awards is generally also limited to jurisdictional issues and issues that concern the integrity of the arbitration.52 Under non-ICSID arbitration, the role of state courts becomes relevant for the annulment and enforcement of arbitral awards.53
In particular, the courts of the seat of the arbitration will generally analyse claims for annulment of investment arbitration awards on the basis of the applicable arbitration norms. Because the specific grounds for setting aside international arbitration awards may vary from one jurisdiction to another, we address this issue on the basis of the UNCITRAL Model Law (as updated in 2006), which has been used as a reference to arbitration legislation in numerous jurisdictions. As explained below, in certain cases, the interpretation by domestic courts of grounds of annulment may seem similar to the specific grounds in the ICSID Convention.
Under Article 34(1) of the UNCITRAL Model Law, the recourse to a court against an arbitral award may only be made through an application for setting aside under the exhaustive grounds included in said provision. Gary Born stresses that the decision to annul an award is at the discretion of the court when one of the grounds applies.54 Article 34(2) of the UNCITRAL Model Law contains four annulment grounds that must be proven by the party making the application and two annulment grounds that may be found by the court. As explained by UNCITRAL, this provision mirrors the grounds for refusing recognition and enforcement under Article V of the New York Convention.55
The grounds for annulment that the applicant party has the burden of furnishing proof include:
- the party to the arbitration agreement was under some form of incapacity or that the agreement is not valid under the law to which the parties subjected it;
- the party making the application was not given proper notice of the appointment of an arbitration or of the arbitral proceedings or was otherwise unable to present its case;
- the award deals with a dispute not contemplated by or not falling within the terms of the submission of the arbitration or contains decisions on matters beyond the scope of submission to the arbitration; and
- the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties.56
In addition, the court may find that (1) the subject matter of the dispute is not capable of settlement by arbitration under the law of the state in question, and (2) the award is in conflict with the public policy of that state.57
By 2017, almost 230 investments awards had been rendered under non-ICSID arbitrations, and approximately 71 annulment or set-aside applications had been submitted by the parties against these awards. From these applications, a decision on the application for annulment was rendered in 58 cases, in most cases upholding the award.58
Some examples of recent decisions59
In March 2020, the Swiss Federal Tribunal issued its decision on the set-aside proceedings of the award rendered by an arbitral tribunal administered by the Permanent Court of Arbitration in the case of Clorox v. Venezuela under the Venezuela–Spain BIT.
Venezuela filed an application to set aside the award before the Swiss Federal Tribunal on the ground established in Article 190(2)(b) of the Federal Statute on Private International Law,60 alleging that the tribunal manifestly exceeded its powers by exercising jurisdiction over Clorox Spain's investment, which was not protected under the Venezuela–Spain BIT,61 given that the original investment had been made by US-based Clorox International.62 The tribunal agreed with Venezuela's position that Clorox Venezuela did not have a protected investment under the BIT, considering there was a requirement of an active link between investor and investment, beyond the sole ownership of assets. However, the Swiss Federal Tribunal annulled the award because it concluded that the definition of investment under the BIT was an ordinary asset-based definition of investment provided in a general clause followed by a non-exhaustive list of examples, which did cover Clorox Venezuela's investment.63
In April 2017, the Paris Court of Appeals partially annulled an award in Serafín García Armas and Karina García Gruber v. Venezuela. In this case, the tribunal concluded that the claimants' nationality when making the investment was not relevant; rather the relevant dates were those pertaining to the alleged treaty breach and the commencement of the arbitration.64 Consequently, Venezuela applied for annulment of the award before the Paris Court of Appeals, alleging the lack of jurisdiction of the tribunal under Article 1520(1) of the French Code of Civil Procedure.65 The Paris Court of Appeals considered that the nationality at the time of the investment was relevant for protection under the Spain–Venezuela BIT, given that the BIT had two cumulative conditions for jurisdiction – nationality of the investor and protected investment – and one of them was missing.66 Accordingly, the French court partially annulled this award. The award was reinstated by the French Court of Cassation in a decision that upheld an appeal filed by the claimants dated 1 December 2021. The French Court of Cassation revoked the decision of the Paris Court of Appeals, considering that its decision added a jurisdictional requirement that was not provided for in the BIT, namely, that the investor had to hold Spanish nationality at the time the investment was made.67
III Concluding Remarks
Annulment of awards is a central mechanism in ISDS to secure the tenets of procedural correctness in arbitral decision-making. It has been conceived as a limited recourse that differs from an appeal and that is generally not an opportunity to revisit the merits of the dispute.
In the context of current revisions to the ISDS system, several proposals have been voiced that refer to post-award remedies. One alternative roots for the development of a more complete annulment mechanism;68 another proposal favours the creation of an appeals mechanism.69 One of the areas of discussion has been whether this proposal would overlap with existing annulment mechanisms and whether it would result in a third-tier process that extends the timeline of proceedings, furthers fragmentation and increases costs.70 UNCITRAL's working group has also flagged concerns about the fact that this inclusion may result in a need to amend the ICSID Convention, considering, among other issues, whether the grounds for annulment contained therein can also be grounds for appeal, the effects of the decisions on appeals and the nature of appealable decisions.71 At this stage, it is not possible to anticipate how these discussions among states will unfold and whether they will yield any specific reforms to the existing post-award remedies in ISDS.