What are the options when a Defendant does not pay what is due under an arbitral award
Whilst there are no league tables or rankings as to which states, or companies, are the best or worst at paying out on arbitration awards made against them, it is clear that non-payment of an award is not unique to developing economies or any one industry. Political and economic unpredictability is driving the uncertainty of both award payment and the time of payment. The risk varies from State to State and indeed between industries and the risk of non-payment of an arbitration award can be more acute in certain areas.
Arbitration is on the rise
Statistics from the International Centre for Settlement of Investment Disputes (ICSID), for example, indicate that the number of arbitrations doubled in the last 10 years. ICSID figures show that the proportion of arbitrations filed against sovereign states in Eastern Europe/Central Asia accounted for a quarter of arbitrations globally. South America, Sub-Saharan Africa and the Middle East & North Africa followed with 24%, 15% and 10% respectively. With regard to industry, Oil, Gas and Mining, Power and Construction accounted for just under half of all new cases.
Where an award is made in favour of a Claimant at arbitration often the Claimant will have to enforce that award rather than enjoy the luxury of it being paid voluntarily. This is a costly and protracted affair. We have advised parties as to their options in such circumstances which can include the following:
1. Arbitration Award Default Insurance
Claimants can protect themselves by purchasing this coverage which guarantees payment of a legally enforceable arbitral award against a State Defendant where that Defendant refuses to comply with the award. It is worth noting that it is usually the case that the premium of such policies are cheaper the earlier in the process you buy them. Therefore Claimants should consider taking out such a policy as soon as Arbitration is considered.
2. Assignment of Arbitration Award
Some award creditors may choose to “sell” their award. Generally awards are “sold” at a significant discount. Though this may sound appealing to award creditors who wish to cut their losses, the prospect to “sell” the awards may only appear in big ticket arbitrations.
3. Third Party Enforcement Funding
After what is likely to have been an expensive and lengthy arbitration, the award creditor may lack the financial appetite to undergo another phase of legal proceedings to secure payment of the award. In such circumstances an award creditor could seek 3rd party funding (assuming it has not already received such funding for the arbitration itself) from a funder that specialises in enforcement proceedings in return for a share of the award.