Recognition, enforcement and recovery of investment treaty awards: Part II

Introduction

In Part I of our series on the recognition, enforcement and recovery of investment treaty awards, we provided a concise summary of the enforcement framework for investment treaty awards under the 1965 Convention on the Settlement of Disputes between States and Nationals of Other States (the ICSID Convention) and the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). Because of the inherent nature of investment treaty arbitration as a form of recourse for investors against sovereign states, foreign state immunity is often raised at the point of recognition or enforcement of investment treaty awards, either as an objection to the exercise of subject matter jurisdiction against states by domestic courts or to protect certain types of state property from measures of execution.

In Part II, we examine foreign state immunity laws and their interaction with domestic regimes for the recognition and enforcement of investment treaty awards in more detail.

Principles of Foreign State Immunity

The doctrine of foreign state immunity occupies a fundamental place in international law and international relations. Foreign state immunity comprises two related concepts, relevant at two stages of the recognition/enforcement process:

• immunity from suit, i.e. immunity of foreign states from the jurisdiction of domestic courts (jurisdictional immunity); and
• immunity from execution, i.e. immunity of a foreign state’s property from execution of a judgment or award against it (execution immunity).

As there is no single international treaty regime in force to govern foreign state immunity, the application of immunity has primarily been left to domestic law, resulting in a lack of uniformity. For this reason, practitioners are advised to consider closely the specific laws of the jurisdictions in which they are engaged.

Originally, foreign state immunity was (broadly) absolute and a small minority of states today maintain a doctrine of absolute foreign state immunity, including the People’s Republic of China. However, a majority of states have now adopted a concept of restrictive immunity.

Restrictive Jurisdictional Immunity

Restrictive jurisdictional immunity is a general immunity, subject to exceptions. The main exceptions are:

• waiver and / or submission (waiver); and
• engaging in a commercial activity.

Waiver

A foreign state cannot rely on jurisdictional immunity to the extent that it has waived such immunity. A waiver can be express or implied but must be clear and unequivocal. For example, an appearance before a court merely to assert immunity is not a waiver. Equally however, a submission to jurisdiction is implied when a state appears before a court and takes active steps to defend the merits of a dispute and will be treated as binding.

Waiver by prior agreement is also often recognised as an exception to jurisdictional immunity but is a common source of contention. In the case of a non-ICSID arbitration, submission to the supervisory jurisdiction of the courts of the seat is regarded as uncontroversial. However, there are divergent approaches between states as to whether an agreement to arbitrate under the law of one state amounts to an implied waiver of jurisdictional immunity in other states where recognition or enforcement of the award is sought.

Contention concerning waiver by prior agreement extends to the treatment of the New York Convention and the ICSID Convention. Domestic courts, particularly in the US and Australia, have considered whether ratification of these treaties, either alone or in conjunction with some other step such as agreement to arbitrate, amounts to a waiver or submission.

In relation to the New York Convention, see for example: Seetransport Wiking Trader v Navimpex Centrala 989 F.2d 572 (2d Cir.1993); Creighton Ltd v Qatar 181 F.3d 118, 126 (D.C. Cir. 1999); Tatneft v Ukraine 771 F. App’x 9, 10 (D.C. Cir. 2019); Process and Industrial Developments Ltd v Federal Republic of Nigeria 506 F.Supp.3d 1, 8 (2020).

In relation to the ICSID Convention, see for example: Societe Ouste Africaine des Betons Industriels (SOABI) v Senegal (1991) 30 ILM 1169; Benvenuti & Bonfant v People’s Republic of the Congo, Cour d’appel, Paris (26 June 1981) 65 ILR 88; Blue Ridge Investments LLC v Republic of Argentina 735 F3d 72 (2nd Cir 2013); Mobil Cerro Negro Ltd v Bolivarian Republic if Venezuela 863 F3d 96 (2nd Cir 2017); and Eiser Infrastructure Limited v Kingdom of Spain [2020] FCA 157 (affirmed in Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l [2021] FCAFC 157 and currently on appeal to the High Court of Australia).

In practice, the case law warrants close attention. Divergence remains between jurisdictions so practitioners should carefully consider the scope of exceptions in the jurisdictions in which they are engaged.

Commercial transactions

The basic principle upon which the commercial transaction exception to jurisdictional immunity rests, is that when a foreign state acts in a ‘commercial’ matter within the ordinary jurisdiction of municipal courts it should be subject to that jurisdiction. The principle is notoriously easy to state at this high level of generality but often difficult to apply to particular factual scenarios.

Restrictive Execution Immunity

Execution against a state’s property is only permissible in two main scenarios:

• through an explicit or implied waiver of execution immunity; or
• through enforcement against a state’s commercial property.

Waiver

Explicit waivers of execution immunity may relate to general state property or some specific property earmarked by the state to satisfy a liability or arbitral award. In respect of implied waivers of execution immunity, generally, a waiver of jurisdictional immunity does not extend to a waiver of execution immunity.

In respect of the ICSID Convention, no implied waiver of execution immunity is available given that article 55 of the ICSID Convention expressly preserves execution immunity to the domestic laws of contracting states. In contrast, the New York Convention contains no express provisions addressing foreign state immunity, whether as to jurisdiction or execution. However, a small number of civil law jurisdictions, principally France and Switzerland, have found that a waiver of jurisdictional immunity through submission to arbitration in a New York Convention state extends to a waiver of execution immunity. Thus, in Societe Creighton v Minstre des Finances de L’Etat du Qatar et autre, Cour de cassation [Cass.] l e civ, July 6, 2000, 127 J.D.I. 1054 (2000), the French Cour de Cassation held that Qatar had impliedly waived its execution immunity by entering into an arbitration agreement providing for the ICC Rules, which provide that an award will be binding upon the parties and that the parties are obliged to comply.

Commercial property

The doctrine of restrictive immunity in many jurisdictions rests on the premise that states are not immune in relation to acts undertaken by a state as a commercial actor, in contrast to acts undertaken by a state in a sovereign capacity. As a consequence, it is generally accepted that execution immunity does not extend to a state’s commercial property. However, the question as to what constitutes commercial property is complex. For example, a contract for the supply of goods or services in return for monies may be commercial in nature but be entered into in furtherance of a sovereign purpose. Similarly, the commercialisation of state owned natural resources involves both commercial and sovereign acts. Domestic laws differ in how to address this issue, particularly as to whether the inquiry is focused upon the nature of the act or its purpose.

In some jurisdictions, the law focusses on the nature of the act. Section 1610(a) of the U.S. Foreign Sovereign Immunity Act (1976) permits execution against foreign state property in the United States ‘used for a commercial activity in the United States.’ ‘Commercial Activity’ is defined in section 1603(d) to mean ”…either a regular course of commercial conduct or a particular commercial transaction or act. The commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose.”

Section 3 of the United Kingdom’s State Immunity Act (1978) provides that a state is not immune in respect of proceedings relating to ‘a commercial transaction’, where a ‘commercial transaction’ includes “any contract for the supply of goods or services’ and ‘any loan or other transaction for the provision of finance…” It therefore distinguishes commercial transactions and contracts from transactions or activity into which a state engages in the exercise of sovereign authority.

However, the United Nations Convention on Jurisdictional Immunities of States and Their Property adopts a hybrid nature and purpose approach, providing in article 2(2):

“In determining whether a contract or transaction is a ‘commercial transaction’…reference should be made primarily to the nature of the contract or transaction, but its purpose should also be taken into account if the parties to the contract or transaction have so agreed, or if, in the practice of the state of the forum, that purpose is relevant to determining the non-commercial character of the contract or transaction.”

A further practical issue is that in seeking to establish that state property is not sovereign but commercial, there is often information asymmetry between a state and a private entity in favour of the state, which can make discharging the evidentiary burden challenging.

Conclusion

Domestic laws in relation to foreign state immunity take different approaches when seeking to balance the sovereign rights of states against the rights of award creditors, including between jurisdictions that have adopted a restrictive immunity approach. The application of exceptions to both jurisdictional and execution immunity are nuanced and can give rise to complex issues of law and fact. This extends from the interaction of domestic immunity laws to the recognition and enforcement regime for investment treaty awards under the New York Convention and ICSID Convention.

As domestic courts continue to grapple with these issues, investors and their legal advisers should closely and carefully consider the scope of exceptions to immunity in prospective enforcement jurisdictions.