Impact of the current geopolitical climate on award enforcement against states

Introduction

Enforcing an arbitral award against a state presents unique challenges, distinct from the commercial arbitration sphere. Where a state fails to voluntarily comply with an arbitral award, award creditors face the oft-times daunting task of pursing enforcement against state assets wherever they may be found in the world, subject not only to the enforcing state’s laws on award enforcement but also its laws on state immunity. This has posed a perennial challenge for award creditors against Russia. The current geopolitical climate may, however, be changing that enforcement landscape.

General considerations in enforcing awards against states

A recent survey of 170 arbitration cases found that award creditors against states ordered to pay damages began enforcement proceedings 40 percent of the time (Enforcement and Recovery: Practical Steps), indicating that foreign investors are often required to pursue enforcement proceedings before national courts in order to secure the payment adjudged to be due to them. The cost of enforcement and the time taken to enforce can both be high. The enforcement of an arbitral award involves an analysis of both national and international laws. National laws matter because courts apply domestic rules, which may or may not include the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York Convention), when enforcing awards. Even when domestic rules include the New York Convention provisions, their interpretation and application can vary widely, particularly as regards the public policy exception to enforcement.

International laws matter because they inform a state’s rights and obligations, whether under treaty or at customary international law, that impact on award enforcement. For example, contracting states of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) are obligated to give effect to ICSID Convention awards as though they were final judgments of their national courts. Equally, however, states, including ICSID member states, benefit from rights of sovereign immunity including vis-à-vis award enforcement. The ICSID Convention in particular gives precedence to the municipal law on sovereign immunities in the state where an investor seeks to enforce an award.

Award enforcement against states therefore often pits an award creditor’s rights to compensation against a state’s right to be immune from the exercise of a foreign court’s jurisdiction over it and/or the attachment of state assets. While jurisdictional immunity and execution immunity typically apply to sovereign acts or properties of a state, many states recognize exceptions in respect of commercial acts and properties. Some domestic laws on sovereign immunity, such as the Foreign Sovereign Immunities Act of 1976 in the United States, also contain express exceptions in cases where a judgment presented for enforcement relates to a claim for acts of terrorism by a state designated as a state sponsor of terrorism (see our December 2016 article, Layperson’s Guide- Justice Against Sponsors of Terrorism Act).

Even where an exception to state immunity may apply, award creditors may face protracted litigation seeking to enforce their award against some states, Russia being notable in this regard. In Franz Sedelmayer v. Russian Federation, SCC, Arbitration Award (July 7, 1998), a German investor who commenced arbitration proceedings against Russia in 1996, received an award in his favour in 1998, but spent the next ten years seeking to enforce it due, in part, to the sovereign immunity defences raised by Russia.

(For a further analysis of enforcement of awards under the ICSID Convention and the New York Convention, see our May 2022 IAR article, Recognition, Enforcement and Recovery of Investment Treaty Awards: Part I)

Enforcing awards against frozen and seized assets of sanctioned persons tied to a state

Russia’s latest invasion of Ukraine, commenced on February 24, 2022, has received wide-spread international condemnation. The primary response of many countries has been to impose economic costs on Russia and Belarus through sanctions. The scale of economic statecraft is unprecedented. Sanctions introduced by the United States and its allies and partners, including the European Union, the United Kingdom, Canada, Australia, and Singapore, target economic activity in and with Russia as well as the assets and operations of Russian investors outside of Russia.

The result is a highly complex geopolitical environment with a potentially enormous impact on foreign investment in Russia and the surrounding region. Russia has international investment treaties in place with more than 60 countries. Many of those treaties include an arbitration mechanism whereby foreign investors with investments in Russian territory can bring claims against Russia seeking compensation in the event of losses caused by treaty violations.

Two types of claims against Russia may be available to foreign investors under those treaties:

1. Claims related to investments in Russian territory, for example, in the event that assets are nationalized, funds transfers are suspended, or intellectual property rights eliminated. Russia has threatened these types of measures, and firms from 'unfriendly countries' more generally.
2. Claims related to investments in Ukrainian territory that is occupied or purportedly annexed by Russia, for example, in the event that assets are seized, destroyed, or otherwise made inaccessible by Russian forces or authorities in territory where Russia exercises effective control.

While historically award enforcement against Russia has been fraught with difficulty, partly due to its assertions of sovereign immunity, the current geopolitical environment may be shifting the enforcement landscape.

Since Russia’s invasion of Ukraine, allied states in opposition to Russia’s invasion of Ukraine have focused on freezing Russian assets linked to sanctioned persons in their respective jurisdictions. Since February 24, 2022, the European Union has frozen approximately €13.8 billion worth of Russian assets, the United Kingdom has frozen approximately US$13 billion worth of Russian assets, and Canada has frozen approximately CAD$123m worth of Russian assets. A U.S.-based global task force (which includes the European Commission and Britain) is estimated to have frozen a total of US$330 billion worth of Russian assets.

The basis for these sanctions is the connection believed to exist between sanctioned persons and the Russian state. Canada has therefore now gone a step further through the introduction of Bill C-19, which received royal assent on June 23, 2022 and which allows Canada to seize and repurpose the assets of sanctioned persons. A similar bill has been introduced and passed in the U.S. House of Representative titled the “Asset Seizure for Ukraine Reconstruction Act”.

These measures invite consideration of whether (and, if so, how) frozen and seized assets may be subject to award enforcement proceedings. Accessing and attaching such assets would require consideration of the enforcing jurisdiction’s sanctions rules in addition to the applicable award enforcement regime. A further question arises as to whether sovereign immunity defenses would nevertheless be available to prevent enforcement.

Enforcing awards against so-called “state sponsors of terrorism”

Lithuania and Latvia have also both designated Russia as a state sponsor of terrorism, and have called upon other NATO states to do the same. A U.S. Senate bill introduced in September 2022, titled the “Russia is a State Sponsor of Terrorism Act”, similarly proposes to designate Russia as a state sponsor of terrorism. Any such designation has significant consequences in these jurisdictions for whether sovereign immunity defenses would be available to Russia to thwart the enforcement of arbitral awards.

Conclusion

Foreign investors holding investments in Russia or Russian-occupied territory that are harmed by retaliatory measures in Russia or armed conflict in Ukraine should carefully assess whether they may have a treaty claim to seek redress for their losses, and take early and appropriate advice on such a claim. Funders should also carefully assess funding opportunities through a lens that takes account of the shifting enforcement landscape and its implications for long-term success in value recovery.

With thanks to Alexandra Redhead and Sanika Kulkami