International relations

 MARKET VIEW – LITIGATION 

Omni Bridgeway’s Wieger Wielinga gives an overview of the Enforcement of Arbitration Awards against Sovereign entities in Practice

The last decade has shown a sharp increase in investment treaty-based and other international arbitration against sovereign nations, parastatals and other semi-sovereign entities. In the slipstream came an increase in the number of cases in which such sovereigns resisted complying with judgments and arbitration awards, including awards from the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). Winning an arbitration award against a sovereign does not necessarily mean that recovery will be successful.

After all, the true value of litigation or arbitration as a means of resolving a dispute lies in the ability to enforce the outcome. In international arbitration, therefore, one will find few litigants going through the costly and time-consuming endeavour of dispute resolution just to make a point. It would be unfair to argue that law firms do not have this as a clear risk factor in sight before starting arbitration, but undeniably lawyers and their clients do often focus a tad more on the merits of the matter rather than the practice of enforcement against sovereigns in politically risky regions. The latter risk has, in the past decade, been underestimated.

This article discusses practical considerations for implementing an enforcement strategy against a sovereign counterparty. It is confined to some basic concepts and does not have any pretence of completeness.

Some basic observations

Avoid the home jurisdiction

Absent voluntary payment of the award, and assuming all diplomatic avenues have been exhausted, the options left will chiefly involve legal remedies for enforcement. The first practical question to answer is whether to include legal action in the respondent’s home jurisdiction as part of the recovery effort. This depends on the specific jurisdiction involved, but in practice we rarely advise doing so, principally because of the practical experience that in these cases one simply cannot rely on the local judiciary being sufficiently impartial, professional or incorruptible. Some of these jurisdictions even have specific legislation that prevents enforcement against certain state assets or state entities. Also, voluntarily submitting to a local judiciary may lead to procedural issues or decisions that could have adverse consequences in enforcement procedures in the courts of some western jurisdictions.

Strategic co-ordination and settlement momentum

The options available in an enforcement context are: (i) inducing the respondent to settle; or (ii) enforcement through sale and seizure of assets, often piecemeal.

‘Knowing the relevant “piercing the corporate veil” doctrines and having intelligence to support the case are a crucial element in the enforcement practice.’

An unwilling debtor has the advantage of time, more so given that most tribunals typically award interest at levels below the rates the debtor is paying in the free market. Such a debtor is by definition not in a hurry and can take a ‘wait and see’ approach. In most cases there will only be progress if there is a sense of urgency on the part of your debtor to pay your debt. That sense of urgency is usually best generated vis-à-vis your sovereign counterpart by strategic deployment of the different measures to be taken. To this end, measures are better not taken in isolation but as part of a well prepared strategy specifically designed to create settlement momentum. Of course the appropriate approach to enforcement varies from debtor to debtor and should have regard to the sensitivities of the case and the client’s interests at large.

The importance of intelligence 

Asset-tracing intelligence

In either scenario, whether a seizure and sale of assets strategy or enforcement action to create overall settlement leverage, enforceable assets have to be found in one or more reliable jurisdictions and be of sufficient value to cover the debt or at least sufficient non-monetary or nuisance value to induce the other side to settle. This takes time and requires a specialist who not only knows where to find the assets but also understands what the underlying legal requirements are for these assets to actually be useful for enforcement. These requirements differ considerably from jurisdiction to jurisdiction. In many cases against unwilling sovereigns one really needs the full range of forensic investigative services for the identification, characterisation and quantification of a respondent’s asset position. Typically, these services will include verification of the legal and beneficial ownership of assets and offshore vehicles; the provision of evidence in support of attachment orders, and an evaluation of which assets should be targeted in which order. The latter decision will be based on the strategic and commercial value of assets, timing issues, jurisdictional considerations and potential legal obstacles to attachment/seizure such as sovereign immunity. Even though asset tracing is in principle a dynamic business – not a static endeavour – at Omni Bridgeway we benefit daily from access to the historic data we have gathered during our 28 years of enforcement practice. Our database, for example, has developed into a significant collection of who owns or owned what and where.

Intelligence on the counter party

Understanding the reasons why a sovereign may resist honouring a final binding award can be hugely important for a recovery strategy. Those reasons vary. In many cases, bad payment habits are a form of cash management. Argentina, on a large and politicised scale, is a case in point. Often other reasons of a more bureaucratic or outright political nature may be in play. There may be a lack of precise allocation of responsibility within the government resulting in uncertainty as to whose approval needs to be obtained to authorise payment. In some dictatorial regimes, civil servants handling the file may be afraid of being the unlucky messenger (and its consequences) without a clear exogenous factor that creates urgency. In some countries, politics and story spinning (keeping up appearances with the public) may play a role in a government’s decision to not quickly settle an ICSID award. Under any of these circumstances, the sovereign may consider delaying payment long enough to frustrate the prevailing party into settlement negotiations. Some countries simply refuse to honour any legally binding award and resist fiercely any, and all, enforcement activity, almost as a matter of principle. In some cases, a sovereign’s reaction falls somewhere in between. It may feel it needs to exhaust every option the legal system has on offer, including a ‘setting aside’ procedure that on the face of it seems to have little merit, just so it can justify payments within its internal political setting. Knowing the key decision makers of the sovereign counterparty and understanding the political context in which they operate is therefore of great importance.

Sovereign immunity

Sovereign immunity is the doctrine that prevents a sovereign state or its political or administrative subdivisions, departments and agencies from being sued or its assets subjected to foreclosure measures without its consent. The doctrine has its roots in the ancient principle that ‘the monarch can do no wrong’. Claiming sovereign immunity is a common way for a sovereign respondent to avoid satisfying international arbitration claims. There are two types of immunity to distinguish in disputes with sovereign counterparties: immunity from jurisdiction and immunity from execution. Immunity from jurisdiction refers to whether a domestic court in a certain case can exercise jurisdiction over that foreign sovereign in the first place. Immunity from execution refers to the immunity of certain assets from execution of an award or judgment obtained against a sovereign respondent. Each jurisdiction has its own rules and interpretation of enforcement immunity. These may be rules of a national order embodied in a specific statute, such as the US Foreign Sovereign Immunities Act 1976 or the UK’s State Immunity Act 1978. Such rules may also be codified as part of a country’s civil (procedural) legislation such as in the Netherlands. Finally, there are rules defined predominantly in jurisprudence such as in France, Germany and Switzerland. Most western countries uphold the restrictive doctrine of immunity, meaning that some property is excluded from immunity, often property judged to be of a commercial nature. Nevertheless interpretation varies considerably in each jurisdiction, even between countries with a very similar legal system and tradition. Some jurisdictions still uphold the doctrine of absolute immunity allowing no enforcement against states at all, unless with specific consent. Initiatives to harmonise the plethora of doctrines in treaties have, however, taken place. In developed countries where a restrictive immunity doctrine applies, despite the above-mentioned differences, there seems to be a degree of consensus on certain categories of property being immune: military assets, property for diplomatic missions, and property forming part of cultural heritage.

The practical implication of the various immunity doctrines for the enforcement practice is obvious. While the obvious ‘immune’ categories should be avoided altogether, the remaining assets still need to be scrutinised for immunity in each jurisdiction and there is almost always room for interpretation. Being well prepared before an attachment is applied for will help. The devil, more often then not, is in the detail.

State entities, state instrumentalities

In principle, a state cannot be distinguished from its government, its ministries, and its various agencies and organs. This means that the assets in the name of these entities, if they pass the immunity test, are assets that could, ceteris paribus, be used for execution. Yet one argument that sovereigns often use in attacking asset execution measures is that the asset is owned by an unrelated legal entity. This issue, again, is very jurisdiction and case dependent. Each law has its own rules and each jurisdiction where the interpretation of the applicable law on this subject takes place may be influenced by its own lex fori in the interpretation of the issue. Sovereign entities may go by myriad names: a parastatal, an instrumentality, a state’s alter ego as well as territories such as provinces or states within a federation. The relevance for now is the realisation that, in practice, the relationship between the state and the entity who owns the assets found by an intelligence department or firm may be unclear. An effective enforcement needs detailed analysis and legal interpretation in order to demonstrate, with the maximum factual and legal support possible, that relationship.

A related issue is where assets are clearly in possession of a separate legal entity, which claims them as its own, but there is nonetheless a defendable reason to attach for execution and defend an attachment. For instance, where specific decrees demonstrate that the asset are held for the state as an agent.

Both immunity and the concept of legal identity may be arguments invoked by a sovereign to ward off creditors shield its assets from execution. Knowing the relevant ‘piercing the corporate veil’ doctrines and having intelligence to support the case are a crucial element in the enforcement practice.

Conclusion

The limited scope of this article means it cannot expand on all subjects relevant to the practice of enforcing awards against sovereigns. Such subjects would include for instance also interim relief and/or pre-award attachments; the dangers of corruption; ‘unfair play’ by sovereigns; and non-legal enforcement measures such as publicity.

The key points to highlight are:

• In general one should avoid the home jurisdiction of a sovereign when enforcing an award against that sovereign.
• One should appreciate the value of gathering intelligence, real world experience and strategic thinking. This strategic thinking should lead to a well-planned and coherent enforcement endeavour. An ad hoc ‘trial and error’ type approach is ill conceived and could damage the overall enforcement process.
• Knowledge of legal concepts such as sovereign immunity and piercing the corporate veil in a multitude of jurisdictions is crucial.
• Finally, it should be added that enforcement of high-value awards against unwilling sovereign counterparties is a team effort. Lawyers instructed in different jurisdictions to invoke and defend enforcement measures with sufficient and well-prepared ammunition are an invaluable part of any recovery team. Such teamwork requires not only solid preparation by all team members -the client, the (specialised) funder and the lawyers in different jurisdictions- but also a high level of mutual trust.