ENFORCING ARBITRAL AWARDS AGAINST SOVEREIGN STATES
THE VALIDITY OF SOVEREIGN IMMUNITY DEFENCE IN INVESTOR-STATE ARBITRATION.
MICHAEL JUNIOR CHE NEBA
Thesis submitted for the master’s degree in law
Faculty of law, Uppsala University
THESIS CONTENT PAGE
BY: MICHAEL JUNIOR CHE NEBA
introductory note and back ground of study
State practice before it courts
arbitral awards and court judgements
doctrines established in international investment law as an agency of public international law
international investment law as part of public international law
Harmonisation or fragmentation of international law.
doctrines in the settlement of investment disputes
The notion of sovereign immunity in investment arbitration.
Doctrine of sovereign immunity
State trading and effect of an international agreement by a state to arbitrate its disputes
Exceptions to the principle of sovereign immunity
Immunity from jurisdiction
Immunity from enforcement or execution of awards
Enforcement of court judgements and arbitral awards
Non-ICSID awards regulated by the New York convention.
Limitations and challenges in enforcing arbitral awards against sovereign states
United Nations Convention on Jurisdictional Immunities of States and Their Property
Moving towards a unified future
PART ONE: INTRODUCTION AND BACKGROUND TO STUDY
This thesis illustrates the relationship that exist between international investment law and the public law notion of sovereign immunity with a keen interest in the enforcement and execution of foreign arbitral awards against states as sovereignties.
The main research question of the thesis, is whether defence of sovereign immunity should be wholly made available to host states in investment arbitration, or should it be limited by national or municipal laws on sovereign immunity where enforcement of the arbitral awards is sought. This poses a major problem in investment arbitration as to the degree at which a state may waive its immunities from enforcement and execution of foreign arbitral awards, and under the municipal laws of another state.
The development of sovereign immunity is highly influenced by the fact international investment law is a hybrid of both (public and private) international laws, which influences rules on immunity from execution. The purpose of investment treaties is to protect investors against the sovereign acts of host states in a forum which is fair and impartial on such issues (sovereign immunity defence in investor state arbitration). The process of aiding foreign investors in overcoming such a claim made by host states, could be made possible with the development of international conventions and municipal laws on sovereign immunity. Therefore, once a state agrees to arbitrate its disputes with alien investors, in which it owes international responsibility to, such as breach of treaty obligations on the part of the host state, it thus limits its (the state) chances of successfully relying on the notion of sovereign immunity to escape international wrongful acts, thereby limiting unjustified claims of sovereign immunity as a defence by host states from enforcing and executing arbitral awards.
BACKGROUND OF STUDY
With the rapid increase of Bilateral Investment Treaties (BITs) over the past decade, involving both developed and developing nations, commencing commercial transactions with private individuals, has increased the process of seeking neutral and impartial forums, investor treaty based dispute settlement (ISDS) cases have commenced arbitration before institutionalised tribunals such as the centre for settlement of investment disputes (ICSID), the Stockholm Chamber of Commerce (SCC) and ad hoc tribunals such as the United Nations Commission on international trade law (UNCITRAL).
The commencement of claims before ICSID tribunals helps to depoliticize investment disputes and to limit the risk of diplomatic protection which is granted by a state to its nationals in investment disputes.
The purpose of investment protection agreements is to protect alien investors against uncompensated expropriation, breach of the fair and equitable standard as well as other substantive protections afforded. A state might have absolute authority over resources within its territory and can sometimes expropriate without compensating alien investors based on the ”police power” doctrine. Indisputably, the state has the right under treaties to afford maximum protection to foreign investors and their investments.
Failure by a state to obey treaty and contractual obligations entered with private persons, might be used as a claim basis by investors to seek enforcement of arbitral awards against the host states who often wish to deny enforcement or execution, based on the doctrine of sovereign immunity. Consequently, a state under international conventions such as the New York Convention on the enforcement and recognition of arbitral awards 1958 (NYC) and ICSID, are under obligations to enforce foreign arbitral awards. The non-compliance a contracting party to the said conventions, will result in a breach of treaty obligations under public international law.
The two principles that govern proceedings of enforcement of arbitral awards being; the principle of good faith (pacta sunt servanda) and the doctrine of sovereign immunity (par in parem non habet jurisdictionem). The principle of good faith is developed from article 26 of the Vienna Convention on the law of treaties (VCLT) and interpretation of treaty clauses in good faith, while the latter on sovereign immunity holds that a state as a sovereign, is not subjected to the jurisdiction another state.
In the enforcement proceedings, domestic courts will apply the rules of lex specialis and jus cogens, to see which of the two above principles (good faith and sovereign immunity) has precedence over the other.
A difficulty in enforcing arbitral awards comes from the discrepancy in a waiver of a states immunity from enforcement, execution and before national or municipal laws on sovereign immunity. This results in most states adopting a restrictive approach on immunity over the approach of absolute immunity. Even with the application of the theorem of restrictive immunity, a state can still raise the claim of sovereign immunity in the enforcement and execution stage and still be successful.
Consequently, investor state arbitration is hampered in the enforcement proceedings by not affording alien investors maximum protection. This leaves open the research question in this thesis. Should states be allowed to fully rely on the notion of sovereign immunity, or should it be limited to the municipal or national laws on sovereign immunity on the state in which enforcement is sought.
The thesis focuses on the principle of proportionality, to deal with the widening gap between investors rights and public concerns in investment arbitration. This principle Is however achieved via merging international and municipal law on sovereign immunity. This is because the enforcement of arbitral awards varies between jurisdictions based on the interpretation of sovereign immunity in municipal laws as well as the arbitration clauses of a national court. Even with most awards, due to the defence of sovereign immunity raised by host states, little scholarly writing is being made annually to address the issue of sovereign immunity defence in the execution of investment arbitration awards.
The thesis takes account of the decisions of international investment law, public international law, state practice and doctrine thereby attempting to answer the following questions.
Does international investment law and its related principles favour a fragmentation or harmonisation of international law?
Are domestic rules on immunity, (municipal laws on sovereign immunity) superseded by the NYC and ICSID?
How do we distinguish immunity from enforcement and execution? Does the agreement to arbitrate imply a waiver from immunity to execution by a host state?
The impact of proportionality in the future of investment arbitration disputes.
Attesting to provide answers of the above-mentioned questions will be divided into several chapters as seen below:
Chapter one of this thesis highlights the introductory note and background of the study, structure, as well as the research methodology comprising of both doctrinal and comparative analyse.
Chapter two views the doctrines established in international investment law and explains if it favours a harmonisation or fragmentation of public international law.
Chapter three illustrates the evolution of sovereign immunity, the effects of states trading, engaging in international agreements to arbitrate claims, the doctrines involved in disputes concerning sovereign immunity limiting it from absolute to restrictive immunity. Also, it distinguishes immunity from jurisdiction and immunity from enforcement and execution of arbitral awards
Chapter four is the core of the thesis and deals with the enforcement of court judgements and arbitral awards before municipal or state courts, distinguishing ICSID non-ICSID (awards governed by the 1958 New York Convention.
Chapter five is a continuation of chapter four, but talks on the limitations or setbacks of enforcing arbitral awards
Chapter six, of the thesis provides a way forward for foreign investors in overcoming the defence of sovereign immunity and analysis the role of the principle of proportionality in future disputes as such.
The methodology of this research, will first consider the ”BLACK-LETTER-LAW” approach, in analysing the socio-economic and political discrepancies in different jurisdictions, thereby comparing the common law jurisdictions such as the United Kingdom, civil law jurisdictions such as Sweden and Argentina, as well as socialist countries such as the Peoples republic of China. In this light, it therefore views the relationship between international investment law and sovereign immunity. Th methodology ends with analysis of legal principles (doctrines), legislative and judicial decisions on sovereign immunity, both in the national and international levels.
LEGAL PRINCIPLES (DOCTRINAL)
The most vital legal principles or doctrines in the enforcement of investment arbitral awards are: The principle of good faith (pacta sunt servanda) derived from the treaty obligations and interpretation, and the principle of sovereign immunity (par in parem non habet jurisdictionem). The application of these two principles simultaneously is lax in the sense that no one has precedence over the other and the absence of an international unified means in applying both principles simultaneously. So, it difficult to establish which principle has precedence over the other
This thesis is party based on a doctrinal research methodology. So, doctrinal or legal principles will be used to solve the above problem (in applying the principle of good faith and sovereign immunity, which principle should have precedence over the other?). This is achieved by distinguishing acta jure or claims derived from sovereign acts and acta jure gestionis, both analysed in a restrictive approach on sovereign immunity. By relying on the said approach, a state cannot rely on the claim of sovereign immunity as a defence to with respect to a claim concerning a commercial act of the state. At the execution level, there is need for recognising commercial acts or assets of the state. This thesis will do so in chapter five.
Based on the principle of good faith and treaty obligations contained in articles 31-33 in the VCLT, which specifies rules on interpretation, requires the doctrine of sovereign immunity to be interpreted according to the VCLT. The doctrine of sovereign immunity has become a principle in international law and has often bowed to treaty provisions in the interpretation process. Article 31(3)(c) of the VCLT provides that where there is a major conflict of laws between international national law, ”any relevant rules of international should be applied between the disputing parties”. The treaty therefore looks at international law as a harmonisation or harmonisation with respect to international investment law and sovereign immunity.
STATE PRACTICE BEFORE NATIONAL COURTS
There are two conventions which govern the enforcement and execution of foreign arbitral awards before national courts. These are the 1958 New York Convention the Washington convention or ICSID. While awards rendered under ICSDID convention are perceived as a final judgement of the domestic court, awards under the NYC, are viewed as foreign awards, subjected to review before domestic courts. Here, treaty interpretation plays a role, in the determination of conflict of laws country’s public policy, legislation in domestic law and international law.
The ICSID convention is created by the world bank, to depoliticise investment arbitration and sovereign immunity under ICSID, leaves immunity from execution to the law of the forum state where execution is sought and governed in articles 54(3) and 55. The NYC, was created by the United Nation (UN) and makes no mention of sovereign immunity and execution of arbitral awards. Therefore, national courts have interpreted sovereign immunity based on NYC awards differently, creating variations in state practice and interpretation.
So much, some countries are copying state practice and interpretation of sovereign immunity (legal transplants) creating a harmonisation of international law. Even with this harmonisation, differences may still be observed in the way various national jurisdictions apply the notion of sovereign immunity. The thesis in this section will use the comparative analysis technic. I.e. between national laws as well as between international treaties them selves such as the 1972 European convention on sate immunity and the United Nations Convention on Jurisdictional Immunities of States and Their property. More importantly, the relationship could be seen between national laws and international treaties.
ARBITRAL AWARDS AND COURT JUDGEMENTS
The absentia of multilateral a multi-lateral treaty governing the principle of sovereign immunity has made most states to move to a more restrictive approach on sovereign immunity enshrined in their domestic laws. This is problematic as the principle, will then be interpreted differently across various jurisdictions. The thesis looks at common law jurisdictions on sovereign immunity such as the United states of America that has a parliamentary law on sovereign immunity, while civil law jurisdictions such as Sweden and Argentina have relied on case law, public international law as well as judicial law developed in their national courts. Also, socialist countries such as China still maintain the notion of absolute Immunity.
Common law jurisdictions such as the UK and US create laws on immunity case law becoming binding precedent. These two jurisdictions have adopted a restrictive approach on sovereign immunity and case law is rooted in their traditional national laws on sovereign immunity. Arbitral awards rendered in these nations have become precedents to other countries. Such cases include the UK case of Alcom v the republic of Colombia, and the US case of LETCO v Liberia
Civil law countries refer to international law on sovereign immunity developed via case laws in their municipal laws. The practice of Swedish courts is like that of common law jurisdictions of the U.S.A and the U.K, which aloe for the enforcement and execution of alien arbitral awards against property that is used for commercial purpose. A good example is the case of Sedelmayer v Russian Federation. The financial crisis in Argentina saw the state receive a lot of arbitral awards against it as it has thus adopted a restrictive approach on sovereign immunity.
Socialist countries such as China, have seined the UN Convection, which advocates for a restrictive approach on but still practice the notion of absolute immunity. The FG Hemisphere Associates LLC v DRC, final appeal in Honkong with a common law jurisdiction saw that Honkong cannot adhere to a doctrine on sovereign immunity which is different to that practiced in mainland china.
As seen above, the practice of enforcing arbitral awards is inconsistent and varies from jurisdiction to jurisdiction as there are there stages in enforcing arbitral awards being jurisdiction, recognition and execution. All these is left at the wimps and caprices in the jurisdiction of the municipal law were enforcement is sought.
DOCTRINES ESTABLISHED IN PUBLUIC INTERNATIONAL LAW AS AN AGENT OF PUBLIC INTERNATIONAL LAW
The growing number of investor-state cases before arbitral tribunals has raised concerns on the relationship between international investment law and international law. This is because investment disputes as such, are hybrids of public (sovereign) and private (commercial) nature of disputes, which also aims to bring a balance between investor protection and regulatory powers of host states. Making investment state arbitration as a structure of global governance. It is then important to analyse if international investment law is a harmonisation or disintegration of public international law.
The chapter also aims to view the balance between international investment law and sovereign immunity law, with respect to alien investor protection and the sovereignty of the state. Therefore, by providing to a background to the doctrines of treaty interpretation and state responsibility.
INTERNATIONAL INVESTMENT LAW AS PART OF PUBLIC INTERNATIONAL.
With the increase in bilateral investment treaties (BITs), multilateral treaties (MITs) and regional integrations such as the European Union (EU), Often have a theoretical and conceptual framework, as well as the interpretation of treaties to the enforcement of arbitral awards to the final stage. This has an impact on public international law, even though there is unpredictability and certainty in enforcing arbitral awards. This is due to the conflicts of interest in the protections afforded to alien investors in treaties, and the right of states to regulate and control the investment purposes via the so-called police power doctrine.
Another means by which investor state arbitration contributes to public international law, is via diplomatic protection. By relying on diplomatic, a state national relies on its state to commence on inter-state claim. This is viewed in the Barcelona traction case. The existence of diplomatic protection in investor state arbitration is termed by Paulson as ”arbitration without privity” which makes the mechanism different from other form of dispute resolution. Traditional diplomatic protection is only possible if the investor exhaust local remedies in the host state. The existence of ”gunboat diplomacy” makes it possible that once a state has given its consent, it has much less control over the dispute, than traditional means of diplomatic protection. This makes a treaty-based system precedent and superior alternative to investor protections, rather than the reliance on diplomatic protection which is uncertain and politically motivated.
The system of investment arbitration combines the applicable law of public law and private dispute resolution with procedural rules of private procedural law and those used in commercial arbitration, such as those contained in the Stockholm Chamber of Commerce (SCC).
Conclusively, international investment law is a form of public international law because in investment arbitration, a party is usually the state, which wields public law powers, such as expropriation for public purpose, and sometimes it is elevated to an inter-state battle.
THE HARMONISATION OF FRAGMENTATION OF INTERNATIONAL LAW
DOCTRINES IN THE SETTLEMENT OF INVESTMENT DISPUTES