Enforcement of Arbitral Awards under the International Convention for the Settlement of Investment Disputes (ICSID)

I. Introduction

In the realm of global economic transactions, disputes are inevitable, which is why a redressal mechanism to ensure that they are effectively addressed is of paramount importance. There are several dispute resolution mechanisms that could be availed which ordinarily consist of parties upholding their respective obligations, or one party agreeing to uphold the rights of another. The willingness of parties to uphold such obligations must entail a positive inclination towards compliance vis-à-vis the tenets inherent to the dispute mechanism². One dispute mechanism that has become exceedingly sought after to resolve international economic disputes by parties is arbitration since it does not involve the complexities that arise from judicial adjudication of disputes considering the vast intricacies of legal systems around the world³. Arbitration has also assumed a greater role in the settlement of international investment disputes, predominantly involving private investors and host nations. The importance of international economic relations across the globe has resulted in the establishment of the International Convention for the Settlement of Investment Disputes (“ICSID” or “Convention”) as an ancillary body of the World Bank, to resolve investment disputes among investors and the host states. Consequently, The International Centre for the Settlement of Investment Disputes (“the Center”) was set up to address investment disputes and effectively implement the provisions of the ICSID Convention.

One aspect of the dispute resolution mechanism under the ICSID that constantly surfaces in negotiations is the enforcement of arbitral awards by the ICSID under article 54 of the Convention. The impugned question that arises more often than not is about the effective enforcement of ICSID's arbitral awards and whether the provisions of the ICSID promote such enforcement. This paper shall be limited to primarily cover the arbitral process under the ICSID Convention, its jurisdiction, the recognition and enforcement of ICSID’s arbitral awards, and immunity from execution, in addition to a brief contextual background of the ICSID.

II. Background

The World Bank was established as a body that sought to promote international investments by private investors. As its ancillary organization, the key purpose for establishing the ICSID was to encourage international cooperation for economic development in developing countries by way of private investments and the promulgation of a mutual understanding between the host states and the foreign investors. Ibrahim Shihata, immediate past Vice President of the World Bank and Secretary-General of the ICSID noted that the main objective for establishing the ICSID was to promote an atmosphere of confidence among the states and investors to promote the flow of resources to developing countries under tenable conditions⁴. The ICSID also aims to protect foreign investors from potential unilateral actions by the host states under international law and ensure that such actions do not affect the investments made by the investors⁵. The host states are also promised an unbiased and objective dispute resolution mechanism to resolve the disputes. This is ensured by the ICSID Convention read alongside the ICSID Rules of Arbitration, which provide for private investors with an international forum for redressal, whereas the Rules assure the investors that host states do not jeopardize the arbitral process by refusing to negotiate and the like after initially consenting to ICSID arbitration.

The ICSID Convention also provides that a contracting party may, as a pre-requisite of its consent to arbitrate, mandate the exhaustion of all domestic remedies⁶. Moreover, Article 42(1) of the Convention mandates that, unless otherwise agreed upon, the arbitral tribunal shall resolve the dispute in accordance with the law of the host state, taking into account any relevant rules of international law that might be pertinent⁷. Although the ICSID Convention creates a level playing field for both investors and host states, the enforcement of arbitral awards under ICSID does not have the same rules.

III. Constitution of icsid and the arbitral process

The ICSID is a consortium of the Administrative Council (each member represents a contracting member state and the Chairman); a Secretariat (Secretary-General, one or more Dep. Secretary-General and other Staff); a panel of Arbitrators; and a panel of Conciliators⁸. The Administrative Council is the presiding authority of the ICSID with a wide array of powers conferred upon by the Convention and the Secretariat is its main administrative organ. Members of the Administrative Council are also bestowed with the power to adopt the rules of procedure that shall govern the institution of arbitration proceedings and the subsequent processes. The panel members are comprised of experts from relevant fields nominated by a contracting state or the Chairman of the Administrative Council, and the members must be people of high moral character⁹.

IV. Jurisdiction

Article 25(1) of the Convention enunciates the jurisdiction of the ICSID and states that the jurisdiction of the Center shall extend to any legal dispute arising out of a legitimate investment between a Contracting State (or any authorized constituent of the State, which the parties in dispute agree upon and present before the Center), and a national belonging to another contracting state¹⁰. If both the parties have assented to bring their dispute to the ICSID, then either of them shall not unilaterally withdraw such consent. The term ‘investment’ is often brought under scrutiny since the Convention provides no express definition of the same, although this can be considered a deliberate attempt by the drafters to leave the definition open to interpretation by the authorities to cover a wider scope of economic transactions rather than limit the scope of the term to just a traditional interpretation. Furthermore, Art. 25(2) of the Convention defines a ‘national of another contracting state’ by differentiating between a juridical and natural person. It provides that:

“National of another Contracting State” means:(a) “any natural person who had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration as well as on the date on which the request was registered under paragraph (3) of Article 28 or paragraph (3) of Article 36, but does not include any person who on either date also had the nationality of the Contracting State party to the dispute;”¹¹ and

(b) “any juridical person which had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration and any juridical person which had the nationality of the Contracting State party to the dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of this Convention¹².”

Art 25(2) facilitates a mechanism for investors to attain access to the ICSID. Foreign investments are frequently channelled through domestically incorporated companies in the host states. If the host state agrees to treat companies as foreign nationals given that they are controlled by foreign entities, then such companies can be parties to ICSID proceedings, despite the provision which states that treating an investor as such needs an agreement between the contracting parties¹³. No express agreement is required, the conduct of parties can be treated as an agreement. It is also pertinent to note that consent to the jurisdiction of the ICSID excludes all remedies mentioned under art. 26 of the Convention and shall not be unilaterally withdrawn¹⁴.

V. Initiation of arbitration

The process for initiating arbitration involves a request made by either a contracting state or the foreign national party to the issue at hand, which is registered by the Secretary-General unless it is established that the dispute does not fall within the ambit of the ICSID, in which case the registration is denied. Once registered, the Arbitration panel is set up in accordance with the agreement between the parties, and if no such agreement exists then the panel would include three arbitrators (one appointed by each party and the other one would be the President of the tribunal who is mutually appointed). Should the parties reach an impasse at this stage and are unable to establish an arbitrator, the Chairman of the Administrative Council will take up the responsibility of appointing the arbitrators with the parties’ consent.

Unless the parties decide otherwise, the proceedings are conducted in accordance with the Arbitration Rules read alongside Convention. The parties to the issue can also choose to decide the substantive law (law of host state applicable if parties do not decide upon the substantive law, considering that such law is in accordance with rules of international law) that shall be applied by the Tribunal or panel. Rules also include issues such as examination of witnesses, cross-examination and the language that would govern the proceedings and so on¹⁵. Moreover, art. 26 of the Convention prohibits the reliance on other remedies once the parties have assented to the ICSID’s arbitration process¹⁶. If the tribunal denies jurisdiction, the proceedings shall not continue in accordance with the Convention and Arbitration Rules, in which case an award cannot be reached. However, once an award is granted it is binding upon both parties and shall be enforceable in the contracting states as if it were a final judgement from a Court in the said State¹⁷’.

VI. Recognition and enforcement of arbitral awards

Enforcement of awards does not necessarily involve a court action to ensure compliance with the award. Enforcement would be treated as being effective when the arbitral award can be enforced against the losing side. Under the New York Convention, the procedures resulting in the enforcement of the arbitral awards under the ICSID are regarded as enforcement and recognition¹⁸. However, the ICSID Convention provides for an exception by treating these award executions as a separate aspect of enforcement.

According to art. 54(1) of the ICSID Convention: “Each contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by the award within its territories as if it were a final judgement of a court in that state. A Contracting State with a federal constitution may enforce such award as if it were a final judgment of a court of a constituent state¹⁹.”

In contrast, Art. 54(2) of the Convention posits the procedural paperwork that a party seeking to get an award recognized or enforced is supposed to undertake in the contracting states’ territory to fulfil the obligations of such states under art. 54(1)²⁰. The problem with the enforcement of arbitral awards is not about establishing the obligations of parties and so on. The main issue is that recognizing an ICSID award by itself does not indicate absolute enforcement. Despite the need to effectively recognize and enforce ICSID arbitral awards, the party in whose favour the award is enforced only retains an executionary title, specifically if the losing side in the dispute is the state, whereas the situation is more lucid if the enforcement is against an investor as opposed to the state²¹. The reason behind this discrepancy in enforcing arbitral awards lies in the fact that the Convention does not alter or replace the rules of immunity from execution against a state which is found to be in non-compliance with the ICSID award. Therefore, the effectiveness of execution against a state entity is based upon the immunity rules applicable in the country where the execution is sought.

VII. Execution of awards

As aforementioned, the holder of a recognized ICSID award only holds a mere executionary title, more so if the awards are enforced against a State, primarily because of the doctrine of immunity against such an execution. Art. 54(3) of the Convention mandates that execution of ICSID awards would be governed by the laws regarding the execution of judgements in the state wherein such execution is sought²². This principle is consolidated by Art. 55 to the extent that nothing in the Convention can be assumed to be deviating from the law in force in any contracting state concerning immunity from execution against the said state or that of a foreign one²³. Simply put, the purpose of these provisions is that enforcement of ICSID's awards are subject to the domestic laws of the state wherein such enforcement is sought and that no exception shall be made in relation to the said domestic laws by dint of the Convention, other than the ones provided for by the domestic laws.

To better understand immunity from execution, it is pertinent to consider the case of Letco v. Liberia, two US District Courts recognized an arbitral award of the ICSID against the state of Liberia²⁴. The impugned award attempted to recover damages for a breach of a concession agreement with Liberia. Liberia alleged a contract violation by LETCO and LETCO initiated arbitration proceedings under the aegis of the ICSID, as mentioned in their agreement. Despite Liberia's refusal to participate in the proceedings, the arbitration panel decided in favour of LETCO, and on seeking enforcement an ex-parte decision was provided by the District Courts as mandates by the Convention. A writ of execution was issued to the US Marshal for the Southern Dist. of New York, and thereafter LETCO's attempt to execute the decision was denied based on immunity from execution.

VIII. Conclusion

On the face of it, the ICSID Convention may seem like a perfect mechanism to tackle issues concerning international investment dispute resolution. Despite its purported effectiveness, the Convention leaves the door open for a floodgate of complications regarding the enforcement of arbitral awards. The only plausible solution that private parties can avail to determine a restrictive application of the immunity doctrine would be to resort to forum shopping. It should not remain customary for private parties to disburse their resources in the hope of attaining enforcement of ICSID arbitral awards.

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