Enforcement proceedings against State entities —
From one end to another

Author: Neil Q. Miller Publication | May 2018

Remembering one of my favourite scenes in Monty Python’s The Life of Brian, if a gathering of arbitration lawyers were huddled in a room contemplating the question “what has arbitration ever done for us?”, then (assuming no meaningful contribution to sanitation, medicine, wine, public order, irrigation, roads, a fresh water system, and public health I am aware of) apart from efficiencies in time and cost (questionable), neutrality of forum, arbitrator expertise and procedural flexibility, the most likely extolled contribution would be “ease of enforcement of awards”.

However, notwithstanding the many deserved tributes to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Convention) elsewhere in this issue, when it comes to enforcing an arbitral award against a non‑paying or recalcitrant State or a State owned entity, in most jurisdictions the road ahead can be long and winding, with many unwelcome obstacles.

The guiding principles of the Convention

The introductory words to the Convention set out the central obligation imposed upon Contracting States to recognize foreign arbitral awards as binding and to enforce them, where requested to do so, under the lex
fori. Each Contracting State is free to determine the domestic procedural mechanisms to be followed (where the Convention does not prescribe any requirement), albeit these should be in line with the purpose of the Convention which is to encourage recognition and enforcement of awards in the greatest number of cases as possible.

That purpose is enshrined in Articles III and VII(1) of the Convention which on the one hand aim to prohibit domestic law conditions on recognition and enforcement that are more stringent than those in the Convention, yet on the other hand allow domestic law provisions that give more favorable rights to a party seeking to enforce an award.

If only that were so in practice. Despite these good intentions, there are a number of difficulties surrounding enforcement of arbitral awards against sovereign States.
 
These issues are perhaps best highlighted with the use of a hypothetical case study. The facts of the case study we will use are as follows: The claimant is a foreign private company (Company) which has made  an in‑country investment in a particular State. The respondent is the government of the country in which the investment was made (State). A dispute has arisen in respect of the investment, which the Company referred to arbitration seated in New York, USA (a Convention State). The tribunal determines that it has jurisdiction and is validly constituted, and ultimately finds in favor of the Company and issues a large monetary award against the State. The State fails to pay the award. The Company brings recognition and enforcement proceedings before the English courts (another Convention State), with the aim of enforcing its award against the State’s assets within that jurisdiction.

Resisting enforcement

In most jurisdictions, awards are not directly enforceable so parties will need to seek the assistance of domestic courts to do so. The process of enforcing foreign awards in England is, on the face of it, relatively simple – the enforcing party applies to the court for recognition and enforcement, usually without notice to the other party, by issuing an arbitration claim form supported by witness evidence exhibiting the award and the arbitration agreement (with certified translations if these are not in English). After the order is granted, the respondent is served with the order and application, and is afforded a certain amount of time within which to apply to set aside the order.

The exhaustive grounds upon which recognition or enforcement of a foreign award may be refused are set out in Article V of the Convention. Those are enshrined in English domestic law by section 103 of the Arbitration Act 1996 (Arbitration Act). In brief, these include

  • Incapacity – a party to the arbitration agreement was under some incapacity.
  • Invalidity – there was no valid arbitration  agreement.
  • Lack of due process – a party was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case.
  • Lack of jurisdiction – the award deals with disputes outside or beyond the scope of the submission to arbitration.
  • Serious procedural irregularity – the composition of the tribunal or the arbitral procedure did not comply with the arbitration agreement or (failing such agreement) the law of the seat.
  • Finality – the award is not yet binding or has been set aside or suspended at the seat.
  • Arbitrability – the subject matter of the dispute is not capable of settlement by arbitration.
  • Public policy – it would be contrary to public policy to recognise or enforce the award.

Despite these grounds being exhaustive and relatively limited, they nonetheless allow a number of avenues to resist or delay enforcement. To complicate matters, many of the terms used (for example, “incapacity” or “proper notice”) are not defined in either the Arbitration Act or the New York Convention — so the question of what falls within these grounds must be hashed out by the domestic courts.

Generally, applications to resist enforcement before the English courts are dealt with on paper, without a full hearing. However, not all cases are straightforward and where the court considers the respondent has a real prospect of establishing one of the section 103 grounds for resisting enforcement, or it considers there to be some other compelling reason, the matter will need to be dealt with at trial. Importantly, until such challenges are dealt with, the enforcement order is stayed. As a result, a party can face (in each jurisdiction where enforcement is sought) a number of challenges to enforcement.

Substantive issues

Jurisdiction – limits to the “competence-competence”  doctrine

The “competence‑competence” doctrine is a general principle of international arbitration which provides that a tribunal is empowered to determine its own jurisdiction to deal with the dispute.

However, this doctrine does not grant the tribunal exclusive power to deal with questions of its own jurisdiction. Importantly, it does not prevent any court where enforcement of the award is sought from re‑examining the tribunal’s jurisdiction. It is accepted that arbitrators cannot be the sole judges of their own jurisdiction—hence lack of jurisdiction is one of the grounds for resisting enforcement under the Convention and the Arbitration Act. Consequently jurisdiction issues may be raised both before the courts of the seat (if an action is brought to set aside the award) and the enforcing courts (if an action is brought to enforce the award). Should a court determine that the tribunal lacked jurisdiction, then it may deem the award to be invalid and therefore unenforceable.

One frequently used tactical challenge to resist or delay enforcement of an award is a challenge to the validity or existence of the agreement to arbitrate. Typically whether a valid arbitration agreement exists (and its scope) is a jurisdictional issue dealt with by the tribunal. However, the issue is also capable of being opened up again by the courts, both at the seat and at the enforcement stage.
 
In Dallah Real Estate & Tourism Holding Co v Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, the English Supreme Court accepted that the international trend was to limit reconsiderations of the findings of an arbitral tribunal and noted the pro‑enforcement policy of the Convention. However, the Supreme Court nonetheless concluded that if an action is brought to set an award aside, a court is not only entitled to review the tribunal’s jurisdiction but also has wide powers to re‑open issues of fact in order to determine independently, for example, whether a valid arbitration agreement exists. This decision also confirms that a party is not required to challenge or appeal an award in the courts of the seat of arbitration before resisting enforcement elsewhere.

Other possible challenges on jurisdictional grounds include arguing that the award wrongly deals with matters outside the scope of the arbitration agreement and/or outside the scope of the parties’ submission to arbitration. Both of these issues go to the heart of the tribunal’s jurisdiction. The latter is particularly dangerous — as any dispute resolution lawyer knows, the parties’ claims and defences do evolve during the course of proceedings. The particular danger in arbitration arises where they evolve to the extent that they fall outside the scope of the original submission to arbitration.
 
The key takeaway for parties is that last word on jurisdiction does not necessarily rest with the tribunal. When a party comes before the English courts seeking enforcement of an award, it may be met with a number of jurisdiction challenges, and these may involve the court reopening (albeit limited) issues of both fact and law. Enforcement can be delayed while the courts address such challenges.

State immunity

In most jurisdictions, foreign States are granted certain immunities against proceedings brought against them before the courts of another State. In England, these are set out in the State Immunity Act 1978. However, there are certain exceptions to immunity including where the State has waived immunity. Section 9 of the State Immunity Act provides that where a State has agreed in writing to submit disputes to arbitration, then the State has waived immunity from both arbitration proceedings and arbitration‑ related proceedings before the English courts. As a result, States can challenge the existence of an arbitration agreement.

Another line of argument brought by States is that the State entity in question did not have the power to enter into an arbitration agreement on behalf of the State and/or the State is not a party to the agreement. This can also involve related incapacity arguments.

Such arguments were raised in Svenska Petroleum Exploration AB v Lithuania & Anor [2005] EWHC 2437 (Comm). In that case, the government of Lithuania sought to resist enforcement of an award made against it on grounds that Lithuania was not a party to the arbitration agreement within the commercial joint venture contract in question. It argued that as a State it was not bound by a State‑owned company’s agreement to arbitrate, which it had not endorsed by its own proper State procedures. Lithuania had raised the same arguments unsuccessfully before the tribunal, and there had been a two‑day hearing on matters of arbitrability and jurisdiction. The same arguments were raised at the enforcement stage before the English courts. Ultimately, the English court agreed with the tribunal’s findings.

Consider this scenario in our case study: The State argues that the Company does not fall into the category of “investor” under the Bilateral Investment Treaty (BIT) in which the arbitration agreement is found. It therefore asserts that there is no valid agreement to arbitrate between the parties, and that absent a valid arbitration agreement, the State is entitled to rely on its immunity from both suit and enforcement against
assets. Notwithstanding the fact that the Company has successfully proven once in the arbitration that it falls within the definition of investor, the State invites the court to re‑examine these issues. The court finds that the question of whether the Company is an investor under the BIT comes down to interpretation, as a result, it may now need to hear submissions on the issues – these can involve complex questions of law (international and treaty interpretation) and expert evidence.

Due process and procedural issues

Enforcement can also be resisted on grounds that the arbitration procedure was improperly conducted or somehow defective. Common examples include: challenges to the arbitrators themselves — whether on grounds of lack of impartiality or bias, or that they did not have the skills prescribed in the arbitration agreement; or challenges to the arbitral process itself — for example, a party was not afforded full opportunity to present its case or the tribunal breached the agreed rules of the arbitration.

Returning to our case study: The State alleges that the tribunal was biased because one of the arbitrators had previously been instructed by the law firm acting for the claimant party. It also argues that, as is clear from the award, the tribunal had failed to properly consider and give weight to the State’s evidence on a particular issue. Moreover, the tribunal’s case management decisions wrongly restricted the State’s ability to properly present its case.

Finally, the State argues that the award itself should not be enforced because the investment in question was tainted by bribery and corruption, and therefore the award breaches public policy.

In England, such arguments face a high bar and rarely succeed. Allegations of due process and/or procedure can often be poorly disguised attempts to invite the court by the backdoor to review the merits of the tribunal’s decision. English courts are also particularly alive to (and strongly resist) any attempts to reopen the merits of a dispute. Nonetheless raising such issues can serve to increase the cost of and delay enforcement.

Finality

It is not uncommon for States to challenge an award at the seat, seeking to have it annulled or set aside. This is particularly common where the seat chosen by the parties (often unwisely) is within the State’s own jurisdiction. Different jurisdictions take different approaches to whether or not an award that has been annulled or set aside at the seat is still enforceable elsewhere (see our article, "Awards set aside or annulled at the seat", in this issue). In England, the courts will generally not enforce an award that has been set aside at the seat, unless the judgment setting aside the award was obtained by fraud, breached natural justice, or was otherwise contrary to public policy.

Challenges within the court enforcement process

Full and frank disclosure

In England, the initial application for an enforcement order is often made ex parte (i.e. without notice to the other side), although enforcement is stayed until the respondent has been served the order and it has had a chance to challenge it. Whenever an order is made without notice, the applicant owes a duty to the court to inform it of all relevant matters. This is known as giving “full and frank disclosure”. Relevant matters include anything that that might affect the judge’s decision to grant the order.

Practically speaking, this means that the applicant is obliged to draw to the judge’s attention the nature of the arguments the defendant is likely to pose, and the critical points for and against granting the application. It is not enough to merely rely on general points or exhibited documents; a party must be proactive in its disclosure of relevant issues. Failure to give full and frank disclosure may not only result in the enforcement order being set aside, but also may leave a party open to costs sanctions.

Procedural and formality challenges

There are also a number of procedural and formality challenges that a party might face when seeking to enforce an award. One example of a common area of procedural dispute is whether (as a matter of domestic law) a party has been adequately served with all necessary documents. In England, the English Civil Procedure Rules (CPR) prescribe which documents should be served and how. There are also specific rules in respect of service on a State – these are found in both the CPR and the State Immunity Act. Added to that, when serving an order on a foreign State, it will frequently involve serving the State outside of the jurisdiction of the enforcing courts. In England, that means certain formalities must be complied with (as set out in the CPR).

The form and content of the order can also provide grounds for challenges to enforcement. Again, in England, it is the CPR that prescribes the form and content for enforcement orders, including for example that the order must inform the State of its right to apply to set the order aside and that the order is stayed until the time allowed for contesting the award has elapsed or any such application is disposed of.

Therefore, returning to our case study: The Company successfully secures a court order recognising the award and that order is served on the State. However, that is not yet the end of the matter. The State argues that the enforcement order alone was not enough to effect service and that it should have been served with an arbitration claim form and corresponding acknowledgement of service (and all with official translations). It also argues that form and content of the order was not correct. Furthermore, that the process for service was not correctly followed. Such challenges all have the effect of further delaying enforcement.

Arguably, these domestic procedural and formality requirements complicate enforcement beyond that prescribed in the Convention (again, bearing in mind the Convention’s purpose of encouraging recognition and enforcement of awards in the greatest number of cases as possible). However, the reality is that in England, as in most other jurisdictions, domestic procedural laws can complicate the enforcement process as well as allow a State several opportunities to delay enforcement.

Limitation issues

An enforcing party must also bear in mind that there will be limitation periods for enforcing awards. Should the party fail to apply for enforcement within the relevant period, it will face an argument that the enforcement proceedings are time barred. Complicating matters is that a party seeking to enforce against a State will often need to enforce the award in a number of jurisdictions. Limitation periods, however, vary quite significantly across jurisdictions. For example, in England, generally the limitation period is six years. But in China, the limitation period was originally a comparatively short six months period, though that was recently extended to two years.
 
Calculating the expiry date of relevant limitation periods can also throw up complications. In England, time runs from the date on which the cause of action accrued, namely, when the State failed to pay the award. But where the award does not specify a time limit for honouring the award, the court may need to imply a reasonable time within which the State had to comply and therefore from when time runs for the purposes of limitation. Again, contrasting the situation in China; time will run differently for parties depending on whether or not they have assets located in China when the award was made. These nuances need to be considered quite carefully as soon as an award is obtained (if not in advance), and can prove a real trap for parties unfamiliar with global enforcement.

Conclusion

Successfully obtaining a favorable award is not always the end of the matter. If the losing party fails to honour the award, the successful party will need to seek the assistance of domestic courts, often in a number of jurisdictions, to enforce the award. English courts are known to be very pro‑arbitration and it is quite rare for a party to successfully resist enforcement in this jurisdiction. However, that is not the case across all jurisdictions. Further, even if unsuccessful, challenges to enforcement can prove costly and serve to delay enforcement, particularly facing such challenges in each jurisdiction where enforcement is sought.

As a result, enforcing parties need to be aware of the jurisdiction‑specific nuances of enforcing awards in different countries, as well as being alive to common tactics of recalcitrant parties to obstruct or delay enforcement. The moral is “Effectus autem in re publica facile”... now go find a large wall and write it out a hundred times.


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