Sovereign immunity and enforcement of arbitral awards

“a tribunal enjoys broad discretion when ruling on provisional measures, but should not recommend provisional measures lightly and should weigh the parties' divergent interests in the light of all the circumstances of the case”Saipem S.p.A. v. The People's Republic of Bangladesh, ICSID Case No. ARB/05/07 Decision on Jurisdiction and Recommendation on Provisional Measures para 175 https://www.italaw.com/cases/951 .

It is considered that particular types of provisional measures may challenge sovereignty of States. Thus, tribunals frequently invoke sovereign immunity in order to deny a request for specific performance or restitutio in integrum, pointing impractibility of this remedy. Elder, Troy E., The Case Against Arbitral Awards of Specific Performance in Transnational Commercial Disputes (1997). The Journal of the London Court of International Arbitration, Vol. 13, No. 1, 1997; Florida International University Legal Studies Research Paper No. 11-10. Available at SSRN: https://ssrn.com/abstract=1833733s Thus, the Tribunal in Occidental Petroleum Corporation & Occidental Exploration and Production Company v. The Republic of Ecuador was requested to issue provisional measures in form of specific performance of a contract. The Tribunal did not agree with the Claimant that provisional measure was justified, stating that in case of commitment of internationally legal act the reasonable remedy would be compensation, presumed to be equivalent to restitution in kind. Para 85 The Tribunal further acknowledged that “provisional measures may not be awarded for the protection of the rights of one party where such provisional measures would cause irreparable harm to the rights of the other party, in this case, the rights of a sovereign State”. Para 91

“The Tribunal is reluctant to recommend to a State that it order its courts to deny third parties the right to pursue their judicial remedies and is not satisfied that if it did so in this case, Respondent would have the power to impose its will on an independent judiciary”. Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24 Order on Provisional measures para 43 https://www.italaw.com/cases/857

Lastly, the Tribunals are usually not willing to interfere with the exercise of sovereign rights to investigate and prosecute crimes, pointing out that provisional measures in this sphere may be ordered, only in exceptional situations. As it was stated in Hydro S.r.l v. Albania, “criminal law and procedure are a most obvious and undisputed part of a State's sovereignty… any obstruction of the investigation or prosecution of conduct that is reasonably suspected to be criminal in nature should only be ordered where that is absolutely necessary” Hydro S.r.l. and others v. Republic of Albania, ICSID Case No. ARB/15/28 Order on Provisional Measures Para 3.16 https://www.italaw.com/cases/3958. In the following case, the Tribunal took into account that refusal to issue provisional measures would significantly affect the ability of Claimants to participate in arbitration and granted the requested measures.

Conclusively, in the context of ordering provisional measures in investor-state arbitration the concept of sovereign immunity cannot be ignored, as it affects both the possibility of granting of interim measures and the nature of such measures. As it was illustrated above, the waiver of immunity from pre-judgment measures is required in order to allow the measures against sovereign states. Moreover, sovereignty affects the manner and type of issuing measures, as Tribunals may be reluctant to interfere in internal affairs and integrity of States.

3.2 Emergency arbitration and sovereign immunity

The provisions on emergency measures, aimed at granting prompt protection to the parties before constitution of arbitral tribunal, have been recently incorporated in arbitration rules of several arbitration institutes, such as the Stockholm Chamber of Commerce (hereinafter referred to as “SCC”), the International Chamber of Commerce (hereinafter referred to as “ICC”), the Singapore International Arbitration Centre (hereinafter referred to as “SIAC”), the Australian Centre for International Commercial Arbitration (hereinafter referred to as “ACICA”). However, in the arena of investment disputes, emergency arbitration is not well recognized, as most frequently used rules in investment treaty arbitration, the ICSID Convention and UNICITRAL Rules, did not provide emergency arbitrator procedure, while the ICC Rules specifically preclude the application of emergency arbitrator procedure from investment disputes Article 29(5) of the ICC Rules. On the contrary, SCC does not acknowledge distinction between investment treaty and commercial disputes, applying rules on the emergency arbitrator procedure equally to both types of disputes. Since the SCC Rules are applicable to many BITs and multilateral agreements such as Energy Charter Treaty, the possibility of increase in application of emergency arbitrator procedures exists. There have been several cases so far, initiated under SCC Rules, where investor sought emergency protection in investment treaty disputes TSIKInvest v Republic of Moldova; JKX Oil & Gas plc, Poltava Gas BV and Poltava Petroleum Company v Ukraine; Evrobalt v Republic of Moldova; Kompozit v Republic of Moldova.

Apparently, application of emergency arbitrator procedure in investment disputes may raise several concerns of States, connected with sovereign immunity. To start with, the State may contend that emergency arbitration, where the arbitrator is not appointed by the parties to the dispute but by an arbitral institute, explicitly infringes principle of sovereign immunity. The fairness of this argument will depend on whether emergency arbitration falls within the scope of an arbitration agreement. Due to the fact that rules on emergency arbitration are incorporated into the main rules of arbitration, it is assumed that once agreed to particular set of rules, a State impliedly consents to the emergency arbitration rules. At the same time a State may argue that it did not consent to the new rules, entered into force after the day of conclusion or ratification of investment treaty. The following objection was raised, for instance, by the Ukraine in JKX Oil & Gas plc. v. Ukraine https://www.italaw.com/cases/3153 . It should be noted that, arbitral institutions uphold different approaches to the problem of retrospective or prospective application of new rules. The SCC maintains that emergency arbitration rules should be applicable to all proceedings commenced after entry into force of new regulations. Therefore, despite the fact that new rules on emergency arbitration were not effective at the time of conclusion of an agreement, they will still be subject to application to arbitral proceedings commenced after the effective date of new rules. Kyongwha Chung. Emergency Arbitration in Investment Treaty Disputes http://hnmcp.law.harvard.edu/wp-content/uploads/2012/02/Kyongwha-Chung-Winnerpdf.pdf p.6 On the contrary, ICC Rules on emergency arbitration will apply to the parties of arbitration agreement, concluded after entry into force of new rules, only if the parties will consent to their implementation. Hence, the legitimacy of emergency arbitrator as well as existence of violation of sovereign immunity principle is fully dependent on rules and practice of arbitral institution.

What is more, a State may claim that particular emergency measure, for example, restitutio in integrum or specific performance, challenges sovereign immunity of State. It is well established with regard to provisional measures that such remedy, even if possible, but impracticable, “imposing too heavy a burden on the party against whom it is directed” Occidental v. Ecuador, supra note 128, at para. 82. The following approach might be similarly applicable to emergency measures. Hence, for the purpose of elimination of any controversies as to applicability of particular emergency measure, it is suggested to clearly stipulate permitted measures in investment treaties.

Finally, the main difficulty may arise during the enforcement of emergency decision, as sovereign immunity can undermine the effectiveness of emergency measures. There exists no consensus amongst scholars as to binding force of emergency measures. Some researchers are of the view that emergency decision is final and, therefore, binding “in respect to the issues which it addresses.” Ali Yeєilirmak, Provisional Measures in International Commercial Arbitration, 2005 para. 4-77. Moreover, some arbitral institutions highlight the obligatory nature of emergency measures. For example, the SCC rules provide that “an emergency decision shall be binding on the parties when rendered” Article 9, appendix 2, while the ICC rules prescribe the obligation “to comply with any order made by the emergency arbitrator” Article 29 (2). The compliance with an award may be ensured by specific mechanisms, provided by arbitration rules. For example, the ICC rules entitle subsequently constituted tribunals to take into account non-compliance with an emergency decision while deciding on parties' requests connected with emergency proceedings, including the reallocation of the costs ICC 29(4).

Therefore, considering the binding nature of emergency decision, it seems logical to suppose that they may be subject to enforcement under the NY Convention. Then in situation of non-compliance with an emergency award an investor is entitled to bring a case to a state court for its enforcement.

Thus, in JKX Oil & Gas plc. v. Ukraine https://www.italaw.com/cases/3153 , the Supreme Court of Ukraine affirmed that the emergency decision was rendered in the form of an “award” rather than an order, reversed the ruling of the Appellate court, which refused enforcement of emergency decision due to public policy considerations, which concerns sovereignty of Ukraine, and concluded that the Appellate Court did not established relevant facts of the case, what led to improper resolution of a dispute.

Since emergency decision might have a form of an award, it can be assumed that its recognition and enforcement may be refused pursuant to Article V of the NY Convention, while process of execution will be dependent on applicable provisions of national law and will be subject to challenges described above with regard to final arbitral awards.

Conclusively, the principle of sovereign immunity may obstruct emergency arbitration in several stages. The State may raise the immunity defense on jurisdictional stage, opposing the legitimacy of emergency arbitrator and proceedings before tribunal, not appointed by the parties. It can further argue that particular emergency measures are not applicable, due to interference in State sovereignty. On the enforcement stage, the State may rely on allegedly non-binding character of the emergency decision and, thus, its non-enforceability, as well as resort to other grounds for refusal of enforcement and execution, stipulated in the NY Convention or national legislation.

Conclusion

The following thesis represents a comparative research on the problem of enforcement of arbitral awards rendered against States in the course of investment-treaty arbitration. The conducted study demonstrates that, despite the shift from absolute immunity approach to restrictive one, the well-established principle of sovereign immunity still may undermine the effectiveness of investor-state arbitration. A State, in principle, may raise its sovereign immunity defense from the initiation of arbitral proceedings till the execution stage, being reluctant to provide a foreign investor with compensation. Surely, sovereign immunity may be voluntary waived by a State but the analysis of sources, state practice and customs demonstrates that no universally recognized approach to the issue of extension of this waiver on different stages of arbitration exists. It seems quite clear that a valid agreement to arbitrate usually constitutes a waiver of immunity from jurisdiction of arbitral tribunal under the doctrine pacta sunt servanda. However, the situation becomes more complicated with regard to question whether consent to arbitration implies a waiver of immunity from enforcement and execution. The majority of developed States, following pro-investor approach, uphold the position of extension of waiver of jurisdictional immunity on recognition and enforcement phase, as a logical consequence of arbitration. Meanwhile, other countries continue to interpret the immunities restrictively and give an emphasis to sovereignty of states.

The extension of jurisdictional immunity to execution stage is rather a marginal trend but still appearing in practice of some States, despite the existence of specific provisions, requiring an explicit and separate waiver of immunity from execution. Although this approach ensures the efficiency of arbitral awards and protection of investors, it may be detrimental for immunities, which States enjoy under the international law. Taking into account that investment tribunals frequently resolve disputes, which concern questions of public character and are not usually arbitrable, the simplified procedure of execution of awards, disregarding sovereign immunities, may drastically affect sovereignty of States. Probably, States cannot be criticized for the cautious attitude to immunities, as the rationale behind state-friendly approach is to avoid deterioration of diplomatic relations and to prevent implication of reciprocal measures. Considering that amounts of money sought by investors in course of arbitral proceedings exceed enormous numbers, the forcible execution may destabilize international relations between relevant States.