The international community has developed different mechanisms currently in place to ensure the recognition and enforcement of arbitral awards. The New-York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 is the most popular and surely most efficient of such international instruments. Considering the large number of its signatory states (145 as of the date of this article) and its long lifetime, this Convention has proven to be an effective vehicle for creating a favorable international regime in this field.
It should, however, be noted that the New-York Convention neither offers any dispute resolution mechanisms, nor does it impose any sanctions for the breach by contracting states of their obligations in respect of the recognition and enforcement of foreign arbitral awards. For this reason, international arbitration scholars and practitioners repeatedly opined that it was necessary to establish a special international jurisdictional body capable of protecting the rights of foreign creditors in case of unlawful denial of recognition and enforcement of arbitral awards.
Although these considerations never triggered any particular initiative and never transformed into any effective international instruments, creditors have made many attempts to seek redress for allegedly unfair refusal to recognize and enforce arbitral awards in various international jurisdictional bodies (such as investment arbitration tribunals and the European Court of Human Rights).
This is a very broad topic and the author does not purport to provide its comprehensive analysis; instead the major focus is on the most interesting issues relating to the application of the abovementioned international tools and the assessment of their efficiency for ensuring the enforceability of arbitral awards.
Ukrainian Practice
It is noteworthy that three (i.e. almost 40 %) out of eight international disputes known to the author and relating to the non-enforcement of arbitral awards (both before investment arbitration tribunals and the European Court of Human Rights) were initiated against Ukraine.
In particular, Western NIS v. Ukraine case was brought before the International Centre for Settlement of Investment Disputes in respect of the refusal to recognize and enforce the award of the American Arbitration Association, which was rendered in favor of the Claimant. No award was issued in this investment dispute as the case was concluded by an amicable settlement between the parties without public disclosure of its terms.
Regent v. Ukraine was brought before the European Court of Human Rights in respect of the non-enforcement of an arbitral award made by the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry against Oriana, a state-owned company. The court arrived at a conclusion that the State really breached its obligations and ordered Ukraine to pay compensation equal to the amount of non-enforced arbitral award.
Trial of the last out of the abovementioned three disputes ended only recently: an award in GEA Group Aktiengeselschaft v. Ukraine was issued on March 30, 2011. This was the dispute regarding the non-enforcement of the ICC award. The International Centre for Settlement of Investment Disputes held that, in the given circumstances, the State did not breach any investment obligations. For this reason, it dismissed all claims put forward by the Claimant and awarded all legal costs against the latter.
Thus, judging by the Ukrainian practice, a conclusion suggests itself that international mechanisms actually afford certain guarantees for the protection of rights of foreign creditors and investors. These guarantees are, however, far from absolute. An overview of the conditions of, and restrictions on, the enforcement of such guarantees is provided below.
Investment Arbitration
First of all, it should be said that under no circumstances should investment arbitration tribunals be regarded as an appellate instance competent to consider whether national courts and other competent bodies complied with domestic and international regulations (including those on recognition and enforcement of arbitral awards). Investment arbitration tribunals have limited jurisdiction, which is generally enshrined in bilateral and multilateral investment protection treaties. Although jurisdictional clauses in investment treaties vary considerably, they generally provide for the resolution of investor-state disputes relating to investments made by investors of one contracting party in the territory of the other contracting party.
Therefore, one should first determine whether the arbitral award, which has been denied recognition and enforcement, is an investment within the meaning of the applicable rules of law, and second, determine whether such denial of recognition and enforcement can be regarded as a breach of any of the State’s obligations under the respective investment protection treaty (expropriation without fair compensation, a violation of the fair and equitable treatment standard, denial of justice, etc.).
In the context of jurisdiction, the key and most contentious issue is whether an arbitral award qualifies as an investment that can be afforded protection under the respective international treaty. It should be noted that the definition of an investment is now one of the most complicated issues in international investment arbitration in general.
An absolute majority of international investment protection treaties contain the broadest possible definition of an investment as every kind of asset of an investor of one Contracting Party in the territory of the other Contracting Party. A literal interpretation of this definition obviously suggests that an arbitral award falls under such definition of an investment and that, depending on the specific circumstances of a particular case, an inappropriate denial of its recognition and enforcement be potentially regarded as a breach by the State of its investment obligations.
Meanwhile, some investment arbitrations concluded that regardless of the definition of an investment contained in a particular international treaty, an investment should also possess a certain set of characteristic features common for an investment as a generally accepted notion. Such characteristics include, in particular, a certain duration, a contribution to the economic development of the host State, a certain level of risk, etc. (the so-called “Salini test” was clearly articulated in Salini v. Morocco). As to arbitral awards, their qualification as investments will depend on the nature of the legal relations giving rise to such arbitral awards. Such an approach was used in Saipem v. Bangladesh and Romak v. Uzbekistan.
Therefore, if the underlying transaction possesses the characteristic features of an investment, the related arbitral award should be equally afforded protection under the respective international investment promotion and protection treaty. Meanwhile, this approach provides that when an arbitral award is issued in a dispute arising under an ordinary sale and purchase agreement, this arbitral award will not be afforded investment protection.
The third and the most formal approach, which was employed, in particular, by the arbitral tribunal in GEA Group Aktiengesellschaft v. Ukraine, differentiates between the underlying transaction and the arbitral award. Under this approach, it is only the underlying transaction, and not the arbitral award, that can be regarded as an investment, can be afforded protection under an international treaty and, accordingly, can be the subject matter of investment arbitration.
This approach is rather controversial and has already sparked lively debates among investment arbitration theorists and practitioners who point to the artificial nature of such differentiation and to the integrity of a “business transaction” consisting of both the underlying transaction and the arbitral award.
Another complicated issue is the circumstances in which failure to enforce an arbitral award can be regarded as a breach by the State of its investment obligations. In particular, international practice has confirmed that failure to enforce an arbitral award can indeed qualify as expropriation and a violation of the fair and equitable treatment standard. Provisions regarding denial of justice can also apply depending on particular circumstances.
Obviously, not every instance of refusal to recognize and enforce an arbitral award can and must be regarded as a breach of international investment obligations, because the possibility of such refusal is generally accepted in some cases. In certain situations, however, it is obvious that both an apparently wrongful failure to enforce an arbitral award and the groundless reversal of such arbitral award can be potentially regarded as a breach of the State’s investment obligations and can, therefore, serve as grounds for holding the State liable and awarding respective compensation.
European Court of Human Rights
Unlike in investment arbitrations, the competence of the European Court of Human Rights (the “ECHR”) is not restricted in terms of investments. Therefore, disputes regarding improper refusal to accept and enforce arbitral awards may be considered whether or not the underlying transaction has any features of an investment.
On the other hand, like with investment arbitrations, the ECHR is not the appellate authority in the context of the legislative system of a particular state. Consequently, it does not verify the decisions issued by national courts but rather determines whether an action taken by the State represents a breach of the State’s obligations under the Convention for the Protection of Human Rights and Fundamental Freedoms (the “Convention”) such as, for instance, the right to a fair trial and protection of property.
In the course of its practice (cases Regent v. Ukraine, Stran Greek Refineries & Stratis Andreadis v. Greece, Kin-Stib & Majkić v. Serbia) the ECHR has many times affirmed the fact that an arbitration court (tribunal) is the “tribunal established by the law” within the meaning of paragraph 1 of Article 6 of the Convention and, thus, all the guarantees provided in paragraph 6 extend to the respective awards issued by the arbitration court. Therefore, the absence of an efficient mechanism for enforcement of arbitral awards or the State’s preventing such enforcement constitute the breach of the State’s obligations set forth in paragraph 1 of Article 6 of the Convention.
It should be noted that in the case Regent v. Ukraine the breach of paragraph 1 of Article 6 of the Convention occurred at the time of the enforcement proceedings when the exequatur procedure was complete and the arbitral award was recognized and enforced by Ukrainian courts. The ECHR did not directly handle the question whether the request regarding the availability of an efficient mechanism for enforcement of arbitral awards concerns the court procedure for recognition and enforcement of such arbitral awards. However, in any case it is safe to say that such procedure for granting exequatur at least should conform to the general procedural guarantees provided in Article 6 of the Convention.
Another important conclusion which follows from the ECHR practice is that a claim under the arbitral award shall qualify as “property” within the meaning of Article 1 of Protocol 1 to the Convention, which means that such provision is applicable to the claim. Thus, the failure of a State to enforce an arbitral award may be construed as an expropriation and may make the State liable to pay a reasonable redress.
Conclusions
Currently the mechanisms existing within investment arbitrations and the European Court of Human Rights indeed provide the possibilities to protect the interests of foreign creditors and recover the damages from the State for manifestly unlawful non-execution of arbitral awards by public authorities. However, one should be particularly cautious when choosing a mechanism and should carefully consider all risks and prospects of the similar trials, with due attention to all details of a specific case.
It should, however, be noted that the New-York Convention neither offers any dispute resolution mechanisms, nor does it impose any sanctions for the breach by contracting states of their obligations in respect of the recognition and enforcement of foreign arbitral awards. For this reason, international arbitration scholars and practitioners repeatedly opined that it was necessary to establish a special international jurisdictional body capable of protecting the rights of foreign creditors in case of unlawful denial of recognition and enforcement of arbitral awards.
Although these considerations never triggered any particular initiative and never transformed into any effective international instruments, creditors have made many attempts to seek redress for allegedly unfair refusal to recognize and enforce arbitral awards in various international jurisdictional bodies (such as investment arbitration tribunals and the European Court of Human Rights).
This is a very broad topic and the author does not purport to provide its comprehensive analysis; instead the major focus is on the most interesting issues relating to the application of the abovementioned international tools and the assessment of their efficiency for ensuring the enforceability of arbitral awards.
Ukrainian Practice
It is noteworthy that three (i.e. almost 40 %) out of eight international disputes known to the author and relating to the non-enforcement of arbitral awards (both before investment arbitration tribunals and the European Court of Human Rights) were initiated against Ukraine.
In particular, Western NIS v. Ukraine case was brought before the International Centre for Settlement of Investment Disputes in respect of the refusal to recognize and enforce the award of the American Arbitration Association, which was rendered in favor of the Claimant. No award was issued in this investment dispute as the case was concluded by an amicable settlement between the parties without public disclosure of its terms.
Regent v. Ukraine was brought before the European Court of Human Rights in respect of the non-enforcement of an arbitral award made by the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry against Oriana, a state-owned company. The court arrived at a conclusion that the State really breached its obligations and ordered Ukraine to pay compensation equal to the amount of non-enforced arbitral award.
Trial of the last out of the abovementioned three disputes ended only recently: an award in GEA Group Aktiengeselschaft v. Ukraine was issued on March 30, 2011. This was the dispute regarding the non-enforcement of the ICC award. The International Centre for Settlement of Investment Disputes held that, in the given circumstances, the State did not breach any investment obligations. For this reason, it dismissed all claims put forward by the Claimant and awarded all legal costs against the latter.
Thus, judging by the Ukrainian practice, a conclusion suggests itself that international mechanisms actually afford certain guarantees for the protection of rights of foreign creditors and investors. These guarantees are, however, far from absolute. An overview of the conditions of, and restrictions on, the enforcement of such guarantees is provided below.
Investment Arbitration
First of all, it should be said that under no circumstances should investment arbitration tribunals be regarded as an appellate instance competent to consider whether national courts and other competent bodies complied with domestic and international regulations (including those on recognition and enforcement of arbitral awards). Investment arbitration tribunals have limited jurisdiction, which is generally enshrined in bilateral and multilateral investment protection treaties. Although jurisdictional clauses in investment treaties vary considerably, they generally provide for the resolution of investor-state disputes relating to investments made by investors of one contracting party in the territory of the other contracting party.
Therefore, one should first determine whether the arbitral award, which has been denied recognition and enforcement, is an investment within the meaning of the applicable rules of law, and second, determine whether such denial of recognition and enforcement can be regarded as a breach of any of the State’s obligations under the respective investment protection treaty (expropriation without fair compensation, a violation of the fair and equitable treatment standard, denial of justice, etc.).
In the context of jurisdiction, the key and most contentious issue is whether an arbitral award qualifies as an investment that can be afforded protection under the respective international treaty. It should be noted that the definition of an investment is now one of the most complicated issues in international investment arbitration in general.
An absolute majority of international investment protection treaties contain the broadest possible definition of an investment as every kind of asset of an investor of one Contracting Party in the territory of the other Contracting Party. A literal interpretation of this definition obviously suggests that an arbitral award falls under such definition of an investment and that, depending on the specific circumstances of a particular case, an inappropriate denial of its recognition and enforcement be potentially regarded as a breach by the State of its investment obligations.
Meanwhile, some investment arbitrations concluded that regardless of the definition of an investment contained in a particular international treaty, an investment should also possess a certain set of characteristic features common for an investment as a generally accepted notion. Such characteristics include, in particular, a certain duration, a contribution to the economic development of the host State, a certain level of risk, etc. (the so-called “Salini test” was clearly articulated in Salini v. Morocco). As to arbitral awards, their qualification as investments will depend on the nature of the legal relations giving rise to such arbitral awards. Such an approach was used in Saipem v. Bangladesh and Romak v. Uzbekistan.
Therefore, if the underlying transaction possesses the characteristic features of an investment, the related arbitral award should be equally afforded protection under the respective international investment promotion and protection treaty. Meanwhile, this approach provides that when an arbitral award is issued in a dispute arising under an ordinary sale and purchase agreement, this arbitral award will not be afforded investment protection.
The third and the most formal approach, which was employed, in particular, by the arbitral tribunal in GEA Group Aktiengesellschaft v. Ukraine, differentiates between the underlying transaction and the arbitral award. Under this approach, it is only the underlying transaction, and not the arbitral award, that can be regarded as an investment, can be afforded protection under an international treaty and, accordingly, can be the subject matter of investment arbitration.
This approach is rather controversial and has already sparked lively debates among investment arbitration theorists and practitioners who point to the artificial nature of such differentiation and to the integrity of a “business transaction” consisting of both the underlying transaction and the arbitral award.
Another complicated issue is the circumstances in which failure to enforce an arbitral award can be regarded as a breach by the State of its investment obligations. In particular, international practice has confirmed that failure to enforce an arbitral award can indeed qualify as expropriation and a violation of the fair and equitable treatment standard. Provisions regarding denial of justice can also apply depending on particular circumstances.
Obviously, not every instance of refusal to recognize and enforce an arbitral award can and must be regarded as a breach of international investment obligations, because the possibility of such refusal is generally accepted in some cases. In certain situations, however, it is obvious that both an apparently wrongful failure to enforce an arbitral award and the groundless reversal of such arbitral award can be potentially regarded as a breach of the State’s investment obligations and can, therefore, serve as grounds for holding the State liable and awarding respective compensation.
European Court of Human Rights
Unlike in investment arbitrations, the competence of the European Court of Human Rights (the “ECHR”) is not restricted in terms of investments. Therefore, disputes regarding improper refusal to accept and enforce arbitral awards may be considered whether or not the underlying transaction has any features of an investment.
On the other hand, like with investment arbitrations, the ECHR is not the appellate authority in the context of the legislative system of a particular state. Consequently, it does not verify the decisions issued by national courts but rather determines whether an action taken by the State represents a breach of the State’s obligations under the Convention for the Protection of Human Rights and Fundamental Freedoms (the “Convention”) such as, for instance, the right to a fair trial and protection of property.
In the course of its practice (cases Regent v. Ukraine, Stran Greek Refineries & Stratis Andreadis v. Greece, Kin-Stib & Majkić v. Serbia) the ECHR has many times affirmed the fact that an arbitration court (tribunal) is the “tribunal established by the law” within the meaning of paragraph 1 of Article 6 of the Convention and, thus, all the guarantees provided in paragraph 6 extend to the respective awards issued by the arbitration court. Therefore, the absence of an efficient mechanism for enforcement of arbitral awards or the State’s preventing such enforcement constitute the breach of the State’s obligations set forth in paragraph 1 of Article 6 of the Convention.
It should be noted that in the case Regent v. Ukraine the breach of paragraph 1 of Article 6 of the Convention occurred at the time of the enforcement proceedings when the exequatur procedure was complete and the arbitral award was recognized and enforced by Ukrainian courts. The ECHR did not directly handle the question whether the request regarding the availability of an efficient mechanism for enforcement of arbitral awards concerns the court procedure for recognition and enforcement of such arbitral awards. However, in any case it is safe to say that such procedure for granting exequatur at least should conform to the general procedural guarantees provided in Article 6 of the Convention.
Another important conclusion which follows from the ECHR practice is that a claim under the arbitral award shall qualify as “property” within the meaning of Article 1 of Protocol 1 to the Convention, which means that such provision is applicable to the claim. Thus, the failure of a State to enforce an arbitral award may be construed as an expropriation and may make the State liable to pay a reasonable redress.
Conclusions
Currently the mechanisms existing within investment arbitrations and the European Court of Human Rights indeed provide the possibilities to protect the interests of foreign creditors and recover the damages from the State for manifestly unlawful non-execution of arbitral awards by public authorities. However, one should be particularly cautious when choosing a mechanism and should carefully consider all risks and prospects of the similar trials, with due attention to all details of a specific case.