ICSID Background Paper on Compliance and Enforcement of Awards: Valuable insights on the monetisation of ICSID claims

The International Centre for Settlement of Investment Disputes (ICSID) plays a vital role in facilitating the resolution of disputes between investors and States. However, information on what happens after an award is issued is often scarce, complicating investors’ risk assessments and monetisation strategies. 

To address this information gap, recently the ICSID Secretariat published a Background Paper on the Compliance with and Enforcement of ICSID Awards (the Background Paper). The research finds that ICSID awards have a very high rate of compliance, post-award settlements and successful enforcement. These encouraging findings emerge at a time when States are increasingly resisting enforcement of ICSID awards on substantive grounds, for example  in the intra-EU context (see our latest updates here, here, and here). 

The scope of the ICSID Background Paper

The Background Paper is the most comprehensive study on post-award compliance and enforcement of ICSID awards to date. It considers ICSID awards concerning pecuniary obligations (i.e., damages or costs) for which no post-award remedies (e.g., annulment, revision) are pending as of 31 December 2021. Other decisions which may also create pecuniary obligations (e.g., decisions on annulment with costs orders) are excluded from the scope of the research. The study identified 231 ICSID awards with pecuniary obligations for which public information regarding voluntary compliance, post-award settlement and/or enforcement proceedings was available. Of these, 151 are damages awards. This post focuses on this subset of 151 ICSID awards in which damages were awarded to investors (Damages Awards).

Encouraging evidence of post-award voluntary compliance, settlements and enforcement

The most significant evidence arising from the Background Paper is that, overall, 66 percent of the ICSID Damages Awards have been voluntarily complied with or settled post-award. This confirms that ICSID proceedings offer investors an effective means of achieving a satisfactory monetisation of their claims. The Background Paper argues that such high rate of voluntary compliance might be due to accrual of interest, enforcement litigation costs, risk of assets seizure, as well as the debtor-State’s creditworthiness and reputation in the international sphere.

Information on the outcome of enforcement proceedings, although in most cases unavailable, also shows a positive trend for investors. Enforcement actions were pursued in relation to 31 percent of the Damages Awards, but information about their outcome was only available in relation to 23 percent of this subset. However, 73 percent of these enforcement actions were successful.

After excluding the Damages Awards for which information on their post-award outcome was not available, ICSID concluded that investors obtained satisfaction in relation to 97 percent of the ICSID Damages Awards where the outcome is known. In more detail, this percentage can be broken down as follows:

• 90 percent of awards were satisfied voluntarily or through post-award settlements;
• 7 percent of awards were successfully enforced; and
• 3 percent of awards were not enforced.

These data provide helpful insights on the value of the ICSID system. 

There are, however, some limitations to the underlying data. As the study acknowledges, information on the outcome of enforcement proceedings is sometimes unavailable, resulting in a limited picture of the enforcement proceedings landscape. Moreover, the study does not differentiate between full and partial satisfaction of Damages Awards. It is very likely that investors have accepted ‘haircuts’ to their compensation as part of post-award settlements or when selling their rights under favourable awards to third parties. Argentina’s 2013 post-award settlements of five ICSID awards are a flagship example. These awards were partially paid in sovereign bonds with a discount of approx. 25 percent of the global amount of USD 677 million. More recently, British investor Rockhopper recently announced an agreement with a specialist fund that would allow them to monetise approx. 50 percent of a EUR 190 million award against Italy. Successful attachment of assets also may not have fully satisfied awards’ holders. 

The undoubtedly encouraging satisfaction rate of ICSID awards may therefore benefit from also incorporating data on the average ‘haircuts’ accepted by investors. While obtaining this additional data will be challenging, even if only limited, this would be valuable information for prospective users of the system.

In the vast majority of cases, domestic courts enforce ICSID Damages Awards

In addition to these encouraging figures, the Background Paper also provides insights into the interpretation and application of the ICSID Convention by domestic courts. No surprises emerge from the study, but rather support for the generally perceived advantages of ICSID awards:

• The ICSID Convention provides a simplified recognition and enforcement procedure limited to verifying the authenticity of the award, as opposed to the New York Convention system, which allows for more grounds to challenge enforcement (e.g., invalidity of arbitration agreement or public policy);
• Domestic courts of Member States to the ICSID Convention have an obligation to enforce an award as if it were a final judgment of a national court, which precludes them from refusing enforcement based on a substantive review of the award, as held, for example, by courts in Switzerland, the US, Australia, the UK, Malaysia and Zimbabwe; and
• Enforcement may be denied if the applicant fails to comply with domestic procedural requirements, e.g., by failing to lodge the enforcement action before the correct forum, perform proper service, or pursue the enforcement action within the applicable statute of limitation period.

Yet, enforcing ICSID awards may in practice not always be as straightforward as originally intended. Recent case law shows that domestic courts – despite the clear language of the ICSID Convention – sometimes do create additional hurdles to the enforcement. For instance:

• In the US, one judge in the DC District Court, while considering an application to enforce the ICSID award in PV Investors v. Spain, conducted a de novo review of the validity of the award’s underlying arbitration agreement. The judge did so in order to assess whether – as a matter of US law – the respondent State had waived its immunity from jurisdiction. On appeal, the DC Circuit recently ruled that only the existence of an arbitration agreement – and not its validity – is relevant for purposes of establishing jurisdiction in US courts.
• In Switzerland, the Federal Supreme Court rejected an appeal concerning the enforcement of the OperaFund v Spain ICSID award. According to Swiss law, ICSID awards can be enforced only insofar as the underlying dispute has a “sufficient connection” to Switzerland, a requirement whose compatibility with Switzerland’s obligations under the ICSID Convention is questionable;
• In the EU, in the landmark Romatsa judgment, the Court of Justice of the European Union (CJEU) recently held that – despite the obligation to enforce ICSID awards as if they were final judgments of domestic courts – EU courts are precluded to enforce intra-EU ICSID awards because of their incompatibility with EU law. Prior to the CJEU’s clarification, EU courts had taken opposite approaches, with Romanian courts giving precedence to the ICSID Convention over EU law and Luxembourg and Swedish courts doing the opposite.     

This notwithstanding, the ICSID system remains – as the Background Paper demonstrates – the safest legal regime when it comes to investment treaty disputes. Satisfaction of ICSID awards can in fact be achieved through a thorough (and global) enforcement strategy.

Takeaways

The Background Paper shows that the dispute settlement mechanisms offered by ICSID are self-contained, self-sufficient and highly effective. The overwhelming majority of domestic jurisdictions recognise and accept the key principles of the ICSID Convention on enforcement of arbitral awards. Two-thirds of States comply voluntarily with their obligations or conclude post-award settlements. Despite some understandable shortcomings of the Background Paper, the data remains valuable and encouraging for prospective investors concerned about the recouping losses from international wrongful acts of States.

Furthermore, investors can enhance their chances of monetising favourable awards by implementing strategies even before an award is issued. For instance, investors should engage in asset tracing from an early stage of the proceedings and monitor and update these findings during the arbitration. This proactive approach allows them to act promptly when obtaining a favourable award, thereby increasing their negotiating leverage in post-award settlement discussions and facilitating enforcement actions in favourable jurisdictions without undue delay.