State-Investor Arbitration
State entities seek to encourage foreign investment in order to secure funding for projects such as infrastructure within the country; however, commercial parties want to know that there is recourse available if anything goes wrong. This is where state investor arbitration can help.
In the past year, investor-state dispute settlement (‘ISDS’) has been significantly reformed due to its increasing popularity heralding major changes for businesses investing in foreign countries. ISDS mechanisms are embedded in thousands of investment treaties, ranging from bilateral treaties between individual states to multilateral treaties with global signatories.
The number of investor-state arbitrations has been on the rise. According to a November 2024 report by UN Trade and Development (‘UNCTAD’), the number of known ISDS cases more than doubled in the past decade, rising from under 600 in 2013 to over 1,300 by the end of 2023. At least 60 new arbitration cases were initiated in 2023. This surge underscores the growing reliance on ISDS mechanisms to resolve investment disputes.[1]
When it comes to the outcome or arbitration of ISDS disputes, we can see trends arising from data provided by the World Bank’s International Centre for Settlement of Investment Disputes (‘ICSID’), the Permanent Court of Arbitration (‘PCA’), the International Chamber of Commerce (‘ICC’), as well as ad hoc arbitrations conducted primarily under the United Nations Commission for International Trade Law (‘UNCITRAL’) rules.
This data shows developed countries tend to win arbitrations in more cases, with an average success rate of 53.6%. This is compared to the success rate of 44.5% for High HDI countries and 33.3% for developing countries. We can conclude that investors are much more likely to win a case against a developing economy than against a developed one making it imperative to consider the location of an arbitration claim before commencement to mitigate possible risk and should be taken into account before entering commercial transactions.
One interesting factor brought forward is that governments in the majority of developing economies are often unaware of investment treaty law and its implications. As a result, when implementing new measures that could affect investments, they do not follow rigorous legal procedures that could mitigate the chances of successful claims against them. This is different from High HDI countries which tend to give a great deal of thought to their new policies to protect them against potential arbitration claims. These procedures include, among others, informing investors of policy changes and allowing them sufficient time to prepare for new regulations. In contrast, developing countries may also lack the expertise to provide official justifications for their policies.[2]
Benefits of arbitration in ISDS
Arbitration, particularly in an international context, is a long-established method of dispute resolution in ISDS disputes due to the numerous advantages it can offer opposing parties compared to litigation in national courts.
Firstly, the privacy of arbitration has long made it an attractive method of dispute resolution in commercial matters concerning state entities. In a national court, the principle of open justice means that there is no confidentiality. Therefore, through open disclosure, private and commercially sensitive information never intended to be made public is uncovered. This may cause reputational harm, embarrassment and prejudice to a party’s competitive position. Protection from these risks is essential when dealing with state entities due to the expectation for them to act ethically from both the global market and its own citizens.
Further, under the New York Convention, the enforceability of international arbitral awards is made much simpler and far reaching. With over 170 signatories, this convention significantly exceeds the number of countries with whom the UK has reciprocal arrangements for the recognition and enforcement of national court judgments. This attracts state entities to utilise this expansive method of enforcement.
Resolving disputes against a sovereign or state-owned entities can be particularly complex. Many state contracts call for litigation of investment disputes in the national court of the host country. This can cause concern for private parties given the leverage executive authorities may exercise over local courts and the national courts’ preference to give broad discretion to public authorities, raising concerns about the neutrality and fairness of local court proceedings. Even with the New York Convention in place, enforcement of against overseas assets can be annulled by local law under one of the Convention’s rare grounds for refusing international arbitration awards.
However, as above, current trends reveal that foreign investors from the outset opt to avoid these risks by including bilateral or multilateral treaties in the initial contract and utilising international arbitration centres, such as the ICC, LCIA or ICSID. These are not dependent on the New York Convention and therefore not subject to local court interference.
Role of ICSID Arbitration
The ICSID is an international arbitration institution established in 1966 for legal dispute resolution and conciliation between international investors and states.
The ICSID Convention now boasts 166 signatory states. In its latest annual report, ICSID reported that it had administered a total of 341 cases in its last financial year, the second-highest number it has ever recorded in a single year, highlighting its pivotal role in the ISDS landscape.
Many ISDS cases are governed by rules developed by the UNCITRAL. A significant development in 2024 was the progress made by an UNCITRAL working group on reforms aimed at improving ISDS proceedings. These reforms aim to streamline and bring uniformity to the current fragmented landscape of investment protection and dispute settlement.[3]
ICSID provides for settlement of disputes by conciliation, mediation, arbitration or fact-finding. The ICSID process is designed to take account of the special characteristics of international investment disputes and the parties involved, maintaining a careful balance between the interests of investors and host States. Each case is considered by an independent Conciliation Commission or Arbitral Tribunal, after hearing evidence and legal arguments from the parties. A dedicated ICSID case team is assigned to each case and provides expert assistance throughout the process.[4]
State immunity
A key factor to consider when entering a commercial transaction with a state entity, or potentially launching an arbitration claim is the principle of state immunity.
State immunity is the protection given to a state from being sued in the courts of other states. This immunity stemmed from the ideology that states have sovereign equality, and one state should not be allowed to “judge” another. However, in the modern era of international trade, states have become increasingly involved in acts of a commercial or private nature, often through their agencies, organs or state-owned enterprises. This prompted the development in many countries of a legal distinction between public or sovereign activities on the one hand, and private or commercial activities on the other. Only in respect of its sovereign activities may the state reasonably expect to be immune from proceedings in a foreign court.
Specifically in relation to enforcement of arbitration awards, one argument that is sometimes advanced by states in investor-state disputes is that they enjoy state immunity from the enforcement of arbitral awards against them and not just partaking in the arbitration itself.
State immunity in respect of arbitration matters mainly at two levels. First, at the level of recognition and enforcement of the arbitration award by the courts of the country in which recognition and enforcement of the award is sought. Second, at the level of execution of the arbitral award in the country in which execution of the award is sought.
Recognition and enforcement of an award refers to the stage in the proceedings in which an arbitration award is declared valid by a national court and an enforcement order is issued by the relevant national courts. Execution, on the other hand, refers to the subsequent step of seizure and sale of a state's assets, the collection of monies due, in accordance with an already obtained enforcement order against the state.[5]
Recent case law has demonstrated the issue of state immunity in an enforcement context. The applicability was ruled on by the Court of Appeal in England and Wales in October 2024 in a jointly heard appeal involving Spain and Zimbabwe (Infrastructure Services Luxembourg S.À.R.L. v. Kingdom of Spain and Border Timbers Limited v. Republic of Zimbabwe [2024] EWCA Civ 1257).
In the cases of Infrastructure Services v Spain and Border Timber v Zimbabwe, the claimants, having successfully secured separate awards against the respective states, applied for an order under the English Arbitration Act 1996 to register their ICSID awards as judgments of the court for enforcement purposes. The registration orders were granted to the claimants, which both states subsequently sought to set aside on the grounds of state immunity. In a joint hearing before the Court of Appeal, the Court determined that by ratifying the ICSID Convention, Spain and Zimbabwe had effectively waived their state immunity under the State Immunity Act 1978, thereby subjecting themselves to the jurisdiction of the English courts for the enforcement of ICSID awards.
The Court of Appeal's decision aligns the UK's position with that of the courts in Australia, New Zealand, the US, France, and Malaysia, all of which have interpreted Article 54 of the ICSID Convention as a waiver of state immunity and a submission to their domestic jurisdiction.
The alter ego principle
The alter ego principle can be utilised to circumvent state immunity and allows a company who has a successful award against a sovereign state to pursue attachment proceedings against a state-owned enterprise. In other words, the property owned by the entity may be collected against to pay the debts of the state.
However, proving that a state-owned enterprise is an alter ego of a debtor-state is often very difficult. There is, for instance, a strong presumption under English law that the separate corporate status should be respected. First, the award-creditor must find assets which can be seen to be held by the state. Then the award-creditor needs to show that the state cannot succeed in an argument that the assets benefit from state immunity, which would debar the execution of an award.
There are a few criteria which point towards an entity being an alter ego. By way of example:
- The debtor state has undermined the standalone status of the enterprise through extensive political meddling. i.e. the board includes government ministers, or senior civil servants, the government supervises the companies’ day to day operations.
- The company performs a public function that is not usual in private entities.
The degree of separation between the company’s property and the state’s property
Further case law considering enforcement in ISDS
A recent decision by an ICC arbitration tribunal awarded a state-owned entity of the Democratic Republic of the Congo to pay €39 million in penalties to an Australian mining company for breaching the orders of an emergency arbitrator in a dispute over a lithium project. Further interim relief was sought in this case by the Australian company for interim relief through an ICC emergency arbitration to block the transfer of shares to Jin Cheng. Schroeder, a former counsel at Derains & Gharavi, and issued two orders in May and November 2023 enjoining Cominière from any action that would result from its purported termination of the agreement and to preserve the status quo on pain of a daily penalty of €50,000.[6]
UK arbitration has further proven a useful mechanism working in favour of state-owned entities. A subsidiary of Russia’s central bank, the National Bank Trust (NBT) obtained a final award through the LCIA in November 2023 for USD 565 million against companies linked to the family of a Russian property tycoon. The award is now being enforced by NBT through insolvency proceedings in Cyprus and the British Virgin Islands. Interestingly, this case led to a landmark decision by the Court of Appeal in October 2024 that the UK sanctions regime does not prevent courts from entering judgment in favour of sanctioned persons in civil litigation.[7]
The enforceability of arbitral awards is a rapidly developing area and arbitral Tribunal awards have the power to be internationally recognised both in relation to interim measures and final awards. On March 22, 2024, the DIFC Court of Appeal upheld an earlier decision by the Court of First Instance to enforce an interim award issued in a London-seated arbitration, confirming that the DIFC Courts have jurisdiction to enforce interim measures ordered by arbitral tribunals even where the seat of the arbitration is not the DIFC.[8]
Statistically, the number of states and state-owned entities as parties in LCIA arbitrations remains high, with 11% of the LCIA’s caseload involving states and/or state-owned entities. 85% of parties in LCIA arbitrations originated from 91 countries other than the United Kingdom. Of the 135 cases that were transferred to the LCIA from the Dubai International Arbitration Centre (DIAC) following the enactment of Decree No. (34) of 2021 of the Government of Dubai and an agreement between the LCIA and DIAC, 100 cases have now been closed, with an additional 13 in their final stages and only 18 remaining active or stayed.[9]
Asset recovery following a successful arbitral award.
The above sections demonstrate the good standing which arbitral awards have in today’s global market. However, it is important to instruct legal representation that is well versed in not just obtaining a favourable award but possess the expertise in practical asset recovery methods that must be sought outside of arbitration tribunals.
The reasoning for this is a fundamental difference between the terms "recognition" and "enforcement" of arbitral awards.
"Recognition" means the acceptance of an award as having the same effects as a domestic award obtained through national courts. The award may accordingly be relied on by way of defence, set-off or otherwise in any legal proceedings in England and Wales or Northern Ireland.
"Enforcement" means giving an award the same effect as a domestic court judgment. The court is not ordering execution measures by way of asset recovery (such as the seizure of property), but merely issuing a declaration of enforceability, which then serves as the official basis for actual execution. Once an award has been declared enforceable in the same manner as a court judgment, the various enforcement procedures available to a judgment creditor become available to the award creditor.
There is a variety of highly effective asset recovery measures that require application to the Court following a successful arbitral award. A popular and highly effective method is obtaining a worldwide freezing orders (‘WFOs’) of debtor assets, in some cases this can be applied for as an interim measure during an active arbitration where there is a risk of dissipation of assets. Ultimately, the defendant/debtor’s assets held in bank accounts or in tangible investments such as property or cars can be frozen until all funds are successfully recovered. The Court can also issue charging orders over property held by the defendant/debtor which further allows the claimant to apply for an order of sale of the property to release the funds owed to them.
There is a full and frank disclosure process, and the receiver of the WFO has to disclose their direct and indirect assets regardless of whether they are the beneficial owner of the asset. It is common practice for assets to be hidden within companies or transferred to connected persons – such Orders are designed to “pierce the corporate veil” and are highly useful in larger, international disputes which state entities are usually involved with as there will be many counterparts to a transaction that funds may need to be traced from.
How our firm can help
Rahman Ravelli Solicitors are experts in international arbitration and well equipped to provide specialist and tailored legal representation to achieve practical results for ISDS, including advising from the outset of entering a commercial transaction, considering the location of the state, likelihood of recovery and asset recovery measures available.
We have strong connections with foreign Counsel in different jurisdictions to assist in any advisory or regulatory work involving state entities or larger cross border contracts.
Our firm will be able to guide you through the arbitration process and utilise their investigatory skills for successful asset recovery.
Source
- https://www.pinsentmasons.com/out-law/analysis/major-changes-investor-state-dispute-settlement
- https://dailyjus.com/world/2024/06/is-investment-arbitration-beneficial-for-developing-countries-an-empirical-analysis
- https://www.pinsentmasons.com/out-law/analysis/major-changes-investor-state-dispute-settlement
- https://icsid.worldbank.org/About/ICSID#
- https://uk.practicallaw.thomsonreuters.com
- https://globalarbitrationreview.com/article/congo-state-entity-hit-penalties-in-lithium-dispute
- https://globalarbitrationreview.com/article/russian-state-bank-wins-damages-in-fraud-claim-lcia
- https://www.cov.com/en/news-and-insights/
- https://www.globalarbitrationnews.com/2025/01/01/baker-mckenzie-international-arbitration-yearbook-2024-2025-united-kingdom/
