The 5 Ws of Enforcement
Locations
Enforcing arbitral awards against states and state entities presents unique challenges in circumstances where the respondent does not voluntarily comply with the payment demand. This article describes those challenges and sets out pre-emptive measures designed to assist claimants in anticipating and overcoming them based on intelligent preliminary work combined with the implementation of effective cross-sectoral strategy throughout the process1.
Pre-emptive due diligence: the ‘Who’ of enforcement Who is the claimant?
Who is the claimant?
Going into a dispute with a state or state-owned entity will not usually be an arms-length affair but more likely a David against Goliath situation. Often it is after the arbitration award is issued that when the war really begins. Usually, a state will have vastly more resources at its disposal, a bigger wallet than individuals, and may employ bad faith tactics to dissuade creditors from seeking to monetise an award. The first aspect of due diligence is not legal but factual. A creditor should establish whether there are political considerations that might motivate a state to refuse payment. Readers may be familiar with the long running enforcement proceedings by IPCO (Nigeria) Ltd (“IPCO”), which sought in November 2004 to enforce an award of over £150M award against the Nigerian National Petroleum Corporation ("NNPC"), which has challenged the seizures in the UK on a variety of grounds including alleged fraud on the part of the creditors.2
In the similarly long-running case of Francesco Becchetti and others against Albania3, the claimant group obtained an ICSID award currently valued at over £125M after Becchetti’s television station (which was heavily critical of the Albanian government) was expropriated. After failing to annul the award, Albania continues to fight tooth and nail to prevent a pay-out, even threatening to leave the ICSID Convention as a final resort. In this case, part of the state’s actions included allegedly fabricating criminal charges against Becchetti for tax evasion, thereby threatening to make the aggrieved investor’s life difficult practically, from a travel perspective, even if his lawyers are successful in the civil enforcement action.
In these situations, it is crucial to obtain the correct and most cost-effective combination of investigative and public relations assistance, including carrying out ‘on the ground’ intelligence work to establish key pressure points designed to create leverage in the enforcement process. The legal battle, in such cases, can only deliver a limited result for the ‘persona non grata’ in enforcement proceedings.
A caveat emptor for claimants is that most intermediaries whose assistance is sought may claim to have the requisite experience and knowledge of the state or jurisdiction(s) in the matter, but often do not; the pre-enforcement due diligence involved in putting a claimant’s own legal teams to the test should never be underestimated.
Who is the respondent?
In tandem with carrying out due diligence on a claimant, it is wise to understand the opponent. Not all states are alike. As a first consideration, it is important to assess the state of solvency of a state and, by extension, a state entity. Does it have funds to satisfy an award? Assuming it is a developing state (where these concerns usually arise), is it on favourable terms with the World Bank, the IMF, the European Bank for Reconstruction and Development (amongst others) and can the legal team find the direct contact details for the country representatives responsible for meting out financial assistance that could be targeted with the enforcement action?
For instance, the financial health of a Kyrgyzstan which has limited oil and gas resources and depends on gold exports, remittances from Kyrgyzstanis working abroad and external state support (for example, from Russia) is very different to an oil-rich state. It may be useful to carry out desktop searches on bank loans due to the state, or export programmes to overseas partners (potentially other states) in which monies are due or undertake more extensive searches into assets held outside the country, in order to determine how long and how challenging the enforcement process will be.
In addition, local counsel’s input is worth seeking for insight into the financial position of specific ministries or state entities. In Iraq, for instance, anecdotal evidence suggests the Ministry of Oil possesses its own budget and does not rely on the Ministry of Finance and is autonomous in making certain decisions such as choosing its legal counsel. This may be similar in other countries in which there is less decentralisation. It is therefore vitally important to understand the financial capacity of the opponent.
Asset considerations: the ‘What’ of enforcement
Which assets to seize, and seize first?
The identification of enforceable state assets is critical. A list should be compiled from the outset as to the assets and their ease of enforcement, with funds held in bank accounts being ideal targets, followed by public securities and real property. A preliminary question is then whether the assets may risk being caught by state immunity from enforcement defences in the applicable jurisdiction(s). If enforcing in England, the UK Sovereign Immunity Act 1978 (SIA) applies.
By way of example, in AIG Capital Partners Inc. and another v. Republic of Kazakhstan and others4, the claimants brought a successful claim against Kazakhstan under the US-Kazakhstan BIT. The claimants sought to enforce the ICSID award against shares and cash held by third parties in London on behalf of the National Bank of Kazakhstan, which the state sought to challenge. As a matter of law, the SIA provides that state property is immune from enforcement unless it is intended for commercial use. The claimants contended that these assets were intended for use for commercial purposes so fell outside the protections of the SIA. But there are certain caveats. The SIA provides that a state’s central bank funds enjoyed full immunity from enforcement, regardless of whether the property was used for commercial purposes. This decision underlines the risk that a state may still be immune from execution against an ICSID award, even if prima facie, the assets in question are commercial in character.
Another, less obvious, asset is revenue income from a business partner. In the case by Standard Chartered against Tanzania5, the claimant was successful ultimately in locating and freezing revenue owing from a joint venture partner due to the state, thereby diverting payment to the claimant. The size of the award can also make a difference in whether and how long it takes to enforce. Below a certain amount (say, $20M, in most instances) the cost and time is disproportionately high relative to value, in pursuing an enforcement action where the state is entrenched in its position. Above a certain amount (such as $1BN) it becomes too important a fight for the state to lose. Anecdotally, the ‘sweet spot’ is in the region of $100M.
Who owns the assets?
A related question is the identity of the legal owner of the assets in question. This also becomes relevant when dealing with state entities: for example, it is not always a fait accompli to enforce against a state vis-à-vis the actions of its entities, when such actions cannot be attributed to the state. Equally, when assets of a seemingly separate entity are deemed effectively to belong to a state that is subject to sanctions, this may cause problems in the enforcement process, such as in the Al-Kharafi v Libya6 case (described below).
Location of assets: the ‘Where’ of enforcement
Where are the assets?
A key consideration is where the targeted assets are located. Assuming they include real property, this can be checked in public registers or databases. Local counsel may be able to assist with this process. It is worth noting that some jurisdictions are opaquer than others in terms of what can easily be searched without a court order: this includes Switzerland where third party assets of numerous states and state officials are located. It may also be useful to engage a corporate investigator with trustworthy contacts on the ground to search for assets that may not be easily identifiable. In this respect it is important not only to locate an investigator with experience, but one who will use lawful means to carry out their investigation so as to preserve the reputation of the claimant and the integrity of the award. The enforcement process is also much more challenging, generally, when enforcing against assets on the state’s own territory, because the state’s own courts are not always independent of the state.
When enforcing within the relevant state
The key to enforcing within the state itself is to move fast and capitalise on momentum, especially momentum derived from small but strategically timed gains. It is usual to incentivise local counsel and enforcement officials with commission, but it is vital at the outset to vet counsel, their credentials and independence. It is an ongoing process throughout the proceedings to make sure one is not dealing with a politically compromised team on the ground, who may have an interest in frustrating the enforcement process. This could be either because they have a financial interest, or because they are at risk of criminal sanctions or suchlike by the state apparatus. It is also preferable to have a direct line with the enforcement officials (such as bailiffs or court clerks), who will be central figures in the battle and whom one must always keep onside.
The focus on enforcing within certain states is to emphasise nuisance value (for example, seizing telecoms masts, private planes used by statesmen (for non-state related purposes), vehicles (non-diplomatic), rather than focus solely on value. The aim is to bring the decision makers to the table to come to a settlement so that the creditor does not continue to apply pressure and cause embarrassment both in-country and in the state’s external relations.
When enforcing outside the relevant state
When enforcing against assets held in another jurisdiction (when it is not an ICSID award7 ) it is important to consider whether the process to obtain exequatur of the award is straightforward (such as if the state in which the assets are located is signed up to reciprocal enforcement treaties with that of the state of the seat of arbitration), and whether the state is signed up to treaties such as the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (“NYC”). Arguably, however, it is even more important to conduct diligence into the trade relationship of the enforcing state with the state against which enforcement is sought. For example, in the case of Becchetti v Albania, Italy is an important trading partner of Albania. This could be a reason why the state of Italy allegedly refused diplomatically to support Mr Becchetti in his enforcement efforts.
Obstacles to enforcement: the ‘Why’ (not) of enforcement
Once pre-emptive due diligence is completed on the parties and (where necessary) intelligence obtained to understand whether a state will not prove obstructive in combatting a politically sensitive award, and after a thorough audit of the asset position is undertaken to establish the path of least resistance against the most easily monetizable assets in the most favourable jurisdictions, the time comes to beauty parade the best lawyers on the ground and mobilise the chosen team in the legal battle against those assets. Obtaining an enforceable domestic judgment may be the next step in the process. It is important to find a legal team that is wise to the approach that a state may use in the domestic courts. Although certain law firms may be competent in running the arbitration proceedings, not all will have the requisite experience to conduct the enforcement process thoroughly.
Possible state ‘defences’ to combat an enforcement action
It is likely an award creditor will encounter a sovereign immunity defence from a state respondent regarding execution against its assets, even if the state’s claim that it is immune from being sued proved fruitless. Whether it is successful will depend on the laws governing state immunity in the jurisdiction where the award is being enforced: these vastly differ from state to state.
In Svenska v Lithuania8, Svenska (a Swedish company) entered into a joint venture contract governed by Lithuanian law, with AB Geonafta, a Lithuanian State-owned entity in the oil and gas exploration and production field. The arbitration, which was seated in Denmark, included an irrevocable waiver of all sovereign immunity claims by the Lithuanian government and Geonafta. In the ensuing ICC arbitration, the tribunal found the Lithuanian government to be bound by the arbitration agreement, having directly signed the contract. After obtaining a favourable award, Svenska applied to enforce it in England, whose courts granted an exequatur judgment.9 Lithuania subsequent challenge on grounds of sovereign immunity culminated in the Court of Appeal, which concluded by examining the parties’ intentions, and determined that in any event the SIA does not grant immunity to states where they agreed to the arbitration in writing.10 As a result, the Lithuanian government was also not immune from the enforcement proceedings.
However, it is not inconceivable that some states may change their laws at the eleventh hour to frustrate a creditor’s enforcement attempts. This happened in the well-known Yukos case11, when (prior to the war in Ukraine) France changed its rules on sovereign immunity from enforcement under the Sapin II Act12 by mandating that a judge preliminarily approve any enforcement measure on assets belonging to a foreign state. This was one of the reasons that the Yukos shareholders could not enforce in France against Rosneft, the Russian state-owned oil company.
In contrast with the Svenska decision in the UK courts, under the Sapin II Act, it is not enough now for the state to have waived its rights to claim immunity by signing an arbitration clause. It must expressly have consented to enforcement against such assets or ring-fenced them for the purposes of the proceedings, or such assets must be specifically used otherwise than for the purposes of public service and they are expressly linked to the entity against which the proceedings are initiated. This greatly restricts the pool of French-located state assets against which a creditor can enforce.
Sanctions
Something else to be aware of is what sanctions are in effect against the state, whose assets may be out of reach for that reason alone. In Al-Kharafi v Libya, the French Supreme Court blocked enforcement of an award in favour of a Kuwaiti company (Al-Kharafi) against assets belonging to a Libyan sovereign wealth fund, Libyan Investment Fund. The court did so on the grounds that the assets, which were already frozen due to international sanctions, could not be seized without prior authorisation from the competent EU member state’s authority. As the Kuwaiti company had not sought prior authorisation from the French Treasury, being the competent authority under the Regulation, the court held all attachments to be invalid.
In the UK, the sanctions regime (particularly regarding Russian sanctions, currently) is constantly changing and it is important to seek specialist advice from sanctions lawyers if considering enforcing against a potentially sanctions-affected entity.
Public policy
Under the NYC, a court may refuse recognition and enforcement of an arbitral award if it would be contrary to its own state’s public policy, as defined by the domestic law of that state. In Soleimany v. Sokimany13, the English Court of Appeal refused to enforce an award concerned with an illegal contract for the smuggling of carpets out of Iran, holding that it would be contrary to public policy to enforce an award which on its face related to a contract considered illegal at the place of performance.
Timing: the ‘When’ of enforcement
Last but not least, timing is crucial in enforcement. Award creditors enforcing against the governments of politically turbulent states need to be mindful of the current political climate, including the timing and likely outcome of elections, and a state’s economic priorities, when considering the best time to apply pressure. An example is a case the authors are currently assessing, concerning enforcement against Pakistani state assets on behalf of European claimants. Given that the elections are upcoming and the incoming government (if it is from an opposing political faction) may not be as sympathetic to the interests of foreign investors as the previous administration, it may be wise for such investors to bide their time. In these circumstances, it is best to wait and see which party takes power, and work with well-connected but neutral political analysts before initiating any process.
Another example is that of NML Capital v Argentina, which went all the way to the US Supreme Court14. This case demonstrates that changes in government may also mean changes in economic or diplomatic priorities, which can create opportunities for negotiation and settlement. Argentinian officials proved more willing to settle claims arising from their predecessors’ conduct than their own, with Argentina’s abrupt settlement of a more than decade-long, US$1 billion dispute. After years of highly contentious litigation – including attachment of an Argentinian navy ship – a settlement agreement with the private equity fund (dubbed ‘vultures’) which had bought the initial investors’ claim against the state, came only months after the election of President Mauricio Macri, who had promised to revitalise Argentina’s economy.
Conclusion
The battle against a state does not stop when the award is in hand. It becomes multi-faceted, and takes on more than just a legal process is in full swing. To prevent the victor of an arbitration that has dissipated sweat equity and costs from being consigned to a fate akin to that of Pyrrhus15, the right strategy combined with the correct budget from the outset is essential. Due diligence should be conducted from the start: on the opponent, its relationship with the claimant, the nature and location of the assets, and the experience and credentials of the team in place (which will include investigators, law enforcers, public relations experts, lawyers, political analysts, and more). The coordinated implementation of excellent strategy also comes at a cost: few battles were ever won ‘on the cheap’. States will be banking on the ineptitude or under resourced status of their adversaries. It is for the new generation of award creditors to prove them wrong.
References:
1 As the authors are English law qualified, and due to space constraints, the article addresses the English law position on enforcement, providing an unqualified opinion on other jurisdictions (such as France), where examples are appropriate for contextual reasons only.
2 IPCO (Nigeria) Ltd v Nigerian National Petroleum Corporation [2015] EWCA Civ 1144
3 Hydro S.r.l. and others v. Republic of Albania (ICSID Case No. ARB/15/28)
4 [2005] EWHC 2239
5 Standard Chartered Bank v. The United Republic of Tanzania, ICSID Case No. ARB/10/12
6 French Court of Cassation, No 19-25.108 and No 19-21.964
7 The ICSID Convention seeks to facilitate international investment by providing a means of resolving investment disputes separate from any domestic courts. The ICSID Convention established the ICSID, which administers arbitrations under its Arbitration Rules. Each Contracting State commits to enforcing an arbitral award issued by a tribunal under the ICSID Convention as if that award were a final judgment of its own courts.
8 Svenska Petroleum Exploration AB v. AB Geonafta and the Republic of Lithuania, ICC Case introduced 12 June 2000.
9 2005] EWHC 2437 (Comm)
10 [2006] EWCA Civ 1529
11 Yukos Universal Limited (Isle of Man) v. The Russian Federation (PCA Case No. 2005-04/AA227)
12 Economic Modernisation Act 2016-1691 of 9 December 2016, known as the “Sapin II Act”
13 [1999] QB 785.
14 Republic of Argentina v. NML Capital, Ltd., 573 U.S. 134 (2014)