A recent judgment of the Federal Court has cleared the path for investors to enforce, in Australia, arbitral awards under the International Convention on the Settlement of Investment Disputes (ICSID Convention). This article explores important considerations for investors and sovereign states either prosecuting or defending ICSID award enforcement proceedings in Australia, in light of the decision.
A precedent for recognition and enforcement
In Eiser Infrastructure Ltd v Kingdom of Spain [2020] FCA 157, Justice Stewart granted the applicant investors leave for the recognition and enforcement of ICSID arbitral awards of €128,000,000 and €101,000,000 respectively against the Kingdom of Spain (Judgment), under section 35 of the International Arbitration Act 1974 (Cth). The consequence of those orders is that, in the event the judgment sum remains unpaid by Spain, the investors may seek to "execute" the judgment by seizing assets owned by Spain within Australia, in accordance with the compulsory execution processes of the Australian courts.
The underlying dispute concerned Spain's breach of the "fair and equitable treatment" protection under Article 10(1) the Energy Charter Treaty (ECT) by enacting measures from 2012-2014 that reduced and ultimately revoked financial incentives for renewable energy investments, to the detriment of investors who had relied on the promised long-term nature of incentive scheme. The regulatory reforms in question have given rise to dozens of highly-publicized ICSID proceedings filed against Spain in the past five years.
Justice Stewart reached two important conclusions in the Judgment:
- First, His Honour held that Spain had, by signing and ratifying the ECT and the ICSID Convention, expressly submitted to the jurisdiction of the Australian courts in respect of the recognition and enforcement of any resulting award. He thereby rejected a range of "foreign state immunity" arguments made by Spain, of the type that are frequently agitated in defence of ICSID award enforcement proceedings. This finding significantly narrows the scope for resistance against the recognition of an ICSID award in Australia.
- Second, His Honour held that a sovereign's legal immunity against "execution" of the award against its assets is preserved by Article 55 of the ICSID Convention. This finding recognizes the distinction between an initial "recognition and enforcement" phase and the subsequent "execution" phase, consistent with the approach taken in other jurisdictions including in the US and France.
The Judgment is currently the subject of an appeal by Spain.
Execution against Assets – The real battleground?
While recognition and enforcement may now be more readily obtained, the real issue for investors quickly becomes whether they are able to execute the judgment against assets of the sovereign debtor, and thereby monetize the outstanding award debt.
Enforcing against sovereign-owned assets under Australian law is governed by the Foreign State Immunities Act 1985 (Cth). The exercise is more complex than enforcing against a commercial debtor, in that Australian law restricts seizure of assets of a sovereign state, subject to limited exceptions, including where the assets to be seized are "commercial property". An illustration of the complexities that arise in attempting to characterise assets as commercial property or otherwise can be seen in the leading case of Firebird Global Master Fund II Ltd v Republic of Nauru [2015] HCA 43.
In the event available assets are identified within the jurisdiction, and a legal exception to the immunity is established, successful enforcement may be obtained.
Key considerations for investors and sovereign states
Investors looking to enforce an award will need to consider the following matters:
- Prior to commencing proceedings, forensic analysis may assist in identifying assets owned by the sovereign debtor that may be available for execution of the judgment. This could encompass asset categories spanning bank account monies, real property, aircraft, ships and/or cargo.
- Once assets are identified, legal advice should be sought as to whether those assets are protected by Australia's sovereign immunity protections.
- Where the award amount is substantial and the value of available assets is insufficient to satisfy that debt, investors should bear in mind that Australian limitation periods permit execution of an outstanding judgment debt over an extended period of time (generally, at least 6 years), during which time the available asset pool may change.
Conversely, sovereign states who are debtors under an ICSID award will need to be vigilant and monitor any assets that are presently, or might become in the future, exposed to execution measures under Australian law.
The Judgment arrives at a time when Australian courts have been faced with a marked increase in the number of pending actions by investors seeking to enforce ICSID awards, including several further proceedings pending against Spain and a proceeding against the Islamic Republic of Pakistan. The success by the investors in the Eiser case may see this uplift in investor actions continue further, with Australia seen as a friendly forum for enforcement of ICSID awards.