Innovation in International Arbitration

Two decisions by US courts this year illustrate the divergent practices that can arise when domestic courts in states with federal systems are asked to recognise arbitral awards issued under the auspices of the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID).

The Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) requires member states, including the United States, to recognise and enforce ICSID awards. Neither the Convention nor the US statute implementing its provisions, however, specifies the process by which recognition shall occur. In a ruling issued in February 2015, the first-instance federal court in Manhattan refused to vacate an earlier decision granting an ex parte petition to recognise an ICSID award that had been filed the day after the arbitral tribunal issued the award.¹ Three months later, the first-instance federal court in Washington, DC reached the opposite conclusion, holding that the only appropriate procedure for recognising an ICSID award against a respondent state was through commencement of a plenary action with notice served on the state in accordance with the Foreign Sovereign Immunities Act (FSIA² The petitioner in the second case, along with the other award creditors, then sought and obtained ex parte recognition in New York.

Both courts issued reasoned opinions in support of their respective holdings, but reached diametrically opposite conclusions about the intention of the drafters and the meaning of the text, of the Convention and the US implementing statute. Absent guidance from a higher federal court, these conflicting decisions may influence the choice of US forum for recognising and enforcing ICSID awards. Specifically, where possible, award creditors may prefer to seek recognition of ICSID awards in New York to gain the benefits of a quicker path to enforcement that offers less opportunity for an award debtor to transfer, conceal or dissipate assets.

The treaty and statutory context

A cornerstone of ICSID arbitration is the status accorded to awards in the courts of its 159 member states. National courts lack the power to set aside or modify ICSID awards, which are subject to review, revision, and annulment only within the ICSID system.³ In addition, article 54(1) of the Convention requires member states to ‘recognize an [ICSID] award ... as binding and enforce the pecuniary obligations imposed by that award as if it were a final judgment of a court in that State.’⁴ For states with federal constitutions, the article further provides that each ‘may enforce [the ICSID] award in or through its federal courts and may provide that such courts shall treat the award as if it were a final judgment of the courts of a constituent state’.⁵

Both the Convention and practice draw a distinction between recognition, on one hand, and enforcement or execution on the other.⁶ Recognition is generally the first step toward execution: the award creditor obtains a judgment which then serves as the basis for enforcement within that jurisdiction, such as through attachment of assets.

The United States has implemented article 54(1) through a federal statute, 22 USC section 1650(a) (ICSID Enabling Statute), which provides that an ICSID award ‘shall create a right arising under a treaty of the United States’, with ‘pecuniary obligations’ that ‘shall be enforced and shall be given the same full faith and credit as if the award were a final judgment of a court of general jurisdiction of one of the several States’ in the United States.⁷ The ICSID Enabling Statute does not expressly use the term ‘recognise’, and does not prescribe the procedural mechanism by which an ICSID award is converted into a federal judgment, leaving room for varying approaches in the lower federal courts.

Ex parte motions are allowed: Mobil v Venezuela (New York)

The February 2015 decision in Mobil Cerro Negro Ltd v Bolivarian Republic of Venezuela maintained the long-standing practice of the United States District Court for Southern District of New York, allowing ex parte petitions for recognition of ICSID awards.

The subject of the underlying arbitration is a familiar fact pattern in investment treaty arbitration. Following the expropriation of its assets in 2007, ExxonMobil, through subsidiary entities (Mobil), commenced an ICSID arbitration against Venezuela and eventually obtained an award of over US$1.6 billion in damages, plus interest, on 9 October 2014.⁸

The next day, Mobil filed an ex parte petition in the Southern District seeking recognition of the award under the ICSID Enabling Statute, and the court granted the petition after an ex parte hearing. Mobil immediately sent a letter to counsel for Venezuela notifying it of the judgment and demanding payment.⁹ Four days later, on 14 October 2014, Venezuela sought to vacate the judgment, claiming that the ICSID Enabling Statute does not authorise federal courts to borrow the ex parte recognition procedure of the forum state, as the Southern District has routinely done,¹⁰ and even if it did, the FSIA supersedes that statute where recognition actions are brought against foreign sovereigns, so as to impose service, personal jurisdiction and venue requirements that were not met in that case.¹¹

The Mobil court rejected both arguments.

First, the court held that the case law of the Southern District and the relevant federal appeals court ‘overwhelmingly supports looking to the law of the forum state, here, New York, to fill the procedural gap in section 1650a as to the manner in which a recognition proceeding is to occur’.¹²

‘The decisive issue,’ the court explained, ‘is whether there is a significant conflict between some federal policy or interest and the use of state law.’¹³ The court concluded that Venezuela had failed to identify any such conflict. To the contrary, ‘using the streamlined recognition procedure’ under New York state law ‘effectuates the policy interests underlying the ICSID enabling statute, because, by facilitating conversion of an ICSID award to a judgment, it facilitates granting ‘full faith and credit’ to the award and enables the creditor to move towards enforcing it.’¹⁴ In the court’s view, the directive in the ICSID Implementing Statute ‘reflects that Congress, like the ICSID Convention that it was implementing, intended that ICSID awards be expeditiously recognized, free from substantive review’ by national courts.¹⁵ In short, ‘a foreign party has no valid ground to claim offense at a streamlined recognition procedure’ for ICSID awards, especially because a foreign sovereign remains ‘free to challenge the later attachment of or attempted execution on its assets’.¹⁶

Second, as a matter of first impression in that district, the New York court found that the FSIA did not supersede the ICSID Enabling Statute and impose procedural requirements for recognition of ICSID awards against a foreign state.¹⁷

As a threshold issue, the New York court rejected Venezuela’s contention that it lacked subject matter jurisdiction under the FSIA. It found that two exceptions to sovereign immunity in the FSIA itself – those for arbitration awards and an implied waiver of immunity – provided jurisdiction for actions arising out of ICSID awards¹⁸ The court went further and observed that there was, ‘arguably, a third statutory basis for subject matter jurisdiction over such an action,’ because the general FSIA provision on sovereign immunity expressly states that such immunity is ‘subject to existing international agreements to which the United States is a party at the time of enactment of this Act’.¹⁹ Noting that the ICSID Convention and its implementing statute predated the FSIA by a decade, the court concluded that ‘the italicized opening clause, by its terms, leaves in place – and reflects Congress’s intention not to disturb – the provisions of the ICSID Convention and enabling statute’.²⁰

Turning to the whether the FSIA’s requirements as to service of process and venue apply in the context of recognition of ICSID awards, the court acknowledged that under cardinal rules of statutory construction, it must enforce the clear text of the statute as written.²¹ To decide whether the text is in fact clear, however, the court must assess whether its language has a ‘plain and unambiguous meaning,’ which is ‘determined by reference to the language itself, the specific context in which the language is used, and the broader context of the statute as a whole’.²²

Applying these principles, the New York court found that the FSIA’s language does not have a ‘plain and unambiguous meaning with regard to the particular dispute’ before it, and at most, leaves congressional intent unclear as to whether the FSIA’s requirements apply in the context of recognition.²³ To resolve the ambiguity, the court considered the broader context of the statutory schemes concerning actions involving sovereigns and found significant indications of congressional intent to allow for simple and automatic recognition of ICSID awards – not the contested litigation of a plenary action.²⁴ The court also noted that this approach was consistent with the drafting history of the ICSID Convention and its objective of creating a ‘self-contained regime’ in which awards would not be subject to judicial review, and observed that ‘legislatures in a number of other contracting states [had drawn] the same conclusion’, permitting ‘immediate, and ex parte, recognition of ICSID awards’.²⁵

The court reasoned that the approach urged by Venezuela, requiring that award creditors seeking recognition comply with the FSIA’s requirements for commencing a plenary action ‘resolvable only upon full motions practice’, would be ‘deeply problematic,’ because it ‘would bring the FSIA into grave tension with the objectives of the ICSID Convention and of Congress’.²⁶ Venezuela’s arguments could not be accepted, the court concluded, because the ICSID Contracting States and the US Congress ‘sought to depart from, not to double down on, the model of a contested recognition process used under the New York Convention’.²⁷

Finally, since parties cannot in any event challenge ICSID awards in national courts, the court held that ‘[r]eading into the FSIA’s silence a congressional intention to graft onto the ICSID enabling statute the FSIA’s [procedural] requirements’, and oblige parties to commence a separate suit for recognition, ‘would not serve any practical purpose’. Instead, ‘[i]t would merely provide an avenue for delay.’²⁸

The court in Mobil therefore denied Venezuela’s motion to vacate the ex parte judgment, but stayed enforcement of the judgment pending ICSID’s resolution of Venezuela’s application to revise the award. Venezuela appealed the court’s decision in March 2015, and its appeal remains pending at the time of publication.²⁹

Ex parte motions are not allowed: Micula v Romania (Washington, DC)

In May 2015, three months after the Mobil decision, the district court for the District of Columbia refused to allow an ex parte petition brought by Viorel Micula, a Swedish investor, for recognition of an ICSID award of over US$116 million against Romania.³⁰

While acknowledging that the Southern District of New York ‘routinely recognized ICSID awards on an ex parte basis’, the Washington, DC court ultimately decided to follow a 2012 ruling from another district – the Eastern District of Virginia in Continental Casualty v Argentina – which had held that converting an ICSID award into a domestic judgment required service on the foreign sovereign.³¹

The Micula court found that the Virginia court’s reading of the statute was ‘more consistent’ with the ‘text and structure’ of the ICSID Enabling Statute, which requires federal courts to ‘enforce’ ICSID awards in the same manner as state court judgments, but ‘does not use the verbs “confirm” or “recognize”’³² Relying on references to ‘actions’ and ‘proceedings’ in a leading treatise on domestic practice and procedure within the US federal system, and the text and legislative history of the ICSID Enabling Statute, the court concluded that ‘it follows that ICSID awards were intended to be enforced by plenary actions.’³³

The DC court found further support in the fact that the legislative reports preceding passage of the ICSID Enabling Statute did not ‘refer to ex parte proceedings or the need for confirmation or recognition as a precursor for enforcement, even though Congress knew that such mechanism was possible’ under the Federal Arbitration Act.³⁴ The court also found it ‘instructive’ that when Congress later passed the statute implementing the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), it authorised a streamlined procedure for confirmation of an international commercial arbitration award – demonstrating, in the court’s view, that ‘when Congress wants to permit ex parte confirmation of a foreign arbitration award it knows how to do so.’³⁵ The court held that the absence of such language ‘is strong evidence that Congress did not intend for parties who had won ICSID awards to confirm such awards’ through an ex parte process, and ruled that the petitioner ‘must file a plenary action ... to convert his ICSID award into an enforceable judgment in this court’.³⁶

Finally, the court in Micula held that its interpretation of the ICSID Enabling Statute ‘does not conflict with or abrogate any way, the United States’ obligations under Article 54 of the Convention’, because ‘Article 54(3) of the Convention contemplates that ‘the award shall be governed by the laws concerning the execution of judgments in force in the State in whose territories such execution is sought.’³⁷

The opinion did not discuss, however, a number of issues which the New York court had found critically important to its decision to permit ex parte proceedings, including:

• whether Congress intended the ‘full faith and credit’ language in the Enabling Statute as a direction to courts to spare parties the burden and cost of repeat litigation;
• whether applying the notice, personal jurisdiction and service provisions of the FSIA to the recognition and enforcement of ICSID awards would serve any practical purpose other than delay the proceedings;
• the drafting history of the ICSID Convention, and the differences between the recognition and enforcement regime for ICSID awards and the regime put in place for international commercial arbitration awards by the New York Convention; or
• whether requiring a plenary action, with attendant litigation solely on procedural questions that could have no effect on the validity of the ICSID award, was consistent with the treaty and statutory regime for the enforcement of such awards in the United States.

Having found that a plenary action was necessary, the DC court denied the ex parte petition to recognise the award in an oral order communicated to the parties in a telephonic hearing.³⁸

A few days later, the Micula award creditors filed an ex parte petition for recognition of the same ICSID award. In a routine application of the practice reaffirmed in Mobil, the Southern District of New York granted the petition, and issued an order directing that the award: ‘shall be recognized and entered as a judgment by the Clerk of this Court in the same manner and with the same force and effect as if the Award were a final judgment of this Court, as authorized by 22 USC section 1650a and Article 54 of the ICSID Convention’.³⁹

Practical consequences

The nature of the recognition procedure applied by the US court does not affect the substantive rights of an award-debtor state. Regardless of whether the court permits ex parte petitions or requires plenary actions, states remain free to seek revision or annulment of the award within ICSID. Moreover, after the award is recognised, states can still resist enforcement or execution against their assets on immunity grounds, and continue enjoy other procedural protections under the FSIA, which only allows execution on a foreign state’s assets after ‘a reasonable period of time has elapsed following the entry of judgment’.⁴⁰ That period may vary depending on the jurisdiction: in New York, for example, 30 days is deemed reasonable,⁴¹ while execution in the District of Columbia can take longer.⁴²

Nevertheless, requiring an award creditor to bring a plenary action and comply with FSIA requirements for service of process, notice and venue will create an avenue for further delay in enforcement – and potentially allow award debtors more time to render themselves effectively judgment-proof in a particular jurisdiction. For example, the FSIA affords sovereigns 60 days after service to respond to actions filed against them.⁴³ Moreover, as the Mobil court indicated, ‘having to use the time-consuming process for serving a foreign state under the Hague Convention or to litigate the adequacy of personal jurisdiction’ or venue will likely lead to substantial delays.⁴⁴

The epilogue in the Micula case amply illustrates the likely reaction of parties confronted with this lack of procedural uniformity among US courts. Absent clarification by later decisions by these courts,⁴⁵ or guidance from the relevant federal courts of appeals or the US Supreme Court, these divergent lines of authority will likely promote a form of forum shopping, where award creditors that are able to seek recognition in New York will pursue ex parte petitions and the shorter path to a domestically enforceable judgment that this process offers.⁴⁶

Notes

1. Mobil Cerro Negro Ltd v Bolivarian Republic of Venezuela, No. 14 Civ. 8163, – F. Supp. 3d –, 2015 WL 631409 (SDNY 13 February 2015).
2. Micula v Government of Romania, No. 1:14-CV-00600 (APM), – F. Supp. 3d –, 2015 WL 2354310 (DDC 18 May 2015).
3. ICSID Convention, article 53 (‘(1) The award shall be binding on the parties and shall not be subject to any appeal or to any other remedy except those provided for in this Convention. Each party shall abide by and comply with the terms of the award except to the extent that enforcement shall have been stayed pursuant to the relevant provisions of this Convention. (2) For the purposes of this Section, ‘award’ shall include any decision interpreting, revising or annulling such award pursuant to articles 50, 51 or 52.’).
4. Id article 54(1) (emphases added).
5. Id (emphasis added).
6. Christoph H Schreuer, The ICSID Convention: A Commentary (2009), at 1135 (noting that the ‘words ‘enforcement’ and ‘execution’ are identical in meaning’ in the context of article 54 of the ICSID Convention); ICSID Convention, article 55 (‘Nothing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign State from execution’).
7. 22 USC section 1650a (1966) (emphasis added). See also id (‘The Federal Arbitration Act (9 USC 1 et seq.) shall not apply to enforcement of awards rendered pursuant to the convention.’)
8. See Mobil Cerro Negro Ltd, – F. Supp. 3d –, 2015 WL 631409, at *2.
9. Mobil Cerro Negro Ltd, 2015 WL 631409, Id at *2–*3.
10. New York Civil Practice Law and Rules (CPLR), article 54, entitled ‘Enforcement of Judgments Entitled to Full Faith and Credit’, provides that a copy of a ‘foreign judgment authenticated in accordance with an act of congress ... may be filed within ninety days’ of authentication along with an affidavit of the judgment creditor stating that the applicable requirements had been satisfied. The judgment debtor does not receive notice until ‘thirty days after filing of the judgment and the affidavit.’ CPLR sections 5402, 5403. Section 5403 does require, however, that ‘the proceeds of an execution shall not be distributed to the judgment creditor earlier than thirty days after filing of proof of service.’
11. Mobil Cerro Negro Ltd, 2015 WL 631409, at *2–*3.
12. Id at *7 (citing decisions of the District and the United States Court of Appeals for the Second Circuit, which also sits in Manhattan, and the decisions of which are binding on lower federal courts in New York, Connecticut and Vermont).
13. Id at *9 (internal citation and quotation marks omitted).
14. Id (emphasis in original).
15. Id.
16. Id at *10 (‘whether Mobil applied for recognition of its award via a plenary lawsuit or an ex parte application ... the nature of that proceeding would not expand or contract Venezuela’s substantive rights’).
17. Id at *11–*24.
18. Id at *12–*13 (citing 28 USC sections 1605(a)(6)(b) & 1605(a)(1), and Blue Ridge Invs LLC v Argentina, 735 F. 3d 72, 84-84 (2d Cir. 2013)).
19. Id. at *13, quoting 28 USC section 1604 (emphasis added). Section 1604 of the FSIA provides in full: ‘Subject to existing international agreements to which the United States is a party at the time of enactment of this Act a foreign state shall be immune from the jurisdiction of the courts of the United States and of the States except as provided in sections 1605 to 1607 of this chapter.’
20. Mobil Cerro Negro Ltd, 2015 WL 631409, at *13.
21. Id at *15.
22. Id.
23. Id at *17.
24. Id at *18–*22 (discussing the legislative history and text of the Enabling Statute, and noting that ‘full faith and credit’ has ‘an acquired meaning’ that ‘makes final the determinations of sister states, such that, subject to exceptions inapplicable here, no attach can be made outside a state on a judgment rendered therein’).
25. Id at *22 (referring to the United Kingdom, Australia and France).
26. Id at *21.
27. Id.
28. Id at *22.
29. Case No. 15-707-cv (2d Cir.).
30. See Micula, 2015 WL 2354310.
31. Id at *5 (citing Continental Casualty Co v Argentine Republic, 893 F. Supp. 2d 747 (ED Va 2012)).
32. Id.
33. Id at *5–*6 (emphases added) (citing Charles A Wright, Arthur R Miller & Edward H Cooper, Federal Practice and Procedure section 4469, vol. 18B, at 79 (2d ed. 2002); 28 USC section 1650a(b); House of Representatives Report No. 1741, at 3–4 (1966); Senate Report No. 1374, Appendix at 4 (1966)).
34. Micula, 2015 WL 2354310, at *6.
35. Id.
36. Id.
37. Id.
38. Id at *3.
39. Micula v Government of Romania, Case No. 1:15-mc-00107-P1, Amended Order and Judgment (SDNY 28 April 2015), at 3.
40. 28 USC section 1610 (‘No attachment or execution referred to in subsections (a) and (b) of this section shall be permitted until the court has ordered such attachment and execution after having determined that a reasonable period of time has elapsed following the entry of judgment and the giving of any notice required under section 1608 (e) of this chapter’).
41. See CPLR section 5403 (Within 30 days after filing of the judgment and the affidavit, the judgment creditor shall mail notice of filing of the foreign judgment to the judgment debtor at his last known address. The proceeds of an execution shall not be distributed to the judgment creditor earlier than thirty days after filing of proof of service’).
42. See Agudas Chasidei Chabad of United States v Russian Federation, 798 F. Supp. 2d 260, 269-70 (DDC 2011) (finding eight months’ time since notice of judgment to be an adequate period for purposes of section 1610(c)) (citing Ned Chartering & Trading, Inc v Republic of Pakistan, 130 F. Supp. 2d 64, 67 (DDC 2001) (collecting cases to conclude ‘that other courts have found periods such as two or three months sufficient to satisfy section 1610(c)’s requirements’ and separately determining that six weeks was acceptable)).
43. 28 USC section 1608(d) (‘In any action brought in a court of the United States or of a State, a foreign state, a political subdivision thereof, or an agency or instrumentality of a foreign state shall serve an answer or other responsive pleading to the complaint within sixty days after service has been made under this section.’).
44. See Mobil Cerro Negro Ltd, – F. Supp. 3d –, 2015 WL 631409, at *22.
45. In a footnote to its opinion, the Micula court noted that in an earlier case, another judge in the district had in fact ‘concluded that ex parte recognition of an ICSID award was appropriate under the ICSID Convention’ and the ICSID Enabling Statute because that process ‘was consistent with the terms and purposes of the ICSID Convention, as well as the previous decisions of other courts’. Micula, 2015 WL 2354310, at *4 n. 6 (citing Miminco, LLC v Democratic Republic of the Congo, No. 14-01987(RC), 2015 WL 10611555, at *2 (DDC 9 February 2015)). As of the time of publication, no subsequent decision of the DC district court had either accepted or rejected the reasoning in Micula.
46. Absent a reasonable connection to another district, US federal law generally mandates filing against foreign sovereigns in the District for the District of Columbia. See 28 USC section 1391(f) (‘A civil action against a foreign state as defined in section 1603 (a) of this title may be brought—(4) in the United States District Court for the District of Columbia if the action is brought against a foreign state or political subdivision thereof.’).