Fundamental tenets of international trade and investment agreements or sovereign immunity?

The Full Court of the Federal Court of Australia recently heard an appeal by the Kingdom of Spain in proceedings brought by European companies (Eiser Infrastructure Ltd and Energia Solar Luxembourg S.à.r.l. on the one hand, and Infrastructure Services Luxembourg S.à.r.l. and Energia Termosolar BV on the other), to enforce two International Centre for the Settlement of Investment Disputes (ICSID) awards against Spain. The Appeal is the latest instalment in a long-running dispute concerning legislative reforms in Spain’s regulation of renewable energy. 

The judgment of the Full Court, which remains reserved, will clarify Australia’s approach to the recognition, enforcement and execution of ICSID and other foreign awards against sovereign debtors. 

This Insight provides an overview of the Australian proceedings and considers some of the issues they raise in respect of enforcement of arbitral awards against foreign sovereigns. The key issues include: 

• the extent to which the stages of ‘recognition and enforcement’ of a foreign award, and its ‘execution’ against sovereign-held assets, are distinct in legal and practical respects; and
  
  
• the development of Australian jurisprudence on foreign sovereign immunity from jurisdiction where the enforcement of an investor-State award is at issue and, in particular, whether a foreign State’s consent to arbitration will be construed as a waiver of sovereign immunity in the proceedings to enforce an award.

Background

In 2017, the claimant investors (from England, Luxembourg and the Netherlands, the Investors) successfully argued before two ICSID tribunals that Spain had failed to accord fair and equitable treatment to their investments in solar power plants, in breach of Article 10(1) of The Energy Charter Treaty (ECT). 

The Eiser investors were awarded €128 million in May 2017, while the Infrastructure Services investors won €101 million in June 2018. The two awards represented the first ICSID cases to reach a final award concerning Spain’s roll-back of incentives to promote investment in the solar power sector.

Despite the lack of any apparent connection with Australia, the Investors commenced enforcement proceedings in Australia pursuant to s.35 of the International Arbitration Act 1974 (Cth), seeking leave to enforce the awards. Obtaining leave to enforce would clear the path for the Investors to execute any outstanding debt under the award against Spain’s commercial assets in Australia.  

In the first-instance judgment of the Federal Court HHJ Stewart granted leave to enforce both awards against Spain. In so doing, His Honour rejected Spain's argument that it was immune from the jurisdiction of the Australian courts pursuant to the Foreign States Immunities Act 1985 (Cth) (Immunities Act).

Under s.9 of the Immunities Act, a foreign State is immune from the jurisdiction of the courts of Australia (with certain limited exceptions). Article 54 of the ICSID Convention, to which both Australia and Spain are parties, however, provides that each Contracting State ‘shall’ recognise an award rendered pursuant to the ICSID Convention as binding, and enforce the pecuniary obligations imposed by that award within its territories ‘as if it were a final judgment’ of a court in that State.

Before the Federal Court, the key argument advanced by the Investors was that, while the ‘execution’ of an award against foreign sovereign assets may be shielded by sovereign immunity, the same does not hold true for the ‘recognition’ and ‘enforcement’ as sought in the proceedings before the Federal Court. This is because, the Investors argued, Article 55 of the ICSID Convention expressly allows the defence of sovereign immunity only against execution (i.e. the seizure of sovereign assets), not the recognition of an award as binding and the enforcement of the pecuniary obligations imposed by the award as if it were a final judgment of a court.

In granting leave to enforce the awards, HHJ Stewart sided with the Investors, finding that:

• by signing and ratifying the ECT and the ICSID Convention, Spain expressly had submitted to the jurisdiction of Australian courts in respect of the recognition and enforcement of awards and had therefore waived immunity from enforcement; and
  
  
• Spain’s sovereign immunity against ‘execution’ of an award against its assets is preserved by Article 55 of the ICSID Convention, because of the distinction between an initial ‘recognition and enforcement’ phase and the subsequent ‘execution’ phase, consistent with the approach taken in a number of other jurisdictions (including the United States and France). 

Oral submissions on appeal before the Full Court

Of particular interest are the following two aspects of the proceedings before the Full Court.

• Firstly, an application by the European Union (EU) to intervene as amicus to assist Spain in resisting enforcement.
  
  
• Secondly, the various permutations of the substantive argument advanced by Spain for why sovereign immunity shields it from enforcement of the awards in Australia.

European Commission intervention

An important intervening development between the time that the two cases were argued before the ICSID panels and the commencement of the enforcement proceedings in Australia, was a decision by the Court of Justice of the European Union (CJEU) in March 2018 (Slovak Republic v Achmea B.V.).

The CJEU held that an arbitration clause in an intra-EU bilateral investment treaty (BIT) consenting to ICSID arbitration is incompatible with the EU law because it removes disputes involving the interpretation or application of EU law from the mechanism of judicial review provided for by the EU legal framework. This finding ultimately led to an agreement signed by the majority of the EU Member States in May 2020 to terminate all BITs concluded between any two EU Member States.

There has been much debate about the implications of the CJEU judgment for arbitration commenced by investors of one EU Member State against another EU Member State under the ECT (like in the Eiser and Infrastructure Services cases); the ECT not being an intra-EU BIT.  From the perspective of Spain and the EU, it means that Spain had not consented validly to ICSID arbitration under the ECT.  

On this basis, the European Commission (EC) sought to intervene in the appeal to argue that the awards were unenforceable for lack of valid consent by Spain to ICSID arbitration. Because the point, however, had yet to be advanced by Spain in the first-instance proceedings, the Investors successfully resisted the intervention, arguing that the EU could not agitate points before the Full Court that were not open to Spain to advance at the appellate level.

Sovereign immunity and the enforcement of awards  

The substantive argument on appeal centred around three main issues.

• Interpretation of Articles 54 and 55 of the ICSID Convention.
  
  Spain argued that the defence of sovereign immunity that is available pursuant to Article 55 of the ICSID Convention could be invoked not only to resist post-judgment ‘execution’ against sovereign assets, but also at the stage of ‘enforcement’.
  
  This argument turned heavily on a trilingual comparison of the English, French and Spanish texts of the relevant provisions of the ICSID Convention, the latter two versions bearing no distinction between ‘recognition’ and ‘enforcement’ on the one hand, and ‘execution’ on the other. Spain contended that, therefore, Article 55 of the ICSID Convention expressly preserves the operation of domestic law on foreign state immunity in relation to the enforcement that the Investors sought.
  
  In response, the Investors contended that the linguistic interpretation advanced by Spain ignored the true meaning of the words as interpreted in light of the Convention’s object and purpose, and the travaux préparatoires, which recognise execution to be but a subset (or a stage) in the continuum of enforcement.
  
  
• The dispute regarding the proper construction of the ICSID Convention should be determined by the International Court of Justice (ICJ), not a domestic court.
  
  Spain further argued that the competent court to resolve any outstanding dispute regarding the correct construction of the ICSID Convention is the International Court of Justice, it being the court upon which Article 64 of the ICSID Convention confers jurisdiction to resolve inter-State disputes regarding the interpretation or application of the Convention.
  
  Spain relied on a recent decision of the Supreme Court of the United Kingdom in Micula v Romania [2020] UKSC 5, which it said recognised that, where there are fair arguments on both sides about the correct construction of a convention, it is not a matter for a domestic court to say which argument should prevail.
  
  The Investors, on the other hand, argued that the fact that a dispute between the ICSID State Parties can only be settled by the ICJ says nothing about the jurisdiction of the Australian judicature. It does not subtract from that jurisdiction in relation to enforcement proceedings.
  
  
• Interpretation of the Immunities Act.
  
  Spain also submitted that HHJ Stewart had overlooked the critical role of s.7(4) of the Immunities Act, which states that Part IV of the Act (which governs enforcement and execution of awards against foreign sovereign assets) will only apply where a state is ‘not immune from jurisdiction’ of an Australian court.
  
  Spain argued, therefore, that an examination of whether a foreign state is immune from jurisdiction of Australian courts should always be the starting point of inquiry. It is only if one of the exceptions to immunity from jurisdiction listed in ss. 10 – 21 of the Act (e.g. if proceedings related to a foreign State’s commercial transactions) applies that an action of enforcement against a foreign sovereign may be justiciable.
  
  The Investors contended that immunity from execution is and should be construed as separate from immunity from jurisdiction.

Observations

The judgment of HHJ Stewart provided comfort to investors generally. It evinced a commitment of Australian courts to the international regime established by the ICSID Convention, which was designed to recognise and give effect to awards rendered against states benefitting from foreign investments. If upheld on appeal, it will have the effect of solidifying the role and reputation of Australia as a friendly forum for enforcement of foreign arbitral awards against sovereigns.

Beyond matters of enforcement, the arguments advanced by the parties raise questions of broader jurisprudential interest.

The first relates to how Australian courts will construe the relationship between domestic jurisdiction and the jurisdiction of the ICJ in circumstances in which the interpretation of a treaty provision is disputed and the jurisdiction to resolve that dispute is conferred upon the ICJ.  

The UK Supreme Court decision in Micula v Romania (which lifted a stay on enforcement of an ICSID award in favour of Micula, despite an extant investigation by the European Commission, which Romania argues will affect the enforceability of the award) does not seem to assist Spain’s case as the Court found that in spite of Article 64, domestic courts have ‘competence to consider and rule upon the effect of a multilateral treaty, insofar as it may bear upon the outcome of the proceedings before them’.

The second question of broader interest concerns the relationship between domestic law on foreign sovereign immunity and Australia’s international commitments under the ICSID Convention.  Interpreting domestic legislation so as to allow a foreign State to resist enforcement would seem to betray the provisions in Article 54 of the ICSID Convention, which requires Australia and other Contracting Parties to recognise and enforce ICSID awards.

Whatever the decision of the Full Court in this case, there are a number of observations of relevance to foreign states and investors, which can already be drawn.

• If a foreign sovereign debtor has assets available for execution in Australia (e.g. commercial assets), legal advice should be sought as to whether there is the potential for enforcement and execution in Australia against those assets.
  
  
• Sovereign states that have had awards rendered against them under the ICSID Convention will need to monitor any assets that may be exposed to execution in Australia.

A final point to note is that, in the time between the decision of HHJ Stewart and the appeal, Spain was successful before an ICSID Ad Hoc Committee in obtaining the annulment of the award in Case No. ARB/13/36 (the Eiser investors). Spain also filed for the annulment of the award in favour of the Infrastructure Services investors, but the decision remains pending.

Under the ICSID Convention, annulment of ICSID awards is possible only on the basis of a limited number of serious grounds. It has the effect of removing the award, meaning that it can no longer be enforced or executed before domestic courts of a Contracting Party where the respondent State’s asserts might be located.  

The unanimous decision to annul the €128 million award in favour of Eiser turned on an undisclosed business relationship between an arbitrator appointed by the investor and one of the investor’s experts that was found to have been improper and affected the legality of the constitution of the arbitral tribunal.  It was an historic decision as it marked the first time an ICSID award had been annulled for improper constitution of the tribunal and a serious departure from a fundamental rule of procedure.  

In another unprecedented development, the Eiser investors have since filed further submissions to the Ad Hoc Committee under Article 49(2) of the ICSID Convention (which allows supplementary awards to be sought). They seek relief in the form of a supplementary decision addressing questions, which they say the Committee previously failed to consider, and any consequent adjustments to the annulment decision. Ultimately, the investors seek reinstatement of the award in full or in part. The fate of Eiser’s attempt to revive the annulled award before the Ad Hoc Committee remains to be seen.

If one or both awards are annulled, and Eiser’s attempt to reinstate the award fails, execution will not be possible. If they do not remain annulled, and the Full Court affirms the judgment of HHJ Stewart, the question presumably will arise as to whether Spain’s property in Australia is immune from execution of the awards. This, therefore, remains both a fascinating and critically important case to watch.