State Immunity From Execution in the Collection of Awards Rendered in International Investment Arbitration: The Achilles’ Heel of the Investor-State Arbitration System? – Vol. 26 No. 1

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Author: Olga Gerlich*

Published: July 2015

In July 2014 the Permanent Court of Arbitration in The Hague rendered three awards in the investment arbitration against the Russian government brought by the shareholders of Yukos, once Russia’s largest oil and gas company, under the Energy Charter Treaty. The compensation granted for expropriation of the investor’s assets makes them the largest awards in the history of investment arbitration. However, as indicated by commentators, the Russian Federation is unlikely to voluntarily comply with these awards. The remedy available to the investors against Russia’s non-compliance, namely the forcible execution of the compensation awarded in third states, will be barred in the case of most of the Russian assets by virtue of the principle of state immunity from execution.

Another case concerning Russia illustrates well the potential problems regarding state immunity pleas in the execution of investment awards. Sedelmeyer was the sole owner of a company dedicated to the training of police and security personnel which entered into a joint venture with the Leningrad police department in 1991. Following expropriation of his capital contribution in the joint venture, Sedelmayer initiated arbitration under the Germany-Russia bilateral investment treaty (“BIT”) at the Stockholm Chamber of Commerce. In 1998 the tribunal rendered an award in his favor, ordering Russia to pay $2.35 million, plus interest. It took Mr. Sedelmayer 12 years and over 30 domestic execution cases to collect part of the award compensation. During that time Russia successfully evaded paying the awarded compensation by raising its state immunity from execution before national courts.

At the international law level, the enforcement of international investment arbitration awards is governed by the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (“ICSID Convention”) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). The first applies to awards rendered in accordance with the ICSID Arbitration Rules, the latter to awards rendered under other arbitration rules, including the ICSID Additional Facility Rules and the UNCITRAL Arbitration Rules. In the light of the rather successful history of compliance with investment awards, the limitations to these collection mechanisms are yet to be fully explored in practice. Nonetheless, the examples of recalcitrant states like Russia and Argentina reveal some serious deficiencies in the investor-state arbitration system which this article aims to analyze. Investors challenged by recalcitrant states are frequently forced to collect their compensation award in jurisdictions other than the respondent state. However, there they encounter a significant legal obstacle, namely state immunity from execution.

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*Trainee attorney-at-law (aplikantka radcowska), Warsaw Regional Bar of Legal Advisors. The author wishes to thank professors Céline Lévesque and John Currie of the University of Ottawa for their helpful comments on the earlier drafts of this article. All errors remain the author’s responsibility.