Although NML Ltd won an investment arbitration against Argentina many years ago, it has yet to succeed in enforcing its award against the country. The latest judicial decisions in NML Ltd’s attempts to enforce the award were rendered recently by the French Cour de Cassation, which elaborated on the French conception of sovereign immunity from execution, in particular, on the interpretation of waivers of immunity from execution clauses.
As a general rule, international arbitral awards are final, binding and enforceable, regardless of who the parties are. Arbitration awards against a State entity are commonly enforced either under the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (‘ICSID Convention’) or the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘the New York Convention’).
Both conventions contain commanding language obliging state parties to enforce the awards rendered even against them, with Article 54 of the ICSID Convention stating that “[e]ach Contracting State shall recognize an award rendered pursuant to this 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” and Article III of the New York Convention indicating that “[e]ach Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles. There shall not be imposed substantially more onerous conditions or higher fees or charges on the recognition or enforcement of arbitral awards to which this Convention applies than are imposed on the recognition or enforcement of domestic arbitral awards.”
Yet, neither treaty provides for concrete rules for execution once an award is recognized in the State in which execution is sought. Execution of arbitral awards will be governed by the law of the execution of judgments in force in the country where execution is sought. National courts will thus have the last word regarding the execution of awards.
It is commonly accepted that States can benefit from immunity from execution of arbitral awards and judgments to cover States’ property located on another States’ territories that relate to the performance of a mission of public service. This immunity to the execution of arbitral awards derives from public international law and more specifically from customary law and treaty law such as the 1972 European Convention on State Immunity and the 2004 UN Convention on Jurisdictional Immunities of States. Enforcement of arbitral awards by national courts against a State entity can thus be put in jeopardy if a State claims sovereign immunity from execution, as is frequently the case.
Under most legal systems, most assets belonging to the State cannot be disposed of for the execution of an arbitral award or judgment (for example, the country’s foreign embassies, or consular possessions, military property, cultural heritage, exhibitions of scientific and historical objects, etc.) unless these assets are used or intended for use by the State for other than governmental non-commercial purposes. It is generally recognized that immunity from execution will only apply to assets that are held by a State to perform its sovereign or public services. However, sovereign immunity from execution may be lifted by the State itself in order to attract foreign investors, frequently by a waiver of its sovereign immunity.
To execute an award against a State, the challenge for the investor is thus:
1. to determine which assets are held for sovereign or public purposes and which are held for commercial or economic activities; and
2. if the assets are held for sovereign or public purposes, to determine whether the State waived its sovereign immunity from execution.
In doing so, the investor will have to take into consideration the law of the execution of judgments in force in the country where execution is sought.
France, like other countries in Europe, used to find that immunity from execution measures could not be claimed where the State intended to allocate certain assets for the performance of a purely commercial operation. Further, French Courts gradually adopted a more lenient approach towards waivers, even recognizing implicit waivers. Still, there had to be a limit and the Paris Court of Appeal held, in a case where the contracts at issue stated ‘the decision rendered in the arbitration shall be final and binding on the parties. The parties shall not appeal against the arbitral award and the [State] waives its right to immunity as concerns the enforcement (application) of an arbitral award rendered against it with respect to the present contract’ that it was not sufficient to prove the unambiguous intention of the State to waive its right to rely on diplomatic immunity from enforcement measures. In a judgment of 28 September 2011, the Supreme Court added that failing an express and specific waiver, a State could rely on its diplomatic immunity to resist enforcement measures against diplomatic assets. Therefore, diplomatic immunity was the limit.
It seems however that the French Supreme Court has recently gone a step further towards a greater protection of sovereign immunity by upholding, in the NML Ltd et al. v the Republic Argentina saga, Argentina’s immunity despite a waiver. NML Capital Ltd (a creditor) sued Argentina before a U.S. federal court, obtained a judgment for USD 284 million in 2006, and initiated enforcement proceedings in Europe, in particular against funds deposited on bank accounts used by Argentian embassies. This time, NML Capital rather focused on non-diplomatic assets, i.e., monies related to tax, social security and oil royalty claims owed by French companies to Argentina through their local branches.
The French Supreme Court first held that those assets were held for public purposes and would thus be immune from execution provided that Argentina had not waived its sovereign immunity. Turning to the waiver issue, the Supreme Court held that a waiver of immunity from execution had to be express and specific by mentioning the assets or the category of assets over which the waiver is granted. As it was not the case, Argentina’s immunity from execution was upheld.
As noted by Herbert Smith recently in Kluwer’s blog, making a distinction between assets for public purposes is confusing. Why should certain assets or categories of assets prevail over others if they have the same purpose? In light of the bargaining power of the State, why should an express general waiver not bound the State if it chose to insert one?
Such recent State-friendly decisions highlight the need to grant special attention to risk management for a party contemplating investments in a foreign State, particularly regarding the drafting of waivers of sovereign immunity from execution.