The Uncertain Lacuna of BIT Arbitration Enforcement: Challenges and Evolving Perspectives

Introduction

With booming foreign investments in international business, Bilateral Investment Treaties (“BIT/s”) serve as a cornerstone of global investment law, meant to ensure fair and equitable treatment for foreign investors in host states. As it is usual, where there are arrangements, there is a possibility of dispute. The other crucial component of these treaties, Investor-State Dispute Settlement (“ISDS”), allows investors to bring claims against cases of expropriation, unfair regulation, or treaty violations.

Treaties such as ICSID Convention 1965 and New York Convention 1958, govern the BIT arbitration with the aim to facilitate the recognition and enforcement of arbitral awards across jurisdictions. These legal frameworks provide a neutral, legally binding mechanism for dispute resolution, ensuring that investors are not subjected to biased domestic courts.

However, securing a favourable award is only half the battle- the real challenge lies in its enforcement. Despite being legally binding by its nature, the enforcement of BIT arbitral awards remains uncertain and inconsistent. Only around 60% of investor-state arbitration awards are fully enforced, with significant delays or outright refusals.

The three key issues to be explored are as follows:

1. What is the mechanism for the enforcement of BIT arbitration awards?

2. What legal and political mechanisms allow states to avoid enforcement?

3. What reforms can improve enforcement of BIT arbitration awards?

Seeing the growing trend of disputes, solving the enforcement lacuna is critical for maintaining investors confidence in BIT arbitration.

The legal framework and mechanisms for BIT arbitration enforcement

The Gold Standard of Investor-State Arbitration (“ICSID”) 1965 established by the World Bank, is the most widely used arbitration mechanism for BIT disputes. By the virtue of Article 54 of the said convention, the awards are treated as final judgements, prohibiting national courts from reviewing awards and thus limiting the right to review to the ICSID annulment committee, reducing the risk of annulment or non-enforcement.

The story is not so clear as it appears; this convention struggles with its own challenges beginning from delays in annulment proceedings under Article 52, to states claiming sovereign immunity. Lack of direct enforcement power means investors must seek compliance in domestic courts, making the situation worse.

One such example can be seen in Micula v. Romania (2013), wherein the tribunal awarded $250 million to Swedish investors, leading to annulment proceedings, and later Romania refused enforcement citing EU law conflicts.

The New York Convention (1958)  is the backbone of non-ICSID Enforcement, governing enforcement in 172 countries and relying on national courts under Article 3 for the enforcement, with Article 5 providing grounds for refusal, wherein states get a chance to invoke public policy to reject enforcement. This leads to multiple proceedings in different courts of law which is a herculean task in itself.

Something similar happened in Yukos v. Russia (2014), where the tribunal awarded $1,846 million to Yukos Universal Limited, leading to multiple enforcement proceedings in various courts of law, making the process chaotic and ineffective.

Next in line is the UNCITRAL Model Law, which provides for a flexible ad-hoc arbitration arrangement leading to enforcement under New York Convention or Domestic laws. As in the case of Australia v. Hong Kong (2017), Australia successfully resisted the award on the grounds of public policy.

Challenges in Enforcing BIT Arbitration Awards

Despite robust legal frameworks, enforcing BIT arbitration awards remains highly unpredictable. Now and then, states resist compliance by invoking sovereign immunity, seeking annulment and using public policy defences. Let’s delve into the primary challenges and examine case studies highlighting these enforcement difficulties.

Sovereign immunity and national interests are one of the most frequently used defences by states to evade from enforcement citing their regulatory autonomy and interference in public interest policies. As it can be seen in Tatneft v. Ukraine, years of litigation battle went on for the enforcement due to the defence of sovereign immunity cited by the defendants.

Next comes the states challenging arbitration awards through annulment or set-aside proceedings. This leads to significant prolongment of the legal process, sometimes leading to annulment of awards altogether. In ConocoPhillips v. Venezuela the enforcement was delayed for years through annulment proceedings at the ICSID.

Another very frequently used defence is public policy, where governments are often seen arguing that enforcement would undermine economic stability, health regulations, or environmental protection. As seen in Philip v. Uruguay (2010), the case was regarding strict anti-smoking laws of Uruguay, wherein the state was able to evade responsibility very smoothly by citing their public health measures.

Next major challenge is lack of global enforcement body leading investors to seek enforcement in multiple jurisdictions, leading to inconsistent ruling in the same case and getting stuck in lengthy legal battles. As seen in Yukos v. Russia, even after getting the arbitral award, the claimants had to pursue enforcement worldwide in different jurisdictions.

Many a times the BIT arbitral awards are also influenced by diplomatic relations and political pressures. States use their diplomatic might to negotiate a more favourable settlement leaving investors in the aegis of undue influence. As can be seen in Pakistan v. Tethyan Copper (2012), the State negotiated a settlement significantly lower than the amount of the award.

Reforming BIT Arbitration Enforcement: The Way Forward

The inconsistent enforcement of BIT arbitration awards sparks sharp criticism from both investors and states. The investors demand for a stronger enforcement mechanism, while states argue for more regulatory flexibility. Some reforms are being suggested to reconcile conflicting demand.

One of the most awaited reforms is the creation of a permanent international investment court to replace ad-hoc BIT arbitration. The very first step in this way has already been taken by European Union through its initiative of Investment Court System (ICS) with an aim to ensure consistency in rulings, introduce an appellate mechanism and enhance transparency. However, the ICS proposal faces resistance from countries preferring full flexibility and control, fearing that a rigid court system could limit their policy space. However, in the interest of investors a way must be figured out to bring all the countries on the same pace.

The next very necessary step is to strengthen compliance and enforcement mechanism by imposing financial penalties for countries that refuse to direct enforcement of awards without requiring national court approvals. Institutions like  the World Bank and IMF must be brought in picture linking compliance with loan and aid eligibility of the nations.

Another concern to be addressed is transparency and public interest considerations;  one of the major criticisms of BIT arbitration by many states is that that enforcing BIT awards can undermine public policies. It’s necessary to mandate disclosure of investor-state cases, instead of private proceedings, also encouraging BITs to include sustainable development clauses to balance investor rights with social policies.

Conclusion: Is BIT Arbitration Enforcement a Broken System?

The insufficient clarity about BIT arbitration award enforcement raises significant concerns for both investors and states. The legal protection intended by BITs for foreign investments suffers from state resistance, enforcement mechanism as well as vague regulatory areas that reduce their reliability.

The major obstacle states face in BIT payments is their sovereign immunity which provides them the ability to delay or refuse payments altogether. The ICSID Convention (1965) and New York Convention (1958) exist to facilitate enforcement yet states frequently use public policy defences along with annulment proceedings and political strategies to escape paying awards. For example, in Yukos v. Russia investment treaty award was disregarded, so investors had to file multiple cases leading to lengthy legal battle.

There exists no global enforcement power in BIT arbitration that forces investors to count on national courts which commonly protect their homeland's interests ahead of international agreements. According to the documentation provided by ConocoPhillips shows that, how countries employ annulment processes as payment delay tactics. The settlement preference in the Tethyan Copper (2019) case alongside other BIT arbitration cases results in reduced enforcement potentially eliminating its deterrent impact.

The future of BIT arbitration needs better enforcement tools among which the proposed EU Investment Court System (ICS) stands out because it replaces ad hoc arbitration with a permanent tribunal (European Commission ICS Proposal). Not only this, global institutions like the World Bank and IMF must be involved and enforcement must be linked with financial credibility of the state to gain investors confidence. Furthermore, to address the concerns of the state, a sustainable development clause must be brought in to balance investor rights and public policy.

Author: Aditya Pratap Singh