Source: https://www.iisd.org/itn/2020/06/20/domestic-procedures-for-the-payment-of-damages-by-states-in-investment-arbitration-affef-ben-mansour/
Timestamp: 2020-08-14 14:35:34
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Matched Legal Cases: ['art 1', 'art 2', 'Art. 53', 'Art. 34', 'Art. 1', 'Art. 183']

Domestic Procedures for the Payment of Damages by States in Investment Arbitration – Investment Treaty News
Analysis | June 20, 2020 | Affef Ben Mansour
Domestic Procedures for the Payment of Damages by States in Investment Arbitration
Scenarios in which states may face an obligation to pay damages as a result of international judicial or arbitral proceedings have proliferated as an increasing number of international courts have received state consent to their jurisdiction, including in international investment arbitration.
In the context of investment arbitration in particular, this obligation to pay damages can result from state responsibility in the violation of a BIT, an investment law, or an investment contract. Even though the obligation of restitutio in integrum (full compensation) involves “wip[ing] out all the consequences of the unlawful act,”[1] in actual practice, it usually results in an obligation for the state to pay[2] fairly high amounts.[3]
The increasing number of arbitral awards that include a requirement for obligated state parties to pay and the large sums awarded by these tribunals have been among the main criticisms levelled at ISDS mechanisms in recent years. These criticisms have led to initiatives for a possible reform of ISDS, including the discussions currently underway in the framework of UNCITRAL Working Group III.
Obligated state parties are required to comply with the arbitral award.[4] Should the state refuse to comply, the ICSID Convention allows any investor to resort to enforcement mechanisms targeting the assets of the host state located in the territory of one of the 154 countries that are parties to the ICSID Convention. For awards rendered by ad hoc tribunals or on the basis of the ICSID Additional Facility, the enforcement can be requested in the 163 countries that are parties to the New York Convention.[5]
As recently as a few years ago, observers noted that states generally complied voluntarily with investment arbitral awards, [6] whether such awards were rendered through ICSID arbitration or in an ad hoc context. Today, the trend is moving more and more toward “resistance.”[7] This phenomenon is illustrated by the increase in annulment proceedings against investment arbitral awards as well as by enforcement procedures targeting state property.
Commentators on investment arbitration cases rarely focus on scenarios in which states voluntarily comply with investment arbitral awards. As a result, there has been little analysis to date of the legal issues encountered by states in mobilizing, within a reasonable period of time, the frequently very large amounts awarded by arbitral tribunals in favour of investors.
Among the many obstacles that states can encounter in the implementation of investment arbitral awards, one of the most important is the unsuitability of internal budgetary procedures for paying the pecuniary obligations decided by an arbitral tribunal (see Part 1). This difficulty is now attenuated in certain states that have adopted budgetary standards aimed at addressing such unexpected budgetary developments (Part 2).
1. Challenges related to traditional budgetary procedures for the payment of international pecuniary obligations
The implementation of a pecuniary obligation can appear simple at first glance: the award generally specifies the amount and currency of the sum that the state must pay, and sometimes the payment deadline. The state then has only to take the measures necessary to carry out the transfer of the amount of money to the investor’s bank account, in the case of investor–state arbitration.
Nonetheless, this apparent simplicity hides a more complex reality. Indeed, apart from the principles of good faith and of a reasonable timeframe, no other international rule appears to oversee this post-award phase, other than that which provides for the payment to be made according to the internal procedures of the obligated state. Consequently, regardless of the origin of international obligation, the state retains control over the internal budgetary process relative to payment. That said, the state—and more specifically the executive authority—is subject to national budgetary rules in proceeding with the payment of the amount prescribed by the decision of the arbitral tribunal.
There are two principal challenges at this level.
First, the date of the award seldom corresponds to the timetable for voting on the annual state budget. In other words, the expected payment of damages is generally not provided for in the annual state budget. As a result, at the time when the award is rendered—and even for cases in which the state intends to comply with the award—the executive authority generally does not have the required authorizations to pay the amount specified by the arbitral tribunal.
Second, in accordance with the principle of separation of powers in democratic states, the governments of the obligated states are generally required to obtain parliamentary approval before being able to pay off their debt resulting from an arbitral award. This technique is not without practical and political difficulties for the state bodies responsible for the fulfilling of pecuniary obligations. Indeed, there is no guarantee that a parliament will agree to adopt the budget required to pay the state’s international pecuniary obligation, and even less so within a reasonable timeframe. Such a situation can, therefore, give rise to a new dispute between the investor and the host state due to the non-execution of the arbitral award rendered.
2. Specific budgetary mechanisms for the diligent payment of damages
In order to ensure that international rulings and arbitral awards are implemented within a reasonable timeframe, some states, starting in the late 20th century, have developed internal budgetary mechanisms with the aim of facilitating the implementation of international pecuniary obligations.
2.1. A budgetary procedure based on anticipation: The examples of France, Peru, and Spain
Some states have introduced budgetary procedures based on foresight and anticipation, in order to deal—if necessary and within a reasonable timeframe—with the voluntary payment of damages issued by an investment arbitral award.
In France, with regard to pecuniary compensation following a one-time international dispute, the Ministry of Foreign Affairs had previously ensured payment from an evaluative line of credit appearing in its annual budget. Since the adoption of the Law relating to Finance Laws of 2005, the various bodies of the French state are now required to set up a projected budget, taking into account the possible pecuniary obligations of the state. In other words, they must include within their budgets a specific line of provision for risks and charges in the possible event of a “certain, or likely, outflow of resources.”[8] Thus, when France is a party to a dispute before an international court, the Ministry of Foreign Affairs must include an assessment of pecuniary risk in the budget for the following year.
A similar procedure exists in Peru. In this respect, the General Law on the National Budgetary System[9] also provides for a budgetary reserve with the Ministry of Economy and Finance to comply with unforeseen pecuniary obligations, which, by their nature, are not included in the annual state budget. The payment of damages awarded by an arbitral tribunal can thus be carried out with an authorization from the Head of State and the Ministry of Economy and Finance. As an example, following the ICSID award in the case of Bear Creek Mining Corporation v. Peru,[10] the Head of State, with the consent of the Ministry of Economy and Finance,[11] authorized the transfer of an additional amount to the Ministry of Energy and Mines in order to proceed with the payment of the damages awarded to Bear Creek Mining Corporation by the arbitral tribunal. The payment was made one year after the award was rendered.[12]
Difficulties in implementing an arbitral award can also arise due to the federal or more or less decentralized form of a state.[13] Anticipating this issue, Spain—a unitary state composed of 17 autonomous communities—stipulates in its Law on Budgetary Stability[14] that autonomous communities as well as public companies must include a specific line in their annual budgets enabling compliance with unforeseen financial obligations. Spain also organizes a procedure for examining internal responsibilities among state bodies whose acts have been declared unlawful by an international or European court. It is useful to note that Spain applied this principle long before the adoption of this legislation. In the case of Maffezini v. Spain, the arbitral tribunal had assigned the acts of the SODIGA Company to Spain. Once the award was rendered, Spain forwarded the award to SODIGA, which made the payment and charged the expenditure to its annual budget.[15]
Clearly, an approach based on budgetary anticipation can facilitate the implementation of an international award within a reasonable timeframe. This approach is nevertheless not without its difficulties, given the irregular timetable of arbitration proceedings and the unpredictable nature of the assessment of the likely amount of compensation, if the international court or tribunal hearing the case determines that the state is responsible. Finally, budgetary anticipation is not enough to enable the implementation of the arbitral award within a reasonable timeframe, when the amounts awarded by an arbitral tribunal are exorbitant compared to the limited annual budgets of developing countries. An ICSID arbitral tribunal recently ordered Pakistan to pay USD 6 billion in damages,[16] which represents approximately one-fiftieth of its annual GDP.[17]
2.2. An exceptional budgetary procedure: The examples of Guatemala and Bolivia
States can also provide for an exceptional procedure authorizing the executive to make certain budgetary modifications during the year without the authorization of parliament. It is within the framework of such exceptional procedures that Guatemala and Bolivia complied with the investment arbitral awards rendered in the cases of Railroad Development Corporation v. Guatemala[18] and Guaracachi v. Bolivia,[19] respectively.
In Guatemala, the Constitution[20] as well as the budget law[21] provide for the possibility of an exceptional budgetary procedure involving various supervisory bodies. This procedure allows the executive to issue a decree authorizing a state body or a public enterprise to modify its annual budget in order to proceed with the payment of the amount due under an investment arbitral award and not provided for in the annual state budget. This procedure thus enabled the payment of damages awarded by an ICSID tribunal 11 months after the final award was rendered.[22]
Even though the following example is not recommended due to the absence of a monitoring mechanism, in Bolivia, a presidential decree was sufficient (following the ad hoc arbitral award rendered in the case of Guaracachi v. Bolivia) to authorize the Minister of Hydrocarbons and Energy and the President of the National Electricity Company to sign an agreement with the investor regarding the payment of the USD 31.5 million owed by Bolivia—in exchange for a few concessions by the investor.[23] In this way, Bolivia, which received the arbitral award on January 31, 2014, fulfilled its pecuniary obligation a mere six months later.[24] Nevertheless, few of the world’s constitutions allow the executive to release an amount of several million US dollars in a few months without parliamentary authorization or a pre-established exceptional budgetary procedure.
Without these exceptional mechanisms, it is likely that the voluntary implementation of these two arbitral awards would have required more time. This delay could be viewed by the investor as a refusal of the state to comply with the award and lead it to initiate enforcement procedures applicable to the assets of the obligated state. The delay in the state’s implementation of the investment arbitral award could constitute a new source of contention.[25] Nonetheless, these exceptional budgetary procedures, which are outside the traditional control of the legislature over the actions of the executive, must be managed and controlled to limit the possibility of abuses and excesses.
Dr. Affef Ben Mansour is an attorney at the Paris Bar. She is the author of a doctoral thesis on The Implementation of International Judgments and Awards of International Tribunals, published by Larcier in 2011.
[1] Case concerning the Factory at Chorzów, fond, judgement of 13 September 1928, P.C.I.J.., Serie A n° 17, p. 47. https://www.icj-cij.org/files/permanent-court-of-international-justice/serie_A/A_17/54_Usine_de_Chorzow_Fond_Arret.pdf
[2] Among the cases brought before a tribunal on the basis of the ICSID Convention or the ICSID Additional Facility, 66% give rise to an arbitral award. Of the latter, 48% result in an arbitral award attributing liability to the state. ICSID. (2019). Affaires du CIRDI – Statistiques, numéro 2019-2, pp. 26–27. https://icsid.worldbank.org/en/Documents/ICSID_Web_Stats_2019-2_(English).pdf
[3] See the list of the highest amounts of damages awarded by investment tribunals in Bonnitcha, J. et Brewin, S. (2019, octobre). Compensation Under Investment Treaties (IISD Best Practices Series). IISD, pp. 29–31. https://www.iisd.org/library/iisd-best-practices-series-compensation-under-investment-treaties
[4] See Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 18 March 1965, entered into force on 14 October 1966, Art. 53(1); UNCITRAL. (2013). UNCITRAL Arbitration Rules, Art. 34(2). https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/uncitral-arbitration-rules-2013-e.pdf; see also the relevant provisions in BITs, the arbitration clauses of investment contracts, and the Arbitration Rules of arbitral institutions.
[5] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 10 June 1958, 21 U.S.T. 2517, 330 U.N.T.S. 3, Art. III. https://treaties.un.org/doc/Publication/UNTS/Volume%20330/volume-330-I-4739-English.pdf
[6] See, in particular, Dugan, C. F. (2008). Investor–state arbitration. Oxford University Press, pp. 675-676; Alexandrov, S. A. (2009). Enforcement of ICSID awards: Article 53 and 54 of the ICSID Convention. Transnational Dispute Management, 1, p. 10. https://www.transnational-dispute-management.com/article.asp?key=1345
[7] Van den Berg, A. J. (1989). Recent enforcement problems under the New York and ICSID Conventions. Arbitration International, 5(1), 2–20; Baldwin, E., Kantor, M., & Nolan, M. (2006). Limits to enforcement of ICSID awards. Journal of International Arbitration, 23(1), 1–24.
[9] Republic of Perú. (2012). Law No. 28411, General Law of the National Budget System, approved by Supreme Decree No. 304-2012-E, Arts. 44 and 45. http://transparencia.mtc.gob.pe/idm_docs/normas_legales/1_0_31.pdf
[10] Bear Creek Mining Corporation v. Republic of Perú, ICSID Case No. ARB/14/21, Award, 30 November 2017. https://www.italaw.com/sites/default/files/case-documents/italaw9381.pdf
[11] Republic of Perú. (2018). Supreme Decree No. 246-2018-EF, 30 October 2018. https://www.gob.pe/institucion/mef/normas-legales/213392-246-2018-ef
[13] Ben Mansour, A. (2011). La mise en œuvre des arrêts et des sentences des juridictions internationales. Larcier, pp. 257–259.
[14] Kingdom of Spain. (2013). Organic Law 2/2012 of Budgetary Stability and Financial Sustainability, Article 8 (1); modified by Organic Law 9/2013 of 20 December 2013 regarding the control of commercial debt in the public sector, Art. 1(13). https://www.boe.es/eli/es/lo/2012/04/27/2/con
[15] Consello de Contas de Galicia. (2001). Informe de fiscalización, Ejercicio 2001, XesGalicia, SXECR, S.A. y Sodiga Galicia, SCR, S.A., p. 48, para. 4.14. http://www.consellodecontas.es/sites/consello_de_contas/files/contents/documents/2001/XESGALICIA_2001_C.pdf
[16] Tethyan Copper Company Pty Limited v. Islamic Republic of Pakistan, ICSID Case No. ARB/12/1, Award, 12 July 2019. https://www.italaw.com/sites/default/files/case-documents/italaw10737.pdf
[17] See the data published on the World Bank website: https://data.worldbank.org/country/pakistan
[18] Railroad Development Corporation v. Republic of Guatemala, ICSID Case No. ARB/07/23, Award, 29 June 2012. https://www.italaw.com/sites/default/files/case-documents/ita1051.pdf
[19] Guaracachi America, Inc. v. The Plurinational State of Bolivia, UNCITRAL, PCA Case No. 2011-17, Award, 31 January 2014. https://www.italaw.com/sites/default/files/case-documents/italaw3293.pdf
[20] Republic of Guatemala. (1993). Constitución política de la República de Guatemala, Art. 183. http://www2.congreso.gob.pe/sicr/cendocbib/con4_uibd.nsf/E36A11EC8CBB4D0105257E6C0070698F/$FILE/5_pdfsam_ConstitucionPoliticadelaRepublicadeGuatemala.pdf
[21] Republic of Guatemala. (1997). Decree No. 101-97 of the Congress of the Republic of Guatemala of 2 November 1997 relating to the Organic Budget Law, Arts. 29 and 49. https://www.contraloria.gob.gt/wp-content/uploads/2018/02/8-LEY-ORGANICA-DEL-PRESUPUESTO-DECRETO-DEL-CONGRESO-101-97.pdf
[22] Republic of Guatemala, Ministry of Communications, Infrastructure and Housing. (2013, 14 November). Acuerdo gubernativo n° 436-2013. https://www.minfin.gob.gt/images/downloads/leyes_acuerdos/acuerdogub436_201113.pdf
[23] Plurinational State of Bolivia. (2014, 22 May). Decreto supremo nº 2006. https://www.lexivox.org/norms/BO-DS-N2006.xhtml
[24] Joint letter from the Bolivian State and the investor to the arbitral tribunal, 29 May 2014. https://www.italaw.com/sites/default/files/case-documents/italaw3297.pdf; see also the payment of the damages awarded by the ICSID tribunal in the case of Quiborax S.A. and Non-Metallic Minerals S.A. v. The Plurinational State of Bolivia (ICSID Case No. ARB/06/2, Award, 16 September 2015); Plurinational State of Bolivia. (2018, 6 June). Decreto Supremo N° 3582. https://www.lexivox.org/norms/BO-DS-N3582.xhtml
[25] See Achtouk-Spivak, L., and Ben Mansour, A. (2015). Reconnaissance et exécution des sentences arbitrales, in Charles Leben (dir.), L’avenir des traités de protection des investissements. Pedone, pp. 1018–1023.
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