Getting paid: Managing the risks of enforcing against a sovereign state
Mining companies are some of the most active participants in bringing claims against sovereign states under both commercial arrangements and investment treaties. Winning a monetary judgement in court or an award in an international arbitration against a sovereign state is a major step towards a remedy for the claim. However, if the state does not pay the awarded amount voluntarily, then the claimant must seek to enforce it. Enforcing against a sovereign state requires navigating issues that are not present in enforcement actions against non-state parties. This article will touch in some of the key issues a party must be aware of when collecting on an award or judgement against a state and how to best position themselves ahead of time to avoid some common problems.
1 | Navigating state immunity
State immunity is a fundamental issue that must be navigated when enforcing an arbitration award or foreign judgement against a state. Broadly speaking, there are two branches of state immunity: immunity from suit, which bars a state from being sued in another state’s courts; and immunity from execution, which bars execution on a judgement against a state’s assets.
There are exceptions to both branches of state immunity which are critical to enforcing arbitration awards and judgements against states.
Many jurisdictions around the world recognize that a foreign state is not immune from either being sued or execution on its assets if it has waived that immunity. This can take the form of an express waiver clause in a commercial contract with a state or other state action that amounts to a waiver. An express waiver of state immunity can be included in commercial contracts with states and simplifies the issues of state immunity in enforcing a judgement or award after a dispute. Parties contracting with states should review their agreements with states to see if these clauses are present. Parties contracting with states should also seek to include waiver of immunity clauses whenever possible from the outset of the commercial relationship to make enforcing against the state easier should the need arise.
ii) Commercial activities exemption
Another common qualification is that a state is not immune from being sued in relation to its commercial activities. This is often referred to as the “commercial activities” exception and allows a state to be sued in proceedings that relate to its activities that are of a commercial nature. A similar exception often applies to a state’s assets that are used for commercial activity, making those assets not immune from execution.
Each legal jurisdiction will have its own laws relating to state immunity. In Canada, foreign states enjoy qualified immunity under the federal State Immunity Act. The immunity does not apply if it is waived by the state or if the claim against the state relates to the state’s commercial activities. State assets are immune from execution subject to the same exceptions (i.e., the state waives immunity, or the assets are used for commercial activities). This commercial activity exception also applies to assets of a state’s central bank held in Canada.
2 | The process of recognition and enforcement
Enforcing a judgement or award against a state is a multistage process. The first stage is to have the arbitration award or foreign judgement recognized. The second step is to have the recognized award or judgement enforced.
Recognition of international arbitration awards is made easier in jurisdictions that are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly called the “New York Convention”. The New York Convention is signed by over 170 countries and provides a framework to have foreign arbitration award recognized as if they were local court judgements. The process is designed to encourage recognition proceedings and make refusing recognition possible only on limited grounds.
Recognition of foreign court judgements follow different legal schemes from international arbitration awards. In Canada, the recognition of a foreign court judgement is a matter of private international law which has been codified in several provincial jurisdictions. Canada, and some Canadian provinces, have agreements with select jurisdictions for the reciprocal recognition of judgements. But there is nothing like the New York Convention for the recognition of foreign judgements on a global scale.
It is therefore arguably more straightforward to have an international arbitration award recognized than a foreign court judgement. Companies should check their commercial agreements with states for arbitration clauses and include them whenever possible.
Also, the corporate structure through which a mining project is held should be examined to assess whether investors are protected under an investment treaty. A large global network of bilateral and multilateral investment treaties is currently in force. Prudent enterprises will examine which jurisdictions have treaties with the host state in which their project is located and seek to avail themselves of treaty protection before any dispute arises. This not only provides substantive protection outside a contractual relationship with the state, but also may make it easier to have a future international arbitration award recognized and enforced down the line.
Once an arbitration award or foreign judgement is recognized in a jurisdiction, it can then be enforced. Generally, a party who has a recognized award or foreign judgement has access to the types of enforcement tools of a domestic court judgement in that jurisdiction. These vary by jurisdiction, but can include freezing orders, garnishing orders, or orders for seizure and sale of property. Issues of state immunity must be navigated at both the recognition and enforcement phases.
3| Managing enforcement risk
Mining companies and investors should build enforcement risk into their political risk assessments of the jurisdiction in which the project is located. Companies should know if the host state has a history of not paying when ordered to by a judgement or award. The credit worthiness of the state should be assessed with the ease of enforcement in mind. Part of assessing enforcement risk at any stage should also involve understanding whether a state is known to have assets abroad and in which jurisdictions.
This type of information will form the basis of any global enforcement strategy if a party finds itself having to enforce a judgement or arbitration award against a state. At the early stages of an enforcement effort, parties should engage coordinating counsel to lead the effort. Coordinating counsel often engage with asset investigation firms to locate assets and local lawyers in multiple jurisdictions where assets are located to get specialized legal advice relating to their specific jurisdiction.
Mining companies and investors can manage enforcement risk by taking proactive steps to put themselves in strong position to enforce judgements or award against sovereign states if needed. Many states pay or seek settlement after a party shows they have the wherewithal to pursue enforcement. Good planning and risk mitigation to avoid common obstacles can avoid the need to proceed to enforcement all together.
J. Thomas Hatfield is a partner, international arbitration and cross-border litigation, at McMillan LLP.