International enforcement of arbitral awards
The New York Convention allows for recognition and enforcement of international arbitral awards in most states. In this article, we outline the main steps of the process of enforcing international arbitral awards, adding our practical insight on the peculiarities of specific jurisdictions.
Around one year ago, on 27 December 2019, Gazprom “voluntarily” paid almost USD 3 billion to Naftogaz, Ukraine’s state-owned gas company, to settle damages and interest due under an arbitral award rendered in February 2018. Voluntarily is in quotation marks because the payment was made only after Wikborg Rein’s Gas Dispute team (including the authors) had spent roughly one and a half years of pursuing enforcement action in a number of jurisdictions and were getting close to securing a victory. This process and other international enforcement projects have taught us that even if international law provides that arbitral awards should be easily recognised and enforceable in most countries, local procedural and substantive law may significantly affect the prospects of success. In this article, we outline the main steps of an enforcement process, with some observations on the peculiarities of specific jurisdictions.
The first step in enforcing an arbitral award is to identify and locate the assets belonging to the losing party, the award debtor. Asset identification may be done in public registers or databases and local counsel may be able to assist with this process. It may also be useful to engage a corporate investigator to search for assets that may not be easily identifiable.
Once assets are identified, it is important to confirm that they in fact have value. It is also important to confirm that assets are held directly by the award debtor, and not by one of its subsidiaries, since courts in most legal systems rarely allow creditors to “pierce the corporate veil” to seize the subsidiaries’ assets.
Furthermore, local rules about the jurisdictional limits of asset attachment or seizure orders should be investigated. For instance, if a Swiss company has issued physical share certificates and removed them from the canton in which enforcement is sought, an attachment order issued by a court of that canton has no effect.
In some jurisdictions, the award creditor (the winning party in the arbitration) can request that authorities and courts use their powers to force the award debtor to disclose the location of its assets. In England and Wales, the courts regularly exercise their power to compel a debtor to identify all of its assets in the jurisdiction. In the US, there is a specific federal statute (28 U.S.C § 1782) which can provide asset discovery in the US in aid of foreign enforcement proceedings. By contrast, in the Swiss canton of Zug, it is entirely a matter for the creditor to prove the existence of assets belonging to the award debtor, and failure to do so is a ground to refuse enforcement.
Once the award creditor has identified the debtor’s assets, it should consider requesting that a court attach these assets before the creditor applies for recognition of the award. Pre-recognition attachments do not transfer any rights over the assets to the award creditor, but they prevent the award debtor from dissipating or diminishing those assets.
To succeed with an application for pre-recognition attachment, most courts require the award creditor to prove that there is a real risk that the award debtor will dissipate assets and to undertake to begin recognition proceedings within a certain period after the attachment has been issued.
If assets are located in several jurisdictions, it may be advisable to commence enforcement proceedings simultaneously in many or all of them. The element of surprise may prevent a recalcitrant debtor from hiding assets in one jurisdiction as soon as it learns of enforcement proceedings in another.
The next step to enforce an award is to get a judgment recognising the award. The award creditor will most likely rely on the New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards (the “NY Convention”), to which more than 160 states are signatories.
The NY Convention requires national courts in signatory states to give foreign arbitral awards the same treatment as they would domestic court awards. Therefore, provided that certain requirements are met, courts in signatory states must recognise foreign arbitral awards as binding and enforceable in their jurisdiction.
The NY Convention provides only limited grounds for a local court to refuse recognition and enforcement:
- Invalidity of the arbitration agreement.
- The debtor was not given proper notice of the arbitration or was otherwise unable to present its case.
- The tribunal exceeded its mandate or lacked jurisdiction.
- Irregularity in the composition of the tribunal or the procedure.
- The award is not binding or has been suspended or set aside by a competent authority in the jurisdiction in which the award was made.
- The dispute was not capable of settlement by arbitration, or enforcement would violate public policy.
A local court may stay recognition and enforcement pending challenge or set-aside proceedings. In some jurisdictions, for example England and Wales, a stay tends to be the default when challenge proceedings have been initiated, while in others, for example Germany and the Netherlands, a stay is not so easily granted. This is largely explained by the fact that the legal test for whether a stay should be granted differs between jurisdictions.
Furthermore, some courts, for example in Switzerland, will look to the court hearing the challenge for signals as to whether enforcement abroad should be delayed; others, like the English courts, will make their own assessment without regard to the position of the court hearing the challenge.
Another factor which can delay proceedings is that some jurisdictions take a formalistic approach to service of notice on the award debtor. The award creditor should therefore check which rules apply for service and notification, how these rules are interpreted and practiced, and how potential delays can be mitigated. Notably, some countries may have bilateral agreements on service with the debtor’s country that may be applied instead of the Hague Service Convention. Sometimes, the authorities charged with serving notices in the country of the debtor may appear to wilfully delay service to protect a politically well-connected debtor.
Seizure of assets
If a local court has recognised an award, the award creditor can execute the award by seizing the award debtor’s assets. The exact process for seizure differs in various jurisdictions, but certain common features can be identified.
First, the award debtor is given notice before seizure takes place, which may need to be delivered in accordance with international treaties or domestic laws. As described above, this can delay the process and allow the debtor to argue that notice was improperly served.
Second, the court typically orders an independent bailiff or a government authority to seize the assets. Again, the award debtor may have an opportunity to slow or resist the process by arguing that the bailiff or authority has acted improperly.
Once assets are seized, they are either transferred to the award creditor or they are sold, with the proceeds then distributed to the award creditor. If the assets are to be sold by the award creditor, it may need to organise an auction or identify a seller, processes that can be time-consuming.