Your dispute resolution strategy does not start only once a dispute arises or stop once you have an award. As part of the in-house legal team, you are the guardian of your company’s legal interests from contract negotiations to enforcement of arbitral awards. Be the internal asset and business partner you’re meant to be!
At Jus Mundi, we are aware that not all legal departments have a dedicated arbitration or disputes team. To make your life extra easy, Jus Mundi is publishing a series of practical Arbitration Know-How articles, specifically intended for in-house counsel.
Take a look at the previous articles of our Arbitration Know-How Series:
- The Ultimate Arbitration Checklist: a Practical Guide for In-House Counsel, which exposes, in practical terms, the steps to be taken in the contract negotiation phase, pre-dispute phase, and during arbitration.
- Arbitration Clause Drafting 101 explains how to confidently draft a dispute resolution/arbitration clause to avoid using a claim-generating clause;
- Mitigate Business, Financial & Legal Risks Through Arbitration Intelligence & Legal Monitoring, which exposes how to stay on top of the new arbitral developments and mitigate legal risks.
- Perfecting The Art Of Selecting Legal Professionals For Your Arbitration And Conducting Arbitrators Due Diligence, provides the tools to choose the right arbitration external counsel, select appropriate arbitrators, and conduct more autonomously their due diligence.
Parties are often caught off guard when, after winning an arbitration, they come to the realisation that there is still a big chunk of work to do: getting the money.
In case of non-compliance, because the losing party is unwilling or unable to honour the terms of the arbitral award, the winning party could pursue recognition and enforcement proceedings. Multilateral treaties such as the Convention on Recognition and Enforcement of Foreign Arbitral Award of 1958 (New York Convention) and the Convention on the Settlement of Investment Disputes between States and Nationals of other States of 1965 (ICSID Convention) provide expedited procedures for recognition and enforcement of awards that fall into its scope of application and tend to limit the motives available for a national court to refuse enforcement of an arbitral award.
However, after spending time and capital arbitrating a dispute, a winning party will often be unenthusiastic about the idea of deploying more of the same trying to execute the award. From this standpoint, quick recovery of damages may be the most important issue for your legal department and company, as the award simply has no value if it is not complied with or enforced.
It is not all bleak though: losing parties tend to voluntarily comply with the arbitral award.[i] However, one may wonder if this reality is changing.[ii] In any case, even if the expectation should normally be that the award debtor will comply, in-house counsel should reasonably anticipate non-compliance by the opposing party.
Before resorting to enforcement, the winning party must contemplate how it can prompt compliance with the award. From pre-dispute considerations to an effective post-award strategy, there’s an array of routes available to ensure compliance by the award debtor.
- Beware! An effective arbitration strategy should not end at the rendering of the arbitral award. It is too late to start thinking about compliance and enforcement when the award has already been rendered.
- The post-award phase is at the intersection of legal, economical, and geopolitical considerations, and it is the role of your legal department to anticipate how it can prompt compliance with a favourable award without spending time and money enforcing it.
Mutually Beneficial Advantages of Compliance with an Arbitral Award
Compliance with the award nurtures trust in the arbitral process and is mutually beneficial for both parties:
- For the award creditor, it safeguards swift collection of the debt and ensures that no extra costs or time is spent on enforcement proceedings. It also avoids having to resort to local courts, potentially in a foreign jurisdiction, when the purpose of arbitration is to avoid litigation.
- For the award debtor, it guarantees the respect of its legal obligation to comply with the award and eliminates reputational risks that may arise if the opposing party decides to publicise the dispute. By voluntarily complying with the award, the losing party is also saving costs and time it will spend resisting enforcement.
Most importantly, timely compliance will go a long way in saving the commercial relationship between the parties as it will avoid potentially years of litigation.[iii]
Quick Recap of the Legal Framework Governing Compliance With Arbitral Awards
Arbitral awards are final and binding upon both parties.
In the context of ICSID arbitration, the State has an international obligation to comply with the arbitral award.[vi]
Your Step-by-Step Strategy to Prompt Compliance with an Award
Pre-Dispute: Reasonably Anticipating Non-Compliance
An important aspect of an arbitration strategy is reasonably anticipating non-compliance with the award once the dispute has ended. Even the strongest of commercial relations can be ruined by disputes and it is necessary to take into consideration the possible situation of your counterparty in the future.
Contractual tools to prompt automatic enforcement of the award should be taken into consideration. Payment guarantees, for instance, could be seen as a strong assurance for both parties, which can provide important leverage when needed.
When your counterparty is a State or State entity, sovereign immunity issues should be addressed. Idyllically, the contract should include a broad waiver of immunity from execution clause, or a clause earmarking assets that may be potentially attached in satisfaction of the award. However, in practice, such clauses are extremely rare.
If the losing party thinks that the award was made in error, it will most probably try to set aside the award at the seat of arbitration. Therefore, it’s important to carefully draft your arbitration clause, so that it doesn’t create hurdles to compliance or potential enforcement proceedings.
Take a look at Part 2 of our Arbitration Know-How Series: Arbitration Clause Drafting 101, for tips on how to confidently draft a dispute resolution/arbitration clause.
Post-award: prompting compliance
After the rendering of the award, the winning party shouldn’t hesitate to address a letter to the losing party reminding them of their legal obligation to honour the terms of the award. This is also an opportunity where the winning party could propose talks for a potential settlement if this solution is deemed the fittest to the dispute.
- Consider settling
It may sound counterintuitive to settle with the opposing side once the arbitral award has been rendered, especially in your favour. Unfortunately, award creditors should sometimes accept that it will be difficult to recoup the full value of the award when the award debtor refuses to comply voluntarily, especially if the latter’s assets are in multiple jurisdictions, making enforcement proceedings more difficult and costly.
In this case, the winning party should assess potential settlement, including a reduction of the value of the award in return for timely payment. This reduction also reflects the costs saved by not pursuing forced execution.
Other than securing compliance with the award, a settlement will save the commercial relationship, even potentially reincarnate it after a dispute. Sometimes, it may be more important for your company to continue doing business with a partner while expeditiously recovering a part of the value of the award, rather than pursuing more litigation and destroying a commercial relationship. [vii]
When analysing settlement possibilities and the discount to the award, the costs of enforcement proceedings should be balanced with the value of the award and most importantly, with the value of what you think can be effectively recouped after enforcement proceedings.
- Applying commercial pressure
If settlement discussions fail or if you deem a settlement not fit for your dispute, the award creditor may still be able to make the award debtor comply with the award without forced execution.
By leveraging the reputational risk and publicising the dispute, the winning party can prompt the losing party to comply with the award or accept settlement terms.
- This could be done by notifying trade organisations of instances of non-compliance. Trade bodies such as GAFTA and FOSFA (both provide for ADR services) publish a list of defaulters on arbitral awards. This information is only available to members of the organisation and is not publicly accessible.
- More recently, this practice has expanded to arbitral institutions, with Delos Dispute Resolution introducing a Compliance Reinforcement Mechanism in the DELOS 2021 Arbitration Rules. This allows “an award creditor to obtain the publication on Delos’s website of a Compliance Failure Notice once the time-limits for all forms of recourse against the award have expired at the seat of arbitration”.
Potential partners would think twice before contracting with a business known for its lack of compliance with unfavourable awards.
Read our article on arbitration intelligence to make informed decisions as to which partners to contract with.
- Considerations when your opponent is a State or a State entity
Generally, negotiation with States or their entities may be more difficult as there are usually more stakeholders involved when dealing with sovereigns. Moreover, sovereigns’ legal and internal budgetary constraints can be restrictive and pose challenges to prompt compliance with the terms of an award.
It is important to utilise diplomatic channels when needed.
This has proved to be a successful strategy by Azurix and Blue Ridge (assignee to CMS) who requested the withdrawal of Argentina from the US Generalized System of Preferences (GSP) after non-compliance with two arbitral awards rendered in their favour. The request was granted but the parties eventually settled. A similar request was submitted by Chevron against Ecuador for which the country review is still ongoing.
Publicising the dispute could provide important leverage. One commentator has noted that when dealing with States, “some investors apparently believe this may be their best leverage in collecting an award”.[viii] Non-compliance can negatively impact a sovereign’s credit rating if it is seeking credit from an international organisation. More generally, it may harm a State’s investment climate.[ix]
Monetising the Award
Another viable option will be to “monetise” the award in the secondary market. This could be very attractive for the winning party as it obtains financial relief relatively quickly. The latter could avoid the hurdles of enforcement proceedings by selling its rights to the award to a third party at a discounted price, in exchange for the third party assuming the enforcement risk and costs. If the award debtor is consistently refusing to comply, this could be a commercially sensible outcome for the winning party.
This option will depend on numerous factors, notably the size of the award: the award needs to be sizeable to accommodate for the discount on the value of the award and the enforcement costs. Monetisation structure can also differ, parties could negotiate a lump sum payment or a multitude of payments based on future trigger events.
When All Fails: Considerations Before Commencing Enforcement Proceedings
If compliance by the award debtor is no longer a viable reality, you will be forced to recognize and enforce the award. An effective strategy should be planned as enforcement proceedings could be costly and time-consuming.
Registration of the award in court or further forced execution may prompt the debtor to reassess its options and settle. If needed, keep settlement possibilities open throughout all steps of these proceedings.
Our tips to planning an effective enforcement strategy:
- Locate the debtor’s assets: a lack of assets or an inability to locate them will make enforcement of the award very difficult. Locating recoverable assets is considered the main hurdle in the enforcement stage. Depending on the complexity of the case, specialised firms in asset tracing may bring a strong added value.
- Inform yourself about the laws applying in the jurisdictions where the debtor’s assets are located: it is important to be aware of the procedural rules and laws governing recognition and enforcement proceedings, such as knowing if the New York Convention applies. When dealing with States, awareness of sovereign immunity laws is recommended.
Take a look at our Wiki Note to learn more about the concept of Sovereign Immunity from Execution (in Enforcement).
- Analyse the need for funding: depending on the localisation of the debtor’s assets and your strategy to recoup the value of the award, you may need to fund enforcement proceedings in multiple jurisdictions. This is different from full monetisation of the award and is closer to risk sharing, where the funder will fully or partially fund the costs of enforcement proceedings in return for a share of the recovered sum.
We hope you found our Arbitration Know-How Series helpful. Learn more about the specific stages prior to and during arbitration at which you can be more independent, save on legal costs, and truly be known internally as a risk-mitigating and cost-saving department.
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About the author
Zeyad Abouellail is a Legal Content Officer at Jus Mundi and a PhD candidate at Paris-Saclay University. His research focuses on the post-award phase in investment arbitration. He holds two Master’s Degrees in International Business Law from Paris-Saclay University and Paris 1 Panthéon-Sorbonne University. Prior to joining Jus Mundi, Zeyad has interned at several law firms in international arbitration and corporate law in Cairo, Egypt.
[i] International Arbitration: Corporate attitudes and practices 2008, Queen Mary University of London and PriceWaterhouseCoopers (“84% of the participating corporate counsel indicated that, in more than 76% of their arbitration proceedings, the non-prevailing party voluntarily complies with the arbitral award; in most cases, according to the interviews, compliance reaches 90%”); Crystal Robles, The 2014 Survey: How Well Are Arbitral Awards Enforced in Practice?, 20 News & Notes from the Institute for Transnational Arbitration 5, 5 (Qtrs. 2 & 3 2014) (survey respondents were ‘[p]ractitioners with experience in over 2,000 arbitrations resulting in awards in over 35 jurisdictions’) (‘Forty-four percent of participants answered that “very few” (10 percent or less) of their commercial arbitration awards were subject to judicial enforcement, while 27 percent answered that “some” (10 to 40 percent) were.’), referenced in Drahozal, Christopher R., Empirical Findings on International Arbitration: An Overview (December 21, 2016). Oxford Handbook on International Arbitration (Forthcoming)
[ii] J William Rowley QC, Editors Preface, in The Guide to Challenging and Enforcing Arbitration Awards – Second Edition, Global Arbitration Review, 8 June 2021.
[iii] Loukas Mistelis & Crina Baltag, Recognition And Enforcement Of Arbitral Awards And Settlement In International Arbitration: Corporate Attitudes And Practices, The American Review of International Arbitration, Vol. 19, (2008) (“The interviewed corporations revealed that the main reason for compliance with the arbitral awards was to preserve a business relationship. In sensitive industries, such as insurance and re-insurance, pharmaceuticals, shipping, aeronautics and oil and gas, the percentage is significantly higher, as the number of major players in these sophisticated markets is much lower than in other industries (86% in the construction industry, 73% in the energy, oil and gas and 100% in the insurance and re-insurance).”)
[iv] See ICC Arbitration Rules 2021, Art. 35.6; UNCITRAL Arbitration Rules 2013, Art.34.2; LCIA Arbitration Rules 2020, Art. 26.8; ICDR Arbitration Rules 2021, Art. 33.1; SIAC Arbitration Rules 2016, Art. 32.11; HKIAC Arbitration Rules, Art. 35.2; CRCICA Arbitration Rules 2011, Art. 34.2.
[v] See for example, Sales & Purchase Contract, Art. 13.3 (available on Jus Mundi https://jusmundi.com/en/document/other/en-tube-city-ims-llc-v-anza-capital-partners-llc-sales-purchase-contract-monday-9th-march-2020#other_document_16560); Distributorship Agreement, Art. 14.8 (available on Jus Mundi https://jusmundi.com/en/document/other/en-nautilus-hyosung-inc-and-hyosung-america-inc-v-tranax-technologies-inc-distributorship-agreement-thursday-1st-december-2005).
[vi] Art. 53 of the ICSID Convention.
[vii] The 2008 Queen Mary Survey found that “40% of the participating corporations have negotiated a settlement after the arbitral award was rendered; this usually entailed a discount in return for prompt payment”. 56% of them indicated that the motive was to save time and costs, while for “ 19% of the participating corporations, maintaining a relationship with the nonprevailing party was an important driver of a settlement”.
[viii] R. Doak Bishop, Introduction: The Enforcement of Arbitral Awards Against Sovereigns, at 7, in R. D. Bishop (ed.), Enforcement of arbitral awards against sovereigns, Juris Publishing (2009).
[ix] See Vinuales, Jorge E. and Bentolila, Dolores, The Use of Alternative (Non-Judicial Means) to Enforce Investment Awards Against States. In Boisson de Chazournes, L., M. Kohen and J. E. Viñuales (eds.), Diplomatic and Judicial Means of Dispute Settlement: Assessing their Interactions (The Hague: Brill) (2012)