Globally, Spain is the state with the highest number of unpaid investment awards against it. Not only is Spain not paying, it is also indicating that it will never do so. As one commentator recently put it, Spain would rather defend itself ‘to the bitter end’ than pay.
The recent Court of Appeal case of Infrastructure Services Luxembourg S.À.R.L. v Kingdom of Spain is an example of what it looks like when a state defends itself to the last against numerous well-funded investors seeking billions of dollars. In this matter, Spain stood side by side with Zimbabwe in seeking to halt the registration of International Centre for Settlement of Investment Disputes (ICSID) awards against them in the courts of England and Wales.
The increasing use of ICSID arbitration by investors against states has been met with a strong reaction from the European Union, which has terminated the intra-EU investment treaties that allow for ICSID arbitration between EU member states. The EU’s actions have generally been rejected by ICSID arbitral tribunals, which have held that the intra-EU treaties can still be relied on by investors in certain circumstances. So, the awards keep coming regardless of the EU’s stance.
However, if a state does not accept that it must pay an ICSID award, that award risks being a very expensive piece of paper for investors. This is unless the award can be enforced in municipal courts where the state has assets.
The registration of ICSID awards is the first step in being able to enforce and execute such awards in England and Wales. Until this case, it was generally considered that the ICSID convention made registering ICSID awards relatively simple by obliging signatory states’ courts to recognise and enforce the award as though it were a final judgment of that state’s court. The ICSID convention preserved signatory states’ laws relating to state immunity from execution, but this usually concerns such issues as evaluating whether state assets are commercial in nature.
The procedure for registering ICSID awards in the UK has been in place since the 1960s. Yet more than 50 years later, Spain and Zimbabwe mounted a novel attempt to use state immunity to halt the registration of ICSID awards in England.
Spain and Zimbabwe’s case relied on the construction of the UK’s State Immunity Act (SIA) 1978. The SIA makes a state immune from the jurisdiction of the English courts unless one of the exceptions to immunity in the act applies. The exceptions of the SIA in question were section 2, which relates to states submitting to the jurisdiction of the UK, and section 9, the arbitration exception.
Spain and Zimbabwe’s arguments were rejected by the Court of Appeal. The court was clear that registering ICSID awards was not merely an administrative act but was adjudicative in nature. The court was equally clear that parties to the ICSID convention (such as Spain) had submitted to the jurisdiction of the English courts for the purposes of section 2 of the SIA. The appeals were therefore dismissed.
Had Spain and Zimbabwe been successful, it would have provided states with a major opportunity to challenge the validity of ICSID awards and given investors looking to enforce those awards in England a further obstacle to pass. While this has not materialised, the judgment remains significant.
Notably, the Court of Appeal relied heavily on the approach of the courts of other states to similar issues. The Court of Appeal noted how the courts of Australia, New Zealand, the US, France and Malaysia have all interpreted the ICSID convention and found the approach of those states to be ‘of considerable persuasive force’. The Court of Appeal praised the approach of the High Court of Australia in particular, which has already handed down judgment against Spain for the very same award.
There is much to be said for ensuring that municipal courts adopt a cohesive approach to interpreting treaties, and international law more generally. It allows for certainty for governments, diplomats and investors alike. However, the English courts have not always adopted this approach. Cases such as Basfar v Wong have resulted in the UK taking a position that is an outlier internationally, risking the UK’s standing in the international community.
Also significant is the fact that this matter is yet another major state immunity case to go before the English courts in a short space of time. Earlier this month, the Supreme Court heard arguments in Royal Embassy of Saudi Arabia (Cultural Bureau) v Constantine, the latest in a long line of immunity cases arising from claims in the employment tribunal. Elsewhere, Malaysia, South Africa, Kuwait and Bahrain have all recently been involved in significant immunity cases in the English courts, as the boundaries of immunity continue to be tested by increasingly sophisticated claimants.
While Spain is not alone in invoking state immunity in its defence, it finds itself at the front line of the conflict between the EU and the investor-state community. So long as Spain maintains its never-say-die approach, we can be sure that more battles are coming. Battles in which state immunity will feature significantly.
Jehad Mustafa is a partner at Farrer & Co, London
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