QLLM397 – Investment Treaty Arbitration- Session 7 - Awards and Annulment – Readings | Study Guides, Projects, Research Law

Session 7 - Awards and Annulment – Readings

Lew, Mistelis and Kröll, paras 28-92 – 28-116

Annulment proceedings

ICSID has its own special mechanism whereas under other arbitration regimes, the review of

an award in challenging proceedings is effected by state courts. Art 52 is an internal control

mechanism through ad hoc committees. It is intended to avoid long lasting proceedings in

state courts and take account of the special factual situation in state contracts.

Up to Dec 2002 – annulment proceedings have been instituted in 7 cases (2 were

settled/discontinued before a decision), 3 of them had their awards/part of their awards

annulled. Ad hoc committed emphasise that annulment proceedings are not supposed to be an

appeal. They are limited to controlling the legitimacy of the decision making process.

Not all grounds which justify an annulment protect the interest of parties e.g. impartiality of

the arbitrator which also serves to protect the integrity of the arbitration process. Parties are

obliged to raise grounds for challenge as early as possible. Failure to do so would result in

them being barred from seeking annulment for procedural reasoning by Rule 27.

Grounds for annulment are listed in art 52(1). Grounds mentioned in this article are narrow

because not every excess of power or departure from a rule of procedure is sufficient to annul

an award.

Excess of powers (art 52(1)(b)) – this is where the tribunal lacks jurisdiction either because

the dispute is not covered by the arbitration agreement or other requirements of art 25 are not

met. Any tribunal which has not been authorised by the parties exceeds its powers if it

renders an award or if the award goes beyond what the parties have requested or failure to

exercise existing jurisdiction (Vivendi). An excess of power may also exist when the tribunal

disregards the applicable law.

The line between non-application and wrong application is thin. An incorrect application of a

law often consists in the non-application of a single rule of that law which should have been

applied.

An excess of power is manifest if it can be discerned with little effort and without deeper

analysis.

Serious departure from a fundamental rule of procedure (art 52(1)(d)) – The departure must

be serious and it must also be a ‘fundamental’ rule of procedure e.g. right to be heard,

impartiality of the arbitrators. Serious departure entails quantitative as well as qualitative

elements. The departure must have deprived the party of protection or benefits the rule was

intended to provide. Giving a party a right to be heard before an award is rectified was

considered to be a fundamental rule of procedure (Amco v Indonesia).

Failure to state reasons (art 52(2)(e)) – this covers cases where there is a complete absence of

reasons or where the reasons given contradict each other and the award cannot be based on

the reasoning of the remaining parts. Ad hoc committees have adopted a generous standard

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Session 7 - Awards and Annulment – Readings Lew, Mistelis and Kröll, paras 28-92 – 28- Annulment proceedings ICSID has its own special mechanism whereas under other arbitration regimes, the review of an award in challenging proceedings is effected by state courts. Art 52 is an internal control mechanism through ad hoc committees. It is intended to avoid long lasting proceedings in state courts and take account of the special factual situation in state contracts. Up to Dec 2002 – annulment proceedings have been instituted in 7 cases (2 were settled/discontinued before a decision), 3 of them had their awards/part of their awards annulled. Ad hoc committed emphasise that annulment proceedings are not supposed to be an appeal. They are limited to controlling the legitimacy of the decision making process. Not all grounds which justify an annulment protect the interest of parties e.g. impartiality of the arbitrator which also serves to protect the integrity of the arbitration process. Parties are obliged to raise grounds for challenge as early as possible. Failure to do so would result in them being barred from seeking annulment for procedural reasoning by Rule 27. Grounds for annulment are listed in art 52(1). Grounds mentioned in this article are narrow because not every excess of power or departure from a rule of procedure is sufficient to annul an award. Excess of powers (art 52(1)(b)) – this is where the tribunal lacks jurisdiction either because the dispute is not covered by the arbitration agreement or other requirements of art 25 are not met. Any tribunal which has not been authorised by the parties exceeds its powers if it renders an award or if the award goes beyond what the parties have requested or failure to exercise existing jurisdiction (Vivendi). An excess of power may also exist when the tribunal disregards the applicable law. The line between non-application and wrong application is thin. An incorrect application of a law often consists in the non-application of a single rule of that law which should have been applied. An excess of power is manifest if it can be discerned with little effort and without deeper analysis. Serious departure from a fundamental rule of procedure (art 52(1)(d)) – The departure must be serious and it must also be a ‘fundamental’ rule of procedure e.g. right to be heard, impartiality of the arbitrators. Serious departure entails quantitative as well as qualitative elements. The departure must have deprived the party of protection or benefits the rule was intended to provide. Giving a party a right to be heard before an award is rectified was considered to be a fundamental rule of procedure (Amco v Indonesia). Failure to state reasons (art 52(2)(e)) – this covers cases where there is a complete absence of reasons or where the reasons given contradict each other and the award cannot be based on the reasoning of the remaining parts. Ad hoc committees have adopted a generous standard

and supplied reasons themselves if they considered the result to be correct but not sufficiently reasoned. The reasons are required to be reasonably sustainable and capable of providing a basis for the decision (Amco v Indonesia). However, there is a danger that the tribunal could be reviewing the merits of an award and to avoid this, a more lenient standard is proposed in Mine v Guinea. The requirement that an award has to be motivated implies that it must enable the reader to follow the reasoning of the Tribunal on points of fact and law. The adequacy of the reasoning is not an appropriate standard of review because it draws an ad hoc committee into an examination of the substance of the tribunal’s decision. Even if the tribunal made an error of fact/law, the committee must only look at whether the award enables one to follow the tribunal’s reasoning from Point A to Point B and eventually, to its conclusion. Failure to deal with crucial and decisive arguments submitted to the tribunal can also justify annulment under art 52(1)(e) according to some ad hoc committees. Annulment process – applications for annulment must be made in writing to the sec-gen who verifies their prima facie admissibility before registering them. Must be made within 120 days after the award is rendered and must contain grounds which it is based. For the alleged corruption of an arbitrator, time starts to run once the corruption is discovered within the limit of three years. Members (3) of the ad hoc committee are appointed by the chair of the admin council and the parties and none should have the same nationality as the parties/arbitrators of the original tribunal or should have been appointed to the panel of arbitrators. Proceedings are conducted according to the same rules as for the original proceedings. If a ground for annulment is found, the committee has discretion whether or not to annul the entire award or just parts of it. It can’t modify the award or substitute its decision for that of the tribunal. Upon annulment, the dispute will be submitted to a new tribunal constituted in the same way as the original one. This new tribunal isn’t bound by the reasoning of the ad- hoc committee and its award may be subject to annulment proceedings. Recognition and enforcement ICSID awards are subject to a special regime for recognition contained in art 54 of the Convention. All contracting states are required to recognise the award and enforce its pecuniary obligations as if it were a final judgment of the court of the state. This obligation exists where or not the state or its nationals were party to the proceedings. The enforcement procedure only covers the pecuniary obligations. Orders for specific performance or other non-pecuniary obligations must be enforced under the New York Convention or the law of the state of enforcement. Art 54 doesn’t contain any grounds upon which recognition and enforcement can be denied/reviewed. Those grounds can only be raised within the framework of an annulment procedure. If not, the party seeking recognition and enforcement needs to furnish a copy of the award certified by the sec-gen to the competent authority as named by the state. Art 54 doesn’t demand preferential treatment of awards so a state party can resist execution by invoking sovereign immunity if that defence would also exist in relation to a domestic

of the findings on the merits, it followed the grounds for annulment invoked in the application. Manifest excess of powers Lack or excess of jurisdiction – an example would be where there is no jurisdiction or a decision goes beyond an existing jurisdiction. The requirements for jurisdiction are contained in art 25 and can form the basis for a complaint of lack of jurisdiction e.g. nationality requirements, no legal dispute arising directly out of an investment. Non-exercise of jurisdiction – an ICSID tribunal commits an excess of powers where it exercises jurisdiction it doesn’t have under the agreement or treaty/ICSID convention and also if it fails to exercise a jurisdiction which it possesses under those instruments. This amounts to a manifest excess of powers (Vivendi). In Vivendi, any breaches of the BIT by the authorities of Tucumán were attributable to Argentina under the rules of state responsibility. Failure to apply the proper law – this ground for annulment was applied in Klöckner I and Amco I but refused to be applied in Mine, Wena and Vivendi. Serious departure from a fundamental rule of procedure Impartiality – raised in Klöckner I on the basis of the award’s style, in Amco I on the way the tribunal had dealt with the evidence before it and both allegations were rejected by the committees. Right to be heard – a complaint that the award was based on a theory that had not been discussed by the parties before the tribunal. The committees have rejected the idea that the tribunals are restricted to the arguments presented to them by the parties. A failure to anticipate an argument that appears convincing to the tribunal and the resulting failure to address it does not find a remedy in annulment. Deliberation – in view of the secrecy of tribunal deliberations, it’ll be difficult for an ad hoc committee to judge the seriousness of the deliberation. Evidence and proof – this is a complaint about the way tribunals deal with evidence and proof, especially the allocation of the burden of proof. Wena – the applicant stated that the tribunal had committed an erroneous reversal of the burden of proof but the committee found that the applicant had not identified the rule it was purporting to rely on. The committee stated that it was incumbent upon the parties to produce evidence and the tribunal’s power to call upon the parties to produce further evidence was discretionary. Failure to state reasons This is the most difficult ground for annulment to apply and to analyse. Applications for annulment have repeatedly alleged an absence of reasons or other defects in the tribunal’s reasoning. Absence of reasons – this is the absence of reasons on particular points contained in the award. In Klöckner I the committee found that the tribunal had imposed an obligation of

result without explaining the reasons for doing so. However, in Amco I and Mine, the committee reconstructed the missing reasons from the awards and declined to annul on this ground. In Vivendi, the committee found that the tribunal had given full reasons for the dismissal of the federal claims. Insufficient and inadequate reasons – this is a subjective criterion. Committees have grappled with the problem of finding a standard for this concept. This claim was accepted in Klöckner I because the committee looked the quality and correctness of the reasons. Contrary reasons – contradictory reasons amount to a failure to state reasons. In Amco I, contradictor reasons were found to exist with respect to the calculation of the amount of the investment. In Vivendi, the committee confirmed that contradictory reasons might cancel each other out. Failure to deal with every question – this is not listed as a separate ground but committed agreed that this could lead to annulment but not whether the appropriate ground would always be failure to state reasons. Other possibilities of appropriate ground could be excess of powers and serious departure from a fundamental rule of procedure. III Time limits Parties are subject to restraints as to timing of their complaints. Under Arbitration Rule 27, a failure to raise a violation of pertinent rules constitutes a waiver of the right to object. It’s not an option for a party to await the outcome of the proceedings on the merits without making an objection to jurisdiction, and then if the award turns out unfavourable, to request annulment on grounds of an excess of powers. In the annulment proceedings, a party may not present new arguments on fact and law that it failed to put forward in the original arbitral proceeding (Klöckner I and Mine). The time limit for annulment applications is found in art 52(2). IV Conclusion Wena and Vivendi demonstrate that ICSID’s review mechanism has found its proper place, abandoning the early activism of the Klöckner case and presenting itself as an unusual remedy for unusual situations. Christopher Schreuer: revising the system of review for investment awards Introduction There has been an increase in the number of annulment proceedings as a consequence in part, of the increase in the number of awards. Recently, there’s also been a problem with compliance with an increasingly hostile attitude towards investment arbitration in Latin America. Inconsistent decisions by tribunals have also raised concern. Many of the alternatives to the review system would require changes to existing treaties and this may be unrealistic. Changing the scope of review

current investment arbitration but could guarantee harmonization while leaving the tribunals their competence to adjudicate their cases. This mechanism wouldn’t require an amended to the ICSID convention because it can be created by the ICSID Administrative Council like the Additional Facility was. Delays caused by this mechanism would be much more limited than a formal appeals procedure. Preliminary rulings could help prevent the development of inconsistencies in the first place. If this system is introduced, we would need to work out under what circumstances a tribunal would request a preliminary ruling and whether it has an obligation to do so. Would these rulings then be binding on the tribunal or would they be recommendations? And lastly, how would the body be composed. Compliance and enforcement Challenging decisions goes in tandem with resisting compliance even after the obligation under the award has been confirmed. Argentina has developed a new theory that would subordinate compliance with a final ICSID award to prior enforcement by its own domestic courts. For an investor who has won an award, this would mean that they’d have to go through the domestic court system of the host state before receiving payment under the award. Therefore, Argentina would not be in default unless the until the investor has used the Argentine court system to enforce the award and has prevailed there. The primary obligation to abide by an award is under art 53. Where there is non-compliance then this means that there’s a breach of the convention and remedies are:

Enforcement under art 54 in the courts of all state parties to the convention
The revival of the right to diplomatic protection under art 27 Any attempt therefore to condition compliance with an award upon its prior enforcement through the award debtor’s courts is contrary to the convention. An important step to secure effectiveness of an award would be to require the posting of a security/performance bond by the award debtor seeking annulment as a condition for a stay of the award’s enforcement. If the challenge of the award is successful, the security is returned, if no, the award creditor may draw upon the security. Some ad hoc committees have required the posting of a bond and others have not. A practice that would make a stay of enforcement conditional upon posting of a security for the award’s eventual performance would serve a dual purpose; it would facilitate enforcement but it may also deter requests for annulment motivated by a desire to delay/avoid compliance. Promod Nair & Claudia Ludwig - ICSID annulment awards: the fourth generation (2010) Four annulment decisions were rendered in the summer of 2010; Sempra Energy v Argentina, Enron v Argentina, Helnan Hotels v Egypt and Vivendi v Argentina (II). Annulment as an ‘extraordinary remedy’

A defining characteristic of ICSID arbitration is its internal mechanism of reviewing awards. Applications to annul ICSID awards are heard by ad hoc committees convened specifically for this purpose by ICSID itself. The drafters of the ICSID (Washington) convention made a deliberate choice against a formal appeals procedure raking the view that an appeals system would increase the amount of time taken to reach a final decision escalating costs. Art 53 excludes appeal or other remedies except for those provided for in the convention. Art 52 provides grounds for the annulment of awards. Hans Van Houtte - annulment is a drastic and limited remedy. It is drastic because the decision doesn’t just alter some elements of the award, but invalidates it completely or in part. The only redress open to a party whose award has been annulled is to resubmit it to another tribunal. It is limited because the committee is not a court of appeal which rehears the substance of the dispute. It can only consider whether the award should be annulled on one of the grounds in art 52. Three generations of ICSID annulment decisions Christopher Schreuer classifies ICSID annulment cases into three generations:

First generation 1985-1986 – Klöckner I and Amco I. Awards were set aside on the ground that the tribunals had manifestly exceeded their powers. The committees faced criticism for re-examining the merits of the cases and failing to properly distinguish between annulment and appeal. Observers commented that ICSID would lose its appeal if committees followed these judgements accusing them of undermining the objective of finality of awards.
Second generation 1989-1992 – MINE v Guinea – the committee here held that the adequacy of the reasoning is not an appropriate standard of review under the provisions in art 52 because it draws the committee into examining the substance of the tribunal decision which would be an appeal which is against art 53. In Klöckner II and Amco II, the committees considered the resubmitted awards from the first generation cases and the applications for annulment were unsuccessful.
Third generation 2002-2009 – Wena, Vivendi and CMS decisions underlined that committees would only intervene in serious and important cases. In Wena the committee stated that it can exercise its discretion and explain a tribunal’s conclusion where an award showed a lack of reasons. CMS confirmed the decision in Vivendi where even if an award has serious errors and defects, annulment does not follow as an automatic consequence. The annulment process is not intended to give losing respondents a second bite at the cherry providing a fully-fledged right of appeal, on the other hand, the process seeks to ensure a minimum level of oversight over ICSID tribunals which helps preserve the legitimacy of the system. The following principles regarding the scope of committees were established: -narrow and limited mandate -cannot correct errors of law -enjoy a certain degree of discretion -may reconstruct the reasons if the tribunal has failed to provide them

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