Arbitral Awards v State Immunity – a Pyrrhic Victory in the Australian High Court?

The High Court has handed down its anticipated decision in Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l [2023] HCA 11. The decision clarified several key questions with regard to the principles of foreign State immunity and how it operates in Australia, including the differences between the concepts of “recognition”, “enforcement” and “execution” – key concepts in international arbitration whose meaning was elusive. However, it remains unclear how this decision would have any material effect on a foreign State, and reiterates the difficulties a party will face when seeking to recoup losses against a recalcitrant Sovereign.

Background

Infrastructure Services Luxembourg S.à.r.l (Respondent) commenced arbitral proceedings against the Kingdom of Spain (Spain) for breaching its fair and equitable treatment obligations under the Energy Charter Treaty in relation to some of the Respondent’s investments into renewable energy in Spain under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965) (Convention). The Respondent obtained a very substantial award (worth €101m) and sought to enforce that award in Australia under the International Arbitration Act 1974 (Cth).

However, since one of the parties involved in the dispute was a State, the Foreign States Immunities Act 1985 (Cth) (Act) would apply. Section 9 of of the Act states that a foreign State is immune from the jurisdiction of Australian courts except as provided by that Act.

Section 10 of the Act further provides that one such situation where immunity does not apply is when the foreign State has subjected itself to Australian jurisdiction, including under a treaty (relevantly here, the Convention). It was argued that because Spain is a party to the Convention, it had already assented to three critical articles therein which concerned recognition and enforcement of the award. The details of those articles are as follows:

• Article 53 provides for the binding nature of the award;
• Article 54 provides for:
  • recognition of the award by a Contracting State as binding,
  • enforcement of the award within a Contracting State as if it were a final judgment of a court in that State, and
  • execution of the award which is to be governed by the laws of the State concerning execution; and
• Article 55 recognises of the long-standing principle of sovereign immunity, but expressly provides that this only applies to execution and not recognition of the award.

Judgments of lower courts

At first instance, a single judge of the Federal Court (Stewart J) held that Spain’s assent to the three articles (by virtue of it being a party to the Convention) meant that it had waived its immunity from recognition and enforcement, but not from execution, of the award. His Honour therefore made orders against Spain requiring it to “pay the applicants €101 [million]”.

On appeal, the Full Court of the Federal Court (Allsop CJ, Perram and Moshinsky JJ) largely agreed with the primary judge in holding that Spain had waived its immunity only with respect to recognition, not execution, but expressed some doubt as to whether enforcement had also been waived. On this basis, their Honours held that the original orders made by the primary judge went too far because they “require[ed] Spain to do something” (ie a positive act). New orders were made recognising the award as binding on Spain and noting that “judgment be entered” against Spain for the €101 million, but crucially provided that nothing in that order “shall be construed as derogating from the effect of any law relating to immunity of [Spain] from execution”.

The High Court’s judgment

Two questions fell to be considered by the High Court (at [7]):

1. whether Spain’s agreement to Articles 53-55 of the ICSID Convention involved any waiver of foreign State immunity from the jurisdiction of Australian courts; and
2. whether Spain’s amenability to jurisdiction is limited to “bare recognition” or to “recognition” and “enforcement” of the award; and whether the orders made by the Full Court below amounted to enforcement.

In a unanimous decision, the High Court answered “yes” to question (i) and that in respect of question (ii), Spain’s amenability to jurisdiction extends to both “recognition” and “enforcement” of the award.

In doing so, the High Court examined the operation of the Act with respect to the concept of foreign State immunity and how that immunity could be waived. Then, their Honours considered the extent to which Spain had so waived that immunity by its entry into the Convention. This involved a detailed analysis of the meaning of (and importantly the differences between) the concepts of recognition, enforcement and execution.

Waiver of foreign State immunity from jurisdiction

In determining how immunity could be waived under the Act, the High Court undertook a detailed exposition of the Act and the principles of international law concerning foreign State immunity and its waiver. Relevantly in this case, their Honours arrived at the conclusion that the insistence of international law that a waiver of immunity in a treaty must be “express” merely means that “any inference of a waiver of immunity must be drawn with great care when interpreting the express words of that agreement in context”, and “does not deny that implications are almost invariably contained in any (expressed) words of a treaty” (at [26]).

On that basis, the High Court held that s 10(2) of the Act does not preclude the possibility that a foreign State has waived its immunity by implications drawn from the context and purpose of the text of a treaty. Thus, the question of whether Spain has waived its immunity depended on the text and context of the Convention of which it is a party, in particular with respect to Articles 53, 54, 55.

Articles 53, 54 and 55 – the meaning of recognition; enforcement and execution

The High Court accepted that the meaning of the words “recognition”, “enforcement” and “execution” has been plagued with conflation and misuse in the past, particularly in the context of international arbitration. However, the correct view is that they are all distinct concepts.

With respect to the distinction between “recognition” and “enforcement” in the Convention, the High Court held that the former only extends to an obligation to recognise that an award rendered pursuant to the Convention “as binding” (at [43]). On the other hand, “enforcement” instead goes to the “pecuniary obligations imposed by the award” and extends to a duty to enforce those pecuniary obligations “as if the award were a final judgment of a court in that State”. The distinction is made even clearer once one realises that “recognition” and “enforcement” is severable, in the sense that the party entitled to an arbitral award might seek “recognition” of that award without necessarily seeking “enforcement” of the underlying pecuniary obligations imposed by the same (at [43]).

Crucially, these two concepts are also distinct from “execution”.

The High Court held that “the obligation to “enforce” the pecuniary obligations imposed by an award as if the award were a final judgment of a court in the Contracting State stops short of an obligation to ensure their execution” [our emphasis], and that whether execution is ensured is left to domestic law of each of the State parties to the Convention.

In other words, the three concepts are “analytically distinct” (at [45]) and can be summarised as follows:

• “recognition” means the process whereby the domestic court determines that an award “is entitled to be treated as binding”;
• “enforcement” denotes the transformation of an arbitral award into a judgment of the domestic court which enjoys the same status as any of its other judgments; and
• “execution” extends to the “means by which a judgment enforcing an international arbitral award is given effect”, normally through measures against property under a writ of execution.

A large part of Span’s submission concerned differences in the French and Spanish versions of the Convention and their impact on the meaning of the words. However, the High Court dismissed these arguments and held that there were no relevant differences.

Extent of Spain’s waiver of immunity under Articles 53, 54 and 55

Having distinguished the three concepts, the only question that remained was whether the texts of each of Articles 53, 54 and 55 were sufficiently clear to render Spain, by virtue of its assent to these Articles, to have waived its immunity in respect of each of the three obligations of “recognition”, “enforcement” and “execution” under the Act.

After a careful consideration of the text and context of the relevant Articles, as well as other authoritative writings on the subject, the High Court held that the relevant Articles, in particular Article 54(1), amounted to a waiver of immunity in relation to recognition and enforcement (but not execution) on the part of any member State to the Convention, notwithstanding any express mention of a waiver.

In conclusion, the High Court dismissed the appeal and left the orders made by the Full Court below undisturbed. 

Impact and takeaways

Private parties should carefully consider the High Court’s decision, especially when negotiating new agreements and considering foreign investments. A waiver by a foreign State of its immunity against enforcement and recognition, does not necessarily mean it has also waived immunity against execution.

Without execution, the beneficiary of an arbitral award against a foreign State may not have any practical means of receiving payment. All is not lost:

1. The High Court was silent as to whether the operation of the exceptions to immunity from execution are affected by the judgment. The operation of the Australian Foreign State Immunities Act 1985 (s 32 which relates to commercial property and s 33 relating to immovable property) are not altered, meaning that claimants can still recover commercial property (defined as property other than diplomatic property or military property “that is in use by the foreign State concerned substantially for commercial purposes”). In many cases, it is likely that award (and judgment) beneficiaries would be seeking to execute against commercial property of the foreign State (such as shares or money in bank accounts).

2. The High Court also reinforced the idea that any waiver of immunity from execution must be “express” to attract s 10(2) of the Foreign Immunities Act. If a private party were to introduce a clause in its contractual dealings with a foreign State, requiring the State expressly waive its immunity from recognition, enforcement, and execution, it is unlikely that immunity would defeat execution.

3. A further avenue to avoid State immunity arises where the claimant can show that the transaction between itself and the foreign State was of a commercial character, meaning “a commercial, trading, business, professional or industrial or like transaction” (eg a contract for goods, an agreement for a loan or some other transaction for or in respect of the provision of finance, or a guarantee or indemnity in respect of a financial obligation). If this can be shown, foreign State immunity will not be recognised by Australian courts, even without an express waiver (s 11 of the Foreign States Immunities Act 1985; see ACCC v PT Garuda Indonesia Ltd [2017] HCA 21).