Arbitration and the Role of Immunity in Investor-State Disputes

Investor-state arbitration has emerged as a crucial dispute resolution process between host governments and international investors in recent decades. Concerns over the execution of arbitration regulations have grown in significance as more and more international investors use arbitration courts to settle their conflicts with host governments. State immunity is one of the trickiest legal challenges in this procedure. A large number of governments have consented to arbitration through multilateral accords or bilateral investment treaties (BITs). The execution of the ensuing arbitral rulings, particularly about the seizure of state assets, is not always covered by this kind of consent, though. The following research examines the continuous tension between state sovereignty and the effectiveness of investor-state arbitration. It will examine how jurisdictional and execution immunities function in the framework of ICSID and other arbitration systems, as well as how courts worldwide have reacted to enforcement actions. This post seeks to determine whether current views of sovereign immunity compromise the enforcement of awards and the legitimacy of the ISDS system itself by examining recent case law and treaty practices.

One of the most debated issues in the international investment environment is sovereign immunity in investor-state arbitration between jurisdictional immunity and execution immunity. Under the principle of sovereign immunity, often known as state immunity, one sovereign state cannot be sued in the courts of another without the state’s consent. This aspect of the sovereign immunity belongs to the jurisdictional immunity, and further reflects customary international law. While many states accept arbitration under international treaties through the ICSID and UNCITRAL frameworks, this consent to jurisdiction merely indicates that the state has agreed to be sued by another. However, sovereign immunity includes not only immunity from jurisdiction but also immunity from execution. Immunity from execution is for the protection from the award of the arbitration of one state’s property from seizing the state's assets without the consent of that state. Unlike the jurisdictional immunity, accepting being sued by another state through BITs between states, and under ICSID or UNCITRAL gives consent for the jurisdiction but not for the execution. Just because a state gave consent to be sued does not mean it can also be executed by that state. Even though the state secured an award, they might not get paid it. This has resulted in significant enforcement challenges for successful claimants, as some states use immunity defenses to prevent the execution of embassies, central bank reserves, and other assets used for public purposes. A great example of this is the Yukos v. Russia case. Even though the side of Yukos secured 50 billion USD they tried to seize the property on which Russia operates (for example: units of units, bank accounts, property belonging to civil servants). Russia did not accept it and did not pay by making a claim of execution immunity. It shows both theoretical and practical gaps. It reflects the reality that “even if you win the arbitration, you may not get the award.”

There are so many different approaches to the question of execution around the world. That is why there is no global consensus on ISDS. This has an impact on how arbitration awards are enforced in practice. A group of states with the most powerful economic and diplomatic relationships take a strict and conservative approach to executive immunity. Even when they consent to arbitration under international treaties, they regard immunity as an essential attribute of sovereignty. In this view, consent to arbitration does not imply consent to enforcement, and any attempt to seize state assets must be supported by an express, written waiver of immunity. The courts in these countries often defend state assets against enforcement actions in the absence of such a waiver. This strategy has become established in the national legal systems of countries such as the USA, the UK, Germany, Italy and, in practice, Russia. If an asset is being used for an economic or other purpose other than diplomatic or governmental, it may allow for enforcement even if there is no permission before. This more flexible approach helps strike a balance between the sovereignty of states and the rights of investors. However, even in this view, there are still some negatives that remain; the burden of proving the category of the asset rests with the investor, or enforcement may still be partial, political. Nevertheless, this approach is way more useful for keeping a balance between parties and not weakening the ISDS system.

As an option for a solution to enforcement challenges in investor-state arbitration, include clear waiver clauses. The state would have explicitly abandoned execution immunity for a certain type of assets, especially those not used for core sovereign functions. Reform initiatives within UNCITRAL and ICSID working groups have also urged the creation of model treaty wording that protects post-award enforcement mechanisms. In this way, states will not be able to evade from enforcement by invoking immunity after losing arbitration. Another possible solution is to make the national laws harmonized among nations. It may be made through international conventions (legally binding, like the Vienna Convention), or soft-law instruments (non-binding but guidelines like UN model laws). Right now, the legal landscape is fragmented because every state has its own approach to this. Harmonizing laws may reduce this effect.

In conclusion, state immunity, particularly execution immunity, poses an obstacle in practice to enforcement in investor-state dispute settlement. It also reduces the effectiveness of investor–state arbitration. Even though many governments agree to arbitrate disputes under the ICSID or UNCITRAL frameworks, this agreement sometimes does not permit enforcement, leaving investors with legally binding judgments but no practical solution. The diverse national approach ranges from strict immunity protection to flexible functional tests. It creates a fragmented and unpredictable enforcement system. To solve this problem, treaty reform efforts must be made by including explicit waiver clauses and supporting the harmonization of national laws through international conventions or soft-law instruments. The legitimacy of the international investment system and the balance between investor protection and state sovereignty can only be preserved by such structural changes.

REFERENCES

Happ, R., & Wuschka, S. (2023). Dispute Resolution in Investment Protection Agreements. Springer. https://doi.org/10.1007/978-3-662-64043-2

International Centre for Settlement of Investment Disputes. (2022). Working Paper #5: Proposals for Amendment of the ICSID Rules. Retrieved from https://icsid.worldbank.org/resources/rules-amendments/

United Nations Commission on International Trade Law. (2020). Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-ninth session (A/CN.9/1044). Retrieved from https://undocs.org/A/CN.9/1044

Yukos Universal Limited (Isle of Man) v. The Russian Federation, PCA Case No. AA 227, Final Award (18 July 2014). Retrieved from https://www.italaw.com/cases/1170