Part 1:  Enforcement of Arbitral Awards

            Since the mid–twentieth century, nations around the world have encouraged international investment by agreeing to arbitrate disputes with foreign investors, allowing for the straightforward recognition and enforcement of arbitration awards against foreign states. The global trend towards economic nationalism over the last decade has called into question all three of these accountability—and, fundamentally, rule-of-law—measures, and threatens to limit the availability of legal recourse against foreign states and to disrupt investors’ commercial expectations. 

            This Note is the first in a series of notes that will unpack all three trends, and predicts that the policy direction the U.S. takes is likely to have an outsized influence on the long term prospects for protection of the rights of investors in foreign states.  The United States was at the forefront of these globalization initiatives for most of the 20th and early 21st centuries, but during the Trump administration, championed the retreat towards mercantilism. 

            While the Biden administration has been often portrayed as repudiating international trade liberalization, the reality is more schizophrenic, especially when it comes to arbitration between foreign states and investors.  Until recently, the administration has largely taken only symbolic moves against investment treaty arbitration.  But on February 2, 2024, the administration urged the U.S. Court of Appeals for the D.C. Circuit to adopt a rule that would allow foreign states to systematically repudiate their arbitration obligations embodied in treaties and contracts.  If its view is adopted by the courts, it will devastate the regime for investment treaty arbitration in the United States, and perhaps worldwide.

I. The (Incomplete) Turn Against Investment Treaty Arbitration Agreements

            Treaty-based investment protections date back centuries.  The Treaty of Paris (1783), which ended the American Revolutionary War, required the newly-independent United States to return property expropriated from British subjects and to enforce debts owed to British subjects.[1]  But by the mid-twentieth century, many “representatives of the newly independent and underdeveloped countries questioned whether rules of state responsibility toward aliens can bind nations that have not consented to them and” argued that traditional protections to foreign investors “reflect ‘imperialist’ interests and are inappropriate to the circumstances of emergent states.”[2]  To signal that they would not expropriate foreign nationals’ property, many developing states entered into investment treaties guaranteeing foreign nationals and companies the right to arbitrate disputes concerning the expropriation of their property.  Investment treaties proliferated during the 1980s and 1990s as world trade and cross-border investment flows increased.[3]  These treaties generally provided for arbitration before long-established international forums like the International Centre for Settlement of Investment Disputes (ICSID) (1966) which was established for the sole purpose of handling investor-State disputes or ad hoc arbitration under the United Nations Commission on International Trade Law (UNCITRAL) Rules.[4]  There are now more than 3,200 bilateral investment treaties, a large number of which are between developing states.[5] 

            The United States was originally one of the most enthusiastic proponents of investment treaty protections and investment treaty arbitration.[6]  These protections were logical corollaries of the “Washington Consensus.”[7]  But in recent years, it has begun to turn against investment treaty arbitration, contending that such arbitration agreements infringe national sovereignty and impede public regulatory measures.[8]

            To illustrate, during their 2016 Presidential election campaigns, both Donald Trump and Hillary Clinton opposed the United States ratifying the Trans-Pacific Partnership (TPP)—a free-trade agreement involving eleven other countries—despite Clinton previously praising the agreement while she was Secretary of State.[9]  Clinton cited the TPP’s inclusion of investment treaty arbitration provisions as reason for her apparent change of mind.[10]  She also warned in her 2014 memoir that such agreements gave “investors the power to sue foreign governments to weaken their environmental and public health rules,” referencing a case in which Philip Morris restructured its Australian operations to distribute through a Singaporean subsidiary specifically so that it could invoke a Singapore-Australia bilateral investment treaty to challenge Australian tobacco regulations.[11]  (Philip Morris ultimately lost the arbitration on the merits.[12]) 

            President Trump translated this opposition to investment treaty arbitration into U.S. policy.  He withdrew the United States from the TPP shortly after assuming office.[13]  He also negotiated with Canada and Mexico to replace the North American Free Trade Agreement (NAFTA) with the United States-Mexico-Canada Agreement (USMCA)—further weakening investment treaty arbitration provisions.[14]  Under NAFTA, the state parties consented to arbitration with one another’s investors, and the state parties also later ratified the ICSID Convention, which sharply limits the availability of annulment procedures and streamlines recognition and enforcement of awards.[15]  USMCA, by contrast, provided that Canadian investors would receive no investor-state protections and limited Mexican and U.S. investor protections.[16]

            The United States’s turn against investment treaty arbitration has not occurred in isolation.  In recent years, Bolivia, Ecuador, India, Indonesia, and South Africa have begun the process of terminating their investment treaties, and many countries have begun withdrawal from the ICSID Convention as well.[17]  In 2020, 23 European Union (EU) member states (i.e., all EU member states except Austria, Finland, Ireland, and Sweden) entered into an agreement that terminated more than 130 intra-EU investment treaties.[18]

            The Biden administration’s position towards investment arbitration has been less consistent.  In April 2023, National Security Adviser Jake Sullivan gave a speech to the Brookings Institution in which he declared that U.S. global economic policy had become outdated, and announced that the United States would “forge a new consensus” based on a “modern American industrial strategy.”[19]  Sullivan’s speech did not mention investment treaty arbitration specifically, but the speech represented a shift away from deregulation, privatization, and trade liberalization—the ideas that drove states to embrace bilateral investment treaties in the first place.[20]

            Many have tried to capitalize on the Biden’s administration apparent philosophical outlook by pressing it to oppose investment treaty arbitration.  In November 2023, more than 200 civil society organizations urged the administration to remove investment treaty arbitration provisions from its existing treaties—contending that the investment treaty “regime has been especially detrimental to public health, climate and environmental protections, Indigenous land rights, financial regulations, and democratic sovereignty.”[21]  Citing similar concerns, Senator Elizabeth Warren and thirty-two other Democratic Senators and U.S. Representatives urged the administration “to pursue the removal of [investment treaty arbitration] provisions from the United States’ existing trade and investment agreements.”[22]

            But while President Biden came out against investment treaty arbitration during his 2020 presidential campaign, he has taken no actions to remove arbitration protections from treaties.[23] 

II. The Turn Against Investment Treaty Arbitration Enforcement

            The shift in national attitudes towards investment treaty protections is not the only part of the story.  States are increasingly refusing to pay awards in favor of foreign investors.  This marks a sharp divergence from past practice.  In the 2000s and early 2010s, the vast majority of states voluntarily complied with investment treaty arbitral awards, with only pariah states declining to systematically pay arbitral awards.[24] 

            All of that has changed, with the European Union leading the way following its decision to undermine the enforceability of arbitration awards issued against EU states.[25] A pair of Court of Justice of the European Union decisions, Achmea v. Slovak Republic (2018) and Republic of Moldova v. Komstroy LLC (2021), recently held that arbitration clauses in a BIT and the Energy Charter Treaty (1994), respectively, were incompatible with EU law.  Spain has since argued that, as a consequence of these decisions, some of its treaty arbitration obligations are invalid as a matter of law. 

            This effort has had mixed success worldwide, with some countries choosing to enforce arbitral awards against EU states notwithstanding the EU’s efforts to undermine investment treaty arbitration, and others still undecided.  In the United Kingdom, for example, the English Commercial Court held in Infrastructure Services Luxembourg S.a.r.l v. Kingdom of Spain (2023) that Spain was required to pay a €120 million arbitral award under the ICSID Convention, and that the U.K. would be in breach of its ICSID obligations if it were to deny recognition to the award.[26]  Australia’s High Court came to the same conclusion in April 2023.[27] 

            U.S. courts, by contrast, have come to diverging conclusions.  In February 2023, a judge in the U.S. District Court for the District of Columbia decided, in two cases, that Spain was not immune from an action to enforce an arbitral award, and rejected Spain’s argument that Achmea and Komstroy negated the validity of the underlying arbitration agreement.[28]  But a month later, a different judge on the same court came to the opposite conclusion in another arbitration enforcement action against Spain.[29]

            On February 2, 2024, the Biden administration filed an amicus brief in the D.C. Circuit appeal from these decisions, and its argument was nothing short of a bombshell.  It took the position that a U.S. court seeking to confirm the arbitral awards against Spain must assess for itself whether Spain’s arbitral agreement was valid.[30]  It contended that foreign states had the power to challenge the existence of an arbitral agreement in this way, even when the arbitration clause assigns this responsibility to the arbitrators, the arbitrators find that there is a valid arbitration agreement, and notwithstanding the fact that U.S. legislation requires all awards issued under the ICSID Convention to be afforded the same “full faith and credit” that state court judgments would receive.[31]  The brief did not expressly opine on whether U.S. courts would have to apply EU law (which, in the Achmea and Komstroy decisions, concluded that certain EU arbitration provisions were incompatible with EU law) when deciding whether an arbitral agreement exists, but it seemed to imply as much, characterizing Spain’s efforts to overturn awards in European courts as involving “the application of EU law to member states and their citizens.”[32]

            The Biden administration’s view, if adopted, would have a seismic impact on foreign sovereign litigation.  As a legal matter, states enforcing New York Convention awards may decline enforcement if they find that the parties who agreed to arbitration were “under some incapacity,” but such an inquiry into the validity of an award governed by the ICSID Convention would breach the United States’ treaty obligations.[33]  In terms of policy, one of the principal objectives of treaties like the New York Convention and the ICSID Convention is to prevent the losing party from relitigating issues the parties to the arbitration agreed should be decided by the tribunal during enforcement proceedings.[34]  But the Biden administration’s position would require U.S. courts to conduct a searching inquiry into whether the sovereign’s facial agreement to arbitrate is valid under its own domestic law.  A foreign state could thus turn a simple action to enforce an otherwise valid arbitral award into a mini-trial as to whether the cabinet-level minister who signed the arbitration agreement had domestic legal authority to do so.  These arguments have been used opportunistically by sovereigns before outside the arbitral context, and can be tremendously expensive and time-consuming to litigated.[35]  And such cases are most legally complicated when the countries bringing such challenges lack strong rule-of-law traditions and clear legal standards, which, in turn, are often the countries most likely to default on their arbitral obligations and raise spurious authority defenses in bad faith.  Such a regime would profoundly undermine the point of arbitration clauses, which investors negotiate for because they presume that arbitration is a comparatively fast and inexpensive way to resolve disputes.

            Whatever the D.C. Circuit (and, if it comes to that, the Supreme Court) decides will impact the future of anti–investment treaty arbitration efforts, both given the United States’ global influence, but also due to its unique role as the primary enforcement jurisdiction in the world.  This role derives from, among other things, expansive post-judgment discovery available in U.S. courts that extends to overseas assets, the Supreme Court’s holding in 2014 that foreign states cannot raise foreign sovereign immunity as a defense to discovery, and the primacy of the dollar in global finance.[36]  Skilled and sophisticated firms pursuing enforcement of arbitration awards typically obtain confirmation of an award in the U.S. to take advantage of the extraordinarily broad world-wide asset discovery available in the U.S. courts.[37] If the United States were to follow the Biden administration’s lead, endorse the EU’s anti–investment treaty arbitration strategy, and hold that EU arbitral awards are unenforceable in U.S. courts, it would have a very damaging effect on arbitral enforcement worldwide—and encourage other states to follow suit.  By contrast, if the United States were to hold the line and confirm EU arbitral awards, the EU could be under pressure to abandon its crusade and begin complying with arbitral awards again.

III. The United States’ Future Leadership

            It remains to be seen how permanent or widespread these headwinds against arbitration and debt enforcement will be.  Many of the original justifications for the spread of investment treaty arbitration and enforcement of contractual rights against sovereigns could hold strong way. 

            But whatever position the United States takes on these issues will matter a great deal.  The U.S. remains preeminent in global finance and international economic policy—thanks in part to its support for state accountability over the last several decades—and its support, or lack thereof, for arbitration, award enforcement, and the rule of law will influence global policy for the next generation, just as its commitment to those precepts influenced the last generation.

            The risk now, though, is that the United States’ turning away from international state accountability in the arbitral context will have broader reverberations.  Writing in 1951, the great international law scholar, human rights law advocate, and future International Court of Justice judge Hersch Lauterpacht described the old regime, in which foreign states were immune in litigation, “amount[ed], in fact, to a denial of justice.”[38]  And such denials of justice had spillover consequences.  The Washington Consensus of the 1980s and the 1990s correlated, after all, with the global expansion of democracy.[39]  The recent turn towards economic nationalism, and away from state accountability, by contrast, has come about concurrent with the rise of strongman politics, the return of great state conflict, and a shift in global capital to less democratic states.[40]  No regime is perfect, and there are of course many ways in which the global financial regime could be improved.[41]  But abandoning the rule of law and state accountability are hardly the place to start.

***

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Endnotes:

[1]  Paul B. Stephan, The World Crisis and International Law 149 (2023).

[2]  Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 430 (1964); see also Martin Daunton, The Economic Government of the World 1933-2023, at 542-52 (2023).

[3]  See Stephan, supra note 1, at 149-50, 228-29.

[4]  See Daunton, supra note 2, at 624.

[5]  See Gary B. Born, International Arbitration: Law and Practice 496 (3d ed. 2021).

[6]  See id.

[7]  So-called because it represented the “lowest common-denominator of policy advice being addressed by [the International Monetary Fund, the World Bank, and the U.S. Treasury] … as of 1989”—which emphasized, among other things, “trade liberalization,” “free inflows of foreign direct investments,” and “secure property rights.”  Daunton, supra note 2, at 599 (first quoting John Williamson, What should the Bank think about the Washington consensus?, 15 World Bank Rsch. Observer 251, 251 (2000)).

[8]  See Stephan, supra note 1, at 229.

[9]  See James McBride, et al., What’s Next for the Trans-Pacific Partnership (TPP)?, Council on Foreign Relations (last updated Sept. 20, 2021), https://perma.cc/Y6V5-DRCW.

[10]  See Shawn Donnan, US looks to TPP to reform arbitration system, Financial Times (Nov. 8, 2015), https://www.ft.com/content/d7379996-862b-11e5-90de-f44762bf9896.

[11]  See Hillary Clinton, Hard Choices 428 (2014).

[12]  See Stephan, supra note 1, at 152-53.

[13]  See McBride, supra note 9.

[14]  See Born, supra note 5, at 494-95.

[15]  See id. at 494.

[16]  Such limits included requiring U.S. investors to exhaust local remedies for 30 months before commencing arbitration (unless such exhaustion is “obviously futile”); and permitting only discrimination and direct expropriation claims while prohibiting claims for indirect expropriation, violation of the minimum standard of treatment, or violation of an investor’s legitimate expectations.  See id. at 495.

[17]  Stephan, supra note 1, at 230-31.

[18]  See Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union (May 29, 2020), http://tinyurl.com/ycyb666k.

[19]  Remarks by National Security Advisor Jake Sullivan on Renewing American Economic Leadership at the Brookings Institution (Apr. 27, 2023), https://perma.cc/S8W9-SA9J.

[20]  See Matthew Duss & Ganesh Sitaraman, The Era of Neoliberal U.S. Foreign Policy Is Over, Foreign Pol’y (May 18, 2023), https://foreignpolicy.com/2023/05/18/neoliberal-foreign-policy-biden-sullivan/; Stephan, supra note 1, at 150-51.

[21]  Letter from Public Citizen, et al., to President Joseph R. Biden (Nov. 1, 2023), https://perma.cc/4S8J-Z6CU.

[22]  Letter from Elizabeth Warren, United States Senator, et al., to the Honorable Katherine Tai, U.S. Trade Representative, et al. (Nov. 1, 2023), https://perma.cc/5Z9U-Q7F2.

[23]  See Carole Simson, Biden Comes Out Against ‘Special Tribunals’ For Corporations, Law360 (July 28, 2020), https://www.law360.com/articles/1295978/biden-comes-out-against-special-tribunals-for-corporations.

[24]  See Emmanuel Gaillard & Ilija Mitrev Penusliski, State Compliance with Investment Awards, 35 ICSID Rev. – Foreign Inv. L.J. 540, 541-42 (2020) (collecting authorities).

[25]  See Nikos Lavranos, Report on Compliance with Investment Treaty Arbitration Awards 2023 (2d ed.), https://www.internationallawcompliance.com/wp-content/uploads/2023/10/FULL-Report-2023-DEF-25-OCT-.pdf.

[26]  Infrastructure Services Luxembourg S.a.r.l v. Kingdom of Spain, [2023] EWHC 1126 (Comm.).

[27]  Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. & Anor [2023] HCA 11.

[28]  NextEra Energy Global Holdings B.V. v. Kingdom of Spain, 656 F. Supp. 3d 201 (D.D.C 2023); 9REN Holdings v. Kingdom of Spain, No. 19-cv-01871 (TSC), 2023 WL 2016933, at *1 (D.D.C Feb. 15, 2023).

[29]  Blasket Renewable Invs, LLC v. Kingdom of Spain, 665 F. Supp. 3d 1 (D.D.C. 2023).

[30]   See generally Br. of the United States as Amicus Curiae, Nextera Energy Global Holdings B.V. v. Kingdom of Spain, Nos. 23-7031, 23-7032, 23-7038 (Feb. 2, 2024) (Nextera Amicus).

[31]  22 U.S.C. § 1650a.

[32]  Br. of the United States as Amicus Curiae 28, Nextera Energy Global Holdings B.V. v. Kingdom of Spain, Nos. 23-7031, 23-7032, 23-7038 (Feb. 2, 2024).  This brief represents a striking about-face from just two years ago, when the Biden administration told the same court that an “award need not be valid to provide the district court with jurisdiction under the arbitration exception, as the validity of an arbitral award is a merits question.”  Br. of the United States as Amicus Curiae 7, Process & Indus. Devs. Ltd. v. Fed. Republic of Nigeria, No. 21-7003 (Jan. 20, 2022).  The Biden administration’s most recent brief purports to distinguish questions about an arbitral agreement’s validity from the “antecedent determination made that the parties have actually formed an agreement to arbitrate.”  Nextera Amicus, supra note 30, at 16.

[33]  See N.Y. Convention art. V(1)(a); ICSID Convention art. 54(1).

[34]  See, e.g., Process & Indus. Devs. Ltd. v. Fed. Republic of Nigeria, 27 F.4th 771, 776 (D.C. Cir. 2022).

[35]  See, e.g., Themis Cap., LLC v. Democratic Republic of Congo, 881 F. Supp. 2d 508, 532 (S.D.N.Y. 2012) (denying summary judgment on breach of contract action, and ordering a case schedule involving substantial discovery, because the Democratic Republic of Congo denied that its interim Minister of Finance and Budget had authority to sign the contract); see also Themis Cap., LLC v. Democratic Republic of Congo, 626 F. App’x 346, 348 (2d Cir. 2015) (ultimately affirming judgment, issued two years later, that found that the minister did have such authority).

[36]  See Republic of Argentina v. NML Capital, Ltd., 573 U.S. 134, 138-46 (2014).

[37]  See, e.g., Doraleh Container Terminal SA v. Republic of Djibouti, No. MC 23-83 (BAH), 2023 WL 6160015, at *3 (D.D.C. Sept. 21, 2023) (denying motion to quash subpoenas seeking “eleven years’ worth of SWIFT messages that contain any of 338 keywords”).

[38]  Hersch Lauterpacht, The Problem of Jurisdictional Immunities, 28 Brit. Y.B. Int’l L. 220, 236 (1951).

[39]  See, e.g., Samuel P. Huntington, Democracy’s Third Wave, 2 J. of Democracy 12 (1991).

[40]  See generally Gideon Rachman, The Age of the Strongman: How the Cult of the Leader Threatens Democracy Around the World (2022); cf. Janan Ganesh, The world is better seen from Dubai than from Davos, Financial Times (Jan. 19, 2024), https://www.ft.com/content/9e6a380f-4377-4cfa-aa0d-c5ae5e9cc483 (“When the world was American-led, market-based and ever more democratic, Davos was a useful distillation of it.  Dubai, where the US is one influence among several, capital more state-directed and political values negotiable, is now a more faithful portrait of the world.”).

[41]  See, e.g., Erica Benner, What the west forgot about democracy, Financial Times (Jan. 17, 2024), https://www.ft.com/content/f5fc04dd-6885-4835-8d5a-b07a344d51ee.