High Court rejects Spain's foreign state immunity claim and reinforces Australia's reputation as ‘pro-arbitration' - Arbitration & Dispute Resolution

In April 2023, the High Court of Australia handed down its long-awaited decision in Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. [2023] HCA 11, rejecting the application of foreign state immunity from suit to recognition and enforcement of arbitral awards made under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965¹ (ICSID Convention) and reinforcing Australia's reputation as a 'pro-arbitration' jurisdiction.

The High Court case was the first contested application in Australia for the recognition and enforcement of an arbitral award made under the ICSID Convention.

The Court considered the extent to which Spain's entry into the ICSID Convention constituted a waiver of foreign state immunity under the Foreign States Immunities Act 1985 (Cth) (FSIA) and unanimously dismissed an appeal from the Full Court of the Federal Court, confirming that Spain waived its immunity from the jurisdiction of Australian courts for the purposes of recognition and enforcement proceedings.

Background

From the late 1990s until around 2012, Spain adopted a number of regulatory measures aimed at incentivising investment in Spain's solar power and renewable energy industry, including introducing subsidies for renewable energy producers.

Based on these incentives, Eiser Infrastructure Ltd (Eiser), Energia Solar Luxembourg S.ὰ.r.l. (Energia), Infrastructure Services Luxembourg S.ὰ.r.l. (Infrastructure Services) and Energia Termosolar BV (Energia Termosolar) (together, Investors) collectively invested approximately €265.5 million in the Spanish renewable energy market.

Following the global financial crisis and a change in government in 2012, Spain reduced and eventually revoked the subsidy scheme, causing 'substantial harm' to the value of investments in Spain's renewable energy sector.²

The Investors claimed that Spain had failed to afford them fair and equitable treatment, as required under Article 10(1) of the European Energy Charter Treaty (ECT), ³and commenced two separate arbitration proceedings under the ICSID Convention in late 2013: the first by Eiser and Energia, and the second by Infrastructure Services and Energia Termosolar. The arbitrations produced findings in favour of the Investors, awarding Eiser and Energia €128 million, and Infrastructure Services and Energia Termosolar €101 million in damages, plus interest.

In 2019, the Investors commenced proceedings in the Federal Court of Australia to have the ICSID awards recognised and enforced in Australia as if they were judgments of the Court, claiming payment of the sums awarded, plus interest and costs.⁴ The matters were heard together.

Procedural history

Eiser Infrastructure Ltd v Kingdom of Spain (2020) 142 ACSR 616

Spain resisted the application for recognition and enforcement, claiming that it was immune from the jurisdiction of Australian courts pursuant to section 9 of the Foreign States Immunities Act 1985 (Cth) (FSIA). The Investors contended that Spain had waived its jurisdictional immunity by becoming a party to the ICSID Convention. The Investors invoked Articles 53 and 54 of the ICSID Convention, which provide that:

an ICSID award is binding on the parties and not subject to any appeal or other remedy, except for those found in the ICSID Convention (Article 53); and
each Contracting State (including Spain and Australia) must "recognise an award rendered pursuant to [the ICSID Convention] as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State" (Article 54).

The waiver argument was based on sections 9 and 10 of the FSIA. They provide that foreign states are immune from the jurisdiction of an Australian court, subject to several exceptions, including where they submit to jurisdiction, for example by way of a treaty (section 10(2)).

At first instance, the Federal Court (Stewart J) agreed with the Investors. Stewart J found that by becoming a party to the ICSID Convention, Spain had submitted to the Court's jurisdiction for the purposes of the awards' recognition and enforcement and thereby waived its ability to rely on immunity in the proceedings on foot. Spain had not, however, waived its immunity from execution.

In respect of immunity from execution, the Stewart J reasoned that this was expressly preserved under Article 55 of the ICSID Convention, which provides that "[n]othing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign State from execution".

Spain appealed the first instance judgment to the Full Court of the Federal Court. The award against Eiser and Energia was thereafter annulled and so the appeal was heard only as against Infrastructure Services and Energia Termosolar.

Kingdom of Spain v Infrastructure Services Luxemburg S.à.r.l. (2021) 284 FCR 319

On appeal to the Full Federal Court, Spain argued that the proceedings brought by Infrastructure Services and Energia Termosolar were recognition and enforcement proceedings, and that Article 55 should be read to preserve immunity for 'enforcement'. On this basis, Spain continued to maintain that it was immune from the jurisdiction of Australian courts in the proceedings brought by the Investors.

The Full Court disagreed with Spain although its finding departed from the judgment of Stewart J in one important respect. The Full Court held that Spain's entry into the ICSID Convention amounted to waiver of immunity from a proceeding for the recognition of an award. However this was not the case for execution, and perhaps not for enforcement. Perram J (Allsop CJ and Moshinsky J agreeing) identified "two cumulative reasons" for this conclusion.

Firstly, Article 54(1) and (2) of the ICSID Convention distinguishes recognition proceedings from enforcement proceedings "in a way which is dichotomous".⁵ In essence, Perram J reasoned, a party may elect to seek recognition of an award without seeking enforcement.
Secondly, and contrary to Stewart J's characterisation of the proceedings, the Full Court considered that Infrastructure Services and Energia Termosolar sought recognition of the ICSID award only, not recognition and enforcement. Under this characterisation, there was no ambiguity that Spain had submitted to the jurisdiction of Australian courts in a recognition proceeding pursuant to Article 54(2).

On this basis, the Full Court found that Spain was prevented from relying on jurisdictional immunity under section 10(2) of the FSIA.

Having considered that the Federal Court proceedings were merely to recognise the award, it was unnecessary for the Full Court to make findings on whether Spain would be immune from enforcement or execution. The Court did, however, correct the orders of Stewart J because they went beyond the scope of 'recognition only' and 'requir[ed] Spain to do something', namely pay the sums sought. The Full Court made new orders, including for the award to be recognised as binding and for judgment to be entered against Spain for €101 million.

In March 2022, the High Court granted Spain special leave to appeal the Full Federal Court's decision.

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

On 12 April 2023, the High Court dismissed Spain's appeal and upheld the orders of the Full Court with one important clarification. The High Court concluded that Spain's entry into the ICSID Convention amounted to waiver of foreign state immunity from the jurisdiction of Australian courts in proceedings to recognise and enforce an ICSID award but not in respect of execution.

The High Court's reasoning

Spain waived its foreign state immunity from jurisdiction

The question before the High Court was whether Spain's entry into the ICSID Convention and concomitant agreement to Articles 53–55 constituted a waiver of foreign state immunity from the jurisdiction of the Federal Court pursuant to section 10(2) of the FSIA.

Spain relied on international authorities to argue that section 10 of the FSIA permits an Australian court to recognise a waiver of foreign state immunity from jurisdiction only where the words of a treaty contain an 'express' waiver. Spain argued that this does not extend to circumstances where waiver is derived by implication from a treaty obligation that requires state parties to recognise awards as binding and enforce the pecuniary obligations imposed by an award, as required under Articles 53 and 54 of the ICSID Convention. Spain argued that the mere act of becoming a party to the ICSID Convention does not amount to a waiver of immunity, as it is not a sufficiently clear and unambiguous act.

The High Court found that a waiver by agreement for the purposes of section 10(2) of the FSIA can be inferred even if an international agreement does not expressly use the word 'waiver', provided that the implication is clear from the words used and the context.⁶ Employing this test, the High Court found that Spain's waiver for the purposes of section 10(2) was "unmistakable", and arose out of Spain's agreement to Articles 53–55 of the ICSID Convention – although this did not extend to a waiver from execution.

The meaning of 'recognition', 'enforcement' and 'execution'

The High Court also helpfully clarified the meaning of the terms 'recognition', 'enforcement' and 'execution' in Articles 53–55 of the ICSID Convention. The Court found that these terms have separate and distinct meanings:

The obligation to 'recognise' in Article 54(1) imposes an obligation to recognise an ICSID award 'as binding' and goes no further.
The obligation to 'enforce' in Article 54(1) expresses an obligation to enforce "the pecuniary obligations imposed by [the ICSID] award as if [the ICSID award] were a final judgment of a Court in [the Contracting] State".
The disjunctive 'or' in Article 54(2) 'makes plain that those two obligations ... are severable' and a party can seek recognition without seeking enforcement.
Article 54 distinguishes between 'recognition' and 'enforcement', on the one hand (Article (1) and (2)), and 'execution', on the other hand (Article 54(3)).
Article 55 makes clear that the obligation in Article 54(2) to 'enforce' the pecuniary obligations imposed by an ICSID award 'stops short of an obligation to ensure their execution'.

The Court adopted the definitions used in the recently approved version of the proposed Restatement of the Law: The US Law of International Commercial and Investor-State Arbitration:

Recognition is a court's "determination ... that an international arbitral award is entitled to be treated as binding", involving a court's "acceptance of the award's binding character and its preclusive effects".
Enforcement is "the legal process by which an international award is reduced to a judgment of a court that enjoys the same status as any judgment of that court".
Execution is "the means by which a judgment enforcing an international arbitral award is given effect. The execution process commonly involves measures taken against the property of the judgment debtor by a law-enforcement official ... acting pursuant to a writ of execution".

The Court observed that these definitions and distinctions align with several cases including Clarke v Fennoscandia Ltd 2008 SC (HL) 122 and TCL Air Conditioner (Zhongshan) Co Ltd v Judges of the Federal Court of Australia (2013) 251 CLR 533. They also align with academic commentary and the travaux préparatoires to the ICSID Convention.

The Court concluded that the orders made by the below courts were properly characterised as orders for recognition and enforcement, and that they should remain undisturbed as such.

Impact of the decision

As mentioned previously, the High Court's rejection of the application of foreign state immunity from suit to the recognition and enforcement of arbitral awards reinforces Australia's reputation as a 'pro-arbitration' jurisdiction.

Australia's support for enforcement of the award against Spain was also significant in light of ongoing debate on whether arbitration agreements in intra-EU bilateral investment treaties and the ECT as between the EU Member States, are inconsistent with EU law and unenforceable.

Spain relied on decisions of the Court of Justice of the European Union in Slovak Republic v Achmea BV⁷ and Republic of Moldova v Komstroy LLC,⁸ which determined that agreements to arbitrate in intra-EU bilateral investment treaties and the ECT are not applicable to intra-EU investor-state disputes. However, the High Court considered these decisions to be irrelevant because the relevant agreement which gave rise to a waiver of jurisdictional immunity resulted from Spain's entry into the ICSID Convention, not its entry into the ECT.

It is important to bear in mind, however, that from a practical perspective, the High Court's interpretation of Articles 53 and 54 of the ICSID Convention does not have any bearing on award execution, and questions remain as to whether execution will be successful. The High Court noted that:

"... a curiosity of the ICSID Convention is not that it requires recognition and enforcement of awards against foreign states, but that a foreign state which has agreed to arbitration is not deemed to also accept the consequence of execution...the result [is] that Contracting States waive their immunity from jurisdiction in relation to recognition and enforcement but not any immunity that they have from execution."sup>9 nder the FSIA, there are exceptions to immunity from execution, including:

section 32, which allows execution against property, other than diplomatic or military property, which is in use by the foreign state concerned substantially for commercial purposes; and
section 33, which allows execution against immovable property.

The Investors will need to establish that one of the exceptions in the FSIA applies to receive payment.

That notwithstanding, it is significant that the Investors secured recognition and enforcement of the ICSID award. It may assist their broader enforcement strategy by applying pressure on Spain. Indeed, since the Federal Court's 2020 judgment on the Investors' application, there have been several other award creditors who have applied to have their ICSID awards recognised and enforced in Australia against the Kingdom of Spain. Time will tell whether these proceedings against Spain will provide relief for the Investors in practice.

Footnotes

¹ Convention on the Settlement of Investment Disputes between States and Nationals of other States, opened for signature 18 March 1965, 575 UNTS 159 (entered into force 17 October 1966).

² Eiser Infrastructure Ltd v Kingdom of Spain (2020) 142 ACSR 616 [11].

³ The Energy Charter, opened for signature 17 December 1994, 2080 UNTS 95 (entered into force 16 April 1998).

⁴ Eiser Infrastructure Ltd v Kingdom of Spain (2020) 142 ACSR 616 [4]-[6].

⁵ Kingdom of Spain v Infrastructure Services Luxemburg S.à .r.l. (2021) 284 FCR 319 [22].

⁶ Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. [2023] HCA 11 [26].

⁷ Slovak Republic v Achmea BV [2018] 4 WLR 87.

⁸ Republic of Moldova v Komstroy LLC [2021] 4 WLR 132.

⁹ Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l [2023] HCA 11 at [73], citing Van den Berg, "Recent Enforcement Problems under the New York and ICSID Conventions" (1989) 5 Arbitration International 2 at 13.

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Australia: High Court rejects Spain's foreign state immunity claim and reinforces Australia's reputation as ‘pro-arbitration'