High Court of Australia rejects Spain’s sovereign immunity claim and clarifies two-step process for arbitral awards under the ICSID Convention

The High Court of Australia has unanimously affirmed Australia’s long-standing pro-arbitration and enforcement friendly reputation in a judgment dated 12 April 2023. The highly anticipated decision in Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. & Anor [2023] HCA 11 concerned the recognition and enforcement of a EUR101 million arbitral award in Australia made under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). Ultimately, the High Court had to consider whether, and to what extent, Spain’s entry into the ICSID Convention and concomitant agreements to Arts 53, 54 and 55 of that Convention, constituted a waiver of foreign State immunity under the Foreign States Immunities Act 1985 (Cth) (the Act) from Australian court processes concerning recognition and enforcement.

The decision of the High Court follows several earlier decisions of the Federal Court and Full Court of the Federal Court of Australia.¹ Our summaries of the Federal Court judgments can be read in the Australia chapter of our 2020, 2021 and 2022 Asia-Pacific Roundup.

 

Background

In 2007, a number of financial incentives for renewable energy were put in place by the Spanish Government. As a result, companies such as Eiser Infrastructure (Eiser) (now Infrastructure Services Luxembourg, ISL) invested over EUR100 million in solar power projects in Spain. These incentives were subsequently reversed, with Eiser successfully obtaining a EUR101 million ICSID award against Spain for its failure to accord fair and equitable treatment in breach of Art 10(1) of the Energy Charter Treaty (ECT).

An ICSID annulment committee upheld the award in 2021. Enforcement proceedings were brought by Eiser in the Federal Court of Australia, with Spain arguing it had sovereign immunity under the Act. A foreign State is immune from the jurisdiction of Australian courts except where otherwise provided by the Act.² Relevantly, one such exception is where a foreign State has subjected itself to Australia’s jurisdiction, including under a treaty (for example, the ICSID Convention).

 

Earlier Judgments of Lower Courts

The critical issue before the Federal Court in the first instance was whether the Kingdom of Spain had, by virtue of signing the ECT and the ICSID Convention, submitted itself to the jurisdiction of the Australian Federal Court. Spain defended the claims on the ground that ‘enforcement’ and ‘execution’ have different meanings in Spanish and English, such that no waiver of its sovereign immunity had occurred for the enforcement proceedings. Justice Stewart of the Federal Court held that, by entering into the ICSID Convention, Spain ‘expressly submitted itself to the jurisdiction of the courts of other Contracting States in respect of the recognition and enforcement, but not execution, of any resulting award’.³

Spain appealed the decision to the Full Court of the Federal Court and argued that the proceedings brought by Eiser should be characterised as recognition and enforcement proceedings, and that Art 55 of the ICSID Convention, which grants States immunity from ‘execution’, should be read as being inclusive of enforcement. Therefore, Spain could assert sovereign immunity to the proceedings.

The Full Court of the Federal Court (Allsop CJ, Perram and Moshinsky JJ) rejected Spain’s arguments for two reasons:

• First, on proper construction, Art 54(1) and (2) of the ICSID Convention contemplate two distinct processes such that a party may seek recognition without seeking enforcement. However, it concluded that Art 54(1) and (2) does not extend to execution proceedings from which there may be immunity under Art 55.
• Second, the Full Court did not agree that the initial proceeding was for recognition and enforcement, finding the initial proceedings concerned recognition alone.

On that basis, the Court held that Art 55 did not apply to exempt Spain from the recognition proceedings, as it only applied in instances of execution. The Court expressed some doubt as to whether immunity extended to enforcement).⁴ As such, the Full Court found Stewart J had not erred in concluding that foreign state immunity was not available to Spain, the appeal was allowed and stood over for further argument. This was done on the limited basis that the orders made at first instance went beyond the scope of ‘recognition only’ proceedings as they ‘requir[ed] Spain to do something’.⁵

In a second judgment, which corrected the orders of Stewart J, the Full Court confirmed that Australia can meet its obligations under the ICSID Convention to recognise the pecuniary obligations of an ICSID award made against a foreign State without contravening a State’s sovereign immunity over execution as provided under Art 55.

Spain appealed the decision to the High Court of Australia.

 

High Court’s Judgment

Following from the lower court decisions, the High Court considered:

• Whether Spain’s agreement to Articles 53, 54 and 55 of the ICSID Convention involved any waiver of foreign State immunity from the jurisdiction of Australian courts; and
• Whether firstly, Spain’s amenability to jurisdiction is limited to ‘bare recognition’ or to ‘recognition’ and ‘enforcement’ of an award; and secondly, whether the orders made by the Full Court of the Federal Court amounted to enforcement.

The High Court also considered Spain’s ‘not fully developed’ argument regarding the application of the 2021 European Court of Justice decision of République de Moldavie v Komstroy LLC (Komstroy). Komstroy proposed that the ECT’s investor-state arbitration clause does not apply to intra-EU investment disputes. In dismissing this argument, the Court stated Komstroy was irrelevant to the dispute as the ‘relevant agreement’ to submit to the jurisdiction of Australian courts arose from Spain’s entry into the ICSID Convention, rather than the ECT.

In dismissing Spain’s appeal, the High Court held that, given Spain's status as the subject of a binding ICSID award, its consent to Articles 53, 54, and 55 of the ICSID Convention constituted a relinquishment of sovereign immunity from the authority of Australian courts to recognise and enforce the award, albeit not to execute it.

The High Court, in alignment with the findings of the Full Court, ascertained that the words ‘recognition’, ‘enforcement’, and ‘execution’ as used in Articles 53, 54, and 55 of the ICSID Convention carry distinct meanings. Recognition denotes an obligation to accept the award as binding under domestic law, enforcement goes a step further and is the process by which a party seeks the court’s assistance to ensure compliance with the award (as recognised), and execution pertains to the formal mechanism through which a judgment giving effect to the award's enforcement is executed.

Once that distinction was made, the High Court concluded that the orders made by the lower courts were properly characterised as orders for recognition and enforcement, and on that basis, Spain could not claim immunity under the Act.

 

Key Takeaways

This is the first time a State outside of the European Union has considered the recognition and enforcement of an arbitral award rendered in relation to a dispute under the ECT. The outcome is of course specific to the Australian Courts, and provides precedential guidance to parties seeking to enforce or resist arbitral awards under the ICSID Convention as follows:

1. The highest court in Australia has now confirmed the two-step approach to recognition and enforcement of arbitral awards under the ICSID Convention as the approach that will be followed in Australia;
   
   
2. State parties need to be wary of relying on sovereign immunity in order to resist recognition of arbitral awards made against them under the ICSID Convention; and
   
   
3. Enforcing parties need to ensure that applications for recognition, in particular the orders they seek, do not confuse recognition and enforcement.

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¹ Eiser Infrastructure Ltd v Kingdom of Spain [2020] FCA 157; Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. [2021] FCAFC 3; Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. (No 3) [2021] FCAFC 112.
² Foreign States Immunities Act 1985 (Cth) ss 9 and 10.
³ Eiser Infrastructure Ltd v Kingdom of Spain [2020] FCA 157 at [190].
⁴ Kingdom of Spain v Infrastructure Services Luxembourg Sarl (2021) FCAFC 3 at [1], [6], [9], [22], [25], and [118].
⁵ Ibid, [65].