Investors who rely on international arbitration of disputes with sovereign States must accept that enforcement of their award, in the event that they are successful, can be a long and drawn out process. In worse case scenarios, claimants may wait several years to receive the damages awarded to them or to accept far less than the full award.
This is often because enforcement although an essential part of the arbitration strategy is often under developed owing to an over reliance on the mechanisms of enforcement available under the New York and Washington conventions for instance. These mechanisms have proved very effective during times of geopolitical stability and economic prosperity. However, we are arguably no longer in those times. Political stability is uncertain, economic interdependence is under strain. These are the two elements that enable convention based enforcement mechanisms to work. If political stability and economic interdependence weakens, the uncertainty for enforcement is amplified. The consequence may very well be that meritorious claims are never launched owing simply to a lack of enforcement certainty.
Sometime ago I wrote an article in GAR entitled “Wildcatters” where I identified that a glut of meritorious international arbitration claims failed to see the light of day because access to experienced and professional counsel is often disproportionately expensive for those potential claimants who most need it. I proposed a three pronged solution focusing on: (i) institutional guidelines for cost management and rules for expedited arbitration where appropriate; (ii) entrepreneurial law firms to embrace alternative fee earning models; and (iii) third party funding solutions. The proposal called for institutional arbitration bodies to set up online platforms that enabled claimants to create legal packages combining these three elements. Perhaps we should now be adding a fourth limb – arbitral award default coverage.
Recently, some political risk insurers have been exploring options for arbitral award default coverage to cover the non-payment of awards resulting from international arbitrations arising from treaties. That is new but there is no reason why such insurance should not be available. Treaty based rights are clear and identifiable under BITs or multilateral treaties and thus, in theory those rights could be insurable. The question becomes one of timing. Although some investors may seek this sort of insurance ab initio (i.e. at the time of the investment), my hunch is that most would prefer to wait until later. This of course makes it more difficult as insurers struggle with purchasing insurance coverage against a risk when the risk arises (“adverse selection”). To deal with this, most political risk insurance coverage has a clause that requires an investor to represent that an event which could give rise to a loss has not already happened. But when is that exactly?
In my previous blog “the costly killing of legitimate expectations by royal decree” I considered the types of claims that Spain is currently facing in respect of alleged breaches under the Energy Charter Treaty (ECT). If we take Spain as an example in respect of the regulatory changes in respect of feed-in tariffs, when could it be said that an investor knew of a change that could give rise to a loss? Was it during political campaigns when candidates declared they would tackle the tariff deficit? The election of one such candidate? Consequential legislative changes? Enforcement of those legislative changes against investors? Enforcement of those legislative changes against the investor seeking political risk coverage? Instructions to counsel to initiate international arbitration proceedings? Arguably, until the renewable energy investor in Spain is faced with direct enforcement against its claimed entitlement to feed-in tariffs, they would still be entitled to arbitral award default coverage.
Evidently, insurers will need to set sensible limits to avoid these sorts of complications but with the enforcement mechanisms available, knowledge of a country’s geo-political standing and economic interdependence, they could make the necessary underwriting determinations regarding prospective recovery. The question then is really for the investors. Is it affordable and proportionate?
The likely difficulty with this type of insurance is that the cost of obtaining it on an individual basis may be prohibitively expensive and out of reach for claimants who may have had their principal asset expropriated or economically devastated by the actions of a State. This is an area where professional third party funders (PTPFs) may assist. Although the cost of procuring arbitral award default coverage may be disproportionate on a claim by claim basis, across a portfolio of disputes that are being funded by a PTPF the cost for each claim covered within that portfolio should in theory be significantly lower. In this way, could an award become bullet proof?
The three tools I initially proposed to enable access to justice in “Wildcatters” will get meritorious claims out of the gates but ultimately justice is not its own reward (despite what we were told as children). These are commercial claims and at the end, a commercial entity that has suffered a loss is expecting compensation for that loss. A four-pronged approach including arbitral award default coverage could ensure that when the race is run and won, that the victory is not pyrrhic.
For more information on Vannin Capital, please contact: Meika Aysal, Marketing at Vannin Capital, T: +44 207 099 5180, E: firstname.lastname@example.org