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Furthermore, it has been recognized by ad hoc committees that failure to exercise an existing jurisdiction also amounts to an excess of powers. It is held that the tribunal commits an excess of powers not only if it exercises a jurisdiction which it does not have, but also if it refuses or fails to exercise a jurisdiction which it possesses.

Therefore, an award interpreting the investor-state arbitration provision in an extensive way may not be annulled since it does not constitute a manifest excess of powers, while an award interpreting the same provision in a strict way may instead be annulled due to the tribunal’s failure to exercise its existing jurisdiction. For example, in MHS v. Malaysia, the tribunal found that the service contract for the location and salvage of historical relics from an ancient shipwreck, similar to other commercial contracts, was not an “investment” for the purpose of the ICSID arbitration, and thus concluded that it had no jurisdiction over the dispute. ⁴⁷¹ The award, however, was annulled by an ad hoc annulment committee on the ground that the tribunal manifestly exceeded its powers by failing to exercise a jurisdiction over the dispute.

In the view of the annulment committee, the term “investment” was unqualified under both the ICSID Convention and the UK-Malaysia BIT. No requirement of objective characteristics was added to the term “investment”. Since the contract at issue was one of a kind of asset constituting a claim to money and to performance in accordance with the UK-Malaysia BIT, there was an investment within the meaning of the UK-Malaysia BIT. ⁴⁷²

In addition, with respect to the appointment of members of ad hoc committees, the Chairman of the ICSID Administrative Council has wide discretion, while the disputing parties have no say. In contrast to the appointment of arbitrators, the appointment of ad hoc committee members is less predictable and more uncertain. It seems that requesting annulment of the award is not a credible strategy for the host states to deal with the jurisdictional expansion of tribunals. It is not only because annulment is an exceptional and narrowly circumscribed remedy, but also ad hoc committees appointed entirely by the ICSID Administrative Council tend to defeat the request for annulment on the ground of manifest excess of jurisdiction.

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Arbitral awards are binding upon the disputing parties and create an obligation to comply with them. However, arbitral awards cannot be automatically enforced. The recognition and enforcement of awards is heavily dependent upon domestic courts.

The host state, as the losing party, may resist the recognition and enforcement of the award before domestic courts under national laws. Notably, the regime for the recognition and enforcement of ICSID awards and non-ICSID awards are slightly different.

According to Article 54(1) of the ICSID Convention, each Contracting State shall recognize an award rendered pursuant to this 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. An ICSID award is thus equated with a final judgment of each Contracting State’s domestic courts. Therefore, the ICSID award will be automatically recognized by each Contracting State’s domestic courts as if it were its final judgment. The obligation to recognize the ICSID award applies to all State parties to the ICSID Convention, not just to the respondent state to the proceedings. Domestic courts may not examine the legitimacy and correctness of the ICSID award, for example whether the ICSID tribunal exceeds its jurisdiction.

Domestic courts are limited to verifying that the award is authentic.

However, the ICSID Convention does not require domestic courts to go beyond that and to undertake forced execution of ICSID awards. Article 54(3) of the ICSID Convention provides that “execution of the award shall be governed by the laws concerning the execution of judgments in force in the State in whose territories such execution is sought.” Article 55, stipulating that “nothing 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”, further clarifies that the law referred to in Article 54(3) includes the law on state immunity. Therefore, the obligation to recognize and enforce the ICSID award does not affect any immunity from execution that states enjoy. The doctrine of sovereign immunity from execution may prevent the enforcement of ICSID awards. It seems that the losing respondent states may resist the enforcement of ICSID awards on the ground that their state properties enjoy immunity from execution.

Even so, the losing parties may still face a high possibility of being enforced since ICSID awards have worldwide enforceability. Recognition and enforcement may be sought not only in the host state or in the investor’s state of nationality, but also in any

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state that is a party to the ICSID Convention. The winning party, usually the foreign investor, may select a state or several states where enforcement seems most promising.

This choice is likely to be determined by the availability of enforceable assets. ⁴⁷³ Proceedings for the recognition and enforcement of ICSID awards may be initiated in several states simultaneously.

Moreover, domestic legislations and practice concerning the issue of state immunity from execution are not consistent. The United Nations Convention on Jurisdictional Immunities of States and their Property adopted in 2004 makes a distinction between commercial and non-commercial properties. State properties used for non-commercial purposes enjoy immunity from execution and thus cannot be enforced without the consent of the state, while state properties serving commercial purposes may be enforced. This Convention, however, still awaits approval by states.

A number of states, such as United States, United Kingdom, Canada, Australia and Japan, have passed domestic legislations on state immunity. An approach of restrictive immunity is roughly followed by these states in distinguishing state properties used for commercial purposes and state properties used for non-commercial purposes. The criterion of distinction between commercial and non-commercial state properties in theses domestic legislations, however, is not always consistent and clear.

On the contrary, several states, such as China, unequivocally hold the position that a state and its property shall, in foreign courts, enjoy absolute immunity, including absolute immunity from jurisdiction and from execution. Considering the inconsistency of practice on the law of state immunity, foreign investors may apply the forum-shopping strategy in seeking enforcement of ICSID awards in those states adopting the restrictive immunity approach. The losing respondent state may resist enforcement of the ICSID award in its own court, but it cannot prevent courts of other state parties to the ICSID Convention from enforcing the award under their national laws.

In contrast to the self-contained mechanism of recognition and enforcement of ICSID awards, the recognition and enforcement of non-ICSID awards is subject to more judicial review by domestic courts. For non-ICSID investment awards, foreign investors may seek their recognition and enforcement in domestic courts of state parties to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Article 5 of the New York Convention lists a number of specific

473 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, Oxford University Press, 2nd edition, 2012, p. 310.

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grounds on which recognition and enforcement of foreign arbitral awards may be refused. The most important of these grounds are the invalidity of the arbitration agreement, lack of proper notice or violation of due process, excess of jurisdiction by the arbitral tribunal, improper composition of the tribunal, an award that is not yet binding or has been set aside. In addition, recognition and enforcement may be refused if a subject matter not capable of settlement by arbitration under the law of the state in which enforcement is sought (lack of arbitrability), of if it would be contrary to the public policy of that state. These obstacles to the enforcement of foreign arbitral awards are also commonly found in many national arbitration laws.

Therefore, state respondents may have two techniques to attack non-ICSID awards.

When an investment award is rendered pursuant to non-ICSID arbitration rules, state respondents may first attempt to set aside the award in the domestic courts at the place of arbitration on primarily procedural grounds, for example for lack of arbitral jurisdiction or violation of due process. If the application for setting aside the award is defeated by the domestic court at the place of arbitration, state respondents may still request refusal of recognition and enforcement of the award. Compared with the enforcement of ICSID awards where state immunity from execution is the only obstacle, the enforcement of non-ICSID awards may be refused by domestic courts on a wider ground, such as lack of arbitral jurisdiction, lack of arbitrability and public policy defense. The enforcement procedures of ICSID awards are plainly superior to those of non-ICSID awards. ⁴⁷⁴ It thus seems more favorable for state respondents to choose non-ICSID arbitration rules as the governing rules on arbitration process since they may have more flexibility in resisting the enforcement of awards rendered under non- ICSID arbitration rules.

Although the enforcement of non-ICSID awards is subject to greater supervision and review by domestic courts under the national law of the place of enforcement, courts generally have acknowledged that setting aside or refusal to recognize and enforce an award should be possible only in exceptional circumstances. The trend in the practice of domestic courts is to restrict the review of foreign awards. Besides, the two special grounds for refusing enforcement of non-ICSID awards, the lack of the arbitrability defense and the public policy defense, do not appear to have posed serious problems in the enforcement practice concerning non-ICSID awards. Many domestic courts, especially courts in arbitration-friendly jurisdictions such as United

474 Gaetan Verhoosel, Annulment and Enforcement Review of Treaty Awards: To ICSID or Not to ICSID, ICSID Review-Foreign Investment Law Journal, Vol. 23, No. 1, 2008, p. 154.

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States, United Kingdom and France, have developed a deferential attitude toward foreign awards and have restricted their arbitrability filter and public policy filter. ⁴⁷⁵ Notwithstanding the distinction between ICSID awards and non-ICSID awards regarding their recognition and enforcement, state respondents have generally complied with investment awards in a voluntary way in practice. The instances in which state respondents have refused to abide by awards are still rare. ⁴⁷⁶ The high level of voluntary compliance with investment awards by state respondents may be attributed to the following factors.

First, state respondents are concerned about their reputation and investment climate as an attraction to foreign investment and to the inflow of foreign capital. State respondents’ non-compliance with investment awards may influence their reputation and investment climate. Such considerations of economic cost-benefit analyses of states play an important though hardly measurable role. Second, grounds for refusing enforcement of investment awards are merely procedural bars but do not affect the obligation of state respondents to comply with them. Successful reliance on grounds for refusing enforcement does not alter the fact that non-compliance with an investment award is a breach of an international obligation under investment treaties.

Failure to comply with the award leads to the revival of the right to diplomatic protection by the prevailing investor’s home state. Therefore, grounds for refusing enforcement of an award provide neither argument nor excuse for failing to comply with it. Refusal by a state respondent to comply with the award constitutes a violation of the state’s international obligations and will incur its international responsibility.

Article 27(1) of the ICSID Convention, for instance, permits the granting of diplomatic protection in case a state respondent fails to abide by and comply with the award. Diplomatic protection is a political supplement to the enforcement of

475 August Reinisch, Enforcement of Investment Awards, in Katia Yannaca-Small (ed.), Arbitration under International Investment Agreements: A Guide to the Key Issues, Oxford University Press, 2010, pp. 678-680.

476 Gary Born, A New Generation of International Adjudication, Duke Law Journal, Vol. 61, 2012, pp. 835-836.

See also Alan S Alexandroff & Ian A Laird, Compliance and Enforcement, in Peter Muchlinski, Federico Ortino & Christoph Schreuer (eds.), The Oxford Handbook of International Investment Law, Oxford University Press, 2008, p. 1185(“Anecdotal evidence would suggest that state respondents…have…abided by final awards.”); Andrea Bjorklund, Sovereign Immunity as a Barrier to the Enforcement of Investor-State Arbitral Awards: The Re-Politicization of International Investment Disputes, American Review of International Arbitration, Vol. 21, 2 1 , p. 231(“The instances in which states have refused to pay are still rare.”); August Reinisch, Enforcement of Investment Awards, in Katia Yannaca-Small (ed.), Arbitration under International Investment Agreements: A Guide to the Key Issues, Oxford University Press, 2010, p.

6 7(“In the majority of that fraction of cases in which host States were found to have incurred liability, the awards seem to have been voluntarily complied with. Enforcement in national courts appears to be a rare phenomenon.”).

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investment awards. Diplomatic protection exercised by powerful home states will certainly be a great pressure for state respondents. Third, non-compliance with investment awards may lead to adverse consequences in other field. There are examples when home States have suspended advantages otherwise available to non-complying States and have exerted diplomatic pressure. In March 2012, the United States suspended application of its generalized system of tariff preferences (GSP) to Argentina after Argentina had failed to comply with investment awards rendered against it in favour of US claimants. The United States’ SP scheme allows exporters from eligible countries to pay lower customs duties on their exports to the United States. The United States would not consider giving GSP benefit to Argentina unless it honors investment awards. ⁴⁷⁷ Fourth, a state’s refusal to comply with investment awards, especially ICSID awards, would be likely to reduce its chance to obtain loans or financial assistance from the World Bank⁴⁷⁸ or even the International Monetary Fund since ICSID is one of the five organizations of the World Bank Group.