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Executive Summary

This Chapter explains when arbitral awards may be annulled or set aside. It begins by clarifying that annulment and set-aside proceedings are not full-scale appeals. It then explains that annulment following an ICISD arbitration is a procedure provided for by the ICSID Convention itself on limited grounds. It finally considers how a set-aside proceeding for a non-ICSID arbitration is conducted by the local courts at the seat of arbitration on the basis of local legal provisions, which usually establish limited grounds for set-aside.

1.0 Introduction

Unlike court decisions, arbitral awards generally cannot be appealed in the conventional sense.¹ However, there are procedures for “annulling” or “setting aside” arbitral awards where the arbitral tribunal has committed a serious error. This is the most important recourse against an arbitral award. When an award has been annulled, also known as “setting aside” or “vacatur”, the court where recognition and enforcement of the award is sought will normally decline to recognise or enforce the award.

The choice of a particular form of arbitration, whether under the ICSID Convention or before some other institution, can affect the difficulty of pursuing annulment or set-aside in the event of an unfavourable arbitral result. While ICSID’s annulment proceeding is a specialised process conducted by ICSID itself, other forms of arbitration usually require the dissatisfied party to seek set-aside or annulment before local courts.

When choosing whether to pursue ICSID arbitration or some other form of arbitration, the party should conduct a thorough analysis of the advantages and disadvantages offered by the different systems available to it, in order to determine which is strategically most suitable to their case.

This chapter first explains the annulment of awards subject to the ICSID Convention, then addresses the set-aside of non-ICSID awards.

2.0 Annulment under ICSID

The ICSID Convention establishes a self-contained arbitral system with its own set of rules and procedures, including its own review process — the “annulment proceeding”. National courts have no power to review an ICSID award for substantive correctness or procedural irregularities. Once the annulment process has been concluded, the ICSID award is final. The parties are bound to comply with it, and the courts of any ICSID Contracting State (154 contracting Contracting States as of July 2018) must automatically recognise and enforce the award as if it were a final judgment of the local courts.

The annulment process is quite distinct from an appeal mechanism. Unlike an appeal, an annulment proceeding does not, at least in theory, involve the re-evaluation of the

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merits of a dispute, and is only available for a limited number of serious errors. For instance, in one recent annulment decision in a case concerning an expropriation, the annulment committee remarked that: “it is not within the Committee’s remit to review the substantive correctness of the Award, either in fact or in law.”²

Nevertheless, the annulment proceeding is a common recourse against ICSID awards, although it is rarely successful. Applicants for annulment include claimants and respondents, and occasionally both claimants and respondents seek annulment of the same award (generally when the award does not grant full relief to either party).³ From January 2011 through 30 June 2018, ICSID tribunals rendered 158 awards. Annulment committees annulled 5 awards in whole or in part, rejected 30 applications for annulment, and 18 proceedings were discontinued.⁴

Investors and states considering commencement of annulment proceedings should recognise that the vast majority of annulment efforts are unsuccessful.

2.1 The Annulment Committee

In the ICSID system, annulment committees are ultimately responsible for determining whether an award should be annulled. An annulment committee is an ad hoc panel of three arbitrators chosen directly by ICSID for the particular annulment proceeding.

In order to preserve the impartiality and independence of the panel as well as to safeguard the integrity and outcome of the proceedings, the ICSID Convention lays out certain requirements for committee members.⁵ For example, none of the members of the committee may have served as arbitrator in the tribunal that rendered the award subject to review, and none of the members may share the same nationality as either of the parties to the dispute.

2.2 Annulment Procedure

The ICSID Convention establishes clearly defined procedures for the annulment mechanism. Most importantly, a party that wishes to challenge an award has 120 days from the date the tribunal rendered the award to apply for annulment.⁶ Once the annulment proceeding commences, it is governed by many of the same procedural rules that apply to an ICSID arbitration.

At the conclusion of the annulment proceeding, the annulment committee may annul an award either in part or in full.⁷ The annulment committee has substantial discretion to decide whether a given annullable error is material.⁸ Annulment committees generally determine whether there are grounds for annulment and then whether these lead to practical consequences for the parties.⁹ If the committee decides against annulment, the original award binds the parties under the terms of the ICSID Convention.¹⁰

Committees are limited to the claims for annulment advanced by the parties at the time of the request for annulment.¹¹ A party, claimant or respondent, cannot raise additional grounds for annulment.¹²

Whatever the outcome, the decision of the annulment committee is not subject to appeal or annulment. As a result, if the request for annulment is successful and the original arbitral award is annulled, the only possible remedy would be to resubmit proceedings before a new arbitral tribunal.¹³ In such a case, no new claims can be brought in resubmitted proceedings.¹⁴ Where there is a partial annulment, the tribunal in resubmitted proceedings will consider only the annulled portion of the award. It cannot revisit the remaining issues.¹⁵ Although rare, resubmitted proceedings have been successful in a few cases.¹⁶

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2.3 Grounds for Annulment

The ICSID Convention establishes strict guidelines for annulment.¹⁷ An award can only be annulled based on a limited number of grounds listed in the Convention. Annulment Committees are not permitted to go beyond these grounds. One prominent commentator explained why the annulment process is both necessary and limited in scope: “It is designed to provide emergency relief for egregious violations of a few basic principles while preserving the finality of the decisions in most respects.”¹⁸

The ICSID Convention limits the possible grounds for annulment to five categories:

1. The tribunal was not properly constituted;

2. Corruption of an arbitrator;

3. Manifest excess of powers;

4. Departure from a fundamental rule of procedure; and

5. Failure to state the reasons on which the award is based.¹⁹

In short, the annulment mechanism primarily applies to cases “where there has been some violation of the fundamental principles of law governing the tribunal’s proceedings.”²⁰

Annulment committees differ as to how strictly they interpret the grounds for annulment. Some earlier annulment committees interpreted these grounds narrowly.²¹ More recent committees have sometimes given more expansive scope to the grounds for annulment.

We review each ground for annulment below.

2.3.1 The Arbitral Tribunal was not Properly Constituted

If the arbitral tribunal was not properly constituted in accordance with applicable rules, the award it rendered may be subject to annulment.22 The relevant rules for constituting the tribunal might come from the ICSID Convention itself, other ICSID rules, or the law underlying the dispute.

This ground for annulment has generally been used as a tool to challenge the independence of arbitrators. Although annulment committees have expressed differing opinions, at least one prominent decision concluded that its review should not be limited to procedural aspects of the arbitral tribunal’s constitution, but instead could also extend to arbitrator independence and impartiality.²³ This has been held to include a conflict of interest that materially affects the tribunal’s final decision.²⁴ However, few cases have actually dealt with this issue and there have been no successful annulments on this ground.

2.3.2 Corruption of an Arbitrator

Although corruption of an arbitrator or the arbitral tribunal is grounds for annulment, to date no award has been annulled on this basis, and claims of arbitrator corruption are very rare. Only one ICSID case has addressed this ground for annulment based on arbitrator corruption, raising this ground in relation to a possible conflict of interest. However, the party ultimately withdrew this ground for annulment before the tribunal could consider it.²⁵

2.3.3 The Arbitral Tribunal Manifestly Exceeded its Powers

Claims that the award must be annulled because the arbitral tribunal manifestly exceeded its powers are common. Because this ground for annulment is potentially broad, parties seeking annulment have often attempted to fit their complaints into its terms.

These efforts have produced an extensive debate as to what constitutes a manifest excess of powers within the meaning of the ICSID Convention. A common view, though not universally accepted, is that either a lack of jurisdiction or the tribunal’s failure to apply the correct law to the dispute (as opposed to an error in application of the law) could constitute a manifest excess of powers.

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An excess of powers is not by itself sufficient for annulment; the excess must be manifest. Some annulment committees considered this requirement to be quite demanding. Committees have thus adopted the view that a manifest excess of power can be both an error “clearly capable of making a difference to the result”²⁹ and an error that is “not arguable”.³⁰

It is well established that there is a possibility of annulment when a tribunal has improperly exercised or failed to exercise jurisdiction. However, a committee may also annul an award for failure to apply the law agreed by the parties. Though committees have generally held that this does not include an incorrect application or misapplication of the law,³² in exceptional circumstances a “gross and consequential misinterpretation or misapplication of the proper law” may constitute a ground for annulment.³³

2.3.4 A Serious Departure from a Fundamental Rule of Procedure

A party may seek annulment of an award if the arbitral proceedings involved a serious departure from a fundamental rule of procedure.³⁴ The words “serious” and “fundamental” establish a high threshold. Indeed, some tribunals have thought that the word “serious” requires a departure that is substantial, whereas the word “fundamental” requires “a set of minimal standards of procedure to be respected as a matter of international law.”³⁵

The emphasis is on “the manner in which the Tribunal proceeded, not on the content of its decision.”³⁶ The failure to allow the parties to adequately present their case might constitute a serious procedural violation.³⁷ The applicant must show which fundamental rule of procedure has been violated and how that violation is substantial, such that the result would have been different had the rule been observed.³⁸ If it appears from the circumstances that the party did not intend to exercise the right in question, the departure may not be held to be “serious”.³⁹

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2.3.5 Failure to State the Reasons on Which the Award was Based

A party may also seek annulment of an award if the award fails to state the reasons on which it is based.⁴¹ The proper interpretation of this basis for annulment is somewhat difficult because the ICSID Convention “does not include any limiting terms such as ‘manifest’, ‘serious’ or ‘fundamental’.”⁴²

Despite the lack of textual clarity, annulment committees have generally understood this ground for annulment as restricted in scope. For example, one committee considered that the failure to state reasons “does not allow any review of the challenged Award which would lead the ad hoc Committee to reconsider whether the reasons underlying the Tribunal’s decisions were appropriate or not, convincing or not.”⁴⁵ As such, the failure to state the reasons is not equivalent to a simple error in the substance of the decision.

Instead, the requirement that the award state reasons has often been understood to require only that the text of the award provide an explanation sufficient to allow “one to follow how the Tribunal proceeded from Point A to Point B and eventually to its conclusion, even if it made an error of fact or law.”⁴⁶

Although annulment is available only on specific grounds that are nominally narrow, it nevertheless can produce dramatic results. For example, in the Occidental v Ecuador annulment decision, the committee found that the Tribunal manifestly exceeded its powers because a 40% interest in the investment subject to dispute had legally been transferred from the claimants to another investor.⁴⁷ The final result was a reduction in the value of the award by approximately US$700 million, from US$1.8 billion to US$1.1 billion.

The general trend that emerges from past annulment procedures is that for a request for annulment to be successful, the violation must have had a material effect on a party and been sufficiently grave to justify annulling an award.

3.0 Set-Aside of Non-ICSID Awards

Not all investment disputes are governed by the ICSID Convention. Parties may also choose to have their dispute administered by other arbitration institutions such as the International Chamber of Commerce or the Permanent Court of Arbitration. When parties elect these non-ICSID institutions, they may challenge the arbitral award in what is often called a set-aside proceeding. When an award has been set aside, it will lose its legal status in the state where it has been set aside, and other states will have no legal obligation to (and usually will not) recognise or enforce the award.

Unlike in arbitration under the ICSID Convention, parties have to request a set-aside before the national courts of particular states. Other arbitral institutions lack any internal procedure equivalent to ICSID annulment. As a result, the effort to obtain set-aside of an award is normally governed by national arbitration laws.

The laws and courts of the state where the arbitration is formally seated (or located) usually govern both the arbitration itself and any set-aside action against the award.

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The parties should specify the seat of arbitration in the arbitration agreement, effectively electing a particular procedural law and set of courts. If the parties fail to choose the law of the seat, the applicable arbitration rules may allow the arbitral tribunal to determine its own seat.

Because each state has its own laws of arbitration, the precise rules for pursuing set-aside can vary depending on where it is sought. Despite the potential for great variety in arbitration laws, many jurisdictions have adopted the UNCITRAL Model Law on International Commercial Arbitration or some variation of it. Accordingly, the UNCITRAL Model Law will be the primary focus of this section.

The grounds for set-aside in the UNCITRAL Model Law (as well as the grounds for set-aside in many domestic arbitration statutes) mirror the 1958 New York Convention’s grounds on which a court may refuse to recognise or enforce an award.⁴⁸ Most courts, including in the United States, have held that the New York Convention imposes no limitations on the grounds for annulment.⁴⁹ Grounds for set-aside in such cases are exclusively governed by national laws.

3.1 Set-Aside Procedure

The procedure for bringing a set-aside action against an arbitral award is subject primarily to the procedural law of the local court where the set-aside is sought. However, the UNCITRAL Model Law itself establishes that any set-aside challenge to an award must be brought within three months of the date of the award.⁵⁰ It also permits the court considering the set-aside action to suspend the proceeding and allow the arbitral tribunal to cure the defects that might otherwise necessitate the setting aside of the award.51 The procedural rules of the court where the set-aside action is brought will determine most of the remaining procedure for the setaside action.

For non-ICSID awards, set-aside can be more complex than under ICSID as it can involve national courts that have their own laws and standards for set-aside. Furthermore, challenging an award in national courts could result in appellate review, with additional time, cost and uncertainty.

Importantly, the decision of the first instance court on set-aside will often be subject to appeal, depending on the particular jurisdiction in which the action was brought. For example, in the BG v Argentina case, Argentina sought set-aside before the US federal courts.52 The District Court for the District of Columbia decided to enforce the award.⁵³ On appeal, the DC Circuit reversed the District Court’s ruling.⁵⁴ The claim then went to the Supreme Court of the United States, which reversed the DC Circuit decision, conclusively rejecting the set-aside.⁵⁵

Though most domestic arbitration statutes closely mirror the UNCITRAL Model Law, different courts, even within the same jurisdiction, may interpret legislation differently. For example, in the United States, the grounds for judicial review of arbitral awards are set out in the Federal Arbitration Act.⁵⁶ Some federal appellate courts have held that the parties are not permitted to expand the scope of review beyond the limits set out in the Federal Arbitration Act, while other courts have held that they may do so.⁵⁷

3.2 Grounds for Set-Aside

Like the ICSID Convention, the UNCITRAL Model Law enumerates limited grounds for set-aside based on serious problems involving the arbitration agreement or the manner in which the tribunal conducted the arbitration or made the award.⁵⁸ Under the UNCITRAL Model Law an award may be set aside if:

• One of the parties did not have the capacity to enter into an agreement to arbitrate or if the agreement to arbitrate is not valid under the governing law;⁵⁹
• There is a failure to respect a party’s right to be given proper notice or to present its case;⁶⁰
• The award addresses issues beyond the scope of the arbitration agreement;⁶¹

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• The arbitral tribunal was not properly constituted, or when the subject matter is not arbitrable;⁶² or
• There is a conflict between the award and public policy.⁶³

In contrast to the ICSID Convention, the UNCITRAL Model Law does not allow for annulment on grounds directly equivalent to a manifest excess of powers, a failure to state reasons on which the award is based, or corruption of an arbitrator. Also different is the inclusion in the UNCITRAL Model Law of two additional grounds for set-aside: (i) conflict with public policy, and (ii) non-arbitrable subject-matter.

Unlike the ICSID Convention’s grounds for annulment, the grounds for set-aside in the UNCITRAL Model Law become part of national law. As states may have very different legal cultures and practices, this can result in divergent interpretations of the grounds for set-aside.

The threshold for setting aside is generally high and set-aside happens only in exceptional cases. Indeed, courts have recognised that “annulment of international awards is an exceptional occurrence, with the overwhelming majority of all awards being upheld in the face of annulment challenges.”⁶⁸ As with ICSID awards, non-ICSID awards are difficult to annul or set aside.

Notes

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