EMPEA Guidelines – 4
4. Reliable and consistent approach to dispute resolution and enforcement
Given that private equity investments often take the form of minority stakes with influence but not control, reliable, consistent, fair and efficient dispute resolution mechanisms are critical, including the recognition and enforcement of arbitral awards and foreign court judgments in accordance with international norms.
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4.1 – Reliable and fair mechanisms for dispute resolution, including arbitration
Legal systems should provide a reliable, predictable, fair and timely forum for dispute resolution in support of both the enforcement of contractual obligations and the rights of shareholders.
4.2 – Recognition of arbitration proceedings and enforcement of local arbitral awards
Arbitration proceedings should be recognized and respected, and local arbitral awards enforceable. Parties to contracts governed by local or foreign law should be permitted to agree that disputes will be settled through arbitration, including in the local country or in a foreign jurisdiction.
- Legal systems should be arbitration-friendly, with arbitration laws that set out clear ground rules for arbitrations conducted within the jurisdiction, safeguarding the privacy of the proceedings and the autonomy of the tribunal's decision-making. A useful precedent for pro-arbitration legislation is the UNCITRAL Model Law on International Commercial Arbitration, which has been adopted by a number of arbitration-friendly countries.¹
- Court interference in local arbitrations should be kept to an appropriate minimum. For example, it should be possible to call upon local courts to compel arbitration, or enforce orders for provisional relief, such as freezing injunctions.
- With respect to foreign arbitrations and court proceedings, interference should in general be avoided, unless this serves to support the foreign proceedings.
4.3 – Recognition and enforceability of foreign court judgments and arbitral awards
- Legal systems preferably ensure that foreign court judgments or foreign arbitral awards can be enforced against assets located in the jurisdiction.
- Enforcement of foreign court judgments and arbitral awards generally should be based on treaty arrangements between states that provide for reciprocal recognition and enforcement of judgments or awards from other states. Conformity with internationally-recognized standards and conventions is strongly preferred. Countries should consider membership in the International Centre for Settlement of Investment Disputes (ICSID) and ratification of the 1958 New York Convention on Recognition and Enforcement of Arbitral Awards, both of which are addressed in greater detail in 4.6 and 4.7 below.
- Local courts' power to refuse enforcement of a foreign judgment or arbitral award should be limited to narrow grounds, avoiding reconsideration of the merits.
- Local arbitral awards should only be subject to challenge on narrow grounds, such as the award having been obtained by fraud.
- Countries should also consider the availability of effective mechanisms in practice, such as the ability to seize cash or assets, for the purpose of satisfying awards.
4.4 – Consistent, predictable, transparent and efficient legal systems
Legal systems themselves are ideally consistent, predictable, transparent and efficient, with an effective system of courts, laws, politics and administrative practices with clear and stable rules for the handling of disputes. Specifically, private equity investment will be more robust in countries with systems in which:
- Courts are independent from political interference and neutral, even where the state or a state-owned entity is party to a dispute; and,
- There is effective training of the judiciary and administrative staff, including, among other things, appropriate anti-corruption policies;
- Court procedures, including relevant appeals, are reasonably swift. Mediation and out-of- court settlements are encouraged. Experience shows that adequate resources need to be provided by the state in order to ensure an efficient judicial and administrative system.
- Court systems are open and the reporting of rulings and judicial decisions are available to the public, sometimes made possible by either public or private funding for the creation of court reports and for their dissemination. Web-based solutions may be of assistance in this regard, but consideration should be given to whether publication in electronic form will ensure accessibility throughout the relevant country.
4.5 – 2005 Hague Convention on the Choice of Court Agreements
- Other than within Europe and in certain countries of the former Soviet Union, there are no multilateral treaties for the enforcement of foreign court judgments. The 2005 Hague Convention on the Choice of Court Agreements aims to change this by providing, amongst other things, that a judgment given by the chosen court in a contracting state must be recognised and enforced in principle in all other contracting states.² Both the US and the European Union have signed the Convention, and ratification of the Hague Convention would be an extremely positive sign for a country. The Hague Convention requires two accessions or ratifications to enter into force.
4.6 – International Centre for Settlement of Investment Disputes
If they have not already done so, countries should consider becoming members of ICSID (International Centre for Settlement of Investment Disputes) and signatories to the ICSID Convention.³
- Membership in ICSID and enforcement of its awards may send a positive signal to potential investors that their investment is protected by an effective dispute resolution mechanism. An arm of the World Bank, ICSID was created by the ICSID Convention, a multilateral treaty ratified by more than 140 states. ICSID has proven to be a successful body under whose rules and regulations disputes between contracting states and foreign investors from other contracting states can be resolved.
- The majority of disputes are referred to ICSID via bilateral or multilateral investment treaties, which require one state to create favourable conditions for investors from the other state(s), or via a state's national investment legislation.
- ICSID allows for more transparency and more public participation than most other forms of international commercial arbitration. It operates within an autonomous jurisdictional system: local courts cannot support or intervene directly. Awards cannot be challenged locally, but must be brought before a second ICSID panel, which is an ad hoc committee that hears annulment proceedings. An ICSID award is directly enforceable in a contracting state as if it were a local court judgment.
4.7 – New York Convention on Recognition and Enforcement of Arbitral Awards.
If they have not already done so, countries should consider ratifying the 1958 New York Convention on Recognition and Enforcement of Arbitral Awards.⁴
- The New York Convention is a pro-enforcement treaty that facilitates recognition and enforcement of foreign arbitral awards in countries that have ratified the Convention. It also restricts the grounds on which local courts can refuse enforcement by eliminating, for example, non-enforcement due to alleged errors of fact or law.
- The New York Convention is the main reason arbitral awards are more readily enforceable abroad than court judgments, making arbitration the prevailing method for resolution of international commercial disputes. Adopted by the UN in 1958, it has been ratified by more than 140 countries and is the law in most nations. Ratifying the New York Convention should indicate to potential foreign investors a country's desire to show that arbitral awards obtained elsewhere can be enforced against local assets.
- As noted in 4.7(b) above, ratifying the New York Convention alone will not make enforcement easier if effective practical mechanisms for enforcement do not form part of a country's legal regime. That said, a party is indisputably better off with a New York Convention-based right to enforcement. Without it, the party may need to sue on the foreign arbitral award as evidence of a debt, which is a cumbersome method of enforcement that is best avoided.
¹UNCITRAL Model Law on International Commercial Arbitration
²The Hague Conference on Private International Law, Hague Convention of 30 June 2005 on Choice of Court Agreements
³ICSID Convention, Regulations and Rules; List of ICSID Convention Signatories
⁴New York Convention (UN)
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