Label: Highlight
Subject: Dispute Resolution , Litigation
Paper: NZZ
Reading time: 4 Min

How companies sue states

Enforcing claims requires staying power.

Switzerland is one of the ten countries with the highest proportion of direct investments abroad worldwide. Investments are only made after careful consideration and also depend on whether they enjoy sufficient legal protection. Since private investors do not want to rely on local courts, there are bilateral investment treaties (BITs) that provide for any disputes over investments to be adjudicated by an independent arbitral tribunal such as the International Centre for Settlement of Investment Disputes (ICSID). It is therefore crucial for investors and their protection that such BITs exist with the relevant countries. Switzerland has concluded over 120 BITs.

In some cases, however, conflicts can still arise, for example if a state expropriates a company's assets or fails to honour agreements and assurances. If no bilateral solution can be found, the company will try to assert financial claims against the state in court or arbitration proceedings.

In the current geopolitical situation, new conflicts regarding investments must be expected. Russia in particular will probably increasingly act as a counterparty, as was the case, for example, in 2014 in the record Yukos lawsuit with a judgment of over 50 billion US dollars. Structurally weak countries with large natural resources, such as Libya or Venezuela, are also regularly involved in investment disputes.

States have the longer leverage

Since in practice states do not always voluntarily comply with an arbitral award or court judgment in their own country, the judgments must be recognized and enforced in other countries. In the case of ICSID judgments, this is done in accordance with the ICSID Convention, which facilitates the recognition and enforcement of judgments. For other arbitral awards, this is usually done under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

When enforcing judgments in countries where the state in conflict has large foreign assets such as foreign currency, shareholdings or real estate, various hurdles must be overcome. In order to locate assets, support is first needed from highly specialized asset tracing firms, which use their research to locate assets that are not publicly known. Whether these are subsequently suitable for enforcement depends on local legislation. Sovereign assets—such as consular real estate–are protected from seizure by creditors in many countries due to sovereign immunity. This immunity ensures that states always have the necessary resources to perform their essential public functions. Whether assets used for economic purposes are also protected by immunity depends on the extent to which sovereign immunity is regulated locally. Only assets that are not protected by immunity—for example, company holdings—can be the subject of enforcement proceedings.

Significant assets are often not held by the state itself, but by state-owned entities. However, since these were not themselves parties to the court proceedings and are therefore not considered debtors, their assets cannot be seized. Exceptionally, however, such assets can be seized. This requires proof that the state controls the company to such an extent that it is the same legal entity, the so-called alter ego. A comprehensive evidentiary procedure will be necessary for this. Experience shows that courts in the USA are more open to an alter ego argument than courts in Europe and Asia.

Geopolitics slow down proceedings

Last but not least, political factors must also be taken into account. In some countries, there is uncertainty about which government is in power. This leads to jurisdictional problems in enforcement proceedings, if only for the service of documents or representation in the process.

Major economic powers try to enforce their interests through government sanctions, in the U.S. through the Office of Foreign Assets Control (OFAC). This blocks assets of other states and state-owned entities, making enforcement difficult for creditors. In connection with the Iraq-Kuwait conflict, for example, oil products from Iraq were protected from enforcement by OFAC so as not to jeopardize the reconstruction of the country. Thus, creditors cannot comprehensively enforce their judgments unless they are granted an exemption. Obtaining such a permit usually involves a great deal of effort and requires a coordinated effort by lawyers and lobbyists.

As a result, the enforcement of judgments against states is extremely complex and costly. For inexperienced creditors, it is therefore advisable to cooperate with investment vehicles that specialize in the enforcement of judgments and have a great deal of experience and staying power. An important advantage of acting against states is that they cannot simply disappear from the scene, for example by going bankrupt. Therefore, with staying power, a process of enforcement can be brought to a successful conclusion despite all obstacles.