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Arbitrators hedge bets against State respondents

Enforcing the value of an arbitration award against a state respondent is not without its complications, says Steve Jones of Arthur J Gallagher which has devised a way to hedge potential default.

International arbitration awards are not easy to collect in a number of juridictions lynx_v

For claimants involved in an international arbitration, success is not simply achieved upon receipt of an arbitration award in their favour — this merely represents a milestone on a long road which they hope will eventually lead to them making a recovery. In most cases, enforcement proceedings are required which may well result in a dispute just as lengthy and expensive as the underlying case they have just completed. However, the outcome of enforcement proceedings is notoriously difficult to predict and never more so than when the respondent is a state. This brings into play a variety of reasons for the non-recognition of awards such as; public policy, jurisdictional issues, or judicial activism which may be influenced by the social, economic and political situation within the respondent State at the time payment is due. 

For these reasons actual payment risk is an aspect clients will always consider at the outset of proceedings and their legal representatives can find it hard to evaluate as arbitrations may take years to conclude. Within that period, the political or economic situation can change dramatically. In certain cases, the lack of confidence in being able to make a recovery can mean that an otherwise meritorious claim will never reach the arbitration arena, and no client enjoys triumph in a pyrrhic victory.   

Whatever the underlying reason, the realisation that the battle is won but the war continues can be a deflating experience for claimants.  All they want to do is realise the value of their award, as soon as possible, but frequently discover that, in practice, this can be hard to do, especially if the respondent state is an emerging market.  

This challenge has led to successful claimants seeking out alternative options when pursuing judgement debtors, including selling off the debt, using litigation funding options to fund asset recovery or settling with the respondent for a much lower amount to achieve a quicker payment. None of these options represent a perfect solution and all will result in the claimant giving away a large part of what is rightfully theirs. 

Is the answer therefore to look to hedge this risk before the default has occurred? This debate was the genesis for Arthur J. Gallagher’s unique Arbitration Proceedings Award Default (APAD) insurance which answers the enforcement question by providing certainty in place of unpredictability. The policy is taken out before the award is rendered and negates the need for lengthy and expensive enforcement proceedings by indemnifying claimants to the value of an arbitrator’s award, making full payment if the defendant fails to honour their payment obligation. It allows claimants to claim under the policy just 60 days following a default and addresses the primary purchaser motivations of certainty, speed and value — with the claimant retaining 100% of their award.

Naturally the risk varies from State to State and the risk of complete non-honouring of an award is more acute in certain geographical areas than others. However, even in the most developed nations late-payment can cause a concern for organisations (and increasingly their lawyers acting on a contingent fee basis) who are depending on a monetary realisation of the value of the dispute.  

Real change and increased confidence in the arbitration process will, of course, only come in time, if and when accountability and sanctions against defaulting nations are increased. Until then solutions like APAD can make the road to recovery that bit shorter. 

Steve Jones is Director of the Dispute Resolution Practice at Arthur J Gallagher. One of the largest insurance brokerage companies in the world, it places more than US$18bn annually into the global insurance market, employs over 22,000 people and provides services in over 140 countries. 

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29 September 2015

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