Indaba 2025: Commencing ISDS Claims, Seeking Remedies and Enforcing Awards in Africa29 January 2025

Commencing investor-State disputes: Litigation Funding

Commencing a claim against a host State in respect of adverse regulatory measures that violate the State’s treaty or host State agreement relating to foreign investment protection is a complex undertaking. This can particularly be an issue for small to mid-cap companies who may not necessarily have the financial means and resources to commence legal action against a State.

For investor-State disputes, litigation funders offer a practical and effective solution. Litigation funding refers to a financial arrangement in which third-party investors provide capital to a party (typically the investor in an investor-State dispute) to bring a claim against the host State in exchange for a share of the potential monetary award or settlement. This sort of funding arrangement can mitigate the financial risks associated with complex investor-State disputes.

Litigation funding can be important for several reasons:

• uncertain costs of disputes: the legal costs involved in an investor-State dispute can be uncertain and expensive if proceedings are protracted. Disputes can typically last around three to five years from the time of commencing an arbitration to obtaining an award from the tribunal. Failing early settlement, and the longer these disputes are drawn out, the greater the costs incurred in legal, tribunal and expert fees, gathering documentary evidence and other administrative expenses which can be prohibitive for small to mid-cap companies; and
• access to justice: litigation funding enables small to mid-cap companies who do not otherwise have the financial means to pursue claims against host States to access impartial dispute resolution and navigate the complexities of these claims without bearing the financial burden;
• risk mitigation: as with all types of dispute resolution, there is no guarantee of a favourable outcome by the commencement of an investor-State dispute. Litigation funding allows small to mid-cap companies to share the financial risk with a third-party funder, which can also help improve the chances of a successful outcome by providing the necessary capital resources required for the investor to present its best case.

A litigation funder typically conducts a thorough risk assessment of the case, including evaluating the merits of the dispute, the jurisdiction in which the claim is brought, and the likelihood of a favourable award. If they agree to fund a claim, they will typically agree to cover most upfront costs in return for an entitlement to a portion of any financial recovery (e.g. damages or settlements) that the investor achieves from their claim.

Where there is a potential treaty or contractual claim against a host State in Africa, the investor affected is well advised to consider whether litigation funding may be a necessary tool to bring legal action.

Remedies available under the investor-State dispute settlement mechanism

Our first Indaba 2025 Insight article here considered common types of remedies that investors can seek through the investor-State dispute settlement (“ISDS”) mechanism where their investments have been subject to adverse treatment by their host State. These remedies include:

• damages for unlawful direct or indirect expropriation of licences;
• damages for the host State’s breach of its obligation to accord the investor fair and equitable treatment and frustrating the investor’s legitimate expectations;
• damages for the host State’s unlawful imprisonment of a foreign investor and/or their employees; and
• restitution of the investor’s legal rights where an investor wishes to continue operating its project within a country rather than be compensated for its loss.

When considering a claim against a host State, investors may wish to assess a range of different types of remedies:

• damages for loss: monetary compensation for sunk costs and loss of profits presents one of the most common remedies sought and obtained in ISDS. The aim of this remedy is to make the investor “whole” by providing compensation for the harm caused by the host State’s unlawful actions. Tribunals often follow specific standards, such as fair market value, to assess damages which considers the value of the investment at the time of the host State’s breach. Compensation can also include interest accrued from the time of the breach until the time of the award;
• restoration of investment: this remedy requires the host State to return the investor’s property or assets to their original condition, as far as possible, though this may not always be feasible particularly where the investment has been sold or irreparably damaged;
• interest on damages: tribunals may award interest on damages to compensate for the time that the investor has been deprived of their investment or profits due to the host State’s unlawful and wrongful actions. The interest is typically calculated from the time of the host State’s breach until the time of the award and may be awarded at a rate determined by the tribunal, often based on market rates or rates specified in the investment agreement or treaty;
• specific performance: in some cases, an investor may seek an order compelling the host State to perform a specific obligation, such as honoring a contract, respecting agreed-upon investment terms, or allowing continued operation of the investment. An arbitral tribunal’s power can extend to ordering specific performance unless there are any provisions in the relevant investment treaty or host State agreement the subject of the dispute that limits the tribunal’s power to order non-monetary relief; and
• declaratory relief: an investor may request a declaratory judgment in which the tribunal issues a formal declaration regarding the rights and obligations of the parties involved. While this does not involve direct compensation, it can clarify legal rights and obligations, which may help resolve ongoing disputes or prevent further violations by the host State.

If an investor succeeds in their claim, the tribunal may also order the host State to pay for some or all the investor’s legal costs and arbitration fees.

Enforcement of awards in ISDS

Claims against host States may be brought in a variety of forums, including in the context of a commercial arbitration (typically under the United Nations Commission on International Trade Law (“UNCITRAL”) Arbitration Rules) or within the framework of the International Centre for Settlement of Investment Disputes (“ICSID”).

To determine the appropriate forum in which to bring a claim, consideration must be given to the dispute settlement clause in the relevant investment treaty or host State agreement. In some cases, commencing a claim within the ICSID framework may not be an option available to the investor at all because this type of claim can only be brought against a host State where the State is a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention”), explained further below.

Enforcing awards under the ICSID Convention

ICSID is a world leading institution for administering investment treaty disputes. It was established in 1966 by the ICSID Convention. To date, 165 States have signed the ICSID Convention. Of these, 157 States have also ratified the Convention and are Contracting States.

Article 54 of the ICSID Convention provides that once an arbitral award is made, it is binding and must be recognised and enforced as if it were a final judgment of a national court in any of the Contracting States. In other words, the award is automatically enforceable in all Contracting States to the ICSID Convention without the need for an investor to go through recognition and enforcement proceedings before a national court. This allows the award to be enforced against commercial assets held by the award debtor in other countries.

The final and binding nature of ICSID awards and the provisions on their recognition, enforcement and execution are key features of the ICSID Convention. ICSID awards cannot be appealed or be the subject of any other remedy except annulment on exceptional grounds provided under Article 52 of the Convention. Annulment of an ICSID award may only be available where:

• the tribunal was not properly constituted;
• the tribunal manifestly exceeded its powers;
• there was corruption on the part of a tribunal member;
• there was a serious departure from a fundamental rule of procedure; or
• the award failed to state the reasons on which it was based.

According to ICSID’s June 2024 paper on “Compliance with and Enforcement of ICSID Awards”, in the majority of cases, parties voluntarily comply with or reach post-award settlements in respect of ICSID awards. Further, where enforcement proceedings were commenced in domestic courts, these have been largely successful, subject only to immunity of any assets from execution.

From a review of 151 awards that awarded damages to a party, ICSID found that award creditors obtained satisfaction through voluntary compliance or post-award settlements in 66% of cases, while 31% went to enforcement and in 3% enforcement was not pursued. In respect of the awards where the outcome of enforcement actions was available, ICSID found that enforcement was successful in 97% of the awards.

When considering an ICSID claim, investors can therefore have confidence that in the event of obtaining a favorable award, ICSID offers a robust legal framework for the enforcement of this award.

Enforcing awards under the New York Convention

Investment treaties or host State agreements may provide for other forms of ISDS outside of the ICSID framework. For example, arbitration under the UNCITRAL Arbitration Rules is often provided, especially where ICSID arbitration is not available to the investor because the host State is not a party to the ICSID Convention.

Where an award is issued in favour of the investor under an UNCITRAL arbitration, the investor will need to have the award recognised and enforced through national courts under the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly known as the “New York Convention”). To date, there are 172 Contracting States to the New York Convention.

For an ISDS award to be recognised and enforced under the New York Convention, the following process will typically apply:

• recognition of the award: an arbitral award made in a Contracting State is recognised as binding and has the same effect as if it were made in the State where enforcement is sought. Courts will recognise the award unless there are specific grounds to refuse recognition (discussed further below); and
• enforcement of the award: once recognised, the party can then seek enforcement of the award in the courts of the Contracting State where the assets of the award debtor are located. Enforcement means that the courts will take steps to compel the debtor to comply with the award, such as by seizing assets or ordering payment. Enforcement is subject to the national laws of the country where enforcement is sought, but those laws must comply with the provisions of the New York Convention.

The regime for the recognition and enforcement of awards under the New York Convention differs from the regime under the ICSID Convention. A key difference under the New York Convention is that awards are not immediately enforceable, and there are a number of limited, exceptional grounds for Contracting States to refuse the recognition and enforcement of awards.

These grounds are set out in Article V of the New York Convention and are intended to protect parties against unjust or unfair arbitral awards:

• incapacity of parties: where one of the parties was under some incapacity (e.g., not legally capable of entering into the arbitration agreement);
• invalid arbitration agreement: where the arbitration agreement is invalid under the law governing the agreement or the law of the country where the award was made;
• lack of proper notice: where the party against whom the award is made did not receive proper notice of the arbitration proceedings or the ability to present its case;
• excess of authority: where the arbitrators went beyond the scope of their authority under the arbitration agreement or the law governing the arbitration;
• award not dealing with the dispute: where the award does not address the issues raised by the parties in the arbitration, or the arbitrators exceeded the scope of the dispute; and
• contravention of public policy: where the recognition or enforcement of the award would violate the public policy of the country where enforcement is sought.

In terms of practical considerations on how ISDS awards would be enforced: apart from assets tied to a State’s sovereign functions or a public purpose (e.g. military assets or diplomatic properties), a wide range of State-owned assets may be subject to enforcement. These include tangible assets like real estate, infrastructure, natural resources and other government-owned property, as well as any commercial assets, such as company shares, contracts or revenue from commercial operations if a State operates in a commercial capacity (e.g. through State-owned enterprises).

Conclusion

Where a host State has introduced adverse regulatory measures, commencing an ISDS claim is a complex undertaking with several legal matters to consider. For an investor lacking the financial means and resources to take legal action, arranging third-party litigation funding may be a viable solution.

Once a claim is brought, a range of remedies may be sought against the host State, with pecuniary damages being the most common form of relief sought in the context of ISDS, while other non-pecuniary relief may also be sought, including restoration of the investment (where feasible), specific performance and declaratory relief.

Where ICSID arbitration is available, and an investor obtains an award in its favour, the ICSID Convention provides for the immediate enforceability of the award within any ICSID Member State, meaning that the investor does not need to incur any additional time and cost going through separate enforcement proceedings before a national court. An award must be enforced by the host State as if it were a final judgment of its national courts.

Where arbitration is commenced outside of the ICSID framework (e.g. under the UNCITRAL Arbitration Rules), an award may still be recognised and enforced through the New York Convention. While this regime ordinarily provides for a robust recognition and enforcement regime, a key risk specific to ISDS disputes is that a host State can delay the recognition and enforcement of any award in favour of the investor in its national courts. Depending on the level of independence and capacity of the host State’s judiciary, the investor may face significant challenges in enforcing any award against the host State and obtaining due compensation for any losses it has suffered.