Kluwer Law International

Posts Tagged ‘Investment Arbitration’

Universidad Monteávila (Caracas)

On April 22, 2013, representatives of Members States of the Bolivarian Alliance for the Americas (“ALBA” for its acronym in Spanish) met in Guayaquil, Ecuador. The purpose of the meeting was to discuss the manner in which their interests are affected by the activities carried out by transnational companies, under a reunion known as the First Ministerial Conference of Latin American States affected by Transnational Interests.

Founded in 2004, ALBA is an international cooperation organization which is mainly associated with socialist and social democratic governments, being its main purpose to achieve regional economic integration based on a vision of social welfare. Its current members are Bolivia, Cuba, Ecuador, Nicaragua, Dominica, Saint Vincent and the Grenadines and Venezuela. However, this particular conference also counted with representatives from Argentina, Guatemala, El Salvador, Honduras and Mexico.

The important result of the discussion was the subscription of a Declaration which “supports the establishment and implementation of regional bodies for the solution of investment disputes,” with the caveat that such bodies will have to ensure fair and balanced rules for the settlement of conflict between transnational corporations and States. This desire to create an alternate instance is somehow explained in the preamble of the above mentioned Declaration, where it is stated that “recent developments in various Latin American countries, concerning disputes between States and transnational corporations, have shown that decisions that violate international law and the sovereignty of States persist, due to the economic power of certain companies”.

Therefore, the States gathered in Guayaquil decided to call to action the Union of South American Nations (“UNASUR”), another international organization existing in the region composed by Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Suriname, Uruguay and Venezuela. Such encouragement specifically refers to the creation of a regional dispute resolution mechanism which apparently is under negotiation.

In this sense, it must be highlighted that recent reports have confirmed that UNASUR has announced that it is very probable that its own investment arbitration center will open this year, if its establishment is approved in the July meeting of the Foreign Ministers of the organization. Obviously, this is an effort to limit the reach of ICSID which is currently administering a considerable amount of disputes involving Latin American countries. According to the Uruguayan expert Cecilia Olivet, Latin America is the region with the largest number of arbitration proceedings, with Argentina, Venezuela, Ecuador, Mexico and Bolivia “monopolizing” 27% of all the investment disputes in the world.

Although the main functioning conditions of this centre are not yet entirely clear, some reports seem to suggest that under UNASUR’s arbitration centre rules, greater deference will be given to the sovereign and regulatory needs of States, and an appeal and precedent scheme will be implemented. Furthermore, it is possible that such novel centre will also have jurisdiction in relation to commercial disputes in the region, as well as to regional and international trade matters.

Until such option is implemented, it is important to be aware that under the Declaration, the States congregated in Guayaquil decided to create an Executive Committee responsible, among other things, of “coordinating the joint defense and exercise of legal actions through international legal teams of experts and professional lawyers,” and designing communication strategies, as a counterweight to the global campaigns allegedly undertaken by transnational companies, with the objective of disseminating the legal, technical and political aspects of the different cases. Also, the conformation of an International Observatory is expected for the purposes of auditing and monitoring international arbitral tribunals’ actions in relation to worldwide investment disputes.

All these actions reveal how some States that have several pending ICSID cases are already paving their way in order to confront possible adverse awards. For example, since 2012, Venezuela is expecting decisions of arbitral tribunals in the cases brought by ExxonMobil and ConocoPhillips after the expropriation of their projects in the Orinoco Oil Belt, which could eventually order the payment of compensation to such companies for a staggering amount of forty billion dollars.

Will all this fuss lead anywhere? Or better yet, will this mean the end of ICSID at least in Latin America? In principle, it is obvious that the main promoters of all these radical ideas are States which are not very glad with some decisions taken by arbitral tribunals under ICSID facilities or fear future decisions which could seriously affect their economic interests. However, the proposed creation of an alternative investment dispute resolution forum which promotes sovereignty over transnational standards is doomed to fail, because as with the large majority of national courts of Latin American States, investors will not consider such a forum to be an impartial venue to resolve an eventual dispute.

Precisely, the key feature of ICSID and more specifically of the vast majority of BITs currently in effect, is that they recognize that the international investment regime must grant certain minimal conditions to investors, in order to promote their investment in a foreign territory. Changing such status quo will simply bring a decrease or the disappearance of international investment in the region. And that, for the sake of the Latin American future, is something that should not happen.

More from our authors:

	Litigation in the Netherlands. Civil Procedure, Arbitration and Administrative Litigation - 2nd Edition by Marieke van Hooijdonk, Peter V. Eijsvoogel € 70
	Yearbook Commercial Arbitration Volume XXXVII 2012 by Albert Jan Van Den Berg (ed.) € 215
	International Arbitration: Law and Practice by Gary B. Born € 30
	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

Wilmer Cutler Pickering Hale and Dorr LLP,
for WilmerHale

The Singapore International Arbitration Centre (“SIAC”) has issued new rules that came into force on April 1, 2013. The rules changes are accompanied by new Practice Notes for cases administered by SIAC under its rules and the UNCITRAL rules that also came into force on the same date. While the changes do not reflect a significant overhaul of the prior version of the institution’s rules, they do contain important changes of which practitioners should be aware.

The 2013 rules are the fifth set of rules issued by SIAC, which promulgated previous versions in 1991, 1997, 2007, and 2010. The SIAC rules are one of several sets of arbitral rules to be updated in the last few years; other recent updates include the CIETAC rules (2012), the ICC rules (2012), the Swiss rules (2012), and the UNCITRAL rules (2010).

SIAC’s new rules are significant in part because of the institution’s substantial and growing caseload involving parties from around the world. According to its website, SIAC registered 235 cases during 2012 (the largest number of cases ever registered in a single year at SIAC) involving parties from 39 jurisdictions and was handling a total of 525 active cases at year’s end. The largest number of cases filed at SIAC in 2012 involved parties from Singapore, China, India, Indonesia, the United States, and Hong Kong. However, SIAC’s caseload extends well beyond the Asia-Pacific region, also including parties from Bermuda, the British Isles, the British Virgin Islands, Cayman Islands, Cyprus, Denmark, France, Germany, Liberia, Mauritius, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Arab Emirates, and the United Kingdom.

The most salient changes to the new rules are detailed below.

Court of Arbitration

The new SIAC rules establish a Court of Arbitration (“Court”) that takes over case administration functions from SIAC’s Board of Directors (“Board”), which will now focus on corporate and business development matters. The Court is comprised of 16 members from jurisdictions around the world with Dr. Michael Pryles serving as the Founder President of the Court.

The responsibilities of the Court under the new rules include rendering decisions on challenges to arbitrators (Rule 13) and jurisdictional challenges (Rule 25). The President of the Court will have responsibility for determining applications for expedited procedures (Rule 5) and appointment of arbitrators (Rules 6-10) and emergency arbitrators (Schedule 1). While the SIAC rules now use terminology similar to that of the ICC International Court of Arbitration, the SIAC Court does not exercise the more involved review function of its ICC counterpart.

Commencement of the Arbitration

The new rules give the SIAC Registrar the power to determine when an arbitration has commenced. Under Rule 3.3, the Registrar is now responsible for determining that a notice of arbitration is in “substantial compliance” with Rule 3.1, which sets out the requirements for notices of arbitration.

Time Limits

Changes in the new SIAC rules to time limits are minimal but important. A new Rule 2.5 has been added that permits the Registrar to “extend or shorten any time limits prescribed under” the rules. In addition, Rule 9 on multi-party appointment of arbitrators has been amended to give parties 28 days or a time period set by the Registrar to make a joint appointment (absent an agreement by the parties) calculated from the date on which the Registrar received the notice of arbitration rather than the date of the filing of the notice of arbitration as had been the standard in the previous version of the rules.

Investment Arbitration

In a nod to the growing number of investment arbitration cases being heard at arbitral institutions other than ICSID, Rule 3.1(d) of the new SIAC rules notes that the notice of arbitration must include a reference to the contract “or other instrument [e.g., investment treaty]” underlying the dispute.

Substitute Arbitrators

Rule 14.1 now allows a substitute arbitrator to be appointed in cases involving the “removal” of an arbitrator. Previously, the rules provided for the appointment of a substitute arbitrator only in the event of a “death” or “resignation” of an arbitrator.

Party Representatives

The new rules loosen the regulation of party representatives by SIAC and arbitral tribunals comprised under it. Whereas the former version of Rule 20 provided that “[a]ny party may be represented by legal practitioners or any other representatives, subject to such proof of authority as the Registrar or the Tribunal may require,” the new version of Rule 20 dispenses with the proof requirement and simply provides that “[a]ny party may be represented by legal practitioners or any other representatives.” This is an important change that reaffirms the fundamental principles of party autonomy and the freedom of a party to choose its own counsel in international arbitral proceedings.

Witness Interviews

In direct recognition of the various approaches taken by different jurisdictions to witness preparation, Rule 22.5 of the new SIAC rules expressly permits witness interviews. The former version of Rule 22.5 stated that “[s]ubject to the mandatory provisions of any applicable law, it shall be proper for any party or its representatives to interview any witness or potential witness prior to his appearance at any hearing.” The new rule has discarded the mandatory law exception and now states that “[i]t shall be permissible for any party or its representatives to interview any witness or potential witness (that may be represented by that party) prior to his appearance at any hearing.” While the new Rule 22.5 would not override applicable mandatory national law prohibiting witness interviews in an international arbitration (which, in any event, would arguably be inconsistent with the New York Convention), it nevertheless reflects the practice and expectations of parties and tribunals in international arbitration.

The change also brings the SIAC rules into line with other leading rules on arbitral procedure that expressly recognize the permissibility of interviewing witnesses prior to hearings, including Rule 25.2 of the Swiss Rules of International Arbitration, which provides that “[i]t is not improper for a party … to interview witnesses, potential witnesses, or expert witnesses,” and Rule 4.3 of the IBA Rules on the Taking of Evidence in International Arbitration, which similarly provides that “[i]t shall not be improper for a Party … to interview its witnesses or potential witnesses and to discuss their prospective testimony with them.”

Additional Powers of Tribunals

Rule 24 of the new SIAC rules broadens the powers of tribunals. The former version of Rule 24(e) provided that “the Tribunal shall have the power to … order the parties to make any property or item available, for inspection in the parties’ presence, by the Tribunal or any expert.” The presence requirement and the qualification that the tribunal or any expert must be able to perform the inspection have been eliminated. Rule 24(e) now broadly provides that “the Tribunal shall have the power to … order the parties to make any property or item available for inspection.”

Rule 24(n) is a completely new provision made in response to the Singapore Court of Appeal’s decision in PT Prima International Development v. Kempinski Hotels SA [2012] SGCA 35. Rule 24(n) provides that “the Tribunal shall have the power to … decide, where appropriate, any issue not expressly or impliedly raised in the submissions filed under Rule 17 [written submissions] provided such issue has been clearly brought to the notice of the other party and that other party has been given adequate opportunity to respond.” This provision thus empowers a tribunal to act in a situation where a new issue has arisen, for example, during document disclosure or at a hearing, so long as there is notice and an opportunity to be heard on the new issue.

Jurisdiction Challenges

Rule 25.1 has been amended to create a two-step procedure for addressing a challenge made to the jurisdiction of SIAC prior to the constitution of a tribunal. Under the new version of the rule, the challenge will go first to the Registrar, who will determine if the objection should be referred to the Court. If the Registrar refers the matter to the Court and the Court determines that “it is prima facie satisfied” that there is a valid arbitration agreement, then the case goes forward without prejudice to the tribunal’s competence to rule on its own jurisdiction. The previous rule had a one-step process, i.e., a Committee of the Board (the predecessor to today’s Court in terms of case-administration matters) decided the matter without having a preliminary decision made by the Registrar.

Further, the term “scope” has been deleted from Rule 25.1. As a result, a party cannot raise an objection (prior to the appointment of the tribunal) that the scope of an arbitration agreement does not cover a claim or counterclaim. Parties were able to do so under the previous version of the rules.

Rule 36.1, which is an entirely new addition to the rules, provides that “the decisions of the President, Court and Registrar with respect to all matters relating to an arbitration shall be conclusive and binding upon the parties and the Tribunal” and that they “shall not be required to provide reasons for such decisions.” Rule 36.2, which is also new, goes on to provide that “the parties shall be taken to have waived any right of appeal or review in respect of any decisions of the President, the Court and the Registrar to any state court or other judicial authority.”

Publication of Awards

Rule 28.10 is another entirely new provision providing that “SIAC may publish any award with the names of the parties and other identifying information redacted.” This provision will prove to be very helpful to practitioners and academics but, at the same time, potentially unappealing for parties.

Post-Award Interest

Under Rule 28.7, tribunals established under the SIAC rules are now permitted to award post-award interest. The earlier version of this rule permitted interest to be awarded “ending not later than the date of the award.” The change makes the SIAC rules consistent with amendments to §§ 12(5) and 20 of Singapore’s International Arbitration Act made in 2012.

Costs

A new addition to Rule 30.2 permits the Registrar to fix separate advances on arbitration costs for claims and counterclaims. In addition, the term “apart from the costs of arbitration” has been deleted in Rule 33, which relates to legal and other costs. This change was made because Rule 31 already permits tribunals to apportion the costs of arbitration among parties, making the term in Rule 33 redundant and unnecessary.

Gary B. Born, Michelle Glassman Bock, and Thomas R. Snider

More from our authors:

	Litigation in the Netherlands. Civil Procedure, Arbitration and Administrative Litigation - 2nd Edition by Marieke van Hooijdonk, Peter V. Eijsvoogel € 70
	Yearbook Commercial Arbitration Volume XXXVII 2012 by Albert Jan Van Den Berg (ed.) € 215
	International Arbitration: Law and Practice by Gary B. Born € 30
	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

Wilmer Cutler Pickering Hale and Dorr LLP,
for WilmerHale

The Singapore International Arbitration Centre (“SIAC”) has issued new rules that came into force on April 1, 2013. The rules changes are accompanied by new Practice Notes for cases administered by SIAC under its rules and the UNCITRAL rules that also came into force on the same date. While the changes do not reflect a significant overhaul of the prior version of the institution’s rules, they do contain important changes of which practitioners should be aware.

The 2013 rules are the fifth set of rules issued by SIAC, which promulgated previous versions in 1991, 1997, 2007, and 2010. The SIAC rules are one of several sets of arbitral rules to be updated in the last few years; other recent updates include the CIETAC rules (2012), the ICC rules (2012), the Swiss rules (2012), and the UNCITRAL rules (2010).

SIAC’s new rules are significant in part because of the institution’s substantial and growing caseload involving parties from around the world. According to its website, SIAC registered 235 cases during 2012 (the largest number of cases ever registered in a single year at SIAC) involving parties from 39 jurisdictions and was handling a total of 525 active cases at year’s end. The largest number of cases filed at SIAC in 2012 involved parties from Singapore, China, India, Indonesia, the United States, and Hong Kong. However, SIAC’s caseload extends well beyond the Asia-Pacific region, also including parties from Bermuda, the British Isles, the British Virgin Islands, Cayman Islands, Cyprus, Denmark, France, Germany, Liberia, Mauritius, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Arab Emirates, and the United Kingdom.

The most salient changes to the new rules are detailed below.

Court of Arbitration

The new SIAC rules establish a Court of Arbitration (“Court”) that takes over case administration functions from SIAC’s Board of Directors (“Board”), which will now focus on corporate and business development matters. The Court is comprised of 16 members from jurisdictions around the world with Dr. Michael Pryles serving as the Founder President of the Court.

The responsibilities of the Court under the new rules include rendering decisions on challenges to arbitrators (Rule 13) and jurisdictional challenges (Rule 25). The President of the Court will have responsibility for determining applications for expedited procedures (Rule 5) and appointment of arbitrators (Rules 6-10) and emergency arbitrators (Schedule 1). While the SIAC rules now use terminology similar to that of the ICC International Court of Arbitration, the SIAC Court does not exercise the more involved review function of its ICC counterpart.

Commencement of the Arbitration

The new rules give the SIAC Registrar the power to determine when an arbitration has commenced. Under Rule 3.3, the Registrar is now responsible for determining that a notice of arbitration is in “substantial compliance” with Rule 3.1, which sets out the requirements for notices of arbitration.

Time Limits

Changes in the new SIAC rules to time limits are minimal but important. A new Rule 2.5 has been added that permits the Registrar to “extend or shorten any time limits prescribed under” the rules. In addition, Rule 9 on multi-party appointment of arbitrators has been amended to give parties 28 days or a time period set by the Registrar to make a joint appointment (absent an agreement by the parties) calculated from the date on which the Registrar received the notice of arbitration rather than the date of the filing of the notice of arbitration as had been the standard in the previous version of the rules.

Investment Arbitration

In a nod to the growing number of investment arbitration cases being heard at arbitral institutions other than ICSID, Rule 3.1(d) of the new SIAC rules notes that the notice of arbitration must include a reference to the contract “or other instrument [e.g., investment treaty]” underlying the dispute.

Substitute Arbitrators

Rule 14.1 now allows a substitute arbitrator to be appointed in cases involving the “removal” of an arbitrator. Previously, the rules provided for the appointment of a substitute arbitrator only in the event of a “death” or “resignation” of an arbitrator.

Party Representatives

The new rules loosen the regulation of party representatives by SIAC and arbitral tribunals comprised under it. Whereas the former version of Rule 20 provided that “[a]ny party may be represented by legal practitioners or any other representatives, subject to such proof of authority as the Registrar or the Tribunal may require,” the new version of Rule 20 dispenses with the proof requirement and simply provides that “[a]ny party may be represented by legal practitioners or any other representatives.” This is an important change that reaffirms the fundamental principles of party autonomy and the freedom of a party to choose its own counsel in international arbitral proceedings.

Witness Interviews

In direct recognition of the various approaches taken by different jurisdictions to witness preparation, Rule 22.5 of the new SIAC rules expressly permits witness interviews. The former version of Rule 22.5 stated that “[s]ubject to the mandatory provisions of any applicable law, it shall be proper for any party or its representatives to interview any witness or potential witness prior to his appearance at any hearing.” The new rule has discarded the mandatory law exception and now states that “[i]t shall be permissible for any party or its representatives to interview any witness or potential witness (that may be represented by that party) prior to his appearance at any hearing.” While the new Rule 22.5 would not override applicable mandatory national law prohibiting witness interviews in an international arbitration (which, in any event, would arguably be inconsistent with the New York Convention), it nevertheless reflects the practice and expectations of parties and tribunals in international arbitration.

The change also brings the SIAC rules into line with other leading rules on arbitral procedure that expressly recognize the permissibility of interviewing witnesses prior to hearings, including Rule 25.2 of the Swiss Rules of International Arbitration, which provides that “[i]t is not improper for a party … to interview witnesses, potential witnesses, or expert witnesses,” and Rule 4.3 of the IBA Rules on the Taking of Evidence in International Arbitration, which similarly provides that “[i]t shall not be improper for a Party … to interview its witnesses or potential witnesses and to discuss their prospective testimony with them.”

Additional Powers of Tribunals

Rule 24 of the new SIAC rules broadens the powers of tribunals. The former version of Rule 24(e) provided that “the Tribunal shall have the power to … order the parties to make any property or item available, for inspection in the parties’ presence, by the Tribunal or any expert.” The presence requirement and the qualification that the tribunal or any expert must be able to perform the inspection have been eliminated. Rule 24(e) now broadly provides that “the Tribunal shall have the power to … order the parties to make any property or item available for inspection.”

Rule 24(n) is a completely new provision made in response to the Singapore Court of Appeal’s decision in PT Prima International Development v. Kempinski Hotels SA [2012] SGCA 35. Rule 24(n) provides that “the Tribunal shall have the power to … decide, where appropriate, any issue not expressly or impliedly raised in the submissions filed under Rule 17 [written submissions] provided such issue has been clearly brought to the notice of the other party and that other party has been given adequate opportunity to respond.” This provision thus empowers a tribunal to act in a situation where a new issue has arisen, for example, during document disclosure or at a hearing, so long as there is notice and an opportunity to be heard on the new issue.

Jurisdiction Challenges

Rule 25.1 has been amended to create a two-step procedure for addressing a challenge made to the jurisdiction of SIAC prior to the constitution of a tribunal. Under the new version of the rule, the challenge will go first to the Registrar, who will determine if the objection should be referred to the Court. If the Registrar refers the matter to the Court and the Court determines that “it is prima facie satisfied” that there is a valid arbitration agreement, then the case goes forward without prejudice to the tribunal’s competence to rule on its own jurisdiction. The previous rule had a one-step process, i.e., a Committee of the Board (the predecessor to today’s Court in terms of case-administration matters) decided the matter without having a preliminary decision made by the Registrar.

Further, the term “scope” has been deleted from Rule 25.1. As a result, a party cannot raise an objection (prior to the appointment of the tribunal) that the scope of an arbitration agreement does not cover a claim or counterclaim. Parties were able to do so under the previous version of the rules.

Rule 36.1, which is an entirely new addition to the rules, provides that “the decisions of the President, Court and Registrar with respect to all matters relating to an arbitration shall be conclusive and binding upon the parties and the Tribunal” and that they “shall not be required to provide reasons for such decisions.” Rule 36.2, which is also new, goes on to provide that “the parties shall be taken to have waived any right of appeal or review in respect of any decisions of the President, the Court and the Registrar to any state court or other judicial authority.”

Publication of Awards

Rule 28.10 is another entirely new provision providing that “SIAC may publish any award with the names of the parties and other identifying information redacted.” This provision will prove to be very helpful to practitioners and academics but, at the same time, potentially unappealing for parties.

Post-Award Interest

Under Rule 28.7, tribunals established under the SIAC rules are now permitted to award post-award interest. The earlier version of this rule permitted interest to be awarded “ending not later than the date of the award.” The change makes the SIAC rules consistent with amendments to §§ 12(5) and 20 of Singapore’s International Arbitration Act made in 2012.

Costs

A new addition to Rule 30.2 permits the Registrar to fix separate advances on arbitration costs for claims and counterclaims. In addition, the term “apart from the costs of arbitration” has been deleted in Rule 33, which relates to legal and other costs. This change was made because Rule 31 already permits tribunals to apportion the costs of arbitration among parties, making the term in Rule 33 redundant and unnecessary.

Gary B. Born, Michelle Glassman Bock, and Thomas R. Snider

More from our authors:

	Litigation in the Netherlands. Civil Procedure, Arbitration and Administrative Litigation - 2nd Edition by Marieke van Hooijdonk, Peter V. Eijsvoogel € 70
	Yearbook Commercial Arbitration Volume XXXVII 2012 by Albert Jan Van Den Berg (ed.) € 215
	International Arbitration: Law and Practice by Gary B. Born € 30
	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

International Moot Court Competition Association (IMCCA)

and Oleg Temnikov

I. Bureau Veritas v. Republic of Paraguay

In the recent Further decision on objections to jurisdiction dated October 9, 2012 the tribunal in Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC B.V. v. Paraguay (ICSID Case No. ARB/07/9) dismissed BIVAC’s claim based on violation of the fair and equitable standard by reasoning that the dispute relates to mere refusal to pay invoices under a pre-shipment inspection contract and that, in doing so, Paraguay has not acted “in a manner that is qualitatively different from an ordinary contracting party.” The tribunal thus upheld the traditional distinction between mere breach of contract and treaty breach stating that “[s]omething more than mere breach of contract is needed.” (para. 246)

II. The traditional conception of the contract-treaty divide

Under the dogmatic conception of the contract-treaty divide, “the breach by a State of a contract does not as such entail a breach of international law. Something further is required… such as a denial of justice by the courts of the State…” (Comm. 6 to Art. 4 ILC’s Articles on State responsibility; Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/97/3, Decision on annulment, 3 July 2002, para. 95; etc.) In this regard, the BIVAC tribunal noted that it does not exclude the possibility that:

“a substantial breach of a contract could, as such, give rise [sic] a breach of [the FET standard]… [but] even [assuming that such a situation could] arise, the continued unhindered availability of a contractually agreed forum… would be a significant factor imposing an additional hurdle for a claimant to overcome.” (para. 246)

III. Can the investor succeed on a claim for expropriation or breach of the FET standard based on the host State’s refusal to pay?

The authors do not deny the traditional view of the contract-treaty divide. However, we find it more intellectually challenging to argue here for the investor who is faced with such an “additional hurdle”. Can he succeed on a claim of expropriation or breach of the FET standard that is a treaty claim? Moreover, it turns out that under the dogmatic view, a State may escape international responsibility by merely refusing to pay under a contract instead of taking covert measures which fall squarely into the definition of expropriation.

At the outset, we make the clarification that we are dealing here with the scenario in which the underlying contract qualifies as protected investment under the applicable BIT, the BIT does not contain an umbrella clause and the contract contains a forum selection clause referring all disputes to the host State’s courts. (Cf. Siemens A.G. v. the Argentine Republic, ICSID Case No. ARB/02/8, Award, 6 February 2007, para. 249)

3.1. The test of puissance publique is irrelevant

Previous tribunals dealing with the question of whether breach of contract may amount to expropriation or breach of the FET standard have applied a test of puissance publique, that is, they have sought to satisfy themselves that the State, in breaching the contract, acted in sovereign capacity (by e.g. enacting a law or decree attempting to expropriate or annul the debt) rather than as mere contracting party. (SGS Société Générale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6, Decision on jurisdiction, 29 January 2004, para. 161; etc.)

In the words of the Consortium RFCC v. Morocco tribunal:

“a State may perform a contract badly, but this will not result in a breach of treaty provisions, unless it be proved that the state… has gone beyond its role as a mere party to the contract, and has exercised the specific functions of a sovereign.” (ICSID Case No. ARB/00/6, Award, 22 December 2003, para. 65 translated in Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Award, 14 July 2006, para. 53)

Thus, the BIVAC tribunal held that, in refusing to pay, Paraguay acted as mere contracting party. (para. 246) On the facts, however, it seems strange to qualify the conduct of investigations and the establishment of a special Commission as ordinary commercial acts. (paras. 51, 60)

In any event, international law does not distinguish for the purposes of State responsibility whether the State acted as holder of jure imperii or not. (See Comm. 6 to Art. 4 of the ILC’s Articles on State responsibility) Notably, the tribunal in Bayindir Insaat Turizm Ticaret ve Sanayi A.Ş. v. Pakistan determined that:

“the test of ‘puissance publique’ would be relevant only if Bayindir was relying upon a contractual breach… In the present case, Bayindir… pursues exclusively Treaty Claims. When an investor invokes a breach of a BIT by the host State… the alleged treaty violation is by definition an act of ‘puissance publique’.” (ICSID Case No. ARB/03/29, Decision on jurisdiction, 14 November 2005, para. 183)

Similarly, in Impregilo S.p.A. v. Pakistan, the tribunal determined that:

“Only the State in the exercise of… puissance publique and not as a contracting party, may breach the obligations assumed under the BIT.” (ICSID Case No. ARB/03/3, Decision on jurisdiction, 22 April 2005, para. 260)

However, when making this statement the tribunal was speaking of Impregilo’s claims regarding unforeseen geological conditions which are outside the sovereign activity or even the control of the State. (para. 268; Cf. para. 284)

On the other hand, the case mostly cited in support of the view that “mere non-performance of a contractual obligation is not to be equated with a taking of property” is Waste Management. (Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Award, 30 April 2004, para. 174) Close examination or the text of the award shows, however, that the tribunal did not deny that “the outright refusal by a State to honour a money order or similar instrument… may well constitute… an actual expropriation.” (para. 168) The tribunal went on to distinguish the case at hand in that “[t]he question here is not one of final refusal to pay (combined with effective obstruction and denial of legal remedies)…” (para. 176; as to ‘denial of legal remedies’ see infra 3.3.) Rather, the tribunal referred to the Mexican financial crisis which affected payment under the contract. (para. 112)

3.2. The intention of the host State shall be taken into account

Some tribunals have looked to the intention of the State. Thus, the investor’s claim in Waste Management could have succeeded had it shown evidence of “sectoral or local prejudice.” (para. 115; see also, Impregilo S.p.A. v. Argentina, ICSID Case No. ARB/07/17, Award, 21 June 2011, para. 278; Eureko B.V. v. Poland (Netherlands-Poland BIT ad hoc arbitration) Partial Award, 19 August 2005, para. 233) Be that as it may, our main proposition is that, even without providing evidence of the State’s motivation, the investor may overcome the aforesaid jurisdictional hurdle.

3.3. Recourse to local courts is not a pre-condition for treaty claims

Under the dogmatic view as above described, “[a] mere refusal to pay a debt is not an expropriation of property… where remedies exist in respect of such a refusal.” (SGS v. Philippines, para. 161) The problem with this proposition is that, absent contrary stipulation in the BIT, the exhaustion of local remedies is not a prerequisite to an ICSID tribunal’s jurisdiction, rather the idea was to dispose of this requirement. (See Article 26 ICSID Convention)

Therefore, a forum selection clause found in the underlying contract – providing for the jurisdiction of the host State’s courts in contractual matters – shall not obstruct the investor’s treaty claims. (See e.g. Vivendi v. Argentina, para. 101)

Importantly, the Committee in Helnan International Hotels A/S v. Egypt has held:

“[Such a requirement would] do by the back door that which the Convention expressly excludes by the front door… [I]t would empty the development of investment arbitration of much of its force and effect, if, despite a clear intention of States parties not to require the pursuit of local remedies as a pre-condition to arbitration, such a requirement were to be read back in… It would leave the investor only with a complaint of unfair treatment based upon denial of justice.” (ICSID Case No. ARB/05/19, Decision on annulment, 14 June 2010, paras. 47, 53)

Similarly, the tribunal in Alpha Projektholding GmbH v.Ukraine observed:

“Whether Claimant could have enforced its rights in local courts… is not relevant… Claimant chose to seek a remedy through international arbitration instead, as it is entitled to do.” (ICSID Case No. ARB/07/16, Award, 8 November 2010, para. 411)

In this regard, the BIVAC tribunal’s reasoning that “a substantial breach of a contract could constitute a violation of a treaty [so far as there is] preliminary determination” by the competent local court (para. 274) is to be criticized for dismissing the investor’s claim without a second thought.

3.4. The investor’s legitimate expectations include the host State’s obligation to observe contractual obligations

As to the FET standard, in finding no arguable case under it, the BIVAC tribunal noted that “the Claimant has not been able to cite any authority for the proposition that international law imposes any obligation as such on a State to pay moneys owing under a contract.” (para. 270) Such a sweeping statement shall be measured against other decisions in which there is support for the proposition that observance of contracts falls into investor’s legitimate expectations. Thus, the tribunal in Toto Costruzioni Generali S.P.A. v. Lebanon observed that “[l]egitimate expectations may follow from… representations made by the host state, or from its contractual commitments.” (ICSID Case No. ARB/07/12, Award, 7 June 2012, para. 159)

Moreover, the tribunal in Noble Ventures, Inc. v. Romania stated:

“[The FET] standard… can be consider[ed] to be a more general standard which finds its specific application in inter alia the duty… to observe contractual obligations towards the investor.” (ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 182)

Further, the tribunal in Impregilo S.p.A. v. Argentina dismissed Impregilo’s claim based on the FET standard stating that “the existence of legitimate expectations and the existence of contractual rights are two separate issues.” (para. 292) But the sole reason upon which the tribunal based its pronouncement was the test of puissance publique (para. 294) and we already showed above why this reasoning is not persuasive.

IV. The need for reconsideration

The above survey of arbitral practice shows that the existing inconsistency of decisions and the preconception that a host State’s refusal to pay under a contract does not amount to expropriation or breach of the FET standard deserve further clarification.

This will also affect the question of admissibility of claims and stay of proceedings in cases such as SGS Société Générale de Surveillance S.A. v. Pakistan (ICSID Case No. ARB/01/13, Decision on jurisdiction, 6 August 2003), SGS v. Philippines and BIVAC. The preferred approach is that in SGS v. Paraguay where the tribunal held that treaty claims are not co-extensive with contract claims “they are not necessarily disposed of by the four corners of the Contract.” (SGS Société Générale de Surveillance S.A. v. Paraguay, ICSID Case No. ARB/07/29, Decision on jurisdiction, 12 February 2010, para. 173) The tribunal, therefore, declined to stay proceedings awaiting the decision of the national court, otherwise it would be “at risk of failing to carry out its mandate” (para. 172) which is a ground for annulment under Article 52(1)(b) ICSID Convention.

V. Conclusion

As the tribunal in Robert Azinian, Kenneth Davitian, & Ellen Baca v. The United Mexican States (ICSID Case No. ARB(AF)/97/2, Award, 1 November 1999) noted “[l]abelling is… no substitute for analysis… The egregiousness of any breach is in the eye of the beholder…” (para. 90)

This analysis shows that neither the test of puissance publique, nor the existence of available local remedies is a good reason to dismiss claims for expropriation or breach of the FET standard based on the State’s ‘mere’ refusal to pay. It is hoped that arbitrators will keep an open eye and more importantly, an open mind, when facing such claims in the future.

Inna Uchkunova wishes to thank Oleg Temnikov for the little conversations which have instilled great inspiration for this and other projects.

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In Part I it was argued that the proper law applicable in the investor-State disputes under Article 42 (1) ICSID Convention depends on the substantive grounds of the investor’s claim. In support of this, I have outlined three factual scenarios and types of claims with evidence from case law. Part I dealt with host State domestic law and  the direct relationship between investor and State. The ICSID case law on the latter supporting the analysis from Part I is as follows:

2.1.                        Case law examples

In SOABI v Republic of Senegal (ARB/82/1) there was a contract between the investor and the Government of Senegal. In para 5.02 of the award the Tribunal directed itself straight to Senegalese law, i.e. host State law, without any consideration of international law. The Tribunal explicitly recognised in its reasoning two connecting factors of the investment to Senegal and its national law – the project was located in the country and Senegalese parties were involved as well. The award may be interpreted as also providing support for the following conclusions:

• Where there is a nexus, especially a contractual one, between the investor and the host State, the relationship and the dispute arising out of it should be exclusively within the realm of national law of the host State.
• Even if there is a choice of law in the nexus instrument, the Tribunal may make use of private international law technique as to determine proper applicable law, which the case seems to demonstrate by the use of connecting factors to direct the project exclusively within the scope of domestic law.

In Autopista Concesionada de Venezuela v Bolivarian Republic of Venezuela (ARB/00/5) the Tribunal had to make an assessment of the applicability of international law in a dispute arising out of a concession agreement. It was acknowledged that this situation calls for a different treatment from the one under international law instruments like BITs. The nature of the dispute was contractual and the relationship was recognised as governed by domestic Venezuelan law. The Tribunal reiterated that international law should have corrective and supplementary role but not beyond this extent for that particular dispute (para 102 of the award). However, under Venezuelan domestic law, international law should have primacy over contradicting national legislation. Hence, the position of the Tribunal should not be surprising since the acknowledged role of international law in the dispute is predetermined by the general place of international law within the system of host State law – international law may in fact correct contradicting domestic law. The Tribunal refused delving into greater importance of international law in this scenario and treated the disputed as a mere contractual claim applying the status of Venezuelan law, including incorporated international law.

3                Scenario 3: basis of the investor’s claim is a public international law instrument

3.1.                        Scenario 3 bears a stark difference to Scenarios 2 and 3. If the investor relies on rights granted by virtue of a bilateral or multilateral international law instrument, then the applicable rules should be evinced from the bulk of international law. The precise scope of this bulk may be determined by reference to the Statute of the International Court of Justice, Article 38, which lays down the array of source of international law. The primary rules governing the relationship between the parties to the dispute would be, however, the particular BIT or MIT (which does not rule out the applicability of customary international law). As subsidiary and complementary rules the tribunal should apply other treaties or customary international law and, if necessary, make use of judicial decisions and doctrine. Furthermore, as the investor seeks to trigger the liability of the State for internationally wrongful acts, this calls for the application of the rules on state responsibility which are rules of public international law (e.g. International Law Commission’s Draft Articles on State Responsibility, and relevant case law).

Would there be, however, any relevance of national law of host State in this scenario?

As a matter of fact, the dispute arises out of circumstances primarily related to host State. The rights acquired by the investor are usually those stemming from relations situated within the host State. No matter whether the investor has obtained licenses, permits, authorizations, etc. from the authorities of the host State, or contracted with local natural or corporate persons, or acquired real estate rights, corporate membership, etc., all these rights of the investor, and the respective duties of the host State or third local parties are, usually, based on host State’s national law. However, a line of distinction should be drawn. The provisions of national law may be relevant as governing the outlined array of rights and duties. But the purpose of the proceedings brought before the arbitral tribunal constituted under ICSID Convention due to a BIT/MIT claim is to assess the compatibility of State’s conduct as a fact against the standards required by particular international law instrument(s). Therefore national law would not be, properly speaking, applicable law. The role of national law would be as a fact that the tribunal should treat and take into account in its consideration and application of the appropriate law. To a great extent, this role resembles the relevance of foreign law in municipal court proceedings or municipal law before international tribunals such as International Court of Justice, European Court of Human Rights, etc.

3.2.                        Case law examples

In El Paso Energy International v Argentine Republic (ARB/03/15) the Tribunal made an extensive pronouncement on the interplay between BIT application, international law and national law. It agreed with other Tribunals, for instance in Asian Agricultural Products v Sri Lanka (ARB/87/3), that the international law instrument granting rights to the investor, serving as basis of its claim, is the lex specialis where the determination of applicable law should start from (para 24 of the award). The application of a public international law instrument naturally calls for the application of all relevant rules of international law (e.g. on interpretation of treaties, liability for breach of treaties, etc.), thus rendering international law primary and having a leading role. Therefore, a preliminary issue that should be dealt with prior to establishing a breach of international law is to what extent State’s acts and omissions are compatible with the international standards. The nature of these acts and omissions is governed by national law and relations between the investor and the State, and any third parties, are governed by the domestic law of the host State. This is why the Tribunal concluded that:

“The fact that the BIT and international law govern the issue of Argentina’s responsibility for violation of the treaty does not exclude that the domestic law of Argentina has a role to play too. The Tribunal agrees with the Claimant that this role is to inform the content of those commitments made by Argentina to Claimant that the latter alleges to have been violated. Thus, in order to establish which rights have been recognised by Argentina to the Claimant as a foreign investor, resort will have to be had to Argentina’s law. However, whether a modification or cancellation of such rights, even if legally valid under Argentina’s law, constitutes a violation of a protection guaranteed by the BIT is a matter to be decided solely on the basis of the BIT itself and the other applicable rules of international law.” (para 135 of the award)

Similarly in Azurix Corp v Argentine Republic (ARB/30/3) the Tribunal determined that the Argentinean law should necessarily be dealt with in the decision making process for the purposes of inquiring into host State’s liability. However, the treaty basis of the claims did not allow further utilization of national law (para 67 of the award).

Is it possible that in this scenario host State law may still function as law? The relevant criterion is whether a tribunal should give rise to the legal consequences that a domestic rule of law engenders or would use the rule to be measured against a standard in an international law instrument and thus trigger the consequences envisioned in the international instrument. If such an international law instrument makes a reference to a national rule, a tribunal should treat this reference like the function of conflict rules in private international law. The international standard directs to giving rise of a domestic law rule and thus it renders it applicable – not relevant as a fact but applicable as law. This analysis seems to find support in Asian Agricultural Products v Sri Lanka where (paras 21 and 24 of the award) the Tribunal reasoned that a BIT may incorporate domestic law rules and thus render them source of law  supplementary to international law. A BIT, as in that case, may refer to certain rules or standards in host State law, which the tribunal would have to apply directly as the international law instrument requires so.

Conclusion

Article 42 (1) of ICSID Convention should be perceived, as demonstrated by this analysis, as a general source of powers of the arbitral tribunal regarding the pool of rules from which the tribunal may select the particular rules appropriate for application in the concrete factual situation. Which rules would be proper for application is thus premised on the factual circumstances (and the cause of action) and are not a priori determined by the ambit of the provision of the Convention. The case law examples demonstrate a differentiated approach of Tribunals and one of the criteria for such diversity may exactly be the cause of action relied upon by the investor. Neither domestic law nor international law provide for conclusive result as to proper applicable law determination. It is important to note the distinction between Scenarios 1 and 2, on one hand, and Scenario 3, on the other. If international law is applied on equal basis with national law in Scenarios 1 and 2, this would in fact “internationalise” investor-State relations, especially contracts, while such relations by their nature are primarily absorbed into a domestic law system. The true “internationalisation” is in Scenario 3, which is engendered by the treaty basis of the claim and the basis of the protected rights.

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In Part I it was argued that the proper law applicable in the investor-State disputes under Article 42 (1) ICSID Convention depends on the substantive grounds of the investor’s claim. In support of this, I have outlined three factual scenarios and types of claims with evidence from case law. Part I dealt with host State domestic law and  the direct relationship between investor and State. The ICSID case law on the latter supporting the analysis from Part I is as follows:

2.1.                        Case law examples

In SOABI v Republic of Senegal (ARB/82/1) there was a contract between the investor and the Government of Senegal. In para 5.02 of the award the Tribunal directed itself straight to Senegalese law, i.e. host State law, without any consideration of international law. The Tribunal explicitly recognised in its reasoning two connecting factors of the investment to Senegal and its national law – the project was located in the country and Senegalese parties were involved as well. The award may be interpreted as also providing support for the following conclusions:

• Where there is a nexus, especially a contractual one, between the investor and the host State, the relationship and the dispute arising out of it should be exclusively within the realm of national law of the host State.
• Even if there is a choice of law in the nexus instrument, the Tribunal may make use of private international law technique as to determine proper applicable law, which the case seems to demonstrate by the use of connecting factors to direct the project exclusively within the scope of domestic law.

In Autopista Concesionada de Venezuela v Bolivarian Republic of Venezuela (ARB/00/5) the Tribunal had to make an assessment of the applicability of international law in a dispute arising out of a concession agreement. It was acknowledged that this situation calls for a different treatment from the one under international law instruments like BITs. The nature of the dispute was contractual and the relationship was recognised as governed by domestic Venezuelan law. The Tribunal reiterated that international law should have corrective and supplementary role but not beyond this extent for that particular dispute (para 102 of the award). However, under Venezuelan domestic law, international law should have primacy over contradicting national legislation. Hence, the position of the Tribunal should not be surprising since the acknowledged role of international law in the dispute is predetermined by the general place of international law within the system of host State law – international law may in fact correct contradicting domestic law. The Tribunal refused delving into greater importance of international law in this scenario and treated the disputed as a mere contractual claim applying the status of Venezuelan law, including incorporated international law.

3                Scenario 3: basis of the investor’s claim is a public international law instrument

3.1.                        Scenario 3 bears a stark difference to Scenarios 2 and 3. If the investor relies on rights granted by virtue of a bilateral or multilateral international law instrument, then the applicable rules should be evinced from the bulk of international law. The precise scope of this bulk may be determined by reference to the Statute of the International Court of Justice, Article 38, which lays down the array of source of international law. The primary rules governing the relationship between the parties to the dispute would be, however, the particular BIT or MIT (which does not rule out the applicability of customary international law). As subsidiary and complementary rules the tribunal should apply other treaties or customary international law and, if necessary, make use of judicial decisions and doctrine. Furthermore, as the investor seeks to trigger the liability of the State for internationally wrongful acts, this calls for the application of the rules on state responsibility which are rules of public international law (e.g. International Law Commission’s Draft Articles on State Responsibility, and relevant case law).

Would there be, however, any relevance of national law of host State in this scenario?

As a matter of fact, the dispute arises out of circumstances primarily related to host State. The rights acquired by the investor are usually those stemming from relations situated within the host State. No matter whether the investor has obtained licenses, permits, authorizations, etc. from the authorities of the host State, or contracted with local natural or corporate persons, or acquired real estate rights, corporate membership, etc., all these rights of the investor, and the respective duties of the host State or third local parties are, usually, based on host State’s national law. However, a line of distinction should be drawn. The provisions of national law may be relevant as governing the outlined array of rights and duties. But the purpose of the proceedings brought before the arbitral tribunal constituted under ICSID Convention due to a BIT/MIT claim is to assess the compatibility of State’s conduct as a fact against the standards required by particular international law instrument(s). Therefore national law would not be, properly speaking, applicable law. The role of national law would be as a fact that the tribunal should treat and take into account in its consideration and application of the appropriate law. To a great extent, this role resembles the relevance of foreign law in municipal court proceedings or municipal law before international tribunals such as International Court of Justice, European Court of Human Rights, etc.

3.2.                        Case law examples

In El Paso Energy International v Argentine Republic (ARB/03/15) the Tribunal made an extensive pronouncement on the interplay between BIT application, international law and national law. It agreed with other Tribunals, for instance in Asian Agricultural Products v Sri Lanka (ARB/87/3), that the international law instrument granting rights to the investor, serving as basis of its claim, is the lex specialis where the determination of applicable law should start from (para 24 of the award). The application of a public international law instrument naturally calls for the application of all relevant rules of international law (e.g. on interpretation of treaties, liability for breach of treaties, etc.), thus rendering international law primary and having a leading role. Therefore, a preliminary issue that should be dealt with prior to establishing a breach of international law is to what extent State’s acts and omissions are compatible with the international standards. The nature of these acts and omissions is governed by national law and relations between the investor and the State, and any third parties, are governed by the domestic law of the host State. This is why the Tribunal concluded that:

“The fact that the BIT and international law govern the issue of Argentina’s responsibility for violation of the treaty does not exclude that the domestic law of Argentina has a role to play too. The Tribunal agrees with the Claimant that this role is to inform the content of those commitments made by Argentina to Claimant that the latter alleges to have been violated. Thus, in order to establish which rights have been recognised by Argentina to the Claimant as a foreign investor, resort will have to be had to Argentina’s law. However, whether a modification or cancellation of such rights, even if legally valid under Argentina’s law, constitutes a violation of a protection guaranteed by the BIT is a matter to be decided solely on the basis of the BIT itself and the other applicable rules of international law.” (para 135 of the award)

Similarly in Azurix Corp v Argentine Republic (ARB/30/3) the Tribunal determined that the Argentinean law should necessarily be dealt with in the decision making process for the purposes of inquiring into host State’s liability. However, the treaty basis of the claims did not allow further utilization of national law (para 67 of the award).

Is it possible that in this scenario host State law may still function as law? The relevant criterion is whether a tribunal should give rise to the legal consequences that a domestic rule of law engenders or would use the rule to be measured against a standard in an international law instrument and thus trigger the consequences envisioned in the international instrument. If such an international law instrument makes a reference to a national rule, a tribunal should treat this reference like the function of conflict rules in private international law. The international standard directs to giving rise of a domestic law rule and thus it renders it applicable – not relevant as a fact but applicable as law. This analysis seems to find support in Asian Agricultural Products v Sri Lanka where (paras 21 and 24 of the award) the Tribunal reasoned that a BIT may incorporate domestic law rules and thus render them source of law  supplementary to international law. A BIT, as in that case, may refer to certain rules or standards in host State law, which the tribunal would have to apply directly as the international law instrument requires so.

Conclusion

Article 42 (1) of ICSID Convention should be perceived, as demonstrated by this analysis, as a general source of powers of the arbitral tribunal regarding the pool of rules from which the tribunal may select the particular rules appropriate for application in the concrete factual situation. Which rules would be proper for application is thus premised on the factual circumstances (and the cause of action) and are not a priori determined by the ambit of the provision of the Convention. The case law examples demonstrate a differentiated approach of Tribunals and one of the criteria for such diversity may exactly be the cause of action relied upon by the investor. Neither domestic law nor international law provide for conclusive result as to proper applicable law determination. It is important to note the distinction between Scenarios 1 and 2, on one hand, and Scenario 3, on the other. If international law is applied on equal basis with national law in Scenarios 1 and 2, this would in fact “internationalise” investor-State relations, especially contracts, while such relations by their nature are primarily absorbed into a domestic law system. The true “internationalisation” is in Scenario 3, which is engendered by the treaty basis of the claim and the basis of the protected rights.

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Rationalizing applicable law in investor-State disputes in absence of express choice of law under Article 42 (1) of ICSID Convention

PART I

Article 42 of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) determines the powers of an arbitral tribunal constituted under the ICSID Convention as to applicable law in investor-State disputes.

Paragraph 1 of the Article has been subject of varying interpretation in both practice and doctrine, especially as to the determination of applicable law in cases of absence of express choice of law. The interpretation of the Article oscillates from absolute focus on national law of host State to complete preference of international law. However, it is possible to rationalize the scope of applicable law under Article 42 (1) in light of the model factual scenarios which may be brought to the ICSID dispute resolution mechanism.

The present diversity of views as to the proper understanding of Article 42 (1) is engendered by the attempt to reach an overarching and absolute interpretation of applicable law “wrapping” domestic law and international law in an indivisible package. However, it is hereby proposed that Article 42 (1) should rather be interpreted as delimiting the general array of powers provided to ICSID tribunals, i.e. the law that may be applied, while the concrete law applicable to a particular case would depend on the circumstances of this case and, most of all, the legal basis of the aggrieved investor’s claim so that the tribunals may apply either domestic or international law, or both. The substantive grounds for the Investor’s claim lie in a substantive law already tightly linked to the facts of the case.  Hence, there is a trigger prior to the stage where the tribunal exercises its powers under Article 42 (1) in the absence of express choice of law and this is the claim brought by the investor and its cause of action, its substantive law basis – which actually incorporates his substantive rights that the investor claims to be prejudiced.  Below follows an analysis of three factual situations which predetermine what would be the proper law determinable under Article 42 (1).

1.                      Scenario 1: basis of investor’s claim is a national law provision of the host State.

1.1                    An investor-State dispute may arise out of national legislation, for instance laws enacting incentives to investors. In such case the rights of the investor and the respective obligations of the State stem from the domestic law of the host State. Without surprise the proper applicable law would be the national law of the host state.

This may be supported by an argument borrowed from the area of private international law (conflict of laws). In a situation involving a foreign entity making investment in another country the relations between the investor and the host State has to be connected to certain legal order. Although usually located on the territory one country, the investment apparently features an international element which triggers the relevance of private international law techniques. The variety of types of rights the investor has acquired – real estate, stock/debentures, contractual in personam rights, intellectual property, etc., would all be granted by the national law of the host State and hence the investment would be linked in closest manner to the domestic law of the host State. On basis of these closest connecting factors the lex proximus should be the law of the host State.

Would there be any application of international law in this scenario? It can be argued that international law may be applicable but only to the extent it is a part of the municipal law of the host State. In such regard the starting point should be to determine the position of the host State to international law – whether a monist or dualist one, and in what manner rules of international law become incorporated in its national law. Each domestic law lays down the hierarchical place of international law, both treaties and customary international law, within its structure.

A number of tribunals (and doctrine) have considered that international law may have corrective role, derogating contrary provisions of national law, or subsidiary role if national law features lacunae to be filled by international law. However, if a national law features lacunae, the proper way to address the issue would be to seek sources of solution within the body of rules (and principles) of national law instead of direct recourse to public international law.  Therefore, it is more reasonable to adopt a view based on the relevance of international law as incorporated within the host State law, as would be demonstrated by the review of case law.

1.2.                    Case law examples

In SPP v Arab Republic of Egypt (ARB/84/3) the dispute arose out of provisions of the national legislation of Egypt with respect to a hotel construction project adjacent to the pyramids near Cairo. The legal basis of investor’s claim was the Egyptian Law No. 43 of 1974. When considering the ambit of applicable law (paras 74-80 of the award) the Tribunal acknowledged the applicability of national law of the host State. However, the Tribunal did not rule out application of rules of international law. As a theoretical consideration, it was suggested that international law would enter into play in case of lacunae to be filled by it. Moreover, the Tribunal applied rules regarding attribution of acts and omissions of State from the area of State responsibility as customary international law but it explicitly recognised that acts of State officials are in breach of principles of international law, thus considering two separate grounds for liability of Egypt – its national legislation, which the Tribunal applied, and potential violation of international standards (e.g. from customary international law), which streamlines the role of application of international law rules such as those on attribution from the area of State responsibility.

Similarly, in Tradex Hellas v Republic of Albania (ARB/94/2), the cause of action of the investor was Albanian Law No. 7764 of 1993. The Tribunal reasoned (para 69 of the award) that the proper applicable law should be the law of the host State. International law could have been invoked only to the extent of interpretation of concepts such as expropriation that were already incorporated in the national legislation of the host State (Albania).

The decision of the Annulment Committee in Wena Hotels v Arab Republic of Egypt (ARB/98/4) can be interpreted as an argument in the same vein. The Committee had to establish the relationship between domestic Egyptian law and application of international law and whether the Tribunal in the case made manifestly erroneous application of law. The Committee based its conclusions regarding the role of international law upon Egyptian constitution which granted priority of international law instruments over national legislation. Therefore it may be construed that the applicability of rules of international law does not draw upon the postulate of Article 42 (1) alone but it is triggered by the place of international law within the system of particular domestic law, as a result of which the Tribunal may make recourse to it. In such a case international law can have a corrective, supplementary or controlling function – but this would be so by virtue of international law’s position as being incorporated in municipal law, and not merely due to the second sentence of Article 42 (1).

2.                       Scenario 2: basis of investor’s claim is a direct “nexus” with the host State

2.1.                   This point first begs clarification of the term “nexus”. A “nexus” may be understood as a contractual link or a unilateral grant of rights, i.e. license, concession, authorization, permit, etc. in both cases establishing direct connection between the investor and the State. The analysis of this situation is to a significant extent similar to the one in Scenario 2.  The primary applicable rules would be those particular rules governing the nexus-based relationship. Since the nexus is a national law instrument, any relevant rules of national law should be applied as well.

It is possible that the parties to a contractual nexus, i.e. the investor and the State, choose applicable law different from the national law of the host State, given that this national law allows so. This choice of law, if properly made, seems to divert the applicable law under Article 42 (1) away from the national law of the host State. However, two possible corrections may be pertinent in this regard:

First, by virtue of a general technique of private international law, the choice of law of the nexus would not possibly derogate from cornerstone provisions of host State law, e.g. overriding mandatory rules, public policy, etc. so that these may be relevant to the application of the chosen law and thus, again, bring host State national law to the front.

Second, even if the parties to the nexus (most often a contract) opt for law applicable to the nexus other than that of the host State, the relationship between the investor and the State yet remains in closest connection to the host State and, therefore, its national law. If the lex proximus is in fact the law of the host State, this would suggest to the arbitral tribunal that the national law should be applied in its entirety without regard to the choice of law stipulated in the nexus.

The role of international law in such a situation would be as in Scenario 1.

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International Moot Court Competition Association (IMCCA)

and Oleg Temnikov

There is a Taoist fable of the three stupid men who were traveling together from one village to the next. They rested for the night under a banyan tree. In the morning, it turned out that the travelers have forgotten whose shoes are whose. Because none of the three men was able to walk in another man’s shoes or to recognize his own their journey ended under the banyan tree.

Foreword

On February 8, 2013 the tribunal in Tidewater and ors v. Venezuela (ICSID Case No. ARB/10/5) issued its Decision on jurisdiction. To the present authors it was of particular interest for the following passage:

“[Investment treaties] … may provide for investor-state arbitration, but only for a class of claims that is more limited ratione materiae than the total corpus of substantive rights vouchsafed under the treaty.” (para. 128)

Using this decision as an occasion, we here join in the debate as to whether the investor has substantive rights under a BIT or he is rather only permitted to step “into the shoes and asserting the rights of the home State”. (Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. The United Mexican States, ICSID Case No. ARB(AF)/04/05, Award, November 21, 2007, para. 169)

The roots of the debate: Investor’s substantive rights and countermeasures

The debate as to whether investors possess individual rights under BITs was brought to the forefront by the three “sweetener” cases which dealt with the question whether Mexico can rely on a defence of countermeasures against the United States to justify its breach of the NAFTA. To understand the matter, consider Comm. 5 to Art. 49 of the ILC’s Articles on State responsibility:

“[C]ountermeasures may […] incidentally affect the position of third States or indeed other third parties […] If they have no individual rights in the matter they cannot complain.”

It follows that if investors have individual rights under BITs, the host State cannot rely on a defence of countermeasures.

The first tribunal in Archer Daniels denied that investors have individual rights under the NAFTA and found that investors are permitted to enforce what are in essence inter-State rights: “Chapter Eleven sets forth substantive obligations which remain inter-State, without accruing individual rights for the Claimants.” (para. 168; See also paras. 169-180) As a result, the tribunal held that the Respondent State can rely on countermeasures. (para. 180)

The second tribunal in Corn Products International, Inc. v. The United Mexican States (ICSID Case No. ARB(AF)/04/01, Decision on responsibility, January 15, 2008) took exactly the opposite view: “In the case of Chapter XI of the NAFTA, the Tribunal considers that the intention of the Parties was to confer substantive rights directly upon investors.” (para. 169)

Therefore, it rejected the defence of countermeasures:

“A central purpose of Chapter XI… was to remove such claims from the inter-State plane and to ensure that investors could assert rights directly against a host State. The Tribunal considers that, in the context of such a claim, there is no room for a defence based upon the alleged wrongdoing not of the claimant but of its State of nationality, which is not a party to the proceedings.” (para. 161; See also paras. 176, 192)

Finally, the third tribunal in Cargill, Incorporated v. United Mexican States (ICSID Case No. ARB(AF)/05/2, Award, September 18, 2009) also supported the position that countermeasures may not preclude the wrongfulness of an act in breach of obligations owed to nationals of the ‘offending State’. (para. 422, See also para. 429)

None of the three tribunals discussed the possible implications of the Monetary Gold principle. According to said principle, whether legal interests of a third State (in the above cases the United States) not participating to the proceedings “would not only be affected by a decision, but would form the very subject-matter of the decision”¹ the judicial or arbitral body before which the claim is presented shall decline to exercise jurisdiction since the consent of the third State is a necessary precondition. This is another ground on which the defence of countermeasures must fail.²

Further support for the view that investors have substantive rights under BITs

Other arbitral awards³ as well as national court decisions⁴ recognize that investors have substantive rights. The International Law Commission has also supported this view in its study on the MFN clause:

“While the obligation to accord most-favoured nation treatment is undertaken by one State vis-à-vis another, the treatment promised thereby is one actually given in most cases to persons…” (Comm. 2 to Article 5 1978 Draft Articles on most-favoured-nation clauses with commentaries)

It is therefore submitted that the rights of investors are substantive and that they cannot be stripped of those rights by the host State’s exercise of countermeasures.⁵

This proposition is further supported by the fact that home States have no control over the investor’s claims. Likewise, the tribunal in Corn Products mentioned that:

“The individual may even advance a claim of which the State disapproves… That occurred in GAMI, in which the United States filed a submission that the Tribunal lacked jurisdiction…” (para. 173)

Other implications of the direct/procedural rights debate

The other implications of the debate turn on issues such as the continuous nationality rule⁶ and waiver of rights.

As to the continuous nationality rule it suffice to mention that since the rights under BITs accrue to investors and are not constrained in the inter-State diplomatic protection model⁷ there is no requirement that the claimant shall have the nationality of the home State continuously from the date of the injury to the date of the award, but need only establish that it had the nationality of the home State on the two dates specified in Article 25(2)(a) of the ICSID Convention, namely “on the date on which the parties consented to submit such dispute to conciliation or arbitration as well as on the date on which the request was registered.” (Corn Products, para. 172)

As to waiver, it shall be stated that investors may make valid waiver of their rights, if it is explicit and unambiguous⁸ contrary to the view once expressed by the tribunal in SGS Société Générale de Surveillance S.A. v. Philippines (ICSID Case No. ARB/02/6, Decision on jurisdiction, January 29, 2004, para. 154).

We do not go so far as to suggest that due to the direct nature of the investor’s rights a defence based on necessity would be unsuccessful.⁹ Notably, in 2007 the German Constitutional Court held that:

“currently no rule of general international law can be ascertained entitling a State, vis-à-vis private individuals, to suspend the performance of due obligations for payment arising under private law by invoking necessity based on an inability to pay”.¹⁰

However, this topic deserves further research.

Are individuals subjects of international law?

Finally, one last and more general implication of the debate concerns the status of individuals as subjects of international law. The most authoritative definition of subjects of international law given so far is that provided by the ICJ in the Reparation for injuries Advisory Opinion:

“a subject of international law [is] capable of possessing international rights and duties, and… it has capacity to maintain its rights by bringing international claims.”¹¹

The theory of international legal personality has some inherent ambiguities. Firstly, it is not clear whether subjectivity is acquired a posteriori; that is, it follows the conferment of rights and duties, or, on the contrary, the latter flows from the recognition of international personality. Secondly, under the theory that individuals are subjects of international law since they are capable of possessing rights and duties under international law, it turns out that only certain individuals – and not the whole class of individuals or their formations – would qualify as subjects. For example, only protected investors have rights under BITs, as suggested above, or, in the field of human rights, only those nationals of States parties to the First Optional Protocol to the ICCPR are capable of bringing individual communications.

Be that as it may, it appears generally agreed that individuals qualify as subjects of international law. This view is supported by the two latest treatises on the subject.¹² Similarly, the tribunal in Plama Consortium Limited v. Bulgaria (ICSID Case No. ARB/03/24, Decision on jurisdiction, February 8, 2005) prominently held that:

“By any standards, Article 26 is a very important feature of the ECT which is itself a very significant treaty for investors, marking another step in their transition from objects to subjects of international law.” (para. 141)

Conclusion

The majority of arbitral tribunals have opined that investors possess substantive rights under BITs and this has important implications as above described. To return to the leitmotif contained in the beginning of this post, the investor is now able to walk in the field of international investment law comfortably on his own legs and in his own shoes.

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University of Victoria Faculty of Law

At a conference a few years back, a well-known and respected arbitrator was speaking on the topic of predictability and consistency of arbitral decision making in investment treaty arbitration.  The arbitrator asked whether arbitrators should fly solo or in flocks.  He made a strong and persuasive case for the independence of the arbitrator, to fly solo—perhaps into uncharted territory.  The arbitrator used the example of the condor—flying high in the sky, with clear-sighted vision taking in the expanse of the territory below it.

Using animal and bird metaphors for arbitrators and arbitral tribunals has its dangers. The condor is a member of the Vultur genus. According to Wikipedia, a “vulture is primarily a scavenger, feeding on carrion. It prefers large carcasses”.  It nests “at elevations of up to 5,000 m…. generally on inaccessible rock ledges”.  Particularly in light of the publication of the controversial report Profiting from Injustice, most arbitrators probably do not wish to characterized as inaccessible scavengers feeding on large carcasses.  (The report, in any event, only uses the ignominious term “legal vultures” to refer to law firms!)

Canada is well known for its iconic animals, many of which are featured on our currency: the hard-working beaver on the five cent coin, the majestic polar bear on the two dollar coin, the migrating Canada goose on the silver dollar and the great northern loon on the dollar coin.   But as animal metaphors for arbitral tribunals, there are some troubling public relations issues.  We have a nocturnal, large semi-aquatic rodent, a hunter and carnivore, a bird that makes an annoying honk and, truth be told, is not very smart and, finally, the loon is now immortalized on our one dollar coin, known as the loonie—enough said.

There is no dearth of views on the question of whether arbitrators should go solo or fly in flocks. The Freshfields lectures by Professor Kaufmann-Kohler in 2006 and by Professor Reisman in 2012 are reflective of two very different approaches.  In articles and a series of arbitral decisions, Professor Kaufmann-Kohler has expressed the view that arbitrators have a duty to strive for consistency and predictability, and thus to follow a consistent line of cases.   This view is reflected in the oft-quoted statement by the tribunal in Saipem v. Bangladesh, which postulates two duties on tribunals: (i) a duty to adopt solutions established in a series of consistent cases; and (ii) a duty to seek to contribute to the harmonious development of investment law.  In contrast, in his Freshfields lecture in November 2012, Professor Reisman is reported as saying that investment arbitrators “best serve the system by being case specific”, while acknowledging three exceptions: (i) thoughtful consideration of previous awards, (ii) interpretation of the object and purpose of an investment treaty and (iii) “occasional” supplementary interpretation.

Professor Kaufmann’s Kohler’s and Professor Reisman’s lectures highlight two different approaches to the role of arbitrators and to the question of whether predictability and consistency of arbitral decision-making is important.  Few would argue that predictability and consistency are not important aspects of the rule of law.  If the application of legal standards is so unpredictable and inconsistent that results become arbitrary or depend on the personal views of the judge, there is little left of the rule of law. Further, few would argue that decision makers should not have at least an eye to the harmonious development of the law.  Having a collection of inconsistent and contradictory rules is antithetical to the rule of law. But, in the context of investment treaty arbitration, aspirations for predictability, consistency and harmonious development of the law should not be viewed as imposing a duty on arbitrators to adopt the solution in a consistent line of cases.  Rather, the overriding duty of arbitrators is one of providing clear reasons for their decisions.  Where there is a jurisprudence constante (the development of doctrine through the accretion of a consistent line of cases), arbitrators do not have a decisional duty to adopt the solution in the doctrine, rather, I agree with other commentators who argue that arbitrators have a duty to provide cogent and detailed reasons for not following jurisprudence constante (see Irene Ten Cate, “The Costs of Consistency: Precedent in Investment Treaty Arbitration” on decisional burdens).   The duty is not one of result (adopting the solution) in a consistent line of cases.  The duty is one of means—there is a persuasive or argumentative burden on the arbitrator to demonstrate why jurisprudence constante should not be followed (see Stephen Schill, “From Sources to Discourse: Investment Treaty Jurisprudence as the New Custom” on argumentative burdens).

In a number of decisions, Professor Stern has written that the duty of the arbitrator is to decide each case on its own merits independently of any jurisprudential trend.  This approach goes too far if it is interpreted as meaning that the arbitrator has a duty to decide the case without any reference to jurisprudential trends.  Where there is a jurisprudential trend, the arbitrator has the duty to confront that jurisprudence in his or her reasons.  And certainly, this is what Professor Stern has done in practice, as exemplified by her 32 page dissenting opinion in Impregilo v. Argentine on the question of the application of an MFN clause to investor-state arbitration provisions.  (To be clear, I not arguing that there is  jurisprudence constante on whether a “garden variety” MFN clause applies to dispute settlement.  I am simply using Prof. Stern’s opinion as an example of the type of thoroughly reasoned decision that arbitrators have a duty to provide if they are going to depart from jurisprudence constante.)

In Glamis v. The United States, the Tribunal stated at para. 8 that: “a NAFTA tribunal, while recognizing that there is no precedential effect given to previous decisions, should communicate its reasons for departing from major trends present in previous decisions, if it chooses to do so.” [emphasis added].  That proposition should be reframed to say that a tribunal must communicate its reasons for departing from major trends.  From where does this duty arise?  It arises from the arbitrator’s duty to apply the applicable law and the duty to provide reasons, particularly in the context where the parties have made extensive submissions referring to previous cases.

The predictability and consistency challenge faced in a number of areas of investment law is, of course, that there is no jurisprudence constante and that there may be conflicting jurisprudential trends.  This can been seen most obviously on the question of the interpretation of MFN and observance of undertakings clauses. I am not optimistic that predictability and consistency is attainable in light of the varied approaches tribunals have taken to the interpretation of specific MFN and observance of undertakings clauses.  We do not have an investment treaty system with a vertical hierarchy.  We have a fragmented, horizontal network of treaties, institutions, rules and actors.  Further, just like there are pathological arbitration agreements, there are pathological treaty provisions that point in multiple directions at the same time.  In this disorder, arbitrators are the guardians of a process—not the gatekeepers of consistency.

By making this comment, I do not want to be understood as suggesting that there is massive inconsistency and unpredictability in international investment law.  My view is quite the opposite.  In Stephen Schill’s recent article on the literature and sociology of international investment law he writes that following:

The monographs on international investment law that had been published since 2007 all dealt with the theme of fragmentation as it emerged from these inconsistent arbitral decisions. Almost paradoxically, however, mainstream international investment law literature did not perceive inconsistent arbitral awards as a fundamental problem, nor did it view it as an obstacle to the doctrinal reconstruction of substantive and procedural investment law. Instead, convergence in arbitral jurisprudence is the main theme of the numerous textbooks dealing with international investment law, even though the substantive law is enshrined in a myriad of bilateral treaties and implemented by one-off arbitral tribunals.

What is most striking to me is not inconsistent jurisprudential trends, but that after 23 short years of investment treaty jurisprudence, there is such a remarkable level of jurisprudence constante in an area of international law where there has been such intense ideological divisions in the past.

I will conclude this post with a few thoughts on how to improve consistency.

• Ultimately, only States can resolve deep jurisprudential divides such as whether an MFN clause in a particular treaty applies or does not apply to dispute settlement. It is unlikely that this type of issue can be resolved jurisprudentially within the existing structure of investment treaty arbitration.
• States have to take a more active role in clarifying the meaning of existing treaty obligations.   In future treaties, they must ensure that treaty provisions are clearly drafted to address the jurisprudential divides – for example by either clearly specifying that MFN applies or does not apply to dispute settlement.
• Arbitrators should welcome, rather than be hostile to, the possibility of applying Article 31(3)(a) and (b) of the Vienna Convention, which provide that (i) any subsequent agreement between the treaty parties and (ii) and subsequent practice establishing an agreement of the parties with respect to interpretation of the treaty shall be taken into account.  The concern that States will use this mechanism abusively to provide restrictive or unreasonable interpretations is exaggerated, given the practical and political difficulties of the home state of the investor agreeing to an interpretation that seriously prejudices its own investors.  Claims that the NAFTA Free Trade Commission’s interpretative statement on Article 1105, Minimum Standard of Treatment were abusive, unfair, contrary to the rule of law or an unauthorized amendment of NAFTA are simply wrong and fail to recognize the mandatory rules in the Vienna Convention.
• With respect to tribunals, one proposal I would like float is that whenever there is a disputed question of treaty interpretation, that the tribunal take steps to request the investor’s home state to provide its views on contested matters of treaty interpretation.  This would ensure that the tribunal has the views of both treaty parties, as well as the investor, before it.  Where the tribunal cannot make the request on its own initiative under the applicable rules because of duties of confidentiality, it could seek the agreement of the parties to provide for such a process.  This default procedure would ensure that both State parties to the treaty are given an opportunity to provide their views on the proper interpretation of the treaty.  Any agreement between the State parties regarding interpretation or subsequent practice that establishes agreement of the State parties regarding interpretation shall – must be taken into account.
• More generally, state parties should take a more active role in treaty interpretation and the new generation of investment treaties should include mechanisms for the involvement of all state parties whenever there is a contested interpretation – which, of course, will likely be in every case.

Anthea Robert’s thesis in her wonderful article, Power and Persuasion in Investment Treaty Arbitration: The Dual Role of States, is compelling.  Arbitral tribunals and states share interpretative powers.  There should be a greater emphasis and encouragement of home state practice in the interpretation of investment treaty obligations.  Although this will not necessarily result in greater predictability and consistency, there is a greater likelihood that any tribunal interpretation will be more, rather than less, consistent with the state parties’ treaty obligations.

Returning to the introduction, if I was forced to choose an animal metaphor for an arbitral tribunal it would be an owl.  The owl is solitary and, of course, wise.  The owl has 360 degree vision.  The owl acts independently but provides wise reasons for its decisions, reasons that identify and illuminate tensions in the cases and result in a reasoned decision.  One owl’s decision does not create law or jurisprudence constante.  But it is different with a group of owls – the literary collective noun for a group of owls is a parliament – and parliaments have a law making function.  A parliament of owls establishes a jurisprudence constante.  Tribunals are key actors in the creation of law—they play a constitutive role in law creation by interpreting and applying treaties.  The doctrine of legitimate expectations as an element of fair and equitable treatment is a creation of tribunals—it was not mandated by the treaty term fair and equitable treatment.

The only problem with the owl metaphor for arbitrators is that owls approach small prey silently from above, eat it whole and regurgitate the indigestible parts.  But, then again, no one really wants to have to read anything indigestible in a tribunal award.

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	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

Herbert Smith Freehills LLP,
for YIAG

On February 6, 2013, Achmea (a Dutch insurer, better known by its former name, Eureko) initiated UNCITRAL arbitration proceedings against the Slovak Republic on the basis of the Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic (the “Netherlands-Slovakia BIT“) [The Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic was signed on 29 April 1991 and came into force on 1 October 1992.] These proceedings appear to be of a new kind: aimed at preventing a likely expropriation [Achmea press release "Achmea undertakes legal steps against Slovak Republic", 6 February, 2013; L. E. Peterson, "Dutch investor seeks to test limits of investment treaty arbitration by asking arbitrators to block state from expropriating its assets", IA Reporter; K Karadelis, "Measures targeting health insurers lead to new claim against Slovakia", GAR, 7 February 2013].

The 2013 arbitration proceedings are the latest episode in a dispute between Achmea and the Slovak Republic dating back to 2006. In 2006, the Slovak Republic enacted a law banning private health insurers operating in the country from distributing profits to their shareholders. Further to Achmea’s (Eureko at the time) previous claim, an arbitral tribunal upheld jurisdiction on the basis of the BIT and found Slovakia liable for breaching the fair and equitable treatment and the free transfer provisions of the Netherlands-Slovakia BIT in December 2012 [Achmea v Slovakia, PCA Case No 2008-13, Award of 7 December 2012 (not public); Achmea press release, "International arbitration tribunal rules in favour of Achmea", 7 December 2012]. Although the Slovak Constitutional Court reversed the law as unconstitutional in 2011, the arbitral tribunal ordered Slovakia to compensate Eureko, to the amount of €22 million, for the damage suffered within the period during which the law was in force. Slovakia challenged the final award before the German courts, as it had already done, without success, in respect of the decision on jurisdiction.

With the re-election of prime-minister Robert Fico in spring 2012, the dispute entered a new stage. On July 25, 2012, the government voted unanimously in favour of a new project aiming at instituting a single, state-run health insurer and pushing out the two existing private providers by 2014 [The Slovak Spectator, "Fico targets private health insurers again", 26 July 2012]. On October 13, 2012, the Health Ministry presented a draft proposal containing three alternatives to the government: the acquisition by the state of the shares in the private health companies, the takeover of management of the private insurers’ client portfolios or the expropriation of the private health insurance companies. In order to take effect, however, the draft law still has to receive parliamentary approval.

Achmea’s new notice of arbitration dated 6 February 2013 appears to be a direct reaction to the new regulation that may be enacted by the State. The request for arbitration is not publicly available and the only information available so far is based on Achmea’s press release, according to which the arbitration “seeks to avert the outright expropriation of UZP.” Assuming that there is no other claim, this arbitration thus amounts to a request for purely pre-emptive measures against a State; in other words a request that a State refrain from enacting a law that would constitute a violation of the BIT.

The Achmea II case thus presents two original elements.

First, according to the press release, it seems that no pecuniary measures have been requested at this stage, since no damage has occurred. Although not uncommon in international arbitration against states (investment tribunals have on several occasions agreed to grant non-monetary relief [On non-monetary relief in investment arbitration, see for instance: C. Schreuer, "Non-pecuniary Remedies in ICSID Arbitration", AI, 2012; M. Endicott: "Remedies in Investor-State arbitration: restitution, specific performance and declaratory awards" in P. Kahn, T. Wälde, New aspects of international investment law, 2007; C. Malinvaud, "Non-pecuniary Remedies in Investment Treaty and Commercial Arbitration", ICCA Congress Series, 2009; P. Dunand, M. Kostytska, "Declaratory Relief in international arbitration", JIA, 2012] in the form of declaratory awards [See for instance: Saudi Arabia v Aramco, 27 ILR 117, 1963; Biwater Gauff v Tanzania, ICSID case n° ARB/05/22, Award of July 24, 2008], orders for specific performance [See for instance: Texaco v Libya, J.D.I, 1977, pp. 350-389], prohibitory injunctions or mandatory orders [ATA v Jordan, ICSID case n° ARB/08/2, Award of May 18, 2010. In two pending cases, the Claimant made requests for provisional injunctions: Philip Morris v Uruguay (UNCITRAL), Request for arbitration of February 19, 2010; Chevron v. Ecuador, PCA Case No 2009-23, First Interim Award on Interim Measures of January 25, 2012] ), arbitral tribunals generally favour pecuniary measures [C Dugan, D Wallace, N Rubins, B Sabahi, Investor State Arbitration, 2008, p. 569]. Furthermore, claims based solely on such measures are quite rare [To our knowledge, only the Saudia Arabia v Aramco case was entirely limited to non-pecuniary remedies in the field of investor-state. This was, however, a very specific case since the parties had agreed that the award should be only declaratory. Saudi Arabia v. Arabian American Oil Company (Aramco), see above].

Second, by contrast with existing awards ordering non-pecuniary measures, the investor’s new claim is entirely aimed at pre-emptively challenging a new regulation which has not yet been adopted, thus assuming that the contemplated expropriation would not be in the public interest, would not be implemented in accordance with due process and would be discriminatory.

This kind of action raises a number of unresolved questions. Some of these questions are at the heart of the rationale of investor-state arbitration, according to which an arbitral tribunal is only entitled to exercise jurisdiction over disputes which the parties have agreed to submit to arbitration: (1) whether there is an existing dispute where there is a threat of expropriation but none has yet occurred, and (2) whether the State’s consent to arbitration under the Netherlands-Slovakia BIT would apply to this kind of pre-emptive claim.

1. Is there a “dispute” between Achmea and Slovakia?

1.1 Pursuant to article 8 of the Netherlands-Slovakia BIT, “Each Contracting Party hereby consents to submit a dispute (…) to an arbitral tribunal…” [Netherland –Slovakia BIT, Article 8].

1.2 The pre-emptive nature of the Achmea II case raises the question of the existence of a dispute when the investor has not yet suffered any prejudice, and where expropriation is envisioned as a possibility but the conditions of its implementation remain unknown.

1.3 Under general international law, the ICJ has defined a legal dispute as a “disagreement on a point of law or fact, a conflict of legal views or interests between the parties” [See for instance: Mavrommatis Palestine Concessions, Judgment No 2, 1924, P.C.I.J.; Case Concerning certain property (Liechtenstein v Germany), Preliminary objections, Judgment of 10 February 2005, §24]. Several ICSID arbitral tribunals have used this definition [See for instance: Maffezini v Spain, ICSID Case n°ARB/97/7, Decision on Jurisdiction, 25 January 2000, §94; Tokios Tokelès v Ukraine, ICSID Case n°ARB/02/18, Decision on Jurisdiction, 29 April 2004, §106] and there appears to be no reason why an ad hoc tribunal whose jurisdiction is based on a BIT should not follow the same path.

1.4 In addition, while commenting on article 25 of the ICSID Convention, Pr. Schreuer states that “[t]he existence of a dispute may be in doubt in several ways. An open question may not have matured into a dispute between the parties. Or a difference of opinion may not be sufficiently concrete to amount to a dispute that is susceptible of conciliation or arbitration” [C. Schreuer, The ICSID Convention: A Commentary, 2009, Article 25, §41].

1.5 Although it remains uncertain whether this commentary can be applied directly to non-ICSID arbitrations [AES v Argentina, ICSID Case n° ARB/02/17, Decision on Jurisdiction of April 26, 2005, §43], an interpretation of the “ordinary meaning” of article 8 of the BIT in accordance with general international law [Pursuant to Article 31 of the Vienna Convention on the Law of Treaties] might lead to a similar conclusion.

1.6 The question would thus be whether a mere draft law aimed at expropriating assets of a foreign investor, but not yet voted on by the Parliament, might rise to the level of a dispute under this definition.

1.7 In the ICSID case of Enron v Argentina [Enron v Argentina, ICSID Case n°ARB/01/3, Award of 14 January 2004], the investor alleged that certain taxes which had been assessed but not yet collected amounted to a breach of the BIT. As here, Enron had thus not yet suffered any damage and would probably not suffer any should, ultimately, no taxes be collected. Logically, Argentina argued that the dispute between the parties was purely hypothetical, since the taxes might never be collected, or be collected only in a small amount [Enron v Argentina, §72]. The arbitral tribunal however rejected this argument on the ground that once taxes are assessed, there is, from the state’s perspective, a liability on the part of the investor and a claim seeking protection under the treaty is thus no longer hypothetical because a specific dispute can be identified [Enron v Argentina §74].

However, in Achmea’s case, the dispute is one step earlier: the act of the state at the origin of the dispute, and which is aimed at the expropriation of Achmea’s subsidiary Union, has not even been voted on by the Parliament. Furthermore, the exact conditions under which the project would be implemented do not appear clear, as three are scenarios concerning how to return to a single-insurer system but none has been selected. Accordingly, whether an arbitral tribunal will, following the same line of reasoning as Enron, consider that, from the state’s perspective, there is already, at this stage, a liability on the part of the investor remains doubtful. The context of the dispute and the previous regulations enacted by the State could, however, constitute an argument for Achmea that there is actually a dispute which is not hypothetical, in view of the state’s previous attitude.

1.8 In any event, one might also ask whether Slovakia consented to submit purely pre-emptive claims to the arbitral tribunal by signing the BIT.

2. Did Slovakia consent to submit requests for pre-emptive claims to an arbitral tribunal under the BIT?

2.1 It is likely that Slovakia will argue that the arbitral tribunal does not have jurisdiction because, under the Netherlands-Slovakia BIT, it has not agreed to UNCITRAL’s jurisdiction for pre-emptive claims. The investor will thus have to prove that the parties’ consent to arbitration under the Netherlands-Slovakia BIT would extend to purely pre-emptive actions. It has long been established within the framework of ICSID arbitration that consent is the “cornerstone” of the jurisdiction of ICSID tribunals. The same can be said for ad hoc arbitrations in which the consent to arbitrate is based on a BIT.

As such, ordering purely pre-emptive remedies might collide with the fact that “[r]estrictions upon the independence of states cannot be presumed [Permanent Court of International Justice, Decision of September 7th, 1927, §18] “. According to this principle, the state should explicitly agree to any restriction of its legislative power. No aspect of the Netherlands-Slovakia BIT indicates any intent on the part of the contracting states to grant the tribunal powers to deal with a hypothetical future violation of the Netherlands-Slovakia BIT. Accordingly, the tribunal may also refuse jurisdiction over Achmea’s claim on the ground of lack of consent.

2.2 However, the arbitral tribunal might equally consider that the absence of any reference to claims of this sort in the Netherlands-Slovakia BIT does not necessarily mean that it has no jurisdiction over these claims, which are of a peculiar nature. For instance, the arbitral tribunal might interpret Achmea’s claim as a purely procedural question, to be solved in the course of the proceedings. This is the approach adopted when issuing injunctive orders during arbitration. However, in those cases, the arbitral tribunals are not seized solely on the basis of the non-pecuniary relief sought against a state.

The question of consent appears therefore in a specific light in the Achmea II case, and it remains to be seen which position the tribunal will adopt.

In conclusion, Achmea’s claim raises jurisdictional questions in relation to the notion of an actual dispute as well as to the scope of the State’s consent to investor-state arbitration. At the same time, considering the overall context of this dispute, the practical interest of the kind of claim made by Achmea is obvious: this is a situation where the investor has already been subject to measures by the same government that have been considered by an arbitral tribunal to be a violation of the Netherlands-Slovakia BIT. An arbitral tribunal may thus be tempted to consider that this new claim is part of a broader dispute in which the investor has openly and repeatedly been targeted by Mr. Fico. On that basis, an arbitral tribunal may want to consider that there is a dispute and that as the State has agreed to submit all disputes to arbitration, without specific restriction, it has jurisdiction.

Should that be the case, however, what would be the kind of award that an arbitral tribunal could then pronounce on the merits without interfering with the state’s sovereignty? It would not be acceptable to order a State not to enact a law. Could it be a declaration that, should the State enact the law in question, it will be in breach of the Netherlands-Slovakia BIT? How then would the arbitral tribunal determine the frontier between granting or refusing a pre-emptive measure and according to what criteria? How then would such an award be enforced against the State? Even assuming that an arbitral tribunal would have jurisdiction over such a claim, a number of additional open questions would remain.

The author would like to thank Lisa Bohmer for her valuable assistance in preparing this blog.

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