- Specific treaties — Arbitration — Diplomatic protection — Claims — Treaty provisions — Negotiations and consultation
The potential for conflict over a treaty’s interpretation or application always exists in international relations, no matter how well drafted the treaty or how detailed its provisions. Although the causes of conflict vary in individual cases, they may generally be attributed either to an imperfect agreement over the subject of the treaty or to changes in circumstance after the agreement has been concluded. The goal of all treaty negotiations is to express in writing the full meaning of the parties’ agreement; however, the parties’ ability do so is limited by two factors: (1) the fact that treaty negotiators from different countries have been shaped by differing national cultures, ideologies, legal traditions, and interests (factors that profoundly influence and complicate communications at the bargaining table); and (2) the inherent inability of treaty negotiators to foresee all of the circumstances to which the treaty may be applied in the coming years. Moreover, even if negotiators had perfect foresight, there is no assurance that persons applying the treaty in the future would interpret treaty provisions exactly as the negotiators had intended. As a result, it can fairly be said that all treaties are imperfect agreements. Moreover, changes in circumstances that are beyond the control or expectation of either party may make fulfilling treaty commitments extremely costly or impossible for one of the parties. That party will, in turn, then seek to avoid or reinterpret its commitments in a way that will lighten its burden, an action that will naturally be resisted by the other contracting party.
In view of these considerations, it is important for a treaty to have mechanisms for the resolution of conflict through the effective and objective application and enforcement of treaty provisions. This element is particularly important in the case of investment treaties because their purpose is to encourage investors to make long-term, substantial financial commitments on the basis of the treatment that host states promise in the treaty. Indeed, although investment treaties are made only between states, their principal purpose is to benefit the nationals and companies of the contracting states by granting them specified treatment and protection under international law. Virtually all disputes that arise under investment treaties do so because an investor believes the host state did not provide the level of protection and treatment promised. Unlike the customary international law on foreign investment, which lacks an obligatory mechanism for resolving disputes, all investment treaties provide such mechanisms. The importance of these (p. 393) mechanisms is twofold. First, they are a means for resolving disputes and securing the payment of compensation to injured investors. Second, such enforcement mechanisms deter states from disregarding their treaty commitments to other investors. The existence of effective and efficient methods for resolving investment disputes is, as an UNCTAD study has stated, ‘the ultimate guarantee of protection for foreign investors’.1 This chapter will examine the nature of conflicts between investors and states and the various means provided by treaties to resolve them.
Disputes between states and investors can arise in many different contexts, take various forms, and have differing degrees of importance. These disputes may arise from the contested seizure of a foreign investor’s factory, the promulgation of new environmental regulations increasing costs to an investor’s enterprise, or the simple refusal of host state authorities to grant a visa to a foreign technician needed by an investment project. More generally, investor–state disputes governed by treaties occur because a host state has taken a ‘measure’ that allegedly violates that state’s treaty commitments on the treatment it has promised to accord to investments protected by that treaty. Three of the most common measures that may lead to an investor–state dispute are governmental actions that (1) cancel or change contractual or licence rights enjoyed by an investment; (2) seize or cancel property rights owned by an investor; or (3) change legislation or regulations, causing economic detriment of the investment protected by a treaty.
Because of the broad treatment standards articulated in investment treaties, such as ‘full protection and security’ and ‘fair and equitable treatment’, virtually all disputes between investors and host governments are potentially subject to the applicable investment treaty. Nonetheless, it is important to understand at the outset that disputes arising under international investment treaties are not ordinary commercial disputes. Treaty-based investor–state disputes are unique and that uniqueness needs to be understood because it affects the ways that disputants approach their conflicts and the utility and effectiveness of dispute resolution techniques used to resolve them.
First, such disputes are not just a matter of simple contract claims governed by contract law. While they are certainly subject to the domestic law of the host country, they are also governed by public international law in the form of treaties—instruments of international law—entered into by two or more states.2References(p. 394) Given the international legal nature of these disputes, unilateral attempts by a host state to deal with them through domestic laws and regulations may well be unsuccessful.
Second, public policy questions are often at the heart of investor–state conflicts. The host government has taken certain public policy measures—for example legislative or administrative acts meant to preserve the environment, regulate business, or impose a tax—which it considers important for the public welfare but which an investor believes violate its rights under a treaty. The resolution of such disputes has significant implications for the ability of sovereign governments to regulate enterprises within their territories.3 If an arbitral tribunal ultimately judges contested measures to be illegal under the applicable treaty, the resulting award may not only require the offending government to pay the investor damages and to incur heavy arbitration costs but also to repeal or modify such measures in order to avoid similar arbitration claims from other foreign investors.
Third, because they involve public policy issues, investor–state disputes are political in nature. Moreover as political groups, non-governmental organizations, the media, and ultimately the general public come to have definite views on the dispute and how it should be settled, the controversy may become highly politicized. The political nature of these disputes influences the strategies of both the governments and investors involved in seeking to resolve them.
Fourth, underlying the dispute is an intended long-term investment relationship—a complex connection, often amounting to a state of interdependence, between the investor and the host country. In the case of privatization of public services, such as water, gas, or telecommunications, the investor and the host country are linked in a more or less permanent relationship. Such relationships are far more difficult to unravel, for example, than undoing a simple contract for the sale of a commodity in international commerce. In these more complicated relationships, the host country is dependent on the continued supply by the investor of a needed public service and, at least in the short run, has no option but to continue to deal with the investor. Similarly, the investor, having committed substantial capital to the privatized enterprise, is dependent on the host country for continued revenues. For this reason, at least in the short run, the investor also has few opportunities to disengage from the investment.
Fifth, the amounts of money at stake in investor–state disputes are large, sometimes staggeringly so, amounting in some cases to hundreds of millions, even billions of US dollars. As a result, in most investor–state, treaty-based disputes, host countries face the risk of having to pay substantial negotiated settlements or arbitration awards that might prove burdensome in relation to the country’s budget and financial resources. Whereas the average award in ordinary international commercial arbitration is less than a million dollars, an award in an investor–state References(p. 395) arbitration may well be many times that amount.4 For example, arbitral tribunals have rendered awards of US$353 million (against the Czech Republic),5 US$71 million (against Ecuador),6 US$824 million (against Slovakia),7 US$133.2 million (against Argentina),8 and in the much publicized Yukos case in 2014 more than US$50 billion (against Russia).9
Moreover, aside from settlements or awards, the costs of investor–state arbitration are usually substantially greater than those incurred in an ordinary commercial dispute and may prove a significant burden for developing countries. In addition to indirect costs, such as the time of government officials and corporate executives devoted to preparing and participating in the matter, there are substantial direct costs. Direct costs usually consist of two elements: (1) the expenses of the party’s legal representation; and (2) its share of the costs of administering the arbitration. The precise amount of such costs varies depending on the case’s complexity, the amount in dispute, and the extent of time needed to reach a resolution. In a highly complicated and lengthy case, the costs of legal representation can be extremely heavy. For example, in CME v Czech Republic, the Czech Republic reportedly spent US$10 million on its legal defence.10 A more typical investor–state case may be International Thunderbird Gaming Corporation v United Mexican States, a NAFTA case under UNCITRAL rules that was decided in January 2006. There, the total cost was US$3,170,692, which included US$405,620 in arbitrators’ fees, US$99,632 in administrative expenses, US$1,502,065 in costs for Mexico’s legal representation, and US$1,163,375 in costs for Thunderbird’s representation.11
It is possible for a successful host country to recoup some of these costs from an investor who brought the case; however, the rules on apportionment of costs vary and in any case are subject to the tribunal’s discretion. On the other hand, a host References(p. 396) state that loses a case may, in certain circumstances, be required to pay a portion of the investor’s costs.
Before the advent of investment treaties, investors basically had three methods to seek resolution of their disputes with host states: (a) direct negotiation with host state governments; (b) domestic courts in the host country; and (c) diplomatic protection by their home states.
(a) Direct negotiations with host governments
Many disputes between foreign investors and host countries have been resolved by direct negotiations between the disputants. Indeed, nearly all investment treaties provide that in the event of a dispute between an investor and the host country the two parties are required to engage in consultations and negotiations,12 often for a specified period of time (for example six months),13 before the investor may pursue other remedies. As a result, virtually all disputes go through a period of negotiation before either reaching settlement or advancing to formal investor–state arbitration. Because of the confidentiality that usually surrounds such settlements, accurate, comprehensive statistics on negotiated settlements of investor–state conflicts are not available. One example of a successful investor–state negotiation that did not involve an investment treaty took place between India and Enron, a large US energy company. In 1993, Enron, a US corporation, and the Maharashtra State Electricity Board (MSEB) in India signed a contract whereby a consortium led by Enron would build the Dabhol Power Project. The total investment was US$2 billion. MSEB signed an agreement to buy all the electricity produced by the project for twenty years. When a newly elected government came to power References(p. 397) in Maharashtra state, it cancelled the contract, alleging that the power tariff was too high and that the contract was not in the state of Maharashtra’s best interests. Later negotiations between the state and Enron were successful and resulted in a modification of the contract, a reduction in power tariffs, and the continuation of the project.14
(b) Local courts
A second option for resolving investor–state disputes is for aggrieved investors to have recourse to the courts of the host country. Depending on the country involved, this option, which is required by some investment treaties prior to arbitration,15 may pose a variety of problems for foreign investors. First, depending on the country concerned, local courts may lack judicial independence and might be subject to the control of the host government, depriving the investor of an impartial forum. Second, even if the judiciary is independent, it may nonetheless harbour prejudice towards foreign investors, as the courts of the state of Mississippi demonstrated in the NAFTA case of Loewen Group, Inc v United States.16 Third, local courts may not have the expertise to apply complex principles of international law to complicated foreign investment transactions. Fourth, even if courts have such expertise, domestic law may limit or prohibit them from adjudicating their state’s international commitments. And finally, local courts often have a heavy backlog of cases and inefficient procedures that deny expeditious justice and make obtaining a final judicial determination difficult. For these reasons, in many countries foreign investors do not consider local courts an effective and reliable means for resolving disputes with host governments, and they therefore often References(p. 398) try to avoid them. Indeed, one of the principal reasons for creating treaty-based, investor–state arbitration was to enable investors to avoid the courts of the countries in which they invest.
(c) Diplomatic protection
A third method available to aggrieved investors is to enlist the aid of their home countries to assist them in obtaining a satisfactory settlement from the host government. This method is known as diplomatic protection. As was discussed in Chapter 3, foreign investors consider it a far from perfect means of resolving their disputes for several reasons. First, under international law, before a state can make formal claim against another state on behalf of one of its nationals, that national must first ordinarily exhaust local remedies available in the host state. The International Court of Justice (ICJ) has stated that the principle of exhaustion of local remedies is ‘a well-established rule of customary international law’17 whose purpose is to ensure that ‘the State where the violation occurred should have an opportunity to redress it by its own means within the framework of its own domestic legal system’.18 Nonetheless, from the point of view of the investor, exhausting local remedies can be a long, slow, complicated process that merely serves to delay reparation of the injury sustained.
Second, the availability of diplomatic protection for investors depends entirely on their home country’s willingness to extend assistance in a given situation. Home country governments were not then, and are not now, required to espouse claims against offending states, no matter how egregious their conduct has been. The decision to espouse a claim or not, and to pursue it vigorously or not, is completely within the discretion of the home government.
Third, once the home country government has espoused the claim, it effectively ‘owns’ it. This means that it controls how the claim will be made, what settlement it will accept, and whether any portion of the settlement will be paid to the aggrieved national. Thus, for example, a home country might abandon an injured national’s claim if it judges that other factors in its relations with the host country, such as security or trade, require it. In such a situation, the injured investor is left without redress against the offending host country and its unsympathetic home government.
A further complication involves a home country’s ability to extend diplomatic protection to nationals who are shareholders in foreign corporations. In the famous Barcelona Traction case,19 Belgium sued Spain in the ICJ on behalf of injured Belgian shareholders of Barcelona Traction, which was a Canadian References(p. 399) corporation. Barcelona Traction was supplying electricity to the city of Barcelona when the Spanish government expropriated it. The Court ruled that Belgium had no right to make a claim on behalf of the Belgian shareholders, since the primary party injured by the expropriation was the Canadian corporation, and not the Belgian shareholders. Although this decision has been strongly criticized over the years,20 it remains difficult for shareholders of one nationality to press claims for injuries to a corporation that was incorporated in another country. This is particularly vexing, since purchasing shares in companies and corporations organized in other countries is a common investor practice.
And finally, once the era of gunboat diplomacy ended, diplomatic protection of aliens and foreign investors did not necessarily result in meaningful redress in many cases. Often, it yielded little by way of concrete results except the exchange of oral or written statements, and the injured investor received no material compensation. And, of course, the matter could only be brought to an international tribunal if the offending state agreed, which rarely occurred. Thus, diplomatic protection was and is an uncertain remedy for injured international investors. Investment treaties have sought to establish a dispute settlement process that does not suffer from these defects.
In order to establish a stable, rule-based system for international investment, treaties provide means to resolve disputes about the interpretation and application of treaty provisions. Whereas treaties traditionally only recognized states as participants in the dispute settlement process, many now also grant investors a distinct role and specific rights as disputants. Most investment treaties provide four separate dispute settlement methods: (1) consultations and negotiations between contracting states; (2) arbitration between contracting states; (3) consultations and negotiations between covered investors and host governments; and (4) investor–state arbitration. The following sections of this chapter will examine each of these methods.
Most investment treaties contain a separate article on dispute settlement between contracting states. That article usually provides that attempts to resolve disputes concerning the interpretation and application of a treaty should first proceed by ‘negotiation’, ‘consultations’, or ‘diplomatic means’.21 A common formulation of References(p. 400) this requirement is found in Article 11 of the 1989 bilateral investment treaty (BIT) between the United Kingdom and Ghana. It states: ‘Disputes between the Contracting Parties concerning the interpretation and application of this Agreement shall be settled through the diplomatic channel.’22
Even if an investment treaty does not have a similarly specific provision on dispute settlement, by virtue of customary international law and Article 33 of the United Nations Charter, the contracting parties have a duty to seek peaceful solutions to their disputes and engage in good faith negotiations to that end.23
Such treaty provisions clearly indicate that conflicts over the interpretation and application of treaty provisions, which will often involve the contested application of the treaty to one or more investors of the contracting states, are to be settled by discussions and negotiations between diplomatic representatives of the two states at whatever level the two states choose. For example, these discussions could take the form of a telephone call from the vice consul of the investor’s home country to officials in the local ministry of finance, reminding them of their BIT commitments on monetary transfers, or of formal discussions by the foreign ministers of the two countries concerning the alleged nationalizations of investment properties.
Often an appropriate intervention by representatives of the investor’s home country can help to settle an investor–state dispute. On the other hand, it must also be recognized that the nature and vigour of that intervention will depend not only on the nature of the investment dispute but also on the overall political and economic relationship between the two countries. For example, if an investor’s home country has an important military base located in the host country or if the two share a valuable trade relationship, the investor’s home country may be unwilling to jeopardize the status quo by advocating too vigorously for an investor.
The consultations and negotiation provisions serve a useful function in preserving investment relationships under the treaty. They facilitate conflict settlement that might otherwise evolve into costly arbitrated disputes that could endanger the contracting parties’ relationship. Second, the provisions may provide the host state with useful information and insights about developing investment policies that will advance its national interests while respecting investment treaty commitments. In many situations, the consultation process may be structured to guide the overall application of the treaty. Thus, for example, the Denmark–Poland BIT, in addition to providing for dispute settlement between the contracting References(p. 401) states, contains a provision authorizing consultation to ‘review the implementation of this Agreement’ and requires the first consultation to take place within five years of the treaty entering into force.24
One of the most elaborate consultation mechanisms for contracting parties is the Free Trade Commission created by the North American Free Trade Agreement (NAFTA).25 The NAFTA Free Trade Commission, endowed with its own secretariat, is composed of cabinet-level representatives of the three contracting states. It is authorized, among other things, to supervise the implementation of the NAFTA treaty, oversee its further elaboration, and resolve disputes regarding its interpretation or application. Moreover, under Article 1132(2) of the treaty, the Commission can issue ‘interpretations’ of NAFTA provisions that are binding on arbitral tribunals deciding investor–state disputes. In exercising this power the Commission has issued interpretations concerning access to documents in Chapter 11 investor–state cases, the meaning of Article 1105, which requires a minimum standard of treatment in accordance with international law,26 and the transparency and efficiency of Chapter 11 arbitrations.27 The ASEAN Comprehensive Investment Agreement adopts still another approach. Rather than specify procedures for consultations in the event of disputes, the Agreement incorporates by reference the 2004 ASEAN Protocol on Enhanced Dispute Settlement Mechanism,28 an elaborate set of dispute settlement procedures that the ASEAN states have adopted to handle all of their interstate disputes.29
In the event that states are unable to settle a dispute through negotiations and diplomacy, nearly all investment treaties give disputing states the right to invoke arbitration to settle their conflict. Interstate arbitration is an old and traditional method for the peaceful resolution of state disputes. Basically, arbitration is a dispute resolution method by which the disputants agree to submit their dispute to a third party (the arbitrator or arbitrators) for a decision according to agreed-upon References(p. 402) norms and procedures and to carry out that third party’s decision. Arbitration is thus a means for converting a diplomatic dispute into a legal or judicial dispute.
The modern history of interstate arbitration dates from the 1794 Jay Treaty between the United States and Great Britain.30 The Jay Treaty sought to resolve contentious issues resulting from the American Revolutionary War. It influenced the development of interstate arbitration in that it provided for the final settlement of disputes between two states by an arbitral tribunal and also indicated the standards that should apply in arriving at a decision. Moreover, it set down some of the principles that have come to characterize modern international arbitration in the resolution of disputes between both states and private parties. For example, the Treaty and the awards made by the treaty-constituted tribunals established the important rule that arbitration tribunals are competent to decide their own jurisdiction. The practice of including arbitration clauses in commercial and other treaties became widespread following Italy’s repeated use of such clauses in its treaty practice.31 By the end of the nineteenth century, over a hundred treaties referred to interstate dispute settlement by arbitration.32
(1) Disputes between the Contracting Parties concerning the interpretation or application of this Agreement should, if possible, be settled through the diplomatic channel.
(2) If a Dispute between the Contracting Parties cannot thus be settled, it shall upon the request of either Contracting Party be submitted to an arbitral tribunal.34
References(p. 403) While similar language may also be found in certain multilateral investment agreements such as the Energy Charter Treaty (ECT),35 it is worth noting that the ASEAN Comprehensive Investment Agreement takes a different approach by incorporating by reference the ASEAN Protocol on Enhanced Dispute Settlement Mechanism signed in Vientiane, Lao PDR, on 29 November 2004, which applies to all disputes between ASEAN member states.36
As will be seen in section 15.8, this language on the settlement of interstate disputes contrasts with that employed by the same treaties in stating the purpose of investor–state arbitration, which is to settle ‘investment disputes’. Thus, it has been argued that the two dispute settlement systems created by most investment treaties not only have different disputing parties—that is, investors and states in one, and contracting states in the other—but also have two different mandates—that is, adjudication of investment disputes in one, and interpretation or application of the treaty in the other.37
Interstate, investment treaty arbitration is ad hoc, rather than institutional, and tribunals consist of three arbitrators: one appointed by each contracting party and a third, a national of a third country, who is agreed upon by the other two arbitrators. If the arbitrators cannot agree on a third member, or if one of the parties refuses to appoint an arbitrator, the treaty provides for an ‘appointing authority’, such as the President of the International Court of Justice, the Secretary-General of the United Nations, or some other distinguished international figure, to make the appointment. Many treaties require a minimum period of negotiation between the contracting parties before one of them may resort to arbitration. As a general rule, the tribunal is free to determine its own rules of procedure, but nearly all treaties provide that decisions must be made by a majority in order to avoid the paralysis that a rule requiring unanimity might create. The decision of the arbitrators is final and binding on the contracting parties to the treaty.
The coexistence of the two forms of dispute settlement—interstate and investor–state—raises important questions about the relationship between the two and how and under what conditions states may invoke interstate arbitration in practice. Virtually all investment treaties are silent on these questions. A few of China’s BITs, in setting the rules for investor–state arbitration, specifically provide that ‘the provisions of this Article shall not prejudice the Contracting Parties from using the procedures specified in Article 14 [on interstate arbitration] where a dispute concerns the interpretation or application of this Agreement’.38 Similar language is not to be found in other investment treaties.
References(p. 404) In theory, there would seem to be three basic situations in which states might invoke interstate arbitration. The first would include a difference of opinion between contracting states concerning the interpretation of treaty language unconnected to an actual conflict between a national of one state and the government of another. For example, one state might believe that the other state is not actively promoting and facilitating investment to the extent promised in the treaty. The second situation might arise where one state believes that the other state has violated the treaty in its treatment of specific investors from the first state. Invoking interstate arbitration would in effect constitute a form of diplomatic protection. The third situation would occur where a state that is an actual or potential respondent in an investor–state arbitration over an alleged treaty violation invokes interstate arbitration in order to secure an interpretation of the treaty that will favour its position in its investor–state dispute.
Each of these situations raises a variety of important legal issues; however, answers to them remain in the realm of speculation since contracting states to investment treaties seem to have invoked interstate arbitration on only three occasions. The first case occurred in 2003, when Peru, in response to an International Centre for Settlement of Investment Disputes (ICSID) claim against it by Chilean investors, instituted an interstate arbitration against Chile and requested the ICSID tribunal to suspend its proceedings until the interstate arbitration was resolved. The tribunal declined the request, and Peru ceased to press its case against Chile.39
The second known interstate case also took place in 2003, when Italy invoked interstate arbitration against Cuba under their 1993 BIT40 because of alleged injuries to some sixteen Italian companies in various industries caused by Cuban government measures taken in violation of the treaty. Unlike the Peru–Chile case, the Republic of Italy v Republic of Cuba case would result in both an interim award41 in 2005 and a final award42 in 2008, both of which dealt at length with important legal issues.
The interim award dealt with three important objections raised by Cuba. First, Cuba objected to Italy’s invocation of interstate arbitration as vehicle for diplomatic protection of its nationals’ interests when the treaty granted Italian investors the right to initiate investor–state arbitration on their own initiative. On this point, the tribunal concluded that the mere existence in the treaty of a provision References(p. 405) for investor–state arbitration did not bar a state from pursuing interstate arbitration as a means of affording diplomatic protection to its nationals; however, once an investor had brought an investor–state claim against the host government or given its advance consent to such a process, its home state would be barred from invoking interstate arbitration as a means of diplomatic protection. Cuba also raised a jurisdictional objection to the effect that the transactions that Italy was seeking to protect were not ‘investments’ under the Cuba–Italy BIT. Although the treaty defined investment in the usual broad fashion as ‘any kind of asset’ and among its enumerated examples included ‘claims to money or to any performance having an economic value’ and ‘any economic right accruing by law or contract’, the tribunal took the view that three elements, not specifically stipulated in the treaty, were nonetheless required for an investment: a contribution of capital, a sufficiently long duration, and risk assumed by the investor. Such requirements, according to the tribunal would exclude ordinary sales transactions from the definition of investment. Finally, with respect to Cuba’s objection that the investors had not exhausted their local remedies as required by customary international law, the tribunal held that the requirement of exhaustion of local remedies did not apply to those claims that Italy was bringing in its own right but that it did apply to the diplomatic protection claims that Italy was bringing on behalf of Italian investors. It also found that the contracting parties did not waive the requirement of exhausting local remedies merely because the treaty also provided for investor– state arbitration.
Taking account of the principles set forth in the Interim Award, Italy pursued only six of the original sixteen investor claims in the second phase of the proceeding; however, the tribunal would dismiss all of them in its final award on various jurisdictional and substantive grounds.
The third interstate arbitration occurred in 2011, when Ecuador, disagreeing with the interpretation by the tribunal in the investor–state case of Chevron v Ecuador43 of a clause in the US–Ecuador BIT requiring each host country to provide foreign investors with ‘effective means’ for asserting claims and enforcing rights, invoked interstate arbitration against the United States, seeking a correct interpretation of the clause.44 The tribunal in the Chevron case had held that Article II(7) of the treaty protected foreign investors against ‘undue’ delay in local court systems, and this obligation might require a higher standard of governmental behaviour than that demanded for ‘denial of justice’ under international law. Here then was an instance when a state, disappointed by its fate in investor–state arbitration, sought to use interstate arbitration to thwart or mitigate that result. The interstate tribunal rendered a decision in 2012 but as of 2015 it had not been publicly released. It seems that the tribunal dismissed Ecuador’s claims. Nonetheless, in future, respondent host states disappointed by rulings in References(p. 406) investor–state cases may turn to interstate arbitration increasingly as a means to correct what they consider a miscarriage of justice.
Many disputes between foreign investors and host countries are resolved through negotiation. Indeed, nearly all investment treaties provide that in the event of a dispute the parties are to engage in consultations and negotiations, often for a specified period of time (six months in many cases), before another remedy is sought.45 As a result, it is safe to say that almost all such disputes go through a period of negotiation before reaching settlement or advancing to formal investor–state arbitration. Because of the confidentiality that often surrounds such settlements, accurate and comprehensive statistics on these negotiated settlements are not available.
Negotiations may be conducted before or after arbitration has begun. For example, a 2006 ICSID case by the Western NIS Enterprise Fund against Ukraine46 was terminated when the disputants agreed to a settlement in which Ukraine reimbursed the Fund for certain loans it had made.47 As of the beginning of 2014, UNCTAD estimated that of the 274 known concluded investor–state arbitrations, approximately 26 per cent had been settled.48 On the other hand, ICSID determined that in 2014, 35 per cent of its concluded cases were ‘settled or otherwise discontinued’.49
A variety of factors can prevent successful negotiated settlements. These might include, for example, the host government’s belief that vital national interests are at stake, the investor’s perception that crucial economic interests are in play, the political dynamics of the host country, the inability of the investor to mitigate its loss, and the appointment by the parties of incompetent or dysfunctional References(p. 407) negotiators to represent them. Any of these factors can inhibit or halt the negotiation process.
Depending on the circumstances, the threat of initiating arbitration can either favour or discourage negotiated settlements of investor–state disputes. On the one hand, faced with the hard realities of the costs, slow pace, and unpredictability of arbitration, some parties might negotiate a settlement rather than incur additional expenses and delay. On the other hand, initiating arbitration may create a psychological barrier to settlement by causing the parties to harden their positions and become less flexible in dealing with one another.
Unrealistic expectations by the parties can create a further obstacle to successful negotiations. In most cases, the alternative to successful negotiation is arbitration in which the investor will be the claimant and the state refusing that claim the respondent. Investor–state arbitration has risks and costs for both sides, and it is important that both sides understand those costs and benefits thoroughly so that they can accurately evaluate settlement proposals advanced by the other side. Not surprisingly, parties to a dispute, influenced by psychological and political factors, tend to view their conflict from their own points of view. This factor often leads them to overestimate their chances of success in later litigation. When the investor overestimates the strength of its claims and the host state undervalues the worth of the claimant’s case, the opportunities for a successful negotiated settlement decline. Various factors may contribute to such a miscalculation, including the failure of lawyers to give their clients a frank assessment of the strength of their case and their likelihood of prevailing in arbitration. One possible means of overcoming these barriers is through the intervention of a skilful, well-intentioned third party who can provide the disputants with a neutral, disinterested evaluation of their respective cases and can advise them on ways to reach a negotiated settlement.
Although mediation, conciliation, and other forms of alternative dispute resolution (ADR) are becoming increasingly popular in settling domestic disputes, their use in investor–state disputes seems relatively rare. Nonetheless, persons involved in disputes with host governments should consider them as a potential option.50
In theory and in law, there is no reason why mediation and other forms of ADR could not be applied to investor–state disputes just as successfully as they are applied elsewhere. Certainly, nothing in international investment treaties prohibits the parties from engaging in mediation or other ADR processes to settle treaty disputes. On the other hand, until recently relatively few investment treaties specifically authorized or recognized the applicability of ADR procedures to investor–state disputes. Those that do, generally only make reference to conciliation, which is a form of ADR but does not necessarily encompass the range of techniques and approaches usually associated with ADR.
(p. 408) With respect to non-adjudicative methods for the resolution of investor–state disputes, the traditional formulation found in investment treaties is that in the event of a dispute ‘the parties shall initially seek to resolve the dispute by consultations and negotiations’,51 ‘the dispute shall as far as possible be settled amicably through negotiations between the parties’,52 or ‘the dispute shall as much as possible be settled amicably between the parties’.53
Although these treaty provisions, which require the parties to negotiate and consult prior to arbitration, do not specify how those negotiations and consultations are to be conducted, they also do not prevent the parties from seeking assistance from mediators, conciliators, or facilitators to help them to conduct their negotiations and consultations. On the other hand, specific language authorizing the use of ADR might serve as a signal to governments and investors that the contracting parties intended to encourage disputants to use ADR and that they should seek to resolve their dispute accordingly. Although no corroborative evidence exists, it is possible that a treaty’s failure to authorize ADR up to this point has inhibited disputants’ willingness to use it.
Some treaties specifically authorize the use of conciliation; in fact, it is the only form of non-binding third party procedure that most treaties recognize. For example, the 1988 Japan–China BIT gives investors the option to engage in either conciliation or arbitration.54 However, no treaty requires its use.
Other treaties contain language specifically authorizing the use of alternative resolution techniques as part of the negotiation and consultation process. For instance, the 1990 US–Poland BIT states: ‘In the event of an investment dispute … the parties shall initially seek to resolve the dispute by consultation and negotiation, which may include the use of non-binding, third-party procedures.’55 Article 6(2) of the 1985 US–Turkey BIT provides that if negotiations are unsuccessful, ‘the dispute may be settled through the use of non-binding, third party procedures mutually agreed upon’.56 And Article 23 of the 2012 US Model BIT provides: ‘In the event of an investment dispute, the claimant and the respondent should initially seek to resolve the dispute through consultation and negotiation, References(p. 409) which may include the use of non-binding, third party procedures.’57 This language appears to be an attempt to underscore the importance of alternative dispute resolution techniques and to introduce them into the investor–state dispute resolution process.
It is difficult to determine the extent to which third party intervention actually takes place in investor–state disputes. It may well be that third parties, such as local business leaders, diplomats, politicians, and others, play an important role in facilitating the negotiations that successfully settle investor–state disputes. While these third parties may not be formally designated as mediators, they nevertheless exercise mediation functions.
The willingness of disputants to resort to mediation or another ADR technique depends, among other factors, on their knowledge of and experience with these processes. In general, companies engaged in international business disputes have not sought the help of mediators to the degree that they have in the domestic context. Generally, they first try to resolve the matter themselves through negotiation, but when that fails, they immediately proceed to arbitration or litigation. Various factors explain this failure to attempt mediation or another form of voluntary third party intervention. These factors include a lack of knowledge about the processes, persons, and institutions that provide the services in question, the fact that companies tend to give control of their disputes to lawyers whose professional inclination is to litigate, and the belief that mediation is merely a stalling tactic that only serves to delay an inevitable arbitration proceeding.58
With parties increasingly recognizing the disadvantages of arbitration, some companies are turning to more explicit forms of mediation to resolve business disputes.59 Increasingly, when a dispute can be quantified (for example calculating the extent of damage done to an asset by a partner or the amount of a licensor’s royalty fee), the parties will engage an independent third party, possibly an international accounting or consulting firm, to examine the matter and give an opinion. The opinion is not binding on the parties, but it allows them to make a more realistic prediction of what may happen in an arbitration proceeding.
Host countries’ lack of experience with and knowledge of ADR as it applies to investor–state disputes may also explain why they have not resorted to it more often. The politics of investor–state disputes may also be a complicating factor. Once an investor has initiated arbitration against a host state, the host government may fear that its willingness to resort to ADR will be perceived by the investor or the public as weakness or as compromising national interests. A treaty References(p. 410) provision specifically authorizing the use ADR techniques might help to counter this reaction.
One type of voluntary third party intervention that has particular relevance for investor–state conflicts is conciliation. ICSID, the International Chamber of Commerce, and other arbitration institutions offer this service, which is normally governed by a set of rules.60 Indeed, certain investment treaties specifically provide for conciliation as an option during investor–state disputes. Generally, a party to a dispute seeking institutional conciliation addresses a request for conciliation to the institution offering conciliation services. If the institution secures the agreement of the other disputant, it will appoint a conciliator. While the conciliator has broad discretion to conduct the process, in practice he or she will often invite both sides to state their views of the dispute. He or she will then make a report proposing an appropriate settlement. The parties may accept the report or reject it and proceed to arbitration. In many cases, the report will be used as the basis for a negotiated settlement.
Conciliation, therefore, is a kind of non-binding arbitration.61 Its function is predictive. It tends to take a rights-based approach and gives the parties a third person’s evaluation of their respective rights and obligations. If, as indicated earlier, mediators work on the process, communication, and substance of disputes, conciliators usually focus almost exclusively on the substance of the dispute. They do not normally adopt a problem-solving or relationship-building approach to resolving the dispute, nor do they seek to eliminate the various psychological, strategic, and structural barriers that might obstruct negotiations. The conciliation process is confidential and completely voluntary. Either party may withdraw from conciliation at any time.
One theoretical question is how to categorize conciliation. It has been argued that it is a process separate and distinct from mediation;62 however, if one defines mediation as a voluntary process by which a third person assists the disputants in negotiating a settlement to their dispute, conciliation clearly falls within the definition of mediation. As it is currently practised, conciliation would appear to be a form of mediation, albeit narrower in scope; its primary focus is to propose a solution that may be used as the basis of a negotiated settlement and not to work on process and communications or seek to eliminate other barriers to agreement. The conciliator has no power to impose a decision. The primary function of the conciliator’s report is to help the parties to negotiate a settlement.
Since conciliation is confidential, public information on the process itself is scant. One of the few published accounts concerning the practice discusses the first conciliation conducted under ICSID auspices. In that case, a retired English (p. 411) judge, Lord Wilberforce, successfully acted as a conciliator to assist in resolving a dispute involving the distribution of the US$143 million accumulated profits of a joint venture between Tesoro Petroleum Corporation and the state of Trinidad and Tobago. The conciliation, which started in 1984, took less than two years and cost only US$11,000.63 Despite the success of ICSID’s first conciliation and the reference to conciliation in some investment treaties, conciliation has not become widely used to resolve investor–state disputes. By 30 June 2014, ICSID since its creation in 1966 had received only nine requests for conciliation, while receiving 464 requests for arbitration during that same period.64 The success rate for ICSID conciliation does not appear to be high. In only 20 per cent of concluded conciliation proceedings did the parties report reaching agreement.65 These figures do not necessarily indicate that mediation is infrequently used to settle international business and investment disputes. It is possible that third parties other than formally designated ‘mediators’, ‘conciliators’, or ‘facilitators’ have played an important role in helping parties involved in investment disputes to negotiate a settlement. Nonetheless, many countries, concerned by the costs of investor–state arbitration, have sought to give great prominence to conciliation and ADR in the treaties they have negotiated in the twenty-first century.66
In considering the applicability of ADR to investor–state disputes, it must be stressed that many attorneys only view conciliation as a rather limited form of mediation. In contrast to the passive and restricted role Lord Wilberforce played in ICSID’s first conciliation case, other third parties may actively intervene in disputes to help the parties to negotiate a settlement of their investor–state conflict.67
(a) The nature and evolution of international arbitration
Arbitration is an ancient dispute settlement method whereby the disputants agree to submit their dispute to a third party (the arbitrator or arbitrators) for a decision according to agreed norms and procedures and to carry out the decision of that third party. The arbitration process is based on agreement by the parties and the authority of the arbitrator is founded on that agreement. In addition to its traditional role as a means to resolve interstate conflicts, arbitration has also become an References(p. 412) important means for resolving international commercial disputes between private parties and for the settlement of investor–state conflicts.
After World War II, with the growth in international business activity, arbitration became an increasingly common method to resolve international commercial disputes. Thus, arbitration agreements and clauses found their way with increasing frequency into international contracts for the sale of goods, the transfer of technology, and the undertaking of foreign investments. In certain particularly significant contracts with foreign companies, such as those involving mineral development, states might also agree to submit future disputes to international arbitration as well. As a result, a discrete system of international commercial arbitration developed to deal with disputes involving private parties engaged in trans-border commerce. Institutional centres of international commercial arbitration, such as the London Court of Arbitration and the International Chamber of Commerce, emerged and grew into important structures to support this process. These institutions developed rules to govern the arbitral process, and parties in their contracts would specifically opt for a particular centre and its rules in the event of a contract dispute. In addition, further support for the international arbitral system came with the 1958 conclusion of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards68 and the adoption in 1966 of the UNCITRAL Arbitration Rules.69 Often referred to as the New York Convention, the former has been ratified by 152 countries as of 2014.70 Under the treaty, member states commit their courts to enforcing international arbitration agreements and awards in accordance with specific rules and conditions. The UNCITRAL Arbitration Rules, prepared after several years of work by a group of international jurists operating under the authority of the United Nations Commission on International Trade Law (UNCITRAL), are designed to provide a set of accepted arbitration rules not tied to any particular arbitral institution. They may be used either in ad hoc arbitrations or arbitral proceedings administered by arbitration institutions. Although both sets of international legal rules were designed primarily to support international commercial arbitration, they would also become relevant for investment treaties and investor–state arbitration.
The jurisdictional basis of any arbitration resides in the agreement by the parties to submit their dispute to the arbitral process. Without such an agreement, the parties cannot be compelled to submit to arbitration and any arbitral award can be successfully attacked by demonstrating that the agreement to arbitrate was absent or defective. In international business, agreements to arbitrate take one of two forms: (1) a References(p. 413) provision—usually referred to as an ‘arbitration clause’—in a contract, stipulating that future disputes arising under or in connection with the contract are to be submitted to arbitration; and (2) an agreement—usually called a ‘submission agreement’—by which the parties to a specific, existing dispute agree to submit that dispute to arbitration.
It must be stressed that as applied in the international business setting, arbitration is a principled and rational method of dispute resolution that seeks a result based on the evidence, the applicable law, and the arguments presented to the arbitral panel. It is by no means a form of conciliation, mediation, or ‘palm tree justice’. On the contrary, it is a highly structured and formal process that operates through a set of specific rules and procedures. Although an arbitral proceeding may not exhibit all of the hallowed ritual and procedural technicalities common to judicial hearings, it must nevertheless conform to the minimal standards of justice common to the world’s legal systems. Indeed, a tribunal’s failure to respect minimal requirements of justice may mean that a court of law will refuse to enforce the resulting arbitral award. Thus, the parties must be given an opportunity to be heard, the arbitrator must be impartial, and the decision-making process must be fair.
The arbitral process, like a court case, goes through a series of procedural stages. Thus, the aggrieved party must initiate the process by filing a demand for arbitration, which the respondent must answer. The arbitrator or arbitrators must then be selected and their powers defined. The time and place of the arbitration hearing must be determined, along with the appropriate procedures. Once these preliminary matters are determined and any challenges to the jurisdiction of the arbitrators are resolved, each side submits its evidence and presents its case. Based on the evidence, the arguments of the parties, and the applicable rules and principles of law, the arbitrators decide the dispute and prepare an award embodying their decision. An arbitral award, however, is not self-enforcing. If the losing party refuses to respect the award, the winning party will need to rely on state power and particularly on state courts to enforce it.
Although the stages of arbitration are fairly uniform, the requirements and rules applicable to each stage may differ significantly among various arbitration systems. The procedural rules applicable to an arbitration depend on the consent of the parties. Most commonly, an arbitration agreement will contain a provision adopting the entire body of rules promulgated by an institution such as the International Chamber of Commerce, the American Arbitration Association, or UNCITRAL. To supplement or replace these rules, the parties may agree on special rules for their particular arbitration. Most legal systems will respect the procedures selected unless they are fundamentally unfair or are the product of fraud or overreaching. Indeed, the failure of the arbitral tribunal to follow the agreed-upon procedures may be grounds for invalidating any eventual award. If the parties have not specified a particular rule or if the adopted set of rules is silent on a particular matter, the arbitral tribunal is normally competent to select the necessary procedures.71 Generally speaking, arbitration rules are not as well (p. 414) defined and detailed as judicial procedural rules. Failing agreement by the parties or if a lacuna exists in the applicable rules, arbitrators have significant discretion in shaping the applicable arbitration procedures.
Tribunals’ decisions and jurisprudence over time have also shaped the international arbitral system. Tribunals have articulated the notion of ‘party autonomy’ and fashioned a body of law, lex mercatoria, gleaned from existing arbitral awards, the writings of commentators, and general principles of law, and applied it to commercial agreements often independently of municipal laws. However, no matter how effective this mechanism was for settling private party disputes, the involvement of a foreign sovereign in an arbitration inevitably makes the procedures of international commercial arbitration insufficient for the settlement of investor–state disputes. This is so because of sovereign nations’ state immunity, especially with regard to absolute foreign sovereign immunity, and also the difficulty in enforcing awards against the sovereign, an issue not settled until the adoption of the 1958 New York Convention and the 1965 ICSID Convention.
In contrast to these developments, the possibility of dispute settlement between an alien and a state through international arbitration, despite an increased need due to the rise in foreign investment activity, was precluded by positivist views of international law and state practice. The adoption of the ICSID Convention was necessary to achieve a major breakthrough in this area.
An initial theoretical problem for applying arbitration to investor–state disputes came from the positivist school of legal thought, which regarded international law as governing relations between sovereign states alone. Thus, individual or corporate persons, lacking legal personality under international law, could not obtain an international remedy through an international arbitral tribunal. Consequently, disputes arising out of contracts between sovereign states and private foreign individuals were considered to be subject only to the host state’s municipal law. The Permanent Court of International Justice affirmed that view in the Serbian Loans case when it held that the dispute was exclusively the relationship between the borrowing state and private person, ‘that is to say, relations which are in themselves, within the domain of the municipal law’.72 Lena Goldfield Limited v USSR References(p. 415) was one of the very first arbitrations involving a foreign investor and a state, and at the time it was considered a curious exception to the dominant view.73 In 1935, Sir Hersch Lauterpacht reluctantly noted the Lena award in his Annual Digest, stating with regard to the exact nature of the Lena decision: ‘[I]n a sense [it] stand[s] half-way between international and municipal arbitrations.’74 The Soviet Union, Latin American countries influenced by the Calvo Doctrine, and the newly decolonized countries seeking a New International Economic Order, also tended to support the view that international law dealt exclusively with the regulation of relations between states, and therefore did not apply to relations and transactions between states and private foreign investors.75
In situations where a large number of disputes involving nationals of a particular country had to be settled, states have agreed to the establishment of claims commissions. Such procedures did not upset the positivist theory that states needed to be the only parties involved, since the basis of such commissions’ power and jurisdiction was agreement between the two states involved in the dispute.76 To resolve investment disputes between investors and capital-importing countries, capital-exporting countries relied upon the interstate arbitration mechanism in various bilateral commercial agreements, such as FCN treaties. Early BITs would also adopt this approach. Thus, the very first BIT, an agreement between Germany and Pakistan signed in 1959, provided for interstate arbitration as a mechanism for investment dispute settlement.77 Under Article 11 of that BIT, which followed the pattern of earlier FCN treaties, the contracting parties undertook to resolve disputes regarding treaty interpretation and application through consultations in a spirit of friendship. Failing that, they agreed to submit the dispute to the ICJ by mutual agreement or, if the two states could not so agree, to an arbitration tribunal.
References(p. 416) With the growth of international investment, resolving investor–state disputes through interstate arbitration proved deficient in several ways, at least from the perspective of foreign investors. First, the remedy was highly politicized because it necessitated involvement by the investor’s home government. The initiation and pursuit of a claim against a host state in interstate arbitration or before another body required energetic and prolonged action by the home country government. Moreover, an investor might be prevented from even seeking intervention if a host country required foreign investors to waive diplomatic protection by their home government as a condition of entry. Moreover, no home government would take action solely on the basis of the investor’s claim. Rather, its decision on whether or not to pursue interstate arbitration would be based on a comprehensive evaluation of the home country’s diplomatic, political, and economic relations with the offending country. Moreover, regardless of the merits of the investor’s claim, a home state would be likely to refuse to take any formal action on behalf of an investor if it determined that such an action would damage valuable relations with the host country. Thus, an investor could well find that its national government refused to espouse a meritorious case simply because it feared doing so would be received badly by the host government and would thus harm important national interests. A government would be even more reluctant to invoke interstate arbitration if the merits of the investor’s case were unclear. Second, if the home government did decide to initiate an interstate arbitration, the claim would then belong to the home country government, not the investor. This meant that the investor would have no control over the case, no formal role in the interstate proceedings, and no voice in decisions with respect to litigation strategy, settlement, or abandonment of the claim. Third, losing states faced with awards against them often sought to avoid payment by invoking the doctrines of foreign sovereign immunity and the act of state, both of which deny an aggrieved investor a remedy. Fourth, if an offending host state did not comply with an ICJ decision, the only enforcement mechanism available under Article 94(2) of the United Nations Charter is a UN Security Council resolution, a practical impossibility in virtually any investor–state dispute.
In an attempt to overcome these difficulties, some investors, mostly large corporations in the mineral and extractive industries, negotiated arbitration clauses in concession contracts. These clauses provided for disputes arising under their contracts with a host country to be decided by an independent international tribunal located in a third country, rather than in local courts. Such arbitration clauses also provided that any arbitral award would be accepted by and enforceable against the host government, and they set down detailed rules regarding the selection of arbitrators, the arbitral procedure, and, in many cases, the law to be applied by the arbitral tribunal. However, only a few investors had the negotiating power to make such agreements with host governments. Moreover, the validity of such agreements was sometimes questioned. If the government refused to proceed with the arbitration, the investor’s only remedies would again be to make a request to its national state either for diplomatic intervention or to espouse the investor’s claim before an international tribunal. Moreover, attempts to agree on References(p. 417) an appropriate mode of dispute settlement were frustrated by an absence of adequate arbitration mechanisms. For example, arbitration processes organized by private entities such as the International Chamber of Commerce were frequently unacceptable to governments, particularly in the non-western world, and the only public international arbitral tribunal, the Permanent Court of Arbitration, was not yet open to private claimants.
(b) The development of investor–state arbitration
As a result of the lack of any established arbitration mechanism recognized by both investors and governments as adequate, individual disputants and other parties approached the World Bank, as an institution, and the President of the Bank, in his personal capacity, to assist in the settlement of financial disputes involving private parties and states on several occasions.78 The World Bank’s involvement in investment dispute settlement fell into three categories. The first category included two cases involving conciliation in the Suez Canal Compensation and City of Tokyo Bond cases. Disputants in other cases made similar requests for help, but the President declined to accept. The second category included a large number of cases in which the President designated impartial arbitrators, umpires, or experts to assist in resolving existing or future disputes. The third category consisted of cases in which the World Bank attempted to help the parties to agree on a method for solving their disputes outside the World Bank’s framework, for instance, by recourse to commercial arbitration, as was the case in the dispute between Columbia and Parsons & Whittemore.79 Although the World Bank succeeded in facilitating settlements of some of these investment disputes, it was not really equipped to handle that task in addition to its regular activities. At the same time, the World Bank’s staff were acutely aware that one of the bank’s fundamental purposes was, as stated in Article I of its Articles, ‘to assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes’.80 This laudable goal might well be furthered by a fair and efficient means of dispute resolution that had the confidence of both investors and host states.
In the early 1960s, the staff of the World Bank concluded that an institution specifically designed to deal with the special problems of settling investment disputes between foreign private investors and host country governments would facilitate the international flow of capital. In 1962, the World Bank’s Board of Governors requested the Executive Directors to study the matter. After a series of discussions within the World Bank and meetings with legal experts in various References(p. 418) parts of the world, the staff recommended an international convention to establish an institution to provide arbitration and conciliation facilities to settle such investment disputes.
The approach suggested by the World Bank included the following principles:
1. a recognition by states of the possibility of direct access by private individuals and corporations to an international tribunal in the field of financial and economic disputes with governments;
2. a recognition by states that agreements made by them with private individuals and corporations to submit such disputes to arbitration are binding international undertakings;
3. the provision of international machinery for the conduct of arbitration, including the availability of arbitrators, methods for their selection, and rules for the conduct of arbitral proceedings;
4. the provision for conciliation as an alternative to arbitration.
The World Bank’s approach was motivated by a strong commitment to promote the flow of private investment to areas in need of capital, an objective of special concern to the World Bank.81 The staff decided that improving the investment climate in developing countries could be done best from a procedural angle, by creating international machinery that would be freely available for the conciliation and arbitration of investment disputes.82 In other words, the establishment of adequate methods for settling investment disputes was considered vital in improving the investment climate and, thus, the promotion of foreign private investments for development.
Accordingly, in 1964 the World Bank’s Board of Governors directed the Executive Directors to ‘formulate a convention establishing facilities and procedures which would be available on a voluntary basis for the settlement of investment disputes between contracting States and Nationals of other contracting States through conciliation and arbitration’.83 The World Bank chose a multilateral convention, whose members would include both capital-exporting and capital-importing states, as the international legal instrument to foster a climate of confidence by providing basic rules that dealt with the protection of both governments’ and foreign investors’ legitimate interests.84 In order to allay the concerns of foreign investors that host states might repudiate agreements with investors providing for the conciliation or arbitration of investment disputes, one purpose of the proposed convention was to establish that such agreements were valid (p. 419) international obligations. Governments that were asked to enter into arbitration agreements and that were willing to agree to international, rather than national, procedures for dispute resolution feared that notwithstanding that acceptance they might remain subject to diplomatic or other governmental representations or claims by the national government of the foreign investor. The convention would remove this fear by excluding such representation or claims when an arbitration agreement was in effect and respected by the host government. After entering into an agreement for conciliation or arbitration, both parties wished to be sure that the agreement could not be frustrated by a unilateral act and that, in the case of arbitration, any award would be complied with.85 To give these assurances, the convention would embody the following principles:
1. It provided that a non-state party, an investor, could have direct access to an international forum against a state party without the need for espousal of its cause by its national government. In signing the convention, states accepted that principle, but no signatory state would be compelled to submit to the facilities provided by the convention and no foreign investor could initiate proceedings against a signatory state unless that state and the investor had specifically so agreed. However, once they did agree, their agreement was irrevocable and the parties were bound to carry out their agreement in accordance with the dispute settlement rules established by the convention.
2. While the Convention implied that local courts were not the final forum for the settlement of disputes between states and a foreign investor, it did not suggest that local remedies could not play a major role. In consenting to arbitration, the parties were free to agree either that local remedies might be pursued in lieu of arbitration or that local remedies needed to be exhausted before a dispute could be submitted for arbitration under the Convention. If the parties did not make either stipulation, the Convention provided that arbitration would take the place of local remedies.
3. As a corollary to the principle that an investor could bring a claim in arbitration directly against a foreign state without its home government’s intervention, the proposed convention provided that an investor’s national state would no longer be able to espouse a claim on the investor’s behalf. The Convention, therefore, was designed to offer a means of settling investment disputes between states and foreign investors directly, on a legal basis, and to insulate those disputes from politics and diplomacy.
4. Arbitral tribunals’ awards rendered under the Convention would be recognized and enforceable in all contracting states as if they were final judgments of their national courts, even if the state in which enforcement is sought was not a party to the dispute in question. The proposal made clear, however, that if the law of the state where enforcement was being sought (p. 420) prevented enforcement against a state as opposed to execution against a private party, the convention would not change that law. The proposal only sought to place arbitral awards on the same footing as final judgments of national courts. If the judgments could be enforced under the domestic laws in question, so could the award; if that judgment could not be so enforced, neither could the award.
5. The proposed convention would not establish standards for the treatment of aliens’ property and did not prescribe standards for foreign investors’ conduct in their relations with the host state. Accordingly, the Convention would not contain provisions concerning the substantive law or the merits of investment disputes—it would focus instead solely on the procedure for their settlement.86
By 1965, the Executive Directors and the World Bank staff had completed their work, which resulted in the Convention on the Settlement of Investment Disputes between States and Nationals of other States.87 This Convention was then submitted for approval to the member states of the World Bank and entered into force on 14 October 1966. The Convention has steadily gained state acceptance since that time. As of 30 June 2013, 158 countries had signed the Convention and 149 deposited their instruments of ratification.88
The Convention on the Settlement of Investment Disputes between States and Nationals of other States (sometimes referred to as the ‘Washington Convention’) created an international institution named the International Centre for Settlement of Investment Disputes (ICSID) to provide facilities for the conciliation and arbitration of investment disputes. Located in Washington, DC at the headquarters of the World Bank, the Centre itself does not engage in conciliation or arbitration; instead, it facilitates the establishment of arbitral tribunals and conciliation commissions in accordance with the provisions of the Convention. The Centre’s governing body, known as the Administrative Council, is composed of one representative from each contracting state. The ex-officio chairman of the Administrative Council is the President of the World Bank.
The Convention establishes a system of arbitration that is distinct from interstate and international commercial arbitration. In a sense, it stands between those two forms of arbitration, while sharing features of both systems. It creates a complete, self-contained jurisdictional system for the settlement of investor–state disputes. Thus, the Convention laid the foundation for future investment treaties References(p. 421) to incorporate this mechanism into their texts. Therefore, an investor can bring suit without the aid or intervention of its national state and litigate on a procedurally equal footing with a host state.89 The establishment of the ICSID institutional investor–state arbitration became a catalyst for offering other institutional, as well as ad hoc, forms of arbitration.
The Convention created ICSID as an institution distinct from the World Bank but at the same time linked to it. This linkage allows the Centre to take advantage of the World Bank’s administrative resources and perceived prestige and reputation for impartiality. On the other hand, the Convention sought to design dispute resolution processes that are not influenced by the World Bank or its staff. At the same time, the fact that the Centre was created under the sponsorship of the World Bank from which it continues to receive support has tended to assure investors and governments that it is an acceptable forum for investor–state dispute resolution.
(1) The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally.
Although ICSID would not hear its first case until 1972, it has become an important institution for international investment dispute resolution and handles the majority of known investor–state disputes. In 1978, ICSID’s Administrative Council authorized its Secretariat to administer certain proceedings that were not covered by the Washington Convention. There were three types of such proceedings: (a) conciliation or arbitration of legal disputes arising out of an investment that is not within the jurisdiction of ICSID because either the state party or the state whose national is a party is not a contracting state of the Convention; (b) conciliation or arbitration proceedings between parties where at least one is a contracting state or a national of a contracting state and where the settlement of the legal dispute may not directly arise out of an investment; and (c) fact-finding proceedings. The procedures governing each of these proceedings are set out in ICSID Additional Facility Rules.90 These procedures enable states that are not References(p. 422) ICSID members to commit to investor–state arbitration in investment treaties through the Additional Facility Rules. Many have done so, and several additional facility cases have been registered. It should be noted, however, that the ICSID Convention and its enforcement provisions do not apply to these three types of proceedings. The enforcement of awards under the Additional Facility Rules would ordinarily be governed by the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards. For this reason the Rules provide that Additional Facility Arbitration may only be held in a state that is a party to the Convention.
In addition to these investor–state dispute settlement mechanisms, investment treaties often offer investors ad hoc investor–state arbitration under UNCITRAL rules or at other arbitral institutions such as the Stockholm Chamber of Commerce.
Between 1987 and the beginning of 2014, the total number of investor–state disputes submitted to arbitration was estimated at 568, with a total of ninety-eight countries involved as a respondent in at least one case.91 The majority of these arbitration cases have taken place under ICSID’s auspices. The reason for this growth is the rapid increase in investment treaties and their imposition of ICSID and other forms of investor–state arbitration for resolving disputes.
Shortly after the adoption of the ICSID Convention, investment treaties began to provide for settling investor–state disputes through arbitration. The first BIT to include an ICSID clause was the Netherlands–Indonesia treaty,92 signed in 1968, just two years after the ICSID Convention went into effect. That treaty, which set the pattern for subsequent investment agreements, provided that if the investor–state dispute could not be settled amicably, ‘the dispute shall, at the request of the national concerned, be submitted either to the judicial procedures provided by the Contracting Party concerned or to international arbitration or conciliation’. It further provided that each contracting party to the treaty ‘hereby consents to submit any legal dispute arising between that Contracting Party and a national of the other Contracting Party concerning an investment of that national in the territory of the former Contracting Party to’ ICSID. Through the treaty, each contracting state provided the essential jurisdictional element of consent to arbitration but left the decision as to whether or not to arbitrate to the investor.
Unlike the arbitration clauses used in contracts, these treaty provisions could not be considered an arbitration agreement with the investor because the investor, while a national of a contracting state, was not a party to the treaty. Conceptually, References(p. 423) such a provision constitutes an irrevocable offer to arbitrate disputes concerning the interpretation and application of the treaty. An investor may accept that offer in different ways, including the submission of a request for arbitration or some other mechanism offered in the treaty. The offer includes the various terms and conditions contained in the applicable investment treaty.93
Treaties negotiated in the following years provided for investor–state arbitration, and today such provisions have become standard in investment treaty practice. Moreover, multilateral treaties such as NAFTA and the ECT have also adopted investor–state arbitration as their fall-back dispute resolution mechanism. However, the specific nature of those provisions, their scope, and their conditions and legal consequences are not uniform among investment treaties. For example, whereas most BITs and NAFTA grant investors the right to invoke arbitration against a host state, the ECT gives a more nuanced approach that is worth considering in some depth.
The dispute settlement provisions of the ECT, found in Articles 26 to 28 (Part V), are like most BITs in that they create separate mechanisms for state-to-state disputes and disputes between aggrieved investors and host countries. With regard to the former, the ECT follows BITs in providing for ad hoc arbitration if diplomatic negotiations fail. In this respect, one should note Article 15 of the ECT on subrogation, which specifically recognizes the ability of a national or company to assign its rights and claims to a contracting party and the right to pursue those rights and claims against another contracting party.
In its provisions on the settlement of investment disputes between investors and host countries, the ECT departs from the approach of more recent BITs and does not allow for automatic recourse to international arbitration by the investor. Under Article 26, disputes between a contracting party and an investor of another party over an alleged breach of the ECT may be submitted by the investor only after an attempt at amicable settlement for a period of at least three months. Following that period, an investor may choose one of the following dispute settlement procedures: (1) the courts or administrative tribunals of the host country; (2) any previously agreed dispute settlement procedure; and (3) binding international arbitration under the auspices of the International Centre for Settlement of Investment Disputes, the Arbitration Institute of the Stockholm Chamber of Commerce, or ad hoc arbitration under the UNCITRAL Arbitration Rules. However, an investor’s right to invoke international arbitration can be limited at the option of a host country. Article 26(3) provides that ECT contracting parties may choose to be listed in Annex ID, which identifies them as denying investor access to international arbitration when an investor has previously submitted an investment to local courts or to other dispute settlement procedures. The effect of this provision is that if local law requires disputes to be heard first by local courts, by opting to be listed in Annex ID an ECT country can prevent an aggrieved investor from initiating international arbitration. This resistance to granting References(p. 424) aggrieved investors automatic access to international arbitration in disputes with the host country is in distinct contrast to the prevailing BIT trend to provide for such a right.
The first investor–state arbitration to establish jurisdiction on the basis of an investment treaty was the 1990 case of AAPL v Sri Lanka.94 The tribunal in AAPL relied on Article 8 of the 1980 UK–Sri Lanka BIT, which provided that ‘[e]ach Contracting Party hereby consents to submit to’ ICSID ‘for settlement by conciliation or arbitration … any legal disputes arising between that Contracting Party and a national or company of the other Contracting Party concerning an investment of the latter in the territory of the former’.95 Without a specific arbitration clause in a contract between the investor and the Sri Lankan government and with little discussion, the tribunal decided the treaty provision was sufficient to establish Sri Lanka’s consent to arbitrate and that the filing of a request for arbitration was adequate evidence of the UK investor’s consent. Many subsequent cases would proceed in a similar manner.96 It is established investment treaty practice, therefore, that an investor may accept a host country’s offer to arbitrate in an investment treaty simply by instituting arbitral proceedings.97 On the other hand, most treaties do not specifically state how an investor must manifest its consent or even if consent must be manifested at all. In most instances, the nature and form of investor consent will be determined by the rules of the arbitral process under the treaty. Thus, in the case of an ICSID arbitration, one would look to the ICSID Convention and Rules to determine whether the consent manifested meets ICSID requirements.
– the national law of the Contracting Party on whose territory the investment is situated, including the rules relating to conflict of laws;
– the provisions of the present agreement;
– the terms of the particular obligation which involves the investment;
– the generally accepted rules and principles of international law.98
This provision, and other similar provisions that refer to national legislation, cannot be read as creating a prioritized list of sources indicating that national law is to be applied even when it conflicts with treaty provisions. It is an established principle of international law, as reaffirmed by the Vienna Convention on the Law of Treaties (VCLT), that a state party to a treaty ‘may not invoke the provisions of its internal law as justification for its failure to perform a treaty’.99 Indeed, to arrive at a decision, tribunals in many investor–state disputes must evaluate whether a particular item of internal legislation and its application to a covered investment violates a treaty provision. To hold that a provision gives preference to national legislation over a treaty provision would nullify the treaty’s goal of restraining state action by requiring that it conform to international standards in its treatment of covered investments and investors.
Not all treaties contain a specific governing law clause.100 In such situations, if the treaty provides for dispute resolution according to the ICSID Convention, a tribunal would be guided on governing law by Article 42(1) of the Convention. That article provides that in the absence of an agreement with respect to choice of law, the tribunal will apply the law of the host country and such rules of international law as may be applicable. If a treaty contains no provision on governing law and no reference to choice of law rules, the tribunal would first apply the investment treaty provisions itself, since it is directed by the treaty to decide disputes arising under the treaty, and then to other rules of international law such as the VCLT.
While the majority of investment treaties now contain provisions on investor–state arbitration, those provisions are by no means uniform. Although a survey of the individual differences among the vast array of existing treaties is beyond the scope References(p. 426) of this book,101 there are certain important issues on which persons interpreting such treaty provisions should focus, including the following: (1) the unequivocal nature of the state’s consent to arbitrate; (2) the scope of the consent to arbitrate; (3) the conditions precedent to arbitration; and (4) available dispute forums. Each of these issues is examined briefly.
(i) The unequivocal nature of the state’s consent to arbitrate
Although the majority of contracting states make unequivocal commitments in their treaties to arbitrate disputes with covered investors, in some treaties the state’s commitment is less firm and unequivocal. Some clauses, found principally in older BITs, simply state that investor–state arbitration will be resorted to if the parties agree to it. This requires the creation of a subsequent, specific agreement to arbitrate between the investor and the host state. In other treaties, contracting states promise ‘sympathetic consideration’ of requests to arbitrate disputes by investors of another contracting party.102 Such a provision is much less than a firm, unequivocal consent to arbitration; however, it can be interpreted as an implied obligation not to withhold consent unreasonably.103
In several treaties, contracting states, while refraining from giving their unequivocal consent to arbitrate, have nonetheless promised to give their consent to any investor who requests it. For example, Article 10 of the Netherlands–Pakistan BIT of 1988 provides: ‘The Contracting Party in the territory of which a national of the other Contracting Party makes or intends to make an investment, shall assent to any demand on the part of such national to submit, for arbitration or conciliation, to the Centre … any dispute that may arise in connection with the investment.’
If the host state refuses to give its consent after receiving a request from a covered investor, the other contracting party could demand that the refusing party carry out its obligation under the treaty. If the state persists in its refusal, the insisting party would have recourse to the remedies available under the treaty or other applicable rules of international law.104 Alone such a clause would not allow an investor to begin arbitration because ICSID and other forums require both parties’ consent to establish arbitral jurisdiction.
References(p. 427) (ii) The scope of consent
Arbitral jurisdiction requires on the consent of the parties. Normally, the extent of arbitrators’ jurisdiction depends the scope of the authority that parties give them. For anyone interpreting and applying investor–state treaty provisions, therefore, it is essential to determine whether the specific dispute at issue falls within the scope of the provision on investor–state arbitration.
In general, most treaty provisions have a wide scope and stipulate that consent to arbitration covers ‘any dispute’ or ‘all disputes … concerning an investment’. For example, Article X of the Spain–Argentina BIT covers ‘[d]isputes arising between a Party and an investor of the other Party in connection with investments within the meaning of this Agreement’.105 US BITs, on the other hand, contain an elaborate and broad definition of investment disputes, which specifically defines the disputes covered as including: (a) disputes concerning the interpretation or application of an investment contract; (b) disputes concerning the interpretation or application of an investment authorization; and (c) disputes concerning breaches of rights created under the terms of the BIT.106
Some treaties seek to limit, rather than broaden, the scope of disputes that are subject to investor–state arbitration. For example, Romanian BITs from the 1970s restricted international arbitration to disputes about the amount of compensation due to an investor after expropriation and even then only after the dispute had been decided by the host country’s courts. Thus, an investor dissatisfied with the amount of compensation granted after exhausting local remedies is entitled to ICSID arbitration, but in the case of any other dispute, including disputes about the legality of the expropriation, the local court’s decision is final. China takes this approach in its BITs. Article 8 of its 1994 investment treaty with Jamaica only allows arbitration for disputes relating to the amount of compensation owed as a result of an expropriation.107 In the ICSID case of Plama Consortium Limited v Republic of Bulgaria,108 the tribunal would not allow claimants to avoid a similarly limited consent clause in the Bulgaria–Cyprus BIT by using the MFN clause in that BIT to take advantage of a broader consent clause in the Bulgaria–Finland BIT.
Even if the contracting parties to an investment treaty give an unequivocal consent to the arbitration of investment disputes with other contracting parties’ investors, References(p. 428) all treaties set down certain conditions, sometimes procedural, that an investor must fulfil before commencing arbitration proceedings. One common condition discussed earlier in this chapter is a requirement that an investor first try to resolve the dispute amicably, through direct negotiations and consultations with host country government authorities. In order to forestall delaying tactics and make clear when a party has satisfied this condition, treaties often specify time limits for such negotiations. If the parties are unable to settle the dispute within the designated time period, which may range from three to twelve months, the investor is free to commence arbitration. Arbitral jurisprudence on whether the passage of the specified time is a required element to establish jurisdiction appears to be divided. One the one hand, in SGS v Pakistan,109 the tribunal, applying a Pakistan–Switzerland BIT requiring a twelve-month period of consultation, held that the completion of the period was not a condition precedent to jurisdiction.110 On the other hand, the tribunal in Enron v Argentina, applying an Argentina–US BIT calling for six months of consultation, specifically stated that it was a jurisdictional requirement and that failure to fulfil it would result in a lack of jurisdiction.111 While the specific language of the treaty in question will influence this issue, from a policy perspective it would seem that the better view is that periods of consultation and negotiation are jurisdictional in nature and a condition precedent to arbitration. All treaties evince a preference by the contracting parties to settle investor–state disputes through negotiations and other amicable means rather than by arbitration and litigation. The stipulated consultation period is one means of achieving this desirable public policy goal. Arbitral tribunals should not diminish the condition’s importance by asserting jurisdiction before it is fulfilled.112 On the other hand, in order to foster an expeditious settlement process of investor claims, NAFTA, unlike most other investment treaties, provides what is effectively a three-year statute of limitations after which an investor is barred from seeking arbitration.113
Beyond mere negotiations and consultations, some treaties require that parties to an investor–state dispute seek a resolution through local judicial and References(p. 429) administrative means. Normally, these efforts are limited to specific periods of time and are not a requirement for the exhaustion of local remedies in the traditional meaning of that term.
A wide variety of arbitral and judicial forums exist in the world. Investment treaties normally indicate to which particular forums an investor may have recourse in order to settle a dispute with a host country. Many treaties specify only one such forum, which is often ICSID. Others give investors a choice of various arbitral options. For example, unless a contracting state has specifically limited dispute resolution, the ECT offers investors the following options: (1) the courts or administrative tribunals of the host country; (2) any previously agreed dispute settlement procedure; or (3) binding international arbitration under the auspices of ICSID, the Arbitration Institute of the Stockholm Chamber of Commerce, or ad hoc arbitration under the UNCITRAL Arbitration Rules.114 Other treaties refer to other arbitral institutions, including the International Chamber of Commerce and certain regional centres.
In a significant departure from customary international law and earlier bilateral commercial treaties, contemporary international investment treaties commonly grant investors the right to bring claims in arbitration against host states for violations of treaty provisions with respect to investor treatment. The novelty and power of this remedy cannot be overstated. There are few other instances where international law gives private persons and companies the right to force a sovereign to appear before an international tribunal, compel that state to defend its actions ostensibly taken to protect the public interest, and, if those actions are judged to violate international law, to pay the injured investor compensation. Unlike the situation prevailing before the advent of the investment treaty movement, investors have the right to bring claims autonomously and without reference to or the permission of their home governments, to control and direct their case against a host state as they see fit, and to have full entitlement to any monetary award that an arbitral tribunal may grant them. Indeed, it should also be emphasized that investment treaties usually grant aggrieved investors the right to prosecute their claims autonomously, with complete disregard for the concerns and interests of their home countries. For capital-exporting states and foreign investors, it is this mechanism that gives important, practical significance to international investment agreements and enables the treaties to afford true protection to foreign investment.
References(p. 430) Particularly in recent years, investors have taken advantage of that remedy. At the end of the twentieth and the beginning of the twenty-first centuries, one of the most significant developments in international investment law has been the growth of investor–state arbitration to settle investment disputes. From 1987 to the beginning of 2014, at least 568 investor–state treaty arbitrations had been brought,115 virtually all of which involved private investors as claimants and states as respondents. The precise number cannot be ascertained because some investor–state arbitrations are not made public by the involved parties. As of 2014, known cases involved ninety-eight different governments. The three investment treaties most frequently invoked as a basis for investor–state arbitration were NAFTA (fifty-one cases), the ECT (fifty-one cases), and the Argentina–United States BIT (seventeen cases).116 Of the total number of arbitral cases brought, UNCTAD estimates that 43 per cent were decided in favour of states, 31 per cent were decided in favour of investors, and 26 per cent were settled.117 The frequency of investor–state litigation has also grown substantially from only two cases begun in 1994 to record levels of fifty-eight and fifty-six registered in 2012 and 2013, respectively
In the realm of international investment, investor–state, treaty-based arbitration has become increasingly common. Similarly, arbitral awards interpreting and applying investment treaty provisions have become increasingly numerous. For international law firms, investor–state arbitration—once an arcane field only of interest to a few scholars and specialists—has become an important and lucrative area of practice.
In almost all investor–state arbitrations, the investor is the claimant and the host state is the respondent. Three reasons explain why states rarely initiate international arbitration cases against investors. First, host states generally consider their internal legal processes—for example their regulatory powers and judicial systems—sufficient to handle their claims against investors during disputes. Second, BITs grant investors rights but rarely impose obligations on them that host states can enforce through arbitration. Third, ICSID and other forms of arbitration require the consent of both parties to establish jurisdiction. Under nearly all investment treaties, the state alone, not the investor, consents to arbitration; consequently, unless the investor has specifically consented to arbitration in some other way, it is not subject to arbitral jurisdiction. Thus, among all the arbitration cases registered at ICSID as of 2007, only two were initiated by states, and jurisdiction in both cases was based on contracts with the investor and not on investment treaties.118
One may argue that the recent growth in treaty-based investor–state disputes is purely a function of the vast increase in international investment generally References(p. 431) and the inevitability of conflict in investment relationships and that, therefore, investor–state disputes are a natural and inevitable fact of international economic life. On the other hand, one must also acknowledge that investor–state disputes have certain potential negative consequences for both the states and the investors involved.
The costs of investor–state disputes are imposing growing financial hardships on individual states, particularly on poor, developing countries. The OECD estimates that the average cost to the parties of an investor–state arbitration is US$8 million, with costs exceeding US$30 million in some cases.119 In addition to the costs of actually conducting the arbitration, there are two other costs. First, a host country risks having to pay awards that, in relation to its budget and financial resources, may be extremely burdensome. Second, the ‘policy cost’ of an investor–state arbitration is that a substantial award to the investor may require the host government to repeal or modify other similar but unrelated measures.
The growing number of investor–state disputes may impose other, indirect burdens on governments, as well. Investment policy, like any other government policy, needs to be sustained by popular support. Public realization of the costs incurred by host countries during investor–state, treaty-based disputes, which are often accompanied by significant publicity and media comment, might lead to declining support for foreign investment or for the economic liberalization policies many countries have adopted over the last two decades.120 In other words, continued public support for policies favouring foreign investment is not a foregone conclusion, and increases in investor–state arbitration may contribute to additional restrictions if popular support leans the other way. Moreover, a high-profile investor–state arbitration may be seen by other foreign investors as a negative reflection on the investment climate in the host country, and as an indication that the country concerned is not as receptive to foreign investors as its government contends. After all, the basis of any claim in a treaty-based, investor–state arbitration is that the host country violated its international treaty commitments.
In addition to the cost incurred by host countries and investors, investor–state arbitrations may also have negative consequences for international relationships between host countries and investor home countries. A highly publicised, hotly litigated arbitration between a foreign investor and a host country can negatively affect governmental and public opinion in the investor’s home country towards the host country and vice versa.
Despite a few investors who have won large awards as a result of treaty-based, investor–state arbitration, the idea that it is the road to vast riches for investors (p. 432) is a gross exaggeration. Investor–state arbitration also entails significant costs for the investor—costs that may not be recouped from any eventual arbitral award. The costs to the investor have several dimensions. First, there are the financial costs incurred by the investor by hiring legal representation and paying its portion of the arbitration’s administrative costs. Second, there are the costs incurred by having to devote significant executive time, effort, and concentration to arbitration rather than the investor’s core business. Third, there are relationship costs. A transnational corporation requires productive relationships with host governments, business communities, and the publics where it operates. Initiating arbitration against a host government might serve to rupture those relationships and put into question its relationships with countries that are sympathetic to the host country respondent. Other host countries may ask themselves: If this investor was willing to sue country X, may it not also be willing to sue us? It was perhaps an evaluation of these costs that led the former CEO of Metalclad, which won an award of US$17 million against Mexico in a much noted case,121 to state publicly that he found the whole arbitration process a burden and he wished he had settled his company’s claim through informal mechanisms, or what he called Metalclad’s ‘political options’.122 Presumably, he was indicating that, in hindsight, informal processes of dispute resolution might have been less costly than the formal processes involved in investor–state arbitration.
Over the past six decades, the nations of the world have engaged in the process of constructing a treaty regime that grants specific rights under international law to private investors who undertake investments in foreign countries. A potentially important question is whether those private investors may waive any or all of the rights granted to them by individual treaties, particularly the right to bring a claim in arbitration directly against a host state. No investment treaty specifically deals with this issue, and no arbitral award appears to have decided it.
The question is not purely theoretical. It is possible that host countries, having entered into numerous investment treaties in an earlier era, might later seek to extricate themselves from treaty commitments towards particular investors by asking them to waive certain rights, for example recourse to compulsory international arbitration, as a condition for the host government’s permission to make an investment or its grant of a particularly desirable benefit. For example, if a country has discovered vast mineral or petroleum resources, could it require investors seeking to invest in the development of those resources to waive some or all of their rights under an otherwise applicable BIT? If subsequent to such an investment, the host state takes actions that injure the investment and the investor then seeks to assert its rights under the applicable treaty, could the host state raise the References(p. 433) investor’s earlier waiver as a defence to a claim in an investor–state arbitration proceeding? While it is generally agreed that an injured alien may waive an existing claim against a state,123 it does not follow from that principle that a prospective waiver of rights will be binding and irrevocable.
One approach to resolving this question is to inquire whether the investment treaty in question confers rights directly on investors as subjects of international law or whether investors derive those rights from the treaty state to which they belong.124 If the former situation prevails and investors, by virtue of the investment treaty, are endowed directly with a right to make a claim in arbitration in their own capacity, neither acting on behalf of their home state nor deriving their capacity from it to make such a claim, then, according to some scholars, an investor should be able to waive that right to the same extent that an individual is able to waive any other right.125 On the other hand, if the right to bring an action under the treaty is derived from its home state, which is a party to the treaty, then a waiver of the right to make a claim in investor–state arbitration under the treaty should be ineffective because the right is not the investor’s to give away.
Another approach to the problem is to inquire into the intent of the contracting states that concluded the treaty granting an aggrieved investor the right to institute arbitration against a host state for treaty violations. As revealed by treaty preambles, the purpose of investment treaties is not merely to give rights to individual investors, but to achieve the larger aims of strengthened economic relations between the two countries concerned, the promotion of capital flows between them, and their economic development and increased prosperity. To achieve these goals, states, through the treaty-making process, have constructed an elaborate regime of international rights and duties binding the contracting parties, of which the right of investors to bring claims is an important part. Investor–state arbitration plays an important role in sustaining that regime. Investor–state arbitration is not only a means to protect individual investor rights but also to assure respect of the reciprocal treaty obligations and rights by the states concerned. Thus, investor–state arbitration, like other private rights of action granted under domestic law to individuals, serves as a mechanism created by the contracting states to assure respect for treaty obligations and therefore the preservation of the treaty structure. Investors should not be allowed to permanently waive those References(p. 434) rights and thus risk undermining the international legal structure between the contracting states.
The only arbitral case to consider the question of waiver of the right to investor–state arbitration was Aquas del Tunari v Bolivia in which Bolivia argued that a provision in a concession contract by which the parties agreed to the exclusive jurisdiction of Bolivian courts to settle concession disputes constituted a waiver of ICSID jurisdiction. The tribunal concluded that the dispute resolution clause in the concession did not constitute such a waiver; however, it did state in passing that ‘it would appear that an investor could also waive its right to invoke the jurisdiction of ICSID’.126 The strength of that statement is undermined by the fact that it was irrelevant to the holding in the case but more important because the tribunal did not fully analyse the role of investor–state arbitration in the preservation of the investment regime created by investment treaties.
The element of the international investment regime that has drawn the most concern and criticism has been investor–state arbitration. The concerns and criticisms have several dimensions. First, the very legitimacy of a system that entrusts to private persons the power to judge the legality of regulations and measures ostensibly taken in the public interest by lawful governments, often democratically elected, has been challenged. Partisans of this view argue that it is wrong to allow arbitrators to thwart regulations and laws enacted to protect and advance vital public interests such as health, safety, security, and environmental protection. Second, the costs of the system and damage awards against state parties place a great burden on public finances and are not worth the questionable benefits to be derived from this form of dispute settlement. Third, the system is not transparent since it is possible for the parties to invoke confidentiality to prevent the public from fully understanding the workings of a process that can affect the public interest. Fourth, in individual cases, investor–state tribunals have rendered erroneous and inconsistent decisions but the investment regime affords no mechanism, such an appellate institution, by which such decisions may be corrected and a consistent jurisprudence developed. Fifth, serious questions have been raised about the impartiality and independence of arbitrators. It is often claimed that some arbitrators assume their arbitral responsibilities with preconceived notions of the facts and the applicable law and are also influenced by their other activities and interests.127
These concerns have provoked significant comment and thought among scholars, arbitrators, and practitioners and within government departments, NGOs, References(p. 435) and international institutions. They have also led individual governments to take certain actions. Thus dissatisfaction with investor–state arbitration was the primary cause for countries such as South Africa, Bolivia, and Venezuela to decide not to renew BITs that have reached their termination dates, and for Venezuela, Bolivia, and Ecuador to withdraw from ICSID by denouncing its Convention.
Other countries, while leaving in place their existing investment treaties, have sought to limit or control investor–state arbitration more tightly in the new treaties they have made. Indeed, one may say that the development of a new generation of investment treaties has been prompted by the results observed over several years in investor state–arbitrations interpreting and applying the earlier generation of international investment agreements. The new generation of treaties contains more detailed definitions and other provisions, for example with regard to particularly problematic concepts such as ‘fair and equitable treatment’, in order to limit the discretion of arbitrators in applying them in the future. They may also provide more detailed provisions on treatment exceptions, arbitral procedure, transparency of proceedings, and submissions by non-disputing parties.128
Yet others have sought to narrow the scope of investor–state arbitration in their new agreements and a few countries have determined to reject any type of investor–state arbitration in their investment treaties on the grounds that it imposes unacceptable constraints on national policy-making,129 thereby leaving their investors to local and intergovernmental remedies to resolve investor–state disputes. As of the middle of the second decade of the twenty-first century, the investment regimes dispute settlement process seemed in a state of flux and open to various possible options for reform.130
2 As the ICSID Annulment Committee stated in the Vivendi case, which involved a dispute under the Argentina–France BIT: ‘[a] state may breach a treaty without breaching a contract, and vice versa’; ‘whether there has been a breach of the BIT and whether there has been a breach of contract are different questions. Each of these claims will be determined by reference to its own proper or applicable law—in the case of the BIT, by international law; in the case of the Concession Contract by the proper law of the contract’. Compañía de Aguas del Aconquija SA and Vivendi Universal (formerly Compagnie Générale des Eaux) v Argentine Republic, ICSID Case No ARB/97/3 (Decision on Annulment) (3 July 2002) ¶¶ 95 and 96.
4 N Rubins, ‘The Allocation of Costs and Attorney’s Fees in Investor–State Arbitration’ (2003) 18 ICSID Rev—FILJ 109, 125 (observing that whereas 58 per cent of commercial arbitration claims brought to the ICC in 1999 were for less than US$1 million, the average claim for ICSID cases in 1997 was US$10 million).
5 CME Czech Republic BV v Czech Republic (Final Award) (14 March 2003), UNCITRAL (The Netherlands–Czech Republic BIT) ¶ 161. See also PS Green, ‘Czech Republic Pays $355 Million to Media Concern’, New York Times, 16 May 2003, W1.
9 Hulley Enterprises Ltd (Cyprus) v The Russian Federation, PCA AA 226, (Final Award) (18 July 2014) ¶ 339; Yukos Universal Ltd (Isle of Man) v the Russian Federation, PCA AA 227, (Final Award) (18 July 2014); Veteran Petroleum Ltd (Cyprus) v the Russian Federation, PCA AA 228 (Final Award) (18 July 2014).
10 International Institute for Sustainable Development, ‘Czech Republic Hit with Massive Compensation Bill in Investment Treaty Dispute’, Investment Law and Policy Weekly News Bulletin, 21 March 2003. See also CME Czech Republic (n 5 above).
11 See <http://naftaclaims.com/disputes/mexico/Thunderbird/award.pdf> accessed 24 March 2015.
12 eg Agreement Between the Czech Republic and Malaysia for the Promotion and Protection of Investments (9 September 1998), Art 7(1): ‘Any dispute which may arise between an investor of one Contracting Party and the other Contracting Party in connection with an investment on the territory of that other Contracting Party shall be subject to negotiations between the parties in dispute.’
1. Any dispute between one Contracting Party and an investor of the other Contracting Party relating to the effects of a measure or series of measures taken by the former Contracting Party on the management, use, enjoyment or disposal of an investment made by the investor, and in particular, but not exclusively, relating to expropriation referred to in Article VI (Expropriation) of this Agreement or to the transfer of funds referred to in Article VII (Transfer of Funds) of this Agreement, shall, to the extent possible, be settled amicably between them.
(1) Disputes with regard to an investment which arise within the terms of this Agreement between an investor of one Contracting Party and the other Contracting Party, which have not been amicably settled shall be submitted, at the request of one of the Parties to the dispute, to the decision of the competent tribunal of the Contracting Party in whose territory the investment was made.
(2) The aforementioned disputes shall be submitted to international arbitration in the following cases:
(i) where, after a period of eighteen months has elapsed from the moment when the dispute was submitted to the competent tribunal of the Contracting Party in whose territory the investment was made, the said tribunal has not given its final decision;
16 ICSID Case No ARB (AF)/98/3 (19 July 2002), available at <http://worldbank.org/icsid> accessed 8 June 2009.
17 Interhandel (Switzerland v United States) (Judgment) (21 March 1959)  ICJ Rep 25. See also Elettronica Sicula SpA (ELSI) (United States v Italy) (Judgment) (20 July 1989)  ICJ Rep 15, ¶ 50, referring to the obligation of exhaustion of local remedies as ‘an important principle of customary international law’.
18 Interhandel (n 17 above).
21 eg the 1987 Switzerland–Bolivia BIT (Accord entre la Confédération suisse et la République de Bolivie concernant la promotion et la protection réciproques des investissements), Art 10(1), entitled ‘Les différends entre Parties Contractantes’ (Disputes between the Contracting Parties) states: ‘Les différends entre Parties Contractantes au sujet de l’interprétation ou de l’application des dispositions du présent Accord seront réglés par la voie diplomatique.’
22 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Ghana for the Promotion and Protection of Investment (22 March 1989).
23 UN Charter, Art 33(1) provides: ‘The parties to any dispute, the continuance of which is likely to endanger the maintenance of international peace and security, shall, first of all, seek a solution by negotiation, enquiry, mediation, conciliation, arbitration, judicial settlement, resort to regional agencies or arrangements, or other peaceful means of their own choice.’
24 Agreement between the Government of the Kingdom of Denmark and the Government of the Republic of Poland for the Promotion and the Reciprocal Protection of Investments (1 May 1990), Art 13(1) states: ‘(1) The representatives of the Contracting Parties shall, whenever needed, hold meetings in order to review the implementation of this Agreement. These meetings shall be held on the proposal of one of the Contracting Parties at a place and at a time agreed upon through diplomatic channels.’
28 Available at <http://www.asean.org/news/item/asean-protocol-on-enhanced-dispute-settlement- mechanism> acccessed 17 January 2015.
31 LB Sohn, ‘International Arbitration in Historical Perspective: Past and Present’ in AHA Soons (ed), International Arbitration: Past and Prospects (Carnegie Endowment for International Peace, 1990) 12.
32 B Descamp, ‘General Survey of the Clauses of Mediation and Arbitration Affecting the Powers Represented at the Conference’ in JB Scott (ed), The Proceedings of the Hague Peace Conferences (OUP, 1920) 191.
Any dispute between the High Contracting Parties as to the interpretation or the application of this Treaty, which the High Contracting Parties shall not satisfactorily adjust by diplomacy, shall be submitted to the International Court of Justice, unless the High Contracting Parties shall agree to settlement by some other pacific means.
Under this treaty, a dispute between the US and Italy concerning an alleged expropriation gave rise to the ICJ Case Concerning Elettronica Sicula SPA (ELSI) (United States v Italy) (Judgment) (20 July 1989)  ICJ Rep 15.
34 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Chile for the Promotion and Protection of Investments (8 January 1996).
36 ASEAN Comprehensive Investment Agreement, Art 27. (‘The ASEAN Protocol on Enhanced Dispute Settlement Mechanism signed in Vientiane, Lao PDR on 29 November 2004, as amended, shall apply to the settlement of disputes concerning the interpretation or application of this Agreement.’)
38 Agreement between the Government of the People’s Republic of China and the Government of the Republic of Singapore on the Promotion and Protection of Investments (1985), Art 13.12. See also Agreement between the Government of the Democratic Socialist Republic of Sri Lanka and the Government of the People’s Republic of China on the Reciprocal Promotion and Protection of Investments (1986), Art 13.11; and New Zealand and China: Agreement on the Promotion and Protection of Investments (1988), Art 13.12.
39 Empresas Lucchetti SA and Lucchetti Peru SA v Peru, ICSID Case No ARB/03/4 (Award) (7 February 2005) (Peru–Chile BIT) ¶¶ 7 and 9 (also known as Industria Nacional de Alimentos SA and Indalsa Perú SA v Peru).
either to the competent tribunal of the Contracting Party in whose territory the investment was made; or
to international arbitration of the International Centre for the Settlement of Investment Disputes (ICSID).
47 ‘Ukraine Reaches Settlement in BIT claim by US-govt Venture Capital Fund’, Investment Treaty News, 4 July 2006, available at <http://www.iisd.org/pdf/2006/itn_july4_2006.pdf.> accessed 17 January 1915.
51 Agreement between Australia and the Socialist Republic of Vietnam on the Reciprocal Promotion and Protection of Investments (signed 5 March 1991, entered into force 11 September 1991) 1991 Austl TS No 36, Art 129(1), available at <http://www.unctad.org/sections/dite/iia/docs/bits/ australia_vietnam.pdf> accessed 25 August 2009.
53 ‘Tout différend relatif aux investissements entre l’une des Parties contractantes et un national ou une société de l’autre Partie contractante est autant que possible réglé a l’amiable entre les deux Parties concernées.’ L’accord sur le traitement et la protection des investissements, Fr-Pan (5 November 1982) 1985 J officiel 12067, Art 8(1).
56 Treaty between the United States of America and the Republic of Turkey Concerning the Reciprocal Encouragement and Protection of Investments (signed 3 December 1985, entered into force 18 May 1990), Art 6(2).
59 eg General Electric Corporation has developed a programme known as the Early Dispute Resolution Initiative, which seeks to save money and time through the effective use of dispute resolution techniques outside formal litigation and arbitration, often with external mediators. See Harvard Business School, GE’s Early Dispute Resolution Initiative, HBS Case N9-801-395 (2001).
60 See eg ICSID, ‘Rules of Procedure for Conciliation Proceedings’ in ICSID Convention, Regulations and Rules, available at <https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/CRR_English-final.pdf> accessed 3 November 2014.
67 See eg the very different, proactive approach taken by a multidisciplinary team of mediators in successfully mediating an investment dispute between Vattenfall, a Swedish state-owned electricity company, and Polskie Sieci Elektroenergetyczne (PSE), a Polish integrated electricity company, as reported by the team’s chief mediator. TW Wälde, ‘Efficient Management of Transnational Disputes: Mutual Gain by Mediation or Joint Loss in Litigation’ (2006) 22 Arb Int’l 205, 206.
69 United Nations Commission on International Trade Law Arbitration, 31 UN GAOR Supp (No 17), 35-50 UN Doc A/31/17 (1976) (hereinafter ‘UNCITRAL Arbitration Rules’). The text of the UNCITRAL Arbitration Rules is reprinted in (1972) 2 YB Comm Arb 161, 161–71; (1979) 27 Amer J Comp L 489, 489–503.
70 UNCITRAL, Status: Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), available at <http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html> accessed 17 January 2015.
Any arbitration proceeding shall be conducted in accordance with the provisions of this Section and, except as the parties otherwise agree, in accordance with the Arbitration Rules in effect on the date on which the parties consented to arbitration. If any question of procedure arises which is not covered by this Section or the Arbitration Rules or any rules agreed by the parties, the Tribunal shall decide the question. (emphasis supplied).
See Order in Response to a Petition by Five Non-Governmental Organizations for Permission to make an Amicus Curiae Submission (12 February 2007) in the ICSID case of Suez, Sociedad General de Aguas de Barcelona SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/03/19, in which the tribunal relied on Art 44 to allow non-parties to make amicus curiae submissions on the merits of the case, available at <https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC519_En&caseId=C19> accessed 17 January 2015.
Historically, the Lena case remains a baleful monument to the absolute power of a State able by force alone to thwart the consensual process of international arbitration, a threat to transnational trade still present in many parts of the world. Juridically, over the last years, its direct beneficiary has been the modern system of international commercial arbitration to which the Lena tribunal applied several innovative and hugely important ideas: (1) the application of a non-national system of law to the merits of the private law dispute, namely ‘general principles of law’; (2) the power of the majority of an arbitration tribunal to continue the proceedings in the absence of the minority (notion of ‘truncated tribunal’); (3) the related jurisdictional concepts of ‘Kompetenz-Kompetenz’, the legal autonomy or ‘separability’ of an arbitration clause and the scope of the reference of a specific dispute to a particular arbitration tribunal. In the broadest sense, the Lena case represents the development of modern commercial arbitration.
VV Veeder, ‘The Lena Goldfields Arbitration: The Historical Roots of Three Ideas’ (1998) 47 ICLQ 747–8
86 See eg Paper prepared by the General Counsel and transmitted to the members of the Committee of the Whole SID/63-2 (18 February 1963); Summary Record of Proceedings, Adis Ababa Consultative Meetings of Legal Experts (16–20 December 1963) Z7 (30 April 1964).
87 (18 March 1965) 575 UNTS 159; 17 UST 1270; TIAS No 6090. For a history of the Convention, see ICSID, Convention on the Settlement of Investment Disputes between States and Nationals of Other States: Analysis of Documents Concerning the Origin and Formation of the Convention (Washington, DC, 1970). See also C Schreuer, The ICSID Convention: A Commentary (Cambridge University Press, 2001), which is the most comprehensive and authoritative scholarly analysis of the text of the Convention.
89 A Broches, ‘Bilateral Investment Protection Treaties and Arbitration of Investment Disputes’ in J Schultz and J van den Berg (eds), The Art of Arbitration, Essays on International Arbitration, Liber Amicorum Pieter Sanders (Kluwer Law International, 1982) 64.
90 Known formally as the Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat of the International Centre for Settlement of Investment Disputes (Additional Facility Rules). In addition to a brief set of rules prescribing the basic conditions necessary for access to the facility, the Additional Facility Rules contained detailed schedules setting out Additional Facility Administrative and Financial Rules, Additional Facility Conciliation Rules, Additional Arbitration Rules, and Additional Facility Fact-Finding Rules.
93 Schreuer (n 87 above) 210–22.
95 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Democratic Socialist Republic of Sri Lanka for the Promotion and Protection of Investments (13 February 1980), Art 8(1).
97 R Dolzer and C Schreuer, Principles of International Investment Law (OUP, 2008) 243. See also the award in Generation Ukraine v Ukraine (16 September 2003), in which the tribunal stated at ¶ 12.2, ‘it is firmly established that an investor can accept a State’s offer of ICSID jurisdiction contained in a bilateral investment treaty by instituting ICSID proceedings’.
100 eg Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Albania for the Promotion and Protection of Investments (30 March 1994).
The competent authority of the Contracting Party in the territory of which a national of the other Contracting Party makes or intends to make an investment, shall give sympathetic consideration to any request of such national to assume the obligation to submit, for arbitration or conciliation, to the Centre … any dispute that may arise in connection with that investment, and shall inform that national in writing of its decision. (emphasis added)
103 Schreuer (n 87 above) 217.
104 ibid 216.
110 Other cases taking a similar view that specified amicable settlement procedures that were not jurisdictional in nature were Ethyl Corp v Canada, UNCITRAL (Decision on Jurisdiction) (24 June 1998) ¶ 85; Biwater Gauff v Tanzania (Award) (24 July 2008) ¶¶ 343–344; and Occidental v Ecuador, ICSID Case No ARB/06/11 (Decision on Jurisdiction) (9 September 2008) ¶ 94.
111 Enron Corp and Ponderosa Assets LP v Argentina (Decision on Jurisdiction) (14 January 2004) 88. Other cases that adopted a similar view that such procedures are jurisdictional in nature were Burlington v Ecuador, ICSID Case No ARB/08/5 (Decision on Jurisdiction) (2 June 2010) ¶¶ 312, 315; Murphy Exploration and Production Co International v Ecuador, ICSID Case No ARB/ 08/04 (Award on Jurisdiction) (15 December 2010) ¶ 149; Wintershall v Argentina, ICSID Case No ARB/04/14 (Award) (8 December 2008) ¶¶ 114–156.
112 For an opposing view, see Dolzer and Schreuer (n 97 above) 248–9.
An investor may not make a claim if more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor has incurred loss or damage.
117 ibid 126.
118 Tanzania Electric Supply Co Ltd v Independent Power Tanzania Ltd, ICSID Case No ARB/98/8 and Gabon v Société Serte, ICSID Case No ARB/79/1. See the listing of registered cases on the ICSID website, at <https://icsid.worldbank.org/apps/ICSIDWEB/cases/Pages/AdvancedSearch.aspx> accessed 17 January 2015.
119 D Gaukrodger and K Gordon, ‘Investor–State Dispute Settlement: A Scoping Paper for the Investement Policy Community’, OECD Working Papers on International Investment, 2012/03, 19, available at <http://www.oecd.org/daf/inv/investment-policy/WP-2012_3.pdf> accessed 17 January 2015.
120 eg an UNCTAD study found that from 1991 to 2002, ‘1551 (95%) out of 1641 changes introduced by 165 countries in their FDI laws were in the direction of greater liberalization’. UNCTAD, World Investment Report 2003: FDI Policies for Development: National and International Perspectives, UN Doc UNCTAD/WIR/2003 (4 September 2003) 20.
122 J Coe (n 62 above) 7, 8, n 2.
International law thus recognizes that an investor may, after a claim against a state has arisen, enter into a settlement agreement with that State and commit to a final waiver of those claims. The State can subsequently rely on that waiver and assert it as a defense against the investor, should such investor attempt to raise those claims again.
ibid ¶ 175.
124 JJ Van Haersolte-Van Hof and AK Hoffmann, ‘The Relationship between International Tribunals and Domestic Courts’ in P Muchlinski et al (eds) The Oxford Handbook of International Investment Law (OUP, 2008) 962, 984.
125 ibid 1002–3.
127 See generally, M Waibel et al (eds), The Backlash Against Investment Arbitration: Perceptions and Reality (Kluwer Law International, 2010); D Gaukrodger and Gordon (n 119 above) 19; UNCTAD, World Investment Report 2013 (2013) 111–12.