Overview
A. Introduction
1. Foreign investments are regularly undermined or impeded by improper state conduct. Fortunately, there exists a network of international legal instruments (notably, bilateral investment treaties - BITs) that contain important protections. Additionally, they often enable the foreign investors to seek remedies for any wrongful conduct before an independent, international arbitral tribunal. This will usually be more desirable than bringing the claim before the host state’s courts, which may be subject to political interference, the court system might be very slow, or the investor may have concerns about its ability to enforce a domestic court decision.
2. Often, foreign investors are able to choose from a number of arbitration options. This choice is highly important, and can have significant consequences. As such, investors should carefully consider their best option. This advisory provides an introduction to some of the most commonly used arbitration options, the differences between them, and the most important consequences for an investor in choosing a particular option over another.
3. For those unfamiliar with investor-state arbitration and the legal instruments that give rise to them, we recommend reading our previous advisory for an introduction to the subject, and how such instruments can be a useful tool for minimizing political risk. These advisories are part of a series that outlines key aspects of the investor-state arbitral process and the rights and defenses that are frequently raised in this context.
B. The Most Common Arbitration Options
4. By way of summary, the following five forums are most often provided for under BITs. An overview of the three most commonly used forums is provided thereafter.
4.1 Arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Arbitration);
4.2 Arbitration under the Additional Facility Rules of the International Centre for the Settlement of Investment Disputes (ICSID Additional Facility Arbitration);
4.3 Ad hoc arbitration under the UNCITRAL Arbitration Rules (Ad Hoc UNCITRAL Arbitration);
4.4 Arbitration at the Arbitration Institute of the Stockholm Chamber of Commerce (SCC Arbitration); and
4.5 Arbitration under the Rules of Arbitration of the International Chamber of Commerce (ICC Arbitration).
(i) ICSID Arbitration
5. The Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) has been ratified by 150 states as of January 26, 2015. The Convention established the International Centre for the Settlement of Investment Disputes (ICSID), an institution under the auspices of the World Bank. Claims can only be brought under the ICSID Convention where the dispute arises directly out of an investment and is also between a state that is a party to the Convention and an investor whose home state is also a party to the Convention.
(ii) ICSID Additional Facility Arbitration
6. The ICSID Additional Facility expands ICSID’s reach by allowing states and investors of states that have not ratified the ICSID Convention to agree to have their dispute resolved through ICSID. However, either the respondent state or the home state of the investor (but not both) must be a party to the Convention. Further, unlike with ICSID Arbitration, there is no requirement that arbitration at ICSID’s Additional Facility must arise “directly out of an investment”; rather, the transaction underlying the dispute need only have features which distinguish it from an ordinary commercial transaction.
(iii) Ad Hoc UNCITRAL Arbitration
7. The UNCITRAL Arbitration Rules are a set of procedural rules which are often included as an arbitration option in BITs. They were adopted in 1976 and revised in August 2010; further, a small but significant addition has been made to the 2010 Rules to implement new transparency rules (see para 15 below).
8. Generally, the 2010 UNCITRAL Arbitration Rules apply to agreements to arbitrate (including those contained in BITs) concluded after August 15, 2010, unless the parties agree otherwise. However, if the offer to arbitrate was made before that date (for example, if the BIT precedes that date) and only the acceptance was made after it, the 2010 Rules do not automatically apply. Arbitration agreements concluded prior to August 15, 2010 or based on an offer made before that date are instead subject to the 1976 UNCITRAL Arbitration Rules, unless the parties agree that the 2010 Rules are to apply.
9. Unlike with ICSID and the ICSID Additional Facility, there is no dedicated institution associated with the administration of arbitrations pursuant to the UNCITRAL Arbitration Rules. T he bulk of the organizational work for the arbitration must be undertaken by the tribunal and the parties. However, the parties may agree that the services of an institution such as ICSID or the Permanent Court of Arbitration (PCA) will be responsible for administering an Ad Hoc UNCITRAL Arbitration.
C. Factors to Consider When Deciding Between Arbitration Options
10. It is important that investors commence arbitration in a forum that is permitted by the terms of the relevant BIT; failing to do so could result in significant wasted costs and may, in certain circumstances, result in limitation defences barring claims. When deciding between permitted arbitration options, the factors set out below are of particular importance.
(i) Jurisdiction
11. A critical factor for any investor with a potential BIT claim to consider is the jurisdiction of the tribunal established to hear the claim. If the tribunal determines that it lacks jurisdiction, it must dismiss the claim. Jurisdictional issues will be considered more extensively in a future advisory. However, one particularly important jurisdictional question is also relevant to the selection of arbitral forum, so is set out below.
12. To qualify for protection under the relevant BIT, an investor’s activities in the host state must qualify as an “investment”; this term is defined widely in most BITs to cover “every kind of asset” including shares, concessions, debt instruments, land and moveable property. With ICSID Arbitration, there is an additional requirement that the dispute must “aris[e] directly out of an investment.” However, the fact that ICSID Arbitration involves two “investment” requirements (under the BIT and under the ICSID Convention) while arbitrations in other forums involve just one does not necessarily mean that ICSID Arbitration should be disregarded; indeed, the statistics demonstrate an overall preference for ICSID Arbitration (see para 18 below). Investor-state arbitral tribunals have approached the two “investment” requirements in a wide variety of different (and often conflicting) ways. It is therefore difficult to draw any solid conclusion as to which is the most favorable forum for BIT claims with respect to the issue of “investment.” Further, it should be noted that at least one tribunal has suggested that the same test will be applied in both ICSID and Ad Hoc UNCITRAL Arbitration. What is certain is that this is an issue that demands careful consideration by investors when selecting a forum for the arbitration of their dispute.
(ii) Finality and Enforceability of Awards
13. A key difference between forums lies in the finality and enforceability of awards rendered by their tribunals. T his topic will be covered more extensively in a future advisory. However, by way of general overview the following can be noted:
13.1 ICSID Arbitration awards are subject only to annulment proceedings under the ICSID Convention; national courts in states that are party to the Convention must recognise such an award as if it were a final judgment of a court in that state and may not refuse recognition. The grounds for annulment under the ICSID Convention are that: the tribunal (i) was not properly constituted or (ii) manifestly exceeded its powers; (iii) a member of the tribunal was corrupt; (iv) there was a serious departure from a fundamental rule of procedure; or (v) the tribunal failed to state the reasons for its decision in the award.
13.2 By contrast, with non-ICSID arbitrations the national courts of the seat of the arbitration are generally able to vary or set aside the award on various grounds. This often covers where the court considers that the tribunal did not have jurisdiction or where there has been a serious procedural irregularity. Further, the recognition and enforcement of investor-state arbitrations other than ICSID Arbitrations will frequently be governed by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. By April 2, 2015, that Convention applies to 154 states. It includes several grounds on which national courts may refuse to recognise and enforce an arbitral award, which covers most of the ICSID annulment grounds listed above; notable additional grounds under the New York Convention cover situations where (i) the national law in the court of enforcement does not permit arbitration of the subject matter of the dispute, (ii) recognition or enforcement would be otherwise contrary to public policy, or (iii) the award has been set aside at the seat.
(iii) Counterclaims
14. In general, respondent states can raise counterclaims in investor-state arbitrations so long as they fall within the tribunal’s jurisdiction. However, differences in the precise scope of jurisdiction over counterclaims arise between the various forums. In ICSID and ICSID Additional Facility Arbitrations as well as arbitrations under the 1976 UNCITRAL Arbitration Rules, counterclaims must arise directly out of the subject-matter of the dispute. By contrast, the 2010 UNCITRAL Arbitration Rules do not contain such a requirement; as such, arbitrations under these rules appear to have a wider scope for counterclaims and unconnected set-offs.
(iv) Transparency
15. A significant addition was made to the 2010 UNCITRAL Arbitration Rules in 2013, and which came into force on April 1, 2014. The addition incorporated UNCITRAL’s Rules on Transparency in Treaty-based Investor-state Arbitration (Rules on Transparency) into the 2010 UNCITRAL Arbitration Rules. When applicable, the Rules on Transparency require that most of the key documents in an Ad Hoc UNCITRAL Arbitration, any oral hearings and the decisions of the tribunal be made available to the public. There are exceptions that cover confidential and protected information. The applicability of the Rules on Transparency depends on when the BIT under which the dispute has arisen was concluded:
15.1 With respect to BITs concluded before April 1, 2014 (which is likely to be more common for several years): the Rules on Transparency only apply if the disputing parties in the arbitration agree, or if the state parties to the relevant treaty subsequently agreed to the use of the Rules after April 1, 2014.
15.2 With respect to BITs concluded on or after April 1, 2014: the Rules on Transparency apply automatically, except if the state parties to the relevant treaty have excluded their application. Further, the Rules can be dis-applied with the consent of the disputing parties in the arbitration, but only if the relevant BIT so permits.
16. In the ICSID context, the Arbitration Rules for both ICSID and ICSID Additional Facility Arbitration were amended in 2006 to increase the transparency of proceedings. They now include the following provisions: except where one of the parties object, the oral hearings in an ICSID arbitration can be attended by members of the public; ICSID tribunals may, following consultation with the parties, permit submissions from third parties; and, with both parties’ consent, any award may be published by ICSID. Thus, in general, transparency in regard to ICSID and ICSID Additional Facility Arbitration requires the consent of both parties to the arbitration. The exception to this is that ICSID is required in all cases to publish excerpts of the legal reasoning of awards.
(v) Costs
17. Arbitration costs include the fees and expenses charged by the tribunal and the arbitration institution. Where Ad Hoc UNCITRAL Arbitration is used without an administering institution, such costs can be significantly reduced; however, doing so will generally result in the parties and/or the arbitrators undertaking a higher proportion of administrative work, both of which will have cost implications. By way of example, the Appendix to this advisory provides a breakdown of the arbitration costs at ICSID, and the fixed costs associated with an Ad Hoc UNCITRAL Arbitration where the PCA is involved in the appointment of arbitrators but no further administrative matters. The notes to the Appendix also address the situation where the PCA fully administers the arbitration.
D. Statistics
18. The total number of known investor-state arbitrations for each of the major forums as at December 31, 2013 is summarized below (sources: ICSID and UNCTAD). As can be seen, these statistics demonstrate an overall preference for ICSID Arbitration. (However, it should be born in mind that the preference indicated by these statistics may be skewed by the fact that a number of BITs do not provide a range of arbitration options but only permit ICSID Arbitration.)
18.1 ICSID Arbitrations – 407
18.2 ICSID Additional Facility Arbitrations – 43
18.3 Ad Hoc UNCITRAL Arbitrations – 158
18.4 SCC Arbitrations – 28
18.5 ICC Arbitrations – 6
E. Conclusion
19. Investors faced with a choice between arbitration options for the resolution of their dispute should not underestimate the importance of this decision. Although cost is often likely to be a relevant factor, sufficient consideration should also be given to other issues: in particular, jurisdiction, and review and enforceability of awards.
F. Appendix
20. Please click here for a copy of the Appendix.
