The International Journal of Public and Private Arbitration
Full Contents List
- Introduction
- Regional Overviews
- Recent Developments in Investment Treaty Arbitration
- Challenges to Arbitrators
- State of Necessity in Investment Arbitration
- Arbitration of Intellectual Property Disputes
- Provisional Application of the Energy Charter Treaty
- Country Overviews
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The European & Middle Eastern Arbitration Review 2008
Section 3: Regional Overviews
Recent Developments in Investment Treaty Arbitration
Constantine Partasides, Leilah Bruton, Elizabeth Snodgrass
Freshfields Bruckhaus Deringer
Introduction
A decade ago it was said that explorers had set out to discover a new continent
for international arbitration.1 This new frontier was not geographic in nature
but jurisdictional. It was a place where investors could bring arbitrations
directly against the states in which they invested, even if they had no direct
contractual relationship with the state. It was a place of arbitration without
privity. And bilateral investment treaties (BITs) were expected to be one of
the main lands of discovery in that new continent.
A decade on, those words appear prescient indeed. Since the mid-1990s, the International
Centre for Settlement of Investment Disputes (ICSID) has seen remarkable growth
in the number of arbitrations that it administers under the 1965 ICSID Convention.
From a few isolated cases brought before it in the first 20 years of its existence,
ICSID now oversees a large and growing number of arbitrations. This is largely
due to the proliferation of BITs. Today, there are more than 2,500 BITs in force,
involving some 180 countries.2 In addition, a number of multilateral investment
agreements also give an investor a direct right of arbitration against the host
state. These include the North American Free Trade Agreement (NAFTA)3 and the
Energy Charter Treaty.4 In total, there have been over 229 investment treaty
arbitrations,5 with over two-thirds having been filed since 2001.6
Once an exceptional occurrence, arbitration without privity has come of age.
Today, not only do we routinely represent clients in disputes arising under
BITs, but clients considering a new investment (and financing entities playing
a role in that investment) expect us to advise them on the matrix of BITs available
and how best to structure their investment to take advantage of the rights and
remedies contained in those BITs.
In this chapter, we explore recent developments in two of the substantive protections
that are most commonly found in BITs and relied upon by investors: the right
to be compensated for expropriation and the fair and equitable treatment standard.
We also briefly consider recent developments in the case law on the ICSID annulment
procedure.
Expropriation
Most BITs oblige host states to compensate foreign investors in the event of
expropriation. The notion of expropriation is expansive in nature and may result
from either (i) a direct act of taking, such as an outright nationalisation;
or (ii) an ‘indirect’ taking that substantially deprives the investor
of the use or enjoyment of its investment, even if the legal and beneficial
title to the asset remains with the investor. An expropriation may also be ‘creeping’,
where it is not immediate but unfolds through a series of acts the cumulative
effect of which is the substantial deprivation of the use or value of an investment.
Application of the standard for indirect or creeping expropriation has traditionally
turned on an assessment of how much deprivation is ‘too much’, such
that it tips over into the category of expropriation. Some recent case law,
considered below, has suggested that the deprivation of use or enjoyment might
have to be almost total in order to constitute an expropriation and give rise
to an obligation of compensation.
The claimant in CMS v Argentine Republic had purchased a minority shareholding
in an Argentine company (TGN) that operated a gas transportation network in
northern Argentina. CMS claimed that certain measures taken by Argentina as
of 2000 breached the BIT in question. The claimant argued that these measures,
which decreased TGN’s tariff revenues by 75 per cent and the value of
the claimant’s shares in TGN by 92 per cent, constituted an indirect and
creeping expropriation of its investment.
In rejecting the claimant’s expropriation claim,7 the tribunal stated
that the essential question was whether the claimant’s enjoyment of its
property had been effectively neutralised by the measures on which its claim
was based.8 The tribunal held that the appropriate standard to apply was that
of substantial deprivation. Nevertheless, based on findings that the claimant
retained control of its investment; that the government did not manage the day-to-day
operations of TGN; and that the claimant had full ownership and control of the
investment, the tribunal held that Argentina had not expropriated the investment
despite a reduction by more than 90 per cent in the value of the investment.9
The tribunal in LG&E v Argentine Republic came to a similar conclusion.
In that case, the claimants alleged that the value of their holdings in the
relevant licences had been reduced by more than 90 per cent as a result of Argentina’s
abrogation of the principal guarantees of the tariff system.10 However, the
tribunal found that the measures in question did not deprive the investors of
the right to enjoy their investment and noted that the value of the investment
had rebounded since the economic crisis.11 The tribunal also found that the
claimants had not lost control over their shares in the licensees, nor were
they unable to direct the day-to-day operations of the licensees.12 The tribunal
concluded by stating that, in order to constitute an expropriation of the claimants’
investment, the measures in question had to constitute “a permanent, severe
deprivation of LG&E’s rights with regard to its investment, or almost
complete deprivation of the value of LG&E’s investment.” 13
In light of these recent decisions, many investors are now beginning to see
their entitlement to fair and equitable treatment as their most valuable substantive
protection under investment treaties.
Fair and equitable treatment
The fair and equitable treatment standard is designed to create an absolute
baseline of treatment for foreign investors, which the host state must provide
regardless of how little protection it affords its own nationals.
Recent case law regarding the concept of fair and equitable treatment suggests
that state action affecting investors’ legitimate expectations and legal
and business stability constitutes a breach of the fair and equitable treatment
standard. In addition, tribunals have in recent cases found breaches of the
fair and equitable treatment standard to follow, in the right circumstances,
from a breach of an underlying agreement between the investor and the host state.
The ‘legitimate expectations’ position is reflected in the awards
in the cases of CMS v Argentine Republic, Técnicas Medioambientos Tecmed,
SA (Tecmed) v United Mexican States, Occidental Exploration and Production Company
(OEPC) v Republic of Ecuador, and LG&E v Argentine Republic. The tribunal
in CMS focussed on the stability of the legal and business environment as an
essential element of the standard,14 stating that “fair and equitable
treatment is inseparable from stability and predictability.”15 The OEPC
tribunal concurred, holding that “[t]he stability of the legal and business
framework is ...an essential element of fair and equitable treatment”,16
which “does not depend on whether the Respondent has proceeded in good
faith or not.”17
In the light of this requirement of stability and predictability, the tribunal
in Tecmed held that fair and equitable treatment meant that the host state would:
act in a consistent manner, free from ambiguity and totally transparently in
its relations with the foreign investor, so that [the investor] may know beforehand
any and all rules and regulations that will govern its investments, as well
as the goals of the relevant policies and administrative practices or directives,
to be able to plan its investments and comply with such regulations.18
In finding Argentina in breach of the fair and equitable treatment standard,
the CMS tribunal observed that “the measures that are complained of did
in fact entirely transform and alter the legal and business environment under
which the investment was decided and made.”19 The tribunal acknowledged
that a legal framework could legitimately evolve to adapt to changing circumstances,
but went on to state that the framework could not be “dispensed with altogether
when specific commitments to the contrary have been made.”20
This approach was also followed more recently in LG&E v Argentine Republic,
in which the tribunal stated that “the fair and equitable standard consists
of the host state’s consistent and transparent behavior, free from ambiguity
that involves the obligation to grant and maintain a stable and predictable
legal framework necessary to fulfill the justified expectations of the foreign
investor”.21 The tribunal set out the characteristics of justified or
fair expectations, which included that they be based on the conditions offered
by the host state at the time of the investment and that they exist and be enforceable
by law.22 The tribunal in this case held that Argentina had created specific
expectations among investors, the abrogation of which violated the stability
and predictability underlying the fair and equitable treatment standard.23
In these cases, unfair and inequitable treatment is equated with any state conduct
that departs from the expectations investors may derive from conditions at the
time they make their investment.
In other cases, tribunals have considered the relationship between breach of
contract and the fair and equitable treatment standard. One such case is Waste
Management Inc v United Mexican States, in which a dispute arose from a concession
contract for the provision of waste disposal services in the Mexican city of
Acapulco. Under the concession agreement, the investor (through a local subsidiary)
undertook to provide on an exclusive basis certain municipal waste disposal
and street-cleaning services in a specified area of Acapulco and to build and
operate a permanent solid-waste landfill for the city as a whole. In return,
the city agreed to provide a site for the landfill as a ‘gratuitous loan’
for the duration of the concession. Disputes under the concession agreement
were to be submitted to arbitration in Acapulco under the rules of Conciliation
and Arbitration of the National Chamber of Commerce of Mexico City (CANACO).
The claimant alleged that the city had violated various obligations under the
concession and that, at the time it eventually suspended operations, approximately
80 per cent of the total amount invoiced to the city remained unpaid. The local
subsidiary of the investor commenced proceedings before the Mexican courts,
which were dismissed, and proceedings under the concession agreement, which
were subsequently discontinued.
The claimant brought a claim for breach, inter alia, of the fair and equitable
treatment provision (article 1105) of NAFTA. The claimant alleged that, contrary
to this protection, its investment had been subject to arbitrary acts by the
respondent which were capricious, lacking in due process of law and which rendered
the investment valueless. Further, it claimed that its local subsidiary had
been subjected to a denial of justice by organs of the respondent state, including
by the city raising groundless procedural issues to delay the litigation thereby
aggravating its financial position.24
The tribunal described the standard of treatment set out in NAFTA, article 1105
as follows:
the minimum standard of fair and equitable treatment is infringed by conduct
attributable to the State and harmful to the claimant if the conduct is arbitrary,
grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant
to sectional or racial prejudice, or involves a lack of due process leading
to an outcome which offends judicial propriety – as might be the case
with a manifest failure of natural justice in judicial proceedings or a complete
lack of transparency and candour in an administrative process.25
On the facts, the tribunal found that the respondent had not breached NAFTA,
article 1105 and, in this respect, emphasised the importance of the dispute
resolution provision in the concession agreement.26 For the tribunal in Waste
Management, it was not enough to found a claim for denial of fair and equitable
treatment on an allegation of breach of contract. Rather, the investor could
only bring a claim under the fair and equitable treatment standard if there
was the equivalent to a denial of justice in the context of the contractually-agreed
dispute resolution procedures. And the tribunal considered that the decisions
of the Mexican courts and CANACO in this case had not constituted a denial of
justice.27
A similar issue was considered by the tribunal in the recent case of Parkerings-Compagniet
v Republic of Lithuania. In this case, the consortium in which the claimant
held an interest through its wholly-owned Lithuanian subsidiary was granted
an exclusive 13-year right to organise, maintain, develop and enforce the public
parking system in the Lithuanian city of Vilnius. The concession was eventually
terminated, and the claimant commenced proceedings under the applicable BIT,
claiming breach of a number of its provisions, including the ‘equitable
and reasonable treatment and protection’ standard, which the tribunal
determined was identical in substance to the fair and equitable treatment standard.28
In this context, the claimant alleged, inter alia, that the city of Vilnius
did not act in good faith during the contractual relationship, refused to renegotiate
the agreement in good faith and eventually decided unilaterally to terminate
the agreement, thus treating the claimant in an arbitrary manner in breach of
the fair and equitable treatment standard.29
The tribunal noted that, while under certain limited circumstances a substantial
breach of contract could constitute a violation of a treaty, case law offered
“very few illustrations of such a situation” and that, in most cases,
“a preliminary determination by a competent court as to whether the contract
was breached under municipal law is necessary” especially where the contract
provides for a particular forum to resolve disputes arising out of it.30 However,
the tribunal went on to state that if the investor is denied access to local
courts then an arbitral tribunal can determine whether this denial of justice
has breached the treaty in question:
In other words, as a general rule, a tribunal whose jurisdiction is based solely
on a BIT will decide over the ‘treatment’ that the alleged breach
of contract has received in the domestic context, rather than over the existence
of a breach as such.31
In this case, the tribunal held that the local subsidiary had access to the
Lithuanian courts but had not challenged the alleged violation before them.
Accordingly, the tribunal held that, even if the agreement had been wrongfully
terminated, the claimant had failed to show that the right of its subsidiary
to complain of the breach of the agreement had been denied by the Republic of
Lithuania and, therefore, that its investment had not been accorded fair and
equitable treatment.32
As these cases illustrate, while the breadth of the fair and equitable treatment
standard as described in the first set of cases set out above makes this an
extremely valuable substantive protection for investors, the relationship between
contract and treaty breaches can impose, in the eyes of some tribunals, certain
restrictions on reliance on this standard.
Annulment
The ICSID Convention allows parties disappointed by the outcome of an ICSID
arbitration to seek the annulment of an award, in whole or in part, under article
52. Ad hoc committees constituted for the purpose of considering an annulment
application may only annul awards on the limited grounds set out in the Convention,
which include: manifest excess of powers by the original tribunal that issued
the award; serious departure from a fundamental rule of procedure; and the award’s
failure to state the reasons on which it was based. Ad hoc committees do not
have jurisdiction to review the merits of the original award in any way, nor
can they substitute their views on a case for those of the original tribunals.
The effect of annulment, instead, is to erase the preclusive effect of the award
and provide the parties with a second chance to arbitrate the same issues again
before an entirely new ICSID tribunal.
Given the extraordinary level of voluntary enforcement of ICSID awards,33 the
ICSID annulment process has effectively become the only avenue to avoiding enforcement
of an ICSID award. This process has been criticised in the past for being the
arbitration equivalent of a game of snakes and ladders,34 as is illustrated
by the well-known Klöckner v Cameroon case, which was considered by no
less than four separate tribunals over a period of nine years,35 but more recently,
as described below, it would appear that the situation has become more measured.
The first round of ICSID annulment cases in the 1980s attracted substantial
attention in the legal and investment communities.36 The ad hoc committees in
the first round of annulment cases – Klöckner v Cameroon, Amco Asia
v Indonesia and MINE v Guinea – set aside at least parts of all three
of the awards under review. The first ad hoc committees in Klöckner and
Amco were severely criticised, with commentators arguing that the committees
had overstepped their mandates by examining the merits of the awards they reviewed
thereby turning what was intended to be a safety net against egregiously irregular
awards into an appeals process.
Because the first round of annulments seemed to presage a cycle of appellate-type
proceedings, it was widely feared that the annulment process in practice would
undercut the finality of the ICSID process and undermine investor confidence
in ICSID arbitration. However, as early as the late 1980s, many commentators
believed that the ICSID system had reestablished the balance, as a result of
the more measured holdings of the later ad hoc committee decisions.
The two most recent annulment decisions have been in keeping with this later
trend: the tribunal in one, Industria Nacional de Alimentos v the Republic of
Peru, upheld the original award in its entirety,37 and in the other, CMS v Argentine
Republic, annulled part of the award but upheld the original tribunal’s
award of damages.38
In the case of CMS, Argentina requested the annulment of the original award
based on manifest excess of powers and failure to state reasons. The ad hoc
committee noted in its decision that it had “no jurisdiction to control
the interpretation thus given by the Tribunal [to a particular article of the
applicable BIT], still less to reconsider its evaluation of the facts.”39
Argentina’s application was rejected on all grounds except with respect
to the tribunal’s finding that Argentina had breached the so-called ‘umbrella
clause’ in the relevant BIT. Notwithstanding the partial annulment of
the award, the ad hoc committee emphasised in its decision that the award as
a whole, including the amount of damages, was not affected.
These most recent annulment decisions thus continue the trend in ICSID practice
over the past two decades towards curtailing the scope of review of an award
on annulment.
The proliferation of investment treaty arbitration is rapidly turning this area
of law from an undiscovered continent into an increasingly well-mapped landscape.
Of necessity this short survey has only been able to highlight a few of the
landmarks in this rapidly emerging landscape. However, one feature is very clear:
although the terrain is becoming better trodden with each passing case, there
are still significant areas of uncertainty and, as ICSID’s practice with
respect to annulment has shown, potential for significant change as the law
in this exciting field develops.
Notes
1 Jan Paulsson, ‘Arbitration Without Privity’,
10 ICSID Review – Foreign Investment Law Journal, 232 (1995).
2 United Nations Conference on Trade and Development (UNCTAD),
World Investment Report 2006, available at www.unctad.org/templates/webflyer.asp?intItemID=3968&lang=1.
3 NAFTA, 20 December 1993, 32 ILM 605 (1994).
4 Energy Charter Treaty, 17 December 1994, 1994 O J (L380)
32-33.
5 See ‘UNCTAD Reviews Investor-State Dispute Settlement
Cases and Draws Implications for Developing Countries’, UNCTAD/Press/IN/2006/0009/02/05/06,
available at www.unctad.org.
6 It is thought that the first arbitration under an investment
treaty was brought by Asian Agriculture Products against Sri Lanka in 1987.
Asian Agriculture Products v Democratic Republic of Sri Lanka, ICSID Case No.
ARB/87/3, 27 June 1990, 4 ICSID Rep. 246 (1997).
7 As noted below, the CMS tribunal did hold that Argentina
had breached its obligation to accord the investor fair and equitable treatment.
The tribunal also found a failure by Argentina to observe the obligations entered
into with regard to the investment, as was required pursuant to the BIT.
8 CMS Gas Transmission v the Argentine Republic, ICSID Case
No. ARB/01/8, Award, May 12, 2005, available at www.worldbank.org/icsid/cases/cms_award.pdf,
paragraph 262.
9 Id, paragraphs. 263-264.
10 LG&E Energy Corp et al v the Argentine Republic, ICSID
Case No. ARB/02/1, Decision on Liability, available at www.worldbank.org/icsid/cases/pdf/09_lge_liability_e.pdf,
paragraph 177.
11 Id, paragraph 198.
12 Id, paragraph 199.
13 Id, paragraph 200.
14 CMS Award, supra, paragraph 274.
15 Id, paragraph 276.
16 Occidental Exploration and Production Company (OEPC) v Republic
of Ecuador, Final Award, July 1, 2004, available at www.asil.org/ilib/oepc-ecuador.pdf,
paragraph 183.
17 Id, paragraph 184.
18 Técnicas Medioambientos Tecmed, SA (Tecmed) v United
Mexican States, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, 19 ICSID Review
- Foreign Investment Law Journal 158 (2004), paragraph 98.
19 CMS Award, supra, paragraph 275.
20 Id, paragraph 277.
21 LG&E Decision on Liability, supra, paragraph 131.
22 Id., paragraph 130.
23 Id., paragraph 133.
24 Waste Management, Inc v the United Mexican States, ICSID
Case No. ARB(AF)/00/3, Award, 30 April 2004; 43 Int’l Legal Materials
967 (2004), paragraph 87.
25 Id, paragraph 98.
26 Id, paragraph 116.
27 Id, paragraph 128.
28 Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8,
Award, 11 September 2007, available at ita.law.uvic.ca/documents/parkerings.pdf,
paragraph 278.
29 Id, paragraph 314.
30 Id, paragraph 316.
31 Id, paragraph 317.
32 Id, paragraph 319.
33 Historically, the rate of voluntary compliance with ICSID
awards has been approximately 85 per cent – see James C Baker, Foreign
Direct Investment in Less Developed Countries: The Role of ICSID And MIGA (1999),
55 – and to date no respondent state has actually defaulted on an ICSID
award following enforcement proceedings.
34 Alan Redfern, ‘ICSID – Losing its Appeal?’,
3 Arb Int’l 98 (1987).
35 Klöckner Industrie-Anlagen v United Republic of Cameroon
and Société Camerounaise des Engrais, ICSID Case No. ARB/81/2,
Award, 21 October 1983, 2 ICSID Rep 9 (1994) (excerpts), Decision of the Ad
Hoc Committee on Annulment, 3 May 1985, 1 ICSID Review-Foreign Investment Law
Journal 89 (1986) (English translation of French original), Award on Resubmission,
26 January 1988 (unpublished), Decision of the second Ad Hoc Committee, 17 May
1990 (unpublished).
36 In addition to the Klöckner case cited above, see Amco
Asia Corp v Republic of Indonesia, ICSID Case No. ARB/81/1, Award, 20 November
1984, 1 ICSID Rep 413 (1993), Decision of the Ad Hoc Committee on Annulment,
May 16, 1986, 1 ICSID Rep 509 (1993), Award on Resubmission, 5 June 1990, 1
ICSID Rep 569 (1993), Decision of the Second Ad Hoc Committee on Annulment,
17 December 1992, 9 ICSID Rep 3 (2006); Maritime International Nominees Establishment
(MINE) v Republic of Guinea, ICSID Case No. ARB/84/4, Award, 6 January 1988,
4 ICSID Rep 61 (1997), Ad Hoc Committee Decision, 22 December 1989, 4 ICSID
Rep 79 (1997) (case was resubmitted, but settled before an award was rendered).
37 ICSID Case No. ARB/03/4, Decision on Annulment and Dissenting
Opinion, 5 September 2007, available at ita.law.uvic.ca/documents/LucchettiAnnulment.pdf.
38 CMS Gas Transmission Company v the Argentine Republic, ICSID
Case No. ARB/01/8, Decision on Annulment, September 25, 2007, available at ita.law.uvic.ca/documents/cmsannulmentdecision.pdf.
39 Id, paragraph 85.
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