Investment treaty arbitration – a summary
Bilateral and multilateral investment treaties often contain a State’s standing consent to arbitration. These arbitrations are governed by rules such as the Arbitration Rules of the International Centre for Settlement of Investment Disputes (ICSID), the United Nations Commission on International Trade Law (UNCITRAL) or the Arbitration Rules of the Stockholm Chamber of Commerce (SCC). Disputes can also be pursued by investors under the Energy Charter Treaty (ECT).
Investment treaty arbitration is unique in that under certain circumstances a qualifying investor may be allowed direct recourse against a host State in the face of adverse actions of a host State. These actions include interference with long-term licences, inconsistency in administrative decisions or unlawful expropriation without appropriate compensation.
The majority of investment treaties in force today contain a host of so-called “substantive protection provisions”; such as guarantees to fair and equitable treatment, full protection and security and a prohibition against unlawful expropriation.
In the absence of an applicable investment treaty, foreign investors’ remedies may be limited to the diplomatic protection of their home State or recourse to the national courts of the host State.
Investment treaty arbitration therefore is a powerful tool in the hands of foreign investors, particularly in relation to complex, high-value and long-term investments in sectors such as infrastructure, natural resources and energy.
Structuring treaty protection
In order to ensure that an investment is covered by the protection provisions of a bilateral or multilateral treaty, it is important for high-value and long-term investments to be structured appropriately. The earlier the potential availability of investment treaty protection is addressed, the more likely it is that a business will be able to benefit from this mechanism. It is paramount that this structure is in place long before a potential dispute in a host-State crystallises.
For a State, it is critical to be aware of the contents of the bilateral and multilateral investment treaties to which it is a party, should a dispute with a foreign investor arise.
Once a dispute has materialised, it is important that appropriate steps are taken to preserve all relevant evidence and to formulate a comprehensive legal strategy. This includes analysing the availability of investment treaty protection and calibrating immediate practical steps. This includes communications, team management and document collection.
For States, it is often a question of resource allocation and putting forward the most efficient legal team possible. This legal team will be closely integrated with State counsel and advocates.
Investors will need to assess the most effective way forward, including considering funding options. Third-party funding facilities are available. Understanding the practical, legal and commercial requirements of third-party funders is essential to maximise the prospects of securing third-party funding.
Deciding to arbitrate
Foreign investors often want to continue operations within the jurisdiction of a host State. This ongoing relationship will need to be considered when deciding whether or not to pursue investment arbitration proceedings.
It is important to determine the most appropriate arbitration rules for pursuing a dispute. There are important differences between different types of rules, for example as between the UNCITRAL and ICSID arbitration frameworks.
For a respondent State, early correspondence – such as the so-called “Notice of Dispute” – is essential to understand the contours of potential legal proceedings. This is often a good time to put in place internal and external counsel and identify an appropriate negotiation or litigation strategy.
Selection and constitution of the tribunal
Once a Notice of Arbitration or the equivalent document has been submitted to the relevant arbitral body, the parties will need to select their arbitrator-nominee. In the majority of investment treaty arbitrations, the number of arbitrators is three. This means that generally, each party nominates one arbitrator.
Depending on the rules, the chairperson is selected either by the two party-nominee arbitrators, by the parties or by an arbitral institution.
The selection of the arbitrator is one of the most important phases of an arbitration proceeding. The arbitrator needs to be independent and impartial of the parties and should have an understanding of the subject matter and industry underlying the dispute.
Care should be taken to avoid selecting an arbitrator who later may be challenged by the other side. This could take place for example on the basis that he or she has written something which means that he or she has effectively “prejudged” the legal issue and is therefore not able to render an independent decision.
Shaping the proceedings
Once the tribunal is in place, the parties’ legal representatives and the Tribunal members will work together to design the procedure pursuant to which the arbitration will take place. This includes determining the procedural timetable and whether or not issues such as jurisdiction, merits and the quantification of claims will be heard together or in separate phases altogether. If the phases are split, this is often referred to as bifurcation or trifurcation.
It will also contain potential limits on the length of written submissions, witness statements and expert reports as well as language and translation modalities, if appropriate. The confidentiality or otherwise of the proceedings themselves and any documents produced as part of the proceedings is also often a contentious issue that needs to be dealt with at the outset.
This design is then captured in a formal document, often referred to as a procedural order.
In complex international disputes involving both high-profile foreign investors and nation States, it is important that the process is carefully designed to give as much foresight as possible at the outset. Different tribunals will have different preferences. The majority composition of the tribunal (civil law versus common law) will often also have an impact on the conduct of the proceedings.
The location of any procedural or substantive hearings is another important consideration. Whilst the parties can agree in principle on the physical location in which hearings take place, tribunals are often asked to make a decision on this issue in the face of this agreement between the parties.
In arbitrations under the UNCITRAL Rules, there is also a question as to where the “legal seat” of the tribunal is located. This “legal seat” determines important issues such as the procedural law of an arbitration and has an impact on the potential enforceability of an arbitration award.
The “legal seat” does not necessarily have to be the same as the physical location of where the hearings take place.
During the proceedings, the parties will focus on presenting the strongest version of their case to the tribunal. The parties may also wish to make interim applications, such as applications for provisional measures or security for costs. Provisional measures can include attempts to compel the other side to behave in a certain way or to refrain from behaving in a certain way. Because tribunals do not have police powers, the enforcement of decisions on provisional measures may depend on further action taken by national courts in the relevant jurisdictions.
Award enforcement and annulment or challenge
The procedure for the enforcement or annulment of an award depends on the rules pursuant to which an award is issued.
For example, under the ICSID Convention, an award is entirely delocalised. In principle, it cannot be challenged by any national court because it is to be treated under international law as though it is a decision issued by the highest court of the respondent State. Instead, ICSID awards are subject to the annulment mechanism provided for in Article 52 of the ICSID Convention. In practice, the ICSID annulment mechanism provides a very high threshold for annulment. Only in the rarest of circumstances do so-called ICSID “annulment committees” overturn the decision of the underlying tribunal, either in whole or in part.
Awards issued under the UNCITRAL Rules are subject to the grounds for challenge under the 1985 New York Convention on the enforcement of arbitral awards. These grounds are very limited (including, for example, the improper constitution of a tribunal or a violation of a principle of public policy) and their practical application largely depends on the jurisdiction in which a challenge is heard.
Enforcement proceedings can be a lengthy affair, including a significant number of ancillary proceedings and complex matters of asset tracing and seizure. Furthermore, in the case of nation State respondent parties, enforcement proceedings often engage issues of sovereign immunity.
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