UNCTAD/ITE/IIT/30 UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT DISPUTE SETTLEMENT: INVESTOR-STATE UNCTAD Series on issues in international investment agreements UNITED NATIONS NOTE UNCTAD serves as the focal point within the United Nations Secretariat for all matters related to foreign direct investment and transnational corporations. In the past, the Programme on Transnational Corporations was carried out by the United Nations Centre on Transnational Corporations (1975–1992) and the Transnational Corporations and Management Division of the United Nations Department of Economic and Social Development (1992–1993).
In 1993, the Programme was transferred to the United Nations Conference on Trade and Development. UNCTAD seeks to further the understanding of the nature of transnational corporations and their contribution to development and to create an enabling environment for international investment and enterprise development. UNCTAD’s work is carried out through intergovernmental deliberations, research and analysis, technical assistance activities, seminars, workshops and conferences.
The term « country » as used in this study also refers, as appropriate, to territories or areas; the designations employed and the presentation of the material do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities,
UNCTAD/ITE/IIT/30 UNITED NATIONS PUBLICATION Sales No. E. 03. II. D. 5 ISBN 92-1-112577-4 Copyright © United Nations, 2003 All rights reserved Printed in Switzerland ii IIA issues paper series IIA Issues Paper Series The main purpose of the UNCTAD Series on issues in international investment agreements – and other relevant instruments – is to address concepts and issues relevant to international investment agreements and to present them in a manner that is easily accessible to end-users.
The series covers the following topics: Admission and establishment Competition Dispute settlement: investor-State Dispute settlement: State-State Employment Environment Fair and equitable treatment Foreign direct investment and development Home country measures Host country operational measures Illicit payments Incentives International investment agreements: flexibility for development Investment-related trade measures Lessons from the MAI Most-favoured-nation treatment National treatment Scope and definition Social responsibility State contracts Taking of property Taxation Transfer of funds Transfer of technology Transfer pricing Transparency Trends in international investment agreements: an overview IIA issues paper series iii Preface The secretariat of the United Nations Conference on Trade and Development (UNCTAD) is implementing a work programme on international investment agreements.
It seeks to help developing countries to participate as effectively as possible in international investment rule-making at the bilateral, regional, plurilateral and multilateral levels. The programme embraces capacity-building seminars, regional symposia, training courses, dialogues between negotiators and groups of civil society and the preparation of a Series of issues papers. This paper is part of this Series. It is addressed to Government officials, corporate executives, representatives of non-governmental organizations, officials of international agencies and researchers. The Series seeks to provide balanced analyses of issues that may arise in discussions about international investment agreements.
Each study may be read by itself, independently of the others. Since, however, the issues treated closely interact with one another, the studies pay particular attention to such interactions. The Series is produced by a team led by Karl P. Sauvant and Pedro Roffe. The principal officer responsible for its production is Anna Joubin-Bret, who oversees the development of the papers at various stages. The members of the team include Helene Dufays-Budhdeo and Jorg Weber. The Series’ principal advisors are Arghyrios A. Fatouros, Sanjaya Lall, Peter Muchlinski and Patrick Robinson. The present paper is based on a manuscript prepared by Peter T. Muchlinski and Stephen C. Vasciannie.
The final version reflects comments received from Nils Urban Allard, Joachim Karl, Mark Koulen, Ernst-Ulrich Petersmann, Christoph Schreuer and M. Sornarajah. Geneva, May 2003 iv Rubens Ricupero Secretary-General of UNCTAD IIA issues paper series Acknowledgements UNCTAD’s work programme on international investment agreements is implemented by a team of UNCTAD staff members and consultants headed by Karl P. Sauvant, Khalil Hamdani and Pedro Roffe and including Helene Dufays-Budhdeo, Arghyrios A. Fatouros, Anna Joubin-Bret, Sanjaya Lall, Aurelie Legrand, Peter T. Muchlinski, Marie-Estelle Rey, Patrick Robinson, Angelika Sitz and Jorg Weber. Administrative support is provided by Severine El Botout-Excoffier. UNCTAD has carried out a number of activities related o the work programme in cooperation with other intergovernmental organizations, including the Secretariat of the Andean Community, l’Agence pour la Francophonie, the Inter-Arab Investment Guarantee Corporation, the League of Arab States, the Organization of American States and the Secretaria de Integracion Economica Centroamericana. UNCTAD has also cooperated with non-governmental organizations, including the Centre for Research on Multinational Corporations, the Consumer Unity and Trust Society (India), the Dutch Foundation for Research on Multinationals (SOMO), the Economic Research Forum (Cairo), the European Roundtable of Industrialists, the Friedrich Ebert Foundation, the German Foundation for International Development, the International Confederation of Free Trade Unions, the Labour Resource and Research Institute (LaRRI), Oxfam, the Third World Network and World Wildlife Fund International.
Since 2002, a part of the work programme has been carried out jointly with the World Trade Organization (WTO). Funds for the work programme have so far been received from Australia, Brazil, Canada, France, Japan, the Netherlands, Norway, Portugal, Sweden, Switzerland, the United Kingdom and the European Commission. Botswana, China, Costa Rica, Croatia, Djibouti, Egypt, Gabon, Germany, Guatemala, India, Indonesia, Jamaica, Malaysia, Morocco, Namibia, Peru, Singapore, South Africa, Sri Lanka, Thailand, Tunisia and Venezuela have also contributed to the work programme by hosting regional symposia, national seminars or training events. In pursuing this programme of work, UNCTAD has lso collaborated closely with a number of international, regional and national organizations, particularly with the Centro de Estudios Interdisciplinarios de Derecho Industrial y Economico (the Universidad de Buenos Aires), the Indian Institute of Foreign Trade, the Legon Center of Accra (Ghana), the Senghor University (Egypt), the University of Dar Es Salaam (Tanzania), the Universidad de los Andes (Colombia), the Universidad del Pacifico (Peru), the Universidade Estadual de Campinas-UNICAMP (Brazil), the University of Pretoria (South Africa), the National University of Singapore, the University of Tunis (Tunisia), the University of Yaounde (Cameroon) and the University of the West Indies (Jamaica). All of these contributions are gratefully acknowledged. IIA issues paper series v Table of Contents Table of contents Page Preface…………………………………………………………………………… v Acknowledgements………………………………………………………….. v Executive summary…………………………………………………………. 1 INTRODUCTION…………………………………………………………… 5 I. EXPLANATION OF THE ISSUE …………………………… 11 II. STOCKTAKING AND ANALYSIS ………………………… 23 A. Encouragement of informal, negotiated settlement …………………. 23 B. Venue ………………………………………………………………………………. 26 1. National dispute settlement in the host country ………………. 26 2. International dispute settlement ……………………………………. 34 a.
Ad hoc dispute settlement…………………………………….. 34 b. Institutional dispute settlement……………………………… 35 c. Choice of venue clauses ………………………………………. 37 C. Determination of procedural issues ……………………………………… 44 1. Procedure for the initiation of a claim …………………………… 45 2. Establishment and composition of the arbitral tribunal ……. 46 a. Admissibility ratione materiae……………………………… 48 b. Admissibility ratione personae …………………………….. 51 c. Admissibility ratione temporis……………………………… 54 4.
Applicable law …………………………………………………………… 54 a. Applicable procedural law……………………………………. 55 b. Applicable substantive law…………………………………… 55 5. Finality of awards ………………………………………………………. 58 6. Enforcement of awards ……………………………………………….. 62 7. Costs ………………………………………………………………………… 64 IIA issues paper series vii Dispute Settlement: Investor-State III. INTERACTION WITH OTHER ISSUES AND CONCEPTS …………………………………………………… 9 CONCLUSION: ECONOMIC AND DEVELOPMENT IMPLICATIONS AND POLICY OPTIONS ………………….. 79 A. No reference to investor-State dispute settlement in an agreement …………………………………………………………………. 80 Reference to investor-State dispute settlement in an agreement …………………………………………………………………. 81 1. Choice of venue …………………………………………………………. 81 2. Choice of procedure and procedural rules ……………………… 86 a. Choice of dispute-settlement method …………………….. 86 b. Procedure for initiating a claim …………………………….. 86 c.
Establishment and composition of the arbitral tribunal………………………………………….. 87 d. Admissibility ……………………………………………………… 88 e. Applicable law……………………………………………………. 89 f. Finality of awards……………………………………………….. 89 g. Enforcement of awards………………………………………… 90 h. Costs…………………………………………………………………. 91 B. References …………………………………………………………………….. 95 Selected UNCTAD publications on transnational corporations and foreign direct investment…………………… 05 Questionnaire ……………………………………………………………… 123 Table 1. Interaction across issues and concepts ……………………………………………… 69 viii IIA issues paper series Executive summary The present paper is concerned with the settlement of investment disputes between States, on the one hand, and private parties, on the other. Generally speaking, this is an area of investment practice that has prompted a broad range of legal issues, and a substantial number of approaches to tackle them. While in theory this issue is of importance for both the host State and the foreign investor, in practice it has more significance for the foreign investor.
When a foreign investor enters the territory of a host country, that investor is usually inclined to seek protection in the form of specified treatment standards – such as most-favoured-nation treatment, national treatment and fair and equitable treatment – as well as guarantees on matters such as compensation for expropriation and the right to transfer capital, profits and income from the host State. These rights are often embodied in particular provisions of bilateral investment treaties, or in regional or multilateral instruments on particular aspects of investment. It is evident, however, that treatment standards and guarantees are of limited significance unless they are subject to a disputesettlement system and, ultimately, to enforcement. Accordingly, the importance of dispute-settlement mechanisms for issues between a host State and an investor is readily discernible. Indeed, this is a point often made by both foreign investors and host countries.
For the former, the security of foreign investment will turn not only on specified safeguards, but also on the assurance that these safeguards are available on a non-discriminatory and timely basis to all foreign investors. Conversely, the host country wishes to ensure that, in the event of a dispute with foreign investors, it will have the means to resolve the legal aspects of that dispute expeditiously and taking into account the concerns of the State, as well as those of foreign investors. Dispute Settlement: Investor-State Against this background, the present paper examines the main aspects of investor-State dispute settlement from the perspective of both the investor and the host State. Considerable attention is paid to the different venues available for resolving investment disputes.
Investors and capital-exporting countries representing them have often maintained that disputes between host States and investors should be resolved in accordance with international third party dispute-settlement procedures. Such procedures are said to encourage investor confidence and security and help to create the appearance and reality of fairness in the dispute-settlement process. In contrast, some capital-importing countries have traditionally maintained that private foreign investors are not entitled to privileged treatment in dispute settlement and should be required to resolve their disputes in the national courts of the host country. These two basic models suggest that States negotiating investor-State dispute settlement mechanisms have a number of options when considering dispute-settlement provisions in international investment agreements.
Reference to dispute-settlement procedures can be omitted from an investment agreement; reference to disputesettlement procedures can grant exclusive jurisdiction to the courts and tribunals of the host State, or at least state a clear preference for such national approaches; reference to dispute-settlement procedures can be in keeping with the consensual approach which offers the parties a choice between national and international systems and methods of dispute settlement and, in exceptional cases, it can provide for compulsory recourse to international dispute settlement. Each model carries distinct implications for the investor and for the host country. These are considered in Section IV of the paper. 2 IIA issues paper series Executive Summary
At the procedural level, investor-State dispute settlement raises a number of issues concerning the most appropriate technique for dispute settlement, with an emphasis on the use of the most speedy, informal and effective method; the procedure for the initiation of a claim; the establishment and composition of arbitral tribunals, should this method of dispute settlement be chosen; the admissibility of the claim before such a tribunal; the applicable procedural and substantive law to be applied by such a tribunal to the conduct and resolution of the dispute; the extent to which the award of such a tribunal can be regarded as final; the enforcement of arbitral awards; and the costs of using such dispute settlement mechanisms. With particular reference to international investment agreements, this paper considers these issues in order to highlight the main approaches that are available to host States and investors in the prevailing economic environment. This eference to procedural matters does not imply that such matters are all of equal importance, but the question of how dispute settlement procedures are developed is of significance to the drafting of investor-State dispute settlement clauses. IIA issues paper series 3 INTRODUCTION The growth in international trade and investment as a means of creating new economic opportunities in the global economy, for both developed and developing countries, has led to the rise of specialized international investment agreements (IIAs) that seek to regulate a range of issues related to foreign investment. In this context, special consideration has been given to the concerns of both foreign investors and host countries with respect to dispute-settlement procedures.
The vast majority of bilateral investment treaties (BITs) – as well as some regional agreements and other instruments – contain provisions for the settlement of disputes between private parties and the host State, and of disputes between States arising from investment. The distinction between investor-State and State-to-State disputes is used to provide an ordering principle for the discussion of this extensive topic in the present Series. Thus, two papers – covering, respectively, each set of relationships – are provided. The present paper deals with investor-State disputes only, while a further paper deals with State-to-State dispute settlement (UNCTAD, forthcoming a). Traditionally, dispute settlement under international law has involved disputes between States. However, the rise of private commercial activity ndertaken by individuals and corporations engaged in international trade and/or investment has raised the question whether such actors should be entitled to certain direct rights to resolve disputes with the countries in which they do business. Under customary international law, a foreign investor is required to seek the resolution of such a dispute in the tribunals and/or courts of the country concerned. Should these remedies fail or be ineffective to resolve a dispute – be it that they lack the relevant substantive content, effective enforcement procedures and/or remedies or are the result of denial of justice (see Brownlie, 1998, ch. XXII) –, an investor’s main recourse is to seek
Dispute Settlement: Investor-State diplomatic protection from the home country of the individual or corporation concerned. This is explicable on the basis that, by denying proper redress before its national courts, the host State may be committing a breach of international law, where such denial can be shown to amount to a violation of international legal rules. 1 Furthermore, generally only States can bring claims under international law, given that they are the principal subjects of that system. Private non-State actors lack the requisite international legal personality and so must rely on this indirect means for the vindication of their legal rights.
However, the remedy of diplomatic protection has notable deficiencies from an investor’s perspective. First, the right of diplomatic protection is held by the home country of the investor and, as a matter of policy, it may decide not to exercise this right in defence of an investor’s claim. The home State may choose not to pursue the investor’s claim for reasons that have more to do with the broader international relations between the home and host countries than with the validity of the investor’s claim. Second, even if the home country successfully pursues an investor’s claim, it is not legally obliged to transfer the proceeds of the claim to its national investor (Jennings and Watts, 1992; Brownlie, 1998).
Third, in the case of a complex transnational corporation (TNC) with affiliates in numerous countries (each possessing, in all probability, a different legal nationality) and a highly international shareholder profile, it may be difficult, if not impossible, to state accurately what the firm’s nationality should be for the purposes of establishing the right of diplomatic protection on the part of a protecting State. 2 Furthermore, there are practical limitations on the process of diplomatic protection. This system requires even relatively small claims to be pursued through inter-State mechanisms, meaning that investorState disputes on particular points may be conflated into State-to-State disagreements. As a matter of business strategy, neither the investor nor 6 IIA issues paper series Introduction he host country may wish this to occur, as it could have implications for future economic arrangements among investors, and for relations between the home and host countries concerned – implications that may be quite out of proportion to the claim in issue. Given these difficulties, foreign investors often decline diplomatic protection where they have the option of securing remedies more directly by means of investorState dispute-settlement mechanisms. In addition, capital-importing countries may wish to avoid the inconvenience of diplomatic protection by investors’ home States by agreeing to direct settlement procedures with investors. The kinds of disputes that may arise between an investor and a host State will often involve disagreements over the interpretation of their respective rights and obligations under the applicable investment agreement.
In addition, they may involve allegations unrelated to the contract such as, for example, the failure to provide treatment according to certain standards or failure to provide protection required by treaty or customary law (see generally Sornarajah, 2000). Such disputes rarely lead to full litigation, and normally are settled by mutual and amicable means. Much will depend on the condition of the relationship between the investor and the host State. Where both parties wish the relationship to continue and to develop, the resolution of disputes should prove possible with little recourse to the kinds of systems of dispute settlement provided for in IIAs.
Indeed, the existence of an effective third-party settlement procedure may prevent the breakdown of negotiations over a dispute by ensuring that parties do not attempt to get away with unreasonable or inflexible demands. However, in certain cases, disputes may be incapable of mutually satisfactory resolution by way of amicable discussion and negotiation. Where this is the case, the parties have a number of options for dealing with the dispute. These are discussed in Section I below. IIA issues paper series 7 Dispute Settlement: Investor-State Dispute-settlement provisions in IIAs are mainly concerned with providing methods for resolving more serious cases of disagreement.
In this context, IIAs may offer an avenue for the resolution of investor-State disputes that allow significant disagreements to be overcome and the investment relationship to survive. Equally, where the disagreement is fundamental and the underlying relationship is at an end, the system offered by an IIA might help to ensure that an adequate remedy is offered to the aggrieved party and that the investment relationship can be unwound with a degree of security and equity, so that the legitimate expectations of both parties can, to some extent, be preserved. IIAs perform an essential riskreducing function that may allow for more confidence on the part of investors and host States in the conduct of their investment relationships.
These functions of investor-State dispute settlement should not be taken as suggesting that this issue is unproblematic. Several areas of controversy exist. First, there is a continuing debate over whether it is appropriate to use international arbitration as a means of dispute settlement where this may weaken national dispute-settlement systems. Second, the application of international minimum standards for the treatment of aliens and their property is by no means universally accepted (Sornarajah, 1994, 2000). Third, not only developing countries but also, it seems, developed countries may view the process of international dispute settlement in this field with some suspicion.
This can be seen from, for example, academic, judicial and political criticism of recent North American Free Trade Agreement (NAFTA) arbitration awards (De Palma, 2001; Foy and Deane, 2001) and from the significant disagreements that remained over the form and contents of the investor-State dispute-settlement provisions during the Multilateral Agreement on Investment (MAI) negotiations at the Organisation for Economic Co-operation and Development (OECD) (UNCTAD, 1999c, p. 19). 8 IIA issues paper series Introduction Notes 1 2 See Azanian v. United Mexican States, International Centre for Settlement of Investment Disputes (ICSID) (ICSID, 1999a). Indeed, under international law, it may not even be acceptable to « lift the corporate veil » and determine the nationality of the corporation by reference to the nationality of its principal controlling shareholders, as opposed to the nationality of its seat or place of incorporation which is the accepted standard; see Barcelona Traction case, International Court of Justice (ICJ) (ICJ, 1970). IIA issues paper series 9 Section I EXPLANATION OF THE ISSUE
At the outset, it is essential to place the issue of investor-State dispute settlement within its wider context. The settlement of any dispute, not just investment disputes, requires the adoption of the most speedy, informal, amicable and inexpensive method available. Hence, in recent years, the stress has been on the use of so-called “alternative dispute-resolution” mechanisms, i. e. those methods of dispute settlement that seek to avoid the use of the procedures provided by the public courts of a country, or, in international law, of an international court. Usually they include direct methods of settlement through negotiation, or informal methods that employ a third party, such as the provision of good offices, mediation or conciliation. Arbitration may also be seen as an alternative dispute-resolution mechanism, although it is arguable that, given the high degree of legal control over the means and modalities of arbitration in municipal and, to a lesser extent, international law, its practical conduct may be only marginally different from that of a court proceeding (Merills, 1998; Asouzu, 2001, pp. 1126). However, as far as the international settlement of investment disputes is concerned, from an investor’s perspective arbitration is a more accessible method of dispute settlement than diplomatic protection, given that their lack of international personality does not bar them from direct participation. Recourse to an international court such as the International Court of Justice (ICJ) is effectively barred, given the lack of standing for non-State actors, although investor-State disputes could be brought before regional courts such as the European Court of Justice or the European Court of Human Rights, where nonState actors have direct rights of audience under the treaties that establish these judicial bodies. Dispute Settlement: Investor-State In light of the foregoing discussion, the most important question to make clear is that the first step in the resolution of any investment dispute is the use of direct, bilateral, informal and amicable means of settlement.
Only where such informal means fail to resolve a dispute should the parties contemplate informal third-party measures such as good offices, mediation or conciliation. The use of arbitration should only be contemplated where bilateral and third-party informal measures have failed to achieve a negotiated result. Indeed, this gradation of dispute-settlement methods is commonly enshrined in the dispute-settlement provisions of IIAs, as will be demonstrated in Section II of this paper. However, the bulk of the paper will concentrate on the rules and practices surrounding arbitration, as this method of dispute settlement has generated the most detailed international treaty provisions in practice.
The choice of a dispute-settlement method is only one of the choices that an investor and State may have to make when seeking to resolve a dispute. Another central question for consideration concerns the forum for the resolution of such a dispute. In keeping with traditional perspectives, some developing capital-importing countries – particularly some Latin American States – have historically maintained that disputes between an investor and a host State should be settled exclusively before the tribunals and/or courts of the latter (referred to as the Calvo Doctrine; see further Shea, 1955). This viewpoint was manifested not only in the domestic legislation of individual countries; it also revailed in certain regional agreements that prohibited member States from according foreign investors more favourable treatment than national investors, demonstrating a clear preference for dispute settlement in domestic courts. The United Nations Charter of Economic Rights and Duties of States of 19743 also adopted such an approach. However, while this approach remains an important precedent, it will be shown that the practice of developing countries and economies in transition has moved away from it in recent years. Most recent BITs 12 IIA issues paper series Section I concluded by such States provide for some type of international dispute-settlement mechanism to be used in relation to investment disputes.
Nonetheless, this remains a controversial issue for negotiations leading to IIAs, as a balance needs to be struck between host country and international dispute settlement. Local settlement is convenient and there is a continuing need to recognize the validity of properly conceived and drafted national investment laws – and other applicable laws and regulations – as a legitimate and valuable source of rights and obligations in the investment process. In contrast with the above-mentioned approach, foreign investors have traditionally maintained that, as regards developing countries, investor-State disputes should be resolved by means of internationalized dispute-settlement mechanisms governed by international standards and procedures, with international arbitration at its apex.
This position is supported largely by arguments concerning the apparent fairness inherent in relying upon independent international arbitrators, rather than upon national courts that may be subject to the influence of the executive in host countries. Host countries may perceive such an emphasis on internationalized systems of dispute settlement as a sign of little confidence, on the part of investors, in their national laws and procedures, which may or may not be justifiable in a given case. However, the willingness to accept internationalized dispute settlement on the part of the host country may well be motivated by a desire to show commitment to the creation of a good investment climate.
This may be of considerable importance where that country has historically followed a restrictive policy on foreign investment and wishes to change that policy for the future. In so doing, the host country can be entitled to expect that the internationalized system is itself impartial and even-handed with both parties to the dispute. 4 IIA issues paper series 13 Dispute Settlement: Investor-State Assuming that the investor and host State choose to adopt an international system of dispute settlement, a series of further choices arise. The first again concerns method. Where the parties have tried and failed to resolve their differences informally and to reach a negotiated settlement, the next choice concerns whether the parties wish to pursue ad hoc or institutional arbitration.
Ad hoc arbitration depends upon the initiative of the parties for their success. The parties must make their own arrangements regarding the procedure, the selection of arbitrators and administrative support. The principal advantage of ad hoc dispute settlement is that the procedure can be shaped to suit the parties. However, there are numerous problems associated with ad hoc arbitration. First, the process is governed by the arbitration agreement between the parties. Its content depends on the relative bargaining power of the parties. The stronger party may therefore obtain an arrangement advantageous to its interests. 5 Second, it may be impossible to agree on the exact nature of the dispute, or on the applicable law.
Third, there may be difficulties in selecting acceptable arbitrators who can be relied on to act impartially and not as “advocates” for the side that had selected them. Fourth, the proceedings may be stultified by inordinate delay on the part of one side or both, or through the non-appearance of a party. Finally, there may be a problem in enforcing any award before municipal courts should they decide that the award is tainted with irregularity, or because the State party to the proceedings enjoys immunity from execution under the laws of the forum State. These difficulties – which may be particularly acute in the case of developing country parties to investor-State disputes – have led to the use of institutional systems of arbitration.
An institutional system of arbitration may be a more reliable means of resolving a dispute than an ad hoc approach, especially as it is likely to have been devised on a multilateral level and so may show greater sensitivity to the interests of developing countries. Once the 14 IIA issues paper series Section I parties have consented to its use, they have to abide by the system’s procedures. These are designed to ensure that, while the parties retain a large measure of control over the arbitration, they are constrained against any attempt to undermine the proceedings. Furthermore, an award made under the auspices of an institutional system is more likely to be consistent with principles of procedural fairness applicable to that system and so is more likely to be enforceable before municipal courts. Indeed, recognition may be no more than a formality.
Two systems in particular appear suitable for use in investment disputes between a host State and a foreign investor: the conciliation and arbitration procedures available under the auspices of the International Centre for Settlement of Investment Disputes (ICSID) and the International Chamber of Commerce (ICC) Court of Arbitration. The ICSID system is the only institutional system of international conciliation/arbitration specifically designed to deal with investment disputes and will receive closer scrutiny in Section II below. Apart from ICSID, ICC arbitration clauses have been used in IIAs, resulting in ICC arbitration in the event of a dispute.
However, one of the criticisms lodged against the ICC Court of Arbitration as a forum for the resolution of foreign investment disputes is that, being primarily a centre for the resolution of commercial disputes between private traders, it has relatively little experience in the complexities of longterm investment agreements involving a State as a party. This may account for the observation that ICC arbitration clauses are used relatively infrequently in international economic development agreements. Nonetheless, the evidence of the actual use of the ICC Court of Arbitration in disputes involving Governments or State-owned enterprises is by no means negligible. Accordingly, this criticism of the ICC should not be overstated (Muchlinski, 1999, p. 539).
In the case of institutional systems, a further distinction should be made between regional and multilateral systems. A number of IIA issues paper series 15 Dispute Settlement: Investor-State regional international commercial arbitration centres have been established, especially in developing regions, that may be of value in relation to investor-State disputes. Though these cater mainly to disputes between private parties, and will not therefore be studied in detail, their existence cannot go unnoticed in the present paper, given their potential to develop as possible venues for the settlement of investor-State disputes (Asouzu, 2001, chapters 2-3).
Once the choice between ad hoc and institutional arbitration has been made, further issues must be determined, either by the parties to the dispute themselves when ad hoc procedures are chosen, or by the constitutive instrument that governs the institutional system chosen by the parties for the resolution of their dispute. In particular, the following matters must be addressed: • Procedure for initiating a claim. Under ad hoc procedures, the parties must agree on a method for initiating the claim. An institutional system prescribes a procedure. The principal aim of this procedure is to show that the dispute is submitted with the consent of the parties in accordance with any required procedural rules.
It often involves a preliminary examination of the complaint by the secretariat attached to the system concerned, so that it may be assessed for admissibility, although it must be stressed that the tribunal itself is normally the final judge of admissibility. Establishment and composition of the arbitral tribunal. Clearly, a basic question that needs to be determined is who sits on the tribunal, who is eligible to sit and in what numbers should they sit. • 16 IIA issues paper series Section I • Admissibility. In ad hoc procedures, the parties must decide for themselves which claims they submit to the tribunal. In institutional systems, by contrast, there are rules on admissibility.
In particular, the dispute must come within the jurisdiction of the tribunal: o o ratione materiae in that it must be one connected with an investment; ratione personae in that it is brought by and/or a country that is entitled to use the system concerned against a respondent country that is capable of being sued system; an investor institutional investor or under such o ratione temporis in that the dispute must have arisen at a time when the parties were legally entitled to have recourse to the system concerned. • Applicable law. In cases of international arbitration, two choice of law questions arise: which law governs the procedure of the tribunal and which substantive law governs the resolution of the dispute. In ad hoc procedures, the parties need to determine these issues. These may already have been determined by the investment agreement governing the investor-State relationship, typically reflecting the relative bargaining position of each party.
However, such agreements may at times be unclear or even be silent on these important questions, especially where the parties cannot accept each other’s preferred governing law or laws. In such cases, the parties need to agree on the choice of law issues in the arbitration agreement that founds the tribunal and its jurisdiction. Much depends again on the relative bargaining 17 IIA issues paper series Dispute Settlement: Investor-State positions of the parties, as the choice of a particular procedural or substantive law may confer advantages to one party over another (Sornarajah, 1994, pp. 332-338). By contrast, institutional systems specify rules on the choice of law issue in their constitutive instrument.
In the first place, the choice of procedural law is resolved by the applicability of the rules and procedures of the institutional system itself. These can be found in the constitutive instrument and in supplementary rules of procedure produced by that system. As regards the choice of substantive law, preference is usually given to the parties’ own choices in these matters, where the investment agreement concerned makes clear what these choices are. Where such clarity is absent, the applicable provision governs the determination of that question. Nonetheless, the main guiding principle concerning applicable law is the principle of party autonomy in choice of law matters, whether under an institutional or ad hoc system of arbitration. • Finality of the award.
A very important aspect of dispute settlement through third-party adjudication is that the resulting award is the final determination of the issues involved. However, to allow an award to stand where there is evidence of errors on the face of the record, or some suggestion of impropriety, would defeat the very purpose of such a disputesettlement technique. Accordingly, in the case of ad hoc awards, these may be regarded as unenforceable by reason of error of law, or procedural impropriety, under the municipal law of a country that is requested to enforce the award. By contrast, institutional systems of arbitration may provide procedures for the review of an award by another panel of arbitrators.
Equally, as is the case with the World Trade Organization’s (WTO) State-to-State dispute-settlement 18 IIA issues paper series Section I mechanism, an appellate body might be set up with the right to review an original decision for errors of law (see Article 17(6) of the Dispute Settlement Understanding of the World Trade Organization (WTO, 1994)). Furthermore, should one party to the dispute fail to take part in the procedure, provisions for default or ex parte proceedings may prevent the frustration of the award. • Enforcement of awards. Where a dispute is resolved in national courts, the particular court concerned also has the means to ensure that its decision is executed by agents of the State with respect to ersons and property within the State. By contrast, in cases of internationalized ad hoc arbitration, the arbitral tribunal has no direct powers of enforcement vis-a-vis either the investor or the host country in respect of persons and property in the host country. Naturally, this prompts the need for special award-enforcement mechanisms, which are briefly described in Section II. If such enforcement mechanisms are not in place, or if they are inadequate, then both the investor and the host State may find that a successful claim before an arbitral tribunal could lose its financial significance: there are no means of enforcing the tribunal’s decision.
In order to remedy this possible outcome, institutional systems of arbitration may provide for the automatic enforcement of awards, made under their auspices, by the courts of all the countries that are parties to the system, subject only to specific rules concerning immunities of sovereign property from attachment in enforcement proceedings. Costs. A further procedural issue concerns the allocation of costs in a dispute settlement proceeding between an investor and the host State. Generally, the costs of an arbitration are 19 • IIA issues paper series Dispute Settlement: Investor-State borne by the losing party on the basis of costs agreed by the parties at the outset of the proceeding.
On the other hand, where institutional systems of arbitration are used, such costs may be pre-determined by the administrative organs of that system. However, as will be shown in Section II, even under an institutional arrangement the parties concerned can still exercise considerable discretion when allocating costs. 20 IIA issues paper series Section I Notes 1 2 3 4 5 The concept of negotiation as a technique of dispute settlement used directly by each party is self-explanatory and requires no further definition. However, the other terms used in the text have some specialized connotations and may be defined as follows: good offices involves the use of a third party to liaise with the disputing parties and to convey to each party the views of the other on the dispute.
The third party plays no part in suggesting solutions to the dispute. By contrast mediation and conciliation involve the third party in a more active role, in that it may intervene with suggestions as to how the dispute might be resolved, thereby helping the disputing parties towards a negotiated settlement. In practice it may be difficult to differentiate between mediation and conciliation on a functional basis and the two terms can be used interchangeably (Asouzu, 2001, p. 20). However, they differ from arbitration in that the third party has no right or authority to determine the resolution/outcome of the dispute independently of the parties.
It has also been said that dispute resolution through international arbitration may be preferred by foreign investors due to a possible distrust of the court system of the host State and the choice of a forum in which the investor will feel more comfortable. See further text below and Sornarajah, 2000. Unless otherwise noted, all instruments cited herein may be found in UNCTAD, 1996, 2000a or 2001. Such impartiality has at times been questioned (Dezaly and Garth, 1996). This problem could be mitigated by the use of United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules in ad hoc procedures. See further below. IIA issues paper series 21 Section II STOCKTAKING AND ANALYSIS This section of the paper uses the range of choices discussed in Section I as the basis for a review of the types of dispute-settlement clauses that may be included in IIAs.
The structure and content of such clauses will be considered in the context of current and historical practice and in light of their impact on investor-State disputes. From a negotiator’s viewpoint, the main concern is the extent to which a dispute-settlement provision preserves or limits party choice in these matters. This depends on a number of policy variables that are discussed more fully in Section IV below. For now, it suffices to indicate examples of clauses and provisions that serve either to preserve or to control party choice in the relevant areas. The discussion will focus in the main on institutional approaches to dispute settlement, rather than on ad hoc methods, as the former are referred to in the bulk of international instruments in this field.
As noted in Section I, where ad hoc arbitration is used the parties themselves determine most of the issues surrounding the process and these determinations are not normally controlled by IIA provisions. Nonetheless, IIAs may offer the parties some guidance on the procedures that can be followed under ad hoc arbitration and intergovernmental organizations (most notably UNCITRAL) have offered standardized rules of dispute settlement. Thus, attention will also be paid to these developments where relevant. A. Encouragement of informal, negotiated settlement At the outset it should be noted that the majority of disputesettlement clauses in IIAs relating to investor-State disputes mandate the use of informal methods of dispute settlement in the first instance. Dispute Settlement: Investor-State
Recourse to informal methods will, hopefully, lead the investor and host State towards an amicable, negotiated settlement of their differences. As was noted in Section I, the requirement for consultation or negotiation is valuable to States not only because it helps to defuse tensions in some instances, but also because it may underline the amicable spirit in which most States hope to conduct their investment relations (UNCTAD, 1998, p. 88). Furthermore, the obligation to negotiate and consult before initiating the other means of dispute settlement is not to be taken lightly: it is an obligation of substance and context. The parties to the dispute must negotiate in good faith. At the bilateral level, the model BITs of capital-exporting countries such as Germany (1991) (Article 11(1)), Switzerland (1995) (Article 8(1)) and France (1999) (Article 8) all expressly envisage that consultation or negotiation should precede adversarial proceedings. 2 Among capital-importing countries, BITs such as those between China/Viet Nam (1992) (Article 8(1)), Argentina/Bolivia (1994) (Article 9(1)) and Brazil/Chile (1994) (Article VIII(1)) also exemplify this approach. In some instances at the bilateral level, the duty to negotiate or consult is implicit in the dispute settlement provision. For example, Article 8 of the 1991 United Kingdom model BIT stipulates that, if an investor-State dispute should arise and “agreement cannot be reached within three months between the parties to this dispute through pursuit of local remedies or otherwise”, then conciliation or arbitration may be instituted.
At the interregional level, although some of the earlier efforts of capital-exporting countries to formulate treaties on investment did not refer to amicable settlement (including the Abs-Shawcross and OECD BIT drafts), the draft MAI does (Abs and Shawcross, 1960; UNCTAD, 1999c, p. 19). Specifically, Article V(D)(2) of the draft MAI indicates that each investor-State dispute “should, if possible, be settled by negotiation or consultation”, and then envisages other solutions 24 IIA issues paper series Section II involving judicial settlement. It is arguable that the use of the term “should” – as distinct from “shall” – implies that the duty to negotiate or consult does not rise to the level of a legal obligation. However, this may be a matter of little practical significance in most cases, as both parties to a dispute, acting in good faith, will wish to proceed amicably in the first instance.
At the regional level, this issue also arises with respect to the NAFTA: Article 1118 of that agreement states, in full, that: “The disputing parties [in an investor-State dispute] should first attempt to settle a claim through consultation or negotiation”. Where provision is made for an amicable settlement of disputes, time limits are often countenanced as a means of facilitating the interests of both protagonists, although time limits are not always specified. 3 Usually, the time limits range from three months4 to 12 months. 5 More recently, a six-month period appears to have become commonplace, as exemplified by Article 34(2) of the New Zealand/Singapore Economic Partnership Agreement of January 2001.
Finally, it should be noted that the World Bank system of investment dispute settlement, under the 1965 Washington Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention), provides for conciliation as well as arbitration. The system offers an international form of third-party, nonbinding, dispute settlement, in which the role of the conciliators is “to clarify the issues in dispute between the parties and to endeavour to bring about agreement between them upon mutually acceptable terms” (Article 34 (1)). If the parties reach agreement, the Conciliation Commission set up under the Convention draws up a report noting the issues in dispute and recording that the parties have reached agreement. If the parties do not agree, the Commission draws up a report recording its failure to bring the parties to agreement (Article 34(2)). Two points should be noted in relation to ICSID conciliation procedures. First, the procedure is not completely informal and parties must follow prescribed IIA issues paper series 25 Dispute Settlement: Investor-State rules. Second, it is rarely used. Furthermore, on a more general level, it should be noted that the ICSID Convention’s main effect on disputes is to lead to the settlement of most cases that are submitted to arbitration or conciliation (Schreuer, 2001, pp. 811–812). B. Venue As noted in Section I, apart from the initial question of whether a dispute can be settled amicably, the first main question that the parties to a dispute must answer concerns venue.
In other words, should a dispute be dealt with by national dispute-settlement methods – centred upon the host State party to the dispute and the procedures that it offers – or by an international approach to dispute settlement? In the latter case, there is a choice between ad hoc and institutional systems. The implications of these different choices on the content of disputesettlement clauses deserves consideration and will be done in three stages: first, the possibility of using clauses that restrict party choice to dispute settlement in the host State will be considered; second, the basic features of provisions that offer an internationalized dispute settlement system will be described; and third, the nature and content of choice of venue clauses in IIAs will be mapped out. 1. National dispute settlement in the host country
In accordance with the principle of national sovereignty over activities occurring on the territory of a State, most countries have traditionally maintained that investor-State disputes should be resolved in their national courts. In its strict formulation, this position means that foreign investors ought not, in principle, to have the option to pursue 26 IIA issues paper series Section II investor-State disputes through internationalized methods of dispute settlement. This approach has been exemplified in historical practice by the provisions of certain Latin American investment instruments. For example, by Articles 50 and 51 of Decision No. 24 of the Commission of the Cartagena Agreement (1971) pertaining to foreign investment: “Article 50.
Member countries may not accord to foreign investors treatment more favourable than to national investors. Article 51. No instrument pertaining to investment or to the transfer of technology may contain a clause removing disputes or conflicts from the national jurisdiction and competence of the recipient country, or permitting subrogation by States of the rights and actions of their national investors”. The rule in Article 51 of Decision No. 24 indicated the Commission’s disapproval of internationalized dispute settlement by prohibiting outright legal instruments which allowed access to any form of adjudicatory mechanisms outside the host country.
This level of antipathy towards third party dispute settlement was also reflected, for instance, in the national constitutions of some Latin American countries and in the resistance that Latin American countries7 initially maintained to the consensual approach included in the ICSID Convention (Szasz, 1971). Beyond Latin America, this perspective also influenced the attitude of other countries during the 1970s. Thus, the United Nations Charter on Economic Rights and Duties of States, which was adopted by the General Assembly on 12 December 1974, emphasises that each State has the right “to regulate and exercise authority over foreign investment within its national jurisdiction in accordance with its laws IIA issues paper series 27 Dispute Settlement: Investor-State and regulations and in conformity with its national objectives and priorities”.
It also states that, in the case of disputes concerning compensation as a result of nationalization or expropriation, such disputes should be settled “under the domestic law of the nationalizing State and by its tribunals, unless it is freely and mutually agreed by all States concerned that other peaceful means be sought on the basis of the sovereign equality of States and in accordance with the principle of free choice of means” (Article 2. 2(a) and (c)). The priority of national measures is apparent. However, it should also be noted that States are given the freedom to use other means of resolving compensation disputes. Thus, the Charter certainly cannot be interpreted as prohibiting the use of internationalized measures, merely not advocating them.
Before negotiations on the draft United Nations Code of Conduct on Transnational Corporations were discontinued, the provisions of the Code concerning dispute settlement remained subject to considerable controversy. The influence of the Latin American negotiating perspective – and of some other developing capitalimporting countries – was evident in various draft provisions of the Code. For example, one of the later versions of Article 57 stipulated as follows: “[Disputes between States and entities of transnational corporations, which are not amicably settled between the parties, shall/should be submitted to competent national courts or authorities in conformity with the principle of paragraph 7. Where the parties so agree, such disputes may be referred to other mutually acceptable dispute settlement procedures. ]”.
From the perspective of the Group of 77, the group representing the negotiating position of the developing countries, this provision – including the reference to paragraph 7 of the draft Code of Conduct – was meant to reinforce the point that dispute settlement is mainly an 28 IIA issues paper series Section II issue for national courts. Where there is agreement, other forms of settlement may be acceptable, but the draft Code of Conduct 8 should, in the Group of 77’s perspective, emphasize the primacy of national courts (Robinson, 1985, p. 13). It would be misleading, however, to focus solely on the practice and perspectives of Latin American countries concerning national court jurisdiction in the period leading up to the end of the 1970s. Since that period, Latin American countries have generally reconsidered their approach.
Hence, at the bilateral level, Latin American countries that had traditionally eschewed BITs, mainly because of reservations concerning dispute settlement, have become parties to a number of such treaties. Furthermore, on becoming parties to such treaties, Latin American countries have not, as a rule, avoided dispute-settlement provisions that contemplate internationalized dispute settlement (OAS, 1997). In this regard, the 1994 Chilean model BIT provides an important example of this change. Specifically, Article 8 indicates that the investor and host country should enter consultations in respect of any dispute, but, if such consultations fail, the investor may submit the dispute either: “(a) (b) to the competent tribunal of the Contracting Party in whose territory the investment was made; or to international arbitration of [ICSID]”.
The extent of the change in Latin American perspectives in this area can be seen in a willingness in their relations with each other to accept the lex specialis on dispute settlement in BITs. For example, the BITs between Chile and Ecuador (1993) (Article X), Argentina and Bolivia (1994) (Article 9), Colombia and Peru (1994), Ecuador and El Salvador (1994) (Article X) and Brazil and Venezuela (1995) (Article 8) are testimony to the notion that international arbitration is becoming IIA issues paper series 29 Dispute Settlement: Investor-State accepted as part of the contents of investor-State dispute settlement clauses. This change of policy is also reflected at the regional level.
The States involved in Decision No. 24 of the Commission of the Cartagena Agreement have revised the policy inherent in Articles 50 and 51, quoted above. Now, by virtue of Decision 291 (1991), the members of the Andean Community accept that they shall each apply the provisions of their domestic legislation in settling disputes between foreign investors and the State (Article 10). Apart from prohibiting international dispute settlement outright, a preference for national dispute settlement in the case of investor-State disputes can be preserved by including dispute-settlement provisions that require local remedies to be exercised before an international claim can be pursued.
For example, according to the Caribbean Community (CARICOM) Guidelines for use in the Negotiation of Bilateral Treaties (1984), each CARICOM State, in considering investor-State disputesettlement provisions, should seek to ensure that “resort to arbitration would only be permitted after all national remedies have been exhausted”. Broadly in keeping with this guideline, Article 9 of the (1987) BIT between Jamaica and the United Kingdom contemplates ICSID conciliation or arbitration proceedings for investor-State disputes, but also envisages that local remedies should be exhausted as a precondition for internationalized third party intervention.
In its relevant part, Article 9 reads: “If any such [investor-State] dispute should arise and agreement cannot be reached between the parties to the dispute through pursuit of local remedies in accordance with international law then, if the national or company affected also consents in writing to submit the dispute to the Centre [ICSID] for settlement by conciliation or arbitration under the [ICSID] Convention, either party may institute proceedings. … ”. 30 IIA issues paper series Section II It should be noted, however, that Jamaica has moved away from requiring the exhaustion of local remedies as a precondition for resort to arbitration in more recent agreements. 9 The approach requiring prior exhaustion of local remedies is also taken in other cases.
For example, Model B of the Asian-African Legal Consultative Committee Revised Draft of Model Agreements For Promotion and Protection of Investments (1985) reads as follows: “If any dispute or difference should arise between a Contracting Party and a national, company or State entity of the other Contracting Party, which cannot be resolved within a period of ________ through negotiations, either party to the dispute may initiate proceedings for conciliation or arbitration after the local remedies have been exhausted” (emphasis added). In some cases, although it is envisaged that local remedies are to be exhausted before external arbitration or conciliation is pursued, time limits are placed on the local remedies requirement (UNCTAD, 1998; Schreuer, 2001, pp. 390-393).
Here, then, even if the courts or other tribunals within the host country are still considering a particular dispute, once the fixed term period is reached, the investor may forego the local proceedings. As noted above, time limits tend to range from three months, as suggested in the 1991 United Kingdom model BIT (Preferred Article 8), to eighteen months, as in the 1995 Italy/Jamaica BIT (Article 9(3)). Naturally, the rate at which domestic proceedings are completed varies from country to country, but where the time limit is as short as three months, it can be maintained that the value of the need to exhaust local remedies is undermined: most domestic legal systems require more than three months for judicial processes to be completed. IIA issues paper series 31 Dispute Settlement: Investor-State
In several instances, bilateral and regional instruments that include investor-State dispute-settlement provisions remain silent on whether the disputant investor has an obligation to exhaust local remedies. From the numerous examples in this regard, the 1991 German and 1995 Swiss model BITs, NAFTA and the 1967 OECD Draft Convention on the Protection of Foreign Property may be mentioned. For each such agreement that has entered into force, the question is whether one may infer that the investor must exhaust local remedies before proceeding to international third party settlement. Arguably, it should not be possible to exclude so basic a rule of customary international law without express words.
Some support for this view may be garnered from the decision of the Chamber of the International Court of Justice in the case concerning Elettronica Sicula S. p. A. (ELSI) (United States v. Italy) (ICJ, 1989). In this case, the Chamber of the Court considered, inter alia, whether a foreign investor was required to exhaust local remedies before the investor’s home country could pursue an international claim with the host country concerning an alleged breach against the investor. The Friendship, Commerce and Navigation Treaty (FCN