Understanding the clockwork of investment arbitration

August 2017  |  PROFESSIONAL INSIGHT |  FINANCE & INVESTMENT

Financier Worldwide Magazine

August 2017 Issue

One of the most distinctive features of investment treaty arbitration is that, in spite of being based on some 3300 different international investment agreements, the issues in dispute and the multi-billion dollar discussions held over them are channelled through a very discrete number of threads.

This may be surprising to those engaged in the practice of contract-based arbitration, where the universe of issues and disputes branches out into myriad variations and formulations which change based on the industry, the jurisdiction and the terms of the specific transaction – in all probability, if you asked people to think of a contract, everyone would think of a very different instrument, depending of their line of work, area of economic interest and geography. However, the clockwork of investment arbitration can be easily explained by a horological analogy. If, instead of thinking of a contract, you asked people to think of a watch, it is very likely that most would think of a very similar instrument, and, at any rate, those who thought of a round dial with both a short and a long hand would understand at a glance the picture imagined by those who thought of a square dial with two series of two figures, usually separated by a colon. The same can be said of investment treaties, which tend to all deal with the same issues, in markedly similar terms, usually heralded under widely-accepted scholarly marquees, the most common being fair and equitable treatment, most-favoured-nation treatment, national treatment, expropriation, free transfers, full protection and security and umbrella clauses.

Certainly, the analogy covers some other particular aspects of investment treaties. First, while some only deal with our primary area of interest, there are others (NAFTA, CAFTA-DR, the ECT and the other smart phones, smart watches and grand-complications of international economic law) which serve a variety of purposes, only marginally or cursorily including time-reading or investment protection. Secondly, while instruments of these sorts have been available for over two centuries, only around the mid-20th century could private persons actually start choosing how to use them at their own pace, while before that they were only operated at the instance of their governments (think of the passage from Big Ben to the wristwatch, and from the PCIJ to ICSID arbitration). Finally, in horology, as in investment treaty law, the Swiss have the largest variety of instruments, though they have not taken the lead regarding the instruments currently operating primarily on solar power.

We will explore the fundamental substantive features of international investment treaties (which, in horological parlance, again to the benefit of our analogy, would be called the ‘complications’ of each instrument), which can be listed under two major categories: those requiring host states to provide a certain standard of treatment detailed somewhere else, and those requiring certain specific conducts or protections to be adopted by the host state. This distinction will prove useful, though, as we will see, some argue that certain provisions requiring standards of treatment do require specific conducts, and also certain provisions requiring specific conducts incorporate by reference certain requirements as to standards of treatment.

The most widespread provisions falling under the first category include those requiring fair and equitable treatment, most-favoured-nation treatment, and national treatment, each of which can only be established by reference to international customary law, another treaty, or the provisions of domestic law, respectively.

Under ‘fair and equitable treatment’, host states are required to provide foreign investors from the relevant nationalities the standard of protections granted under international customary law, which provides a very useful and powerful tool for investors, as it allows disputes regarding breaches of international customary law to be settled under the dispute resolution mechanism contained in the treaty – usually, some form of investment arbitration. Some discussion exists as to the precise level of customary law protection imported into a treaty under a ‘fair and equitable treatment’ provision, with some treaties taking a clearer stance than others on the matter, by typically citing the international minimum standard of treatment required under international customary law as the appropriate, mandated standard of treatment. At the same time, some scholarly commentary and decisions have held that the expression ‘fair and equitable treatment’ prescribes a specific conduct and not a customary law standard, and have applied those terms as requiring a certain foreseeability, transparency, a lack of arbitrariness, discrimination or denials of justice in the planning and implementation of state action, and even the protection of certain ‘legitimate expectations’ by investors.

Meanwhile, under ‘most-favoured-nation treatment’ and ‘national treatment’ provisions, host states are required to grant investors of the relevant nationalities with the levels of treatment granted to the foreign investors holding the highest level of comparable protection, or the level granted to nationals of the host state in similar circumstances, respectively. While we will only dwell on the substantive protections granted by treaties – and not in the provisions dealing with the conditions for the applicability of the treaty itself or with the resolution of investment disputes – we will note that in some circles it was argued that ‘most-favoured-nation treatment’ could also be used to import jurisdictional devices contained in other investment treaties or to overcome conditions to jurisdiction contained in the applicable investment treaty. Interestingly, foreign investors and commentators have not usually felt equally tempted to grant foreign investors the same procedural rights granted to nationals through ‘national treatment’ provisions.

The second category includes provisions dealing with expropriation, free transfers, full protection and security and umbrella clauses, among other, less common protections.

The treaty protection dealing with expropriation typically requires host states only conduct expropriations in pursuance of public purpose, without discrimination, following due process and in exchange for adequate compensation tendered without undue delay. Most treaties also specifically extend these protections to situations where a state, while not directly expropriating, adopts measures having an identical effect – which receives the moniker of ‘indirect expropriation’. Treaties usually contain a specific indication of the form of compensation due in cases of direct or indirect expropriation, while a minority of treaties, typically those entered into by socialist or former socialist economies, only contain protections dealing with the method of compensation, but not with the conditions or methods for the expropriation itself.

Provisions dealing with ‘free transfers’ typically require host states to allow the transfer of profits and other investment-related remittances of funds abroad without undue delays or preconditions, to allow the foreign investor to operate in the territory of the host state and repatriate the profits generated by the investment, or the funds obtained from the sale, or expropriation, of the investment itself. In some treaties, these provisions also contain language requiring those transfers be permitted to be made in freely convertible currencies.

Treaties usually also contain provisions under which states agree to provide foreign investors of the other contracting state, their investments and personnel, with full protection and security. While this is normally interpreted as referring to physical protection and security, some literature and decisions have advocated an expansive interpretation of these provisions, and have read them as including certain forms of legal protection and security.

Many investment instruments also contain a provision prescribing that contracting states shall abide by the contractual terms and commitments agreed to the benefit of investors of the other contracting state, a provision usually referred to as an ‘umbrella clause’. This protection extends to commitments and obligations undertaken by states in the context of certain contractual arrangements which qualify as investment agreements, for example, contracts where the state is acting in its sovereign capacity, and which refer to certain undertakings by the foreign investor which are relevant to the development of the host state, as is usually the case in infrastructure and similar projects. These provisions allow that certain breaches of investment agreements be considered breaches of the investment treaty itself, thus enabling the aggrieved foreign investor to bring a claim under the treaty dispute resolution mechanisms. As a side note, before the advent of investment treaties containing access to ICSID or other forms of investment arbitration, most investment disputes arose from these investment agreements which contained dispute resolution clauses calling for investment arbitration.

Diego Brian Gosis is a partner at GST LLP. He can be contacted by email: diego.gosis@gstllp.com.

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Diego Brian Gosis

GST LLP