March 01, 2015

Current Trends in International Investment Arbitration

With global trade rapidly expanding, attorneys are increasingly exploring how to address disputes that cross borders.

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As global trade and investment continue to expand at an almost exponential rate, firms and their legal teams are increasingly exploring how to address disputes that cross borders. Although there are various ways in which dispute resolution may occur in cross-border contexts, international arbitration is becoming increasingly popular. Further, within international arbitration, it is international investment arbitration that seems to have garnered the lion’s share of recent headlines. For example, in just the last year, an international arbitral tribunal held that the government of the Russian Federation was liable for $50.2 billion for expropriating the assets of Yukos, one of the largest oil companies in Russia. This was based on a claim that Russia had violated its obligations under the Energy Charter Treaty through the expropriation.

The Yukos case is only one example of the impressive growth in international investment arbitration. In the past few years, many firms have initiated disputes with host states, alleging that a sovereign government violated investment treaties. Investment arbitration claims have been brought by Vodafone, TCF, Occidental Petroleum, Électricité de France, and many others from across the world.

The amounts involved are often staggering. “Bringing a billion-dollar claim is no longer enough to stand out in a survey of international arbitration.” Michael D. Goldhaber, High Stakes, Focus Europe, Am. Law. Supp., Summer 2011, at 22. Indeed, there are well over 100 investment arbitration disputes each seeking over $100 million in damages.

This article lays out some of the key issues likely to face litigators and arbitrators in international investment arbitration. We begin by providing a brief background to international investment arbitration and how the dispute resolution process operates. We then explore the kinds of issues foreign investors are likely to face and how most investment treaties attempt to address such concerns. Finally, we mention some of the more recent developments in investment arbitration, with a few concluding thoughts for those representing clients who have global sales or operations or who are planning cross-border investments.

Overview

Investment arbitration applies to claims brought against a sovereign nation by foreign firms who have invested there under the auspices of an investment treaty. An investment treaty, in turn, is an agreement between nations to establish an arrangement to encourage and protect foreign investment.

Investment treaties may be between two states (bilateral investment treaties, or BITs) or multiple states (multilateral investment treaties or free-trade agreements). As noted in the 2014 World Investment Report published by the United Nations Conference on Trade and Development, there are more than 3,000 investment treaties in existence. See U.N. Conference on Trade & Development, World Investment Report 2014, at xxv (2014), available at http://unctad.org/en/PublicationsLibrary/wir2014_en.pdf. And states continue to negotiate and conclude even more of them—both as stand-alone instruments and as a part of comprehensive trade agreements. An example of the latter is the Trans-Pacific Partnership, a potential regional free-trade agreement being negotiated among 12 nations in the Asia-Pacific region.

Such treaties are important because they grant foreign investors both substantive rights for investments made in the “host” country—the country receiving the investment—and enforcement mechanisms for foreign firms alleging violations by the host country that don’t require adjudication in the host country’s local courts. Foreign investors may initiate an action against the host state under such treaties, but not against individuals or firms. Cases can usually be brought in the International Centre for Settlement of Investment Disputes (ICSID)—if the host country is a signatory to the ICSID convention—or through ad hoc arbitration. This is valuable because investors are wary of resolving disputes in the courts of the host state given potential bias, rules of state immunity, and lack of subject area expertise.

On the other hand, trying to resolve disputes in the courts of the country of the foreign investor (called the “home” state) can be problematic because those courts might be wary of assuming jurisdiction and because the investor is trying to recover against the assets of the host state, which are likely to be located there.

Arbitration awards are less subject to these concerns because 154 countries have adopted the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which makes it easier to enforce a foreign arbitral award than to enforce a judgment of a foreign court. Also, arbitration is usually conducted by those with substantial expertise in the subject matter of the dispute.

Investment arbitration occurs under the auspices of a range of institutions and rules. ICSID is the most widely used, but many other important arbitral institutions administer investment disputes. They include the International Court of Arbitration of the International Chamber of Commerce (ICC) in Paris, the London Court of International Arbitration, the International Centre for Dispute Resolution in New York, the Arbitration Institute of the Stockholm Chamber of Commerce, the Singapore International Arbitration Centre, and the Permanent Court of Arbitration in The Hague. Arbitration can also be conducted without the support of an institution. This is called “ad hoc arbitration.” Often governed by the Arbitration Rules of the United Nations Commission on International Trade Law, an ad hoc arbitration is based on the arbitration agreement between the parties.

Investment arbitration has been keeping these fora quite busy. By the end of 2013, there were some 568 investment arbitral claims involving 98 countries. See World Investment Report 2014, supra, at xxv.

Foreign Investment Issues

Compared with investing at home, investing abroad poses broader and more complex risks. Many of these are unavoidable and part of today’s complex political and economic environment. Unfamiliarity with the legal and regulatory environment of the host state only increases the anxiety.

For example, foreign investors frequently face political risks, which include the possibility of arbitrary or misleading government conduct. The Arab Spring, for instance, not only led to dramatic political change but also put foreign investments at risk, particularly in Libya and Egypt. Incoming regimes frequently introduce major policy changes that can hurt foreign investors’ established expectations and take further steps such as cancellation of licenses. Similarly, a host state may also interfere with and discriminate against the foreign investor to protect its domestic industry. When this happens, legal recourse in the courts of that country may not be the most effective remedy.

International investment agreements set forth minimum standards for the treatment of foreign investors. When the host nation breaches its obligations under the investment treaty, an investor can directly initiate actions under the treaty without having to approach its home state for diplomatic assistance.

While the protections provided by different investment agreements vary, some of the commonly used standards are as follows.

The “fair and equitable treatment” standard is the most frequently invoked and provides the basis for most successful claims. Although the scope of this obligation is constantly evolving, the standard protects foreign investments against arbitrary and unfair treatment by the host country.

Investment agreements also provide for compensation in the event of expropriation or nationalization. In most investment agreements, this means that expropriation is limited to seizures for public purposes in a nondiscriminatory manner accompanied by adequate compensation. In the 1970s, when the Qaddafi regime nationalized foreign oil concessions, Texaco, British Petroleum, and LIAMCO recovered substantial damages in arbitrations.

“National treatment” clauses prohibit the host government from stacking the deck against foreign investors. Although there are variations found in various BITs, the ability to bring a claim under this clause depends on comparing the treatment received by the foreign investor with that given to domestic parties and establishing that the state has discriminated.

Most investment treaties also feature a “most-favored nation” clause. This prohibits discrimination among foreign investors and enables investors to rely on and utilize beneficial commitments in other treaties entered into by the host state with other countries, conferring various dispute resolution protections. Most-favored nation clauses are quite common in many countries and create an interesting upward spiral in prevailing guarantees.

India: A Case Study

India is one of the most important emerging economies and has demonstrated its ability to grow at a fierce pace. For several reasons—including competitive labor costs, a skilled workforce, a large and expanding domestic consumer market, and its younger demographics—India is a leading destination for foreign investors. According to an Ernst & Young Attractiveness Survey, more than half of international business leaders surveyed plan to set up new operations or expand existing operations in India over the next year.

Nonetheless, some of the largest global players investing in India have burned their fingers with regulatory, tax, or other disputes. When trouble arises, foreign investors are wary of using Indian courts, which have a notorious reputation for delay. In the World Bank’s 2015 Doing Business report, India ranks third from the bottom—186 of 189 economies assessed—on the ease of enforcing contracts. See World Bank Grp., Doing Business 2015, at 192 (2014), available at www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB15-Chapters/DB15-Report-Overview.pdf; www.doingbusiness.org/reports/global-reports/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB15-Chapters/DB15-Country-Tables.pdf.

In light of these challenges, foreign investors are increasingly considering options under investment arbitration regimes. Until two years ago, there was little investment arbitration activity involving India. Then came White Industries.

White Industries, an Australian company, won an ICC arbitration for $4 million (Australian) from a Paris-seated tribunal in 2002 in a contractual dispute with Coal India, a state-owned mining entity. From 2002 to 2010, White Industries unsuccessfully sought to enforce the award in India, and in July 2010, it filed a treaty claim against the government of India under the Australia-India BIT in London, alleging a violation of treaty rights arising from nonenforcement of the ICC award.

In a unanimous decision, the London tribunal held that India’s inordinate delay in enforcing White Industries’ award violated its obligation to provide “effective means of asserting claims and enforcing rights” under the Australia-India BIT. The tribunal noted:

[C]ourt congestion and backlogs are relevant factors to consider, but do not constitute a complete defence. To the extent that the host State’s courts experience regular and extensive delays, this may be evidence of a systemic problem with the court system, which would also constitute a breach of the effective means standard.

(The full text of the award is available at www.italaw.com/sites/default/files/case-documents/ita0906.pdf.)

It is interesting that the government of India complied with the unfavorable award without any pushback.

White Industries awakened foreign investors to the possibilities of actively using investment arbitration against the Indian government. Moreover, recent Supreme Court of India jurisprudence has made it easier to enforce foreign arbitral awards in general, which makes international investment arbitration even more attractive for foreign investors engaged with India. See Bharat Aluminium Co. v. Kaiser Aluminium Technical Servs. Inc., [2012 (3) ARBLR 515 (SC)]; Shri Lal Mahal Ltd. v. Progetto Grano Spa, [2013 (3) ARBLR 1 (SC)]. The combined effect of these outcomes is a near deluge of claims by companies that include Sistema, ByCell, Deutsche Telekom, Khaitan Holdings, and the much-discussed Vodafone.

In 2007, Vodafone bought Indian cell provider Hutchinson India’s assets for $11 billion. The parties structured the sale through an entity in Mauritius to take advantage of an India-Mauritius tax treaty. This was fairly common practice at the time. But the Indian tax authorities decided they would still assess the Vodafone transaction as requiring $2 billion in taxes. Vodafone filed suit in India in the Bombay High Court, and many other foreign investors watched the suit carefully.

The Bombay High Court held in favor of the Indian government, but the Supreme Court of India reversed in early 2012, favoring Vodafone. This might have been the end of the matter, except that the government ennacted new legislation to retroactively overturn the Supreme Court’s decision.

In response, Vodafone filed an investment arbitration claim based on the Netherlands-India BIT because the company is incorporated in the Netherlands. India and Vodafone entered conciliation talks shortly thereafter, but the negotiations seem to have fizzled and Vodafone is pursuing the arbitration.

The Vodafone case and others have prompted a reaction in India and other countries concerned about how the rise of investment arbitration may constrict their ability to formulate policy. India is already reworking its “model” BIT and taking a cautious stance in current bilateral negotiations over potential investment treaties. For instance, progress on the highly anticipated India-United States BIT has been hampered because of India’s reluctance to include dispute settlement provisions. Then finance minister of India, P. Chidambaram, commented:

We think that international arbitration is hijacking the domestic judicial system. There are two major concerns. [In] [c]ommercial arbitrations between Party A and Party B, [the] sovereign is being dragged into [them] quite unnecessarily and [it is] unjustified. . . . The second concern is that the judgements of the highest court in the country are being made subject to international arbitration. . . .

We believe in [the] efficacy of bilateral investment protection agreements. We want such international agreements. But we want to guard against the ingeniously interpreted to enlarge the jurisdiction of international arbitrations. And you would agree with me that there are numerous cases of jurisdiction hopping and jurisdiction shopping in international arbitration today.

Press Trust of India, Intl. Arbitration Is Hijacking Domestic Judicial System: FM, Bus. Standard, Oct. 11, 2013, available at www.business-standard.com/article/pti-stories/intl-arbitration-is-hijacking-domestic-judicial-system-fm-113101100067_1.html.

Australia and South Africa also have new arbitration policies, and Bolivia, Ecuador, and Venezuela have all denounced the ICSID Convention.

Despite this friction, the increase in global business and the absence of general agreement on how to resolve disputes means that international investment arbitration will continue to be in the news. Some of the most interesting developments are probably just over the horizon.