Investment Treaty Arbitration

History

By Susan D. Franck

Since at least 1794, arbitration has been used as a mechanism for fostering foreign investment and providing a neutral forum to resolve international disputes. Although there have been bumps and bruises as international arbitration has evolved into an independent discipline with impartial and expert decision makers, arbitration is now the preeminent method for resolving complex international disputes and imminently preferable to other options, such as the use of force or informal solutions (such as closed-door diplomatic negotiations).” In the article by
Susan D. Franck, “The Liability of International Arbitrators: A Comparative Analysis and Proposal for Qualified Immunity” (20 N.Y.L. Sch. J. Int’l & Comp. L. 1, 1-2 (2000)), she explains that arbitration is the preferred dispute resolution mechanism for international disagreements). Arbitration was historically perceived as promoting respect for the rule of law. This respect is necessary for investment stability, and is particularly relevant when investors are concerned about facing investment dispute resolution conducted by a foreign sovereign. This concern is exacerbated when the defendant is the (country). Delocalized arbitration, by contrast, offers a neutral forum where impartial tribunals with specialist expertise could make determinations pertaining to investments in a way that would bolster investor confidence and foster greater certainty.

Arbitration of investment disputes was not once as widely used as it is now.” This was primarily because individual investors had no standing and no direct cause of action against a Sovereign for a violation of international law that adversely affected their investment.

Rather, investors were forced to lobby their home country to espouse a claim on their behalf at the International Court of Justice (the “ICJ”), which resulted in only episodic investment disputes and even smaller numbers of successful claims. In the happy event that a (country) espoused its investor’s case, and the ICJ did find a violation of international law, there were two drawbacks. First, an aggrieved investor would not necessarily receive the compensation for the Sovereign’s illegal conduct. Second, the only enforcement tool available to the ICJ is the enactment of a Security Council Resolution, which is not commercially useful where an investor seeks financial compensation.

With these limitations, the remaining alternative for aggrieved investors was to initiate litigation before national courts. This option was not attractive to investors who, presuming they could establish a colorable cause of action, found themselves in the Sovereign’s court litigating against the (country).

In an effort to address these concerns, investment treaties made two fundamental shifts for the resolution of investment-based disputes.

• First, the treaties gave investors a direct cause of action against a Sovereign for damages. This means investors are no longer at the mercy of international politics and governmental bureaucracy when deciding to initiate dispute resolution, and can avoid their litigation being swallowed by the larger foreign relations dialogue.
• Second, without the need for a separate contract with a dispute resolution mechanism, investment treaties gave investors a choice of neutral settings for resolving their grievances.

Overall, these shifts have created a private cause of action against (countries), which permits investors to act like “private attorney generals”, and places the enforcement of public international law rights in the hands of private individuals and corporations. These shifts were a major innovation. They created a mechanism to bolster investors’ confidence that they will receive a “fair shake” when resolving disputes with (countries), “thus reducing the risks associated with investment and, arguably, increasing the incentive to investment abroad.”

Treaties and Conventions

For detailed information about UNCITRAL materials, the Inter-American Convention on International Commercial Arbitration, the New York Convention (the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards), the Washington Convention (the Convention on the Settlement of Investment Disputes between States and Nationals of Other States) and other treaties concerning international arbitration, click here.

Investment Treaty Arbitration and International Law

Issues:

• The international law foundation of investment treaty arbitration
• The legal character of the direct access of foreign investors to investment treaty arbitration

Procedural Aspects of Investment Treaty Arbitration

This include:

• The role, function and qualifications of arbitrators in investment treaty arbitration
• The applicable law and non-investment considerations in investment treaty arbitration.

THE CHALLENGE OF SOVEREIGNTY

When legal claims directly implicate public interests, the role of arbitration may be open to question. If challenges to environmental regulations or tax assessments create risks for general community welfare, an argument exists that resolution of such controversies should remain the prerogative of courts, rather than being surrendered to arbitrators.

To some extent, societal well-being can be jeopardized by any large arbitration, even if exclusively between private companies. A license dispute between two major pharmaceuticals might result in an award that affects prices paid by consumers. However, it is easier to become alarmed about infringement of national sovereignty when states become parties to arbitration, as happens increasingly under investment treaties.

As much an emotion as a legal construct,1 sovereignty has probably been invoked ever since one ruler resisted attack from another, and the aggressor felt bound to give reasons (good or bad) to justify the invasion.2 Derived from the Latin super, meaning “above,” sovereignty in the context of international relations normally implicates a state’s right to exercise supreme power within its territory.

Source: William W. Park, “Arbitration of International Business Disputes”, 2nd edition, Oxford University Press