Investment Treaty Arbitration – An Overview

What is investment treaty arbitration?

Investment treaties are entered into between two or more states to guarantee certain levels of protection to foreign investors investing in the host state. The purpose of investment treaties is to encourage and protect foreign investment through substantive obligations and dispute-resolution mechanisms contained in those treaties that permit investors to bring claims directly against a host state for breach of the substantive obligations contained therein. Investors can typically do so through international arbitration, with disputes being brought directly against the state without the need to seek recourse via the domestic courts.

The first investment treaty was entered into in 1959 between Germany and Pakistan, and the first investment treaty known to the authors to contain an investor-state arbitration provision was entered into in 1966 between Italy and Chad. The number of investment treaties worldwide surged in the ensuing decades, particularly in the 1990s, as a result of the economic trend at that time towards economic liberalisation and globalisation. Today, there are over 3,000 known investment treaties, made up of numerous bilateral investment treaties (BITs) and several multilateral investment treaties (MITs).

Key features of investment treaties

Investment treaty terms are often the subject of extensive negotiation between state parties, the result being that no two investment treaties are ever the same. They do, however, generally share some common features:

• In order to access the treaty protections, a party must first meet certain criteria. Across all investment treaties, the two key requirements are that the party is (1) an “investor” and (2) making an “investment”.
  
  An example definition of what it is to be an “investor” can be found in the 2020 United States-Mexico-Canada Agreement, which replaced the North American Free Trade Agreement, where an investor is defined as “a party or state enterprise thereof, or a national or an enterprise of such party, that seeks to make, is making or has made an investment”. An enterprise is defined in turn to include any corporation, trust, or other association, whether privately or governmentally owned. Definitions across other treaties vary from being more specific to being more broadly defined, but a defining feature is that they all require an investor to be an individual or a legal entity, such as a company, from one of the state parties to the investment treaty investing in another state party to the investment treaty.
• An investor must show that it has the nationality of the state that is protected. This is relatively simple for individuals as, under most investment treaties, the domestic law of the country where nationality is claimed usually determines an individual’s nationality. Where there is dual nationality, nationality has tended to override residence. The position can be less clear cut for corporates. While some treaties determine their nationality simply as the place of incorporation, others may impose further requirements, such as having the company’s seat of business or registered office in the place of incorporation or requiring the company to be engaged in substantial economic activities there. These latter requirements function to prevent companies gaining investment protection simply by setting up a post-box presence in the relevant state.
• Investment is typically defined broadly and varies from treaty to treaty. It usually includes any kind of asset owned or controlled by a qualifying investor. Types of assets are often listed to include physical assets, shares, bonds, intellectual property rights, and concession contracts, among other types of assets. Common exclusions include ordinary commercial transactions and pre-investment activities.
• Investment treaties are generally designed to offer protection against expropriation of the investing party’s assets without adequate compensation being provided. Indeed, the amount of compensation for an alleged expropriation is often one of the main issues in dispute in many investment treaty arbitrations.
• In addition, most investment treaties typically provide for other protections such as fair and equitable treatment (or, increasingly in more recent treaties, the minimum standard of treatment under customary international law), full protection and security, and national treatment. Broadly speaking, these protections respectively require host states to act transparently and consistently with the legitimate expectations of investors, to ensure the physical security of the investment, and to afford foreign investors treatment that is no less favourable than that accorded to domestic investors. Another common protection is most-favoured-nation treatment, which operates by allowing an investor covered by an investment treaty to rely on the standards of treatment contained in other investment treaties to which the host state is party that are more favourable.

The arbitration process and enforcement options

Investment treaties typically contain dispute-resolution clauses that require the parties to resolve any disputes arising via international arbitration. Investors can usually choose between various arbitration forums, including the International Centre for Settlement of Investment Disputes (ICSID), other enumerated arbitral institutions, or ad hoc arbitration, typically under the UN Commission on International Trade Law (UNCITRAL) Arbitration Rules. In order to opt for ICSID arbitration, the investor must be from and the host state must be a member state of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (though ICSID also offers an additional facility that may be used in some circumstances when these criteria are not met). Once an award is made, it is binding and enforceable given that members agree to recognise ICSID arbitral awards as if they were final judgments of their own domestic courts. For non-ICSID arbitrations, the enforcement of awards is typically governed by the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention.

Public international law also plays a part in investment treaty arbitration. The basis for interpreting investment treaty clauses is the Vienna Convention on the Law of Treaties (Vienna Convention). The Vienna Convention provides that a treaty must be interpreted in good faith and in accordance with the ordinary meaning to be given to the terms in context and in light of the object and purpose of the treaty.

Arbitrators can usually be selected by the parties or appointed by the arbitral institution administering the arbitration. Both the investor and host state are typically represented by counsel.

Most treaties provide for a cooling-off period that prevents parties from immediately starting the arbitration process upon breach of the treaty. That cooling-off period is often around three to six months and during this time the parties are required to attempt to resolve their dispute amicably.

Case studies

Several European Union (EU) states have faced a host of investment treaty arbitrations brought by investors following changes to renewable energy investment regulatory structures in those states. These states include Bulgaria, the Czech Republic, and Italy, but Spain has borne the brunt of these claims, with the Spanish Government disclosing that these claims against it amount to nearly EUR 8 billion. These EU states committed to providing subsidies for renewable energy investments, but when the revenue from the state-subsidised prices failed to cover costs, these states began to reduce its subsidies, triggering a wave of arbitration proceedings from foreign investors totalling more than 50 cases to date, many of which of been successful for the investors. The claims have mainly focused on two protections and grounds for relief: (1) the requirement that the host state extend fair and equitable treatment to foreign investors, and (2) the requirement to provide compensation for expropriation.

One of the largest investment treaty arbitrations to date was brought by the former shareholders of Yukos against the Russian Federation under the Energy Charter Treaty (ECT). Yukos, once Russia’s largest oil producer, was dismantled following a series of tax claims by the Russian Federation which ultimately led to its bankruptcy and the state’s acquisition of its assets. The shareholders in turn brought three claims under the ECT. The tribunal held that the Russian Federation had taken measures that were equivalent to expropriation and had failed to observe the ECT’s requirement to exercise fair and equitable treatment. The tribunal awarded approximately USD 50 billion in damages.

State Defences

There are several ways for states to defend themselves in investment treaty arbitrations. Strategy will frequently involve disputing the tribunal’s jurisdiction over the investor’s claims. Examples of jurisdictional objections include: (1) the claimant not being a qualified investor and/or not having a qualified investment, (2) the actions complained of not being attributable to the state (i.e., the relevant entity was not acting under governmental authority or under the control of the state), (3) the investment not being made at the relevant time, and (4) the investment not being made in a lawful manner.

Advantages and disadvantages of investment treaty arbitration

Investment treaty arbitration is attractive to foreign investors as it provides a neutral forum in which to resolve disputes outside of the courts of the host state. Arbitrators in investment treaty arbitrations are often experts in international investment law, which provides comfort to the parties that the issues at play will be properly understood and determined by the decision-makers. Arbitration procedure also allows for greater flexibility than litigation and, as such, parties can tailor the process to meet the needs of their particular case. As noted above, investment treaty awards benefit from enhanced enforceability.

However, investment treaty arbitration also has its challenges. Some argue that it can infringe a state’s right to act in the public interest, preventing the state from implementing policies that it would otherwise put in place. There have been growing concerns and increasing calls for reform centering around the confidential nature of arbitration for international disputes given the issues involved are often of a public nature and involve use of taxpayers’ money. However, this has led to recent reforms to increase transparency, with many proceedings now being open to the public. There can also be inconsistencies in arbitral decisions, which can lead to unpredictability in the application of international investment law. These criticisms have caused some states to take measures to limit their exposure to investment treaty arbitration, calling into question the future of investment treaty arbitration, if concerns are not addressed.

The most notable example of this has been in the EU. In 2018, the EU Court of Justice found in Case C-284/16, Slowakische Republik v Achmea BV, ECLI:EU:C:2018:158, that an arbitration provision in a BIT between two EU Member States was incompatible with EU law. Thereafter, in May 2020, 23 EU member states signed the Agreement for the Termination of Bilateral Investment Treaties between the Member States of the EU on grounds that arbitration clauses in intra-EU BITS stand in conflict with EU treaties. While these and other developments have significantly curtailed, if not effectively ended, the use of intra-EU BITs in the EU, awards rendered in arbitrations involving intra-EU BITs have been enforced in jurisdictions outside the EU, including Switzerland, the United States, and England and Wales. 

Conclusion

In conclusion, investment treaty arbitration is a mechanism that was designed to depoliticise investment disputes, carefully balancing the protection of foreign investments with the regulatory autonomy of host states. The evolution of investment treaty arbitration from its inception to date demonstrates its significance in the global legal landscape. The legal complexities inherent in investment treaties demand a high level of legal expertise, from the nuanced definitions of “investor” and “investment” to the complexities of treaty protections. The challenge will lie in adapting the system to tackle the various criticisms, including those outlined above.

Our expertise

With offices in many of the world’s major arbitration centres, including London, Paris, Geneva, Dubai, Hong Kong and Singapore, we are ideally placed to work with you both to prevent and to resolve disputes as they arise, whatever the law, language, rules, industry sector, or subject matter of that dispute may be. Our dedicated multicultural and multilingual specialists conduct arbitrations under both civil and common law systems and regularly act in arbitration-related domestic court proceedings.

Whether you are a state, a state-owned entity, a sovereign wealth fund, a corporate, a sports federation or authority, private business or individual, our strategically focused specialists will work alongside you through every aspect of any arbitration. Please contact Thomas Snider or your usual Charles Russell Speechly contact if you would like to get in touch.