Vishesh Sharma* and Vishakha Choudhary**
Uniform jurisprudence concerning state counterclaims in investment arbitration remains elusive. Ordinarily, the conditions for their presentation are twofold: parties should have consented to arbitration of counterclaims, and the counterclaims should be connected to the primary claim. However, tribunals have oscillated between strict application of these criteria, to extreme dilution based on liberal interpretations of International Investment Agreements (“IIAs”). Notably, in the recent David Avenaward, the jurisprudence on counterclaims took a novel direction – disregarding the traditional ‘close connection’ test, the Tribunal permitted counterclaims simply by noting obligations incumbent upon investors pursuant to the CAFTA-DR.
These winds of change signal a departure from an already shaky trend. To induce certainty in investment protection regimes, the new generation of IIAs should take a decidedly clear approach to counterclaims. In this light, the present inquiry seeks to analyse recent policy response to arbitral awards on counterclaims, and the harmony between extant case law and provisions of these model IIAs. Finally, it offers suggestions for simultaneously achieving judicial efficacy and preventing abuse of the investor-state dispute settlement (ISDS) mechanism vis-à-vis counterclaims.
Arbitrating Counterclaims: Ambiguous Judicial Response to Ambiguous IIAs
IIAs fail to explicitly allow or restrict the arbitration of counterclaims. Accordingly, their jurisdiction and admissibility in investment disputes remain contentious. These issues are largely decided through recourse to treaty interpretation.
With respect to jurisdiction, tribunals primarily assess whether the IIA evinces parties’ consent to submit counterclaims to arbitration. Early tribunals such as Salukaand Paushokfound such consent implicit in broad dispute resolution clauses of their respective applicable IIAs, since these clauses did not restrict the scope of arbitrable ‘investment disputes’. More recent decisions in Metal-Techand Urbaser derived the requisite consent from the neutral phrasing of dispute resolution clauses, which did not limit standing for initiating claims to investors. Conversely, jurisdiction over counterclaims was denied in Rusoro Mining, as the IIA in question restricted investment disputes to disputes arising from breaches of the treaty by the host state. Pertinently, in 2011, two controversial and corresponding views with respect to jurisdiction over counterclaims emerged in the form of the Goetzaward and the Roussalis dissenting opinion (Prof. Michael Reisman). They conclude that by consenting to arbitration rules (ICSID) permitting Respondents to submit counterclaims, contracting parties to IIAs implicitly agree to arbitration of counterclaims.
The question of admissibility of counterclaims has also seen polarising positions emerge. While the Saluka and Paushok duo emphasised the need for a strict legal connection (“operational unity” and “common origin”) between claims and counterclaims to render the latter admissible, recent decisions have considerably relaxed this requirement. The Goetz Tribunal admitted counterclaims ‘related to’ the subject matter of the claims. The Urbaser Tribunal, in admitting counterclaims, considered that the counterclaims were ‘based on’ the disputed investment rights and ‘related to’ breach of commitments on which investment rights were conditioned. Both these conclusions were founded on the wide notion of ‘investment disputes’ in the IIAs. However, the David Avenaward, delivered on 18 September 2018, takes a decidedly novel approach. Despite the limited standing in Article 10.16 CAFTA-DR, allowing only investors to submit ‘investment disputes’, the Tribunal assumed jurisdiction over counterclaims. In its opinion, by imposing obligations upon investors, contracting parties had implicitly consented to arbitration of state counterclaims. Surprisingly, it did not even attempt to ascertain admissibility according to the ‘legal connection’ test, emphasizing the Respondent state’s unconditional right to agitate breaches of environmental obligations by the investor, committed in the course of exercising investment rights.
How does the next generation of IIAs fare?
Incontrovertibly, the fragmentation of judicial discourse on counterclaims stems from the lack of precision in IIAs. The past few years have seen substantial overhauls in investment regimes across nations. Unfortunately, these do not substantially tackle existing ambiguities with respect to counterclaims.
After terminating its existing BITs, the Indian Government is attempting to renegotiate them according to the 2016 Model BIT. India’s erstwhile BITs were based on the 2003 Model, which did not expressly address counterclaims. Its broad dispute resolution clause (“Any dispute…in relation to an investment”) could potentially have been used to assume jurisdiction over them. Perhaps, however, the scope of admissible counterclaims would be limited, owing to the absence of any obligations imposed upon investors.
The 2016 Model BIT makes marginal improvements over the existing regime. Chapter III compels investors to “comply with all laws regulations, administrative guidelines and policies” of the host state. It additionally demands compliance with taxation laws, corporate social responsibility, and seeks to prevent corruption. However, the dispute resolution clause in Article 13.2 restricts tribunals’ jurisdiction to disputes arising from breaches of the host-state’s obligations. Further, standing to bring claims under Articles 15 and 16 of the Model BIT is limited to investors. By applying the Rusoro reasoning, tribunals could deny jurisdiction over state counterclaims.
Conversely, Article 13.4 allows tribunals to take into account corrupt activities of investors in deciding whether their claim is tenable. Following the reasoning of the decision in David Aven, this may be viewed as an affirmative obligation upon investors not to engage in corrupt practices, which could constitute the legal basis of a counterclaim. Further, both the Oxusand Gavazziawards disregard words in dispute resolution clauses limiting the standing to ‘bring a claim’– while these provisions would undoubtedly exclude ‘free-standing claims’ by host states, they would not necessarily preclude the host state from raising a ‘closely connected’ counterclaim in defence. Thus, the future interpretation and impact of Articles 15 and 16 on arbitration of counterclaims is unclear.
Hence, India’s attempt to revolutionise its investment protection framework has not resolved any lingering confusion with respect to arbitration of counterclaims. In fact, the seemingly contradictory duties of tribunals under Articles 13.2 and 13.4 might aggravate this conundrum.
The preamble of the Netherlands Model BIT sets its tone, seeking to balance investment protection with legitimate policy objectives such as public health, safety, and environment protection. In furtherance of the same, the Model BIT allows host states to demand environmental protection, compliance with labour standards, and respect for human rights from investors (Articles 2, 6, and 7), under both domestic laws (Article 7.1) and internationally recognised standards (Article 7.2). However, the Model BIT narrowly envisages disputes to be those concerning ‘loss or damage to the investor or its investment(s)’ and grants the right to submit disputes to ‘investors’ (Articles 16 and 18).
Given the prevailing uncertainty about the impact of such ‘limited standing’ clauses, as discussed in the foregoing sections, Articles 16 and 18 do not oust a tribunal’s jurisdiction over counterclaims conclusively. In fact, the extensive obligations for investors prescribed in Articles 6 and 7 make a finding in favour of jurisdiction and admissibility of counterclaims equally likely. To add to this turmoil, Article 23 of the Model BIT allows tribunals to take international human rights standards into account while determining compensation due to investors – providing an additional window of opportunity for state counterclaims seeking set-off of damages.
Intended to replace the NAFTA, Chapter 14 of the USMCA governs investment relations. Vide Articles 14.16 and 14.17, the Agreement allows contracting parties to adopt measures concerning environmental, health, safety, or other regulatory objectives. Yet, it fails to address the arbitrability of potential breaches by investors under these clauses. While the right of submission of a ‘claim’ under Annex D of the Chapter is granted solely to the Claimant, the Agreement does not explicitly restrict the Respondent from agitating an ‘investment dispute’ in any provision.
Moreover, in Article 14.D.7, the Agreement prohibits respondents from asserting counterclaims based on indemnification or compensation available to an investor pursuant to an insurance or guarantee contract. Since parties have expressly chosen to exclude certain counterclaims from the domain of arbitrable investment disputes, a contrario, other counterclaims may well be considered admissible before tribunals.
Notably, none of these BITs address the test of admissibility of counterclaims, leaving it to the discretion of tribunals. These tribunals could choose from a variety of options, namely the Saluka reasoning (strict factual and legal connection), the Urbraser reasoning (strict factual connection, diluted legal connection test) or the recent David Aven reasoning (counterclaims based on any state right or investor obligations).
The foregoing discussion confirms the continued uncertainty with respect to questions of jurisdiction and admissibility of counterclaims. Primarily, this necessitates redesigning future IIAs to expressly define the contours of admissible counterclaims, specify jurisdictional requirements, and eliminate seemingly contradictory provisions on tribunals’ powers. Additionally, given the increasing investor obligations envisaged under IIAs, these treaties should either expressly address their arbitrability, or specify the appropriate forum for disputes arising from these obligations. The provisions of the 2015 Draft Indian BIT, surprisingly abandoned in the 2016 Model, achieved this effectively. It not only prescribed detailed obligations for investors in Articles 9 to 12, but also granted an explicit right to the host state to institute counterclaims on these grounds under Article 14.11 – thereby preventing any ambiguity.
Until changes of this nature are implemented in IIAs, the optimum solution would be for tribunals to assume jurisdiction of counterclaims when the definition of ‘investment disputes’ under a IIA is broad. If lack of locus standi to initiate arbitration is equated to the lack of standing to submit counterclaims once the arbitration has commenced, the efficacy of ISDS would be seriously jeopardized by the threat of contradictory decisions. Moreover, while admissible counterclaims should bear a manifest factual connection with the primary claims, a strict legal connection must not be demanded. So long as the IIA recognizes the host state’s right to take measures binding investors (for the protection of environment, human rights, et al), factually related counterclaims on these subject matters should be held to be closely connected. This approach ensures that arbitration continues to be a ‘one-stop-shop’ for adjudication of related disputes, and is not mired with fragmented decisions-making.
Nonetheless, recent trends
in arbitral awards and investment treaty drafting indicate that there is no
perceivable end to various equivocal interpretations. The debate on
counterclaims is bound to continue.
* Vishesh Sharma is a B.B.A., LL.B. (Hons.) Student at Gujarat National Law University, India
** Vishakha Choudhary is an LL.M. Candidate at Europa-Institut, Saarland University, Germany.
 Metal-Tech Ltd. v. Uzebekistan, ICSID Case No. ARB/10/3, ¶407.
 Saluka v. The Czech Republic, UNCITRAL, ¶76.
 David Aven v. Costa Rica, ICSID Case No. UNCT/15/3, ¶738-739.
 Saluka Investments BV v. Czech Republic, UNCITRAL, ¶39.
 Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. The Government of Mongolia, UNCITRAL, ¶689-694.
 Metal-Tech Ltd. v. Uzebekistan, ICSID Case No. ARB/10/3, ¶408-410.
 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, ¶1143.
 Rusoro Mining Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5, ¶623-627.
 Antoine Goetz et consorts v. République du Burundi, ICSID Case No. ARB/95/3, ¶278.
 Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Declaration.
 Saluka Investments BV v. Czech Republic, UNCITRAL, ¶76.
 Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. The Government of Mongolia, UNCITRAL, ¶695.
 Antoine Goetz et consorts v. République du Burundi, ICSID Case No. ARB/95/3, ¶285.
 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, ¶1151.
 David Aven v. Costa Rica, ICSID Case No. UNCT/15/3, ¶734-739.
 Oxus Gold v. Republic of Afghanistan, UNCITRAL, ¶948.
 Marco Gavazzi and Stefano Gavazzi v. Romania, ICSID Case No. ARB/12/25, ¶152-154.