Investment Tribunals Are Too Quick to Establish the Existence of Issue and Cause of Action Estoppel in International (Investment) Law

Alexandros-Cătălin Bakos[1]

There is no denying that there is a serious backlash against investment arbitration at the moment. The signs are everywhere: from the latest discussions occurring within UNCITRAL’s Working Group III to the more recent practice of states (see the 22 European Union Member States’ declaration concerning the termination of their intra-EU Bilateral Investment Treaties); the latest ‘battlefront’ seems to be the Energy Charter Treaty, where the investment tribunals seized of disputes on the basis of this treaty consider it immune from the effects of the Achmea decision. The causes for this backlash are manifold. For present purposes, however, I would like to focus my attention on only one of the causes: incorrect decisions. And I would like to go even further and look at a very specific example of incorrect decisions: the application of the principle of estoppel by investment tribunals. I will focus exclusively on the procedural aspect of estoppel, as a bar to a claim. This seems to be its main, although not its only (para. 831), function – at least in international investment law.

Some background information on estoppel

Generally, estoppel is a very strong mechanism which has a preclusive effect against a party contradicting itself if another party has relied (usually to the latter’s detriment) on the initial position of the former (para. 231). Essentially, the party which contradicts itself is prevented from averring the contradictory fact (the subsequent one). ‘[W]hat is relevant for estoppel is that there has been a declaration, representation, or conduct which has in fact induced reasonable reliance by a third party, which means that the State, even if only implicitly, has committed not to change its course’ (idem, para. 246). Furthermore, the element which induces reliance must be unambiguous (paras. 8.46-8.47). Other tribunals refer to the fact that representations must be ‘clear and consistent’ (for example, the Chagos Marine Protected Area Arbitration, para. 438).

In international law, the application of estoppel dates back to the days of the Permanent Court of International Justice: for example, in the Legal Status of Eastern Greenland case, Norway was precluded from asserting sovereignty over Greenland, as the former had expressly recognized the latter as part of Denmark. This form of estoppel, however, seems to heavily overlap with vaguer principles – including the principle of good faith (para. 483).

There are voices in international law which argue that estoppel as such exists in a single form in international law and not in its various iterations found in the domestic common law systems (para. 436). This view, however, is not shared by all international law practitioners. Whether due to fragmentation of international law or not, this divergence becomes obvious once one analyzes arbitral practice. One example of how arbitral tribunals have looked at estoppel in its specific iterations concerns procedural aspects. There, estoppel acts as a more specific and technical mechanism designed to prevent an already litigated claim from being pursued again (similar to res judicata, although with a few important differences which will be mentioned below). The important branches of estoppel which may preclude a claim from being relitigated are: cause of action estoppel;[2] and issue (or collateral) estoppel.[3] It is important to mention that both these doctrines ‘prevent the parties from re-litigating a question that has been determined by a Court of competent jurisdiction, between the same parties or their privies, in a previous action. Once those elements have been made out, and unless there are special circumstances, the parties are precluded from raising the issues. [footnote omitted] The special circumstances which would permit the issue to be raised again include the discovery of further material relevant to issues in the first set of proceedings [footnote omitted] or fraud’.[4] The essential difference between the two doctrines, according to Griffith and Seif, is that cause of action estoppel concerns the claim itself which is precluded, whereas issue estoppel prevents relitigation of a point of law or of fact already decided by a tribunal.[5] Wilken QC and Ghaly point out that the difference is one of specificity.[6] According to them, ‘issue estoppel bites on the facts and issues required to establish the cause of action whereas cause of action estoppel looks only at the cause of action’.[7] Sheppard equates ‘cause of action’ with ‘claim’.[8]

A very important point of difference between estoppel – in both its iterations – and res judicata is that the latter requires (at least traditionally, as Judge Anzilotti mentioned in his dissenting opinion to the Factory at Chorzów case) a three-element identity between the concerned claims (the same person, the same claim and the same legal grounds); also known as the ‘three-element test’. Moreover, estoppel extends to the privies of the relevant parties, while res judicata – if interpreted strictly – does not.[9] Without going into the details of how the three elements of res judicata have been interpreted, especially in investment arbitration (as this is another subject for another date), it can be reasonably stated that estoppel is a stronger tool (than res judicata) in the arsenal of investment tribunals which can be used to prevent abusive re-litigation. The problem, however, is that the existence of such an instrument in international law is not clearly evident and tribunals seem to have taken its existence for granted.

The problems with the investment tribunals’ application of estoppel

Although not a general principle of law,[10] some arbitral tribunals seem to have applied estoppel as such. As will be seen below, however, there is at best inconclusive evidence as to the existence of a general principle of estoppel and at worst clear attempts to disregard this non-existence and apply a principle out of nothing.

At the same time, there are arbitral tribunals which may suggest or clearly determine that estoppel is a principle of law,[11] although this is usually not explained clearly and the reasoning is incomplete. As such, one is left wondering how did the tribunal uncover such a principle and whether it really exists.

For example, the Petrobart tribunal mentioned that ‘while the doctrine of collateral estoppel seems to have primarily developed in American law, other legal systems have similar rules which in some circumstances preclude examination of an issue which could have been raised, but was not raised, in previous proceedings. A doctrine of estoppel is also recognised in public international law’ (at pp. 66-67).

The tribunal, however, was unclear whether this amounted to a principle of law or not. The fact that there exist rules which establish preclusion of issues which could have been raised but were not raised and that these rules occur outside of the American legal system, as well, does not transform estoppel into a principle of law. At the same time, the tribunal did not mention in what form is estoppel recognised in public international law. It may have suggested that this would be applied as a principle, but it stopped short of fully clarifying whether such a principle indeed exists. The alternative may have been the customary law nature of estoppel, but the tribunal neither identified the underlying state practice and opinio juris nor referred to awards/ judgements in which such a custom was established. In the end, the claim preclusion argument was anyway rejected, since – among others – there was no identity between the legal grounds relied on in the relevant proceedings (at pp. 67-68).

Another example is RSM v. Grenada. There, the tribunal explicitly endorsed collateral estoppel as a general principle of law (para. 7.1.2). The tribunal noted ‘that the doctrine of collateral estoppel is now well established as a general principle of law applicable in the international courts and tribunals such as this one. [footnote omitted] (ibid.). However, it did not come to this conclusion itself, but rather relied on other tribunals’ conclusions.[12] What is surprising after looking at the cited cases is that neither of them clearly endorses estoppel as a principle of law.

For example, the Amco v. Indonesia tribunal referred to res judicata as a principle of law (paras. 26-46). One cannot exclude the possibility of this encapsulating estoppel as well, but such a conclusion is not clear. This lack of clarity is further compounded by the fact that the Amco v. Indonesia tribunal mentioned that ‘it is by no means clear that the basic trend in international law is to accept reasoning, preliminary or incidental determinations as part of what constitutes res judicata’ (idem, para. 32). As issue/collateral estoppel necessarily implies the fact that the reasoning of an award must be considered for this mechanism to arise,[13] the finding of the Amco v. Indonesia tribunal raises serious doubts as to the conclusion that estoppel was part of the principle to which that tribunal referred.

As regards the other relevant case (Southern Pacific Railroad Co. v. United States, which arose before the Supreme Court of the United States) it is true that what the cited tribunal referred to was issue estoppel (pp. 48-49). It mentioned that a general principle existed which mandated ‘that a right, question, or fact distinctly put in issue, and directly determined by a court of competent jurisdiction as a ground of recovery cannot be disputed in a subsequent suit between the same parties or their privies, and, even if the second suit is for a different cause of action, the right, question, or fact once so determined must, as between the same parties or their privies, be taken as conclusively established so long as the judgment in the first suit remains unmodified’ (ibid.). What the tribunal does not mention, however, is whether this general principle is a general principle common to all nations or whether this was a general principle specific only to the common law system.

There are tribunals which even seem to rely on estoppel, although, in reality, they are applying res judicata. This was the case with the Marco Gavazzi and Stefano Gavazzi v. Romania tribunal (paras. 164-166). In the first place, the tribunal analyzed whether an initial decision (which was alleged to preclude the claims before the forum) had ‘conclusive effects on the Parties to the present proceedings under the doctrine of res judicata or issue estoppel’ (idem, para. 164). Subsequently, it went on to mention that ‘under international law, three conditions need to be fulfilled for a decision to have binding effect in later proceedings: namely, that in both instances, the object of the claim, the cause of action, and the parties are identical’ (idem, para. 166). Although it did expressly refer to issue estoppel at one point, the tribunal referred to the conditions which were necessary to be fulfilled in order for res judicata to operate (the three-element test, as mentioned above). Moreover, it conflated issue estoppel with cause of action estoppel. As shown earlier, identity of cause of action is only necessary in the case of cause of action estoppel and not in the case of issue estoppel.

All the above examples demonstrate that estoppel as such is not applicable in investment arbitration (by virtue of international law, at least) and that tribunals seem to ignore this. There is no general principle – as understood by Article 38 (1) (c) of the Statute of the International Court of Justice, as an authoritative reflection of the sources of international law – of estoppel. At least no principle which could cover cause of action or issue estoppel. There is no evidence of a customary rule encapsulating estoppel either.[14] Moreover, not even investment treaties seem to contain this mechanism. For example, the 2012 US Model BIT – selected for being relevant to a common law jurisdiction – does not make any reference to estoppel. Neither does one of the latest UK BITs (the UK-Colombia BIT) contain any reference to estoppel – although it does allow the tribunal to address abuse of process; however, this is different than estoppel.


[1] Editor at avocatnet.ro and Associate Expert at DAVA | Strategic Analysis. This post is based on part of my thesis, submitted for the completion of an LL. M. in Law and Economics at Utrecht University. I would like to express my gratitude to Dr. Yulia Levashova, for her continuous support and for an in-depth and comprehensive feedback. In any case, I take full responsibility for the opinions and they are exclusively mine, not reflecting anyone else’s or any other institution’s.

[2] Audley Sheppard, ‘Chapter 8. Res Judicata and Estoppel’ in Bernardo M. Cremades Sanz-Pastor and Julian D.M. Lew (eds.), Parallel State and Arbitral Procedures in International Arbitration, p. 225 (hereinafter referred to as ‘Sheppard’).

[3] Ibid.

[4] Sean Wilken QC, Karim Ghaly, The Law of Waiver, Variation and Estoppel. Third Edition (Oxford University Press 2012), para. 14.08 (hereinafter referred to as Wilken QC, Ghaly).

[5] Gavan Griffith; Isabella Seif, ‘Chapter 8: Work in Progress: Res Judicata and Issue Estoppel in Investment Arbitration’, in Neil Kaplan and Michael J. Moser (eds), Jurisdiction, Admissibility and Choice of Law in International Arbitration: Liber Amicorum Michael Pryles (Kluwer Law International 2018), p. 124 (hereinafter referred to as ‘Griffith; Seif’).

[6] Wilken QC, Ghaly, para. 14.09.

[7] Ibid..

[8] Sheppard, p. 225.

[9] Griffith; Seif, p. 126.

[10] Charles T. Kotuby Jr. and Luke A. Sobota, General Principles of Law and International Due Process. Principles and Norms Applicable in Transnational Disputes (Oxford University Press 2017), footnote 262, p. 200. Such a conclusion (that estoppel is not a general principle of law) is in accordance with one of the major views in international legal relations as to what constitutes a general principle of law: one ‘which can be derived from a comparison of the various systems of municipal law, and the extraction of such principles as appear to be shared by all, or a majority, of them [emphasis added]’, Hugh Thirlway, The Sources of International Law. Second Edition (Oxford University Press, 2019), p. 108.

[11] Stating that estoppel is a principle of law serves two aims: firstly, the tribunal justifies the application of estoppel by reference to a source of international law (usually, part of the applicable law). Secondly, this gives the tribunal legitimacy, as the tribunal grounds its decision to rely on estoppel on a widely-applicable source of law (whether objectively true or not is not as important).

[12] The cases to which the RSM tribunal referred were mentioned at page 27, footnote 34 of the award: Amco Asia Corporation v Republic of Indonesia, ICSID Case No. ARB/81/1, Decision on Jurisdiction (Resubmitted Case), 10 May 1988, para. 30; Company General of the Orinoco Case, 10 R.I.A.A. 184 (1905); and Southern Pacific Railroad Co. v. United States, 168 U.S. 1 (1897). The second tribunal quoted in turn the third one. As such, I will refer only to the first and third tribunals in the remainder of this part.

[13] Sheppard, p. 234; Griffith, Seif, p. 121.

[14] Christopher Brown, ‘A Comparative and Critical Assessment of Estoppel in International Law’, University of Miami Law Review [Vol. 50:369 1996], pp. 384-385;Pan Kaijun, ‘A Re-Examination of Estoppel in International Jurisprudence’, 16 Chinese Journal of International Law (2017), p. 761.

A Meeting of the Two Worlds: The Human Rights Regime and International Investment Law – A Critique of Urbaser v. Argentina

Priya Garg*

A plethora of cases have been filed before investment tribunals regarding the issue of interaction or conflict between human rights obligations of investor or State and his or its, as the case may be, duties under international investment law (hereinafter, IIL).[1] The recent case of Urbaser v. Argentina only joins this already long queue. Critique of the case has been made before as well on this blog and it can be accessed here. There have been several other write ups as well analysing this verdict. The present post presents a fresh analysis on certain aspects or furthers the already made analysis of this judgement.

In this case, Claimants are two Spanish shareholders in the company which secured from the Argentinean government the contract for providing water and sewage services to the country’s low-income regions. When the agreement was entered into, only a limited percentage of the Argentinean inhabitants had access to drinking water and sewage services. Therefore, the primary objective behind the agreement was to expand these services in the concerned regions. Subsequently, Argentina faced financial emergency due to which its government began imposing restrictions and conditions upon the foreign investor at hand for securing benefits for its own residents. One of them was the restraint against cutting water and sewage supply of the households which have not paid their dues to the company. This pushed the company into losses, eventually resulting into its insolvency.

Therefore, the Claimant approached the investment tribunal contending the violation by Argentina of its Spain-Argentina BIT obligations. Argentina (Respondent) defended itself by arguing that its IIL obligation did not stand breached because it had acted in the manner which its human rights obligations under its domestic as well as international law required. Additionally, it counterclaimed that the Claimant’s failure to finish in time its pipe laying and other kind of work promised under its contract with Argentina amounted to the violation of the former’s obligations under contract law and the obligations of pact sunt servanda and good faith under international law. Moreover, it argued that since this non-performance of the contractual obligations by the investor denied the Argentinean residents of their basic right to water and sanitation, therefore the Claimant’s contractual breach simultaneously resulted in its violation of its human rights obligations under international law.

It is crucial to note, as will be made clear later as to why, that under the applicable law clause of their BIT, Spain and Argentina agreed that the investment tribunal shall arrive at its decision on the basis of the BIT Agreement and, where appropriate, on the basis of the other treaties between the Parties, the host nation’s domestic law and general principles of international law (Article IX(5), Argentina-Spain BIT (1991)). Hence, the presence of this applicable law clause, which allows the application of international law principles, ultimately made the Respondent take support of its international human rights obligations to defend itself as well as to develop a counterclaim against the Claimant.

Finally, the investment tribunal identified ‘Right to Water’ as a ‘human right’ under international law. It accepted the Respondent’s defence resting on its international human right obligations to conclude that the Respondent’s conduct did not amount to the breach of its IIL obligations. It however denied that the Claimant’s non-adherence to the contractual terms of expanding water and sewage network in the Argentinean regions has amounted to violation of its human rights obligations under international law. Very interestingly, the Tribunal nevertheless went on to state that the international human rights obligations can be ‘imposed’ ‘directly’ on private corporations (i.e. non-state actors) in relation to their conduct with the residents of the host nations. It relied on conventions and international documents such as the UDHR and International Covenant on Economic, Social and Cultural Rights (ICESCR) among others to substantiate its assertion.

Firstly, this case contributes by allowing the host nation to successfully raise the defence of its international human rights obligations against the investor’s allegation of breach of the BIT obligations by the former. In earlier cases, in the similar context, such a defence was either not allowed or was not discussed or it did not influence the tribunal’s final verdict despite its acceptance as a principle.[2]

Secondly, it would be fascinating to notice that the tribunal at one place remarked that Argentina’s constitutional law obligations (which also contain its international law obligations because under the Argentinean Constitution, international law obligations override the country’s constitutional law provisions as well) will ride over its BIT obligations because the investor while undertaking its investment decision could have discovered by conducting its due diligence the existence of these prior obligations of the State of Argentina under its domestic law.[3] Making this kind of observation is also no mean feat for an investment tribunal.

This case is also significant because it stated that the international human rights obligations can be imposed directly on private corporations/investors. I begin with critiquing this stance of the investment tribunal.

Under international law, an entity can be a subject or an object of international law wherein objects are relatively more passive players than subjects. Though objects can be beneficiaries of or adherers to the international law provisions, nevertheless unlike subjects, they can neither directly bring an action nor can they be directly sued in relation to these provisions. Conventionally and as a matter of rule, States and international organisations are considered as subjects while non-state entities such as private corporations or individuals are not. On the basis of the distinction that exists between subjects and objects, obligations and rights under international law can be classified as primary/direct and secondary/indirect.  While obligations can be ‘imposed’ on objects directly, they can be ‘enforced’ only through the State governing these objects and not by directly suing the objects.

However, direct enforcement is possible by a State against the objects belonging to some another State if both of they agree upon creating a legal mechanism (such as constituting a tribunal) for this purpose. Unless this happens, direct enforcement of rights against objects is not legally correct. This is because creation of such an arrangement otherwise would undermine the States autonomy as they would then lose a share of their autonomy and power vis-à-vis their own objects if direct claims against the objects come to be permitted.

In the present case, Tribunal cited international documents and advanced other arguments based on logic[4] to state that human rights obligations such as the Right to Water can be ‘imposed’ directly on private corporations.[5] Even if this assertion and the approach behind arriving at it is considered to be correct, then also this does not ipso facto imply that such obligations can even be directly ‘enforced’ against private corporation by the host nation. As explained above, this direct ‘enforcement’ (and not mere direct ‘imposition’ of obligations) under international law against non-state actors can only happen when the concerned states have agreed to creating an international forum for such direct enforcement. Clearly and for obvious reasons, the states’ consent under their BIT to submit the disputes ‘relating to the BIT’ to the investment tribunal could not be reasonably read as their consent to vest this tribunal with the power to allow direct ‘enforcement’ of international law obligations against the ‘objects’ of international law. Hence, any attempt by the Tribunal, if undertaken at all, to directly ‘enforce’ international law obligations against the non-state actors (here, investor) would infringe upon the sovereignty of the State to which the investor belongs. Hence, this would be inappropriate under international law.

In the present case, though ultimately the Tribunal did not allow the direct ‘enforcement’ of any human right obligation[6] against the private entities and hence did not commit the error of law of the nature just highlighted above; nevertheless, its failure to clarify the difference that exists between direct ‘imposition’ and ‘enforcement’ of obligations existing under international law could lead to a misunderstood interpretation of the tribunal’s stance in this case, in future. Hence this clarification I just brought into notice becomes significant.

There were some loopholes even in the reasoning of the tribunal behind direct imposition of international law obligations on investor. The Tribunal explained that international law obligations, such as human rights obligations, can be directly imposed on investors (in addition to States) because under IIL, investors have the ‘right’ to directly obtain benefits out of the BIT provisions and that hence, it would be unjust to assert that no ‘duty’ can be directly fastened on them under the same regime.[7]

This is fallacious because under a BIT both the party nations ‘mutually’ share the rights and duties. Further, they simultaneously consent to allowing the investors of each other’s nation to carry out investment in the foreign soil on favourable terms. Hence, at very juncture itself, there is no prima facie or blatant asymmetry between the negotiating States and there is an element of consent with respect to the terms of a BIT. Infact, as a matter of fact, this is how BITs have been drafted since their inception. And it is an altogether different ‘policy’ question if we wish to make amendments in the pattern and the format of the BITs so as to impose substantive ‘obligations’ directly on private investors as well instead of imposing them only on the party nations while leaving the investors with only substantive ‘rights’ under BIT. Hence, if any country wishes to impose such direct obligations on private foreign investors they can incorporate a provision to that effect under their BITs. Resultantly, it is not in the realm of an adjudicatory body to suo moto extend the substantive law obligations to private investors when BIT is silent on this point as in the case in the present fact scenario.

Another fallacy in the tribunal’s reasoning is that it has stated its stance on several such issues relating to international human rights law regarding which serious and never-ending debates already exist. For instance, it is debatable if a) right to water is a standalone international human right, b) direct human right obligations have indeed been fastened on private corporations under different human right documents such as UDHR, ICESCR and if so, then what is the extent of such obligations, or c) the UDHR provision(s) imposing obligations on non-state actors fall under customary international law and is hence binding.

The latter point is crucial because UDHR by virtue of being a declaration and not a treaty would be otherwise not binding. Similarly, at another place, while explaining its stance that international human rights obligations can be imposed directly on private corporations, the tribunal reasoned that since as per the documents dealing with obligations of this kind human rights are for everyone, this implies that the obligation to not destroy them ought to be discharged by all, including non-state actors.[8] This kind of reasoning by the Tribunal has been termed beforehand as the ‘natural rights approach’ to understanding the human rights obligations. However the correctness of this approach is itself a matter of debate. Despite this, the tribunal did not delve into the discussion about the arguments and counter-arguments that already exist on each of these contentious matters. Instead, it only outrightly adopted one side of the argument(s) that already has been advanced in each of the debates without explaining why the other side of argument was not endorsed by it.[9] This lack of elaborate reasoning and discussion would make its analysis and verdict prone to being departed from.

Additionally, another problem in the tribunal’s reasoning is that certain portions of its judgement[10] may give an impression that it was trying to use the applicable law clause of the Spain-Argentina BIT, wherein it has been mentioned that the BIT dispute could be decided in accordance with international law provisions as well, to ‘create’ obligations for the private investor which the BIT did not even contain in the first place. This is because unlike in case of Morocco-Nigeria BIT, under the Spain-Argentina BIT, no human right obligation of any kind has been imposed on the investors.

Therefore, the phrase in the applicable law clause of the Spain-Argentina BIT allowing the use of international law provisions by the Tribunal implied that in cases of ambiguity in relation to the BIT provisions, other related areas of law such as the international law can be used to arrive at the correct interpretation by the Tribunal. Hence, the permission given under the applicable law clause to the Tribunal to resort to the international law provisions did not imply that the international law provisions can be used to create a completely new and standalone obligation without it being mentioned in the BIT.

However, I also acknowledge the concern that may exist when I state that a new human right obligation can be imposed by an investment tribunal on investor only when the obligation finds a mention in the BIT. It is that amidst the pressure to attract greater foreign investment, specifically so in case of underdeveloped and developing nations, countries can do away with insisting on incorporating such non-investment related provisions under their BIT. Nevertheless, existence of this concern does not ipso facto imply that investment tribunal begins utilizing its powers to ‘create’ human rights obligations for investors having their existence only under international law while the BIT is completely silent on this point. Therefore, this understanding of the Tribunal of the impact of the applicable law clause under the BIT allowing the reference to international law provisions requires correction.

As corollary to this concern, I have another reservation against the tribunal’s discussing in detail that if in the present case the investor had indeed violated the Argentinian residents’ human rights.[11] This was done to address the Respondent’s counterclaim that the Claimant has violated its international human rights obligations. However, it was not even required of the Tribunal to discuss the merits of this contention of the Respondent. This is because in the Spain-Argentina BIT, there is no umbrella clause. Hence, mere violation of any international human rights obligations without involving the contravention of a BIT provisions would not confer the jurisdiction on the investment tribunal to decide the issue of such contravention.

Finally, I discuss if the verdict actually marks a significant shift in the position of law under the IIL regime so far the interface between human rights and IIL obligations is concerned.

Upon reading this verdict there is likely to be a temptation to overestimate its contribution. Its selective reading is likely to make one believe that this case at least states, if not anything else as being significant, that international human rights obligations can be directly ‘imposed’ on private corporations.[12] This inference, if arrived at, would not be correct as this proposition comes alive only against a specific backdrop.

This is because first of all, in the verdict it has been explicitly stated that international human right obligations cannot be directly imposed on investors where their act does not amount to ‘destruction’ of existing human rights. Hence, ‘omission’ in stopping the ongoing destruction of human rights by someone else or taking positive steps for promotion of human rights of the host nation’s inhabitants would not attract claims of international human rights directly against investor by host nation. Therefore, where host state seeks to compel its foreign investor to perform its contractual obligation to expand water supply and sanitation network and to continue providing water supply and sanitation services to its inhabitants despite their non payment of bill by arguing that international human rights requires this, this judgement would be of no practical utility to the host nation.

Second, very interestingly, this case destroys its own contribution of stating that international law obligations can be imposed directly on corporations (i.e. non-State actors). This is because while awarding the final relief, the tribunal said that even if the investor was found to have been violating its human right obligation to provide water supply nevertheless this cannot allow the host nation to claim damages from him.[13] This is because such duty of reparation by way of damages against the investor (i.e. the aspect of the possibility of direct ‘enforcement’) does not exist under the Spain-Argentina BIT which is often the case with the BITs. Hence the practically useful aspect for the host nation of the tribunal’s stance that international human rights obligations can be directly ‘imposed’ on private corporations is only that this proposition can be used by any tribunal as a mitigating factor thereby reducing the quantum of damages that it was otherwise going to grant to private investor against the host State’s violation of its BIT obligations.

Alternatively, sometime in future this proposition may prod a host State to plead in cases of breach of international human rights obligations by private investor that the investor cannot approach the investment tribunal to claim remedy against the host State for its alleged violation of its BIT obligation. The application of the ‘clean hands doctrine’ should prevent the guilty foreign investor from seeking the tribunal’s assistance in getting its grievance resolved under BIT.

And it is only to this limited extent and for this narrow purpose, the Tribunal’s proposition imposing international human rights obligations directly on investors can be useful to the host nation.

Further, as a matter of conclusion I would also like to state given the several loopholes that exist in the approach of the tribunal in arriving at its verdict, there is uncertainty if this verdict, given all its flaws as highlighted by me in this paper, would at all be followed by investment tribunals ‘as it is’ in the future.


Priya Garg, Student at West Bengal National University of Juridical Sciences, Kolkata.


[1] Marc Jacob, International Investment Agreements and Human Rights, INEF Research Paper Series Human Rights, Corporate Responsibility and Sustainable Development, 14, 03/2010, Institute for Development and Peace (2010).

[2] Tamar Meshel, Human Rights in Investor-State Arbitration: The Human Right to Water and Beyond, 6:2 Journal of International Dispute Settlement 9-17 (2015); Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12; Compañia de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3; Biwater v. Tanzania, ICSID Case No. ARB/05/22; ICSID Case No. ARB/04/4; Técnicas Medioambientales Tecmed S.A. v. United Mexican States, ICSID Case No. ARB (AF)/00/2; Marc Jacob, supra 1, at 16 (Another example of this conservative stand can be found in the Metalclad case where the tribunal did not view the public purpose exceptions favourably. According to the conventional view, only the effect of the impugned state measure on the property rights of an investor is relevant, the purpose of the state’s actions is not relevant. Hence, State’s obligations to pay compensation for expropriation can arise irrespective of the benefits that the measure could carry for the society).

[3] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶514 & 515.

[4] See Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1193 and 1994.

[5] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1193-1205.

[6] Even if it is ‘imposed’ these obligations existing under international law directly on private companies.

[7] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1194.

[8] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1199.

[9] See Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1182-1210.

[10] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1210 (For instance, when the Tribunal remarked that international human rights law might have been resorted to by it for abstaining the investor corporation from committing the act amounting to the destruction of the existing human rights under international law).

[11] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1193-1221.

[12] E.g., Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1193-1210.

[13] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1220.

Coming out of the Closet: Third-Party Funding in International Arbitration

by Andrii Hubai*

The recent rise of third-party funding in international arbitration has opened a completely new dimension for arbitration itself. An opportunity of funding the parties of the process became a big deal breaker in many aspects that are visible at a first glance and those hidden behind the privacy clauses of funding agreements. This article is prepared in order to dive the readers into the changes of the procedural part: what circumstances change the vectors of development, who benefits from uncovering the financial facts, etc? The new figure comes into play and it is necessary to simulate possible variations of how it can influence the whole “game” of arbitration.

Introduction

Since 2012 the third-party funding (hereinafter – “TPF”) market has grown rapidly by 500%, this figure corresponds to the increase of agreements and actual investors looking for particular cases.[1] Consequently, the topic of uncovering those who sponsor this market is currently on agenda of practitioners.

The urge that drives us to discuss such issue comes from the importance of such field for the business community in general. International commercial arbitration stays on the crossroads of law and trade while providing with solutions and benefits to both. It is important to improve this legal instrument and to keep it up to date so that the end consumers (private companies with impressive turnovers) are facilitated and satisfied. Even more, the world economy depends on arbitration, the GDP of every country directly depends on how the businesses make the deals and, in case it is necessary, solve possible disagreements with the help of arbitration. With this being said, we cannot undermine the importance of a single aspect of international commercial arbitration, especially the third-party funding.

The mentioned above issue starts to be addressed more often by the European research academia and international community on various levels. Notwithstanding, it is necessary to mention following: scientific majority, in most of the cases, while observing such aspect, highlights the issue irregardless of the physical borders since international commercial arbitration presumes no borders in its essence. It is an autonomous field with its own fundamental regulatory acts (New York Convention 1958)[2] but yet very customizable and rather free from local obligations. This article will highlight the progress on different levels (countries, supranational organisations etc) but purely for informative reasons in order to underline the progress that has been done around the globe.

The research is based on the recent academic publications and statistical data from the circle of European and international academics (David Abrahams, Derric Yeoh, Edouard Bertrand, Jeniffer Trusz, Jern-Fei Ng etc.) solely on the matters of the third-party funding. For those readers, who are not fully accustomed with the basics of the international arbitration, the author recommends to refer an attention towards the books of Gaillard Emmanuel[3], Margaret Moses[4] and others. Alongside the work, particular scientific methods were used so to achieve the best result possible, among them: comparison method, historical method, statistical method, model method etc.

While drafting the practical part, the briefings of the private companies, particular cases and recent professional opinions were utilised in order to provide the readers with the insights coming from the real business world (e.g. roundtable discussions of private companies). However, elaborating on the practical part still appears as a challenge due to a high level of privacy. 

  1. The battle of transparency against the privacy

When entering into the TPF, the funder is rather not interested to be revealed due to a simple reason of confidentiality in the business world[5]. It is fair to say that the same reason was one of the triggers for creating the arbitration in general – so to avoid extra eyes glancing the disputes.

However, nowadays trend prioritises the transparency over confidentiality in the matters of international arbitration. In the Queen Mary International Arbitration Survey 2015[6] many practitioners expressed strong desire in the need of TPF being disclosed. However, the most peculiar aspect was that soft law was chosen as the way of how to implement such desire. The business, as usual, wants it to be less radical. Nevertheless, many national legislators have gone further and decided not to limit themselves only with the soft law but to envisage a mandatory clause obligating the parties to disclose the TPF in arbitration relations.

It seems rather clear that this aspect starts to be addressed more often on all the levels: (a) National, (b) Regional and (c) Institutional. In author’s opinion, such differentiation represents the best overall picture by going one layer after another with providing the notorious examples on each level.

(a) National level

Australia is considered as a forerunner in funding the arbitration by third parties. It is a big industry that was first limited to bankruptcy cases but subsequently expanded on civil matters of all kinds. One of the major cases that helped the TPF to spread and gain its power was Campbells Cash & Carry Party, Ltd. v Fostif Party Ltd.[7] that provided the funder with a wide range of control over the case itself.

The Australian High Court confirmed that funding agreement was not in abuse of local laws.  Thus, the claim of the opponent based on such ground was dismissed. The panel justified the presence of the funders and the influence over the case in various matters: appointment of own legal team, deciding on the crucial aspects concerning settlements, variations in choosing the defence tactics etc. Such case, accordingly, triggered the changes on the legislative level based on the argument of support of consumer rights.

The High Court of Australia added that any risk of over influencing the case should be precluded by the professional code of conduct, which always stands, regardless of the legislation gaps concerning the TPF. Such rules oblige the advocates to perform on behalf and in the best interest of the client.[8]

Recent legislative update coming from Singapore prescribes the requirements necessary for the TPF being revealed to the parties. It became obligatory to disclose the fact of funding together with the identity of the funder.[9] Nevertheless, the terms of the agreement may still be kept confidential.

Furthermore, there are some sanctions expected to appear when the funder constitutes non-compliance with the funding agreement in Singapore. This is done so to avoid any bias happening during the arbitration process when the other party may expect the opponent to have the financial support but be mistaken by that.

The reason for such updates lies behind the aspirations of Singapore to strengthen its position at the arbitration market in Asia[10] and to keep up with the modern trend of sponsoring arbitration, which has been already utilised by other well-known arbitration arenas (London, Hong Kong, Vienna etc).[11]

(b) Regional level

The update concerning the disclosure of TPF also came from the European Union, which is currently seeking the conclusion of FTA agreement with Vietnam and other international partners[12]. The clauses requiring the TPF to be disclosed in the arbitration proceedings have been envisaged into the mentioned above FTA agreements. Such clause prescribes to notify the tribunal of arbitrators about the fact of TPF, nature of the agreement itself and the contact details of the funder (full name, address). No other details are required.[13]

The same applies for the EU-Canada relations – the update on the free trade agreement was carried out by the partners and constituted into the Comprehensive Economic and Trade Agreement (hereinafter – CETA)[14]. While resolving the disputes in a specially created tribunals, CETA obliges third-party funders to be immediately uncovered.[15] Even more, the fact of sponsorship may be taken into account by the tribunal while deciding on allocating the security costs. The usage of such controversial method does not receive much of appreciation from the side of the author. The funders are not amused of the possibility to be engaged as a party of the process since this might oblige to pay more than the funding contract prescribes.

Nevertheless, such a tribunal is an ad hoc being exclusively created for the purposes of resolving disputes arising from the trade relations between the partners and should not be influencing the trade relations outside of its scope nor be a precedent for other cases.

(c) Institutional level[16]

The first attempts to regulate the TPF by the arbitration institution were carried out by the Association of Litigation Funders of England and Wales. Such organisation came up with the first in kind Code of Conduct for the mentioned above industry.[17] Later one the practitioners commented[18] that such Code was rather vague leaving big blanks in most important areas without being actually binding for those, arbitrating outside the institution.[19] However, the problem of obligation to follow the rules in particular jurisdiction will always stand due to shortcomings of international law. The positive influence that brings such endeavours rests in attempts rather than actual results.

The Singapore International Arbitration Centre has also released new arbitration rules that fit purely for investment arbitration. Such rules provide with explicit power for arbitrators to order the disclosure of TPF while deciding on the particular case.[20]

Additional aspect that should be touched when commenting about the institutional level is an authority of such institutions in creating the lists of trustworthy funders along with the already known lists of arbitrators. The academicians[21] elaborate on this issue as an important aspect of the overall regulation of TPF worldwide. This step may also bring in line all the requirements necessary for the funders to be achieved in order to sponsor the party of the process. It seems quite complicated for the author to imagine unified standards of compliancy for the funders across the world. However, it is a good trend towards regulating the field. To add to this, it is better to have different requirements at different institutions than to have none at all.

  1. The Client-Funder-Lawyer triangle

When the funder swirls into the arbitration, it breaks the standard lineal Client – Lawyer relationships by creating a triangle of Client – Funder – Lawyer relationships. Moreover, the funder himself stands on top of them. Depending on the funding agreement, the sponsor may exercise almost full control over the case, the so called “hands on” approach (deciding the arbitrators panel, lawyer, position of the party and forming the position up until the final order or deal with another party) or take it easy and observe the situation from the side (“hands off” approach).[22] Considering the fact that every investor cares about the income he will receive from the money invested, it is reasonable to think that most of the funders might want to influence the case at least at some manner and engage into the process their own legal team.

Edouard Bertrand, in his book underlined that the funder, in a strictly legal sense, is not a party to arbitration since one does not receive any rights or obligations. However, in an economical sense, the funder is a party due to a reason that if the opponent raises a strong defence, it will influence the defendant and the funder in a direct manner.[23] Thus, even not present at the hearings physically, he receives the same legal “punch” as a defendant.

Due to that, the funder is ought to influence both the client and the lawyer in case he wants to recover his money. The right to decide partially passes to the one who sponsors the whole process. When the client might want to agree on the deal with another party without going further, the funder might not be willing to agree with this and will try to push it forward just because such deal will not bring expected profits. Meanwhile, the lawyer, who de jure owes the duty to the client, de facto shifts such duty to the funder. This turns out in giving such advices to the client that are not necessarily in his best interest simply because the funder has decided on particular lawyer and he is his paymaster.

This triggers the ethical question that might stand on the path of the future of the TPF. However, we might argue in defence that the TPF agreement, as any other private contract, can be terminated by the request of one of the parties. Even though it seems that the funder is on a top of a “TPF triangle”, the client can go beyond that and simply break the deal by refusing the interference of the funder. However, this seems rather illogical since the main idea of TPF is to receive the money for the purpose of arbitration. Thus, both, the client and the funder have one common aim – to win the case and to recover the damages meaning that they are well aware about the rules of the game and are willing to play it. Even more, neither client nor funder will go for such extremes since they both act in a reasonable way with pursuing the same interest.

  1. Modes of disclosure

 While discussing the institutions and countries being concerned by such issue, it is worth mentioning the types of disclosure used in arbitration process. We will explore such phenomena based on distinctive feature of the amount of information that is revealed about the TPF:

(а) Full disclosure

It is a very rare case when full disclosure may occur. The principle it is based on, is giving the full information about the funder, the funding agreement and other details including price, the interest rate etc. Such approach may infringe the sanctity of the private contracts and fundamental principles of civil law. The only justification for full disclosure may be reasoned by the need of affirming the fact that arbitrator is independent while deciding particular case. It might be invoked when there is a negative and possible likelihood for the arbitration process to be terminated in the middle, or even worse – at the final stage due to dependency of the arbitrator.[24]

Nevertheless, it is possible to avoid such an extreme measure with the improvement of arbitration rules, especially on the institutional level. Jeniffer Trusz in the article “Full Disclosure? Conflicts of Interest rising from Thid-Party Funding in International Arbitration” proposed simple but yet extremely useful solution.[25] The professor offers a four-step system of rules that should be incorporated by the arbitration institutions for the mechanism of disclosure of TPF without the need of going into full disclosure.

 

(b) Partial disclosure

This form of disclosure respects the sanctity and privacy of the agreement concluded between the funder and the funded party. It requires disclosing the mere fact of the funding without going into details and informing about the terms of the agreement. One of the issues that may arise in this case is that the TPF may be nominal, meaning that the opponent may not know for what exact amount the party was funded (it can be full funding or partial). On the other side, the influence that it brings for the case may exceed any expectations in a positive manner – another party may be willing to settle the dispute without even having the knowledge about the minimum funding level.

Notwithstanding, what if the price of the funding agreement is $1 USD? The opponent and the panel will not be aware about such details since, usually, they are not revealed – only the mere fact of sponsorship is communicated to the parties of the process. Thus, the opponent may make an offer based on the knowledge that the other party is sponsored without realising that the amount of investments equals to almost nothing. This creates a negative influence on the arbitration process leaving the opponent being not well informed and because of that, the opponent might be forced to make an offer which he would not make otherwise. This issue is something fresh on the “TPF market” since it has not been discussed yet.[26] In order to eliminate this gap, the arbitration institutions might consider including the obligation to reveal the price while drafting the update of rules.

For better or for worse, TPF has conquered most major arbitration arenas leaving the practitioners and academics with the urge of proposing the way how such mechanism may be smoothly implemented into the whole architecture of arbitration.

  1. The changes: positive-negative ratio

If we consider the benefits of disclosure, many positive aspects may be mentioned. One of the most important – elimination of the possible conflict of interest between the revealed funder and other parties of the process, support of justice by providing the weaker party with an opportunity for defence, rise of economy by boosting the investment industry and, the last but not least, changing the negative approach towards the mechanism of TPF.

Australian experience shows the following: it is confirmed statistically that the cases being funded by the TPF are less likely to be reversed and are more citied in the scientific researches. The reason behind that is the funder himself, who assesses the case thoroughly with selecting the lawsuits that have prediction of winning at least of 70%.[27] It may sound as an exaggeration, but the TPF will be a story of success because it deals with successful cases in the matters of the trustful parties, reliable panel of arbitrators etc. Thus, there is no reason for the funder to hide in the shade. The presence of the investments should be considered as an indication of quality mark.

These day, it is no longer a problem to get the side funding which was previously called maintenance or champerty in common law practise and was prohibited by most of the States.[28] Such definition traces back to the medieval ages aiming against fraudulent practices of high figures intermeddling into the court procedures.[29] The justification against that was straightforward: no gambling should be done when the justice is dispensed

Thus, no medieval practices are applied any more. There are many instruments available in order to indicate the fraud rather than prohibiting the whole industry based on the “once and for all” principle. Both parties of the process are free to get the funding; the only matter is to check whether it does not influence the arbitration process in a negative manner. A good way to ensure this is to come up with an update of institutional rules, which is already on its way. Even more, the author suggests to consider the opportunity of creating the new treaty –  the New York Convention II [30]aimed to facilitate this sphere and other potential fields lacking the uniformity in regulation. Such proposal will become a new chapter and logical continuation of the original Convention.  Additionally, it as a chance to power up the positive influence over the arbitration industry while sticking to the uniformity principle.

The pro argument of proposing the New York Convention II is the interest of the states to become signatories due to purely economic reason. It may sound harsh, however it is a proven fact that majority, if not all signatory states follow the New York Convention 1958 impeccably. Even such a big player at the international arena as Russia, which at times is not willing to implement he decisions of the European Court of Human Rights[31], strictly follows the New York Convention 1958 on the matters of arbitration. The reason for that is simple – the money matter makes its influence. It is in the best interests of every state to create good conditions for arbitration in order to gain from that. Unlike, for example, the Convention on Human Rights[32] which brings to the State nothing but the economic loss.[33]

The same mechanism of “money reason” was put before and should be inserted into the fundaments of the new international treaty again. This will unify the rules on third-party funding in international commercial arbitration, and provide with the useful method of regulating the TPF industry.

What are the negative sides? While deciding, the arbitrator may put an obligation to cover the security costs by the funder, despite the mentioned already fact, that the funder is not a party of the process in a strictly legal sense. This pushes the investors to go behind the “curtain” of privacy clauses, again. Such fears have been offset by the recent cases. In Kardassopoulos v. Georgia case of 2010, it was confirmed by the arbitrators that the funder should cover no security costs[34]. However, it is quite complicated to change the overall attitude of the funders[35] just by a handful of cases. What needs to be addressed in here is the solid assurance of preventive clauses being put into arbitration rules of particular institutions confirming such approach.

The academician Derric Yeoh expresses an idea that TPF can become a slippery slope for the arbitration process due to many factors that have been mentioned already. However, it is not only the TPF that can do so, there are many potential risks arising every day in different legal fields, and not only the legal ones. Thus, much wiser move would be not to prohibit the TPF in particular parts but to create an instrument that regulates it.[36]

Meanwhile, it is obvious that positive aspects outweigh the negative ones without any doubts. Yet, the main approach in international arbitration concerning TPF was in applying the policy “Don’t ask, Don’t tell” which evidently has seen better days. This article became an opportunity to underline phenomena of third-party funding and guide the readers through the new path of more transparent arbitration process. The approach that is transparent not towards the public, but exclusively towards the parties of the process, meaning, that arbitration itself does not lose its major benefit – the privacy. It is fair to say that both parties including the arbitrators’ panel deserve to know who are the players behind the curtains, and whether they exist in general.

Overall, the main message that needs to be addressed as a closing line: TPF comes out of the closet. Third-party funding becomes public not in harm to the parties but for the benefits of the process.

Conclusions

Following the thorough research of the topic and applying various approaches so to receive the best result possible, following conclusions may be provided:

  1. The TPF is a recent trend in arbitration that becomes popular with astronomic progression. The statistical data shows the rise of interest among investors for more than 500%. This triggers the developing of new field of arbitration that is, however, lacks some primary regulation and universal approach.
  2. The countries, which are known as being world arenas for the international arbitration have already adopted the regulations concerning the TPF. This is a signal of importance of TPF and the call to the world governments to do the same.
  3. It is not only countries who update their laws, such changes have also reached out the regional and supranational organisations especially in the field of trade, for example, the trade agreements that have been highlighted (EU-Canada, EU-Vietnam) in this article give a clear understanding of importance of TPF on all the levels.
  4. International arbitration institutions that are relatively autonomous make their own effort towards updating the rules so to assist the TPF and to make it more efficient. Such institutions might become the locomotives, influencing the creation of more unified legislation for TPF.
  5. The changes of classical lineal relations “client-lawyer” in procedural part of arbitration were discussed. The entrance of the new figure into play – the funder, changes the weight system and shifts the lawyer’s duty to the person who sponsors him. Eventually this heavily influences the decisions of the party of the process who is behaving under the money influence from the funder.
  6. Additional attention was given to procedural aspect in the case where the party of the process is nominally funded so just to be called funded (e.g. the fact of the funding is existent, however the party receives only 1 US dollar). When the party receives the title of being funded, it changes the approach the opponent will take, without even realising that the funding agreement is nominal.
  7. The proposal of drafting the new international Treaty aimed towards regulating the TPF in international arbitration by example of the New York Convention 1958 was communicated. The author proposed simple but yet efficient method of assuring the implementation of such Treaty by the governments.
  8. Overall message that was distilled from the article comes as follows: “The changes make no harm to the essential value of arbitration – its privacy – but rather serve as an extra instrument in supporting the justice, if the process of sponsorship is done according to the commonly accepted standards.”

Footnotes

[1] DELANEY, J. Mistakes to avoid while approaching third-party funders. Global Arbitration Review, 2014, p..9.

[2] United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, New York.

[3] GAILLARD, E. Legal Theory of International Arbitration, Martinus  Nijhof Publishers, 2010

[4] MOSES, M. The Principles and Practice of International Commercial Arbitration, Cambridge Press, 2008

[5] Roundtable discussion: Third Party Funding in international arbitration in Europe: Part 1 – Funders’ perspectives, International Business Law Journal, 2012, p.207.

[6] See official web-site http://www.arbitration.qmul.ac.uk/research/2015/ [last accessed 8 May 2017].

[7] Campbells Cash & Carry Party, Ltd. v Fostif Party Ltd (2006) 229 ALR 58 (Australia).

[8] Singapore Legal Profession (Professional Conduct) Rules, r. 2(2)(c).

[9] See official web site of the Parliament of Singapore https://www.parliament.gov.sg/sites/default/files/Civil%20Law%20%28Amendment%29%20Bill%2038-2016.pdf [last accessed 21 May.2017].

[10] KUSHUBO, H. Third-Party Funding in International Arbitration: Regulating the Treacherous Trajectory, Asian International Arbitration Journal, 2016

[11] News channel: see the web site http://www.channelnewsasia.com/news/singapore/two-bills-passed-to-boost-singapore-s-position-as-dispute-resolu-7554516 [last accessed 21 May.2017].

[12] Ashurst web-site: Third Party Funding in International Arbitration, 2017 see electronic article https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide—third-party-funding-in-international-arbitration/ [last accessed 19 May 2017].

[13] EU-Vietnam Free Trade Agreement Article 11, p. 33. See the electronic copy: http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154210.pdf

[14] Comprehensive Economic and Trade Agreement between EU and Canada. See the text on the official web site http://trade.ec.europa.eu/doclib/docs/2014/september/tradoc_152806.pdf [last accessed 07 June 2017].

[15] Dechert’s Law Firm, Theh EU succeeds in establishing a permanent investment court in its trade treaties with Canada and Vietnam,  Legal briefing from the Dechert’s International Arbitration,  2016.

[16] Author’s commentary: by the institutional level the author implies to the international arbitration institutions that are established by private entities or governments and provide their own rules (e.g. the Arbitration Institute of the Stockholm Chamber of Commerce etc). The research would not be full without mentioning such institutions.

[17] Association of Litigation Funders of England and Wales, Code of Conduct for Litigation Funders, 2011.

[18] BLACKABY, N. & REDFERN, A. Law and Practice on International Commercial Arbitration, Sweet & Maxwell London 2004 p.34-12

[19] U.S. Chamber Institute for Legal Reform Comments on the Code of Conduct for Litigation Funders, U.S. Chamber Institute for Legal Reform 2-6, 2011.

[20] SIAC Investment Arbitration Rules 2017; and the official web-site http://www.siac.org.sg [last accessed 05 May 2017]

[21] SAHANI, V. Judging the Third-Party Funding. UCLA Law Review, 2016, p.389.

[22] BENCH, L. & SHANNON, V. Third Party Funding in International Arbitration, 2012, p. 4-12

[23] BERTRAND, E. The Brave New World of Arbitration: Third-Party Funding, ASA Bulletin, 2011 p.610.

[24] LANDI, N. The Arbitrator and the Arbitration Procedure: Third Party Funding in International Commercial Arbitration – An Overview, Austrian Yearbook of International Arbitration 85, 2012, p.96

[25] TRUSZ, J. Full Disclosure? Conflicts of Interest Arising from Third-Party Funding in International Arbitration, 2013, p.1661-1673.

[26] Such comment is made based on the best knowledge of the author/

[27] ABRAHAMAS, D. & CHIEN. D, A Market of Justice: A First Empirical Look at The Third Party Litigation Funding, 15(4) J.Bus. L. 1075, 2014, p.1105-1106.

[28] REDERN, A. & HUNTER, M. International Commercial Arbitration, Thomson Sweet & Maxwell 2004, p.10-17

[29] JERN-FEI, N. The Roles of the Doctrines of Champerty and Maintenance in Arbitration, Essex Court Chambers, 2010.

[30] In this matter the author refers to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 as a great example of unified regulation of international commercial arbitration across the world.

[31] News article: Russian Federation: Constitutional Court Allows Country to Ignore ECHR Rulings, Library of Congress 18.05.2016 see the official web site http://www.loc.gov/law/foreign-news/article/russian-federation-constitutional-court-allows-country-to-ignore-echr-rulings/ [ last accessed 09 June 2017].

[32] The Convention for the Protection of Human Rights and Fundamental Freedoms, 4.11.1950, Rome.

[33] Author’s commentary: by highlighting this aspect, the author does not, in any matter, tries to undermine the importance of the European Court of Human Rights or deprive the importance of fundamental rights. This comment rather serves as a message to the society on nowadays disbalance in various rights and how different the approaches of governments to different corpus of rights. The same situation is applied not only to the Russian Federation but also to Ukraine and other European States.

[34] Kardassapoulos case, ICISD Case Nos. ARB/05/18, ARB/07/15.

[35] KIRTLEY, W. & WIETRZYKOWSKI, K. Should an Arbitral Tribunal Order Security for Costs When Impecunious Claimant Is Relying Upon Third-Party Funding, Journal of International Arbitration, 2013, p.17-30

[36] YEOH, D. Third Party Funding in International Arbitration: A Slippery Slope or Levelling the Playing Field? Journal of International Arbitration 33, no.1, 2016, p.115-122.


* Andrii Hubai, Vilnius University, Law Faculty, LL.M student in International and European Union Law; email: andrii.hubai@gmail.com

The Concept of Arbitrability of Arbitration Agreements in India

by Harshal Morwale*

“Arbitration is the grease that helps economies flow and brings us benefits around the world.”

David W. Rivkin[1]

  1. Introduction

Arbitration is a dynamic dispute resolution technique. An arbitrator’s powers normally derive from the arbitration agreement. With increasing number of cross border transactions and international trade contracts, the arbitrability of arbitration agreements holds a prominent place in the resolution of international and domestic arbitrations.

  1. Effect given to an arbitration agreement by court

Traditionally, the parties move to court when the dispute relating to an arbitration agreement arises. So the question that needs to be dealt with is how does a court give effect to an arbitration agreement? It can be dealt in parts.

  • Where one party wants to institute arbitration and another one is uncooperative, court may pass order compelling arbitration.
  • Where litigation is initiated over a claim falling within the scope of arbitration agreement, court may dismiss the suit on grounds of lack of jurisdiction.
  • Depending on the law of the seat, the Court may even have powers to support the arbitral tribunal – witnesses, documents, opinions.[2]

However, question is when can parties approach court even in presence of an arbitration agreement? In other words, what makes a dispute non-arbitrable?

  1. The Golden Rule

The Golden Rule is that if the dispute is covered by an Arbitration agreement, the said dispute should be resolved by Arbitration. Ordinarily every civil or commercial dispute whether based on contract or otherwise which is capable of being decided by a civil court is in principle capable of being adjudicated upon and resolved by arbitration subject to the dispute being governed by the arbitration agreement.[3] However, there are exceptions to this Rule. There are several scenarios and circumstances, which might render the dispute non-arbitrable.

  1. Arbitrability

Arbitrability can be found in UNCITRAL Model Law, which permits the courts of the seat to set aside an arbitral awards on the grounds that the subject matter of the dispute is not capable of resolution by arbitration under the law of the State.[4] The term arbitrability has different meanings in different contexts. The three facets of arbitrability, relating to the jurisdiction of the arbitral tribunal, are as under: [5]

  • Whether the disputes are capable of adjudication and settlement by arbitration?

That is, whether the disputes, having regard to their nature, could be resolved by a private forum chosen by the parties (the arbitral tribunal) or whether they would exclusively fall within the domain of public fora (courts).[6]

  • Whether the disputes are covered by the arbitration agreement?

That is, whether the disputes are enumerated or described in the arbitration agreement as matters to be decided by arbitration or whether the disputes fall under the excepted matters excluded from the purview of the arbitration agreement.[7]

  • Whether the parties have referred the disputes to arbitration?

That is, whether the disputes fall under the scope of the submission to the arbitral tribunal, or whether they do not arise out of the statement of claim and the counter claim filed before the arbitral tribunal.[8]

  1. Drawing a line

While deciding the issue of arbitrability courts are required to draw a line between arbitrable and non-arbitrable disputes on the basis of two different policy objectives:

  • Ensuring that sensitive matters of public interest are debated and resolved before national courts, and
  • Promoting arbitration as a vibrant system of dispute resolution for parties who freely chose to arbitrate rather than litigate their differences.[9]

While the first two procedural requirements must be satisfied at the beginning of an arbitral proceeding, the issue of the subject-matter arbitrability can arise when it comes to the recognition and enforcement of a foreign arbitral award.[10]

Number of pronouncements have been rendered laying down the scope of judicial intervention, in cases where there is an arbitration clause, with clear and unambiguous message that in such an event judicial intervention would be very limited and minimal. However, the Arbitration Act, 1996 contains provisions for challenging the arbitral awards. These provisions are Section 34 and Section 48 of the Act. Section 34(2)(b) and Section 48(2) of the Act, inter alia, provide that an arbitral award may be set aside if the Court finds that the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force. Even when such a provision is interpreted, what is to be shown is that there is a law which makes subject matter of a dispute incapable of settlement by arbitration.[11]

  1. Which law makes a dispute non-arbitrable?

The Courts have held that certain kinds of disputes may not be capable of adjudication through the means of arbitration. Disputes like criminal offences of a public nature, disputes arising out of illegal agreements and disputes relating to status, such as divorce, cannot be referred to arbitration.[12]

  • The well recognized examples of non-arbitrable disputes are :
    • Disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
    • Matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody
    • Guardianship matters
    • Insolvency and winding up matters
    • Testamentary matters (grant of probate, letters of administration and succession certificate)[13]
    • Eviction or tenancy matters governed by special statutes[14]
    • Mortgage[15]
    • Cases arising out of Trust Deed and the Trust Act[16]
    • Patent, trademarks and copyright
    • Anti-trust/competition laws
    • Bribery
    • Fraud[17]

 

  • Would mere allegation of fraud make Commercial Dispute Non-Arbitrable?

More recently, commentators and courts have taken the position that a mere allegation of illegality should not relieve a tribunal of jurisdiction to determine the dispute, including the question of illegality.[18]

Courts are of the opinion that mere allegation of fraud simplicitor may not be a ground to nullify the effect of arbitration agreement between the parties. It is only in those cases where the Court, while dealing with Section 8 of the Act[19], finds that there are very serious allegations of fraud which make a virtual case of criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by civil court on the appreciation of the voluminous evidence that needs to be produced, the Court can sidetrack the agreement by dismissing application under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration clause or the validity of the arbitration clause itself.

The reverse position thereof would be that where there are simple allegations of fraud touching upon the internal affairs of the party inter se and it has no implication in the public domain, the arbitration clause need not be avoided and the parties can be relegated to arbitration. While dealing with such an issue in an application under Section 8 of the Act[20], the focus of the Court has to be on the question as to whether jurisdiction of the Court has been ousted instead of focusing on the issue as to whether the Court has jurisdiction or not. It has to be kept in mind that insofar as the statutory scheme of the Act is concerned, it does not specifically exclude any category of cases as non-arbitrable. Such categories of non-arbitrable subjects are carved out by the Courts, keeping in mind the principle of common law that certain disputes which are of public nature, etc. are not capable of adjudication and settlement by arbitration and for resolution of such disputes, Courts, i.e. public for a, are better suited than a private forum of arbitration.

Therefore, the inquiry of the Court, while dealing with an application under Section 8 of the Act[21], should be on the aforesaid aspect, viz. whether the nature of dispute is such that it cannot be referred to arbitration, even if there is an arbitration agreement between the parties. When the case of fraud is set up by one of the parties and on that basis that party wants to wriggle out of that arbitration agreement, a strict and meticulous inquiry into the allegations of fraud is needed and only when the Court is satisfied that the allegations are of serious and complicated nature that it would be more appropriate for the Court to deal with the subject matter rather than relegating the parties to arbitration, then alone such an application under Section 8 should be rejected.[22]

  1. Whether Arbitrator can decide not arbitrable dispute?

If a non-arbitrable dispute is referred to an Arbitrator and even if an issue is framed by the Arbitrator in relation to such a dispute, there cannot be a presumption or a conclusion to the effect that the parties had agreed to refer the issue to the Arbitrator. There was a case where the respondent authorities had raised an objection relating to the arbitrability of the aforestated issue before the Arbitrator and yet the Arbitrator had rendered his decision on the said excepted dispute. In the opinion of courts, the Arbitrator could not have decided the said excepted dispute. Court, therefore, held that it was not open to the Arbitrator to decide the issues, which were not arbitrable, and the award was quashed.[23]

  1. Changing Scenario

Scenario on global level is changing. Increasingly, disputes involving antitrust laws, which were formerly considered inappropriate for arbitration, are being arbitrated. Securities issues are also arbitrable, at least in the United States.[24]

There has been seen the growing acceptance of arbitration, at least in the international sphere, public policy limits to arbitrability are gradually disappearing. Arbitrators now adjudicate disputes involving such public matters as intellectual property rights, antitrust and competition, securities laws, bankruptcy, corporate law, taxation, and allegations of fraud, corruption or bribery. [25]

  • Arbitration of competition law

Being regulatory law, it is foremost related to the governmental apparatus of supervision over market practices purporting to prevent and/or sanction abusive actions in the forms of antitrust agreements and abuse of dominant position, in broad terms. Hence, competition law is primarily enforceable by designated regulatory bodies. [26]

  • In spite of that, both doctrine and case law confirm that competition law may be subject to private enforcement. US Supreme Court opined that where the Court confirmed that obligations arising out of statutory rules would be arbitrable to the same extent as contractual duties.[27] This constitutes private enforcement of competition law since private claims are allowed to seek sanctions for breaches of statutory competition rules (though private enforcement may lead only to a single remedy – compensation)
  • Spanish Court of Appeals also recently ruled on the arbitrability of competititon law. The Court concluded that the EU law or Spanish law does not preclude the arbitrability of the competition disputes as long as the relevant award applied the mandatory competition rules. Therefore, competition law claims are considered to be at free disposition of the parties.[28]
  • Arbitration of Copyright disputes

The Canadian Supreme Court opined that – In order to determine whether questions relating to ownership of copyright fall outside arbitral jurisdiction, we must more clearly define the concept of public order in the context of arbitration, where it may arise in a number of forms, as it does here, for instance, in respect of circumscribing the jurisdiction ratione materiae of the arbitration. Thus a matter may be excluded from the field covered by arbitration because it is by nature a matter of public order. The concept also applies in order to define and, on occasion, restrict the scope of legal action that may be undertaken by individuals, or of contractual liberty. The variable, shifting or developing nature of the concept of public order sometimes makes it extremely difficult to arrive at a precise or exhaustive definition of what it covers.

The development and application of the concept of public order allows for a considerable amount of judicial discretion in defining the fundamental values and principles of a legal system. In interpreting and applying this concept in the realm of consensual arbitration, we must therefore have regard to the legislative policy that accepts this form of dispute resolution and even seeks to promote its expansion. For that reason, in order to preserve decision‑making autonomy within the arbitration system, it is important that we avoid extensive application of the concept by the courts. Such wide reliance on public order in the realm of arbitration would jeopardize that autonomy, contrary to the clear legislative approach and the judicial policy based on it.[29]

In these recent matters, even Bombay High Court opined that it is possible to lose sight of the fact that in trademark and copyright disputes, we very often are confronted with written agreements. In copyright matters, agreements are in fact a statutory requirement for an assignment. There must be a written document. The law does not say that the written document of assignment should have an arbitration clause. [30]

To quote Hon’ble G.S. Justice Patel –

What Mr. Dhond (counsel for plaintiff) suggests, in effect, is that in every one of these cases, all these arbitration clauses must be treated as entirely null, void and otiose. No law that I am aware of even remotely suggests anything of the kind. I think it would do a very great violence not only to the language but to the purpose and ambit of the Arbitration Act as also the Copyright Act, if I would have to read it in the manner Mr. Dhond suggests. I find Mr. Dhond’s protests, to the effect that the view I am inclined to take would turn the entire edifice of intellectual property law on its head, needlessly alarmist. It will do nothing of the kind. On the contrary, I believe an acceptance of Mr. Dhond’s view must result in widespread confusion and mayhem in commercial transactions. We often have complex commercial documents and transactions that routinely deal with intellectual property rights of various descriptions as part of the overall transaction. This can be said of mergers, acquisitions, joint ventures, the setting up of special purpose vehicles, technology transfer and sharing agreements, technical tie-ups, licensing and so on. The range of fields of human activity that could possibly be covered by any one or more of these is limited by nothing but our own imagination: steel manufacturing, setting up of power plants, software, motor car manufacture, computer hardware, music, films, books and literature, performances and even services. If Mr. Dhond is correct, then in any of these cases, where intellectual property rights are transferred or, for that matter, in any way dealt with, no dispute arising from any such agreement or transactional document could ever be referred to arbitration, and every single arbitration clause in any such document would actually, in his formulation of it, be void and non-est ab initio. It would have to be so — Sukanya Holdings[31] will not allow a dispute relating to intellectual property rights to be segregated from other disputes. I do not think the world of domestic and international commerce is prepared for the apocalyptic legal thermonuclear devastation that will follow an acceptance of Mr. Dhond’s submission.[32]

Therefore, it is safe to say that intellectual property dispute or at least copyrights disputes are arbitrable.

  1. Conclusion

Arbitration offers significant advantages for the resolution of many disputes. An arbitrator’s powers normally derive from the arbitration agreement. In general, arbitration is not part of the state’s judicial system, although the state sometimes assigns powers or functions directly to arbitrators. Nonetheless, arbitration is still, in a broader sense, a part of the dispute resolution system the legitimacy of which is fully recognized by the legislative authorities.

The law establishes a mechanism for overseeing arbitral activity that is intended to preserve certain values that are considered fundamental in a legal system, despite the freedom that the parties are given in determining the methods of resolution of their disputes

Today, on global level most of the disputes are considered arbitrable. Therefore, initially while negotiating national or international arbitration agreements it is necessary to look at national laws and present issues with their arbitrability. It cannot be emphasized enough that effective planning is very important in arbitration.

In cutting edge environment of international commercial arbitration, if India has to emerge as a global hub for arbitration, national law and international law has a wide role to play.


* Harshal Morwale, Final Year, B.A. LL.B. (5 Years), SNG Law College, Akola.


Endnotes

[1] David W. Rivkin (Former President at the International Bar Association) (Quiet Triumph : How Arbitration Changed The World)

[2] ‘How does a Court give effect to arbitration agreements? ‘ (Law Web) <http://www.lawweb.in/2017/09/how-does-court-give-effect-to.html> accessed 20 September 2017

[3] Hindustan Petroleum Corporation Ltd v Kamalkant Automobiles , 2017 (123) ALR 369 [High Court of Allahabad]

[4] Section 34.2. – UNCITRAL Model Law, 1985

[5] Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd, (2011) 5 SCC 532 [Supreme Court of India]

[6] Ibid

[7] Ibid

[8] Ibid

[9] L. Yves Fortier, ‘Arbitrability of Disputes’ [2005] International Law, Commerce and Dispute Resolution, 269-284

[10] Luljeta Plakolli-Kasumi, ‘The Notion of “Ordre Public”: Arbitrability of Patent Law Disputes’ [2015] 1(1) Journal of Alternative Dispute Resolution in Kosovo, 12-24

[11] A Ayyasamy Vs A Paramasivam & Ors, AIR 2016 SC 4675 [Supreme Court of India]

[12] Ibid

[13] 6.1.1 – 6.1.5 Supra note 5

[14] Supra note 5 – Where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

[15] Supra note 5  – Under the Arbitration and Conciliation Act, 1996 only parties to the arbitration agreement can refer their disputes to arbitration (being a right in personam). Since the rights of a third party may be affected in a mortgage suit (being a right in rem), such an action cannot be referred to arbitration under the Act.

[16] Shri Vimal Kishor Shah Vs Jayesh Dinesh Shah & Ors, (2016) 8 SCC 788, [Supreme Court of India]

[17]6.1.9 – 6.1.12 –  O.P. Malhotra on ‘The Law & Practice of Arbitration and Conciliation’, (3rd edn)

[18] Margaret L. Moses, The Principles and Practice of International Commercial Arbitration (3rd edn, Cambridge University Press 2017) pg. 35

[19] Section 8 – Power to refer parties to arbitration where there is an arbitration agreement – THE ARBITRATION AND CONCILIATION ACT, 1996

[20] Ibid

[21] Ibid

[22] Supra note 11

[23] M/S Harsha Constructions v Union of India (2014) 9 SCC 246 [Supreme Court of India]

[24] Supra Note 18

[25] Ibid

[26] Deyan Draguiev, ‘Arbitrability of Competition Law Issues Reinforced‘, Kluwer Arbitration Blog, January 10 2014,

[27] Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) [Supreme Court of United States]

[28] Camimalaga S.A.U. v. DAF Vehículos Industriales S.A.U., Audiencia Provincial [2013] Appeal no. 66/2013

[29] Desputeaux v. Éditions Chouett,  [2003] 1 S.C.R. 178, [Supreme Court of Canada]

[30] Eros International Media Limited v. Telemax Links India, 2016 SCC OnLine Bom 2179, [High Court of Bombay]

[31] Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya (2003) 5 SCC 531) [Supreme Court of India]

[32] Supra note 30

The Case Against the Corruption Defense

José María de la Jara*[1] and Eduardo Iñiguez*[2]

 

In 1989, high-profile executives from Dubai met with Daniel Arap Moi, former President of Kenya, to seek his approval for the construction of duty free complexes at the Nairobi and Mombasa International Airports.

At the beginning of the meeting, an executive from the investor, World Duty Free (WDF), left a brown briefcase containing US$ 500,000.00 in cash by the wall. When the gathering was over, the cash had been replaced with fresh corn … and the project had been approved.

A few years later, WDF began an investment arbitration claiming the Kenyan Government had breached their agreement. During the process, the investor alleged the payment was a gift required by protocol. This was seized by the Republic of Kenya, which argued that bribing was illegal and that the investor’s conduct should not be protected. Upon that, the tribunal held that “corruption is contrary to international public policy of most, if not all states or, to use another formula, to transnational public policy” and consequently declared the claim inadmissible. This is known as the “Corruption Defense”.

First recognized in ICC Case No. 1110 in 1963, the Corruption Defense has been used by states when the contract that gives place to the arbitration was obtained by corrupted means.

The acceptance of this strategy has typically resulted in the refusal to hear the merits of the claim, even where the corruption also involved the state , given place to the tribunal declining its jurisdiction (e.g. Inceysa Vallisoleta v. Republic of El Salvador) or considering the claim inadmissible (e.g. Phoenix Action v. The Czech Republic).

Arbitration practitioners have recognized the attribution asymmetry derived from the Corruption Defense, leading to a one-sided result where states that took part on the corrupt act could profit from their own illicit conduct. However, tribunals have not yet come to a different solution different than sharing arbitration costs.

In our view, exaggerated reliance on the Corruption Defense might actually end up increasing the net levels of illegal acts in host states. Hence, in this article we propose three steps to analyze whether such strategy should be accepted by tribunals. This guide will help states on their evaluation of the contingencies of the Corruption Defense, as well as innocent, gullible or equally-guilty investors that want to fight against that strategy.

  • Is the state contradicting itself?

Since host states are typically defendants in investment arbitration, it is them who have historically brought out the defenses based on the investors’ “unclean hands”.

From that point of view, states should bear in mind that some tribunals have required a high-standard of proof for corruption.

For example, in Bin Hammam v. FIFA, Mr. Hammam, a candidate for FIFA President was present in a meeting with Mr. Warner and several delegates who would decide on his candidacy. Immediately after Mr. Hammam left the room, Mr. Warner announced there were “gifts” for the delegates, which were actually envelopes containing US$ 40,000 in cash. Even though the tribunal determined “it is more likely than not that Mr. Bin Hammam gave the money”, it held that other scenarios could not be excluded, such as the money being given to Mr. Warner “as a token of appreciation for setting up the meeting” or “that there was another source of money”.

If the state provides evidence that could to fulfill this high standard, investors could argue that a Corruption Defense contradicts the host state’s previous acts. This is known as the Doctrine of Estoppel.

In sum, such doctrine posits that no one should take advantage of its own previous acts. In Saltman words, “[i]t is intended to afford protection against injustice and fraud to an injured party by denying another party the right to repudiate any acts, admissions of representations which have been relied on by the injured party to its detriment”.

As discussed by Reeder, international investment tribunals have already applied the Estoppel Doctrine. For example, in Fraport, the tribunal recognized that: “[p]rinciples of fairness should require a tribunal to hold a government estopped from raising violations of its own law as a jurisdictional defense when it knowingly overlooked them and endorsed an investment which was not in compliance with its law”.

In our view, the Doctrine of Estoppel could be used to fight against the Corruption Defense, as the state’s request for arbitration relies on a corrupt procurement of the contract, where the state also participated.

In order to establish a contradiction, the investor would need to prove that the contract was concluded between the host state and a private party by corrupted means. In contrast, bribery between private parties, as in ICC Case No. 1110, will not help investors on fighting against the Corruption Defense.

Once the corrupt act by the state is identified and proven (first act), the state should be banned from using its own corruption as a defense against the investor’s claim (contradiction).

Under this framework, the Republic of Kenya’s use of the Corruption Defense should not have been accepted, as it acknowledged to have received a bribery.

  • Is the state responsible?

A possible barrier for the application of the Estoppel Doctrine is whether the conduct of a specific official or government organization can be extended and considered as the state’s responsibility.

According to Pitou, even when US courts will generally not estop agents who have acted without actual authority, several of them are likely to construe a government employee’s authority, so the estoppel can proceed.

International investment arbitration tribunals also follow such a position. For example, the tribunal in SGS v. The Republic of Paraguay held that the conduct of host state officials remains attributable to the state. Furthermore, in the Waguih case, the tribunal stated that the conduct of any state organ shall be considered an act of the state, even there when it exceeds the authority of that organ.

Therefore, in a situation where the President of a state itself is the one who incurs in the corruption acts (like in the Kenyan case), such behavior should be considered as an act of the state.

Also, host states should take into account that their strategic position would be dramatically hampered if the investor provides evidence that they did not do anything to investigate nor prosecute the corrupt acts that are now being used as defense. After all, how could a state benefit from its own behavior if nothing has been done to remedy it?

As stated by Raouf, “if a host State takes no action in order to investigate or prosecute the corrupt acts of its own officials, it should have a consequence upon its right to rely corruption as a defense”.

As a result, states that want to rely on the Corruption Defense should be demanded to prove that they have done everything on their power to investigate and sanction the illegal conduct.

Furthermore, admitting the corruption acts and doing nothing about them (not now nor before) could be considered as ex post knowledge or ratification of those, as in Ionnis Kardassopoulos v Georgia. As Kulkarni concludes, “lack of genuine interest in combating corruption may be inferred and lend credence to an estoppel claim”.

  • Is the investor responsible?

Even if the aforementioned steps are applied, investment tribunals will still be cautious to deny the Corruption Defense, as it could mean favoring the investor on the merits, even when the contract that gave place to arbitration involved illicit acts.

Consequently, investors fighting against a Corruption Defense should prove the gravity of each party’s contribution to the illegal behavior. In order to do that, as suggested by Kulkarni, they might consider presenting evidence of (i) who began the corrupt behavior, (ii) the amount paid, (iii) the involvement of the state and (iv) to what extent the conduct was only incidental.

Also, as stated by Davies, an investor should make reasonable efforts to monitor, supervise and punish its employees and co-operate with law enforcement authorities. He must be able to prove that he has taken measures to prevent and, given the case, correct any possible corruption acts.

Specially, an investor must take in consideration what the International community has called “red flags”, which are indicators of ethical and/or reputational risks that could possibly be a sign of corruption.  The following are some of red flags identifies by the he Woolf Committee:

  • An investor lacks experience in the sector and still gets the contract/project;
  • No significant business presence of the company within the country;
  • An investor request ‘urgent’ payments or unusually high commissions;
  • An investor requests payments be paid in cash, to be paid in a third country, to a numbered bank account, or to some other person or entity; and/or
  • An investor has a close personal/professional relationship to the government.

Based on that, investors should prepare their defense taking into account whether any of its employees incurred in a behavior tagged as a “red flag” and, if so, which measures were taken to punish such conduct and mitigate its impact.

Final remarks

Freeing states from their responsibilities and denying investors’ access to arbitration where both might be responsible is an asymmetrical solution, especially if states know from the outset that they will be defendants and thus will be the only ones allowed to use the Corruption Defense. As identified by Rojas, this encourages states to take less precaution against illegal behavior, as they could ultimately rely on the Corruption Defense. Moreover, Reeder warns that states could immunize themselves against arbitral judgments by preparing a Corruption Defense in advance, avoiding liability even for willfully violating an investment treaty.

Corruption is no doubt despicable. However, arbitrators that “close their eyes” when faced with corruption allegations and deny their jurisdiction are not the answer to such illegal practices. As Kreindler explains, determining illegality is both the business and the duty of arbitrators. In our view, this would result in great disclosures with respect to corruption, as both parties would be incentivized to litigate the attribution of the illegal act, resulting in potential benefits for global anti-corruption efforts.

In conclusion, states and investors should both respond for their acts, in proportion to their fault. After all, it takes two to tango.

[1]  Associate at Bullard Falla Ezcurra +. Executive Director at PsychoLAWgy.

[2]  Intern at Bullard Falla Ezcurra +.

The authors would like to thank Matt Reeder for his contribution to this work.

The continued lack of adequate investment protection in Europe

Nikos Lavranos, Secretary General, EFILA

Recently, the UNCTAD Investment Division announced that it had “completed its regular semi-annual update of the Investment Dispute Settlement Navigator, which is now up-to-date as of 1 January 2017”.

The Navigator is a useful web-based search tool containing information regarding pending and closed investor-State disputes based on the thousands of investment treaties.

According to UNCTAD, the key findings of this update are as follows:

“In 2016, investors initiated 62 known ISDS cases pursuant to international investment agreements (IIAs). This number is lower than in the preceding year (74 cases in 2015), but higher than the 10-year average of 49 cases (2006-2015).

The new ISDS cases were brought against a total of 41 countries. With four cases each, Colombia, India and Spain were the most frequent respondents in 2016.

Developed-country investors brought most of the 62 known cases. Dutch and United States investors initiated the highest number of cases with 10 cases each, followed by investors from the United Kingdom with 7 cases.

About two thirds of investment arbitrations in 2016 were brought under bilateral investment treaties (BITs), most of them dating back to the 1980s and 1990s. The remaining cases were based on treaties with investment provisions (TIPs).

The most frequently invoked IIAs in 2016 were the Energy Charter Treaty (with 10 cases), NAFTA and the Russian Federation-Ukraine BIT (three cases each).

The total number of publicly known arbitrations against host countries has reached 767.”

Some of these above key findings are of particular interest and should be put into a broader perspective.

First, it is interesting to note that the number of new ISDS cases has fallen. This is a trend that can also be seen for example in the ICSID statistics, which show that the number of ICSID cases has been falling as well (in 2015 52 new cases were registered, while in 2016 48 new cases were registered).

UNCTAD does not give any explanation as to the possible reasons for the fall in cases. One could of course think of several reasons: the States have improved their behaviour vis-à-vis foreign investors or investors consider the use of investment treaty arbitration as a less attractive option for dispute resolution and instead prefer to use other options. In this context, it is interesting to note that according to the same UNCTAD Navigator, States continue to win more cases (36.4%) than investors (26.7%), while 24.4% of the cases are settled. Investors/Claimants could perceive this as not such an attractive option to resolve a dispute with a State, in particular in conjunction with the high costs associated with the proceedings.

Second, it is noticeable that the Energy Charter Treaty (ECT) is the most frequently invoked investment treaty in 2016. This has been a trend of the past years with the explosion of disputes in the renewable energy sector, mainly against Spain but also against several other European States. Moreover, in the past 3 months it has been reported that investment arbitration proceedings – not only based on the ECT – have been initiated against Italy, Croatia, Bosnia-Herzegovina, Latvia, Greece and Serbia.

This suggests that European States have a poor track record when it comes to the protection of foreign investors and their investments. Again, one wonders what the reasons are for the fact that the ECT is so popular and why European States face some many disputes. Whatever the reasons may be, the fact that the ECT and BITs are used so frequently against European States underlines the continued lack of adequate investment protection in Europe, which in turn confirms the necessity of investment treaties.

In fact, the World Rule of Law index 2016 indicates very clearly the stark differences among European States regarding their Rule of Law track record. This index ranks Denmark (1), Norway (2), Finland (3), Sweden (4), Netherlands (5), Austria (6), Czech Republic (17), France (21), Spain (24), Romania (32), Italy (35) and Bulgaria (53) out of 113 countries.

The Corruption Transparency index 2016 of Transparency International ranks Denmark (1), Finland (3), Sweden (4), Switzerland (5), Norway (6), Netherlands (8), Germany (10), Poland (29), Lithuania (38) Czech Republic (47), Croatia (55), Romania (57), Italy (60), Greece (69) out of 176 countries.

The Doing Business Report 2017 ranks Denmark (3), Norway (6), UK (7), Sweden (9), Finland (13), Germany (17), Lithuania (21), Bulgaria (39) and Malta (76) out of 190 countries.

Obviously, these rankings have their limitations and must be treated with caution but the emerging general picture is nonetheless very clear. The “Nordic” European countries simply have a better track record than the “Southern” and “Eastern” European countries. In other words, they not only treat foreign investors better but they also have less perceived corruption and less red tape for doing business.

It is about time that this reality is generally accepted also in the European institutions living in the “Schuman bubble”.

These obvious conclusion from this is that – contrary to UNCTAD’s and European Commission’s repeated call for “reforming” the current system by inter alia also terminating investment treaties – all efforts should be focused on improving the Rule of Law track record in those European countries which clearly show deficiencies.

However, in the past decades little progress has been made and there is no reason to believe that things will improve very soon. Consequently, in these circumstance investment treaties are still very much needed – in particular in Europe.

 

Call for Contributions: EFILA Blog

Given the present debate surrounding the investment and EU law community (enhanced by the Brexit, the TTIP or CETA negotiations), the EFILA Blog editorial board believes that a veritable dialogue must take place, allowing all arguments to be heard and all diverging positions to be defended.

Therefore, The EFILA Blog editorial board welcomes any contribution that pertains to the field of of international (investment) law and arbitration, EU law and public policy, as well as the dynamics of these multiple legal, political and economic spheres.

If you are interested in submitting any material to the EFILA Blog, please contact our Managing Editor, Horia Ciurtin, at the following e-mail address: h.ciurtin@efila.org

 

Is Third Party Funding a Relevant “Investment” for the Purposes of a IIA Protection?

by Duarte G. Henriques, BCH Advocados*

During a meeting on the occasion of the last ICCA Congress in Mauritius, someone asked whether a Third Party Funding is considered an “investment” for the purposes of protection afforded by international investment agreements (“IIAs”) and investor state dispute settlement (“ISDS”). Contrary to my first reaction—“no, TPF is not protected”—the question is not so easy to address and might not have one single answer.

Although related, this question is different from a similar issue, which has generated lively debates around the recoverability of costs and other expenditure incurred by a funded party through a funding structure. At least in one case the tribunal did not award the costs of the arbitration to the prevailing party because it had been funded by a funder, the latter having no contractual right vis-à-vis the claimants for reimbursement of the arbitration costs (see Quasar de Valores v. Russia). Nevertheless, the trend in investment arbitral tribunals is to award costs to the funded party even if those costs have been funded by a third party (see inter alia others Kardassopoulos v. Georgia).

Let us recall what TPF is. Broadly speaking—and thinking of the most common business model (or financial structure)—a third party funding may be encapsulated in the following idea: an entity external to a dispute provides to a party in dispute a non-recourse funding for the latter to pursue a claim, against a retribution consisting of a share over the proceeds. Applied to the “investment arbitration” setting, this means that an investor is funded by a third party to pursue its claim against the host State, and the third party funder will pay all the costs of the arbitration (legal fees, arbitration costs, experts, and the like) and receive in return a share calculated upon the proceeds. If the claim does not prevail, the funder’s “investment” will not be repaid.

However, according to almost every investment protection treaty, a claim against a host State must meet some requirements related to jurisdiction and admissibility. I will not elaborate much on this and will limit myself to some brief considerations. Of course one may ask whether or not a TPF “investment” meets all the requirements of some tests that are used to assess the availability of protection under an IIA (for instance, it is common to apply the so-called “Salini test”, while other investment tribunals resort to quantitative and qualitative indicia).

However, my goal is to address a more overarching requisite that may be found in the definition of the protected investments themselves.

Currently, the number of existing bilateral investment treaties and other international investment agreements in force amounts to more than 2,900. Each international instrument has a specific language, but regarding the definition of a protected investment, the wording is almost identical across the spectrum, with some specificities which are not particularly remarkable. Accordingly, we may pick an instrument at random—in this case, I chose the “BIT” between the United Kingdom and the Republic of Colombia of March 2010.

For the purposes of this “BIT”, an investment is defined as ‘every kind of economic asset, owned or controlled directly or indirectly, by investors of a Contracting Party in the territory of the other Contracting Party, in accordance with the law of the latter, including in particular, but not exclusively, the following: (i)  movable and immovable property, as well as any other rights in rem, including property rights; (ii)  shares in, and stocks and debentures of, a company and any other kind of economic participation in a company;  (iii)  claims to money or to any performance under contract having an economic value; (iv)  intellectual property rights, including, among others, copyrights and related rights, and industrial property rights such as patents, technical processes, manufactures’ brands and trademarks, trade names, industrial designs, know-how and goodwill; (v)  business concessions granted by law, administrative acts or contracts including concessions to explore, grow, extract or exploit natural resources.’ (Article I/1/a).

Having no regard to specific exclusion provisions (such as those that were foreseen in the UK/Colombia “BIT”), the first question that arises is whether this provision contains an exhaustive list of protected investments or, on the contrary, the provision is merely illustrative (“open clause”).

This question is not so misplaced as one might initially think. Indeed, very recently, in a somewhat parallel matter—that of an investment related to a Greek bond issuance bought by the investor Poštová Banka in the secondary market—an investment arbitral tribunal considered that the definitional clause contained a list of examples to which some meaning should be given, and no provision applied to the specific lending products in question. Therefore, the tribunal considered that it lacked jurisdiction to hear the claim (a detailed analysis of this case by Professor George Affaki may be found here). However, this understanding contrasts with at least three previous awards (Ablacat, Deutsch Bank and Ambiente Officio), where the tribunals considered that the “definitional” provision should be read broadly so as to include these financial products and other similar ones as a protected investment.

In all these cases, we are speaking of financial products with somewhat fragile links to the economy of the States in question and, therefore, one may rightfully ask whether a similar approach may be taken regarding a “Third Party Funding” investment.

Be that as it may, one may think of possibly qualifying investments more connected to the “local economy” in the context of Third Party Funding. Let us think of one example, which might well be taken from a real case: an investor mining company invested in country A and created a few hundred jobs for local employees; this was the only asset of the investor company; the host State revoked the exploration and exploitation licence and, therefore, the investor became insolvent and the company was dismantled with those hundreds of employees made redundant. However, this investor was able to have its claim against the host State funded by a third party funder. The claim was a mix of compensation and restitution and was successful enough to have the company exploitation and the jobs reinstated. In the meantime, the host State promulgated legislation prohibiting any repatriation of funds and, therefore, the Third Party Funder was not able to receive its share of the proceeds.

Is this a protected investment or not? Did the host State violate its international commitments to protect foreign investment from national individuals and companies nationals of the other contracting State?

Ultimately, the answer to this question will rely how the definitional provision of the relevant IIA should be understood. If one adopts an approach similar to the arbitral tribunal in the case Poštová Banka, the Third Party funding may fall outside the scope of the investment protection instrument. However, if the approach is broader, then I do not see why a protection should not be accorded to such an investment, albeit of a “third party” to the dispute and to the main investment made in the host State.

I’d welcome your thoughts on this.


Duarte G. Henriques, Rua Fialho de Almeida – 32 – 1 E, 1070-129 Lisbon • Portugal, dghenriques@bch.ptwww.bch.pt.

 

The Pechstein Judgment Emphasizes the Virtues of Arbitration

by Nikos Lavranos, Secretary General of EFILA

On June 7, 2016, the German Federal Court (Bundesgerichtshof, BGH) published a press release summarizing its judgment in the Pechstein case. Since the judgment itself has not yet been published, the following blogpost is solely based on this press release and other publicly available sources.

This case revolves around the attempt of Ms Pechstein, a world class speed skating champion, to annul an award by the Court of Arbitration for Sport (CAS), which had imposed a 2 year suspension on Ms Pechstein for suspicion of doping. Ms Pechstein always denied any doping and claimed that any strange blood levels are due to an inherited condition.

In order to be able to participate in international ice skate races, Ms Pechstein “voluntarily” signed an arbitration agreement with the International Skating Union (ISU) referring disputes to the CAS.

Ms Pechstein challenged the ban before the CAS, but in 2009 a CAS arbitral tribunal upheld the ban, finding no evidence of an inherited condition. She subsequently tried twice to have the award set aside before the Swiss Federal Tribunal in 2010, without success.

Ahead of the Winter Olympics in Vancouver in 2010, Pechstein turned again to CAS to challenge the German Olympic Committee’s not to select her for the national speed-skating team because of the ban. However, an arbitral tribunal of the CAS’s ad hoc Olympic division chaired by Yves Fortier QC rejected that challenge too on the basis of res judicata.

Subsequently, Ms Pechstein turned to the German courts, seeking €4 million in damages from the ISU for loss of income caused by its breach of its dominant position.

While in 2015 Ms Pechstein was successful before the Munich Higher Court, which accepted that her argument that she had not freely agreed to arbitrate at CAS as her consent was a condition of her participation in international competitive speed skating, the German Federal Court overturned that decision.

Most importantly, the Federal Court declared the CAS to be “a real tribunal for arbitration” and that “the global fight against doping is in the interest of both the organisations and those of athletes”. While the court agreed that the skating union is in a dominant position, it said that its conferral of exclusive jurisdiction on CAS to hear disputes is not an abuse of its position as it is based on the “mutual interests” of ensuring that sport is clean. The Federal Court also stressed that there was no “structural imbalance” at CAS, which would imply that the CAS arbitral tribunals’ decisions are skewed against athletes.

Whether or not the German Federal Court’s ruling is considered right or wrong, one  conclusion is clear: this judgment is a massive support for arbitration.

More specifically, the Federal Court considered the finality and speed of the CAS procedures to be of particular importance. The exclusivity of CAS arbitration ensures that parties cannot circumvent the system by turning to ordinary courts. In this way, consistency and finality of the arbitration proceedings are ensured.

Nonetheless, there has been critique on the CAS arbitration system, in particular regarding the closed list of arbitrators. Considering the CAS’ case-load of more than 500 new fillings last year alone, it is obvious that the closed list of arbitrators must be opened up, in order to avoid repetitive appointments of the same arbitrators, who have too many cases on their plates and therefore are unable to deliver their awards in a speedy manner.

Indeed, the CAS is a perfect example that speaks against the use of closed lists or rosters of arbitrators, which has become fashionable in recent investment treaties. Only the free choice of arbitrators will enable the parties to select the arbitrator they consider most suitable, which includes also the actual availability of the arbitrator.

The judgment of the Federal Court also underlines the importance of keeping domestic courts out of the arbitration proceedings. Turning to domestic courts in parallel to arbitration usually only increases the costs and delays the proceedings without a real chance of a “better” decision.

In sum, the Pechstein case is a very good example, which strongly supports the virtues of arbitration, which are finality, quality and speed. This is a message that the European Commission and the Member States should take into account when negotiating investment treaties with arbitration provisions such as for example TTIP.

 

Can Investors Use the Proposed Unified Patent Court for Treaty Shopping?

Pratyush Nath Upreti*, Upreti & Associates

In recent years, there have been several discussions on Investor-State Dispute Settlement (ISDS) and its impact on states’ sovereign right to regulate. The latest cases of Philip Morris and Eli Lilly are evident where intellectual property claims were brought under the scrutiny of investment tribunals. These cases have received greater attention, bringing serious debate upon ISDS provisions in the ongoing Investment Agreementa, such as Transatlantic Trade and Investment Partnership (TTIP) between the European Union and the United States. On the other hand, the European Commission has proposed the Unified Patent Court (UPC) as a common patent court for all member states of the European Union. In other words, a step towards achieving further harmonization of the patent system in the European Union. On this note, let’s examine whether the proposed Unified Patent Court Agreement can be used to challenge IP claims under the ISDS.

Under International Investment Law, investment treaties offer an investor a choice of either ICSID or UNCITRAL arbitration. At the national level, an investor may choose European Court of Human Rights for additional claims of property rights or pursue a host country’s local court before the tribunal. The recent IIAs restrict investor to seek local remedies in the form of monetary compensation after consenting arbitration under the agreement. Although, forum shopping under investment law is not a new phenomenon. It rests on parties to choose the forum. But the important question is: can an investor have the liberty to do treaty shopping to enforce their intellectual property rights?

Treaty shopping refers to the strategy used by multinational corporations to ‘steal’ not only a higher level of protection, advantages or benefit, but also the jurisdiction of arbitral tribunals. For example, an Indian investor wants to protect its investment in South Africa, in spite of India does not have investment treaty with South Africa. This would be achieved by establishing a subsidiary Indian company in the country (China) in which South Africa has an investment treaty with.  For example, in China, the investor will be able to enjoy protection through treaty. In effect, investors tried to seek protection through China-South Africa treaty as corporate nationalities of China. The treaty shopping is mainly done (i) to seek to ensure treaty protection where none would otherwise be available (ii) to seek to benefit from specific substantive protections in particular treaties or (iii) to seek to benefit from certain procedural or other aspects of the dispute settlement provisions of a particular treaty.

In general, investors use treaty shopping through specific clauses of the investment agreement. But it may not always be so. Under the proposed Unified Patent Court, an investor may get the advantage of treaty shopping with respect to patent cases.  The preamble of the proposed Unified Patent Court states;

Considering that the Unified Patent Court should be a court common to the Contracting Member States and thus part of their judicial system, with exclusive competence in respect of European patents with unitary effect and European patents granted under the provisions of the EPC.”

Similarly, Article 1 of UPC states “The Unified Patent Court shall be the court common to the Contracting Member States and thus subject to the same obligations under Union Law as any national court of the Contracting Member States”.  In addition, Article 2 defines court as the Unified Patent Court created by the Agreement. The combined reading of the preamble and Article 1 of the UPC makes clear that for European Patent, Unified Patent Court is the National Court of Contracting Member States.

Now let’s turn into ongoing Eli Lilly vs. Canada under the North American Free Trade Agreement (NAFTA). The case involves investment claims in tribunal on the ground that the patent invalidation by the Canadian Supreme Court violated the principle of fair and equitable treatment, as well as the expropriation of property. Although, it is very difficult to assume that arguments of Eli Lilly will succeed.  But in light of Eli Lilly case, an investor may challenge the decision of invalidity or any decision on patent given by UPC.

Article 32(1) describes UPC as having exclusive competence in respect of actions for revocation of Patents. Also, Article 65 empowers the court to decide on the validity of a patent on the basis of an action for revocation or a counterclaim for revocation. Thus, the Court may revoke a patent, either entirely or partly on the grounds referred in the EPC. So, revocation/invalidation of the patent under UPC may give rise to the expropriation of property and violate the legitimate expectation of an investor along with full protection and security to the investor.  It is important to note that these terminologies are the golden rules of investment agreements. However, lack of clear and reliable interpretation has given investors an opportunity to litigate intellectual property under investor-state dispute settlement.

When UPC is considered to be the national court of a contracting member state, an investor has an option of treaty shopping to bring the case to the tribunal under a particular BIT. Therefore, an unhappy investor may bring a claim against the decision of UPC (being the national court of all member states) on the basis of any IIAs agreed by any participating member state, as well as new EU IIAs. The objective of the investor is to bring claims under investor-friendly investment agreement. Therefore, the investor may eye on most favorable IIAs, to succeed in their favor.

For example, the Netherlands are considered as one of the liberal proponents of BITs in the world. The recent model BIT adopted by Netherlands has a very wide definition[1] of an investment. Unlike other BITs, it does not require the investor’s presence in a host state to qualify for an investment. Similar to the most liberal approach under BITs, the Dutch model protects investments irrespective of whether they are significant, lasting or any contribution to host country economic development are made in accordance with host country law. Moreover, any investor not satisfied by UPC decision has the option of bringing claims under the provision of Netherlands BITs. Thus, a Patent holder may treaty shop for the most convenient IIAs available in Europe. This may result in more frivolous IP litigation in investor-state dispute settlement.


[1] Under 2004 Dutch Model BIT, definition of investment also includes goodwill, know-how, even right granted under public law, including rights to prospect, explore, extract and win natural resources.


Pratyush Nath Upreti – is a Lawyer at Upreti & Associates a Kathmandu based law firm, where he is leading commercial and research department. He holds Advanced Master (LLM) Intellectual Property Law & Knowledge Management (IPKM) degree from Maastricht University, Netherlands. He is also an executive member of New IP Lawyers Network, a wing of school of Law and its research centre SCule (Science, Culture and the Law) under University of Exeter, United Kingdom. He can be reached by  upretipratyush@gmail.com