www.nlj.com
The weekly Newspaper for the Legal profession
Monday, April 9, 2007
in focus
int’l arbitration
Disputes in developing countries
Arbitration enables
parties to replace a
domestic judiciary with
a tribunal they find
more reliable.
By Jack Boos,
Ian Meredith
and Clare Tanner
special to the national law journal
economies, such as the
People’s Republic of China, Vietnam and countries in the former Soviet bloc, are receiving
unprecedented attention as foreign direct investments play an increasingly critical and more
welcomed role in economic development. Yet
the multinational company that jumps overseas
with only a cursory understanding of disputeresolution systems can encounter unexpected
and unwelcome challenges. Business confidence
and legal confidence are not the same thing.
Businesses involved in international trade in
developing or unstable economies are frequently exposed to high levels of political risk. Political risk insurance, from both governmentbacked and commercial providers, is a popular
option. Government-backed providers, such as
the Multilateral Investment Guarantee Agency,
the U.S. Treasury Office of Foreign Assets Control and the British Export Credit Guarantee
rapidly developing
Jack Boos and Ian Meredith are partners and
co-chairmen of the arbitration practice at Kirkpatrick
& Lockhart ­Preston Gates Ellis, and Clare Tanner is
an associate at the firm. Boos is based in San
Francisco, Meredith and Tanner in London.
They can be reached at jack.boos@-klgates.com, ian.
meredith@klgates.com and clare.tanner@klgates.com,
respectively.
Department, tend to provide cover for risk such
as currency-transfer restrictions, expropriation,
war and civil disturbance and breach of contract. The commercial providers, such as Lloyd’s
of London, American International Group Inc.
and the Chubb Corp., provide additional services unique to the private market, like kidnap,
ransom and extortion coverage and coverage for
the cancellation of export ­licenses by authorities in project procurement source countries.
Commercial and treaty arbitrations provide
another avenue. Domestic courts in some parts
of the world, particularly in developing and unstable economies, ­often lack effective enforcement mechanisms, reducing contractual or other rights to little or no real value. The lack of a
consistently neutral or experienced judiciary,
the perceived tactical disadvantage of being a
foreign party and the length of time to conclude
a case can all mean that a remedy available on
paper is largely illusory.
A well-drafted commercial arbitration provision may provide a ready forum to obtain a
timely and enforceable remedy. Arbitration enables the parties to replace the domestic judiciary, who may be subjected to political interference or pressure, with an arbitral tribunal made
up of individuals in whom the parties have
more confidence.
Consistent with the principles of party autonomy and fairness, and pursuant to national
legislation which adopts the United Nations
Commission on International Trade Law (UNCITRAL) model law, arbitration can be a flexible mechanism with no set procedure. When
negotiating an arbitration provision, the parties
will need to decide whether to opt for administered or nonadministered “ad hoc” arbitration.
The major arbitral institutions include the
International Chamber of Commerce based in
Paris, the London Court of International Arbitration, the American Arbitration Association,
the International Centre for Dispute Resolution
in New York, the Stockholm Chamber of
Commerce, the Singapore International Arbitration Centre and the Hong Kong International Arbitration Centre. Moscow’s International Commercial Arbitration Court is making
a bid to attract foreign business by modifying its
rules and other steps, but the Stockholm
Chamber remains the popular institution for
parties doing business in Russia and the former
Soviet states.
Appointment of arbitrators
In assessing the most appropriate institutional rules, the mechanism for the appointment of the arbitrators is a particularly important consideration. The most common tribunal
is a three-person tribunal, with each party selecting one tribunal member. The party-nominated arbitrators, or an independent body, then
select the tribunal chair.
Whenever possible, parties should avoid restrictions placed on arbitrator selection as a result of the choice of institutional rules. For example, the rules of the China International
Economic and Trade Arbitration Commission
(CIETAC) require parties to appoint from a
panel, unless the parties agree otherwise and the
nonpanel appointment is confirmed by the
chairman of CIETAC. In the view of some observers, the recent controversies in the arbitration community in China may have set back the
cause of arbitration in that country and, at least
in the near term, may result in more parties who
are doing business in the People’s Republic of
China opting for arbitration administered
by, say, the Hong Kong International
Arbitration Centre.
The choice of institution also may influence
alternative methods of dispute resolution that
are made available to the parties. For example,
CIETAC has a strong tradition of tribunal conciliation. This requires tribunal members, and
­often the tribunal chair, to act as a conciliator
but then to proceed to operate impartially as the
decision-maker if the conciliation fails. For
The National Law Journal
obvious reasons, this role is challenging and
may only be appropriate for a suitably skilled
arbitrator. That said, tribunal conciliation has
proven to be successful particularly when involving parties from regions of the world in
which mediation is not commonplace.
The objective of negotiating an arbitration
provision is to minimize political interference
and risk. Parties will need to agree on the “seat,”
or legal place of arbitration—one that can determine both the procedural law of the arbitration and which court will support the arbitral
process and hear any challenge to the award.
This choice of seat is critical, as not all countries
have a judiciary with wide experience in arbitration or that is hospitable to it.
For example, in Oil & Natural Gas Corp.
Ltd. v. Saw Pipes Ltd., (2003) 5 S.C.C. 705, the
Supreme Court of India significantly expanded
the scope to challenge an arbitration award by
enlarging the “public policy,” also known as
“manifest disregard of applicable law,” ground
for challenge.
An arbitral award remains of limited value
without a reliable mechanism for enforcing it.
Arbitration awards made in a country that is a
party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral
Awards (codified at 9 U.S.C. 201 et seq.) can be
enforced in any other convention state, by the
local court giving effect to the award as if it were
a court judgment, subject to limited, mostly due
process, exceptions. Some countries’ courts are
more scrupulous than others in avoiding the revisiting of the merits of the case. The New York
Convention has been ratified by 138 countries.
Government interference
Of course, even the most favorable and
well-drafted arbitration provisions are not
bulletproof against direct or indirect attacks
by foreign governments. Government changes
can shift policy priorities. Some may refuse
to comply with commitments made by
prior leadership.
In this situation, investors have the advantage. Investment treaty protections allow foreign investors to make direct claims against a
foreign host state, in addition to or in place of a
contractual claim. This is a developing area of
international arbitration and, while there are
no strict doctrines of precedent, useful concepts
have been considered on a number of occasions
and are becoming more widely accepted.
Treaty protections are usually found in either
bilateral investment treaties (BITs) or multilateral investment treaties (MITs). MITs include
Chapter 11 of the North America Free Trade
Agreement and the Energy Charter Treaty.
Governments in developed nations tend to enter into MITs and BITs with developing nations
in order to encourage their nationals to invest
in regions of the world that might otherwise
present an unacceptably high political risk.
The protections available will depend on
the detailed terms of the relevant MIT or BIT,
Monday, april 9, 2007
but those most frequently relied upon tend to
provide for protections against expropriation
without prompt, adequate and effective compensation and a right to fair and equitable treatment. Other protections include measures
against arbitrary or discriminatory treatment; a
right to treatment no less favorable than that
accorded to nationals of the host state; “most
favored nation” treatment, which prevents the
host state treating foreign investors from one
state less favorably than those from another; the
right to the free transfer of investments and
returns; and full protection and security accorded by the host state to investments.
Other protections
include right to
equitable treatment.
There is a distinction to be drawn between
breaches of treaty obligations and breaches of
contractual obligations. Some BITs or MITs
contain provisions known as “umbrella clauses,”
which can effect the elevation of a breach of a
contractual commitment into a treaty breach.
However, these have yet to be regarded as
settled law.
ADC Affiliate Ltd. and ADC & ADMC Management Ltd. v. Republic of Hungary, ICSID Case
No. ARB/03/16 (2006), illustrates the circumstances in which a ­foreign investor may obtain a
remedy against a host state. The claimants,
­Cyprus-based but ultimately owned by Canadian interests, were to build a new terminal at
Budapest airport and collect revenues from
businesses operating at the terminal. However,
as a result of a 2002 government decree, they
were no longer able to operate the terminals or
collect the associated revenue. The claimants
relied on the Cyprus-Hungary BIT to bring an
investment treaty claim, and Hungary was
found liable for expropriating the investors’ interests without payment of full market-value
compensation. The claimants were awarded
more than $75 million, plus costs.
Disputes over ‘investments’
The arbitral institution of particular relevance to investment treaty arbitration is the
International Centre for the Settlement of Investment Disputes (ICSID). The ICSID was established by the Convention on the Settlement
of Investment Disputes between States and
Nationals of Other States. The ICSID’s
jurisdiction extends to any legal dispute arising
directly out of an “investment” between a
contracting state and a national of another
contracting state.
It is necessary to look to the definition in the
relevant BIT or MIT or in the ­underlying contract to assess whether the transaction at issue is
an “investment.” A pure trading relationship on
an ad hoc basis is unlikely to be deemed an investment. Each relevant treaty needs to be carefully scrutinized and interpreted consistent with
the Vienna Convention on the Law of Treaties,
rather than applying normal contractual principles of interpretation.
Features suggestive of investment may include the duration of the project, including an
expectation of a longer-term relationship; the
regularity of profit and return; the assumption of
risk; a substantial level of financial ­commitment;
and whether the transaction is significant for
the host state’s development.
Nationality is an evolving concept in investment treaty arbitration. Claims may be brought
by majority or minority shareholders. The nationality of a corporate entity may be assessed by
more than one test.
Not all investor-state disputes are referred to
ICSID arbitration. Some recent data suggest
that a majority of non-ICSID arbitrations were
referred to UNCITRAL tribunals, while others
proceed under the London Court of International Arbitration, International Chamber of
Commerce or Stockholm Chamber of Commerce rules. Each treaty defines the options
available. When the claim proceeds under the
ICSID rules, the review of the tribunal’s award
proceeds under a separate and distinct regime.
When a party initiates a treaty claim under
institutional rules, the “seat of arbitration” concept applies and review will proceed before the
national courts at the seat of the arbitration.
ICSID tribunal awards are enforced by the
courts of Convention countries as if they were
final judgments of national courts.
International commercial arbitration and
insurance can provide real mechanisms for reducing risk for parties involved in international
trade. In addition, when the subject of the contract may be an investment, serious consideration should be given to structuring the investment so that the investor can claim ­nationality
in a state that is a party to a MIT or BIT with
the host state, thereby unlocking the opportunity to take advantage of relevant protections
within one or more treaty. A well-drafted
arbitration clause combined with an
appropriate ­ investment structure can serve to
allay political risk. nlj
Reprinted with permission from the April 9, 2007
edition of The National Law Journal.
© 2007 ALM Properties, Inc. All rights reserved.
Further duplication without permission is prohibited. For information, contact 212.545.6111 or visit
www.almreprints.com. #005-04-07-0010