UK: Interesting Developments in International Commercial Arbitration

Last Updated: 11 June 2003

There has been a noticeable increase in recent years in parties commencing international arbitration proceedings against states. There are a number of factors that have influenced this trend: the dramatic change in the legal environment for foreign investment; the establishment of a specialised institution at the World Bank to deal with investment disputes; the increase in states doing business in the commercial sector directly or through state owned or controlled entities; the increase in bilateral and multilateral treaties that provide for arbitration and an increased awareness by corporations of the potential to rely on such regimes should a state fail to comply with its international obligations.

Regime change

International investment is central to the world economy. The legal regime applicable to foreign investment has grown substantially even within the last ten years. In large part this was a direct consequence to changes in the global economy at the end of the cold war. Many emerging nation states and reformed economies were desperately trying to encourage foreign investment for development. To do so they needed to provide a stable environment as foreign investors look for stability and certainty for risk management purposes. Many states revised their foreign investment laws e.g. Iran Foreign Investment Law 2002 and Kazakhstan Law no 266-XIII, of 27 December 1994 Concerning Foreign Investments.

In addition to these domestic changes there has also been a huge growth in bilateral investment treaties and multilateral investment treaties providing foreign investors with direct recourse against a state. These treaties give investors certain protections against state actions that adversely affect their investments including discriminatory regulations, such as different rights for depreciation, implementation of certain tax regimes, specific application of competition or employment legislation; revocation of essential licences; increased tariffs; or confiscating property.

Bilateral investment treaties Bilateral investment treaties (BITs) were derived from the more general Friendship Commerce, Navigation treaties. The first modern form of BIT was entered into between the Federal Republic of Germany and Pakistan on 25 November 1959. By the end of the 1980s there were several hundred BITs. Today there are over 2,000 investment treaties each with its own regime to protect foreign direct investment. Most importantly they provide for international arbitration as the mechanism for resolving disputes between the investor and the state.

The terms and conditions of each BIT vary depending on the countries involved1 and the negotiations between the states. However, there is a certain pattern with regard to the type of provisions incorporated. These include most-favoured-nation treatment, no expropriation of investments directly or indirectly without providing fair compensation, prohibitions on a state carrying out any discriminatory acts and a dispute resolution provision usually providing for arbitration, and giving the investor a choice of two or three alternative places and forms of arbitration. BITs therefore essentially provide a standing offer to arbitrate a particular dispute insofar as it falls under the definition of investment set out in the BIT.

BITs are beginning to play an important role in the planning and development of international investment relations. They provide a wide range of protections against adverse state acts for foreign investors and their subsidiaries. Careful planning at the outset can often provide foreign investors with a choice of dispute resolution options for any future dispute. In a recent dispute two ad hoc arbitrations, CME Czech Republic BV v Czech Republic and Lauder v Czech Republic, were taken under two different BITs on substantially the same facts. The tribunals reached different conclusions in their awards2 .

Multilateral investment treaties There are also an increasing number of multilateral treaties with provisions on investment, for example the ASEAN Agreement3 , NAFTA4 and the Energy Charter Treaty5 . One of the oldest multilateral treaties dealing exclusively with investment is the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 (ICSID Convention). It is based in the World Bank and provides an autonomous regime for the settlement of investment disputes between contracting states and nationals of other contracting states. In ICSID’s early years only one or two arbitrations were registered each year. This has changed: there are now closer to two cases per month being registered by ICSID.

Arbitration under ICSID is completely independent from any national law provisions. It has its own procedural rules and operates as a truly delocalised mechanism. There is no appeal from a tribunal’s decision on a particular matter to any domestic court. The only recourse is to apply to have the award annulled under ICSID’s autonomous regime. There have to date only been eight such applications for annulment, few of which have been successful.

The Energy Charter Treaty 1994 entered into force in April 1998. It has been signed by 51 states from both East and West Europe, former CIS states, the European Union itself and Japan and Australia. The Energy Charter Treaty’s primary aim is to establish, maintain and promote long-term co-operation in the development of the energy sector. It is a substantial innovation as traditionally the energy industry was exclusively controlled by the host government. The investment provisions are similar to those found in many BITs and were influenced by NAFTA. It provides energy investors with the same type of investment protection to other sectors of foreign investment and gives a choice of arbitration form to the investor. No dispute has yet been resolved under the Energy Charter Treaty. One case, AES Summit Generation Limited v Hungary, was registered at ICSID but settled quickly.

State parties and arbitration

There are certain distinct features of arbitrations involving a state party. These include;

  1. the implications of dealing with a sovereign nation including the relevance of public international law;
  2. sovereign immunity – immunity from suit and immunity from execution; and
  3. the possible political implications which evoke greater public interest in the outcome.

As questions of public international law will often have to be interpreted and applied, it is essential that the arbitrators appointed have the appropriate experience. Another consideration when arbitrating with a state party is the scope of disclosure available or how willing a tribunal will be to make such an order. To what extent will disclosure of documents of a state department be allowed?

This issue arose in a NAFTA case, SD Meyers v Canada where the respondent refused to produce certain specific documents on the basis of crown privilege. This was upheld by the tribunal for documents which were protected by the relevant certificate. A claimant must therefore decide whether it is in a position to make its case without obtaining certain documents which a state may be reluctant to disclose.

Conclusion

The public international law regime applicable to foreign investment is changing very quickly. Many small and medium sized companies are beginning to take advantage of these provisions to make claims against host states to protect their investment. It seems likely that this trend will continue for some time. Investors are beginning to structure their investments through corporate entities or shareholders able to benefit from the treaties or laws. In some cases the investors are structuring matters to give two or more potential areas for protection.

However, foreign investors do need to understand the peculiarities of taking a case against a sovereign nation or a state entity, which are governed by public international law principles. Even within the past five years the changing public international law regime on investment protection has given rise to a growing body of arbitral decisions. It is not clear yet where these developments will lead but its implications must be carefully considered.

Footnotes

1 See the UK and USA standard form BIT in Dolzer & Steven, Bilateral Investment Treaties (Martinus Nijhoff 1995) pps 228 and 240 respectively.

2 See www.cme.cz/doc10/en/00.htm.

3 The Agreement of the Members of the Association of South East Asian Nations for the Promotion and Protection of Investments, 1987.

North American Free Trade Agreement 1993 entered into force in 1994 see www.sice.oas.org/trade/nafta/naftatce.asp.

Energy Charter Treaty 1994 entered into force in 1998 currently has 51 signatories see www.encharter.org.

Article by Dr Julian DM Lew QC

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.