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.


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.


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

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

Energy Charter Treaty 1994 entered into force in 1998 currently has 51 signatories see

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.

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