In a nutshell, arbitration is a way to get a definitive and binding decision on a dispute or sets of disputes, without reference to a court of law. Commercial arbitration has a long and illustrious history, both domestically and internationally. Investment arbitration has also been used for a long time evident in the existence of arbitral awards dating long time ago. However, it was only after the first bilateral investment treaties (BITs) were signed in 1959 and after the World Bank introduced the ICSID (International Centre for Settlement of Investment Disputes) Convention in 1965 that it became a widely used general mechanism of international dispute resolution.
Because investment arbitration deals with sovereign states, a huge amount of money, and the interest of private parties, its development has dominated legal agendas. Since public opinion pointed to the fact that arbitrators had complete power over investment litigation to an extent that they could sometimes disregard public interest, regulations were requested to frame this practice. This was a concern that led to an update of international investment practice, independent from private international commercial arbitration, as we may see later in this development.
I. Legal Framework and Applicable Law
In terms of public international law, the most truly applicable treaty for commercial arbitration is the New York Convention 1958, which solely concerns the recognition and enforcement of foreign arbitral awards, whereas the other traditional instruments are no longer relevant. On the other hand, treaties of public international law for investment arbitration lay the foundation for investment arbitration, especially bilateral instruments such as the more than 2,000 BITs, multilateral instruments such as the ICSID Convention, the Energy Charter Treaty, and regional instruments such as NAFTA (North American Free Trade Agreement) and CAFTA(Central America Free Trade Agreement).
European Law may be relevant both in commercial and investment arbitration in different ways. For commercial arbitrations, quite frequently the issue of mandatory rules such as antitrust law and their qualification as public policy become relevant. For investment arbitration, a wide range of issues and discussions has been initiated by the Lisbon Treaty regarding its conflicts with existing BITs and the future competence to conclude new BITs by the EU (European Union) Member States
The role of national law is also not the same: In commercial arbitration, procedurally, the mandatory rules govern the arbitrations at the place of arbitration, and in the vast majority of cases, the tribunal must apply domestic substantive law. Exceptions have been seen in practice where contracts excluding any national law and referring to the Unidroit Principles or to various combinations or common denominators of two or several national laws. These latter choices of law clauses obviously do not make the work of the arbitrators easier but are understandable where the parties come from very different legal cultures and cannot agree on one domestic law. In investment arbitration, national law plays a different role. Procedurally its mandatory provisions are of relevance if the arbitration is not ruled by treaties such as ICSID or NAFTA but chosen to be under rules of non-governmental institutions such as the ICC (International Chamber of Commerce) or the LCIA (London Court of International Arbitration) which, in turn, must respect the mandatory law at the place of arbitration.
II. Applicable Substantive Law
The focus on private law, private contracts, and private parties is the characteristic of commercial arbitration. Where states participate in commercial arbitration, it is widely assumed that they are acting in their private capacity.
Investment treaty arbitration, on the other hand, is based on public international law rather than private law, treaties in parallel to (or instead of) contracts, and sovereigns (who enter into treaties) and regulators functioning in their public capacities (which govern populations). As a result of these fundamental distinctions, procedural variations between investment and commercial arbitration have emerged. Investment treaty arbitration has established a comprehensive set of quasi-precedents, with the citation to and review of prior awards being a routine aspect of investment pleadings and awards. This is because most investment treaties have identical clauses and investment awards are often made public. The intense public interest in investment treaty arbitration has resulted in procedural changes such as the publication of certain awards and pleadings, as well as the opening of some hearings and the participation of amici.
In investment contracts between the state and the foreign investor, one will usually have an explicit choice of law in which the substantive law of the host state is applicable. Such a choice of law clause will generally have to be interpreted as also meaning that the investor must accept later changes of the domestic law. But as it is known from many cases, such conclusion will often be rejected by the investor claiming that the state changed its law with the intention to improve its own position and delete or devalue the contractual rights of the investor. This is rather obvious when a law expropriates, but less clear where a similar effect is reached by new tax or other economic laws. Comparable difficulties arise in contracts with state enterprises when the state modifies the law or issues administrative acts which either improve the contractual position of its state enterprise to the detriment of the investor or prevent the state enterprise from fulfilling certain contractual obligations which it then justifies by referring to the state’s acts as force majeure.
Under the ICSID Convention Art. 42, national law may have its relevance since the article expressly refers to the law of the host state in addition to the rules of the international law. Under the light of this, the foreign investor shall usually agree that the laws of the host state govern its investment, including any subsequent amendments to the law. Nevertheless, this is subject to the treaty’s limits. In such cases, applications or modifications to the law may be considered violations of the treaty. (ex: Trilateral Agreement between China, Japan, and Korea art. 3: “[t]reatment granted to an investment once admitted shall in no case be less favorable than that granted at the time when the original investment was made.”)
Moving to the arbitration rules selected by the parties, they are only applicable to investment arbitration if those rules are found in treaties. The rules of non-governmental institutions originally created and used only for commercial arbitration are also chosen today by the respective parties, states as well as investors, for investment arbitration. Only the UNCITRAL (United Nations Commission on International Trade Law) Rules were frequently included as an alternative in treaties. But now we find investment arbitrations under the rules of the ICC, the LCIA, and other national arbitration institutions originally created and intended only for commercial arbitrations. If states turn away from ICSID, as Venezuela has done by its denunciation of the ICSID Convention on 24 January 2012, they will have to select other arbitration rules for their disputes with foreign investors.
III. The Selection of Arbitrators
The parties are often motivated by the fact that they can select judges of their own choice and confidence to opt for international commercial arbitration. It is crucial for the parties to be able to select arbitrators well acquainted with the field of the dispute.
In investment arbitration, the situation is different: The usual issues in such disputes are more limited since the bilateral, as well as multilateral investment protection treaties, contain very similar protective provisions dealing with expropriation, fair and equitable treatment, discrimination, and sometimes contracts by “umbrella clauses”. In this view, the typical expertise required from arbitrators is public international law and particularly its application to such protection.
There is quite a group of arbitrators who do both kinds of arbitration; however, it is not always the case.
The IBA( International Bar Association) Conflict Guidelines are beneficial in all fields of arbitration concerning conflicts of interest and arbitration challenges. In commercial arbitration, the usual dispute and challenge would be based on the arbitrator’s previous or current interactions with one of the parties. In investment arbitration, the challenge generally will be based on former arbitral appointments. In this context, it is worth noting that in past years, certain parties or their counsel seem to have concentrated on candidates who have been appointed repeatedly by the same party, whether private or state, or more broadly by investors or states, and who they believe has built a reputation beneficial to one party.
IV. Jurisdiction & Power of the Tribunal
In commercial arbitration, jurisdictional disputes mostly concern the scope of the contractual arbitration clause, particularly whether it also covers non-signatories within a group of companies or behind a general contractor or after an assignment of the contract. In investment arbitration, there is a much wider scope of jurisdictional issues and we have much more frequently jurisdictional objections which may result in a bifurcation of the procedure. There, the consent of the parties to arbitration is mostly expressed in a treaty of public international law such as a BIT or the ICSID Convention. Thereby, general principles of treaty interpretation, especially the Vienna Convention on the Law of Treaties, will become relevant in much detail. The state’s consent to arbitration may depend on the interpretation of if an “investment” and a legal dispute about it existed, the Claimant is a national of the alleged home state, often as a company which has been created there by the mother company for the only reason that this new home state has a BIT with the respondent state and a national of that home state really owns and/or controls the allegedly expropriated company.
V. Confidentiality & Transparency
According to the World Investment Report of the UNCTAD(United Nations Conference on Trade and Development) from 2019, the amount of money used as foreign investment is worth 1300 billion dollars. International Investment being of public interest, a lot of voices have risen to claim a clearer justice on this topic. An often-made criticism about it is that arbitrators will not look at the public interest, but more about how to secure the rights of the investors. To get rid of those criticisms, the world of international arbitration tried at some point to improve the transparency of the arbitration process. The most important answer came from the United Nations, through its commission for international trade law. This commission adopted the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration in New York in 2014. The purpose of this Convention was to make more accessible investment arbitration to the public through several procedural rules. However, this Convention seems to apply only for treaty-based investment, excluding de facto any possibility to widen its application to private contract, more common in International Commercial Law.
This convention also facilitates the possibility for third parties to intervene during arbitration to submit documents. This kind of intervention, called amicus curiae is well known by the European Commission which asks to intervene in almost all affairs inside the European Union. We can quote another example, in the case opposing Philip Morris against Uruguay, where the arbitral tribunal agreed to an intervention of the World Health Organization.
Also, this UNCITRAL Convention has still a small impact, indeed only 7 countries have ratified it. However, parties to an investment contract can decide to apply the provisions of the Convention even though the State did not ratify it. For instance, in an affair involving Guinea, the Parties agreed to apply the convention, but they modified the provision to better suit their interests in the procedure.
In matters of international commercial arbitration, without a sovereign state as a party, it is less likely that an affair will be of public interest. Therefore, this research of more transparency is less intense than it is when it comes to international investment. However, some affairs can be very mediatized and the result without access to the deliberation can create other issues. As an illustration, in 2008 an arbitral court ruled in favor of the famous (in France) Bernard Tapi, in litigation against “Crédit Lyonnais”. The decision was blurred, and a lot of jurists contested it. After a police raid into the domiciles of arbitrators, several decisions of French justice, and a lot of newspapers on it, the arbitral decision was withdrawn in 2015. This situation would have not occurred if the arbitral process was more transparent, thus the importance even in private matters, to reduce confidentiality to avoid this kind of issue.
More globally, we can quote the situation of the EU which clearly demonstrate the bad publicity that arbitration receives. Seeing this, the Directorate General of the European Commission mandated a public interview about this clause of dispute resolution setting arbitration in the matter of investment. 97% of people asked were against this clause. The asymmetry due to the lack of transparency in arbitration, which can lead to partial decisions against the public interest is now clearly understood by people other than arbitration specialists.
In consequence, the confidentiality of awards in international commercial investment renders it difficult to create a kind of legal safety, legal safety required in international investment arbitration to not deter either investor than States. Viewing the implications of International Investment, especially in Public matters, it is understandable that a different comprehension of transparency was made compared to private international commercial matters.
VI. Predictability and Consistency of Decisions
This issue is closely connected with transparency, predictability, and consistency of arbitral decisions. In commercial arbitration, the confidentiality of the proceedings and the awards, has often resulted in that no real knowledge of jurisprudence can be established by the legal community on how arbitral tribunals have decided on issues appearing in disputes. In domestic court procedures, the legal community can reach judgments and relevant information easily. Institutions of commercial arbitration, such as ICC have tried to improve the situation by publishing or permitting publications on procedural decisions and awards without identifying the parties and details of the case. LCIA enabled a publication on its decisions on conflicts and challenges of arbitrators. But beyond that, publications on concrete cases and awards in commercial arbitration remain the exception and some kind of “insider” knowledge. However, in international investment arbitration, the awards and relevant facts of the case are often made public.
To avoid severe faults of a tribunal in procedure or substance, for commercial arbitration, national arbitration laws and the New York Convention provide options for corrective action. In investment arbitration, there are similar options such as the Annulment Procedures in the ICSID Convention.
In conclusion, it has been pointed out that international investment arbitration has a public nature and may have a potential impact on a country and its citizens, while international commercial arbitration concerns solely private legal disputes. Both forms of arbitration will continue to cross-fertilize each other, specifically with respect to transparency and the call for a more systemic case law.
Image: Arizona State Law Journal
