Checks and balances in investment arbitration
GUILLERMO CORONADO AGUILAR1
SUMARIO: I. Introduction. II. The properties of an award. III. No transfer of right. IV. Court intervention by actions or inactions. V. The clash of principles in the New York Convention. VI. Conclusion.
Resumen. Los Laudos Arbitrales Internacionales están sujetos a la posibilidad de no ser reconocidos por las cortes nacionales, en este sentido, la intervención de las cortes debe ser abordada a partir de la Convención de Nueva York, del Tratado Bilateral de Inversión y de la Convención del Centro Internacional de Arreglo de Disputas de Inversiones, en donde el Arbitraje de Inversión puede ser utilizado a manera de contrapeso para la posible negligencia u obstaculización por parte de las cortes nacionales en el reconocimiento y la ejecución de un Laudo Arbitral Internacional.
Palabras clave: Arbitraje Comercial, Arbitraje de Inversión, Laudo Arbitral Internacional, inversión, intervención judicial, ejecución.
Abstract. International Arbitral Awards face the possibility of not being recognized by national courts, in this sense, action of the courts must be assessed in light of the New York Convention and under the Bilateral Investment Treaty or the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, in which Investment Arbitration can come into play as a way to counterbalance the possible negligence or obstacle created by national courts in the recognition and enforcement of an International Arbitral Award.
Keywords: Commercial Arbitration, Investment Arbitration, Arbitral Award, investment, court interference, enforcement.
I ] IntroductionThe lack of knowledge by national courts towards an arbitral award could cause great problems to international commercial arbitration, i.e. to interfere in the execution of the award, either consciously or unconsciously. The interference could be in different ways, first in the non-recognition of the award, second in disregarding the award by virtue of a so call public policy, or third, by freezing proceedings in Courts during the stage for the recognition of the award.
The possibility of having an Investor-State arbitration in the panorama, is a tool that must be regarded on a case-by-case basis, even if things seem to be bad, there is hope. In assessing such hope first it must be studied, among others, (i) if the award, relating to commercial matters, can be regarded as an investment according to the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID) or the Bilateral Investment Treaty (BIT) agreed upon; (ii) if there is a loss of effective control and the benefits of the investment; (iii) the way the interference of the local courts is made; and (iv) the place of the arbitration.
Therefore, if a Commercial Award is to be nullified by the local courts, such actions can be contrasted or counterbalanced in some way by an Investment Arbitration, but such must be closely studied in order to avoid the very best principle of Arbitration which is the finality and settlement of disputes, in other words, to avoid an Investment Arbitration as a subsequent instance of the Commercial Arbitration.
II ] The properties of an award
There is a discussion whether the award as it is, can be regarded as an investment or in the other hand, does not amount to an investment, therefore there could not be jurisdiction upon the tribunal. In order to establish if there is any right protected under the ICSID or the BIT towards arbitration, it is important to answer the question of what an award is.
In general, awards can be regarded with different characteristics, but there are two main characteristics that must be pointed out: first, if the award is an active, second, if the award is a right under the perspective of investment. If such characteristics are properly drawn and presented, there is no doubt that the award in itself has property rights and therefore is an investment.
1. It is an active and a right
A typical case regarding court intervention in arbitration proceedings is the case Saipem S.p.A. v People’s Republic of Bangladesh. The origin of the dispute relates to a contract concluded on February 14, 1990, between Saipem S.p.A., a gas and oil company from Italy and Petrobangla a Bangladeshi public entity. The contract was for the construction of a natural gas pipeline and it called for the International Chamber of Commerce Rules of Arbitration (ICC Rules).
This case is of great importance for two main reasons, even though there was a court intervention by national courts, the proceedings continued until having an award by the Arbitral Tribunal, leading to a ICSID case, which is the second point, in which recognizes that the elements of an investment are broader.
Due to a strong opposition by the local population to the performance of the contract, such contract was substantially delayed, leading to a disagreement between the parties upon the amount for compensation and additional costs, referring the matter to an ICC Arbitration. In such proceedings, Petrobangla interposed a series of procedural requests that were denied. Due to the denial, Petrobangla sought the revocation of the Tribunal’s authority before the local courts, which at the end was granted. An order to stay the arbitral proceedings was issued, nevertheless the Arbitral Tribunal continued with its mandate. After such, the local court rendered a decision revoking the authority of the Tribunal. Yet, the Tribunal rendered a final award condemning Petrobangla to the payment of damages.
After the decision was rendered by the Tribunal, Petrobangla sought the setting aside of the award before the Supreme Court of Bangladesh. The Court denied the petition arguing that the award never existed since it was rendered by a non-existent Arbitral Tribunal. In this sense, the interaction and interpretation of Article II of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) must be as well analyzed, as to who has the final authority to decide upon the Arbitral Award.
In this sense of ideas, the Bangladeshi Courts may have violated the obligation to avoid interference upon the Arbitral procedure, as established in the referred article of the New York Convention.
After the declaration of inexistence of the Arbitral Tribunal, which led also to the declaration of inexistence of the Award by the Local Courts, the matter was dealt under the ICSID Case No. ARB/05/7, in relation to a BIT celebrated between Italy and the Republic of Bangladesh. Respondent mainly argued, that “a dispute arising out of the ICC Award is not a dispute arising directly from the original investment, i.e., from the Contract”2, following this line of argument the Tribunal reasoned that “the rights arising out of the ICC Award arise only indirectly from the investment”3. However the Tribunal expressed that article 25 of the ICSID investment:
“[M]ust be understood as covering all the elements of the operation, that is not only the ICC Arbitration, but also inter alia the Contract, the construction itself and the Retention Money (see above No. 110). Hence in accordance with previous case law, the Tribunal holds that the present dispute arises directly out of the overall investment”.4
In the final award rendered on June 20, 2009, the Tribunal decided that: “the actions of the Bangladeshi courts do not constitute an instance of direct expropriation, but rather of ‘measures having similar effects’ within the meaning of Article 5(2) of the BIT. Such actions resulted in substantially depriving Saipem of the benefit of the ICC Award”. 5
If we look closely, the Tribunal recognizes that the Award in itself has benefits, in other words, a monetary value in benefit of the investor, in this case Saipem.
Furthermore, the Tribunal considered that “the decision of the Bangladeshi Supreme Court that the ICC Award is ‘a nullity’ is tantamount to a taking of the residual contractual rights arising from the investments as crystallised in the ICC Award.”6 Such decision establishes that the court intervention to the proceeding, and to the award in itself, was a violation of Article 5 of the BIT and, as it will be further analyzed, a violation of Article II of the New York Convention.
As it has been showed, there are rights that are born from the award itself, from which parties can benefit. Following the same criteria, under the case CME v Czech Republic the Tribunal found that “the Respondent, represented by the Media Council, breached its obligation not to deprive the Claimant of its investment”.7
Accordingly, the awards contain benefits upon which parties can benefit from. But this is not settled finally; there are other arguments that can arise, particularly the lack of transfer of rights, in other words, that there has not been a physical taking of the investment. The rights within the award haven’t been materialized; therefore, it is a potential right to be transformed into a physical benefit, i.e., the award transforms in the way the reparation must be made.
Furthermore, in the case Fedax v Venezuela in the decision on jurisdiction of July 11, 1997, the Tribunal found that the promissory notes signed by the Government of Venezuela were in themselves regarded as an investment. “The investor would change with every endorsement but the investment itself would remain constant.”8 If we regard an award to hold in itself rights, then it can be regarded as an investment as set forth in the case Fedax v Venezuela.
III ] No transfer of rights
The typical view of a direct or indirect expropriation deals mainly with a physical taking of the property or a loss of the rights, in other words, the investor no longer has a title over the property or has lost such property through a creeping method made by the Host State. It could be argued then that the arbitral award recognizes the rights of the Investor and that the transfer of such rights does not take place when a court intervention occurs, in other words, the Investor is still recognized within the award. Therefore, no rights are being effectively transferred to the Host State, for such reason it is a matter outside Investment Arbitration.
In addition, it could be then argued that a taking must exist, a material transfer of rights from the Investor to the State. In that regard, if an award is rendered by the Tribunal, the rights and obligations of the parties are settled, hence there could not be a transfer of rights. Thus, no direct or indirect taking has happened.
In the same finding –CME v Czech Republic– the Tribunal established that even if there are no takings, either directly or indirectly, what it is important is that the commercial value of the investment of claimant was destroyed:
“What was destroyed was the commercial value of the investment in CNTS by reason of coercion exerted by the Media Council against CNTS in 1996 and its collusion with Dr. Zelezny in 1999”.9
The importance resides in whether the investor can enjoy the benefits of its right, in this case, the benefits of a right contained in a piece of paper, thus an award: “De facto expropriations or indirect expropriations, i.e. measures that do not involve an overt taking but that effectively neutralize the benefit of the property of the foreign owner, are subject to expropriation claims. This is undisputed under international law”.10
Going further, it could be argued that the right within the award is not affected since the investor is recognized as having rights within the award, therefore no affection of its position has happened, in the case Tippetts, Abbett, McCarthy, Strattion v Tams AFFA “a deprivation or taking of property may occur under international law through interference by a state in the use of that property or with the enjoyment of its benefits, even where legal title to the property is not affected.”11
What is more, in the case Tokios Tokeles v Ukraine12 the tribunal highlighted that the physical intervention was not relevant in establishing intervention by the state, even if there was not “destruction of machinery; no seizure of materials; no exclusion of staff from offices; no arrest of ships; and so on”13, rather it recognizes that the State obligations of the investment relate not only to the physical property of Lithuanian investors but also to the business operations associated with that physical property.14
As it is shown, the right of the party contained in a piece of paper, whether it is a contract, or in this case, an award, is subject to recognition as an Investment; not because in itself is an investment, rather because the interference by the State gives occasion to a blockade for the benefits of the rights enshrined in the Award. The blockade can be through court interferences, either passively or actively.
IV ] Court intervention by actions or inactionsCourt intervention to an arbitral award can be made in different forms; one could be through a direct intervention to the proceedings or in denying the recognition and enforcement of the award, the other can be through an inactivity of the courts in recognizing and enforcing the award.
1. Inactions
As said before, the court of the place where the recognition and enforcement of a Foreign Arbitral Award is sought, can take a passive attitude before the recognition and enforcement of it, i.e., doing nothing. Resting the case in the courts without pushing forward. In the final award of the Investment Arbitration case Chevron Corporation and Texaco Petroleum Company v Ecuador, the court interference was through inactivity of the courts, regarding such inactivity as denial of justice. Even though, such case relates to 7 cases litigated before local Courts, it could be regarded as a handy example when a Court is subject to recognize or execute a Commercial Arbitral Award.
For example there was a case –within such 7 cases– pendent for evidentiary hearing more than 14 years. In such Arbitration claimant argued a violation of article II(7) of the BIT, “effective means of asserting claims and enforcing rights”, in this regard, parties facing a passive intervention by the courts can claim an undue effective mean for enforcing a right, i.e., denial of justice for undue delay.
In Chevron’s case, Ecuador claimed that in order to establish a denial of justice for undue delay, first there must be an exhaustion of local remedies. Ecuador cites Paulsson: “denial of justice encompasses the notion of exhaustion of remedies. There can be no denial of justice before exhaustion”15, further, the Tribunal in the award on the merits establishes that a country –particularly Ecuador and Article II(7)– must “provide foreign investors with means of enforcing legitimate rights within a reasonable amount of time”16.
As a principle of international law, the exhaustion of local remedies is a must. Furthermore, it is acknowledged, that “the purpose for the exhaustion of local remedies is to enable the state to have an opportunity to redress the wrong that has occurred within its own legal order”17 reducing potential claims.
Article 14(2) of the Draft Articles on Diplomatic Protection defines Local Remedies as “remedies which are open to an injured person before the judicial or administrative courts or bodies, whether ordinary or special, of the State alleged to be responsible for causing the injury”, –such Draft Articles must be understood as soft law, on which we can infer some principles of International Law.
Furthermore, Article 14(3) of the Draft Articles, establish that the “local remedies shall be exhausted where an international claim, or request for a declaratory judgement related to the claim”. In the case between United States and Ecuador, having 7 pendent cases for more than several years, could be regarded as undue delay, therefore exempting the requirement of exhaustion.
Also, the Draft Articles on Diplomatic Protection give some kind of light regarding delays by the courts, under Article 15 (b), “there is undue delay in the remedial process which is attributable to the State alleged to be responsible”.
Even if the tribunal establishes that such delay was analyzed solely on the necessity of the interpretation of the BIT between United States and Ecuador, such principle can be established as a principle of international law, regarding the obligations set upon by the States, this is reflected under Article 19(b) of the said Draft Articles; it establishes that a State entitled to exercise diplomatic protection should take into account the point of view of the injured person and the reparation to be sought.
In analyzing the reasonability of the delay by the Ecuadorian courts, the Tribunal considered the complexity of the cases and the Claimant’s behavior in the delay.18 Thus, a timeframe for the recognition and enforcement of the award must be analyzed on a case by case basis, but, reasonability must take part, taking into account that it might not be necessary to exhaust local remedies.
Remarkably, Article 26 of the ICSID Convention excludes the requirement of exhaustion of local remedies, unless it was agreed otherwise: “Consent of the parties to arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy. A Contracting State may require the exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under this Convention.”
While negotiating a BIT, Parties are free to agree for the exhaustion of local remedies, nevertheless “the clauses of this kind are rare and are found mostly in older BITs”19, but we have to bear in mind that we are dealing with the problem of recognition and enforcement of the award, which must be dealt by local courts exclusively, since they hold the ius imperium to oblige someone to comply, in other words, they hold exclusive jurisdiction regarding the enforcement of an award.
If local Courts do not act promptly or are inefficient, it must be analyzed as to whether the Arbitral Award and the rights enshrined within are capable to undergo as a way of counterbalance before an Investment Arbitration.
2. Actions
On the other hand, State courts can bring direct actions interfering to the recognition and enforcement of an award, such interference could be in the way of derailing the arbitral proceedings or declaring the award null, void or incapable to be performed, as set forth in the New York Convention.
A case that best exemplifies the intervention by a court is the case –already referred above– Saipem S.p.A. v The People’s Republic of Bangladesh, let’s remember that in this case, the national Courts of Bangladesh interfere directly in the proceedings by revoking the authority of the ICC Arbitral Tribunal, causing the neglecting of the Award by the local Courts.
Such Court intervention did not succeed since the ICC Arbitral Tribunal concluded that the authority to revoke was within the sole powers of the ICC Court not the Courts of Bangladesh; otherwise will be contrary to the general principles of international arbitration.20 Therefore, the ICC Arbitral Tribunal rendered an award, despite the Court opposition.
The reasoning of the national Courts of Bangladesh in denying the award is an interesting one; Petrobangla –respondent to the ICC Arbitration– filed an application to set aside the ICC Award, the High Court of Bangladesh denied the application since “there is no Award in the eye of the law, which can be set aside”.21
The point of view by the Courts is really interesting, why deny something that never existed? if such is the case, can an Investment Arbitral Tribunal recognize the Award as a good to be expropriated if it “never existed”? The Tribunal in Saipem established that “the rights determined by the Award are capable in theory of being expropriated”22.
In view of the Arbitral Tribunal, the ICC Award contained rights which benefited Claimant, therefore the court interference resulted as an action tantamount to expropriation: “In respect of the taking, the actions of the Bangladeshi courts do not constitute an instance of direct expropriation, but rather of “measures having similar effects” within the meaning of Article 5(2) of the BIT. Such actions resulted in substantially depriving Saipem of the benefit of the ICC Award. This is plain in light of the decision of the Bangladeshi Supreme Court that the ICC Award is ‘a nullity’. Such a ruling is tantamount to a taking of the residual contractual rights arising from the investments as crystallised in the ICC award. As such, it amounts to an expropriation within the meaning of Article 5 of the BIT”.23
Further, the Tribunal examines if the actions taken by the courts were illegal or not. The Tribunal first recognized that is not sufficient to be deprived of the benefits of the award, since such measure will entail that every set aside of an Award could be brought before Investment Arbitration.24 In such analysis the Tribunal dealt with the New York Convention, particularly Article II(3) and Article II(1). “Bangladesh is right that Article II(3) of the New York Convention requires courts of member states to refer the parties to arbitration ‘when seized of an action in a matter in respect of which the parties have made an [arbitration] agreement’. However, Article II(1) of the New York Convention imposes on Bangladesh a wider obligation to recognize arbitration agreements”.25
Then, we can find that Arbitral Tribunals must assess the actions taken by the Courts when dealing with Commercial Awards, under the light of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
V ] The clash of principles in the New York Convention
There is a question, similar to the 9th Soliloquy of Hamlet, a “to be or not to be situation”26. Did the local courts violate the New York Convention under Article II(1) or did they act in accordance with a right envisaged by the same Convention under Article V(1)(e)?
In analyzing the case, the Tribunal established that the main obligation of the Bangladeshi Courts is to recognize arbitration agreements, Article II(1) New York Convention.27 On the other hand, Jan Paulsson establishes a point of view by detractors of arbitration “when the intervening court is the one at the seat of arbitration, it may be pointless, imprudent, or indeed unlawful for the arbitrators to proceed.”28
Furthermore, let’s remember that Article II(1) establishes that “Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences… capable of settlement by arbitration”.
The Tribunal established that the decision to revoke the Tribunal’s authority is a violation that frustrates the spirit of the convention, particularly a violation to the recognition of the arbitration agreements. 29
Contrariwise, the consequence of declaring the award null is that the award is inoperative in the jurisdiction or in the local courts declared. Such is what is expressed by Article V(1)(e) on which “Recognition and enforcement of the award may be refused, … that … (e) [t]he award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.”
As well, the opposing view is an interesting one, since the local court in which the award will be executed has a say on the matter, but let’s remember that there was Court intervention.
The Tribunal in the case at hand did not review Article V(1)(e) of the New York Convention since the matter was not dealing with the issuance and validity of the award, rather it was dealing with the revocation of the Tribunal’s authority. This is due to the fact that there was a direct intervention by the Courts to the Tribunal and the Arbitration proceedings, “many authorities hold that Article II(1) and II(3) impose a mandatory (not discretionary) obligation to give effect to arbitration agreements”30, in this sense it was sufficient to analyze such Article II.
Nevertheless, a case-by-case analysis must be performed in order to establish if the local courts complied with the principles contained in the New York Convention, particularly to what the Tribunal established as the “spirit of the convention”.
In this sense of ideas, there are two prevailing principles within the New York Convention which will be referred as principles regarding the positive freedom by the Arbitral Tribunal to render a valid award and the negative freedom by the Arbitral Tribunals not to render an invalid award.31 As said before a “to be or not to be” situation, first, the obligation by the Courts to recognize and execute arbitral awards, second, the capability of the Courts to safe ward the State from awards inoperative or incapable to be performed.
The Spirit of the Convention must be understood as the main goal for the awards to be recognized and executed, not to be inoperative or incapable to be performed, this is what can be understood from the title of the New York Convention, being the main obligation by the States.
If something along the way happens to disrupt the legal nature of an international award within the limits of the New York Convention, an Investment Arbitration could counterbalance the negative effect of the disruption by the Host State when dealing with the recognition of the award.
VI ] ConclusionLocal Court intervention when recognizing or executing Arbitral Awards can be used as a way to encourage local governments not to comply with the obligations set in such awards, violating Articles II(1) and II(3) of the New York Convention, thus creating a sense of disparity and helplessness for the party benefitted from such; but, in a way of checks and balances, Investment Arbitration comes into play in order to provide justice, since it has the power to order States to comply with such a finding, causing a precedent within the government that could modify the law and having a pro-arbitration policy within courts setting a Rule of Law.
1 Guillermo Coronado Aguilar, is YIAG regional representative for Latin-America, coordinator for the Arbitration Commission of the Mexican Bar Association Jalisco’s Chapter, editor for the Vindobona Journal of International Commercial Law and Arbitration, associate at Coronado Figueroa y Asociados, S.C., comments welcome at Esta dirección de correo electrónico está siendo protegida contra los robots de spam. Necesita tener JavaScript habilitado para poder verlo.
2 Saipem S.p.A. v People’s Republic of Bangladesh [2007] ICSID Case No. ARB/05/7, Decision on Jurisdiction and Recommendation on Provisional Measures, para. 112.
3 Ibid para. 113.
4 Ibid.
5 Saipem S.p.A. v People’s Republic of Bangladesh [2009] ICSID Case No. ARB/05/7, Final Award, para. 129.
6 Ibid.
7 CME v Czech Republic [2001] UNCITRAL Arbitration Proceedings, Partial Award, para. 591.
8 Schreuer, C., Malintoppi, L. Reinisch, A. and Sinclair, A. The ICSID Convention A Commentary, 2009, Cambridge University Press, Cambridge, p. 182, para. 349.
9 Ibid.
10 Ibid para. 604.
11 Ripinsky. S and Williams, K. Case Summary of Tippetts, Abbett, McCarthy, Stratton v Tams-Affa Consulting Engineers of Iran, available at: <http://www.biicl.org/files/3948_tippets_synopsis.pdf >
12 Tokios Tokelés v Ukraine, [2007] ICSID Case No. ARB/02/18, Final Award
13 Ibid para. 111.
14 Tokios Tokelés v Ukraine [2004] ICSID Case No. ARB/02/18, Decision on jurisdiction, para. 92.
15 Chevron Corporation and Texaco Petroleum Company v Ecuador, [2008] PCA Case No. 34877 Interim Award, para. 234.
16 Chevron Corporation and Texaco Petroleum Company v Ecuador, [2010] PCA Case No. 34877, Award on the merits, para. 250.
17 Shaw, M. International Law, 2008, Cambridge University Press, Cambridge, p. 819.
18 Ibid para 254.
19 Dolzer, R., and Schreuer, C., Principles of International Investment Law, 2012, Oxford University Press, Oxford, p. 265.
20 Saipem S.p.A. v People’s Republic of Bangladesh [2009] ICSID Case No. ARB/05/7, Final Award, para. 45
21 Ibid para. 50.
22 Ibid para. 122.
23 Ibid para. 129.
24 Ibid para. 133.
25 Ibid para. 166.
26 Available at: “<http://en.wikipedia.org/wiki/To_be,_or_not_to_be>”
27 Ibid.
28 Jan Paulsson, Interference by National Courts, in Lawrence W. Newman and Richard D. Hill (eds.) The Leading Arbitrators’ Guide to International Arbitration (Second Edition, Juris Publishing) p. 125.
29 See fn. 17, para. 167
31 Berlin, I., Two Concepts of Liberty, Four Essays on Liberty, Oxford University Press: available at: < http://www.wiso.uni-hamburg.de/fileadmin/wiso_vwl/johannes/Ankuendigungen/Berlin_twoconceptsofliberty.pdf>