International Investment Arbitration and Principle of State Consent: A Case for Derogation?

  1. Introduction[1]

The principle of state consent is one of the well-established principles in international dispute settlement. Respecting this principle ensures an award’s acceptance and proper implementation by the parties. However, on some occasions, a derogation of this principle has been made to expand the jurisdiction by the investment arbitral tribunals as the primary focus of this paper. Therefore, the second section describes three instances of this trend (the MFN, fork-in-the-road, and umbrella clauses), and the third section discusses the supporters’ and opponents’ views about such irregularities and concludes whether they are consistent with the consent of the state. It seems that among the described instances, the only consent-consistent trend is the way tribunals have applied umbrella clauses. 

2. Forms of Jurisdictional Expansion 

Investment treaty arbitration tribunals (Tribunals) have expanded their jurisdiction by using specific methods:  

            First, they have applied the ‘Most favoured nation clause’ (MFN) on the dispute settlement provisions. As a result, these tribunals have incorporated less restrictive forms of consent into the treaty containing their jurisdictional basis (the basic treaty). For instance, the tribunal in Maffezini v. Spain[2] circumvented the requirement of an eighteen-month negotiating period before the arbitration initiation existed in the Spain-Argentina BIT based on the absence of such limitation in the Spain-Chile BIT applying the MFN clause.[3]Several other tribunals have followed this logic.  

            Second, most tribunals have limited the chance of ‘fork-in-the-road clauses’ successful invocation by the respondent host states. These clauses limit the applicant’s choice of forum(mostly between domestic courts of the host state and international arbitration) for pursuing his claims. Once this choice is made, it would block the claimant’s access to the other option(s). In fact, ‘parties are precluded from, simultaneously or subsequently, resorting to any other potentially available dispute resolution mechanism.’[4] Therefore, this clause’s primary function for the respondent State is to raise its applicability as an admissibility issue before the tribunals. In response, most of them have adopted a strict test called ‘triple identity’ in these situations according to that ‘the same dispute involving the same cause of action between the same parties’[5] cannot be brought before different courts or tribunals. As a result of the narrow interpretation of this test’s requirements, the tribunals have rarely found the fork-in-the-road clause applicable in the cases before them. This shows that they have not been reluctant to ‘give foreign investors another opportunity to resort to international arbitration, if [for example] they choose a domestic court at the beginning.’[6] For example, the tribunals in CMS v. Argentina[7] and Desert Line Project v. Yemen[8] adopted such interpretation regarding the ‘subject matter’ (although termed differently, has the same character of cause of action) and ‘cause of action’ requirements, respectively, resulted in the clause’s inapplicability.          

            Third, the application of the ‘umbrella clause’ brings ‘contractual and other commitments under the treaty’s protective umbrella.’[9]Consequently, ’a violation of an investment agreement will lead to a violation of the investment treaty.’[10]Therefore, these clauses ‘…extend the jurisdiction of tribunals to violations of contracts…’[11]This is when ‘host state’s brach of investment contract with foreign investor does not necessarily mean the violation of the BIT.’[12]However, by adopting a broad interpretation of these clauses, some tribunals have accepted their jurisdiction to hear the claims of violation of the contract. This kind of application would be more problematic when the parties consented to the tribunal’s jurisdiction only to hear the treaty’s violations.

In Eureko v. Poland[13]the tribunal had to interpret the umbrella clause in Article 3.5 of the Netherlands-Poland BIT.[14]It concluded that ‘breaches by Poland of its obligations under [the contracts] … that are not breaches of Articles 3.1 and 5 of the treaty nevertheless may be breaches of Article 3.5 of the treaty…’[15]In other words, the breaches of contract ‘could be breaches of the BIT’s umbrella clause , even if they did not violate the BIT’s other standards.’[16]It is noteworthy that jurisprudence is not consistent at this point.

3. Consistency with the Principle of State Consent

The interpretations adopted by tribunals on the occasions mentioned above have raised some concerns about their consistency with the well-established principle of state consent. There is no doubt that the primary source of investment tribunals’ jurisdiction is the parties’ consent. Any derogation from the limits of their consent would jeopardize the arbitral tribunal’s legitimacy and award. It can also be a ground for the annulment of the award.

            The scope of the ‘MFN clauses’ and how tribunals interpret them significantly depend on their wordings. Although there is less challenge about the incorporation of better substantive guarantees from third treaties to the basic treaty by the application of the MFN clause,[17] this situation is less clear about the dispute settlement clauses. One group of tribunals have rejected to apply the MFN clause on the dispute settlement clauses. The decision of the tribunal in Plama v. Bulgaria[18] is a clear example. The other group has concluded that there is no restriction to apply this clause on dispute settlement provisions. The leading case, as mentioned above, is the Maffezini case. However, these two groups are not entirely against each other due to the cases’ factual differences before them (incorporating the otherwise non-existent consent to arbitration v. Incorporating less restricted consent).

Specifically speaking, the Maffezini case’s idea raised some concerns about its compatibility with the parties’ consent. Supporters of this reading rely on the fact that arbitration would be ‘more favorable to [protecting] the investor’s rights and interests’ than the courts of the host state, and it is the primary application of the MFN clauses to incorporate this favorable condition to the basic treaty.[19]It would also be possible to emphasize the factual differences between these cases and justify the different outcomes.

            On the other hand, criticizers of this conclusion point to the importance of respecting the conditions ratione voluntatis. These are ‘qualifying condition[s] for the enjoyment of the jurisdictional rights.’[20] Moreover, there is no acceptable reason why the different conditions of parties’ consent should be treated differently, significantly when the MFN clause cannot affect the conditions ratione personae, ratione materiae, and ratione temporis.[21]It worths noting that while the tribunal in the Maffezini case excluded the application of the MFN clause to public policy considerations such as ‘fork-in-the-road’ provision or the ‘exhaustion of local remedies,’[22]it did not explain the difference between these situations with the case before it.[23]

            As stated above, there is a significant divergence in the jurisprudence regarding the scope of the MFN clause’s application. As a treaty provision, the general rules on treaty interpretation govern the interpretation of these clauses. Therefore, the clause’s application on the dispute settlement clauses shall depend on the parties’ express indication or when the application of the treaty interpretation rules suggests otherwise. The later includes when travaux preparatoires of the BIT or subsequent practice of the parties proves different conclusion.             

            Regarding fork-in-the-road clauses, the test adopted by tribunals to decide their applicability in a particular case, in addition to narrow interpretation of this test’s requirements, have resulted in fewer cases being rejected to be heard because of such clauses. It is obvious that in this way, tribunals have overlooked a condition of host states’ consent to arbitration. Although most of tribunals adopted such strict reading of the clause, some opposition has been made against this trend.

            The primary reliance of tribunals in rejection of the clause’s applicability has been on the distinction between treaty and contract claims. In these cases, the determinative element has been the difference between the source of claims in proceedings before domestic courts and arbitral tribunals. Given these tribunals, the clause cannot affect their jurisdiction because the claims before them concern the treaty violation, while the claims before domestic courts are or were about contractual violations. In the language of the tribunal in CMS v. Argentina:

‘Decisions of several ICSID tribunals have held that as contractual claims are different from treaty claims, even if there had been or there currently was a recourse to the local courts for breach of contract, this would not have prevented submissions of the treaty claims to arbitration.’[24]

            This distinction was rejected for the first time in Pantechniki v. Albania.[25]In this case, the sole arbitrator concluded the fork-in-the-road clause to be applicable while was aware that the investor’s claims have a different basis.[26]This tribunal determined that the criteria ‘to assess whether the same dispute has been submitted to both national and international fora’ would be the so-called ‘fundamental basis’ test.[27]‘The tribunal must determine whether the claim truly does have an autonomous existence outside the contract.’[28]Another argument of the opponents relies on the problems of the ‘triple identity’ test. The tribunal in Chevron v. Ecuador case[29] raised the concern about the application of this test in determining the applicability of the fork-in-the-road clauses. It argued:

‘It is unlikely the the triple identity test will be satisfied in many cases where a dispute before a tribunal against a state under a BIT and based upon an alleged breach of the BIT is compared with a dispute in a national court.’[30]

It indeed warns that ‘a strict application of the triple identity test would deprive the fork-in-the-road provision of all or most of its practical effect.’[31] Moreover, applying this test would result in a conclusion ‘that cannot be inferred from fork-in-the-road clauses at first glance.’[32]The applicability of these clauses only means an international arbitration cannot be instituted regarding the same parties’ disputes before the host state’s courts. They do not block the institution of subsequent arbitration proceedings ‘if they are based on different facts of the case, are brought by a different party or seek different relief than in domestic proceedings.’[33]

In sum, it seems that the scope of the fork-in-the-road clauses needs to be redefined. This time by adopting a more lenient and restricted application of the triple identity test. Findings the tribunal in the Pantechniki case, in addition to the concerns raised by the tribunal in the Chevron case, reiterates the necessity of this process. Although the ‘fundamental basis’ test can cause some difficulties in application due to its unclear scope, at least it guarantees that tribunals would not ignore the, somehow vital, condition of the host state’s consent.        

            In the cases of the ‘umbrella clause’ application, the question is about the clause’s ability to convert the contract’s breaches into treaty breaches. One line of reasonings ‘attempt(s) to ground the method of interpretation in the accepted canons embodied in Article 31 of the VCLT.’[34]In line with this view, some tribunals have relied on the ‘ordinary meaning’ of the umbrella clauses provision in the context of the particular BIT and in light with its object and purpose. They have given ‘full effect’ to umbrella clauses by reconciling the textual interpretation of the clause with the BIT object and purpose, which is mostly  something similar to ‘the encouragement and reciprocal protection of investment.’[35]The tribunals in Noble Ventures v. Romania,[36] SGS v. Philippines[37] and Eureko v. Poland[38] cases have adopted similar reasoning.

The opposite line of reasonings restricts the scope of the clause, however not in a consistent manner. The most restricted interpretation of the umbrella clause has been adopted in the SGS v. Pakistan case.[39] In this case, the tribunal denied the possibility of converting the contract’s breaches into the breach of the treaty by mentioning mainly four reasons, which two of them seem more compelling. First, accepting this application of umbrella clause ‘would lead to a flood of lawsuits’[40] before tribunals. Second, this kind of application would make the other guarantees in the BIT superfluous. ‘There would be no real need to demonstrate a violation of those substantive treaty standards if a simple breach of contract,…, would suffice to constitute a treaty violation…’[41] Tribunals in El Paso v. Argentina[42] and Pan American v. Argentina [43] cases adopted a more lenient view by restricting the clause’s application only when the state has acted in its sovereign capacity. However, none of the readings of the clause adopted in the second line of reasoning is plausible. The strictest interpretation of the clause ignores its existence and does not explain the reason(s) for its derogation from the rules of Article 31 of the VCLT. The distinction between the commercial and sovereign breach of the contract for applying the clause does not have a firm basis in international law and has been rejected by some tribunals. 

In conclusion, due to the parties’ freedom in designing the scope of the BIT provisions and its guarantees, 

‘if the parties choose to extend the scope of the agreement … [in a way to] also cover, to some extent, operations previously deemed … “contractual” in nature, conventional terminology cannot stand in the way of the parties’ intentions. Ultimately, no justification exists for ignoring or revising the canons of interpretation laid down in Article 31 of the VCLT. References to conventional terminological distinctions or to categories of a specific domestic legal order have no place within this canon.’[44]

This conclusion would not be inconsistent with most of the parties’ terms of consent. In a broad form of consent, the tribunal would have jurisdiction over any investment dispute, regardless of its source. As a result, the application of the umbrella clause would not be contrary to this consent. Even when the tribunal’s jurisdiction is restricted to treaty violation claims, this clause’s application will convert the breach of contract into the treaty’s breach. Consequently, it would fall within the tribunal’s jurisdiction to hear such disputes. However, in the most restricted form of consent, i.e., only to specific types of violations such as expropriation, this broad interpretation seems problematic.

4. Conclusion

Generally, there has been a tendency in the investment arbitration jurisprudence among the tribunals to adopt specific strategies to expand their jurisdictional scope. This paper reviewed only three occasions in which such strategies being adopted. All of them have been related to the scope of certain protections provided in the BITs. This expansionism has raised some concerns about the consistency of these views with the principle of state consent. The second part provided the supporters and opponents’ reasonings for these forms of interpreting different treaty provisions.

            As a result of these analyses, the only situation in which the current adopted interpretation seems consistent with the principle of state consent is the application of umbrella clauses. Even in those situations, this form of application cannot be prescribed for all consent types to arbitration mentioned primarily in dispute settlement clauses.    

[1] This paper is presented as an assignment on the course on “International Litigation and Arbitration Procedures” in the Advanced Studies of International Dispute Settlement and Arbitration in Leiden University, Academic year 2020-21

[2] Maffezini v. Spain, ICSID, Case No. ARB/97/7, Decision of Jurisdiction (25 January 2000)

[3] M.Sornarajah, Resistance and Change in the International Law on Foreign Investment (2015), 184

[4] J.Sicard-Mirable, Y.Derains, Introduction to Investor-State Arbitration (2018), 69

[5] R.Dolzer, C.Schreuer, Principles of International Investment Law (2012), 267

[6] C.Huiping, ‘The Expansion of Jurisdiction by ICSID Tribunals: Approaches, Reasons and Damages’, (2011) 12 The Journal of World Investment& Trade 671, at 680

[7] CMS v. Argentina, ICSID, Case No.ARB/10/8, Decision on the Objections to Jurisdiction (17 July 2003)

[8] Desert Line Project(DLP) v. Yemen, ICSID, Case No.ARB/05/17, Award (6 February 2008)

[9] Dolzer, Schreuer, supra note 5, at 166

[10] SGS v. Philippines, ICSID, Case No. ARB/02/6, Decision of the Tribunal on Objections to Jurisdiction (29 January 2004), para.119

[11] Dolzer, Schreuer, supra note 5, at, at 262

[12] Huiping, supra note 6, at 681

[13] Eureko v. Poland, Partial Award (19 August 2005)

[14] 1992 Agreement between the Kingdom of the Netherlands and the Republic of Poland on encouragement and reciprocal protection of investments, 2240 UNTS 387 (2004) 

[15] Eureko case, supra note 13, para.250

[16] Dolzer, Schreuer, supra note 5, at 170

[17] Ibid., at 211

[18] Plama v. Bulgaria, ICSID, Case No.ARB/03/24, Decision on Jurisdiction (8 February 2005)

[19] Maffezini  case, supra note 1, para.56

[20] Impregilo v. Argentina, ICSID, Case No.ARB/07/17,  Concurring and Dissenting Opinion of Professor Brigitte Stern (21 June 2011), para.78  

[21] Ibid., paras.78,83

[22] Maffezini case, supra note 2, para.62

[23] For example, See Concurring and Dissenting Opinion of Professor Brigitte Stern, supra note 20, para.101

[24] CMS case, supra note 7, para.80

[25] Pantechniki v. The Republic of Albania, ICSID, Case No.ARB/07/21, Award (30 July 2009)

[26] Ibid., para.67

[27] Ibid., para.61

[28] Ibid., para.64

[29] Chevron Corporation and Texaco Petroleum Corporation v. The Republic of Ecuador, PCA, Case No.2009-23, Third Interim Award on Jurisdiction and Admissibility (27 February 2012)

[30] Ibid., para.4.76

[31] Ibid.

[32] G. Wegen, L. Market, ‘Investment Arbitration- Food for Thought on fork-in-the-road- A Clause Awakes from its Hibernation’ in G. Zeiler, I. Welser, Pitkowitz (eds.), Austrian Yearbook on International Arbitration (2010), 269 at 291

[33] Ibid.

[34] Ibid., at 172

[35] Eureko case, supra note 13, para.248

[36] Nobel Ventures v. Romania, ICSID, Case No. ARB/01/11, Award (12 October 2005)

[37] SGS case, supra note 10

[38] Eureko case, supra note 11

[39] SGS v. Pakistan, ICSID, Case No.ARB/01/13, Decision on Objections to Jurisdiction (6 August 2003)

[40] Dolzer, Schreuer, supra note 5, at 172

[41] SGS case, supra note 22, para.168

[42] El Paso v. Argentina, ICSID, Case No.ARB/03/15, Decision on Jurisdiction (27 April 2006)

[43] Pan American/BP v. Argentina, ICSID, Case No.ARB/04/8, Decision on Preliminary Objections (27 July 2006)

[44] Dolzer, Schreuer, supra note 5, at 174,175

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