ABSTRACT
Investment treaty arbitration (‘“ITA”’) and domestic courts are two primary avenues for resolving investment disputes. This research explores the advantages and disadvantages of “ITA” compared to domestic courts, providing a comprehensive understanding of their implications for investors and states. In recent times, numerous States, scholars, and civil society representatives have grown more critical of the rationale behind upholding a dispute resolution mechanism that permits foreign investors to directly sue sovereign States in international arbitration forums instead of the recipient State’s courts.
DEVELOPMENT OF “INVESTMENT TREATY ARBITRATION”
During recent years, several States, scholars, and civil society members have increasingly challenged the legitimacy of a “dispute resolution system that permits foreign investors to directly file claims against sovereign States before international arbitration tribunals instead of the host State’s courts.”
In the concept of “investment treaty arbitration,” jurisdiction” is often based on a proposal of assent to arbitration provided by the treaty’s state parties, which is typically “a bilateral investment treaty (BIT)”. The proposal might be taken by nationals of the opposite state party to the treaty, often by initiating arbitration procedures.” Simultaneously, claimants generally rely on the treaty’s substantive standards. Hence, at first glance, “jurisdiction” and relevant substantive law look as if they are closely intertwined. However, a more detailed examination reveals that while they are correlated in several ways, “jurisdiction” and applicable law are not always identical.
Specifically, it is wrong to infer that a tribunal’s “jurisdiction” based on a certain treaty implies that the substantive law it applies is inevitably formed of that treaty’s criteria of safeguarding the environment. In simple terms, a tribunal’s jurisdictional foundation does not determine which law it will apply.
The extent of a tribunal’s “jurisdiction” can vary significantly between different treaties. Sometimes, “jurisdiction” exceeds the substantive standards provided by the treaty; other times, it aligns with them. Occasionally, “jurisdiction” does not encompass the entirety of the treaty’s protective provisions. In certain instances, the substantive law applied by a tribunal is derived entirely from sources external to the treaty that constitutes the jurisdictional foundation.
In the same way that the foundation of a tribunal’s “jurisdiction” does not prescribe the law it is obliged to utilize, the governing law in a particular case doesn’t ascertain the tribunal’s “jurisdiction”. This legal framework regulating jurisdictional matters is distinct from the law pertinent to the substance of the circumstance.
The piece that follows first looks at the legislation controlling a tribunal’s jurisdictional difficulties. “Jurisdiction” is fundamentally decided by the instrument(s) conferring “jurisdiction.” In treaty arbitration, this will constitute the treaty that grants assent to arbitration. On some concerns, such as the legality of the investment and the investor’s nationality, the treaty will make reference to domestic law.
The subsequent part addresses the varying scope of “jurisdiction” implemented by “investment treaty tribunals”. This scope can range from broad “jurisdiction” over all investment-related disputes to “jurisdiction” only over specific, assiduously defined disputes. There is no obvious relationship among these jurisdictional articles and the applicable law requirements of the applicable treaties.
The third part explores circumstances where the tribunal’s “jurisdiction” and the applicable law originate from different sources. This is particularly the case when the tribunal pertains to substantive benchmarks that predate the treaty providing for jurisdiction.
1. The “Law Governing Jurisdiction”
Respondents in investment treaty arbitrations often raise jurisdictional protestations. Tribunals consistently hold that interrogations of “jurisdiction” are managed by their own set of rules, determined by the parties’ permission to “jurisdiction,” rather than by the law relevant to the case’s grounds. Illustratively, in CMS v Argentina, the tribunal rejected the respondent’s attempt to use national law to contest shareholder standing, affirming that only the “ICSID Convention” and the “BIT”s jurisdictional provisions were applicable.
2. The Extent of “Jurisdiction” Exercised by Investment Treaty Tribunals –
The scope of a tribunal’s “jurisdiction” varies by treaty. Some treaties grant broad “jurisdiction” over all investment-related disputes, while others limit “jurisdiction” to narrowly defined disputes. For example, “Austria’s Model “BIT” limits arbitration to disputes concerning obligations under the agreement, while China’s Model “BIT” offers arbitration for any legal dispute in connection with an investment. The Guatemala-Spain “BIT”, as interpreted in Iberdrola v Guatemala, restricts “jurisdiction” to disputes related to treaty violations, unlike other treaties with broader jurisdictional clauses.”
ADVANTAGES & DISADVANTAGES
Broadly speaking, there are two interconnected disparagements against “investment treaty arbitration” compared to domestic courts. Firstly, critics argue that there is no necessity for an international system to resolve investment disputes because investors inherently “retain rights under domestic systems,” which are often presumed, but not proven, to be insufficient. Essentially, the current international “investment agreement (IIA) arbitration regime fails to consider instances where domestic courts provide sufficient access to justice for foreign investors. Similarly, detractors claim that the IIA framework” allows investors to lodge rights against sovereign States without exhausting local remedies in the host State, even when those remedies could potentially deliver justice. Indeed, “IIAs commonly waive the requirement to dissipate local remedies, even for countries with well-developed legal systems.”
Secondly, critics highlight “domestic investors (and international investors of non-IIA nationalities) do not have the procedural right to arbitrate against the host State under an IIA.”
If local remedies are deemed to be untrustworthy, why should only (some) foreign investors receive advantages from an international adjudicatory procedure? There is no obvious relationship among these jurisdictional articles and the applicable law requirements of the applicable treaties. To critics, this differential treatment appears unfair and exemplifies “the privileges granted by less developed countries to multinational corporations at the expense of local investors who are competitively disadvantaged.”
Recently, the notions of the preeminence of “domestic courts over international tribunals and the non-discrimination between local and foreign investors have been invoked by several States, comprising of capital-exporting countries and traditional advocates of the investment treaty system, to justify anti-investment arbitration policies.” The idea that foreign investors should not be granted more rights than domestic investors, including procedural rights, has received support from various entities, such as “The Australian Government, the European Parliament, and the U.S. Administration under President Trump.” For instance, “in 2011, the Australian Government led by Prime Minister Gillard openly stated it would no longer agree to investment arbitration in its treaties, citing reasons of equal treatment between foreign and domestic investors. In 2015, the European Parliament recommended that the European Commission ensure that foreign investors are treated non-discriminatorily and have a fair opportunity to seek and achieve redress, without benefiting from greater rights than domestic investors, and opposed the inclusion of Investor-State Dispute Settlement (“ISDS”) in the Transatlantic Trade and Investment Partnership (TTIP). During the recent NAFTA renegotiations, the U.S. Trade Representative informed Congress of the U.S. Government’s scepticism about “ISDS”, noting that investor-state arbitration grants “a foreign national more rights than Americans have in the American court system,” and suggested that investors should resort to State-to-State dispute settlement or include arbitration provisions in their contracts as more appropriate alternatives.”
In “investment treaty arbitration”, “jurisdiction” is usually grounded on a state’s offer of consent to arbitration, which is commonly found in a bilateral investment treaty (“BIT”). Nationals of the other state party to the treaty can accept this offer, typically by initiating arbitration proceedings. In unison, claimants often depend on the treaty’s substantive paradigms. Therefore, at first sight, “jurisdiction” and the applicable substantive law seem closely connected. However, upon closer inspection, it becomes evident that although they are related in several respects, “jurisdiction” and applicable law are not always the same.
Specifically, it would be incorrect to presuppose that a tribunal’s “jurisdiction” based on a distinct treaty means that the substantive law it applies is inevitably composed of that treaty’s standards of protection. To put it differently, the foundation of a tribunal’s “jurisdiction” does not determine the law that it will enforce.
The extent of a tribunal’s “jurisdiction” can vary significantly between different treaties. Sometimes, “jurisdiction” exceeds the substantive standards provided by the treaty; other times, it aligns with them. Occasionally, “jurisdiction” doesn’t cover the entire treaty’s protection standards. In some cases, the substantive law that a tribunal applies is found entirely outside the treaty that serves as the jurisdictional basis.
The law relevant to a case, like the foundation of a tribunal’s “jurisdiction”, doesn’t prescribe the law to which it must adhere. The law guiding jurisdictional issues differs from the law governing the factual basis of the case. “jurisdiction” is primarily decided by the instrument(s) that confer “jurisdiction”. In treaty arbitration, this is the treaty that grants consent to arbitration. In some cases, such as the legitimacy of the investment and the investor’s country of origin, the treaty will give effect to domestic law.
A detailed contemplation at the “investment arbitration as a substitute for domestic courts” reveals that the present “ISDS” design may worsen the legitimacy crisis of the investment treaty regime. Entrusting high-stakes disagreements to private arbitrators risks prioritizing corporate interests over public welfare. By sidelining domestic courts, it raises doubts about IIAs’ societal benefits. Direct access to international remedies for foreign investors increases financial & sovereignty costs for host states, contributing to dissatisfaction. This heavy reliance on investment arbitration can create a perception of reverse discrimination and diverges from the established standards in other areas of international law.
From the perusal of the case of “White Industries Australia Limited v. The Republic of India (“UNCITRAL”, 2011),” an Australian company, “White Industries, initiated arbitration against India under the India-Australia Bilateral Investment Treaty (“BIT”). The dispute arose due to delays by Indian courts in enforcing an ICC award in favor of White Industries against Coal India, a state-owned enterprise. The tribunal ruled in favor of White Industries, holding that India had breached its obligation to provide “effective means” of asserting claims and enforcing rights under the “BIT”. This case highlighted the potential for BITs to provide relief for foreign investors facing delays and inefficiencies in domestic judicial systems.”
Additionally in “Devas Multimedia Private Limited v. Antrix Corporation (ICC Arbitration, 2015)”,a company based in Mauritius, initiated arbitration under the India-Mauritius BIT after the Indian government cancelled a lucrative satellite deal between Devas and Antrix Corporation, the commercial arm of ISRO (Indian Space Research Organisation).The tribunal awarded Devas $672 million in damages, finding that India had expropriated Devas’s investment and failed to provide fair and equitable treatment.
In the famous case of “Vodafone International Holdings BV v. India (“UNCITRAL”, 2020),” Vodafone initiated arbitration under the India-Netherlands “BIT” after India retrospectively amended its tax laws to impose a $2 billion tax liability on Vodafone related to its acquisition of Hutchison Whampoa’s Indian operations in 2007.
After ruling in favor of Vodafone, stating that India’s retrospective tax demand breached the “BIT”’s fair and equitable treatment provision. The tribunal ordered India to cease the tax demand and reimburse Vodafone for legal costs.
PRESENT-DAY INSTANCE
Recent disputes continue to illustrate the dynamics between “ITA” and domestic courts. For example, the ongoing “forced labor litigation in Korea” has raised questions about the ability of Japanese companies to seek recourse through “ITA” for adverse domestic judgments. This contemporary instance underscores the relevance of “ITA” in challenging domestic judicial decisions perceived as injurious by foreign investors.
CONCLUSION
Investment Treaty Arbitration provides a valuable alternative to domestic courts for resolving investment disputes, offering neutrality, enforceability, and expertise. However, it also presents challenges related to cost, transparency, and limited appeal options. Analyzing case laws and current events highlights the nuanced advantages and disadvantages of “ITA”, informing stakeholders about the optimal forum for dispute resolution in international investments. Proponents of “ISDS” often argue for its necessity by claiming that it removes disputes from national courts, which may lack independence, and efficiency, or may be biased against foreign entities. This reasoning, whether intentional or not, promotes the notion that foreign investors should bypass domestic courts and go straight to international arbitration. However, this chapter challenges that notion by revealing that many investors do utilize domestic courts before resorting to “ISDS” and explores the reasons behind this trend. By examining cases in two countries with developing judicial systems and two with established efficient courts, the author provides substantial evidence of the wide array of claims made by foreign investors in the host nations.
BIBLIOGRAPHY
1. Blythe, S. E. (2013). The advantages of investor-state arbitration as a dispute resolution mechanism in bilateral investment treaties. Int’l Law., 47, 273.
2. Cambridge Core. (2024). Challenging Domestic Judgments Through Investment Arbitration: Implications for the Forced Labour Litigation in Korea.
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4. Devas Multimedia Private Limited v. Antrix Corporation, ICC Arbitration Case No. 18051/CYK. (2015). International Chamber of Commerce. Retrieved from ICC Arbitration.
5. Vodafone International Holdings BV v. India, “UNCITRAL”. (2020). United Nations Commission on International Trade Law. Retrieved from “UNCITRAL” Case Law.
6. Wanli Ma & Michael Faure, Is Investment Arbitration an Effective Alternative to Court Litigation? Towards a Smart Mix of Litigation and Arbitration in Resolving Investment Disputes, 48 Brook. J. Int’l L. 1 (2022).
7. White Industries Australia Limited v. The Republic of India, “UNCITRAL”. (2011). United Nations Commission on International Trade Law. Retrieved from “UNCITRAL” Case Law.
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