A string of mainstream media reports are suggesting that Uruguay is looking to compromise with Philip Morris International in relation to a sensitive international arbitration.

On Tuesday, The UK-based Guardian newspaper reported that Uruguay

has promised to water down anti-smoking laws after pressure from the tobacco giant Philip Morris, prompting accusations of corporate bullying.

More specifically, the paper reports that Uruguay will make certain changes to its strict tobacco control laws in order to comply with its “international trade obligations”:

“On some arguments, Uruguay is very strong from a legal point of view and changes aren’t necessary. On other points, we need to make changes to the law or come up with a new law,” the foreign affairs minister, Luis Almagro, said.

Readers of this blog may recognize that these developments come in the context of an arbitration claim initiated by Philip Morris International at the International Centre for Settlement of Investment Disputes (ICSID). For background on the claim, see this report from my Investment Arbitration Reporter newsletter (no subscription required).

It’s not clear on what basis Uruguay has decided that its policy must be amended. According to the ICSID, the country has yet to instruct outside legal counsel. As such, it’s not clear whether the government commissioned external legal opinions (or relied on internal legal advice) following Philip Morris International’s filing of a damages claim under the Switzerland-Uruguay bilateral investment treaty.

If the claim goes forward, it promises to be an extremely sensitive arbitration. Already, a number of NGOs and activist groups have drawn attention to the dispute, and raised concerns about the potential for BITs (and their intellectual property protections) to foreclose the use of certain public health measures.

No doubt both parties are keen for the arbitration to be settled, rather than devolve into a circus. However, if Uruguay is blinking as a result of a conviction that its policies are not compliant with its bilateral investment treaty obligations, such a move may reverberate widely – with governments coming under pressure to create more breathing space in their treaties for public health measures. (Mind you, Uruguay’s new tobacco regulations were some of the strictest in the world, so the arbitration was not necessarily a test-case for more middle-of-the-road measures).

I’m planning to make further inquiries in order to understand what legal advice Uruguay received – and from whom – as part of its recent announcement that it must tweak its tobacco policies.

I’ll update readers if I find anything interesting.

Luke Eric Peterson
http://www.iareporter.com

27 June 2010 marks the 20^th anniversary of investment treaty jurisprudence.  On 27 June 1990, the tribunal in Asian Agricultural Products Ltd. v. Sri Lanka (ICSID Case No. ARB/87/3) (AAPL) dispatched its final award to the parties.  The AAPL tribunal (Dr. Ahmed Sadek El-Kosheri (President), Professor Berthold Goldman and Dr. Samuel Asante) was the first to be “seized by an arbitration request exclusively based on a treaty provision and not in implementation of a freely negotiated arbitration agreement directly concluded between the Parties…” (para. 18, Final Award).  This despite the fact that “arbitration without privity” had been available under investment treaties since at least 1969.  AAPL turned out to be the launching point for a body of distinct investment treaty jurisprudence and the first of over 350 investment treaty cases that have arisen over the past 20 years.

The basics facts and outcome in AAPL are well known.  The majority of the tribunal found Sri Lanka had breached its obligation under the Sri Lanka/UK BIT to exercise due diligence in the protection of the investor’s shrimp farm during military operations.  The majority awarded damages of US$460,000 based on AAPL’s 48% shareholding in the joint venture company, Serendib, which operated the shrimp farm.  The damages in question represented the value of Serendib’s tangible assets.   In a forceful dissent, Dr. Asante disagreed with the majority’s interpretation of the treaty, found that the investor had not established Sri Lankan forces were responsible for the damages in question and stated that damages should have been limited to US$ 300,000, the amount of AAPL’s equity investment.

Although the Final Award is probably best known for its finding that a treaty-based “full and protection security” obligation imposes an obligation of due diligence on the state and not strict liability for damages (and that this obligation is essentially a codification of customary international law), the Final Award is regularly cited for a variety of legal issues.  Indeed, AAPL has been cited in over 50 investment treaty arbitration decisions and awards.

Interestingly, and unlike the many cases that have followed, Sri Lanka does not appear to have contested jurisdiction, despite the fact that AAPL was a minority shareholder and was claiming damages in a shrimp farm that was owned by a Sri Lankan company.  As a result, the Final Award is often cited for the proposition that shareholders can bring an investment treaty claim regardless of whether the treaty explicitly permits indirect claims.

AAPL is also cited for the proposition that an investor is entitled to the more favourable treatment in another treaty by virtue of an MFN clause.  The majority was of the view that AAPL could obtain the benefit of more favourable treatment provisions in other investment treaties, but rejected the argument that other treaties provided more favourable treatment.  The case is also regularly cited for its findings on burden of proof, that consent to ICSID jurisdiction can arise from an investment treaty and that claims for future profits should be disregarded where there is an insufficient history of actual operations.

Rereading the award I was struck by the familiarity of the preliminary issues to be addressed—applicable law, interpretation, attribution and the depth of the tribunal’s reference to international law sources, in particular older international arbitration decisions and the writing of publicists.  The Tribunal emphasized that bilateral investment treaties are “not a self-contained legal system” but have to be “envisaged within a wider juridical context in which rules from other sources are integrated though implied incorporation methods, or by direct reference to certain supplementary rules…”   This is an important principle to highlight in light of current debates about the fragmentation of international law and the relationship between a state’s investment treaty and other obligations under public international law.

I spent some time in Namibia and South Africa last December looking into the impact of bilateral investment treaties on land reform.

I don’t do a lot of field trips, and my wife harboured some suspicion that this “research venture” was merely a tidy excuse to trade the New York winter for the Southern African summer.

These suspicions only grew when pictures surfaced of me on a four-wheeled all terrain vehicle in the Namibian desert – with nary a laptop or notebook in sight.

So, it’s with considerable relief that I see that my short paper (written with the South African lawyer Ross Garland) was published this week.

The paper is hardly the first word on the topic. Nor, I expect, will it be the last.

While conflicts over land are hardly exclusive to sub-Saharan Africa, the international law dimension of land politics is coming to a head in this region though. (Indeed, I blogged about this topic a year ago).

Readers of my Investment Arbitration Reporter news service will be aware of the international arbitration claim mounted by a bloc of Dutch passport-holders following the violent expropriation of their farms in Zimbabwe. The claimants prevailed in their arbitration at the International Centre for Settlement of Investment Disputes (ICSID) – making out a breach of the Netherlands-Zimbabwe bilateral investment treaty – but they are struggling to collect on the 2009 arbitral award. Don’t be surprised if other claims against Zimbabwe should emerge in the months or years to come.

Elsewhere in the region, relations between land-owners and governments have been less fraught, but there are unavoidable political pressures for more ambitious forms of land reform.

Proposed land reform measures tend to be viewed through the prism of domestic constitutions and their property rights guarantees. However, matters don’t end there. Foreign owners – as well as locals who dress up in foreign garb via creative ownership structures – may also rely on bilateral investment treaties for a further layer of legal protection.

To date, there have not been large-scale expropriations in Namibia or South Africa. However, if governments move beyond the willing-buyer/willing-seller approach to land reform then we could see more legal disputes arise.

Already, in the case of Namibia, a handful of German property-owners who were among the first to be targeted for compulsory expropriation turned to the Namibian Constitution and the Germany-Namibia BIT when their lands were targeted for expropriation in recent years.

Likewise, in South Africa, an anonymous Swiss investor complained that the mere prospect of future expropriation had devalued his land to such an extent that it breached the Swiss-SA BIT.

An arbitral panel rejected that claim – in a still unpublished UNCITRAL arbitral award – but don’t be surprised if we see the politically-contentious question of land reform taken up by future arbitral tribunals.

In the mean time, let me leave you with a few shots of the Namibian desert: an expanse of beautiful, but arid land that is unlikely to give rise to any investor-state arbitration claims.

Luke Eric Peterson
http://www.iareporter.com

The preliminary hearings in the Pacific Rim v. El Salvador CAFTA arbitration went off without a hitch at the start of this week.

I’d like to report that I hung on every word via the live webcast that had been arranged by the International Centre for Settlement of Investment Disputes. However, I spent my Monday – a public holiday here in the United States – digesting nothing more challenging than the latest Stieg Larsson potboiler.

But, when I returned to the office on Tuesday I caught the second half of the on-line hearings. (For background on the case click here and here).

The arbitration is particularly noteworthy because the parties were bound – by the terms of the CAFTA – to conduct their arbitration in public. Under the Central American Free Trade Agreement’s investor-state arbitration mechanism, legal pleadings and oral hearings are open to public scrutiny.

Thanks to the CAFTA’s clear wording, the parties do not have the luxury of turning to the tribunal for a confidentiality order at the first sign of any public or media scrutiny of the proceedings. Thus, PacRim and El Salvador found themselves above-deck, tied firmly to the mast, in full view of the public and critics.

This made for an interesting experiment: would the arbitration’s participants be able to steer the ship past the Scylla of the nosy media and the Charybadis of noisy environmental activists?

A first test came last week, when protesters organized a demonstration outside the Washington offices of Crowell and Moring – who represent PacRim in the arbitration.

A brief online video of the demonstration shows several dozen activists making speeches and holding posters. One activist tottered around rather precariously on a pair of stilts. Critics, in D.C. and elsewhere, are calling on PacRim to respect El Salvador’s right to bar gold mining out of an abundance of environmental caution.

Ultimately, the protesters got to howl at Crowell, and the arbitration process seemed to emerge none the worse for wear.

In fact, when I called Crowell and Moring after the demonstrations, a Partner with the firm told me that he and his colleagues continued to work away on their last-minute hearing preparations. He added that the firm and PacRim “firmly believe that people have a right to demonstrate and make their views known, as long as it’s done in a peaceful way.”

Of course it remained to be seen whether the hearings themselves would come off without a hitch. But, come Monday and Tuesday of this week, there was nary a hiccup.

Of course, it’s instructive to think what might have happened had the CAFTA not mandated full openness.

Perhaps at the first sign of media or public criticism, the claimant would have made an urgent request for provisional measures, ostensibly to protect the right to non-aggravation of the proceedings. Such orders have been issued from time to time in ICSID proceedings, perhaps most notoriously in the Biwater v. Tanania arbitration arising out of a particularly contentious water-privatization dispute.

In the Biwater case, the tribunal issued a Procedural Order which famously held that arbitrators could act pre-emptively – in the absence of actual harm – so as to lock-down the release of certain information about the case.

I’m not sure that this Order had much effect in terms of silencing interested observers or critics of Biwater. But, the Order has had a rather depressing knock-on effect in other ICSID cases, where tribunals have continued to crack down on public access and disclosure – in the absence of any real threat to the arbitration proceedings.

These days, tribunals are all too prepared to slam the door and lock all the windows at the first hint of public interest in a case.

Against this rather depressing backdrop, it was nice to see that a politically-charged arbitration like the PacRim v. El Salvador case is perfectly capable of being conducted in a highly-public manner without the arbitral proceeding falling into disarray.

Interested practitioners, wary activists, and the system as a whole were all winners this week.

http://www.iareporter.com

UNCTAD’s most recent note on investment treaty arbitration (Latest Developments in Investor-State Dispute Settlement, IIA Issues Note No. 1 (2010)) provides a useful overview of the growth in investment treaty arbitration and the major jurisprudential developments in 2009.  According to UNCTAD, the total number of known investor-state cases under investment treaties stood at 357 at the end of 2009, including 225 at ICSID, 91 under the UNCITRAL Rules, 19 under the SCC Rules, eight administered by the Permanent Court of Arbitration, and 5 with the ICC.  There are four ad hoc cases and one case filed with the Cairo Regional Centre for International Commercial Arbitration.

The graph in the note shows a steadily increasing investment treaty caseload, with significant increases since 2002.  57% of cases have been initiated during the past five years.  The number of cases filed in 2009 (at 32) fell for the third consecutive year.  Although this can hardly be described as a trend, one might wonder whether the growing body of cases dismissing claims against host states, coupled with awards of costs against unsuccessful claimants is having some chilling effect on new claims.  ICSID registrations for all types of cases stand at only 11 for the first five months of 2010.  That said, continued nationalizations in Latin America and potential claims relating to state measures to address the financial and economic crisis might lead to a rise in claims.

The number of state respondents to investment treaty claims also continues to rise, now standing at 81. UNCTAD reports that 49 developing countries, 17 developed countries and 15 countries with economies in transition are involved in claims.  Claimants from developed states continue to predominate, but there are 23 cases from investor claimants from developing states.  Argentina remains the most sued state with 51 cases against it, followed by Mexico (19), the Czech Republic (16), Ecuador (15), Canada (14), Ukraine (14) and the United States (14).

Of the 164 concluded cases, UNTAD reports that “38 per cent were decided in favour of the State (62) and 29 per cent in favour of the investor (47), while 34 per cent (55) cases were settled”.

At the recent Northwestern Law School conference on the Israeli-Arab Dispute and International Law I had the good fortune to address one of the few bright spots in current Arab-Israeli relations.

Most international law scholars of the Arab-Israeli conflict seem to know little about international trade, and focus almost exclusively on the laws of war in their discussion of Middle East relations. Therefore when I was choosing my topic for discussion, I decided to analyze the current status of the Arab League boycott against Israel. The secondary boycott, of course, involves the blacklisting of any corporation that does business in Israel.

As a result of the secondary boycott, Arab consumers suffered because they did not have access to the most efficient source of goods and services. Israeli investment also suffered because foreign corporations often chose to sell their products to dozens of countries with hundreds of millions of consumers rather invest in one small country with a few million consumers. Third-country corporations were caught in the middle and forced to make hard choices that they should never have been forced to make.

The good news is that in the past fifteen years the secondary boycott against Israel has died a quiet death. According to official reports from the United States, of the twenty-two members of the Arab League, only three countries–Iraq, Libya, and Syria–continue to enforce a secondary boycott. Even then, it appears that only Syria is serious about it. USTR has recently stated that the secondary boycott “has extremely limited practical effect overall on U.S. trade and investment ties with most Arab League countries.” As a practical matter, we are experiencing the death rattle of the secondary boycott against Israel.

One can only speculate about the cause of death, but I would hazard that it has much to do with the legalization of international economic relations. Since the end of the Cold War, thousands of bilateral investment treaties have been signed. Hundreds of those involve Arab countries, with Egypt having signed seventy-nine, Morocco seventy-three, Oman seventy-one, Lebanon forty-nine, Jordan thirty-five, etc. These BITs are unusually significant in that they depoliticize disputes by guaranteeing foreign investors the right to pursue treaty-based investment arbitration. If an investor is blacklisted as a result of the secondary boycott against Israel, then it likely has a viable claim for a BIT violation, such as compensation for conduct tantamount to an expropriation or denial of fair and equitable treatment.

Equally momentous is the binding nature of the WTO rules, which prohibit discriminatory import bans. The Arab League boycott violates WTO rules against MFN treatment and quantitative restrictions. Not surprisingly, none of the twelve Arab League countries that are WTO members enforce a secondary boycott, and only three of them–Kuwait, Saudi Arabia, and the UAE–continue to enforce a primary boycott.

Even the primary boycott is subject to a strong legal challenge before the WTO, but Israel thus far has decided to forego this avenue, concluding that “the boycott right now is on the defensive as a result of working behind the scenes…. We do not wish to politicize the WTO.” One may take this at face value, or conclude that Israel fears that such a challenge would require the WTO to finally interpret the national security exception, an ambiguous provision that deserves careful interpretation in a less politically-volatile context.

WTO accession talks will continue to create pressure to eliminate the secondary boycott. In its accession talks, for example, Saudi Arabia confirmed that “the application of secondary and tertiary boycotts had been terminated in practice and in law.” Recent WTO decisions involving China’s accession commitments now make clear that those promises are subject to legal enforcement. The three secondary boycott holdouts–Iraq, Libya, and Syria–are all seeking WTO membership, and given the nature of accession talks, one can be sure that termination of the secondary boycott will be a precondition of their membership.

That’s great news for the Arab street. The importance of promoting foreign investment is particularly acute in the Middle East. The Arab world is facing a ticking time-bomb, with approximately 70 percent of its population under twenty-five years old. It desperately needs to find ways for its growing population to contribute to its economy. For most Arab countries, the commitment to strengthen their economies and develop trade relationships has taken precedence over the desire to enforce a secondary boycott against Israel. Almost nine out of ten Arab countries have concluded that the costs of continued enforcement of the secondary boycott outweigh the benefits.

That’s also great news for Israel. It is now enjoying a tremendous influx of foreign investment. The boycott’s greatest risk was always that it would impede direct foreign investment into Israel. That fear no longer animates the discussion. In the same year that Israel was at war with Lebanon, it enjoyed record direct foreign investment of over $13 billion.

Yesterday a federal court in New York granted Chevron’s request for discovery of outtakes from the 2009 documentary Crude about the multi-billion dollar litigation in Ecuador. Chevron’s request was pursuant to 28 U.S.C. 1782, which authorizes a judge in the United States to order discovery of evidence to be used in proceedings before a foreign tribunal.

As reported here, Chevron’s lawyer, Randy Mastro, argued that over 600 hours of film that was left on the editing room floor will incriminate the plaintiffs’ lawyers and show collusion between the Ecuadorian judge, the court-appointed expert, the Ecuadorian government and plaintiffs. “We’re trying to show in Ecuador that the expert report is tainted,” Mastro said. “We have the right to show how the process was manipulated by the plaintiffs’ counsel working in concert with the government…. Outtakes are an extraordinary record in which the plaintiffs’ counsel and their clients participated.”

The Court held that an investment arbitration panel is a “foreign tribunal” within the meaning of the statute. “The arbitration here at issue is not pending in an arbitral tribunal established by private parties. It is pending in a tribunal established by an international treaty, the BIT between the United States and Ecuador.” But the court seemed to suggest that even if it was a private arbitration, it could still order discovery under Section 1782. In the wake of the Supreme Court’s 2004 decision of Intel Corp. v. Advanced Micro Devices, the court noted that several circuits have “held that international arbitral bodies under UNCITRAL rules constitute ‘foreign tribunals’ for purposes of Section 1782. This Court agrees.”

Regarding whether a documentary film enjoys a journalistic privilege that precludes discovery, the court held that documentary films may invoke journalistic privilege, but that the test to satisfy the privilege was not met. The material sought is not confidential, will likely prove relevant in the case, and cannot reasonably be obtainable from other available sources.

Perhaps most interesting, the court seemed sympathetic to Chevron’s arguments that Ecuador is no longer the fair and impartial forum it once was when it advocated dismissal of the case on the grounds of forum non conveniens. The court cited a disturbing 2009 State Department report of judicial corruption and influence, and stated that “one readily sees why Chevron … now might be concerned about their fate in the Ecuadorian courts, regardless of whether events ultimately will prove those concerns to be justified.”

So Chevron will now have access to hundreds of hours of unedited film outtakes that have the potential to be completely explosive. If Chevron is to be believed, it could show footage of plaintiffs’ lawyers using pressure tactics to influence the outcome. Reportedly among the outtakes is a scene in which the plaintiffs’ lawyer pressures an Ecuadorian judge not to inspect a laboratory used to assess environmental contamination, saying “this is something you would never do in the United States, but Ecuador, you know, this is how the game is played, it’s dirty.”

Until very recently, the issue of moral damages had arisen in only a handful of investor-State disputes. However in 2008 and 2009 alone, no less than five arbitration awards discussed the issue. While some tribunals dismissed moral damages claims based on lack of evidence (Pey Casado v. Chile; Biwater v. Tanzania and Europe Cement v. Turkey) or lack of jurisdiction (Cementownia v. Turkey), in one such case, Desert Line Projects LLC v. Yemen, the Arbitral tribunal awarded an amount of US$1 million in compensation to a corporation. This post examines why and how arbitral tribunals established under investment treaties award monetary compensation for moral damages suffered by foreign investors as a result of treaty breaches committed by the host State of the investment (see, Patrick Dumberry, “Compensation for Moral Damages in Investor-State Arbitration Disputes”, 27(3) Journal of International Arbitration, 2010).

The basic principle of State responsibility is, of course, that a State must make full reparation for any injury (whether material or moral) caused to another State or a foreign investor. A tribunal should therefore award an amount of compensation that is exactly equivalent to the actual moral damage suffered and should not award a single dollar in compensation over and above that.

The concept of moral damage is, however, vague and may be subject to different interpretations. The same is true for the quantification of moral damages. Thus, under the exact same circumstances, a certain type of moral damage that is considered by one tribunal to be worth US$10,000 in compensation could very well be deemed worth US$100,000 by another. There are only a select few instances where a tribunal, such as the UNCC, is bound by strict guidelines determining in advance the amount of compensation to be awarded for certain specific types of moral damages (see, UNCC Governing Council Decision no. 3, S/AC.26/1991/3 (23 October 1991); UNCC Governing Council Decision no. 8, S/AC.26/1992/8 (27 January 1992). In all other cases where no guidelines exist, tribunals will necessarily have a great deal of flexibility and discretion to determine what amount should adequately compensate an investor for the moral damage suffered. How should tribunals then exercise such discretion? This is where the issue of culpa matters.

The Desert Line award’s reference to “the physical duress exerted on the executives of the Claimant” which “was malicious and therefore constitutive of a fault-based liability” (para. 290) suggests that the Tribunal considered Yemen’s fault when finding its international responsibility. Similarly, in his concurrent and dissenting opinion in the Biwater v. Tanzania case, Arbitrator Born referred to Tanzania’s “deliberate” conduct causing moral damages to the Investor (para. 33). These statements seem to suggest that fault or malice by the host State is a condition for an award of compensation for moral damage. It should be recalled, however, that the work of the I.L.C. on State responsibility has clearly adopted the concept of the “objective” responsibility of a State whereby “it is only the act of a State that matters, independently of any intention” (J. Crawford, I.L.C.’s Articles on State Responsibility, Introduction, Text and Commentaries, at p. 84). In my view, malice or any other intent is clearly not a necessary precondition for a tribunal to award compensation for moral damages.

The presence of culpa will undoubtedly, however, have an impact on a tribunal’s decision with respect to the consequences of responsibility. Thus, State’s fault or malicious intent will be taken into account by tribunals when they actually quantify the amount of compensation to be awarded to remediate moral damages. This has long been recognised in doctrine as well as by the I.L.C. Special Rapporteur Arangio-Ruiz in his Second Report on State Responsibility (Yearbook ILC, 1989, vol. II, Part one, at para. 145 and 180: “[I]it seems both logical and rational, as recognized by a number of authorities, that the presence or absence of fault, and, if there is fault, the degree of wilful intent or negligence, play some role in the determination of the degree of responsibility and therefore of the forms and degrees of the reparation due”).

Thus, the amount of compensation should be proportionate to the seriousness of the offence committed by a State and its degree of responsibility. A tribunal may award a greater amount of compensation for moral damages in a situation where the conduct of the State is especially malicious or shocking. Simple common sense would dictate such a solution. This does not mean that there exists any higher threshold for finding a breach of international law in the context of moral damages claims. In my view, it is undesirable that only “egregious” State behaviour should result in awarding compensation for moral damages.

One illustration of the approach proposed here is the 1992 case of Letelier and Moffitt where the ad hoc Commission established by the United States and Chile awarded more than US$1 million in compensation for moral damages to three individuals and their heirs. This case arose from the assassination in 1973 in Washington of Mr. Letelier, a Chilean opponent to the Pinochet regime living in exile in the United States, by Chilean secret police agents. In his own “separate concurrent Opinion” Arbitrator Orrego Vicuña indicated that Chile “ha[d] given important steps to satisfy the moral dimension of the human rights situations with which it has had to deal” and that “[t]his positive attitude ha[d] certainly a bearence on the determination of compensation for moral damages.” (UNRIAA, vol. XXV, p. 16). The Commission therefore seems to have taken into account the “positive attitude” of Chile since the regime change in 1990 by awarding less monetary compensation than it would have had otherwise.

Arguably, tribunals should not only take into account the “positive” attitude of States regarding foreign investors but also, quite logically, any other “negative” factors. Any particularly condemnable governmental actions toward a foreign investor could have a bearing on the quantification of the actual amount of compensation to be awarded for moral damages.

When awarding compensation for moral damages, a tribunal is therefore not only wiping out all the negative consequences of a wrongful act. It is also sometimes expressing its strong concerns about a State’s unacceptable treatment of foreign investors, a concern which can be expressed in monetary terms. In such a case, the amount of compensation is not only attributed to remediate damage but also to send a clear message to the host State. There are several earlier examples of international law cases where arbitral tribunals have awarded monetary compensation in circumstances akin to moral damages with the clear intent of condemning unacceptable State conducts (see, Moke v. Mexico, U.S.-Mexico Mixed Claims Commission, 1871, in J.B. Moore, History and Digest of the International Arbitrations, Vol. IV, 1898, p. 4311).

In my view, a tribunal expressing strong concerns about State actions through an award of compensation to remediate moral damages must be distinguished from the notion of punitive damages. The concept of punitive damages is not recognized under international law (I.L.C. Commentaries, p. 243). Investor-State arbitral tribunals have also refused to award punitive damages (see, CMS v. Argentina, at para. 404). On the one hand, a State is not being imposed an extra amount of compensation in addition to the actual damages suffered. The amount of compensation awarded is in fact equivalent to the actual damage. On the other hand, the goal of awarding compensation still remains to remediate the actual damage suffered; it is clearly not to punish the host State. It may be that the concept of “aggravated” damages would in fact be a better term to describe this situation.

King Solomon might have split the baby had he not realised the identity of its parent in time. Judges and arbitrators – some 3,000 years later – might be quicker to identify a company’s real group structure, but are they any better in splitting parent from child-subsidiary?

A typical corporate veil piercing case involves a controlling shareholder that sets up an undercapitalized corporation to incur obligations to third parties; the shareholder then siphons off the proceeds of its corporate borrowing received from those third parties. When the company’s debts become due the company has insufficient assets to meet its repayment obligations. At that point, the controlling shareholder relies on the principle of limited liability to avoid personal liability. The result is that the third parties end up bearing the exposure.

In such situations, a court or tribunal may intervene to prevent the obvious injustice by piercing the corporate veil so as to hold the controlling shareholder accountable.

Despite various theories justifying corporate veil piercing, the presumption is – however – not to do so. Piercing the veil remains an exception not the rule. Approaches differ not only from one jurisdiction to another, but also within the same national systems of law.

For example, the general rule in the Civil Code of Russia is that each company has separate and distinct legal identity. On the other hand, the 2008 law on foreign investments in strategic sectors of the economy relies on the concept of group of entities. The law applies to investors and groups of companies that want to buy stakes in Russian companies working in one of strategic sectors, such as television broadcasting, defence and the telecommunications industry. In accordance with this law, a ‘group of entities’ is seen as one economic and legal actor which includes offshore subsidiaries. In effect, this amounts to piercing the corporate veil, i.e. disregarding separate legal identity of corporations.

The ‘proper’ approach to piercing the corporate veil and outcome is even less predictable in the context of international commercial arbitration.

Unlike national courts, arbitral tribunals do not have enforcement mechanisms of their own and need to resort to national courts. If a tribunal renders an award against a party which is not subject to the underlying arbitration agreement, problems will likely arise at the enforcement.

Article V of the New York Convention provides five procedural defects, on which national courts can rely to refuse recognition and enforcement of arbitration awards. These are (1) lack of valid arbitration agreement; (2) denial of opportunity to be heard; (3) an excess of jurisdiction by an arbitrator in deciding matters beyond the scope of the arbitration submission; (4) procedure contrary to the parties’ agreement; and (5) annulment of the award in the country where rendered.

Arguably, an award rendered against a non-signatory can be challenged on the basis of any of these grounds, especially if there was no explicit arbitration agreement. For instance, a company that has not signed the arbitration agreement may not be present at the hearings, and is, thus, denied an opportunity to be heard. Local courts might annul the arbitration award against the parent company if the arbitration agreement was not in writing.

However, UNCITRAL noted in its report on written form for arbitration agreement that national courts increasingly adopt a liberal interpretation of the requirement of a written contract.* They construe it in accordance with international practice and the expectations of the parties.

Despite these new developments observed by UNCITRAL, the unpredictability with respect to arbitrations that involve piercing the corporate veil remains a serious problem. Not only is it unclear whether a particular tribunal would be sympathetic towards piercing the corporate veil under applicable domestic law, but the parties must face even greater challenges at the stage of enforcement.

Piercing the corporate veil may help to give a concrete practical meaning to the object and purpose of an arbitration agreement. However, there are downsides of such piercing which negate many of the benefits which the corporate form offers. Creditors will be in a more difficult position to monitor assets of the corporations they are dealing with. And corporations will be unwilling to take business risks which may result in their shareholders’ corporate or personal assets being exposed.

Therefore, as a practical matter, it is better to make arbitration agreements as inclusive as possible. This will help to avoid dealing with piercing the corporate veil altogether.

The full text of the draft paper “Piercing the Corporate Veil in International Arbitration” to be published in Global Business Law Review is available here.

* U.N. Commission on International Trade Law [UNCITRAL], Working Group on Arbitration, Working Group on Arbitration, Working Paper: Possible Rules on Certain Issues Concerning Settlement of Commercial Disputes: Conciliation, Interim Measures of Protection, Written Form for Arbitration Agreement, ¶¶ 11 and 12(m), A/CN.9/WG.II/WP.108/Add. 1 (Jan. 26 2000).

The principle of good faith arises in investment treaty arbitrations in various contexts. Tribunals, of course, regularly refer to Article 31(1) of the Vienna Convention for the rule that treaties shall be interpreted in good faith. Tribunals have noted that states must perform their treaty obligations in good faith. References to good faith occur in the interpretation of substantive obligations, notably fair and equitable treatment and the minimum standard of treatment in customary international law. Further, states sometimes seek to defend their actions on the basis that there was good faith in government conduct. This blog focuses on the obligation of good faith in the conduct of investment treaty arbitration proceedings. This procedural obligation should be distinguished from the separate issue of whether the investment in question and any claims arising from it are made in good faith.

Whenever there are allegations of misconduct by investors or states references to the principle of good faith are likely to follow. Not surprisingly, good faith has been relevant in cases involving issues of investor misconduct (Plama v. Bulgaria; Phoenix Action, Ltd. v. Czech Republic; Fraport v. Philippines; Inceysa Vallisoletana S.L. v. El Salvador). These cases have, however, involved questions of good faith in the making of the investment and the subsequent conduct of the investor, rather than whether the investor’s claim was made and pursued in good faith (the exception is Phoenix—see below). In contrast, in a 2008 Decision on Preliminary Issues in Libananco Holdings Co. Limited v. Turkey, good faith was discussed in the context of the alleged interception and surveillance by Turkish police of legally privileged communications between the claimant, its counsel and witnesses. In addressing, the parties’ submissions on the issue, the Tribunal (Mr. Michael Hwang S.C.; Mr. Henri C. Alvarez Q.C.; Sir Franklin Berman Q.C.) stated:

Nor does the Tribunal doubt for a moment that, like any other international tribunal, it must be regarded as endowed with the inherent powers required to preserve the integrity of its own process – even if the remedies open to it are necessarily different from those that might be available to a domestic court of law in an ICSID Member State. The Tribunal would express the principle as being that parties have an obligation to arbitrate fairly and in good faith and that an arbitral tribunal has the inherent jurisdiction to ensure that this obligation is complied with; this principle applies in all arbitration, including investment arbitration, and to all parties, including States (even in the exercise of their sovereign powers).

Libananco Holdings Co. Limited v. Turkey, Decision on Preliminary Issues, 23 June 2008, para. 79.

The Tribunal cites no authority for these principles, presumably because they are self-evident ground norms. The idea that there is a duty to arbitrate in good faith is well-established (see Born, International Commercial Arbitration at pp. 1008-1014) and, in the investment treaty context, has been recognized in other investment treaty awards (for example, see Methanex Corporation v. United States of America, Final Award, Part II – Chapter I, para. 54 at p. 56). The second principle flows as a necessary incident of a tribunal’s jurisdiction and is implicit in arbitration rules that allow a tribunal to make decisions regarding the conduct of the arbitration proceedings.

If we accept that there is an obligation to arbitrate fairly and good faith, does that duty also apply to the making of a claim, or does it apply only to the procedural obligations that come with an agreement to arbitrate (i.e. co-operation and conduct in the proceedings)? Here I am thinking of Phoenix v. Czech Republic where the Tribunal referred to the principle that in order to have access to ICSID arbitration, investments must be made in good faith. The Tribunal referred to Phoenix’s “initiation and pursuit of this arbitration” as “an abuse of the system of international ICSID investment arbitration” (para. 144). The Tribunal found an abuse of rights by the Claimant’s “creation of a legal fiction in order to gain access to an international arbitration procedure to which it was not entitled” (para. 143). Phoenix, however, is unlike cases such as Inceysa or Fraport, where there was misconduct (fraud and illegality respectively) in the initial investment. In Phoenix, the Tribunal characterized the claimant’s wrong as a “détournement de procédure”, but the good faith issues in Phoenix are unlike those in Libananco, Quiborax or Methanex, where the issue was party conduct during the proceeding.

The obligation to arbitrate fairly and good faith identified in Libananco applies to party conduct during the proceedings. With respect to the investor’s conduct in bringing a claim, good faith and other concepts, such as abuse of process, abuse of rights and détournement de procedure, may be relevant either as jurisdictional impediments (as suggested in Phoenix) or as issues of admissibility of claims (see my earlier post).