But am I the only person who was wondering whether Spain might step forward to sue Argentina on behalf of Repsol?

To be sure, a state-to-state claim would swim against the tide of conventional wisdom. After all, modern Bilateral Investment Treaties contain investor-to-state arbitration clauses precisely so that investors can fight their own legal battles.

However, in recent years, at least one European government has exercised diplomatic protection on behalf of its nationals by invoking the state-to-state arbitration provisions of a bilateral investment treaty. The recently-documented decision by Italy to sue Cuba on behalf of 16 putative investors has illustrated the potential utility of the oft-neglected state-to-state arbitration mechanism found in many BITs.

Several aspects of the Repsol-Argentina controversy make it an intriguing candidate for state-to-state arbitration.

Spain is likely to be dragged in at some stage anyway

In the days after the announcement of Argentina’s nationalization plans, Spain was swift to announce that it would take retaliatory action against Argentine imports. Even if Spain stays its hand for now – and lets the European Commission handle any trade retaliation – the Spanish government is likely to be dragged into the Repsol-Argentina dispute down the road.

Unless Argentina alters it present strategy of not paying final arbitral awards voluntarily, any foreign investor that pursues investor-state arbitration will inevitably turn back to its home state for political and legal muscle during the enforcement and collection phase. Just as the United States and France have been dragged into disputes after their respective investors have failed to collect on final arbitral awards against Argentina, Spain would likely be asked by Repsol to help play the role of collections agent.

If it is inevitable that Spain will get dragged into the dispute during the enforcement end-game, then authorities might have fewer illusions about the supposed “depoliticization” offered by investor-state arbitration. If Spain can look forward to wrestling with Argentina over the enforcement of an arbitral award, perhaps Spanish government lawyers might like to have a hand in the running of the case that gives rise to that award.

A more active Spanish role does not have a huge diplomatic downside

Greater involvement by Spain in the arbitration with Argentina would not necessarily come at the expense of diplomatic relations between the two countries. Increasingly frayed diplomatic relations between Spain and Argentina in recent years mean that Spain is unlikely to play an effective role as facilitator or honest-broker vis a vis Spanish investors and Argentina.

Spanish Foreign Minister José Manuel García-Margallo admitted as much in a recent interview with The Wall Street Journal, where he conceded that Spain had expended considerable diplomatic energy – ultimately in vain – to heading off the nationalization of Repsol.

A source familiar with the resolution of earlier ICSID disputes between Spanish companies and Argentina tells me that the warmer relations between Spain and Argentina in previous years were instrumental in getting several investment disputes – like those involving Gas Natural and Telefonica – resolved without needing to arbitrate them fully.

With Spain bereft of any hope of playing such a facilitative role this time around – and less encumbered by the need to safeguard its good political relations – perhaps the Spanish authorities would have fewer qualms about stepping forward and playing a more central role in any arbitration with Argentina.

Nothing to lose, but what is to be gained?

While Spain might have less to lose, what would be gained by bringing a state-to-state claim?

Perhaps most obvious is that Spain – at a time when it is itself facing arbitral claims from disgruntled foreign investors – might have an interest in playing a more hands-on role in the arbitral processes through which concrete meaning is given to the terms of Spanish investment treaties.

Equally, if Spain were to climb into the driver’s seat, the European Union might be keen to do some “backseat driving”. As is well known, the E.U. has taken over the competence to negotiate investment agreements on behalf of E.U. member-states with non-E.U. member-states, and the Brussels-based European Commission would certainly expect to work closely with Spain on any claim against Argentina.

Given the E.C.’s extensive experience in active claims-management on behalf of E.U. trading interests in the World Trade Organization, I suspect that Brussels might not find a claim by Spain to be so unusual or off-putting. Indeed, managing such a case might provide a further opportunity for Brussels to place its own stamp on the development and evolution of investment law. For some time now, Brussels has been reduced to the role of a peeping tom, seeking to peer into closed investor-to-state proceedings, and to make its views heard (sometimes over the objections of the parties involved.)

The question of speed

Another factor which Spain might consider in deciding whether to bring an arbitration claim against Argentina could be the speed with which a state-to-state arbitration might play out. It remains to be seen whether a state-to-state proceeding could offer a faster alternative to the clearly glacial pace of many investor-to-state claims against Argentina.

In some cases, it seems that state-to-state arbitration would be markedly swifter.

Under the U.S.-Ecuador BIT, such claims must be resolved in a mere 6 months after the constitution of a tribunal. Such a timetable – if applicable in real life – would be a massive improvement on the time it takes to resolve investor-state claims.

Unfortunately for Spain, the Spain-Argentina BIT does not contain the type of extreme fast-track process prescribed in certain outlier treaties like the U.S.-Ecuador BIT. However, even without such a treaty-imposed deadline, it strikes me that state-to-state arbitration could be faster than investor-to-state proceedings in some instances.

To be fair, any head-start conferred on state-claimants by the Spain-Argentina treaty – which allows for claims to be filed a mere 6 months, rather than (an arguable*) 24 months after notification for investor-claimants – would be offset by the requirement for the exhaustion of domestic remedies that applies in diplomatic protection contexts. I’m not sure if the exhaustion requirement might be applied flexibly in this case, but there is certainly a possibility that domestic remedies could be protracted. If Repsol were obliged to spend years in the Argentine courts, then it might take Spain longer to get to the arbitral starting line than if Repsol proceeded in its own name.

It would remain to be seen whether the actual arbitration process would be faster or slower in a state-to-state context than in an investor-state one. However, until we see a few test-cases brought by states – and can measure their overall pace – I remain open-minded as to whether state-to-state claims could be arbitrated more swiftly than investor-state claims.

In the coming months, we’ll see if Spain decides to interpose itself into the legal phase of the Repsol controversy. Probably, it won’t.

However, the precedent set by the recent Italy-Cuba BIT arbitration – coupled with the recent tendency of home-states to get dragged into investor-state cases anyway during the enforcement end-game – should be enough to open the eyes of home-states to the long-overlooked prospect of bringing state-to-state arbitration claims under bilateral investment treaties.

(* Note that views will differ as to whether Repsol could, in light of recent arbitral developments, expect to use an MFN clause in order to steer around a treaty requirement of 18 months of local litigation prior to international arbitration.)


Luke Eric Peterson is Editor of Investment Arbitration Reporter, an online news and analysis service specializing in foreign investment law and policy. By invitation of Kluwer, he contributes occasional commentary to the Kluwer Arbitration Blog

When focused on the content of good faith, the courts in different countries as well as academic commentators seem to be often baffled. Nor in the sources of the lex mercatoria such as the UNIDROIT Principle of International Commercial Contracts, the European Principles of Contract Law, and the United Nations Convention on Contracts for the International Sales of Goods (CISG or the Vienna Sales Convention) can one find a clear definition of the content of the notion of good faith. In order to rationalise good faith jurists have proffered various legal theories ranging from efficiency arguments to formal entitlements in the spirit of solidarity to its conceptualisation in a more specific sense as ‘a true behavioural standard’. This dilemma pervades in international law, in general, and in the emerging case law of international investment law in particular. Therefore, it proves the international arbitrator’s task in an investment dispute all the more difficult as in any other field when it comes to define the concept and to render any decision on the basis of it.

It thus merits a fresh look at the concept of good faith in order to understand its scope and function in a contractual relationship which is the focus of this blog. In order to apply the concept to a particular context good faith could be considered a functional or objective one in the sense of a framework of relationship between the parties to a contract and cooperation being its underlying current. In this respect good faith is a framework concept based on cooperation as its philosophical foundation. In international business-contracting the consideration of mutual interests of the contracting parties in the spirit of cooperative dealing seems to get favour in some quarters as a manifestation of modern trend of collectivism as opposed to the nineteenth century legacy of individualism. Farnsworth, however, observes:

“Good faith performance has always required the cooperation of one party where it was necessary in order that the other might secure the expected benefits of the contract. And the standard for determining what cooperation was required has always been an objective standard, based on the decency, fairness or reasonableness of the community and not on the individual’s own beliefs as to what might be decent, fair or reasonable. Both common sense and tradition dictate an objective standard for good faith performance.” [E. Allan Farnsworth, Good Faith Performance and Commercial Reasonableness Under the Uniform Commercial Code, 30 U. CHI. L. REV. 666 (1963)].

It needs to be stressed that co-operation should not be understood in the sense of familial relationship such as motherly love or brotherly affections, but must be confined to the contractual relationship, hence the notion of good faith as a framework concept, i.e. fidelity to the bargain, as mentioned earlier. As far as the content of good faith is concerned the focus has to be specific in a particular context concerned in the contractual framework to see if the parties have acted in the spirit of cooperation, i.e. ‘good-faith cooperation’ [L Carvajal-Arenas, ‘Good Faith in the Lex Mercatoria: An Analysis of Arbitral Practice and Major Western Legal Systems’ (PhD thesis, University of Portsmouth 2011)]. In numerous domestic court decisions (e.g. United Group Rail Services Limited v Rail Corporation New South Wales and in international judicial (e.g. the North Sea Continental Shelf cases (ICJ), and arbitral decisions [e.g. Wintershall v Qatar (1990), Mechema Ltd. (England) v S.A. Mines, Minérais et Métaux (MMM) (Belgium) (1982)] there seems to be a tendency to give weight to the context in which the concept is to be meant. Article 31 (1) of the Vienna Convention on the Law of Treaties also points out the importance of the context of the terms of the treaty while interpreting it in good faith. Therefore, the content of the concept of good faith is more of a contextual nature than the concept itself understood in the abstract sense. The International Court of Justice observed: “(t)he principle of good faith is ‘one of the basic principles governing the creation and performance of legal obligations’; it is not in itself a source of obligation where none would otherwise exist.” [Border and Transborder Armed Actions Case (ICJ), (Nicaragua v. Honduras), Jurisdiction and Admissibility, Judgment, 20 December 1988, ICJ Rep 69, at 105 (1988)].

One may thus wonder if good faith can be understood in two senses, viz., ‘macro good faith’ and ‘micro good faith’. In respect of the former the abstract notion of good faith in the sense of honesty, fairness, reasonableness signifying its subjectivity may be meant, i.e. ‘macro good faith’ – a horizontal approach, a layer of idea which is generic (i.e. an idea at a higher level of abstraction) and may not be understood the same in different factual patterns as it will depend on its application to them. Thus, from the notional point of view good faith in the macro sense is considered to act as a major interpretative principle. While, on the other hand, it should be appreciated that what appears to be good faith in one context may not appear the same in another context with a different pattern of facts, situations or surrounding circumstances. Thus, the notion of good faith focusing on the particular context concerned – i.e. the vertical approach – may be understood as ‘micro good faith’ which brings with it the sense of objectivity rather than subjectivity understood in the horizontal sense, i.e. ‘macro good faith’. It should be appreciated that the pacta sunt servanda principle, being the foundation of all contracts, is the manifestation of ‘macro good faith’. But ‘micro good faith’ being applied in specific factual contexts may limit the application of the pacta sunt servanda principle in order to conform to it, even in changed circumstances that affect the contract. Therefore, the pacta sunt servanda principle in a contractual relationship may not be applied as an incantation or in the abstract sense, rather it should be assessed in terms of ‘micro good faith’.

In international investment law, substantive standards of treatment (investment treaty provisions) such as ‘fair and equitable treatment’, ‘full protection and security’, ‘protection of legitimate expectation’, ‘transparency’, ‘non-discrimination’, ‘national treatment’ and ‘most favoured national treatment’, etc., are considered fundamentally based on good faith, or manifestations or corollaries of good faith, but their content depends on the specific contexts in which they are applied. Here comes the crunch point when one asks: even if a state literally complies with the foregoing standards in respective cases, will it be always considered to have acted in good faith in its relationship to the other contracting party? Inversely, if a state acts in good faith to comply with its non-investment international treaty obligations relating to human rights, the environment or climate change that may interfere with investors’ rights, will it be implicated in bad faith vis-à-vis the foreign investors? It is difficult to give any straightforward answers to these questions; the answers, however, may be found specifically in the contexts in which the notion of good faith is to be examined. In investment arbitration jurisprudence such a contextual extrapolation seems to be increasingly endorsed rather than the simple meaning attributed to a standard of treatment (e.g., the S.D. Myers, Mondev, ADF, Loewen and Waste Management cases). Often, in order to reflect good-faith cooperation in an investment contract situation the aforementioned standards of treatment for foreign investors may have to be weighed against the state party’s competing public interests, such as the protection of the environment, the promotion and protection of human rights and the securing of the economic development of the host country. There seems to be a growing support for such a stance amongst various stakeholders such as host countries, NGOs, international organizations (the World Bank and the IMF, etc.) and others, though this aspect of international investment law is still in the early stage of development.

The scope and content of the standards of treatment for foreign investors may differ from contexts to contexts entailing the understanding of good faith in the micro sense. As the comments to section 205 of the U.C.C. also states, in a different domain of law though, that “[t]he phrase ‘good faith’ is used in a variety of contexts, and its meaning varies somewhat with the context.” To get a result then it would be advisable to look at the notion of ‘micro good faith’ – a context-based one with the objectivity that underscores the framework of relationship, co-operation being its philosophical foundation. Good faith in a particular situation should thus be understood not as an abstract concept but as a functional or objective one, i.e. in the micro sense, covering all stages of a contract.

In Petrobart v. Kyrgyzstan (the ECT-based claim), the tribunal decided that a contract for the sale of gas condensate constitutes an Investment since the definition of this notion under the ECT encompasses “any right conferred by law or contract or by virtue of any licenses or permits …” Although the Petrobart v. Kyrgyzstan tribunal regarded the notion of ‘Investment’ as a broad one, the definition contained in the ECT appears to indicate the opposite and, thus, excludes ordinary commercial transactions such as the sale of goods.

Article 1(6) of the ECT defines the term ‘Investment’ as follows:

‘Investment’ means every kind of asset, owned or controlled directly or indirectly by an Investor and includes:
(a) tangible and intangible, and movable and immovable, property, and any property rights such as leases, mortgages, liens, and pledges;
(b) a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise;
(c) claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment;
(d) Intellectual Property;
(e) Returns;
(f) any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.

A change in the form in which assets are invested does not affect their character as investments and the term “Investment” includes all investments, whether existing at or made after the later of the date of entry into force of this Treaty for the Contracting Party of the Investor making the investment and that for the Contracting Party in the Area of which the investment is made (hereinafter referred to as the “Effective Date”) provided that the Treaty shall only apply to matters affecting such investments after the Effective Date.

‘Investment’ refers to any investment associated with an Economic Activity in the Energy Sector and to investments or classes of investments designated by a Contracting Party in its Area as ‘Charter efficiency projects’ and so notified to the Secretariat.

The first paragraph of Article 1(6) includes in the definition of the notion of ‘Investment’ any kind of assets owned or controlled directly or indirectly by an ‘investor’ and provides for a non-exhaustive list of such assets, similar to most definitions of ‘investment’ found in BITs. However, this broad enumeration is qualified under the subsequent paragraphs of Article 1(6). Paragraph 3 restricts the notion of ‘Investment’ to “investment associated with an Economic Activity in the Energy Sector[.]” It is, thus, not only the association between the ‘Investment’ and an Economic Activity in the Energy Sector (which under Article 1(5) of the ECT means “an economic activity concerning the exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of Energy Materials and Products except those included in Annex NI, or concerning the distribution of heat to multiple premises”), but also the character of “investment” that particularizes the notion of ‘Investment’ under the ECT. This is also confirmed by paragraph 2 of Article 1(6): ““Investment” includes all investments …”

The use of quotation marks and capital letter to identify the defined meaning of ‘Investment’ and the use of the term ‘investment’ in lower case indicate that the two terms were intended to have different meanings. This was also acknowledged by the drafters of the ECT during the negotiations: “the practice in the ECT [is] of using initial capital letters to identify defined terms. …[W]e could find no persuasive rationale that would justify departing from the ECT’s existing usage.” Consequently, despite the non-exhaustive list contained in Article 1(6), not every asset constitutes an ‘Investment’ under the ECT, but only those assets that satisfy a double threshold: they are investments within the ordinary meaning of the term and they are associated with an Economic Activity in the Energy Sector.

But in the end, the thorny question remains: what is the ordinary meaning of the term ‘investment’? Is it “the commitment of funds or other assets with the purpose to receive a profit, or ‘return’, from that commitment of capital”, as the tribunal in Romak v. Uzbekistan opined? Or is it a notion defined by three elements: contribution, certain duration and risk, which the tribunal in Saba Fakes v. Turkey found to be “necessary and sufficient” to qualify the ordinary meaning of ‘investment’? The debate is still open.

Crina Baltag, Ph.D., LL.M., M.Sc, Attorney-at-law, crinabaltag@gmail.com

From the Jay Treaty (1794) to the current investor-state arbitration regime under investment treaties, states have used international arbitral mechanisms to resolve complex disputes involving key areas of national interest.   Although arbitration has often been used to deal with legal disputes arising out of times of crisis, in most cases the arbitral institution in question, whether called a commission or tribunal, has been a bespoke institution, created after the fact and designed to address the specific type of dispute at issue.   In contrast, a defining feature of the investment treaty claims against Argentina resulting from its emergency laws is the use of “all-purpose” tribunals based on a standing offer to arbitrate in an investment treaty, rather than a custom-made mechanism created after the fact.

The modern history of international arbitration is often traced to the Jay Treaty (1794), which established three mixed commissions to decide boundary, debt and shipping related claims.  The Jay Treaty was significant in reviving the state practice of arbitrating claims before mixed commissions, comprising commissioners or arbitrators appointed by the two states.  Further, it is an early example of a Friendship, Commerce and Navigation Treaty, precursor to international investment treaties.   From that early history, claims to injuries to persons and property have often been addressed through arbitral mechanisms.  Indeed, from 1840-1940, states established over sixty arbitral commissions to deal with disputes arising from injuries to foreign nationals.

The Conference will examine three important claims mechanisms in the 20^th century: the Mexican Mixed Claims Commission, the Iran-US Claims Tribunal and the United Nations Claims Commission.  What lessons can be learned from these mechanisms in terms of dealing with mass claims arising out of crises?  How did these institutions manage a large number and variety of claims, the consistency and coherence of awards, and funding and enforcement mechanisms?

The second part of the conference will turn to the investor-state arbitration cases arising out of the Argentine economic crisis.  Unlike the three institutions that will be discussed in the first part of the conference, which were designed after the fact, the investor-state arbitration process under investment treaties was not specifically designed to address mass claims arising out of crises.  At the same time, investment treaties were created in part to provide investors protection in periods of fundamental economic and political change.   Can the investor-state mechanism, which arguably is best suited to address one-off cases of nationalization, expropriation and breaches of other minimum standards of treatment, deal efficiently and coherently with mass claims?  Are the control mechanisms for review of arbitral awards in ICSID and the New York Convention suitable in the case of mass claims?  And, is the mechanism failing the ultimate test because awards are not being paid?

The Conference is co-chaired by Prof. John R. Crook and Prof. Andrew Newcombe and will begin with keynote address by V.V. Veeder, Q.C. on “Economic Crises and Investor-State Arbitrations – A Historical Perspective”.   The Conference will host a stellar faculty of presenters: José E. Alvarez, Mark Clodfelter, L. Yves Fortier, Cymie R. Payne and Jennifer Thornton.

Reports on the Conference, as well as the ASIL Annual Meeting, will be available on ASIL Cables.

This post is written by Andrew Newcombe as a member of the ITA Academic Council.

The event was subject to the Chatham House rules, so my notes below should not be attributed to any particular panelist or audience members. However, in the case of moderator Michael Goldhaber, his views have been publicized in his magazine columns, one of which is referenced below. (Roger intends to blog about his own talk, so I’ll leave him to weigh in further in this space).

In no particular order, here a couple things that caught my ear at the NYU event:

• Until recently, arbitrators had been able to ride in the slipstream of the U.S. Courts, to borrow Michael Goldhaber’s expression. For instance, mere days after a U.S. Judge issued a preliminary injunction against enforcement of an 18 Billion (U.S.) Ecuadorian court judgment, an arbitral tribunal sitting in the Chevron v. Ecuador BIT arbitration issued its own interim measures. However, the U.S. injunction was overturned in September by a U.S. Appeals Court. That means, according to Goldhaber, that the BIT arbitration may have become Chevron’s “first or only line of defense”.

• And, as you may have heard, Chevron’s BIT claims may test the boundaries of available relief in such arbitrations. Based on the evidence of last week’s NYU event, there is a full spectrum of opinion as to the propriety of investment arbitration tribunals ordering states to do (or refrain from doing) certain things. Some advocates and arbitrators are keen to see such tribunals award non-pecuniary forms of relief. Others warn that they threaten to undermine the support of certain states for investment treaty arbitration. While a forthcoming decision on jurisdiction could touch on the available forms of relief, another possible flash-point could arise if Chevron were to ask for more clarity as to the types of actions required of Ecuador pursuant to an earlier (but notably terse) interim measures order.

• Many of the juiciest revelations and allegations in the Chevron-Ecuador saga have stemmed from the use of a U.S. statute (28 U.S.C. § 1782) that permits judicial discovery in the aid of foreign proceedings. Views differ as to whether such court-aided discovery complicates and lengthens arbitral proceedings. However, there was some suggestion last Monday night that the use of that statute will continue to grow – unless the U.S. Supreme Court curtails its availability – and that lawyers might risk a “malpractice” suit if they don’t brief their clients about the statute.

• Apparently, some corporate clients are so keen to avoid any use of U.S. judicial discovery that these companies are negotiating contracts whose arbitration provisions exclude such an option. One wonders if governments will begin to negotiate investment treaties that prohibit (or condone) such a discovery tool.

• Mind you, if a party does plan to use the 1782 statute – and their contract or treaty does not exclude such a possibility – they might want to tell their arbitral tribunal at the earliest possible juncture. Not only will this help to determine whether such evidence is likely to be admitted in the arbitration, it might also help to persuade a Federal Court Judge that the discovery request is not a vain exercise.

• Perhaps most intriguing is the potential for non-parties to an arbitration to use the U.S. statute to procure evidence that might be relevant to a given arbitration. The statute is worded so as to permit “interested persons” to petition a U.S. Federal Court for discovery. To date, a would-be amicus curiae in an international arbitration has not attempted to use this tool to gather evidence. But, watch this space.

Luke Eric Peterson
InvestmentArbitrationReporter.com

Although the Tribunal’s finding that it can hear mass claim has garnered the most interest, various aspects of the Decision have sparked debate.  The Tribunal held that the Claimants’ security entitlements in Argentinean bonds are investments for the purposes of Article 25, ICSID Convention and protected under the Argentina-Italy BIT.  Another controversy arises from the fact that the Decision was issued by the majority of the Tribunal without the simultaneous release of the dissenting opinion. The dissenting opinion, which the Decision states is “Forthcoming”, has yet to be released.

On 15 September 2011, the Argentine Republic filed a request for the disqualification of the majority of the Tribunal (Professors Pierre Tercier (President) and Albert Jan van den Berg), alleging that the two arbitrators could not be relied on to exercise independent judgment.   The disqualification request criticizes the two arbitrators in particularly strident language, arguing that the transmission of the Decision: “(a) without the dissenting opinion of the other arbitrator, (b) without his consent, and (c) without even waiting for a draft of said opinion” together with the majority’s rejection of Argentina’s request for provisional measures “is a manifestation of an absolutely inappropriate conduct” (para. 20).

Although the Decision raises a series of interesting issues (for example, see Sarah Ganz‘s post on the Decision’s treatment of the 18-month litigation requirement in the BIT), in this post I focus on the majority’s distinction between jurisdiction and admissibility, a subject of one of my previous posts.  In its Decision, the majority of the Tribunal (the Tribunal) states that it is appropriate and necessary to distinguish issues relating to jurisdiction and admissibility (para. 248) and that the “guiding thought of the Tribunal for distinguishing issues of jurisdiction from issues of admissibility has been the following cornerstone consideration:

 If there was only one Claimant, what would be the requirements for ICSID’s jurisdiction over its claim? If the issue raised relates to such requirements, it is a matter of jurisdiction. If the issue raised relates to another aspect of the proceedings, which would not apply if there was just one Claimant, then it must be considered a matter of admissibility and not of jurisdiction.” (para. 249)

The Tribunal’s analysis thus takes a two-fold approach.  First, it analyzes the mass claims issue within the context of the Parties’ consent to arbitration (a question of jurisdiction) and second, it analyzes the admissibility of mass claims.

The Decision is perhaps the clearest example of an investment treaty tribunal distinguishing between jurisdiction and admissibility.  The Tribunal highlights at para. 247 that:

 (i)            While a lack of jurisdiction stricto sensu means that the claim cannot at all be brought in front of the body called upon, a lack of admissibility means that the claim was neither fit nor mature for judicial treatment;

(ii)            Whereby a decision refusing a case based on a lack of arbitral jurisdiction is usually subject to review by another body, a decision refusing a case based on a lack of admissibility can usually not be subject to review by another body;

(iii)            Whereby a final refusal based on a lack of jurisdiction will prevent the parties from successfully re-submitting the same claim to the same body, a refusal based on admissibility will, in principle, not prevent the claimant from resubmitting its claim, provided it cures the previous flaw causing the inadmissibility.

With respect to consent, the Tribunal rightly held that if, in principle, it had jurisdiction over one claimant, “it is difficult to conceive why and how the Tribunal could loose such jurisdiction where the number of Claimants outgrows a certain threshold.” Further, it highlighted that “the collective nature of the present proceeding derives primarily from the nature of the investment made.”:

The ICSID Convention aims at promoting and protecting investments, without however further defining the concept of investment and leaving this task to the parties through relevant instruments such as BITs … Thus, where the BIT covers investments, such as bonds, which are susceptible of involving in the context of the same investment a high number of investors, and where such investments require a collective relief in order to provide effective protection to such investment, it would be contrary to the purpose of the BIT and to the spirit of ICSID, to require in addition to the consent to ICSID arbitration in general, a supplementary express consent to the form of such arbitration. In such cases, consent to ICSID arbitration must be considered to cover the form of arbitration necessary to give efficient protection and remedy to the investors and their investments, including arbitration in the form of collective proceedings.  (para. 490).

In conclusion, the Tribunal, rightly held that “the “mass” aspect of proceedings relates to the modalities and implementation of the ICSID proceedings and not to the question whether Respondent consented to ICSID arbitration. Therefore, it relates to the question of admissibility and not to the question of jurisdiction.” (para. 492).

The Tribunal took a purposive approach to the interpretation of the ICSID Convention’s “silence” as to mass claims, holding that it would be “contrary to the purpose of the BIT and to the spirit of ICSID to interpret this silence as a “qualified silence” categorically prohibiting collective proceedings, just because it was not mentioned in the ICSID Convention” (para. 519).

With respect to the adaptations, the Tribunal identified the need to adopt mechanisms to allow a simplified verification of evidentiary materials with respect to each individual claim (para 531) and the manner of the representation of the claimants (paras. 531-532).  In finding that it had the power to adapt procedures to address the “mass claims” aspect of the case, the Tribunal states that adaptations must consider the principle of due process and a must seek a balance between the procedural rights and interests of each party (para. 519).  In assessing that balance the Tribunal considered: (i) under what conditions is it acceptable to change the method of examination from individual to group treatment; (ii) to what extent are Argentina‘s defense rights affected in comparison to 60,000 separate proceedings; and (iii) is it admissible to deprive Claimants of certain procedural rights (para. 539).

Argentina’s had argued that there are strong policy reasons why ICSID is an inappropriate forum to address issues with respect to sovereign debt restructuring.   The Tribunal flatly rejected this argument, rightly stating that “Policy reasons are for States to take into account when negotiating BITs and consenting to ICSID jurisdiction in general, not for the Tribunal to take into account in order to repair an inappropriately negotiated or drafted BIT.”

It its disqualification request, Argentina suggests that the procedural mechanisms set out in the Decision are an unjustifiable limit on Argentina’s right of defence and further evidence of the Tribunal’s alleged lack of independent and impartial judgment (paras. 25 et seq.).   Although Argentina has characterized the majority’s Decision as “egregious” and various Tribunal statements as “shocking” and “absurd”, this hyperbole should seen for what is—a regrettable attempt to appeal a tribunal decision through the guise of a disqualification request.  The majority of the Tribunal’s approach to mass claims is correct in principle and practical, objective and fair-minded in practice.  International arbitration can be an effective and efficient system of dispute resolution because of its ability to adopt flexible procedures to address myriad claims and issues.  The majority’s Decision reflects this approach and will stand the test of time.

At the time of this writing, a freezing request by German businessman Franz Sedelmayer remained under active review at a Swedish government debt enforcement agency.

Mr. Sedelmayer, you may recall, is the bearer of a real collector’s item: a vintage 1998 arbitral award in which the Russian Federation was ordered to pay some $2.35 Million (US) for helping itself to the German businessman’s St. Petersburg-based private security company.

Since 1998, Mr. Sedelmayer has made a second career out of enforcing that arbitral award. By his estimate, he has been involved in more than 70 litigations around the world, trying to identify and seize Russian assets, while defending against various legal actions brought by the Russian authorities against him.

More than one bailiff in Western Europe has broken into a cold sweat when tasked by Mr. Sedelmayer with slapping the handcuffs on Russian government assets. For a long time, the indefatigable German businessman accumulated plenty of anecdotes – including a quixotic bid to seize Russian cosmonaut gear at an international air show – but few liquid assets.

Recently, his luck has started to change, as he has begun to lay hands on certain buildings and real estate in Western Europe.

However, Mr. Sedelmayer’s latest enforcement tactic – seizing Russian funds deposited at arbitration centres and law firms – should occasion some soul-searching amongst proponents of foreign investment protection standards.

If the successful claimant in an investment treaty arbitration is reduced to targeting deposits ponied up in other more recently initiated arbitrations, the entire enterprise takes on the contours of a classic pyramid scheme: with the contributions of later entrants used to pay off earlier participants.

Not only does this enforcement model appear deeply embarrassing for devotees of investment arbitration, its limits are also plainly apparent. Even if a bailiff agrees to seize arbitration deposits, and such a seizure is not quashed by the courts on sovereign immunity grounds, it can only offer succor to those with debts small enough to be satisfied by the deposits used to finance other arbitral proceedings.

If a tiny award against a highly-globalized G8 economy can remain unpaid for more than a decade, what of those seeking larger sums from regimes that tend to stuff their cash into the sofa cushions, rather than scattering it beyond their borders?

One answer that has been bandied about in the Argentine context is for home governments – or all governments with an interest in binding dispute settlement – to bring diplomatic pressure to bear against dilatory debtors. However, this “re-politicization” of the dispute settlement process comes with all of the usual baggage. States expend precious diplomatic capital when they go to battle for investors-creditors on the foreign relations playing field. Sometimes that capital is worth spending. At other times it is not.

Another solution is to expect claimants to bear the cost of enforcement – either by carrying insurance which covers the risk of award-default, or by selling their awards at a discount to vulture funds or organizations specializing in debt-collection. This pathway may be attractive for some, but for bearers of modest awards it may be neither viable nor equitable. (Try explaining to the owner of an expropriated family business, that they should take a haircut after gambling everything and “winning” in arbitration.)

There may be no silver bullets when it comes to dealing with recalcitrant debtor states.

However, the fact that an arbitral award-creditor has been reduced to targeting deposits laid down in other arbitral proceedings strikes me as something of a watershed.

Mr. Sedelmayer’s long struggle – and his increasingly audacious tactics – remind us that it is one thing to erect a system of 3,000+ international investment treaties, but quite another thing to make it work.

As the 15th anniversary of his arbitration victory looms, it is time to take some of the energy devoted to investment treaty rule-making and to re-focus it on the vexing question of enforcement.

Luke Eric Peterson
InvestmentArbitrationReporter.com

The claim alleges that Guatemala is failing to enforce its own labour laws, thus falling afoul of international legal obligations written into the U.S. Free Trade Agreement with Central America and the Dominican Republic (CAFTA-DR).

While there have been a handful of arbitration claims brought under the CAFTA-DR’s investor-state dispute process, the U.S.-Guatemala proceeding is apparently the first state-to-state claim to be brought pursuant to Chapter 20 of the same agreement.

Those familiar with the rather leisurely investor-state arbitration process might be surprised to discover that the CAFTA’s state-to-state process provides for a fast-track form of dispute resolution.

Indeed, from the moment that a state-to-state claim is launched, parties have 15 days to select a chair for the three-member arbitration panel. And, once the chair is selected, the parties have a further 15 days to pick their respective arbitrators.

Failure to select a wing-arbitrator within that 15 day period, means that the choice will be made by lot – within a matter of 3 days – from a roster of approved Chapter 20 panelists.

(By contrast to this hasty process of arbitrator selection, parties in investor-state proceedings under the CAFTA-DR have 75 days in which to set up an arbitral panel, after which further time can elapse if an appointing authority needs to nominate the remaining panelists.)

All going according to plan, an arbitral panel in the U.S.-Guatemala case could be in place inside of a month. And, not only are arbitrators empaneled very swiftly under the state-to-state dispute resolution process, they are also expected to resolve cases in months, rather than years.

Within 120 days, and definitely no later than 180 days, arbitrators should have prepared an initial report setting forth findings of facts, and a preliminary determination as to whether the respondent state has breached its CAFTA obligations.

The parties then have two weeks to comment on the initial report, and the arbitrators must issue their final report a mere 30 days after the release of their initial report. While there is a bit of discretion for extending certain deadlines set out in Chapter 20 of the CAFTA, the default timetable for state-to-state arbitrations clearly envisions a very swift form of justice.

By my back-of-the-envelope math, an arbitral claim could be resolved in about 8 months.

By contrast, it took nearly 8 months to put together an arbitral tribunal to hear the first claim under CAFTA’s investor-state chapter. That unrelated case, which also involves Guatemala, will celebrate its 4th anniversary later this month and oral hearings are still some distance off.

So, in principle, the newly-minted claim against Guatemala under Chapter 20 could be fully arbitrated before the longer-running investor-state proceeding sees a final award.

By Luke Eric Peterson
InvestmentArbitrationReporter.com

The Act is Pakistan’s answer to the Supreme Court of Pakistan’s 2002 decision in the SGS v. Pakistan proceedings that the ICSID Convention, although ratified by Pakistan, having not been incorporated into the laws of Pakistan by implementing legislation, the domestic courts had no power to enforce the provisions of the Convention while ignoring the existing national statutes relating to arbitration. This case saw parallel arbitration proceedings in Pakistan and before ICSID, and the Supreme Court upheld the lower courts’ decision not to stay the arbitration proceedings under the Pakistani Arbitration Act following the commencement of the ICSID arbitration.

However, the SGS v. Pakistan case had highlighted the need for national legislation in order to give full force and effect to the ICSID Convention. The enactment of this legislation, however, was not exempt of obstacles. The legislation was first promulgated by presidential ordinance in November 2006, but lapsed. Under the Constitution of Pakistan, presidential ordinances have a limited life of four months unless earlier repealed or enacted into a statute. A new presidential ordinance was promulgated in March 2007 followed by another in July 2007, but the state of emergency was thereafter declared in Pakistan, which gave it permanent life. The permanent life however was cut short by a judgment of the Supreme Court which declared the emergency as illegal. This resulted in promulgation of another presidential ordinance in November 2009 followed by another in April 2010. The current Act is the result of a government sponsored bill introduced in Parliament in 2010.

The purpose of the Act is to implement the International Convention on the Settlement of Investment Disputes between States and Nationals of other States, with an aim to bringing transparency in the settlement of investment disputes. The Act attaches the ICSID Convention as a schedule.

Under the ICSID Convention, awards are insulated from review by national courts at the recognition and enforcement stage, but no such guarantees are offered when specific assets are targeted in execution of the award. Article 54(1) of the ICSID Convention provides that each contracting state shall “recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State”. Article 54(3) of the ICSID Convention provides that the execution of the award is governed by the laws concerning the execution of judgments in force in the State in whose territories such execution is sought, and Article 55 emphasizes that “nothing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any State from execution”.

The Act leaves a great discretion to the Pakistan courts for the enforcement of ICSID awards. Article 4 provides that an award registered in Pakistan must “be of the same force and effect for the purposes of execution as if it had been a judgment of the High Court” and, if the award “relates to pecuniary obligations”, “proceedings may be taken on the award” and “the High Court shall have the same control over the execution of the award, as if the award had been a judgment of the High Court”. High Courts in Pakistan are generally courts of appeal, which are to be found in each province. The purpose of giving jurisdiction to a High Court is to ensure the quality of judicial expertise. With respect to its binding effect on the government itself, the Act provides that the principles set forth in Article 4 bind the government but “not so as to make an award enforceable against the Government in a manner in which a judgment would not be enforceable against the Government”. Moreover, the Act provides that these principles do not apply if the government is not a party to the award (Article 5).

In effect, therefore, the Act does not provide for a foolproof execution of ICSID awards in Pakistan. Execution of awards is subject to the review of the High Court and, if the award has been rendered against the Government, it can only be enforced if it were enforceable in the same circumstances if it were a judgment. In practice, the High Court will have the power to attach and sell assets, as long as such assets are not related to defense and national security. High Court decisions can be appealed. However, in execution matters, the grounds of appeal are very limited.

The Act, however, removes a lacuna and one can hope that it will render the enforcement of ICSID awards in Pakistan easier. It has also the advantage of a providing an effective reference for the execution of awards in Pakistan. In contrast, in many a state, the execution of ICSID awards is left to the civil procedure provisions applicable to the execution of judgments, which can lead to confusion and unsatisfactory decisions.

In addition to this Act, Pakistan is also preparing the enactment of two statutes relating to international arbitration. First, a law to enforce the New York Convention has been passed by the National Assembly and is currently pending consideration before the Senate. Second, a new Arbitration Act, based on the UNCITRAL Model Law, is pending before the National Assembly.

Ijaz Ahmed, Ijaz Ahmed & Associates, Karachi, Pakistan

Laurence Burger, Winston & Strawn LLP, Geneva, Switzerland

Such sums may be “small change” compared to the more conventional forms of economic compensation claimed for treaty breaches. Still, it’s become de rigeur for claimants – and even some states – to tack on claims for a few million Dollars in moral damages.

Arbitrators have been slower to award moral damages. However, in a recently-concluded ICSID arbitration proceeding, a tribunal grappled at considerable length with the claimant’s $3Million (US) moral damages request.

You can find a fuller accounting of the Joseph Charles Lemire v. Ukraine case here, so I won’t rehearse all of its facts. It suffices to mention that Mr. Lemire is a U.S. investor in Ukraine’s radio broadcasting industry, and that he accused Ukrainian broadcasting authorities of unfairly rejecting a long string of applications for new radio frequencies that would have permitted him to expand his radio business.

Arbitrators ultimately held that Ukraine’s treatment of Mr. Lemire did not meet the standards of fairness set out in the U.S.-Ukraine bilateral investment treaty, and awarded him $8.7 Million (US) for his financial losses.

Mr. Lemire made a further request for moral damages, complaining that he had suffered indignity, stress, humiliation and other forms of moral harm as a result of the state’s serial (and legally unfair) rejection of radio licensing applications. He also cited the stress and anxiety occasioned by state-harassment, including a series of (allegedly irregular) inspections, and license renewal delays.

What “exceptional circumstances” would justify moral damages?

In its March 28, 2011 Award, the tribunal debated whether Mr. Lemire’s treatment constituted the type of “exceptional circumstances” that warrant an award of moral damages.

To elucidate the meaning of “exceptional circumstances” the arbitrators looked to certain arbitral awards plead by the parties. They identified three criteria:

• the State’s actions imply physical threat, illegal detention, or other analogous situations in which the ill-treatment contravenes the norms according to which civilized nations are expected to act;
• the State’s actions cause a deterioration of health, stress, anxiety, other mental suffering such as humiliation, shame and degradation, or loss of reputation, credit and social position; and
• both cause and effect are grave or substantial

Mr. Lemire’s injuries don’t meet the test

The tribunal acknowledged that Ukraine’s repeated and unfair rejection of Mr. Lemire’s licensing applications had led to some “negative impact” to his reputation and entrepreneurial image. However, the gravity of this harm could not be likened to the hurt caused from armed threats, or by witnessing the deaths of others, or the other types of suffering endured by claimants in earlier cases where moral damages were warranted.

The tribunal also found that the allegedly harassing inspections carried out on Mr. Lemire’s company were not undertaken in order to “intimidate” the foreign investor.

Thus, while the tribunal expressed sympathy for Mr. Lemire’s stress and anxiety, it held that the economic compensation awarded was sufficient to compensate for the moral aspects of his injuries.

Ukraine urged that any moral damages be calculated in line with human rights law

Because Mr. Lemire’s suffering did not rise to the level where moral damages were warranted, arbitrators did not need to address an argument by Ukraine that such damages should be quantified in line with the practice under international human rights law.

Ukraine pointedly noted that Mr. Lemire had offered no explanation for his decision to claim $3 Million (US). Moreover, the government observed that awards of moral damages before international human rights courts and tribunals “are much lower than that requested by Claimant.”

I’ve made a similar argument in a 2009 article, in my Investment Arbitration Reporter newsletter. Frankly, it’s unheard of for human rights tribunals to award 1 Million (US), much less 3 Million (US), even in cases of the gravest indignities such as torture or extra-judicial killing.

I happen to favour the award of moral damages in certain investment treaty cases. Such a remedy can be a crucial one where claimants have suffered grave indignities, particularly when calculable business losses may be minimal. However, I can’t see a principled reason why the same manner of indignities visited upon claimants – be they in human rights or investment law contexts – should result in the award of wildly divergent sums by international tribunals

If arbitrators were to engage in a comparative analysis of the quantification of moral damages it might help, in its own small way, to alleviate the perception that investment treaty arbitration is a system of “concierge-level” international justice that puts aliens (or at least foreign investors) on a privileged plane above all other claimants in international dispute resolution.