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

In summary of the facts, Injazat Capital Limited and Injazat Technology Fund ITF (Claimants) brought a claim before the Court of First Instance against Denton Wilde Sapte DWS (Defendant) for alleged negligence and failing to advice the Claimant in regard to the existence or exercise of an option to sell shares it acquired under a Share Subscription Agreement.

DWS submitted a claim to stay those proceedings since DWS’s terms of business, attached to an engagement letter sent to ITF, provided for a jurisdiction clause that reads, i.e.: “If any claim, dispute or difference of any kind whatsoever (…) arises out of or in connection with those agreements (…), you and we each agree to submit to the exclusive jurisdiction of the Dubai Courts. However, we may at our sole option, refer the claim, dispute or difference to LCIA arbitration in London (…)”.

The Claimant asserted that the terms of business and the arbitration option were not received, and in any event they were not accepted, although DWS’s position was that the terms were forwarded by fax and e-mail to the Claimant who did not respond to it.

The grounds based on which the Court refused to grant a stay

DWS pointed to the application of article 13 of the DIFC Arbitration Law (Law No. 1 of 2008) obliging the Court to grant a stay in the presence of a valid agreement to arbitrate. The Court accurately rejected its application on the basis that the said Law only applies where the seat of arbitration is the DIFC as provided in its article 7.

Following that, the Court has made several misconceptions in its justification to refuse granting a stay.

Turning to the New York Convention NYC to which the UAE is a member since 2006, the Court could have granted a stay in accordance with article II(3) of the NYC, instead it rejected its application on the basis that there is no ambiguity with regard to the scope of application of article 13 of Law No.1 despite that there is a presumption that legislation is drafted in a manner consistent with treaty obligations (Salomon v. Commissioners of Customs and Excise [1967] 2 QB 116). Article II(3) of the NYC sets out the maximum threshold that a member State can adopt and provides for the obligation of the Court to refer the parties to arbitration unless the arbitration agreement is null and void, inoperative or incapable of being performed. The Court, in clear violation of that article, relied on the more onerous provisions of the scope of article 13 of Law No.1 conditioning the grant of a stay only to those arbitrations where the seat is in the DIFC.

In strengthening its position, the court referred to article 5 of the Dubai Law No. 12 of 2004 relating to the jurisdiction of the DIFC Court (as amended by Law No.16 of 2001), and which allows the parties to submit to the jurisdiction of any other Court. Although the term “any other Court” is wide enough to encompass a reference to an arbitration tribunal or Court, the Court of First Instance decided that there is no room for construing Law No.12 as if it covers parallel proceedings before a Court and an arbitral tribunal.

Back to the jurisdiction clause of DWS’s terms of business, the latter referred to the jurisdiction of the Dubai Courts. DWS contended that the Dubai Courts meant the national Courts of Dubai other than the DIFC. Strangely, the Court of First Instance decided that the onus is on DWS to establish that it constituted an agreement to contract out of the DIFC Courts, and further construed that the background circumstances in which the contract was entered into – the provision of legal advice within the DIFC – leads to the conclusion that the reference is to the DIFC Courts.

It is common sense however for all practitioners in the UAE that a reference to the Courts of Dubai is, rather than being construed, a clear reference to the non-DIFC Courts (Hardt v Damac – CFI 036/2009). Additionally, the aforementioned Law No.12/2004 amended by Law No.16/2001provides in article 2 a clear definition of the Dubai Courts as those of the “Emirate of Dubai”.

The decision of the Court of First Instance raises several concerns as to how similar applications for a stay will be dealt with in the future, and poses questions as to the enforceability of the New York Convention by DIFC Courts.

It is noteworthy that the DIFC Courts system provides for a mechanism of appeal before the Court of Appeal, and a decision by the same on that matter should be worth waiting for.

Ever since the Supreme Court’s 2004 decision in Intel Corp. v. Advanced Micro Devices, Inc. that question has vexed lower federal courts. Although the Supreme Court did not address international arbitration directly, its reasoning appeared to support a broad interpretation that would encompass arbitral tribunals, which likewise act as “first-instance decision-makers” that render “dispositive rulings” subject to limited national court review. Moreover, in describing the scope of Section 1782, the Court found that Congress amended the statute in 1964 to “provide the possibility of U.S. judicial assistance in connection with administrative and quasi-judicial proceedings abroad” and quoted scholarly commentary that defined the term ‘tribunal’ to include “investigating magistrates, administrative and arbitral tribunals, and quasi-judicial agencies, as well as conventional civil, commercial, criminal, and administrative courts.”

In the wake of Intel, federal courts have struggled to apply the Court’s liberal Section 1782 standards to the context of international arbitration. Lower courts are divided on the question of whether a contract-based private international arbitral panel satisfies the statutory definition of “international tribunal.”

A majority have concluded that arbitral tribunals established by private contract are “foreign or international tribunals.” As the federal district court in In re Babcock Borsig AG, 583 F.Supp.2d 233 put it, addressing a Section 1782 petition involving an ICC arbitration, “[t]here is no textual basis upon which to draw a distinction between public and private arbitral tribunals, and the Supreme Court in Intel repeatedly refused to place ‘categorical limitations’ on the availability of § 1782(a).” Under this analysis, the functional approach adopted by the Supreme Court in Intel suggests that contract-based arbitral tribunals are first-instance decision-makers that issue decisions both responsive to the complaint and reviewable in court. As the court in Roz Trading, 469 F.Supp.2d 1221 put it, “it is the function of the body that makes it a ‘tribunal,’ not its formal identity as a ‘governmental’ or ‘private’ institution.”

Other federal district courts have concluded that private arbitral tribunals are not “international tribunals” within the meaning of Section 1782. These courts focus on arbitration as an alternative to litigation, foreclosing a key element of Intel’s analysis: judicial review. “[T]he very narrow circumstances in which [arbitral] decisions may be subject to review does not allow for judicial review of the merits of the parties’ dispute,” opined the federal district court in Norfolk Southern Corp., 626 F.Supp.2d 882. “Accordingly, the ‘arbitral tribunal’ at issue here does not fall within the definition the Supreme Court embraced in its Intel dictum.” Moreover, according to some courts, the fact that the source of judicial authority is derived from private agreement likewise militates against classifying it as a foreign or international proceeding under § 1782. Finally, pragmatic concerns have loomed large in the analysis. As one court put it, “[i]nterpreting § 1782 to apply to voluntary, private international arbitrations would be a body blow to such arbitration, since it would create a tremendous disincentive to engage in such arbitration wherever, as here, such a reading would create substantially asymmetrical discovery obligations.”

Whatever doubts there may be about the application of Section 1782 to contract-based international arbitration, federal courts uniformly agree that an arbitral tribunal established pursuant to a bilateral investment treaty constitutes an “international tribunal” within the meaning of the statute. Since Intel, over twenty federal courts have considered motions to compel Section 1782 discovery in aid of proceedings before treaty-based investment arbitration tribunals. Not a single federal court has held that such arbitral tribunals fall short of the statutory definition of an “international tribunal.”

Rather than take a functional approach that analyzes whether the investment tribunal is a first-instance decision-maker rendering decisions subject to judicial review, these courts either assume that such arbitral panels are “international tribunals,” or focus on the fact that the arbitral tribunal has its origins in a bilateral investment treaty. Although the absence of judicial review in the investment context is even more pronounced than in private commercial arbitration, this factor has not featured in any of the decisions applying Section 1782 to investment arbitration. In short, federal courts take a functional approach in defining an “international tribunal” in the commercial arbitration context, and a formalist approach in the investment arbitration context.

Whilst that focussed principally on the implications for, and efficacy of, the type of award in issue the purpose this post is, in contrast, to look again at the argument that initially prevailed before the tribunal and what it would have meant for English arbitrations more generally had Flaux J accepted it.

The basis upon which the tribunal ruled that it could not make any award of damages will strike many as highly controversial.
The starting point was the reasoning of the ECJ that it deployed to outlaw the grant of an anti-suit injunction by one EU Member State court against proceedings brought in another in breach of an arbitration clause. In doing so the ECJ held that, although the proceedings for relief in the former came within the arbitration exclusion of Council Regulation 44/2001 (the “Regulation”), this did not mean they could be permitted to otherwise undermine the effectiveness of the Regulation. In the ECJ’s view an anti-suit injunction did this as it restricted the ability of the first seised court to rule on its own jurisdiction and interfered with a litigant’s right to a form of judicial protection to which it was entitled.

In the tribunal’s view (which is set out at paragraphs 22-26 of Flaux J’s judgment and was largely relied upon by the insurers before him) the “underlying theme” of the ECJ’s decision was that the right to bring proceedings before an EU Member State court in accordance with the Regulation is therefore to be given pre-eminence. That being the case, a decision by a tribunal with seat in England which would effectively punish a party for so doing could not be sustained. The Regulation accordingly constrained the ability of the tribunal to act for essentially the same reasons that an English court is precluded from granting the anti-suit injunction.

One can find great difficulties with this conclusion. Primarily, there is the arbitration exclusion to consider. Surely, it wholly covers the proceedings before the tribunal – which should therefore be free from any constraints. Crossing that threshold is an entirely different proposition from the matters that were before the ECJ.

Buttressing that argument are the observations made by AG Kokott at paragraphs 70-73 of her opinion (with which the ECJ did not disagree). She acknowledged that a consequence of arbitration’s place outside the Regulation was that parallel proceedings within the EU before an arbitral tribunal and a Member State court can arise and that this could lead to inconsistent rulings on jurisdiction and the merits of the case. Indeed, rectifying that exact situation was what that she saw as being the goal of the anti-suit injunction (albeit such being an impermissible means of achieving it).

These objections, which formed the thrust of West Tankers’ arguments before Flaux J, were, for the tribunal, not enough to displace its view of the width of the ECJ’s ruling.

Correctly, it is suggested, Flaux J disagreed with the tribunal. His primary conclusion (see paragraphs 51-68 of his judgment) was that the tribunal had erred in law and that it was not barred from making the award of damages. In particular, he held that there absolutely nothing in the reasoning of either the AG or ECJ to support the far-reaching conclusion that the tribunal itself fell within the scope of the ECJ’s decision.

In Flaux J’s opinion, not only was it the AG’s clear view (as evidenced by those parts of her opinion mentioned above) that a tribunal was simply not affected by the Regulation, it was, additionally, wrong to suggest that there could be any meaningful difference between living with the possibility of inconsistent decisions on the merits or jurisdiction, which the AG expressly recognised, and allowing the tribunal to award damages as a result of a breach of the arbitration clause. The latter was merely a manifestation of the aforesaid state of affairs. More generally, there was nothing in the reasoning of the ECJ itself to suggest that the type of constraints imposed on a national court by its decision should also extend to an arbitral tribunal.

Flaux J’s decision is clearly to be welcomed. If the insurers’ (and tribunal’s) position had been accepted it would not only have negated the ability of an English tribunal to grant the type of relief in issue but would have left it with difficult questions as to what else it cannot do if proceedings are brought in another EU Member State court. In that latter regard it is perhaps arguable, given the direct subject matter of the damages award, that distinguishing between other action taken and the award of damages for breach might not carry the difficulties that Flaux J suggested (at paragraph 74 of his judgment). Having said that, it is understandable why the judge would want to emphasise such a point in order to help ensure that any need for a tribunal to address such problems was avoided entirely.

Such problems would, of course, be the natural consequence of accepting an argument which amounts to little more than requiring the arbitration exclusion to be overridden by the Regulation even in those proceedings to which it should most clearly find application. The emergence of such arguments is perhaps no surprise given the use of similar reasoning by the ECJ in its decision. More happily, it appears that the English courts are more than ready to sensibly interpret the more difficult aspects of the ECJ’s ruling and to reaffirm the remaining boundaries between the courts and arbitration in this sphere.

The judgment is available here.

Background to the English court’s decision

The protracted history of this dispute will be familiar to many arbitration practitioners worldwide, and particularly to those in Europe. It all began in August 2000, when a vessel owned by West Tankers, under charter to Erg, collided with Erg’s jetty in Syracuse, Italy. The charter party was governed by English law and contained an agreement to arbitrate any disputes in London.

Erg claimed compensation from its insurers and also commenced arbitration proceedings in London against West Tankers for the excess in damages above that covered by the insurance. Sometime later, the insurers brought proceedings against West Tankers before an Italian court to recover the sums they had paid to Erg, despite the existence of the arbitration clause. The dispute gained considerable renown when West Tankers’ application for an anti-suit injunction restraining the insurers from pursing the Italian court proceedings was refused following a landmark ruling from the ECJ which held that such relief would not be compatible with the Brussels Regulation.

West Tankers subsequently secured a favourable award from the arbitral tribunal holding that it was under no liability to either Erg or Erg’s insurers. It then successfully sought to obtain a judgment in terms of that award, using section 66 of the Arbitration Act 1996 (the ‘Act’). In the latest proceedings, it sought from the tribunal an award of damages for the breach of the arbitration agreement as well as an indemnity for the costs of defending the Italian proceedings. The tribunal declined jurisdiction to make this award, which prompted West Tankers to file an appeal with the English Court on a point of law under section 69 of the Act. It is that decision which is the subject of the latest judgment of the English court. To date, the Italian court has not yet ruled on whether it has jurisdiction to hear the dispute.

The decision of the English court

In finding that the majority of the tribunal had erred in law, Flaux J determined that there was nothing in the ECJ’s judgment (or the Opinion of the Advocate General on which it was based) which deprived the tribunal of jurisdiction to award relief for breach of the obligation to arbitrate. He relied heavily on the recognition by the ECJ of the possibility of parallel arbitration and court proceedings. Bearing in mind the fact that a tribunal and a court may reach inconsistent decisions on the merits and/or the scope and effect of the agreement to arbitrate, he held that there would be no qualitative difference between inconsistent judgments and an award of damages for breach of the arbitration agreement. In fact, a damages award would be an extension and consequence of the declarations made in the previous award as to the merits of the dispute.

Flaux J considered that the tribunal’s decision had been based on a misunderstanding of the principles underlying the ECJ’s decision as regards the application of the Brussels Regulation to arbitration. He acknowledged that arbitrators are bound to apply EU law but clarified that arbitration is excluded from the scope of the Brussels Regulation by Article 1(2)(d). In his view, the obligation to uphold the principle of effectiveness and mutual trust between Member State Courts in the context of the Brussels Regulation lies on ‘national authorities’ (which does not include private tribunals). As such, the tribunal was not obliged to defer to the Italian courts in the same way that an English court would need to under the Brussels Regulation.

But what is the practical effect of this decision?

Flaux J gave permission to appeal and commented that this case is likely to go further. Nonetheless, until any successful appeal, there is scope for a party faced with parallel proceedings in the EU in breach of an arbitration agreement to seek recompense from an arbitral tribunal for that breach, so as to put it (so far as possible) in the position it would have been had the parallel proceedings not been pursued. This would effectively allow it to seek compensation for the legal costs involved in defencing the parallel proceedings to the extent that was not ultimately recovered in the Italian proceedings.

Therefore, where proceedings before a court of a Member State run parallel with arbitration proceedings, the threat of being liable for compensatory damages should the national court decline jurisdiction may discourage parties from pursuing so-called ‘torpedo’ actions in future.

Does this decision represent progress for arbitration?

Alongside the previous judgment of the English court relating to section 66 of the Act, this is, in many ways, a result which represents progress for arbitration in Europe: parties who find themselves engaged in proceedings in a forum they have not selected will be comforted to know that this remedy may represent a deterrent for their counterparty. It also serves to limit the anti-arbitration ramifications of the ECJ’s decision regarding the anti-suit injunction by effectively rendering the Italian proceedings academic even though they cannot be injuncted.

However, it is questionable whether the advantages of this decision are confined to those who seek enforcement locally. Pending the reform of the Brussels Regulation, there is still little clarity on the interface between the jurisdiction of arbitral tribunals and the jurisdiction of the courts. This decision does not fully address what happens in the scenario whereby the court of a Member State accepts jurisdiction (notwithstanding the arbitration agreement), and issues a judgment which is inconsistent with that of an arbitral tribunal. In those circumstances, depending on where the relevant assets are located, the party who has been awarded damages may be left with no option but to return to the same national court which issued an inconsistent judgment in order to enforce this award. This could lead a court of a Member State to be asked to enforce an award which effectively seeks to undermine its own judgment. The question is then whether that court would be able to resist enforcement, and on what grounds. The New York Convention is likely to compel recognition and enforcement of the award, unless the dissatisfied party can rely on the public policy exception contained within Article V(2)(b). The way in which the court in question would interpret the public policy exception is, of course, an open question. Although generally seen as a last resort, this ground may be a convenient route for the dissatisfied party to negate entirely the effect of this latest judgment.

So, whilst it is on the one hand encouraging that a party faced with parallel proceedings in breach of an arbitration agreement may be entitled to compensation for its troubles in a private forum, it is not yet clear whether this decision will have the teeth required to ensure that it is effective.

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.

We obtained a good result for the client in that case, but for me, the real impact of the case came in the form of an epiphany. I became convinced that Korea had a big future in international arbitration. The reason was as much an accident of history as my taking that first case. The Asian Financial Crisis of the late 1990s had ravaged Korea’s economy. Businesses were failing or on the verge of it, and the major conglomerates that had not collapsed were desperately selling off non-core assets in an effort to stay afloat. This was a buying opportunity for foreign companies willing to accept the risk of the unstable economy. In short: due to hard economic times, there were a lot of M&A deals in a very short period, typically with ICC arbitration clauses. A wave of disputes was, in my opinion, almost inevitable.

However, I found the Korean community at large did not yet share my expectation. Even my own firm management was reluctant when I proposed establishing Korea’s first international arbitration practice group. Fortunately, they decided to support me in my ambition, and I was also able to persuade a younger colleague from the US, John Bang, to join me in founding a practice group. That was 10 years ago.

Today, the landscape has changed. Korea is now a significant user of arbitration, and those at the forefront of the field here are increasingly receiving global recognition and appointments to posts in the major institutions and organizations around the world. I feel grateful that history has born out my instincts. I am grateful to my colleague John for joining me in this venture. And I am grateful for the dedication and support of a fantastically talented team of 16 lawyers (and growing) that have joined our team since its formation.

I am thus immeasurably pleased to present yet another first: Korea’s first comprehensive overview of commercial arbitration in Korea, titled “Arbitration Law of Korea: Practice and Procedure,” and published by Juris Publishing in February 2012. It is the collective work of all the lawyers that comprise BKL’s practice group, and I give due credit to all the hard work that went into its research and drafting.

Although the story of Korea’s rise to prominence in international commercial arbitration over the last decade is known in broad outline to many industry insiders and followers, we nonetheless felt it important to include a fuller picture. Thus, the opening chapter of the book offers an inside view into Korea’s rise to prominence in this field and may contain a number of surprises for readers. For instance, it may not be common knowledge that year after year Korea rivals and even exceeds in even-numbers both of its much larger neighbors, Japan and China, in ICC arbitrations – an important measure of activity in this field. Readers may also be surprised at the many ways in which Seoul is a good alternative to more standard rivals Singapore and Hong Kong as a place for conducting arbitrations. In fact, this may become the reality, as Korea has shifted from an inbound investment locale to outbound, and has seized a top global position in a number of sectors, including shipbuilding and technology. With stronger bargaining power, Korean parties may insist on holding more arbitrations in Korea.

The remaining chapters of the book cover all the areas one would expect: arbitration agreements, arbitral tribunals, arbitration procedures under the rules of the local arbitration institution, enforcement of arbitral awards, and the supportive role of the courts. For those unfamiliar with Korea’s legal system there is even an overview of Korean civil court procedures.

With regard to arbitration practice and procedure, readers will be comforted to find few surprises. Korea (1) is a signatory to the New York Convention, (2) in 1999, was the first Asian country to adopt the UNCITRAL Model Law and (3) has a judiciary that has been consistently supportive of the arbitral process.

Our book also points out a few practices and procedures where Korea stands apart, though there are not many. For instance, requests for provisional attachments can be made ex parte and may be subject to a more lenient standard than some jurisdictions.

Publishing this book has been a satisfying cap to our team’s first decade. It reflects not only our knowledge of the laws and rules, but our practical experience as well. And that experience has been substantial, even in just one decade, for several reasons which may be particular to Korea. First, there is no cultural reluctance to litigate business disputes as you may find in Japan. Second, Koreans are quick to adapt to new trends and once they take hold, they are often widely adopted. And third, there is a business culture that is comfortable with turning things over to the ‘dispute experts’ once things reach a breaking point on the business level. Thus, arbitration has taken hold quickly in Korea and become a standard and accepted part of international business practice. As a result, our team has accrued a wealth of experience in the last decade, and we have tried to reflect that practical experience in the book.

For anyone who is interested in arbitration in Korea – or who finds themselves engaged in one as a party – we hope this book will be a valuable resource.

On 19 March 2012 India confirmed that it will add the Peoples’ Republic of China (including the Special Administrative Regions of Hong Kong and Macao) to the list of so-called “gazetted” states. Only arbitral awards rendered in states notified via the Government of India Official Gazette will be recognised and enforced in India under the New York Convention. This condition flows from s.44 of the Indian Arbitration and Conciliation Act 1995. The list of 45 or so gazetted states (out of 144 ratifying New York Convention states) has arisen piecemeal and throws up some odd results. For example, San Marino, a tiny European republic of 32,000 souls, was gazetted – but China, the world’s second largest economy, was not.

Singapore (gazetted by India several years ago) has benefited greatly from its membership of the “gazette club”. The fact that Singapore was gazetted – and China was not – was actively promoted by Singapore as a reason to select Singapore (over Hong Kong) as the seat of an arbitration having an Indian connection. After all, an award rendered in Singapore would be enforceable in India – but a Hong Kong award would not. The same parties, the same facts, the same outcome in the arbitration – but an “ungazetted” Hong Kong award was worthless in the Indian courts. And all this despite the fact that India, China and Singapore have all ratified the New York Convention.

China’s (and therefore Hong Kong’s) omission from the list of gazetted territories coincided with Singapore’s ambitious push for arbitration market share. The Singaporean government, assisted by the highly accomplished Singapore International Arbitration Centre, has taken Singapore to a point where it is the only viable Asian rival to Hong Kong as an arbitration seat. Both have excellent infrastructure, strong independent courts, sensible arbitration legislation, and (generally) a pro-arbitration environment. Both are easy places in which to do business and to conduct hearings. In terms of arbitration seat selection, the two cities are now arguably neck and neck, although each has perceived strengths in certain market sectors. Finance/banking institutions tend to favour Hong Kong while shipping/insurance disputes have gravitated towards Singapore.

Like any business, arbitration hubs need distinctive ways of differentiating themselves. One such differentiation was the China/India axis. Hong Kong seems to command a lead in PRC-related disputes. Hong Kong is seen as a natural and neutral alternative to an arbitration on the Mainland. As regards India, however, parties looked to Singapore. This is partly historical/cultural (Singapore is much more “Indian” than Hong Kong) and partly economic/diplomatic (Singapore and India have closer trade accords). But the omission of China from India’s list of gazetted states has also had a profound practical impact on Hong Kong as an arbitration seat. At a stroke it took Hong Kong out of the running for most Indian-connected arbitrations.

The Hong Kong International Arbitration Centre has been quick to spot the implications of Delhi’s decision to gazette China. HKIAC’s Secretary-General, Chiam Bao, commented on 11 April that “with Sino-Indian trade on the increase, this long-awaited clarification is welcomed by the HK arbitral community. We look forward to showcasing to India the many attractive features that Hong Kong has to offer as a seat of arbitration”. By contrast, Singapore (at least in official circles) has been silent about Hong Kong’s piece of good news.

What does this mean in practical terms? HKIAC is right – Sino-Indian trade is on the rise, and it was always artificial for Sino-Indian parties to opt for Singapore automatically because Hong Kong was not (in Indian eyes) a “recognised” seat. Indian-connected agreements with no PRC connection will probably continue to gravitate to Singapore – old habits die hard. But Indian parties with potential disputes against Singaporean entities/governmental agencies now have a viable alternative seat to Singapore – a fact they may exploit by opting for Hong Kong. And multi-party contracts with some Indian content will no longer exclude Hong Kong merely on the ground that China is not a gazetted state.

HKIAC and the HK Government must explain the implications of the Indian notification to users of arbitration. HKIAC will need to go on a charm offensive – especially in Indian commercial and official circles – to sell Hong Kong as the attractive alternative that it is. Singapore has done this very effectively to date. Hong Kong now needs to make a concerted effort to broaden its appeal in the previously challenging Indian market.

Granted, any flow of Indian-connected work from Singapore to Hong Kong will be slow and gradual. Arbitration clauses revised in Hong Kong’s favour today may not yield references for months or even years. Above all, Hong Kong must alter arbitration users’ habits and mindset in order to explode the notion “think India, think Singapore”. India’s notification of PRC/Hong Kong is a golden opportunity for Hong Kong as a seat and venue – let’s see if Hong Kong capitalises on that opportunity.

Section 3.3.6 of the IBA Guidelines on Conflicts of Interest in International Arbitration advise that when a “close personal friendship exists between an arbitrator and counsel of one party, as demonstrated by the fact that the arbitrator and the counsel regularly spend considerable time together unrelated to professional work commitments or the activities of professional associations or social organizations,” the arbitrator should disclose the relationship. This advice has hardly proved controversial — no doubt in part because the Guidelines are flexible, and designed to “be applied with robust common sense and without pedantic and unduly formalistic interpretation.” (IBA Guidelines, Introduction ¶ 6). The Guidelines themselves have been well-received by the arbitration community, with arbitrators and counsel alike consulting the guidelines to determine whether a conflict exists and, if so, the proper course of action.

Though the situations described in the Application Lists — the waivable and non-waivable Red Lists, the Orange List, and the Green List — were not intended to be comprehensive, there is at least one new type of “relationship” that merits independent consideration by the arbitration community; namely, the network of potential virtual “relationships” created through growing use of social media sites like Facebook, LinkedIn, and Twitter.

Over the past several years, use of social media has grown exponentially. When the Guidelines were passed in May 2004, LinkedIn was celebrating its first birthday. Facebook (then, “thefacebook.com”) had been founded only two months earlier. Twitter would not be created for two more years. But in December 2011, Facebook had 845 million members, with 483 million users logging on daily in one of more than 70 languages to connect with friends, colleagues and acquaintances; to share pictures and information; to comment on news stories; and to pledge allegiance to certain groups, ideas, or products. As of February 2012, LinkedIn hosts more than 150 million members, from more than 200 countries and territories. Members typically share their resumes, and join groups hosted by various professional organizations (where members may then participate in semi-public discussions). Twitter, for its part, boasts more than 465 million accounts, from which users post approximately 175 million 140-character “tweets” per day. Lawyers, law firms, arbitral institutions, and industry publications are among the members of these sites.

For law students trying to break into the profession, social media outlets are a way to connect with practitioners and to learn about pressing issues. For practitioners, social media outlets are a way to maintain contacts across borders, to garner recognition within the community, and to track new developments. While for newer practitioners, whose participation in social media sites may have predated their entry into the profession, social media may seem like a normal part of life, seasoned practitioners seem also to recognize the potentials of social media as a communication tool. Whereas relationships within the profession once required direct contact and true personal connections, social media sites permit virtual “relationships” to blossom, even between people who have never actually met in person.

But with the rise of virtual “relationships” come a host of new circumstances that might give rise to potential challenges to arbitrators, based on theories of “justifiable doubts as to [an] arbitrator’s impartiality or independence.” Social media certainly make certain relationships more visible; unlike face-to-face meetings, phone calls, or even email, social media sites leave a more public record of the relationship between two people. If privacy settings are not enabled, third parties may easily view someone’s page, “friends,” pictures, posts, and comments from friends. Even where privacy settings are enabled, third parties may still be able to view certain information.

While it feels somewhat strange to discuss social media within the traditionally solemn context of international arbitration, the phenomenon is not something that the community may ignore. The community must set guidelines now for determining which virtual “relationships” require disclosure, waiver, or disqualification. We must similarly determine if an arbitrator’s use of social media sites should be discoverable by the parties to a proceeding, and what the proper balance is between a justified need for access and the arbitrator’s right to privacy.

Until consensus is reached, potential arbitrators might consider one of the following options, representing a continuum of sorts:

1. Do not use social media at all. Though technically an option and of course the surest way of avoiding any potential for controversy, avoiding social media altogether hardly seems realistic or necessary. As we have noted in a previous post, arbitrators are not simply hatched, or spring fully formed like Athena from Zeus’ brow. Arbitrators are people who have contacts, friends, families, and lives outside of the hearing room. They cannot and should not be precluded from social interaction for fear of a conflict of interest. The point is particularly true for would-be future arbitrators of the younger generation: while today’s senior arbitrators may feel little need to embrace social media for networking or other purposes, younger lawyers whose generation is truly knit together by such sites cannot be expected to be sole holdouts, simply to avoid the possibility that decades later — when they achieve sufficient prominence to be considered as arbitrator — one of the persons they accepted years earlier as a Facebook “friend” or a LinkedIn contact may turn out to be counsel appearing before them in a case.

2. Limit friends to truly social contacts. This is fairly easy to achieve for those whose arbitrator careers were well established before the advent of social media, who can easily distinguish in their own minds between family and friends from outside the arbitration community, and those who are simply professional contacts. It may be safest in these circumstances to exclude the latter as Facebook friends, although perhaps allowing them to be listed as LinkedIn contacts, since the latter functions less as a true sharer of life stories and more as an online Rolodex, and is comparatively unlikely to imply true personal connections giving rise to future challenges. But for the younger generation, again, this strategy may be too late. Many young lawyers already have accumulated social media “contacts” of hundreds of people whom they have met in a variety of settings, from their hometown community to their college and law school classmates, from academic conferences and early jobs to “friends of friends.” At the time younger lawyers accepted such social media contacts, there is no way they could predict which of these individuals might develop into personal friends, which into meaningful professional contacts, and which into neither at all.

3. Use available privacy settings to diligently filter the information you share. Many social networking sites permit members to filter the information they share, so that certain information goes only to certain people. Thus, for those who decide not to limit their social media “friends” to only contacts with whom they have true personal relationships, at minimum they should carefully determine which pictures, posts, and information they wish to share with professional contacts, prior to those individuals attaining true “personal friend” status. This strategy provides some protection against later challenges, because it enables distinctions to be drawn about the level or extent of connection that can be assumed simply from social media connections. Remember, however, that sharing is a two-way street. Even if one practitioner filters the information he or she provides to social media contacts, other people might not. The scrupulous filterer may still find his or her Facebook account awash in personal reports from others with whom in reality there is no close friendship, and to an outside observer, the simple receipt of such personal reports may suggest a more meaningful relationship than in fact exists. Ultimately, the arbitration community will have to decide whether mere receipt of information through social media sites creates any conflict of interest or even an “appearance” of potential impropriety.

4. Restrict access to your account during pending proceedings. Finally, if two individuals already “linked” through social media accounts find themselves serving as arbitrator and counsel in an ongoing proceeding, both should take active steps to restrict information transmitted to the other during the pendency of the proceeding. Depending on the particular case, completely removing one another from “Friend” lists may also be warranted.

There are no categorical answers to the question of how to navigate the world of social media to avoid potential conflicts, particularly for those who are just starting out in their careers. The bottom line, however, is that members of the arbitration community must be conscious that their participation in social media sites could potentially create conflicts of interest in international arbitral proceedings, or be perceived as so doing, leading to possible future conflicts. All members of the community, whatever their current status, should therefore think carefully of the consequences before accepting Facebook “friend” requests, and particularly before sharing personal information with such “friends,” beyond the simple “CV” summaries routinely available through LinkedIn. As with many things in life, forewarned is forearmed, in the brave new world of social media.

By Jean E. Kalicki and Mallory Silberman

I. Background

The facts of the case are similar to previous cases involving SGS. SGS is a Swiss company providing certification services based on pre-shipment inspection of goods. Under a contract entered into between SGS and the Ministry of Finance of Paraguay in 1996 (“the Contract”), SGS was to perform such services for cargoes destined for Paraguay. Sustained attempts by SGS to collect on its invoices failed. There were also alleged oral and written promises by Paraguayian officials to make good on the claimed debt, which were not honoured. SGS commenced ICSID arbitration under the bilateral investment treaty (“BIT”) between Switzerland and Paraguay. The BIT contains an umbrella clause under Article 11.

Paraguay resisted jurisdiction on, inter alia, the basis that Article 9 of the Contract vests exclusive jurisdiction in the domestic courts of Paraguay. In response, SGS argued that it was not advancing any claims under the Contract and was only asserting claims for breach of the BIT (including breach of the umbrella clause). Paraguay further argued that it was improper to defer to SGS’s “labeling” of its claims as being based on treaty rather than contract. In Paraguay’s view, a State’s non-performance of a contract can only give rise to a BIT violation if sovereign interference can be shown.

II. Holding

In passages worthy of note by practitioners, the Tribunal first endorsed the oft-cited distinction between treaty claims and contractual claims, viz, the fact that an act or omission may give rise to a contractual claim does not mean that it cannot also separately give rise to treaty claims. It is for SGS to characterize its claims, and the Tribunal will address each claim to see if they are legally and factually adequate for jurisdictional purposes. The threshold at the jurisdictional stage is whether the facts alleged by a claimant could, if proven, make out a claim under the relevant treaty.

The Tribunal did not accept Paraguay’s argument that “sovereign interference” was necessary to transform a contractual breach into a treaty violation. It opined that, one could logically characterize every act by a sovereign State as a sovereign act, including contractual breaches to which the State is a party. There was no basis why a State’s actions, solely because they occur in the context of a contract or a commercial transaction, are somehow no longer acts of the State.

The Tribunal noted in dicta that, even if SGS had brought contractual claims, the wording of the dispute resolution provision in the relevant Treaty was arguably wide enough to encompass those claims, but difficult issues relating to the forum selection clause in the Contract would have been raised. However, since SGS only brought treaty claims before the Tribunal, the forum selection clause in the Contract would not divest the Tribunal of jurisdiction to hear treaty claims.

The Tribunal next addressed each of the treaty claims to see if they were legally and factually adequate for jurisdictional purposes. On the umbrella clause, Paraguay argued that an umbrella clause is implicated only if the host state abuses its power or exerts undue governmental influence in breaching a contract or any other type of undertaking. Paraguay’s alternative submission was that the claim for breach of the umbrella clause was inadmissible in light of the forum selection clause in the Contract providing for exclusive jurisdiction of the Paraguayan courts.

The Tribunal rejected Paraguay’s arguments in its entirety. The Tribunal first cited the plain and ordinary meaning of the language of the umbrella clause, with Article 31(1) of the Vienna Convention requiring respect for the ordinary meaning of the clause. The Tribunal took the view that the umbrella clause before it “establishes an international obligation for the parties to the BIT to observe contractual obligations with respect to investors.” The Tribunal next cited a whole series of reasons to dismiss Paraguay’s alternative submission that the claims under the umbrella clause were inadmissible. The reasons are:

(a) SGS’s claims under the umbrella clause are not co-extensive with claims under the Contract. SGS advanced claims under the umbrella clause not only for breach of the Contract’s payment obligation but also for breach of alleged subsequent commitments by Paraguay’s representatives.

(b) Even to the extent that certain claims under the umbrella clause may be co-extensive with claims under the Contract, any argument that the breach of an umbrella clause will not be assessed under an independent, international law standard under the treaty, but under the Contract, is an argument that goes towards jurisdiction at best. Having rejected that jurisdictional argument, the Tribunal would have to have very strong cause to decline the exercise of its jurisdiction.

(c) It would be incongruous to find jurisdiction on the basis of the umbrella clause but then dismiss the claims based on admissibility grounds, because the effect would be to divest the umbrella clause of its core purpose and effect.

(d) The dismissal of claims under the umbrella clause as inadmissible on the ground that a forum selection clause in the Contract is applicable may, in effect, read an implied waiver of treaty rights into every investment agreement that specifies a dispute resolution mechanism other than ICSID.

(e) Given the significance of investors’ rights under a BIT, and of the international law “safety net” of protections that they are meant to provide separate from and supplementary to domestic law regimes, they should not lightly be assumed to have been waived. If parties to a later-in-time contract could have expressly excluded the right to resort to arbitration under the extant BIT but do not do so, that silence would not be taken as effecting a waiver of treaty rights.

(f) Other provisions of the BIT between Switzerland and Paraguay, such as the dispute resolution provision itself, contemplate that tribunals constituted under it would be deciding contractual matters and therefore should not be rendered inutile.

III. Comment

This is undoubtedly a decision that investors would welcome. The Tribunal’s decision is in marked contrast to two other cases involving SGS over similar facts at hand, namely, SGS v Pakistan decided in 2003 and SGS v Philippines decided in 2004, which need no introduction to many readers. The tribunal in another parallel case involving Paraguay over the same facts, BIVAC v Paraguay, adopted the same approach as the tribunal in SGS v Philippines, reasoning that because the investor’s contract post-dated the relevant BIT, the contract’s forum selection clause should take precedence.

The argument that the claims under the umbrella clause are restricted to breaches based on sovereign conduct was rejected by the Tribunal even though tribunals in El Paso v Argentina and CMS v Argentina have held otherwise. Leaving aside practical difficulties of distinction, the language of the umbrella clauses seen thus far do not justify any distinction between acts that are of a sovereign and acts that are of a non-sovereign character. Moreover, this is consistent with other substantive treaty standards which do not hinge on such a distinction. Both commercial and sovereign conduct are attributable to the State under the international law on state responsibility. Once one accepts that an umbrella clause is a substantive treaty standard as it is meant to be, there is no principled reason why one should enquire about the nature of a State’s conduct for claims under the umbrella clause, when the same is not done for other treaty standards.

It would appear that the current tide of jurisprudence concerning umbrella clauses is in favour of such clauses encompassing host State commitments of all kinds, including contractual commitments as the Tribunal had unequivocally found in the present case. The significance of SGS v Paraguay, however, lies in its holding that, even in the presence of a forum selection clause that the investor had specifically and freely entered into, the tribunal can exercise jurisdiction over claims under the umbrella clause. This holding is premised on the view that treaty rights provide an alternative choice for the investor and should not be easily whittled away. In an important footnote in its jurisdictional award, the Tribunal further observed that:

“There is a serious question whether individuals are capable of waiving rights conferred upon them by a treaty between two States…. Because we would not give effect to an alleged waiver that is merely implied, we need not address the question whether we would have given effect to an express waiver.”

Leaving aside the question of whether any express waiver can be given effect, that a tribunal should not easily give effect to implied waivers must be right. Going back to first principles, once it is accepted that the umbrella clause is an independent treaty standard, it should follow that claims under the umbrella clause, as with any other treaty claims, should be resolved by the treaty forum. The fact that claims under the umbrella clause may be, in effect, identical to contractual claims misses the fundamental point that the umbrella clause itself is an independent treaty standard. A breach of an umbrella clause is a breach of treaty, giving rise to international responsibility. It has been observed that between contractual liability under a national law and international responsibility for breach of treaty, various legal and practical differences exist, spanning interpretation, breach, defences and remedies. This is why it has been said that an approach other the one taken by the Tribunal would effectively render the umbrella clause otiose.