The Boom in Parallel Claims in Investment Treaty Arbitration

Investment treaty arbitrators have adopted a de facto policy of favouring parallel claims by declining to yield to contractually-agreed dispute settlement provisions. In 12 cases decided before June 2010, tribunals awarded at least US$1.2 billion against states after taking jurisdiction over an investor claim in spite of an exclusive jurisdiction clause in a relevant contract.[1] The policy is widespread among tribunals but appears out of step with judicial restraint based on principles of party autonomy, sanctity of contract, or the avoidance of parallel proceedings.

These observations emerged from a study of arbitrator decision-making under investment treaties outlined more fully in a book by the author.[2] The study revealed a tendency of arbitrators to favour parallel claims in spite of treaty language that supported restraint due to the role of another forum. The de facto policy has important implications besides the obvious benefit to the investor-state arbitration industry that grew alongside the boom in treaty claims since the late 1990s. Fundamentally, it expanded arbitrator power and prospects for investor compensation and state liability, while revealing how the growth of investor-state arbitration has depended on expansive legal interpretations by arbitrators.

Overlap between contract and treaty-based disputes

Investment treaty arbitration is deeply intertwined with contract-based adjudication. It emerged from the study that approximately two-thirds of investment treaty cases appeared to involve a contract—presumably with its own dispute settlement clause—that related to the dispute brought before the treaty arbitrators.[3] In light of this overlap, it was asked whether the treaty arbitrators stayed or delayed their own proceedings in deference to a contractually-agreed forum. Restraint might not be appropriate in all such cases. Yet, in these circumstances, principles of party autonomy and sanctity of contract provided a basis for arbitrators to: (a) allow other forums to play the primary role in resolving a dispute; and (b) limit their own role to providing a check against sovereign interference in the contract-based forum. In spite of this, investment treaty tribunals overwhelmingly declined to show restraint in the face of a contract-based forum.

Rejection of restraint

On the specific issue of exclusive jurisdiction clauses, the earliest example of restraint, from 2000, was Vivendi (No 1) in which the tribunal declined to hear an investor’s claim because it related closely to a concession contract that contained its own exclusive jurisdiction clause.[4] The tribunal decided that the claimant had to submit the dispute first to the contract-agreed forum and that, if the claimant was unsatisfied with the outcome, then the claimant would be limited to a claim of denial of justice under the treaty.[5] Thus, the tribunal decided implicitly that investment treaties do not provide a general alternative venue for investors involved in contractual disputes, where the investors have agreed previously to resolve such disputes in another forum.

Had the decision in Vivendi (No 1) been accepted widely by later tribunals, it would have constituted investment treaty arbitration as a supplement to contract-based adjudication. Instead, the decision was overridden by an International Centre for Settlement of Investment Dispute (ICSID) annulment committee of three World Bank-appointed arbitrators, two of whom—Yves Fortier and James Crawford—became mainstays in investment treaty arbitration.[6] According to the annulment committee, the original tribunal’s decision amounted to a manifest excess of powers under the ICSID Convention because the original tribunal:[7]

• looked beyond the claimant’s framing of the treaty claim in order to evaluate for itself whether the claim involved issues of contractual performance or non-performance,
• stayed its proceedings upon finding that the underlying dispute was a matter of contract and that the contractual forum was the more appropriate forum,
• declined to analyse in detail specific treaty standards until after the claimant had resorted to the contractual forum, and
• signalled that the treaty would not offer relief for the claimant unless the respondent state denied justice to the claimant in the contract-based forum.

This annulment heralded the current de facto policy in favour of parallel claims under investment treaties despite the role of contract-based forums.[8] Remarkably, the Vivendi (No 1) annulment committee overrode the original tribunal in a situation where the annulment committee was itself supposed to be deferring to the original tribunal.[9] In essence, the original tribunal was said to have exceeded its power manifestly because it showed restraint.

After the annulment in Vivendi (No 1) in 2002, there were few examples of restraint linked to the role of a contract-based forum.[10] Rather, in 30 of 36 cases where this specific legal issue was found to have arisen, the tribunal allowed a treaty claim to proceed in the face of a contractually-agreed venue.[11]

Arbitrators justified this favouring of parallel claims in various ways. For instance, in Vivendi (No 1), the annulment committee emphasized the distinction between formal causes of action rather than factual similarities between disputes in order to distinguish treaty from contractual claims.[12] Other tribunals took a similar approach that sidelined exclusive jurisdiction clauses.[13] For example, the Siemens tribunal stated that “[t]he dispute as formulated by the Claimant is a dispute under the Treaty….  The Tribunal simply has to be satisfied that, if the Claimant’s allegations would be proven correct, then the Tribunal has jurisdiction to consider them.”[14] In Eureko v Poland, the tribunal allowed an investor’s claim to proceed under the treaty in spite of an exclusive jurisdiction clause, stating that the investor “advances claims for breach of Treaty… [and] every one of those claims must be heard and judged by this Tribunal.”[15]

This hands-off approach solidified a shift in power to claimants because, in effect, the arbitrators chose not to evaluate for themselves whether the investor’s complaints against the state, though presented as treaty claims, in fact fell within the scope of a contractual dispute resolution clause. Similarly, arbitrators adopted an interpretive presumption—put forward also by the Vivendi (No 1) annulment committee—that an exclusive jurisdiction clause must rule out investment treaty arbitration specifically if it is to preclude a treaty claim.[16] In other words, it was insufficient for such clauses to designate the contract-based forum to the exclusion of other forums generally. Adopting this presumption, arbitrators faced with a general waiver clause typically did not show restraint based on party autonomy, sanctity of contract, or other considerations.[17]

Arbitrators also facilitated parallel treaty claims by applying different thresholds to decide whether a claim related to the treaty or a contract. In Sempra, the tribunal decided that the contract-based forum had exclusive carriage over disputes that were “purely” contract-related, whereas the investment treaty tribunal could hear any disputes “relating to” the interpretation of the treaty. [18] According to the tribunal, if it did not characterize disputes based on this test of contractual purity, then “the contract would nullify the provisions of the treaty.”[19] As such, the tribunal de-emphasized party autonomy and sanctity of contract in a situation where these principles appeared clearly to support restraint.

In other cases, arbitrators allowed the investor’s claim to proceed by distinguishing one or more parties in the treaty arbitration from the parties to the contractual relationship or proceedings.[20] For example, in National Grid, the tribunal emphasized that the company that brought the treaty claim was different from the company that signed the concession contract, although the former owned the latter.[21] By this approach, a company could avoid an exclusive jurisdiction clause and bring a treaty claim simply by having a subsidiary negotiate the contract and litigate the contractual dispute.

Thus, investment treaty arbitrators erected a series of legal obstacles for states seeking to uphold their position under an exclusive jurisdiction clause. In doing so, they veered from alternative options that might invoke concepts of comity, forum non conveniens, or flexible versions of lis pendens. This created a major hurdle to the effectiveness of contractual dispute resolution clauses and allowed claimants and tribunals to distinguish almost any investment treaty claim from an underlying contractual relationship. In turn, it helped to fuel the boom in treaty arbitrations.

Treaty-based requirements also side-stepped

On another track, tribunals in many cases declined to give effect to treaty provisions that supported restraint to avoid parallel proceedings. First, most arbitrators took a soft approach to wait periods under an investment treaty by allowing an investor claim to proceed even though the claimant had not waited the required period before bringing a treaty claim. In 14 of 19 cases where this issue appeared to arise, the tribunal allowed the treaty claim to proceed.[22]

Tribunals justified this position on various rationales, including that the treaty was not sufficiently clear and precise,[23] that the issue raised by the wait period was insignificant because the tribunal would have allowed the claim to be re-submitted in due course,[24] that imposing the wait period would have little effect other than to increase any damages owed by the state,[25] that the respondent state’s obligation to provide most-favoured-nation treatment extended to dispute settlement processes such that wait periods were removed or shortened for all claimants,[26] or that giving effect to a wait period would nullify the treaty’s role to provide access to international arbitration regardless of whether an investor resorted to other remedies.[27] Many of these rationales are highly debatable, at least, and they indicate how arbitrators usually chose to expand their role in the face of treaty provisions that appeared precisely to constrain it.

Incidentally, such arcane legal interpretations by arbitrators could sow the seed for a monumental harvest, such as in Occidental (No 2) where the tribunal awarded over US$2.3 billion (including pre-award interest) against Ecuador after allowing the claim to proceed in spite of a treaty-based wait period. The tribunal reasoned that it would have been futile for the investor, during the wait period, to have continued to pursue a negotiated solution; paradoxically, on the same facts, the tribunal also concluded that Ecuador had acted disproportionately by terminating a contract with the claimant instead of continuing to negotiate.[28] In this case and others, arbitrators framed wait periods as an option instead of a prerequisite for treaty claims. In doing so, they put aside an apparent precondition for the state’s consent to arbitrate under the treaty.[29]

Arbitrators took a similarly expansive position when faced with a fork-in-the-road clause in a treaty. Such clauses require claimants to choose between bringing a claim under the treaty or resorting to another forum such as domestic courts or a contract-based forum. In all but two of 17 relevant cases the tribunal did not bar an investor claim although it was subject to a fork-in-the-road clause that appeared not to have been satisfied by the claimant.[30]

Conclusion

Remarkably, had tribunals taken a general position of restraint in these contexts—especially out of respect for contract-based forums—then investor claims under the treaties in many cases, perhaps most, would have had to wait for a resolution in another forum. As mentioned at the outset, in cases in which the tribunal did not show restraint—although the claim appeared to relate to a contract with a dispute settlement clause that had been agreed previously by the claimant or a related entity—states were ordered to pay at least US$1.2 billion overall.[31] This amount would rise to US$3.5 billion if one included the award in Occidental v Ecuador (No 2).[32] It is not for nothing that investment treaty arbitration has boomed, based partly on the de facto policy choices of for-profit arbitrators.

Author: Gus Van Harten is an associate professor at Osgoode Hall Law School of York University.