Initial Stages of a Dispute: The Investor’s Perspective

The relevance of arbitration in the settlement of investor–state disputes has grown over the years. This chapter addresses the considerations that investors should bear in mind before commencing arbitration proceedings. Recommendations are made as to what steps an investor should take to determine whether resorting to arbitration is the optimal strategy and, if it is, how an investor can adequately prepare for formal arbitral proceedings under applicable laws and procedures.

Pre-action preparations

Having determined that there is a dispute to be resolved between the investor and the host state, the investor should conduct a holistic and detailed assessment of the actions that underpin the dispute, to determine its logical next steps. In conducting this assessment, it is important for the investor to carry out the following procedures.

• Analyse and streamline the factual background. This is typically done by collating evidence and interviewing fact witnesses to develop a clear chronology of how the dispute arose and its circumstances. With specific reference to witness testimony, it is important to bear in mind that all relevant fact witnesses may not be readily available during the arbitration hearing. Hence, it is vital to put appropriate plans in place to secure their attendance or consider an alternative plan.
• Establish the relevant instrument that protects its foreign investment (i.e., an investment treaty,^[2] investment contract or national legislation). In some instances, for example, there may be more than one applicable instrument, and they may contain varying substantive and procedural provisions. This process will, therefore, help an investor to determine which instrument contains the most favourable provisions in the circumstances.
• Calculate the investor’s chance of success, with the aid of lawyers, by assessing the strengths and weaknesses of the proposed claim. This is usually determined by investigating whether the relevant jurisdictional standards for an arbitral tribunal have been met and whether the conduct of the host state in relation to the investor’s foreign investment indeed breaches the substantive obligations owed to the investor under the relevant instrument or customary international law. In assessing whether the relevant jurisdictional standards have been met, it is crucial to confirm whether the host state has consented to arbitration under an investment treaty, a local investment statute or an investment contract between the investor and the host state.^[3] Also, consideration should be given to whether the host state has consented to arbitration in relation to the covered investor and investment.^[4] In addition, it is vital to confirm that there are valid legal grounds upon which the investor can base its claim against the host state under the relevant instrument or customary international law. These legal grounds, which are discussed in further detail in the following chapters, include denials of fair and equitable treatment, unlawful expropriation and discriminatory treatment.^[5]

At the end of this phase, it is important to clearly frame the investor’s claim and determine the applicable instrument, procedure and strategy.

Satisfying applicable conditions precedent

Having undertaken the pre-action preparations, the investor should consider whether the investment treaty, investment contract or national investment legislation provides for certain procedures that an investor must adhere to before instituting a formal arbitration claim. An example is the requirement to comply with a ‘cooling-off’ period. This requirement is aimed at encouraging amicable settlement between the parties before they initiate formal arbitration proceedings.^[6] Most investment treaties mandate this step and specify a time frame, usually between three to six months, for these amicable discussions or consultations. To the extent that an investment treaty contains this requirement, the investor should ideally wait for that period to elapse because a failure to satisfy the condition could result in the dismissal of its claim as inadmissible by the tribunal, even if there is a basis for jurisdiction.^[7] With that said, a treaty’s most-favoured nation (MFN) clause may provide a means of evading a prescribed cooling-off period as discussed in the chapter on MFN clauses.

Resolving potential claims amicably

Although an investor may have a justifiable basis to institute formal arbitration proceedings against the host state, it is often advisable for investors to explore amicable settlement first. This usually involves the representatives of the investor and the host state engaging in constructive discussions among themselves (i.e., negotiation) or with the aid of a third party (i.e., mediation or conciliation) with the goal of an amicable, workable outcome.^[8]

Taking this path before commencing the formal process of settling disputes has some advantages. First, it tends to minimise negative publicity of the dispute by the host state. The second advantage is that an amicable resolution can help preserve working relationships between the parties after the resolution of the dispute. This is particularly vital where the investor has long-term investment plans in the host state. Third, these mechanisms are usually faster and more cost-effective than investment arbitrations. Lastly, informal dispute resolution offers the parties the flexibility to use a fluid, creative process, unlike formal arbitration proceedings that involve comparatively strict procedural rules.

However, adopting amicable processes in the settlement of investment disputes is not free of shortcomings. For example, an arbitral award is more easily enforced around the world than a written settlement agreement between the parties.^[9] The exercise could be a waste of time and costs where the process does not result in a workable solution between the parties. Further, they may not be suitable for all types of disputes and circumstances (for example, disputes that relate to public interest issues) or where the relationship between the parties has severely broken down or the matter is urgent.

While these amicable mechanisms could take various forms, the popular options are negotiation, mediation and conciliation.

Negotiation

Negotiation involves direct discussions between the representatives of the investor and the host state without the aid of a third party. The parties try to utilise their relationship to find a solution to their dispute. Negotiation is often required in investment treaties in the form of a mandatory cooling-off period between the filing of a dispute and the formal commencement of the arbitration procedures,^[10] but can also extend beyond that time if doing so is likely to yield a fruitful outcome.

Mediation

Mediation involves the assistance of a third party, known as a mediator, in the settlement of a dispute. The mediator aims to assist the parties in reaching their own amicable settlement to a dispute, with the exact role and involvement of the mediator varying, depending on the parties’ preferences.^[11]

Conciliation

This method involves a conciliator who is a neutral, impartial expert, and aims to assist the parties in resolving the issues between them. The exact role of the conciliator depends on the parties’ consent.^[12] The major difference between conciliation and mediation primarily lies in the degree of control that the parties have in the settlement process. While the parties give the conciliator greater control over the dispute and its processes (which, sometimes, entails the formal collation of evidence, the use of pleadings and the issuance of written recommendations by the conciliator in resolving the dispute), a mediator works towards encouraging the parties to reach a solution themselves, including through focusing on their shared interests.^[13] Any agreement that is achieved through conciliation is usually memorialised in writing and can be binding or non-binding, depending on the parties’ preferences.^[14]

Overall, these amicable strategies for dispute resolution will often be worth exploring before commencing formal arbitral proceedings (although, sometimes, time will be of the essence, and immediate action would be required to preserve rights).^[15] They can be explored without prejudice to the right of the parties to resort to other forms of dispute resolution.

Other strategic choices for an investor – choice of forum, choice of arbitration rules, choice of arbitrator

If a claim must be presented formally, an investor may have some strategic decisions to make regarding the appropriate forum, arbitration rules and arbitrators.

Choice of forum

The investor may have a choice of forums in which to pursue its claim against the host state. For example, some investment treaties give investors a choice between pursuing their claims against the host state in the host state’s national courts or in an arbitral forum. In relation to arbitral forums, there could be a choice as to whether the investor can pursue its claim through institutional arbitration rules (e.g., under the International Centre for Settlement of Investment Disputes (ICSID) Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention)) or under ad hoc arbitration rules (e.g., the Arbitration Rules of the UN Commission on International Trade Law (UNCITRAL)).

In relation to the choice between national courts and arbitration, investors will often prefer investment arbitration so as to access a neutral, qualified tribunal, instead of relying on domestic courts where the relevant judges may not be experienced in the subject matter of the dispute or may be biased in favour of the host state. There is also a perception that arbitration could be a cheaper and more flexible option for the parties^[16] (including through the avoidance of potentially endless court appeals) and allows the parties to exercise greater control over the dispute resolution procedure (by appointing the arbitrators, choosing the arbitral rules and agreeing to the relevant timelines). More so, and as noted above, the relative ease of enforcement of arbitral awards is an attractive element of international arbitration.

It is worth bearing in mind that some investment treaties contain a jurisdictional provision that binds an investor or a host state to its first choice of dispute resolution procedure (i.e., domestic court proceedings or arbitration proceedings). This is referred to as a ‘fork-in-the-road’ provision. Hence, if the investor chooses to pursue its claim in the domestic courts of the host state, it may be prevented from later commencing arbitral proceedings, thereby preventing the duplication of procedures and claims.^[17]

Choice of arbitration rules

Many investment treaties allow the investor to choose which arbitration rules will govern the arbitration proceedings.^[18] The most common – which is the focus of this chapter – are the Rules of the ICSID Convention^[19] and the UNCITRAL Rules.^[20] Some major differences between the ICSID and UNCITRAL options are as follows.

• Cost: arbitration proceedings under the ICSID Convention may be less expensive when compared with ad hoc arbitration under the UNCITRAL Rules because the ICSID Rules provide a fee schedule that establishes hourly fees for arbitrators, which are usually less than the typical market rates.^[21] The UNCITRAL Rules, on the other hand, give arbitrators the discretion to determine their fees so long as they are reasonable.^[22] In addition, and with regard to procedural expenses, the services provided by the ICSID Secretariat are at minimum cost. Arbitration proceedings under the UNCITRAL Rules, by contrast, are ad hoc in nature and not administered by an institution by default.^[23] While this enables the parties to avoid having to pay an institutional fee, it can also lead to inefficiency and, ultimately, increased costs.
• Jurisdiction: under the terms of the ICSID Convention, an investor must satisfy the jurisdictional requirements of the relevant investment instrument and the additional requirements in the ICSID Convention.^[24] Bear in mind that the interpretation of ‘investment’ in the ICSID Convention is unsettled. Hence, the additional layer of jurisdictional requirements imposed therein can, in some cases, add to the complexity of the arbitral proceedings and could ultimately result in the dismissal of the claim.^[25] On the other hand, the UNCITRAL Rules impose no additional requirements for jurisdiction. An arbitral tribunal constituted under those Rules will, therefore, have jurisdiction over any claim meeting the requirements of the relevant investment instrument.
• Enforcement and review mechanisms: the ICSID Convention provides a unique system for the review and enforcement of arbitral awards. A party to an ICSID award may file an application for the annulment of an award and it will be decided by an ICSID ad hoc committee.^[26] However, awards rendered under the ICSID Convention are not subject to appeal or review by another forum, including national courts.^[27] Instead, the ICSID Convention requires national courts to enforce the award as though it is a judgment of a court of last instance.^[28] This represents an advantage for the investor. On the other hand, awards rendered pursuant to the UNCITRAL Rules could be subject to set-aside proceedings in the national courts of the place of the arbitration. UNCITRAL awards cannot be enforced as the final judgment of the court of last instance. Thus, the successful party must obtain an order of enforcement from the national courts of each jurisdiction where enforcement is being sought, typically based on the 1958 New York Convention of the Recognition and Enforcement of Foreign Arbitral Awards.^[29]

Choice of arbitrator

An arbitral tribunal in investor–state disputes usually composes three arbitrators. In some instances, the method of the arbitrators’ appointment is stated in the applicable investment instrument. In other instances, arbitrator appointment is made by reference to the arbitration rules selected by the parties. The investor typically names the first arbitrator in the originating process (i.e., a request for arbitration or notice of arbitration), following which the host state names the second arbitrator. The presiding arbitrator is then appointed either upon the agreement of the two parties or the two arbitrators.^[30]

If the arbitrators are to be appointed by the parties, there are certain factors that the investor must consider when choosing who to appoint as an arbitrator. For example, it is important to appoint an independent and impartial arbitrator to ensure a fair hearing during the proceedings. To ensure that the independence and impartiality of the arbitrator appointed are not impugned, the investor must disclose any information or previous relationship with the arbitrator.^[31] Another factor to consider is the experience and expertise of the arbitrator. He or she must be someone with sufficient experience to decide the dispute to ensure a smooth and efficient hearing of the dispute by the tribunal. The availability of the proposed arbitrator is also important to ensure that he or she will invest the required time and effort throughout the proceedings.

The ICSID Rules provide certain restrictions regarding the arbitrators’ nationality. In a three-person ICSID tribunal, a national of the state party to the dispute or of the state whose national is a party to the dispute may not be appointed as an arbitrator without the agreement of the other party.^[32] The UNCITRAL Rules do not provide for any nationality restrictions but the nationalities of the parties to the dispute are considered in practice by the appointing authority in the event of the parties’ failure to appoint the tribunal.^[33]

The originating process

In commencing arbitration proceedings for investment disputes, it is fundamental that certain procedures be followed to ensure that the arbitral tribunal has the competence to decide the issues.

Notice of dispute or notice of intention to submit the dispute to arbitration

As discussed above, parties are mandated to take steps towards settling their differences amicably in most investment treaties. The notice of dispute or notice of intention to submit the dispute to arbitration typically triggers the waiting period. There are usually no formal requirements for this notice. In practice, however, it takes the form of a written notification (for example, a letter), directly from the investor or its legal representatives, and addressed to the head of state or to the relevant ministry charged with the regulation of that investment, or both, identifying the investor’s investment in the host state, the disputed measures adopted by the host state that negatively affect the investment, the legal principles that confirm that those measures are contrary to the provisions of the relevant investment instrument, and an offer to engage in amicable discussions.

Request for arbitration or notice of arbitration

Investment arbitration proceedings are formally commenced by the sending of a notification known as a request for arbitration (in relation to ICSID proceedings)^[34] or a notice of arbitration (under the UNCITRAL proceedings).^[35]

This document is not a complete statement of the investor’s claims. Instead, it provides some basic information about the claims, the parties and the basis for arbitral jurisdiction, including: (1) the names and contact details of the investor and counsel; (2) the identification of and, where possible, a copy of, the arbitration agreement under which the dispute is to be settled; (3) identification of any contract, other legal instrument or relationship out of or in relation to which the dispute arises; (4) a brief description of the nature and circumstances giving rise to the claims; (5) a statement of the relief sought, together with the amounts of any quantified claims and, to the extent possible, an estimate of the monetary value of any other claims; and (6) the claimant’s observations or proposals as to the number of arbitrators, the language, the seat of arbitration and the law or rules of law applicable to the substance of the dispute.^[36] This document does not aim to set out the claimant’s claim in full (which is typically set out subsequently in the statement of claim or the claimant’s memorial).^[37]

The request or notice facilitates the commencement of arbitral proceedings when it has been delivered to the host state (in relation to UNCITRAL proceedings)^[38] or the registration of the request for arbitration by the ICSID Secretariat (in relation to ICSID proceedings).^[39]

In UNCITRAL arbitration proceedings, the host state may file a response to the notice within 30 days of its receipt.^[40] This response usually contains a high-level response to the notice and not a complete statement of defence. The request/notice and response allow the tribunal to prepare for the first session because the documents will delineate the key issues in dispute. Failure to submit the response does not prevent the arbitration from kicking off.^[41]

There is no similar document to a response to the request for arbitration under the ICSID procedure.

Conclusion

There is little doubt that instituting a claim against a host state relating to foreign investment can be an expensive endeavour. The initial phases of the dispute settlement process are essential because several important decisions are made at this stage of the proceedings. These decisions range from choice of forum and arbitrators to arbitration rules and so on. It is therefore essential that parties devote sufficient time and resources towards strategising and complying with relevant procedural requirements. It is also crucial to note that, at the initial stage, alternative mechanisms should be taken into consideration when seeking to resolve investment disputes. This helps to reduce the after-effects of conflicts, including the heavy costs that are involved in advancing an arbitration claim.

Notes