Procedural Issues in an Arbitration: Preliminary Considerations

The initial stages of an investor–state arbitration can become a defining phase for the dispute. Through an initial procedural order, the tribunal and the parties set out and, where possible, agree on the process for the ensuing proceedings. In some cases, the arbitration will require substantial early case management to assist all stakeholders, parties and the arbitrators to navigate a complex landscape of multiple claims, multiple proceedings across national and international forums or urgent pleas for interim relief to preserve evidence or provide security for costs. These procedural questions can be particularly difficult to resolve at the outset of the arbitration when the facts of the case remain largely underdeveloped and unproven.

This chapter examines three important procedural issues that can arise as preliminary considerations in an arbitration and may require attention in an initial case conference or procedural order: bifurcation (or trifurcation) of proceedings, requests for interim relief and managing concurrent proceedings. The following sections set out relevant law related to these issues and the practical considerations that should guide tribunals and parties during the preliminary stages of an investor–state arbitration.

Bifurcation and trifurcation in investor–state arbitration

Relevant law

Historically, the bifurcation of an international arbitration between the jurisdictional and merits phases was agreed by the parties or readily granted by tribunals, often without reasons. The United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules (1976) include an express presumption for bifurcation, whereby an arbitral tribunal ‘should’ rule on a plea concerning its jurisdiction as a preliminary question.^[2] Scrutiny over the potential benefits of bifurcation has developed over time. Tribunals now typically assess requests for bifurcation (or trifurcation, in which jurisdiction and damages are both assessed separately from liability) on a case-by-case basis.^[3] There is no presumption in favour of bifurcation in International Centre for Settlement of Investment Disputes (ICSID) cases.^[4]

During consultations for the amendment of the ICSID Arbitration Rules, several member states have suggested that bifurcation should be allowed more often, or even automatically. Such a development could have signalled a departure from the modern approach that endorses fact-specific inquiries. Currently, ICSID’s proposed amendment does not provide for automatic bifurcation, confirming the necessity to take into consideration the circumstances of the case before determining if bifurcation is appropriate.^[5]

When faced with the facts of a specific case, a number of governing principles may be discerned from the over 100 decisions rendered on requests for bifurcation.^[6] The articulation of a ‘test’ for bifurcation has evolved over time. In Glamis Gold v. The United States of America,^[7] for instance, the tribunal outlined three criteria when considering a request for the preliminary consideration of an objection to jurisdiction:

• first, the tribunal should take the claim as it is alleged by the claimant;
• second, the ‘plea’ must be one that goes to the ‘jurisdiction’ of the tribunal over the claim; and
• third, a tribunal may reject a request to decide jurisdiction as a preliminary matter if it would be unlikely to bring about increased efficiency in the proceedings.

Undoubtedly, procedural economy is a chief consideration in a decision on whether to bifurcate.^[8] Under the third step of the inquiry in Glamis Gold, the tribunal identified various way in which the request for bifurcation would be more likely to achieve the intended outcome of procedural economy.

This three-part test has developed further in subsequent decisions. In deciding in favour of bifurcation, the tribunal in Emmis v. Hungary^[9] expanded on the criteria laid out in Glamis by also considering whether any prejudice suffered by the claimant due to delay in the proceeding could be compensated in the tribunal’s decision on costs. The tribunal in Philip Morris Asia Ltd v. Australia^[10] also recast the Glamis criteria in the following manner.

• Is the objection prima facie serious and substantial?
• Can the objection be examined without prejudging the merits?
• Could the objection, if successful, dispose of all or an essential part of the claims raised?

The tribunal in Lighthouse Corporation v. Democratic Republic of Timor-Leste^[11] added a fourth criterion to the Philip Morris criteria, which recalled the analysis raised in Emmis, by inquiring into ‘[w]hether the bifurcation would prejudice the Claimants’. In Gavrilovic v. Croatia,^[12] the tribunal found the second Philip Morris criterion to be sufficient in disposing of the bifurcation request. In an effort to provide tribunals with clear guidelines on bifurcation, ICSID’s proposed rule amendments incorporate a new provision on bifurcation specifically addressing procedural requirements, which recall the considerations identified by the tribunal in the third step of the test in Glamis Gold.^[13]

There is a fundamental tension when deciding bifurcation applications between the need to achieve a fair outcome while maintaining procedural economy.^[14] In certain cases, repeated requests for different forms of bifurcation and trifurcation have raised allegations of improper conduct. However, in at least one case, where the claimant’s claims were seen to be particularly complex, repeated requests for bifurcation and trifurcation were seen to be ‘generally reasonable under the circumstances’.^[15] The key question, therefore, relates to the actual benefit of bifurcation (and trifurcation).

Bifurcation statistics

Bifurcation is not uncommon. Recent statistics from leading arbitral institutions for investor–state arbitration demonstrate the frequency with which tribunals bifurcate or trifurcate the proceedings. For example, based on available data, the Permanent Court of Arbitration (PCA) has heard 248 cases since June 2013. Among these cases, 67 were bifurcated as between jurisdiction and merits, eight were bifurcated as to damages (i.e., separate for merits or merits and jurisdiction) and six were bifurcated in an alternative manner. Trifurcation is much less common: of the 248 cases heard at the PCA since June 2013, only six were trifurcated.

Although common, the decision to bifurcate (or trifurcate) proceedings carries certain risks. Each successive bifurcation of an arbitration introduces the possibility of significantly increasing the case duration, rather than realising upon any potential procedural efficiency. The aggregated ICSID case statistics on case duration reflect this risk. Between 1 January 2015 and 30 June 2017, the Centre heard 63 cases that concluded with an award. Of those, 29 proceedings were bifurcated to deal with jurisdictional and admissibility issues before the merits and 33 proceedings proceeded with jurisdiction and merits issues heard jointly.^[16] The average length of each type of proceeding was, overall, similar: (1) 1,382 days (three years, nine months) for joint proceedings; and (2) 1,301 days (three years, six months) for bifurcated proceedings. In other words, in aggregate, the option to bifurcate is not resulting in material improvements in case duration.^[17]

Bifurcation can also increase costs. In a study conducted by Professor Susan Franck, claimants’ legal costs in bifurcated proceedings (US$6.4 million) were, on average, US$2.3 million more than non-bifurcated proceedings (US$4.1 million) in 2018. Interestingly, respondents’ legal costs did not seem to vary meaningfully between bifurcated and non-bifurcated cases. Tribunal and administrative costs were 50 per cent higher in bifurcated cases than in non-bifurcated cases due to the increased case length.^[18]

Practical considerations

The practical rationale for bifurcating and trifurcating proceedings is well known: it can promote efficiency,^[19] render certain issues moot or clarify the scope of other, remaining, issues.^[20] It may also better serve the parties’ interests; for instance, to provide a necessary decision for a parallel proceeding or to assist in the management of political risks surrounding close scrutiny of the merits.^[21] However, bifurcation and trifurcation will occasion delays and additional costs where preliminary objections to admissibility or jurisdiction are unsuccessful.^[22]

Accordingly, tribunals should not consider the decision to bifurcate or trifurcate proceedings lightly, nor adopt a request ‘automatically’, as some have proposed in the context of the amendment of the ICSID Rules. Moreover, parties and tribunals must carefully consider the timing for requests and decisions on bifurcation and trifurcation. An initial procedural case conference may be an appropriate time for the decision to bifurcate the proceedings as between jurisdiction and merits; however, the decision to separate damages into its own phase is more difficult to determine at the outset of the proceedings. Information relevant to this decision – the prima facie strength of the substantive liability claims, the complexity of the quantum claims, the variation of potential quantification methodologies depending on findings of liability, as well as the need for numerous experts, sector specialists, or distinct and voluminous bodies of quantum evidence – may only become apparent after an initial round of pleadings. It may only then be possible to discern the potential benefits of separating the quantum phase into a distinct stage of the proceeding, while at the same time allowing for narrowed document production requests, reply submissions, witness evidence, expert testimony and hearings during the liability stage. For these reasons, the initial case conference may be an appropriate time to raise the question of bifurcation (or trifurcation), but it is not necessarily the proper time to resolve all such issues.

Interim relief in investment treaty arbitration

By contrast, tribunals may be required to address certain requests for relief at the outset of the proceedings rather than deferring any decision to a later stage of the arbitration.

Requests for interim relief are less common in investment treaty arbitrations than in commercial arbitrations, as the conservatory concerns that often give rise to such requests, such as the preservation of assets or evidence, do not arise as frequently in investment arbitrations as they do in a commercial context. Where interim relief is sought in investment treaty arbitrations, it is usually by the claimant investor, and often to address other actions that could threaten the status quo or preservation of the investment at issue – such as to stay related civil, administrative or criminal proceedings in the respondent state – or to stop the other party from engaging in arbitrary or vindictive conduct that would ‘aggravate the dispute’. When respondent states seek interim relief, it is usually to obtain an order for security for costs, something that tribunals have been generally (but not universally) disinclined to grant.^[23]

Interim relief may be available in three forums: national courts, the arbitral proceedings themselves or, in some cases, under emergency arbitration procedures. Factors to consider when selecting the appropriate forum include the stage of the arbitration at which the interim relief is sought; the availability of interim relief under the governing bilateral investment treaty (BIT), the applicable arbitration rules and the law of the seat (if any) of the arbitration; and the prospects for enforcement of an interim order or award.

As interim measures in many cases may be effective only when requested at an early stage of the dispute and most BITs provide for a ‘cooling-off’ period of several months before an arbitration can be requested, waiting until the arbitral tribunal is constituted may be too late. In such cases, investors will be left with the option of seeking relief in national courts or, where available, emergency procedures.

The reasons for avoiding the national courts of the respondent state for interim relief are the same as those that can motivate investor–state arbitration as an alternative to litigation in local courts and include concerns as to the impartiality, competence, timeliness and confidentiality of the proceedings. However, unlike commercial arbitration, where virtually all international arbitral institutions provide for some form of emergency procedures, of the rules most frequently used for investment treaty arbitrations, only the Stockholm Chamber of Commerce (SCC) regime^[24] and the Investment Arbitration Rules of the Singapore International Arbitration Centre currently provide for emergency procedures. For example, under the SCC Rules, an emergency arbitrator is appointed within 24 hours of the board receiving an application, and a decision is made no later than five days after the arbitrator receives the request.

A party seeking relief after the constitution of an arbitral tribunal may be able to apply to the tribunal itself or to national courts. Under the ICSID Arbitration Rules, unless the parties have expressly stipulated otherwise in the arbitration agreement, such as the relevant BIT, they waive their rights to seek interim relief in national courts. However, the UNCITRAL Arbitration Rules (2010) and the ICSID Additional Facility Rules both allow parties to seek interim relief from local courts. Most BITs will define the scope of interim relief that a tribunal can award, either by explicitly prescribing the tribunal’s powers or through incorporation of arbitration rules. Generally, the forms of interim relief that a tribunal can provide are no less than those of a national court.

When choosing between a national court and an arbitral tribunal as a forum in which to seek interim relief, a party will need to weigh the laws of the relevant state and the efficacy and integrity of its legal system against the challenges that can arise in obtaining and enforcing interim measures from a tribunal.

First, unlike in many national courts where parties can appear ex parte for an interim order, arbitral tribunals are reluctant to grant interim measures without providing notice to the other party,^[25] an important consideration where the relief sought may require stealth, as in the case of measures to preserve evidence.

Second, whereas an order from a national court is likely to be readily enforceable within the jurisdiction of that court, the recognition and enforcement of interim measures ordered by an arbitral tribunal often involves additional hurdles. The challenges are likely to be more limited when the jurisdiction in which enforcement will be sought has adopted the UNCITRAL Model Law because Article 17 of the Model Law circumscribes the grounds on which recognition and enforcement of an interim measure may be refused. However, even in states that are contracting parties to the New York Convention, if the Model Law does not apply, national courts may not consider interim measures to be arbitral awards subject to the recognition and enforcement obligations of the Convention; a risk that may be further heightened if the arbitration is seated outside the jurisdiction where enforcement is sought.

Third, unlike national courts, arbitral tribunals have limited powers to compel compliance with interim measures they have ordered. This is a particularly important consideration where an interim order requires cooperation and compliance from non-parties to the arbitration, such as banks or other financial institutions in cases of freezing orders.

When requesting interim relief from an arbitral tribunal, a party should look first to any express provisions of the governing BIT and those of the applicable arbitral rules. For example, under Article 47 of the ICSID Convention, ‘[e]xcept as the parties otherwise agree, the Tribunal may recommend any provisional measures that may be necessary to preserve the parties’ rights during the proceeding’,^[26] and under Rule 39 the ICSID Arbitration Rules, a party may seek provisional measures at any time after proceedings have been instituted.^[27] The party is required to specify the rights to be preserved, the measures requested and the circumstances justifying the measures.

Because interim measures are often time sensitive, and a failure to request them promptly can be used as evidence that they are not warranted, a request for interim measures will usually be made at the outset of the proceedings. The request can sometimes be heard as part of the tribunal’s initial session with the parties and the tribunal’s decision incorporated into its first procedural order. However, particularly where the measures are requested by the claimant and the relief sought would impinge on the sovereignty of the respondent state, the tribunal may request a thorough briefing by the parties and issue a decision accompanied by extensive reasons.

Navigating domestic legal challenges

Choice of seat and language

In commercial arbitrations, the choice of seat is fundamental to the integrity of the arbitration. It determines the underlying legal regime and hence the legal framework that governs the arbitral process, including whether and how any court challenges may be brought to arbitration. However, for many investment arbitrations this choice is removed. A little over half of all investment treaty arbitrations are brought under the ICSID Convention. In this ‘delocalised arbitration’ context, the choice of an arbitral seat is absent.^[28] The arbitration is conducted by ICSID, and any request for revision or annulment of the award must be made to ICSID itself. In the case of an annulment, ICSID appoints an annulment committee from its panel of arbitrators to decide the matter, and its decision is final.^[29] States that are party to the ICSID Convention are then bound to enforce the award as if it were a final judgment.^[30] Before the enforcement stage, there is no domestic court oversight of an ICSID arbitration, and the arbitration is not subject to domestic laws governing arbitrations.

For the remaining investment treaty claims (approximately 47 per cent) not conducted under the ICSID Convention and the ICSID Arbitration Rules,^[31] an arbitral seat must be determined. Many investment treaties do not contain an agreement on the choice of seat of arbitration, leaving this matter to be settled by the parties after arbitration is begun. It is therefore important for parties to a non-ICSID arbitration to reflect on their selection of an arbitral seat.

The choice of seat has ‘profound legal and practical consequences’ on both the procedure of the arbitration and the treatment of any award.^[32] To this end, from a strategic perspective, parties should consider what their key needs are in terms of the requirements of the law of the seat. First and foremost, they should consider whether there is a supportive and friendly national arbitration regime in the seat state.^[33] Second, it is important to consider the ‘degree of deference accorded by local courts to awards of investment tribunals’, particularly when it comes to jurisdiction of the tribunal, as this is the ‘most frequent basis for challenges of investment awards before state courts’.^[34] Third, if the seat is not in a party to the New York Convention, this may make enforcing any award rendered in the seat difficult to enforce globally. While parties’ interests on the desirability of easy enforcement may diverge, it is a relevant consideration for both parties in selecting their ideal seat.

Applicable procedural law can also have a significant impact on an arbitration. In particular, key considerations include:

• how costs are allocated between the parties, and whether the tribunal may make separate interim awards dealing with costs;
• whether the tribunal is empowered to order interim measures or whether this requires court intervention; and
• whether hearings may be conducted outside of the formal seat.

In the context of a non-ICSID arbitration, the arbitral seat, if agreed by the parties, will usually be specified in the first procedural order (PO1). If not agreed by the parties, that disagreement is often one of the first real skirmishes between the disputing parties before the fully constituted tribunal. It is important for parties to be prepared for this skirmish, as well as to recognise that arbitrators may have their own preferences regarding seat, based on their home legal system or legal family (e.g., civil or common law), as well as their own prior experience as arbitrators or counsel. An example of how this can play out is provided by the case of Philip Morris Asia Ltd v. Australia.^[35] Faced with a conflict between Singapore and London as the preferred seats, and many of the key factors being equal, the tribunal opted for Singapore as the more natural place of arbitration given that the parties were both based in the eastern hemisphere (Hong Kong and Australia).^[36] It is not unknown, however, for tribunals to sometimes opt for a third state in the face of divergent preferences from the parties.

The language of the arbitration can also have an impact on seat selection, as well as how well state courts are set up to accommodate foreign language proceedings and documents. For example, where the language of the arbitration is not an official language of the state, translation requirements can add significantly to the cost of any court proceedings.

Tactically, parties should consider the natural affiliations and preferences of the tribunal, as well as the likely preferences of the opposing party based on the strategic considerations at play. They should then prepare a realistic shortlist of potential seats that will be palatable to the tribunal. Ideally, this exercise will identify seats that meet most or all of the party’s strategic objectives, while being unlikely to invite objections from opposing parties.

Parallel proceedings by the investor

A party may seek to make use of parallel proceedings for strategic reasons. Prior to doing so, consideration should be given to the potential duplication of costs, double recovery and inconsistent outcomes. The election to proceed before local courts may also preclude future recourse to international procedures if the treaty contains a ‘fork-in-the-road’ requirement. Within the investor–state arbitration context, there are three main types of parallel proceedings that can present challenges:

• different unrelated investors bring multiple proceedings against a state due to its identical or similar measures that affected each of them;
• claims brought against a state by different but related entities (for example, a company as well as its shareholders) in respect of the same harm; and
• the same investor brings claims in respect of the same set of facts against the same state in multiple forums (for example, a contract claim in court proceedings and a treaty claim in arbitration).

For present purposes, we focus on the third scenario, where a party to the arbitration has brought – or is contemplating bringing – parallel proceedings before state courts or another arbitral body.

Where the party concerned is the investor, there may well be strategic considerations that mean that it is desirable to keep as many options on the table for as long as possible. If a fork-in-the-road provision is present, then it may not be possible to bring arbitration proceedings after parallel, local proceedings have commenced. However, where a waiver clause is in issue, matters are more complicated and may need careful management by the investor and its counsel.

A waiver clause ‘permits an investor to seek relief in local courts first, but if and when the investor shifts to international relief under the treaty the investor must waive its right to initiate or continue litigation in local courts’.^[37] As such, if local court proceedings are ongoing, before participating in arbitration investors must consider the consequences of discontinuance of these proceedings and the peculiarity of local rules that govern the discontinuance of proceedings. In some states, discontinuance of a court proceeding can be challenging or costly. In addition, a party may not be able to discontinue a proceeding at all if the proceeding is under appeal.

If a party does choose to participate in arbitration where a waiver clause is at play, there are formal and material components that need to be satisfied to ensure compliance.^[38] The formal requirement is to provide a ‘distinct, formally-executed document’; a simple waiver provided as part of pleadings in the arbitration is not sufficient.^[39] A number of tribunals have, however, emphasised the importance of going beyond form and examining the actions of the investor in concreto. In Railroad Development Corporation v. Republic of Guatemala, the tribunal explained how ‘the mere filing of the waiver was insufficient to satisfy the conditions of the treaty; the party also had to act consistently with the waiver’.^[40] Similarly, in Waste Management, Inc v. United Mexican States I,^[41] Waste Management submitted a formal written waiver as required by the North American Free Trade Agreement, but simultaneously pursued two domestic proceedings against a Mexican state bank and another arbitration against a municipal government. Accordingly, the tribunal concluded that Waste Management had failed to comply with the terms of the waiver and therefore concluded that it lacked jurisdiction.

It follows that investors must take great care in managing parallel proceedings where a waiver clause is in play. Any continuation of proceedings, or other actions that could be construed as inconsistent, are likely to be scrutinised by the tribunal.

Where the state is responding to actions by the investor, careful consideration should be given to what actual steps the investor has taken to commence parallel proceedings, or to withdraw from or discontinue ongoing proceedings. A failure on the investor’s part to comply with formal or substantive requirements of the waiver (or a fork-in-the-road provision) may provide a persuasive reason to bifurcate. Similarly, where the investor has pursued prior or parallel proceedings in another forum, the state should consider whether any issues of res judicata,^[42] issue estoppel or abuse of process^[43] arise.

Finally, where parallel arbitrations exist, for example under a treaty and under an investment contract, the doctrine of lis pendens should be considered. When applied, lis pendens operates to prevent the subject matter of the dispute from being considered simultaneously before more than one tribunal.^[44] In cases where the parties, the subject matter and the cause of action are the same, ‘the principle of lis pendens becomes particularly relevant, allowing the second tribunal to decline jurisdiction or to suspend the arbitration until a relevant determination in the previous proceedings’.^[45]

Anti-arbitration manoeuvres

Parties seeking to avoid arbitration will sometimes seek to either commence local court proceedings or to restrain the commencement or continuation of arbitration. Each of these manoeuvres may be supported by requests for injunctive relief.

An issue of recent prominence is the use of ‘anti-arbitration injunctions’, where one party (usually the state in investment arbitration) seeks an injunction from a court to restrain the international arbitration proceedings. Anti-arbitration injunctions are becoming increasingly common,^[46] and can lead to serious consequences for a party, such as contempt of court, fines, seizure of assets and even imprisonment. They can arise when a party seeks to ‘restrain a party from instituting or continuing arbitration proceedings when that party, going beyond the agreed terms of contract, wrongly attempts to invoke or invokes the jurisdiction of the arbitrator’.^[47]

Anti-arbitration injunctions are normally ‘sought to be justified on the grounds that there is no valid arbitration agreement, and that one party is therefore entitled to an order preventing an illegitimate process from going forward’.^[48] As alluded to above, it often happens that ‘anti-arbitration injunctions form part of deliberately obstructionist tactics, typically pursued in sympathetic local courts, aimed at disrupting the parties’ agreed arbitral mechanism’.^[49]

In British Caribbean Bank Limited v. Belize,^[50] the government of Belize obtained an anti-arbitration injunction against the claimant bank, preventing it from arbitrating the expropriation of certain telecommunications assets. On appeal, the Caribbean Court of Justice set aside the injunction, holding that ‘the jurisdiction to grant an anti-arbitration injunction must be exercised with caution and only granted if the arbitral proceedings are vexatious or oppressive’ and that the existence of parallel proceedings was not in itself vexatious.^[51] Similarly, in Sabbagh v. Khoury,^[52] the Court of Appeal of England and Wales considered that where it is clear that the dispute falls outside the arbitration agreement, ‘the court may grant an anti-arbitration injunction but only if the circumstances of the case require it’ (e.g., when the arbitration proceedings are considered oppressive and vexatious).

The answer to the anti-arbitration injunction is not straightforward. One strategy is to attempt to seek an anti-suit injunction from another forum to restrain the domestic proceedings that give rise to the anti-arbitration injunction. This is similar to the situation where a party applies to restrain a court proceeding in violation of an agreement to arbitrate, either by contesting the jurisdiction of the court in question or by seeking an injunction from a court in another state. Parties should also note the existence of ‘anti-anti-suit injunctions’, which ‘preven[t] the other party from pursuing an anti-suit injunction in another proceeding’.^[53] While a discussion of the battle of the injunctions is beyond the scope of this chapter,^[54] suffice it to say that this situation can quickly lead to conflicting decisions. If there is a risk that the other party may seek to use injunctive relief in a dispute, the tribunal must consider the issue at the earliest opportunity, as it may impact procedural discussions regarding whether to grant interim relief, as discussed above.^[55]

Conclusion

The time between the constitution of the tribunal and the first procedural conference is a busy one for arbitrators and parties alike. It is also frequently the time when the dispute hardens from initial party-controlled exchanges into a plenary dispute resolution process as the tribunal begins to assert itself and control its process.

From the parties’ perspective, the build-up to the first procedural conference is an important opportunity to solidify their strategy around several key areas. This includes whether it is desirable to bifurcate (or trifurcate) proceedings, something that although desirable in certain cases, is not a panacea to be applied indiscriminately. For non-ICSID proceedings, the seat of arbitration assumes an immediate importance as it will set the underlying legal framework and tone of the arbitration moving forward. Finally, there is frequently a need to grapple with immediate situations that surround the arbitration, whether it be through request for interim relief from the tribunal or from national courts or grappling with parallel proceedings.

While some of these are matters that must be addressed (such as the question of the seat), the failure to raise others at the first procedural conference is often a missed opportunity. Raising issues early offers a chance to take the temperature of the tribunal, and also to test the readiness of the opposing party. And through a party’s input into the conference and the drafting of the first procedural order, there is a key opportunity – one that is often overlooked – to set some baseline expectations in the process that will apply throughout the arbitration.

Notes