Does International Arbitration Have a Future?
A review of recent developments
Arbitration is possibly the most widely accepted method of alternative dispute resolution as it has expanded rapidly in recent years. It is used around the world as an effective substitute to court litigation and specially to resolve commercial disputes. Unlike mediation, where a neutral third party attempts to assist the parties to resolve their dispute voluntarily, international arbitration is a binding dispute resolution mechanism. It must be agreed to by the parties either at the time of drafting an agreement or some time thereafter - usually after a dispute has arisen. We examine below recent developments and what the future has to hold.
The Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1959 (the New York Convention) has greatly increased the ease of enforcing international arbitral awards, thus strengthening the international arbitral routine. As for the countries that are parties to the Convention, a review is strictly restricted to specific circumstances such as the incapacity of the parties, a void arbitration agreement, where parties were not given proper notifi- cation of the arbitral proceedings, where the award addressed matters beyond the scope of the agreement to arbitrate, and cases where enforcement would be contrary to public policy of the country in which recognition and enforcement is sought or the subject matter of the difference is not capable of settlement by arbitration under the law of that country.
Recent signatories of the New York Convention include Brazil (2002) and the United Arab Emirates (2006). Some 138 countries and territories now follow the system. Brazil's recent ratification of the Convention was widely heralded as the dawn of a new era for arbitration in Brazil, coupled with their passing of a new Arbitration Act in 1996. The country is now an important player in world trade and the health of the Brazilian economy makes front-page news. Much of this is due to the removal of barriers to investment as a consequence of which international trade and foreign investment increased enormously. As with most Spanish speaking countries in this continent, the slowness of the court system does not escape Brazil. Many hoped that commerce would benefit immediately from the speed and flexibility offered by arbitration, but there is still a long way to go not just for Brazil but also for all Latin American countries. It remains to be seen whether in practice the Brazilian legal system will uphold international awards under the Convention, but this is otherwise a significant step forward for parties doing business in Brazil or with Brazilian entities.
The UAE, for its part, and in particular Dubai is also currently attracting significant foreign investment as part of its strategy to move away from an oil-based economy and to establish itself as the commercial centre of the Gulf region. A key part of this strategy seems to be attracting inward private investment. This move of the UAE will no doubt open the way for disputes to be settled in a neutral venue overseas, which was not an option before the ratification of the Convention.
International Investment Agreements
Wherever an area is capable of attracting overseas investment it will inevitably see disputes. The principal areas of investment dispute are infrastructure; energy, utilities, public services; trade and services. The Convention on the Settlement of Investment Disputes between States and Nationals of other States 1965 (ICSID Convention) entered into force in October 1966, created the International Centre for Settlement of Investment Disputes (ICSID). The ICSID Convention establishes an international system for submitting investment disputes to conciliation or arbitration. It ensures that consent, once given, is binding; that procedures can be instituted and taken forward by a diligent party; and that arbitral awards can be enforced in any member country, subject only to limited international review mechanisms.
Bilateral investment treaties (BITs) often make international arbitration available directly to the investor and the host state. Several treaties with provisions on investment, such as the North American Free Trade Agreement (NAFTA) and the Energy Charter Treaty (ECT), have been concluded with a view to bringing uniformity to international investment law. NAFTA entered into force in January 1994 between Canada, Mexico and the US. It created the world's largest free trade area and was designed to foster increased trade and investment among the parties. NAFTA encourages the use, whenever possible, of arbitration and alternative dispute resolution for settling commercial disputes. Chapter 11 of NAFTA governs investment and provides a right for redress against a state party where there has been an alleged breach of its terms. The central elements of chapter 11 are the minimum standard of treatment and expropriation provisions. State parties must treat covered investment in accordance with international law, including fair and equitable treatment. They must also compensate for the direct or indirect expropriation of covered investment. As in most BITs, chapter 11 allows for arbitration of disputes at the choice of the investor, either before ICSID or under the United National Commission on International Trade Law (UNCITRAL) Arbitration Rules 1976.
In December 2006 Canada subscribed to the ICSID Convention. Canada is the second of the three NAFTA parties to sign the Convention besides the US, which signed it in August 1965. At the end of December 2006, 143 of the ICSID Convention signatories had also deposited their instruments of ratification to become contracting states, and the total number of cases registered with the Centre since its inception reached 222.
Venezuela, for its part, has signed and ratified 24 investment treaties, and ICSID appears as the dispute resolution mechanism in 23 of them, 19 of which refer to the Arbitration Rules of UNCITRAL.
During the V Summit of ALBA in Venezuela on 29 April 2007, the so-called ALBA countries agreed to jointly withdraw and denounce the ICISID Convention 1965. These ALBA countries are the members of the ALBA-TCP integration programme, which stands for 'Bolivarian Alternative for the Americas - Peo-ples' Trade Agreement for: Bolivia, Venezuela and Nicaragua' (Alternativa Bolivariana para las Américas - Tratado de Comercio para los Pueblos: Cuba, Bolivia, Venezuela y Nicaragua).
These countries are also called the 'Rebels of the Americas' and it was indicated during the summit that the above was being agreed in order to "guarantee the sovereign right of the countries to regulate foreign investment in their national territories." Bolivian President Evo Morales stated that ALBA-TCP member countries
vigorously reject legal, media, and diplomatic pressures from certain multinational companies, which having violated constitutional rules; domestic legislation; contractual agreements; and regulatory, environmental, and labour provisions; resist the application of sovereign decisions of the countries by threatening with arbitration and commencing international arbitration proceedings against the States before institutions such as ICSID.1
Various reasons have been put forward to support the above proposed withdrawal. It has been indicated that ICSID goes beyond any public international or domestic laws. Also, that proceedings are kept private although public interests are at stake and ICSID awards cannot be appealed. In addition, there has been some criticism as regards arbitrators being the decision-makers in some cases and then investors' legal representatives in other cases, which it is stated works against impartiality and shows the vulnerability of the system. Additionally, it is mentioned that a clear conflict of interest is generated where ICSID administers commercial disputes from litigating companies that are partially owned by the World Bank, which it is indicated is an entity that has been involved in the financing of a number of private commercial projects.2
The truth is that ICSID does not itself decide arbitration cases, and arbitrations often take place not in the home city of the institution (ie, Washington), but at a location designated by the parties or arbitrators. Arbitration cases are decided by arbitrators, and the parties participate in the appointment of arbitrators and can even decide in advance on the number of arbitrators and how they are to be selected.
A country that subscribes an international convention such as the ICSID Convention would no doubt have been aware of the contents and scope of the agreement prior to ratification. In the case of Venezuela, once ratified and published in the Venezuelan Official Gazette (Gaceta Oficial) the Convention became part of the domestic legislation. As such, the application of the Convention could not possibly go beyond domestic laws as it would be part of our domestic laws. In addition, the parties have the option to choose the proper law, which is the law that would govern and resolve substantive issues. This can be done in advance and anticipating the public interest issues at stake that would be covered by the agreement, as the Tribunal will decide the dispute in accordance with such rules of law agreed by the parties. In the absence of such agreement, the Tribunal is asked to apply the law of the contracting state party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable. If by way of example Venezuela were the state party and no applicable law was chosen by the parties then Venezuelan law and international law rules would be applied to resolve the dispute. Clearly, in this scenario it could not be said that this would work against the interests of Venezuela.
It is correct that ICSID awards cannot be appealed. Nevertheless, ICSID awards can be annulled by a special ICSID ad-hoc committee, and there is also the possibility of requesting a review of the award by an application in writing addressed to the Secretary- General. As for the publicity of the proceedings, these can be kept public or private depending on the particular circumstances of the case and the decision of the parties. In addition, ICSID awards are published and can be accessed at www.worldbank.org/icsid/.
Not only can the parties participate in the selection of arbitrators but even when an arbitrator has been appointed the parties can also apply for his/her disqualification. This means that in those cases where it is an issue for any of the parties that the arbitrator has represented an investor in another case, this party could propose the disqualification of the relevant decision-maker. The same would apply where the arbitrator has provided legal advice to a state and this is an issue for any of the parties.
Cross-border contracts are always subject to the laws of multiple jurisdictions. This means that complicated legal issues will have to be dealt with by the ordinary courts if the parties have not decided on them before the dispute arises (ie, substantive law governing the contract, the country or countries with jurisdiction to resolve the dispute, enforceability of any court judgment).
Possibly one of the most valued benefits of international arbitration is the parties' option to choose a neutral dispute resolution forum, such that no party need submit to the jurisdiction of the courts of another party's home nation. Some learned commentators consider that international arbitration can provide a better solution to international disputes than local or foreign courts because crossborder business disputes present unique challenges that can only be effectively dealt with by international arbitration. In a foreign court there might be the disadvantage of being subjected to foreign legal procedures, foreign customs, foreign language, and even prejudice and corruption. Also, litigating before a foreign court might mean taking a risk with a judge or jury probably unfamiliar with the particular business and almost certainly unfamiliar with the foreign law issues presented in the dispute.
Arbitration offers to the parties the option to decide who will resolve the dispute for them, which means that they can ensure that the arbitrators are fair and knowledgeable. This means that the parties retain the ability to select a decision-maker trained in the particular industry or technology in question and who may come from a neutral jurisdiction. All in all, we think that it would be hard to demonstrate that parties retain more power in ordinary court proceedings than in arbitration.
Investment protection in venezuela
In Venezuela, foreign and domestic investments and investors can now rely on the Act for the Promotion and Protection of Investments 1999 (LPPI). This Act provides a reliable legal framework which affords investments and investors a secure atmosphere by regulating the role played by the state in order to increase, diversify and complement harmonically investments to help reach our domestic development objectives.
As laid down in article 22 of the LPPI:
Disputes between foreign investors from countries which have signed treaties or agreements on promotion and protection of investments currently in force with Venezuela, and those disputes to which provisions either of the Legal Framework of the Multilateral Investment Guarantee Agency (MIGA) may be applied, or of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (CIADI), shall be resolved through international arbitration according to the terms of the aforementioned treaties or agreements provided that said arbitration is provided for in said treaties or agreements without prejudice to the possibility, if applicable, to resort to court proceedings according to Venezuelan law.
Article 22 of the LPPI was reviewed by the Constitutional Chamber of the Supreme Court of Justice on 14 February 2001. The Court concluded that the provision contained in this article could not be relied upon as an authorisation to forgo public law rules in favour of arbitral institutions, therefore depriving local courts of the power to render decisions on eventual controversies that might arise out of the application of the LPPI.
This decision of the Supreme Court of Justice points out that alternative dispute resolution mechanisms, including arbitration, are expressly set forth in the Venezuelan Constitution. It is stated that they are part of the dispute resolution mechanisms that can be used to solve disputes between foreign investors from countries which have signed treaties or agreements currently in force with Venezuela on promotion and protection of investments. Also, to solve the controversies to which the agreement that created the Multilateral Investment Guarantee Agency (OMGIA-MIGA) or the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) apply.
Whether or not the threat from the Venezuelan government to leave ICSID will materialise in the future remains to be seen. Meanwhile, there is no doubt that certain decisions from our Supreme Court of Justice appear to restrict the possibilities to resort to arbitration as an alternative dispute resolution mechanism. The most recent example of this is a decision rendered on 5 April 2006 by the Political Administrative Chamber of the Venezuelan Supreme Court of Justice. This is an important decision that modified the approach as regards arbitration clauses contained in agreements signed by the Venezuelan government or corporations whose majority stockholder is the Bolivarian Republic of Venezuela.
According to this decision, when it comes to agreements having (i) a public interest; (ii) a direct impact on national development; and (iii) a direct impact on the Venezuelan wealth which therefore represent a serious damage to the government, the controversy cannot be subjet to arbitration. Clearly, this decision shows the intention of the Venezuelan government to have any controversies related to Venezuela heard and solved by Venezuelan courts.
What the future holds
The emergence of international arbitration has clearly been stimulated in particular by the growing processes of the globalisation of the economic activity. An important reason for the development in arbitration has been the increasing tendency for international business disputes to be resolved through the process of private arbitration. This is partly because enforcing a national court's judgment in another country can be extremely difficult. If an arbitral award is to be enforced in one of the countries that are parties to the New York Convention, enforcement will be much easier than enforcing a judgment from a foreign court.
Arbitration clauses are normally incorporated into cross-border agreements, generally choosing a neutral forum to resolve any dispute. Also, the proliferation of bilateral and multilateral investment treaties noted in the last few years has had a tremendous impact in the growth of arbitrations. In particular, a recent growth of arbitrations has been seen in eastern Europe and Asia. Singapore, Japan, China, Korea, Macedonia, Tajikistan, Turkmenistan, Moldova, Bosnia and Herzegovina, Bulgaria, Croatia, Estonia, Belarus, Albania, Uzbekistan, the Russian Federation, Pakistan, India, Indonesia, Bangladesh, and Hong Kong have all entered into bilateral investment treaties with other states.
Over the past decade, the number of bilateral treaties has grown by about 1,000 to its present level of over 1,300. More than 800 have been concluded since 1987 by a growing number of countries. The amazing growth in the number of treaties is likely to continue as countries pursue further investment opportunities.
Almost all modern BITs include provisions for dealing with disputes between a party from one country and an investor from another country. The overwhelming majority of the bilateral investment treaties and multilateral treaties contain provisions to assist investors from one relevant signatory state to resort to arbitration in respect of any investment disputes with parties from another signatory state. Several of the treaties provide investors with a choice between resorting to ICSID arbitration or to arbitration on the 1976 Arbitration Rules of UNCITRAL, with the ICSID Secretary-General as the appointing authority of arbitrators. As for ICSID, the total number of arbitration cases has more than doubled during the last 5 years.
The number of BITs has grown significantly as states seek a more structured and secure investment environment. BITs now play an important role in the planning and development of international investment relations.
International arbitration can represent efficient, reliable and cost-effective dispute resolution. It is particularly advantageous in the international arena and is fast becoming the primary mode of dispute resolution for large cross-border transactions. This is because arbitration represents a reliable way for contracting parties to avoid litigation in the local courts of a potentially hostile and almost certainly unfamiliar jurisdiction in another party's country.
The entry of the former socialist states into the global markets and the emergence of new players (in particular smaller companies from eastern Europe, Asia and Latin America) born out of privatisation will continue having an impact in the growth of arbitration as they get fully integrated into the global market. They realise arbitration can be efficiently used in commercial disputes with other companies particularly on the international stage. This means we will continue to see arbitration clauses incorporated into crossborder agreements.
The rapid change to the public international law regime on investment protection has resulted in a body of arbitral decisions over the past five years. They address various issues of substance, including the scope of covered investment and extend of host state obligations. They present, in addition, important issues of procedure. Foreign investors need the stability and predictability to manage risk and increase value. The legal framework, including dispute settlement, is of paramount importance. Effective remedies preserve business corporation and allow redress is necessary. Therefore, perhaps a more detailed drafting of dispute resolution provisions by states parties to bilateral or multilateral investment treaties, investors or govermments seeking some form of contractual commitment could help avoid situations such as unenforceable or inconsistent awards.
The future of international arbitration may well depend, at least in part, on the ability of arbitrators, signatories to arbitration agreements, and courts to maintain the integrity of the international arbitral process.
- Our translation. See 'Paises del ALBA y TCP denuncian convencion del CIADI', available at http://www.minci. gob.ve/noticias_-_prensa/ 8/ 558/paises_del_alba.html; and 'Bolivia, Venezuela y Nicaragua deciden retirarse y denunciar el CIADI', available at http://www.cadtm.org/spip. php?article 6 9.
- See 'Cancilleria oficializa la salida de Bolivia del CIADI', available at http://www.rree.gov.bo/notasprensa/ 007/ 007_ mayo/np1.htm.