At this year’s Annual Meeting, Chapter 5 (Investor-State Arbitration) of the International Commercial Arbitration project will be presented in Tentative Draft No. 5.
Chapter 5 begins with an Introductory Note, depicting the landscape of investor–State arbitration as it differs from the landscape of international commercial arbitration generally (the subject of Chapters 2 through 4). The Note introduces the key distinction between ICSID Convention and non-ICSID Convention arbitration (including arbitration under the ICSID Additional Facility). (ICSID refers to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, ratified by the U.S. in 1966.) The Note also underlines the fact that the obligation to arbitrate in investor–State arbitration may arise from three different sources: treaty, contract, and statute.
The purpose of Chapter 5 is to specify the ways in which the principles and rules governing the role of courts in connection with investor–State arbitration differ from those governing the role of courts in international commercial arbitration generally or, while basically the same, are applied in distinctive ways.
Below you will find the full text of the Introductory Note from Tentative Draft No. 5
Chapter 5 is devoted to investor–State arbitration as defined in § 1-1___. The Chapter is singular in several respects. Invariably, one of the parties to the arbitrations addressed by this Chapter is a State or an entity related to a State. Additionally, this Chapter necessarily dwells on the requirements of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Mar. 18, 1965, 17 U.S.T. 1270, T.I.A.S. No. 6090, 575 U.N.T.S. 159 (“ICSID Convention”), a treaty to which the United States is a party, but which was not material to Chapters 2 through 4. Primarily but not exclusively as a result of the ICSID Convention, the basic principles governing U.S. court involvement in investor–State arbitration in some instances are different from those described in Chapters 2 through 4 as applicable to international commercial arbitration generally. In other instances, those basic principles do not differ in comparison to those governing international commercial arbitration, but they sometimes come into play in highly distinctive ways that are worth underscoring.
This Chapter thus highlights both those principles that are different and those that, while basically the same, are applied in distinctive ways.
ICSID Convention and Non-ICSID Convention Arbitration
A basic distinction in both the law and the practice of investor–State arbitration is that between ICSID Convention and non-ICSID Convention arbitration. See §§ 1-1___, ___ (defining, respectively, “ICSID Convention arbitration” and “non-ICSID Convention arbitration”). The differences manifest themselves not only in the conduct of the arbitration but, more pertinent to the Restatement, in the role of U.S. courts in relation to the arbitration agreement, the arbitral proceedings, and the arbitral award.
As will be seen below, an investor–State arbitration may be based on State consent to arbitrate found not only in international treaties, but also in commercial contracts and national legislation protecting foreign investors. The respective sources of consent have a bearing on the manner in which mutual assent to arbitrate occurs, and their exact content may influence a court’s role in connection with the particular investor–State arbitration in question. However, in most respects the source of the right and the obligation to arbitrate makes no difference in the conduct of an investor–State arbitration, or in the role of U.S. courts in relation to it. These remain largely consistent, regardless of whether an arbitration is treaty-based, contract-based, or statute-based. See §§ 1-1___, ___, ___ (defining, respectively, “treaty-based,” “contract-based,” and “statute-based” arbitration).
A. ICSID Convention arbitration
Parties to investor–State arbitration often subject their arbitration to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Mar. 18, 1965, 17 U.S.T. 1270, T.I.A.S. No. 6090, 575 U.N.T.S. 159 (“ICSID Convention”). Unlike bilateral investment treaties (or “BITs”), or multilateral investor protection treaties, the ICSID Convention creates no substantive rights or obligations. Instead, it establishes a regime for the arbitration of investor–State disputes arising under some other instrument (treaty, contract, or statute).
The ICSID Convention regime is distinct. Its hallmark feature is the dramatically reduced role played by courts over the course of an ICSID Convention arbitration or in connection with an ICSID Convention award. The ICSID Convention apparatus is widely described as “self-contained.” While a court might, rarely, be called upon to enforce an agreement to arbitrate under the ICSID Convention, it has a very reduced role to play during the life of the arbitration. Most importantly, national courts lack authority to entertain challenges to ICSID Convention awards, whether through an annulment action or defenses to an action for recognition or enforcement of an ICSID Convention award. National courts are, however, specifically obligated under the Convention to enforce ICSID Convention awards.
A conspicuous manifestation of ICSID Convention arbitration’s self-contained character is the non-applicability to ICSID Convention awards of the New York and Panama Conventions, as well as the arbitration law of any national jurisdiction, even the jurisdiction on whose territory an ICSID Convention arbitration happens to be conducted. On the other hand, ICSID Convention arbitration is subject to the Rules of Procedure for Arbitration Proceedings under the ICSID Convention that have been adopted by the Administrative Council of the International Centre for the Settlement of Investment Disputes (“Centre”), pursuant to Article 6(1)(c) of the ICSID Convention.
ICSID Convention arbitration is not to be confused with arbitration under ICSID’s so-called “Additional Facility.” Under certain circumstances in which the ICSID Convention does not apply, arbitration administered by ICSID under its Additional Facility may nonetheless be available. An Additional Facility arbitration is a non-ICSID Convention proceeding, as defined in § 1-1___. Discrete procedural rules maintained by the Centre (the Additional Facility Rules) apply to such proceedings. The arbitration and award, like international commercial arbitration and awards generally, are subject to the arbitration law of the arbitral seat as well as to the New York or Panama Convention, just as ordinary international commercial arbitrations are.
B. Non-ICSID Convention arbitration
Investor–State arbitration need not be conducted under the ICSID Convention framework. In this Restatement, investor–State arbitrations conducted outside the ICSID Convention regime are identified simply as “non-ICSID Convention arbitrations.” See § 1-1___ (defining “non-ICSID Convention arbitration”). These arbitrations are subject to the usual ground rules of international commercial arbitration, i.e., subject to the arbitration law of the arbitral seat and, for award recognition and enforcement purposes, subject to the New York and Panama Conventions.
Whenever the role of U.S. courts is different, according to whether the arbitration is of the ICSID Convention or non-ICSID Convention variety, the Restatement clearly so indicates.
Investor–State arbitration’s bases of consent
In both ICSID Convention and non-ICSID Convention arbitration, the right or obligation to arbitrate may be predicated on one of three basic sources. Although the source in any given case generally does not affect the conduct of the arbitration or the U.S. court role in connection with it, it is useful to recognize the existence of these multiple sources.
Thus, unlike international commercial arbitration generally, which arises out of contract, investor–State arbitration may arise out of (a) an international investment treaty, (b) an international investment contract, or (c) an international investment statute. The essential aspects of each of these sources follow.
A. Treaty-based investor–State arbitration. Arbitrations based on a State’s consent to arbitrate found in international investment treaties, referred to as “treaty-based investor–State arbitration,” present the most salient differences from international commercial arbitration. Investment treaties most often take bilateral form, and are hence known as BITs. BITs are a relatively new phenomenon, albeit one that has become increasingly common. Investment treaties may also be multilateral, typically in the form of an investment chapter within a multilateral free trade agreement (such as NAFTA). The number of treaty-based investor–State disputes has grown dramatically, as evidenced by many indicators, including, for example, the striking increase in treaty-based ICSID Convention arbitrations in recent years. In particular, requests for the recognition or enforcement of investment treaty awards are now coming in good numbers before U.S. courts.
By their entry into such treaties (whether bilateral or multilateral), States typically evidence their agreement inter se to arbitrate investment-related disputes with investors from other States. Commonly, these same treaties set forth the substantive rights of which investors may avail, ordinarily expressed as pledges by the States that they will meet certain standards of treatment in dealing with covered investments and investors.
Although investment treaties are agreements between or among States and are the basic source of substantive rights in treaty-based arbitration, they do not themselves form an arbitration agreement between a Contracting State and an investor from another State, for the simple reason that foreign investors are not parties to the treaties. The agreement to arbitrate must arise in a different manner. According to the prevailing view of treaty-based investment agreements, States, in entering into investment treaties, make a “standing offer” to arbitrate, which is addressed to investors of the other State or States, who may then “accept” that offer by actually initiating arbitration.
The contractual element in treaty-based investor–State arbitration is fundamental. The presence of this element, along with the fact that investment treaty arbitration is by nature commercial within the meaning of the New York and Panama Conventions (and this Restatement), makes it possible for such arbitration to fall within the scope of those Conventions, as well as within the scope of the Federal Arbitration Act. All of these instruments presuppose an “agreement to arbitrate” between the parties. For this reason, discussion of treaty-based arbitration in this Chapter will frequently entail cross-references to Chapters 2 through 4 of this Restatement, to which both the Conventions and the FAA are applicable.
The arbitrations giving rise to U.S. court cases may be of the ICSID Convention or non-ICSID Convention variety, and the court’s role will, as noted, vary accordingly.
B. Contract-based investor–State arbitration. A second category of investor–State arbitration consists of arbitrations in which the consent to arbitrate derives from an international investment contract between a State or State instrumentality and a foreign investor. See § 1-1___ (defining “international investment contract”).
Historically, the great majority of investor–State arbitration agreements and awards that have come before U.S. courts have been contract-based. This is due to the frequency of investment contracts between States (and State instrumentalities) and foreign investors. A prototype is the concession contract by which States engage foreign private enterprise to perform activities in connection with the exploitation of natural resources or to conduct essential services on a State’s behalf.
“Contract-based investor–State arbitrations” may proceed under the ICSID Convention if the Convention’s requirements are met and the parties’ contract contemplates (or the parties otherwise agree to) such proceedings. A contract-based ICSID Convention arbitration is conducted in the same manner as an ICSID Convention arbitration conducted on a treaty or statute basis. However, the parties, by virtue of the pre-dispute nature of their agreement to arbitrate, are more likely to avail themselves of the various opportunities thereby offered them to fix elements of the arbitration in advance. The agreement may, for example, affirm the parties’ access to national courts for provisional relief during the arbitration. See § 5-___, infra.