The Proposed Final Draft of Restatement of the Law, The U.S. Law on International Commercial and Investor—State Arbitration will be presented to membership at ALI’s 96th Annual Meeting. The following entry is a historical introduction to international commercial and investor-state arbitration, featured in the draft.
This draft will be presented to membership at the 2019 Annual Meeting for approval. Until approved, this is not the position of The American Law Institute and should not be represented as such.
This brief introduction depicts the development of international arbitration in the United States, as general background to the present Restatement of the U.S. Law of International Commercial and Investor–State Arbitration. It highlights what may be regarded as “milestones” in the development of international arbitration law in the United States.
The Federal Arbitration Act
Legislative support for the enforcement of arbitration agreements and arbitral awards actually began at the state level, and it was a statute enacted in New York in 1920 that served as the model for the FAA. In language that the FAA would echo, the New York statute declared that “[a] provision in a written contract to settle by arbitration a controversy thereafter arising between the parties to the contract, or a submission hereafter entered into of an existing controversy to arbitration … shall be valid, enforcible [sic] and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Support quickly built for a comparable enactment at the federal level. It was spearheaded by business interests looking for what they thought to be a more rapid and less costly means than resolution of commercial disputes in court.
The 1925 FAA, codified at 9 U.S.C. 1 ff., remains the legislative framework for arbitration in the United States. As noted, it ensures the validity and enforceability of agreements to arbitrate arising out of “a contract evidencing a transaction involving commerce,” with commerce defined as “commerce among the several States or with foreign nations, or in any Territory of the United States or in the District of Columbia.” Presented with an arbitration agreement that it finds to be valid and applicable, a U.S. court will refrain from adjudicating disputes falling within its scope. More particularly, it will stay judicial proceedings and, upon request, issue an order directing that an arbitration proceed in accordance with that agreement. The FAA further empowers courts to appoint arbitrators as needed. Importantly, a competent court is bound to confirm the resulting award, i.e., reduce the award to judgment, provided none of the grounds set out in the statute for vacating the award is established. If one of those grounds is established, the court may vacate the award, rendering it null and void within the United States. It may also, in narrow circumstances, correct or otherwise modify an award.
At the time the FAA was enacted, Congress’ focus was on arbitral proceedings conducted or to be conducted in the United States. However, over time international arbitration came to the fore. Upon U.S. ratification of the New York and Panama Conventions, requiring recognition and enforcement of foreign arbitral awards (see infra), the FAA was amended to implement those international agreements.
State Arbitration Law
In 1955, the National Conference of Commissioners on Uniform State Laws produced a Uniform Arbitration Act for adoption at the state level. In 2000, the Act was amended in the form of a Revised Uniform Arbitration Act (RUAA). Like the FAA, it provides for the enforcement of both arbitration agreements and arbitral awards. The Uniform Act, which enters into considerably greater detail than the FAA, has been enacted, either in its original or revised form, in a majority of the U.S. states.
In the interest of attracting international arbitral proceedings to the United States, a number of U.S. states have also adopted legislation specifically governing the arbitration of international disputes. Some have patterned that legislation on a model law produced by the United Nations Commission on International Trade Law (UNCITRAL) for adoption on the international level. The UNCITRAL Model Law on International Commercial Arbitration has been widely enacted around the world.
The question whether a particular state law rule on arbitration is compatible with the FAA, and thus not preempted, is predictably the subject of considerable federal case law, albeit mostly in domestic arbitration cases.
The New York and Panama Conventions
In the early years of the 20th century, a number of international instruments were produced with a view to promoting international arbitration and achieving some degree of uniformity in its governance. The principal instruments were the 1923 Geneva Protocol on Arbitration Clauses and the 1927 Geneva Convention on the Execution of Foreign Arbitral Awards. Conscious of certain deficiencies in these texts, the International Chamber of Commerce (ICC) in 1953 produced a preliminary draft of a new convention on the recognition and enforcement of foreign arbitral awards. The United Nations Economic and Social Council took over the enterprise and shortly thereafter issued an amended version. What emerged from the negotiations that followed was the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, popularly known as the New York Convention because it was negotiated and signed in New York. The Convention, currently in force in 159 States, imposes on signatory States an obligation to recognize and enforce foreign arbitral awards, unless one or more of the Convention’s seven justifications for denying recognition or enforcement is established.
The Convention invites States to extend the application of the Convention to awards made in their own territory, hence not foreign, provided they have an international character of some sort. The United States has taken that step. The award rendered on that basis are termed in the Restatement as “Convention awards made in the United States” or “U.S. Convention awards.” The United States also made a reciprocity reservation, undertaking to enforce only those foreign arbitral awards that were made in the territory of other signatory States.
Though titled a convention on the recognition and enforcement of foreign arbitral awards, the New York Convention also contains a provision, namely Article II, requiring the enforcement of arbitral agreements unless “null and void, inoperative or incapable of being performed.” This provision recognizes that in many cases, unless an arbitration agreement is enforceable, there will be no award to enforce.
A separate convention similar to the New York Convention was negotiated in 1975 among the United States and a number of Latin American countries. While its formal name is the Inter-American Convention on International Commercial Arbitration, it is commonly known as the Panama Convention. It is substantially the same in content as the New York Convention. The Convention currently has 19 signatory States.
The U.S. ratified the New York and Panama Conventions in 1970 and 1986, respectively. Congress implemented the Conventions by inserting two additional chapters into the FAA, Chapter 2 for the New York Convention and Chapter 3 for the Panama Convention. The original FAA thus became Chapter 1.
The ICSID Convention
With the growth of international trade and investment activity, the idea took hold that arbitration would serve well as the mechanism for the resolution of the disputes that might arise out of that activity. In fact, States had for years resorted to arbitration as a means of adjudicating disputes between their nationals and other States, resulting in a series of ad hoc “mixed claims commissions.” Negotiations led to the 1965 International Convention for the Settlement of Investment Disputes (ICSID). The Convention established, under the aegis of the World Bank, an International Centre for Settlement of Investment Disputes (also commonly referred to as ICSID) designed, as its name suggests, to administer arbitrations for the resolution of investment disputes through use of a set of ICSID Rules of Arbitration. ICSID also offers other services, notably conciliation, for the resolution of investment disputes.
The ICSID Convention does not create substantive investment protection rights and obligations, but rather a procedural framework for the resolution of investment disputes. The substantive rights and obligations enforceable under the ICSID Convention are established in other instruments: commercial contracts between a private party and a foreign State, national investment protection legislation, and, increasingly, investment agreements between States.
The ICSID Convention, which sought to establish what has come to be called a “self-contained” system, provides for an annulment procedure within ICSID itself, and bars challenges to awards in national courts. U.S. courts may therefore not entertain actions to vacate awards rendered pursuant to the Convention. The Convention requires States to treat ICSID Convention awards as binding and enforceable. Under Article 54, contracting States must enforce an ICSID Convention award “as if it were a final judgment of a court in that State.” On the other hand, the Convention leaves the rules governing the execution of awards to the law of the State where execution is sought, and specifically leaves intact national rules on the immunity of foreign States from execution.
The United States ratified the ICSID Convention in 1966, providing in 22 U.S.C. § 1650a for the enforcement of ICSID Convention awards. The statute requires that the pecuniary obligations imposed by an ICSID Convention award be enforced and given the same full faith and credit as if it were a final judgment of a court of general jurisdiction of a U.S. state. It also declares the FAA inapplicable to the enforcement of ICSID Convention awards, meaning that ICSID awards are also not subject to the New York or Panama Conventions, which are implemented in FAA Chapters 2 and 3, respectively.
There are at present 162 ICSID Convention signatories States. Today, a majority of investor–State disputes are administered by ICSID. Others are administered by international arbitral institutions, such as the Arbitration Institute of the Stockholm Chamber of Commerce, and still others conducted on a largely ad hoc basis pursuant to a set of procedural rules formulated by UNCITRAL (the UNCITRAL Arbitration Rules).
To widen ICSID’s availability, the Centre established in 1978 what it calls the “Additional Facility.” The Additional Facility, which has its own set of procedural rules, administers arbitrations between a State and a foreign national, one of which is not an ICSID Member State or a national of an ICSID Member State. It also conducts arbitration of disputes that do not arise directly out of an investment between a State and a foreign national, provided that one of the disputing parties is an ICSID Member State or a national of an ICSID Member State.
The Foreign Sovereign Immunities Act “Arbitration Exception”
In 1976, Congress enacted the Foreign Sovereign Immunities Act (FSIA) establishing a framework for determining the immunity of foreign States and State instrumentalities from both litigation and the execution of judgments. With the growth in commercial contracts with foreign States and State instrumentalities, their possible immunity from attempts to enforce arbitration agreements or arbitral awards became a serious issue. To some extent, two of the FSIA’s original exceptions to immunity—waiver and commercial activity—served to overcome these difficulties.
However, in 1988, Congress amended the FSIA to introduce a specific so-called arbitration exception both to immunity from suit and immunity from execution. Both exceptions are worded in such a way as to ensure that assertions of sovereign immunity will not interfere with the proper role of U.S. courts in connection with arbitration agreements, arbitral awards, and related matters.
For good measure, Congress in the same year also amended the FAA to provide specifically in § 15 that “[e]nforcement of arbitral agreements, confirmation of arbitral awards, and execution upon judgments based on orders confirming such awards shall not be refused on the basis of the Act of State doctrine.”
When the U.S., Canada, and Mexico entered into the far-reaching North American Free Trade Agreement (NAFTA) in 1994, they included in it a Chapter 11 providing for the arbitration of investor–State disputes between a NAFTA State and a national of another NAFTA State. Any such proceeding may be conducted pursuant to the ICSID Convention and Rules, the ICSID Additional Facility Rules, or the UNCITRAL Arbitration Rules. Because Canada did not become an ICSID Convention State until 2013 and Mexico did not do so until 2018, NAFTA disputes could not until recently be brought under the ICSID Convention, but only under the ICSID Additional Facility or the UNCITRAL Rules.
Since NAFTA’s establishment, some 75 cases have been brought under Chapter 11, many of them very high-profile. Although the United States has been a respondent in numerous NAFTA proceedings, it has not lost any of those cases.
In 2018, the NAFTA Parties negotiated a replacement agreement, the United States–Mexico–Canada Agreement (USMCA), which substantially curtails the arbitration of investor–State disputes. The Senate has not yet, as of this writing, ratified the Agreement. Once the USMCA enters into force, U.S. investors already present in Canada may avail themselves of investment arbitration under the USMCA for only another three years. Investment arbitration may continue between the United States and Mexican nationals and between Mexico and U.S. nationals, but the scope of protection has been substantially reduced. Essentially, only claims of expropriation and discriminatory treatment may be brought; no longer may investors assert claims of denial of fair and equitable treatment, commonly brought under NAFTA and other international investment agreements. A requirement of exhaustion of local remedies has also been introduced. These restrictions reflect widespread misgivings over, among other things, the impact of investor–State arbitration on a State’s “right to regulate.”
Bilateral Investment Treaties and the “U.S. Model BIT”
There has been an explosion over the last 20 or 25 years in the number of bilateral investment treaties (BITs) by which States reciprocally agree to extend certain protections to investments made on their territory by nationals of the other State and to subject themselves to arbitration over a foreign investor’s claims that the host State has violated its BIT obligations. The number of BITs peaked at about 3000, but is diminishing as BITs are terminated or allowed to lapse. The United States has entered into close to 50 BITs with a wide range of countries.
BITs typically extend a wide range of protections to foreign investors, including most notably, protection against illegal expropriations, denial of national treatment and most-favored-nation treatment, and denial of “fair and equitable treatment” and “full protection and security.” Only very rarely has a BIT been interpreted to allow a respondent State to interpose a counterclaim against a claimant investor.
Like NAFTA, BITs provide a choice of fora for aggrieved claimants. They may, depending on the BIT, bring their claims before ICSID, the ICSID Additional Facility, another named institution, an ad hoc tribunal operating under the UNCITRAL Rules, or in the host State’s courts. Although each BIT is negotiated individually, many States—notably capital-exporting States—conduct their negotiations on the basis of a Model BIT. The current U.S. Model BIT dates back to 2012. The 2012 Model BIT did not significantly alter the standards of investment protection provided by the earlier model BITs, but introduced, among other things, new transparency requirements and certain commitments by States to labor and environmental protection.
International investment agreements may take the form not only of BITs but also plurilateral and multilateral agreements. In addition to NAFTA (which stands to be replaced by the USMCA), the United States is a party to the Dominican Republic–Central America–United States Free Trade Agreement (CAFTA-DR), which likewise extends protections to foreign investors and provides for the arbitration of disputes. Entry into other free trade agreements, providing for the arbitration of investment disputes, is under consideration by the United States.
Meanwhile, UNCITRAL has established a special working group on investor–state dispute settlement (ISDS). Among the proposals on the table, chiefly advocated by the European Union, is creation of a new Multilateral Investment Court (MIC). It is at this time uncertain how closely any such body, if it emerges, will resemble an international arbitral institution or an international judicial body, and thus the extent to which outcomes will be assimilated to arbitral awards or international court judgments, which may bear on, among other things, their enforcement.
Although international arbitration is a federal law matter (albeit not exclusively so) and governed by statute, the law in this field is largely judge-made. To that extent, it resembles the fields of law that have traditionally been the subject of The American Law Institute’s Restatements of the Law. In December 2007, the ALI Council voted to approve a project looking toward a Restatement of the U.S. Law of International Commercial Arbitration, which would be the first in that field. With the increasing salience of investor–State arbitration, and particularly in light of ICSID arbitration’s distinctive features, the project has been renamed the Restatement of the U.S. Law of International Commercial and Investor–State Arbitration.
Like all Restatements of the Law, this Restatement aims to present U.S. law on the subject in a systematic and coherent fashion.
A unique feature of the present Restatement is that it has as its subject an entire and separate adjudicatory regime, with its own textual foundation (the arbitration agreement), its own procedural ground rules (established in part by the parties, in part by arbitral institutions, and in part by arbitral tribunals themselves), and its own distinctive adjudicatory outcomes (arbitral awards). The Restatement is properly concerned with aspects of this adjudicatory regime—including an arbitration agreement, an arbitral proceeding, or an arbitral award—only to the extent that they may present themselves, in one form or other, before a U.S. court. The fact remains that issues relating to arbitration agreements, arbitral proceedings, and arbitral awards are coming more and more regularly before the courts and in an ever-widening range of scenarios—hence the scale of this Restatement.
The Restatement was brought for discussion before the Advisory Committee and Members Consultative Group in stages. Each segment was in turn approved by the ALI Council and the ALI membership, subject to changes to be made in light of discussions in those bodies. With approval of the last segment in May 2018, the Restatement was approved in its entirety, again subject to such changes. In the interest of revisiting a small number of items and taking up issues that had arisen since a given Chapter of the Restatement was approved, the ALI, at the request of the Reporters, reconvened the Advisory Committee and Members Consultative Group to consider those matters. The few changes that the Reporters proposed were laid before and approved by the Council in January 2019 and laid before the ALI membership for final approval at this year’s Annual Meeting.