Investment Treaty Arbitration

What is the Investment Treaty Arbitration?

It is a procedure which settles disputes between foreign investors and Host States. It offers the foreign investor the option of resorting to impartial arbitrators to resolve a dispute. This is advantageous as it avoids the involvement of the national courts of the Host States, which could be unfair as they create results which are only favourable for the Host States.

In this way, the Investment Treaty Arbitration guarantees a fair approach to resolve any types of conflict that arise in an investment. However, for an investor to able to use this arbitration agreement to their benefit, the host state must give its consent, which is usually only given through International Investment Agreements. Additionally, it is uncommon for the host state to give their direct consent to the investor and so this consent can become a limitation on this type of agreement.

Investment Treaty Arbitration’s Main Advantages for Investors

In addition to the main guarantee of being able to resort to arbitration instead of the national courts, there are also the following guarantees:

• Protection against expropriation.
• Impartial and fair treatment.
• Equal treatment as Host States.
• Most favoured nation principle.
• Freedom to repatriate funds.
• Total protection.

These guarantees are developed in International Law and arbitral jurisprudence, although the latter is not binding.

How to enter into an Investment Treaty Arbitration

Investment arbitrations usually start with a 6-month grace period, during which the investor and host state are first encouraged to find an amicable solution to the conflict. Although, the investor usually must exhaust all potential resolution methods before the arbitration, this period also serves as a notice to the host state of the investor’s intention to initiate the arbitration procedure.

However, the vast majority of cases are not resolved within these 6-months. This is because the host states prefer to wait and see if the investor is willing to pay the arbitration cost.

On the other hand, many International Investment Agreements exclude arbitration if legal proceedings are used. Thus, host states quickly turn to their courts to prevent the conflict being transferred into an arbitration procedure. If this scenario happens, it should be taken very seriously by the investor’s legal advisor.

Investment Arbitration Institutions (ICSID) (in Spanish “CIADI” Centro Internacional de Arreglo de Diferencias Relativo a Inversiones)

The main Investment Arbitration Institution is the International Centre for Settlement of Investment Disputes (ICSID). With its head office in Washington, it is part of the World Bank group and hosts disputes from all around the world. It is created through the Washington Convention or ICSID Convention.

Other important investment arbitration institutions are:

• Stockholm Chamber of Commerce (SCC)
• Permanent Court of Arbitration (PCA)
• International Chamber of Commerce (SCC)

Washington Convention or ICSID Convention

This Convention regulates two types of conflict resolution: Reconciliation and Arbitration. Under its supervision, conflicts are resolved by placing the host state and the investor on a level playing field.

This Convention establishes the following limitations:

• Only conflicts which are “legal disputes arising directly out of an investment” can be resolved.
• The dispute must arise between a Contracting State and an investor who is a national of the Contracting State. A “Contracting State” means a State which has signed the Convention.
• Both parties must have given their consent to submit the dispute to arbitration.

The Tribunal

The selection of the Arbitral Tribunal is probably the most controversial part of the entire procedure. Over the years, there have been many controversies surrounding investment arbitrators and although the parties are free to choose the arbitrators, ISCID has put in place nationality and merit restrictions.

Enforcement of Arbitral Awards

The Washington Convention establishes a set of rules for the enforcement of investment awards. These rules are set out in Articles 53 to 55, but the most important are:

• Article 53: the award will be binding for both parties and may not be appealed or potentially challenged. The parties shall abide by it and comply with all its terms.

• Article 54: Each Contracting State shall recognise an award made by the Convention as binding. It shall be enforced within its territories as if it were a final judgment from a court of that State.

If the host state has not signed the Convention, the enforcement of the award will not be governed by its rules. In such cases, they will only be protected by the Convention of Recognition and Enforcement of Foreign Arbitral Awards.

Cost and Success Rate

Cost is an essential part of deciding whether or not to enter into the arbitration procedure. The parties must pay the costs of the Tribunal, the institution and the lawyers. Typical average costs usually amount to between 4 or 5 million dollars per proceeding. At this point, due to the high costs, there also is the option of relying on third-party donations if the costs cannot be met.

Regarding the success rate, studies state that more than 40% of claims result in an arbitration award.

Approximate Duration of Investment Treaty Arbitration

The average duration of this type of arbitration is between 3 to 4 years. According to 2015 statistics released by ISCID, the average arbitration in their institution is 39 months. This time frame is from the constitution of the Arbitral Tribunal to the issuance of the award. The longest ICSID arbitration lasted 10 years, however it is rare for arbitration to go on for that long.

Conclusion

A few years ago, investment arbitration was at its peak. In 2015, ISCID had its largest number of arbitration proceedings in its history. Despite this, some experts predict that other conflict resolution methods will replace arbitration in the coming years. However, it seems unlikely that this will happen. As long as arbitration remain a quick and inexpensive resolution method, especially in comparison to others, investors will continue to rely on it.