Free «International Investment Arbitration: Do International Investment Tribunals Have Authority to Arbitrate on Private Contractual Agreements?» Essay

International Investment Arbitration: Do International Investment Tribunals Have Authority to Arbitrate on Private Contractual Agreements?

In a world that is increasingly interconnected in terms of businesses, globalization has emphasized the need for international investment arbitration to manage the way international businesses are conducted. The implementation of international treaties between two parties is mainly done through observance of undertaking clause. The clause found in articles 3(1) and 4(1) of the treaty usually require parties to ensure fair and equitable treatment of investments, avoid taking measures that have expropriation effect without providing compensation to the affected party, and always guarantee the observation of one’s contractual commitments (Weiler 2010, p. 325). To this end, a party to the international treaty and contractual agreement cannot engage in acts and omissions that point to breach of agreements and violation of the treaty clauses.

As the economic and business environments have evolved, the parties to international investment treaties have found it increasingly difficult to observe all the clauses in the treaty. The result is a breach of the contract, which requires international investment arbitration procedures to be used to solve the emergent disputes between the parties (Sinclair 2004, p. 5).  Within the confines of the international treaties, there have emerged divergent views as to whether international investment tribunals have the authority to arbitrate matters concerning contractual violations by one party or the claims based on the treaty as defined in the international treaty agreements between the parties.  In order to pursue arbitration involving contractual agreements between parties at the international level, arbitrators must identify the claims based on allegations of violating provisions in the contract as well as breach of certain provisions of the treaty. They can also determine whether arbitration should be based on the provisions of the contract or the treaty (McLachlan, Shore & Weiniger 2014, p. 35).

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The arbitration process also needs to be undertaken on the basis of the multi or bilateral investment as well as national investment laws between the parties involved. It should also give protection to foreign investors from violations of their rights. International arbitration lawyers have given dissenting opinions as to whether International Arbitration Tribunals can arbitrate on matters involving the violation or breach of Contract Agreements given the nature of the agreement. The successful arbitration of the cases between Salini v. Morocco, Lanco v. Argentina, and Vivendi v. Argentina, following the precedent of SGS V. Pakistan, anchored the process of arbitrating matters concerning treaties and contractual agreements (Weiler 2010, p. 327).

Even though the distinction between the arbitration processes in these two scenarios is well recognized in the investment treaty arbitration process, there is still dissenting views on the power of international investment tribunals to arbitrate on matters arising from agreements entered out of International Investment Treaty. While some international investment lawyers think that the authority of international investment tribunals is based on diverging rationales, some suppose that any investment agreement is based on Contractual Agreement. Others still consider that an International Treaty must be bound by the international responsibility of the host nation regardless of the applicability of the investment treaty (Naniwadekar, 2010, p. 7).

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The current proposal seeks to study the role of International Investment Tribunals in arbitration of Contractual Agreements by exploring the diverging views from legal practice. To achieve this aim, the researcher will explore different views on the practice of international arbitration on cases involving International Treaty and Contractual Agreements between parties at international level. The research will add to the existing knowledge on the role of International Investment Tribunals in arbitrating on disputes arising from Contractual Agreements and International Treaty violations or breaches. The following research questions will guide the researcher to pursue this aim:

  1. What are the fundamental differences between Contractual Agreements and International Treaties when it comes to international investment arbitration?
  2. What are the obligations of parties in contractual agreements and international treaties?
  3. Do International Arbitration Tribunals have the authority to arbitrate on issues arising from agreements between parties based on contractual agreements?
  4. What are the views of international arbitration lawyers on the authority of International Arbitration Tribunals in violation or breach of contractual agreements?

International investment arbitration has recently developed in response to an increase in cross-border investment and the effects of globalization on businesses and projects. Modern international investment projects involve a wide range of participants including governments, multinationals, and local investors, which necessitates the need for a regulatory framework for rules of engagement (Goldhaber 2004, p. 8). Through agreements, the participants establish norms and practices to guarantee bilateral and multilateral investment treaties that are bound by decisions made by arbitration tribunals and enforced by foreign courts. , there have been concerns among scholars and international lawyers on the power and authority of international investment tribunals to make decisions that bind bilateral agreements outside the international treaties that govern multilateral investment treaties.

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Part of the argument is that some bilateral agreements are private agreements that are not subject to the rules and policies established in the multilateral investment agreements. Yet, some have viewed the need to empower investment tribunals to pass decisions in case of a dispute or controversy between two parties that entered into bilateral agreements (Charney 1997, p. 11). The international investment treaties have empowered arbitral tribunals and foreign courts to make binding decisions even on governments. The power of these decision-making bodies is invested in the investment protections to ensure a due process when it comes to solving disputes and controversies emerging from business engagement. The provisions oblige all parties to a treaty or an agreement to comply with the agreements in the treaty even in cases where the process infringes on the sovereign control, including exploitation of resources.

The control mechanisms are initiated in case of existing demands between parties to an agreement. The arbitration tribunals are formed in accordance with the resolutions in the provisions as a means to rectify the normal operations. Foreign courts are empowered to enforce the provisions of a multilateral agreement with the view to promote international investments and the credibility of international investment laws (Vandevelde 1993, p.91). However, many scholars have disagreed on the ability of arbitration tribunals to arbitrate on matters on bilateral agreements, which may not be bound by the provisions of international treaties. While the globalization has necessitated the bilateral agreements between countries and parties to a business, the provisions of these agreements have been a source of divergent views among international lawyers, who argue that bilateral agreements are private agreements that should not be subjected to the provisions of multilateral investment treaties (Dezaley 1996, p. 85).

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The development in business investments in foreign lands in the recent past, brought about by globalization, has induced few changes in international law that governs investments. The bilateral investment treaties (BITs) govern the relationship that parties to an international investment have with each other, especially concerning governments. These agreements have been prevalent since the 1960s, when substantive protections to foreign investors were adapted. BITs also ensure that arbitration of disputes between the parties is solved before the International Center for Settlement of Investment Disputes (ICSID). The major aim of the ICSID is to offer conciliation and arbitration platforms to the states and parties signatory to the agreements ratified by the center (Werner 1997, p. 14).

However, some agreements have been entered into by parties to investment, which is not bound by the policies of the center and which must be arbitrated when a dispute arises out of them. Even though dispute resolution clauses for BITs are largely dominated by the ICSID convention on arbitration, there have been calls from different quarters to have alternative resolution mechanisms for disputes arising from private agreements. Also, the issues are complicated by the fact that some parties may not be signatories to the ICSID convention and therefore necessitating the need for an alternative resolution process (Cremades & Cairns 2002, p. 212). An important aspect that must be considered when a dispute arises between parties is the definition recognized by the ICSID convention.

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According to this convention, an investment dispute involves a government and a foreign investor relating to the host country. With regard to this definition, most contemporary investment disputes arise when an investor, who is contracted, claims a breach of the provisions in the BIT agreement. A claim of this nature could include expropriation of an investment without due compensation and affording the investor equitable and fair treatment. It makes the investor to have a claim based on an international law that governs engagement of parties (Carver 1995, p. 186).

To this end, a claim of this nature means that the host country is obliged to respond to the basis of it being a signatory to the international law or national law that governs the international investment projects with another party. The second case in which a claim could be made by a party to BITs is when a contractual agreement is signed between a government and an investor where the investor can bring claims against the government under the provisions in the BIT agreements. Consequently, the resolution of a dispute in the BITs may be based on two claims: the first is the contract-based claim and the second is the treaty-based claim.

While this has been the practice in many of the disputes that have arisen internationally, there have been arguments that investors are given precedence over the sovereign states when it comes to claims arising from an investment dispute. The reason for this is the fact that governments are parties to both contractual agreements as well as BITs. Foreign investors, acting in their private capacities, are subjects only to contractual agreements and not bound by the provisions of the BITs. Therefore, a challenge arises from the jurisdiction of international investment tribunals and their authority to provide jurisdictions over the claims that a party makes (Bucher 1994, p. 22). It is also noteworthy that international tribunals, such as the one formed under the ICSID conventions, are only bound by the consent of the countries that have signed the provisions. Most contractual agreements between a private investor and a government contain a forum-selection clause that points to the process of selecting the tribunal in the event of a dispute. In line with the cases that have already been solved before international tribunals, it is widely accepted that international tribunals should have jurisprudence over claims of BIT infringement without regard to the forum-selection clause entered into by the state and the investor.

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However, recent cases of disputes indicate a need for an alternative mechanism for dispute resolution, especially for privately entered agreements on contract-based claims. This issue arose between the SGS v. Pakistan dispute as well as SGS v. Philippines, where issues of forum-selection clause and contract-based claims arose. The reason for this change is the umbrella clause, which, when interpreted, means that contract-based claims are inherently transformed in BIT claims under the clause when a dispute arises. Nevertheless, there have been arguments from different parties that when the umbrella clause overrides the forum-selection clause in contract-based claims, it shortchanges the investor by subjecting them to provisions that they have ascended to (Houde & Yannaca 2004, p. 3).

Governments usually package themselves as potential business partners to attract foreign investors. As a result, many investors are lured into entering deals with governments without considering the potential risks that may arise when the umbrella clause overrides the forum-selection in the event of a dispute. The result is that even though the contractual-based agreements look enticing to the investors, it is possible that government may misuse the umbrella clause to subject the investor to international arbitration without considering the implications for  the investors (Houde & Yannaca 2004, p. 5).

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For instance, in cases where the government decides to expropriate a deal without compensating the investor, it presents the investor with losses despite what is contained in the contractual agreements. In some cases, investors turned to their countries to help them with resolving the disputes with another country even though such actions did not guarantee the investor of compensation because no assurance existed that their governments were in a position to find a worthy cause to support their grievances in matters that were entered in private agreements. So, the international investment tribunals were seen as the panacea through which foreign investors could find redress of contract contravention with another country.

The law also provides that investors who had contractual-based claims against a country could seek for redress in the courts in that particular country. This was disadvantageous to the investors because the courts, in most countries, are subject to the policies and control of their governments. Wendlandt (2004, p. 524) points to the Calvo Doctrine that posits that foreign investors do not have equal treatment with the host countries and, therefore, seeking redress for a grievance in national courts has proved to be a futile exercise. Although, in the wake of a need to have continued flow of capital in the country, many partners to contractual based agreements are willing to compromise the umbrella clause in BITs and allow forum-selection clause to supersede the provisions in the BITs.

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The result is the mutual agreement to seek redress for disputes in an international investment tribunal, which may not have authority to oversee such matters. Globalization of the world investment deals has also created a room for increased investment opportunities and hence higher probability of disputes arising from investment deals. However, foreign investors are still subjected to cumbersome politically instigated arbitration process in national courts, which leaves them with little protection (Wendlandt 2004, p. 525). Some arbitration matters are also not sufficiently catered for in the multilateral treaties that govern the economic relations between countries and the existing structures are inadequate to address the current complex nature of the BITs that governments and investors enter into.

Agreements such as the friendship, commerce, and navigation treaties between developed countries did not provide room for balancing the interests between powerful economies and the investors who wanted to invest in such countries. With regard to the nationally sanctioned treaties, some countries may find it easy to deny the provisions they have entered into with another country if such action undermines their sovereign control on investment in their economies (Goldhaber 2004, p. 6). The treaties are not binding and cannot offer plausible resolution mechanisms for the disputes that emerge between the state and the foreign investor from the country that ratified the treaty.











Thus, the international investment arbitration mechanism required an internationally recognized tribunal to provide resolution mechanisms in cases where the parties to the convention gain consent from the state and the investor. The BITs and the multilateral agreements are now considered as the source of authority when it comes to solving disputes that involve BIT based claims or the contract-based claims. This issue is disputed among the international lawyers who argue that the foreign investor is still at a loss when it comes to disputes of expropriation by the state.

One of the limiting clauses in majority of contract based claims is the high threshold of the investor-government arbitration. The disputes are expected to involve a large sum of money that and beyond the commonplace disputes. This provision inhibits the number of cases that can be solved through the process (Vandevelde 1993, p. 190). Since most investment deals do not reach the level of money prescribed in the clause as well as the complexity of the process of selecting a forum to oversee the dispute, investors are left with only the option of international investment tribunals, which have a lower threshold.

As noted by Werner (1997, p. 13), this also presents a challenge to the whole process of arbitration because the clauses in the contracts are not supportive of the forum-selection as a mechanism for resolving the investment disputes at international levels. As observed by a group of international lawyers on investment arbitration, “Most specialists would agree that ICSID arbitration is an intrinsically superior mechanism in certain contexts. An ICSID award, rendered in accordance with one of the most universally accepted international treaties, may be expected to have an exceptionally high degree of authority” (Wendlandt 2004, p. 526). As a result, international investment tribunals are intrinsically empowered to offer arbitration owing to the large number of BITs disputes that have been solved.

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In addition, the ubiquity of the BIT agreements necessitates the need for a coherent arbitration framework, which can provide assurance to the involved parties that justice will be delivered to each party. Irrespective of the provisions in the BITs or contractual agreements entered into privately, the international arbitration tribunals formed under the provisions of the ICSID convention is likely to provide more convincing decisions with regard to the disputes between parties in contractual claims (Cremades & Cairns 2002, p. 216).  The dispute resolution mechanisms in the BITs as well as contractual agreements have designated the international investment tribunals as the default authority to arbitrate on disputes arising from investment deals. Thus, non-ICSID parties are obliged to allow international tribunals to offer ad hoc arbitration to provide solutions to international disputes.

As argued by Wendlandt (2004, p. 527), BIT related disputes may be taken to bodies other than international tribunals, including the ICC and UNCITRAL, which represent notable foreign courts even though the majority have reference to the ICSID provisions. He argues that the reference to ICSID provisions in BIT and contractual agreements is only textual and responds to the dispute resolution clause, which designates international tribunals as the default mediator of international disputes.

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An increased preference for international investment arbitration overseen by the ICSID provisions indicates that contemporary investors have faith in the arbitration mechanisms offered at the ICSID. Notably, the power of the international tribunals is derived from the express consent of the parties involved and more often included in the BIT and contractual agreements between parties to an investment deal.

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