An Introduction to Investment Arbitration

By Harshvardhan Tripathi, for Legal Corner LLP. Harshvardhan is a fifth year student of NALSAR University of Law and will be graduating in 2022.

The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) if you are planning to consider incorporate or expand your existing business in the US so as to get legal advice that is specific to your business needs

Investment arbitration is a procedure to resolve disputes between foreign investors and the host States. It is more specifically called investor-state dispute settlement mechanism. The possibility for a foreign investor to sue the host state is a guarantee for the foreign investor that in case there occurs a dispute between them the investor will have access to arbitrators who are independent and possess sufficient experience and qualification to resolve the dispute in an effective manner and render A final enforceable award.

This mechanism allows the foreign investors to circumvent domestic codes of the country which might otherwise be perceived to be biased towards the state, or lack sufficient independence. It allows resolution of disputes as per international treaties which provide different kinds of protection to the investor.

The Crucial element of consent in Investment arbitration

In order  for the foreign investor to initiate and investment arbitration  the host state must consent to such an arbitration.

Such consent to investment arbitration is usually given by the host States in international investment agreements, bilateral investment treaties(BITs), as well as free trade agreements and multilateral agreements such as The Energy Charter Treaty.

Other ways in which the consent can be given is through an investment agreement concluded directly between a state and a foreign investor, or when such a consent is contained in the domestic law of the host state such as in the Mining or the investment law. The United Nations UNCTAD maintains a list of International treaties and instruments which provide for the host state consent to investment arbitration and this should be consulted at the outside of any potential dispute to see whether investment arbitration is envisaged under such laws.

The substancial protections provided to foreign investors are dependent upon the international investment agreement under which the claims have been raised by the investor. Such protection is different from the protections that are provided by the domestic law of the host state and there may be such scenarios where the protection provided by the former may in fact be greater than the  latter.

The most common protections provided to the foreign investors are:

1.  Protection from expropriation
2.  Fair and equitable treatment
3.  National treatment
4.  Most favoured Nation treatment
5.  The freedom to transfer funds
6.  Complete protection and security

Each of the aforementioned protections are defined under the international law and have significant jurisprudence behind them. However one must be mindful that the scope of these protections is hotly debated in the international arbitration jurisprudence and the jurisprudence is non binding upon the arbitral tribunals and is only persuasive.

Cooling off period 

Majority of the investment arbitration agreements provide for a cooling off period of usually six months where the foreign investor and the host state are encouraged to negotiate their disputes and reach upon an amicable solution. This cooling off period begins typically when a notice of intent to initiate arbitration proceedings against the host state is served by the foreign investor upon the host state. The parties engage in negotiation and mediation, and in case they are not able to resolve the dispute amicably through ADR mechanism, the foreign investor then has to file a request for arbitration as per the applicable rules of arbitration in the arbitration agreement.

On the other hand in some cases, the investor may be obliged by the arbitration agreement upon which it claim is based to exhaust all effective domestic legal remedies prior to initiating a claim in arbitration.

Then there are cases in which other arbitration agreements force the foreign investor to either choose to file a suit against the host state before domestic courts or before an international arbitral Tribunal. Such clauses are commonly referred as ‘fork in the road’ clauses. It is important for a foreign investor to review the instrument that contains the consent of the host state before initiating proceedings, because if the investor approaches the domestic courts of the host state first they may later be barred from initiating arbitration.

Institutional investment arbitration versus Ad Hoc investment arbitration

International Centre for Settlement of Investment Disputes (ICSID) is the most popular and the most renowned arbitration institution which administers investment arbitration cases. It is based in Washington DC is utilised by parties from across continents.

Other popular Institutions include the Stockholm Chamber of Commerce, the Permanent Court of Arbitration and the International Chamber of Commerce.

If however the arbitration agreement does not provide for an arbitration institution to adminster the proceedings, then it is considered an Ad Hoc arbitration. In most cases,  such Ad Hoc arbitrations are governed by the UNCITRAL  ad hoc arbitration rules. It is usually considered that ad hoc arbitrations are more cost effective as compared to the ICSID  administered arbitration, however this opinion is not substantiated by statistics released by the institutions.

Time and Cost associated with Investment Arbitration

On an average, investment arbitrations proceeding stretch for slightly above three years. According to the statistics released by ICSID in 2015, the average length of investment arbitration cases was on average 39 months.

Although there are no appeals of investment arbitration awards, the arbitral rules under which the claim is brought do provide for limited grounds for the annulment or setting aside of an arbitral award. For instance,  the ICSID  the rules allow for the annulment of an award if

1.  the Tribunal was not constituted properly
2.  the Tribunal manifestly exceeded its power
3.  there was corruption on the part of a member of the Tribunal
4.  there has been a serious departure from a fundamental rule of procedure
5.  that the award has failed to state the reasons on which it is based

Investment of iterations are known to have significant cost and this may discourage foreign investors from relying upon this mechanism of dispute resolution. As per a available statistic, the average costs for the claimant were USD 4,437,000 and average respondent costs were USD 4,559,000 for investment arbitrations, while average tribunal costs were USD 746,000.

In case the parties are unable to cover their cost for the arbitration,  another option available to them is to obtain funding from specialised third party funders who provide funds to persue investment arbitration cases in return for a stake in the financial outcome of the arbitration. However one must remember that obtaining third party funding is a difficult and a time intensive process and it is only provided in the strongest cases.

According to some studies that have been conducted,  claimants have 41% success rate in investment arbitration whereas respondent win approximately 59% of the arbitrations.  Almost one fourth of the claims are dismissed on the grounds of lack of jurisdiction.

The average claim in investment arbitration is usually under 500 million US dollars. On the other hand the quantum of the average award is usually only 76 million US dollars which indicates that many of the initial claims by the investors are exaggerated.

It is definitely true that the exorbitant cost involved in initiating and responding to an investment arbitration proceeding are a huge detriment towards its popularity . Furthermore, the lack of expertise of legal counsels who specialise in investment arbitration in one’s own jjurisdiction will be huge problem while pursuing investment arbitration cases. However, the countries continue to enter into Bilateral investment treaties and it seems that despite the limitations of the process, investment arbitration is becoming increasingly popular over the years and is here to stay as a popular mechanism of resolving disputes between host states and foreign investors.

If you have any questions on choice of law, please email me at chetana@legalcornerllp.com . I will be happy to set up a free consultation.