Need For Multilateral Framework In Investment Arbitration For Dispute Resolution

Introduction

In the last two decades of the 20th century, due to globalization as well as liberalization, there
has been an increase in the free-flow of foreign investments, especially in developing countries.
Due to this, great changes have taken place in the foreign investment regime, mainly in the form
of Bilateral and Multilateral Investment Treaties. These treaties have had a significant impact on
aspects such as national sovereignty, federalism, and public policy decisions that relate to the
health and environment of the host countries.

With the tremendous rise in the number of BITs and MITs, there is also an increase in the
amount of investment treaty arbitration. However, concerns have arisen with respect to
inconsistent arbitral awards, lack of transparency, parallel arbitration proceedings, impartiality
and diversity in the appointment of arbitrators, and delay in the award making processi.

In the past two decades, there have been some inconsistent awards delivered by tribunals in
Investment treaty arbitration, which in turn have faced criticism from academician, sovereigns,
investors . However, while absolute consistency in any legal system is not possible, at least a
minimum level of consistency is necessary in any legal system to attain certainty.

This article specifically focuses on the SGS arbitrations ii and Lauder arbitrations involving
similar facts and circumstances in which tribunals reached to contradictory conclusions, which
attracted a great deal of public attention.

SGS Arbitrations

The SGS arbitrations involved two arbitration proceedings, (i) between SGS Société Générale de
Surveillance S.A. v. Islamic Republic of Pakistan (‘SGS v. Pakistan’) and (ii) SGS Société
Générale de Surveillance S.A. v. Republic of the Philippines (‘SGS v. Philippines’), in which
tribunals came to different conclusions regarding the interpretation of the umbrella clause which
is also known as “observance of undertaking” involving almost similar facts.

SGS v. Pakistan was the first investment treaty arbitration in which the tribunal considered the
meaning of an umbrella clause. SGS, by relying on Article 11 of the Switzerland-Pakistan BIT,
claimed that that it was the duty of “every state to observe all the obligations that it should enter
in relation to foreign investments”.iii The tribunal in that case held that the claimant failed to
provide evidence “that the parties to the BIT intended that umbrella clause transmute a
contractual breach to the level of a treaty breach. The tribunal on the basis of lack of evidence
rejected the broad interpretation and denied the claimant’s claim.

Only after the gap of five months, SGS sued Republic of Philippines and the factual matrix of the
SGS v. Philippines was almost similar to that of SGS v. Pakistan. Despite this similarity, the
tribunal reached a different result which is opposite of the previous decision through a different
analysis.
Article X(2) of the Switzerland-Philippines BIT provided that every Sovereign “shall observe
all the obligations undertaken with regard to investments in its territory by the investors of other
Sovereigns.

By relying on the article X (2), the tribunal observed that it was the “duty of every Sovereign to
observe all the obligations it has accepted or will, in future, accept with investments under the
purview of the BITs”. The tribunal concluded that due to the umbrella clause, “Philippines
breached the binding and contractual commitments that it has presumed under the BIT, with
regard to the specific foreign investments.

The Philippines award is diametrically opposite to the Pakistan award. While the decision of the
tribunal in SGS V. Pakistan is based on narrow interpretation of the treaty, the tribunal in SGS v.
Philippines concluded its decision on rather a broad interpretation. Therefore, it is undeniable
that one of the decision is based on incorrect interpretation of the treaty, that leads to confuse all
the stakeholders regarding correct implementation of umbrella clause.
The Lauder Arbitrations

Lauder v. Czech Republic and CME v Czech Republic are two arbitral proceedings which were
Czech Republic-USA BIT
initiated against the Czech Republic for the violations of and Netherlands-Czech
Republic BIT respectively. Both the tribunals reached very conflicting, and therefore opposite
conclusions in relation to each other, even though the underlying facts were the same.

The Lauder tribunal held that the Czech Republic engaged in discriminatory and arbitrary
treatment of investments. Further, the tribunal noted that there was neither expropriation nor
violation of either the duty to provide fair and equitable treatment (FET), or the obligation to
provide full security and protection. Finally, the tribunal concluded that Czech Republic had not
breached its obligations under the investment treaty and therefore owed no damages to Lauder.

Only after gap of ten days, the CME tribunal reached a conclusion which was the exact opposite
of the Lauder tribunal. The CME Tribunal held that Czech Republic had not fulfilled its
obligations related to fair and equitable treatment, full security and protection of investments,
obligation to treat investments in conformity with principles of international law and obligations
not to impair investments by unreasonable or discriminatory measures. The tribunal awarded
CME damages worth US $269,814,000.

Later, Czech Republic moved Sweden’s Svea Court of Appeal to vacate the award of CME
tribunal. The Svea Court of Appeal refused to set aside the award opining that it had very narrow
review power and only in exceptional circumstances could an award be set aside iv. The Svea
Court of Appeal accepted the existence of parallel proceedings by the Lauder tribunal in London,
but refused to interfere on the ground that it had no jurisdiction and also refused to apply res
judicata or lis pendens because the two awards involved different parties under different BITs
entered between different Sovereigns.
The contradictory decisions rendered in the Lauder cases results in undermining the legitimacy
of investment arbitration, particularly where disputes related to public policy, environmental and
human rights and public health are at stake.

Analysis

Various academic literature, practitioners, etc. of this discipline have already discussed
numerous approaches to resolve this issue of inconsistency. A common suggestion has been the
establishment of appellate tribunal under the ICSID framework.

Each BITs is drafted differently depending upon the environmental regulations, Public health,
human rights and the level of development of the negotiating countries, hence obligations differs
from one BIT to another and arbitral awards rendered on the basis of these differently worded
BITsv would leads to inconsistent awards which raises question regarding the legitimacy of this
system. Hence, even though investors from different nations brings claim against same host
nation involving disputes having similar facts, there is likehood of being treated differently by
the tribunals due to different wordings of the BITs.

Instead of establishing a permanent investment court or appellate facility, a better approach

would be to establish a new centralized dispute resolution mechanism under the ICSID
Convention, 1966 on the lines of World Trade Organization (WTO) agreement, by replacing all
the current BITs with a centralized investment treaty that would apply to all the signatories of the
ICSID Convention.

The central objective of establishing a centralized dispute resolution mechanism is to provide

security, stability and predictability to the investment treaty system. The participants of the
investment treaty system are both sovereigns and private foreign investors, and these private
investors need stability in the system in which they have invested billions of dollars abroad.
Typically, disputes arise when the host countries breach obligations stipulated in the clauses,
such as fair and equitable treatment, most favoured nation, expropriation, full protection and
security.
As we already have a reliable body in the form of ICSID which acts as a nodal agency for
facilitation of dispute resolution, the ICSID Secretariat could be asked to adopt and implement
the new centralized dispute resolution mechanism. Further, the Secretariat would also draft
substantive provisions for interpretation of terms like Fair and Equitable Treatment, Most-
Favoured Nation, full protection and security, expropriation, etc., to ensure consistency. A
similar approach was followed in the recently concluded Comprehensive Economic and Trade
Agreement (CETA)vi between Canada and European Union (EU) too which provided list of acts
which constitute violation of FET obligationvii. The tribunal should interpret the provisions of the
agreement, according to customary international law, including those set out in the Article 31 of
Vienna Convention on the Law of Treaties. The interpretations should assist the tribunals in
clarification of the obligations undertaken by the host states.

The ICSID Secretariat would also provide reservations and exceptions to the nations for the
implementation of the centralized investment treaty on the basis of their economic, political and
social conditions. This would ensure that an equal footing is provided to each nation, just like
WTO agreements where developing nations are provided some special treatments, including
special and differential treatment. It would further increase the acceptability and clarity of the
new model.

Conclusion

Consistency is an important attribute of any legal framework. As it can be seen from the above-
discussed caselaws, lack of a centralised investment treaty has contributed to inconsistencies in
arbitral awards. Adoption of a multilateral framework would potentially rule out such
inconsistencies and would call for a reform in investment treaty dispute resolution regime.
However, to implement such a multilateral framework, it is important to bring majority of
nations on same page which is a very daunting task. However, it is not impossible, for we
already have a global framework for trade, i.e. WTO. Further, establishing a framework for
investment treaty would require same level of effort like WTO and would also require a strong
political will to bring majority of nations on board for negotiations.
i
World Investment Report 2015 (UN 2015)
ii
SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan (ICSID Case No. ARB/01/13), Decision on
Objections to Jurisdiction, Aug. 6, 2003, ines (ICSID Case No. ARB/02/6),
SGS Société Générale de Surveillance S.A. v. Republic of the Philippines (ICSID Case No. ARB/02/6), Decision on
Jurisdiction, Jan. 29, 2004
iii
Treaty between United States of America and the Argentine Republic Concerning the Reciprocal Encouragement
and Protection of Investment, art. II(2)(c) (Oct. 20, 1994)
iv
Czech Republic v. CME Czech Rep. B.V., Judgment of the Court of Appeal, Case No. T 8735-01 [hereinafter Svea Court
of Appeal Judgment], Page no.84-85
v
S. Hindelang, Study on Investor-State Dispute Settlement (ISDS) and Alternatives to Dispute Resolution International
Investment Law( ISSN : 1875-4120 Volume 13,issue 1March 2016)
vi
Comprehensive Economic Trade Agreement
(16thDecember2016),ec.europa.eu/trade/policy/in-focus/ceta/ceta-chapter-by-chapter/
vii
Article 8.10.2