New opportunities for resolving disputes involving asian states

Shearman & Sterling partner examines different options open to investors for resolving disputes involving Asian states.

In Asia, the traditional options available to foreign investors who cannot amicably settle disputes with governments or local authorities are often unattractive. The host state's own courts may well be perceived as prejudiced against foreign investors, while the host state will be immune from most actions in courts of other countries. International arbitration is a popular alternative to the courts, offering neutrality and enhanced enforceability. However, arbitration traditionally requires the prior agreement of the investor and the host state, and this will not always be present, especially where the two parties have no previous contractual relationship.

Modern investment treaties can offer an effective solution to these difficulties. That solution is neutral international arbitration which - in contrast to the traditional arbitration model - is available even if there is no prior agreement to arbitrate between the state and the aggrieved investor. In addition, awards issued in many investment treaty arbitrations should be easier to enforce worldwide than a traditional arbitration award or court judgement.

As bilateral and multilateral investment treaties proliferate, the benefits of investment treaty arbitrations - and particularly the opportunity for an investor to access international arbitration without a prior agreement with the state - are gradually being discovered around the world. However, relatively few Asian parties have, as yet, been involved in this new breed of dispute resolution.

1. Traditional Dispute Resolution Options

What recourse is traditionally available to a foreign investor in dispute with the state or authorities of the state in whose territory it has invested? The investor may have a contract with the host state or one of its organs, or with a third party (such as a state-owned corporation or a private entity). It may have no formal contract at all. In each case, there will almost always be an initial attempt by the investor and the host state to settle the dispute amicably. These attempts may well succeed, especially where the investor considers the dispute resolution options to be so unfavourable that it has little choice but to settle on the state's terms. But where can the investor turn if it does not want to or cannot settle? Traditionally, the answer has been the courts or, providing the disputing parties agree, either arbitration or some form of ADR (Alternative Dispute Resolution). Each of these solutions can, in many Asian jurisdictions, be deeply unsatisfactory.

a. Litigation in the Courts

Generally speaking, a state or local authority can be sued by a foreign investor, or any other party for that matter, in its own courts. The principal case where this will not be so is where both parties have agreed to refer their disputes to another forum, such as arbitration or the courts of another jurisdiction. The problem with action against host states in their own courts is that the host states often enjoy - or are perceived to enjoy - a substantial "home town advantage". In addition, even if the host state's courts are not biased or perceived as such, litigation in the host state may be a daunting prospect for a foreign investor unfamiliar with the host state's laws, courts and language. Also, an investor bringing a dispute before the courts will frequently have to endure years of appeals before achieving final resolution.

As for courts outside the host state, the doctrine of sovereign immunity will generally apply, in the absence of waiver by the host state, to bar an investor or other party from suing that state for conduct of a sovereign nature. Similar restrictions are likely to apply to the enforcement outside a host state of any judgement against that host state.

b. Alternative Dispute Resolution

ADR procedures, such as mediation, are established alternatives to litigation or arbitration in the United States, and are growing in popularity elsewhere. The essential distinction between ADR and court litigation or arbitration is that its objective is an agreed settlement promoted by a third party facilitator, rather than a binding determination issued by a court or arbitrator.

The major downsides of ADR are that it requires the cooperation of the disputing parties before and throughout the process, and that there can be no binding outcome without the agreement of the disputing parties. Whether as a result of these difficulties or otherwise, sovereign states are not known to be voracious users of ADR.

c. "Traditional" International Arbitration

International arbitration's principal strengths are its neutrality and its enforceability. However, the enforceability in certain jurisdictions of an arbitral award against a state may be troublesome where the state has not waived sovereign immunity from execution. Even more fundamentally, international arbitration requires all the disputing parties to have consented in advance to submit their dispute to arbitration. Traditionally, this consent is found in an arbitration clause inserted by the parties in their main contract. An investor therefore cannot opt for "traditional" arbitration against a state unless it has a contract with the state which contains an arbitration clause. In many investment contracts, states do not include arbitration clauses in investment contracts. And in many investment disputes involving states, the investor contracted with a third party, not the state itself, and there is no contractual relationship between the investor and the state at all, let alone an arbitration clause.

Investment treaty arbitration can often help aggrieved investors circumvent these obstacles.

2. New Dispute Resolution Opportunities Offered By Investment Treaties

Around 2,000 bilateral investment treaties are in force worldwide, alongside a handful of multilateral investment treaties1. The vast majority of these treaties entered into force in the past decade, and share similar features. The three principal areas addressed in most investment treaties are the scope of the instrument's application, the substantive protection offered to investors, and the resolution of disputes.

a. Scope of Treaty

The scope of most investment treaties flows from their definition of the words "investor" and "investment". An investor is usually defined as a national of a party to the treaty, or a company or other juridical entity either incorporated in that country or controlled by nationals or companies of that country. An investment generally means all assets, including claims to money or to performance having an economic value. Loans and promissory notes (even after assignment by the initial creditors) have been held to be investments within the scope of certain investment treaties. Shares in companies incorporated in states party to the treaty are also likely to be investments.

b. Substantive Protection

Investment treaties generally require each state party to admit in its territory investments by investors of other state parties in accordance with the host state's laws and regulations. They then set out a series of specific investment protections. These vary from treaty to treaty, but they typically include assurances of fair, equitable and non-discriminatory treatment, full protection and security, most-favoured-nation status, compensation for expropriation or acts tantamount to expropriation, and free transfer of returns on investment. Some treaties also elevate breaches by a state of an investment contract with a qualifying investor to the status of a treaty violation.

These substantive protections cover a wide range of acts and omissions by states or local authorities, particularly given the increasingly broad interpretation by international tribunals of what constitutes an act tantamount to expropriation. However, many of these protections may already be available under the contracting states' investment laws or under customary international law. The real innovation of investment treaties therefore lies less in the substantive protection they offer than in the effectiveness of their dispute resolution mechanisms.

c. Dispute Resolution Mechanisms

A standard modern investment treaty will contain two dispute resolution mechanisms: one for disputes between a state party and investors of another state party; the second for disputes between the two or more states that are party to the treaty. The second mechanism is an example of a traditional arbitration clause inserted in an agreement and is therefore unremarkable. In contrast, the first mechanism - designed to resolve investor/state disputes - has been described as changing the landscape of international arbitration.

The most significant feature of the investor/state mechanism in most treaties is that the states make a very broad offer, to all investors of the other state parties, of neutral international arbitration of all disputes it has or may have with any of those investors in the future. This offer is thus made to offerees who are not party to the instrument containing the offer (the investment treaty) and who may not even exist when the offer is made. The offer can then be accepted at a later date - perhaps many years later - by any investor of a second state party to the treaty with a grievance against the first state. The investor's acceptance of the state's offer of arbitration is often notified to the state only when the investor files suit as specified in the treaty.

The initial sweeping offer of arbitration by a host state, followed by acceptance by an investor with whom the state may have had no prior contract, bears little resemblance to the traditional arbitration agreement. Traditionally, the offer and acceptance of arbitration occurs well before a dispute arises, through the inclusion of an arbitration clause in a main agreement simultaneously executed by parties specifically contracting with each other. Although dubbed "arbitration without privity", investment treaty arbitration in fact remains based on the consent of the parties, as with any arbitration. It is the unconventional, "two-step" formation of the arbitration agreement which distinguishes investment treaty arbitration, and which stimulates arbitration lawyers worldwide with the prospect of increased business suing and defending states2.

A typical example of a dispute under an investment treaty would involve an investor with a stake in a joint venture established in another country. The investor believes the value of its stake in the joint venture has been diminished by the conduct of the host state or local authorities. This conduct could range from destruction of the JV's facilities by military action, or the failure by the police to prevent damage to or occupation of the JV's facilities by third parties, through to uncompensated nationalisation of the JV, passing by the enactment of laws favouring the JV's local competitors or the imposition of exchange controls impairing the investor's repatriation of dividends. If there is an investment treaty between the country of the investor and the host state, the chances are that it offers the investor legal remedies (usually compensation) for the diminished value of its investment and, most importantly, that it allows the investor to pursue those remedies in neutral international arbitration even if it has no prior agreement with the host state permitting it to do so.

Importantly, investment treaty arbitration is also available where the state and the investor do have a prior contract. If there is no dispute resolution clause in that prior contract, there is no difficulty. Where there is a dispute resolution provision in the prior contract, current arbitral jurisprudence seems to allow submission to investment treaty arbitration of claims based on violations of the applicable treaty and, depending on the wording of the treaty, of other claims, including those based on alleged violations of the parties' contract.

Some treaties bar access to international arbitration where the investor has already chosen a different dispute resolution path. This sort of "fork-in-the-road" clause usually prevents an unsuspecting investor who has commenced proceedings in the courts of the host state from later turning back and taking the international arbitration "fork" offered in the treaty as an alternative to the courts. As a result, every foreign investor's reaction before suing a state in court should be to examine its dispute resolution entitlements under any applicable investment treaties.

Where an investor does elect arbitration under an investment treaty, it often has a choice between different forms of arbitration. Perhaps the most significant of these is ICSID arbitration, administered by an affiliate of the World Bank.3 The advantages of ICSID arbitration include its establishment by a treaty ratified by over 130 countries, its specialisation in the resolution of investment disputes between states and foreign investors, its efficient secretariat, and the increased enforceability of its awards as compared to those of other arbitration systems.4

The main alternative to ICSID arbitration proposed in investment treaties is arbitration under the UNCITRAL5 Arbitration Rules. Although these are sound rules, they do not provide for an administering institution, and therefore may lead to proceedings that are more exposed than administered arbitrations to disruption by delinquent parties. Further, for the reasons outlined above, an award under the UNCITRAL Arbitration Rules may be less straightforward to enforce than an ICSID award.

3. Investment Treaties Ratified By Asian States

a. Multilateral Treaties

The major multilateral investment treaty in Asia is the 1987 ASEAN Agreement for the Promotion and Protection of Investments.6 In addition to a number of substantive investment protections, the ASEAN Investment Agreement contemplates several methods, including ICSID arbitration, of resolving disputes between a member state and an investor of another member state. However, the disputing parties are required to agree on the particular system of arbitration, failing which the dispute is to be submitted to neutral ad hoc arbitration.7 This treaty thus gives investors from any of the member states valuable protection for their investments in the territory of other member states, as well as access to neutral international arbitration to enforce that protection.

At least one dispute - between a Singaporean investor and Myanmar - has been referred to arbitration under the ASEAN Investment Agreement.

Japan, together with nearly 50 mainly European states, has ratified the Energy Charter Treaty. This protects foreign investments in the energy sector, and provides for resolution of investor/state disputes by ICSID, UNCITRAL or Stockholm Chamber of Commerce arbitration. To the author's knowledge, no disputes involving Japan have been referred to arbitration under the Energy Charter Treaty.

b. Bilateral Investment Treaties

Asian nations have ratified hundreds of bilateral investment treaties (BITs). The total at any one time is not easy to determine with any certitude, such is the rhythm of signature and ratification of these instruments. Asian countries party to a significant number of BITs include:

  • China - the PRC has ratified at least 60 BITs, with countries such as Australia, France, Indonesia, Japan, Korea, Malaysia, Singapore, Thailand and the U.K. Many PRC BITs provide for ICSID arbitration, but only for disputes concerning the amount of compensation due following expropriation of investments;   
  • Hong Kong - the SAR has ratified over a dozen BITs, with countries including Australia, France, Japan, Korea and the U.K. Most Hong Kong BITs provide for UNCITRAL arbitration of investor/state disputes.
  • India - India has ratified over a dozen BITs, with countries such as Germany, Korea, Russia and the U.K. India's BITs typically provide for a choice of dispute resolution procedures, including UNCITRAL arbitration.
  • Japan - Japan has ratified at least eight BITs, including treaties with China, Hong Kong and Russia. BITs with Korea and Singapore have been signed but not yet ratified. Although the Japan/Hong Kong BIT provides for UNCITRAL arbitration of investor/state disputes, most Japan BITs provide for ICSID arbitration.   
  • Korea - the Republic of Korea has ratified at least 50 BITs, with countries such as China, France, Hong Kong, India, Indonesia, Malaysia, Thailand and the U.K. Most BITs ratified by Korea provide for resolution of disputes through ICSID arbitration.   
  • Singapore - Singapore has ratified over 20 BITs, including with China, France, Indonesia, Taiwan and the UK. Many of these instruments refer investor/state disputes to ICSID arbitration.

A number of disputes have been brought to ICSID arbitration under BITs entered into by Asian states. For example, a Swiss public company has brought significant claims against Pakistan and the Philippines under BITs between Switzerland and each of those countries. In each case the investor had entered into long-term contracts with the host state.8 Sri Lanka was recently successful in defending a suit brought by a U.S. claimant under the Sri Lanka/U.S. BIT, where the claimant's expenditures in bidding for a power project that did not materialise were held not to be investments, and were therefore not covered by the BIT. Sri Lanka was also party to the first ICSID arbitration commenced under a BIT, where the investor was from pre-handover Hong Kong and was protected by the Sri Lanka/U.K BIT. The investor obtained compensation for damage caused to its investment in a shrimp farm in Sri Lanka by government military action against rebels. China, India, Japan, Korea and Singapore have not been party to ICSID arbitrations under bilateral investment treaties; neither have investors from those countries.9

4. Checklist for Investors Interested In Referring Disputes To Investment Treaty Arbitration

  1. do you have a dispute with a state other than your "home" state, or an organ of that other state?
  2. is there a bilateral or multilateral investment treaty in force between that state and your "home" state?
  3. does that treaty contain an offer by the host state of resolution by arbitration of investment disputes with investors of your "home" state
  4. are you an investor as defined by the treaty?
  5. does your dispute concern an investment as defined by the treaty?
  6. does your dispute comply with all other conditions contained in the treaty's dispute resolution provision, particularly any that concern recourse to local courts?

If you have answered yes to each of these questions, you are likely to be able to refer your dispute to international arbitration under the investment treaty in question. You are encouraged to investigate the international arbitration opportunities offered by such a treaty before embarking on court action, as court action may bar subsequent access to international arbitration.

1. Specific investment treaties ratified by Asian states are discussed at 3. below.

2. An illustration of the impact of investment treaties on the number of international arbitrations involving states can be seen in the huge increase in the docket of ICSID over the past five years. ICSID is the principal forum for resolution of international investment disputes. Only 100 or so disputes have been submitted to ICSID since its establishment in 1965. However, 60 of these arbitrations were submitted in the past five years, and three-quarters of these were brought under investment treaties.

3. ICSID stands for "International Centre for Settlement of Investment Disputes".

4. This increased enforceability results from the ICSID Convention's stipulation that every member state must directly enforce ICSID awards as final judgements of its own courts. In addition, there is a perception that ICSID's affiliation with the World Bank places increased pressure on ICSID award debtors to comply with awards voluntarily.

5. UNCITRAL stands for "United Nations Commission on International Trade Law".

6. Member states are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

7. Ad hoc arbitration is arbitration with no administering institution and no specific procedural rules agreed in advance.

8. The author represents the Swiss investor in these arbitrations.

9. India is not a party to the ICSID Convention.

10. If you are an individual, your "home" state for these purposes is likely to be the state of which you are a national. If you are a company, your "home" state may be that where you are incorporated, and/or that of your controlling shareholders.

John Savage is a partner in Shearman & Sterling's Singapore office and heads the firm's international arbitration practice in Asia. He currently represents investors and states in five ICSID investment treaty arbitrations, and is advising investors on three further investment treaty disputes. He can be reached at [email protected].

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