ICC Articles

My fellow presenters have offered comments on some very significant issues relating to the current practice of international arbitration. I have been asked to address a subject matter-parallel state-to-state and investor-state proceedings and certain related matters-that have not yet figured prominently in daily practice. Nonetheless, I think there are interesting aspects to the subject matter which are worthy of attention now.

State-to-state and investor-state dispute settlement provisions of bilateral investment treaties

Bilateral investment treaties (BITs) typically provide that an investor may assert a claim in its own name and on its own behalf against a host state for violations of the treaty. The remedy sought is usually money damages. At the same time, BITs also contain provisions for the resolution of disputes between the state parties to the treaty. ¹ These provisions permit one state to bring a claim against another state in ad hoc arbitration on any issue relating to the interpretation or application of the treaty. The question naturally arises as to whether these dispute settlement provisions occupy overlapping, but independent, spheres, or whether one mechanism should in any particular circumstance take precedence over the other.

One line of argument holds that a state-to-state proceeding under a BIT that seeks from a tribunal an interpretation of a relevant article of a treaty is not an espousal of an investor's claim or an exercise of diplomatic protection. [Page73:]

Rather, it is an exercise of the state parties' chosen interpretative mechanism to obtain a binding interpretation of a provision in dispute. This view reflects Art. 31 of the Vienna Convention, which makes clear that, after the plain text of a treaty, it is the intent and understanding of the parties to the treaty, variously expressed, that is the primary source of its meaning. Where the

parties voluntarily create a mechanism (state-to-state arbitration) to produce such treaty interpretations and agree to be bound thereby, the decision that issues from a state-to-state proceeding is, in effect, an authoritative agreement of the parties under Art. 31 of the Vienna Convention regarding the proper interpretation of the treaty; as such, it ought to be given effect by an investor-state tribunal asked to apply the same treaty.

Seen from another perspective, however, a state-to-state proceeding brought during the pendency of an investor-state arbitration holds the potential to interfere with the investor-state proceeding. That is because, at a certain level of generality, every investor-state claim entails a dispute about the interpretation or application of a particular provision of the treaty. If both disputes proceed in parallel, there is the risk that one tribunal could reach an interpretation inconsistent with that of the second tribunal. Alternatively, if the view is adopted that the investor-state tribunal's work should be suspended pending the resolution of the state-to-state dispute, this creates the prospect that every investor-state claim is vulnerable to the respondent state initiating a state-to-state claim simply to delay or derail the proceedings of the first (investor-state) tribunal. ²

It may be that a state-to-state proceeding could have the same salutary effect as appropriately applied provisions for the consolidation of multiple investor-state proceedings. That is to say, where a cluster of investor-state cases presents an identical legal question of treaty interpretation or application, it may be more efficient for that issue to be resolved in a state-to-state proceeding. However in this circumstance, it is the state and not the affected investors- who are foreclosed from even observing, much less participating in, the state-to-state proceeding-that frames the question for the ad hoc tribunal's attention. As such, this may prove a less desirable mechanism than consolidation rules for achieving such efficiencies.

As of the date of this seminar, I am aware of only one case in which some of these issues arose. In the interest of disclosure, I should say that it was a case in which I acted as counsel for one of the parties. In that case an investor[Page74:]

had initiated arbitration against a host state under a BIT. Because there had been a substantial record of diplomatic exchanges between the state of the investor and the respondent state about this very dispute that predated the filing of the investor's claim, the respondent state initiated a state-to-state proceeding under the BIT and sought to suspend the investor-state tribunal's proceedings. The respondent state advanced substantially the arguments that precedential and interpretive priority ought to be assigned to the state-to-state proceeding that have been described above.

In a very short decision that did not elaborate reasons, the investor-state tribunal rejected the request for suspension of its proceedings. The respondent state did not subsequently move forward with the request for a constitution of a tribunal under the state-to-state mechanism.

Given that most investment treaties today include both investor-state and state-to-state dispute settlement mechanisms-and yet, so far as I am aware, the treaties do not specify how the two should or may interact-it seems likely that this scenario will recur. Soon enough, tribunals will have to address these questions head-on, and their analysis will be of great interest to practitioners.

Possible parallel proceedings under free trade agreement investment chapters

Similar issues have the potential to arise under the investment provisions of certain free trade agreements, particularly those to which the United States is a party. In NAFTA, the US FTA with Chile, the US FTA with Singapore, the Central American FTA, as well as other US FTAs under negotiation, there is a bifurcation of certain claims between investor-state and state-to-state proceedings. For example, national treatment claims, most-favoured-nation treatment claims and claims for fair and equitable treatment in respect of investments in the financial services sector can be brought only in state-to-state proceedings. An investor is free to pursue other claims, e.g.,

expropriation, arising out of the same measures under the usual investor-state proceedings. Given this possibility for simultaneous proceedings arising out of the same set of facts, a number of interesting issues arise including: whether factual findings of one tribunal should be binding on the other; whether a conclusion on a legal issue reached in one proceeding should be binding on the other tribunal; and how to ensure that the investor is not[Page75:]

disadvantaged by the presence of the same respondent in both proceedings whereas, presumably, the investor is not present in the state-to-state proceedings. At first blush, given that the same respondent will appear in both proceedings, there would appear to be a strong argument in favour of some form of estoppel that would limit the respondent's ability to relitigate the same factual or legal issues in a second proceeding.

Parallel proceedings before the WTO and under a bit

It may well be the case that the same measure or series of measures taken by a government gives rise to violations both of a bilateral investment treaty and of the provisions of a WTO agreement. For example, where a company both exports a product to a foreign market and has a subsidiary in that foreign market that is also involved in manufacturing or marketing the same product, one and the same government measure may affect both trade flows and the investment. This may give rise to claims before the WTOon the trade infraction and simultaneous claims by the investor under an investment treaty. Once again an assortment of claims may be brought by different parties arising out of the same core of facts, and similar injuries may be addressed in different proceedings and potentially by different remedies - such as money damages in the case of the investor-state proceeding, and removal of the offending measure on pain of trade sanctions in the case of the WTO proceeding. Such parallel proceedings raise a number of questions similar to those discussed above.

State party efforts to control the decision-making process

A related and final matter for our consideration is the mechanism now enshrined in the investment chapters of numerous free trade agreements and the 2004 US Model BIT that permits the state parties to that agreement to issue a joint interpretation of the treaty that is binding, including on any investor-state tribunal before which a case under the treaty may be pending. The question obviously arises as to whether the exercise of such authority usurps the power and preempts the independence of the investor-state tribunal. There is every reason to believe that this is a serious risk. It may well be that defensive concerns of the state parties may, in the heat of a dispute, take precedence over the more principled impulses that led them to conclude[Page76:]

the treaty in the first place. A somewhat less intrusive variant is the provision now enshrined in the US Model BIT that requires a tribunal to share with the parties, at the request of either, the text of a decision before it is formally issued. Although neutral on its face, risks to the independence and integrity of the arbitral process are also present in this mechanism.