ICC Activities

Introduction

The principle of equality of parties before international investment tribunals was the subject of a study conducted by the 18th Commission of the Institut de Droit International. In 2018, the Commission published its report, defining the equality principle in the composition of tribunals and its various procedural applications during arbitration.¹ In 2019, the Commission adopted a resolution that identified certain core principles in this regard (‘Resolution’),² including specific principles governing the composition of a tribunal,³ the bringing of counterclaims by states,⁴ production of documents and evidence,⁵ and the use of improper means during arbitration.⁶

The panel members discussed each of these aspects, drawing both from the Commission’s observations and their own professional experiences.

Marie-Isabelle Delleur (Associate, Clifford Chance, Paris; ICC YAF Representative, Europe and Russia) opened the session. William Ahern and Alina Leoveanu (respectively Senior Associate, and Senior Legal Consultant, Mayer Brown, Paris) hosted and moderated the event.

The principle of ‘equality’ in investor-state arbitration

In his keynote address, Toby Landau QC (Barrister and Arbitrator, Duxton Hill Chambers, Singapore Group Practice) discussed equality as an ideal in investor-state arbitration. He explained that equality is one of the cardinal principles of any judicial process, and fundamental to the rule of law.⁷ It includes a procedural principle, which requires the maintenance of substantial equality between the parties, even if that means treating similarly situated parties differently when necessary.

The principle of equality emerged as a fundamental tenet of commercial arbitration, as evident from various institutional rules and instruments.⁸ However, transposing this principle to the context of investor-state arbitration creates difficulty. The fact that investor-state arbitration mimics commercial arbitration procedures, and that most arbitrators lack expertise in public international law, creates the following tensions with the principle of equality:

• The nature of investor-state arbitration. The former is a vertical system of dispute resolution where the parties operate at different levels. Similar to public or administrative law, it entails an individual investor making a claim against a sovereign entity, questioning the exercise of sovereign discretion. This makes it incompatible with the process of commercial arbitration, where disputing parties (including states) are equal counterparties to a commercial transaction.

• The structure of investor-state arbitration. First, investment treaties are structured one-sidedly to exclude counterclaims by states; this diminishes a state’s ability to take attention away from itself and focus on the investor, and excludes part of the story from the tribunal’s jurisdiction. Second, the structure of investment treaties, and how investment law has developed, allows one dispute to give rise to multiple claims under multiple treaties. Despite nascent progress involving the abuse of rights doctrine,⁹ there is no universal system for coordinating these parallel claims. This creates a structural inequality because an investor need only convince one of the parallel fora about the merits of its claims, whereas a state must successfully defend its same conduct in every parallel proceeding.
• The practice of investor-state arbitration. The timing and strategy of commencing a case is always in an investor’s hand. This sets up an initial inequality because the investor has had more time to prepare its case and attain suitable representation. The situation is aggravated by the fact that states are also burdened by budget issues, complexities arising from a federal structure, domestic politics, and personnel changes resulting in lack of institutional memory. These aspects can have a (near-)fatal impact on the constitution of the tribunal and the outcome of the arbitration. An investor, however, is not constrained by any of these difficulties.

Nonetheless, there are many inequalities which advantage the state. For instance, the state may have vast powers to grant anti-arbitration injunction through municipal courts, assert state privilege to deny document production, and initiate criminal proceedings against an investor which can, in turn, impact the collection of evidence and intimidate potential witnesses.

Taken together, these factors pose a broader question – whether the contemporary model we are using, based on commercial arbitration, is designed to address the tensions of equality in investor-state arbitration? Toby Landau QC suggested that if this question cannot be answered affirmatively, it legitimizes the need to structure a better alternative.

Effect of states’ criminal justice powers on the equality of parties

Laura Fadlallah (Associate, Bredin Prat, Paris) explored how the exercise of states’ criminal justice powers can negatively impact the principle of equality. A state can initiate criminal proceedings against an investor in various contexts, including to question the legality of the investment and its compliance with domestic laws. This can raise procedural issues. For instance, a state may – by exercise of its criminal justice powers – collect evidence through improper means or unfairly restrict an investor’s access to its evidentiary record, thereby affecting an investor’s ability to present its case.

This presents a dichotomy. On the one hand, criminal justice is at the heart of state sovereign power, which is not compromised by a state’s mere agreement to arbitrate.¹⁰ On the other hand, having offered to arbitrate, a state ought not to abuse its criminal justice powers to obstruct an investor’s right to bring a treaty claim, or generally disrupt the arbitration process.

Article 11 of the Resolution addresses this problem by obligating the parties to conduct themselves in good faith.¹¹ It also empowers arbitral tribunals to exclude evidence obtained in violation of the good faith principle, if it is essential to preserve the equality of the parties.¹² Indeed, tribunals have previously found evidence to be inadmissible for being obtained through criminal proceedings.¹³

Exceptionally, in order to protect the equality of the parties, a tribunal may recommend to the state measures concerning the effect of the exercise of its powers of criminal investigation and prosecution upon its own process.¹⁴ This power, however, is exceptional for it may interfere with a state’s sovereignty. Accordingly, before ordering a provisional measure to this effect, a tribunal must strike a delicate balance between the parties; the measure cannot unduly encroach on the state’s sovereignty and activities serving public interests.¹⁵ Instead, it may adopt other practical solutions, such as granting provisional measures for the preservation of evidence,¹⁶ and requiring states to seek leave before producing documents obtained during a criminal investigation.¹⁷

The role of counterclaims in investor-state arbitration

Harshad Pathak (Principal Associate, P&A Law Offices, New Delhi) discussed the possibility for states to bring counterclaims as a means of maintaining equality of parties in investor-state arbitration, and the difficulties involved. He noted that the emergence of investor-state arbitration coincides with the gradual decline of the colonial era; it was designed to create an enforceable, supra-national legal order that could facilitate a steady flow of investments from capital-exporting states to the newly-independent states that required foreign capital.¹⁸ Consequently, the structural framework that emerged only envisaged one claimant (i.e. the investor) and one respondent (i.e. the state). Most early-generation investment treaties were negotiated with this understanding, almost exclusively between the global north and the global south.¹⁹

Nonetheless, the contemporary perception of investor-state arbitration is evolving. One now accepts that the ability of states to institute counterclaims may serve the equality principle,²⁰ and rebalance the asymmetry arising from the investor being the perennial claimant.²¹ Article 2.1 of the Resolution states that both the state and the investor are ‘equally entitled’ to submit a claim in relation to an investment to a tribunal, subject to the terms of the instrument of consent.²²

This evolving understanding is, however, only of theoretical relevance. This is because to determine whether a counterclaim is within a tribunal’s jurisdiction, the Institut de Droit International Commission and several tribunals adopt a narrow approach that gives exclusive primacy to the language of the underlying treaty.²³ This means that unless a treaty expressly permits counterclaims, or does not use prohibitory language, the tribunal will not have jurisdiction over a counterclaim.²⁴ However, since most early generation treaties were designed with only one claimant (the investor) in mind, this narrow approach remains at loggerheads with the post-colonial foundations of investor-state arbitration.

Accordingly, unless one adopts a broader approach as has been done by some tribunals,²⁵ in most cases, investor-state arbitration is structurally incompatible with the very idea of counterclaims. It remains rooted in its historical objective, which was to ensure accountability of states, not the investor. This is an unfortunate consequence, since the notion of counterclaims holds potential to bolster the principle of equality, arrest the increasing backlash against investor-state arbitration, and allow it to move away from its post-colonial foundations.

Equality in the composition of international investment tribunals

Finally, Gabriele Ruscalla (Former Counsel, ICC International Court of Arbitration, Paris) highlighted the significance of the equality principle in the composition of international investment tribunals. The increasing criticism of the investor-state arbitration framework casts doubts on its legitimacy and democratic accountability and has led to attempts to reform various facets of investor-state arbitration, including proposals to establish a permanent international tribunal for deciding investment disputes.

Presently, investor-state arbitration recognizes the equality principle to be relevant to the composition of a tribunal at two distinct levels:

• ‘equality of treatment’ implies that a tribunal must be both independent and impartial.²⁶
• ‘equality in the appointment of tribunal members’ with each party being entitled to nominate its arbitrator.²⁷

Critically, presently, both facets of the principle of equality have the same rank. However, the proposal to put in place permanent bodies for deciding investor-state disputes alters the above understanding, effectively downgrading the principle of equality of appointment. This is also evident from the observations of the 18th Commission. On the one hand, the Commission accepts that the impartiality of the members of an international investment tribunal is an ‘indispensable prerequisite’ to the equality of the parties.²⁸ On the other hand, it notes that ‘in case of a permanent international tribunal, the principle of the equality of the parties does not require that each party retain the ability to appoint a judge’ as ‘[t]he overriding’ consideration is the independence and impartiality of the judicial body’.²⁹ It adds that the right to a fair trial does not include, as an essential component, a right to appoint members of the tribunal; ultimately, ‘the issue is one of the proper design of the constitution of such a tribunal, not the fact of its creation’.³⁰

Therefore, unlike the present design, the proposed reforms suggesting the establishment of a permanent adjudicatory body create a hierarchical divide between the two facets of the equality principle. This hierarchical divide not only raises uncomfortable questions regarding the representational legitimacy and diversity of the proposed permanent adjudicatory body, but also appears to be at variance with the experiences of some of the panel members. They affirmed that, in their experience, both investors and states regarded their entitlement to appoint an arbitrator as indispensable and as valuable as their expectations of independence and impartiality.

Conclusion

In conclusion, all panelists concurred on the following propositions: (i) the principle of equality is fundamental to investor-state arbitration; and (ii) it does not operate in the same manner as in commercial arbitration since an investor and a state are differently situated. This understanding is manifest in the various tensions of inequality inherent in investor-state arbitration framework. It remains unclear whether international investment tribunals have the necessary tools to counter these tensions. This suggests that the contemporary model based on commercial arbitration procedures requires further refinement. However, this does not imply that the establishment of a permanent adjudicatory body is a better alternative, as far as the equality principle is concerned.

The recording of the full ICC YAF session is available online.

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