The right to commence Investor-State Dispute Settlement (ISDS) proceedings is one of the most important features of modern IIAs. IIAs and investment contracts usually allow foreign investors to commence ISDS at one or more arbitral institutions, at the option of the investor. The more favoured institutions include the International Centre for Settlement of Investment Disputes (ICSID) (for investment treaty arbitration — attracting a great majority of such arbitrations), the Stockholm Chamber of Commerce (SCC), the Permanent Court of Arbitration (PCA), and the International Chamber of Commerce (ICC) (for arbitrations commenced under investment contracts). Arbitration can also take place on a non-institutional ad hoc basis under the UNCITRAL Arbitration Rules or other rules that the parties may agree upon. Even where noninstitutional arbitration is provided for in the applicable instrument, the parties often agree to transfer the arbitration to an institution for professional administrative assistance. Chapters 13 to 26 discuss various aspects of the arbitration process.

Chapter 13: The Arbitration Process

Aggrieved investors have a number of decisions to make when pursuing a claim against a respondent state based on an alleged violation of an IIA or an investment contract. Each of these decisions should be made early in the process.

At the outset, both the investor and the respondent state should consider the forum in which the arbitration of the dispute will occur, the parties and claims involved, as well as the fees and costs likely to be incurred. The choice of forum in an international investment dispute will have a significant impact on the process, and potentially the outcome of the arbitration. Investment disputes may end up before national courts, ad hoc arbitral tribunals, or various arbitral institutions. Investors should carefully evaluate all decisions with respect to the choice of forum before commencing proceedings, including all applicable treaties and contracts, as well as the appropriate parties and claims.

From the investor’s perspective, a national court is rarely a suitable forum for resolving a foreign investment dispute. If the applicable IIA or investment contract provides a choice, the dispute can be submitted to an ad hoc arbitration or an institutional arbitration. An ad hoc arbitration offers increased flexibility because it is not subject to the rules of an arbitration institution. In an ad hoc arbitration, the parties may select or develop a set of arbitration rules to guide the arbitration proceedings. In a large and complex investment dispute, the parties should generally prefer an arbitral institution for the conduct of the arbitration, and the applicable IIA or contract will usually identify one or more arbitration institutions.

A key factor that both international investors and host states must evaluate is the identity and the number of parties to the investment dispute, as well as the types of claims and defences that each party may assert. Multi-party claims are increasingly common in investment disputes. Multi-party disputes can also arise with regard to different investors and investments that may have been harmed by a single government measure. Although consolidation of such claims may be possible even in the absence of an agreement by all the parties, this practice is controversial and almost always leads to jurisdictional and logistical challenges for parties and their counsel, particularly in cases involving so-called “mass claims”.

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When deciding whether to bring an investment arbitration, an evaluation should be made of the fees and costs for the entire arbitration, which may be viewed in the context of “sunk costs” required for the investment itself. In addition to the fees and costs of counsel, experts and tribunal, as well as the time spent by the investor’s in-house staff, other “costs” may include short-term and long-term reputational costs and investment opportunity costs. Before commencing proceedings, investors should also realise that arbitral tribunals usually have wide discretion as to how to apportion fees and costs. In doing so, tribunals will consider the outcome of the case, the applicable law, the parties’ conduct, and other relevant circumstances.

Chapter 14: Choice of Counsel

All parties in an investment treaty dispute should take particular care in selecting their counsel. Specialised and experienced legal advice and representation is important in any complex high-stakes dispute. This is even more important in international investment disputes, where a confluence of substantive, procedural and political issues occur and appellate remedies are extremely limited. Strategies and approaches used in domestic court litigation are usually not well-suited for international investment arbitration proceedings. Selecting counsel should reflect this reality. It is best practice to: (1) identify and develop a pool of qualified candidates; (2) establish the proper criteria and their importance; and (3) select the most appropriate lawyer, or team of lawyers, for the entire dispute resolution process.

Chapter 15: Arbitrators — Selection and Challenge

Selection of arbitrators is one of the most important decisions that the parties make at the beginning of an arbitration. In the process of appointing arbitrators, a party should understand the applicable rules for appointment of arbitrators and for constituting the tribunal. The classic formula is a three-person arbitral panel, with each party nominating one arbitrator, and the third (the presiding arbitrator or chairperson), selected by both parties, by the two party-appointed arbitrators, or by the “appointing authority”, such as an arbitral institution. If a party fails to nominate its arbitrator, the applicable rules normally set out default procedures for appointing an arbitrator on that party’s behalf.

Since it is the arbitrators who decide the cases, a party in an arbitration should carefully select whom to nominate as its arbitrator. The party should also check the qualifications of the arbitrator selected by the other side, appointed by an arbitral institution or by the two co-arbitrators. The party should check for any potential conflicts of interest of the arbitrators in light of all relevant circumstances and the identity of the parties and their counsel, especially since the pool of arbitrators frequently appointed in investor-state cases is relatively small. For selection and challenge purposes, the party should gather as much information about the arbitrators as possible, including their involvement in prior cases, available rulings, publications, and relevant relationships.

Most arbitration rules, as well as best practices in international arbitration, require the arbitrators to disclose any circumstances that may give rise to doubts as to their impartiality or independence. For example, the arbitrators should disclose any past or present relationships with the parties. A party may challenge (propose to disqualify) an arbitrator if there are justifiable doubts as to the arbitrator’s independence or impartiality that create the appearance of bias. Useful guidance on potential grounds for challenging arbitrators is set out in the International Bar Association Guidelines on Conflict of Interest in International Arbitration.

Chapter 16: Third-Party Funding in Investment Disputes

Claimants in investor-state arbitrations are increasingly using third-party funding, which refers to the practice of using an outside company to pay for all or a major portion of the claimants’ attorneys’ fees and other expenses (including arbitrators’ and the arbitral institution’s fees) in exchange for a portion of the proceeds of an award in

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the event of success. Since third-party funding of investment disputes is a relatively recent phenomenon, it is likely that there will be significant legal developments in this area.

Investors should be aware that tribunals may require them to disclose whether they are using third-party funding and the identity of their funder. Further, due to concerns that a claimant’s third-party funder may not pay an award on costs in favour of the respondent and would be out of reach for the purpose of enforcement of the award, a very recent development is that the respondent state may request tribunals to order the claimant to post security to ensure compliance with a potential adverse award. While tribunals have been reluctant to grant such requests, the trend may change as the effects of third-party funding on investment arbitrations are more fully understood. An investor contemplating third-party funding should carefully consider the specific terms of the funding arrangement and its potential impact on jurisdictional issues. Investors should also be aware that the arbitral tribunal may take third-party funding into account when deciding on the apportionment of costs.

Chapter 17: Initiation of Claims and Relevant Timing

The vast majority of international investment arbitrations unfold in predictable stages, even though each investment arbitration features its own underlying facts and can have unique procedural milestones. The stages described in this chapter are the fulfilment of pre-arbitration requirements, the filing of the arbitration, the establishment of the tribunal, the first procedural conference of the tribunal with the parties, the exchange of documents and written submissions, the hearing(s) on jurisdiction, the merits phase (and a possibly separate damages phase), and lastly, the issuance of the tribunal’s final award.

The applicable international investment agreement(s) or investment contract(s) usually require satisfaction of certain pre-arbitration requirements. These requirements are generally meant to encourage amicable resolution of disputes and can include good faith negotiations between the parties, mediation, conciliation, and/or exhaustion of local remedies. For example, before commencing an arbitration, an investor may be required by the applicable law or agreement to wait several months from the day it notified the host state of the existence of a dispute. Although the failure to comply with the prescribed pre-arbitration requirements has usually not been fatal to the claimant bringing the arbitration, it will likely lead to the respondent state objecting to the jurisdiction of the tribunal, which in turn will cause, at the very least, additional expenses and delays.

Chapter 18: Conciliation and Mediation

Disputes, including investor-state disputes, may not need to be submitted to or decided by arbitration if they are settled amicably. As noted above, IIAs and investment contracts often require the parties to pursue consultations and negotiations in order to resolve disputes before resorting to arbitration.

Mediations are structured settlement discussions. In most cases, they are conducted by a trained mediator or panel whom the parties select mutually. The parties usually agree that the discussions will be confidential and held on a “without prejudice” basis, meaning that whatever is presented cannot be used in any subsequent arbitral or other dispute resolution proceeding. A mediator typically does not have the authority to make binding decisions; rather, the parties will present abbreviated versions of their cases through oral and documentary submissions, and the mediator will attempt to assist the parties to reach a mutually agreeable settlement of their dispute.

Conciliation is another means of attempting to reach a settlement, but a conciliator takes a more assertive role than a mediator, attempting to drive the parties towards a settlement.

Before formally requesting mediation or conciliation, investors should consider carefully the reasons for doing so, the likely time frame and the pros and cons of this process in light of the circumstances of the dispute, as well as the expected outcomes.

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Chapter 19: Interim Relief (Arbitral Tribunal and Courts)

A party initiating or involved in an arbitration may be able to obtain relief from the arbitral tribunal or a court to protect its interests pending final resolution of the dispute. Classic forms of interim protection, also known as interim relief, and provisional or conservatory measures, include orders or recommendations to maintain the status quo, preserve and collect evidence, refrain from aggravating the dispute, preserve assets, protect the integrity of the arbitral proceedings, and provide security for costs.

The party considering whether to seek interim relief should review any applicable rules regarding the circumstances that would allow a party to qualify for interim relief. Generally, the criteria for ordering interim relief are the following: (i) the movant has a reasonable possibility of success on the merits of its claim; (ii) there is a risk of irreparable harm if the relief requested is not granted, i.e., harm that cannot be compensated with an award of monetary damages; and (iii) the relief requested is “proportional,” i.e., the harm to the movant outweighs the harm to the other party if the requested relief is not granted.

It is important to bear in mind that although an arbitral tribunal may not have coercive powers to enforce a ruling on interim measures, a party disregarding such a ruling does so at its peril. In the final award, the tribunal has the authority to draw adverse inferences and award costs against the party that did not comply with the tribunal’s directive regarding interim relief.

Chapter 20: Bifurcation

Foreign investors should expect respondent states to request the bifurcation of a proceeding, i.e., to divide it into two (or perhaps three) separate phases. In a bifurcated investment arbitration, questions regarding the tribunal’s jurisdiction are examined and decided separately, before the tribunal decides questions of liability and/or the amount of damages. In other words, the tribunal examines the merits only after it confirms its jurisdiction. A tribunal is generally more likely to bifurcate the proceeding where the examination of the state’s jurisdictional objections could definitively determine whether it has the authority to proceed. In some disputes, the merits phase and the damage phase are bifurcated.

Although bifurcation may prolong the duration of the arbitration and may lead to higher overall fees and costs for the proceedings, it can serve as a mechanism for efficiently identifying key issues in a manner that assists both the tribunal and the parties to resolve the dispute in an efficient manner. In addition, if the tribunal rejects the state’s objections to jurisdiction or liability, bifurcation can also lead to a greater chance that the parties will settle their differences outside the arbitration process.

Chapter 21: Evidence

As in any adversarial legal proceeding, a party in the arbitration must be prepared to produce sufficient evidence to support its claims. It can do so through documentary evidence or witness testimony. With regard to documentary evidence, contemporaneous documents that describe events or situations will typically be a stronger form of evidence than non-contemporaneous documents. Evidence of witnesses with direct knowledge of the facts or testimony of a person in a formal/ official capacity can supplement the record in areas where documentary evidence is unavailable or unclear.

The testimony of a fact witness is normally presented in the form of a written witness statement, but it is important to keep in mind that the witness must be prepared to appear at the hearing if called for cross-examination by the opposing party or by the tribunal. Failure to do so creates a high risk that the witness’s evidence will be formally disregarded. In order to assist the parties and the tribunal to deal with technical matters or matters that require specific expertise, a party may appoint an expert who

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will produce an expert report as evidence and appear for examination at the hearing. Even where a party, and not the tribunal, appoints an expert, the expert is required to remain independent from the parties, lawyers, and the tribunal.

The arbitration process envisions a limited form of production of documents, which in many instances is guided by the International Bar Association Rules on the Taking of Evidence in International Arbitration. Document production in international arbitrations are typically less detailed and extensive than the process of discovery in US courts, but can still require significant efforts from the parties, particularly if parties raise objections to production of documents requested by their adversary. A party’s failure to comply with a tribunal’s order to produce could prompt the tribunal to draw an “adverse inference” in the award or to order costs against the party.

Despite the great significance of the evidentiary process in investor-state arbitrations, most of the applicable arbitral rules remain silent on evidentiary principles. The arbitral tribunal has a good deal of discretion in dealing with evidentiary issues. The general principle remains that the party making an assertion has the burden of supporting it. The most common standard of proof is the preponderance of evidence or balance of probabilities.

Chapter 22: Counterclaims

In certain circumstances in ISDS proceedings a state may assert a counterclaim against an investor. In assessing whether a counterclaim may be filed and its chances of success, it is necessary to examine the jurisdictional requirements for bringing counterclaims under the applicable arbitration rules. Although a few counterclaims brought by states in disputes commenced under investment contracts have been successful, counterclaims brought by respondent states under international investment agreements are seldom successful due to the fact that IIAs typically impose obligations on host states rather than foreign investors. Counterclaims under IIAs are rare, and if one is asserted, it would likely be based on allegations of investor fraud, corruption, or violations of international or domestic law. Note that the same bases might be used by the state as defences against investors’ claims.

Chapter 23: Damages and Valuation

The assessment of damages is one of the most complex features of an international investment arbitration. It normally requires counsel to engage a valuation expert and closely coordinate with the expert to develop legal arguments and quantify damages. Other experts, such as economists and investment bankers, may also have to be brought into the case. A number of issues may arise in this process, such as identifying relevant compensation standards, which may be found in an IIA (e.g., compensation for expropriation provisions), or in customary international law (e.g., the reparation principle embodied in the classic Chorzów Factory case); identification and application of a proper valuation method; and application of legal principles that that may limit the amount of recoverable compensation, such as causation and contributory fault. Also important are ancillary issues, such as calculation of interest and apportionment of the costs of the arbitral proceedings, including the parties’ attorneys’ fees.

Counsel should provide valuation experts with proper legal instructions on the applicable legal standards in order to enable them to quantify the damages properly. Various heads of recoverable damages in an investment treaty arbitration may include: fair market value of an investment, pre- and post-award interest, attorneys’ fees, and the expenses of the arbitral proceedings. Close coordination between counsel and experts, and a simplified but effective presentation of a party’s case on damages, are necessary to help increase the chances of success.

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Chapter 24: Annulment and Set Aside of Awards

Arbitral awards, including awards rendered in investor-state arbitrations, cannot be appealed like court decisions. However, where a party believes that the arbitral tribunal has committed a serious error, it can seek to “annul” an ICSID Convention arbitral award, or “set aside” a non-ICSID arbitral award in a local court. Generally, it is difficult to succeed as the thresholds for doing so are high.

The ICSID system limits the possible grounds for annulment to five categories. The losing party raises grounds 3-5 most frequently:

  1. The tribunal was not properly constituted.
  2. Corruption of an arbitrator.
  3. The tribunal has manifestly exceeded its powers. Debates continue regarding the scope of this ground, which is potentially broad. A common view, though not universally accepted, is that this ground requires either a clear lack of jurisdiction, or the tribunal’s clear failure to apply the correct law to the dispute, as opposed to an error in application of the law or a wrong factual finding.
  4. Serious departure from a fundamental rule of procedure. The focus of this ground is on the manner in which the tribunal conducted the proceeding, particularly, on whether it failed to allow the parties to adequately present their case and the seriousness of this failure.
  5. The failure of the tribunal to adequately explain in its award how it arrived at a decision on a particular issue.

If a party applies for annulment of the ICSID award within the time limits specified in the ICSID Convention, ICSID appoints a three-member ad hoc annulment committee. A separate committee is appointed for each annulment proceeding. Following a written and oral procedure, the committee determines whether the award should be annulled, and if so, in full or only in part. The decision of the committee is not subject to a further appeal or annulment. If the arbitral award is annulled, the party who won in the arbitration could resubmit the claims to a new arbitral tribunal. If the award is annulled only in part, the tribunal in the resubmitted proceedings will not reconsider the portions of the award that were not annulled.

In general, the laws and courts of the state where non-ICSID arbitrations are formally seated would govern both the arbitration itself and any set-aside action against the award. A request to set aside a non-ICSID award must therefore be made to a national court. National arbitration laws also govern grounds and procedures for setting aside arbitral awards. In this respect, many jurisdictions have adopted the UNCITRAL Model Law on International Commercial Arbitration or some variation of it. Some of the grounds on which an award may be set aside are similar to the grounds for ICSID annulment, but they also include conflicts between the award and public policy. When an award has been set aside, it will lose its legal status in the state where it has been set aside, and other states will usually not recognise or enforce the award.

Chapter 25: Recognition and Enforcement of Awards

Once a party obtains an arbitral award in its favour, it may need to compel the other party to comply with it by obtaining recognition and enforcement of the award. Recognition is the process by which a foreign arbitral award is converted into a local court judgment, while enforcement involves action by national courts to require compliance. A further procedure is the execution of the award against particular assets of the award-debtor.

The ICSID Convention makes the recognition and enforcement of ICSID awards relatively straightforward. The Convention requires that Contracting States automatically recognise ICSID awards and grant them the same legal status as final judgments of their highest court. The investor therefore only needs to present a copy of the award certified by the ICSID Secretary-General to the national courts which are obliged under the ICSID Convention to enforce any pecuniary relief, such as monetary compensation, granted in the award.

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Recognition and enforcement of non-ICSID awards are governed by the national laws of the place where recognition and enforcement are sought. Although many states are members of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, national courts have adopted various interpretations of the New York Convention’s grounds for refusing recognition and enforcement.

Whether it is an ICSID or non-ICSID arbitral award, execution of the award against particular assets of the award-debtor is governed by national law. If execution is sought against assets of a state, the state may raise the defence of sovereign immunity from execution with respect to a particular asset. To avoid this, it is advisable to try and secure an advance waiver of that immunity. Whether a specific asset is protected by sovereign immunity depends on the law and the judgment of the court in the place where execution is sought.

Chapter 26: Transparency in Investment Arbitration

Parties to an investment arbitration have a variety of reasons for keeping the process confidential, such as the protection of sensitive or confidential business information, insulating witnesses and arbitrators from public pressure, and allowing for the more efficient resolution of disputes. In recent years, however, a degree of transparency has been introduced into investor-state arbitrations, sometimes enabling non-parties to have access to the disputing parties’ submissions, to submit amicus curiae briefs after receiving leave from the tribunal, and in some cases to attend the hearing. Before initiating an arbitration, it is important for the parties to consider the applicable transparency regime in light of the particular dispute and the interests at stake.

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