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Executive Summary

Aggrieved investors have a number of decisions to make when pursuing a claim against a respondent state based on an alleged violation of that investor’s treaty or contract rights. At the outset of the dispute, both the investor and the respondent state should consider the forum in which the dispute will take place, the parties and claims involved, and the fees and costs likely to be incurred (and potentially recovered) in connection with any international investment arbitration.

1.0 Introduction

This chapter discusses a number of preliminary matters regarding the initiation of the arbitration process in an investment treaty dispute, with chapters that follow discussing the process in greater detail. Section 2 of this chapter provides a broad overview of choice of forum; Section 3 provides an overview of issues relating to multiple parties and claims, and Section 4 provides an overview regarding fees and costs.

2.0 Choice of Forum

The choice of forum in an international investment dispute will have a significant impact on the process, and potentially the outcome, of that dispute. Investment disputes may end up before: (1) national courts, (2) ad hoc arbitral tribunals, or (3) various forms of institutional arbitration.¹ Arbitration under the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (the “ICSID Convention”) is by far the most common method for resolving investment disputes, but is just one of many alternatives (described in Section 2.2 below).

From a temporal perspective, an investment arbitration, like an international commercial arbitration, can arise in two ways. Either an arbitration agreement will exist before the dispute arises, or the parties will prepare a “submission agreement” after the dispute arises. Once a dispute arises, it is almost always difficult for the parties to agree on details of a dispute resolution process, so submission agreements are a far less common mechanism for arbitrating disputes.

The availability of a wide range of forums for the resolution of a particular investment dispute can lead to costly proceedings before reaching the merits of the dispute. A well-drafted dispute resolution clause — whether contained in an agreement, a treaty, or a local law — will limit the uncertainty.

2.1 National Courts versus Investment Arbitration

In the absence of an applicable arbitration agreement, investment disputes between states and private parties will be subject to the jurisdiction of national courts.² In many cases, national courts are not a suitable forum for resolving foreign investment disputes. National courts of the host state may be, or at the very least may be perceived to be, partial towards the host state or may lack sufficient expertise with the

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types of international investment issues necessary to resolve the dispute effectively. In addition, national courts of certain states may apply uniquely unfavourable interpretations of international law or procedural or jurisdictional limitations relating to sovereign immunity.

Because litigation in some national courts after an international investment dispute has arisen can compromise an investor’s interests, an investor should ensure that it has carefully examined its legal rights and remedies with respect to the host state before making its investment. In particular, if doubts exist about the neutrality of domestic courts, the investor should endeavour to make sure that if a dispute arises, that investor has the right to bring an arbitration rather than being forced to seek redress in those domestic courts.

Unlike international commercial arbitration, which requires that one of the parties to a contract invoke an arbitration agreement (or clause) in the contract, it is not necessary for the disputing parties to have any contractual relationship in an investment dispute. An arbitration agreement in this context may be formed when a foreign investor exercises its rights under a unilateral promise by a state to consent to arbitrate disputes under a national investment law, an investment treaty, an investment chapter of a free trade agreement, or an investment contract.³

Investment arbitration can arise from a state’s unilateral offer of consent to arbitrate in an investment law, as well as bilateral or multilateral investment treaties or commercial agreements. Look to all sources to determine whether there has been an offer to arbitrate. That offer may then be accepted by a qualifying investor through the initiation of an arbitration.

If an agreement to arbitrate exists, then the decision whether to pursue an international arbitration or to bring an investment dispute before domestic courts will usually be addressed by an investment treaty or the arbitration agreement itself. For example, the ICSID Convention and most bilateral investment treaties have effectively abolished the requirement that local remedies be exhausted5 and replaced it with the principle that a state’s consent to investor-state arbitration essentially waives that requirement. Consequently, once a host state and a national of a state that is a party to the ICSID Convention refer their dispute to ICSID arbitration, their consent excludes other local remedies.

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Moreover, certain investment treaties contain a “fork-in-the-road” provision, which requires that an investor make an affirmative, definitive and final choice between submitting the dispute to the host state’s domestic courts or to an international investment tribunal. In these cases, loss of access to international arbitration would typically apply only if the parties and the cause of action in the two proceedings were identical.⁶ Although investment treaties do not typically contain both an exhaustion of local remedies and a “fork-in-the road” provision, an investor must nonetheless evaluate all of the applicable treaties and contracts before initiating any action in national courts or risk losing its right to arbitrate against the respondent state. “Forkin- the-road” provisions are discussed in more detail in Chapter 11.

In certain instances, bringing a claim before national courts can preclude an investor from later pursuing international arbitration. Investors should carefully evaluate all relevant decisions with respect to choice of forum before commencing proceedings, all applicable treaties and contracts, as well as the appropriate parties and claims to be brought before any national court or arbitral proceeding.

2.2 Ad Hoc Arbitration v Institutional Arbitration

As part of the decision to bring an arbitration against a host state, an investor must evaluate whether the arbitration will be an “ad hoc” arbitration or one facilitated by an arbitral institution, such as the International Centre for the Settlement of Investment Disputes (ICSID) (an institution exclusively devoted to investment arbitration).ICSID, which is one of the five organisations of the World Bank Group, is the leading institution that oversees the administration of international investment arbitrations. It provides significant institutional support to its users in the form of facilities for the arbitration of disputes, lists of possible arbitrators, registration and screening of arbitration requests, assistance in constituting tribunals and conducting proceedings, hearing venues, and rules and regulations.9 The Washington (ICSID) Convention also attempts to prevent the obstruction of the proceedings by a recalcitrant party by, for example, providing for appointment of arbitrators in case a party fails to do so,¹⁰ empowering tribunals to rule on their own jurisdiction,¹¹ providing that awards are binding and enforceable,¹² and limiting the grounds by which an award can be annulled.¹³

Provided that the treaty or agreement in question permits it, parties may submit their disputes to arbitration before other arbitral institutions such as the American Arbitration Association (AAA), the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), the Singapore International Arbitration Centre (SIAC), the Hong Kong International Arbitration Centre (HKIAC), the Permanent Court of Arbitration (PCA), the Stockholm Chamber of Commerce (SCC), among others. These institutions similarly provide rules and limited oversight to ensure smooth functioning of the proceedings, and procedural regularity, which are intended to produce an enforceable award. Practitioners should not undervalue the procedural oversight and institutional momentum that an institution may provide, particularly with a recalcitrant party. Cost factors and regional familiarity often influence the selection of these institutions. However, as explained earlier, ICSID is used far more often than these other institutions as its awards are more easily enforceable.

Ad hoc arbitration offers practitioners increased flexibility because they are not subject to the rules and oversight of an institution. In an ad hoc arbitration, the parties may

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select the UNCITRAL Arbitration Rules or another set of existing arbitration rules to guide their proceedings without the involvement of an institution, or develop their own rules.

Although ad hoc arbitration lacks institutional support and the enforcement mechanism that ICSID provides,¹⁴ ad hoc arbitration can be an effective mechanism where parties want greater autonomy over their dispute resolution process or where there may be jurisdictional barriers¹⁵ to proceeding before certain institutions.¹⁶ For example, in an ad hoc arbitration process, certain claimants may avoid the ICSID Convention definition of “investment” under Article 25 of that Convention in favour of a broader definition of “investment” that exists in many bilateral investment treaties.¹⁷

Although there are certain advantages to ad hoc arbitration, in any significant investment dispute, the parties will generally want to use an arbitral institution for the conduct of the arbitration due to the rules and oversight provided by these institutions.

3.0 Multi-Party and Multi-Claim Investment Disputes

Multi-party claims are increasingly common in investment disputes. Key factors that both international investors and host states must evaluate are 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. A claim will often be brought by different entities in the chain of corporate control for their direct and indirect interests in a single investment.¹⁸ If these entities are parties to different agreements or are incorporated in different jurisdictions, there may be different jurisdictional grounds for their claims under different legal instruments.¹⁹

In recent cases, multi-party disputes have also arisen with regard to different investors and investments that may have been harmed by a single government measure. In some cases the parties have agreed to consolidate claims.

In the absence of an agreement by the parties, consolidation of claims, while possible, may also be controversial, particularly in cases involving so-called “mass claims”. For example, after the Argentine financial crisis of 2001, a group of approximately 60,000 Italian nationals who owned bonds issued by the Argentine government collectively brought an ICSID arbitration against Argentina to recover the value of the bonds. The Tribunal ultimately accepted that it had jurisdiction to hear the claim; an eminent arbitrator on the panel, however, submitted a strong dissenting opinion questioning whether investment treaty tribunals were the proper forum to hear such mass claims.²¹

Even if the claims of multiple parties can be consolidated into a single arbitration, there are a number of logistical considerations to bear in mind. For example, a respondent state should consider:

• Whether it would rather defend multiple different cases in separate proceedings;
• Whether the separation of claims and likely increased costs associated with multiple arbitrations would deter some potential claimants with less at stake;
• How the tribunal’s decisions in independent cases may or will impact one another; and

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• The “signal” that is sent to the market by the state’s decisions.

Similarly, there are logistical issues that multiple claimants should consider when pursuing an investment arbitration. For example:

• Whether a joint representation is in the best interest of all clients;
• How to negotiate and structure a joint engagement with multiple clients, including addressing potentially conflicting interests and strategies in a single claim; and
• How fees and costs should be allocated between or among different clients with different interests or amounts at stake in the dispute.

Multi-party claims will almost always lead to jurisdictional and logistical challenges for parties and their counsel. Counsel and their clients should identify all relevant parties, their respective claims, the legal instruments under which each party will bring its claims and/or defences, and evaluate the circumstances surrounding each of these elements at a very early stage in the investment dispute resolution process.

4.0 Fees and Costs

The subject of fees and costs is, of course, a critical part of the process of resolving international investment disputes. This issue raises three general concerns: (1) the types of fees and costs, (2) the total amount of fees and costs, and (3) allocation of fees and costs between or among the parties during and after the arbitration proceedings.

4.1 Types of Fees and Costs

The total fees and costs consist of fees and costs of: (a) counsel, (b) consulting and testifying experts, and (c) the arbitral tribunal. However, these are not the only costs of the arbitration.²² Perhaps the biggest additional immediate “cost,” which both claimants and respondents must consider, is the lost time and resources of the internal legal and non-legal employees required to pursue or defend an arbitration. In addition, other “costs” may include short-term and long-term reputational costs as well as other investment opportunity costs. All of these fees and costs must be viewed in the context of the “sunk costs” that have already been incurred in connection with the investment itself.

When deciding whether to bring or defend an investment arbitration, each party should evaluate the cost of the entire case, which includes fees and costs for all legal and non-legal sources as well as all other short-, medium-, and long-term monetary and non-monetary costs.

4.2 Amount of Legal Fees and Costs

Investment disputes can be bet-the-company cases for claimants, with amounts in dispute that may materially alter national budgets for respondent states.²³ As a result, claimants and respondent states both invest significant sums to ensure they have adequate representation, competent arbitrators, and thorough proceedings.

A recent study indicated that the average arbitral tribunal’s fees and costs total approximately US$750,000, while each party incurs average fees and costs of US$4.5 million.²⁴ For an arbitration involving two parties, this means average total fees and costs of nearly US$10 million.²⁵ Tribunal fees and costs include the expenses and time of the tribunal itself along with the costs of the institution or appointing authority, as well as ancillary costs such as travel, lodging and meals. Party fees and costs include fees for legal representation and expert witnesses, as well as ancillary costs of travel, lodging, meals, translations, research, printing, and facilities, among other incidental costs.

Generally, claimants spend more pursuing their claims than respondents, but there are extreme cases where the respondents spend considerably more money.²⁶For example,

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in Jan Oostergetel and Theodora Larentius v Slovakia,²⁷ respondents incurred costs of US$16,330,000 compared to the claimants, who spent US$2,231,000. Likewise, in Libananco v Turkey, the respondents incurred costs of US$35,702,000 compared to US$24,382,000 for claimants. These cases demonstrate not only the substantial sums that parties can spend on their representation, but also the large gap that can exist between how much either side spends on a dispute.²⁸

4.3 Allocation of Fees and Costs Between or Among the Parties

The allocation of fees and costs begins with an examination of the underlying treaty or arbitration agreement, and continues with an analysis of the applicable arbitration rules (if any) and applicable national or state/provincial laws. Many investor-state arbitration agreements, and most national or state/provincial laws (to the extent they are applicable) address fees and or costs under a “fee shifting” or similar provision (where the losing party pays some or all of the winning party’s fees and costs). Conversely, treaties rarely address the allocation of fees and costs between or among the parties.

The next step is to examine the applicable arbitration rules. Depending on the specific arbitration rules, at the beginning of an arbitration, each party will generally bear its own fees and costs and half of the fees and costs of the tribunal. Nonetheless, arbitration rules can be vague as to how fees and costs should eventually be allocated between the parties and give arbitral tribunals wide discretion on how to apportion fees and costs. For example, Article 61(2) of the ICSID Convention authorises tribunals to allocate fees without setting out any criteria for the allocation.

On the other hand, Article 42(1) of the 2010 UNCITRAL Arbitration Rules state that “[t]he costs of arbitration shall in principle be borne by the unsuccessful party or parties” but provides that “the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable taking into account the circumstances of the case.” Other rules refer to factors such as the outcome of the case in terms of failure and success of claims, the parties’ conduct, or other “relevant circumstances”.²⁹

Investors should realise before commencing proceedings that arbitral tribunals usually have wide discretion as to how to apportion fees and costs. Tribunals may consider the applicable law, the outcome of the case, the parties’ conduct, and other relevant circumstances.

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Notes

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