Executive Summary

Bifurcation can be an effective tool for dividing and prioritising an arbitration into discrete phases — usually jurisdictional, merits, and/or damages phases. When considering whether an arbitration should be bifurcated, the parties and the tribunal should consider the procedural and substantive advantages and disadvantages for doing so.

1.0 Introduction — Definition of Bifurcation

Bifurcation is the term used to refer to the division and prioritisation of a proceeding into distinct phases. In investor-state arbitrations, bifurcation is most often used to separate jurisdictional issues from merits (or liability) issues. But bifurcation can also be used to separate the merits phase from the damages (or remedies) phase of an arbitration. In rare circumstances, bifurcation can even give way to trifurcation.1

Early in a proceeding, every claimant and respondent should evaluate whether bifurcation (or trifurcation) is appropriate and/or advantageous and, if so, the process for obtaining that result.

2.0 Rationale for Bifurcation

Bifurcating or trifurcating an arbitration into discrete phases can (1) improve the efficiency of the decision-making process and (2) reduce fees and costs. By streamlining the various issues in dispute into a preferred sequence, the parties and the tribunal can focus on a narrower subset of questions and considerations during each respective phase. Deciding certain threshold issues at an early stage may also avoid unnecessary expenses, by reducing the number of relevant issues in dispute, and ultimately result in faster resolution of the entire arbitration. As the Tribunal in Accession Mezzanine Capital v Hungary stated, the “overarching question” regarding bifurcation is “whether fairness and procedural efficiency would be preserved or improved.”2

In Tulip Real Estate v Turkey,3 for example, the Tribunal rejected bifurcation of two of the objections raised by Turkey, finding that the issues it would need to consider would be “intimately linked” to the merits, and therefore bifurcation would not serve procedural economy. However, the Tribunal ordered bifurcation with respect to Turkey’s final objection (that the claimant had failed to respect the BIT’s mandatory negotiation period), because that issue could be decided discretely, and if decided in favour of Turkey, it would avoid the possibility of hearing the entire case only to find that a necessary prerequisite for arbitration had not been met.4

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Although there is no general presumption in favour of bifurcation, it is common for tribunals in investor-state disputes to divide and decide jurisdictional matters on a preliminary basis.5 By contrast, investor-state tribunals are generally inclined to bifurcate the merits and damages phases only when unique circumstances are present. For example, in Suez v Argentina, the Tribunal explicitly acknowledged that bifurcating liability and damages “is not common” in ICSID proceedings, but nonetheless ordered bifurcation on its own initiative, citing the “complexity of the case and the extraordinarily voluminous record” as well as judicial economy.6

3.0 The Procedural Basis for Ordering Bifurcation

There are three ways to bifurcate an arbitration proceeding: (1) by the mutual consent of the parties; (2) by request of one of the parties; or (3) by the tribunal’s own initiative.

Tribunals are generally given broad discretion to conduct proceedings as they see fit and to ensure efficiency and economy, so long as the parties are treated equally.7 Article 41(2) of the ICSID Convention provides tribunals with the power to decide a jurisdictional issue “as a preliminary question or to join it to the merits of the dispute.”8 In addition, the ICSID Arbitration Rules and the Additional Facility Arbitration Rules (which are applicable when an investor-state dispute falls outside the scope of the ICSID Convention) expressly permit tribunals to “suspend the proceeding on the merits” if a formal objection relating to the dispute is raised.9 The Additional Facility is also discussed in Chapter 10.

In Accession Mezzanine Capital v Hungary,10 for example, the Tribunal ordered bifurcation pursuant to Article 41 of the ICSID Convention and Rule 41 of the ICSID Arbitration Rules, because the jurisdictional issues Respondent raised “deserve[d] a focused examination in a separate phase that could either make a merits phase unnecessary or sharpen many factual issues should the Tribunal reach the merits.”

Given the increase in the number of investment arbitrations under the ICSID Convention, and the unfamiliar or tenuous jurisdictional foundations on which these arbitrations are sometimes brought, respondent states often object on jurisdictional grounds. Thus, claimant investors should expect to expend time and resources resolving threshold jurisdictional issues, which may or may not be bifurcated from the merits phase of the arbitration.

In deciding whether to order bifurcation, tribunals must balance the rights of the parties and consider a number of factors, such as:

  • The merits of the jurisdictional (or other) objection(s);
  • The effect that bifurcation may have on document requests and document exchange (if allowed);
  • Whether bifurcation would result in greater convenience to witnesses, the parties, or the tribunal;
  • Whether bifurcation would materially expedite the proceedings and conserve resources; and
  • Whether the issues relevant to each phase (jurisdiction, merits and damages) would overlap in such a way as to make bifurcation impractical or unfair.

In Glamis Gold, Ltd. v U.S.A.,11 a NAFTA/ICSID dispute conducted in accordance with the UNCITRAL Arbitration Rules, the Tribunal engaged in an analysis of these factors and rejected the respondent’s request for bifurcation, ruling that (1) the respondent’s first objection was “not a plea as to jurisdiction” and therefore lacked merit, and (2) the respondent’s second objection would require the Tribunal to resolve factual issues “so intertwined with the merits that it is very unlikely that there will be any savings in time or cost” from bifurcation.

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If, after deciding to bifurcate an arbitration, the tribunal finds that it lacks jurisdiction, the tribunal will issue a final award dismissing the arbitration on that basis. That final award is then subject to the enumerated post-award mechanisms available under the applicable convention or treaty (e.g., annulment in ICSID proceedings which is discussed in Chapter 24). On the other hand, if the tribunal finds that it possesses jurisdiction, it will issue a reasoned decision or award on jurisdiction, and the arbitration will proceed to the merits and damages phases.

4.0 Strategic Considerations For and Against Bifurcation

There are a number of strategic factors that parties considering bifurcation should analyse depending on their respective positions in the arbitration. The proper outcome for each of these factors is, of course, highly fact-dependent.

First, despite bifurcation’s purported benefit of promoting efficiency, in practice bifurcation may, in certain circumstances, create greater inefficiency. For example, an ICSID tribunal’s decision to address jurisdictional objections as preliminary questions, separate from the merits, may add significant length to the duration of the arbitration. According to data published in 2011, ICSID proceedings that were bifurcated and reached final award took an average of about seven months longer to conclude than unbifurcated cases.12

Second, although swift disposal of certain threshold issues will likely result in cost savings for the parties, including their legal fees, there is a risk that developing and preparing submissions on one or two discrete issues in a preliminary phase may consume as many resources as doing so for multiple issues as part of a single proceeding.

Third, because bifurcation requires a tribunal to issue decisions or awards on different aspects of the dispute one after another, it may, in certain circumstances, offer the parties a better opportunity to negotiate a settlement. Parties may alter their outlook on their respective chances of success (and their corresponding willingness to settle) after the tribunal has decided or narrowed certain preliminary issues. For example, due to political and policy considerations, respondent states are typically reluctant to settle disputes without first having a third party (i.e., the tribunal) acknowledge that it does have jurisdiction.

Once the tribunal determines that it is competent to hear the merits of the dispute, the chances of the case settling before the merits hearing may increase significantly.

Fourth, if parallel proceedings are pending before a national court that are contingent upon or intertwined with the arbitral tribunal’s resolution of certain issues, it may be in the interest of one or more parties for the tribunal to rule on those issues as early as possible. An early ruling in these circumstances may provide more clarity and narrow certain aspects of the parallel national court proceeding.

Fifth, parties should be aware of how bifurcation may affect the substantive presentation of the dispute going forward. For example, in deciding to bifurcate, the tribunal must be careful to avoid ambiguity or confusion about what issues are “in play” in each phase, so as to prevent one party from presenting legal arguments or evidence during an earlier phase in such a way that may prejudice or unfairly disadvantage the other party in later phases. Conversely, although a tribunal may determine in a preliminary phase that certain issues appear ripe and easily capable of disentanglement from the rest of the dispute, the natural progression of the arbitration may eventually reveal that isolating and trying to resolve those issues at an earlier stage was imprudent.

For the reasons discussed in this section, in the right circumstances, bifurcation can serve as a useful mechanism for identifying and addressing key issues in a manner that will assist the tribunal and the parties to resolve an investment dispute.

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Notes

1
1. In Fraport v Philippines, the Tribunal opted for a unique approach to bifurcation, when it divided the issues of jurisdiction and liability into a single, initial phase, and the issue of damages if required, into a subsequent phase. The Tribunal determined that the claimants failed to establish ICSID jurisdiction and issued an award to that effect, without having to analyse the liability or quantum issues. See Fraport AG v Republic of the Philippines, Award, ICSID Case No. ARB/03/25, 16 August 2007.

2
2. Accession Mezzanine Capital L.P. v Hungary, Decision on Respondent’s Notice of Jurisdictional Objections and Request for Bifurcation, ICSID Case No. ARB/12/3, 8 August 2013, at para. 38.

3
3. Tulip v Republic of Turkey, Decision on the Respondent’s Request for Bifurcation Under Article 41(2) of the ICSID Convention, ICSID Case No. ARB/11/28, 2 November 2012.

4
4. Similarly, in Kardassopoulos v Georgia, the Tribunal addressed two of the respondent’s three jurisdictional decisions in a preliminary decision, but waited to decide the final objection on temporal jurisdictional grounds, since the Tribunal could only determine whether the alleged misconduct occurred after the BIT’s entry into force after a final hearing on the merits. See Kardassopoulos v Georgia, Decision on Jurisdiction, ICSID Case No. ARB/05/18, 6 July 2007.

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5. A 2011 review of 174 ICSID cases revealed that 45 of those proceedings had been bifurcated, which equals a “bifurcation rate” of approximately 26%. See Lucy Greenwood, “Does Bifurcation Really Promote Efficiency?”, 28(2) Journal of International Arbitration 105-111 (2011).

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6. Suez v Argentina, Decision on Liability, ICSID Case No. ARB/03/19, 30 July 2010, at paras. 272, 273; see also, Siag v Egypt, Procedural Order No. 3 (reprinted in part in Award), ICSID ARB/05/15, June 1, 2009, at para. 116.

7
7. See, e.g., UNCITRAL Rules Article 17(1); ICC Arbitration Rules Article 22.

8
8. ICSID Convention Article 41(2); see also UNCITRAL Arbitration Rules Article 23(3).

9
9. See, e.g., ICSID Arbitration Rules Article 41(3); ICSID Additional Facility Arbitration Rules Article 45(2). Both the ICDR Arbitration Rules and the ICC Rules of Arbitration explicitly reference bifurcation as a mechanism tribunals can use in conducting the proceedings. See ICDR Arbitration Rules Article 20(3); ICC Arbitration Rules, Appendix IV. (Case Management Techniques).

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10. Accession Mezzanine Capital L.P. v Hungary, Decision on Respondent’s Notice of Jurisdictional Objections and Request for Bifurcation, ICSID Case No. ARB/12/3, 8 August 2013, para. 39(2).

11
11. Glamis Gold, Ltd. v U.S.A., Procedural Order No. 2, UNCITRAL, 31 May 2005, at paras. 23, 25.

12
12. Greenwood, supra note 5, at 105–111.