Executive Summary

Counterclaims are claims by the host state party to an investment arbitration against the investor that initiated the proceedings. In disputes where the original claims are either for breach of contract or for treaty violations, the option of filing a counterclaim gives the host state the opportunity to submit a claim against the same investor, before the same panel already familiar with the dispute, on condition that the tribunal has jurisdiction to hear the counterclaim. Successful contract counterclaims are rare. However, the arbitration strategy of investors and their counsel (for defensive purposes), as well as host states (for offensive purposes), may benefit from understanding the requirements for submission of a counterclaim. This chapter explains the jurisdictional requirements — including, among others, the consent of the parties to the submission of counterclaims to arbitration, and the close connection of the counterclaim of the original dispute— and discusses possible considerations by a tribunal to determine whether an investor has breached its obligations vis-à-vis the host state.

1.0 Introduction

This Chapter introduces the subject of counterclaims in investment arbitration. While counterclaims by host governments are uncommon, from a tactical perspective a counterclaim that has merit may provide a useful tool for a state to tip the dynamics of an arbitration in its favour.

2.0 Counterclaims in Investment Arbitration

2.1 Overview

Counterclaims are claims by the state party to an investment arbitration against the investor claimant that initiated the arbitration proceeding. Allowing a respondent to bring a counterclaim in investment arbitration promotes efficiency and practicality because it allows the same tribunal that presides over the original proceeding also to decide a related counterclaim involving the same parties, instead of forcing the state respondent to initiate a new and separate proceeding. As noted, counterclaims are rare in investment treaty arbitration and, while recently some tribunals have agreed that they may have jurisdiction to hear counterclaims, as of 2017 few states have won a counterclaim in an investor-state proceeding.1

2.2 Jurisdictional Requirements

The jurisdictional requirements for counterclaims vary depending on the applicable arbitration rules (for example the ICSID Convention and its procedural rules or the UNCITRAL Rules of Arbitration) and the instrument containing the arbitration agreement between the parties, such as a contract, a domestic investment law, or an investment treaty. Under the ICSID Convention, the three jurisdictional requirements are: (1) that the parties consent to submit counterclaims to ICSID arbitration; (2) that

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the counterclaim arise directly out of the subject-matter of the dispute; and (3) that the counterclaim be within the jurisdiction of the ICSID Convention.2 Only the first two requirements apply (using comparable language) under the UNCITRAL Rules.

Before initiating an investment dispute, investors confronted with the possibility of a counterclaim should evaluate it based upon the three criteria presented above: whether they have consented to counterclaims, whether the counterclaim arises directly out of the subject-matter of the dispute, and whether the counterclaim falls within the jurisdiction of the relevant treaty or contract. If the answer to these three questions is yes, the investors should weigh the probable economic cost to it of a successful counterclaim, and the likelihood of success, before initiating arbitration.

2.2.1 Consent

Under the UNCITRAL rules, the consent requirement is met the moment it is clear that the parties have agreed to solve their dispute under the UNCITRAL Rules, i.e., a contract containing an UNCITRAL arbitration clause normally implies consent to the submission of a counterclaim under those rules.3 This is not the case under other arbitration rules. If an arbitration concerns a contract-based dispute, typically the consent to submit counterclaims to arbitration may be found in the contract. If the arbitration is a treaty-based arbitration, the host state’s consent may be established by virtue of the BIT on which the host state’s counterclaim is based. This means that the investor’s consent may be less straightforward since it is not a party to the BIT.

Under the prevailing view of investment tribunals, a Request for Arbitration may be interpreted as the investor’s acceptance of the host state’s offer to arbitrate not only claims by the investor, but also counterclaims by the host state,4 if the BIT language supports this interpretation.5

A minority view, however, is that, when the two state parties to a particular BIT consent to ICSID jurisdiction, the consent from an investor to arbitrate counterclaims that is required by Article 46 is “ipso facto imported into any ICSID arbitration which an investor then elects to pursue.”8 According to this theory, merely by filing a Request for Arbitration — and regardless of the specific language of the dispute resolution clause in the BIT9 — the claimant has consented to counterclaims.10

2.2.2 Arising Dierctly out of the Subject Matter of the Dispute or having a Close Connection with the Primary Claim

Once the parties’ mutual consent is established, a tribunal needs to identify the subject-matter of the original dispute to determine whether the counterclaim arises out of that same dispute. This exercise is relatively straightforward in disputes arising from a contract between the investor and the state because the host state’s counterclaim typically would be that the investor had breached the contract.

On the other hand, because investment treaties typically impose obligations on host states rather than on investors, treaty counterclaims are rare. In those occasional cases, the counterclaims likely include allegations of the investor’s fraud, corruption, or violations of international or domestic law.11 Exceptionally, tribunals have upheld jurisdiction and concluded that treaty counterclaims have arisen out of the subject matter of the dispute.12

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Under the UNCITRAL Rules of Arbitration, the standard analogous to a dispute arising directly out of the subject-matter of the dispute is the requirement that the counterclaim have a close connection with the primary claim. Given that consent is implied from the parties’ agreement to arbitrate their dispute, this is the central requirement for counterclaims under these rules.16

2.2.3 Otherwise Within the Jurisdiction of the Centre

The condition that the counterclaim be “otherwise within the jurisdiction of the Centre”, which is specific to the ICSID Convention, requires that the counterclaim be consistent with the jurisdictional elements of ICSID Arbitration — i.e., that there be: (1) a legal dispute, (2) arising out of an investment, (3) that such dispute be between an investor of an ICSID state party and an ICSID state party, and (4) that those disputing parties express their consent to arbitration in writing.

Investors should be aware that as a consequence of the close connection requirement between the original claim and the counterclaim, should the investor’s claim fall outside the jurisdiction of the Centre, for example due to acts of corruption or fraud when the investment was made, the host state’s counterclaim would also fall outside the Centre’s jurisdictional reach.

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2.3 Merits

Should the tribunal declare that a counterclaim is within its jurisdiction, it would address the merits of the counterclaim. In a contract-based arbitration, whether the counterclaim has merit would be determined by whether or not the claimant has breached the contract. By contrast, a treaty-based arbitration might require an analysis of whether while operating and managing the investments after they were made in the host state, the investor breached general principles and obligations under international law — such as good faith, and the prohibitions of corruption and fraud22 — or under the domestic law of the host state.

Notes

1
1. In 2017 Ecuador obtained damages under counterclaims in Burlington Resources Inc. v Ecuador, ICSID ARB/08/5, Decision on Counterclaims (2017). Burlington based its jurisdiction in the claim on both a contract and a BIT. Although Burlington initially stated that it would challenge the Tribunal’s jurisdiction over the counterclaim, the Parties eventually executed an agreement whereby Burlington accepted the jurisdiction of the Tribunal over the counterclaims. Id. at para. 6. Ecuador had sought more than US$2.6 billion for “tremendous environmental harm” caused to its oil fields as counterclaim. The Tribunal awarded approximately US$41 million to Ecuador. Id., paras. 55, 60, and 1099. See also Perenco Ecuador Ltd. v Ecuador, ICSID Case No. ARB/08/6, Decision on Remaining Issues of Jurisdiction and on Liability (2014), para. 713, and Interim Decision on the Environmental Counterclaim (2015), paras. 317-318, 610, where the Tribunal upheld Ecuador’s environmental counterclaim and where, at the time of writing (December 2017), the parties were waiting for a determination by an independent expert of the value of the damage suffered by Ecuador. Jurisdiction in this dispute was upheld on the basis of a BIT and various contracts.

2
2. Convention on the Settlement of Investment Disputes between States and Nationals of other States, Article 46, 18 March 1965, https://icsid.worldbank.org/apps/ICSIDWEB/icsiddocs/Documents/ICSID%20Convention%20English.pdf. (“Except as the parties otherwise agree, the Tribunal shall, if requested by a party, determine any incidental or additional claims or counterclaims arising directly out of the subject-matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre.”)

3
3. Rules of Arbitration (UNCITRAL 2013), Article 1(1) (“Where parties have agreed that disputes between them in respect of a defined legal relationship, whether contractual or not, shall be referred to arbitration under the UNCITRAL Arbitration Rules, then such disputes shall be settled in accordance with these Rules subject to such modification as the parties may agree.”) Article 21(3) (“In its statement of defence, or at a later stage in the arbitral proceedings if the arbitral tribunal decides that the delay was justified under the circumstances, the respondent may make a counterclaim or rely on a claim for the purpose of a set-off provided that the arbitral tribunal has jurisdiction over it.”)

4
4. See Spyridon Roussalis v Romania, ICSID Case No. ARB/06/1, Award, paras. 775, 866 (7 December 2011).

5
5. Id.

6
6. Hesham T. M. Al Warraq v Republic of Indonesia, UNCITRAL, Final Award, para. 460 (15 December 2014) (“Al Warraq”].

7
7. See the Agreement on Promotion, Protection and Guarantee of Investments amongst the Member States of the Organization of the Islamic Conference. See also Al Warraq, paras. 660-667.

8
8. Spyridon Roussalis v Romania, ICSID Case No. ARB/06/1, Award, (7 December 2011) (Declaration of W. Michael Reisman). According to this declaration, the consent from an investor to arbitrate counterclaims is automatically imported.

9
9. See Antoine Goetz v Republic of Burundi [II], ICSID Case No. ARB/01/2, Award, paras. 278-79 (21 June 2012) (French original).

10
10. Id.

11
11. Gustav. F W Hamester GmbH & Co KG v Republic of Ghana, ICSID Case No. ARB/07/24, Award, para. 356 (18 June 2010); Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v Argentina, ICSID Case No. ARB/07/26 (“Urbaser”), para. 1151 (8 December 2016).

12
12. See Urbaser, para. 1151.

13
13. Id.

14
14. Id.

15
15. Id. para. 1206

16
16. Saluka Investments B.V. v Czech Republic, UNCITRAL, Decision on Jurisdiction over the Czech Republic’s Counterclaim, paras. 47-82 (7 May 2004).

17
17. Id. paras. 47-82 (7 May 2004).

18
18. Id. paras. 50-57.

19
19. Id. para. 79.

20
20. Metal-Tech v Uzbekistan, ICSID Case No. ARB/10/3, Award, para. 110(ix) (4 October 2013) (“Metal-Tech”).

21
21. Metal-Tech, para. 411.

22
22. See J.A. Rivas, “ICSID Treaty Counterclaims: Case Law and Treaty Evolution”, in Reshaping the Investor-State Dispute Settlement System: In Search of a Roadmap, 820-825 (Jean Kalicki and Anna Joubin-Bret, ed., 2015).

23
23. Al Warraq, paras. 670-71.