Dispute Resolution, International Law, RMLNLU International Legal Essay Competition

The inclusion of Award or its Non-Enforcement in the Definition of the Investment

By:  Yash Lahoty

INTRODUCTION

The investment in different states other than the state of establishment (Parent state) is governed by International Investment Agreements (IIAs) also known as Bilateral Investment Treaties (BITs) between the contracting state parties. International Commercial Disputes are now preferably settled through international Commercial Arbitration that is specifically provided in the investment treaty itself.[1] The treaty provides for all kinds of disputes possible such dispute between an Investor and a State or even between Host State and the Parent State.[2]

The advantage of settling disputes through International Commercial Arbitration comes out during the enforceability stage of the award due to the obligation of a state under the New York Convention, 1958.  This convention is considered as the “Foundation of Obligations of states under the International Commercial Arbitration”. It makes it mandatory that an Arbitral Award be considered as an instrument capable of enforcement and recognition that conclusively determined the claims of the parties. [3]

In the end, the enforcement of an Arbitration Award gives credibility to the entire process of the arbitration and rationalize the investment, costs and time put in by the parties in a particular transaction. This is contrary to the cases where the non-enforcement of awards has not been considered as a breach of BITs.

The major argument to include an Arbitral Award in the definition of the Investment would be that the award determines the rights and obligations arising out of an investment that is clearly under the permissible boundaries of the Investment Treaty.[4] However, from the other side, the argument to not consider an award as an investment would be that an award is itself an adjudication and that cannot be brought to the tribunal because it has jurisdiction to adjudge the disputes and not the enforcement of an already adjudged dispute.[5]

INTERPRETING AN ARBITRAL AWARD

For interpretation purposes, there is no distinction to be considered between an ordinary Commercial Award and an Investment Award.  A dispute is brought to an end by an impartial arbitrator or a tribunal that is in favour of one or more parties and competent to be enforceable is generally defined as an award. To understand its legal nature, the essential elements and characteristics must be considered.

Definition and legal nature of Arbitral Awards

An Arbitral Award is a “determination on the merits by an arbitration tribunal in arbitration, and is analogous to a judgment in a court of law”.[6] A US legal dictionary defines Arbitral Award as “A decision made by an arbitration tribunal in an arbitration proceeding. An arbitral award is analogous to a judgment in a court of law. An arbitral award can be of a non-monetary nature where the entire claimant’s claims fail and no money needs to be paid by either party.”[7]

Conventions related to arbitration, rules and related laws do not give any specific definition to the term Arbitral Award. Authors have attempted to define it through its main features, mainly they rely on four essential characteristics:

(i)              Concludes the dispute;

(ii)            Disposes of parties’ respective claims;

(iii)          Maybe confirmed by recognition and enforcement;

(iv)           May be challenged in courts of the places of arbitration.

The important point to be noted is that it is treated at par with a decision of the court but since the mechanism of enforcement is in the hands of national judiciary it is cited as one of the weaknesses of the New York Convention.[8] Effective enforcement is often intervened by the judicial actions of a state.

THE THEORIES OF LEGAL NATURE OF ARBITRAL AWARDS

The legal qualifications of an award are to be considered in light of various theories about the nature of arbitration. This also leads to the debate that whether arbitration proceedings are legal or juridical in nature, which is not only a theoretical debate but has practical consequences as well in International Arbitration.[9]

(i) The Contractual Theory: This theory mainly focuses on the origin of arbitration from a specified agreement where the parties consensually refer the dispute to be resolved through arbitration.[10] The agreement, as well as the award, is enforceable, here the award is considered as an outcome of the agreement to arbitrate and the arbitrators are considered as agents of the parties.

(ii) The Jurisdictional Theory: This theory has given more consideration to the endorsement of arbitrations by the legal system of a state whether it is paralleled to the judicial functions. Comparing Judges to Arbitrators is also done whew by judges are on the public side and arbitrators are on the probate side of the same business.[11]

(iii) The Autonomous Theory: It sees the arbitration process as an entire self-sustaining system established based on the autonomy of the parties and least concerned about the Laws of the state. They are more dependent on the International Arbitration Law and Practise such as the New York Convention.[12]

(iv) The Sui Generis (hybrid) Theory: It attempts to attain a balance between contractual and jurisdictional theory by concluding that arbitration process involves characteristics of both theories wherein the arbitration agreement are to be treated as a contract but the arbitral award to be treated similarly to a decision of National Court.[13] It is considered as the most comprehensive theory.

The above theories have their focus on assessing arbitration as a dispute settlement mechanism and on similar lines, it identifies the position of enforceability of awards under those principles. However, these theories help to reach a precise definition of an arbitral award on a case-to-case basis.

Above discussion also leads to the inference that an arbitral award is not necessarily controlled by laws of the place where such agreement was made. The transnational effect of an arbitration agreement cannot be completely controlled by a legal system of one particular state that has been major ground to set aside an award granted by local courts.

VALUE OF ARBITRAL AWARDS

After ascertaining the legal characteristics of an arbitral award, it is necessary to identify their “value” from the economic perspective or the consequences of enforcement/non-enforcement of such arbitral award. According to a survey conducted by the School of arbitration, London in only 11% of the cases one of the party took the measure of proceeding to a court for enforcement of the arbitral award.[14]

Parties have sometimes satisfied their claim by agreeing to accept less than the awarded amount by a mutual settlement, this, however, does not indicate any defect in the arbitration mechanism or towards the value of the award, and it is merely an outcome of an amicable settlement between the parties to avoid the enforcement proceedings. In certain circumstances, the parties also agreed to satisfy the claims in instalments instead of paying the entire amount of award through one transaction.[15]

Use of these alternatives for enforcement of awards without approaching national courts have been developed which has been reported in the case of CMS v. Argentine Republic[16]. Concerns have also been raised about the effectiveness of the New York Convention if such settlements are taking place without any enforcement proceedings.

It is appropriate to arrive at a reasonable conclusion that says that “value” of every arbitral award is not only dependent on the enforcement but also irrespective of that. The ICSID (International Centre for Settlement of Investment Disputes) and New York Convention have considered a legal framework for enforcement internationally. These awards have been used for renegotiation of contracts to achieve legitimate economic and commercial objectives to ensure future business relationships.[17] This also highlights the fact that an arbitral award whether enforced through legal framework or otherwise do have an economic or commercial value.

AWARDS AS AN INVESTMENT

Various tribunals in several cases have examined whether enforcement or non-enforcement of an arbitral award and state interference in such enforcement proceedings could amount to a breach of Investment Treaties. In some instances, state intervention through judiciary is considered as an expropriation or the other party may invoke the State Responsibility Clause.

The protection of the arbitral award, if it qualifies as an investment, is pertinent to note under the BIT and under the ICSID Convention. Unless it falls under the definition of the investment, the jurisdiction of the tribunal is also not established.[18] Article 25 of the ICSID Convention needs to be examined in light of the definition of investment in the BIT. Many cases have considered this issue, few of which are discussed hereinafter.

Saipem SpA v. People’s Republic of Bangladesh[19]

It’s one of the first known Investment Arbitration case decisions that throw light on the issue of Responsibility of a State for Non-Enforcement of Arbitral Award. The claimant, in this case, initiated ICSID proceedings against the Bangladesh Government for breach of Article 5 of the Italy-Bangladesh BIT, which was essentially the expropriation clause.

The dispute was for a payment of construction of gas pipeline whereby the ICC tribunal as per the BIT has granted an order in favour of the Saipem SpA. The defaulting party that is PetroBangla, which was a state-owned entity filed proceedings in local High Court to set aside the decision of ICC tribunal. High Court refused to recognise the existence of ICC Tribunal Award and furthermore, it held that an award which is non-existing can neither be enforced nor be set aside.

Saipem then initiated ICSID proceedings against the Republic of Bangladesh. The major argument was that actions of PetroBangla (representing State) have deprived them of the ICC Tribunal’s Award that amounts to expropriation under article 5 of BIT. PetroBangla firstly contested the jurisdiction of the ICSID Tribunal by arguing about the existence of an Investment under article 25 of the Convention.[20]

The ICSID Tribunal applied the Salini test[21] and stated that the ‘entire operation’ has to be considered to examine the existence of investment and that would include contract, construction, retention money and also the ICC Arbitration Proceedings. Another point that was considered was whether this dispute has arisen directly out of investment under 25(1) of the BIT. ICSID noted that rights under the ICC Award arise indirectly from the investment, but the tribunal did not agree to the point that award itself is an investment; however, it held that the award would form a part of the overall investment.[22]

The tribunal held that it has jurisdiction but did not state anything about the non-enforcement due to the interference of state towards the ICC Award. However, to assess the state liability both BIT and ICSID were applied.

ATA Construction, Industrial and Trading Company v. Hashemite Kingdom of Jordan[23]

The case mainly involved an annulment of the arbitral award that was granted in favour of Claimant (a Turkish Company) and extinguishment of the arbitration agreement by a local court of Jordan, whether this amounts to Breach of Jordan – Turkey Bilateral Investment Treaty.[24] The dispute was due to the collapse of a Dike constructed by ATA on the Dead Sea for Arab Potash Company (a Jordan state-owned entity).

APC instituted arbitration proceedings under FIDIC contract between them. FIDIC tribunal decided in favour of ATA due to their counterclaims of pending payments. Soon thereafter, APC approached Amman Court for annulment of the arbitral award. The court annulled the award passed by the FIDIC Tribunal and extinguished the arbitration by applying Jordanian Arbitration Law.

ATA instituted ICSID Proceedings against the Kingdom of Jordan for violation of Jordan – Turkey BIT. The major argument of ATA was that Jordan had unlawfully expropriated its money claims and Jordan had failed to accord Fair and Equitable Treatment for investments of ATA and the FIDIC award. The contention of Jordan was that there was no investment at the time of BITs entry into force.[25]

ICSID Tribunal held that claims regarding annulment of award and denial of justice were per se inadmissible due to lack of ratione temporis jurisdiction of the tribunal and since the original dispute arose prior to the date of BIT between Jordan and Turkey. However, in Obiter Dicta the court also held that an Arbitral Award could be considered as an investment if it was expropriated by an unlawful annulment by a court of one state.[26]

Article 1(2)(a) of Jordan – Turkey Treaty states that “claims to money” is a discrete investment apart from the other original investments. Here also tribunal denied holding that an arbitral award in itself is an investment. But with respect to the extinguishment of the agreement the tribunal held it has jurisdiction as extinguishment would take right to arbitrate under article1(2)(a) because that dispute arose only after the decision of Jordanian court.

Tribunal held that Jordanian Courts wrongly applied Jordanian Arbitration Law and a valid right of the claimant was extinguished due to that. Jordan was held liable for violations of the Bilateral Investment Treaty and for not according to fair and equitable treatment to investments of the claimant company. Here also court follows the decision of Saipem case regarding the concept of entire operation to be considered for examining investment under the treaty.

GEA Group Aktiengesellschaft v. Ukraine[27]

In this case, the dispute arose from a settlement and repayment agreement where Oriana (a Ukrainian state-owned refinery) agreed to compensate a German company KCH for not performing a contract related to the conversion of fuel. This was in furtherance of the award granted by ICC Tribunal in favour of Solvadis (formerly KCH). Solvadis approached the appellate court of Ukraine to enforce the awards but it was rejected on the ground the repayment and settlement agreement was made by an unauthorised person.

This led the GEA group, which is the ultimate beneficiary of the award to initiate ICSID Proceedings in accordance with Germany – Ukraine BIT. The main allegations included expropriation, Fair and Equitable Treatment, Discriminatory National Treatment, etc. the tribunal firstly considered the existence of investment which was satisfied through conversion contract and a settlement agreement including the ICC Tribunal Award.

It noted that the settlement agreement and the ICC Tribunal Award in and of themselves could not constitute an investment. The ICSID tribunal found that findings of Saipem Case[28] are not persuasive. The ICC tribunal award and the settlement agreement was nothing more than a legal instrument that determines the rights of the parties. With respect to the settlement agreement, the Tribunal nonetheless said that it could be characterised as an investment if directly arising out of the conversion contract. Hence, all the claims of GEA are bound to fail.[29]

The claim relating to the expropriation due to the refusal of local courts to enforce the arbitral award also fails as the facts and circumstances are completely not relatable to the facts of Saipem Case because no sufficient evidence was produced by GEA to support their claims. The important point to be noted in this case is that emphasis was placed on the definition of investment with respect to the economic development ingredient as held down in the Salini Case.[30]

White Industries Australia Limited v. The Republic of India[31]

The claimant is a mining company of Australia, which initiated arbitration proceedings as per the Australia – India BIT and the UNCITRAL (United Nations Commissions on International Trade Law), due to delay by the Indian Courts in the enforcement of an award which was granted by ICC Tribunal in May 2002 in favour of White Industries. The ICC Tribunal award was a result of a dispute between Coal India and White Industries involving a supply of equipment.

In May 2002 Coal India approached Calcutta High Court for setting aside the arbitral award whereas, on the other hand, White Industries approached Delhi High Court for enforcement of the award. By 2010 none of the proceedings was heard substantially and this prompted White Industries to institute UNCITRAL Arbitration Proceedings.[32]

Major Contention of White Industries was that the Republic of India had expropriated the investments and failed to accord Fair and Equitable Treatment to the investments of White Industries. They failed to provide favourable conditions for investors to effectively assert their claims and enforce their rights regarding the investments. The UNCITRAL Tribunal considered the “investment” and found that the Salini Test was satisfied in this case.[33]

The investment would certainly include the rights of white industries under the contract and are subject to protection as afforded to the investments in the BIT. By citing GEA Group case[34] India argued the award as not to be treated as an investment. The tribunal noted that conclusion expressed by Tribunal in GEA case is an incorrect departure from the jurisprudence that is developed whereby the awards from disputes concerning investments made by investors under BIT are also considered as an investment.[35]

The reasoning in the cases of Mondev International Ltd v United States of America[36] and Chevron Corporation (USA) and Texaco Petroleum Company (USA) v Republic of Ecuador[37] were also considered where both of these provided for protection to the interests that investor’s hold and those which arise out of the original investment. The most emphasised argument of White industries was that India completely failed to provide an effective means to assert their claims.

While the proceedings in Delhi High Court was pending for nine years this does not imply that White Industries had taken all measures to prevent such delays.

Tribunal held that this delay does not amount to the denial of justice but the inability of the courts to effectively deal with the proceedings amounts to a breach of India’s voluntarily assumed obligation about providing effective means to assert rights and to enforce rights of the investors.[38]

Here the UNCITRAL arbitration Tribunal awarded full compensation to the White Industries for the loss suffered by them due to a breach of the obligations under the BIT. This recent case has set motion to the emerging trend of considering arbitral awards as being remedied by the tribunal by invoking the jurisdiction under the BIT. The compliance with the Saipem case and the Salini case was revisited and held to be mandatory for such purpose.[39]

CONCLUSION

The significance of arbitration gives too much reliability on the enforceability of the awards of the International Tribunals. The effectiveness of an arbitral award comes only after the enforceability. As we have seen in the majority of the cases, the arbitration is considered as a self-standing jurisdiction in itself and also a complete alternate judicial system.

Where the enforceability does not take place the judicial interference by local or the Diplomatic Interference becomes the last resort to be adopted by the parties. The emerging alternative of enforcement of awards through national courts are not particularly arbitration supportive as agreed by the parties through the agreement or through the Bilateral Investment Treaties. The protection of the investment under the BIT must be extended to give protection to the awards of the tribunals.

The cases as discussed above shows the changing trends among various tribunals but not settling the dispute entirely. Treating the Arbitral Award at par with the Decision of the National Court has also been the point of discussion for the tribunal in recent cases. Considering the facts and circumstances in each and every case and then adjudging the concerned disputes has become the most sought answer out of all these Tribunal cases.

The Saipem case emphasised on the concept of “Entire Operation” of the investment by also taking into account the Salini Test. The express definition in the BIT by interpretation may include the awards as an investment as property or an asset of the investor. In ATA case, the Tribunal has a similar opinion that Award is a part of the investments and the operations of the investor. The GEA case took an altogether different approach where it did not accept the settlement agreement as an investment.

The White Industries case clearly indicated that any wrongful action or inaction by judiciary regarding the arbitral award might trigger the Investment protection under the ICSID and the BIT itself. A mere disappointment by the parties is not sufficient for Investment Treaty Arbitration; the conduct of the state has to be considered to decide on the denial of justice and abuse of rights.

In all, there are five conditions that could be carved out from these Tribunal Decisions that can identify whether an award, its enforcement or non-enforcement is an investment or not.

(i) Jurisdiction of Tribunal is dependent on relevant BIT and/or the ICSID convention depending on case to case.

(ii) Tribunal has to establish whether state interference in the award invokes the definition of investment.

(iii) Judicial interference or judicial inaction regarding the arbitral award.

(iv) Judicial attitude should be tenable

(v) The assessment of the conduct of the state has to be done to identify prevalent standards under the International Law.

In other words, the Investment Treaty will not specifically provide for such award to be treated as an investment. The examination has to be done on a case-to-case basis keeping in mind the relevant facts and circumstances.

[1] Julian DM Lew, Loukas Mistelis and Stefan Kro, Comparative International Commercial Arbitration (Kluwer Law International 2003) 24-1.

[2] Crina Baltag, ‘Enforcement of Arbitral Awards against States’ (2008) 19 Am Rev Intl Arb 391.

[3] Katia Yannac-Small (ed), International  Investment Agreements: A Guide to the Key Issues (Oxford University Press 2010) 671.

[4] Christopher Duganl, Investor–State Arbitration (Oxford University Press 2008) 675-700.

[5] Emmanuel  Gaillard  and  Domenico  Di  Pietro,  Enforcement  of  Arbitration  Agreements  and International Arbitral Awards – The New York Convention in Practice (Cameron May 2008) 139.

[6] KL Bhatia, Textbook on Legal Language and Legal Writing (Universal Law Publishing Company Pvt Ltd 2010) 130.

[7] ‘Arbitral Award Law & Legal Definition’ (US Legal Dictionary) <https://definitions.uslegal.com/a/arbitral-award/> accessed 22 October 2017.

[8] R Doak Bishop, James Crawford and William Michael Reisman, Foreign Investment Disputes: Cases, Materials, and Commentary (Kluwer Law International 2005).

[9] Ashjan Faisal Shukri Daoud, ‘The Legal Nature of Arbitration Award, Its Effects and Appeal Mechanisms—A Comparative Study’ (2008).

[10] Hong-Lin  Yu,  ‘A  Theoretical  Overview  of  the  Foundations  of  International Commercial Arbitration (2008) 3 Contemp Asia Arb J 255.

[11]  Bremer Schiffbau v South India Shipping Corp Ltd [1981] AC 909, 921.

[12] Julian DM Lew, ‘Achieving the Dream: Autonomous Arbitration’ (2006) 22 Arb Intl 179.

[13] Pieter Sanders, ‘Trends in the Field of International Commercial Arbitration’ (1975) 145 Recueil des Cours   205, 233-34.

[14] School of International Arbitration, Queen Mary University of London and PricewaterhouseCoopers LLP, 2008 ‘International Arbitration Study-Corporate Attitudes and Practices: Recognition and Enforcement of Foreign Awards’ <http://www.arbitration.qmul.ac.uk/docs/123294.pdf&gt; accessed 22 October 2017.

[15] Loukas Mistelis, ‘The Settlement-Enforcement Dynamic in International Arbitration’ (2008) 19 Am Rev Intl Arb 377.

[16] CMS Gas Transmission Company v Argentine Republic [2005] ICSID Case No ARB/01/8.

[17] Boisson de Chazournes, M Kohen and JE Vinuales,  Diplomatic  and  Judicial  Means  of  Dispute  Settlement: Assessing their Interactions (The Hague, Brill 2012).

[18] M Sornarajah, The Settlement of Foreign Investment Disputes (Kluwer Law International 2000).

[19] Saipem SpA v People’s Republic of Bangladesh [2007] ICSID Case No ARB/05/7.

[20] ibid 61.

[22] Saipem SpA v People’s Republic of Bangladesh ICSID Case No ARB/05/7.

[23] ATA Construction, Industrial and Trading Company v Hashemite Kingdom of Jordan [2010] ICSID Case No ARB/08/2.

[24] Agreement between Hashemite Kingdom of Jordan and the Republic of Turkey concerning the Reciprocal Promotion and Protection of Investments (signed 2 August 1993, entered into force 23 January 2006).

[25] ibid 111.

[26] ATA Construction, Industrial and Trading Company v Hashemite Kingdom of Jordan [2010] ICSID Case No ARB/08/2.

[27] GEA Group Aktiengesellschaft v Ukraine [2011] ICSID Case No ARB/08/16.

[28] Saipem SpA v People’s Republic of Bangladesh [2007] ICSID Case No ARB/05/7.

[29] GEA Group Aktiengesellschaft v Ukraine [2011] ICSID Case No ARB/08/16.

[30] ibid 234.

[31] White Industries Australia Limited v The Republic of India [2011] UNCITRAL.

[32] Agreement between the Government of Australia and the Government of the Republic of India  on  the  Promotion and Protection of Investments (signed 26 February 1999, entered into force 4 May 2000).

[33] ibid 741.

[34] GEA Group Aktiengesellschaft v Ukraine [2011] ICSID Case No ARB/08/16.

[35] Rishab  Gupta and  Luke  Eric Peterson, ‘India Sued  by  Foreign  Investor for Investment Treaty Breach; Complaint Stems from Willingness of  Indian  Courts  to  Consider  Set-Aside  of  an Earlier Commercial Arbitration Ruling’ (Investment Arbitration Reporter, 2011) < https://www.iareporter.com/articles/india-sued-by-foreign-investor-for-investment-treaty-breach-complaint-stems-from-willingness-of-indian-courts-to-consider-set-aside-of-an-earlier-commercial-arbitration-ruling/> accessed 22 October 2017.

[36] Mondev International Ltd v United States of America [2002] ICSID Case No ARB (AF)/99/2,.

[37] Texaco Petroleum Company (USA) v Republic of Ecuador [2008] UNCITRAL, PCA Case No  34877.

[38] White Industries Australia Limited v The Republic of India [2011] UNCITRAL.

[39] ibid 7610

(Yash is currently as student at Gujarat National Law University, Gandhinagar.)