THE SPECIFICITIES OF MIXES ARBITRATION (Private actor V State)

Question 1

Introduction

Answer 1

To study the specialities of mixed arbitration, we must talk about :

• the development and bassi’s of mixed arbitation
• instituting mixed arbitation
• conducting mixes arbitration

Question 2

Development and basis of mixed arbitration

Answer 2

The development of mixed arbitation refers to :

• history of the development of mixed arbitation
• Modern mixed arbitration
• The nature of mixed arbitration

Question 3

History of the development of mixed arbitration

Answer 3

Traditionally, there were only interstate disputes and thus, only interstate mechanisms of settlement. Development of mixed arbitation arises with the protection of foreign private rights when they settle in another country. 2 questions :

• the substantives rules
• the remedies

Question 4

The substantives rules

Answer 4

Does international law involves private persons ?

• At first, international law was only meant to interstate relations, but when European countries had an interest in protecting their nationals settled abroad, International law began to concern private persons.
• Emergence of the rule concerning the minimum standard of treatment. (MST). According to this standard, domestic law of the host State cannot fall below the minimum standard of treatment established by International law -> foreign investors shall be provided a treatment corresponded at the very least to that minimum.
• Customary rule since the Barcelona traction case.

Question 5

The content of the minimum standard of treatment rule

Answer 5

the MST includes :

• National treatment
• The protection of acquired rights : implies for instance access to passivities, contractual rights in national law..
• The protection of property : protection against expropriation. Expropriation is not forbidden, states has the right to expropriate an investor.
• The protection of contractual rights in the situation when there is a contract between the foreign investor and the State :
• Access to justice

Question 6

The remedies

Answer 6

When a State does not respect its obligations under the MST, the investor could seek for :

• national court recourse :
• the gunship diplomacy
• Diplomatic protection
• The mixed claims commissions

Question 7

1st solution : national court recourse :

Answer 7

The foreign turns to a national court to protect its rights : but it was rather unreliable in most of the emergent states (lack of trust/independence, ability of local judges..).

Question 8

2nd solution : the gunship diplomacy

Answer 8

the gunship diplomacy : if there were no remedies for nationals established abroad, the State of nationality could set the army and ask for damages (happened a lot between European countries and Latin American countries in the twenty century).

Question 9

3rd solution : diplomatic protection

Answer 9

• Concept : the possibility for the state to bring up to an international level a claim against another state on behalf of its citizens. Landmark case : CPI, Mavrommatis case (Greece/UK), 1924 : “By taking up the case of one of its subjects and by resorting to diplomatic action or international judicial proceedings on his behalf, a State is in reality asserting its own rights — its right to ensure, in the person of its subjects, respect for the rules of international law” -> dispute became an interstate dispute.
• Disadvantages :
  • it’s a discretionary power of the State to use diplomatic protection or not
  • A specific condition needs to be satisfied : the nationality condition = only one State can protect its citizens, the State of nationality. It could raise problems for companies establishes in one State but controlled by investors from another state -> which state can use DP ?
  • A long process : the individual must exhaust all domestic remedies (could take a few years).
  • Damages and compensation : by making a claim before the judge, the State is protecting its own rights. So damages will only concern the right of the State to see international law respected. If the State wins the case, the compensation goes to the state and not directly yo the individuel/company concerned.

Question 10

4th solution : the creation of mixed claims commissions

Answer 10

• Presentation : predecessors of the arbitration mechanism. First mixed claims commission established by the treaty of Jay, 1975 to deal with damages caused by British soldiers to the American citizens and the other way around. Example : USA/Mexico commissions about damages to the US citizens establish in Mexico during an armed conflict.
• Composition : commissioners representing both states and an Umpire from a third State (sur arbitre). State control the procedure and the decision to establish such a commission is a discretionary power of the State concerned by the conflict. -> Disadvantage because :
  • people who were harmed didn’t have automatically a remedy, they needed to wait for diplomacy to work (to states to agree on the creation of these commissions).
  • Such commissions were created after the emergence of a conflict and the violation of the investor’s rights. -> there were no legal certainty/security when someone decided to invest in another country, no insurance about the protection of their rights.
  • Success : the use of these commissions remained useful ; in the hostages case, both States decided to establish a specific tribunal to hear claims of US citizens ; during the golf war, the UN adopted a resolution establishing the UN compensation commission : same mechanism but with a broader personal jurisdiction because every national of every member state of the UN could make a claim for compensation against Irak after the invasion of Koweït ; Mixed claim commission between Érythrée/Ethiopia, 2007 to compensate any harm caused during the war between the two countries.

-> conclusion : mixes claims commissions were at the origin of the great amount of international cases, they contributed to the development of general international law and to the recognition of customary rules and general principal of law AND to the development of modern mixed arbitration.

Question 11

The development of modern mixed arbitration

Answer 11

Other means were solutions established after the emergence of a problem. Investors always have to endure the risk that if something went wrong, they will have to support the risk of having no remedy. -> if was accepted at the beginning (for small businesses), BUT it became much more complicated to accept that kind of risk in the context of modern international economic relations.

The development of mixed arbitration was the consequence of two concurrent phenomenon :

• the development of international institutions dedicated to arbitration/dispute resolution
• The evolution of international rules applicable to foreign investments

Question 12

Institutional development

Answer 12

• International arbitration is not new but was firstly dedicated to commercial arbitration (between private parties) in order for States to regulating commercial arbitration.
• Then, mixed arbitration were instituted = arbitration between a State party on one side and a private parties on the other side in order for States to develop international economic relations + protect interests of companies from developed countries.
  Main example : the Washington Convention, 1965 on the settlement of investment disputes between States and nationals of other states.
  • It created the ICSID (international center for the settlement of international disputes).
  • key role in the development of mixed arbitration between investors and States. It granted to foreign investors access to justice = it was easier for them to assume the risk of an investment abroad because they were reassured on the existence of an international body to obtain damages.
  • Specificity : private investors can directly make a request against a State and ask for the creation of an arbitral tribunal to solve their dispute (≠ diplomatic protection).

Question 13

The evolution of investment rules

Answer 13

• At first, the substantives rules protecting international investment were States contracts (≠ treaties) = specific contract adopted between a foreign investor and a host State to protect big investments : arises issues as for the national law applicable -> the ICSDI dealt with this contracts by applying both national law and international standards.
• Then the BIT (bilateral investment treaties) appeared that contain the same sort of provision :
  • fair and equitable treatment : the State will have to treat an investor in a fair, equitable and predictable manner.
  • Full protection and security : about the physical protection of an investment, the State cannot just destroy it, it must adopt positive legislation protecting foreign investments.
  • National treatment : non discrimination clause between national and foreign investors.
  • Most-favoured nation treatment : clause that means that when an investor from a country A is more protected that the one from a country B, the investor from the country B can expect to be protected/treated as well as the investor from the country A. The State must align treatment for all foreign investors on the best treatment it offers to the countries.
  • Prohibition of expropriation and nationalisation : BIT prohibit unlawful expropriation and nationalisation : there are not prohibited, but there are strictly regulated.
  • Most of them include a compromissory clause, allowing the systematic use of the mixed arbitration : states agree to arbitration BEFORE the emergence of a dispute = arbitration without privity (the State does not know to whom it offers arbitration.

-> BIT created new rules of international standards concerning foreign investments.

Question 14

The nature of mixed arbitration

Answer 14

This question concerns

• the differences between arbitration and litigation
• the advantages/disadvantages of arbitration

Question 15

Arbitration/litigation

Answer 15

ARBITRATION : a third party dispute resolution mechanism but it is PRIVATE by nature = it is private justice, opposed to litigation.

• the parties (States/private party) enjoy a complete freedom to organise the procedure (choosing the arbitrators..).
• Arbitrators do not act as government officials
• The parties control almost all the aspect of the procedure

LITIGATION: PUBLICLY organised system of adjudication :

• Judges are state agents : even if they are independent, they are payed by the State.
• Everything is organised by the applicable law
  Judges are permanent
• Cost…

Question 16

Advantages/disadvantages of arbitration

Answer 16

ADVANTAGES :

• Flexibility : arbitration is not attached to a specific system of law = the parties have a much broader freedom to choose how to organize the procedure : they can even choose the applicable law.
• Expertise : experts acting as arbitrators and as lawyers. It has an impact on how investment rules are interpreted and applied.

DISADVANTAGES :

• speed : it was an avid vantage at first, but arbitration cases are now much more bigger and technical, so speed is no longer an advantage. Damages are worth millions of dollars sometimes, and it can take years to deal with it.
• Cost : arbitration is every expensive as it is a private mechanism, the parties have to pay the arbitrators, the procedure…
• The enforcement : the enforcement of an arbitral award can be complicated. When an investor wins a case, that’s not the end of the story. It can be hard to recover damages even so. In some cases, it may be needed to make another claim.

Question 17

INSTITUTING MIXED ARBITRATION

Answer 17

Arbitration has a huge diversity of mechanisms to settle disputes because of the complete freedom to choose the proceedings. But there are still some common features.

• choosing an arbitration institution
• issued of juridiction
• the request and establishment of a tribunal

Question 18

Choosing an arbitration institution

Answer 18

5 main institutions dealing with mixed arbitration and investment disputes, ICSID concentrates 75% cases in the matter. How the parties can choose ? Strategic issue based on :

• The cost : depending on the arbitration institution, fees are différend. As arbitration is a private mechanism, the parties will have to pay for everything (arbitrators salaries have to be paid). ICSDI arbitrators are paid of the amount of cases they work on (≠ the ICC of Paris which fix the cost of the dispute in relation to the amount of what is at stake).
• The Procedure : each arbitration instituions has “ready for use” procedure, which can always be modified by the parties : they can choose the deadlines, the number of arbitrators, the applicable law.
• The outcome and the status of the award : at the end of the procedure,, how to enforce the arbitration award and get damages ?
  • Before the chambers of commerce : a mixed arbitration award has the same status as a commercial award (pure private decision), soan exequatur might be needed (procedure before the national court that will question the validity of the award).
  • Before the ICSDI : decisions have a specific status, they are automatically enforceable in the countries of the states parties to the Washington convention.

Question 19

The question of jurisdiction

Answer 19

3 questions when it comes to juridiction :

• ratione vuluntatis (consent of the parties)
• ratione materiae (substance of the dispute)
• ratione personae

Question 20

Jurisdiction ratione voluntatis

Answer 20

Consensualism : fundamental principe of international law applicable to dispute resolution mechanism, A tribunal does not have jurisdiction unless both parties consented to their jurisdiction. Different ways to express consent :

• Consent in a contract : a contract between a state and a company can include a compromissory clause that is called a “stated contract” (ex : Total and Mozambique).
• Consent in a treaty : a state will be a party to a bilateral treaty of investment but the private investor is not a party because it’s a private company. How consent by both parties can meet ? Jp solution -> a bilateral investment treaty will include an offer to arbitration to the states to consent to jurisdiction and the private investor can accept the offer and expresses its consent by making a request for arbitration.
• Consent in municipal law : unilateral consent because states often adopt specific legislation to protect their foreign investment. Sometimes, a consent to arbitration can be find. According to the jp, such national legislation will be interpreted as an offer for arbitration.
• Added conditions in arbitration clause : most of the time, condition of negotiation.
• Consent cannot be withdrawn unilaterally : the consent of both parties is protected because a state can not modify its legislation in a way that it affects the proceeding.

Question 21

Jurisdiction ratione materiae

Answer 21

The substance of the dispute is limited to the scope decided by the parties in the legal instrument. in the context of ICSDI, only a LEGAL dispute arising directly out of an INVESTMENT can be submitted :

• a legal dispute : opposition of legal theses between the parties (Concession Mavrommatis).
• an investment : list of criteria to be satisfied (the Salinity Formula) :
  • Financial contribution : the investor has to bring something of value to the host state of investment, a certain amount of money is the origin of that economic action. How much ? Concerning investment arbitration, it is obvious that it concerns a lot of money (millions of euros or dollars)
  • Duration : parties will have to develop an activity for a certain period of time; a one shot contract is not considered as an investment; case law is not stable on that question (between 3 to 5 years at the minimum), temporary services are not investment
  • Risk : element of risk, it’s an activity that is supposed to generate a profit, investors takes the risk that the investment will not be or will be profitable in the future; that is an economical risk; identify an investment and a risk so that the tribunal can have a jurisdiction.
  • Economic development of the host country

Question 22

Jurisdiction ratione personae

Answer 22

For the ICSDI convention, there are several conditions to be met :

• The dispute must arise with a contracting state : (no longer possible to bring a case against Venezuela because it withdrew from the Washington convention). Otherwise, it’s a condition easy to satisfy because 125 countries ratified the Washington Convention. Private party (the second investor) to the dispute must be a national of another contracting state (ex : a French citizen cannot bring a case against France).
  • If it’s an individual : the nationality determines it. The attribution of nationality is a discretionary power of the state in international law.
  • If it’s a legal entity : ICJ, Barcelona Traction stated that the national can be relied on the seat place of the company or the place of the administration of the company, or the place of incorporation. But from that starting point, the nationality of legal entities can’t become a more complex problem.
    • the multinational companies and all their branches : how do we identify the nationality of all these entities?
    • What about when a foreign company is controlled by nationals of a third state ? It can be considered as having the nationality of the ones that controls that company. In practice, that can be a very complex question because how do you establish the nationality of a company controlled by various persons of different nationalities.

Question 23

The request and the establishment of a tribunal

Answer 23

One the tribunal has jurisdiction, there is first a “cooling off period” = the arbitration cannot start before trying to negotiate. Then, there are 7 steps in the matter of request and establishment of a tribunal :

• filling the request : a very formal document by which the parties start the arbitration. Under the Washington Convention, there are some conditions to satisfy (names of the parties, legal base of consent, arbitrators wanted…).
• screening the request : the ICSID secretariat will look at the request to determine in broad terms if an ICSID tribunal can have jurisdiction over case (serious legal bases).
• registration of the request : the ICSID secretariat gives a number to the case and publish it. The parties can ask for provision measures, but the application cannot be made until a tribunal is established (issues when there is an urgent need).
• establishing the arbitral tribunal : the tribunal exists only once the case has started. The parties establish it with some freedom (each party choose its arbitrator which then choose the third one). Everyone can be chosen as long as there is no conflict of interest.
• pay the cost in advance : the arbitrators won’t work until they’re paid.
• first procedural session : the parties and arbitrators met to discuss procedural issues (cost, langage, seat of the arbitration..).
• bifurcation of procedure : Bifurcation is the question the parties ask to decide whether or not to split the procedure in different phases. They can choose to deal with the issues all at one and thus have just one decision of the tribunal.OR, they can choose to split it, and a decision of the tribunal is given to every phase.