Investment Treaty Arbitration as a Public and Unilateral Dispute Settlement

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Department of Law Spring Term 2020

Master Programme in Investment Treaty Arbitration Master’s Thesis 15 ECTS

Investment Treaty Arbitration as a Public and Unilateral Dispute Settlement

A redefinition of the autonomy of disputing parties and arbitral tribunals in the process of investment treaty arbitration

Author: Meysam Salehi

Supervisor: Ylli Dautaj

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For my beloved parents

who helped me undertake this adventurous task with relative ease

Prof. Dr. Kaj Hober, Dr. Joel Dahlquist Cullborg and Mr. Ylli Dautaj deserve a special mention and vote of thanks, for giving me necessary knowledge and guidance

to complete this thesis.

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List of Abbreviations

BIT Bilateral Investment Treaty

ECtHR European Court of Human Rights

FIPA Foreign Investment Promotion and

Protection Agreement

ICC International Chamber of Commerce

ICJ International Court of Justice

ICSID International Centre for Settlement of

Investment Disputes

IIA International Investment Agreement

ISDS Investor-State Dispute Settlement

ITA Investment Treaty Arbitration

ITLOS International Tribunal for the Law of the

Sea

NAFTA North American Free Trade Agreement

SCC Stockholm Chamber of Commerce

UNCITRAL United Nations Commission on

International Trade Law

SIAC Singapore International Arbitration

Centre

CETA Comprehensive Economic and Trade

Agreement

ECT Energy Charter Treaty

PCA Permanent Court of Arbitration

PCIJ Permanent Court of International Justice

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1 Introduction

1.1 Background and Statement of the Problem

Over the last decade, international investment law has been confronted with relatively extensive and fundamental criticisms, this includes the substantive part thereof, which is mostly articulated in international investment agreements (IIAs), and procedural aspects of its system of dispute settlement. Aside from criticisms vis-à-vis substantive provisions of IIAs, critiques with respect to procedural and institutional aspects of investor-State dispute settlement (ISDS)¹ account for the major part of the so-called

‘backlash’ that has been provoked over the last decade against the overall regime of international investment law.

The reason for the procedural aspects of investment treaty arbitration to receive more attentions is the fact that procedural structures, frameworks and respective underlying rules and principles, based on which an investment tribunal functions, affect not only the very practical aspects, but also carve the way in which substantive matters are regarded, interpreted and eventually applied.² Consequently, various issues have been discussed by scholars- ranging from issues related to transparency to lack of an appeals mechanism etc.- this more signifies that some changes in the system may be necessary.

In essence, virtually all these critiques flow form this argument that the investor-state adjudication, contrary to its essence, has been conceived, defined and conducted according to rules and structures which indeed belong to international commercial arbitration, rather being tailored to the context of disputes against States.³

1 The terms investor-States dispute settlement and investment treaty arbitration (ITA) may be used in this research interchangeably.

2 See Kate Miles, ‘Investor-State Dispute Settlement: Conflict, Convergence, and Future Directions’ in Marc Bungenberg and others (eds), European Yearbook of International Economic Law 2016 (Springer International Publishing 2016) 288.

3 M Sornarajah, ‘The Clash of Globalizations and the International Law on Foreign Investment’ (2003) 10 Canadian Foreign Policy Journal 1, 7.

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Among various debates and criticisms hitherto have been raised, one of the issues in which this misconception demonstrates itself concerns the very inconsistent position with respect to the extent of autonomy of either of disputing parties and the judicial body in the process of investment treaty arbitration. To put it differently, one of the questions may be asked in the process of comparing investment treaty arbitration and international commercial arbitration is whether the autonomy of disputing parties in investment treaty arbitration is identical to their autonomy in international commercial arbitration in the sense that disputing parties have the main role in the arbitral process.

In other words, who holds the leading autonomy in the proceeding of an investment treaty adjudication? Disputing parties or the judicial body? If either of the two have a certain share of autonomy, how much and in which areas do they have it? Although this is a question with far-reaching implications for both procedural and substantive aspects of international investment law, it has not received an appropriate attention.⁴ Giving a straight answer to each of the questions outlined above depends primarily upon the way one comprehends the legal character, the function and the main idea behind the system of investment treaty adjudication. In fact, one of the basic problems is that ‘international arbitration’ has been pictured, in the view of a group of scholars, as a plain institution with a single character in the sense that all types of arbitration taking place in transnational domain follow, and are subject to similar body of rules and principles.⁵ Accordingly, this has been perceived that both commercial and investment arbitration, whether the latter arises out of a treaty or a contract, are to be treated as of one nature;⁶ both are “international”, and follow identical underlying rules and principles.

4 For instance, both

5 For this view see for instance Jan Paulsson, The Idea of Arbitration (Oxford University Press 2013);

Emmanuel Gaillard, ‘Three Philosophies of International Arbitration’ (2010) 3 Contemporary Issues in International Arbitration and Mediation: The Fordham Papers 305; Emmanuel Gaillard, Legal Theory of International Arbitration (Martinus Nijhoff 2010).

6 Philippe Fouchard, Emmanuel Gaillard and Berthold Goldman, Fouchard, Gaillard, Goldman on International Commercial Arbitration (Kluwer Law International 1999) 40 (para. 69).

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On the contrary, the focus of this study is: firstly, to draw a clear distinction between international commercial and investment treaty arbitration, and then analyze some of implications that this distinction brings about for both legal reasoning and the power of tribunals in investment treaty arbitration.

1.2 Significance, Purpose and the Questions of Research 1.2.1 Significance of the research

Protection of foreign investment is not a new phenomenon; as Weiler notes, there was in the very old past a regular stream of judicial, administrative, and even arbitral decisions regarding political risk in this context; a trickle that can be traced back to the era of Rome and Persia.⁷ Nonetheless, the law of protection of foreign investment has extraordinarily attracted many scholar’s attention thereto in the last decade and half.

What can account for this drawing interest of academics to this field? What happened and what changed in the law of investment protection? Prior to digging into the task of asking of the question of how an investor-State adjudication is better be conducted, one perhaps needs to deal with the question why this field has suddenly become one the most outstanding areas of international law.

The answer to this question is obtainable by considering the functional feature of the system. The very large number of investor-State arbitral awards call attention to a transformative incident for public international law. Principally, due to the lack of an international personality, foreign investors as private persons do not have direct and independent international legal rights. What thus incarnates a right for them is the availability of a forum of adjudication.⁸ The opportunity of an adjudicative framework a new and unique type of international right. Accordingly, the exercise of this adjudicative function leads the content of that right to be more disclosed.⁹

7 See, generally, Todd Weiler, The Interpretation of International Investment Law: Equality, Discrimination and Minimum Standards of Treatment in Historical Context (Martinus Nijhoff 2013).

8 See Myres McDougal, Harold Lasswell and W Michael Reisman, ‘The World Constitutive Process of Authoritative Decision’ [1967] Faculty Scholarship Series 255

<https://digitalcommons.law.yale.edu/fss_papers/675> accessed 3 June 2020.

9 Marie A Failinger, ‘Not Mere Rhetoric: On Wasting or Claiming Your Legacy, Justice Scalia’ (2003) 34 University of Toledo Law Review 425, 435.

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As far as the functional perspective of investment treaty arbitration is concerned, the mechanism has broad consequences. The jurisprudence is made through adjudicative bodies is has a constitutive role for the new world order.¹⁰ The existence and operation of investment treaty arbitration reveals that transnational practice has remarkably promoted the displacement of the classic assumption that international law is an order to regulate the inter-State relations.¹¹ Moreover, investment treaty arbitration creates various rights for individuals that are directly enforceable as a matter of international law. Appreciation of the process through which international law become transformed by investment treaty arbitration is important not only for the purposes concerning the arbitration process itself, but also when one considers its role in development of the general system of international law. This is in fact decisive for determining the goals and power of investment treaty arbitration, assessment of efficiency thereof and eventually measuring its legitimacy.

1.2.2 Purpose and Questions

In general, the research tries to explore one of the aspects of the misconception mentioned earlier about the nature and characteristic of investment treaty arbitration in order to eventually analyze the implications of recalibration of the concept of investment treaty arbitration for the method of interpretation that and the autonomy of judicial body therein. In this respect, then it is necessary, in part, to show and analyze deviations of tribunals from the true nature of the system. Accordingly, the main and ancillary questions of the research are as follows:

1) What is the role of disputing parties in establishment of investment treaty arbitration?

- Is investment treaty arbitration product of a reciprocal arrangement?

- What is the legal character of investment treaty arbitration?

10 See, generally, Anthea Roberts, ‘Clash of Paradigms: Actors and Analogies Shaping the Ivestment Treaty System’ (2013) 107 The American Journal of International Law 45.

11 Andrea K Bjorklund, ‘Mandatory Rules of Law and Investment Arbitration’ (2007) 18 American Review of International Arbitration - ARIA 189.

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2) What is the function of investment treaty arbitration? Is it a private form of adjudication or a public one?

- Does investment treaty arbitration have public dimensions?

- What are public dimensions of international investment treaty arbitration?

3) What are the implications of either of abovementioned questions for the system of investment treaty arbitration?

- What are the implications of unilaterality of investment treaty arbitration?

- What are fallacious arguments of tribunals? And how arbitral tribunals should have been reasoned instead?

- What are the implications of publicness of investment treaty arbitration?

1.3 Methodological Remarks

A very significant point that needs to be note is that investment treaty arbitration lacks any single accepted theoretical explanation for investment treaty arbitration.¹² It seems that the scholarship explaining the concept of investment treaty arbitration can be divided into four groups. First group of scholars, are traditional and conservative critics who see investment treaty arbitration as an instrument in hand of multinational corporations for their benefits.¹³ Second group are those who treat investment treaty arbitration as an auspice of international commercial arbitration which is a reciprocal and contractual arrangement subjecting to lex mercatoria. Three, a group of scholars militate towards looking at investment treaty arbitration as a natural result of a rejuvenated customary law of the treatment of aliens; the BITs have contributed to formation and creation of new norms of international law. Four, proponents of the idea that investment treaty arbitration should be considered as a form of public international law adjudication, so it needs to be reformed from within to be more tailored to the general principles of international law applicable in adjudications.

12 Roberts (n 10) 94.

13 See, in particluar, M Sornarajah, ‘Evolution or Revolution in International Investment Arbitration?

The Descent into Normlessness’ in Chester Brown and Kate Miles (eds), Evolution in Investment Treaty

Law and Arbitration (Cambridge University Press)

<https://www.cambridge.org/core/product/identifier/CBO9781139043809A042/type/book_part>.

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What is important to note about these four groups of scholars is that they share a common methodological approach: they are all try to argue on what and how the concept they conceive as investment treaty arbitration ought to be so as to be legitimate.

For this, they all use a deductive approach; they put a model and then start to single out deviations of investment treaty arbitration, and then proposing plausible solutions.

Regarding this research, it has adopted a deductive approach with respect to concept of investment treaty arbitration in concert with the current scholarship. Moreover, the research substitutes to the approach that looks at investment treaty arbitration as an auspice of public international law adjudicative system. Accordingly, the current research takes an external point of view with regard to investment treaty arbitration; it leans against an understanding of legitimacy from outside of the mechanism itself.

1.4 Structure

In sum, this research first proceeds with the issue of the relation between international commercial and investment treaty arbitration in order to demonstrate their fundamental differences. In this respect these two are compared from two aspects, namely the legal character and the function. The later chapter, in turn, deals with the implications of the suggested character of investment treaty arbitration for the issue of autonomy. For this purpose, the research will try to elaborate on some of impacts of reciprocity or unilaterality of the underlying framework of investment treaty arbitration on interpretative methods employed by investment tribunals. Moreover, the implication of the public function of the system on the extent of autonomy of either of disputing parties and judicial body in investor treaty arbitration will be discussed.

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2 Dichotomy Between International Commercial and Investment Treaty Arbitration

Giving an answer to the question regarding the role of the doctrine of party autonomy, or more generally the role that parties are entitled to play in the process of investment treaty arbitration, can be given in light of at least two aspects in which international commercial arbitration and investment treaty arbitration distance from each other.

Importance of this question lies in the fact that adherence of investment treaty adjudication to either of them would have numerous implications for the degree of autonomy of either of disputing parties and judicial bodies (tribunals) in investment treaty arbitration.

Investor-state dispute settlement is frequently regarded as a reciprocal system of dispute resolution created by a collection of consents of an investor and a state as the parties to it. In this view, these two parties are considered as the ones whose intentions suffice, and provide the essential legal foundation for an arbitral tribunal to come into existence. This understanding of arbitration is in fact the acknowledged postulate of commercial arbitrations that necessarily entails dominion of the disputing parties over the whole process of arbitration, which is generally seen as an instrument of private justice. This conception of investor-state dispute settlement would subject investment treaty adjudication together with international commercial arbitration to private international law regime, which has its specific rules and principles for international adjudications that take place in the context thereof.

Although conceiving international commercial arbitration as a part of the system of private international law, in which the individuals who are parties to an agreement maintain a considerable entitlement to control legal effects of their deals as well as the way the prospective conflicts become settled (private justice), might be to a great extent in compliance with the idea behind, legal foundations and the context of international commercial arbitration, the divergence in each of the said elements between this system of adjudication and the system of investor-state dispute settlement brings about

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different implications for the latter in term of rules and principles governing the process of adjudication, particularly the role may the principle (or doctrine) of party autonomy play in an international adjudication based on investment treaties.

Accordingly, the purpose of this chapter is primarily to demonstrate that due to various differences between investment treaty adjudication and international commercial arbitration, particularly the divergence in their legal character and their functions, the former is to be essentially considered as an instance of public international law adjudications.

2.1 Difference in Legal Character

For the purpose of this research, elements of legal character of either of international commercial and investment treaty arbitration have been defined and assumed as: the subject matter and type of obligations, the legal order to which either of international commercial and investment treaty arbitration are subject to and the very nature of the source of reference to arbitration. The two systems are different in all these three elements.

2.1.1 Divergence in Subject Matters and Types of Obligation

One of the very distinctive features that differentiates investment treaty arbitration from international commercial arbitration is the substantial difference in matters and types of obligation that come under scrutiny of arbitral tribunals in either of respective adjudications. To put it simply, whilst investment treaty arbitration deals principally with adjudicating a type of measures taken by host states in exercising its sovereign power, the subject matter in international commercial arbitration is a dispute arising from a private-nature arrangement between two persons who act in their private capacity, and whose arrangement, in any type thereof, is subject to a private law analyzing framework.¹⁴ For instance, in the occasion that a host state expropriates

14 There are, of course and always, some matters that may stand somewhere between private and public, but ‘the presence of grey does not mean that black and white do not exist’, as Van Harten says; see Gus Van Harten, Investment Treaty Arbitration and Public Law (Oxford University Press 2007) 46.

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properties of a foreign investor through a legislative act or a governmental decree, this very measure is a regulatory measure taken out of the sovereign power the host state wields, and the prospective dispute is one that falls under public sphere. On the other hand, when a government enters into a contract in order to establish, for example, a set of facilities for the purpose of oil and gas extraction for example, its conclusion of contract is a commercial act that a state performs through its private capacity, an act that could be carried out by any private party.

Although becomes sometimes very challenging, drawing a distinction is of an importance for the purpose of present research. As a matter of principle, States’

authority – as a whole- consisting of their public organs and actions thereof cannot be subject to adjudication in another state’s internal judicial bodies; instead, it can only be subject to public international law adjudications, unless otherwise agreed by them (the principle of sovereign immunity).¹⁵ In this respect, many states clear away the shield of sovereign immunity from the commercial conduct of the state by virtue of recognition of an exception to the general principle of sovereign immunity so that those type of conducts can be subject to adjudications exist in private sphere.

In addition to the difference in subject matters, types of obligations being disputed in international commercial and investment treaty arbitration are of a very distinctive character. As mentioned earlier, since the dispute in international commercial arbitration concerns an alleged negligence in private nature relations, the purpose in the process of arbitration is to find, for example, whether any contractual obligation is violated or not. So, it eventually leads to finding a contractual responsibility.

Investment treaty arbitration, differently, deals with the international responsibility of states for breach of the international obligations they undertake in an international law instrument as to treating foreign investors in a particular manner. It should be noted that although investment treaty arbitration may sometimes involve examination of the

15 Reinhard von Hennigs, ‘European Convention on State Immunity and Other International Aspects of Sovereign Immunity’ (2001) 9 Willamette Journal of International Law and Dispute Resolution 185, 186-7.

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legal obligations that the host state has under an investment contract,¹⁶ the ultimate objective is to assess whether the host state has violated its international obligations under the applicable treaty.¹⁷

As tried to be indicated, the idea here is to demonstrate as clearly as possible that the formation of investment treaty arbitration to settle a class of disputes, namely regulatory disputes between States and individuals which traditionally were adjudicated in domestic courts as a matter of public law mostly in form of an administrative adjudication,¹⁸ is a significant deviation from the normal use of international arbitration, viz. resolution of private-nature disputes. This uniqueness has its own implications that is crucial not to be overlooked, though this has been disregarded by some scholars.¹⁹

2.1.2 Divergence in Legal Foundations

It is of an utmost importance to note that this research does not seek to suggest a comprehensive legal theory for neither international commercial arbitration nor investment treaty adjudication simply because, aside from other constraints, that would require a very long discussion to establish a specific theoretical basis from various schools of thoughts on philosophy of law, which fairly goes beyond the constraints of this research. However, it can be conceded that the underlying postulate would be relatively close to the thoughts of Austinian positivism.²⁰ According to this, analyzing two legal frameworks through comparing their legal foundations (or the source of legal validity) could be to a great extent enlightening so as to reach to a conclusion regarding

16 See Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2004) 74 British Yearbook of International Law 151, 195.

17 Eric De Brabandere, Investment Treaty Arbitration as Public International Law (Cambridge University Press 2014) 51.

18 Martin Loughlin, The Idea of Public Law (Oxford University Press 2003) 84.

19 See for instance Charles N Brower, Charles H Brower and Jeremy K Sharpe, ‘The Coming Crisis in the Global Adjudication System’ (2003) 19 Arbitration International 415. Also Fouchard, Gaillard and Goldman (n 5) 40 et seq, (All investment disputes are characterized, and looked at as commercial without considering duly the differences outlined in the present and following parts).

20 For seeing the differences among modern theories of legal positivism see Raymond Wacks, Understanding Jurisprudence: An Introduction to Legal Theory (3rd edn, Oxford University Press 2012) 77-117.

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the position of investment treaty adjudication in the binary of public or private international law. In this regard, legal foundations of international commercial arbitration and investment treaty adjudication will be examined in the following.

2.1.2.1 Legal Foundations of International Commercial Arbitration

The basis for every international commercial arbitration, and for international arbitral process itself is an agreement. Without a valid agreement to submit the disputes to arbitration, there is no legal ground for asking a party to appear before, or initiate an arbitration process, or even for enforcing an award rendered as a result of an arbitral proceeding.²¹ This agreement to arbitration is, to any rate, subject to analytical framework of private law, in which private persons are parties to agreements.²² It is generally correct that arbitration is a creature originated from will of parties to it,²³ but the effectiveness of an international arbitration nonetheless is mainly contingent upon validity and recognition of its foundation agreement and credibility of the arbitral proceeding from the very beginning phase to the final stage, i.e. rendering the arbitral award. Accordingly, the question would be that from where or which framework does international arbitration obtain its validity for either of agreement and arbitral proceeding? What is the law applicable to arbitration?

There seems that two types of ideas about the legal foundation of international commercial arbitration can be found in the works of scholars, namely the theory that subjects arbitration to a single national legal order (territorial theory) and the theory that attaches arbitration to a plurality of national legal orders (pluralistic theory).²⁴

A. Territorial approach

21 Gary Born, International Commercial Arbitration (2nd edn, Kluwer Law International 2014) 226.

22 This will be discussed in a separate part by comparing agreements to arbitrate in international commercial arbitration and investment ones.

23 Canada Supreme Court, Dell Computer Corp. v. Union des Consommateurs, 2 S.C.R. 801 (2007) para 51.

24 This part of research mainly relies and addresses the perspective of Professor Emanuel Gaillard whose book on the issue is relatively the first in term of collecting and presenting all ideas in one source. It should be noted that the purpose here is not to make any judgment in order to find the best theory because there is no need to do so, considering the purpose of this research.

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According to this view, arbitrators are in fact correspond to national judges who serve under the legal dominion of a specific national legal order which is that of the seat of arbitration. Therefore, legal force of awards rendered as the result of arbitral proceeding solely derives from the law of the place of arbitration whose law governs arbitral process. For one who follows this perception, it is an unescapable conclusion to consider no award as ‘international’ simply because they are indeed ‘American’ or

‘Swedish’ awards due to their taking place in respective states.

F.A. Mann should be considered as the leading opponent of this view who in his distinguished articles, entitled “Lex Facit Arbitrum”, emphatically took up the responsibility to stand against other more autonomous theories. From Mann’s point of view, an arbitral tribunal is just a forum corresponding to other types of courts in the realm of a national legal order, as he explains:

“There is a pronounced similarity between the national judge and the arbitrator in that both of them are subject to the local sovereign. If, in contrast to the national judge, the arbitrator is in many respects, but by no means with uniformity, allowed and even ordered by municipal legislators to accept the commands of the parties, this is because, and to the extent that, the local sovereign so provides.

This is also the answer to certain scholars who argue that arbitration has a character entirely different from judicial proceedings…Is not every activity occurring on the territory of a State necessarily subject to its jurisdiction? Is it not for such State to say whether and in what manner arbitrators are assimilated to judges and, like them, subject to the law? Various States may give various answers to the question, but that each of them has the right to, and does, answer it according to its own discretion cannot be doubted.”²⁵

In this conception, when the parties decide upon choosing a specific state as to be the seat of arbitration, they reveal their intention to subject the arbitration to a particular

25 FA Mann, ‘Lex Facit Arbitrum’ (1967) 55 International Arbitration Liber Amicorum for Martin Domke 157, 162.

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legal order as the law applicable to arbitration concerned.²⁶ Francis Mann, moreover, continues as to ultimately reject the credibility of the term “international”:

“The phrase is a misnomer. In the legal sense, no international commercial arbitration exists. Just as, notwithstanding its notoriously misleading name, every system of private international law is a system of national law, every arbitration is a national arbitration, that is to say, subject to a specific system of national law.”²⁷

In fact, the term of ‘international’ is an indicator of existence of a transnational element, be it the difference in nationality of disputing parties or the nature of the underlying contract etc. So, this does not mean that international commercial arbitration is subject to an international legal order.

To put it simply, the ultimate, and of course interesting in term of practice, implication of this view is that the whole validity of an arbitral proceeding depends on the extent that legal order of the seat gives effect to it.²⁸ Thus, if an award is set aside in the seat of arbitration, it cannot be presented in any other jurisdiction for being recognized or enforced simply because ‘an award’s legal force derives from the authorization to use this means of dispute resolution given by the local sovereign to the parties.’²⁹ Looking at international arbitration as a subject of private international law is evident in this theory.³⁰

B. Pluralistic approach

26 See Roy Goode, ‘The Role of the Lex Loci Arbitri in International Commercial Arbitration’ (2001) 17 Arbitration International 19, 32; see also Hobér (n 7) 36 et seq. He argues as follows: “arbitral tribunals are ultimately dependent on a national law permitting the very existence of arbitration and arbitral tribunals in territory of which the arbitration takes place. This national law is the law of the place, or the seat, of arbitration…While party autonomy thus plays an exceedingly important role, the ultimate benchmark is always the lex arbitri.” [emphasis added].

27 Mann (n 25)., 159.

28 Legal positivism, i.e., among other thing, looking at states as the fount of any legal effect is one of the underlying philosophical postulates of this theory.

29 Gaillard, Legal Theory of International Arbitration (n 4) 30, para 33.

30 Some scholars expressly equate lex arbitri with the term lex fori which is a part of terminology of private international law, and places arbitrator in a position equivalent to national judge. See for instance Alain Hirsch, ‘The Place of Arbitration and the Lex Arbitri’ (1979) 34 Dispute Resolution Journal, 43.

<https://arbitrationlaw.com/library/place-arbitration-and-lex-arbitri-dispute-resolution-journal-vol-34- no-3>.

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While the first thesis maintains that arbitration acquires its juridicity exclusively from the legal order of the seat, i.e. the law applicable to arbitration is solely the law of place of arbitration, the second theory considers that all legal orders can potentially, under certain conditions, be the source of validity for an arbitral process.³¹ In this multilocal view, all legal orders that may have a connection to an arbitration have an equal entitlement to authorize a given arbitration- whether it be the state that hosts the arbitration or the place where enforcement is sought.

As Gaillard observes in this regard, the two theories seem to apprehend one phenomenon from different perspectives; territorial thesis looks at the arbitral process from starting point thereof, but the pluralistic one focuses on the end result.³² The former considers the arbitral proceeding as a sequential unfolding and argues that arbitrators can only do their tasks if they have previously been authorized to do so by virtue of a law which is necessarily the law of the seat of arbitration. On the other hand, pluralistic theory thinks of the arbitral proceeding from its end result, and thus the criterion for an award is whether it is recognized as binding on parties or not.

Recognition and enforcement of award retroactively legitimizes whole the process. He further adds that at least two philosophical postulates can be suggested for this theory, viz. state positivism and Westphalian model of sovereignty, even though he ultimately criticizes the idea to present his own theory.

As for the first premise of pluralistic theory he states that:

“…the conception that roots the juridicity of arbitration in a plurality of legal orders does not consider the parties’ will to be the sole source of the binding force of the arbitration agreement, the various stages of the arbitral proceedings and the resulting award. In this conception, the award is not considered to be

“floating in the transnational firmament, unconnected with any municipal system of law”. It is indeed the national legal orders that recognize the legitimacy of this private means of dispute resolution and that determine the

31 Jan Paulsson, ‘Arbitration Unbound: Award Detached from the Law of Its Country of Origin’ (1981) 30 International and Comparative Law Quarterly 358.

32 Gaillard, ‘Three Philosophies of International Arbitration’ (n 4) 306.

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conditions of the effectiveness of the award as the end result of the arbitral process. Accordingly, this model is perfectly in keeping with strict legal positivism.”³³

In addition, regarding the so-called Westphalian model of sovereignty as the underlying support for this perception, it has been said that the multilocal conception of legality of international arbitration is founded upon the notion that each single State is adequately entitled to make its own decision as to whether an arbitral agreement is valid, or conduct of the arbitral process is done in a sufficient manner. New York Convention of 1958 seems to follow this understanding, thereby under certain conditions each State attempts to recognize and enforce foreign arbitral awards rendered in other contracting parties to the convention. According to article V, the court in place of enforcement may recognize and order the enforcement of a given award, even though it is already set aside in the State hosted the arbitration.

One important issue needs to be noted here is that in contrast to what some scholars argue, the underlying idea of pluralistic theory, or in particular that of New York Convention does not imply independency of arbitral proceeding or award from any legal order.³⁴ The term ‘delocalization’ in this theory, only refers to the possibility that an arbitral award, notwithstanding whether or not is endorsed in the seat of arbitration, may be given effect by the legal order of the place in which enforcement is sought.

Therefore, an arbitral award in both scenarios- whether it is supported by the seat or the place of enforcement- is subject to a national legal order, and obtains its legal validity therefrom.³⁵ However, it is correct that New York Convention was a landmark in term of deviating from the idea that an arbitral award gets its legal validity exclusively from the seat of arbitration.

33 Gaillard, Legal Theory of International Arbitration (n 4) 26. The quoted part at the middle is a reference to Bank Mellat (Islamic Republic of Iran) v. Helliniki Techniki SA case.

34 Gaillard for instance states that the second theory “focuses on the trends arising from the normative activity of the community of States.” ibid. 37.

35 Jan Paulsson, ‘Delocalisation of International Commercial Arbitration: When and Why It Matters’

(1983) 32 International and Comparative Law Quarterly 53

<https://www.cambridge.org/core/product/identifier/S0020589300040185/type/journal_article>;Paulss on, ‘Arbitration Unbound: Award Detached from the Law of Its Country of Origin’ (n 31).

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Having discussed both theories, it is fair to simply conclude that international commercial arbitration, in any of its theories, roots eventually in a national legal order.

This means that the national order giving the legal effect to arbitration is the one has the final saying with respect to the applicable principles of good administration of justice. Accordingly, the matters such as the scope of either of disputing parties’ and arbitrators’ power and autonomy in the process of international commercial arbitration is to be assessed against the recognized principles of adjudication in that specific national legal order. As it is illustrated in the following, the legal validity of investment treaty arbitration, unlike commercial arbitration, originates from public international law.

2.1.2.2 Legal Foundations of Investment Treaty Arbitration

According to the basis set forth earlier, investment treaty arbitration is an adjudication mechanism envisaged and established through the sovereign-nature arrangement of at least two states under an international treaty. This turns an investment treaty arbitration into a genuine international form of arbitration in that is well embodied in the system of public international law in a way that on the one hand, gets its legal validity exclusively from an international treaty, and on the other hand, it is legally capable to contribute to development or even formation of the sources of international law, as it is in the case of customary international law and constant judicial precedent.³⁶ This is a distinctive feature that international commercial arbitration lacks. Investment treaty arbitration, thus, is perfectly detached from any national legal order, including that of any of the contracting states or oven the state in its territory arbitration takes place.³⁷ The point was recently noted by the tribunal in Electrabel v. Hungary as follows:

“Under Article 26 ECT and Article 42 of the ICSID Convention, the Tribunal is required to apply the ECT and ‘applicable rules and principles of international law’. In other words, this Tribunal is placed in a public international law context

36 This will be more elaborated in the discussion concerning function of investment treaty arbitration.

37 See Santiago Montt, State Liability in Investment Treaty Arbitration: Global Constitutional and Administrative Law in the BIT Generation (Hart Publishing 2009) 135-6.

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and not a national or regional context. Moreover, this ICSID arbitration does not have its seat or legal place of arbitration in Hungary or elsewhere in the European Union. Such an arbitral seat could trigger the application of the lex loci arbitri and give rise to the jurisdiction of the local courts in regard to the arbitral process, including challenges to the award. This ICSID arbitration is a dispute resolution mechanism governed exclusively by international law. As a result of the Tribunal’s international status under the ECT and the ICSID Convention, several of the Commission’s submissions cannot be taken into account in this arbitration, because they are based on a hierarchy of legal rules seen only from the perspective of an EU legal order applying within the EU, whereas this Tribunal is required to operate in the international legal framework of the ECT and the ICSID Convention, outside the European Union.”³⁸

In the strict sense, however, this disengagement is only the case for investment treaty arbitrations conducted under few arrangements such as ICSID Convention and the very recent entered into force Comprehensive Economic and Trade Agreement (CETA) between EU and Canada, under which investment tribunals function in a forum completely detached from any national law. On the contrary, investment tribunals conducted under other rules of arbitration such as UNCITRAL Arbitration Rules, or under other mechanism such as ICC, SIAC or SCC, still are not territorially disconnected from the seat of arbitration because it is a requirement for arbitration under these rules and institutions, to have a seat of arbitration.³⁹ However, having a link to a national legal order does not sever the link between investment treaty arbitration and international law simply due to the existence of an interplay between these two even in the case of being conducted under SCC rules for instance. In the view of the present author, in such case, investment treaty arbitration is, in fact, subject to two

38 Electrabel SA v. Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012, para. 4.112.

39 For instance, Article 25 of Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce reads: (1) Unless agreed upon by the parties, the Board shall decide the seat of arbitration.

(2) The Arbitral Tribunal may, after consulting the parties, conduct hearings at any place it considers appropriate. The Arbitral Tribunal may meet and deliberate at any place it considers appropriate. The arbitration shall be deemed to have taken place at the seat of arbitration regardless of any hearing, meeting, or deliberation held elsewhere. (3) The award shall be deemed to have been made at the seat of arbitration.

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different legal orders at the same time, thereby either of which may have its impact on various aspects thereof.⁴⁰ However, the main focus in this research is to analyze the implications of being a species of public international law adjudication for investment treaty arbitration.

Being rooted in public international law, investment treaty arbitration, in addition to all instructions might be stipulated in the foundational treaty, is essentially subject to general principles applicable to public international law adjudications such as jura novit curia, ne ultra and infra petita or non liquet, especially in cases where there are lacunae. Application of these principles has significant ramifications for the ambit of the power of tribunals and arbitrators- in both their constraints and discretional authority.

2.1.3 Divergence in Source of Reference to Arbitration

Due to the reference of international investment treaties to arbitration as the agree arrangement, which is typically a private model of adjudication, many have confused and amalgamated investment treaty arbitration with international commercial arbitration.⁴¹ Aside from differences in subject matters and types of obligation, this misconception is an inevitable outcome of disregarding the fact that the source in which international arbitration is referred to is different in either of cases. On the one hand, international commercial arbitration is founded upon an agreement between individuals with equal power of bargain to resolve their private conflicts as they would prefer (a contract than is subject to private law analytical framework). On the other hand, as it will be explained, investment treaty arbitration is based on a compound of a so-called general consent which has been given in a treaty, and so constitutes a sovereign act,

40 This however may lead to some conflicts when it comes to the practice. For example, there have been some non-ICSID tribunals that applied the principle of jura novit curia as an applicable principle of adjudication in public international law adjudications (awards will be addressed in the chapter concerns the issue); this may, in turn, be contrary to legal instructions of the law of the seat, and put the award at the risk of being set aside. The issue will be discussed in the second part of the research.

41 Nigel and others (n 6) 1-12.

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and an acceptance of investor that is not equal to accepting an offer of arbitration in private agreements though (a sui generis legal framework).

2.1.3.1 The Source of Reference in International Commercial Arbitration

International commercial arbitration is a model of private adjudication that is authorized by the will of parties who envisage it in their agreement to arbitration.⁴² The principle of party autonomy that is the underlying basis of commercial arbitration, is the outcome of the postulate that decisions of individuals about their private affairs are to be respected. As many of scholars and tribunals have argued, international arbitration is not in a legal vacuum. This is endorsed by legal orders that generally support the notion of supremacy of autonomy of private parties to resolve their disputes.⁴³ Being a product of bargain between parties, full appreciation of party autonomy in commercial arbitration is undoubtedly logical because individuals, who are equal in legal position, are free, with few exceptions, to compromise on any issue that falls under private relations among them, and thus one way to do so is to refer the dispute to arbitration. Equality in legal power and position here is emphasized to indicate one of the two main differences of what we call as “source of reference to arbitration” in international commercial and investment treaty arbitration.

In addition to this, agreement to arbitration is consisted of two specific consents, as opposed to general consent. The consent can be generally given in two ways, viz. in advance to arising any claim or after the dispute is arisen. In commercial arbitration when there is an arisen dispute, the given consent is in respect of a specific conflict;

where it is given in advance, it is confined to a particular relationship. As a matter of principle, being a consensual instrument, and founded upon the agreement by parties thereto, international commercial arbitration cannot go beyond that specific dispute, or that relationship from which the dispute has arisen.⁴⁴ In other words, subject-matter of dispute in international commercial arbitration cannot have any effect on interests of

42 Margaret L Moses, The Principles and Practice of International Commercial Arbitration (Cambridge University Press 2017) 2-3; Nigel and others (n 6) 71.

43 Moses (n 20) 55.

44 Nigel and others (n 6) 85.

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those who are not a party to the agreement simply because they have not consented so.⁴⁵

This, nonetheless, does not mean that a state cannot enter into an agreement to refer a dispute to international commercial arbitration. State may give consent to refer its disputes with other parties to an international tribunal through exercising its private capacity.⁴⁶ This is usually the case where states enter into a contract with foreign investors (an investment agreement), and in that contract they agree to arbitration that constitutes the so-called “contract-based investment arbitration” which is nothing more than an instance of international commercial arbitration. In case of such, same as in other private contracts, the principle of party autonomy plays the leading role due to the fact that both investor and state act in their private capacity so they wield an equal role and power of bargain in the process of formation of arbitration. Another important point needed to be noted here is that the given consent by state is a specific consent that solely concerns a particular dispute or commercial relationship; so, it principally does not affect the interest of third parties, the public or other investors in general, contrary to the general consent in treaties which may lead to a broad type of claims. As Van Harten correctly observes, although a state’s specific consent to arbitrate investment disputes arising out of investment contracts might have a certain degree of indirect implications for the host state’s power of decision making, comparing it to the general consent in treaties, implications are much less mainly because the dispute is confined in contract-based investment arbitrations so the state has a clear awareness of what it is going to be exposed to in the future.⁴⁷

45 Gary Born, International Commercial Arbitration (2nd edn, Kluwer Law International 2014) 1406 et seq.

46 Stephen J Toope, Mixed International Arbitration: Studies in Arbitration between States and Private Persons (Cambridge University Press 1990) 391-400; Gus Van Harten and Martin Loughlin,

‘Investment Treaty Arbitration as a Species of Global Administrative Law’ (2006) 17 European Journal of International Law 121, 142.

47 Van Harten (n 12) 63.

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2.1.3.2. The source of reference in investment treaty arbitration

Contrary to the source of reference in international commercial arbitration- a private law-nature arbitration agreement, investment treaty arbitration is founded upon sui generis⁴⁸ legal framework that separates it from a typical arbitration agreement in commercial arbitration from at least two dimensions. First, investment treaty arbitration originates from a general consent given by the host state, in its sovereign capacity, indicating its willingness to its sovereign actions towards foreign investors be assessed by an international tribunal. Secondly, constitution of arbitral tribunal cannot be considered as derived from a consensual arrangement attached to a municipal law, but it is anchored in public international law. In light of this then: how an investment tribunal is constituted? what is the nature of the consent of the host State? And what is its relation to that of the investor? Or on what is an arbitral tribunal in investment treaty arbitration stood?⁴⁹

There is a very popular and relatively broad chosen position for this question which maintains that the host State offers the arbitration to the investor under an investment treaty,⁵⁰ and the investor as its offeree then accepts this offer- this is done through filling a request for arbitration.⁵¹ In this view, investment treaty arbitration is a matter of contract, and thus is a reciprocal product as it is in international commercial

48 However, referring to sui generis is true only when one compares it to the typical ways of reference to arbitration. But if we accept that the general consent is an instance of unilateral acts of stats, it is not sui generis anymore because it is well known in international law.

49 This question is different from the question of the legal framework that investment treaty arbitration is founded on.

50 See, for instance, ICS Inspection and Control Services Limited (United Kingdom) v. The Republic of Argentina, UNCITRAL, PCA Case No. 2010-9, Award on Jurisdiction, 10 Feb 2012, paras. 270-1.

“Whereas in public international law in the State-to-State context, the jurisdictional analysis usually focuses on the consent expressed in the instrument containing the arbitration provision, investor-State arbitration requires the additional and posterior consent by a non-signatory to that treaty: the investor.

The formation of the agreement to arbitrate occurs through the acceptance by the investor of the standing offer to arbitrate found in the relevant investment treaty. The terms and conditions of the offer, however, were negotiated earlier and separately by the contracting parties to the treaty and are directed at investors of the other contracting State generally, rather than at any particular investor.”

51 See, e.g., Planet Mining Pty Ltd v. Republic of Indonesia, ICSID Case No. ARB/12/40, Award on Jurisdiction, para. 152 et seq; Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, Decision on Jurisdiction, 19 Dec 2012, para 48.

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arbitration.⁵² Although advocating the view perhaps makes historical sense, especially for early tribunals,⁵³ the problem with that draw a contractual analogy between the source of reference in international commercial and investment treaty arbitration origins from the fact that the latter is anchored in an international treaty, under which the host State gives its consent, and it further contains the inter partes obligations of the States who are parties to the treaty at issue.⁵⁴ This has a clear implication for investor’s position, namely the investor is solely a beneficiary to inter-State bargain, not a privity to them. Contracting States act in their sovereign acts in an international law sphere. Therefore, for a contractual theory to be able to analyze the arbitral relationship between the host State and investor is to refer to the law of third-party beneficiaries.⁵⁵

The difficulty with this view reveals by considering the fact that a third-party beneficiary relationship in its all legal aspects adheres to, and is dependent on the principal obligation from which it emanates. Once a state gives a consent in a treaty, the act is an international sovereign-nature act, so the relationship (the contract) that is made of merger of this general consent and that of investor cannot be governed by a municipal law, but a treaty. As a matter of orthodoxy, the law of treaties does not provide for plausibility of generating a right for an individual as a third-party beneficiary.⁵⁶

52 See, generally, Charles H Brower, ‘Beware the Jabberwock: A Reply to Mr. Thoma’ (2002) 40 Columbia Journal of Transnational Law 465.

53 Especially when one takes into account the historical background of arbitration in both investor-State (contract-based) and inter-State arbitration which were based on the offer-acceptance model.

54 Jose Alvarez, ‘Are Corporations “Subjects” of International Law?’ (2011) 9 Santa Clara Journal of International Law 12 <https://digitalcommons.law.scu.edu/scujil/vol9/iss1/1> accessed 3 June 2020.

(“In the same way that the U.N. Charter implicitly recognizes that the United Nations has a distinct personhood apart from its member states, investment treaties appear to recognize the distinct

"personhood" of their third party beneficiaries, whose rights appear to be delineated in these treaties as distinct from those of the state parties to such treaties.”)

55 See, e.g., Susan D Franck, ‘The Nature and Enforcement of Investor Rights Under Investment Treaties: Do Investment Treaties Have a Bright Future?’ (2005) 12 U.C. Davis Journal of International Law and Policy 47 footnote 100.

56 Article 34 of VCLT provides: “A treaty does not create either obligations or rights for a third State without its consent.” Also, article 35 sets out: “An obligation arises for a third State from a provision of a treaty if the parties to the treaty intend the provision to be the means of establishing the obligation and the third State expressly accepts that obligation in writing.” [emphasis added to both]

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What does remain then? The present author believes that the best solution that accounts for the nature of the general consent is the law of unilateral acts of states.⁵⁷ Unilateral acts of States are “Declarations publicly made and manifesting the will to be bound may have the effect of creating legal obligations.”⁵⁸ Unilateral acts of states are of two general types, viz, independent or freestanding acts and acts made according to a treaty.

Independent acts are those declarations and actions by officials of a State who are capable to bind that State to an international obligation through reasonable public and diplomatic means.⁵⁹ This type of unilateral acts has its own method of interpretation As the ILC noted, “In the case of doubt as to the scope of the obligations resulting from such a declaration, such obligations must be interpreted in a restrictive manner. As it is clear by the name, unilateral acts made according to a treaty are those acts that refer to an international treaty. It should be noted that the reference to treaty in this type of acts does not change unilaterality thereof. But the reference in these acts is only to acknowledge the treaty obligation according to which they are made.⁶⁰

Importantly, what gives credit to this view is that unilateral acts are able to make international obligations not only for the benefit of States, but also for foreign investors.

In this respect, ILC remarked that unilateral acts of states “may be addressed to the international community as a whole, to one or several states or to other entities.”⁶¹ Therefore, the law pertaining to unilateral acts of states can readily overcome the challenges and limitations concerning the applicability of treaty law in the contractual analogy of the relationship between investor and state.

The general consent is, therefore, a unilateral act of state that is made according to an international obligation that is closely connected with a treaty: the consent is at the

57 See, generally, International Law Commission, ‘Guiding Principles Applicable to Unilateral Declarations of States Capable of Creating Legal Obligations, with Commentaries Thereto, 2006’ (2006)

<https://legal.un.org/ilc/texts/instruments/english/commentaries/9_9_2006.pdf> accessed 3 June 2020.

58 ibid 370.

59 ibid 360.

60 Mobil Corporation, Venezuela Holdings, B.V. v. Bolivarian Republic of Venezuela, ICSID Case No.

ARB/07/27, Decision on Jurisdiction, 10 Jun 2010, para 90.

61 International Law Commission (n 57) 376. For the scope of “other entities”, see WM Reisman and MH Arsanjani, ‘The Question of Unilateral Governmental Statements as Applicable Law in Investment Disputes’ (2004) 19 ICSID Review 328 <https://academic.oup.com/icsidreview/article- lookup/doi/10.1093/icsidreview/19.2.328>.

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same time a treaty obligation (to offer arbitration to foreign investors) and a unilateral act (to make the state itself committed to a self-checking system vis-à-vis qualifying foreign investors). Form a public law perspective, the state as a unity which represents a nation in international sphere in front of other states. This absolute authority has the appropriate power to make all individuals present within its borders subjects to regulatory measures it takes.⁶² Moreover, this absolute power entitles the State to determent specific effects, implications or availability of a remedy for the regulatory measures it takes. Therefore, in the context of investment treaty arbitration, “the state exercises its competences to determine the way in which disputes relating to its sovereign activity on its territory can be settled, which is foreign to the consent expressed by private parties who, among themselves, agree to arbitrate one specific dispute as an alternative to national courts.”⁶³

More significantly, according to what said above, it should be noted that the unilateral act of state is sufficient to give independently the required basis to an international arbitral tribunal to be able to be constituted. However, this does not mean that investor’s consent is irrelevant for the process of investment treaty arbitration. But depending on the treaty at issue, filing the arbitration by investor may have various consequences for either investor or the host State. For instance, some treaties note that for investor to be able to initiate an investor-State adjudication, he must waive his right to seek all other available remedies.⁶⁴

From this perspective, the investment treaty arbitration is a mechanism more corresponding to an administrative adjudication; a mechanism that is solely rooted in the State’s will to provide an opportunity for individuals to challenge its regulatory measures according, however, to the conditions set out by State its own. Accordingly, as it will be discussed later, those conditions that usually attached to the general consent cannot be derogated from even by an agreement between the host state and the foreign investor because the general consent with those conditions is a result of inter-state

62 Loughlin (n 17) 82.

63 De Brabandere (n 16) 51.

64 See article 1121 of NAFTA

Investment Treaty Arbitration as a Public and Unilateral Dispute Settlement

Department of Law Spring Term 2020

Master Programme in Investment Treaty Arbitration Master’s Thesis 15 ECTS

Investment Treaty Arbitration as a Public and Unilateral Dispute Settlement

A redefinition of the autonomy of disputing parties and arbitral tribunals in the process of investment treaty arbitration

Author: Meysam Salehi

Supervisor: Ylli Dautaj

List of Abbreviations

Table of Contents

1 Introduction

2 Dichotomy Between International Commercial and Investment Treaty Arbitration