INTRODUCTION

CHAPTER-1

India is the sixth largest consumer of oil in the world and the ninth largest crude oil importer. Indias oil and gas sector contributes over 15% to the Gross Domestic Product (GDP). According to Ministry of Petroleum and Natural Gas, India has a total reserve of 1201 million metric tonnes of crude oil and1437 billion cubic metres of natural gas as on 01 April 2010. The total number of exploratory and development wells and metreage drilled in onshore1 and offshore2 areas during 2009-2010 timeframe was 428 and 1019 thousand metres respectively.3 Recently the Government of India (GoI) has introduced a new Exploration Licensing Policy (NELP)4 with an objective to provide a level playing field to all the parties, private and public, to compete on equal terms for the award of exploration acreage. A total of 246 blocks were awarded under the eight bidding rounds (from 2001 to November 2010) and 68 oil and gas discoveries have been made so far in the NELP blocks.5 Various measures are also being taken to substantially accelerate exploratory activities for enhancing domestic oil and gas production. These GOI policies of implementing Enhanced Oil Recovery (EOR)/Improved Oil Recovery (IOR) schemes-in particular, exploring new areas, and use of new technologies for seismic surveys, work over, stimulation operations, drilling of wells etc. in producing areas has increased the number of players and activities in this industry.6 Due to the number of parties involved within the oil and gas (O&G) industry, along with the complexity of drilling, exploring and production activities there are possibilities of potential of disagreements, conflicts or different understanding upon the agreements signed between the parties which are likely to cause disputes. As the industry is known as a high-cost and high-risk commercial business, it is impractical for the business players to discontinue any
1 Onshore Oil fields are in Assam/Nagaland, Arunachal Pradesh, Gujarat, and Tamil Nadu/ Andhra Pradesh and natural gas, onshore fields are at Assam, Tripura, Gujarat, Tamil Nadu, Andhra Pradesh and Rajasthan. 2 Offshore production of oil occurs at Bombay High run by ONGC and Private/Joint Venture companies and offshore production of natural gas takes place at the Western area of Bombay High. 3 Ministry Of Petroleum & Natural Gas Government Of India New Delhi (Economic Division), Basic Statistics on Indian Petroleum & Natural Gas, 2011-12, Sourced from: http://petroleum.nic.in/petstat.pdf , last accessed on 08.04.2013 4 Features, The New Exploration Licensing Policy (NELP), GoI, Sourced from: http://pib.nic.in/feature/feyr2001/fsep2001/f110920011.html , last accessed on 08.04.2013 5 i.d Invest India, Oil and Gas sector overview, Sourced from: http://www.investindia.gov.in/?q=oil-and-gas-sector, last accessed on 07.04.2013

business activities whilst seeking settlement over disputes. Therefore players see it as being critical to solve disputes in a swift and effective manner along with avoiding public attention which would be disadvantageous to the ongoing businesses. Consequently, players must decide the most suitable scheme and at the same time, still able to maintain the ongoing relationship. As the oil and gas industry is a heavily regulated industry, sometimes it is necessary to have decisions from the court on a point of law, or protective or injunctive remedies. Thus when a dispute arises, litigation procedure will be unavoidable, at least for the aspect of the dispute for which an order is necessary. However, many issues need to be considered within this traditional legal method. The slow pace of litigation, expensive legal fees, court attitude, judges who handle the case not being specialized concerning the industry concerned, and a decision underlying a win- lose approach are often reasons for the parties to resolve thedisputes at hand outside the court through various forms of ADR. In addition, ineffective outcomes from court litigation, as well as the risk that any disputes settled through such litigation may not have the desirous result, have increased the tendency among the industry to settle their disputes outside court settlements (ADRs). So in this paper we will be investigating different ADR methods and how they can help the O&G industry in India in resolving disputes.

NATURE AND DEVOLOPMENT OF DISPUTES SETTLEMENT

The origin of the Indian oil & gas industry can be traced back to the late 19th century, when oil was first struck at Digboi in Assam in 1889. At independence, oil exploration and production activities were largely confined to the North-Eastern region, particularly Assam. O&G sector was announced to be the core sector industry under the Industrial Policy Resolution of 1954 thus the exploration & production activity was controlled by the government-owned National Oil Companies (NOCs), namely Oil & Natural Gas Corporation (ONGC) and Oil India Private Ltd (OIL) at that time.7 Up to 1990s, there were three rounds of exploration bidding with no success in finding new oil/gas deposits by the foreign companies who only were allowed to participate in the bidding process. This led the government to initiate Petroleum Sector Reforms (PSR) in 1990, under which the fourth, fifth, sixth, seventh and eighth rounds of exploration bidding were announced during 1991-94. For the first time , Indian companies with or without prior experience in exploration & production activities were allowed to participate in the bidding process during these rounds. In 1995, the Government announced the Joint Venture Exploration Programme. However, this was viewed as a deterrent by major private sector oil companies. This led the government to announce New Exploration Licensing Policy (NELP) in 1997 (operationalised in 1999) as part of its Hydrocarbon Vision 20251, a landmark 25year planning document. Under NELP, licenses for exploration are being awarded only through a competitive bidding system and NOCs are required to compete on an equal footing with Indian and foreign companies to secure Petroleum Exploration Licenses.8

India has 20 refineries out of which 17 are in the public sector and three in the private sector. Public sector corporations dominate the Indian exploration and production sector .

In terms of the percentage share in total production Oil and Natural Gas Corporation (ONGC) accounts for the highest share.

7 Evolution of the Indian oil http://www.dnb.co.in/IndiasEnergySector/GasIndustry.asp 8 i.d.

and gas industry, , last accessed on 08.04.2013

Sourced

from:

The second major player in the sector is also a public sector undertaking Oil India Limited (OIL). Both of these undertakings account for about more than 70% of the total market. The remaining share of the pie is cluttered with various private players in the market.9 Someof the key players in the oil and gas industry in India are Oil India Ltd., Oil and Natural Gas Commission, Indian Oil Corporation, Hindustan Petroleum Corporation Ltd., Bharat Petroleum Corporation Ltd., Gas Authority of India Ltd., Reliance Industries Ltd., Essar Oil, Adani Gas, Petronet LNG, Cairn Energy, Shell, British Gas and BP.10 At present the oil industry can be divided into three major componentsand disputes can arise at a horizontal11 or vertical12 level: Upstream segment: comprises Exploration and Production (E&P) activities. Midstream segment: is involved in storage and transportation of crude oil and natural gas. Downstream segment: is engaged in refining and production of petroleum products, and

processing, storage, marketing and transportation of commodities such as crude oil and natural gas. NATURE OF DISPUTES IN OIL &
GAS INDUSTRY:

High government regulations, FDI and use of high priced technologies as it has been discussed earlier in the paper draws a simple conclusion that Contracts and projects related to the oil and gas industry will generally be complex in nature, involving large amount of money and will alsobepolitically sensitive. Cross boundary exploration/exploitation rights are another source of disputes as Companies engaged in the exploration or development of resources in disputed territories, they may find themselves in a disruptive tug of war potentially causing significant losses. When that occurs, such companies may have enforceable contracted rights, as long as the disruption to their business is not categorised as a Force Majeure Event. Other remedies might be available

9 Invest India, Oil and Gas sector overview, Sourced from: http://www.investindia.gov.in/?q=oil-and-gas-sector last accessed on 07.04.2013 10Ministry of Petroleum and Natural Gas Economic Division, Basic Statistics on Indian Petroleum & Natural Gas, 2011-12, Sourced from: http://petroleum.nic.in/petstat.pdf , last accessed on 07.04.2013 11 Dispute between two companies in the same segment Dispute between two companies in two different segments

National Law University, Odisha

pursuant to Bilateral Investment Protection Treaties or by seeking diplomatic protection from their home state.13 TYPES OF DISPUTE IN THE OIL AND GAS INDUSTRY: Disputes in the Industry can range from maritime boundary disputes between States through oil and gas trading contract disputes to offshore construction and pipeline disputes. Some of the areas of dispute which are likely to arise are as follows14 : 1. 2. 3. 4. 5. 6. 7. 8. International Maritime Boundary Disputes Equipment Jurisdiction Disputes Oil Trading Contracts Gas Contracts Redetermination Quality Disputes Hedging

11/12 Disputes over rights to sub-sea resources: Implications for the oil and gas industry, International Arbitration Alert, Sourced from: http://www.shlegal.com/knowledge/publications/11_12_Disputes_over_rights_to_subsea_resources , last accessed on 08.04.2013 14 Anthony Connerty, Dispute Resolution In The Oil And Gas Industry - Recent Trends, Sourced from: http://www.dundee.ac.uk/cepmlp/journal/html/vol8/article8-8.html , last accessed on 07.04.2013
13

DISPUTE RESOLUTION IN OIL GAS INDUSTRY LEGAL MECHANISMSTO RESOLVE SUCH DISPUTES LITIGATION: The traditional way of resolving disputes in India in O&G sector is litigation as the need of litigation is indispensible in certain cases specially where the legal rights of the parties to be decided and there is a need to deciding question of laws or questions of facts as not all the disputes are not compromizable through negotiations. Now a court settlement of dispute will attract a lot of court fees as generally the subject matter in the upstream segment will be of high value (exploration rights, production technologies etc.). Moreover the court proceeding are time consuming thus in most of the cases, litigation will not be a favoured mechanism to resolve disputes as litigation will lead to temporary stoppage of work for years which will turn the huge investment money unproductive and the opportunity loss will be huge in the given case. This will lead to discourage of FDIs in India in the given sector, thus for the overall growth of the O&G sector its better for the Indian companies to not drag the disputes to the courts unless its really necessary. NEGOTIATION Being the least intervention dispute resolution scheme agreed by the disputants, negotiation is a non-binding scheme by which the disputants interact with one another and make an effort to settle any disputes without the intervention of a third party. Negotiation allows the disputants to have the maximum control over the process and its outcome. :

MEDIATION
Mediation is ought to be successful as disputes within the O&G industry by and large are purely commercial disputes between equally commercial parties15 . In this case, a mediator acts only as a facilitator and scrupulously avoids making any kind of evaluation and recommendation concerning either party's case during the negotiation process (a facilitative mediator). the success of this ADR process depends on the fact of willingness of both the parties to be bound by the mutual agreement they arrive through the procedure. Thus mediation tends to be more successful when the mediator has special knowledge of the
15

Disputes between upstream segment

industry or of a technical process used within it. The drawback, however, is that it is seen that the outcome is no more than an agreement enforceable as a contract in law. Parties may not appreciate its usefulnessat a later point of time and draw the other party to the court.

EARLY NEUTRAL EVALUATION

As a preliminary assessment of facts, evidence or legal merits, ENE aims to serve as a basis for further and fuller negotiations, or, at the very least, helps the disputants avoid further unnecessary stages in litigation. An independent person - known as a neutral - will expresses a non-binding opinion on the merits of the issues specified by the disputant. However, the success of ENE relies upon the disputants' faith in the fairness and objectivity of the neutral third-party as well as their willingness to compromise. An ENE is generally suitable for cases which require technical, scientific or specialist issues requiring expert involvement.

MED-ARB
To overcome the drawback of mediation where its outcome is no more than another agreement, the industry is now developing a process which starts as a mediation and finishes as arbitration. A mediator will try to bring the parties to compromise their disagreement. If the parties fail to compromise, they will then proceed to arbitration. The advantage is the time and cost efficiency as it uses the same person for both roles (mediator and arbitrator). However, this advantage may be a disadvantage to the process as the disputants may be less open with the mediator in private session if it is known that the mediator may act as arbitrator. As for the mediator, one will not be able to fully ignore any information given by the disputants when acting as arbitrator. As a result, it could affect the fairness of the outcome given. Med-arb is not suitable in any cases where either mediation or arbitration would be inappropriate; or for any case where the parties may want to disclose confidentiality information with the mediator. In the United States, it is generally used to solve labour contract negotiations disputes.

EXPERT DETERMINATION
Considering that it is essential for the industry to keep any business activities running whilst the disputing parties seek settlement over disputes, it is common for the parties to choose ED over any other mechanisms by referring the disputes to a third neutral party for determination. The key feature of this scheme is its speed as the disputants will appoint an

National Law University, Odisha

expert within the oil and gas industry to consider issues and make a binding decision or appraisal without necessarily of having to conduct any enquiry following adjudicatory rules.

ARBITRATION
When parties based in a single state enter an agreement and opt to dispense with an arbitration clause, the local courts will decide the dispute. Depending on the state, the applicable law may be from the common law tradition, the civil law tradition, Shari'a, or another legal tradition. However as the parties involved within the oil and gas agreements are usually from different jurisdictions, they will consider the local legal system and mechanisms of the local judiciary as something foreign for them. Thus, it is understandable when they decide to opt for international commercial arbitral institution as the forum for disputes. Not only will they feel more comfortable as they have control over the rules used, but the arbitrator appointed to resolve the disputes is believed to have integrity, honesty, expertise, and professionalism in their fields (and in no way not representing the parties nor having anything to do with the case).Moreover, as the outcome- based on a win-win solution approach - shall be final and binding, the arbitration forum remains efficient in terms of time and cost.This, however, depends on the agreement of the parties to execute the arbitral awards as it has no effective force of power. In addition, the benefit of international commercial arbitration for international O&G disputes can only be achieved when arbitration agreements and procedures are well thought out.16 To summarize, with the drawback of litigation procedures, business players within the oil and gas industry are now seeking an alternative requiring more efficient schemes in terms of time and cost. This, however, applies only to disputes which do not require any decisions from a court on a point of law, or protective or injunctive remedies. Despite the wide variety of alternative schemes -where each of every scheme has its own advantages and disadvantages - there are several common features which distinguish them from procedures of national court:17

16 Chloro Controls (I) P. Ltd. v. Severn Trent Water Purification Inc. and Ors, Supreme Court of India, 28

September 2012 17 Read more: Parties the oil and gas industry | Law Teacher http://www.lawteacher.net/tradinglaw/essays/parties-the-oil-and-gas-industry.php#ixzz2PpR3j1Gy , last accessed on 07.04.2013

10

? International arbitration18 Where disputes cannot be resolved amicably the parties may turn to international arbitration or other dispute resolution processes. International tribunals have the power to impose similar arrangements on disputing parties. Countries that have signed the United States Convention on the Law of the Sea (UNCLOS), which defines the rights and responsibilities of nations in their use of the worlds oceans, may have recourse to the International Tribunal for the Law of the Sea (ITLOS), while bringing claims before the International Court of Justice (ICJ), or international arbitration under UNCLOS are also viable options.
ADVANTAGES TO RESOLVE THE DISPUTES BY

ADR

VIS-A-VIS LITIGATION?

In ADR, the disputants are largely free to fashion the procedures. As a result, a flexible rules in assist the parties could allow them to have more control over the procedure;

o o

As the focus on interest in ADR is merely the contentious issues, the outcome could be more satisfying and efficient; With a management involvement - involving the business players directly in the scheme - a more creative and forward looking outcome will be achieved.

o o

ADR focuses on relationship. Thus, the disputants will be able to maintain a positive relationship even after the disputes have been resolved; Confidentiality used within an ADR scheme is a critical element to avoid any unnecessary public attention which would be disadvantageous to the ongoing businesses; and

With a limited transaction costs as an approach, ADR schemes generally produces significant savings in terms of the time invested, the direct costs of the procedure and the many indirect costs arising in the context of disputes.

18 Stephenson Harwood, Shai Wade and Tatiana Minaeva; Disputes over rights to sub-sea resources

implications for the oil and gas industry, http://www.lexology.com/library/detail.aspx?g=78f1856c-7040-4e1d-942e-f20f67ef2c7d 07.04.2013

Sourced from: , last accessed on

11

CONVENTIONS FOR DISPUTE RESOLUTION Although ADR can be useful as a complement to litigation - which is sometimes unavoidable -it can often assist in solving disputes before litigation becomes necessary. The success of ADR within the oil and gas industry is reliant upon the continuing co-operation and goodwill of the parties to resolve the disputes. ADR can be an alternative from the costly and time- consuming process of litigation without having to discontinue any ongoing business activities. However, the author observes that the most appropriate dispute resolution scheme should always be determined on a case by case basis, depending on the particular circumstances of each case. The nature of the dispute, the identity of the parties, the courts' jurisdiction, and the location of assets are only some of the many factors which should be taken into account when deciding which form of dispute resolution scheme suit the parties' best. It is essential to include a clear, comprehensive and internally consistent dispute resolution provision in every commercial agreement within the industry. The effort to tailor the provision during the negotiation and drafting stage will be the most suitable approach in avoiding any costly and time-consuming dispute settlement scheme. Further, it is at the drafting stage that the parties have the best opportunity to take control on how they would settle any potential disputes.19

Sourced from: Parties the oil and gas industry | Law Teacher http://www.lawteacher.net/tradinglaw/essays/parties-the-oil-and-gas-industry.php#ixzz2PpSXmA9O , last accessed on 07.04.2013
19

12

OBJECTIVES OF STUDY 1. To investigate legal issues & disputes in oil & gas industry. 2. To investigate legal mechanisms to resolve disputes and to find out the best suitable method of dispute resolution in this industry.

RESEARCH METHODOLOGY
We will investigate into various methods of dispute resolution and the advantages and disadvantages of such methods. We will try to find out which kind of ADR is an effective remedy for dispute resolution in the oil and gas industry. The researcher would study legal issues & disputes resolution mechanisms in oil & gas industry in India and corresponding practices in other countries? ? Who are the stakeholders involved in oil & gas industries and disputant parties? ? What is the nature of disputes in oil & gas industry? What kind of disputes arises in oil and gas industries? ? What are the Legal mechanismsused to resolve such disputes? ? Whether ADR be a better approach? What are the advantages to resolve the disputes by ADR vis-a-vis litigation? ? What is the traditional way of resolving disputes in this industry? What are the emerging trends in dispute resolution of this industry? ? Which form of ADR within the oil and gas industry is best suitable for the parties to resolve the disputes? ? What are the corresponding practices in other countries?

LITERATURE REVIEW
This article seeks to show how practically all political disputes, intra and inter party disputes with the exception of election petitions, may be resolved through arbitration and the Alternative Dispute Resolution Mechanisms (ADRs) (Note 1) in Africa, using Nigeria as a case study. It shows that it will be for the general good of all political parties, politicians and indeed all African countries for the necessary legal structures to be erected for the formal adoption of those mechanisms for the resolution of such disputes. It is part of the articles thesis that in formalising such a practice, African countries may well be blazing a trail and that the fact that it has not been done elsewhere before, especially in the Western world, is not a reason why it should not be done in Africa and soon too. It is also hoped that the discussion will provide a guide post for those other countries and regions and other countries or regions of the world that are also enmeshed in difficulties with respect to the handling of political disputes in their Court systems. It is hoped that the discussion will enable those countries and regions to chart this new course and reap the benefits thereof. We first examine the different types of political disputes that occur in African countries which we propose can be appropriately dealt with through the ADRs. We then show that litigation, which most Africans (including politicians and political parties) have normally generally resorted to for the adjudication of disputes, is incapable of actually resolving disputes. We shall see that the ADRs, are more consistent with the African culture of everyone being the brothers keeper and a generally communal lifestyle(Note 2) and have over the ages been very effective in the resolution of African political disputes. As a way of more clearly showing that the ADRs actually have the capacity to properly and thoroughly resolve political disputes even in the future, we examine some of the several advantages which they enjoy over litigation, that are relevant to this discussion. The legal and other challenges against the resolution of political disputes through the ADRs are discussed together with their solutions. For convenience, we shall in this discussion classify arbitration and the conventional Alternative Dispute Resolution Mechanisms (the ADRs) together as ADRs. Otherwise, arbitration is no longer so classified. Though it is an alternative to litigation in the general sense, it is no longer regarded as an ADR in the technical sense. Experts have since come to accept it as a different dispute resolution mechanism from both litigation and the ADRs. Dispute resolution media are therefore generally classified as litigation, arbitration and the ADRs. The ADRs consist of early neutral evaluation, conciliation, mediation, negotiation, rent-a-judge, med-arb, arb-med and other modes and combinations of modes that have been fashioned out or are being fashioned out by commercial men, their legal advisers and ADR practitioners in response to practical needs in the market place of life. The reference to ADRs here in the sense already explained is their Western style forms, not customary law equivalents. This writer has shown in a number of other works that in all precolonial African traditional societies (including the ones that eventually made up the present day Nigeria), arbitration and such ADRs as conciliation, mediation and negotiation were in constant employment to resolve disputes. It has also been shown that in their employment and use Africa, at least in some areas, has normally been ahead of the rest of the world. For instance, though in Europe and the Americas, those mechanisms have over the ages been used for mainly commercial disputes, Africans did in the ancient and immediate past use them for the resolution of practically all sorts of disputes including public sector disputes such as tortuous human rights infringements and disputes most of which (in Africa) often have their roots in political differences and disagreements. This article demonstrates that even in the present times most of Africas troublesome political disputes have been resolved not through the Courts but the ADRs. It canvasses that by formally recognising and providing for the resolution of political disputes through the ADRs, modern African legal systems shall only be

effecting a return to what their predecessor native societies had always done but which was cut off from the laws and norms of Africas modern States by the interregnum of the colonial process. It further contends that in so doing African States shall blaze a trail for the modern world and once more show direction to the world in a new use of the ADRs.(Note 3) 2. Political Disputes in View Political parties and politicking, being avenues for the pursuit of power, disputes are inevitable amongst them. In every age and clime, the pursuit and maintenance of power and influence amongst persons and nations/peoples has been the source of most of mankinds wars and conflicts.(Note 4) In partisan politics, it is particularly so in an environment like Africas where selfless service does not always seem to be the primary motive for seeking political power. (Note 5) Again, internal democracy and fairness to all members also do not always seem to constitute the hallmark of political party administration. Inter and intra party disputes arise out of those situations. In addition to such inter and intra party disputes, other forms of political disputes afflict African nations. They include politically inspired disputes between regions and blocks. It is necessary to state at this point that the disputes for discussion in this work are domestic disputes i.e. political disputes occurring within a country, not inter state disputes. 2.1 Intra and Inter Party Disputes More than anything else, intra party disputes have the capacity to seriously weaken a political party. It is also particularly so in a setting like contemporary African politics in which, with the exception of a few places like South Africa, party supremacy and discipline often seem to be rather low.(Note 6) The disputes easily develop and fester. They include disagreements over elections or appointments into party offices; the choice of party flag bearers for municipal, state and national elections; the sharing of appointive offices after a party has won elections or been invited to join a government by a winning party; the handling of party funds; recognition of particular members importance in the party; the godfather syndrome(Note 7); deep seated sectional/tribal sentiments and rivalry etc. They lead to further disputes and eventually to formation of camps (real camps or mere propaganda camps), decamping of members and in some cases the actual demise of the party in question. The recent difficulties in Niger Republic arose out of the tenure elongation efforts of President Tanja Mamodu leading him to dissolve Parliament, toy with the nations judiciary and alter the Constitution. Squabbles for position in a party led to the initial parting of ways between President Robert Mugabe of Zimbabwe and his long time ally, Mr. Morgan Tsvangiria and their eventual contest for the Presidency which, but for the successes of the ADRs, could have torn the country apart. Inter party disputes are mostly rooted in deep seated controversies over whether or not a particular candidate (belonging to a particular party) has been properly elected and declared, and press wars (sometimes characterised by incorrect assertions) between parties in power and the opposition. The dispute between Robert Mugabe and Morgan Tsvangiria after the Zimbabwean elections in 2008 also exemplifies this. 2.2 Other Political or Pseudo Disputes Some inter party disputes sometimes touch on and include the bodies or organisations responsible for organising elections, which in Nigeria is the Independent National Electoral Commission (INEC). They are mainly disagreements between parties over how a certain thing has allegedly been done or not done to favour or disfavour one party or the other. Often, however, a party or the other makes such matters take on the nature of a new kind of dispute between it and the electoral body. In Nigeria, for instance, some political parties recently established a very sharp disagreement with INEC and threatened to sue it for its perceived silence over the launching by the ruling Peoples Democratic Party (PDP) for funds with which to build the partys national Headquarters which those parties claim INEC should have intervened with respect to.(Note 8) Again, whether such disputes are properly resolved or not goes to affect the confidence or otherwise with which the parties, especially those in the

opposition, behold the electoral body and its activities. It also affects how the electoral body perceives such parties, the sincerity of their opposition and issues that they may subsequently raise against it and its activities. Those disputes also need to be properly resolved through the ADRs. In some African countries, political parties also seem to be developing a new genre of political disputes in the country a rather surprising one sided kind of dispute between any party that loses a Court case and the judiciary. Though the judiciary is by no means a disputant with any political party (or any litigant for that matter), in recent times in countries like Nigeria any party that loses a case in Court (particularly an election petition) sees the judiciary as an opponent that is bedevilled with all sorts of vices and deserving of nothing but the harshest forms of criticism. Meanwhile, when the same party wins a case the same judiciary is declared upright, courageous and the last hope of the common man indeed.(Note 9) Such disputes or pseudo disputes are beyond the scope of this discussion and indeed are not actually disputes properly so called since they are inter alia, one sided. The silence with which the judiciary treats such unfair criticisms whilst continuing in its rigorous self assessments and improvement is an ample response to or settlement of such disputes. These different types of disputes referred to above can be pre or post an election. The discussion shall cover all of them except election petitions. We shall see that under the law as it presently stands, election petitions cannot be settled through the ADRs and that there may not be any need indeed for a change of legal policy on the point. 3. Past and Present Use of ADRs for Political Disputes As already indicated, in the past the African kingdoms and societies resorted to customary law arbitration, conciliation, mediation and negotiation for the settlement of all sorts of disputes. Recourse to them was not hampered by any principle of arbitrability or otherwise of any particular dispute or indeed any such thing. Though these mechanisms were not called these English names and might in some societies not have been clearly differentiated one from the other,(Note 10) they were in constant use by the people. Though these mechanisms were used to settle disputes arising out of commercial transactions, they were not restricted to such disputes but were used for all sorts of disputes including political disputes, matrimonial matters and sometimes even criminal cases. Thus if there was a chieftaincy struggle between two or more ruling houses, chiefs and elders would be called in. If there was a misunderstanding between close relations, an elder or elders of the family would intervene. If it was between couples, one or some of their parents, brothers and, or sisters or friends would intervene. In Igboland in Nigeria, if it was between members of a village who were members of the same age grade, the age grade could be invited into the matter. If two villages or communities were involved in a dispute, the chiefs and leaders of thought of the larger kindred would be invited into the matter. Each of these interveners or invited adjudicators would consider the case with a view to doing justice between the contesting parties or families by declaring what was the right thing to do following the ancient customs and laws of the land. In thus declaring the law, they would also pay due attention to what would preserve the social relationships, the cohesion and virtues of the family or community as the case may be. If one of the parties had instituted the proceedings in a manner which required that whichever party was eventually found to be wrong should be sanctioned, it was customary law litigation and would be conducted as such. If he did it in a manner that he did not necessarily seek vengeance or sanction, it would be an ADR proceeding which could be arbitration, conciliation, mediation etc. The character of the proceeding and the end result determined which ADR it was. These mechanisms and their employment for the effective resolution of these and all other kinds of disputes have since time immemorial been recognised for instance in Nigeria and Ghana in a long stream of judicial decisions.(Note 11) In the past as well as the present African traditional societies, litigation in the sense of mere declaration of right and wrong and award of compensation or imposition of sanctions was and is far less employed than the ADRs. The traditional Africans have always found the ADRs more akin to their philosophy and life style. The ADRs, even in Western societies, are geared towards the

administration of enduring - not just technical - justice and the restoration of pre-dispute relationships. As a commentator has noted of the African system, The quintessence of the African jurisprudence is that in a dispute, no party is totally at fault or completely blameless. As such, a high value is placed on reconciliation and everything possible is done to avoid the severance of social relationships. Where men must live together in a communistic environment, they must be prepared for give and take relationship and the zero sum, winner-takes-all model of justice is inappropriate in their circumstances.(Note 12) Even in the present day Africa, the ADRs have proved more effective in the resolution of thorny political disputes. It has almost always turned out that when political disputes (such as who has been duly elected or returned in an election) are settled through the Courts, the parties may accept the verdict and the declared winner forms the government, but the parties would go on in residual disputes. It would be very difficult for them to come together and work together for the interest of the country. This has happened at one point in time or the other in Nigeria, Ghana, Liberia, Egypt, Madagascar and in countries outside Africa such as Chile and Sri Lanka. This would make room for unhealthy political rivalry most of the times. It has become a reoccurring event in Africa however that even when a political dispute has become so deep-set that it is insoluble through the Courts or any other medium, it can be sorted out through the ADRs. Examples abound but two recent and prominent ones should suffice. The nearly intractable post-election dispute in Kenya between President Mwai Kibaki and Mr. Raila Odinga was eventually resolved through mediation by another African, Mr. Kofi Anan the immediate past UN Secretary-General. This was after so much life and property as well as national reputation had been lost. Following the Zimbabwean national elections of 2008-9, the equally destructive and intractable dispute between President Robert Mugabe and Morgan Tsvangiria was eventually settled through the mediatory efforts of the then President Thabo Mbeki of South Africa. Despite Mugabes unnecessarily hard stance, the mediation worked and was able to bring the parties to a point where they could negotiate their way out of the problem and proceed to form a unity government for the good of the country. Probably in realisation of the effectiveness of the ADRs formally or informally undertaken in the African society, the African Union has prescribed and implemented in a fairly faithful manner the idea of peer review and mediatory interventions in intra and inter State conflicts on the continent. This article simply canvasses that this wonderful practice be formalised in the domestic law of each country so that the benefits of effective resolution of political disputes will avail each African nation and its people. 4. Effective Dispute Resolution: Litigation v. the ADRs Most African countries provide for the resolution of disputes, including political disputes, through the Courts.(Note 13) Sometimes the provision is crafted in a manner that is so firm in favour of the Courts that other dispute resolution mechanisms are seemingly excluded.(Note 14) In addition, most of the countries that practice multiparty democracy have provisions for the resolution of election related disputes through the Courts or such other equivalents as Election Petition Tribunals. In Nigeria, s. 285 of the 1999 Constitution prescribes for the determination of election petitions by Election Petition Tribunals though appeals lie to the Courts, to the Court of Appeal with respect to governorship election etc disputes and up to the Supreme Court with respect to presidential election disputes. The meaning of all these is that law and policy makers seem to have made litigation the preferred medium of attempting the resolution of political disputes on the continent. This legal regime was put in place by each African country unmindful of the fact that litigation is not an effective medium for dispute resolution, much less so political disputes and even much less so in Africa. It is also partly traceable to the effects of the colonial process. It was the colonial interregnum that disrupted the warm recourse to the ADRs for resolution of disputes in the traditional African societies. To worsen things, whilst Western style ADRs were developing in the West they (the Western style ADRs) were in stifle in Africa. They were no efforts by the

colonial governments to encourage the use of those processes in the general body of the law outside the customary law. The French colonial system even discouraged their use by not providing for them at all. When resort to them was to be rejuvenated, educated Africans were already seeing them as parts of the detested colonial process.(Note 15) The perception was worsened by the repulsive bias and seeming stereotype with which several Western arbitrators on the international circuit were already treating Third World interests to the knowledge of Africans and other Third World elite.(Note 16) In consequence of those legal regimes, political disputes have normally been taken to litigation fora when the disputes arise. Now and again they are insoluble through litigation with attendant resort to violence and other forms of self help. In fact, many times even before or without attempting a resort to litigation, a residual apprehension that the Courts may not render justice at all or timeously pushes political gladiators into resort to rigging of elections, political violence and other unlawful actions in the bid to protect their interests. In most of the cases in which the ADRs had been resorted to on the continent it was when the frustration of settlement failure had led to loss of lives and property due to violence. This happened in Kenya and Zimbabwe. It need not be so. If the suggestion in this article is implemented it will no longer be necessary to wait for lives and property to be lost before resort to the ADRs for effective resolution of the disputes is made. We shall now consider the different challenges and difficulties encountered in Africa in attempts to resolve political disputes through litigation. We shall be seeing how the ADRs can and in fact do take care of all those difficulties and frustrations. They constitute more reasons why African countries and indeed all other countries particularly those with similar challenges in their legal systems as African countries have should provide legal regimes for the resolution of at least some political disputes through the ADRs in their shores. 4.1 The Need for Actual Dispute Resolution The first need for the embrace of the ADRs is the need for the disputes to be actually settled or resolved. As already indicated, though most African politicians and political parties resort to the Courts the resort to Court does not achieve effective or actual resolution of the disputes. In Nigeria, the other alternative adopted with some level of regularity is settlement through the partys instructions.(Note 17) Partys instructions is a euphemism for hardly objective and often very unfair orders arrived at through influence peddling by party big men and then handed down to disputing party men through the partys officials for willy nilly obedience. Properly resolving a dispute means settling it i.e. removing the misunderstanding and, if possible, the source of misunderstanding and returning the parties to their pre-dispute relationship or situation. Such a resolution engenders the removal of hurts and offences, healing of the mind and ego of the disputants. It invigorates them for continued (and possibly greater) productivity. In a political party setting, it works needed unity ensuring that every one continues to put in his best for the party rather than engaging in anti-party activities or just lying low waiting for the appropriate time to decamp from the party or revenge within the party by hurting it in one way or the other. If a misunderstanding is not so dealt with, it has not been resolved. There may have been a dispute management effort but not a dispute resolution. It is such dispute management without resolution that happens ever so often in litigation. Traditionally, what a Court does over a dispute that comes before it is to deliver a judgement based on the parties legal rights and liabilities. The Court is ill-equipped to, and indeed does not, concern itself with whether or not the judgement achieves peace amongst the parties. Practically every judgement is therefore an imposed term for the cessation of combat. Just as happens in every other war, if parties desire to achieve peace they will have to go beyond the judgement. They have to negotiate amongst themselves expressly or otherwise or settle by some other means.(Note 18) Therefore, when a dispute develops between party members on election into a party office, nomination of a candidate for an election, the contribution or management of election funds etc and it is taken to Court, the Court can only deliver a judgement which judgement can only, at best, compel cessation of open combat but does not secure peace. In fact, it sometimes leads a

deepening of the dispute. It is the same when all that the political party does is to hand down an instruction from above to the disputing parties or sides without necessarily hearing them out.(Note 19) A grave yard settlement is achieved in each case. The parties may accept the judgement or the partys decision. In the latter case, they may even physically embrace themselves or vigorously shake hands as if they have mended fences but the real dispute remains. At the least opportunity, the parties react to the perceived injustice. 4.2 Quality of the Resolution In more ways than one, the ADRs avail political disputants an opportunity for very qualitative or very effective resolution of their dispute more than any other dispute resolution mechanism can avail them. In effect, it is not only that the disputes are actually resolved; a quality of resolution that may not be available in any other forum is achievable. 4.2.1 Quality of Dispute Resolvers The ADRs afford disputants the opportunity to stipulate the quality of their would-be dispute resolvers and to in fact choose those dispute resolvers by themselves. Traditionally, therefore, arbitration and conciliation legislations preserve the parties rights to determine the number, quality/qualifications and mode of appointment of arbitrators or conciliators to hear and determine their matter.(Note 20) The parties are thus able to insist on persons with requisite knowledge not just of the relevant area of law but also of the dynamics of the area of human endeavour from which the dispute has arisen. Sometimes, pragmatism necessitates the choice of dispute resolvers who may have no knowledge of the law but have a deep knowledge of the dynamics of the relevant area of endeavour Thus if a political dispute is to be arbitrated or mediated, for instance, the parties should be able to choose as arbitrators or mediators etc persons who have knowledge of the relevant areas including the principles of decent politicking. In a dispute over an elective office such as the Presidency of a country, for instance, a sitting or former President or other high office holder will more easily understand the issues at stake the compromises that need to be made, the bluffs that need to be called etc than a judge given to declarations of right and wrong. The choice of such an arbitrator, mediator etc, particularly when made by the disputants themselves, will go a long way to create a we-we atmosphere in the proceedings and enhance the acceptability of the award or other end result. Such things are not possible in Court litigation or when the political party simply hands down an instruction crafted by persons with vested interests or who may not even be imbued with the skills for effective resolution of the dispute in question. In litigation and the party instructions approach, the disputants, their political party or political relation as well as the citizenry are the losers. 4.2.2 Informality and Quality of Proceedings Each of the ADRs is normally conducted in a relaxed and more or less informal atmosphere. The arbitrators, mediators etc deliberately create a genial and conducive atmosphere for hate free interaction between the parties. This is done with a view to engendering the discovery of the real facts of the dispute and eventually restoring old relationships as much as possible. This ensures that the parties and their witnesses are not hampered or hindered by the frightening rigidity and formality of the Courts. It also disposes the witnesses to being truthful in their testimony, which in turn engenders the achievement of quality justice based on the true facts. It also helps to heal the parties hurts and offences thereby disposing them to amicable settlement and speedy restoration of predispute relationships. The informality of the ADR processes is infinitely invaluable.(Note 21) For a political dispute, mediation is often the most appropriate mechanism. One of its core strategies consists of helping the parties identify their interest as against their wants or the dictates of their egos. Once politicians and political

disputants are brought to this point in the course of a settlement and ego is dealt with, things would normally run in a quick succession to settlement. The oft repeated quib amongst politicians that there are no permanent friends or enemies but interests becomes helpful. Save for the very self centred ones, a sprinkling of whom can often be seen in Nigerian nay African politics, it is often not very difficult to show in an intra party dispute that the interests of the two sides are the same. It is particularly so if it is a politician of equal or higher hue that is doing the pointing out of interests to them. They feel proud that they have disagreed to agree. 4.3 Speed of Dispute Resolution One of the problems bedevilling the political process in Nigeria nay Africa is the delay in the resolution of political disputes. A party conducts primaries for the selection of its candidates for an election slated to hold 6 months thereafter or less. A dispute arises as to whether or not the preferred candidate was properly chosen. One of the unsuccessful contestants insists on testing the selection process in a Court proceeding. In Nigeria and probably all of Africa there is as yet no way the Courts can determine the question within the 6 months. This is attributable to the high level of congestion and delay in the Courts. Even though such disputes are often given priority attention to the detriment of other pending cases experience shows that since the judges have to write in long hand and work under very difficult infrastructural and other difficulties, such time frames are so short. The scenario has often engendered a situation where a political party gets into an election with unresolved disputes over who has been chosen in the primaries as its candidate. The Courts are completely unable to do anything effective with such time bound matters. The party machineries are often under pressure at such times and too encumbered by deference to party men in government and to other vested interests to be fair, just and effective in resolving such disputes. On the other hand, each of the ADRs being much faster than litigation and far more effective than the party machinery can very quickly and effectively handle such disputes. Time frames can be met. Even if parties themselves, or any of them, becomes dilatory, structures exist (or can be erected) with which the dispute can still be timeoulsy handled. For instance, s. 21 of Nigerias Arbitration and Conciliation Act (Note 22) (ACA) enables arbitrators to proceed to conclusion even if a Claimant or Respondent fails to appear to present its/his case. 4.4 Cost Effectiveness of Resolution All things considered, the ADRs are cheaper means of dispute resolution in the long run. Because litigation is relatively quite cheap on the continent, the ADRs may be dearer in the short run than litigation. The parties have to pay the arbitrators, mediators etc and bear other overhead costs in addition to paying their own lawyers, which is not the case in litigation. However, the ADRs are still relatively cheap in the continent even if not as cheap as litigation. When the overall financial and other costs of delay including the frustrations, loss of lives and property are taken into consideration it is easy to see that indeed the ADRs are far cheaper than litigation. It is far cheaper for a country, the political parties and individuals involved that the issue of who has been properly nominated for an office is properly rested before elections hold than to go into elections with uncertainty on the point with attendant possible upsets as have happened in Nigeria before. (Note 23) In addition, the parties to a political dispute are not normally hampered by costs. Political parties always seem to have enough to spend to prosecute or defend claims in Court or anywhere else. What is more, it is far more cost effective for their disputes to be resolved timeously than to have the disputes prolonged on account of very little money to be saved otherwise. 4.5 Confidentiality and Protection of Party/Personal Secrets The ADRs are purely private proceedings to which members of the public are not admissible except with the consent of the parties. The dispute resolvers, arbitrators for instance, are also forbidden from divulging information gathered in the course of the proceedings to other people. Even a Court of law is disentitled from requiring them to testify on such matters. (Note

24) Political parties and politicians are therefore able to testify on their secrets in the proceedings and same will still remain secrets. On the other hand, any thing that transpires in Court becomes a matter for public knowledge. A party or politician with sensitive personal or legitimate secret information will often not want the secrets divulged in, or on account of, any proceedings. Very often, political disputes are complicated and founded as much on ego, wheeling dealing for power, cold self interest calculations and sometimes even deliberate mischief as on noble facts and considerations. Unless those issues of ego, wheeling dealing and improper motives etc are brought to the fore, no settlement can be achieved. Those factors may never be given in evidence in any public Court or other proceeding. They can very safely be divulged in a private proceeding leading to proper resolution. As a result of these things, the ADRs are the most suitable for the resolution of political disputes. 4.6 Absence of Corruption, Declining Erudition and Deference to Power We have been able to show elsewhere that there may indeed be a few corrupt and lazy persons in the Nigerian nay African judiciary. We also pointed out the infinitesimal existence of judicial pandering to executive wishes in far in between cases. We equally argued that the insufficiency of facilities like well stocked libraries hardly promote continued enhancement of quality of output on the Bench but may well in extreme cases tend to lower it. Though extremely few, the corrupt or lazy judicial officers create the false impression that a sizeable fraction of the judiciary may be corrupt or not continuously improving in erudition. (Note 25) Of course, undue deference to executive power by some Courts is neither an African thing nor is it new. (Note 26) It is equally true however, and particularly worrisome, that in the adjudication of political disputes in an African environment, the possibility of deference to power and corruption is more real than with respect to other kinds of cases that come before the Courts. As argued in the work under reference, corruption is able to occur at all in the Courts because they are public institutions. The presiding judge as it were owes no direct duty of care to the individual litigants. His allegiance is to the State - that abstract normally simply referred to as the government in many African countries. On the other hand, in the ADRs the parties or their agents appoint the arbitrator, conciliator etc. The arbitrator, conciliator etc owes the parties a direct responsibility or account as it were on how professionally and diligently he goes about his work. If he gets corrupt, he can be far more easily challenged and removed than a judge can be challenged. He is a private man who does not wield coercive powers that a Court wields and whose level of respect depends on his personal quality not his office. The ADRs are private sector trades plied by people who would normally not be cajoled into corruption or wrongdoing by money however huge. At the risk of repetition, Nigerian judges are, mainly upright, courageous learned gentlemen who eschew bribery and corruption. Be that as it may, a private plier of a lucrative trade like arbitration is more likely to absolutely shun every shade of corruption, monetary or otherwise, than a salary earner even if the salary earner is on the Bench. The often touted few cases of corruption in the judicial handling of disputes is likely to be completely erased with respect to political disputes if they are handled by arbitrators, conciliators etc. Just as in the case of corruption, declining erudition and competence on the Bench, if any, may be tolerated and endured because the judge is a public officer serving the State and not particular parties. Even if the parties were to be aware from the outset that the erudition and competence of a particular judge to which their case has been assigned are in decline, they can hardly do anything about it. It will be a really strong-willed set of parties advised by lawyers of their kind that would ask for a transfer of their case on the basis of an allegation that the judge is declining in learning and competence. Such an allegation could border on contempt. In arbitration, conciliation etc declining learning and competence cannot be tolerted or endured. Such an arbitrator, conciliator etc would not be patronised by anyone. He would fall into disuse and go out of business. What is more, even for the few cases he may handle before going out of business, this writer has consistently maintained that he is liable in negligence for any injury occasioned by his

lack of skill or delay unlike the judge who enjoys judicial immunity whether or not he is sound in learning. (Note 27) 5. Legal and Other Challenges In this part of the work, we shall be considering if there is anything in the Nigerian law for instance that forbids recourse to any of the ADRs for the resolution of a political dispute. We shall be seeing that indeed there is no such thing. We shall canvass however that, for the avoidance of unnecessary arguments and controversies it will be necessary for laws to be enacted to very explicitly enable the resolution of political disputes through those media. It is hoped that other African countries (and indeed all other countries anywhere that have similar legal regimes with Nigeria on the point) will find guidance in the discussion. 5.1 Public Policy/ Constitutional and Other Legal Considerations In Africa, the major challenge concerning the settlement of disputes outside the customary law and other than by litigation is the question whether or not public policy permits the employment of the particular dispute resolution mechanism in question. (Note 28) That notwithstanding, the question does not seem to have received serious attention in connection with the traditional ADRs i.e. outside arbitration. It is in arbitration that the issue of arbitrability is a notorious one to which many a mind will normally be addressed. Outside the customary law, a dispute is generally not arbitrable if it cannot be the subject of accord and satisfaction or if by specific legal prescription it is exempted from arbitration. Examples are crimes and matrimonial causes. It has not been seriously considered in legal doctrine whether for being unarbitrable a dispute is excluded from settlement through conciliation, mediation and negotiation. It seems to follow however that if a matter is not a proper subject of accord and satisfaction, it cannot be subjected to those dispute resolution media. They are, like arbitration, based on accord and satisfaction. (Note 29) Be that as it may, if any dispute is not excluded from arbitrability by public policy there is nothing in law and practice that excludes it from resolution through any of the traditional ADRs. In the light of the foregoing, once we determine that any political dispute is not excluded from arbitrability in Nigerian law, it will follow that public policy does not exclude it from being subjected to any of the traditional ADR mechanisms. The common law, as a part reflection of the Nigerian public policy on the point, restricts only very few disputes from arbitrability such disputes as crimes and matrimonial causes. (Note 30) Statutes exclude only disputes on copyrights under the Copyright Act (Note 32) and patents under the Patents and Designs Act. (Note 33) All other disputes including political party disputes are arbitrable. (Note 31) Surprising yes, but true! We will now see how. The other Nigerian legislations, including the Constitution, concern themselves with jurisdiction as between the Courts and do not tamper with the arbitrability of disputes. For instance, s. 251(1)(n) of the 1999 Constitution confers jurisdiction on the Federal High Court to the exclusion of any other court on civil causes and matters relating to mines and minerals including oil fields, oil mining, geological surveys and natural gas. That the Courts exclusive jurisdiction is only as between Courts is made clearer when the provision is read together with the Petroleum Act. (Note 34) Under art. 41 of its First Schedule the Act requires any question or dispute arising in connection with any licence or lease to which the Schedule applies (i.e. an Oil Exploration Licence, Oil Prospecting Licence and Oil Mining Lease) to be settled by arbitration unless it relates to a matter expressly excluded from arbitration or expressed to be at the discretion of the Minister. Nothing in the Nigerian Oil and Gas sector is expressly excluded from arbitration by any law. The legal position is therefore that any dispute with respect to any of those licences or leases will be arbitrated. (Note 35) However, if any other matter that concerns oil fields, oil mining etc (and indeed if any of the matters covered under the Act and its First Schedule by virtue of the Ministers discretion for instance) is to be taken to Court, it must be the Federal High Court. Therefore, the fact that the Federal High Court has exclusive jurisdiction if or when the

matter gets to Court does not mean that such a matter may not be adjudicated or settled any how else. Otherwise, it would mean that once a dispute arises over any matter covered by the subsection (and indeed every thing under s. 251), the parties must go to Court (the Federal High Court) and may not settle the matter by any other means whatsoever before or after going to Court. The Nigerian Constitution definitely did not intend to institute such a drastic and unrealistic legal regime. No known legal system imposes on parties to a civil dispute a duty to go to Court willy nilly. In the same way, up to June 13, 2006 the Trade Disputes Act, (Note 36) at s. 21 conferred jurisdiction on the National Industrial Court to the exclusion of any court on trade disputes as outlined in the section. The same Act at ss. 8 and 9 endow a conciliator appointed for the purpose as well as the Industrial Arbitration Panel (IAP) with jurisdiction to entertain a matter and settle it if they can before even the matter gets to the National Industrial Court. In fact, it even imposes a duty on the parties to have a resort to a conciliator and the IAP before approaching that Court. If the conciliator or the IAP is able to settle the matter, it does not get to the Court at all and its exclusive jurisdiction is otiose. (Note 37) Since June 14, 2006, the conferment of jurisdiction on the National Inducstrial Court has been enshrined at ss. 7 and 11 of the National Industrial Court Act. (Note 38) In the same way, apart from with respect to election petitions, neither the Constitution nor the Electoral Act excludes any intra party or inter party dispute from arbitration, conciliation, mediation, negotiation or indeed any other dispute resolution mechanism. (Note 39) There is no specific mandatory provision on how political party disputes other than election petitions may be settled. They are therefore covered, with respect to adjudication by Courts and public tribunals, by the general provisions of ss. 6 and 36 of the Constitution. Section 6 vests the judicial powers of the Federation and federating states in the Courts. Judicial simply means of, relating to, or by the court and judicial power means, the authority vested in courts and judges to hear and decide cases and to make binding judgements on them . Therefore, the section covers only litigation and does not touch the powers of dispute resolution through the private dispute resolution mechanisms. In complimenting s. 6, s. 36(1) provides that in the determination of his civil rights and obligations a person shall be entitled to a fair hearing within a reasonable time by a Court or other tribunal established by law and constituted in such manner as to secure its independence and impartiality. (Note 40) Subsection (3) requires the proceedings (including the announcement of decisions) of a Court or a tribunal relating to the matters mentioned in subsection (1) to be held in public . We have since shown elsewhere that an arbitration tribunal falls outside the other tribunal established by law, which are rather public tribunals. The section does not pretend, for instance, that from the date it came into force all arbitral tribunals in Nigeria must now hold public hearings and render their awards in public. Such a position would have made them public rather than private proceedings and effectively destroyed confidentiality which is one of their attractive hallmarks. (Note 41) In that case, any arbitration conducted in private would amount to a breach of the parties right to public hearing and public pronouncement of decision. Such a legal regime would hardly be consistent with the countrys deliberate and concerted efforts (already made through modern and progressive arbitration statutes) to attract direct foreign investment and to make her shores an attractive venue for transnational arbitrations. (Note 42) It is inconceivable that the country would in 1999 want to remove or destroy the prime characteristics and advantages of arbitration over litigation (privacy etc) by requiring all arbitral proceedings to be held in public. It should also be noted that despite such efforts, Western style ADRs are in Nigeria, nay Africa and the Third World, relatively new and not as known as litigation though their customary law

equivalents are in upbeat prosperity. As already stated in this work, until recently, many African minds conceived of dispute resolution outside the customary law simply as Court litigation. Even as lately as 1998/99 when the 1999 Constitution was fashioned, the ADRs were not as popular with most of the military personnel and few civilians who made the Constitution as much as litigation had always been. In consequence, arbitral tribunals and the conventional ADRs were not had in view or contemplation when the Constitution was being drafted. The words other tribunal was therefore not a reference to arbitral tribunals but to official or public quasi-judicial tribunals such as tribunals of inquiry set up by government. Again, the requirement of both independence and impartiality of an arbitration tribunal and its duty to treat the parties equally consistent with the strict principles of fair hearing is firmly provided for at ss. 7 and 8 of the ACA. It is not normally so with the Courts and official or public tribunals as such provisions are missing from their constituting statutes. (Note 43) The provision is missing because the Constitutional provisions on fair and public hearing unflinchingly bind those Courts and public tribunals. The provision appears in the ACA because the draftsmen, knowing that the Constitutional provisions do not apply to arbitral tribunals, had to make the provisions for arbitral tribunals. If such provisions were not made in the ACA or in other arbitration statutes, arbitral tribunals would infringe no statutory law if they did not observe fair hearing! Article 7(a) of the African Charter grants every individual the right of access to competent national organs and art. 7(d) grants him the right to be tried within a reasonable time by an impartial Court or tribunal (Note 44). The phrases do not seem to have come up for interpretation by the African Commission or an African Court. However, a jurisprudence which supports our view has been developed around art. 6 of the European Convention on Human Rights which has a similar provision for determination of civil rights and obligations by by an independent and impartial tribunal established by law. It has been held repeatedly, inter alia, that tribunal established by law in that provision does not include an arbitral tribunal in a voluntary arbitration. (Note 45) It has equally been held that for a tribunal to be a tribunal established by law it needs to, amongst other things, exercise judicial functions, be independent of the executive arm of government and the parties, have a duration of its members term of office and have guarantees afforded as to its procedure. (Note 46) These are persuasive decisions to guide our thoughts. The International Covenant on Civil and Political Rights, of which Nigeria is a member, provides at art. 14, inter alia, that in the determination of his rights and obligations in a suit at law, everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law. In addition, any judgement rendered in a suit at law shall be made public except where the interest of juvenile persons otherwise requires or the proceedings concern matrimonial disputes or the guardianship of children. Though the General Comment 13 of the UN Human Rights Committee, (Note 47) which has no binding effect on any country, suggests that the article applies to all courts and tribunals within the scope of that article whether ordinary or specialised, different countries such as Hong Kong/China have interpreted it as exclusive of arbitral tribunals. (Note 48) In the light of all the foregoing, it can confidently be asserted that all political disputes intra and inter party disputes and non-party based political disputes - are resolvable through the ADRs. There is nothing in the law or public policy against it. It is not just so; even disputes that are more in the public domain such as human rights violations are, as already indicated, capable of being settled through arbitration and the conventional ADRs. (Note 49) Though election petitions are not our core concern in this paper, it is apposite at this point to briefly examine the law on their resolution through the ADRs. The Constitution and the Electoral Act, 2006 (Note 50) have conferred exclusive jurisdiction on the Court of Appeal and Election Tribunals to the exclusion of other modes of dispute settlement. Though s. 239 of the Constitution confers

jurisdiction on the Court of Appeal for presidential elections only to the exclusion of any court of law in Nigeria, s. 285(1) and (2) confer jurisdiction on the National Assembly Election Tribunals and the Governorship and Legislative Houses Election Tribunals to the exclusion of any court or tribunal with respect to National Assembly, Governorship and House of Assembly election matters. It is arguable that tribunal in the provision is also a reference to a public tribunal; so that the jurisdiction conferred is not exclusive of arbitral tribunals for instance. Be that as it may, s. 140 of the Electoral Act prescribes an election petition filed at a competent tribunal or Court as the only way of challenging the election and return at an election. In the light of such a clear provision, no other dispute resolver other than an Election Tribunal as constituted under s. 285 of the Constitution or the Court of Appeal acting as such under s. 239 can entertain an election petition as a Court or tribunal of first instance. There is therefore no room in the present legal regime for an election petition (or dispute over the propriety or otherwise of the conduct of an election or declaration of a particular candidate as winner) to be taken to arbitration or any of the conventional ADRs. Whether or not such disputes (election petitions) should be resolvable by arbitration or any of the conventional ADRs is highly debatable. The desperate winner takes-all-disposition of many a politician when it comes to election results is by no means consistent with the cordial, informal truth based environment within which the ADRs are normally best conducted. For such politicians (who clearly seem to be in the majority) the stakes may well be considered so high as to accept anything not backed by the fierce coercive powers of the State. The Courts and election tribunals operate with such coercive powers but which arbitrators, mediators and conciliators clearly lack. Many politicians still find it difficult to accept the judgements of Courts and election tribunals without unnecessarily abusing or harshly criticising the judge(s) however clearly rooted in law and justice the judgement may be. They are not likely to accept the awards of arbitrators, much less so the opinions of mediators etc. Secondly, there may be much room for abuse of the system if ADRs are used for election petitions. The number of competent arbitrators, mediators etc that will be needed for such volume of work is presently not available in the country. The effect will be that the all comers syndrome with which very successful ventures are often greeted in the country in recent times will set in and ruin the system. (Note 51) With respect to other political disputes other than election petitions, a major problem with the employment of the ADRs for their settlement is that though there is no law against it, there is as yet no law specifically enabling it or governing the procedure. The ACA covers only the arbitration and conciliation of commercial disputes. Though commercial is very liberally defined, (Note 52) it does not cover political disputes. There is no statute at all on mediation and negotiation. With respect to political disputes, there is need for clear provisions covering these media of dispute resolution and the procedure that may be adopted. In the absence of that, some recalcitrant parties may, through Court Suits and interlocutory injunctions, frustrate any resort to those dispute resolution media. The greater difficulty is even the fact that arbitration, mediation etc are not in the Exclusive Legislative List over which the National Assembly can legislate for the entire country. (Note 53) Though the regulation of political parties is on that List (item 56), not all issues in political disputes can come under that. Some of the disputes will directly touch on the rights of members as individuals/citizens. What is more, election issues are on the Concurrent List over which the Federation and the states share legislative competence. Even the departmentalisation or division of competence between the Federation and states attempted by clauses 11 and 12 of the List is not helpful in this matter. As a result of these things, even if a model statute is agreed on and drafted for the regulation of the settlement of political disputes though the ADRs, it will have to be enacted by the different state Houses of Assembly. Experience with the Child Rights Bill (Note 54) and such other model Bills suggests that unless strong political will and influence are exercised from above it

may well take a long time before all the states or even a majority of them will enact such a statute. 5.2 The Do or Die Attitude of Some Politicians As already indicated, one problem that may militate against the effective resolution of political party disputes through the ADRs is the desperate, do or die attitude with which some politicians seem to approach politics, power and influence. The violence that attends some (few) political campaigns, monitoring of the voting process on election days and in some cases the declaration of results is very surprising. Unless there are express legislative prescriptions requiring such politicians to submit to the ADRs, they are not likely to do so. Even after being compelled to so submit, some of them may still explore every possible avenue to scuttle the process. The attitude also manifests in a winner-takes-all disposition. Dispute resolution media like mediation are completely inconsistent with such dispositions and results. A mediator will seek a win-win situation for both sides and such a politician, particularly when he perceives himself as holding the longer end of the stick than the other party, may not be amenable to such a resolution. He may only accept the result of mediation, for instance, if legislation compels him to accept whatever the mediators eventual opinion is i.e. making his consent irrelevant. Such a process would no longer be mediation properly so called. It would be lacking in the very thing that makes mediation an effective medium of dispute resolution mutuality of the end product. Any such mediation may have the same problem of judgment without settlement which litigation presently has. It may not be a solution to the present problem but a replacement of one problematic mode of dispute resolution with another. 5.3 Fight-to-Finish Attitude of Party Legal Advisers and Lawyers A major problem with the ADRs in a developing common law country is the unduly adversarial disposition of many a lawyer. Some such lawyers, living in deference to the illiterate or semi literate gallery, take on a fight-to-finish attitude so as to show that they are tough lawyers. They erroneously behold such theatrics as synonymous with effective lawyering. They therefore often advise their clients against amicable settlement of matters. Desperate politicians often seem to find soul mates in such lawyers and hire them. Such lawyers may do any thing they can to frustrate the resolution of political disputes through the ADRs which they may consider weak means of sorting out political differences. Happily, such lawyers are getting more and more into the minority in the country and even for that minority there is a solution as we shall see shortly. The Nature of Some Outcomes Another major challenge to the use of the conventional ADRs for the resolution of disputes is the fact that their outcomes are at best in the nature of an agreement or contract. If a party defaults in executing the terms, the other party may only resort to litigation or arbitration to enforce compliance. As a result, they are ordinarily not effective with high stake disputes. In the present Nigerian political terrain, almost every political dispute is made out as a high stake dispute. It must be noted however that arbitration does not have that kind of difficulty though it is not free of difficulties with respect to enforceability. An award is immediately enforceable. It is also not appeallable. However, a Court order of enforcement, an order of denial of enforcement or a setting aside orders is appeallable. As a result, an application for enforcement, denial of enforcement or a setting aside order can sometimes snake all the way from the High Court to the Supreme Court, wasting time and resources. 6. The Way Forward Obviously, the major challenges against using ADRs for political disputes resolution are the absence of a legal framework for their use, difficulties with the enforceability of the outcomes/decisions of most of them, and the possible absence of requisite co-operation on the part of some disputants. Those problems can be easily dealt with by an Act of

the National Assembly and Laws of the State legislatures, as we shall see anon. 6.1 Enactment of Enabling Statutes and Provisions in Parties Constitutions It is quite possible for a model Bill to be drafted for enactment by the National Assembly and the different State Houses of Assembly to govern the resolution of political disputes (possibly with the exception of election petitions) through the ADRs. The statutes would provide for reference of intra and inter party disputes other than election petitions to the ADRs in the manners to be provided also. INEC or relevant Committees of the National Assembly can start the preliminary work by gathering experts in the fields of arbitration and the conventional ADRs as well as draftsmen to craft a Bill. (Note 55) Though delays have been encountered in enacting other model statutes in the states, this one can have a different experience. If the political parties that control the National Assembly and the states (the Executive and, or the Houses of Assembly) see the need for the statute, they can simply convince (instruct?) their members in those legislatures to ensure speedy passage and it will be done. There may also be a need for political parties to insert into their Constitutions a provision requiring such disputes to be referred to any of the ADRs as may be appropriate. The enabling statutes and parties Constitutions may prescribe minimum qualifications and experience for would be arbitrators etc in political disputes. The power to make original or default appointments of arbitrators etc could also be vested in a trusted institution such as the Chief Justice of Nigeria or the President of the Court of Appeal. INEC can sponsor the Model Bill about which we speak or require political parties to insert an ADR facilitating provision in their Constitutions by virtue of its general powers and duty of supervision over political parties under s. 86 of the Electoral Act. (Note 56) 6.2 Immediate Enforceability of Decisions/Outcomes Despite the problems already pointed out hereinbefore about enforceability of the outcomes of ADRs, let it be noted that flexibility and creativity are hallmarks of those dispute resolution media. This ensures that they can always be adapted to suit various circumstances. Thus it is possible to work out a situation in which their end products can become immediately enforceable as has been done in the Mutlidoor Court houses in the country. In Lagos State, for instance, there is an ADR judge. Once he appends his signature on a settlement reached in an ADR proceeding in the Multidoor Courthouse, the terms of the settlement become enforceable as a Court judgement. The same arrangement can be worked out for settlements reached in ADR proceedings over political disputes of the genre discussed in this article. With respect to arbitration and other end results, the Act and state Laws that we canvass for can also remove the enforceability of political disputes awards from the regular Courts and vest same in the Supreme Court or Court of Appeal or at least in particular Divisions of the High Courts. It can also be provided that the decision of the Court of Appeal on such applications is final in these ways, delay attendant to the enforcement and challenge of awards etc will be erased. 6.3 Non Co-operation by Parties and, or their Lawyers In view of the great virtues of flexibility and adaptability which the ADRs have, the statutes which this article canvasses for can prescribe ways and means by which proceedings can go on in spite of any partys recalcitrance or non co-operation. Section 21 of the ACA is already a good example in this regard. In a situation where the Claimant fails to attend proceedings or to present its case, the tribunal can dismiss the case. If it is the Respondent that so fails, an award

can be made against it as well, provided that that its absence or failure to present its case is not taken as an automatic proof of its liability. A similar provision could be made with respect to the settlement of political disputes through the ADRs. It also very often happens now that when fight-to-finish parties or lawyers appear before arbitrators who know their onions, those parties and lawyers quickly learn to abandon their unhelpful traits and embrace needful culture. It can happen with respect to political disputes when they are processed through arbitration and the conventional ADRs.

CHAPTER II: EXPROPRIATION AS A SUBSTANTIAL DEPRIVATION: DIRECT AND INDIRECT EXPROPRIATION The shift from a broad definition of property to an even broader notion of investment has inevitably affected the ways in which the question of establishing the existence of

expropriation has been dealt with in arbitral practice. This chapter will critically examine the sole effect doctrine and the rule of substantial deprivation, both of which investment tribunals frequently rely upon in deciding whether a host states interference with an investment is expropriatory and subject to the payment of compensation. It will be argued that, despite its prevalence in arbitral practice, the substantial deprivation rule fails to offer a reliable criterion for distinguishing between compensable and non-compensable regulatory measures. First, the substantiality threshold is not only subjective but also can be bypassed through corporate structuring and indirect shareholder claims. Second, the substantial deprivation test has not been applied consistently in cases involving the dispossession of tangible and intangible assets. As the test betrays a preoccupation with the permanence of ownership and physicality, it fails to accommodate the protection of intangible assets and therefore is conceptually ill- founded. Finally, neither a definition of investment nor the standards of treatment other than expropriation support the theory of substantial deprivation. Instead, the formulation of

investment treaties expressly extends protection to the whole investment as well as its various strands, regardless of whether the interference with the relevant entitlement is substantial.

1.

Sole effect doctrine and the rule of substantial deprivation

General

Whilst the fact that an expropriation has occurred may be relatively straightforward to establish in cases involving the physical taking of a property, indirect interference with an investment may not so easily yield to analysis. Indirector disguised, constructive, creeping, regulatoryexpropriation can be problematic because the title to property frequently remains unaffected and no appropriation by the government takes place. Therefore, the most difficult question is not to determine whether the conditions for a lawful expropriation have been met or not, but rather whether there has been an expropriation at all.1 Under the traditional expropriation standard, the fact of expropriation was rarely doubted as it involved an outright taking of assets or a total destruction of the investment through denying the investor a right to operate its business.2 The terms deprivation and expropriation were often used

interchangeably.3 Once something of value was taken away, the owner was entitled to an indemnification. Unsurprisingly, as traditional expropriations gave way to indirect state interference with foreign investment,4 the impact a governmental measure on the claimants

1 K Hobr, Investment Arbitration in Eastern Europe: In Search of a Definition of Expropriation (JurisNet, New York 2007) 14-5 2 See, for example, the Sicilian sulphur disputes that arose after the Kingdom of the Two Sicilies had entered into a contract granting a monopoly over the extraction of sulphur thus harming the interests of the UK nationals engaged in the sulphur industry in Sicily (discussed in GS Christie, What Constitutes A Taking of Property Under International law(1962) 38 British Ybk Intl L 307, 320-1). 3 For an earlier study, see WD Verwey and NJ Schrijver, The Taking of Foreign Property Under International Law: A New Legal Perspective? (1984) Netherlands Ybk Intl L 3. More recently, similar findings were made in UNCTAD, Bilateral Investment Treaties 1995-2006: Trends in Investment Rule-Making (United Nations, New York 2007) 45-6. 4 Direct expropriations have not completely receded into the past. See Bernardus Henricus Funnekotter and ors v Zimbabwe , Award, 19 April 2009 (ICSID Case No ARB/05/6), a dispute concerning the expropriation of commercial farms as part of the Land Acquisition Programme; Yaung Chi Oo Trading Pte Ltd v Myanmar , Award, 31 March 2003 (ASEAN Case No ARB/01/1) (2003) 42 ILM 540, a claim concerning the seizure of a brewery in Mandalay; Cemex Caracas Investments BV and Cemex Caracas II Investments BV v Venezuela , Decision on Provisional Measures, 3 March 2010 (ICSID Case No ARB/08/15), a dispute over the nationalisation of the cement business and the confiscation of the cement carrier vessels; SwemBalt AB v Latvia , Award, 23 October 2000 (Ad hocUNCITRAL Arbitration Rules), a case concerning the confiscation of a vessel (discussed in Hobr (n 1) 58); see also S Subedi, International Investment Law: Reconciling Policy and Principle (Hart Publishing, Oxford 2008) 75-6 (pointing to an ecological expropriation in Peru in the case of Empresas Lucchetti SA and Lucchetti Peru SA v Peru , Jurisdiction award, 7 February 2005 (ICSID Case No ARB/03/4), a dispute concerning a plant constructed near a protected wetland). For recent Latin American nationalisations in the energy sector, see M R de Sa Ribeiro, Sovereignty over Natural Resources Investment Law and Expropriation: The Case of Bolivia and Brazil (2009) 2 J World Energy L & Business 129; E Eljuri

ability to use and enjoy its investmentor in other words the fact of deprivationhas come to be regarded as a primary condition for establishing a breach of the expropriation standard.5 The sole effect doctrine6 features prominently in the Iran-United States Claims Tribunal rulings in indirect expropriation claims. For instance, in Tippetts, the tribunal

addressed a claim of expropriation that had allegedly been caused by the appointment of a new manager to the partnership which the claimant formed with the local engineering firm. In an often-cited passage, the decision held that the intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact.7 In the practice of investment arbitration, the tribunal in Metalclad v Mexico was among the first panels to endorse the sole effect approach in the context of determining the host state responsibility for regulatory interference with an investment.8 It construed the expropriation standard in Article 1110

NAFTA as justifying the finding of expropriation whenever the interference with the use of investment has the effect of depriving the owner, in whole or in significant part, of the use or

and C Trevio, Venezuela: On the Path to Complete Oil Sovereignty, or the Beginning of a New Era of Investment? (2009) 2 J World Energy L & Business 259; E Eljuri and JC Daniela, The 2007 Nationalization of the Venezuelan Orinoco Oil Belt (2008) 2 OGEL, available at <http//:www.ogel.org>; G Rachadell de Delgado and N Vojvodic, Nationalization Trends in the Venezuelan Oil Industry (2008) 2 OGEL, available at <http//:www.ogel.org>. 5 R Dolzer, Indirect Expropriations: New Developments? (2002) 11 NYU Envtl L J 64, 79; A Hoffman, Indirect Expropriation in A Reinisch, Standards of Investment Protection (OUP, Oxford 2008) 156; C Schreuer, The Concept of Expropriation under the ECT and other Investment Protection Treaties in C Ribeiro, Investment Arbitration and the Energy Charter Treaty (JurisNet, Huntington, NY 2006) 145; H Sedigh, What Level of Host State Interference Amounts to a Taking under Contemporary International Law? (2001) 2 J World Investment & Trade 631, 638; JW Salacuse, The Law of Investment Treaties (OUP, Oxford 2010) 316-7; A Reinisch, Expropriation in P Muchlinski, F Ortino and C Schreuer (eds), The Oxford Handbook of International Investment Law (OUP, Oxford 2008) 444-6. 6 Dolzer ibid 79; see also LI Fortier and SL Drymer, Indirect Expropriation in the Law of International Investment: I Know When I See It, or Caveat Investor (2004) 19 ICSID Rev Foreign Investment L J 293, 30813. 7 (1984) 6 Iran USCTR 219, 225-6; see also Phelps Dodge Corporation v Iran (1986) 10 Iran-USCTR 121, 130: [t]he Tribunal fully understands the reasons why the Respondent felt compelled to protect its interests through this transfer of management, and the Tribunal understands the financial, economic and social concerns that inspired the law pursuant to which it acted, but those reasons and concerns cannot relieve the Respondent of the obligation to compensate Phelps Dodge for its loss. 8 Metalclad Corporation v Mexico , Award, 25 August 2000 (ICSID Case No ARB (AF)/97/1) (2001) 40 ILM 36

reasonably-to-be-expected economic benefit of property.9 A decade later, the effects-based analysis still holds sway. Recently, a NAFTA tribunal in Corn Products v Mexico held that

governmental measures which have a detrimental effect on an investors markets, even if they are discriminatory, would not constitute an expropriation unless they had the effect of destroying the business in question.10 This decision represents the far end of the spectrum whereby the effect is regarded as the sole criterion in the expropriation analysis, to the exclusion of other factors such as the character of the conduct.11 Although the sole effect doctrine has not been the only dominant mode of thinking in arbitral practice,12 it continues to exert a considerable influence on the process of defining the scope of protection against expropriation in oil and gas law. The doctrine continues to influence arbitral decision-making through the tendency among the tribunals to establish the existence of expropriation by reference to the degree of deprivation inflicted on the investor as a result of the host state interference.13 As stated by the tribunal in Pope & Talbot ,

expropriation requires a substantial deprivation.14 After having observed that it might sometimes be uncertain whether a particular interference is expropriatory, the tribunal found that the proper test would be to examine whether the challenged regulation is sufficiently restrictive to support a conclusion that the property has been taken from the owner.15 More recently, the tribunal in Continental Casualty v Argentina similarly pointed to impact as a

9 Ibid para 103. 10 Corn Products International Inc v Mexico , Decision on Responsibility, 15 January 2008 (ICSID Case No ARB(AF)/04/1) para 93. 11 Nykomb Synergetics Technology Holding AB v Latvia , Award, 16 December 2003 (SCC Case No 118/2001) para 33. 12 For alternative approaches to interpreting and applying the expropriation standard, see Chapter III. For discussion, see A Reinisch, Expropriation in P Muchlinski, F Ortino and C Schreuer (eds), The Oxford Handbook of International Investment Law (OUP, Oxford 2008) 438-42; also A Newcombe and L Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International, Alphen aan den Rijn 2009. 344. 14 Pope & Talbot Inc v Canada , Interim Award, 26 June 2000 (Ad hocUNCITRAL Arbitration Rules) para 102. 15 Ibid.

criterion in determining the expropriatory character of a governments conduct: There are certain types of measures or state conduct that are considered a form of expropriation because of their material impact on propertyOne may distinguish between: (a) outright suppression or deprivation of the right of ownership, usually by its forced transfer to public entities; (b) limitations and hampering with property, short of outright suppression or deprivation, interfering with one or more key features, such as management, enjoyment, transferability, which are considered as tantamount to expropriation, because of their substantial impact on the effective right of property. Both of these types of measures entail indemnification under relevant international treaties16 The rule of substantial deprivation reflects an attempt to gear the international rules governing expropriation to cases which fall short of a physical deprivation and total destruction of an investment.17 Since governmental measures may indirectly bring about a diminution in the investments value or otherwise hinder the use and enjoyment of the investment without dispossessing the investor of its control and management rights, the substantial deprivation test envisages the possibility of the investor being entitled to compensation in a case where such governmental measures pass a certain threshold. As the test requires a deprivation to be substantial, it can be seen as a compromise between a total exemption of regulatory measures from the compensation requirement and an imposition on the government of an obligation to indemnify the investor every time a regulation interferes with the use and enjoyment of an investment. Although the substantial deprivation test has been hailed for its ability to serve as a factual criterion for determining the existence of a compensable expropriation,
16

18

the

Continental Casualty Company v Argentina, Award, 5 September 2008 (ICSID Case No ARB/03/9) para 276. See J Hertz, Expropriation of Foreign Property (1941) 35 AJIL 243, 251 (noting that the question of degree does not arise in connection with express takings of individualised pieces of property but becomes relevant if a disputed measure indirectly interferes with property, i.e. diminishes its value through certain acts). 18See Dolzer (n 5) 79; Hoffman (n 5) 168; also Newcombe and L Paradell (n 13) 343: A substantial deprivation is a necessary factual predicate for a determination of legal liability for expropriation (emphasis original); Z Douglas and J Paulsson, Indirect Expropriation in Oil and gas Arbitrations in N Horn and S Krll, Arbitrating Foreign Investment Disputes (Kluwer Law International, The Hague 2000) 145. See also A Kolo and T Waelde, Environmental Regulation, Investment Protection and Regulatory Takings in International Law

feasibility of the test and its conceptual foundations are doubtful. It has been correctly observed that the meaning of substantial deprivation is relative.19 A deprivation must be substantial but with respect to what?20 If the host state withdraws one of an investors many licences, would such a withdrawal amount to a substantial deprivation? What if the investors licence remains intact but the host government adopts a new regulation significantly reducing the profitability of the investors business under that licence? In either case, the investor suffers a certain degree of deprivation. Not only is it unclear when the threshold of

substantiality is deemed to be satisfied but determining the existence of the requisite degree of deprivation is also problematic. Should the existence of a deprivation be ascertained by reference to an investment as a single unit, to an asset that such an investment comprises, or to the value of an investment? As will be shown below, the substantial deprivation test is open to different interpretations and therefore cannot serve as a reliable criterion for establishing the existence of a compensable expropriation. Substantial deprivation and conceptual severance

The investor can bypass the substantial deprivation test by resorting to so-called conceptual severance, whereby an investment is presented as consisting of several components, with each of these components possessing an economic value. This analytical approach has been

successfully deployed in regulatory takings claims before the US courts in a number of cases. As Radin explains, to apply conceptual severance ...one delineates a property interest consisting of just what the government action has removed from the owner, and then asserts that that particular whole thing has been permanently taken. Thus, this strategy hypothetically or conceptually severs from
(2001) 50 ICLQ 811, 839-840. 19 See S Montt, State Liability in Oil and gas Arbitration: Global Constitutional and Administrative Law in the BIT Generation (Hart Publishing, Oxford 2009) 188. 20 Ibid 265-6.

the whole bundle of rights just those strands that are interfered with by regulation, and then hypothetically or conceptually construes those strands in the aggregate as a separate whole thing.21 Conceptual severance was a vehicle by which a dissenting judge in Penn Central , a well-

known US judicial decision in a regulatory expropriation case, arrived at his finding of a taking.22 In contrast, the majority opinion held that the takings jurisprudence does not divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated; rather, the focus should be on the parcel as a whole.23 Although conceptual severance has not been uniformly endorsed by the US courts, it has been successfully deployed in a number of cases, including Nollan v California Coastal Commission24 (construing a public access easement as a complete taking) and Loretto25

(placing a cable on the roof of a building was found effectively to destroy the whole bundle of rights). As far as international investment law is concerned, the idea of conceptual severance was met with a degree of resistance.
26

However, it would be more realistic to acknowledge

that the complexity of certain investment transactions and the intricacy of structures utilised in channelling foreign investment across the globe both provide many opportunities to deploy conceptual severance legitimately and without any analytical strain. Not only can an

investment be dissected into a number of independent revenue-generating assets, but also the rights the investor possesses over each individual asset can be further segregated into a set of rights having an economic value. Consider, for instance, a concession contract the
MJ Radin, Reinterpreting Property (University of Chicago Press, 1993) 127-8. Penn Central Transp. Co. v. New York City [1978] 438 US 104, 142-44. 483 U.S. 130-31. See also Radin (n 21)128. 483 U.S. 825 [1987] Loretto v Teleprompter Manhattan CATV Corp [1982] 458 U.S. 419. For a critical discussion, see Radin (n 21. 127-30. 26 See Montt (n 19) 188-91, 265-73; Newcombe and Paradell (n 13) 347-8.
21

profitability of which is significantly affected by a regulation abolishing VAT refunds. If the concession represents only a minor part of the investors portfolio in the host state, the investor may not be able to show a substantial deprivation. However, the investment can be structured through the establishment of an offshore subsidiary. Here, the investor can recuperate its loss by channelling an investment claim through the appropriate corporate vehicle. Although the reduction of the concessions profitability might have only marginal effect on the value of the parent companys investment, the investors subsidiary may be in a position to claim a substantial deprivation because the concession contract was the only significant asset on its balance sheet. Providing that a BIT exists between the host state and the offshore haven where the subsidiary vehicle was incorporated, the investor can satisfy the substantial deprivation rule by resorting to corporate structuring and forum shopping. Although corporate structuring and forum shopping are not entirely compatible with the idea of creating a credible and balanced investment protection regime,27 the reality is that they do enable investors to satisfy easily the threshold of substantial deprivation. Furthermore, the recent practice of investment arbitration shows support for conceptual severance. A number of arbitral tribunals have explicitly considered the possibility of a partial expropriation resulting from the deprivation of only part of the investment as opposed to its total or substantial loss.
28

For instance, the tribunal in SD Myers expressly held

that in some contexts and circumstances it would be appropriate to view deprivation as amounting to an expropriation even if it were partial.29 In a similar vein, the Waste

For a critical discussion of corporate structuring and forum shopping, see Subedi (n 4) 92 and M Sornarajah, The International Law on Foreign Investment (CUP, Cambridge 2010) 325-9; however compare SW Schill, The Multilateralization of International Investment Law (CUP, Cambridge 2009) 199-235 (dismissing the critique of corporate structuring and forumshopping and considering them as legitimate instruments of multilateralisation). 28 For an overview, see U Kriebaum, Partial Expropriation (2007) 8 J World Investment & Trade 69, 77-82. SD Myers Inc v Canada, First Partial Award and Separate Opinion, 13 November 2000 (Ad hoc UNCITRAL Arbitration Rules) para 283.
27

Management tribunal has acknowledged the possibility of a partial expropriation of certain assets, such as the amounts unpaid under a contract.30 In Middle East Cement v Egypt , an

overall investment operation was found to be composed of several distinct investments.31 In its analysis of the investors expropriation claims, the tribunal separately examined the revocation of the investors licence to import cement and the seizure of the investors ship. Hence, the award implicitly supports the position according to which the finding of

expropriation does not necessitate evidence of an entire investment being substantially destroyed.32 The problem of partial expropriation was further addressed in v Mexico . In GAMI

this case, a dispute arose from the expropriation of five sugar mills owned by GAM, a Mexican holding company in which GAMI Investments (a US corporation) held 14.18% shares. While the act ordering expropriation of the three mills was later reversed by municipal courts, GAMI Investments still contended that the value of its investment in GAM was destroyed by Mexicos conduct in violation of its obligations under Chapter 11 NAFTA. In examining the investors claim of expropriation, the tribunal distinguished between the substantial

diminution in the value of the investors shareholding in GAM, and the loss inflicted by a formal expropriation of two out of five sugar mills owned by GAM.33 The

tribunal held that for an expropriation claim to succeed, the claimant-investor ought to show a

Waste Management Inc v Mexico, Award, 30 April 2004 (Case No ARB(AF)/00/3) para 141. Similarly, partial expropriation was found in Eureko v Poland , although the tribunal did not couch its findings in explicit terms. See Eureko BV v Poland , Partial Award and Dissenting Opinion, 19 August 2005 (Ad hocUNCITRAL Arbitration Rules) paras 239-241. Similarly, the EnCana tribunal held that refunds are capable of being expropriated independently of the overall investment. See EnCana Corporation v Ecuador , Partial Award on Jurisdiction, 27 February 2004 (LCIA Case No UN3481) paras182-183. Also, Pope & Talbot and SD Myers recognised the opportunity to sell ones product as a property interest. Such interpretation of property opens the door to further conceptual severance. (Pope & Talbot (n 14) para 97; SD Myers Inc v Canada (n 29) para 232). 31 Middle East Cement Shipping and Handling Co Sa v Arab Republic of Egypt , Award, 12 April 2002 (Case No ARB/99/6) (2003) 18 ICSID Rev 602, paras 105-138. 32 Kriebaum (n 28) 81. GAMI Investments, Inc v Mexico, Final Award, 15 Novermber 2004 (Ad hocUNCITRAL Arbitration Rules) paras 127-128.
30

substantial deprivation or impairment of value of its shareholding.34

Although the

investors claim of expropriation failed, the tribunal indicated that the dispossession of only one out of five sugar mills would still constitute an expropriation.35 It is also worth noting that, in a number of cases, claims of expropriation have been dismissed on the grounds that the degree of deprivation was less than substantial.36 For instance, in Telenor Mobile v Hungary the tribunal adopted the parcel as a whole approach and rejected a claim of partial expropriation.37 The dispute concerned a concession for the operation of public mobile radiotelephone services. The investor claimed that it had been detrimentally affected by changes in the regulatory framework after Hungary introduced a socalled universal telephone service which envisaged provision to the public of a minimum set of telecommunication services at a reasonable cost.38 Hungary set up a fund to finance the unrecovered costs incurred by universal service providers and all telecommunication operators, including the investor, had to contribute to the fund. Telenor contended that the imposition of a levy constituted a regulatory expropriation. The tribunal expressly dismissed the earlier arbitral awards that had recognised the possibility of partial expropriation. In the tribunals view, the investment ought to be viewed as a whole and therefore the proper test

Ibid para 126: Should Pope & Talbot be understood to mean that property is taken only if it is so affected in its entirety? That question cannot be answered properly before asking: what property? The taking of 50 acres of a farm is equally expropriatory whether that is the whole farm or just a fraction. The notion must be understood as this: the affected property must be impaired to such an extent that it must be seen as taken. 35 GAMI (n 33) para 127. 3CMS Gas Transmission Company v Argentina, Award, 12 May 2005 (ICSID Case No ARB/01/8) paras 259263. Similarly, the possibility of partial expropriation was implicitly rejected in Nykomb v Latvia (n 11) para 59; Occidental Exploration and Production Company v Ecuador , Award, 1 July 2004 (LCIA Case No UN 3467) para 89; Marvin Feldman v United States of Mexico , Award 16 December 2002 (Case No ARB(AF)/99/1) 7 ICSID Rep 341; 142. See Kriebaum (n 28) 74-6. 37 Telenor Mobile Communications AS v Hungary , Award, 22 June 2006 (ICSID Case No ARB/04/15). The parcel as a whole rule was applied in Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency (2002) 122 S. Ct 1465. See Newcombe & Paradell (n 13) 347-8 (explaining that the parcel as a whole approach militates against conceptual severance by focusing on an investment in its entirety. Under the parcel as a whole rule, the property owner cannot divide its bundle of property rights and argue that the strand affected by the regulation has been taken). 38 Ibid paras 22-23.
34

should examine whether, viewed as a whole, the investment had suffered substantial erosion of value.39 It observed that what the claimant had complained of was merely a diminution in the value of its investment. Since the effect of the measures fell short of the substantial economic deprivation of the investment, no expropriation was found to have occurred.40 Without disputing the outcome of the decision,41 it is submitted that the deployment of the substantial deprivation rule in Telenor is not well founded and, therefore, should not be seen as a viable method of determining investor claims against regulatory measures. The tribunals parcel as a whole approach and the rejection of a partial expropriation claim is problematic if viewed against the treatment by arbitral tribunals of partial expropriation claims involving a physical dispossession. First, it transpires from arbitral practice that tribunals are prepared to find expropriation in a case where the investor has been partly dispossessed of its tangible assets. Yet tribunals fail to extend a similar approach to a partial dispossession of intangible interests. Second, the wording of investment treaties can be invoked in support of the view that investors are protected against a total loss of investment as well as a partial loss affecting either the whole investment or its constitutive elements. Each of these arguments will be further explored below.

1.3. Substantial deprivation: preoccupation with tangibility and severability

Ibid para 67. Ibid paras 71-79. For different reasons, the disputed conduct ought not to be regarded as expropriatory and hence compensable. As will be argued in Chapter III, the mere fact of deprivationwhether substantial or notshould not constitute a treaty violation. Without examining the degree of deprivation incurred by the investor, the Telenor tribunal could have plausibly dismissed the claim of expropriation by reference to the police powers exception and by examining the character of a disputed measure. In fact, the tribunal did acknowledge that certain forms of state interference would not qualify as expropriation. According to the tribunal,[i]t is well established that the mere exercise by the government of regulatory powers that create impediments to business or entail the payment of taxes or other levies does not of itself constitute expropriation (ibid 64).
39

70

It is usually undisputed that a physical taking of some of an investors assets amounts to an expropriation even if the remainder of the investment is left intact. An expropriation of two out of five mills arguably provides a sufficient basis to hold the state liable for that partial divestment without imposing an unreasonable threshold of totality or substantiality of a deprivation.42 As the amount GAMI tribunal held, even the loss of one out of five mills would

to substantial deprivation and trigger the expropriation standard because the owner has been formally dispossessed of its property.43 If the investor is entitled to recovery of the loss caused by the formal taking of one out of five mills, it can be argued that the same principle should apply to the investor who suffers a 20% diminution in value of its investment even if the latter case does not involve a formal dispossession. The investors counsel may well make the case that a regulatory measure causing a loss of 20% of the investors revenue is just as detrimental as a partial expropriation of physical assets belonging to the investor. The

argument rejecting the investors claim on the ground that the diminution in value of its investment does not involve the loss of tangible assets betrays a preoccupation with physicality44 and a failure to take into account the fact that the notion of property embraces intangible assets. If a dispossession of one out of many tangible assets meets the substantial deprivation testor simply does not call for the application of such a testthen it could be argued that there should similarly be no need for satisfying the substantiality threshold in a case involving the loss of an intangible asset. Thus, the substantial deprivation test fails due to its inability to accommodate the reality of modern property which is no longer defined by
See Kriebaum (n 28) 69 (arguing that if an investment consists of five fields and one of the fields is taken, then expropriation should still be found despite the fact that the taking has not affected an investment in its totality). 43 GAMI (n 33) 172. As far back as in 1975, Weston criticised the tests of expropriation showing an excessive adherence to the notion of physicality and affirmative intervention. (BH Weston, Constructive Takings under International Law: A Modest Foray into the Problem of Creeping Expropriation (1975-1976) 16 Va J Intl L 103, 118). For a somewhat similar approach, see F Williams, International Law and the Property of Aliens (1928) 9 British Ybk Intl L 1, 25 (criticising as unsound a distinction between takings of tangibles and takings of intangibles, including a right to carry on a particular trade, and arguing that in both cases the substance remains the same).
42

tangibility and permanence. It also overlooks the fact that the key problem of regulatory expropriation lies in the indirect methods through which it is usually accomplished. Indeed, one of the principal features of indirect expropriation is a governments ability to erode the profitability of an enterprise or otherwise hinder the use and enjoyment of an investment without depriving the investor of its physical assets.

1.4. Substantial deprivation and an assets capacity to be exploited independently

Without denying the possibility of a state being held responsible for a partial expropriation, Kriebaum has argued that a deprivation should be deemed substantial in the case where an investor has been deprived of a right which is capable of an economic exploitation independently of the remainder of the investment.45 Under this argument, an expropriation occurs where an investment consists of five fields and only one field is taken46 or where the investor has been deprived of a licence to export alcoholic beverages but its licence to export cigarettes remains untouched.47 An oil field and a licence are assets that can be exploited independently. In contrast, an undertaking that taxes would remain stable is not.48 Similarly, the reduction of a construction project from a six-lane highway to a four-lane highway would not constitute an expropriation because additional lanes are subordinate to the overall investment.49 The latter entitlements cannot be expropriated because they are ancillary to the

Kriebaum (n 28) 83. Montt supports the idea that the common denominator can be found in the capacity of an asset to be exploited independently of the remainder of the investment. As he puts it, in establishing whether a deprivation is substantial only an identifiable distinct part of an investment should be used as a reference unit (Montt (n 19) 270, emphasis original). Thus, a concession contract is a separate investment that can be individually expropriated, but bundles of rights within that contract are not autonomous and hence cannot be expropriated (ibid). 46 Kriebaum (n 28) 69. 4Ibid 83. 4Ibid 83-4. 4Ibid.
45

overall investment operation and, standing alone, have no economic value.50 This argument is not entirely convincing. The problem lies in analysing intangible property rights within the narrow constraints of the paradigm of traditional property where assets are viewed as necessarily tangible, separable and transferrable (and hence severable). It is clear that despite embracing the possibility of certain intangible assets (such as licences) being segregated into a number of separate units, Kriebaum stops short of applying the same approach consistently in relation to other intangible assets. Her interpretation of an assets capacity to be exploited independently rests on the understanding of an investment in terms of a physical unit rather than a conglomerate of rights possessing an economic value. It could, however, plausibly be argued that a right to a tax refund has an economic value and can be exploited for generating cash revenues or re-invested.51 It is true that the key function of property is less the tangibility of things, but rather the capability of a combination of rights in a commercial and corporate setting and under a regulatory regime to earn a commercial rate of return.52 In economic terms, the profitability of an enterprise may hinge on a right to receive certain tax refunds, and the deprivation of that right may lead to economic loss equivalent to or greater than the loss caused in the event of a physical taking of one of the investors concessions. For the same reason, a concession contract for the construction and operation of a certain number of lanes in the highway project can be seen as an interest
Ibid 84. See also Montt (n 19) 272 (noting that where state measures do not destroy assets but augment liabilities, the limited chances to establish indirect taking should be regarded as a desirable outcome, unless the measure at issue threatens the financial integrity of the enterprise). 51 For instance, the EnCana tribunal dismissed Ecuadors objection that a right to obtain VAT refunds did not constitute an expropriation. Although the tribunal noted that the investor did not invest in certificates entitling it to VAT refunds, the disputed claim fell under the definition of investment in the BIT which included claims to money and returns. Furthermore, the tribunal stressed that [t]he right under the law of the host State to refunds of VAT in respect of the past acquisition of goods and services is a material benefit, and it does not matter whether refunds take the form of tax credits or rights to actual payment of the amount due ( EnCana v Ecuador (n 30) paras 182-183). 52 Kolo and Waelde (n 18) 835. See also BA Wortley, Expropriation in Public International Law (University Press, Cambridge 1959) 9, referring to the German legal doctrine whereby the notion of ownership in the context of expropriation was understood to refer to every legally protected position of monetary value. Such understanding of property and ownership is centred not on the object as such but rather on its value.
50

capable of generating revenue. It can be argued that the reduction of the number of highway lanes is likely to bring about a corresponding decrease in the amounts payable to the investor for the performed work. In particular, if the project envisages the investors right to manage the highway, the number of lanes becomes a crucial factor in the assessment of the projects overall capacity to generate revenues. Once acknowledged that the value of an asset is in its capacity to create wealth, both a licence and an undertaking of a fixed tax regime can be seen as assets capable of being exploited independently. 1.5. Partial expropriation (deprivation) and the definition of investment in BITs

Arguments against partial expropriation also fail because neither the substantial deprivation test, with its emphasis on the parcel-as-a-whole approach, nor the notion of an assets capacity to be exploited independently, find support in oil and gas texts. In defining a protected investment, BITs do not distinguish between assets that can be exploited independently and those that are subordinate to an overall investment. Precisely because the definition of investment in BITs commonly includes claims to performance under the contract and investment returns, it is clear that not only an overall investment but its elements are entitled to protection.53 The that both an overall Chemtura v Canada tribunal acknowledged the fact

investment and specific assets can be evaluated as part of an examination of whether a deprivation is substantial enough to constitute an expropriation.54 Indeed, if the parcel-as-a-

BITs almost invariably include claims to money and performance having an economic value in the list of covered investments. See the UK Model BIT (2005), the Germany Model BIT (2005) and the 1997 Model BIT of China. See also M Hunter and A Barbuk, Reflections on the Definition of an Investment in G Aksen and RG Briner (eds), Global Reflections on International Law, Commerce and Dispute Resolution: Liber Amicorum in honour of Robert Briner (ICC Publishing, Paris 2005) 381-399, 390. 54 Chemtura Corporation v Canada, Award, 2 August 2010 (Ad hocUNCITRAL Arbitration Rules) para 249. The tribunal observed that [i]t would make little sense to state a percentage or a threshold that would have to be met for a deprivation to be substantial as such modus operandi may not always be appropriate. For instance, one could think of cases where one specific asset (a building, a piece of land, a line of business) which represents
53

whole approach and the notion of an assets capacity to be exploited independently were to be accepted, a range of rights and interests arising from an investment would be left unprotected. Trademarks, goodwill, and commercial secrets are frequently included in the definition of investment.55 Although these interests are subordinate to an overall investment and can hardly be exploited independently, excluding them from the scope of oil and gas protection by reference to the parcel-as-a-whole argument would run contrary to the principle of effective treaty interpretation. The idea of an assets capacity to be exploited independently seems to be based on severability, which was long regarded as a defining characteristic of property. As discussed in the previous chapter, the concept of property has spread beyond its traditional boundaries of tangibility, severability and transferability.56 Furthermore, as the notion of investment is not limited to property but comprises the whole process of committing resources in an expectation of profits, its entitlement to protection cannot be defined by such notions as severability.57 Even if the approach to defining investment in existing BITs were to be revised, it would be imprudent to limit oil and gas protection to an investment as a whole only, to the exclusion of rights and interests arising from the investors commitment of resources. Long before the rise of investment treaties, it was acknowledged by the international law doctrine that problems raised by expropriation and the limitation of rights cannot be dealt with separately, and that the term expropriation ought to cover partial deprivations also.58 Since

investment treaties are designed to protect investments, it would hardly be an effective

a part of the value of all the different assets held by a foreign investor in the host State has been entirely expropriated. In such case, applying a percentage or threshold approach to the overall assets held by the investor in the host State would preclude the deprivation from being substantial, whereas applying the same assessment to the specific asset in question would lead to the opposite conclusion (ibid). 55 See Protocol I of the AlgeriaGermany BIT (signed 11 March 1996, entered into force 30 May 2002). 5See Ch 1, 4.2 (B). 5See Ch 1, 3.2. 5See Wortley (n 52) 7.
8

solution to limit the scope of a treaty to an investment and exclude various rights arising thereof. It bears emphasisagainthat the distinctive feature of an indirect state interference is its potential to erode the profitability of an investment without destroying it but rather hindering the enjoyment and use of it. No matter how narrowly an investment is defined in modern international agreements, a cautious drafter is likely to include further reference to claims and rights arising in connection with such an investment. It would be incompatible with the idea of effective protection to limit the scope of a treaty to identifiable distinct parts of an investment, assets capable of being exploited independently, and an undertaking as a whole. So far as the host states regulatory freedom is concerned, limiting the protection to a whole investment, to the exclusion of rights and claims arising from such an investment, would not effectively shield the host state from responsibility. As will be shown in the following section, under non-expropriatory standards of treatment, the investors claim against the host state is not subject to a substantial deprivation test; instead, the investor can challenge the host states conduct if it interferes with its entitlements arising from an investment.

2.

Less than substantial loss can be recovered under other investment treatment standards

The validity of a distinction between partial and total deprivationand the very use of the substantial deprivation ruleis further challenged by the fact that a regulatory measure inflicting a partial loss is still actionable as a breach of fair and equitable treatment (FET), national treatment (NT) and other oil and gas standards. For instance, an investor claiming damages for a breach of FET is not required to show that a deprivation is substantial. Nonexpropriatory breaches of investment treaties do not prompt an exercise in segregating

investment into distinct strands in order to establish the existence of a substantial deprivation. Arbitral practice is replete with decisions where a successful claim under the FET, NT, and arbitrary measures standard entitled investors to a remedy despite expropriation had been found. For instance, in CMS v Argentina ,59 the investor contended that the governmental the fact that no

measures suspending adjustment of the gas tariffs and the abandonment of the foreign exchange regime had wiped out the value of its shareholding in TGN, an Argentinean gastransportation company.60 The tribunal rejected a claim of expropriation as the degree of loss incurred by the claimant did not rise to the level of a substantial deprivation.61 Nevertheless, Argentina was held responsible for the violation of the FET standard, including a failure to ensure clarity and predictability of the investment framework.62 Although the degree of deprivation incurred by the investor did not amount to an expropriation, the tribunal awarded compensation in the amount corresponding to the fair market value of the investment a traditional expropriation remedy.63 In other words, the investor received what it would have otherwise been entitled to if its claim of expropriation had succeeded. Another example is the award in PSEG v Turkey , where a claim of indirect

expropriation was brought by the investor in connection with its concession to build a coalfired electric energy production facility.
64

Although the contract received initial governmental

approval, the project never materialised owing to a series of changes in the legal framework and a subsequent failure to renegotiate the contractual terms. The investor contended that the
CMS Gas v Argentina (n 36). Ibid para 256. 6Ibid paras 260-264. 6Ibid paras 275-281. 6Ibid para 410 (While this standard figures prominently in respect of expropriation, it is not excluded that it might also be appropriate for breaches different from expropriation if their effect results in important longterm losses). 64 PSEG Global Inc and Konya Ilgin Elektrik retimve Ticaret Ltd irketi v Turkey , Award and Annex, 19 January 2007 (Case No ARB/02/5).
59 6

governments conduct amounted to a covert and incidental interference with the investment leading to the termination of the project and the destruction of the investments value.65 The tribunal disagreed. It held that for an expropriation to occur there ought to be some form of deprivation affecting the control of the investment.66 The tribunal was not persuaded that any extreme forms of interference took place in the given case.67 Although the governmental misconduct did not rise to the level of regulatory expropriation, it was sufficient to establish a breach of FET leading to the award of damages.68 In a similar vein, a less than substantial deprivation did not prevent the tribunal in Azurix v Argentina from granting an award of compensation representing the fair market value of an investment. In this case, a dispute arose in connection with the concession for the provision of a drinking water and sewerage service.69 The claimant contended that the

abandonment of the tariff regime agreed with the concessionaire, as well as the politically motivated actions by the provincial government, violated Argentinas obligations under the United States-Argentina BIT. The tribunal found that the impact on the investment did not rise to the level of expropriation because Azurix ...did not lose the attributes of ownership, at all times continued to control ABA and its ownership of 90% of the shares was unaffected. No doubt the management of ABA was affected by the Province's actions, but not sufficiently for the Tribunal to find that Azurix's investment was expropriated. 70 However, the tribunal found the host state responsible for arbitrary conduct resulting from the actions of the provincial authorities, which called for the non-payment of the bills, making it
Ibid para 273. 6Ibid para 278. 6Ibid para 279. 6Ibid. See also paras 238-256 (the tribunal held that a breach of FET was the consequence of inconsistent administrative acts, the roller-coaster of continuing legislative changes, and a failure to negotiate in good faith). 69 Azurix Corp v Argentina, Award, 23 June 2006 (ICSID Case No ARB/01/12) . Ibid para 322.
65 70

impossible for the concession-holder to resume billing.71 It also held Argentina responsible for a violation of the FET standard and for a failure to accord full protection and security, in particular by failing to provide a secure investment environment.72 Hence, the claimant was awarded the payment of the fair market value of the investment.73 As the foregoing examples show, host state interference with a foreign investment can be subject to a duty to compensate even in the absence of a substantial deprivation.74 Likewise, the oil and gas standards other than expropriation do not call for drawing doubtful distinctions between an overall investment and its subordinate elements. The existence of alternative grounds on which the investor can claim compensation without having to establish a substantial deprivation explains the growing reliance on non- expropriatory standards.75 The non-expropriatory standards offer a solution to an all-ornothing dilemma under the standard of expropriation.76 If interferences of a lesser magnitude can give rise to compensation under the FET standard or the prohibition of arbitrary and discriminatory conduct, there would seem to be no reason for retaining the rule of substantial deprivation as a prerequisite for establishing expropriation. Doubts arise about the theoretical and practical value of a rule which the investors can circumvent by resorting to nonexpropriatory standards of treatment. It can be argued that the possibility of recovery under non-expropriatory standards
71 Ibid para 390-393. Ibid para 406-408. Ibid para 425-430. Further examples of this approach can be found in Sempra, Enron, Occidental, BG Group, and National Grid (see below nn 87-90). See Sornarajah (n 27) 333-4 (stressing that recourse to alternative causes of action expands the range of situations in which the host state can be held liable even if the claim of expropriation fails). 75 See Newcombe & Paradell (n 13) 351 (suggesting that where the state fails to honour its commitments or representations, but there is no substantial deprivation of the underlying acquired rights, the investors claim is better framed as a denial of fair and equitable treatment or breach of another minimum standard). 76 C Schreuer, Interrelationships of Standards in A Reinisch, Standards of Investment Protection (OUP, Oxford 2008. 1-3; J Coe and N Rubins, Regulatory Expropriation and the Tecmed Case: Context and Contributions in T Weiler, International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May,2005) 602.

may not always be open to foreign investors.77 For instance, investors may be significantly disadvantaged under the BITs with a limited consent to arbitration.78 However, tribunals can depart from the sole effect approach and adopt an alternative test allowing the finding of an expropriation in the case where the degree of deprivation is less than substantial. The award in Saipem v Bangladesh provides a pertinent example.79 In Saipem, a dispute arose from the judicial intervention in arbitral proceedings instituted by an investor in pursuit of its

contractual right.80 While the investor contended that the conduct of the Bangladeshi courts constituted a denial of justice in violation of FET, the primary claim was for expropriation, which under the applicable BIT was the sole ground giving rise to the jurisdiction of an ICSID tribunal.81 If the tribunal had confined itself to a traditional substantial deprivation approach, no finding of expropriation would have ensued because the loss suffered by the investor did not constitute a substantial deprivation. The impossibility of meeting the substantial deprivation threshold would have been fatal to the investors case as it would have divested the tribunal of its jurisdiction over the dispute. Aware of these limits to the investors ability to claim under the BIT, the tribunal held that the particular circumstances of the dispute called for an inquiry into whether the disputed conduct was also illegal for the
BITs may contain carve-out provisions for taxation measures and, consequently, the investor can litigate a dispute arising from a tax measure only if that measure constitutes an expropriation. See, e.g. EnCana v Ecuador (n 30). See also Fireman's Fund Insurance Company v Mexico , Award, 17 July 2006 (ICSID Case No ARB(AF)/02/01) para 203, where a dispute arose in connection with the provision of financial services and the tribunal was competent to decide only claims of expropriation. Although the disputed conduct did not amount to an expropriation, the tribunal noted that it could give rise to a claim of discrimination under Articles 1102, 1105, and 1405 NAFTA. However, these provisions fell outside the tribunals competence. 78 Some BITs provide only for arbitration of disputes arising from expropriation, to the exclusion of disputes that may stem from a breach of other substantive guarantees. See, e.g. Article 12 (2) (a) the China Australia BIT (1988). See also U Kriebaum, Regulatory Takings: Balancing the Interests of the Investor and the State (2007) 8 J World Investment & Trade 717, 718-9 (noting that despite a decline in the number of expropriation awards, the standard of expropriation retains its importance as some BITs provide no binding dispute settlement for breaches other than expropriation). A similar problem may arise in a situation where an investor seeks indemnification under an insurance policy, including the OPIC and MIGA schemes, and the finding of an expropriation is instrumental. 79 Saipem v Bangladesh, Award 20 June 2009 (ICSID Case No ARB/05/7). 8Ibid para 216. 8Ibid para 121.
77 1

purpose of establishing expropriation.82

Despite the tribunals

caveat that its legality

analysis did not constitute a departure from the sole effect doctrine, the reasoning in the relevant part of the award compels the contrary conclusion: the tribunal did not complement the substantial deprivation analysis by the test of legality, but rather substituted the former with the latter. The Saipem award highlights that (1) tribunals can avoid the substantial

deprivation rule by adopting a different stance on what constitutes an expropriation, and (2) allowing only a deprivation of a certain magnitude to be compensated is unjust, particularly in the circumstances where the wrongfulness of the disputed conduct and the existence of the loss are evident.

3.

Deprivation: an economic loss or wrongful interference

Another problem with the sole effect analysis is that it remains unclear whether a substantial deprivation denotes an interference with the investors ownership and control rights or a certain magnitude of economic loss, i.e. the decrease in the value of investment. The Pope &

Talbot tribunal held that the conduct of a host state would be expropriatory if it involves detention of the investors employees, appropriation of the proceeds of the companys business, interference with the management or shareholders activities, preventing the

investor from paying dividends or other actions ousting the investor from full ownership and control.83 Thus, the tribunal applied the substantial deprivation test in terms of an interference with the investors rights over its enterprise.84
82

This understanding of the

Ibid para 134. The tribunal, however, did not specify the particular circumstances that justified the adoption of the legality test for the purpose of establishing an expropriation. 83 Pope & Talbot (n 14) para 100. This approach mirrors customary international law where the prevailing tendency has been for a diminution in value to remain uncompensated so long as rights of use, exclusion and alienation remain (R Higgins The Taking of Property by the State: Recent Developments in International Law (1982) 176 Recueil des Cours 267,

substantiality requirement was subsequently endorsed in a number of investment awards.85 In contrast, the tribunal in Sempra v Argentina held that the substantial deprivation or

threshold presupposed that the investor was no longer in control of its business operation

that the value of the business was virtually annihilated.86 The tribunal established the existence of a substantial deprivation by reference to both the loss by the investor of its rights of ownership and control over the business and the economic loss reflected in the decrease of the economic value of the business. Similarly, in Occidental v Ecuador the existence of a

substantial deprivation was determined on the basis of the tribunals findings as to the effect of the disputed measures on both the fundamental rights of ownership and the reasonably to

be expected economic benefit.87 However, none of these awards has discussed the interplay between the interference with the rights of ownership and the loss of the investment value in the assessment of the degree of deprivation. A third strand of cases includes Tecmed v Mexico 88, Parkerings v Lithuania,89 and

271). 85 Enron Corporation and Ponderosa Assets, LP v Argentina , Award, 22 May 2007 (ICSID Case No ARB/01/3) para 245. See also Walter Bau AG v Thailand , Award, 1 July 2009 (Ad HocUNCITRAL Arbitration Rules) para 10.16; BG Group plc v Argentina , Final Award, 24 December 2008 (Ad hocUNCITRAL Arbitration Rules) paras 270-271; Corn Products v Mexico (n 10) para 92; Nykomb Synergetics v Latvia (n 11) para 120. For earlier cases where the finding of expropriation turned on the interference with the management and control of an investment, see Biloune and Marine Drive Complex Ltd v Ghana Investments Centre and the Government of Ghana, Award 27 October 1989, 95 ILR 184, and Benvenuti & Bonfant v Congo , Award, 15 August 1980, ICSID Reps 335. See also R Dolzer and C Schreuer, Principles of International Investment Law (OUP, Oxford 2008. 106-7 (analysing partial expropriation through the lens of control); Salacuse (n 5) 304-5 (considering an unjustified interference with the management as one of the forms in which expropriation can be carried out); Fortier and Drymer (n 6) 301 (noting that the interference must be of certain magnitude, degree, and intensity). 86 Sempra Energy International v Argentina, Award, 18 September 2007 (ICSID Case No ARB/02/16) para 285. Occidental v Ecuador (n 36) para 88-89. See also LG&E v Argentina where in rejecting the claim of expropriation, the tribunal discussed the substantiality of deprivation criterion by reference to both the rights of ownership and the enjoyment and an economic value of an investment. ( LG&E Energy Corp and ors v Argentina, Decision on Liability, 3 October 2006(ICSID Case No ARB 02/1) (2007) 46 ILM 36, paras 189-192, 198-200). Also, Metalclad v Mexico (n 8) paras 103-104; National Grid Plc v Argentina , Award, 3 November 2008 (Ad Hoc UNCITRAL Arbitration Rules) para 154. 88 Tcnicas Medioambientales Tecmed SA v Mexico , Award, 29 May 2003 (ARB(AF)/00/2) 10 ICSID Rep 130, para 115. 89 Parkerings-Compagniet AS v Lithuania , Award on jurisdiction and merits, 14 August 2007 (ICSID Case No ARB/05/8) para 455.

Saipem v Bangladesh of

.90 Characteristic to this group of cases is the assessment of the degree

deprivation by reference to a radical or substantial decrease in the economic value of investment. Here, the principal focus of the investment.91 The award in Biwater Gauff v Tanzania , representing a fourth category of case, posits that a substantial deprivation does not necessitate the existence of economic loss.92 addressing the claim of expropriation brought in In analysis is on the loss in the value of an

connection with a termination of the

investors lease, the tribunal held that ...whilst accepting that effects of a certain severity must be shown to qualify an act as expropriatory, there is nothing to require that such effects be economic in nature. A distinction must be drawn between (a) interference with rights and (b) economic loss. A substantial interference with rights may well occur without actually causing any economic damage which can be quantified in terms of due compensation. In other words, the fact that the effect of conduct must be considered in deciding whether an indirect expropriation has occurred, does not necessarily mean an economic test.93 In the tribunals view, the absence of economic loss or damage was primarily a matter of causation and quantum and, therefore, the suffering of substantive and quantifiable economic loss by the investor was not a pre-condition for the finding of an expropriation.94 For instance, the host state interference might have been overtaken by other events or might not be

Saipem v Bangladesh (n 79) para 129.See also Compaa de Aguas del Aconquija SA and Vivendi Universal SA v Argentina , Award, 20 August 2007 (ICSID Case No ARB/97/3) para 7.5.11 (the existence of a substantial deprivation is evidenced by a loss of economic value); Glamis Gold Ltd v United States , Award, 14 May 2009 (Ad Hoc UNCITRAL Arbitration Rules) 14 May 2009, para 356; Bogdanov and ors v Moldova , Award, 22 September 2005 (Ad hocSCC Arbitration Rules) (2006) 3 Stockholm Intl Arbitration Rev, para 79; CME Czech Republic BV v Czech Republic , Partial Award and Separate Opinion, 13 September 2001 (Ad hoc UNCITRAL Arbitration Rules) para 591; Telenor v Hungary (n 33) paras 71-79; Eureko v Poland (n 24) paras 239-241; EnCana v Ecuador (n 30) para 74. See also Schreuer (n 76) 1 (for an indirect expropriation the investor must be deprived of the economic benefits of its investment entirely or in substantial part). 91 See Montt (n 19) 263 (characterising this approach as an economic test). Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania, Award and Dissenting Opinion, 24 July 2008 (Case No ARB/25/22) 93 Ibid para 464. Ibid para 465.
90

quantified in financial terms.95 In the case before the tribunal, an actual economic loss resulted from the poor bid, coupled with numerous management and implementation

difficulties, which led to the companys inability to generate the income which had been foreseen.96 By the time the respondent engaged in a series of acts which led to unreasonable and unjustified interference with the management and operation of the investors enterprise (including the withdrawal of tax exemptions, occupation of the facilities, usurpation of control and the deportation of employees97 ), the investment had no economic value.98 The tribunal held that in such circumstances the investor might still be entitled to declaratory or

restitutionary relief.99 The tribunal relied on the commentary to the International Law Commission (ILC) Draft Article 2 stating that the requirement of damages as part of establishing an international wrong would depend on the content of the primary obligation that had allegedly been violated. For instance, a treaty obligation to enact a uniform law is breached by the failure to enact the law, and it is not necessary for another state party to point to any specific damage it has suffered by reason of that failure.100 The expropriation analysis in Biwater raises a number of questions. The majority of

the tribunal were correct in their finding, at the quantum phase, that Tanzanias obligation to compensate would arise only if the wrongful acts of the government had destroyed the value of the investment.101 However, despite referring to the International Court of Justice (ICJ) decision in ELSI as part of its discussion of causation, the tribunal adopted a view of expropriation that differs fundamentally from the approach taken by the ICJ.102 In ELSI, the
Ibid. Ibid paras 486, 789. 97 Ibid para 519. 98 Ibid paras 485, 792. 99 Ibid para 465. 100 Ibid para 466 (citations omitted). 101 Ibid paras 787, 796-799. 102 Elettronica Sicula S.P.A. (ELSI) (United States of America v. Italy) [1989] ICJ Rep 15.
95 96

ICJ pointed to the fact that the management of ELSI, remaining in full control of the enterprise, had been unable to carry out an orderly liquidation of the company. It therefore could not persuasively claim that the subsequent requisition and liquidation deprived it of its management and control rights.103 Its allegations of expropriation were therefore

dismissed.104 Indeed, how can an investment be expropriated if it has already been lost? The Biwater tribunal could have similarly indicated that in other circumstances the unreasonable and unjustified conduct of the respondent would constitute an expropriation, but in the given case no finding of expropriation ought to be made because the disputed investment had lost its value before the impugned measures were taken.105 It is, however, worth noting that by treating the existence of an economic loss as a matter of quantum the Biwater tribunal correctly distinguished between two key elements of an oil and gas breach: a wrongful act and an injury caused thereby.106 tribunals reasoning begs the question as to the status Nonetheless, the

of expropriation as a distinct

international standard. By alluding to the possibility of injunctive relief in a case where no

Ibid para 101. Ibid para 119. See also a recent award in Firemans Fund v Mexico (n 77). In this case, a dispute arose from the alleged failure by Mexico to recapitalise BanCrecer, a Mexican bank. The tribunal rejected the claim of expropriation on the ground that by the time the allegedly expropriatory conduct took place there was little or no value left of the claimants investment in GFB of which BanCrecer was the main asset. Hence, the tribunal concluded that a lack of effort (even if discriminatory) by a host state to rescue an investment that has become virtually worthless, is not a taking of that investment. Similarly, see Noble Ventures Inc v Romania , Award, 5 October 2005 (ICSID Case No ARB/01/11) para 216 (no expropriation found to have occurred because there was nothing to expropriate). 105 It is also important to note that Biwater is not the first case where a finding of expropriation was made despite the fact that an investment had lost its value before the disputed conduct took place. See CCL v Republic of Kazakhstan [Refinery Case] (2005) 1 Stockholm Intl Arbitration Rev 123, para 174, where the tribunal held that the conduct of the General Prosecutor and the Kazakh courts were expropriatory. The tribunal then proceeded to analyse the existence of the loss caused to the investor. It concluded that by the time an expropriation took place, the value of investment was reduced to nil due to the attachment of most of its assets in debt collection proceedings pursued by a private company against the Refinery (ibid para 175). 106 See J Crawford, The International Law Commissions Articles on State Responsibility: Introduction, Text and Commentaries (CUP, Cambridge 2002) 228; AK Bjorklund, Causation, Morality, and Quantum (2009) 32 Suffolk Transnatl L Rev 435, 440-1 (noting that an injury is distinct from the wrongful act and that the obligation of a state to make reparation depends on the existence of material or moral damage).
103 104

economic loss has been inflicted,107 the award seems to suggest that the host state can be ordered to refrain from interfering with foreign investment even where such interference does not affect the investment in economic terms.108 If the host state can be ordered to refrain from a certain type of conduct regardless of whether economic harm has already been caused or is anticipated to occur, the focus shifts from the protection against an uncompensated dispossession to the pre-emption of any potentially detrimental governmental conduct. If damage is not required for establishing expropriation, expropriation would denote not the taking of something of value but rather an unjustified interference with an investment.109 Once stripped of its traditional function of protection against a dispossession, expropriation turns into just another standard replicating the tasks already vested in other investment protection interference. standards which protect investments against various forms of unjustified

INDIRECT EXPROPRIATION CLAIMS IN INTERNATIONAL ARBITRATION

While the sole effect approach, with its yardstick of substantial deprivation, no longer provides a workable criterion in determining the existence of a compensable event, arbitral practice reveals a burgeoning trend toward the adoption of alternative methods of determining claims of indirect expropriation. This move coincides with the rise in the number of awards rendered against host states under standards of treatment, such as FET, national treatment, and the prohibition of arbitrary and discriminatory measures. This chapter examines the characterfocused approaches to state responsibility for interference with foreign investment. It traces recent developments in oil and gas practice and arbitration whereby the existence of expropriation as a ground of state responsibility for regulatory action is determined through analysis of the character of a disputed action and its international legality. It argues that the shift from the sole effect doctrine has the potential for a more balanced, conceptually sound, and practically viable framework for determining host state liability for interference with foreign investment. As the finding of a breach of oil and gas standards other than expropriation hinges on the character of the disputed governmental conduct in question, this chapter analyses whether the standard of expropriation, with its focus on the fact of deprivation, retains any role as a distinct standard of investment protection.

1.

The shift from the sole effect to character-focused approaches in addressing expropriation

claims: the police powers doctrine

1.1. Arbitral practice

Although the sole effect doctrine and the substantial deprivation rule both continue to dominate expropriation analyses, the recent practice of investment arbitration exhibits a growing trend towards considering the character of a governments disputed conduct as a key criterion in establishing state responsibility to the investor. Among some of the earlier cases involving investment disputes, the award in Middle East Cement is notable for the tribunals emphasis on discrimination and breach of due process of law as key elements justifying the finding of expropriation.1 The tribunal held that expropriation does not cover any losses occurring to an investor due to commercial risks or due to procedures of the State authorities and courts as long as they are under due process of law and not discriminatory.2

Subsequently, following the rise in the number of regulatory expropriation claims, tribunals increasingly recognised the need for alternative approaches to determining host state responsibility for an allegedly expropriatory regulation. The Methanex v United States and

Saluka v Czech Republic awards are leading cases in articulating the expropriation analysis focused on the character of a disputed governmental action. Both awards are notable for their departure from the classical method under which the assessment of the legality of the conduct of the host state was undertaken as part of establishing whether an expropriation was lawful and not as part of establishing whether an expropriation had occurred.3 Methanex arose in

connection with the Californian government ban on the sale and use of a gasoline oxygenate additive called Methyl Tertiary Butyl Ether (MTBE). Methanex, as the largest supplier of

1 Middle East Cement Shipping and Handling Co Sa v Arab Republic of Egypt, Award, 12 April 2002 (ICSID Case No ARB/99/6) (2003) 18 ICSID Rev- FILJ 602. 2 Ibid para 153. U Kriebaum, Regulatory Takings: Balancing the Interests of the Investor and the State (2007) 8 J World Investment & Trade 717, 726.

methanol to Californian producers of MTBE, contended that the ban amounted to an expropriation in violation of Article 1110 NAFTA. The tribunal regarded the character of the disputed measures to be decisive in establishing the existence of an expropriation. It held that ...as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.4 The tribunal concluded that the ban was made for a public purpose, was non-discriminatory and was enacted in accordance with due process. It held that from the standpoint of international law, the California ban was a lawful regulation and not an expropriation.5 In Saluka, a claim of expropriation was brought in connection with an alleged failure by the Czech government to rescue a failing bank of which the investor was a major shareholder.6 In order to prevent an imminent banking collapse, the government decided to put the bank into forced administration. In considering whether the imposition of forced administration amounted to expropriation, the tribunal noted that [i]t is now established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare.7 The tribunal then pointed to conditions under which the government would be absolved from responsibility for interference with a foreign investment. By reference to the Harvard Draft Convention, the tribunal indicated that no obligation to compensate would arise if the disputed conduct (1) was non-discriminatory; (2) was not an unreasonable departure from the
4 Methanex Corporation v United States, Final Award on Jurisdiction and Merits, 3 August 2005 (Ad hoc UNCITRAL Arbitration Rules) Part IV Chapter D, para7. 5 Ibid, Part IV Ch. D, para 15. Saluka Investments BV v Czech Republic, Partial Award, 17 March 2006 (PCAUNCITRAL Arbitration Rules). 7 Ibid para 255.

principles of justice recognised by the principal legal systems of the world; (3) was not an abuse of the powers of the government.8 Having examined the disputed measure against these criteria, the tribunal concluded that the disputed conduct did not rise to the level of a breach under the expropriation clause of the applicable BIT. In LinkTrade v Moldova, a dispute arose in connection with the investors business as a duty free importer of consumer products into the Free Economic Zone of Chisinau.
9

The

investor contended that the law introducing a change in the rates of duties and VAT exemptions destroyed the economic validity of its investment and constituted an indirect expropriation. The tribunal admitted that fiscal measures might cause the taxpayer to surrender part of his income or property to the state. However, in the tribunals view, the character of the disputed measures was decisive in establishing the existence of expropriation: [f]iscal measures only become expropriatory when they are found to be an abusive taking. Abuse arises where it is demonstrated that the State has acted unfairly or inequitably towards the investment, where it has adopted measures that are arbitrary or discriminatory in character or in their manner of implementation, or where the measures taken violate an obligation undertaken by the State in regard to the investment.10 In Bayindir v Pakistan , the tribunal considered a conduct-based analysis to be crucial in a determination of whether an expropriation has occurred.11 After identifying the assets that

were allegedly expropriated by the state in the exercise of its sovereign powers, the tribunal held that, in order to establish the existence of an expropriation, analysis ought to focus on the lack of public purpose, discrimination and a breach of due process, as well as an absence of

8 Ibid paras 256-257. For the Harvard Draft Convention, see LB Sohn and RR Baxter, Responsibility of States for Injuries to the Economic Interests of Aliens (1961) 55 AJIL 554. 9 LinkTrading Joint Stock Company v Moldova, Final Award, 18 April 2002 (Ad hocUNCITRAL Arbitration Rules). 10 Ibid para 64. Bayindir Insaat TurizmTicaretve Sanayi A v Pakistan, Award, 24 August 2009 (ICSID Case No ARB/03/29) para 446.

compensation and departure from general principles of treatment.12 In addressing the character of the disputed governmental interference with the investors rights under the concession contract, the tribunal discussed whether the conduct was in conformity with the contract and whether the fair and equitable treatment was violated.13 The Waste Management award similarly adopted a conduct-based assessment as part of its expropriation analysis. In addressing the investors claim brought in connection with a failed concession contract, the tribunal held that it is not the function Article 1110 to compensate for failed business ventures, absent arbitrary intervention by the State amounting to a virtual taking or sterilising of the enterprise.14 More recently, the legality test was adopted, albeit somewhat controversially, in Saipem v Bangladesh.15 At the centre of the

dispute was the investors claim that an interference by the Bangladeshi courts with the arbitration of contractual claims resulted in expropriation. The tribunal pointed out that under the sole effect doctrine the deprivation of Saipems ability to enjoy the benefits of the ICC award was not sufficient to conclude that the courts intervention had amounted to an expropriation.16 Rather, the particular circumstances of the dispute called for an inquiry into whether the disputed conduct was also illegal for establishing the existence of expropriation.17 In addressing the question of the legality of the courts intervention with the ICC arbitration, the tribunal found that the Bangladeshi courts had abused their supervisory jurisdiction over the arbitration process by revoking the arbitrators authority without any

It must be noted that while the tribunal adopted a conduct-based analysis as part of its expropriation inquiry, it also considered the substantiality of impact of the alleged conduct and placed emphasis on whether the alleged conduct was exercised by the state in its capacity as a sovereign (see ibid paras 459, 474). 13 Ibid paras 469, 481. 1Waste Management Inc v Mexico, Award, 30 April 2004 (ICSID Case No ARB(AF)/00/3) para 160. 1Saipem v Bangladesh, Award 20 June 2009 (ICSID Case No ARB/05/7). 1Ibid paras 129-133. 1Ibid para 134. The tribunal, however, did not specify the particular circumstances that justified the adoption of the legality test for the purpose of establishing an expropriation.
12

justification.18 According to the tribunal, the standard that the Bangladeshi courts had used in considering the legality of the ICC arbitrators conduct and the manner in which the standard had been applied to the facts of the case constituted an abuse of right.19

1.2. Oil and gas practice

The emphasis on the character of governmental measures can be traced in oil and gas instruments. For example, the 1985 Convention Establishing the Multilateral Investment

Guarantee Agency excludes non-discriminatory measures of general application from the scope of expropriation.20 The relevant provision reads as follows: Any legislative action or administrative action or omission attributable to the host government which has the effect of depriving the holder of a guarantee of host ownership or control of, or a substantial benefit from, his investment, with exception of non-discriminatory measures of general application which governments normally take for the purpose of regulating economic activity in their territory.21 The shift from the sole effect doctrine to a multi-factor analysis features prominently in the recent generation of BITs and FTAs. For instance, Annex A of the 2009 Canada - Czech Republic BIT clarifies the standard of expropriation in Article VI, stating that [t]he determination of whether a measure or series of measures of a Contracting Party constitute an indirect expropriation requires a case-by-case, fact-based inquiry that considers, among other factors: ... iii) the character of the measure or series of measures.
Ibid paras 159-161. Ibid para 170. The Convention Establishing the Multilateral Investment Guarantee Agency (1985) 24 ILM 1605. Ibid 1611. See also C Schreuer, The Concept of Expropriation under the ECT and other Investment Protection Treaties in C Ribeiro, Investment Arbitration and the Energy Charter Treaty (JurisNet, Huntington, NY 2006)113.
18

... Except in rare circumstances, such as when a measure or series of measures are so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith, non-discriminatory measures of a Contracting Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriation.22 An identical provision can be found in the recent US FTAs and the 2004 US Model BIT.23Although the explanatory clause in the addendum refers also to other elements of analysis, such as the impact of measures and the extent to which they interfere with investment-backed expectations, the inclusion of the character of disputed measures as a prerequisite for the finding of expropriation provides the much-needed legal basis to support the shift away from the sole effect analysis.

1.3. Doctrinal approaches

The idea

that the character of a

governments

action will frequently be decisive in

determining the existence of expropriation has long been recognised in scholarly writing. The doctrinal codification of the international law on state responsibility in the Harvard Draft Convention provides procedural the most influential example.24 It acknowledges that, subject to from an

and substantive legality conditions, no international wrong results

uncompensated taking that is carried out as part of the normal operation of the laws or from the pursuit of important public policy objectives.25 Recent scholarly analyses similarly draw a distinction between a normal regulation and the abuse of sovereign powers through
See Annex A to Article VI. See the text of the US Model BIT at < http://ita.law.uvic.ca/documents/USmodelbitnov04.pdf> accessed 30 October 2010. 24 (1961) 55 AJIL 515. Ibid 554.
22

illegitimate interferences in foreign investment activities.26 As summarised in the recent commentary, the character, meaning the purpose and context of the governmental measure also enters into the analysis i.e., whether the measure is normal regulation taken to promote a recognised social purpose or the general welfare when non-discriminatory and in good faith.27 Instead of being limited in their role to the post-factum assessment of the legality of an expropriation, the non-discrimination, public purpose and due process criteria have been geared to establish whether an expropriation has occurred.28 The focus on the character of a governmental measure in determining the existence of the host states responsibility is commonly regarded as the application of the police powers doctrine.29 In the words of the Iran-US Claims Tribunal in Sedco, it is an accepted principle of international law that a State is not liable for economic injury which is a consequence of bona fide regulation within the accepted police power of states.30 An investor-state tribunal in Tecmed has similarly referred to the principle that the State's exercise of its sovereign powers within the framework of its police power may cause economic damage to those subject to its powers as administrator without entitling them to any compensation whatsoever
See R Dolzer and F Bloch, Indirect Expopriation: Conceptual Realignments? (2003) 5 Intl L F 155; AS Werner, Indirect Expropriation: The Need for a Taxonomy of Legitimate Regulatory Purposes (2003) 5 Intl L F 166; I Brownlie, Principles of Public International Law (6th edn OUP, Oxford 2003) 509 (State measures, prima facie a lawful exercise of powers of governments, may affect foreign interests considerably without amounting to expropriation). For recent analyses supporting the finding of the state responsible for an interference that violates certain conduct requirements, such as due process and non-discrimination, see M Gutbrod and S Hindelang, Externalization of Effective Legal Protection against Indirect Expropriation: Can the Legal Order of Developing Countries Live Up to the Standards Required by International Investment Agreements? A Disenchanting Comparative Analysis (2006) 7 J World Investment & Trade 59, 63; V Lowe, Regulation or Expropriation? (2002) 55 Current Legal Problems 447, 459; S Subedi, International Investment Law: Reconciling Policy and Principle (Hart Publishing, Oxford 2008)76, referring to the CAFTA-DR Article 10-C (3)(b). For an earlier work endorsing a similar theory, see BH Weston, Constructive Takings under International Law: A Modest Foray into the Problem of Creeping Expropriation (1975-1976) 16 Va J Intl L 103. 126-130 (pointing to coercion and violation of minimum human rights as factors indicating that regulation is expropriatory). 27 K Yannaca Small, Indirect Expropriation and the Right of the Government to Regulate Criteria to Articulate the Difference in C Ribeiro (ed) Investment Arbitration and the Energy Charter Treaty (JurisNet, Huntington, NY 2006) 161. 28 Kriebaum (n 3) 726. See ibid. Sedco Inc v Iran (1985) 9 Iran-USCTR 248, 275.
26

is undisputable.31Yet analysing indirect expropriation claims merely in terms of the police powers doctrine would be incorrect. A host state becomes exempt from an obligation to compensate not simply because its conduct falls within the police powers exception but because it is also non-discriminatory, non-arbitrary and does not transgress due process of law. It is vital that the emphasis is on the character and not on the fact that a regulation is an exercise of police powers. Some of the criticisms advanced against the character-focused approaches to determining claims of expropriation reflect this problem with applying the police powers
32

doctrine.

One major criticism is directed against the requirement of public purpose, which

is frequently referred to as legitimate welfare objective. It has been observed that since virtually any regulatory interference may be in the public interest, the character-focused analysis that includes a public purpose criterion will be problematic from the perspective of investment protection.33 Facing an almost insurmountable barrier of proving that a disputed regulation is against public purpose, foreign investors may have to bear the economic burden of nearly every realization of a public interest through regulatory measures.34 Consequently, the concept of indirect expropriation would lose its meaning.35 It is submitted that these

concerns over the growing emphasis on the character of the disputed conduct in deciding expropriation claims are misplaced. First, the requirement that the act of a government be for a public purpose is not a dominant criterion in the character-focused expropriation analysis that the Methanex and other investment tribunals have endorsed. By merely arguing that a

Tcnicas Medioambientales Tecmed SA v Mexico , Award, 29 May 2003 (ARB(AF)/00/2) 10 ICSID Rep 130, para 119. 32 Schreuer (n 21) 111 rejecting the idea that arbitrariness and discrimination should be relied on in establishing expropriation. 33 Kriebaum (n 3) 726. Ibid. Kriebaum (n 3) 726-7.
31

governmental measure has been adopted in pursuit of a legitimate public interest, the state cannot escape its responsibility; instead, it must show that the disputed governmental act is also non-discriminatory and in compliance with due process of law.36 In the case where a governments policy is designed to achieve certain welfare objectives, the host state bodies remain bound by the standard of non-discrimination, non-arbitrariness, and due process. As noted above, it is important to distinguish between the two major pillars of the police powers doctrine. These are (1) the principle of sovereignty and freedom to exercise its legislative and regulatory functions in the public interest, and (2) the requirement that in adopting certain policies governments must comply with internationally recognised standards of nondiscrimination, non-arbitrariness, and due process.37 The fact that the disputed conduct of a government is justified by reference to some welfare objective or other valid regulatory purpose cannot alone determine the outcome of the related claim of expropriation but rather operates as an indication that certain governmental acts do not give rise to compensation unless discriminatory, arbitrary or otherwise in violation of international law. Second, contrary to the existing arguments outlined above, analysing claims of expropriation against the character-focused criteria does not deprive investors from protection against the exercise of regulatory power by host states where such power is considered to be internationally impermissible. If a claim of expropriation fails, the investor canin many casesobtain redress through contending that there has been a breach of an FET, national
See A Newcombe, The Boundaries of Regulatory Expropriation in International Law (2005) 20 ICSID Rev Foreign Investment L J 1, 25 (The fact that intent is unnecessary does not make it irrelevant to the determination of whether or not a government measure is expropriatory... That intent is not a necessary element of expropriation simply means that a government cannot use lack of intent as a defence to a claim of expropriation); also K Byrne, Regulatory Expropriation and State Intent (2000) Canadian Ybk Intl L 89 (discussing the relevance of intent and its impact on the finding of an expropriation). See also above nn.4 -5 and accompanying text. 37 See American Law Institute, Restatement (Third) of the Foreign Relations Law of the United States (American Law Institute Publishers, St Paul, Minnesota 1987) vol I 712(1); P Muchlinski, Multinational Enterprises & the Law (OUP, Oxford 2007) 588. For the historical origins of the police powers doctrine, see FA Mann, Outlines of a History of Expropriation (1959) 75 LQR 188.
36

treatment, or arbitrary measures standard.38 Indeed, the emerging tendency for establishing the existence of expropriation by reference to the character of conduct that has been challenged has coincided with the growing recourse to non-expropriatory standards, such as national treatment, non-arbitrariness and FET.39 Under these standards, the investors

entitlement to compensation does not depend on the degree of deprivation. Establishing a nonexpropriatory breach of treaty requires evaluating a disputed measure against the relevant standard of treatment. It is the general concept of international legality that underlies the concept of state responsibility for a breach of non-expropriatory standards of treatment.

2.

Inadequacy of the expropriation model for claims of indirect takings

The rise in prominence of non-expropriatory standards of treatment and the vagaries of the substantial deprivation test raise the question of whether expropriation, as a distinct standard of protection, retains its role in oil and gas law. As shown in Methanex, under the

emerging trend for analysing expropriation claims by focusing on the character of a governments disputed conduct,40 the factors of discrimination, arbitrariness, and a violation of due process of law are regarded as prerequisites for the hosts state responsibility. The same concept of illegality lies beneath non-expropriatory standards of treatment. Under both the new approach to expropriation and also the approach to non-expropriatory standards, compensation is payable for loss which is caused by conduct in violation of non- discrimination, due process and non-arbitrariness requirements. In other words, the mere fact
Exceptionally, some BITs allow for arbitration of only a certain category of dispute, such as claims relating to compensation for an expropriation. 39 See Chapter II. Also, T J Grierson-Weiler and IA Laird, Standards of Treatment in P Muchlinski, F Ortino and C Schreuer (eds), The Oxford Handbook of International Investment Law (OUP, Oxford 2008) 269; J Coe and N Rubins, Regulatory Expropriation and the Tecmed Case: Context and Contributions in T Weiler (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, London 2005) 602; C Schreuer, Interrelationships of Standards in A Reinisch, Standards of Investment Protection (OUP, Oxford 2008) 1-3. 40 The trend is exemplified in Methanex, Saluka and Link Trading , see nn. 49 above.
38

that the investor incurred loss is not sufficient to give rise to the states obligation to compensate. In contrast, under the traditional standard of expropriation, the non-discrimination and due process of law requirements usually operate as the conditions of legality of an expropriation, i.e. in establishing whether an expropriation the existence of which has already been confirmed is illegal.41 Unlike the emerging expropriation analysis and the recent approaches to establishing breaches of non-expropriatory standards, the traditional expropriation rule limits the application of non-discrimination and due process requirements to a post facto assessment of conduct that has already been found to be expropriatory. This approach is illustrated in ADC v Hungary .42 The case involved the cancellation of a

concession for the management of an airport. A tribunal held that the cancellation was expropriatory.43 Only after having established the existence of an expropriation did the tribunal proceed to analysing whether such an expropriation was lawful. Guided by the expropriation standard in the applicable BIT, the tribunal examined whether the cancellation of the contract was discriminatory, in violation of due process of law and accompanied by the payment of compensation. This analysis is based on the idea that expropriation is prima facie lawful and becomes illegal if any of the conditions for the lawfulness have not been complied with.44 It can be argued that the wider adoption of the police powers doctrine can optimise the

See, e.g. A Reinisch, Legality of Expropriations in A Reinisch, Standards of Investment Protection (OUP, Oxford 2008), A Sheppard, The Distinction between Lawful and Unlawful Expropriation in C Ribeiro, Investment Arbitration and the Energy Charter Treaty (JurisNet, Huntington NY 2006) 170, Schreuer (n 21), also S Ripinsky and K Williams, Damages in International Investment Law (British Institute of International and Comparative Law, London 2008) 65-6; M Sornarajah, The International Law on Foreign Investment (CUP, Cambridge 2010) 406. 42 ADC Affiliate Ltd and ADC& ADMC Management Ltd v Hungary , Final award on jurisdiction, merits and damages (ICSID Case No ARB/03/16). 43 Ibid para 476. Sornarajah (n 41) 406.
41

existing approaches to expropriation. If the sole effect doctrine is replaced by characterfocused analyses, the expropriation standard could arguably be applied along with other standards of treatment in dealing with regulatory interference claims. However, embracing the police powers doctrine would not solve the problems underlying the existing role of

expropriation and non-expropriatory standards in determining the scope of state responsibility in oil and gas law. It is submitted that the traditional expropriation model fails to furnish an appropriate legal framework for analysing claims that arise from host state interference with foreign investment; hence, it should be replaced by a more feasible standard. The inadequacy of the expropriation standard stems from the compensation requirement. The problem is that under the traditional expropriation maxim, as reinforced in recent practice and scholarship, compensation is a mandatory requirement: an expropriation is illegal if it has not been compensated for. The status of this requirement in customary international law was fiercely debated by a large group of states, culminating in the adoption by the UN General Assembly of its groundbreaking resolutions.45 In the face of resistance and ensuing uncertainty of the customary international law on expropriation, the compensation rule was introduced by its proponents through the backdoor, in bilateral agreements for the promotion and protection of investments with countries which had previously opposed the customary status of the compensation rule.46 The result is a remarkable uniformity among a growing

On the UN GA Resolution No 1803 (14 December 1962) and No 3281 (12 December 1984) and their impact on customary international law, see D Johnson, The effect of the resolutions of the General Assembly of the UN (1955) 32 British Ybk Intl L97; R Dolzer, New Foundations of the Law of Expropriation of Alien Property (1981) 75 AJIL 553; R Higgins, The Taking of Property by the State: Recent Developments in International Law (1982) 176 Recueil des Cours 259; Subedi (n 26) 22-6. These selected pieces of writing represent only a fraction of the large body of literature generated by the UN Resolutions above and the subsequent adopted documents. 46 See WD Verwey, NJ Schrijver, The Taking of Property Under International Law: A New Legal Perspective? (1984) Netherlands Ybk Intl L 3; T Guzman, Why LDCs Sign Treaties that Hurt Them: Explaining the Popularity of Bilateral Investment Treaties (1998) Va J Intl L 639; KJ Vandevelde, The Bilateral Oil and gas Program of the United States (1988) 21 Cornell Intl L J 201; JW Salacuse, The Treatification of International Investment Law (2007) 13 L & Business Rev Am 155.
45

body of BITs and FTAs which invariably include the prohibition of uncompensated expropriation.47 A typical treaty clause on expropriation reads as follows:

Neither Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization

(expropriation), except: (a) for a public purpose; (b) in a non-discriminatory manner; (c) on payment of prompt, adequate, and effective compensation; and (d) in accordance with due process of law and Article 5 [Minimum Standard of Treatment](1) through (3).48

Under the ordinary and effective interpretation of this provision, the state is allowed to expropriate only if it complies with the public purpose, non-discrimination, due process, and compensation requirements.49 In practical terms, however, compensation is the dominant criterion. The plain meaning of the treaty terms suggests that expropriation becomes illegal unless it is accompanied by the payment of compensation.50 For example, an expropriation

See UNCTAD, Taking of Property (United Nations, New York and Geneva 2000) 26-31; Ripinsky & Williams (n 41) 78-9 (identifying about two thirds of existing BITs endorsing the adequate compensation standard as part of the expropriation clause). 48 The 2004 US Model BIT, available at < http://ita.law.uvic.ca/documents/USmodelbitnov04.pdf > accessed 31 October 2010. See also UNCTAD (n 47). 49 Reinisch (n 41) 176 (noting that while customary international law remains unclear, investment treaties clearly state the rules on legality of expropriation). 50 See Siemens AG v Argentina , Award and Separate Opinion, 6 February 2007 (ICSID Case No ARB/02/8) paras 349-352 and Compaa de Aguas del Aconquija SA and Vivendi Universal SA v Argentina , Award, 20 August 2007 (ICSID Case No ARB/97/3). The Vivendi tribunal expressly held that non-payment of compensation would amount to a violation of the treaty (ibid para 7.5.21.). This view may be at odds with the approach taken by international tribunals which found that non-payment of compensation ought not to render expropriation unlawful. For instance, the Aminoil award and some of the awards handed down by the IranUnited States Claims Tribunal, including INA, Sedco, American International Group , and Starrett Housing involved the finding of a lawful expropriation. Non-payment of compensation does not render an expropriation unlawful. (See M Mohebi, The International Law Character of the Iran-United States Claims Tribunal (Kluwer Law International, Boston 1999) 289). Ripinsky & Williams (n 41) 69 correctly observed that [c]ases of indirect
47

can be for a public purpose, non-discriminatory and compliant with due process, yet in accordance with the traditional viewsupported by a treaty text and contradicted only by a handful of decisionsthe non-payment of compensation would nevertheless render such an expropriation illegal and give rise to the host states responsibility in international law. As a result, the requirements of public purpose, non-discrimination and due process become almost irrelevant at the stage of determining a breach. Instead, they can merely affect the quantum of compensation payable to the investor for its expropriated investment.51 The traditional expropriation maxim thus translates into a rule that any deprivation caused by a governmental In Santa Elena , this theory culminated in the muchmeasure must always be compensated.52 criticised arbitral pronouncement that [E]xpropriatory environmental measures no matter how laudable and beneficial to society as a whole are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes whether domestic or international the states obligation to pay compensation remains. 53 For the reasons explained below, this approach is unsustainable and renders the expropriation model inadequate for determining host state responsibility for interference with foreign investment. First, the expropriation standard fails to accommodate the contemporary role of

expropriation would, almost by definition, fall within the scenario of unlawful expropriation, because the expropriating State does not usually acknowledge the very fact of expropriation, and consequently does not provide for payment of any compensation. Also ibid 67, discussing the caselaw of the ECtHR which takes a position similar to Mohebis argument. The relevance of these views for oil and gas disputes is however belied by the fact that the latter are governed by international oil and gas texts which provide only for a very limited possibility of expropriation being found lawful. The ordinary reading of the expropriation standard in most BITs commands the finding of an illegal expropriation unless compensation has been provisioned. 51 See ADC (above n 42). See also PM Norton, Back to the Future: Expropriation and the Energy Charter Treaty in T Walde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer Law International, London 1996) 374 (noting that non-discrimination, public purpose and due process are considered ...primarily as adding an additional sense of grievance in cases where the host state has, in the first instance, failed to pay the investor prompt, adequate, and effective compensation. Perhaps most significantly, that sense of grievance could affect an arbitral tribunals determination of an investments fair market value). 52 If a governmental measure is discriminatory or violates due process, then the investor may be entitled to a higher compensation. See above n 41-42 and accompanying text. 53 Compaa del Desarrollo de Santa Elena SA v Costa Rica , Final Award, 17 February 2000 (ICSID Case No ARB/96/1) (2000) 439 ILM 1317, para 171.

the state as a regulator. Second, the expropriation standard is inconsistent with the paradigm of state responsibility that forms the foundation of non-expropriatory standards of treatment. Each of these arguments will be further explored in the following section.

2.1. Investment treaties are not insurance policies

A disadvantage of the traditional expropriation model is that it does not account for the fact that an economic loss can be incurred due to the interplay of market forces and individual risk. In a modern global economy, this interplay is largely informed by the interventionist role of a state. Regardless of whether one supports, or opposes, state intervention in economic affairs, it is hardly possible to deny that regulation has become a prominent characteristic of governance.54 Governments frequently adjust the outcome of market processes by taxing here, subsidizing there, regulating everywhere.55 Such is the depth and breadth of regulation in a contemporary state that it can justly be regarded as an inalienable element of any business environment. With the rise of the regulatory state, a risk that investment may be affected by regulation can be regarded as part of a normal business risk which the investor needs to take into account and, if necessary, insure against. Foreign investors, like their domestic

counterparts, are not insulated from the effects of omnipresent regulation. It is therefore unreasonable for investors to expect that the state will always bear the cost of regulation by paying compensation every time regulatory action affects the value of investments. Arbitral tribunals and scholars have frequently stressed the fact that investment treaties are not insurance policies against a business risk. As indicated by the ICJ in Barcelona Traction,
See generally BA Ackerman, Private Property and the Constitution (Yale University Press, New Haven and London 1977). See further P Muchlinski, Caveat Investor? The Relevance of the Conduct of the Investor Under The Fair and Fair Equitable Treatment Standard (2006) 55 ICLQ 527, 528 (noting that administrative action is a highly complex, and virtually indispensable, part of the modern governance). 55 Ackerman (n 54) 1.
54

...when a State admits into its territory foreign investments or foreign nationals ... it is bound to extend to them the protection of the law. However, it does not thereby become an insurer of that part of another States wealth which these investments represent.56 The NAFTA tribunal in Azinian v Mexico similarly emphasised that investors, frequently and variously affected by regulation, should not expect that investment treaties would provide a satisfaction guarantee: It is a fact of life everywhere that individuals may be disappointed in their dealings with public authorities, and disappointed yet again when national courts reject their complaints. It may safely be assumed that many Mexican parties can be found who had business dealings with governmental entities which were not to their satisfaction; Mexico is unlikely to be different from other countries in this respect. NAFTA was not intended to provide foreign investors with blanket protection from this kind of disappointment, and nothing in its terms so provides.57 Likewise, the Feldman v Mexico tribunal warned against construing investment treaties as instruments of compensation for any loss that may investors may incur as a result of governmental action. The tribunal remarked that Governments must be free to act in the broader public interest through protection of the environment, new or modified tax regimes, the granting or withdrawal of government subsidies, reductions or increases in tariff levels, imposition of zoning restrictions and the like. Reasonable governmental regulation of this type cannot be achieved if any business that is adversely affected may seek compensation, and it is safe to say that customary law recognises this.58 Indeed, investment treaties are not intended to insulate investors from risks inherent in conducting business abroad;59 rather they guarantee against treatment that is contrary to the basic principles of international law, such as non-discrimination, non-arbitrariness and due
Barcelona Traction, Light & Power Co., Ltd. (Belgium v Spain) (1970) ICJ Rep 3, para 87. Azinian and ors v Mexico, Award on Jurisdiction and Merits, 18 October 1999 (ICSID Case No ARB (AF)/97/2) (2000) 39 ILM 537, para 83. 58 Marvin Feldman v United States of Mexico , Award 16 December 2002 (Case No ARB(AF)/99/1) 7 ICSID Rep 341, para 103. 59 JE Stiglitz, Regulating Multinational Corporations: Towards Principles of Cross-Border Legal Frameworks in a Globalized World Balancing Rights with Responsibilities (2008) 23 Am U Intl L Rev 451, 46 (arguing that normally, free market advocates view markets as more efficient than government in providing insurance. Is there a rationale, in this case, to rely on publicly provided insurance?). See Maffezini v Spain , Award 13 November 2000 (ICSID Case No ARB/97/7) (2001) 16 ICSID Rev-FILJ 248, para 64 (holding that BITs are not insurance policies against bad business judgments), also Muchlinski (n 54) 542.
56

105

process of law. As regulation has become an inalienable part of a business environment, investors cannot claim compensation every time a governmental decision negatively affects the value of their investment. Here lies the inadequacy of the expropriation standard. Once it is recognised that any regulation can entail negative change in the value of an investment,60

the existence of the economic loss alone ceases to form a justifiable basis for an obligation to compensate. 61 The standard of expropriation, with its emphasis on the fact of deprivation as a sole criterion, translates into a duty not to regulate unless compensation is provided for. It does transform investment treaties into insurance policies against a regulatory risk.

CONVENTIONS LIMITING EXPROPRIATION

Understanding the role of regulation in economic relations both globally and at the national level, however, does not mean the exemption of states from responsibility to investors. It has been rightly observed that a blanket exception for regulatory measures would create a gaping loophole in international protection against expropriation.62 In his analysis of risk and its relationship to the international standard of treatment, Brownlie pointed out that whatever risks the alien investor may be expected to reckon with, it is arguable that he cannot be expected to accept a distorted and unforeseeable manipulation of the legal procedures of the host state.63 What is (and should be) prohibited under international law: any regulation that

Newcombe (n 36) 46 (observing that many regulations result in some form of wealth deprivation and arguing that deprivation alone does not provide a sound policy rationale for providing compensation). 61 D Schneiderman, Constitutionalizing Economic Globalization: Investment Rules and Democracy's Promise (CUP, Cambridge 2008) 33 (pointing out that the takings rule potentially poses a significant barrier for the ability of states to intervene in the marketplace). 62 Pope & Talbot Inc v Canada, Interim Award, 26 June 2000 (Ad hocUNCITRAL Arbitration Rules) para 99. 6I Brownlie, Treatment of Aliens: Assumption of Risk and the International Standard in W Flume and others (eds), International Law and Economic Order: Essays in honour of F.A. Mann (Verlag C.H.Beck, Mnchen 1977. 319, referring to the Separate Opinion of Judge Cros in the Barcelona Traction case (1970) ICJ Rep 4, 274.
60

entails a diminution in the investments value or arbitrary, abusive and discriminatory measures that cause an economic loss? In order to protect an investor from the detrimental effects of a governments action, it is important to distinguish between a permissible regulation and an unlawful exercise of state powers. Unlike the traditional expropriation analysis, an inquiry focusing on the nature of a governments conduct does not aim to exempt all regulatory measures from state responsibility in international law. Rather, it intends to ensure that investors are protected against acts and omissions that are discriminatory,

arbitrary, or contrary to due process of law. Focusing on the manner in which the host state interferes with the foreign investment enables the ascertainment of whether a disputed governmental act involves ideological hostility, xenophobic sentiment, political preference, corruption or represents a generally innocuous regulatory activity in pursuit of legitimate economic or social objectives.64

The theoretical underpinnings of state responsibility for expropriation and non- expropriatory breaches: expropriation as a loss

It has been suggested that the resilience of expropriationor its ubiquitous presence among standardsis a by-product of intended redundancy on the part of over-cautious treaty drafters.65 Especially in the context of indirect state interference with foreign investment, the reliance on the doctrine of expropriation has been explained as the result of a reluctance to give up a paradigm of law that was developed in the context of direct expropriations, despite
Sornarajah identifies eight different forms of risks to which investors are exposed: political hostility, nationalistic concerns, reneging on promises made by previous governments, deterioration in the law-and-order situation in the country, internal corruption, changes affecting an industry on a global scale, renegotiation or termination of contracts due to changed circumstances, and economic regulation. (Sornarajah (n 41) 70). While the latter three categories would seem to represent a prima facie lawful regulation, they too remain subject to the conduct analysis. 65 Grierson-Weiler& Laird (n 39) 269.
64

the fact that their legal form has meanwhile undergone a change.66 A similar disinclination to give up the concept of expropriation as a distinct international delict can be discerned in scholarship. For example, Montt argues that that expropriation must necessarily be defined as something less extensive than unlawful harm caused by the government lest the notion of expropriation is equated with state liability for injuries to investors.67 The argument points to a long tradition of reserving expropriation for cases dealing with full or substantial

deprivations of property rights.68 This understanding of expropriation is somewhat outdated and therefore inaccurate. As a matter of the international law doctrine, expropriation has been traditionally regarded as one among many forms of delictual responsibility.69 It is true that not all harm caused unlawfully to an investor would constitute expropriation; indeed, the investor may suffer moral and physical injury without being deprived of its investment. However, so far as the economic loss suffered by an investment is concerned, it is undeniable from both a semantic and legal perspective that the effect of a governmental action, i.e. its negative impact on the value and ownership of the investment, amounts to harm. The very fact that

expropriation is frequently analysed in terms of the sole effect doctrine and the related rule of substantial deprivation indicates that an expropriation is commonly understood as an economic loss. EXPROPRIATION OF BY FORCE OR SUB CONTRACTS Understanding expropriation in terms of an economic harm is instrumental to conceptualising the foundations of state responsibility for interference with foreign
A Hoffman, Indirect Expropriation in A Reinisch, Standards of Investment Protection (OUP, Oxford 2008) 152. 67 S Montt, State Liability in Oil and gas Arbitration: Global Constitutional and Administrative Law in the BIT Generation (Hart Publishing, Oxford 2009) 233. 68 Ibid 233-4. Brownlie (above n 26) 506. That expropriation was one subcategory of state responsibility for injury to foreigners is evidenced by the history of the codification of international rules on state responsibility. See the Special Rapporteurs Forth Report on State Responsibility, FV Garcia Amador, Responsibility of the State for Injuries Caused in its Territory to Persons or Property of Aliens Measures Affecting Acquired Rights UN Doc. A/CN.4/119, Yearbook of International Law Commission (1959-II), see also CF Amerasinghe, State Responsibility for Injuries to Aliens (Clarendon Press, Oxford 1967) 121-32.
66

investment. In contrast with expropriation, which is traditionally deemed as internationally wrongful merely because something of value has been taken and not compensated for, international wrongfulness of non-expropriatory breaches lies in the character of a disputed governmental action, i.e. the presence of discrimination, arbitrariness, and a breach of due process. Analyses applied by arbitral panels in ruling on non-expropriatory treaty breaches are in line with an emerging shift to a character-focused approach in expropriation disputes, and reflect a different, more adequate understanding of the host states role in regulating foreign investment.70 Unlike the general prohibition of uncompensated regulation, state responsibility under non-expropriatory standards of treatment is based on the idea that states should exercise their regulatory functions subject to the restraints of international law, including the principles of non-discrimination, non-arbitrariness, and due process of law. The difference in the legal basis underlying state responsibility for expropriation and non-expropriatory standards of treatment can be presented as follows:

I.

Expropriation (the traditional model)

A failure to compensate loss (taking of something of a value) An obligation to compensate for the loss

II. Non-expropriatory standards of treatment

A governmental measure contrary to the standards of nondiscrimination, non-arbitrariness and due process
70

Loss caused to the investment by a governmental measure

An obligation to compensate for the loss

As noted earlier, the finding of a non-expropriatory treaty breach hinges on the presence of discrimination, due process, arbitrariness; the fact of deprivation is more relevant at the stage of determining a remedy.

It is clear that the ultimate gravamen of the investor claims under either expropriation or nonexpropriatory standards is the economic loss. Yet the asymmetry in the foundation of state responsibility for expropriation and that for non-expropriatory breaches is created by the fact that unlike other standards, the fact of loss dominates the expropriation analysis, with the character of a governments conduct remaining largely irrelevant.71 Furthermore, under the expropriation standard, compensation is both a condition of legality (expropriation is illegal unless compensated for) and a remedy (an uncompensated expropriation must be remedied by the payment of compensation72 ). In contrast, for the host state to be held liable under a non-expropriatory standard of treatment, the existence of an uncompensated economic loss alone will not suffice. Here, the host state will be liable once their disputed conduct is found to have contravened the standard of national treatment, arbitrary measures or FET. The fact that the investor has suffered a certain loss becomes relevant at a later stage, as part of determining the quantum of damages.73 Non-expropriatory standards therefore provide a

better framework for determining a host states responsibility for interference with foreign investment. First, compensation is not one of the mandatory conditions triggering a finding of state responsibility, but rather a remedy to which the investor will be entitled to in the event that the host state acted in a manner contravening a certain standard. Second, nonexpropriatory standards of treatment do not entitle the investor to redress for any deprivation

but only for measures that are discriminatory, in violation of due process, arbitrary or abusive. Hence, the comparative advantage of non-expropriatory standards is that they (1)
This holds true in oil and gas law. The ECHR approaches differ. There is disagreement as to whether an illegal expropriation should attract a different remedy, i.e. higher damages. 73 Unless the remedy sought is injunctive relief. See ATA Construction, Industrial and Trading Company v Jordan, Award, 12 May 2010 (ICSID Case No ARB/08/2). For criticism of the exercise by tribunals of injunctive powers, see Subedi (n 26) 79 (cautiously regarding the possibility of preventative measures in expropriation claims which the tribunal in Enron v Argentina found to be within the competence of international tribunals).
71 7

accommodate the application of the police powers doctrine without exempting host states from responsibility for governmental measures, and (2) do not shield investors from normal regulatory risks.

3.

Expropriation: A Redundant Standard

3.1. Expropriation as a prohibition of lawful measures

While acknowledging the difference in the legal bases of state responsibility for expropriation and non-expropriatory breaches, it can be argued that the two may still coexist and perform their own functions. There is a scope for an argument that by imposing an obligation to compensate for deprivation, the expropriation standard aims to ensure that investors are not left to carry the burden of a lawfully caused harm. For instance, an environmental decree may be for a public purpose (non-arbitrary), non-discriminatory and adopted in compliance with due process of law. Should the investor alone carry the burden of a loss if the society as a whole is to benefit? In the given example, the standard of expropriation would arguably shield the investor from having to bear the loss caused by otherwise lawful measures. Therefore, it could be argued, expropriation should retain its place in oil and gas instruments along with nonexpropriatory standards of treatment which prohibit certain forms of internationally illegal action, such as discrimination, arbitrary conduct, and abuse of power. It is submitted that a distinction between lawful and unlawful harm also fails to furnish an adequate analytical framework for determining a host states liability for interference with a foreign investment. Insisting that expropriation protects against both lawful and unlawful deprivations transforms state responsibility in oil and gas law into strict (or absolute) 111

liability. Indeed, once we accept that a government should always pay for the loss caused to an investorregardless of whether such loss has been inflicted by a lawful or unlawful measurethen any diminution in the investments value will have to be compensated. Not only is such a guarantee undesirable from a policy perspective, but it is also very broad as it postulates state responsibility for any degree of loss caused by any kind of measure.

3.2. The test of proportionality as a means of discerning between compensable expropriation and non-compensable regulation

It might, however, be argued that the standard of expropriation is designed to protect not against any loss but only against the loss which, although caused by a lawful measure, is disproportionate. Indeed, one of the popular solutions for the problems presented by an overreaching expropriation standard is the test of proportionality, which commands that the disadvantages caused by the measure must not be disproportionate to the aims used.74 In

accordance with this test, any loss can be weighed against the aims pursued by the measure at issue. Thus, the harm caused by a lawful measure, such as an environmental decree, would be compensable if it is disproportionate. Without denying the possibility of deploying the
Case C-331 / 88 R v Ministry of Agriculture, Fisheries and Food, ex parte Fedesa [1990] ECR I-4023, para 13. For discussion of the doctrine generally, see AT Yutaka, The margin of appreciation doctrine and the principle of proportionality in the jurisprudence of the ECHR (Intersentia, Antwerp 2002); R Thomas, Legitimate expectations and proportionality in administrative law (Hart, Oxford 2000). For the application in oil and gas law, see Montt (n 67) 221 (arguing for the use of the proportionality test in investment arbitration); JW Salacuse, The Law of Investment Treaties (OUP, Oxford 2010) 313-5, 317; L Ives Fortier and SL Drymer, Indirect Expropriation in the Law of International Investment: I Know When I See It, or Caveat Investor (2004) 19 ICSID Rev Foreign Investment L J 293, 300; Kriebaum (above n 3) 231 (suggesting that the test of proportionality should be used in combination with the sole effect approach); A Newcombe and L Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International, Alphen aan den Rijn 2009) 363-6. For the leading authorities on the test of proportionality in investment arbitration, see Tcnicas Medioambientales Tecmed, S.A. v. United Mexican States , Award of 29 May 2003 (ICSID Case No. ARB(AF)/00/2) (2003) 23 ILM 133, para 122 (there must be a reasonable relationship of proportionality between the charge or weight imposed to the foreign investor and the aim sought to be realized by any expropriatory measure...) and LG&E Energy Corp and ors v Argentina , Decision on Liability, 3 October 2006(ICSID Case No ARB 02/1) (2007) 46 ILM 36, para 195.
74

proportionality rule at a certain stage in the determination of state responsibility, it is submitted that such a possibility does not justify the existence of the expropriation standard as a standalone treaty provision. In fact, the wording of the expropriation standard would militate against the application of the proportionality test. Consider a scenario involving an

environmental decree which, although non-discriminatory and compliant with due process, causes a loss of revenue on the part of the investor. Does the loss constitute an uncompensated expropriation and give rise to state responsibility? As the investor incurs only a partial deprivation, it can be argued that the means justified the ends and that no compensation should be payable. However, one may object to the proportionality test on the ground that the applicable BIT extends protection not only to the whole investment but also to investment returns.75 It is possible to argue that the loss of investment returns is not to be evaluated against the whole investment but instead should be treated as a standalone entitlement. In other words, while the loss of revenue may not involve the loss of the whole investment, if viewed as a separate asset it would be sufficient to trigger the states obligation to compensate.76 Here, the ordinary meaning of the expropriation clause, coupled with the definition of an investment, would support the existence of an obligation to compensate any expropriation: both that which involves the dispossession of the whole investment (a total expropriation) and that which involves only the loss of a certain entitlement, such as the loss of investment returns. Since the application of the proportionality test may deprive the investor from compensation for an expropriation of its revenue, the test would not quite be compatible with the protection afforded to the investor under the BIT. This downside of the proportionality test has been acknowledged by the supporters of maximal investment
75

See Ch I. For conceptual severance techniques and partial expropriation, see Ch II.

76

protection.77 Applying the proportionality test is thus fraught with problems, stemming primarily from the wording of expropriation clauses in oil and gas instruments. Since the proportionality test may exempt certain measures from the payment of compensation on the ground that they are proportionate, the test would run counter to the prohibition of uncompensated expropriation. Yet, ordering a government to pay for a partial loss caused by a lawful governmental ban would be undesirable from a policy perspective. Deployed by a pro- investor oriented tribunal which is aided by the wording of BITs, the proportionality test would not shield host states from having to compensate for any diminution in the value of an investment.

4.

The proposed framework

The foregoing discussion urges us to revise the existing approaches to expropriation. It is argued that the standard of expropriation is inadequate for dealing with investor claims against governmental measures detrimentally affecting the value of an investment. A typical expropriation clause in an oil and gas instrument, supported by the definition of an investment, provides for the payment of compensation for any deprivation and thus transforms

international investment treaties into blanket protection against any regulatory risks. Undesirable as it is from a policy perspective, the standard of expropriation is also inconsistent with the paradigm of state responsibility which underlies the non-expropriatory standards of treatment, such as FET, the prohibition of arbitrary and discriminatory measures, and the national treatment standards. The crucial difference lies in the fact that the nonSee, for example, Kriebaum (above (n 3) 728-9, arguing that despite its virtues the test of proportionality would lead to unacceptable results as it may rule out compensation to a deprived investor).
77

expropriatory standards of treatment do not outlaw any regulatory measures but only prohibit certain types of governmental conduct, such as abuse of power, arbitrariness, and violation of due process. It is therefore submitted that the non-expropriatory standards of treatment

provide a better and more sound analytical and legal framework for determining state responsibility in international investment law. Once we acknowledge that the standard of expropriation fails to furnish an adequate basis for distinguishing between permissible regulation and compensable deprivation, it becomes effectively redundant. As an alternative to the prohibition of expropriation, this thesis proposes adopting a standard that would reflect a realistic understanding of not only the role regulation plays in economic relations but also the fact that international investment instruments do not provide insurance against regulatory changes. Beneath the proposed framework lies the idea that state responsibility in international investment law is a corrective mechanism aimed at remedying the loss inflicted on an investment by wrongful governmental conduct. It can be expressed in the following tentative formulation: Each contracting party shall accord investments fair and equitable treatment by refraining from measures that are discriminatory, arbitrary, in violation of due process of law, or otherwise contrary to a states obligations under international law. By doing away with the mandatory compensation requirement, the proposed standard introduces a uniform framework for analysing investor claims against a host state. That is, for a host states liability to arise, it would be necessary to show the violation of an oil and gas obligation and the loss inflicted upon an investor. This paradigm is designed to replace an asymmetrical relationship between expropriation and non-expropriatory standards of treatment which currently defines state responsibility under existing investment treaties. Beyond doubt, a proposal of this kind is not easy to implement due to reluctance aunease on the part of oil and gas drafters. Expropriation has long been one of the

central investment protection standards. At the same time, oil and gas instruments and arbitral awards appear to be showing signs of departure from the traditional model. Some treaties have already clarified that non-discriminatory regulatory actions in pursuit of public welfare objectives do not constitute expropriation; nor does an adverse effect on the economic value of an investment provide a sufficient basis for concluding that an expropriation has occurred.78 The greater acceptance of the police powers Methanex and Saluka awards have marked the trend for a

exception and the related shift of emphasis from the effect of the character of such conduct. Although fragmentary and

governmental conduct to unsystematic, such

drafting solutions and arbitral approaches support a conclusion that,

ultimately, it is possible to abandon the expropriation standard which mandates compensation for every act negatively affecting the value of an investment. Likewise, the rise to prominence of non-expropriatory standards and the emergence of a single standard of regulatory treatment have already been acknowledged in academic writing.79 The abandonment of expropriation is not intended as an expansion of host state responsibility to foreign investors. It is not suggested that investors should always carry the burden of loss caused by regulatory measures. Instead, it is submitted that state responsibility should arise where the interference by a government with foreign investment contravenes international rules of non-discrimination, non-arbitrariness, and due process of law. Such framework is already in place under non-expropriatory standards of FET, national treatment and the prohibition of arbitrary measures. The rules of non-discrimination, non-arbitrariness and due process of law operate as international legal restraints on the exercise of regulatory powers by host states and allow a line to be drawn between a permissible regulation and that
See the expropriation clause in the recent generation of the US BITs as well as the Norwegian Model BIT (with commentary), available at <http://ita.law.uvic.ca/investmenttreaties.htm> accessed 31 October 2010. 79 See, e.g. Weiler & Laird (n 39) and Schreuer (n 39).
78

which requires compensation. In contrast with the existing guarantee against uncompensated expropriation, they do not intrude upon a normal exercise of regulatory power; nor do they call for the payment of compensation simply because the investor has suffered a loss in value of its investment or otherwise been restricted in the use and enjoyment of it. Doing away with the expropriation clause in favour of non-expropriatory standards of treatment is not a cure-all for the problems surrounding the institution of state responsibility in oil and gas law. In the following chapters, attention will be drawn to various aspects of the interpretation and application of non-expropriatory standards in investment arbitration. In particular, the discussion will revolve around the standards of non-discrimination, due process, observance of undertakings, and fair and equitable treatment. Along with highlighting the increasing recourse to standards of treatment other than expropriation in challenging a host states interference with foreign investments, chapters IV to VII will attempt to outline the contours of a more sustainable, credible and balanced mechanism of investment protection.

STATES RESPONSIBILITY FOR INTERFERENCE IN LIMITING EXPROPRIATION

This chapter will focus on the principle of non-discrimination and its transformation from a legality criterion in the expropriation analysis to a stand-alone ground of state responsibility under non-expropriatory standards of treatment. While the shift from the traditional effectbased expropriation model to character-focused non-expropriatory standards is desirable,

certain interpretive aspects of the non-discrimination standards are problematic due to their potential impact on the scope of state responsibility for interference with foreign investment. In keeping with the central idea of the thesis, this chapter will examine whether oil and gas practice and arbitral decisions provide for the optimal balance between the protection of investment and the host states regulatory freedom. After outlining the move towards a greater substantive role for the principle of non-discrimination in oil and gas law, the chapter will analyse the problems arising from (1) a broad application of the like circumstances requirement, (2) the multiplicity and overlap between the oil and gas standards prohibiting discrimination, and (3) an overreaching arbitral scrutiny of host state justifications for differential treatment. This chapter will conclude with the discussion of the non-

discrimination standards and their impact on a host states regulatory freedom in adopting measures aimed at the protection and maintenance of national security, including emergency measures. 1. The traditional role of the non-discrimination rule under the expropriation standard

In traditional international law on treatment of foreigners abroad, the rule of non-

discrimination operated as a restraint on the exercise by sovereign states of their right to expropriate. In its decision in Oscar Chinn,1 the PCIJ confirmed that international law forbids discrimination based on nationality and involving differential treatment as between persons belonging to different national groups.2 The principle of non-discrimination was repeatedly invoked in early nationalisation cases, including the Anglo-Iranian Oil Company case3 , the

1956 nationalisation of the Suez Canal Company4 , the 1959 nationalisation of Dutch-owned enterprises,5 and the 1971 Libyan Oil Concessions cases.6 As evidenced by state practice and international decisions, discrimination would normally render unlawful.7 Early customary views on expropriation have continued to influence the interpretation of the non-discrimination rule in oil and gas law. There is widespread agreement that, as far as the treaty standard of expropriation is concerned, non-discrimination operates as a legality requirement and is therefore limited to the assessment of the lawfulness of an
Oscar Chinn [1934] PCIJ Rep Series A/B No 63. Ibid 87. See the United Kingdom memorial in Anglo-Iranian Oil Company, which stated that [a] measure of expropriation or nationalization, even if not unlawful on any other ground, becomes unlawful under international law, if in effect it is exclusively or primarily directed against foreigners as such (ICJ Pleadings, AngloIranian Oil Company Case, Memorial Submitted by the Government of the United Kingdom of Great Britain and Northern Ireland of 10th October 1951, 93). See also W McKean, Equality and Discrimination under International Law (Clarendon Press, Oxford 1983) 196-7. 4 It was invoked by the British Foreign Secretary, Mr Lloyd, in the Security Council. See New York Times , 6 Oct 1956. 3. 5 In its Note of December 18, 1959 regarding nationalisation by Indonesia of Dutch-owned businesses, the Netherlands submitted that the right of sovereign states to nationalise the property of foreign nationals was subject to the proviso that such nationalisation ought not to be of a discriminatory nature. The Note stated that Indonesian nationalisation measures could not be regarded as valid under international law since they were only directed against Dutch property and motivated by political considerations relating to the dispute over Netherlands New Guinea. (Netherlands Note of December 18, 1959 (1960) 54 AJIL 484, 486). 6 The expropriation was retaliation for the UKs refusal to react to the occupation by Iran of three islands in the Gulf. The British Minister of State for Foreign and Commonwealth Affairs issued a statement that the taking of the property of [the Claimant] is not a legitimate act of nationalisation because it is discriminatory against the company and for purposes which are not admissible in international law. (Hansard HC vol 828 col 312 (21 December 1971 WA), cited in British Petroleum v Libyan Arab Republic 53 ILR 297, 316). Addressing a claim against the Libyan Government, an arbitral tribunal in BP v Libya held that [t]he taking by the Respondent of the property, rights and interests of the Claimant clearly violates public international law as it was made for purely extraneous political reasons and was arbitrary and discriminatory in character (British Petroleum v Libyan Arab Republic (1979) 53 ILR 297, 329). 7 McKean (n 3) 194-197.
1

the

act of expropriation

expropriation.8 However, it would seem that in the context of regulatory interference with foreign investment, the role of non-discrimination should not be limited to the post facto

determination of whether an expropriation is lawful. Investment tribunal awards show a growing trend towards acknowledging non-discrimination as one of the criteria in establishing if certain governmental conduct constitutes an indirect expropriation.9 For instance, a claim of expropriation in Methanex concerned an allegedly discriminatory governmental measure.10 At heart of the dispute was the executive order adopted by the governor of California which provided for the gradual removal of MTBE (a methanol-based source of octane and oxygenate) from gasoline. An investor, the largest supplier of methanol to the Californian producers of MTBE, contested that the measures were motivated by discriminatory intent to prevent MTBE and methanol from competing with ethanol in the oxygenate market, contrary to the NAFTA Chapter 11 provisions on national treatment, fair and equitable treatment, and expropriation. The investor contended that expropriation had occurred when its shares of the California and U.S. oxygenate market were taken by patently discriminatory measures and handed over to the domestic ethanol industry.11 In addressing the claim of expropriation, the tribunal observed that a discriminatory regulation against a foreign investor was a key

8 See R Dolzer and C Schreuer, Principles of International Investment Law (OUP, Oxford 2008) 90-1, A Reinisch, Legality of Expropriations in A Reinisch, Standards of Investment Protection (OUP, Oxford 2008) 186-90; C Schreuer, The Concept of Expropriation under the ECT and other Investment Protection Treatiesin C Ribeiro, Investment Arbitration and the Energy Charter Treaty (JurisNet, Huntington, NY 2006) 145; UNCTAD, International Investment Agreements: Key Issues (United Nations, New York 2004) 235; JW Salacuse, The Law of Investment Treaties (OUP, Oxford 2010) 321-2; A Newcombe and L Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International, Alphen aan den Rijn 2009) 373. For a recent award, see ADC Affiliate Ltd and ADC& ADMC Management Ltd v Hungary, Final award on jurisdiction, merits and damages (ICSID Case No ARB/03/16) paras 441-443, 476 (analysing discrimination as a criterion of legality of expropriation affecting the quantum of compensation). 9 See Chapter III. That discrimination has been increasingly recognised as an important factor in determining expropriation, see C Mclachlan, L Shore and M Weiniger, International Investment Arbitration: Substantive Principles (OUP, Oxford 2007) 308. Also the Restatement (Third) of the Foireign Relations Law of the United States. 10 Methanex Corporation v United States , Final Award on Jurisdiction and Merits, 3 August 2005 (Ad hoc UNCITRAL Arbitration Rules) (2005) 44 ILM 1345. 11 Ibid, Part II, Ch.D, para28.

requirement for establishing expropriation.12

It held that

...as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation. 13 The tribunal concluded that the ban was made for a public purpose, was non-discriminatory and was accomplished with due process. It held that, from the standpoint of international law, the California ban was a lawful regulation and not an expropriation.14 Eureko v Poland lends further support to the position which regards discrimination as one of the conditions for establishing an indirect expropriation .15 made Although the tribunal

no explicit determination as to the role of discrimination as a factor in the expropriation analysis, the reasoning in the relevant part of the award suggests that the existence of discrimination was critical to its finding of an expropriation. The dispute concerned the host states failure to comply with its commitments under the share purchase agreement that had been concluded as a part of privatisation of PZU, a leading state-owned insurance company. The share purchase agreement envisaged the sale of 51% of the shares in PZU to Eureko. Having acquired a 20% stake in PZU, the foreign investor found itself in an epicenter of the Polish party politics16 which led to the withdrawal of the government from the share purchase agreement and addenda. The investor contended that the governmental conduct was in breach of the obligation not to impair by unreasonable or discriminatory measures the

Ibid, Part IV, Ch. D, para 7 Ibid. Ibid, Part IV, Ch. D, para 15. Eureko BV v Poland, Partial Award and Dissenting Opinion, 19 August 2005 (Ad hocUNCITRAL Arbitration Rules) 12 ICSID Reps 335. 16 Ibid para 43.
12

operation, management, maintenance, use, enjoyment or disposal of investment. 17 The tribunal found that the respondent government acted not for cause but for purely arbitrary reasons linked to the interplay of Polish politics and nationalistic reasons of a discriminatory character.18 In particular, it noted that in changing the privatisation strategy, the Council of Ministers had been motivated by a desire to exclude foreigners from the control over the insurance business in question.19 Such a finding was material to the tribunals conclusion that the governments refusal to honour its commitments under the share purchase agreement amounted to deprivation of the foreign investors contractual rights and was expropriatory in substance and effect.20 The decision suggests that had there been no discrimination behind the governments failure to comply with its commitments under the share purchase

agreement, the tribunal would have been less inclined to grant the investors claim of expropriation. Beyond arbitral decisions, discrimination features prominently among the criteria for distinguishing between expropriation and non-compensable regulation in oil and gas instruments, including the recent generation of Free Trade Agreements. By way of example, the Central America-Dominican Republic-United States FTA and the United States- Singapore FTA contain an identical provision envisaging that except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriation .
17

21

Similarly, the 1985 Convention establishing the

See ibid para 77 referring to Art 3.1. of the Poland Netherlands BIT. Ibid para 233.This conclusion was reached on the basis of evidence, including statements made by the government officials that the change of the privatisation strategy and the withdrawal from the share purchase agreement had been justified by the need to retain control over PZU given the strategic importance of PZU and the fact that most of the financial sector in Poland is already in foreign hands(ibid para 213). 19 See ibid para 218. 2Ibid para 240-242. 2Such wording has been adopted in the Letter of Exchange on Expropriation which forms part of the U.S.
1

Multilateral Investment Guarantee Agency excludes non-discriminatory measures from the ambit of expropriation.22 The shift from interpreting non-discrimination as a condition of lawful expropriation to being one of the criteria for establishing whether an expropriation has occurred reflects fundamental changes in the international law of foreign investment. The scope of international investment law is no longer limited to protecting investors against a physical taking of property and transfer of ownership to the host state. Rather, investors can seek protection against an indirect interference by the host governments exercising their regulatory functions. Discriminatory conduct may give rise to a host states responsibility in international law regardless of whether such conduct amounts to a deprivation falling within the scope of the traditional expropriation standard. Unlike the traditional effects-based analysis of expropriation claims, which mirrors the hitherto prevailing cases of direct takings of foreign assets, the focus of arbitral inquiry is gradually shifting to the character of host state conduct, including its compliance with the principle of non-discrimination enshrined in the standards of national treatment, the prohibition of arbitrary and discriminatory measures, and fair and equitable treatment. There is growing support for the view that only where the state fails to comply with its international obligations (which include the obligation to refrain from discriminatory conduct proscribed by customary international law and specific treaty obligations) does the investor become entitled to compensation for the losses incurred. The changing role of non-discrimination in the oil and gas context is in keeping with the
Singapore FTA, and Annex 10-C to the CAFTA-DR FTA. See <http://www.sice.oas.org/Trade/USASingapore/USASingind_e.asp>, and <http://www.ustr.gov/Trade_Agreements/Bilateral/CAFTA/CAFTADR_Final_Texts/Section_Index.html>(emphasis added). 22 See Article 11 of the Convention stating that Any legislative action or administrative action or omission attributable to the host government which has the effect of depriving the holder of a guarantee of host ownership or control of, or a substantial benefit from, his investment, with exception of non-discriminatory measures of general application which governments normally take for the purpose of regulating economic activity in their territory(The Convention Establishing the Multilateral Investment Guarantee Agency (1985) 24 ILM 1605, 1611).

idea that international investment treaties are not insurance policies protecting against normal business risks. Rather, investment treaties are designed to ensure that host states treat investors in accordance with basic international guarantees.

2.

Discrimination and non-expropriatory standards of treatment: the potential for

expanding state responsibility in oil and gas law

2.1. General

The role of the non-discrimination rule as a restraint on the exercise of regulatory powers is particularly salient under non-expropriatory standards of investment protection. In recent investment treaties, non-discrimination has been subsumed under the national treatment

standard, most-favoured-nation (MFN) clauses, the prohibition of arbitrary and discriminatory measures, and FET.23 There is a series of arbitral awards, in which the alleged discrimination was analysed solely as a part of the national treatment standard, FET, or the obligation to refrain from arbitrary and discriminatory measures. The characteristic feature of this category of disputes is that host states were held responsible for the loss incurred by the investor because of discriminatory measures even despite the fact that no expropriation had occurred. For instance, in SD Myers v Canada ,24 a claim of discrimination was addressed under Article 1102 NAFTA, which contained a national treatment standard. The investor contended that an interim order banning the export of PCB-contaminated waste constituted a disguised
See Newcombe and Paradell (n 8) 298-307 (outlining the scope of the non-discrimination requirement and pointing to an overlap between FET, ADM, national treatment and MFN standards); also UNCTAD, National Treatment (United Nations, New York 1999) 11-2; J Coe and N Rubins, Regulatory Expropriation and the Tecmed Case: Context and Contributions in T Weiler (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, London 2005) 602. 24 SD Myers Incorporated v Canada , First Partial Award and Separate Opinion, Ad hocUNCITRAL Arbitration Rules, 13 November 2000 (2001) 40 ILM 1408.
23

discrimination.25 It also claimed that the promulgation of the export ban amounted to a breach of fair and equitable treatment under Article 1105.26 The tribunal agreed. It found that the export ban favoured Canadian nationals over nonnationals.27 It further held that the measures effectively prevented the investor from carrying out its remediation business, which was a clear disadvantage in comparison to its Canadian competitors.28 dismissed the claim of expropriation due to the temporary nature of the export ban,29 its final determination of Canadas responsibility to the investor was based on the finding of discrimination in violation of the national treatment and FET standards of Chapter 11 NAFTA. Another interesting example is provided by the award in Occidental v Ecuador , in As the tribunal

which a dispute arose from a decision denying the reimbursement of VAT on purchases made in the course of exploration, production and exportation of oil.
30

The investor contended that

Ecuadors refusal to grant VAT refunds amounted to a violation of several provisions of the BIT, including the expropriation standard. The tribunal dismissed the claim of expropriation as in its view there had been no deprivation of the use or reasonably expected economic benefit of the investment, let alone measures affecting a significant part of the investment.31 However, this finding did not prevent the tribunal from awarding damages for discriminatory conduct. The tribunal found that the investor had received a less favourable treatment than that accorded to national enterprises.32 It therefore held Ecuador responsible for a breach of the national treatment standard and granted compensation corresponding to the
Ibid para 130. Ibid para 136. Ibid para 193. Ibid. Ibid para 287. Occidental Exploration and Production Company v Ecuador, Award, 1 July 2004 (LCIA Case No UN 3467). Ibid para 89. Ibid para 177.

25

32

amount of disputed VAT refunds.33 Discrimination in breach of non-expropriatory standards of treatment has formed the basis of host state responsibility in a number of arbitral awards.34 The existing practice points to the emerging concept of an oil and gas breach where the key criterion of illegality is the character of the disputed governmental conduct. The shift from expropriation to nonexpropriatory standards of treatment is not, however, a panacea. Unlike the traditional expropriation model, host state responsibility for discriminatory acts does not hinge on the magnitude of deprivation. Thus, the investor does not need to bear the risk of regulatory interference until such time as the resulting deprivation becomes substantial; virtually any loss on the part of a foreign investor can be compensated once the investor succeeds in establishing a case for discriminatory treatment. As a consequence, the scope of the host states responsibility to a foreign investor will essentially depend on how far a tribunal is prepared to go in interpreting the oil and gas standards prohibiting discrimination and promoting equality among foreign and domestic investors. In order to strike the right balance between the protection of investment and the host states freedom to regulate, it is necessary to ensure that the non-discrimination principle is construed in a way that distinguishes between a

permissible differentiation and prejudice. A broad interpretation of the non- discrimination standards may lead to the relocation of the regulatory risks from a foreign investor to a host state.

2.2. The Like Circumstances Analysis

Ibid para 208. See e.g. Marvin Feldman v United States of Mexico , Award 16 December 2002 (Case No ARB(AF)/99/1) 7 ICSID Rep 341; Nykomb Synergetics Technology Holding AB v Latvia , Award, 16 December 2003 (SCC Case No 118/2001); Saluka Investments BV v Czech Republic , Partial Award, 17 March 2006 (PCAUNCITRAL Arbitration Rules), Eastern Sugar BV v Czech Republic , Partial award and partial dissenting opinion, 27 March 2007 (SCC Case No 088/2004).
33

A.

General

An economic rationale for the non-discrimination rule in oil and gas law is to ensure the same competitive conditions for both foreign and domestic investors and to prevent the host state from favouring domestic investors or investors from other states.35 Both the national treatment standard, with its origin in international trade agreements, and the prohibition of discriminatory measures originating in customary international law, are contingent standards because they require the comparison of the treatment received by the claimant investor with that accorded to other investors.36 In both cases, in order to establish discrimination it is necessary to examine whether the foreign investor and the enterprise which allegedly

received better treatment are in like circumstances.37 The importance of comparing the investors in like circumstances has long been recognised in international law on the protection of foreign interests abroad. For instance, in addressing a claim by a group of Dutch companies challenging the validity of the Indonesian measures on nationalisation of tobacco plantations, the Bremen Court of Appeals held that the equality concept means only that equals must be treated equally and that the different treatment of unequals is admissible.38 In Oscar Chinn , the like circumstances test was among the principal grounds on which the PCIJ rejected a claim of a discriminatory expropriation. The claim concerned an allegedly discriminatory measure which ordered Unatra, a national transportation company, to lower its carriage charges thus depriving Mr. Chinn of any prospect to carry out his business

UNCTAD, National Treatment (n 23) 8, P Muchlinski, Multinational Enterprises & the Law (OUP, Oxford 2007. 621, also Newcombe & Paradell (n 8) 148, noting that the commitment to non-discrimination has important political rationales such as the promotion of multilateralism and the prevention of conflicts). For the history of the non-discrimination principle, see EA Lang, Equal Access/Non-discrimination and Legitimate Discrimination in International Economic Law (1995-1996) 14 Wis Intl LJ 246. 36 See Nykomb v Latvia (n 34) para 4.3.2 (a). 3UNCTAD (n 23) 33-4. 3M Domke, Indonesian Nationalization Measures Before Foreign Courts (1960) 54 AJIL 305, 315.
35 8

profitably. The court acknowledged that the special treatment had been accorded to Unatra due to its special position as a company under state supervision. It held that the inequality of treatment could only have amounted to a discrimination forbidden by the Convention if it had applied to concerns in the same position as Unatra, and this was not the case.39 Since customary international law and recent arbitral practice endorse the like circumstances test as part of the non-discrimination analysis,40 it seems to be a safe conclusion to draw that a comparison should always be made between the like situations, regardless of whether the wording of the standard in a treaty expressly provides so.41 The crucial question is how to

determine the appropriate comparator. As will be shown below, the choice of comparator has a significant bearing on the scope of state responsibility.

B. Determining the appropriate comparator

There is no uniformity in determining the appropriate comparator in arbitral practice. One criterion is the existence of a competitive relationship between the foreign and domestic investors at issue. For instance, in SD Myers the tribunal had to assess the allegedly

discriminatory character of a regulation prohibiting exports of PCB contaminated waste. It compared the investor with its Canadian competitors in PCB waste remediation.42 However, the fact that a foreign investor and a domestic concern that has received better treatment operate in the same sector of economy and are in a competitive relationship may not, in itself,
Oscar Chinn (n 1) 87. See nn. 37, 39-40, also Saluka v Czech Republic (n 34) para 313. In some German BITs the national treatment standard does not expressly refer to the like circumstances requirement. An arbitrary measures clause, too, omits reference to like or similar circumstances. 42 SD Myers (n 24) para 251. The tribunal relied on OECD, National Treatment for Foreign-Controlled Enterprises: As regards the expression in like situations, the comparison between foreign-controlled enterprises established in a Member country and domestic enterprises in that Member country is valid only if it is made between firms operating in the same sector.
39

result in the conclusion that they are in like circumstances.43 As observed in

United Parcel

Service v Canada, it is possible for two investors or enterprises to be in the same sector or to be in competition and nonetheless be quite unlike in respect of some characteristic critical to a particular treatment.44 In this case, the dispute concerned the treatment of goods imported through the investor-run courier services and those imported using the services of Canada Mail. The majority of the tribunal held that, despite the investor and its competitor being engaged in the same business sector, they were not in like circumstances because of different characteristics of the imported goods.45 One problematic aspect of the like circumstances test is the possibility of setting too broad a basis for comparing between two enterprises. The broader the range of comparators to choose from, the greater the possibility that a disputed measure might be found to be discriminatory and amounting to an oil and gas breach. For example, in Occidental v

Ecuador, an investor claimed that a refusal to grant VAT refunds was in violation of the national treatment standard because companies engaged in the export of other goods, such as flowers, mining and seafood products had been entitled to the refunds. The tribunal held that the like circumstances prerequisite ought not to be confined to companies operating in the same sector but called for comparison between exporters generally.46 It held that like situations cannot be interpreted in the narrow sense advanced by Ecuador as the purpose of national treatment is to protect investors as compared to local producers, and this cannot be done by addressing exclusively the sector in which that particular activity is undertaken. 47 By comparing the investors situation with that of a broad range of exporters, the tribunal
Newcombe & Paradell (n 8) 165. United Parcel Service of America Inc v Canada, Award and separate opinion, 24 May 2007 (Ad hoc UNCITRAL Arbitration Rules), Separate Opinion of Dean Ronald A Cass, para 16. 45 Ibid paras 117-119. Occidental (n 30) para 168. Ibid para 173.
43

reached the conclusion that the investor was subjected to less favourable treatment. The breadth of this approach has been correctly criticised. It has been observed that by choosing all exporters as the appropriate comparator group, the tribunal has made it easier for investors to establish a BIT violation.48 Although the investor received less favourable treatment than that accorded to the locally owned flower export companies, the relevant issue was whether there was a legitimate rationale for differential regulatory treatment between different categories of exporters.49 Following the ruling in Occidental, states wishing to

avoid liability would need to treat all exporters alike, notwithstanding policy reasons that might call for different taxation of vital industries.50 Indeed, the tribunals interpretation of the like circumstances requirement considerably curbs a states power to exercise its essential regulatory powers, while also transforming investment treaties into guarantees against any regulatory change that may detrimentally affect foreign investors. C. Regulatory purpose test

As an alternative to existing approaches, it has been suggested that the purpose of an allegedly discriminatory regulatory measure, and not the existence of a competitive relationship, should be central to the determination of whether the investor is in like circumstances with a domestic enterprise.51 According to this argument, two firms in a competitive relationship and

operating in the same sector of the economy may not be in like circumstances because of a legitimate policy basis for distinguishing between them. For instance, a firm may be subject to different pollution emission standards because it is located in an environmentally sensitive
SD Franck, International Decision: Occidental Exploration & Production Co v. Republic of Ecuador (2005) 99 AJIL 676, 679. See also M Sornarajah, The International Law on Foreign Investment (CUP, Cambridge 2010. 338; Salacuse (n 8) 249. 49 Newcombe & Paradell (n 8) 176. Ibid. See also Muchlinki (n 35) 624 (noting that the approach adopted by the Occidental tribunal was at odds with the policy that encourages comparison within the same industrial sector). 51 Newcombe & Paradell (n 8) 165.
48

area, putting it in different circumstances to an otherwise similar firm located in a different area.52 Only if differential treatment is unrelated to environmental issues, will the two firms be in like circumstances. The regulatory purpose is relevant not only at the first step of analysis in determining the appropriate comparators but also as part of establishing legitimate, non-protectionist justifications for the disputed treatment.
53As

stated by the tribunal in Pope & Talbot , the like

circumstances analysis must address any difference in treatment, demanding that it be justified by showing that it bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign owned investments.54 However, the test may also fail if a regulatory purpose is construed in an overly broad fashion. Consider a hypothetical case involving two businesses affected by a tax regulation. If taxation generally (as opposed to a specific tax measure) were to be seen as a broadly defined regulatory purpose through which the likeness of two companies situations is to be determined, virtually any two businesses

can be found in like circumstances. Governments would need to apply identical tax rates across industries and abandon the differentiation between various economic sectors requiring distinct taxation policies. While the regulatory purpose test does offer a useful alternative to otherwise inconsistent and generous interpretations of like circumstances, one should be cautious in defining what constitutes the regulatory purpose at issue. General purposes behind governmental policies should never be relied upon in identifying the appropriate comparator category. The effective application of the regulatory purpose test necessitates narrowing the
Ibid 176. Newcombe & Paradell (n 8) 176. 5 Pope & Talbot Inc v Canada, Award on the Merits of Phase 2, 10 April 2001 (Ad hocUNCITRAL Arbitration Rules) para 79.See also GAMI Investments, Incorporated v Mexico , Final Award, 15 November 2004 (Ad hocUNCITRAL Arbitration Rules) para 114 (the measure must be plausibly connected with a legitimate goal of policy); Saluka (n 34) para 307 (any differential treatment of a foreign investor must not be based on unreasonable distinctions and demands, and must be justified by showing that it bears a reasonable relationship to rational policies not motivated by a preference for other investments over the foreign-owned investment).
52 5

analysis to specific and distinct objectives of a particular governmental measure. Only if focused on a discrete and sufficiently nuanced objective of a governmental act, can the regulatory purpose test offer a feasible approach to analysing breaches of national treatment and other standards prohibiting discrimination.

It is submitted that while the regulatory purpose test can be used in examining claims of discrimination, other factors, such as the existence of a competitive relationship (reasonably narrowed to a certain sector), also remain relevant. For instance, in Corn

Products v Mexico ,55the tribunal analysed both factors. The dispute concerned the imposition of a 20% excise tax on any drink that used a sweetener not made from cane sugar. The investor was a major manufacturer of a high fructose corn syrup (HFCS), a sweetener made from yellow corn and used in soft drinks. The introduction of an excise tax led to the closure of one of the investors plants and the significant reduction of its overall production in Mexico. The investor contended that the effect of the tax was to cause its customers to switch from HFCS to sugar cane sweeteners, thereby destroying its market and amounting to a discriminatory treatment in violation of Article 1102 NAFTA.56 The tribunal reasoned that it was necessary to begin with a comparison between domestic and foreign investors operating in the same business or economic sector as the claimant. It found that Mexican sugar producers operated in the same business or economic sector as the investor: ...when it came to supplying sweeteners to the soft drinks industry, their products were in direct competition with one another, treated both by customers and by Mexican law as being interchangeable. The purpose of the HFCS tax was avowedly to alter the terms of competition between them. 57 The tribunal also inferred the existence of a competitive relationship from the fact that the
Corn Products International Inc v Mexico , Decision on Responsibility, 15 January 2008 (ICSID Case No ARB(AF)/04/1). 56 Ibid para4. Ibid para 120.
55

investor and the Mexican sugar producers lobbied against each other.58 As regards the purpose of the regulatory measure, the tribunal pointed to Mexicos submission that the HFCS tax had been intended as a countermeasure targeting the United States for a failure to open its markets to Mexican sugar imports.59 Since the countermeasure was designed to affect the competition between HFCS and sugar, producers of these directly competitive products were found to be in like circumstances.60 The Corn Product award provides an example of a

multifactor approach to the comparison task. The tribunal did not confine its analysis to the fact that both the investor and the sugar producers were engaged in the same sector of economy. Nor did it adopt the regulatory purpose test as the sole method of examining the like circumstances prerequisite. Rather, in order to establish that Corn Products was in like circumstances with the Mexican sugar producers, the tribunal properly examined the

competitive relationship between the two groups, the substitutability of HFCS and sugar, and the objective and effect of the taxation measure. So far as the claim under Article 1102 is concerned, the Corn Product award illustrates an example of a balanced and sound analysis. Lest investment treaties transform into insurance against a regulatory change, the like circumstances analysis, as a key element of establishing discriminatory conduct in violation of oil and gas standards, should be subject to a multifactor analysis distinguishing an unjustified differentiation from a legitimate exercise of regulatory powers.

2.3. Justifying a de facto differentiation

See ibid para 135 (the tribunal holding that [f]ar from suggesting that they are not in like circumstances, [lobbying] tends to suggest the opposite; it is precisely because they are in close competition that they lobby against each other if they were not competing in the market for what are effectively interchangeable products, they would not trouble to maintain such lobbying activities). 59 Ibid para 136. For the background of the countermeasure, see paras 32-48. 6Ibid para 136.
58 0

A.

Oil and Gas contracts and state aid

Investment tribunals have recognised that any difference in treatment should be justified by showing that it bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign-owned investments.61 In practice, however, arbitral approaches to justifications for allegedly discriminatory conduct tend to expand the scope of state responsibility under oil and gas instruments. For example, in Saluka v Czech Republic ,

a dispute arose from the governments refusal to provide financial assistance to IPB, one of the Big Four banks.62 Due to a bad debt problem, which resulted in large non-performing portfolios and insufficient regulatory capital, IPB failed to meet the liquidity requirements and was placed under forced administration, followed by the sale of its assets to its competitor. The tribunal found the government responsible for its discriminatory response to the bad debt problem in the Czech banking sector, in particular because the government provided financial assistance to three of the Big Four banks to the exclusion of IPB, and thereby created an environment impossible for the survival of IPB.63 It found the government in breach of its obligation to provide fair and equitable treatment and to refrain from unreasonable or discriminatory measures.64 The tribunal pointed out that fair and equitable treatment must not be construed to include the general prohibition of state aid,65 and that although state aid tends to distort competition and to undermine the level playing field for competitors, States cannot be said to be generally bound by international law to refrain from using this tool.66 Nevertheless, the tribunal held that the host state was bound to provide financial assistance in
See n 54 above. N 34 above. See also V Balas, Saluka Investments BV (The Netherlands) v The Czech Republic: Comments on the Partial Arbitral Award of 17 March 2006 (2006) 7 J World Investment & Trade 371. 63 Saluka (n 34) para 466. Ibid para 280. Ibid para 445. Ibid.
61 6

a way that did not amount to an unfair or inequitable treatment of a foreign investor and that the provision of state aid to specific firms or industries must not be discriminatory or unreasonably harmful for the foreign investor.67 The Saluka award raises the question of whether simply by virtue of state obligations under international investment agreements foreign investors should be entitled to expect that the government will step in to help overcome financial difficulties without any prior assurance to this effect given by the government to the investor at the time the latter decided to invest. Particularly problematic is the tribunals approach to determining whether a refusal to provide financial assistance to IPB was reasonably justified. The tribunal found that all four banks were in like circumstances because of their similar strategic importance and exposure to the bad debt problem stemming from inadequacies of the legal regime relating to creditors rights.68 It then rejected the respondents justification for its refusal to provide financial assistance to IBP by reference to the fact that three of the Big Four banks were banks in which the state had a major shareholding interest, while IPB was regarded as a private institution whose fate was a matter for its private shareholders.69 It transpires from the facts of the case that the decision to provide financial assistance to three of the four banks was part of the governments privatisation strategy. At the time IPB was in the process of being privatised, the government clearly stated its negative approach to financing bad loans.70 The government was also careful in making no promise that its privatisation strategy would remain the same.71 After IPB had been privatised and the bad debt problem worsened, the government changed its policy and provided financial support
67

Ibid para 446. Ibid para 322. Ibid para 83. Ibid para 324. Ibid.

during the course of the privatisation of the remaining banks.72 The subsequent provision of state aid to other three banks was linked to the fact that the government still had large blocks of shares in those banks. Despite admitting that it was not proper to second-guess governmental privatisation policies, the tribunal held that the Czech Republic was still under an obligation not to treat investors in a discriminatory manner, including when implementing its privatisation strategies.73 In the tribunals view, it was reasonable for the investor to expect that in the event of serious financial problems the Czech Government would consider and provide financial support equally to all of the Big Four banks.74 Notably, the tribunal

admitted that no explicit assurance from the government was required to justify the reasonableness of such expectations.75 The tribunals analysis of the reasons underlying the Czech governments refusal to grant state aid to IBP provides an example of an overreaching scrutiny. The tribunal did not confine itself to examining whether justification was provided for the differential treatment of the investor or whether such justification was reasonably related to the governmental decision at issue. Rather, it went further to question whether the governmental decision was rational. While some believe that such a strict scrutiny is indispensable in drawing the line between permissible and impermissible distinctions,76 the better view is that tribunals should exercise reasonable self-restraint by adopting a more deferential approach. It is not argued here that tribunals should turn a blind eye to the substance of a disputed policy. The substance of a
Ibid para 325. Ibid para 337. 7Ibid para 329. 7Ibid. 7Such an argument has been advanced in the discussion of the arbitrary measures standard by V Heiskanen, Arbitrary and Unreasonable Measures, in A Reinisch, Standards of Investment Protection (OUP, Oxford 2008) 87. 106. However, compare S Montt, State Liability in Oil and gas Arbitration: Global Constitutional and Administrative Law in the BIT Generation (Hart Publishing, Oxford 2009) 343-7 (pointing to the perils of heightened scrutiny) and R Happ, Dispute Settlement under the Energy Charter Treaty (2002) 45 German Ybk Intl L 331 (rejecting the substantive scrutiny approach in his discussion of the reasonable measures standard) .
72 7

policy or a decision remains relevant as long as it helps to establish extraneous motives on the part of the government, such as when the treatment of the investors is driven by

considerations relating to nationality.77 Yet the primary focus of an inquiry should remain on whether justification for allegedly discriminatory conduct has been offered and whether it is related to the disputed treatment. In Saluka, the tribunal should have analysed whether the

difference in the governmental strategy at the time of the privatisation of IPB and other Big banks was driven by legitimate economic considerations. It was not for the tribunal to penalise the government for its privatisation strategy.78

B. Discrimination and allocation of production quotas

The award in Eastern Sugar v Czech Republic also turned on the justification for differential treatment.79 The dispute concerned the allocation of a quota among sugar producers, and in particular, the opening of an existing cartel to newcomers.80 Eastern Sugar entered the Czech sugar industry as a strategic player with a market share of 31.03% of the white sugar tonnage produced in the country, competing with two other major sugar producers.81 It was the time

when the Czech Republic was in the process of adapting its legislative and regulatory system to standards set forth in the Europe Agreement of 1993. As part of the transition process, successive steps were taken to adapt the Czech sugar regime to that of the European Union.

For instance, in SD Myers (n 24) paras 161-193, the tribunal had firm evidence in support of the finding that, in imposing a ban on export of PCB waste, the Canadian government was driven by an intention to protect the Canadian PCB remediation industry from foreign competitors. For discussion, see T Weiler, A First Look at the Interim Awards in S.D. Myers, Inc v.Canada: It is Possible to Balance Legitimate Environmental Concerns with Investment Protection? (2001) 24 Hastings Intl & Comp L Rev 173. 78 A strategy that favours granting state aid to certain industries only has recently been adopted by many governments. See section 4 below. 79 Eastern Sugar BV v Czech Republic (n 34). Ibid para 198. Ibid para 235.
77

As observed by the tribunal, in the period preceding the accession it was reasonable for sugar producers to expect that the regulation of the sugar market in the Czech Republic would replicate the main features of the existing protectionist regime in the EU. To protect local beetgrowers, the EU member governments maintained heavy import duties on sugar and related products, fixed minimal purchase prices for sugar beet, and made intervention purchases of sugar. Another feature of the EU sugar regime was that due to the low sugar content of beet and accordingly high cost of transportation, sugar factories would normally process sugar beet from nearby growers. In 2000, the Czech Government adopted the First Sugar Decree which was intended to introduce a sugar regime similar to those in EU member states already operating under the EU sugar regime.82 The decree provided for the allocation of a quota of domestic sugar sales based on production during the previous five years. It also flexibilised the quota allocation by giving the state a reserve quota which could be distributed between new entrants.83 The tribunal accepted the claimants allegation that the reserve quota was politically established. It also characterised the opening of the cartel of sugar producers to newcomers as illogical.84 Under the Second Sugar Decree, the reserve was further increased and made available to new entrants only.85 The Second Sugar Decree also provided for a reduction of quota if the historical quota went unused.86 The Third Sugar Decree totally abandoned the allocation of quota based on the historical production levels. Instead, the quota was set based on production levels achieved during two particular days. This caused the reduction of the quota of Eastern Sugar which had earlier closed its factory in Modrany and shifted the production to other
82

Ibid paras 245-7. Ibid para 260. 8Ibid para 263-5. 8Ibid para 279. 8Ibid para 278.
8

facilities. Eastern Sugar claimed that by adopting a new method of allocating quota the Czech government reacted to the closure of the Modrany factory.87 The government for its part explained the adoption of the third Sugar Decree by the need to respond to the upheaval among the beet growers.88 It asserted that the allocation of the remaining quota to a third party investor was aimed at maintaining the growers activities in the area of Modrany factory, which had been disrupted as a result of the two successive closures of manufacturing facilities by Eastern Sugar.89 The tribunal found the Czech Republic responsible for a breach of the treaty obligation not to impair by unreasonable and discriminatory measures the operation, management, maintenance, use, enjoyment or disposal of the foreign investment.90 While the First and Second Sugar Decrees did not rise to level of a breach of the BIT, the tribunal held that the Third Sugar Decree breached the treaty obligations, even if the intent was not to punish Eastern Sugar specifically but more generally to favour newcomers and to preserve the jobs of sugar beet growers.91 In the view of the tribunal, the Third Sugar Decree was a discriminatory and unreasonable measure in the sense of Article 3(1) of the CzechNetherlands BIT.92 This conclusion is open to criticism for a number of reasons. Not only did the tribunal fail to examine whether Eastern Sugar and companies which had allegedly received preferential treatment through the allocation of a larger quota, were in like circumstances but it also did not adequately scrutinise whether the differentiation in question was justified by reasonable policy objectives. By dispensing with an analysis of justifications for adopting a certain method of allocating the quota under the Third Sugar
87

Ibid para 297. Ibid para 321. Ibid paras 326-328. Ibid para 198. Ibid para 338. Ibid.

Decree, the tribunal disregarded the responsibility of the government for protecting its beetgrowers. Here, it is worth recalling the often-cited decision of the International Court of Justice in ELSI.93In that case, the claim of arbitrary and discriminatory measures was brought in connection with the requisition of the plant belonging to a foreign investor following the latters decision to discontinue production and terminate commercial activities and

employment contracts. Although the requisition order adopted by the Mayor of Palermo in response to the investors decision had subsequently been found unlawful by the reviewing Italian court, the ICJ refused to regard such requisition as a measure of an arbitrary and discriminatory nature. It drew attention to the situation which existed in Palermo at the time of the requisition, in particular, to the threat of sudden unemployment of some 800 workers at one factory.94 In the Courts view, it was not unreasonable or merely capricious for the mayor to seek to use the powers conferred on him by the law in an attempt to do something about a difficult and distressing situation.95 Unlike the ICJ in ELSI, the Eastern Sugar

tribunal took little notice of the fact that the government had to deal with the unrest caused by the closure of the factory in Modrany. Instead, it preferred to characterise the Third Sugar Decree as motivated by preferential treatment of newcomers.96 The Eastern Sugar tribunals approach raises the question as to how far an arbitral panel can go in its evaluation of the justification advanced by a host state for a governments disputed treatment of a foreign investor. Is it proper for a tribunal to substitute its own view of how production quotas should be allocated? Again, it would seem proper for tribunals to refrain from questioning the substance of any governmental policy. In evaluating a host states justification for allegedly discriminatory treatment of an investors investment,
93

Elettronica Sicula S.P.A. (ELSI) (United States of America v. Italy) [1989] ICJ Reports 15. Ibid para 129. 9Ibid. 9Eastern Sugar (n 34) para 337.
9

tribunals should confine themselves to establishing the existence of a reasonable nexus between a disputed measure and a rational policy objective. Reviewing the substance of a governmental policy transforms arbitral tribunals into courts of appeal and raises concerns over the design of the system of investor-state arbitration and its credibility. Furthermore, a strict scrutiny approach shifts the burden of a regulatory risk to host governments. Under such an approach, investment treaties, discrimination, transmute into including the guarantee of non-arbitrariness and non-

the promise of a perfect business environment and the

exemption from competition. Instead of encouraging investors to meticulously plan their investment and its protection through a variety of contractual and quasi-contractual the existence of discrimination and

techniques, a pro-investor stance in evaluating

arbitrariness promotes reliance on broad standards of investment treaties as a guarantee of commercial success.97 C. Foresti and others v South Africa The factual background in the recent ICSID case of Foresti and others v South Africa98 offers an interesting perspective on the impact of BITs on the host states freedom of decisionmaking in important socio-economic matters. In this case, a group of investors challenged the adoption by the South African government of the 2004 Mineral and Petroleum Resources Development Act, including the Black Economic Empowerment (BEE) equity divestiture requirement that was intended to encourage greater ownership of mining industry assets by historically disadvantaged South Africans.99 The investors claimed that as a result of the

GAMI (n 54) para 85 (noting that NAFTA does not entitle an investor to act on the basis that a regulatory scheme constitutes a guarantee of economic success). 98 Foresti and ors v South Africa, Award, 3 August 2010 (ICSID Case No ARB(AF)/07/1). Ibid. For the background of the policies, see MW Chow, Discriminatory Equality v Non-discriminatory Inequality: The Legitimacy of South Africas Affirmative Action Policies under International Law (2009) 24
97

abovementioned policies their mineral rights had been extinguished in violation of the South African BITs with Italy and Luxembourg, including the standards of FET, expropriation and national treatment. The arbitral proceedings were subsequently discontinued by the investors prior to the tribunals members entering into discussion of the merits of the case.

Nevertheless, the case is notable for bringing to the fore a controversial question of whether a policy aimed at restoring the rights of people who have been historically disadvantaged and discriminated against should give rise to a valid claim of discrimination in oil and gas law. It has been argued, in a different context, that no liability for the host state should arise in the case where disputed conduct was intended to rectify the historical injustice.100 objections cannot, however, outweigh Here, Such

legal arguments based on the provisions of an important role is played by the like

international investment agreements.

circumstances test. If enterprises affected by the BEE policies have all been treated alike, one may be safe to conclude that no differentiation took place. No matter how important the policy by which the host state justifies its treatment of foreign investors is, arbitral tribunals may find it more convenient and less controversial to avoid the discussion of the policy justifications and instead rely on the like circumstances test. While it is important to assess the claim of discrimination holistically, i.e. by way of scrutinising the treatment of similarly situated investors and ascertaining whether any differentiation was plausibly related to a legitimate governmental objective, it seems that a major role will often be played by the like circumstances analysis. Clearly, in declining an investors claim of discrimination, it would be easier for a tribunal to find that no differentiation occurred instead of establishing a
Conn J Intl L 291. 100 M Sornarajah , The pursuit of nationalized property (M. Nijhoff, Dordrecht1986) 183-6. This view can draw support from the Advisory Opinion on the Minority Schools in Albania , whereby the PCIJ stated that [E]quality in Law precludes discrimination of any kind, whereas equality in fact may involve the necessity of different treatment in order to obtain a result which establishes equilibrium between different situations ([1935] PCIJ 19 (Ser A/B N64)).

differentiation and having to discuss the plausibility and legitimacy of justifications advanced by the host state.

3.

Arbitrary and discriminatory measures: a potential for overlap and redundancy

The prohibition of discriminatory treatment is often included in investment treaties in the form of an obligation not to impair by arbitrary and discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion or disposal of investments.101 In some investment treaties, the prohibition of discriminatory measures forms part of a single standard including FET and umbrella provisions.102 There are also treaties which prohibit unreasonable or discriminatory measure103 or unjustifiable or discriminatory

treatment.104 Further modalities include the variation in the use of the disjunctive and instead of or. For instance, the 1991 USCzechoslovakia BIT proscribes impairment by arbitrary and

discriminatory measures.105 The use of the disjunctive and was decisive in Lauder v Czech Republic, where the tribunal held that in order for the relevant standard to be violated the disputed conduct ought to be both arbitrary and discriminatory.106 Does the diversity of
Treaty Between the United States of America and the Republic of Poland Concerning Business and Economic Relations (adopted 21 March 1990, entered into force 6 August 1994) (1990) S Treaty Doc No 101-18. The origin of the arbitrary and discriminatory measures clause can be traced back to post-war FCNs, from which it found its way into the Abs-Shawcross Draft, the OECD Draft Convention, and a great number of BITs. Newcombe & Paradell (n 8) 298-9. 102 See, e.g., Article 2(2) of the Agreement between the United Kingdom of Great Britain and Northern Ireland and Bosnia and Herzegovina for the Promotion and Protection of Investments (signed 2 October 2002, entered into force 25 July 2003) (2003) 37 UKTS. 103 See, e.g. Article 3 of the Switzerland Uzbekistan BIT (Agreement between the Swiss Confederation and the Republic of Uzbekistan concerning the Promotion and Reciprocal Protection of Investments (adopted 16 April 1993. entered into force 5 November 1993) SR 0.975.262.1.). 104 This formulation can be found in Article 2(3) of the ItalyEcuador BIT (Agreement between the Government of the Italian Republic and the Government of the Republic of Ecuador on the Promotion and Protection of Investments (adopted 25 October 2001, entered into force 5 November 2005) G.U. 20.07.2004 n.168). 105 See below n 106. 106 Lauder v Czech Republic, Final Award, 3 September 2001 (Ad hocUNCITRAL Arbitration Rules) para 219 (emphasis original): [T]he Arbitral Tribunal considers that a violation of Article II(2)(b) of the Treaty requires both an arbitrary and a discriminatory measure by the State. It first results from the plain wording of the
101

drafting solutions mean that there is a difference in the substantive content of nondiscrimination/arbitrary measures standards? As far as the use of varying disjunctives is concerned, the difference may not be material because the arbitrary and discriminatory measures (ADM) standard is almost invariably accompanied by the FET and, in some cases, by the national treatment standard. Thus, where an allegation of discrimination has been brought under a treaty standard that prohibits arbitrary and discriminatory conduct, the

absence of arbitrariness would not always be decisive because the fact of discrimination alone might suffice to trigger state responsibility under the national treatment and FET standards. In a similar vein, conduct that falls short of constituting discrimination but is nevertheless arbitrary can qualify as a breach of FET, thus rendering the invocation of the ADM standard and the related emphasis on the use of disjunctives unnecessary. As regards the substantive content of the arbitrary measures standard, arbitral tribunals have widely endorsed the view expressed earlier by the ICJ in ELSI, defining arbitrariness as something opposed to the rule of law, a willful disregard of due process of law, an act which shocks, or at least surprises, a sense of judicial propriety.107 However, investment tribunals have also differed in their interpretations of what amounts to a wilful and shocking violation of the law. For instance, the Occidental v Ecuador tribunal held that a lack of clarity in the tax law was arbitrary.108 In contrast, the tribunal in Sempra v Argentina found that a suspension of tariff adjustments, which had led to a significant modification of the
provision, which uses the word and instead of the word or. It then results from the existence of Article II(1) of the Treaty, which sets forth the prohibition of any discriminatory treatment of investment, except in the sectors or matters expressly listed in the Annex to the Treaty. If Article II(2)(b) prohibited only arbitrary or discriminatory measures, it would be partially redundant to the prohibition of discriminatory measure set forth in Article II(1). However, compare Azurix Corp v Argentina , Award, 23 June 2006 (ICSID Case No ARB/01/12) para 391 (the tribunal holding that the arbitrariness of the measure was sufficient for establishing a breach). 107 ELSI (n 93) para 128. The ELSI definition of arbitrary conduct was endorsed in Pope & Talbot , Award on Damages, 31 May 2002 (Ad hocUNCITRAL Arbitration Rules) (2002) 41 ILM 1347, paras 63-64, Noble Ventures Inc v Romania , Award, 5 October 2005 (ICSID Case No ARB/01/11) para 176. 108 (n 31) para 163.

investments regulatory regime, was unfair and inequitable but not arbitrary.109

The

existence of different views on what amounts to a manifest impropriety has led some tribunals to conclude that arbitrary should not be equated with unjustified and unreasonable. According to the tribunal in BG v Argentina , arbitrariness should involve a breach beyond the ordinary meaning of reasonableness: a withdrawal of undertakings and assurances which induced the investor to make an investment is not arbitrary but is by definition unreasonable.110 The question is whether this distinction between unreasonable and arbitrary is material or merely reflects the fact that in BG the applicable treaty contained no reference

to arbitrariness but proscribed unreasonable measures, and the finding of the unreasonableness was enough to hold the state responsible to the investor. It would seem that, had the arbitrariness standard been the only provision that the investor could invoke, the tribunal might have been more inclined to characterise the Argentinean conduct as arbitrary. In the case before it, however, the tribunal had a choice of standards offering a variety of connotations and interpretive approaches. Indeed, although the tribunal refused to equate unreasonableness with arbitrariness, it still found Argentina responsible for a breach of FET and unreasonable measures.111 It is therefore submitted that, despite nuances in the wording of the standards in investment treaties and the corresponding variety of connotations, the terms arbitrary, unreasonable and unjustified can be used interchangeably.112 Notwithstanding the differences in wording, the form of treatment prohibited by investment treaties is that which is unjustified or justified on improper grounds.113 What the formulations prohibit is a
Sempra Energy International v Argentina, Award, 18 September 2007 (ICSID Case No ARB/02/16) para 303. 318. 110 BG Group plc v Argentina , Final Award, 24 December 2008 (Ad hocUNCITRAL Arbitration Rules) paras 341-343. 111 Ibid paras 303-310. 112 C Schreuer, Protection against Arbitrary or Discriminatory Measures in RP Alford & CA Rogers (eds), The Future of Investment Arbitration (OUP, New York 2009) 183; however, compare Newcombe (n 8) 303. 113 See, eg. Lauder (n 106) para 232, Siemens AG v Argentina , Award and Separate Opinion, 6 February 2007
109

form of decision-making that depends on individual discretion, founded on prejudice or preference rather than on reason or fact.114 Instead of distinguishing between arbitrariness and unreasonableness standards, it would seem better to view the relevant clauses as providing for the same standard of treatment. An overlap between the prohibition of arbitrary and (or) discriminatory conduct and other standards of treatment also renders unnecessary a scrupulous distinction between various versions of ADM clauses. To begin with, the prohibition of arbitrariness is already enshrined in the third prong of the discrimination test.
115

Furthermore, arbitrariness is

contrary to FET.116 Arbitral awards have also construed FET as encompassing the nondiscrimination requirement.117 The overlap that is evident between various treaty provisions inevitably raises the question of whether certain treaty standards are redundant.118 Indeed, do we need a standalone clause on arbitrary and discriminatory measures if such measures fall within the purview of FET? The possibility of simultaneously claiming a violation of a number of largely overlapping standards has not been adequately addressed in arbitral awards. It remains far from clear whether certain standards should receive priority and whether,

(ICSID Case No ARB/02/8) para 319. 114 See Lauder (n 106) para 221, also CMS Gas Transmission Company v Argentina , Award, 12 May 2005 (ICSID Case No ARB/01/8) (2005) 44 ILM 120, para 291; Occidental (n 31) para 162. 115 See n 54 above. See also I Brownlie, Principles of Public International Law (6th edn OUP, Oxford 2003) 523 (pointing out that action which lacks a normal public purpose is arbitrary). 116 Saluka (n 34) para 309 (the tribunal stating that [a] foreign investor whose interests are protected under the Treaty is entitled to expect that the Czech Republic will not act in a way that is manifestly inconsistent, nontransparent, unreasonable ( i.e. unrelated to some rational policy), or discriminatory ( i.e. based on unjustifiable distinctions). See also Petrobart Limited v Kyrgyzstan , Award, 29 March 2005 (SCC Case No 126/2003) para 422 (refusing to rule separately on a prohibition of unreasonable and discriminatory measures and finding the latter to be subsumed in the FET standard). 117 For instance, discrimination was found to be covered by FET in the following awards: SD Myers (n 15) para 266. Eureko (n 15) paras 233-234; CMS (n 114) paras 294-295; Waste Management Inc v Mexico , Award, 30 April 2004 (Case No ARB(AF)/00/3) (2004) 43 ILM 967, para 98. 118 See Newcombe and Paradell (n 8) 301 suggesting that where a treaty contains FET, the arbitrary and discriminatory measures standard is superfluous. However, compare Schreuer (n 112) 192 (arguing that despite the existing overlap, arbitrary measures and FET should be treated as two conceptually different standards. It has not, however, been explained where exactly the conceptual difference lies).

despite an overlap, tribunals should consider each claim individually.119 It has been suggested that a hierarchy among various standards of treatment can be established depending on the capacity of a standard to embrace violations of other standards.120 Indeed, arbitral practice provides many examples of decisions where tribunals have characterised FET as an overarching standard of treatment. For instance, in Saluka v

Czech Republic the host governments refusal to provide state aid to the investors bank was found to be in violation of the FET provision.121 Turning to the investors claim regarding impairment by unreasonable and discriminatory measures, the tribunal found that a violation of the non-impairment requirement does not therefore differ substantially from a violation of the fair and equitable treatment standard.122 It concluded that the host state violated an obligation of fair and equitable treatment and impaired, by unreasonable and discriminatory measures, the enjoyment of investments.123 Thus, FET was construed to encompass the prohibition of unreasonable and discriminatory measures. A similar approach can be traced in a number of arbitral awards.124 The observed that FET Noble Ventures tribunal, for instance, inter alia the duty

represents a more general standard which finds its specific application in

to provide full protection and security, the prohibition of arbitrary and discriminatory measures and the obligation to observe contractual obligations towards the investor.125
Heiskanen (n 76) 90; also V Heiskanen, Unreasonable and Discriminatory Measures as a Cause of Action Under the Energy Charter Treaty (2007) 10 (3) Intl Arbitration L Rev 104. 120 Heiskanen (n 76) 93-4. 121 See n 34 above. 122 Ibid para 461. 123 Ibid paras 271, 497-498. 124 See MTD Equity Sdn Bhd and MTD Chile SA v Chile, Award, 25 May 2004 (ICSID Case No ARB/01/7) (2005) 44 ILM 91, para 196 (noting that to a certain extent, the prohibition of unreasonable and discriminatory measures was covered by FET); also Petrobart (n 116) para 422. 125 Ibid para 182. It is worth mentioning that in the tribunals view, the fact that no arbitrariness and discrimination had been found did not rule out the possibility of the general FET standard being violated. This observation can be construed as implying that FET, while overlapping with other standards, possesses its own, distinct content. However, as manifested in the tribunals conclusion dismissing the allegation of a breach of FET, its earlier characterisation of the disputed conduct as non-arbitrary and non-discriminatory was decisive in rejecting the claim under the FET provision.
119

Only the Nykomb tribunal has chosen to consider the many claims of an investor under the single umbrella of the ECT provision on unreasonable and discriminatory measures.126 The Nykomb arbitration arose from a contract for the purchase of surplus electric power concluded between Windau and Latvenergo. Latvenergo refused to pay Windau a double tariff for its surplus electric power, while two other enterprises, SIA LatelektroGulbene and LiepjasSiltums, continued receiving the double tariff. Along with claiming a breach of Article 10(1) prohibiting unreasonable and discriminatory measures, the investor contended a breach of FET and umbrella provisions.127 Having upheld the investors claim of discrimination, the tribunal found it unnecessary to rule upon other ECT violations asserted by the investor.128 The tribunal held that in order to establish liability it was sufficient to find that one of the relevant treaty provisions had been violated because the damage caused by the non-payment of the double tariff was the same.129 When viewed against the circumstances of the case, the Nykomb tribunals preference for analysing most of the investors contentions under the ADM standard can be explained by the fact that in terms of evidential basis the existence of unreasonable and discriminatory measures was relatively easy to establish.130 The tribunal did not address the relationship between the ADM and other standards of treatment. It is submitted that the overlapping and therefore redundant standards should be replaced by an overarching treaty provision with clearly outlined parameters of illegality. Judicial economy aside, the elimination of multiple standards prohibiting essentially the same conduct is justified by the need to address the lack of clarity and consistency in arbitral
126

Nykomb (n 34). Ibid para 4.3.2. 128 Ibid. 129 Ibid. 130 Heiskanen (n 76) 99.
127

jurisprudence. Superfluous distinctions between arbitrariness and unfairness often mask the absence of principled analysis and also provide a doubtful basis for the finding of a material breach. The multiplicity of standards also militates against the clarification of the meaning and scope of various standards of treatment. Should FET be regarded as an overarching standard of treatment? It seems that a distinction between the labels unfair and inequitable and arbitrary and discriminatory is largely a matter of theory. While arbitrariness and discrimination seem to denote a narrower category of mistreatment, in reality the choice between characterising certain conduct under either label would depend on the convictions of an individual arbitrator. For example, the Occidental v Ecuador tribunal held that a denial of tax rebates was arbitrary, even despite the fact that the issue was complex and long contested in the domestic courts.131 In contrast, the BG v Argentina tribunal dismissed the investors claim that the dismantling of a tariff regime by the government of crisis-stricken Argentina was arbitrary.132 As the terms arbitrariness, unreasonableness and unfairness can be used interchangeably depending on the

circumstances of a dispute and the beliefs of arbitrators, what matters more is not the label but the scope of the standard and the level of scrutiny it prescribes. Unless host states wish to defer the task of determining what is discriminatory, arbitrary or unfair to each individual tribunal, they should seize control over the interpretative process by introducing a more exacting formulation through the adoption of a uniform standard. As will be shown below, the availability of multiple and overlapping causes of action may potentially give rise to liability for regulatory acts in the areas which host states intended to insulate from the strictures of oil and gas protection.
131 132

Occidental (n 30) para 163. BG (n 110) para 340.

4.

Emergency measures, security concerns and

discrimination 4.1. General

The economic events

of the last decade have highlighted the importance of a balanced

approach to analysing both the claims of discrimination made by foreign investors and also the justifications put forward by the host states.133 In response to the global financial and economic crisis, governments have adopted various measures, including regulations aimed at bolstering the stability and recovery of the financial services sector and programmes targeting strategic industries (such as the automotive manufacturing industry).134 Unlike random buylocal campaigns implemented at various times in different countries, the emergency measures have been widespread among both developed and developing economies, thus raising

concerns over the dangers of the renewed wave of preferential treatment accorded to local enterprises.135 Similar to the Czech governments strategy in Saluka, many countries have not been prepared to provide assistance to foreign-owned businesses. For instance, the United Kingdom was reported to have refused assistance to LDV, a UK-based and Russian-owned van manufacturer, allegedly on the grounds that it considered that the Russian owner should provide the required support.136 Likewise, the United States and China have structured their industry stimulus packages in a way that favours domestic enterprises.137 In Germany, recent legislation on the stabilisation of the financial markets envisages that only financial
For an overview of emergency measures and their interplay with investment, see UNCTAD, Third Report on G20 Investment Measures , Geneva and Paris, 14 June 2010, available at << http://www.unctad.org/en/docs/unctad_oecd2010_en.pdf>>. See also S Ripinsky, Global Economic Crisis and the Danger of Protectionism: Does International Law Help? (2009) 1 (3) Amsterdam Law Forum. 134 See A Aaken and J Kurtz, Prudence or Discrimination? Emergency Measures, the Global Financial Crisis and International Economic Law (2009) 12 J Intl Econ L 859, 862; also K Gordon and J Pohl, The Response to the Global Crisis and Investment Protection: Evidence Columbia FDI Perspectives, No. 25, June 17, 2010. 135 See UNCTAD (n 133). 136 Ripinsky (n 133). 137 Aaken & Kurtz (n 134) 869-70.
133

institutions

domiciled

in Germany can benefit from the creation of a fund for the

recapitalisation of financial services firms through the acquisition of toxic assets and other measures.138 A cursory overview of the emergency regulations enacted in different countries raises the question of whether ousting foreign enterprises from the financial rescue and stimulus programmes is discriminatory and should give rise to state liability under international law. Interestingly, it has been suggested that despite the fact that this new protectionism falls under the remit of the law of the World Trade Organisation and oil and gas law, it is international investment law that is more likely than any other area of international economic law to be invoked in legal action initiated by disgruntled foreign enterprises.139 Not only is oil and gas law characterised by broad coverage and relatively few exceptions but also private investors are not restrained from exercising their right to initiate investor-state arbitration.140 In the present economic and political climate, would Russian-owned LDV be entitled to compensation for the discriminatory refusal by the UK government to provide the financial support LDV considers necessary for the survival of the enterprise? If the question was analysed within the broader, overarching framework of issues relating to the credibility and long-term sustainability of oil and gas arbitration, it would be inappropriate to follow the example of the Saluka award where the investors success largely turned on its any business can be disadvantaged because of

nationality.141 One can argue that since

Ibid 864-5. For more detail, see KJ Hopt, C Kupman, F Steffek, Preventing Bank Insolvencies in the Financial Crisis: The German Financial Market Stabilisation Acts (2009) 10 (4) European Bus Organization L Rev 515. 139 Aaken & Kurtz (n 134) 859-61. 140 Ibid 860. In this respect investors differ from members of the WTO which may refrain from instituting proceedings against a member which adopts discriminatory measures in response to a financial crisis because of the fear of retaliation (see ibid). 141 See nn 70-78 and accompanying text.
138

emergency measures and other forms of economic stimulus packages, foreign investors should not be entitled to compensation for such measures simply because of their nationality. Yet the reality is that under the national treatment standard (as well as other treaty provisions on non-discrimination) a foreign investor might be entitled to receive treatment no less favourable than that accorded to national investors. Once a national enterprise obtains a financial stimulus package or other form of state aid, this gives rise to a foreign investors right to the same treatment. Another area of governmental decision-making prone to investor-state litigation and claims of discrimination is the admission and operation of sovereign wealth funds. SWFs are defined as government investment vehicles funded by foreign exchange assets, which manage those assets separately from official reserves.142 A primary concern behind the SWFs is that government-led enterprises may invest for political reasons and could thus negatively affect national security, financial stability, and corporate governance.143 Furthermore, many SWFs are controlled by countries that are characterised by a lack of governmental accountability. This enables such SWFs to enter into high-risk investments.144 The US

government opposition to the Dubai Port Deal illustrates the political controversy surrounding the foreign SWFs decision to invest. Dubai Ports World, a government-controlled enterprise,
Under Secretary of the Treasury for International Affairs David H. McCormick: Testimony Before the S. Comm. on Banking, Housing, and Urban Affairs, 107th Cong. (2007) (statement of David M. McCormick, available at <http://www.treas.gov/press/releases/hp681.htm>). See further Sornarajah (n 48) 5-6 (suggesting that SWFs from southern economies, such as Dubai and Singapore, are likely to dictate the rules of the game as they enter the stage). 143 E Langland, Misplaced Fears Put to Rest: Financial Crisis Reveals the True Motives of Sovereign Wealth Funds (2009) Tulane J Intl Comp L 263, 269. Also, Y Feng, We Wouldnt Transfer Title to the Devil: Consequences of Congressional Politicisation of Foreign Direct Investment on National Security Grounds (2009) 42 NYU J Intl L & Pol 253 (noting that there is a sense that FDI may serve as a tool for foreign governments to gain footholds in vital industries, to siphon off valuable or sensitive American technologies, or simply to provide a means for sabotage). See further S Firth and D Juric, Can we afford (not) to regulate sovereign wealth funds? (2008) 11 JIBFL 604; K Kalotay, The Political Aspect of Foreign Direct Investment: The Case of the Hungarian Oil Firm MOL (2010) 11(1) J World Investment & Trade 647 (examining the acquisition of MOL by the Russian Surgutneftegaz allegedly driven by political and not financial motives). 144 M Saxon, Its Just Business, or Is It? How Business and Politics Collide with Sovereign Wealth Funds (2009) 32 Hastings Intl & Comp L Rev 693.
142

attempted to acquire a British company that controlled a number of United States ports. Likewise, in 2005 the China National Offshore Oil Corporation failed in its attempt to acquire the American energy company UNOCAL. The US Congress opposed the deal due to fears that the takeover would compromise a strategically sensitive area of the US economy.145 While a refusal to admit a SWF investment can be justified on security grounds under national legislation,146 it is possible that such a refusal would be challenged under bilateral investment treaties. In the case where a disgruntled SWF decides to initiate investor-state arbitration against a host state, national treatment, MFN and ADM provisions will provide an ample legal basis for its claims.147 Both national legislation applying to SWFs and decisions adopted in relation to an individual SWF can potentially lead to host state liability under the relevant oil and gas instruments.148

4.2. Preserving the host state freedom to regulate at a time of emergency: pre-emptive drafting solutions A. Carve out provisions

Carve-out clauses exempting certain types of regulatory activity from the application of the national treatment standard may shield host states from liability for decision-making in certain

Langland (n 143) 269. Also, the German government opposed the acquisition of a holding in telecoms operator Deutsche Telekom AG by a Russian Investor and prevented a Russian-owned state bank from increasing its holding in European Aeronautic Defence & Space Company (W Ben Hamida, Sovereign FDI and International Investment Agreements: Questions Relating to the Qualification of Sovereign Entities and the Admission of their Investments under Investment Agreements (2010) 9 L & Practice Intl Courts & Tribunals 17. 19 ). 146 For instance, all investment in the US is subject to the Foreign Investment and National Security Act of 2007 (FINSA). See Saxon (n 144) 701. 147 Again, the national treatment standard, especially if extended to the pre-entry phase, would provide blanket protection against virtually any measure that hinders the investors entry. See Sornarajah (n 48) 335-6. (commenting on the effect of national treatment provisions). 148 M Audit, Is the Erecting of Barriers against Sovereign Wealth Funds Compatible with International Investment Law (2009) 10 (4) J World Investment & Trade 617, 626.
145

sectors of the economy as well as in areas presenting security concerns.149 As illustrated in the NAFTA decision in ADF Group Inc v United States , investment treaties can contain

reservations rendering the national treatment and MFN requirements inapplicable in cases that involve procurement and subsidies or grants by a government or a state enterprise, including government supported loans, guarantees and insurance.150 Such reservations are contained in Article 1108 (7) of the NAFTA, Article 9(5)(b) of the Canada Model BIT, and Article 14(5)(b) of the US Model BIT.151 Carve-outs are designed to immunise governmental

measures in certain sectors of the economy, such as banking and insurance, and limit a host states exposure to liability for certain policies and measures, including procurement and subsidies. In drafting the carve-out provisions it is crucial to remember that non-discrimination is subsumed under the standards of national treatment, FET and ADM. This fact seems to have been overlooked by drafters of the NAFTA (and of some BITs) which contain prudential exceptions excluding the application of the national treatment and MFN provisions only,
152

For a comprehensive analysis of the use of reservations in contemporary oil and gas practice, see UNCTAD, Preserving Flexibility in IIAs: The Use of Reservations (United Nations, New York 2005). The study observes that many countries, independent of their level of development, feel the need to preserve certain economic activities from international obligations. This trend is more pronounced in the case of developing countries, given their need to face greater social and economic problems while also addressing new regulatory challenges with more limited resources and expertise (ibid, 2). Importantly, while clauses containing reservations, exceptions and carve-out provisions are designed to ensure a larger pool of policy options available to the decision-makers in the host states, such clauses enhance the degree of regulatory transparency by means of indicating the areas of economic activities which are sensitive due to various political and economic concerns (ibid, 13). 150 In this case, a claim was brought by a Mexican investor disputing the measures requiring that steel, iron and manufactured products to be used in a highway construction project be produced in the United States. The investor contended that such requirements were in breach of, inter alia, the national treatment standard set forth in NAFTA Article 1102. The tribunal refused to find the measures inconsistent with NAFTA Article 1102. It observed that even assuming that the contended measures were in breach of national treatment, such measures were exempt from the scope of application of NAFTA Article 1102 due the express proviso made in NAFTA Article 1108 (7) with regard to governmental measures involving procurement, grants and subsidies ( ADF Group Inc v USA , Award, 9 January 2003(ICSID Case No ARB(AF)/00/1) (2003) 18 ICSID Review-FILJ 195, para 199). 151 Treaty texts available at < http://ita.law.uvic.ca/investmenttreaties.htm>. 152 See, for instance, Article IV (1) (b) of the Canada-Czech Republic BIT and Article 14 (5) of the US-Uruguay BIT.
149

thus leaving open the possibility of host state decisions on state aid and financial guarantees being challenged as arbitrary and discriminatory treatment and a breach of FET. Where an oil and gas contains the traditional arsenal of standards, the carve-out provisions should be formulated broadly so as to pre-empt claims of discrimination being filed under the FET and ADM standards. Once again, it is clear that through eliminating the intended redundancy, i.e. multiple and overlapping provisions, the contracting state parties will be able to stipulate exceptions in relation to certain areas of decision-making and at the same time will be able to reduce the potential for inconsistency and their exposure to liability which may otherwise result from the existence of multiple standards that cover discriminatory measures.

B. Security exceptions

Carve-out provisions are not as ubiquitous as the guarantee of FET and the prohibition of arbitrary and discriminatory measures. For instance, while many BITs of the United Kingdom contain the national treatment standard (in addition to the FET provision and the guarantee against unreasonable and discriminatory impairment), such provisions are not accompanied by reservations similar to those found in the US and Canada BITs.153 In the absence of carveout clauses covering the financial service sector and state subsidies, host states remain exposed to investor claims challenging the allocation of financial aid/stimulus packages between domestic and foreign-owned enterprises. Where investment treaties do not contain prudential exceptions, another provision to which the host state may resort in order to avoid responsibility for its decision-making in strategically important areas is the security exception.
153

Ibid.

155

This kind of exception has recently been incorporated in the UK and US model treaties. For example, the Essential Security clause in Article 18 of the US Model BIT stipulates that Nothing in this Treaty shall be construed to preclude a Party from applying measures that it considers necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.154 While the interpretation of security clauses by investment tribunals has given rise to

controversy and awards of vast amounts in damages,155 more recent arbitral practice reveals a willingness by tribunals to accept the host state objections to investor claims disputing emergency measures. For instance, as in many cases that have dealt with a security exception in the oil and gas context, the dispute in Continental Casualty v Argentina arose

following the adoption by the Argentinean government of the Emergency Law and the Capital Control Regime, which led to the abolition of the existing convertibility regime and the imposition of restrictions on transfers. The tribunal was faced with the question of whether the emergency measures, which had a detrimental economic impact on the investor, precluded state responsibility by falling within the scope of Article XI of the Argentina US BIT. According to Article XI, the treaty ought not to preclude the application of measures necessary for the maintenance of public order, the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.156 The tribunal analysed separately the notion of public order and essential security.157 It held that a significant economic crisis, even if not amounting to a

Article 18 Uruguay US BIT (Treaty Between the United States of America and the Oriental Republic of Uruguay Concerning the Encouragement and Reciprocal Protection of Investment (adopted 4 November 2005 entered into force 1 November 2006) (2006)S Treaty Doc No 109-9 (2006)). 155 Continental Casualty Company v Argentina, Award, 5 September 2008 (ICSID Case No ARB/03/9). 156 Ibid para 232 (referring to the text of the Treaty Between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment (adopted 14 November 1991, entered into force 20 October 1994)(1993) S Treaty Doc No 103-2). 157 Ibid paras 174-180.
154

total collapse of the economy, should fall under the exception in Article XI due to its ramifications on the maintenance of peaceful domestic order and national security.158 However, the security exception may not provide a sufficient basis for a state defence against investor claims in relation to an allegedly protectionist allocation of state aid and a discriminatory refusal to admit certain investments. First, it is difficult to predict whether a tribunal called to decide on such a claim would adopt a similar stance to that taken in Continental Casualty , or whether it would prefer to follow the suite of other tribunals that had earlier ruled against the invocation of the security exception by the Argentinean government.159Second, problems may arise in justifying the emergency measures that are aimed at bolstering the recovery and stability of certain industries: it is possible to argue that, unlike measures that intend to ensure the rescue of strategically important business from a near collapse, stimulus packages do not qualify as measures necessary to maintain national security. Thus, one can argue that in contrast with the rescue of Northern Rock, the failure of which would have tangibly undermined the stability of the whole banking sector in the UK, a regulation entitling certain automotive businesses to a stimulus package could not be characterised as an emergency measure necessary to qualify for the public security and public order exception. Likewise, a host states refusal to approve an investment by a SWF would only be narrowly covered: while emergency legislation more readily falls under a security
Ibid. Economic measures aside, the security exception can be invoked in relation to measures aimed at the protection of national security, including those addressing the threat of terrorist attacks. See P Muchlinski, Trends in International Investment Agreements: Balancing Investor Rights and the Right to Regulate. The Issue of National Security (2008-2009) Ybk Intl Investment L & Pol 35. 159 For instance, in CMS v Argentina (n 114), the security exception was analysed in conjunction with a defence of necessity in customary international law and, consequently, failed to preclude the host states liability for emergency measures. For discussion and criticism, see D Foster, Necessity knows no law! - LG&E v Argentina (2006) 9Intl Arbitration L Rev 149; A Reinisch, Necessity in International Investment Arbitration An Unnecessary Split of Opinion in Recent ICSID Cases? (2007) 8 J World Investment & Trade 191; JC Vinuales, State of Necessity and Peremptory Norms in International Investment Law (2008) 14 L & Business Rev Americas 79; K Claussen, The Casualty of Investor Protection in Times of Economic Crisis (2009) 118 Yale L J 1545; J Kurtz, Adjudging the Exceptional at International Investment Law: Security, Public Order, and Financial Crisis (2010) 59 ICLQ 325.
158

exception, it may be difficult to argue plausibly that the acquisition of a US energy company by a Chinese SWF presents a considerable threat to essential security interests. Importantly, the formulation of security exceptions in BITs often detracts from their strength and capacity to serve as a defence against investor claims. The scope of exception clauses is frequently limited to certain obligations only. For instance, under Article 7 of the 2005 United Kingdom Model BIT, it is only the application of the national treatment and The relevant part of the clause MFN provisions that security measures are insulated from.160 reads as follows: The provisions of this Agreement relative to the grant of treatment not less favourable than that accorded to the nationals or companies of either Contracting Party or of any third State shall not be construed so as to preclude the adoption or enforcement by a Contracting Party of measures which are necessary to protect national security, public security or public order 161 As the wording of the exception clause suggests, even where an allegedly discriminatory regulation might qualify as a measure necessary to protect national security, public security or public order, the investor can still invoke FET or the prohibition of unreasonable and discriminatory measures, these two standards falling outside the exception clause and offering an alternative to the national treatment and MFN standards. The investor can argue that since only the national treatment and MFN standard are expressly covered by the security clause, the state should be held responsible for discrimination that is prohibited by other standards of treatment contained in the relevant oil and gas instrument. In order to shield emergency and security measures from investor claims, a more comprehensive approach calls for the formulation of the security clause in such a way that would exempt governmental measures from the application of not only the national treatment and MFN provisions but also from the
See the Draft Agreement Between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of [Country] for the Promotion and Protection of Investments (2005, with 2006 Amendments). 161 Ibid.
160

application of other treaty provisions that cover discriminatory treatment. Clearly, the availability of multiple but overlapping standards of treatment may have adverse implications. Advantageous though it may be from the investors perspective, multiplicity and intended redundancy is likely to increase the host states exposure to arbitral scrutiny and liability for a wide range of governmental decisions. As the host states formerly advocating strong

investment protection are increasingly facing investor claims, treaty drafters may now appreciate the need for a clearer demarcation of the line between the areas protected by oil and gas standards and those areas which fall beyond treaty protection. Eliminating overlapping causes of action through the adoption of a single standard of regulatory treatment embracing the guarantees of non-discrimination, non-arbitrariness, and due process could be a way forward. Such a standard could be complemented by additional guarantees only to the extent that these are not covered by its constitutive elements. The availability of multiple and overlapping standards is not only counterproductive but also exacerbates the lack of clarity and creates the potential for expansive interpretation of investment protection standards.

CHAPTER 3 ARBITRATION CLAUSES IN AGREEMENTS

A. Since the foundation of international arbitration is its consensual nature, the parties to an international contract may to a considerable extent design the manner in which the arbitral proceedings are conducted. The first and most important opportunity for the parties to take control of their arbitration is in the drafting of their arbitration clause. As part of this exercise, the parties have substantial (although importantly, not unlimited) freedom in engineering the structure of their arbitration. In drafting the clause, there are a few mandatory requirements that must be met, and a few provisions that must be included. These provisions should be clear and unequivocal. In addition to these provisions, however, a clause may be ornamented in virtually endless combinations with a cornucopia of provisions covering topics as important as the situs of the arbitration and as esoteric as class action arbitrations. A word of caution is in order. There is no such thing as a single model, miracle or all purpose clause appropriate for all occasions.1 Each clause should be carefully tailored to the exigencies of a given situation, taking into account the likely types of disputes, the needs of the parties relationship and the applicable laws. Because the arbitration clause is typically one of the last contractual provisions negotiated after the parties have agreed on the essential terms often the parties merely insert form clauses or allow the party with the greatest bargaining

strength to dictate the contents of the clause. 2 In the latter case, a negotiator must know which provisions are essential and which are not.3 Beyond merely including arbitration clauses in individual agreements, however, companies may wish to consider the desirability of establishing arbitration and alternative dispute resolution (ADR) programs. Most companies have numerous types of contracts consumer contracts (often standard-form agreements with thousands of people), distribution agreements, franchise agreements, supplier contracts, sales agreements, commercial agreements of various sorts (sometimes with competitors), and unusual agreements such as those involving large projects and sales or purchases of substantial assets. Each of these agreements involve different

considerations for dispute resolution clauses, and different arbitration clauses should be crafted for each. In addition, a multi-tiered ADR clause may be appropriate for major projects. With these concepts in mind, the following discussion attempts a comprehensive analysis of the provisions that parties may include as the elements of an arbitration clause. This discussion also seeks to help the negotiator determine which provisions are necessary, and which may be omitted, in a particular agreement. B. Factors Relevant to the Enforceability of an Arbitration Clause 1. Agreement Requirements

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and the Inter-American Convention on International Commercial Arbitration (Panama Convention) list the requirements that must be met for an arbitral agreement to be
1

Stephen Bond, How to Draft an Arbitration Clause (Revisited), 1 ICC Intl Ct. Arb. Bull. 14 (Dec. 1990). Id. Id.

enforceable by the authority of the treaties. Both Conventions include similar requirements for enforcing arbitral agreements. First, the arbitration agreement must be reduced to writing.4 A

writing may consist of a separate arbitration agreement or an arbitral clause contained in a contract.5 Second, the writing must either be signed by the parties or be contained in an

exchange of letters or telegrams.6 These simple requirements still exclude from enforceability both oral agreements, such as sales made by telephone, and contracts formed by conduct. The latter category encompasses deals in which one party sends a written document containing an arbitration clause, the other party neither signs the document nor responds in writing, but the parties perform the implicit agreement. Despite the existence of a writing and a performed agreement, courts have refused to enforce arbitration clauses in such cases.7 2. Capacity of the Parties

One of the few grounds in the New York and Panama Conventions for refusing to enforce an arbitration award exists when the parties to the arbitration agreement are under some incapacity (pursuant to the law applicable to them) or when the arbitration agreement is invalid

New York Convention art. II(1)&(2); Panama Convention art. 1.

5

New York Convention art. II(1) & (2). New York Convention art. II(2); Panama Convention art. 1 (also includes telex communications in the list of non-signed documents that may contain an enforceable arbitration agreement). See DIETF, Ltd. v. RF, AG, decision of Obergericht [Court of Appeal], Basel-Land (Switzerland), 5 July 1994, 21 Y.B. Com. Arb. 685, 688 (1996) (telefax acceptance of written confirmation of order, which explicitly referred to general conditions, which contained an arbitration clause, satisfied writing requirement). E.g., Smal v. Goldroyce, [1994] 2 HRC 526 (Hong Kong). See Schiff Food Products, Inc. v. Naber Seed & Grain Corp. (Saskatchewan Court of Queens Bench, Melfort 1 Oct. 1996).

under the governing law agreed by the parties or, in the absence of an agreement on the governing law, under the law of the country where the award is made.8 With this incentive in mind, sometimes a State (or a subdivision or agency of a State) will argue that it did not have the capacity to agree to arbitration. Swiss law provides that a State or an enterprise or organization controlled by it cannot rely on its own law to contest either its capacity to be a party to an arbitration or the arbitrability of a dispute covered by the arbitration agreement.9 Thus, if Swiss law governs, the capacity and arbitrability issues may be eliminated for a State party. Nevertheless, it is advisable at the outset to verify the capacity of a State entity to agree to arbitration.10 It may also be useful to include a representation that the State has the capacity to agree to arbitrate. 3. Authority of the Signators

A similar issue arises when a party claims the person signing the agreement was not properly authorized. In civil law countries, certain formalities, such as a power of attorney, are often required for authorization to sign an agreement. Some States, and perhaps even some private companies, may require two signatures of persons at specific levels before certain contracts may be considered binding. In the case of All Union Foreign Trade Association Sojuzneftexport v. Joc Oil, Ltd.,11 a Soviet organization entered into a contract for the sale of oil. The Chairman of the Soviet organization signed the contract, but Soviet law required the signatures of two persons properly
8 9 10 11

New York Convention art. V(1)(a); Panama Convention art. 5(1)(a). Swiss Federal Private International Law Act art. 177(2). Piero Bernardini, The Arbitration Clause of an International Contract, 9 J.Intl Arb. 45, 47 18 (1992). Y.B. Com. Arb. 92, 93, 99 (1993).

authorized by power of attorney from the Chairman. The arbitral institution held the contract invalid because of the mandatory nature of the two-signature requirement of Soviet law. The arbitrators also decided that the risk of the lack of authority of the Association's Chairman to sign the contract fell upon the private party, which was found to have a duty to satisfy itself as to the authority of the signator for the opposing party. It is important for a party to investigate and satisfy itself of the authority of the signator to bind the opposing party. In some cases, it may be worthwhile to include a representation by a party that the officer signing is properly authorized. 4. Parties Bound By An Arbitration Clause

Generally, an arbitration clause binds only the persons or companies who sign the agreement.12 This requirement reflects the fact that arbitration is consensual in nature, and is dependent upon the parties agreement. There are, however, exceptions to this rule. For example, when claims are brought by or against a corporation that is a signatory to an arbitration agreement, U.S. courts may require arbitration of claims by or against a non-signatory, affiliate company if the claims are intimately intertwined with, or are inherently inseparable from, the claims brought by or against the affiliate signatory, provided the non-signatory affiliate consents to arbitration.13 As some courts have said when a parent company was sued in tort as a means of circumventing an arbitration clause in a subsidiarys contract, If the parent corporation was forced to try the case, the
12

F.C. & S.C. v. F.D. & S.D., Partial Award of 17 March 1983 in ICC Case No. 4402, 9 Y.B. Com. Arb. 138, 140 (1984); Thomson-CSF, S.A. v. American Arbitration Assn, 64 F.3d 773, 780 (2d Cir. 1995). See also Pierre Lalive, Le droit suisse de larbitrate, in LArbitrage 279, 281; Roger Perrot, Le droit francaise de larbitrage, in LArbitrage 249, 250. Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 757-58 (11th Cir. 1993), cert. denied, 115 S.Ct. 190 (1994); J.J. Ryan & Sons v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 320-21 (4th Cir. 1988); Carlin v. 3V, Inc., 928 S.W.2d 291, 294-97 (Tex. App. Houston [14th Dist.] 1996, n.w.h.).

13

arbitration proceedings would be rendered meaningless and the federal policy in favor of arbitration effectively thwarted.14 Some courts have based these holdings on a theory of

equitable estoppel.15 At least one celebrated French case has similarly held that a non-signatory parent company could voluntarily participate in an arbitration between the signatories to a contract, one of which was its subsidiary.16 companies doctrine. Second, a non-signatory corporation that is held to be the alter ego of an affiliate company that signed an arbitration agreement may be required to participate in an arbitration proceeding involving claims against its alter ego.17 Third, an arbitral agreement may be held to include Fourth, a successor in This has come to be known as the group of

non-signatories when assent may fairly be implied by their conduct.18

interest is bound to its predecessors arbitration agreement.19 Fifth, a principal is

14

J.J. Ryan & Sons v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 321 (4th Cir. 1988), quoting Sam Reisfeld & Son Import Co. v. S.A. Etero, 530 F.2d 679, 681 (5th Cir. 1976). Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060, 1064 (2d Cir. 1993); Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 757-58 (11th Cir. 1993); McBro Planning & Dev. Co. v. Triangle Elec. Constr. Co., 741 F.2d 342, 344 (11th Cir. 1984). Dow Chemical France v. ISOVER SAINT GOBAIN, Cour dAppel de Paris, 21 October 1983, 110 Journal du droit international (Clunet) 899 (1983), 9 Y.B. Com. Arb. 131, 137 (1984). See also Map Tankers, Inc. v. MOBIL Tankers, Ltd., Partial Final Award No. 1510 of 28 November 1980, 7 Y.B. Com. Arb. 151, 153 (1982) (award of Society of Maritime Arbitrators). Fisser v. International Bank, 282 F.2d 231, 234-35 (2d Cir. 1960); Builders Federal (Hong Kong) Ltd. v. Turner Constr., 655 F. Supp. 1400, 1406 (S.D.N.Y. 1987). Typically, however, the alter ego theory must be tested in court prior to the arbitration proceeding. See Hidrocarburos y Derivados, C.A. v. Lemos, 453 F. Supp. 160, 177 (S.D.N.Y. 1977); Fridl v. Cook, 908 S.W.2d 507, 514 (Tex. App. El Paso 1995, writ dismd w.o.j.). Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060, 1064 (2d Cir. 1993); In re Transrol Navegacao, S.A., 782 F. Supp. 848, 851-52 (S.D.N.Y. 1991). See generally Juan Antonio Cremades, Problems That Arise From Changes Affecting One of the Signatories to the Arbitration Clause, 7 ICC Intl Ct. Arb. Bull. 28, 29-30 (Dec. 1996).

15

16

17

18

19

subject to an arbitration clause in its agents contract.20 An agent who does not disclose the fact it is acting as an agent in contracting will, of course, be bound to the arbitration agreement,21 while an agent who discloses its agency will not.22 Sixth, third-party

beneficiaries of a contract are bound to the arbitration clause because they cannot avoid the burdens of a contract while accepting the benefits.23 On the other hand, some authorities have ruled that assignees of a contract are not required to arbitrate unless the assignee agrees to be bound to the arbitration clause.24 Guarantors and sureties are generally bound to arbitrate only if the guaranty or performance bond either includes an arbitration clause or incorporates a contract containing an arbitration clause.25 5. Unified Contractual Scheme

Some arbitral tribunals and courts have decided that an arbitration clause in one contract between the parties would also apply to other agreements between the same parties if the
20

Wintershall, A.G. v. Government of Qatar, Partial Award of 5 February 1988 and Final Award of 31 May 1988, 28 I.L.M. 795 (1989) (Qatar General Petroleum Corporation, wholly-owned by the Government, was held to be the Governments agent because the Government appointed most of the Board of Directors, most of whom were Government officials, and thus, the Government was bound to arbitrate under its agents arbitration clause). See Marc Blessing, The Law Applicable to the Arbitration Clause and to Arbitrability: Academic Solutions versus Practice and Real Life at 12, included in the First Working Group Papers of the ICCA Congress, May 3-6, 1998, in Paris (arbitral tribunal and Swiss Federal Supreme Court imputed arbitration clause of provincial organization of an Asian State to the national government) (Blessing, The Law Applicable). Yorkshire Intl, Inc. v. Raytex Fabrics, Inc., 355 N.Y.S.2d 1, 2 (App. Div., Dept. 1, 1974). In re Littlejohn & Co. and J. Berlage Co., 247 N.YS.2d 60, 61 (App. Div., Dept. 1), affd, 202 N.E.2d 566 (N.Y. 1964). Interpool, Ltd. v. Through Transport Mutual Ins. Assn., 635 F. Supp. 1503, 1504-05 (S.D. Fla. 1985). All-Union Foreign Trade Assn Sojuznefteexport v. JOC Oil, Ltd., Award in Case No. 109/1980 of 9 July 1984, 18 Y.B. Com. Arb. 92, 100 (1993); Lachmar v. Trunkline LNG Co., 753 F.2d 8, 9-10 (2d Cir. 1985). But see Cremades, supra note 19, at 29. See Compania Espanola de Petroleas, S.A. v. Nereus Shipping, S.A., 527 F.2d 966, 973 (2d Cir. 1975), cert. denied, 426 U.S. 936 (1976); Cianbro Corp. v. Empresa Nacional de Ingenieria y Technologia, S.A., 697 F. Supp. 15, 18-19 (D.Me. 1988).

21

22

23

24

25

agreements relate to the same project.26 Some arbitrators refer to this as a unified contractual scheme.27 Other cases have referred to agreements without an arbitral clause as merely

accessory to a contract containing an arbitration agreement as a way of justifying the extension of the clause.28 In one case argued by the author, a U.S. court ordered arbitration of all contractual and tort claims between the parties although only the letter of intent included an arbitration clause.29 6. Separability Doctrine

Arbitration clauses have been attacked as void based on claims that the contract as a whole was induced by fraud, was rescinded or terminated by its own terms. Although there is some logical force to these claims, to validate such claims when the parties agreed in their contract to resolve all disputes by arbitration would frustrate the intent of the parties. To deal with these claims, arbitral panels and courts promulgated the separability doctrine. The essence of this doctrine is that the arbitration clause is an independent agreement, separate from the remainder of the contract in which it is contained.30 With this logic in mind, courts have

held that the arbitration clause did not terminate with the contract containing it, could not be rescinded with a rescission notice for the contract as a whole and was not invalid for fraud
26

Societe Quest-Africaine des Btons Industriels (SOABI) v. Republic of Sengal, ICSID Case No. ARB/82/1, 17 Y.B. Com. Arb. 42, 52 (1992); G.I.E. Acadi v. Societe Thomson-Answare, Revue de lArbitrage 1988, 573 ss, cited in Blessing, The Law Applicable, supra note 20, at 15. Southern Pacific Ptroperties, Ltd. v. Arab Republic of Egypt, Award in ICC Case No. 3493 of 16 February 1983, in Collection of ICC Arbitral Awards 1974-1985 at 124, 128 (Kluwer 1990); ICC Case No. 7929 of 8 February 1995, cited in Blessing, The Law Applicable, supra note 20, at 16. KCA Drilling v. Sonatrach, Award in ICC Case No. 5651 of 16 September 1988, cited in Blessing, The Law Applicable, supra note 20, at 16. Anderra Energy Corp. v. SAPET Development Corp., 22 Y.B. Com. Arb. 1077, 1080 (1997). Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402 (1967).

27

28

29

30

in the inducement of the contract, unless the arbitration clause itself was specifically induced by fraud.31 One of the implications of this doctrine is that the validity and effect of the arbitration clause may be subject to a different countrys law than the contract itself. 7. Arbitrability of Disputes

One of the issues that occasionally arises is whether the type of dispute involved is arbitrable that is, whether under a given nations view of public order or public policy a particular species of controversy may properly be arbitrated, or whether it must be litigated in the nations courts. Traditionally, certain kinds of claims such as antitrust or competition law issues,32 securities issues,33 intellectual property disputes,34 and personal status and employment issues35 were considered not proper subjects for arbitration. That view has been eroding for the past quarter century. In the past 25 years, both antitrust and competition law issues36 and securities law questions37 have been held by courts to be arbitrable. Although many nations will not allow
31

Id. at 406. American Safety Equip. Corp. v. J.P. Maguire Co., 391 F.2d 821, 828 (2nd Cir. 1968). Wilko v. Swan, 346 U.S. 427, 438 (1953). Marc Blessing, Arbitrability of Intellectual Property Disputes, 12 Arb. Intl 191, 201-02 (1996) (Blessing, Arbitrability). Bernardini, supra note 10, at 47. Mitsubishi Motors Corp. v. Soler Chrysler, 473 U.S. 614, 628-29 (1985); Attorney General of New Zealand v. Mobil Oil New Zealand, Ltd., [1989] 2 NZLR 64d. See also John Beechey, Arbitrability of Anti-trust/ Competition Law Issues Common Law, 12 Arb. Intl 179, 188-89 (1996). Scherk v. Alberto-Culver Co., 417 U.S. 506, 515, rehg denied, 419 U.S. 885 (1974). See also Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 480 (1989); Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 238, rehg denied, 483 U.S. 1056 (1987).

32

33

34

35

36

37

arbitral panels to invalidate patents,38 some countries allow arbitration of all intellectual property issues.39 The U.S. Supreme Court has also ruled that claims under the Age

Discrimination in Employment Act are arbitrable when covered by an arbitration clause in an employment agreement.40 It would be useful for parties to research the applicable law to determine whether any likely disputes that may arise under their agreement are considered non-arbitrable. With this knowledge, parties may better plan for the resolution of disputes. 8. Conditions Precedent to Arbitration

Occasionally, parties provide that a certain action or event will occur prior to the initiation of an arbitration proceeding. For example, in different arbitration clauses reviewed by the author, a meeting of senior executives to negotiate a settlement, the occurrence of mediation41 or a lack of jurisdiction of a specific court have been provided as conditions to the filing of

38

Blessing, Arbitrability, supra note 34, at 201-02 (Australia, France, Germany, Great Britain, and The Netherlands). Id. at 200-01 (Switzerland, Canada and the United States); 35 U.S.C. 294; Saturday Evening Post Co. v. Rumbleseat Press, Inc., 816 F.2d 1191, 1199 (7th Cir. 1987); Beckman Instruments, Inc. v. Technical Develop. Corp., 433 F.2d 55, 63 (7th Cir. 1970). Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 27 (1991). See DeValk Lincoln Mercury, Inc. v. Ford Motor Co., 811 F.2d 326, 335 (7th Cir. 1987) (summary judgment granted in part because party did not comply with mediation clause, which required an appeal to the Policy Board within 15 days as a condition precedent to pursue any other remedy); White v. Kampner, 1992 Conn. Super. LEXIS 931 (Conn. Sup. Ct. Apr. 2, 1992).

39

40

41

arbitration.42 Exhaustion of other alternative dispute resolution (ADR) procedures may also be listed as conditions to the initiation of arbitration.43 Three problems may occur in the drafting of such clauses. The first occurs when the parties provide for the occurrence of an event prior to arbitration but are unclear whether it is merely preferred that the action or event occur before the arbitration or whether it is actually intended as a condition to initiating a proceeding.44 This lack of clarity may result in litigation, delay and extra expense. Second, it is sometimes not clearly stated when the condition will be deemed satisfied and an arbitration may be commenced. If the condition involves settlement negotiations or mediation, it is generally helpful to state a time period so it is clear when the condition has been met. 45 If the condition is even more vague, such as the lack of jurisdiction of a court, it is important to delineate what is required to satisfy the condition.
42

43

One arbitration agreement reviewed by the author provided that all disputes be submitted to the federal district court for the Southern District of New York "to the extent such court has jurisdiction." The clause went on to say that all disputes for which the federal court does not have jurisdiction shall be decided by arbitration in accordance with the Rules of the ICC, with the arbitration to be filed within a reasonable time after the dispute has arisen. See the discussion of ADR, I(2), infra. In Belmont Contructors, Inc. v. Lyondell Petrochemical Co., 896 S.W.2d 352, 357 (Tex. App. Houston [1st Dist.] 1995, no writ), the alternative dispute resolution clause read: "If the parties cannot agree within 10 days on a different method of resolving the matter, the matter shall be submitted by the parties to and be decided by binding arbitration." The court held that failure to agree to another method of resolving the dispute was a condition precedent to binding arbitration, and since the parties agreed to mediation, the arbitration provision was not binding on them even though the mediation failed to settle the dispute. See also Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jana, 835 F. Supp. 406, 409-10 (N.D. Ill. 1993) (filing claim within six years after the event in question is a condition precedent to arbitration, not a procedural stipulation, under section 15 of the NASD Code of Arbitration Procedure); NL Indus., Inc. PaineWebber, Inc., 720 F. Supp. 293, 304 (S.D.N.Y. 1989) (timely filing of written protest was a condition precedent to arbitration). As a corollary, the parties should be careful about imposing deadlines after the expiration of which an arbitration proceeding may not be filed In a case before a court in Geneva, the parties' clause provided that an arbitration proceeding could be filed within 30 days after the failure of negotiations. An arbitration proceeding was filed, but the opposing party claimed it was untimely. One party claimed the negotiations failed in January, while the claimant argued they failed in April. The arbitration was filed within 30 days

44 45

Third, if one party has control over the subject matter of the contract - project management, perishable goods or money, for example - commencing an arbitration proceeding or seeking interim relief in court expeditiously can be extremely important because of the pressure the opposing party can exert by delay. This problem can be solved by careful drafting, which allows the parties to initiate an arbitral proceeding before complying with the condition precedent if necessary to protect a partys economic interests. 9. Incorporation of Arbitration Clauses by Reference

Major projects may involve the negotiation and drafting of many different but interrelated agreements in some cases dozens of separate contracts. If the parties desire to include the same arbitral clause in each agreement, rather than typing the same language into each and taking the risk of varying language, which could lead to different results, the parties may prefer to negotiate a single master or umbrella arbitration agreement. This master agreement can then be

incorporated into each separate contract by reference. If this is done, each separate contract should contain language incorporating the master arbitral agreement. Even if the arbitral clause will be somewhat different in some of the project agreements, a master arbitration agreement can still be used, with any additions or deletions drafted into specific contracts. It is not uncommon in some trades for the parties to conclude contracts by telexes or other similar means in which they agree to price, quantity and the general terms and conditions of an industry association standard-form document, which may include an arbitration clause. Courts have generally upheld the incorporation by reference of an arbitration clause in this manner, provided the contract is between experienced businessmen and they are (or should be) familiar
after the April date. The Geneva court held the negotiations failed in January; therefore, the arbitration was not timely filed, and arbitration failed.

with the document incorporated.46 In France, for an incorporation by reference to be valid, the existence of the arbitration agreement must either be mentioned in the main contract or the contents of the incorporated document must be known to the parties.47 It is generally preferable for the language incorporating the other document to refer specifically to the arbitration clause in order to show the parties were aware of it and intended arbitration. If an arbitral clause from an unrelated agreement is to be incorporated by reference into a specific contract, the parties should be careful to insure that all aspects of the clause fit their agreement.48 10. Unconscionable Arbitration Clauses

Recently, a few plaintiffs in U.S. courts have attacked the selection of the ICC Arbitration Rules in contracts on the ground that the ICCs administrative fees are excessive, and thus, the arbitration clause is unconscionable. An example of these attacks is demonstrated by the case of Brower v. Gateway 2000, Inc.49 There, a computer manufacturers Standard Terms and

Conditions Agreement, which is included in the box with the computer, provided for arbitration of any disputes in accordance with the ICC Arbitration Rules. The Agreement also stated that by keeping the computer more than 30 days, the consumer accepted the Terms and Conditions. A New York court rejected the plaintiffs claims in a domestic class action lawsuit that the
46

Tradax Export, S.A. v. Amoco Iran Oil Co., 11 Y.B. Com. Arb. 532, 534-35 (1986) (Swiss Federal Supreme Court); Lawrence Craig, William Park & Jan Paulsson, International Chamber of Commerce Arbitration 5.08 at 94 (2d ed. 1990). Bomar Oil v. Enterprise Tunisienne d'Activites Petrolieres, decision of the French Cour de Cassation, 11 October 1989, cited in Richard Kreindler, Practical Issues in Drafting International Arbitration Clauses, 63 Arbitration 47, 51 (1997). Progressive Casualty Ins. Co. v. Reaseguradaora Nacional de Venezuela, 802 F. Supp. 1069, 1079 (S.D.N.Y. 1992), rev'd, 991 F.2d 42, 47 (2d Cir. 1993). See Brian Drewitt & Giles Wingate-Saul, Drafting Arbitration Clauses, 62 Arbitration 39, 44 (1996).

47

48

arbitration agreement was a material alteration of a preexisting oral agreement under Uniform Commercial Code (UCC) 2-207 and that it was an unenforceable adhesion contract. With respect to the unconscionability issue, however, the court noted that the ICC advance fee of $4000 (for a claim of less than $50,000) is more than the cost of most of the defendants products. The court held the excessive cost of the ICC fees would effectively deter and bar consumers from arbitration, leaving them no forum for their disputes. The ICC fees were held unreasonable and the arbitration clause unconsicionable and unenforceable under UCC 2302. The appellate court remanded the case for consideration of a substitute arbitrator. C. General Considerations Institutional Model Clauses

Each of the leading arbitral organizations provides a sample arbitration clause for inclusion in international contracts. For example, the International Chamber of Commerce (ICC) suggests the following clause: All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.50 This clause has been said to contain the three key expressions for an arbitral clause All disputes. . . in connection with. . . finally settled.51 The term all disputes encompasses all types of controversies, without exception. The language, in connection with, creates a broad form clause that will cover non-contractual claims such as tort and fraud in the inducement,
49

1998 WL 481066 (N.Y.A.D. 1 Dept. Aug. 13, 1998). ICC International Court of Arbitration Pamphlet. Craig, Park & Paulsson, supra note 46, 6.03 at 111.

50

51

while finally settled indicates the parties intend the arbitrators ruling to be final so a court will not try the case de novo. The London Court of International Arbitrations (LCIA) suggested clause states: Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause. (i) The number of arbitrators shall be [one/three].

(ii) The place of arbitration shall be [City and/or Country]. (iii) The language to be used in the arbitral proceedings shall be [_____]. (iv) The governing law of the contract shall be the substantive law of [_____].52 The American Arbitration Association (AAA) suggests the following clause: Any controversy or claim arising out of or relating to this contract shall be determined by arbitration in accordance with the International Arbitration Rules of the American Arbitration Association.53 It should be noted that the clauses quoted are all broad-form clauses designed to encompass all disputes relating to the parties' contract.54 While almost certainly enforceable, these clauses

provide the bare minimum in an arbitration clause. For those who want more than the bare bones, the discussion in the following sections should provide ample material for drafting a more detailed arbitration clause.

52

LCIA Recommended Arbitration Clauses. AAA International Rules Introduction. The model clause also gives the parties the option of specifying the number of arbitrators, and the place and language of the arbitration. See J.J. Ryan & Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 321 (4th Cir. 1988).

53

54

2.

Different Versions of the Arbitration Rules

Since the major arbitral institutions have amended their arbitration rules from time to time, an issue may arise as to which version of the rules the parties intended to govern their arbitration the version in effect at the time the parties signed their agreement or the version in effect when the arbitral proceeding was commenced. This can be an important issue because the recent amendments to the rules of the ICC (January 1, 1998), the AAA (April 1, 1997) and the LCIA (January 1, 1998) have been substantial. The parties can decide this matter by providing in their clause either that the adopted rules then in force on the date of their agreement or the rules as modified or amended from time to time shall be applied.55 In this respect, the parties may wish to adopt the rules in existence at the

time of contracting because these are the rules they know, and future rule changes may have unpredictable effects. On the other hand, the parties may wish to take advantage of future rule amendments, assuming the institution will only adopt changes that will better the process. While allowing the parties expressly to choose which version of the rules they prefer, some of the institutions include a default provision stating which version will be applied in the absence of an agreement. For example, the rules of the ICC, AAA and LCIA all provide that in the absence of an agreement to the contrary, the arbitration shall be conducted according to the rules in effect on the date of the commencement of the arbitral proceeding.56 arbitral

55

Bond, supra note 1, at 17. ICC Rules art. 6(1) (effective Jan. 1. 1998); AAA International Rules art. 1(1) (eff. April 1, 1997); LCIA Rules Introductory Paragraph (eff. Jan. 1, 1998).

56

3 .Derogation From Institutional Rules In drafting a detailed arbitration clause, the parties should consider whether they can modify the institutional rules adopted. The AAA International Rules provide they are applicable "subject to whatever modifications the parties may adopt in writing."57 This language indicates that any of the AAA Rules may be altered by the parties. In contrast, a few of the ICC Rules also explicitly allow the parties to agree otherwise, but in some cases the ICC has refused to administer an arbitration because of alterations made by the parties' agreement to particular rules deemed by the ICC to be fundamental to its arbitral procedure.58 For example, the ICC has refused to administer arbitrations in situations in which the parties provided for non-binding arbitration, in which the parties' agreement both called for an umpire procedure and adopted the ICC Rules, and in which the parties provided that the chairman of a tripartite panel could not alone decide the case in the absence of a majority, although the ICC Rules permit him to do so.59 The ICC has also refused to set in motion arbitration proceedings when arbitral clauses provided that the ICC Court could not confirm arbitrators, handle challenges to arbitrators, replace arbitrators, determine arbitrators' fees, or scrutinize the draft award.60 It has also been suggested that the ICC would probably refuse to

57

AAA International Rules art. 1.1. Youssef Takla, Non-ICC Arbitration Clauses and Clauses Derogating from the ICC Rules, 7 ICC Int'l Ct. Arb. Bull. 7, 9 (Dec. 1996); Eric Schwartz, Comments on Choosing Between Broad Clauses and Detailed Blueprints at 11, included in the First Working Group papers of the ICCA Congress, May 3-6, 1998, in Paris. Schwartz, supra note 58, at 11-12. Takla, supra note 58, at 9.

58

59

60

administer an arbitration if the parties' agreement attempted to alter the ICC Rules regarding the Terms of Reference.61 If a party wishes to adopt the ICC Rules but to alter them, it should consider including a clause either providing that any alteration of the ICC Rules may be disregarded if the ICC will otherwise refuse to administer the arbitration or adopting back-up rules such as the UNCITRAL Rules for an ad hoc arbitration or another institutions rules such as those of the AAA. 4. Pathological Arbitration Clauses62

Pathological arbitration clauses might be defined as those drafted in such a way that they may lead to disputes over the interpretation of the arbitration agreement, may result in the failure of the arbitral clause or may result in the unenforceability of an award.63 Examples of such

problems include (1) equivocation as to whether binding arbitration is intended,64 (2) naming a specific person as arbitrator who is now deceased or who refuses to act,65 (3) naming an
61

Schwartz, supra note 58, at 11. Defective arbitration clauses were first denominated as "pathological" in 1974 by Frederick Eisemann, who served at that time as the Secretary General of the ICC International Court of Arbitration. Craig, Park & Paulsson, supra note 46, 9.01 at 158. Id. In a French case, the dispute resolution clause was headed, "Choices of forum", and read: "In case of a dispute the parties undertake to submit to arbitration but in case of litigation the Tribunal de la Seine shall have exclusive jurisdiction." Decisions of 1 Feb. 1979, T.G.I. Paris, 1980 Rev. Arb. 97 (1980), and 16 Oct. 1979, 1980 Rev. Arb. 101 (1980), cited in William W. Park, Arbitration of International Contract Disputes, 39 Bus. Law. 1783, 1784 n.2 (1984). Another defective clause provided, "In the event of any unresolved dispute, the matter will be referred to the International Chamber of Commerce," but it failed to say whether the dispute would be settled by arbitration. Alan Redfern & Martin Hunter, Law & Practice of International Commercial Arbitration at 178 (2nd Ed. 1991). Finally, one clause read simply: "Arbitration all disputes will be settled amicably." Drewitt & WingateSaul, supra note 48, at 43.

62

63

64

65

See Marcus v. Meyerson, 170 N.Y.S.2d 924, 925-26 (1958) (court had no authority to name a substitute for a resigning arbitrator who was specifically named in the parties' contract); Swedish Arbitration Act of 1929

institution to administer the arbitration proceeding or to appoint the arbitrators if the institution never existed, is misnamed in the clause or refuses to act,66 (4) providing unreasonably short deadlines for action by the arbitrators,67 (5) providing too much specificity with respect to the arbitrators' qualifications,68 or (6) providing for conflicting or unclear procedures.69

66

9: "If a person who is designated as arbitrator in an arbitration agreement dies, the agreement shall lapse unless otherwise agreed between the parties," cited in Craig, Park & Paulsson, supra note 46, 9.03 at 160 n.5. The Hamm Court of Appeals in Germany decided an arbitration clause was fatally ambiguous and void in a case in which the clause read, "[The parties] shall proceed to litigate before the Arbitration Court of the International Chamber of Commerce in Paris with the seat in Zurich." The court ruled it could not determine if the parties intended to submit to the ICC in Paris or to the Zurich Chamber of Commerce, both of which maintained permanent arbitral tribunals. Hamm Court of Appeals (Nov. 15 1994), Recht der Internationalen Wirtschaft (RIW) Vol. 40, p. 681 (1995) = Recht und Praxis der Schiedsgerichtsbarkeit (RPS), Supplement no. 14 (1995) to the Betriebsberater, p. 21, cited in Johann Hochbaum, Pathological Arbitration Clauses in German Courts German Courts Interpret Arbitration Clauses: Wrong Designation of the Seat of an Arbitration Institution, 11 Mealey's Int'l Arb. Rep. No. 1 at 20, 23 (Jan. 1996). In another clause that referred to the ICC of Zurich, the defendant contested the jurisdiction of the ICC, contending the clause referred to a proceeding under the Arbitration Rules of the Zurich Chamber of Commerce. Bond, supra note 1, at 15. But see Jean Benglia, Inaccurate Reference to the ICC, 7 ICC Int'l Ct. Arb. Bull. 11, 12 (Dec. 1996); Societe Asland v. Societe European Energy Corp., Rev. arb. 1990, p. 521 (reference to the official Chamber of Commerce in Paris, France was held to mean the ICC), cited in Bond, supra note 1, at 15-16; Warnes, S.A. v. Harvic Int'l, Ltd., 92 Civ. 5515 (RWS), 1993 U.S. Dist. LEXIS 8457 (S.D.N.Y.-June 21, 1993) (court enforced a clause calling for arbitration before the New York Commercial Arbitration Association, finding this was a non-existent institution, but ordering arbitration before AAA). Naming a person by title to appoint the arbitrators can be risky. While the President of the International Court of Justice and the President of the Swiss Federal Tribunal have made appointments of arbitrators in the past, they have no obligation to do so and may not continue to make such appointments in the future. See Craig, Park & Paulsson, supra note 46, 9.03 at 161. The ICC will make appointments of arbitrators for a fee, so it should be considered at least as a back-up appointing authority.

67

"An overly strict time limit may have the unavoidable result that the arbitral tribunal's mandate expires before it is practically possible to conduct an international arbitration." Craig, Park & Paulsson, supra note 46, 9.08 at 165. In one case, a time period of three months was specified for the arbitrators to issue an award from the date of the arbitration agreement, which period could be extended four times, but one party refused to extend the period, and the arbitrators ruled their mandate had expired. Belgian Enterprise v. Iranian Factory, 7 Y.B. Com. Arb. 119, 120-21, 124 (1983). "It would be tempting the devil to require that the arbitrator be an English-speaking Italian, with a French law degree and a familiarity with Mid-East construction contracts." Park, Arbitration of International Contract Disputes, supra note 64, at 1786. See also Bernardini, supra note 10, at 56. Benjamin Davis, Pathological Clauses: Frederic Eisemanns Still Vital Criteria, 7 Arb. Intl 365, 387 (1991). One reported arbitral clause read: "Disputes hereunder shall be referred to arbitration, to be carried out by arbitrators named by the International Chamber of Commerce in Geneva in accordance with the

68

69

Sometimes, pathological clauses can be saved. In one case, a clause provided merely: English law arbitration, if any London according ICC Rules. An English court held this was a valid arbitration clause and enforced it.70 In another case, which was argued by the author, the

clause read: "In case of discrepancies between the partners, it is agreed to request arbitration according to international laws of arbitration."71 Because the nominal parties were all Peruvian and U.S. companies, a federal district court held the international law of arbitration to which reference was made was the Panama Convention, to which the U.S. and Peru were both parties.72 Since the Panama Convention contains a default provision mandating use of the InterAmerican Commercial Arbitration Commission (IACAC) Arbitration Rules in the event the parties have not agreed to a set of rules, the court ordered the arbitration to be conducted under IACAC's Arbitration Rules.73

arbitration procedure set forth in the Civil Code of Venezuela and in the Civil Code of France, with due regard for the law of the place of arbitration." Craig, Park & Paulsson, supra note 46, 9.04 at 163. This compromise on the procedural law is virtually guaranteed to lead to delays and costly disputes, and may well lead to the unenforceability of an award. The author recently reviewed a draft clause in which two arbitrators and an umpire were to be appointed, but it implied the three were to decide the case together. In the typical umpire procedure, the parties each appoint an arbitrator, and these two try to decide the case. If they are unable to do so, they appoint an umpire who decides the case alone. See 1996 English Arbitration Act 21. Mixing the umpire procedure with a three-member arbitral tribunal in which the "umpire" acts merely as the presiding arbitrator confuses the procedure and may lead to expensive litigation, an unworkable procedure or an unenforceable award. In a case in which the umpire procedure was specified along with the ICC Rules, the ICC refused to administer the arbitration. Sumitomo Heavy Industries, Ltd. v. Oil & Natural Gas Commission, [1994] 1 Lloyd's Rep. 45 (July 23, 1993).
70

71

72

Arab-African Energy Corp. v. Olieprodukten Nederland, B.V., (1983) 2 Lloyds L. Rep. 419 (Q.B. Com. Ct.). Anderra Energy Corp. v. SAPET Development Corp., 22 Y.B. Com. Arb. 1077, 1078 (1997). See id. at 1079, 1081. Id. at 1085.

73

5.

High-Low or Baseball-Style Arbitration

An unusual form of arbitration, which may significantly affect the result, is so-called "baseballstyle" arbitration, also sometimes referred to as high-low arbitration.74 With this approach, the drafter provides that each party will propose a monetary figure for resolving any dispute over damages, and the arbitrator is required to choose one party's proposal as the award. Some clauses provide that the arbitrator shall select the proposal that is judged to be the more equitable. This technique limits the discretion of the arbitrator and prevents a compromise award. It also pressures the parties to make realistic proposals rather than seeking outrageous sums or offering unreasonably low amounts. When this technique is employed, its use is typically limited to damage claims. 6. On-Line Arbitration

Recently, WIPO created the Administrative Challenge Panel, which provides an on-line arbitration procedure for handling certain types of trademark disputes over the Internet. This project is currently limited to disputes over domain names, and does not encompass damage claims. WIPO also offers expedited arbitration on-line. Most of these cases are submitted on the documents without a hearing. Similarly, AAA and the Cyberspace Law Institute have jointly initiated the Virtual Magistrate Project, which administers arbitrations between system operators and on-line users

74

This name is applied because of its well-known use to resolve salary disputes between players and teams in Major League Baseball in the United States.

involving allegedly wrongful messages.75 These arbitrations decide whether a message should be deleted or access to it restricted, but they do not rule on damage claims.76 One group - the Global Arbitration and Mediation Association - reportedly is already offering international commercial arbitration on the Internet.77 considering these new developments. Because this technique is so recent, a drafter who wants certain categories of disputes handled on-line needs to authorize it in the arbitration agreement. The drafter can provide that all disputes be handled by on-line arbitration, that only certain types of disputes be handled on-line (such as trademark disputes not involving damage claims) or that damage claims of a certain limited extent (e.g., $500,000 or less) be handled on-line. Of course, the parties may wish merely to authorize the filing of documents such as pleadings and briefs through the Internet. If this technique is used, it is critical to designate the situs of the arbitration or the procedural law to apply since there is no single place of an on-line arbitration, and therefore, no clearly applicable procedural law.78 It is also important for the parties to consider issues of Other arbitral institutions are

confidentiality when using the Internet, even if a certain level of encryption is used. Finally, the parties should specify the procedure to be used with an Internet arbitration. For example, the parties may wish to provide that any hearings be held through chat rooms in which dialogue
75

Gabrielle Kaufman-Kohler, Identifying and Applying the Law Governing the Arbitration Procedure The Role of the Law of the Place of Arbitration at 19, included in the Second Working Group papers of the ICCA Congress, May 3-6, 1998, in Paris. Id. Jasna Arsic, International Commercial Arbitration on the Internet: Has the Future Come Too Early?, 14 J. Int'l Arb. 209 (Sept. 1997). Id. at 217-20.

76

77

78

occurs in real time through typed transcripts79 or that oral hearings be held by videoconference, by conference call or by hearings with all parties or counsel present in person. D. An Analytical Framework for Evaluating Arbitration Clauses

Negotiating and drafting arbitration clauses are inherently practical exercises, but evaluating their validity and effectiveness requires an analytical framework. One authority has listed four

essential functions of an arbitration clause: (1) to produce mandatory consequences for the parties, (2) to exclude the intervention of State courts in the resolution of disputes (at least prior to the rendering of an award), (3) to empower the arbitrators to resolve the parties disputes, and (4) to adopt a procedure for resolving the disputes.80 These criteria provide the essential

ingredients necessary for an arbitration clause to be effective, and clauses may usefully be examined against them to determine whether they are valid and will accomplish the intended goal. Nevertheless, these general criteria represent only a starting point in analyzing an arbitral clause. As an additional analytical tool, arbitration clauses may be classified into a trinity of categories: (1) basic clauses, (2) general clauses and (3) complex clauses.81Basic clauses may be defined as those that include only the basic provisions -- those that are essential or particularly important to a viable arbitration agreement. Basic clauses encompass institutional model clauses, but may have additional provisions as well. These provisions may include the following elements: (1) the adoption of arbitration as the method of resolving the
79

Id. at 211-12. See Davis, supra note 69, at 366, translating and discussing the criteria first set out in F. Eisemann, La clause darbitrage pathologique, Commercial Arbitration Essays in Memoriam Eugenio Minoli, U.T. E.T. 1974. See generally Redfern & Hunter, supra note 64, at 168-69 (describing simple, equivalent and detailed clauses).

80

81

parties disputes, (2) an agreement that the award will be final and binding, (3) the scope of the clause, (4) the adoption of either institutional arbitration rules or ad hoc arbitration, (5) the

number of arbitrators, (6) the method of selecting the arbitrators, (7) the place or situs of the arbitration, (8) the language of the arbitration, (9) authorization for a court to enter judgment on the award, (10) a notice provision, and (11) a governing law provision. Basic clauses are often used when routine commercial transactions are involved, when there is only a brief time period for negotiating or drafting the arbitration clause or when the parties are unable to agree to anything more. In the energy industry, examples of basic clauses may be found in oil sales, shipping, joint study and bidding, and oil lifting agreements. General clauses represent perhaps the most common range of arbitral provisions for substantial transactions. They are more involved than basic clauses, including the provisions outlined above and certain optional provisions that are useful, relatively low risk and not uncommon. Beyond the basic provisions, the optional provisions sometimes inserted in a general clause include the following list: (1) ADR provisions such as conditions precedent requiring negotiation or

mediation, (2) qualifications and conduct of the arbitrators, (3) interim measures, (4) costs and attorneys fees, (5) interest, (6) the currency of the award, (7) an exclusion of punitive and consequential damages, and (8) a waiver of appeals. General clauses are typically used in larger commerical transactions such as projects, when a few provisions beyond the basic clause are necessary (but all potential provisions are not needed), when the parties are unwilling to risk including provisions that could either derogate from institutional rules or violate mandatory rules of the applicable law (and they do not have the time or resources

to research the issue), or when an agreement cannot be reached on additional provisions.

Examples of general clauses may be found in the energy industry in joint operating, drilling, natural gas supply, and power plant construction agreements. Complex clauses are those that are more involved still, including some unusual provisions in addition to the basics. These clauses must be carefully tailored to prevent inconsistencies and meticulously researched to prevent provisions that might invalidate the clause in a given jurisdiction. Some of these clauses are often unnecessary or even undesirable in many situations or to many parties, but in a given case, they may be particularly important. Beyond those included in basic and general clauses, the provisions that may be included in a complex clause consist of the following: (1) confidentiality, (2) discovery, (3) multi-party arbitration, (4) consolidation, (5) split clauses requiring litigation of some issues and arbitration of others, (6) summary disposition (written procedure), (7) expert determination, (8) arbitrability, (9) waivers of appeals or consent to appeals, (10) a requirement that the arbitrators submit a draft of a proposed award before it becomes final, and (11) authorization to adapt the contract or to fill gaps in it. Complex clauses may be used in major projects involving large amounts of money, in transactions with governments or state-owned companies, in transactions in which there is a significant risk of breach of contract by one party, or when the arbitral clause represents a particularly important segment of the contract because litigation or other dispute resolution methods are not viable alternatives and may even be repugnant at least to one of the parties. Complex clauses are sometimes inserted in major investment agreements with host governments. In practice, of course, arbitration clauses do not fall neatly into such rigid categories. Each provision serves its own separate and unique need, and the various provisions may be

combined in a variety of different ways in any given arbitral clause. Nevertheless, these

categories may prove a useful analytical tool for evaluating arbitration agreements against a partys needs. Beyond noting the general criteria and classifying the categories of clauses, certain principles for drafting arbitration clauses can also be identified. These principles are aimed generally at preventing the failure of the clause. The first principle requires avoidance of provisions that offend mandatory rules of the applicable substantive or procedural law. This includes at least the procedural law of the situs of the arbitration and the laws of the likely country of enforcement of the award. In one case, a court in France held an arbitral clause invalid because of the inclusion of a provision permitting a broader appeal of the award to the courts than was allowed by French law.82 Also, if an award must be enforced in the Middle East, the mere mention of interest may invalidate the clause.83 The second principle is similar: alterations of arbitral rules fundamental to the operation of the administering institution should be avoided. Some ICC Rules and virtually all of the AAA International Rules may be modified by the parties agreement. But the ICC has refused to administer arbitrations when the parties agreement modified certain rules the ICC considers basic to the proper functioning of an ICC arbitration.84 It is because of these types of problems that some commentators remark of arbitration clauses that less may be more. This may be true if the applicable law and arbitration rules are

82

Societe de Diseno v. Societe Mendes, 1995 Rev. arb. 263 (Cour dappel de Paris Oct. 27, 1994), cited in Schwartz, supra note 58, at 9. Bond, supra note 1, at 14. See C(3), supra.

83

84

unknown to the parties, but in skillful hands, a comprehensive clause can solve many problems, leading to a more cost effective and satisfactory resolution of disputes. A third principle requires respect for the drafting rules designed to prevent pathological mistakes.85 These rules may be summarized as follows: First, the intent to require binding

arbitration should be clearly and unequivocally stated. Second, the drafter should verify the existence and proper name of the institution designated to administer the arbitration. Third, the parties should avoid naming a particular person as arbitrator in their agreement. Fourth, the parties should avoid too much specificity when imposing qualifications for the arbitrators. Fifth, the parties should insure that any institution named to act as appointing authority will agree to fulfill its mandate. Sixth, the parties should insure that the procedure adopted is clear, workable, and not confused or conflicting. Seventh, if deadlines are imposed for action by the institution or arbitrators, generally, either they should be made precatory or extensions should be permitted in the sole discretion of the institution, the arbitrators or a court. Making extensions dependent upon agreement of the parties once a dispute has arisen may be tempting fate. Eighth, if a condition precedent to arbitration is adopted, either a deadline for the occurrence of the condition or the means of satisfying it should be clearly stated. Another drafting problem of lesser import that has arisen involves the use of the word may in describing the initiation of arbitration. Often arbitration clauses provide that either party may initiate arbitration, thus tempting the non-moving party to argue in court that arbitration was not intended to be mandatory. The law is reasonably settled, at least in the U.S., that the use of the word may in this sense means the parties are not required to initiate
85

See C(4), supra.

arbitration, but when one of the parties does, arbitration becomes mandatory for both parties.86 Nevertheless, it is preferable to state that any disputes shall be resolved arbitration. E. by binding

Essential Clauses 1. Adoption of Arbitration as the Method to Resolve

Disputes

The first requirement for an arbitration clause is that the parties agreement must expressly state they intend to resolve their disputes by arbitration. While this seems obvious, occasionally parties have said that controversies would be referred to an institution that administers arbitration proceedings, but without mentioning arbitration as the method for deciding their issues.87 Institutions such as the ICC have other methods for determining disputes that do not include arbitration. These procedures encompass conciliation, expert determination and a pre-arbitral referee procedure. Thus, if the parties want their disputes decided by arbitration, they should say so explicitly. 2. Final And Binding88

It is common for arbitration clauses to provide that any arbitration award rendered will be final and binding. In this context, binding means the parties intend that the award will

86

Allis-Chalmers Corp. v. Lueck 471 U.S. 202, 204 n.1 (1985); Austin v. Owens-Brockway Glass Container, Inc., 78 F.3d 875, 879 (4th Cir. 1996); American Italian Pasta Co. v. Austin Co., 914 F.2d 1103, 1104 (8th Cir. 1990); Held v. National R.R. Passenger Corp., 101 F.R.D. 420, 423-24 (D.D.C. 1984); Block 175 Corp. v. Fairmont Hotel Management, 648 F. Supp. 450, 452 (D.Colo. 1986). See also Republic Steel Corp. v. Maddox, 379 U.S. 650, 658 (1965). Redfern & Hunter, supra note 64, at 178. For a related issue, see the discussion of Waiver of Appeal at G(3).

87

88

resolve the dispute and be enforceable by national courts against the losing party.89 It will not result merely in an advisory opinion that the parties are free to disregard. A reference that any award will be final means the substance of the award will not be reviewed by the courts.90 Even if the parties do not say explicitly that the award will be final and binding, they may accomplish the same result by adopting the ICC, AAA or LCIA Rules. The ICC and LCIA Rules provide that any award shall be binding on the parties, and by submitting to those rules, the parties waive their right to any form of recourse, to the extent such waiver may be validly made.91 The AAA International Rules provide that the award will be final and binding on the parties, and they will carry it out without delay.92 The AAA International Rules do not include language, however, that the parties waive their right to recourse against the award. By including the terms, final and binding, or an equivalent phrase any disputes shall be finally settled by binding arbitration parties express their intent for courts to enforce the award without reviewing the evidentiary foundations of the award. This is an important provision, and especially so if institutional rules are not adopted. 3. Scope of Arbitration93

At the outset, the parties should consider what types of disputes they want arbitrated. If they desire to restrict arbitration only to contract disputes, they should draft a narrow-form
89

U.S. courts have held that the phrase final and binding means that the issues joined and resolved in the arbitration may not be tried de novo in any court. M&C Corp. v. Erwin Behr, GmbH & Co., 87 F.3d 844, 847 (6th Cir. 1996); Iran Aircraft Industries v. Avco Corp., 980 F.2d 141, 145 (2d Cir. 1992). Bond, supra note 1, at 20. ICC Rules art. 28(6); LCIA Rules art. 26.9. AAA International Rules art. 27(1). For a related issue, see the discussion of Split Clauses at H(5), infra.

90

91

92

93

arbitration clause. In the United States, this may be accomplished by using the phrase, "all disputes arising under this agreement," to define the scope of the disputes encompassed within the arbitration clause.94 This phrase may preclude arbitration of matters that are closely

connected to the contract, but do not "arise out of " it. If all potential disputes are intended to be encompassed, including tort claims, statutory claims, fraud-in-the-inducement claims, and any others that may arise from the relationship established by the parties' agreement, then a broad-form clause should be drafted. This is accomplished in the U.S. by the following wording: "all disputes arising out of, connected with, or relating in any way to this agreement." The U.S. Supreme Court has referred to this language as a broad-form clause, and has held that a claim of fraud in the inducement of the contract as a whole falls within the broad sweep of this language.95 In contrast, it is reported that in the United Kingdom, the phrases under this contract, "in connection with" and "in relation to" have been limited in scope by some authorities, the terms "in respect of " and "with regard to" have been afforded a fairly-wide meaning and the words "arising out of" have been construed to have the widest meaning.96 Because of this difference in interpreting these phrases, to create a broad clause, it may be useful to include all of these phrases in series or to state outright the clause is intended to be a broadform clause that will encompass all possible claims between the parties. To insure the breadth of the clause, some parties include language stating the disputes covered include any
94

Mediterranean Enterprises, Inc. v. Ssangyong Corp., 708 F.2d 1458, 1464-65 (9th Cir. 1983); In re Kinoshita & Co., 287 F.2d 951, 952 (2d Cir. 1961). Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 398 (1967). See Ethiopian Oilseeds & Pulses Export Corp. v. Rio Del Mar Foods, Inc., [1990] 1 Q.B. 86, 97 (arising out of should be given a wide interpretation); Ashville Investments, Ltd. v. Elmer Contractors, Ltd., [1989] Q.B. 488, 508; Drewitt & Wingate-Saul, supra note 48, at 41; Redfern & Hunter, supra note 64, at 152-53.

95

96

relating to the contract, its negotiation, performance, non-performance, interpretation, termination, or the relationship between the parties established by the contract. Whatever approach the parties decide to take, they should be clear in their choice of language so as to avoid any ambiguity or misinterpretation. 4. Ad Hoc or Institutional Arbitration

One of the more fundamental issues for parties agreeing to arbitrate future disputes is to determine whether the arbitration will be conducted ad hoc or will be administered by an arbitral institution. The factors that parties may consider in making this decision are discussed below. The advantage of ad hoc arbitration is that the parties avoid the administrative fees ad

charged by arbitral institutions, which can be substantial in some cases. The disadvantages of hoc arbitration are that national courts are more likely to intervene when there is no

administering institution and, in the absence of an administrator, the parties may have to apply to the courts to resolve procedural problems on which they cannot agree. Ad hoc arbitration also

requires that the parties assume the administrative and planning responsibilities generally undertaken by arbitral institutions. Moreover, with ad hoc arbitration, there is no quality control review by an institution like the ICC. There is also evidence that ad hoc awards do not receive

the same deference as institutional awards when they are presented to courts for enforcement.97 The advantages of using an institution represent the flip side of ad hoc arbitration. The

institution may handle most of the administrative functions, provide a method of handling most procedural problems and provide quality control for at least some functions such as the selection of arbitrators. Cost is the primary disadvantage of institutional arbitration. Institutions such as
97

Park, Arbitration of International Contract Disputes, supra note 64, at 1785; Bond, supra note 1, at 16; Nicholas Ulmer, Drafting the International Arbitration Clause, 20 Intl Law. 1335, 1337 (1986).

the ICC usually charge an administrative fee that is a percentage of the amount in controversy. In addition, there may be hidden costs such as first-class airfare for the arbitrators for long flights or the fee for a secretary to the arbitral tribunal (usually a junior counsel) to take care of administrative details and take notes. In return for the administrative fee, however, the ICC performs significant services for the parties, including a review of party-nominated arbitrators for independence, appointing qualified arbitrators when necessary and scrutinizing proposed awards to insure their enforceability. If the parties decide on institutional arbitration, they must choose from a myriad of competing arbitral institutions. Among the better known are the ICC, the AAA, the LCIA, the International Centre for the Settlement of Investment Disputes (ICSID),98 and the Stockholm Chamber of Commerce. Other international arbitral institutions include: the Inter-American Commercial Arbitration Commission (IACAC), the Commercial Arbitration and Mediation Center for the Americas (CAMCA), the Arbitration Court of the World Intellectual Property Organization (WIPO), the Singapore Centre for International Commercial Arbitration, the Hong Kong Centre for International Commercial Arbitration, the Cairo Centre for International Commercial

Arbitration, and the British Columbia Centre for International Commercial Arbitration. In lieu of the arbitration rules of an institution, the parties may adopt the UNCITRAL Arbitration Rules.99 This is a set of arbitral rules drafted by the United Nations Commission on

International Trade Law but not connected to any administering institution. Some institutions
Unlike the other arbitral institutions, ICSID has jurisdictional requirements for its use. See J, infra. G.A. Res. 31/98, 31 U.N. GAOR Supp. (No. 39) U.N. Doc. A/31/39 (1976).

98

99

such as the ICC, AAA and the LCIA have declared they will apply the UNCITRAL Rules if the parties agree to their use.100 The parties may also adopt the UNCITRAL Rules for use in an ad hoc arbitration. If the parties choose an ad hoc arbitration, but do not adopt ready-made rules, they must frame their own rules sufficiently for conducting the proceeding. Otherwise, they fall back on the law of the country where the arbitral proceeding will be held. F. Important Clauses 1.

Number of Arbitrators

Most arbitration rules provide for the number of arbitrators and a method for selecting them if the parties do not specify the number or a mechanism for their appointment. Nevertheless, it is generally desirable that the parties express their preference. The custom in international

arbitrations involving significant monetary amounts is to appoint a three-person panel, but when the amount in dispute does not justify three, a single arbitrator may be preferred. 2. Method of Selecting Arbitrators

The appointment of a three-person panel usually involves each party appointing one arbitrator, and these two then agreeing on a third arbitrator to be the chairman of the tribunal. If the parties simply adopt institutional rules, some provide that the institution will determine the number of arbitrators and will select the third arbitrator when three are deemed appropriate.101
100

The UNCITRAL Rules, promulgated in 1976, have proven popular in practice, and formed the basis of the arbitration rules of the Iran-United States Claims Tribunal and IACAC. Because the decisions of the IranU.S. Claims Tribunal are published, there is a reported jurisprudence interpreting the UNCITRAL Rules. See Stewart Baker & Mark Davis, The UNCITRAL Arbitration Rules in Practice: The Experience of the Iran-United States Claims Tribunal (Kluwer 1992); Jacomijn J. van Hof, Commentary on the UNCITRAL Arbitration Rules: The Application by the Iran-U.S. Claims Tribunal (Kluwer 1991). ICC Rules art 8(2) & 8(4).

101

In an

ad hoc arbitration, it is important that the parties include a back-up provision for

appointment by an independent authority if a party fails to appoint its arbitrator or if the partyappointed arbitrators cannot agree on the presiding arbitrator.102 They should also either

provide for the replacement of arbitrators who die or resign or authorize the continuance of the proceedings with a truncated tribunal, or both.103 Some arbitration clauses provide that the parties shall attempt within a stated period of time after the commencement of the arbitration to agree on a sole arbitrator, but if they are unable to do so within the period allowed, the result will be a panel of three arbitrators. This mechanism provides flexibility the parties are not bound under any and all circumstances exclusively either to a sole arbitrator or to a panel of three. A similar approach may mandate that the arbitration will be conducted by a sole arbitrator if the amount in controversy, exclusive of interest and costs, is less than a threshold amount say US $1 million but will be conducted by a panel of three arbitrators if the dispute involves the threshold amount or more. Occasionally, the contract will provide for a named individual to act as arbitrator. This is generally not a wise procedure because the unavailability of the person named may render the arbitration agreement invalid or, even if not, it may cause problems regarding the appointment of a substitute. 104

102

Most institutional rules address these issues and include procedures for breaking such a stalemate. See ICC Rules art. 8(4); AAA International Rules art. 6(3); LCIA Rules art. 7.2; UNCITRAL Rules art. 7(2). A truncated tribunal is one that begins with three arbitrators but is able to continue its work with a lesser number, if necessary. See ICC Rules art. 12(5); WIPO Arbitration Rules art. 35; Stephen Schwebel, The Validity of an Arbitral Award Rendered by a Truncated Tribunal, 6 ICC Intl Ct. Arb. Bull. 19, 20 (Nov. 1995). Marcus v. Meyerson, 170 N.Y.S.2d 924, 925-26 (1958).

103

104

Many arbitral rules either require or suggest that the institution appoint a sole or third arbitrator who is not a national of either parties' countries. Parties occasionally provide in their clause that no national of a party or of its parent company may serve as arbitrator, or more often, that the sole or third arbitrator may not be a national of the parties' countries. 3. Place

If the parties fail to agree to the place of the arbitration, some institutions' rules allow the arbitrators to decide the situs based on the circumstances of the parties and the case,105 while other rules authorize the institution itself to select the situs.106 U.S. courts will rarely overturn the parties' choice of arbitral forum when the agreement specifies one.107 If the parties do not specify a venue, but have agreed to submit to particular arbitration rules that allow the arbitrators to decide the forum, it will be difficult for the parties to challenge the arbitrators' choice of venue.108 It should be noted that choosing a situs does not mean that all arbitral proceedings

have to take place there; the arbitrators generally have discretion under the arbitral rules to conduct some proceedings at other venues.109

105

AAA International Rules art. 13 (administrator may initially determine the place of arbitration, subject to the power of the arbitrators to determine the situs); UNCITRAL Rules art. 16. ICC Rules art. 14 (ICC International Court of Arbitration shall fix the place of arbitration if not agreed by the parties); LCIA Rules art. 16.1 (seat shall be London unless and until the LCIA Court determines that another seat is more appropriate). National Iranian Oil Co. v. Ashland Oil, Inc., 817 F.2d 326, 335 (5th Cir. 1987); Snyder v. Smith, 736 F.2d 409, 419-20 (7th Cir. 1984), cert. denied, 469 U.S. 1037 (1984). Stanicoff v. Hertz, 406 N.E.2d 1318, 1319 (Mass. App. 1980). ICC Rules art. 14 (arbitrators may conduct hearings or deliberate at any location they deem appropriate); AAA International Rules art. 13 (arbitrators may hold conferences, hear witnesses or inspect property at any place they deem appropriate); LCIA Rules art. 16.1 (arbitrators may hold hearings and deliberations at any convenient location).

106

107

108

109

In selecting the situs, perhaps the most important factor is the legal environment of the forum. Parties should consider the following factors related to the legal system of the venue.110 (1) It is especially important to select a forum whose arbitral awards will be enforceable in other countries (e.g., a country that has ratified the New York or Panama Conventions recognizing arbitral awards). (2) The forum's law should recognize the agreement to arbitrate as valid. Article V(1)(a) of the New York Convention contemplates that the validity of an arbitration agreement may be determined by the law of the country where the award was made, so compliance with local laws is important. (3) Because the arbitral site is usually the country whose courts will hear an action to vacate an award, it is important to consider the scope of review of awards available in that country.111 (4) The national courts of the situs should not unnecessarily interfere in ongoing arbitral proceedings, thereby creating an incentive for dilatory tactics and expensive procedural disputes. (5) The forum's courts should, however, assist the proceedings when necessary (e.g., by compelling arbitration or by enforcing discovery orders made by the tribunal).112 (6) The host country should allow non-nationals to appear as counsel in international arbitration proceedings. This is not always the case; for example, Japan and Singapore have at times required that the parties' representatives be lawyers admitted to practice, and reside, in the forum state.113 Other countries require that representatives be lawyers (e.g., Indonesia, Israel, Saudi Arabia and Spain),114 while others require representatives to present a power of attorney to the arbitral panel (e.g., Argentina, Greece, Austria).115
110

See Gary B. Born, International Commercial Arbitration in the United States at 73-75 (1994). See, e.g., Southern Pacific Properties Ltd. v. Arab Republic of Egypt, 2 Int'l Arb. Rep., No. 1, at 17 (Cass. Civ. 1re 1987) (French court's reversal of ICC arbitral award rendered in Paris). See, e.g., U.S. Arbitration Act, 9 U.S.C. 4, 7. David Rivkin, Keeping Lawyers Out of International Arbitration, 6 Int'l Lit. Q. 4-5 (March 1990). Id. at 4. Id. at 3.

111

112

113

114

115

(7) The situs should not unduly restrict the choice of arbitrators. In Saudi Arabia, arbitrators must be Muslim and male.116 In Venezuela, arbitrators must be lawyers licensed to practice law in Venezuela if Venezuelan law applies.117 Certain other countries have also required that arbitrators be nationals of their country.118 The location of the arbitration may also determine the language of the arbitration if the parties have not specified the language. Even if the parties do specify a venue, some countries' laws require that their language be used. For example, arbitrations in some Arab countries must be conducted in those countries' languages.119 A location that is inconvenient for the parties or expensive for travel may affect the availability of witnesses or the cost of proceedings. The tax treatment of the award may also be a relevant consideration.120 In some cases, the parties may provide for two different places for the arbitration, depending on which party initiates the proceeding. This has been referred to as a home and home provision.121 The most notable venues for international arbitration include London, Paris, Geneva, New York and Stockholm. For cases involving Asian parties, proceedings may be held in Singapore, Kuala Lumpur, Hong Kong or, with Chinese parties, Beijing. With Latin American parties, the more popular venues include Paris, Mexico City, New York, Miami, and Houston.
116

Bond, supra note 1, at 18. James Rodner, Arbitration in Venezuela, in ICC International Court of Arbitration Bulletin: International Commercial Arbitration in Latin America Special Supplement at 99 (1997). Bernardini, supra note 10, at 54. Id. at 58. Id. at 55. Kreindler, supra note 47, at 53.

117

118

119

120

121

With the looming expansion of NAFTA, Buenos Aires and Santiago may soon grow in popularity. 4. Language

Absent agreement by the parties, most arbitral rules allow the arbitrators to decide the language, taking into account the language of the contract and other relevant circumstances.122 The AAA International Rules specify that the language of the document containing the arbitration agreement shall be used unless the arbitrators determine otherwise.123 Similarly, the LCIA

Rules provide that the initial language shall be that of the document containing the arbitration clause unless the parties agree otherwise,124 arbitrators may decide the language to be used.125 Generally, the parties should specify the language to be used in the proceedings if they can agree. If the language selected is not the native language of the client, counsel may wish to provide both for simultaneous interpretation and for sharing equally the cost of translating testimony and documents.126 but after the arbitral tribunal is formed, the

122

ICC Rules art. 16; UNCITRAL Rules art. 17. AAA International Rules art. 14. LCIA Rules art. 17.1. Id. art. 17.3. Kreindler, supra note 47, at 52; Bond, supra note 1, at 20.

123

124

125

126

5.

Entry of Judgment

The Second Circuit Court of Appeals in the U.S. held, in the early 1970's, that in the absence of a clause that a court may enter judgment on an arbitral award, courts may not do so.127 Later courts have softened the impact of Varley by holding that consent to entry of judgment may be implied by the conduct of the parties.128 A reference that the award would be final was

heavily relied upon in one case to authorize entry of judgment upon the award.129 In the wake of Varley, the AAA Commercial Arbitration Rules were amended to provide that parties adopting such rules were deemed to have agreed that judgment may be entered on the award.130 Nevertheless, if enforcement may be required in the U.S., it is important that parties include an entry-of-judgment provision in their arbitration clause. G. 1. Helpful Clauses Qualifications and Conduct of the Arbitrators131

The Arbitration Rules of the AAA, the LCIA and UNCITRAL require that all arbitrators be impartial and independent.132 The ICC Rules only expressly require independence.133 The

127

Varley v. Tarrytown Ass., Inc., 477 F.2d 208, 210 (2d Cir. 1973). See also Splosna Plovba of Piran v. Agrelak Steamship Corp., 381 F. Supp. 1368, 1370-71 (S.D.N.Y. 1974). I/S Stavborg v. National Metal Converters, Inc., 500 F.2d 424, 426-27 (2d Cir. 1974). Id. AAA Commercial Arbitration Rules, art. 47(c) (eff. July 1, 1996). For a detailed discussion of this issue, see Doak Bishop & Lucy Reed, Practical Guidelines for Interviewing, Selecting and Challenging Party-Appointed Arbitrators in International Commercial Arbitration, 14 (Issue No. 4) Arb. Intl 1 (1998). AAA International Rules art. 7.1; LCIA Rules art. 5.2; UNCITRAL Rules art. 10(1). ICC Rules art. 7(1), but an arbitrator may be challenged for "lack of independence or otherwise." Id. art. 11(1) (emphasis added).

128

129

130

131

132

133

1996 English Arbitration Act only expressly requires impartiality.134 The ICSID Rules require a statement from the arbitrator that he will judge fairly between the parties and will not accept instruction or compensation from them.135 In light of these differing tests, a party may wish to insert a clause requiring that all arbitrators be impartial, which is the key test,136 and may even wish to require all arbitrators to declare that they can and shall decide the case impartially. As added insurance, the arbitration clause may adopt the International Bar Association's Rules of Ethics for International Arbitrators, and require that all arbitrators comply with these rules of ethics. Although covered to some extent in the IBA Rules, the parties may wish to insure the complete independence of the arbitrators by requiring that they not have any financial interest in the dispute or any financial dependence on the parties (directly or indirectly). This independence may also take the form of prohibiting the sole or presiding arbitrator (or all arbitrators) from being of the same nationality as any of the parties or their parent companies. In addition, parties may in some cases desire to include a provision requiring certain expertise in the arbitrators. If this is included, it should be broadly drafted unless the arbitration clause is limited to certain types of well-defined disputes. Such a clause may require that all arbitrators be actively involved in the trade, be knowledgeable and experienced in a certain type of business or be knowledgeable of the law relating to that business. A provision that is too
134

Arbitration Act 1996, Chapters 1(a) & 24(1)(a) (June 17, 1996). ICSID Rules of Procedure for Arbitration Proceedings Rule 6(2). See English Arbitration Act 1996, Chapters 1(a) and 24(1)(a) (June 17, 1996); Departmental Advisory Committee on Arbitration Law (Chairman, The Rt. Hon. Lord Justice Saville), Report on the Arbitration Bill 101-04 (February 1996).

135

136

specific as to the qualifications of the arbitrators may fail if arbitrators with those qualifications cannot be found.137 2. Interim Measures

Federal courts in the U.S. have split over their authority to grant interim measures in the face of an arbitration clause. The U.S. Third and Fourth Circuit Courts of Appeals, and New York state courts, have held that U.S. courts may not grant interim measures because of the New York Convention's requirement that a court seized of a matter must refer the parties to arbitration.138 Other courts have disagreed,139 with some creating express exceptions for admiralty cases140 and injunctions.141 This can be an important issue if immediate relief is necessary, for example, to prevent spoilage of perishable goods or to protect intellectual property during the pendency of a dispute. Some arbitral rules and some countries' laws expressly allow the arbitrators to issue interim measures (in the nature, for example, of an injunction or an order to preserve property),142 while other countries laws do not allow arbitrators to issue such orders.143 Because
137

Park, Arbitration of International Contract Disputes, supra note 64, at 1786. I.T.A.D. Assoc., Inc. v. Podar Bros., 636 F.2d 75, 77 (4th Cir. 1981); McCreary Tire & Rubber Co. v. CEAT SpA, 501 F.2d 1032, 1038 (3d Cir. 1974); Cooper v. Ateliers de la Motobecane, 442 N.E.2d 1239, 1242-43 (N.Y. 1982). E.g., Carolina Power & Light Co. v. Uranex, 451 F. Supp. 1044, 1051-52 (N.D. Cal. 1977). Andros Compania Maritima, S.A. v. Andre & Cie., S.A., 430 F. Supp. 88, 89-90 (S.D.N.Y. 1997). Rogers, Burgun, Shahine & Deschler, Inc. v. Dongsan Constr. Co., 598 F. Supp. 754, 758-59 (S.D.N.Y. 1984). ICC Rules art. 23; AAA International Rules art. 21; LCIA Rules art. 25; UNCITRAL Rules art. 26; UNCITRAL Model Law on International Commercial Arbitration art. 17. 1996 English Arbitration Act 39(4) (arbitrators have no power to order provisional relief unless the parties confer such power on them).

138

139

140

141

142 143

of the differing rules and laws, the parties may wish to empower the arbitral tribunal with such authority, or deny it such power, in their arbitration clause. Courts outside the country where the arbitration is to take place will sometimes refuse to decide issues of interim measures, leaving such questions either to the arbitral panel or to the courts of the arbitral venue.144 One method of dealing with this issue at least in part is to adopt the ICC's Pre-Arbitral Referee Procedure, which requires a written agreement.145 In accordance with these rules, the Chairman of the ICC International Court of Arbitration will appoint a referee in the shortest time possible after the time period for filing the answer, which is required within eight days from receipt of the request.146 The referee is empowered to issue certain provisional orders such as orders for conservatory measures, restoration, payments, signing or delivery of documents, and preserving or establishing evidence.147 The referee's order does not pre-judge the case or bind a later authority, but it is binding on the parties until changed by the arbitral tribunal or a court.148 The order is not enforceable as an arbitral award, but non-compliance may be sanctioned by the arbitral tribunal.149
144

See Channel Tunnel Group, Ltd. v. Balfour Beatty Construction, Ltd., [H.L. 1993] A.C. 334, [1993] 1 All E.R. 664, [1993] 1 Lloyds Rep. 291, XIX Y.B. Com. Arb. 736, 745 (1994) (English courts may not grant interim injunction in respect of a foreign arbitration, but may grant pre-arbitration injunction); David Wagoner, Interim Relief in International Arbitration, 62 Arbitration 131, 134 (1996). But see Trade Fortune, Inc. v. Amalgamated Mill Supplies, Ltd., (1994) 89 BCLR (2d) 132; Interbulk (Hong Kong), Ltd. v. Safe Rich Industries, Ltd., (1992) 2 HKLR 185. ICC Pre-Arbitral Referee Procedure Rules art. 3.1. Id. arts. 3.4 & 4.2. Id. art. 2.1. Id. art. 6.3. Martin Hunter, Jan Paulsson, Nigel Rawding, & Alan Redfern, The Freshfields Guide to Arbitration & ADR: Clauses in International Contracts at 50 (Kluwer 1993) (Freshfields Guide).

145

146

147

148

149

3.

Waiver of Appeal/Exclusion Agreement

This topic is related to the issue of the final and binding nature of an award, which is discussed above.150 The provisions of the ICC and LCIA Rules deeming a waiver of any form of

recourse against an award,151 and an arbitration clause provision waiving the right to appeal the award, constitute an "exclusion agreement,"152 which excludes review of an arbitral award on the merits by a national court. In England, the incorporation of an institution's arbitral rules, which provide for the waiver of recourse from an arbitral award, is sufficient to prevent judicial review of the award,153 while in other countries such as Switzerland an exclusion agreement must be express.154 The reason for this difference may be found in the fact that English courts have broad powers to review an arbitral award for errors of English law, when that law is applicable,155 while in Switzerland and other countries, review of an award is limited to the few defenses provided in the New York Convention.156 Thus, the scope of the review conducted in Switzerland is much more limited than that available in England.

150

See E(2), supra. ICC Rules art. 28(6); LCIA Rules at. 26.9. See AB Gotaverken v. General National Maritime Transport Co., 6 Y.B. Com. Arb. 237, 240-41 (1981) (Swedish Supreme Court held ICC award binding and enforceable under ICC Rules art. 24 despite challenge to the award in French courts). Bernardini, supra note 10, at 59. Arab-African Energy Corp. v. Olieprodukten Nederland, N.V., [1983] 2 Lloyd's L. R. 419 (Q.B. Com. Ct.); Marine Contractors, Inc. v. Shell Petroleum Dev. Co. of Nigeria, Ltd., [1984] 2 Lloyds Rep. 27. See Swiss Federal Private International Law Act art. 192(1). See also Clear Star, Ltd. v. Centrala Morska Importowo-Eksportova Centromor and Centromor, S.A., cited in Bernardini, supra note 10, at 59. 1996 English Arbitration Act 69. Swiss Federal Private International Law Act art. 190.

151

152

153

154

155

156

In the United States, courts have held the parties may agree to eliminate all court review of arbitral awards,157 but the intention to do so must clearly appear.158 The Second Circuit has held that U.S. courts may review international awards under the limited defenses provided by the New York Convention despite a provision that an award shall be final and binding.159 The Sixth Circuit has agreed, holding that U.S. courts may review awards under the New York Convention defenses despite a clause that both provided that disputes would be finally settled by arbitration and adopted the ICC Rules with the language deeming a waiver of the right to appeal.160 Thus, the U.S. position appears to be that the inclusion of final and binding

language and the adoption of arbitral rules deeming a waiver of the right to appeal are not sufficient to preclude court review of an award under the limited, but fundamental, defenses provided by the New York Convention. To waive the right to review under these defenses, the arbitral clause must clearly and expressly provide for such a waiver. The difference in these models indicates that a waiver of the right to appeal an award may mean one of two things: (1) the parties may not appeal to the courts on the merits ( i.e., they may not argue that the arbitrators misunderstood the facts or misapplied the law), or (2) the parties may not apply to the courts to vacate the award on any basis, including the defenses listed in the New York and Panama Conventions.161 Since the law differs from country to country as to
Gramling v. Food Machinery & Chem. Corp., 151 F. Supp. 853, 855-56 (W.D.S.C. 1957) (award was agreed to be final and binding without any right of appeal from the award). Aerojet-General Corp. v. American Arbitration Ass'n, 478 F.2d 248, 251 (9th Cir. 1973). Iran Aircraft Indus. v. Avco Corp., 980 F.2d 141, 145 (2d Cir. 1992). M&C Corp. v. Erwin Behr, GmbH & Co., 87 F.3d 844, 847 (6th Cir. 1996). See Food Services of America, Inc. v. Pan-Pacific Specialities, Ltd., (1997) 32 BCLR (3d) 225.

157

158

159

160

161

which of these situations is included in a waiver, if the parties wish to waive the right to appeal, they should be specific in describing which of these situations they intend by their waiver. H. 1. Unusual Clauses Confidentiality

Although confidentiality is often cited as one of the primary advantages of arbitration,162 most of the best known institutions' arbitration rules do not require the parties to maintain the

confidentiality of the arbitral proceedings, the award or any documents exchanged in, or created for, the arbitration proceeding.163 The arbitration rules of some institutions do impose such a confidentiality requirement upon the administrator and arbitrators.164 With the notable

exception of England, whose courts have imposed an implied obligation of confidentiality,165 most countries' laws impose no confidentiality requirements upon the parties to an arbitration.166 The information that parties may desire to maintain as confidential may be categorized as follows: (1) the existence of the arbitral proceeding;
162

Jan Paulsson & Nigel Rawding, The Trouble with Confidentiality, 5 ICC Int'l Ct. Arb. Bull. 48 (1994). See AMCO Asia Corp. v. Indonesia, ICSID ARB/81/1 (award dated 1 February 1994). But see LCIA Rules art. 30.1; WIPO Rules arts. 73-75; Center for Public Resources (CPR) Non-Administered Arbitration Rules, Rule 16. See, e.g., AAA International Rules art. 34; WIPO Arbitration Rules art. 76. See, e.g., Insurance Co. & Lloyd's Syndicate, 10(1) Mealey's Int'l Arb. R. 9 (Jan. 1995) (U.K. Queen's Bench Div. (Commercial Court) October 27, 1994); Hassneh Ins. Co. v. Steuart, [1993] 2 Lloyd's Rep. 243 (Q.B.); Dolling-Baker v. Merrott [1990] 1 W.L.R. 1205, [1991] 2 All ER 890 (U.K. Court of Appeal (Civil Div.) March 21, 1990). See, e.g., Esso Australia Resources Ltd. v. Plowman, FMC. No. 95/014 (High Ct. Austr. 1995); Commonwealth of Australia v. Cockatoo Dockyard PTY, Ltd., No. CA 40713 of 1994, No. CL 55049 of 1994, 10(7) Mealey's Int'l Arb. R. 3 (July 1995) (Court of Appeal of Supreme Court of New South Wales, June 27, 1995); U.S. v. Panhandle Eastern Corp., 118 F.R.D. 346, 349-50 (D. Del. 1988); Galleon Syndicate Corp. v. Pan Atlantic Group, Inc., 6 Mealeys Lit. R.: Reinsurance 73, 74 (N.Y. App. Div., Dept. 1) (Feb. 13, 1996).

163

164

165

166

(2) contemporaneous or historical documents produced or exchanged by the parties; (3) documents prepared for the arbitration (e.g., briefs and pleadings); and (4) the arbitral award. Therefore, if the parties desire that their proceedings, documents and award be maintained as confidential, they should provide for it in their arbitration clause. If a confidentiality obligation is provided in the clause, it should include an exception for situations in which it is necessary to go to court either to compel arbitration or to enforce the award. Other exceptions should be provided for disclosure when required by law or when required to enforce other rights or defend other proceedings in situations in which the fact of the award is a necessary element of the claim or defense.167 2. Discovery

Litigation in U.S. federal and state courts is characterized by broad, pre-trial discovery obtained through document production, interrogatories and depositions (usually oral, but occasionally conducted in writing). In England, document discovery is permitted, but not depositions. Parties may choose arbitration in part to avoid these procedures, which are often perceived as time consuming and expensive. Parties from civil law countries, who are often accustomed to little or no discovery, are likely to hold this perception. There are obvious cost advantages to limiting discovery, but if parties want to insure they will have access to relevant evidence, they should provide for it in their clause.

167

Insurance Co. & Lloyds Syndicate, 10(1) Mealeys Intl Arb. R. 9 (Jan 1995), U.K. Queens Bench Div. (Commercial Court) Oct. 27. 1994.

The International Bar Association has adopted Supplementary Rules Governing the Presentation and Reception of Evidence in International Commercial Arbitration. These rules do not

automatically apply to an arbitration proceeding; they must be adopted by either the parties or the arbitrators. When applicable, they provide for limited production of documents, falling into two categories: (1) documents to be relied upon by the parties at the arbitral hearing, and (2) documents that can be identified with specificity and that are exchanged with third parties ( e.g., correspondence). It is not common for arbitration clauses in international agreements to address whether discovery will be allowed (and if so, in what form), or how evidence will be received by the tribunal. Nonetheless, contracts occasionally address these issues, and parties may desire to provide in the arbitration clause that the tribunal will allow discovery, and may even dictate the discovery that will be permitted and the procedures to be used. The types of discovery that may be specified in the arbitral clause include the following: (1) documents and information contractually required to be provided; (2) audits of books and records; (3) documents to be relied upon by the parties in the arbitral proceeding; (4) documents exchanged with third parties; (5) documents in the care, custody or control of the parties; (6) sworn oral depositions or depositions by written questions; (7) written interrogatories; (8) inspection of premises; and (9) interviews of employees.

In international litigation and arbitration, documents must generally be requested with specificity,168 but if document discovery is desired in the U.S. mode, the parties should provide that documents may be requested by broad category. Some clauses explicitly restrict discovery by providing it shall be limited and handled expeditiously, and shall not include discovery procedures available in litigation before courts. In at least one clause drafted by the author, however, a state-owned oil company agreed to a broad discovery clause that included all of the types of discovery listed above. The discovery provision was limited though to environmental issues.169 Parties may also effectively provide for discovery by including contractual provisions mandating that one party periodically provide the other with certain information or by providing a right to audit. Provisions such as these are often found in joint operating agreements in the energy industry. 3. Multi-Party Arbitration

In situations in which there are more than two parties to an arbitration, and yet the parties want the ability to appoint their own arbitrator, it may be desirable to include a clause addressing this situation. It is possible for an arbitration clause to fail if it provides that each party may appoint its own arbitrator and these two will select the third, but there are more than two parties to the dispute. It is more likely, however, that the arbitration will have to be split into separate

168 169

James Carter, Obtaining Foreign Discovery and Evidence for Use in Litigation in the United States: Existing Rules and Procedures, 13 Intl Law. 5, 15-16 (1979). The parties agreement provided for liability for environmental problems caused by the private partys activity on certain property, while allowing the state-owned company to make other use of the same property. The broad discovery clause represented a compromise on the private partys request for indemnity from the state-owned company for its use of the property.

arbitrations with only two parties to each. Until recently, none of the primary institutions' arbitration rules addressed this problem, and few countries' procedural laws deal with it. In the case of Siemens AG and BKMI Industrienlagen GmbH v. Dutco Construction Co.,170 a claimant filed a single ICC arbitration against two respondents claiming separate breaches by each of a consortium agreement for constructing a cement plant in the Middle East. The arbitral clause provided for three arbitrators to be selected in accordance with the ICC Rules. The ICC required the two respondents jointly to appoint a single arbitrator, and they did so under protest, reserving their rights. After an award was rendered, respondents sought to set it aside. The French Supreme Court ultimately held the principle of equality of the parties in designating arbitrators is a matter of public policy that cannot be waived before a dispute arises. Thus, each respondent had the right to designate its own arbitrator. Responding to this situation, the ICC, AAA, and LCIA recently adopted rules that allow the institutions to appoint all arbitrators when there are more than two parties to an arbitration and either all claimants or all respondents cannot agree on the joint appointment of an arbitrator for their side.171 The options for solving this problem in the arbitration clause may be categorized as follows: (1) If there are three parties, each appoints its own arbitrator, and these three decide among themselves who will be the presiding arbitrator. Note that there is no true neutral or non-party appointed arbitrator with this procedure, and some arbitral rules allow the chairman to decide the dispute if the arbitrators cannot form a majority.172
170 171

No. 89-28 708 Y and No. 89-18 726 Y combined, decision of the Cour de Cassation (French Supreme Court) 1st Civil Chamber, 7 January 1992. ICC Rules art. 10(2); AAA International Rules art. 6(5); LCIA Rules art. 8.1. ICC Rules art. 25(1); LCIA Rules art. 26.3.

172

(2) Either the parties agree to group themselves together into two or three groups for the purpose of jointly appointing an arbitrator or the appointing authority is authorized to group them together. The parties so grouped together then jointly appoint an arbitrator. This procedure may be used when parent and subsidiary companies are parties or when certain parties have a common interest and a common position in the dispute. (3) The appointing authority selects all arbitrators or the strike-list method is used, in which the institution submits a list of potential arbitrators to the parties and allows them to strike those they do not want and rank the remaining candidates. Whichever option is chosen will depend on the likely number of parties, whether they can be grouped together, and how important it is to the parties that they be able to appoint their own arbitrators. 4. Consolidation of Arbitral Proceedings

When there are multiple arbitration proceedings filed or possible, with common questions of law or fact and the possibility of conflicting awards, it may be advisable to consolidate the arbitration proceedings.173 This situation may occur with "chain" or "string" contracts in which a

middleman buys from one party and sells to another. If the parties have not signed the same arbitration clause, however, consolidating the proceedings may be problematic. The U.S. Federal Arbitration Act authorizes courts to enforce arbitration "in accordance with the terms of the agreement."174 Some U.S. courts have interpreted this

provision narrowly, prohibiting consolidation if the parties' agreement does not

173

Hoover Group, Inc. v. Probola & Assocs., 710 F. Supp. 679, 681 (N.D. Ohio 1989) ("The two arbitrations present common questions of law and fact, and a danger of conflicting findings and awards"); Sociedad Anonima de Navegacion Petrolera v. Cia de Petroleaos de Chile, S.A., 634 F. Supp. 805, 809 (S.D.N.Y. 1986). 9 U.S.C. 4.

174

provide for it.175 The opposite view has also been taken, however, based primarily on Rules 42(a) (consolidation of actions) and 81(a)(3) (applicability of Federal Rules of Procedure to arbitration proceedings) of the Federal Rules of Civil Procedure.176 Even when consolidation is possible, the details of consolidating two existing arbitral proceedings may present substantial difficulties. The simplest possibility is to consolidate the arbitrations before one of the existing panels, often the first-filed proceeding, and dismiss the other panel. If there is an overlap of arbitrators, it may be possible to consolidate with five arbitrators. U.S. courts have refused to consolidate when arbitration agreements provided for different arbitral institutions or rules on the basis that "[w]hen the contracting parties have agreed upon an arbitral forum, to impose another upon either of them without consent would be to rewrite their agreement."177 One U.S. court solved this problem by ordering two separate arbitral panels

operating under different institutional rules to hold a joint evidentiary hearing with one of the panels issuing its award first.178

175

Government of the United Kingdom v. Boeing Co., 998 F.2d 68, 70 (2d Cir. 1993) (two separate arbitration agreements and no consolidation clause); Weyerhaeuser Co. v. Western Seas Shipping Co., 743 F.2d 635, 637 (9th Cir. 1984); Coastal Shipping, Ltd. v. Southern Petroleum Tankers Ltd., 812 F. Supp. 396, 402 (S.D.N.Y. 1993); PaineWebber, Inc. v. Fowler, 791 F. Supp. 821, 826 (D. Kan. 1992). Maxum Foundations, Inc. v. Salus Corp., 817 F.2d 1086, 1088 (4th Cir. 1987) (implied consent to consolidate found in identical arbitration clauses); Compania Espanola de Petroleos, S.A. v. Nereus Shipping, S.A., 527 F.2d 966, 975 (2d Cir. 1975) (single arbitration agreement, three parties, no consolidation clause, five arbitrators ordered). Stewart Tenants Corp. v. Diesel Const. Co., 229 N.Y.S.2d 204, 206 (1963). Jamaica Commodity Trading Co. v. Connell Rice & Sugar Co., No. 87 Civ. 6369, 1991 U.S. Dist. LEXIS 8976 (S.D.N.Y. - July 2, 1991).

176

177

178

One factor to consider in deciding whether to include a consolidation clause is the possibility of a class action claim in the United States.179 Class actions are proper only when there are

numerous claimants with common questions of law or fact, such as a dispute over an identical provision in a standard-form contract that involves hundreds of claimants, often consumers.180 Typical commercial transactions tailored to a few parties will not give rise to class actions. U.S. courts have held that consumers whose contracts contained arbitration clauses were required to arbitrate even though they filed their lawsuit as a class action.181 In at least one case, to

prevent a class action in an arbitration proceeding, the clause read: each claim or controversy will be arbitrated by the Franchisee on an individual basis and will not be consolidated in any arbitration action with the claim of any other franchisee.182 Language in some cases may

imply that a consolidation clause is sufficient authorization to certify a class action in an arbitration proceeding.183 Companies with numerous standard-form agreements should be

careful not to implicitly authorize a class action arbitration by including a consolidation provision.

179

See H(11), infra. See Fed. R. Civ. P. 23. Howard v. Klynveld Peat Marwick Goerdeler, 977 F. Supp. 654, 665 n.7 (S.D.N.Y. 1997); Doctors Associates, Inc. v. Hollingsworth, Bus. Franchise Guide (CCH) 11,069 at 28,909-10 (D. Conn. Nov. 25, 1996). Doctors Associates, Inc. v. Hollingsworth, Bus. Franchise Guide (CCH) 11,069 at 28,906 (D.Conn. Nov. 25, 1996). Randolph v. Green Tree Financial Corp., 991 F. Supp. 1410, 1424 (M.D. Ala. 1997).

180

181

182

183

5.

Split Clauses

Another species of scope clauses184 include those provisions authorizing arbitration of certain disputes and litigation of others, which may be denominated as split clauses.185 In these

provisions, the parties may draft a broad-form clause but then carve out certain types of disputes such as intellectual property claims that they do not want to be arbitrable, or they may craft a clause tailored to include only narrowly-specified types of disputes. A variation of this provides for litigation of a certain category of disputes, but empowers one party to elect to have those disputes resolved by arbitration.186 If this variation is chosen, the process for making the

election should be specified.187 Another variation is to provide that one partys claims must be arbitrated, while the other party may litigate its claims.188 A third variation is referred to in England as Scott v. Avery clauses. 189 These provide either that no litigation shall be filed on the issues subject to litigation until an award has been issued on the arbitrable issues, making the completion of arbitration of some issues a condition precedent to litigation of others, or that the respondents sole obligation will be to pay the pecuniary sum awarded in arbitration.190 These provisions are sometimes found in insurance
184

See E(3), supra. Freshfields Guide, supra note 149, at 47. Id. at 48. Id. Barker v. Golf U.S.A., Inc., ___ F.3d ___ (8th Cir. 1998) (clause providing that any disputes shall be resolved by arbitration except for monies owed to Golf USA did not fail for lack of mutuality of obligation because mutuality is not required for arbitration clauses as long as the contract as a whole is supported by consideration). (1856) HL Cas 811 [1843-60] All ER Rep. 1. Drewitt & Wingate-Saul, supra note 48, at 42.

185

186

187

188 189

190

contracts in which courts may be authorized to decide liability issues, while arbitrators are empowered to rule on the damage claims.191 6. Summary Disposition (Written Procedure)

The author has recently seen several domestic arbitration clauses in the U.S. that authorized (but did not compel) the arbitrators in their discretion to decide the case on summary judgment. Summary judgment is a U.S. judicial procedure that permits judges, in appropriate circumstances, to decide a case based on the documents and sworn written testimony in the form of affidavits. With this procedure, a summary judgment may be granted for one party when the undisputed facts and the law indicate there are no disputed issues. But if the sworn testimony from the parties contradicts one another on a crucial point, summary judgment is not appropriate, and oral testimony must be taken. Use of summary disposition appears to be growing in domestic arbitration in the U.S. Internationally, arbitrators may be authorized by the parties to decide the case on the documents, as supplemented by any written testimony if the arbitrators believe they do not need additional information. If the arbitrators believe they need oral evidence, however, for example, when the written testimony is contradictory on key issues and credibility must be assessed, summary disposition may be considered inappropriate.
191

Id. See Dalmia Dairy Indus., Ltd. v. National Bank of Pakistan, [1978] 2 Lloyds Rep. 223, 269-70 (arbitrators decision to rule on the basis of the documents without hearing testimony upheld); Richard Medalie, The Libyan Producers Agreement Arbitration: Developing Innovative Procedures in a Complex Multiparty Arbitration, 7 J. Intl Arb. 7, 21 (June 1990) (arbitrators considered summary judgment motion).

192

if one of the parties requests,193 and the UNCITRAL Draft Notes on Organizing Arbitral Proceedings stating that oral hearings are a fundamental right that must be respected,194 if the parties desire the availability of summary disposition, it may be useful to authorize this procedure specifically. 7. Arbitrability

In many national laws and arbitral rules, arbitrators are given the authority to decide their own jurisdiction.195 This is referred to as "competence-competence" or "Kompetenz- Kompetenz" (jurisdiction concerning jurisdiction). In First Options of Chicago, Inc. v. Kaplan,196 the U.S. Supreme Court held that the question of whether a particular dispute is arbitrable is to be decided by the courts unless the parties agreed that the arbitrators will decide the arbitrability question. In light of First Options, if the parties want the arbitrators to decide the arbitrability issue for an arbitration in the U.S., they must empower the arbitrators in their agreement. But empowering the arbitrators to decide arbitrability can mean one of three things: (1) the arbitrators may look at their jurisdiction without waiting for a court to do so (French model), (2) the arbitrators may decide their own jurisdiction in the first instance without court intervention until after an award is rendered, at which time a court may review jurisdiction (English model) or (3) the arbitrators may decide their own jurisdiction in a binding manner with no court review
193 194

ICC Rules art. 20(2). Of course, an oral procedure does not necessarily mean that oral testimony will be allowed. UNCITRAL Draft Notes on Organizing Arbitral Proceedings 75. See UNCITRAL Model Law on International Commercial Arbitration art. 16(1). 514 U.S. 938, 115 S.Ct. 1920, 1923-24 (1995).

195

196

(German model).197

Any authorization for the arbitrators to decide their own jurisdiction

should specify which of these models is intended by the parties. 8. Consent to Appeal

The corollary to waivers of appeal198 may be found in contract provisions broadening judicial review by specifically authorizing an appeal of arbitral awards for errors of law or findings of fact not based on substantial evidence. Provisions broadening judicial review have been upheld by federal courts in the United States, 199 although one court has noted that the parties agreement may not broaden the courts jurisdiction to review an arbitral award.200 A French court has

gone even further and held not only that an arbitration clause cannot permit an appeal of an arbitrators' findings of fact and law under French law, but that an arbitration clause containing such a provision for increased judicial scrutiny was void and unenforceable.201 If a party wishes to agree to arbitration using the ICC or LCIA Rules, but desires to maintain its right to seek vacatur under the New York Convention's defenses, then it should specifically delete, to that extent, the institutional rule that waives the right to seek recourse.202 This will prevent any inconsistency or confusion.
William Park, The Arbitrability Dicta in First Options v. Kaplan: What Sort of Kompetenz-Kompetenz Has Crossed The Atlantic?, 12 Arb. Int'l 137, 149-50 (1996). See G(3), supra. LaPine Tech. Corp. v. Kyocera Corp., 130 F.3d 884, 888 (9th Cir. 1997); Gateway Technologies, Inc. v. MCI Telecommunications, Inc., 64 F.3d 993 (5th Cir. 1995). Chicago Typographical Union v. Chicago Sun-Times, 935 F.2d 1501, 1505 (7th Cir. 1991). Societe de Diseno v. Societe Mendes, 1995 Rev. arb. 263 (Cour d'appel de Paris - Oct. 27, 1994), cited in Schwartz, supra note 58, at 9. It is unlikely the ICC will refuse to administer an arbitration because of a partys desire to maintain its right to seek a vacatur under the New York Convention defenses.

197

198

199

200

201

202

9.

Adaptation of Contracts and Gap Filling

The adaptation of contracts and gap filling represent two different situations, both of which are distinct from the typical powers of an arbitrator.203 Unless either agreed by the parties or

permitted by applicable law, at least in some countries arbitrators may not possess the power to adapt contracts (often long-term agreements) to changed circumstances or to fill gaps that exist in a contract by adding a new term.204 To the extent they do so, it is likely to be justified as an

exercise in finding and applying the intent of the parties.205 Emphasizing this distinction, the ICC at one time adopted Rules for Adaptation of Contracts. Parties could provide in their contract that any gaps be filled, or the agreement adapted to changed circumstances, by the procedure provided in the ICC Rules for Adaptation of Contracts. Those rules were distinct from the ICC Arbitration Rules; the procedure provided by those rules was not an arbitral proceeding, and any resulting decision was not an arbitral award and could not be enforced under the auspices of the New York Convention. Several years ago, however, the ICC abrogated its Rules for Adaption of Contracts because of non-use. Parties may address this issue by expressly conveying or denying this power to the arbitrators or by ignoring it, in which event the arbitral panel may assume either that it has this power or that it does not. It may be useful for parties to determine whether the arbitrators possess this power under the applicable law, including the law of the place of arbitration and the law of the likely country of enforcement.

203

204

Redfern & Hunter, supra note 64, at 181-82; Bernardini, supra note 10, at 56. Id. at 182-83. Id. at 183.

205

10.

Draft of Proposed Award

In some situations, the parties may wish to have the right to comment on, and correct any errors in, the arbitrators' award before it becomes final. If this is desired, the parties may provide that the arbitrators will submit to the parties an unsigned draft of their award and give the parties a specified time period (e.g., ten days) to provide written comments on any alleged errors of fact, law, computation, or otherwise.206 Thereafter, the arbitrators will render their signed award,

perhaps again within a specified time period. If a time period is specified as a deadline, it should be sufficient to allow the arbitrators to consider the comments and make any necessary changes to the award. 11. Class Actions

Some claimants have filed class action lawsuits, despite the existence of an arbitration clause in their contracts. Upon being referred to arbitration, they requested that U.S. courts certify them as representatives of a class of persons similarly situated in the arbitration proceeding, thus allowing them to recover in a representative capacity all damages suffered by the entire class. U.S. courts have held, however, that they lack authority to certify a class action in an arbitration proceeding, unless the arbitration agreement authorizes class certification.207 Most companies will never want to include a class action authorization provision in an agreement, but if they do, they should expressly provide for it.
206

Since the ICC Court of International Arbitration has the right (and duty) under the ICC Rules to scrutinize awards before they are issued, a provision such as this might cause the ICC to refuse to administer the arbitration. Champ v. Siegel Trading Co., 55 F.3d 269, 276-77 (7th Cir. 1995); Randolph v. Green Tree Financial Corp., 991 F. Supp. 1410, 1424 (M.D. Ala. 1997).

207

I.

Related Clauses (Sometimes Included in the Arbitration Clause) 1.

Notice

Under the New York and Panama Conventions, one of the few defenses to the enforcement of an award is the failure to receive proper notice of the appointment of an arbitrator or notice of the arbitration proceedings, or when a party is unable to present his case, perhaps because of a failure to receive notice of the hearing.208 It can prove very helpful in the event of an arbitration

proceeding to include in the contract a notice provision, which specifies the name or title of the person to be given notice in the event of a dispute and the address to which the notice is to be sent. If the notice provision is not included within the arbitration clause, it may be helpful for the arbitration clause to state that any notices to be given involving arbitration may be provided to the person at the address specified in the notice provision of the contract. A notice provision may prevent disputes over service issues (request for arbitration) and due process concerns (notice of the hearing). The issue of notice may arise when an award is given by default after a party fails to appear for the arbitration hearing.209 The government of Iran

often raised the lack of proper notice as a defense to claims brought against it after the 1979 revolution.210 2. Alternative Dispute Resolution (ADR) Procedures

Increasingly, parties are including provisions requiring the exhaustion of ADR procedures, including settlement negotiations or mediation, before arbitration proceedings may
208

New York Convention art. V(1)(b); Panama Convention art. 5(1)(b). Maritime Intl Nominees Establishment v. Republic of Guinea, 693 F.2d 1094, 1095, 1099 (D.C. Cir. 1983). Ulmer, supra note 97, at 1345.

209 210

be instituted. In fact, the terms med-arb (mediator acts as an arbitrator) and co-med-arb (one person acts as mediator and a different person acts as arbitrator) has come into common usage to describe a two-tiered procedure requiring mediation followed by arbitration.211 Some commentators have suggested arb-med or arb-con, in which the arbitrator may attempt settlement during the arbitration proceedings by acting as mediator or conciliator.212 Some

provisions require a three-tier dispute resolution procedure: a meeting of senior executives to negotiate (occasionally calling for formal presentations by counsel to senior executives of the parties), and if the negotiations are unsuccessful within a certain time period, then the party may initiate mediation. If the mediation is unsuccessful within a defined time framework, then an arbitration proceeding may be filed. So the parties do not get trapped in an endless series of negotiations or mediations, with one party claiming they have not concluded, it is important to set a deadline for each. Thus, if negotiation or mediation is a condition precedent to filing an arbitration proceeding, a time limit for satisfying the condition will allow the parties to move forward. Some large construction projects have adopted complex, multi-tiered ADR procedures for resolving disputes, often with binding arbitration as the procedure of last resort. For example, the Channel Tunnel project created a two-tiered procedure in which all disputes would be referred first to a panel of three independent experts who would render a written decision within

211

212

David Elliott, Med/arb: Fraught with Danger or Ripe with Opportunity, 62 Arbitration 175, 181-82 (1996). Alan Shilston, Arb-Med? Arb-Con is Preferable, 63 Arbitration 241, 242 (1997).

90 days, and if either party were dissatisfied with the experts decision, then it could initiate an arbitration proceeding.213 The Hong Kong Airport Core Programme promulgated a four-tiered ADR procedure:214 (1) an independent engineers decision, (2) mediation, (3) adjudication through a formal evidentiary proceeding with a written decision within 42 days, and (4) arbitration. Still other construction projects have included decisions from an authorized representative and a three-member Dispute Review Board as steps through which claims must proceed before an arbitration may be initiated.215 In construction projects in Hong Kong, a Dispute Resolution Adviser may be appointed to identify potential disputes at an early stage, advise on the means of resolving the disputes and assist in their resolution.216 Although decisions rendered in the prearbitral steps might ultimately be reversed by the arbitrators, many of these programs require the parties to comply with the preliminary rulings unless and until a different decision is issued. These various ADR procedures may, of course, be combined in different ways as part of a dispute resolution clause. Whatever procedures are desired, however, it should be remembered that in designing the procedure there is virtue in simplicity.
Anthony Connerty, The Role of ADR in the Resolution of International Disputes, 12 Arb. Intl 47, 49 (1997). Id. at 54. Id. at 52-53. Henry Tsin, Dispute Resolution Adviser System in Hong Kong Design & Development, 63 Arbitration 67, 68 (1997).

213

214

215

216

3.

Governing Law (a) Substantive Law

and Conflicts Rules It is generally desirable to specify in the contract the substantive law to govern the parties disputes. A party may wish to omit such a clause, however, when the opposing party is insistent on a national law that is clearly unacceptable to the first party. This may occur when a host government insists on its own law in an investment contract. As a practical matter, of course, the private party may have to accede to the host governments insistence, but it may prefer no governing law clause if it has a choice. A governing law clause may be viewed as selecting: (1) the conflicts rules to be followed to determine the substantive law, (2) the substantive law itself, (3) the procedural law, or (4) the law to determine the validity and effect of the arbitral clause (" lex arbitri ").217 Although a

specification of the governing law without excluding the conflicts rules may be held merely to select a country's conflicts rules, the modern tendency is to find that it actually designates the substantive law to be applied.218 Nevertheless, it is preferable to exclude the conflicts rules or to make it explicit that the chosen law is the substantive law of the country.219

217

218

Union of India v. McDonnell Douglas, (1993) 2 L.R. 48; Mozambique Buyer v. Netherlands Seller, Preliminary Award in ICC Case No. 5505 of 1987, in Collection of ICC Arbitral Awards 1986-1990 at 142, 146 (Kluwer 1994). EC Convention on the Law Applicable to Contractual Obligations (Rome Convention of 1980) art. 15; UNCITRAL Model Law on International Commercial Arbitration art. 28(1). Park, Arbitration of International Contract Disputes, supra note 64, at 1787.

219

(b) Procedural Law Generally, parties do not specify in an arbitral clause the procedural law to be applied to the arbitration proceeding.220 In the absence of a choice, arbitrators typically apply the procedural law of the place of the arbitration.221 Occasionally, parties may agree to a situs with an unusual procedural law. In that case, the parties may compromise by specifying a different procedural law.222 But parties must be careful in

doing so. Even if a procedural law other than that of the place of the arbitration is designated by the parties, the arbitrators will likely apply the mandatory rules of law of the place of the arbitration,223 which may result in conflicts with the designated procedural law, litigation over the resulting issues and enforceability problems. It is also possible, when a different procedural law is specified, that the countries of the situs and of the procedural law may both assert jurisdiction over the case.224 Applying a different countrys procedural law than that of the situs may also lead to complications over the place where proceedings to vacate the award may be instituted. For
220

Ulmer, supra note 97, at 1342-43. India Company v. Pakistani Bank, Award in ICC Case No. 1512 of 1971, in Collection of ICC Arbitral Awards 1974-1985 at 3 (Kluwer 1990); Italian Claimant v. Belgian Respondent, Award in ICC Case No. 2272 of 1975, in Collection of ICC Arbitral Awards 1974-1985 at 11-12 (Kluwer 1990). In one case, a clause read: Disputes hereunder shall be referred to arbitration, to be carried out by arbitrators named by the International Chamber of Commerce in Geneva in accordance with the arbitration procedure set forth in the Civil Code of Venezuela and in the Civil Code of France, with due regard for the law of the place of arbitration. Craig, Park & Paulsson, supra note 46, 9.04 at 163. In that clause, the procedural law to be followed was unclear, confused and potentially conflicting, which could lead to challenges to the award. Id. Klaus Lionnet, Should the Procedural Law Applicable to International Arbitration be Denationalised or Unified? the Answer of the UNCITRAL Model Law, 8 J. Intl Arb. 5, 7-8 (Sept. 1991). See Union of India v. McDonnell Douglas, (1993) 2 L.R. 48; National Thermal Power Corp. v. Singer Corp., (1992) 3 S.C.C. 551 (India), 18 Y.B. Com. Arb. 403, 413 (1993).

221

222

223

224

example, may an action to vacate the award be brought in the country whose procedural law is applied (even though it was not the situs of the arbitration) or in the country of the situs (even though its procedural law does not apply) or both?225 The options for the drafter in handling the procedural law may be listed as follows:226 (1) ignore the issue, which is the most common approach, in which case the arbitrators will decide which procedural law to apply; (2) designate the procedural law of the place of the arbitration; (3) specify the procedural law of a country other than that of the situs; (4) adopt a procedural law other than that of a country, such as the UNCITRAL Model Law on International Commercial Arbitration; or (5) exclude a procedural law and create the procedural rules in the arbitration clause itself. If options 3, 4 or 5 are adopted, the parties may wish to specify explicitly that any mandatory procedural rules of the situs will apply and take precedence, thereby avoiding any arguable conflict. (c) Lex Arbitri

Because the arbitration agreement stands as independent of, and separate from, the contract as a whole, its validity and effect may be subject to a law other than that of the contract as a whole.227 Generally, arbitration clauses do not include an explicit choice of the lex arbitri , perhaps because the parties assume the law of the contract will apply to this issue as well.228 But
225

See International Standard Elec. Corp. v. Bridas Sociedad Anonima Petrolera Industrial y Comercial, 745 F. Supp. 172, 176-78 (S.D.N.Y. 1990). See Craig, Park & Paulsson, supra note 46, 8.02 at 133-34. Id. 8.03 at 134. Id.

226

227

228

it is well established that parties may select a law to govern the validity and effect of the arbitration clause that is different from either the law of the situs or the law governing the main contract.229 In the absence of a choice by the parties, arbitrators generally attempt to apply a lex

arbitri that will validate the arbitration agreement. In doing so, arbitrators have reached differing results, at times applying the law specified in the governing law provision of the contract,230 the law of the situs231 or the law of the place of contract performance and award enforcement.232 (d) Denationalized Law Rather than selecting the law of a particular country, parties may sometimes prefer to designate denationalized law such as the principles of the law of civilized nations.234 lex mercatoria , 233 international law or general A variant of this practice is to provide that the

governing law will be the principles of a specified national law that are common to (or are not
Id. at 135. Italian Principal v. Belgium Distributor, Final Award in ICC Case No. 6379 of 1990, in Collection of ICC Arbitral Awards 1991-1995 at 134, 137 (Kluwer 1997). Liechtenstein Claimant v. Austrian Defendant, ICC Award No. 5832 of 1988, in Collection of ICC Arbitral Awards 1986-1990 at 533, 534 (Kluwer 1994). German Claimant v. Greek Respondent, Award in ICC Case No. 953 of 1956, in Collection of ICC Arbitral Awards 1974-1985 at 17 (Kluwer 1990). The existence of lex mercatoria the law of merchants as a subset of international law distinct from national law has been a subject of some controversy. See, e.g., Georges Delaume, Comparative Analysis as a Basis of Law in State Contracts: The Myth of the Lex Mercatoria, 63 Tul. L. Rev. 575, 576-77 (1989); Keith Highet, The Enigma of the Lex Mercatoria, 63 Tulane L. Rev. 613, 628 (1989). But see French Enterprise v. Yugoslav Subcontractor, Award in ICC Case No. 3540 of October 3, 1980, in Collection of ICC Arbitral Awards, 1974-1985 at 105, 106, 109-10 (Kluwer 1990) (applying lex mercatoria). Some commentators have sought to define the contents of both the lex mercatoria and general principles of law. See Lord Justice Mustill, The New Lex Mercatoria: The First Twenty-five Years, in Liber Amicorum for the Rt. Hon. Lord Wilberforce at 149 (1987); Comment, General Principles of Law in International Commercial Arbitration, 101 Harv. L. Rev. 1816 (1988).

229

230

231

232

233

234

inconsistent with) either international law or general principles of the law of civilized nations.235 If this procedure is adopted, the provision should also specify the law to be applied if there are no common principles.236 This type of clause provides a safeguard against the

application of unusual provisions of a host countrys law. Denationalized governing law clauses have been upheld by national courts.237 Both the ICC Rules and the AAA International Rules allow the arbitrators, in the absence of a choice of law by the parties, to apply such r8 ules of law as they deem appropriate.238 The term rules of law is used, instead of the word law, specifically to authorize arbitrators to apply denationalized law, rather than being restricted to applying only national law.239 (f) Placement of the Governing Law Provision

It has been sugested that the placement of the governing law provision in the contract inside or outside the arbitration clause may be significant in construing the provision.240 Since the procedural law and the lex arbitri may be different than the substantive law, placement of the governing law provision inside the arbitration clause might be interpreted as a choice of either
235

Libyan American Oil Co. v. Libya, 6 Y.B. Com. Arb. 89, 92 (1981); British Petroleum (Libya) Ltd. v. Libya, 5 Y.B. Com. Arb. 143, 149 (1980); Texaco Overseas Petroleum Co. v. Libya, 4 Y.B. Com. Arb. 177, 181 (1979). Texaco Overseas Petroleum Co. v. Libya, 4 Y.B. Com. Arb. 177, 181 (1979). See, e.g., Norsolor v. Pabalk Ticaret, Supreme Court of Austria, decision of 18 November 1982, cited in Park, Arbitration of International Contract Disputes, supra note 64, at 1787 n.7. ICC Rules art. 17(1); AAA International Rules art. 28(1). Marc Blessing, Choice of Substantive Law in International Arbitration, 14 J. Intl Arb. 39, 56-57 (June 1997). Yves Derains, The ICC Arbitral Process Part VIII: Choice of the Law Applicable to the Contract and International Arbitration, 6 ICC Intl Ct. Arb. Bull. 10, 11 (May 1995).

236

237

238

239 240

the procedural law or the

lex arbitri, and not of the substantive law. Thus, one commentator

has suggested the governing law provision should be placed outside the arbitral clause, as a separate clause of the contract.241 In one case, the contract provided in a separate clause that Syrian law applied, but the arbitration clause included a sentence that the arbitrators shall judge according to general principles of law and justice. The arbitrators rejected the argument that this sentence applied only to the procedural law or to the lex arbitri, deciding this was not the common intention of the parties.242 Instead, the panel harmonized this sentence with the governing law clause, applying Syrian law, but holding that the sentence in the arbitration clause limited Syrian law, protecting the private party both from future modifications of Syrian law and from exorbitant provisions of the law that could work only to its disadvantage.243 (f) Drafting Considerations

It is beyond cavil that the specific language employed in drafting the governing law clause may be significant. For example, providing that all disputes shall be governed by the law of _____ is not necessarily the same as a clause that provides this agreement shall be interpreted in accordance with the law of _______. At least two cases have restricted the latter clause by holding that the law selected applied only to issues of interpretation of the contract, while other issues would be resolved by law not specified in the contract.244 At least one other
241

Id. Italian Enterprise v. Syrian Enterprise, Award in ICC Case No. 3380 of November 29, 1980, in Collection of ICC Arbitral Awards 1974-1985 at 96, 98 (Kluwer 1990). Id. at 99. Mobil Oil Iran v. Iran, 16 Iran-U.S. C.T.R. 3, 24 (14 July 1987); Ultimate Buyer v. Intermediary Buyer/ Seller v. Primary Seller, Final Award in ICC Cases 7385 and 7402 of 1992, in Collection of ICC Arbitral Awards 1991-1995 at 209, 213 (Kluwer 1997).

242 243

244

case has noted that the term principles of law, as used in a governing law clause, does not rule out the application of principles of international law.245 Thus, the precise language used can

determine whether the law selected applies to most issues in dispute, or only to certain restricted issues.246 4. Equitable Principles

Rather than deciding a case strictly on the basis of applicable law, under some circumstances, an arbitral panel may rule based on equitable principles. Generally, the arbitrators must be

authorized to do so.247 This is usually accomplished by empowering the arbitrators either to act as amiable compositeurs or to decide the case ex aequo et bono. Some authorities imply there is no real difference between the authority to act as amiable compositeur and to decide the case ex aequo et bono.248 But some commentators have suggested the difference is that an amiable compositeur does not have to apply the law strictly, but must still comply with mandatory rules of law, while arbitrators with the authority to act ex aequo et

bono need not apply even mandatory legal principles, subject only to international public policy.249
Texaco Overseas Petroleum Co. v. Libya, 4 Y.B. Com. Arb. 177, 182 (1979). As one commentator has noted, the governing law clause does not apply to all possible issues in the case; for example, it does not apply to issues of capacity of a party, a signators authority to sign a document or the insolvency of a company. Derains, supra note 239, at 16. ICC Rules art. 17(3); AAA International Rules art. 28(3); LCIA Rules art. 22.4; UNCITRAL Rules art. 28(3). See Karyn Weinberg, Equity in International Arbitration: How Fair is Fair? A Study of Lex Mercatoria and Amiable Composition, 12 B.U. Intl L.J. 227, 231 n.26 (1994); Redfern & Hunter, supra note 64, at 38. Christine Lecuyer-Thieffry & Patrick Thieffry, Negotiating Settlement of Disputes Provisions in International Business Contracts: Recent Developments in Arbitration and Other Processes, 45 Bus. Law. 577, 592-93 n.75 (1990) (discussing Swiss law).

245

246

247

248

249

A different view claims that

ex aequo et bono means arbitrators have the authority to

decide the case on equitable principles, with the discretion to mitigate the consequences of a strict application of the law.250 According to the same author, there are two primary limits on decisions taken under this authority: (1) mandatory provisions of law must still be applied, and (2) the authority to mitigate the law applies only to substantive law, not procedural law, which must be applied.251 By contrast, amiable compositeurs are authorized by the parties to act as their agent to settle the dispute.252 This authority represents a joint mandate to settle, allowing the arbitrators to compromise the parties dispute. From this perspective, the concept of amiable compositeur is even broader than that of ex aequo et bono .253 Some contracts with governments have used their own language to permit arbitrators to decide disputes on equitable grounds: This Agreement shall be construed according to the principles of good faith and good will,254 and the arbitrators shall judge according to general principles of law and justice.255 Given the confusion, parties are well advised to avoid these expressions and to specify precisely what authority they are conveying on the arbitrators. The possibilities may be categorized as follows:
250

Mauro Rubino-Sammartano, Amiable Compositeur (Joint Mandate to Settle) and Ex Bono et Aequo (Discretional Authority to Mitigate Strict Law): Apparent Synonyms Revisited, 9 J. Intl. Arb. 5, 9-10 (March 1992). Id. at 13. Id. at 14-15. Id. at 16. Sapphire International Petroleums v. National Iranian Oil Co., 35 International Legal Reports 136 (1957). Italian Enterprise v. Syrian Enterprise, Award in ICC Case No. 3380 of Nov. 29, 1980, in Collection of ICC Arbitral Awards 1974-1985 at 96, 99 (Kluwer 1990).

251

252

253

254

255

(1) The arbitrators may decide the case based on principles of equity and good faith. (2) The arbitrators may decide the case based on principles of equity, but mandatory rules of law must be applied. (3) The arbitrators may decide the case based on principles of equity, and applicable law (including mandatory rules of law) need not be applied. (4) The arbitrators are authorized as the parties agent to settle the parties disputes, with the authority to impose a settlement equitable to the parties. 5. Waiver of Sovereign Immunity

The U.S. Foreign Sovereign Immunities Act (FSIA) provides that foreign governments and their agencies and instrumentalities are not immune from the jurisdiction of U.S. courts if they have explicitly or implicitly waived their sovereign immunity.256 The Act provides for an implicit

waiver if the sovereign has agreed to arbitrate disputes capable of settlement by arbitration under U.S. law and the arbitration takes place (or is intended to take place) in the United States.257 Despite this statute, U.S. courts construe the implied waiver provisions of the FSIA narrowly.258 Therefore, it is generally desirable when dealing with a foreign sovereign to include an explicit waiver of sovereign immunity in the contract, using language as broad and all-encompassing as possible. At a minimum, the clause should include a waiver of sovereign immunity from service of process, jurisdiction of courts (at least to the extent necessary to compel arbitration or enforce awards) and post-judgment execution or attachment of assets. A waiver of immunity from prejudgment attachment of assets, injunctive relief, the appointment of a receiver, the filing of a
256

lis

28 U.S.C. 1605(a)(1). Id. 1605(a)(6). See Maritime Intl Nominees v. Republic of Guinea, 505 F. Supp. 141, 143 (D.D.C. 1981).

257

pendens, or other interim measures, may also be desirable,259 but difficult to negotiate. It is also helpful to include an acknowledgement that the transaction is commercial in nature since the FSIA only applies to commercial activities.260 Of course, the waiver should be irrevocable. On the other side, a government may desire to limit its waiver to the subject matter of the arbitration, including the validity and interpretation of the arbitration clause, the arbitral procedure and the setting aside of the award.261 6. Expert Determination

In lieu of arbitration for all controversies, parties may desire to provide for an expert determination for certain types of disputes that require particular expertise. Historically, an expert determination typically involved a valuation, such as a certifier in construction contracts determining the amount of an interim payment to be made to a contractor.262 Today, expert

determinations may be used for a variety of decisions, for example, for valuations, technical decisions and situations in which there is a possibility of a deadlock among companies to a consortium agreement over management issues.263 In such situations, it may be necessary to

obtain a quick determination by an expert in the subject matter. The ICC has established a Centre for Expertise, which has promulgated rules for conducting an expert determination. The ICC Centre for Expertise may be designated by the
258

Shapiro v. Republic of Bolivia, 930 F.2d 1013, 1016 (2d Cir. 1991). Tatiana de Maekelt, Sovereign Immunity and Its Waiver, in International Contracts at 263-64 (Matthew Bender 1981). 28 U.S.C. 1605(a)(2). de Maekelt, supra note 258, at 237. Doug Jones, Is Expert Determination a Final and Binding Alternative?, 63 Arbitration 213, 213-14 (1997).

259

260

261

262

parties in their agreement to administer an expert determination, in which case the Centre will locate and appoint an expert with the appropriate qualifications for the dispute, unless the parties agree on the identity of the expert.264 Under the ICC Rules for Expertise, the expert may make findings, recommend measures for the performance of the contract or for safeguarding the subject matter and supervising the performance of contractual obligations.265 parties.266 The expert determination is not binding on the

The parties may, however, provide in their contract that the expert determination

will be binding on them, but it will be binding only as a contractual undertaking.267 An expert determination is not an arbitral award and is not enforceable under the New York or Panama Conventions. To enforce the determination, a party must sue on it, but one commentator has observed that courts will generally enforce it.268 The parties should be careful not to mix the concepts of arbitration and expert determination for the same category of disputes because the two involve different procedures and are enforced differently, and a confusion of the two may lead an arbitral institution to treat them either as an arbitration or as an expert determination when the parties intended the opposite result. It may also lead to litigation over the institution's interpretation or the enforceability of a resulting award or determination.
263

See id. at 214. ICC Rules for Expertise art. 5(2). Id. art. 8(1) Id. art. 8(3). Id.; Jones, supra note 261, at 221. Jone, supra note 261, at 221.

264

265

266

267

268

The parties should also take care in imposing deadlines. Strict time limits that are too brief may lead to the expiration of the experts authority before a report can be rendered. 269 7. Punitive & Consequential Damage Exclusion

Despite some state laws in the United States (e.g., New York) prohibiting arbitrators from awarding punitive damages,270 the U.S. Supreme Court has held that arbitral tribunals in the U.S. may award punitive damages unless they are forbidden to do so by the parties' agreement.271 In the aftermath of this ruling, the AAA International Rules were amended to include a section providing the parties are deemed by adopting the rules to have waived the right to punitive damages except when a statute requires that compensatory damages be increased in a specified manner.272 Historically, international arbitral panels have refused to award punitive damages.273 A few

arbitral panels of the Society of Maritime Arbitrators have recently awarded punitive damages, however, in the limited situation of a wrongful conversion of a cargo.274 The author has also recently seen clauses prohibiting an award of punitive damages, except when one party has been found to engage in delaying actions or dilatory tactics. Such a clause must be taken to mean that punitive damages are authorized when the legal basis for punitive damages are proved
269

It is recommended that any deadline provide no less than 60 days for the expert to issue a determination from the date of his appointment. Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 386 N.Y.S.2d 831, 353 N.E.2d 793 (1976). Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 58, 60-61 (1995). AAA International Rules art. 28(5). John Gotanda, Supplemental Damages in Private International Law 6.4 at 226 (Kluwer 1998). Id. at 228-29.

270

271

272

273

274

and delaying tactics are present since delaying tactics alone cannot constitute a sufficient basis for an award of punitive damages. Because of the Mastrobuono case, parties may wish to include a provision expressly prohibiting an award of punitive damages. This may be particularly appropriate when U.S. parties are involved or when U.S. law governs the contract. Similarly, parties may wish to prohibit the arbitrators from awarding consequential or incidental damages. 8. Costs and Attorneys' Fees

It is often useful to provide how costs and attorneys fees are to be apportioned. The rules of the major institutions authorize arbitrators to award costs against one of the parties or to allocate the costs between the parties.275 The rules generally define the costs to include: (1) the arbitrators fees, (2) the arbitrators expenses, (3) administrative fees, (4) fees of experts appointed by the tribunal, (5) expenses of experts appointed by the tribunal; and (6) reasonable legal fees of a party.276 In addition, the ICC Rules allow other costs to be taxed against a party.277 The

AAA International Rules also allow an award of costs connected with an application for interim relief.278 The LCIA Rules do not define the costs, providing merely that all or part of the legal or other costs incurred by one party may be allocated to the other, unless

275

276

ICC Rules art. 31(3); AAA International Rules art. 31; LCIA Rules art. 28.2. ICC Rules art. 31(1); AAA International Rules art. 31. ICC Rules art. 31(1). AAA International Rules art. 31.

277

278

otherwise agreed.279 The rationale for allocating costs is also spelled out in the LCIA Rules: costs should reflect the parties relative success and failure in the award or arbitration.280 In the United States, arbitrators are often reluctant to award attorneys' fees because under the American Rule, courts may not grant attorneys' fees absent statutory or contract authority.281 In England and on much of the European Continent, national laws allow an award of attorneys' fees to the prevailing party on the theory that costs follow the event.282 arbitrators are more accustomed to granting attorneys' fees. If the parties desire the arbitrators to have the authority either to award, or not to award, costs and attorneys' fees, they may wish to grant or deny that power to the arbitrators explicitly. Generally, arbitral tribunals will enforce an arbitral clause authorizing an award of costs and attorneys fees.283 9. Interest Therefore, European

It is a generally-accepted legal principle that interest may be awarded in conjunction with a damage award.284 In the U.S., there is virtually a presumption in favor of awarding pre-

279

LCIA Rules art. 28.3. Id. art. 28.4. Gotanda, supra note 272, 5.4(2). Id. 5.4(1)(a)&(b) at 147-49. Deutsche Schachtbau-und Tiefbohrgesellschaft mbH v. Government of the State of Ras Al Khaimah, 14 Y.B. Com. Arb. 111, 121-22 (1989) (panel enforced a provision that all costs including solicitors fees will be borne by the defaulting party). Gotanda, supra note 272, 2.1 at 12. Both the Principles of International Commercial Contracts, drafted by the International Institute for the Unification of Private Law (UNIDROIT Principles), and the U.N. Convention on Contracts for the International Sale of Goods, authorize an award of interest. Id. 2.4 at 4043.

280

281

282

283

284

judgment interest on arbitral awards.285 Some countries, however particularly in the Middle East prohibit an award of interest.286 One commentator has even opined that the mere

mention of interest may result in the invalidation of the arbitration award or even the arbitration clause in some Middle Eastern countries, like Saudi Arabia.287 There are three issues that arise with respect to an award of interest: (1) whether interest may be awarded, (2) the date from which interest accrues and (3) the rate of interest to be awarded.288 Although some tribunals have awarded interest on the basis of general principles of law289 or principles of reasonableness and fairness,290 if the parties want an award to bear interest, they should expressly authorize it in their agreement,291 especially since some tribunals have refused to award interest.292 Arbitrators generally enforce clauses authorizing an award of interest.293 Interest may be an important part of any award, particularly if there is a significant delay between the event giving rise to the claim and the arbitration award.294
285

In re Waterside Ocean Navigation Co., 737 F.2d 150, 153-54 (2d Cir. 1984). Gotanda, supra note 272, 2.3(6) at 34. Bond, supra note 1, at 14. But see Gotanda, supra note 271, 2.3(6) at 36 n.118 (In Saudi Arabia . . . banks charge commission or administrative costs for what some argue amounts to interest.). Gotanda, supra note 272, 2.1 at 12. See id. 2.5(1)(c) at 50. Id. 2.5(1)(d) at 51. Ulmer, supra note 97 at 1347. Gotanda, supra note 272, 2.5(2) at 53. Id. 2.5(1)(a) at 45. Id. 2.1 at 11, citing KCA Drilling, Ltd. v. Sonatrach, ICC Case No. 5651 (awarding $23 million in damages and $26 million in interest).

286

287

288

289

290

291

292

293

294

The parties may also wish to specify the date from which interest accrues. The agreement may provide that a contract breach will occur if a party does not comply with its obligations by a certain date, in which event interest will run from that date.295 If no such date is specified,

many countries laws provide that interest will accrue from the date of a demand for performance.296 With respect to the rate of interest, parties may leave it to the arbitrators discretion, specify it at a set rate, such as the maximum legal rate provided by the law of a given jurisdiction, or base it on a benchmark like the London Inter-Bank Offering Rate (LIBOR) or the prime rate of a named bank.297 The parties may also provide that only simple interest may be awarded or they may authorize compound interest. Generally, tribunals award simple interest, but a few have rendered awards including compound interest.298 Finally, parties should know that if they do not address the question of interest, the arbitrators may struggle because of the lack of concensus as to whether the authority to award interest is a matter of substantive or procedural law.299 Some nations consider the question of interest to be a matter of substantive law, while others consider it procedural, and still others deem the authority to award interest as substantive, but the date of accrual and the rate to be procedural.300 The parties may avoid disputes over these questions by resolving them in their agreement.
295

Gotanda, supra note 272, 2.1 at 12. Id. Ulmer, supra note 97, at 1347. Gotanda, supra note 272, 2.5(1)(d) at 53. Id. 2.5(1)(b) at 48. Id.

296

297

298

299

300

10.

Currency of the Award

When damages may be specified in different currencies, there are three issues that may arise: (1) the currency in which the award should be stated, (2) the date for converting from the currency in which damages are calculated into the currency in which the award is rendered (in situations in which such a conversion is necessary) and (3) the exchange rate that should be used for the conversion, when necessary.301 The dates that may be selected for conversion include: (1) the date of the breach of the contract, (2) the date of issuance of the award or (3) the date on which the award is ordered to be paid.302 The most common dates are the breach date and the award date.303 With respect to the exchange rate, there are also three possibilities that have been used by arbitral tribunals: (1) the official rate, (2) the market rate and (3) the published rate.304 The published rates used include those found in the New York Times, the Wall Street Journal and the International Financial Statistics of the International Monetary Fund.305 Instead of leaving the decision entirely to the arbitrators, the parties may decide these issues in the contract. In fact, an award may be easier to enforce if the arbitrators are required to state it in a single, specified currency.306 U.S. dollars are especially popular for this purpose because the exchange rate is easily ascertainable, institutions like the ICC calculate costs in this
301

Id., 4.1 at 95, & 4.4 at 127. Id. 4.1 at 94. Id. 4.4 at 127. Id. 4.4(3) at 140. Id. at 140-41.

302

303

304

305

currency and many parties assets are denominated in U.S. dollars, thus reducing the risks of currency fluctuations.307 J. Special Drafting Considerations for ICSID Arbitration

One advantage of ICSID arbitration lies in the ICSID Convention,308 which supports the ICSID Arbitration Rules. Under the Convention, a government party is required to recognize an ICSID award as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State.309 An ICSID award may only be appealed by means of the procedure provided in the ICSID Convention.310 Unlike any other arbitral institutions, ICSID imposes jurisdictional requirements that must be met in order to arbitrate before ICSID. Thus, counsel must take special care in drafting an ICSID arbitral clause. The jurisdictional requirements for ICSID may be summarized as follows: 1. The arbitration must involve an investment dispute. 2. One of the parties to the dispute must be a State which is a party to the ICSID Convention ("Contracting State") or a constituent subdivision or agency of a Contracting State. For a State's subdivision or agency, the State must designate the subdivision or agency to ICSID as an entity authorized to arbitrate under the auspices of ICSID.

306

Ulmer, supra note 97, at 1345-46. See ACLI, Ltd. (A.C. Israel/Woodhouse Co., Ltd.) v. Cominco, Ltd., (1985) 61 BCLR 177, 62 BCLR Xli (note) (arbitrator may make award in the currency referred to in the contract). Id. at 1346. Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, done Mar. 18, 1965, 17 U.S.T. 1270, T.I.A.S. No. 6090, 475 U.N.T.S. 195 (ICSID Convention). ICSID Convention art. 54(1). See Societe L.T.D. Benvenutti et Bonfant v. Government of the Peoples Republic of the Congo, 26 June 1981 (Cour dAppel de Paris, 1st chambre supp.), 7 Y.B. Com. Arb. 159, 160-61 (1982). ICSID Convention art. 52.

307

308 309

310

3.

The other party must be a private party that is a national of another Contracting State. Nationality is determined as of the date of consent to ICSID arbitration, which may occur when a contract containing an ICSID arbitration clause is signed. If the private party is a company locally incorporated in the host country, it may still qualify as a national of another Contracting State for jurisdictional purposes of ICSID if the parties agree, explicitly or implicitly, to treat it as a national of another Contracting State and if it is, in fact, foreign controlled.311 The Contracting State involved in the dispute must consent in writing to ICSID jurisdiction. Consent may be given in the parties' contract, in a nation's internal law,312 in a bilateral oil and gas,313 or in a multilateral treaty, such as the North American Free Trade Agreement (NAFTA).

4.

In drafting the ICSID arbitration clause, counsel should take these jurisdictional requirements into account, and make sure the parties comply in the agreement, or otherwise, with each. Because of the jurisdictional requirements of ICSID, it is wise to provide in the arbitration clause for a back-up institution to administer the arbitration in the event ICSID jurisdiction fails.

THE GUARANTEE OF DUE PROCESS

This chapter will examine the guarantee of due process and the prohibition against denial of justice as elements of an emerging standard of state responsibility in oil and gas law. The chapter will begin with highlighting the shift from due process as a condition of lawful expropriation to due process as one of the criteria for establishing the existence of

expropriation. It will then focus on the growing role of due process as a key element in establishing a breach of non-expropriatory standards of treatment, including the FET standard. The second part of this chapter will explore the oil and gas protection against denial of justice and the local remedies rule. Along with analysing the scope of judicial expropriation and its relationship with the prohibition of denial of justice, attention will be drawn to a recently emerged standard obliging a host state to ensure that investors have access to effective means of asserting claims. Arbitral practice also shows that despite its general decline, the expropriation standard can controversially be given a new lease of life in cases where procedural barriers limit the investors ability to invoke other standards of treatment. As the return of the local remedies requirement in investment arbitration has revealed the ramifications of multiple and overlapping treaty provisions, it will be argued that a unified concept of an oil and gas breach offers a means of eliminating the peril of further fragmentation and inconsistency in interpreting core investment protections. 1. Due process as a condition of legality of governmental conduct

International investment treaties frequently provide that foreign investments shall not be expropriated except where such expropriation is non-discriminatory, carried out under 160 due

process of law regarded

and accompanied by compensation.1 Due process has therefore been

as one of the conduct requirements that must be satisfied for an expropriation to be lawful.2 There is support for the view that a host states duty to ensure due process in carrying out expropriation implies the availability of judicial review so that an independent host state tribunal can assess the amount of compensation due to a foreign investor for the expropriated investment.3 For instance, the 2005 AfghanistanGermany BIT requires that the legality of expropriation, nationalisation or comparable measure and the amount of compensation shall be subject to review by due process of law.4 Early US BITs also provided for an investors

1 See, for example, Article 6(1)(d) of the Treaty Between the Government of the United States and the Government of the Republic of Rwanda Concerning the Encouragement and Reciprocal Protection of Investment (signed on 19 February 2008); also Article 13 (1) (c) of the Energy Charter Treaty signed 17 December 1994, entered into force 16 April 1998) 2080 UNTS 100. See also the award in Goetz v Burundi (2000) 15 ICSID ReviewFILJ 457. In this case, in a language somewhat similar to that of due process, the 1989 BIT between the Belgium-Luxembourg Economic Union and Burundi provided that measures expropriating or restricting property could be adopted only if certain conditions were satisfied, including the requirement of measures being adopted according to legal procedures. (Ibid, para 124). According to the tribunal, this condition implied that the international legality of the measure depended on its legality under international law (ibid, para 127). See CF Dugan and others, Investor-State Arbitration (OUP, Oxford 2008) 447-8. See also Chinese investment treaties which commonly include a requirement that to be a lawful an expropriation must be made in accordance with the domestic legal procedure (N Gallagher and W Shan, Chinese Investment Treaties: Policies and Practice (OUP, Oxford 2009) 279). 2 See P Muchlinski, Multinational Enterprises & the Law (OUP, Oxford 2007) 596; A Reinisch, Legality of Expropriations in A Reinisch, Standards of Investment Protection (OUP, Oxford 2008) 171; A Sheppard, The Distinction between Lawful and Unlawful Expropriation in C Ribeiro, Investment Arbitration and the Energy Charter Treaty (JurisNet, Huntington NY 2006) 170; JW Salacuse, The Law of Investment Treaties (OUP, Oxford 2010) 322. The compliance by a host state with due process and the ensuing lawfulness of expropriation may be decisive at the remedial stage, i.e. in determination of amounts payable to a foreign investor. See ADC Affiliate Ltd and ADC& ADMC Management Ltd v Hungary , Final Award on Jurisdiction, Merits and Damages, 27 September 2006 (ICSID Case No ARB/03/16) paras 483-499; Siemens AG v Argentina , Award and Separate Opinion, 6 February 2007 (ICSID Case No ARB/02/8) paras 273, 349-352 (holding that unlawful expropriation would require restitution comprising of the value of the enterprise at of the date of expropriation plus consequential damages); Reinish (ibid 199-203). 3 UNCTAD, Taking of Property (United Nations, New York and Geneva 2000) 15-6, 32; A Newcombe and L Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International, Alphen aan den Rijn 2009) 366. 4 See Article 4(2) Afghanistan-Germany BIT (2005), also A Reinisch, Standards of Investment Protection (OUP, Oxford 2008) 192-3. See also ADC v Hungary (n 2) para 435, holding that due process of law, in the expropriation context, demands an actual and substantive legal procedure for a foreign investor to raise its claims against the depriving actions already taken or about to be taken against it. Some basic legal mechanisms, such as reasonable advance notice, a fair hearing and an unbiased and impartial adjudicator to assess the actions in dispute, are expected to be readily available and accessible to the investor to make such legal procedure meaningful. For a similar view, see Siemens v Argentina (n 2) para 261.

161

right to judicial review of an act of expropriation.5 It is, however, evident that limiting due process to a post facto assessment of an act of expropriation becomes problematic in a situation where the host state interference with

foreign investment is indirect and hence not accompanied by a formal expropriation decree. It is a distinctive feature of indirect expropriation that no provision is normally made for compensation.6 In this context, confining due process to judicial review of the compensation provisions would deprive the rule of any meaningful content. It is not surprising that outside the realm of traditional expropriation the requirement of due process acquires a different meaning. There is an emerging trend whereby due process is regarded as one of the conditions for establishing the existence of an expropriation, as opposed to determining the legality of an expropriation that has already been found. As summarised in Methanex v United States , a

non-discriminatory regulation for a public purpose, which is enacted in accordance with due processis not deemed expropriatory and compensable.7 The requirement of due process

thus becomes a part of the conduct-based determination of whether a governmental regulation amounts to an expropriation. The reliance on the due process standard in determining the existence of expropriation is not a recent development. In Middle East Cement Shipping and Handling Co v Egypt , the
UNCTAD (n 3) 32. See, for example, Article III (2) of the 1992 United StatesBulgaria BIT: A national or company of either Party that asserts that all or part of its investment has been expropriated shall have a right to prompt review by the appropriate judicial or administrative authorities of the other Party to determine whether any such expropriation has occurred and, if so, whether such expropriation, and any compensation therefore, conforms to the principles of international law. 6 The absence of an expropriatory decree, but the presence of an expropriatory consequence, defines a generic indirect expropriation. (WM Reisman and RD Sloane, Indirect Expropriation and Its Valuation in the BIT Generation (2004) 74 British Ybk Intl L 115, 130). 7 Methanex Corporation v United States, Final Award on Jurisdiction and Merits, 3 August 2005 (Ad hoc UNCITRAL Arbitration Rules) (2005) 44 ILM 1345, Part IV Chapter D, para7. See also J Paulsson, Indirect Expropriation: Is the Right to Regulate at Risk? Symposium co-organised by ICSID, OECD, and UNCTAD, 12 December 2005, Paris, available at <http://www.oecd.org/dataoecd/5/52/36055332.pdf> accessed 21 June 2010 (the author noting that to escape liability under international law, a regulatory act must be consistent with due process).
5

162

tribunal addressed a claim of expropriation under the Greece-Egypt BIT.8 The investors business consisted of importing, storing and dispatching cement. Due to the adoption of a ministerial decree prohibiting the import of all kinds of Portland cement and the subsequent attachment and auctioning of a ship belonging to the investor, the latter was prevented from continuing its business. Along with a claim of de facto revocation of its licence, the investor contended that the seizure and auction of its ship by the port authorities was illegal and constituted an expropriation.9 The tribunal pointed out that while normally a seizure and auction ordered by the national courts do not qualify as a taking, they can be a measure the effects of which would be tantamount to expropriation if they are not taken under due process of law.10 The tribunal held that a matter as important as the seizure and auctioning of the ship ought to have been directly notified to the investor, and, in the absence of such notification, the procedure applied did not meet the requirements of the applicable provisions of the BIT.11 It concluded that the ship was taken by a measure the effect of which would be tantamount to expropriation and the investor was entitled to compensation as prescribed under relevant provisions of the BIT.12 In Amco v Republic of Indonesia , the determination of the states liability to the investor was almost exclusively based on a violation of due process. The case concerned the seizure of the investors management and a revocation of the investors licence to operate. In considering the issue of the lawfulness of the withdrawal of Amcos licence, the tribunal addressed separately the procedural and substantive grounds for justifying the revocation

8 Middle East Cement Shipping and Handling Co Sa v Arab Republic of Egypt, Award, 12 April 2002 (ICSID Case No ARB/99/6) (2003) 18 ICSID Rev- FILJ 602. 9 Ibid, paras131-132. 10 Ibid, para139. Ibid para 143. Ibid para 144.

163

decision.13The tribunal emphasised the need to satisfy procedural prerequisites as set by the applicable law and which are to be in accord with the fundamental principle of due process, which are to assure to any person or entity whose rights are affected by a revocation the right to discuss the grievances alleged against him and to defend himself14 After having analysed the applicable investment law, the tribunal concluded that in order to comply with due process, any sanction for an investors failure to fulfill its investment It held that the purpose and function of obligations should have been preceded by a warning.15 the warnings was to give the addressee of the warnings the opportunity to remedy the failures (if any) mentioned therein; and even in cases where such remedy could not be offered or made, in fact or in law , to give him the opportunity to discuss the administrations grievances and to defend himself against the same.16 The tribunal found that in the case before it such warnings had not been made, thus depriving the investor of due process contrary to Indonesian law as well as general principles of law. Furthermore, the manner in which the revocation was prepared, namely the absence of a proper investigation infringed due process.17 While the award was subsequently annulled, the second tribunal confirmed the finding of a due process violation in the revocation of the licence. In the tribunals view, the whole approach to the issue of revocation of the licence was tainted by bad faith.18 This generally tainted background constituted a denial of justice, effectively depriving Amco of its contractual rights.19

Amco v Indonesia, Award, 20 November 1984 (ICSID Case No. ARB/81/1) 1 ICSID Reports, para 192. Ibid. The tribunal held that such requirement was not only established in Indonesian law, but also formed part of general principles of law (ibid para 198). 16 Ibid para 198. Ibid paras 199-201. Amco Asia Corporation and others v. Republic of Indonesia, Resubmitted Case, Award, 31 May 1990 (ICSID Case No. ARB/81/1) para 98. 19 Ibid paras 174-8.
13

CHAPTER IV: ARBITRATION UNDER COMMON LAW Introduction The verdict of the county court was predictable. Caught driving without a license or proof of insurance, Sherry Scotka received a $350 fine from the Kerr County, Texas, court for each offense. But Scotka, during the stultifying summer of 1993, was anything but predictable. Acting as her own lawyer, she appealed the county court's decision, requesting that the Texas Appeals Court transfer her case to the "Common Law Court of the United States of America." Her argument? That as a "sovereign citizen" she was outside the jurisdiction of Texas law or Texas courts. The appeals court did not look upon her request with favor, noting that she could not even show that the "Common Law Court of the United States of America" existed (1). This was not the first time that the Court of Appeals had faced this sort of peculiar argument. From the Texas hill country had come a rash of such claims in the past several years, all from strangely similar cases: traffic violations, foreclosures, frivolous suits. Brought to court, the defendants, usually operating pro se-that is, defending themselves--would demand that the case in question be removed to the "Common Law Court for the Republic of Texas." Finally, in 1992, the Appeals Court noted officially that there was no such thing. "We hold," said the court, "that the Common Law Court for the Republic of Texas, if it ever existed, has ceased to exist since February 16, 1846" --in other words, when Texas state government was organized. It was then that the defendant changed the transfer reference in her pleading to the "Common Law Court of the United States of America," although interestingly the address on the legal documents remained the same (2). What the Texas appeals court was just beginning to perceive were the beginnings of a movement created by recalcitrant self-proclaimed "sovereign citizens" determined to wrest control of their lives back from all forms of government or authority. Appearing first in isolated spots in Texas and Florida, the notion of "common law courts" soon spread to Kansas and other farm states, then quickly across the nation. The "common law court movement," as it has somewhat clumsily come to be called, now exists in some form in every state in the country. In some states, activity is minimal; in others common law courts are a serious nuisance; in some, they are a plague on the judicial system. Although featured on television shows like "20/20," common law courts did not really breach the public consciousness until the spring of 1996, when FBI agents surrounded a frigid eastern Montana farm to wait out two dozen recalcitrant tax protesters that locals dubbed "freemen." In reality, however, common law adherents had been active for years in different areas across the country. Frustrated county clerks knew of the strange filings made in their offices; puzzled policemen encountered confrontational motorists pulled over for homemade license plates; irritated lawyers discovered that bogus liens had been placed on their property by court opponents. But there was little public awareness or understanding of the movement. The media reported that Oklahoma City bombing suspect Terry Nichols had declared himself a "sovereign citizen," but treated it as a random, bizarre act by a right-wing extremist, not as an action by someone consciously part of an ideological movement.

Few people knew then that these activities were not just isolated phenomena. Fewer still, even today, understand that they are not just part of some movement, but that this movement has a much longer and more active history than most people ever suspected. The "common law court," so called, can be traced back nearly two decades as a form of right-wing social protest, with roots stretching back still farther. What common law court activists do and say today often seems strange and incomprehensible to the average person, but their deeds and words possess a coherent internal logic and are part of a very conscious overall ideology. Understanding the origins of common law courts and why their members act the way they do will increase our understanding of them and assist in developing strategies to combat them effectively. That is the purpose of this overview.

The Posse Comitatus The common law courts and sovereign citizens are the direct ideological descendants of the Posse Comitatus; any attempt to understand the common law courts must start with the this group. The Posse, though, is not necessarily an easy entity to understand. On one level, the Posse was a right-wing extremist organization with a more or less definable beginning. In 1969 a retired dry cleaner named Henry "Mike" Beach (a former member of the 1930s pro-Nazi group, the Silver Shirts) formed the a group called the Sheriff's Posse Comitatus. In California, William Potter Gale started a similar organization, the United States Christian Posse Association, around the same time. From these beginnings, branches formed in other areas of the country, numbering around 80 or so by the mid-1970s. The farm crisis of the early 1980s, for reasons which will be explained below, caused membership to rise greatly, particularly in the plains states. From the start, the Posse caused problems for local, state and federal authorities. As early as 1974, Thomas Stockheimer, head of the Posse in Wisconsin, was convicted on charges of assaulting an Internal Revenue Service agent. Indeed, the normally placid state of Wisconsin became a hotbed of Posse activity, due to leaders Stockheimer, James Wickstrom and Donald Minniecheskie. In northeastern Wisconsin, Wickstrom--who styled himself the "national director of counterinsurgency" of the Posse and liked to conduct paramilitary training--established the "Constitutional Township of Tigerton Dells," a "township" that consisted of a compound of trailers on a farm lot. From there Wickstrom waged a war against local authorities that resulted, in the mid-1980s, in the eventual destruction of the "township" and Wickstrom's arrest (one of many). In other states as well, most notably Kansas, Posse members repeatedly clashed--with resulting deaths and injuries--with local authorities. It was, however, Gordon Kahl of North Dakota who achieved the most notoriety and became the Posse's first real martyr. Kahl was a virulent racist and tax protester who traveled to farm protest meetings across the country's midsection to win converts to the Posse cause. In 1983 four U.S. marshals and two local law enforcement officers set up a roadblock to arrest Kahl for violating the terms of his probation. A shootout ensued which resulted in the death of two of the marshals and the wounding of two others. Also wounded was Kahl's twenty-year-old son. When Kahl fled the state, a

nationwide manhunt--and nationwide publicity--began. Months later, Kahl was tracked down in Arkansas, where he died during another gunfight in which a county sheriff was killed. Eventually, though, the Posse declined as an effective organization, largely through loss of leadership. Faced with repeated imprisonments, some leaders such as James Wickstrom scaled back their activities. Other leaders, such as Henry Beach and William Potter Gale, died natural deaths, the latter while appealing a conviction for threatening IRS agents. Still others, like Kahl, died violently. The result was that by the late 1980s the Posse was floundering. Always locally based, pockets of the Posse continued to survive here and there, but it was no longer a force (3). As an organized right-wing group, the Posse did not really survive. But the Posse had never been simply an organization--indeed, it was hardly ever well-organized. The Posse Comitatus was much more durable as an ideology. Thousands, perhaps tens of thousands, of people who never formally belonged to any Posse group nevertheless subscribed to Posse ideology. The belief system survived even as the group faded. The Posse ideology, and the justifications that result from it, are complex, but stripped of racist overtones, there are three main tenets to Posse ideology that are crucial to understanding how the Posse mindset works. In order of increasing importance, these tenets are 1) the importance of local control, 2) the need to avoid legal and financial authority, and 3) justifications derived from the revelation of "hidden history."

The Importance of Local Control The importance of local control to adherents of Posse ideology was the simplest and most visible feature of their philosophy. Indeed, the term "posse comitatus" itself is a Latin phrase that means "power of the county." Accordingly, Posse teachings argued that the county government was the highest authority of government in the country, a belief sometimes misreported as the county being the only form of legitimate authority. Actually, the Posse recognized the other levels of government, but contended that federal or state officials had to bow before the power of the county sheriff (4).

Avoiding Legal Authority Because of the emphasis given by Posse members to the county sheriff, many journalists well into the 1980s persisted in calling the Posse Comitatus a "law-and-order" group. But nothing was further from the truth. The Posses motivation was essentially the exact opposite of law and order. The Posse wanted to be free of all obligations to laws its members didnt like, and to be free of financial obligations as well. Its entire ideology was specifically designed to achieve this. For instance, their emphasis on the importance of the county sheriff was not intended to support greater "law and order." The Posse argued that it was the sheriff's responsibility "to protect the people of his County from unlawful acts on the part of anyone, including officials of government...whether these be judges of courts or Federal or State Agents of any kind whatsoever." In other words, the local sheriff's duty was to shield the citizenry from the interference of federal, state and local government. If the sheriff

neglected this duty, the people had "the lawful right under natural law to act in the name of the Sheriff to protect local jurisdiction." They could arrest people and hold them "for trial by a citizen jury empaneled by the Sheriff from citizens of the local jurisdiction, instead of by the Courts as is the current procedure in most Counties and which has no basis under law, any act of any legislature or directives issued by the judiciary or Executive notwithstanding." Especially important to the Posse was that sheriffs not be used to enforce court rulings: "The unlawful use of County Sheriffs as LACKEYS of the Courts should be discontinued at once...The Sheriff is accountable and responsible only to the citizens who are the inhabitants of his County." Indeed, the Posse offered a thinly-veiled threat to sheriffs and others who did not accommodate the will of local citizens: "In some instances of record the law provides for the following prosecution of officials of government who commit criminal acts or who violate their Oath of Office: He shall be removed by the Posse to the most populated intersection of streets in the township and at high noon be hung by the neck, the body remaining until sundown as an example to those who would subvert the law." Many Posse members proudly wore a pin shaped as a hangman's noose as a symbol of their membership (5).

"Hidden History" as Justification The third defining characteristic of Posse ideology is the peculiar method by which Posse members justified their positions. They did this through an emphasis--some would say obsession--on "hidden history." In other words, they believed that the true history of the United States--and thus the true laws, the true obligations of citizens, the true government--had been hidden from the American citizen by a massive, long-lasting conspiracy. Indeed, the Posses handbook noted that "the rule for the Judiciary, both State and Federal, has been subtle subversion of the Constitution of these United States. The subversion and contempt for the Constitution by the Judiciary is joined by the Executive and Legislative branches of government. It is apparent that the Judiciary has attempted to alter our form of Government. By unlawful administrative acts and procedures, they have attempted to establish a Dictatorship of the Courts over the citizens of this Republic. The legal profession has, with few exceptions, conspired with the Judiciary for this purpose." (6) Later Posse leaders would develop this simple beginning into a complex tale of conspiracy and cover-up, over a period of over a hundred years, designed to subvert liberty. Given this notion, that the true laws of the United States had been covered up by conspiring legislators, judges and lawyers, Posse adherents seek to uncover the hidden history that has been deprived them. They do this through searching through law books and legal codes, the writings of the founders and early legal scholars, the Uniform Commercial Code, the Bible, and other documents. "People say were creating our own laws," said Montana Freeman Russell Landers, "Were not creating anything. Its right there in the law already." Indeed, practically any document can become fodder for a Posse governmental theory. There is no end to what a creative Posse mind can come up with (7).

One example is the "Missing Thirteenth Amendment," popularized by Texas activist Alfred Adask. Posse adherents discovered a draft Constitutional amendment from the republic's early days, one that would deny citizenship to Americans accepting titles of nobility. This was one of many amendments which failed because not enough states ratified it. But Posse adherents decided not only that it had been ratified, but that its ratification had been covered up by a conspiracy. Their erroneous beliefs were bolstered by discovering some old printed copies of the Constitution which listed the draft amendment along with other, actually ratified amendments. Posse "scholars" combed through state archives, looking for votes on ratification, or hints of cover-up, and concluded, not surprisingly, that there had indeed been a cover-up. Why did the Posse spend all this energy? Because of the way that they interpreted the meaning of the amendment. To the Posse, all lawyers had "titles of nobility," because they put the term "esquire" after their names. Therefore, lawyers were not legally citizens of the United States--but they had engaged to cover up the Thirteenth Amendment, which would have taken away so much of their power. Another example of Posse creativity was the Committee of the States, the brainchild of Posse leader William Potter Gale in the 1980s. Gale argued that the Articles of Confederation, the document that governed the United States before the Constitution was ratified, had never been officially repealed and remained in force. Gale then pointed to a clause in the Articles which said that Congress could appoint a committee that would handle the general affairs of the United States when Congress was not in session (under the Articles, there was no executive branch). Gale interpreted this to mean that the Committee of the States was a second Congress, with full and equal powers--he promptly arranged for a (self-appointed) Committee to come into being. These different facets of Posse Comitatus ideology shaped the evolution of the movement in the 1970s and 1980s. The Posse absorbed much of the tax protest movement, whose natural inclinations were very similar: to avoid the obligation to pay income taxes, and to use "hidden history" as a means, including re-interpreting obscure or out-of-context parts of the tax code and finding novel ways of declaring that the 16th Amendment had never been legitimately ratified. Another, more important, association made by the Posse during this time period was the development of close ties with the anti-Semitic religious sect Christian Identity. Christian Identity, whose members believe that Jews are descended from Satan, was small in number but disproportionately influential in the far right. From the very beginning, Posse ideology was attractive to Christian Identity leaders (and vice versa). For Posse adherents looking for the "true law" that conspirators had erased, Christian Identity advocates pointed to the Bible, saying that the Constitution was divinely inspired. For Posse adherents looking for the source of conspiracy, Christian Identity could point to Jews or "international bankers" as the culprits. Identity theology and Posse ideology complemented each other. William Potter Gale, one of the founders of the Posse, was also one of the most prominent Christian Identity ministers. James Wickstrom, the most visible Posse leader, was likewise an influential Identity figure. Although Posse ideology could always be utilized without a racist component, for many, Posse and Identity beliefs went hand in hand. The development of the Posse ideology also helps to explain its first rise to prominence during the farm crisis of the early 1980s, when inflation, falling land values, rising interest rates, and poor lending practices combined to create a financial crisis that threatened to overwhelm farmers of little or moderate means. The Posse offered a culprit--the international (Jewish) banking conspiracy which had destroyed the Constitutional/Biblical monetary system and replaced it with one based on credit

designed to suck people dry. The Posse also offered a solution: its version of the common law. In February 1981 Missouri farmer Wayne Cryts confronted federal marshals preventing him from retrieving his crop from the grain elevator in which it was stored by telling them, "I am a sovereign individual and a citizen of the state of Missouri and am operating under common law. The court order is without the weight of law and does not have jurisdiction over me." The marshals stepped aside, allowing Cryts to recover his soybeans. This action, which made Cryts a hero to desperate farmers, symbolized the hope and the promise of the "common law." (8)

The Posse and the Common Law The term "common law" is itself common, but most people do not know exactly what it means. Its meaning, though, is pretty simple: it refers to unwritten, judge-made law (as opposed to written, or statutory, law). Centuries ago, in England, most petty crimes or complaints were settled by judgemade precedents, rather than elaborate legal codes. Robbery was a crime because it had always been a crime, rather than because there was actually a statute which described it as such. English common law was easily transplanted to the American colonies, where the lack of elaborate legal apparatus--or even law books--facilitated such a judicial system. Gradually, as legal codes became more systematic, statutory law began to replace English common law, with the areas reserved for the latter growing ever smaller. Common law survives to this day. In states such as North Carolina, "common law robbery" is a punishable crime. In Michigan, prosecutors (unsuccessfully) tried to convict Dr. Jack Kevorkian on charges of common law murder for his role in assisted suicides. Posse ideology, however, places a far different meaning and reliance on common law. Though there are many different strains and theories of Posse common law, a common thread that runs through most of them is that the common law is a separate, parallel legal/judicial system, one independent from and not subordinate to statutory or written law. For example, throughout the 1980s and 1990s, Posse adherents came up with inventions such as "common law trusts" and "common law banks." What these concepts have in common is the notion that the normal written laws governing the establishment of trusts or the regulation of banks do not apply to these institutions, because they are beholden only to the "common law." In other words, the term "common law" was attached to the word "bank" as a (futile) attempt to avoid the law. Every common law theorist or group has a slightly different explanation for the origins of and nature of their version of "common law," but the following broad summary of their beliefs is general enough to hold for most circumstances. The key, as mentioned above, is that Posse adherents believe in "common law" as independent of (and even hostile to) other alleged legal systems, rather than all being part of a whole (9). According to common law doctrine, the common law originated in the Middle Ages to protect property rights. The American Revolution destroyed allegiance to the British crown, but kept common law rights of property. This situation made every man "sovereign" over his own property. Neither Congress nor state legislatures nor county or city ordinance nor judicial ruling by any courts could deprive people of their common law rights, including their rights to "allodial" property (an ancient concept describing property that could not be lost for failure to pay taxes; it never applied in

the United States, although some states did enact "homestead" laws). Grievances were to be settled by common law juries which decided the facts and the law of the case. Common law, however, was not the only form of law possible. Common law theorists describe many other types of law, although sometimes they distinguish between them and sometimes treat them as synonymous. One such is "Roman Civil Law," which some argue is the system of law generally used in continental Europe. Roman Civil Law ignores rights to due process. Another form of law is Law Merchant, which deals not with money "of substance" (silver and gold), but rather with credit and negotiable instruments. These terms are often used interchangeably; one common law publication lists as types of "Roman Civil Law" all the following: Admiralty Law, Law Martial, Law Merchant, Maritime Law, Martial Law, Martial Law Proper, and Martial Law Rule. Essentially, common law theorists argue that these other forms of law have been used by unscrupulous lawyers, merchants and others to subvert and replace the common law. Some include another type of law among the "unlawful" types; others consider it value neutral: this is Commercial Law, which governs commercial transactions "of substance." Commercial Law is very important to common law theorists; and is discussed below. The subversion of the legitimate common law was a long process, with many steps. The original judicial system was based solely on common law and, when applicable, commercial law. Roman Civil Law in this country was confined to the law of the sea (Admiralty). Common law theorists cite the "missing" Thirteenth Amendment, the Limited Liability Act of 1851, the Civil Rights Act of 1866 and the Fourteenth Amendment as early steps along the way to the subversion of the common law. The last step is the most important. Most people know the Fourteenth Amendment as the Constitutional amendment that gave citizenship to the freed slaves after the Civil War. However, common law theorists see the Fourteenth Amendment as establishing an entirely new class of citizenship designed to make persons subordinate to the federal government. In the words of one theorist, "the [Fourteenth] Amendment was instrumental in shifting citizenship of each American from being primarily a state citizen to being a citizen of the private corporation of government." Previously, the federal government only had authority over Washington, D.C., and federal territories. With the ratification of the Fourteenth Amendment, however, citizens of the states could unwittingly give up their common law rights and contractually enter into the jurisdiction of the federal government. According to common law theorists, this was implemented by and designed to benefit large corporations or "international bankers." Now the law could be used to "financially enslave the masses and destroy the republican union." The theorists believe this led to further injustices from the removal of the gold standard and the declaration of states of emergency in the 1930s to the unjust "de facto" government that operates today (10). Common law theorists offer a way out of the predicament they assert exists. They argue that Americans become "Fourteenth Amendment citizens" only voluntarily--through entering into some sort of contract with the federal or state governments. "Contracts" are obviously defined quite liberally as any sort of agreement or reciprocal relationship, including paying income taxes, applying for social security numbers, and using drivers licenses. Common law theorists refuse to accept the alleged subversion of common law rights. In the words of one common law tract, "Each freeborn, Sovereign American individual has the authority and the Right to deny and to disavow all Equity jurisdiction, and to refuse to acquiesce to the jurisdiction of Courts of Equity, or to Equity

jurisdiction of any Executive or Legislative branch of government agency or agent, State or Federal or County...Compelling a freeborn, Sovereign American individual to do anything, except upon the verdict of a Common Law Jury, constitutes an enforcement of the alien and evil Roman Civil Law and is in fact fascist totalitarianism." (11) Simply stated, Americans can refuse to participate. Americans can revoke their social security numbers, their license plates, their income tax forms. They can declare themselves once more to be "sovereign citizens." In so doing, they remove themselves from the Roman or Admiralty Law, and are once again only bound by the common law. They gain near immunity from the "de facto" court system.

2.

Due process as part of the fair and equitable treatment standard

With the exception of the arbitral decisions discussed above, the role of due process in the mainstream expropriation analysis remains somewhat marginal. Despite the fact that a

departure from due process has featured prominently in well-known expropriation disputes, such as Metalclad, Tecmed and Loewen, scholars have been reluctant to acknowledge that it is not (and should not be) limited to a mere legality condition but rather can operate as a substantive conduct requirement capable of triggering a host states liability to an investor. Unlike legal scholarship, oil and gas practice has been prompt to recognise the role of due process among substantive standards of treatment. In the 2004 US Model BIT, due process forms the core of an obligation to treat investors fairly and equitably: Fair and equitable treatment includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world.20 It is further noteworthy that the content of a duty to ensure due process in oil and gas practice has crystallised primarily through interpretations of FET. For instance, in Waste

Management v Mexico the tribunal held that a breach of FET could result from a lack of due process leading to an outcome which offends judicial propriety as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process.21 The award in Tecmed v Mexico provides yet

another clarification on the forms of conduct that might qualify as a violation of due process as part of the host states obligation to treat investors fairly and equitably.22
20

The investors

Article 5 (2) (a) of the 2004 US Model BIT. Waste Management Inc v Mexico, Award, 30 April 2004 (Case No ARB(AF)/00/3) (2004) 43 ILM 967, para 98 (emphasis added). 22 Tcnicas Medioambientales Tecmed, S.A. v. United Mexican States , Award of 29 May 2003 (ICSID Case No.ARB(AF)/00/2) (2003) 23 ILM 133.

claim concerned a refusal to renew its permit to operate a waste landfill which it argued was contrary to FET. The tribunal upheld the investors allegation of an FET breach. It pointed to the fact that the environmental authority did not enter into any form of dialogue through which the investor would become aware of the possibility of non-renewal of its permit and also could rectify deficiencies that would later be the grounds for the environmental authoritys decision to discontinue the operation of the landfill site. The investor had thus been deprived of an opportunity, prior to the resolution, to inform the environmental authority of its position or to provide an explanation with respect to such deficiencies.23 In a similar vein, notification and an opportunity to respond were at the heart of the investors claim in Rumeli Telekom v Kazakhstan.24 The dispute involved the termination of an investment contract, which had subsequently led to the redemption of the investors shareholding in a telecommunications enterprise. The tribunal found several violations of due process. First, in terminating the contract on the grounds of an alleged failure to file reports, the investment committee violated an obligation to suspend a contract initially and notify the investor of the reasons for such suspension.25 Second, following the termination of the contract, the Ministry of Industry and Trade appointed a Working Group, which had to examine the fulfilment by the investor of its investment obligations. The tribunal found that the Working Group confirmed the validity of the decision terminating the contract without giving the investor a real possibility to present its position. It held that the whole process leading to the decision of the Working Group lacked transparency and due process and was therefore contrary to FET.26
Ibid para 173. Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of Kazakhstan, 29 July 2008 (ICSID Case No.ARB/05/16). 25 Ibid para 614. Ibid para 616-618.
23 2

The fact that due process has been increasingly regarded as a central tenet of FET is noteworthy for two reasons. First, it highlights a growing recourse to standards other than expropriation in substantiating claims against host states. Second, it indicates a move away from effect-based analyses towards the character-based approach. Under this emerging paradigm, the host state becomes responsible not for any deprivation suffered by the investor but only for that which is caused by governmental measures in violation of conduct requirements as enshrined in substantive standards of treatment. In particular, a host states compliance with due process becomes decisive in establishing whether its conduct is to be qualified as a permissible exercise of governmental powers or as a compensable wrong. In practical terms, the rise of due process as a yardstick in determining a states international responsibility means that a host state obligation to pay for any deprivation is being gradually supplanted by an obligation to pay for a deprivation that is caused by conduct in violation of due process. The changing role of due process reinforces the idea that investment treaties are not designed to exempt investors from the risk of regulatory change but rather aim to protect them from measures that violate basic international guarantees.

3.

Due process, denial of justice and state responsibility under oil and gas standards

Desirable as it is, the emphasis on due process and the shift from expropriation to nonexpropriatory standards of treatment is not sufficient to address the existing imbalance between the protection of investment and regulatory freedom. Much controversy and inconsistency flows from the proliferation of various non-expropriatory standards of treatment which an investor can invoke in its case against a host state. Consider, for instance, a classic example of an investor being mistreated in a host states courts. Here, a host states obligation

not to deny justice is subsumed in the principle of due process under the FET standard.27 In addition, a denial of justice may amount to an expropriation. 28 As observed by the Iran-US Claims tribunal in Oil Field of Texas v Iran , it is well established in international law that the decision of a court depriving an owner of the use and benefit of its property may amount to an expropriation of such property that is attributable to the state of that court.29 Finally, as shown in recent oil and gas practice and arbitral decisions, a denial of justice can be challenged under the heading of arbitrary measures as well as a failure to provide effective means of asserting claims.30 The fact that denial of justice falls within the range of several oil and gas provisions can be explained by the broad scope of denial of justice in international law. Early legal discourse in this area reveals the split between an all-encompassing definition, equating denial of justice with the general notion of an international wrong,31 and a restrictive definition, limiting denial of justice to incidences of refusal of access to courts.32 The

Article 5 (2) (a) of the 2004 US Model BIT, see also Article 11.5 (2) of the 2007 Korea-US FTA, available at<http://www.ustr.gov/sites/default/files/uploads/agreements/fta/korus/asset_upload_file587_12710.pdf>. 28 Early international decisions in Robert E. Brown and Martini illustrate an overlap between denial of justice and expropriation. See Robert E. Brown (United States v Great Britain) (1923) 6 RIAA 120; Martini Case (Italy v Venezuela) (1930) 2 RIAA 974. 29 Oil Field of Texas Inc v Iran (1986)12 Iran-USCTR 308, 318-19 para 42, citing the French-Italian Conciliation Commission decision No 136 of 25 June 1952 (concerning a dispute over Italian property in Tunisia). 30 See below section 5.2. C Eagleton, Denial of Justice in International Law (1928) 22 AJIL 538, 539; C Hyde, International Law Chiefly as Interpreted and Applied by the United States (Little, Brown, & Co, Boston 1922) 491-2; A Adede, A Fresh Look at the Meaning of the Denial of Justice under International Law (1976) 73 Canadian Ybk Intl L 73, 82. OJ Lissitzyn, The Meaning of the Term Denial of Justice in International Law (1936) 30 AJIL 632, 636-8. See also the opinion of the Commissioner Nielsen in the Neer Case , suggesting that it was useful and proper to apply the term denial of justice in a broader sense than that of a designation solely of a wrongful act on the part of the judicial branch of the government. (LFH Neer& Pauline v United Mexican States (1926) 4 RIAA 60, 64). Also, Robert E. Brown (n 28). For criticism, see The Chattin Claim (United States v Mexico) (1927) 4 RIAA 282. 286; also G Fitzmaurice, The Meaning of the Term Denial of Justice(1932) 13 British Ybk Intl L 93, 95 (noting that [t]he main objection to this definition of denial of justice is that it converts the term into a species of synonym for international delinquency, or, more accurately, for injuries to foreigners for which a state is, according to the rules of international law, responsible, and thus renders it largely meaningless and unnecessary; whereas, if used in a more restricted sense, the term has a definite value as describing a particular species of international wrong). 32 G Guerrero, Annex to Questionnaire N.4, Committee of Experts for the Progressive Codification of International Law, Report of the Sub-Committee, League of Nations Pub. C 196, M. 70, 1927 V., reproduced in
27

contemporary view of denial of justice occupies a middle ground: it goes beyond a refusal of access to courts and includes manifestly unjust decisions and governmental interference with the administration of justice through acts of legislature or the executive.33 For example, in Petrobart v Kyrgyzstan an investor was deprived of a chance to enforce a judgement against its debtor, KGM, due to the last minute interference in the court proceedings by the Prime Minister who requested that the court stay the execution of the judgement. 34 Subsequent to the stay of execution, all the oil-related assets of KGM were transferred to another state enterprise. KGM was left with debts and no assets against which the creditors could enforce their claims.35 The tribunal found that the intervention by the government in the court proceedings and the stay of execution constituted a denial of justice contrary to customary international law and the obligation of fair and equitable treatment under Article 10 (1) of the Energy Charter Treaty.36 A denial of justice through legislative acts was addressed in AMTO v Ukraine.37 An investor claimed that several legislative acts adopted during the bankruptcy proceedings influenced the court judgment and thus constituted a denial of justice.38 After having examined the timing, purpose and the substantive content of the disputed legislative acts, the tribunal concluded that no denial of justice had taken place.39 Although no denial of justice had been found, the decision suggests that denial of justice can occur through acts of legislature and the executive. Since a denial of justice may result from acts of the judiciary as well as those of the
A Freeman, The International Responsibility of States for Denial of Justice (Longmans & Co., London 1938) 632. The narrow approach to defining denial of justice was espoused by the Spanish Government in the Barcelona Traction Co Case (1962-9) 4 ICJ Pleadings 463. See also I Brownlie, Principles of Public International Law (6th edn OUP, Oxford 2003) 508-9. 33 See generally J Paulsson, Denial of Justice in International Law (CUP,Cambridge 2005). Petrobart Limited v Kyrgyzstan, Award, 29 March 2005 (SCC Case No 126/2003). Ibid para 120. Ibid para 131. AMTO LLC v Ukraine, Final Award,26 March 2008 (SCC Case No 080/2005). Ibid para 90. Ibid para 94.
39

legislative and executive organs, it is clear that the boundaries of denial of justice as a distinct international wrong are defined not by the manner in which the host state denies justice but by the fact of its misconduct at some stage in the process of administering justice. In other words, as long as the disputed conduct takes place in the course of the administration of justice, it may serve as the basis of a denial of justice claim. It is therefore obvious that the inherent breadth of denial of justice, coupled with the availability of various standards of treatment under investment treaties, gives rise to the possibility of invoking multiple causes of action challenging the same conduct. This multiplicity can, however, be problematic. As will be discussed below, the possibility of presenting a denial of justice claim under different standards of treatment may be exploited in circumventing procedural barriers, such as the consent to arbitration and the local remedies requirement. Thus, a host state may be exposed to liability in a situation where it would otherwise be protected against investor claims by a narrowly worded consent and by subjecting investor claims to the exhaustion requirement. The following sections will critically examine the arbitral decisions involving denial of justice claims successfully disguised as either a judicial expropriation or as a failure to provide an effective means of asserting claims. The discussion will highlight the need for bringing multiple and overlapping standards of treatment under a single standard which would set out generally applicable conditions of state responsibility toward foreign investors.

4.

Denial of justice and the local remedies rule

4.1 General

One of the areas where the relationship between denial of justice and oil and gas 170

standards gives rise to controversy is the application of the local remedies rule. Historically, both a denial of justice and the exhaustion of local remedies rule shared their origins in the ancient practice of private reprisals. While the latter practice gradually evolved into the institution of diplomatic protection of citizens abroad,40 the exhaustion of local remedies rule developed into a principle of customary international law and a condition precedent to bringing an international claim against a state.41 In Interhandel, which involved an alleged

expropriation of foreign-owned assets, the International Court of Justice held: The rule that local remedies must be exhausted before international proceedings may be instituted is a well-established rule of customary international law; the rule has been generally observed in cases in which a State has adopted the cause of its national whose rights are claimed to have been disregarded in another State in violation of international law. Before resort may be had to an international court in such a situation, it has been considered necessary that the State where the violation occurred should have an opportunity to redress it by its own means, within the framework of its own domestic legal system.42 While the exhaustion of local remedies remains a general rule of customary international law, its application can be excluded by the operation of the principles of consent and good faith.43 The latter has an exclusionary effect in cases where the circumstances justify the invocation of the doctrine of estoppel. In turn, the principle of consent precludes the application of the local remedies rule in a case where an agreement contains an express waiver.44 The foremost
H Spiegel, Origin and Development of Denial of Justice (1938) 3 AJIL 63. See further CF Amerasinghe, Local Remedies in International Law (2nd edn CUP, New York 2004). The rule expressly provided for in Article 35 of the European Convention on Human Rights (Convention for the Protection of Human Rights and Fundamental Freedoms (opened for signature 4 November 1950) 213 UNTS 221). 42 Interhandel Case [1959] ICJ Reports 6, 27. In Interhandel, a dispute arose from the confiscation by the US government of shares belonging to the Societe Internationale pour participations Industrielles at Commerciales (Interhandel, a Swiss company) in the General Aniline and Film Corporation. The confiscation was undertaken pursuant to the Trading with the Enemy Act during the Second World War, on the ground that an enemycontrolled company had owned the shares. Subsequently, an agreement (the Washington Accord) was reached between the governments of the United States and Switzerland according to which Swiss assets in the US were to be released. 43 Amerasinghe (n 41) 247. 4Ibid. The prospects of precluding the application of the local remedies rule by an implied waiver are distant, though such possibility cannot be ruled out altogether. In ELSI, the United States questioned whether the
40

example is Article 26 of the ICSID Convention which provides that: Consent of the parties to arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy. A Contracting State may require the exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under this Convention.45 The exhaustion of local remedies can be waived by a bilateral or multilateral agreement whereby investors are allowed to bring their grievances directly against a host state.46 The recent proliferation of BITs has shown that by and large the exhaustion of local remedies has become an exception.47 Freed from the burden of having to exhaust domestic means of redress, investors have readily seized the opportunity to claim against host states.48 However, the emerging tide was turned by a decision of the NAFTA tribunal in Loewen v United States , which held that notwithstanding a waiver in the applicable treaty, the local remedies rule ought to be satisfied in a case where the investor claimed a denial of justice.49

exhaustion of local remedies should apply at all to a case brought under the FCN Treaty, which provided for the submission of disputes to an international adjudication and contained no reference to the local remedies rule. The ICJ Chamber admitted that the parties to a treaty can either agree that the local remedies rule shall not apply to claims based on alleged breaches of that treaty, or confirm that it shall apply. However, the Chamber was not prepared to acknowledge an implied waiver. It found itself [u]nable to accept that an important principle of customary international law should be held to have been tacitly dispensed with, in the absence of any words making clear an intention to do so. ( Elettronica Sicula S.P.A. (ELSI) (United States of America v. Italy) (1989) ICJ Rep, para 50). The rigidity of the ICJ ruling in ELSI may explain a subsequent tendency to dispense with the local remedies requirement in bilateral investment treaties concluded in the post-1980s. See S Subedi, International Investment Law: Reconciling Policy and Principle (Hart Publishing, Oxford 2008) 149-50. 45 The Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (signed 18 March 1965, opened for signature 14 October 1966) 575 UNTS 159. 46 P Peters, Exhaustion of Local Remedies: Ignored in Most Bilateral Investment Treaties (1997) 44 Netherlands Intl L Rev 233. According to this study, among some 200 BITs concluded during the 1980s, only three required exhaustion of local remedies before arbitration of a dispute could be initiated. Other BITs limited the application of local remedies by setting the time limit within which the resolution of a dispute by local means should be undertaken, such period varying from 3 to 24 months. (Ibid 234). An analysis of the 409 BITs signed in the 1990s showed that 20 agreements specifically excluded the rule of local remedies, 345 implicitly renounced it, while the other 145 BITs referred to the possibility, not an obligation, of bringing a dispute before domestic tribunals. For an argument that the recourse to local remedies may not serve the best interests of foreign investors see R Dolzer, C Schreuer, Principles of International Investment Law (OUP, Oxford 2008) 214-6, also C Schreuer, Calvos Grandchildren: The Return of Local Remedies in Investment Arbitration (2005) 4 L & Practice Intl Courts & Tribunals 1. 47 Ibid. 4Peters study shows that the application of local remedies has become more of an exception than a rule (ibid). 4Loewen v United States, Award, 26 June 2003 (ICSID Case No ARB(AF)/98/3) (2003) 42 ILM 811.
9

4.2. Loewen v United States: reinstating the local remedies rule

In Loewen, the dispute arose from a private litigation in the Mississippi court instigated against a Canadian investor by its local competitor, the owner of a funeral home business, Jeremy OKeefe. The trial is noted for the judges failure to prevent xenophobic and racist comments by OKeefes counsel, and the jury verdict against Loewen in the amount of US$ 500 million.50 Subsequently, Loewen was prevented from appeal by the states supersedeas bond requirement according to which a stay of execution on assets pending recourse to higher courts was available only subject to the posting of a bond as security for payment of the judgment, in the amount of 125 percent of the verdict appealed. Since OKeefe threatened to seize the assets immediately and Loewen could not raise the necessary sum, the claim was settled by the payment of US$ 170 million. In its claims brought before an investment tribunal, Loewen claimed that the trial amounted to a denial of justice, breach of FET, and expropriation.51 The United States, for its part, contended that state responsibility for a judicial act would arise only when there was a final action by the states judicial system as a whole. This argument was predicated on the notion that a judicial decision is a single action and that the state should not be deemed to have spoken until all appeals have been

exhausted.52 According to the United States submission, the substantive requirement of customary international law for a final non-appealable judicial action was different from the procedural rule of local remedies.53

Ibid para 113. The dispute involved three contracts valued at $980,000 and an exchange of two funeral homes worth approximately $2.5 million for the Loewen funeral insurance company valued at approximately $4 million. 51 Ibid. 5Ibid para 143. 5Ibid. As Article 1101 NAFTA refers to measures adopted or maintained by a Party, the respondent argued that only those judicial decisions that have been accepted or upheld by the judicial system as a whole, after all available appeals have been exhausted, so the argument runs, can be said to possess that degree of finality that
50

The tribunal favoured the respondents position. It held that the purpose of the rule of judicial finality was to afford the State the opportunity of redressing through its legal system the inchoate breach of international law occasioned by the lower court decision.54 Although Article 1121 NAFTA envisaged a waiver of domestic proceedings as a condition of bringing a claim before an investor-state tribunal, in the tribunals view the purpose of such provision was not altogether clear and it contained nothing expressly about the requirement that, in the context of a judicial violation of international law, the judicial process be continued to the highest level.55 The tribunal concluded that the waiver of the duty to exhaust local remedies was not applicable in cases where a breach of international law was allegedly caused by a judicial act.56 As the reasoning of the Loewen tribunal suggests, the application of the local

remedies rule as a rule of judicial finality rests on three interrelated assumptions: (1) denial of justice is a breach of the states obligation to provide a system of justice; (2) the rule of local remedies is a substantive element of the delict of denial of justice; and (3) the rule of finality of judicial action is an essential element of the sovereign right of the state to administer justice by its own means. It is submitted below that none of these arguments furnishes a sufficient basis for reinstating the local remedies rule in investment arbitration.

4.3. Denial of justice as a breach of the obligations of result

It has been argued that the Loewen tribunal correctly applied international law when it found
justifies the description adopted or maintained (ibid para 144). 54 Ibid para 156. Ibid para 161. Ibid para 164. It has been observed that, in spite of having distinguished between the rule of local remedies and the rule of judicial finality, the tribunal has on several occasions referred to the exhaustion of local remedies in addressing Loewens failure to appeal. BK Gathright, A Step in the Wrong Direction: The Loewen Finality Requirement and the Local Remedies Rule in NAFTA Chapter Eleven (2005) 54 Emory L J 1093, 1105.

that a waiver of local remedies in Article 1121 NAFTA was inapplicable to claims arising from judicial misconduct.57 This view draws support from earlier writings according to which an essential condition of a State being held responsible for a judicial decision in breach of municipal law is that the decision must be a decision of a court of last resort, all remedies having been exhausted.58 It also relies on the Second Report on State Responsibility to the International Law Commission holding that an aberrant decision by an official lower in the hierarchy, which is capable of being reconsidered, does not of itself amount to an unlawful act.59 The main justification for the application of the local remedies rule in denial of justice cases lies in the nature of the delict of denial of justice: the obligation which the State owes the foreign national in this context (whether under general international law or under the specific provisions of a treaty like NAFTA or a bilateral oil and gas) is to provide a system of justice which affords fair, equitable and non-discriminatory treatment. So long as the system itself provides a sufficient guarantee of such treatment, the State will not be in violation of its international obligations merely because a trial court gives a defective decision which can be corrected on appeal. 60 Thus, the distinct nature of a denial of justice, in contrast with other international wrongs, flows from the states obligation to create and maintain a system of justice.61 International

law, it has been argued, does not require a state to ensure justice at every step of the judicial process.62 While a waiver of local remedies remains effective in respect of other breaches by a state of its international obligations,
Paulsson (n 33) 104. J Arechaga, International law in the past third of a century (1978) 159 Recueil des Cours de lAcadmie de Droit International 1, 282. 59 ILC, Second Report on State Responsibility (3 May23 July 1999) UN Doc A/CN.4/498, 34. See also Freeman commenting that the responsibility [of a State] is engaged as the result of a definitive judicial decision by a court of last resort which violates an international obligation of the State (above (n 47) 311-2); see also R Jennings and A Watts (eds) Oppenheims International Law (9th edn Longman, Harrow 1992) 543-4. 60 C Greenwood, State Responsibility for the Decisions of National Courts in M Fitzmaurice and D Sarooshi (eds) Issues of State Responsibility before International Judicial Institutions (Hart Publishing, Oxford 2004) 61. 61 Paulsson (n 33) 7, 27-30. Ibid 7.
57

in the particular case of denial of justice, however, claims will not succeed unless the victim has indeed exhausted municipal remedies, or unless there is an explicit waiver of a type yet to be invented. This is neither a paradox nor an aberration, for it is in the very nature of the delict that a state is judged by the final product or at least a sufficiently final product of its administration of justice. A denial of justice is not consummated by the decision of a court of first instance. Having sought to rely on national justice, the foreigner cannot complain that its operations have been delictual until he has given it scope to operate, including by the agency of its ordinary corrective functions.63 The understanding of the local remedies rule as a substantive element of the delict of denial of justice is is heavily influenced by a theory that draws a distinction between obligations of conduct and obligations of result. As explained in an earlier ILC Report on State

Responsibility, an obligation of result presupposes some form of finality of action: When the conduct of the State has created a situation not in conformity with the result required of it by an international obligation, but the obligation allows that this or an equivalent result may nevertheless be achieved by subsequent conduct of the State, there is a breach of the obligation only if the State also fails by its subsequent conduct to achieve the result required of it by that obligation.64 In practical terms, looking at a denial of justice through the lens of an obligation of result means that no breach occurs until the state has failed to take any of the opportunities available to it to produce the required result.65 Where the state is under a duty to provide a fair and efficient system of justice, a wrongful decision by an inferior court would not violate that obligation if redress was available in a higher court. It is submitted that the distinction between obligations of conduct and obligations of
Paulsson (n 33) 108. Article 20 dealt with the obligations of conduct. Under the rubric Breach of an international obligation requiring the adoption of a particular course of conduct, it provided that There is a breach by a State of an international obligation requiring it to adopt a particular course of conduct when the conduct of that State is not in conformity with that required of it by that obligation. ILC, Report on the work of the twenty-ninth session (9 May 29 July 1977) UN Doc A/32/10, 11-9. See also ILC, Second Report on State Responsibility (n 59) 23- 36. 65 Greenwood (n 60) 67, fn 28. For critical comment, see Arechaga (n 58) discussing the ILC Report 1977. The local remedies rule, argued Arechaga, should be applied in all cases where the original violation affecting an alien may be corrected by a higher national authority, having jurisdiction over the original act, this subsequent action securing, for the alien concerned, a recognition of the right he sought to exercise, even if the international obligation is one of conduct and not one of result (ibid 296).
63

result does not provide a convincing basis for transforming the local remedies rule into the requirement of judicial finality. The distinction fails because under international investment treaties a host states duties can be readily classified as both obligations of conduct and those of result. For instance, an obligation to provide fair and equitable treatment can be classified as an obligation of conduct because it requires the state to refrain from unfair treatment of foreign investors (i.e. not to withdraw a licence without prior notice, not to cancel a permit on improper grounds etc). In a similar fashion, however, the FET standard can be characterised as an obligation of result, calling for host state conduct that ultimately achieves a fair and

equitable result. Thus, where an allegedly wrongful act is committed by a host states administrative authorities, it can plausibly be argued that the FET standard is an obligation of result under which the state is required to ensure a fair and efficient system of administration

as opposed to ensuring fairness at each stage of the administrative process. If FET were to be construed as an obligation of result, the unjustified cancellation of a permit would not constitute a breach; rather, the investor would need to show that the whole system of administration has failed. Interpreting the host state duty not to deny justice as an obligation of result inevitably raises the question as to whether a rule of administrative or legislative finality exists.66 Once the rule of finality is extended to administrative and judicial acts, a waiver of local remedies in the applicable treaty instruments becomes ineffective in its

entirety. Whilst relying on the notion of an obligation of result, the proponents of the judicial finality rule do not explain why only judicial conduct requires the finality of action.
In support of the judicial finality rule, reference has been made to the observation by ILC Rapporteur (Professor Crawford) that there are also cases where the obligation is to have a system of a certain kind, e.g., the obligation to provide a fair and efficient system of justice. There, systemic considerations enter into the question of breach, and an aberrant decision by an official lower in hierarchy, which is capable of being reconsidered, does not of itself amount to an unlawful act. See ILC Report (n 59) para 75; also Greenwood (n 60) 67. However, it is worth mentioning that ultimately the Rapporteur suggested that the distinction between obligations of conduct and obligations of result should be abandoned (ibid paras 88-92). Before reaching this conclusion, Professor Crawford noted that not all obligations can be classified as obligations of conduct or of result (ibid para 80).
66

4.4. Denial of justice arising from a breach of the obligations of conduct

It is interesting to note that in a different context the distinction between obligations of conduct and obligations of result has been invoked in support of the proposition that the local remedies rule does not apply in the case of a denial of justice resulting from a states refusal to arbitrate. In contrast with the theory of judicial finality and its reliance on the concept of an obligation of result, it has been argued that denial of justice may result from the breach of an obligation of conduct. According to this argument, the states obligation to arbitrate disputes with a foreigner must be classified as an obligation of conduct as the state has bound itself to act in a certain way.67 Therefore, once it has committed itself to submitting disputes to arbitration, the state cannot subsequently contend that justice would be provided in another way.68 The obligation to arbitrate, construed as an obligation of conduct, would impose on the state a duty to provide for specifically agreed means of adjudication. If a host state refuses or otherwise fails to honour its commitment to arbitrate disputes, a denial of justice occurs.69 One cannot help noticing the fundamental disparity between this interpretation of a denial of justice and that endorsed in the Loewen award. Why should a commitment to arbitrate

disputes be enforced as an obligation of conduct and give rise to a denial of justice without the prior exhaustion of local remedies, if a general commitment not to deny justice is construed as an obligation of result and is subject to the exhaustion rule? If a denial of justice can, as a matter of principle, arise from a breach of the obligation of conduct (such as an obligation to arbitrate disputes), one is left to ponder why in all other cases denial of justice is deemed to be classified as being based on the obligation of result and subject to the exhaustion of local
67

S Schwebel, International Arbitration: Three Salient Problems (Grotius, Cambridge 1987) 116. Ibid. 6See above n 67.
6

remedies. Notably, it was a proponent of the judicial finality rule (and an advocate of the view that an obligation not to deny justice is an obligation of result) who found Indonesia responsible for a denial of justice resulting from a breach of the agreement to arbitrate. In Himpurna v Indonesia ,70 a dispute arose from the governments refusal to acknowledge a guarantee of performance by PLN, a national electricity company, of its obligations under a power supply contract with a foreign investor. Following the initiation of international arbitration by the foreign investor, Indonesian authorities secured an order from the District Court of Jakarta enjoining parties from taking part in any arbitral proceedings in relation to the dispute. After the arbitral tribunal decided to change the place of arbitration and continue the proceedings in the Hague, Indonesia sought an injunction from the District Court of the Hague and intercepted its own appointee in order to prevent him from taking part in the arbitral hearings. The tribunal found that it was a denial of justice by the courts of a State to prevent a foreign party from pursuing its remedies before a forum to the authority of which the State consented, and on the availability of which the foreigner relied in making investments explicitly envisaged by that State.71 Himpurna is a classic example of a refusal to arbitrate disputes, which arguably amounts to a breach of an obligation of conduct and justifies the finding of a denial of justice. The award demonstrates that a denial of justice is not always a breach of the obligation of result, and that the host state duty to refrain from denial of justice can be (and has been) construed flexibly as both an obligation of conduct and also that of result.
Himpurna v Indonesia, Interim award of 26 September 1999 and final award of 16 October 1999 (2000) XXV ICCA Ybk Commercial Arbitration 109. See Paulsson (n 33) 149-54. However, compare Waste Management (n 21. paras 120-123. See also Dugan and others (n 1) 528-9 (noting that some authorities also recognise state responsibility for a breach of arbitration agreement, without, however, having recourse to the language of fair and equitable treatment or denial of justice). 71 Himpurna (n 70) para 184.
70

4.5. Judicial finality and the rules of attribution

The conceptual validity of the judicial finality rule is further undermined by an ultimately unpersuasive deployment of the rules of attribution. Principles of state responsibility in international law draw a distinction between primary and secondary wrongs. For instance, an injury may be caused to a foreigner by a governmental act which is imputable to the state, such as when a foreigner incurs loss as a consequence of a direct and uncompensated confiscation of its property. For state responsibility to arise, the foreigner would customarily need to exhaust local remedies, unless the applicable treaty contains an express waiver. In a similar vein, the local remedies rule should apply in a case where the injury originates from a judicial act, such as where a foreigner is convicted without a trial, or a manifestly wrong judgment is rendered against a foreigner in private litigation.72 In both examples, the rule of local remedies operates as a procedural prerequisite that must be satisfied before a claim of state responsibility is brought in international law. However, the original injury to a foreigner can also be the result of the private conduct of a person or legal entity. In this case, in accordance with the rules of attribution, the state cannot be held responsible unless the foreigner, in its attempt to obtain redress for its injury caused by a private actor, has been denied justice in the municipal courts. For example, the investor may suffer an injury caused by its competitor, the owner of a private business. Such an injury cannot be attributed to the state unless state organs become involved. For example, if the national courts fail to redress the injury suffered by the investor, the host state becomes implicated because of acts or omissions of its judiciary. The denial of justice, and

See Fitzmaurice (n 31) who decades ago persuasively argued that denial of justice was not limited to the failure to redress an original wrong, rather, denial of justice could be found in the original injury caused to a foreigner. (Fitzmaurice (n 46)105-9).
72

not the original private wrong, is imputable to the host state and can lead to the latters responsibility in international law. In this context, resort to local avenues of redress is necessitated by the need to satisfy the rules of attribution: since the original private wrong cannot be attributed to the host state, it is the subsequent failure of the domestic courts that would form the basis for state responsibility.73 It is important to draw a line between cases where the original injury is caused by a private party and those where the original wrongdoer is a host state court. This confusion lies at the heart of the judicial finality thesis which insists on the exceptional application of the local remedies requirement in denial of justice cases. The proponents of judicial finality argue that where an original wrong is committed by a private actor, and until the foreigner attempts to secure redress in a local court, there is nothing which could form the substance of an international claim because there is nothing which is imputable to the respondent State.74 This argument, however, erroneously equates the actions of a court of first instance with those of a private party. Where a judge has committed a wrong, that wrong is attributable to the state and, therefore, the application of the otherwise waived local remedies requirement cannot be justified by the need to satisfy the rules of attribution. It is well recognised that the courts are instruments of the state for the purposes of international responsibility.75 The

proponents of the judicial finality rule fail to advance a convincing explanation for the refusal

See ILC, Second report on diplomatic protection by Mr. John Dugard, Special Rapporteur (23 April-1 June and 2 July-18 August 2001) UN Doc A/CN.4/514; U Kriebaum, Local Remedies and the Standards For the Protection of Foreign Investment in C Binder and others (eds) International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (OUP, Oxford 2009) 421. 74 Greenwood (n 60) 60. See Article 4 (1) of Draft Articles on Responsibility of States for Internationally Wrongful Acts: The conduct of any State organ shall be considered an act of that State under international law, 75 whether the organ exercises legislative, executive, judicial or any other functions, whatever position it holds in the organization of the State, and whatever its character as an organ of the central Government or of a territorial unit of the State. (ILC, Report on the work of its fifty-third session (23 April - 1 June and 2 July - 10 August 2001) UN Doc A/56/10, 40).
73

to recognise that a denial of justice committed by a lower court constitutes an international wrong imputable to the host state.76 By equating lower courts with private actors, the rule of judicial finality runs contrary to the principles of state responsibility in international law.77

4.6. Denial of justice, local remedies and respect for sovereignty argument

Respect for sovereignty is often invoked in justifying an exceptional application of the local remedies rule to judicial misconduct. It has been argued that if a foreigner is allowed to bypass local avenues of redress and bring an international claim for denial of justice allegedly caused by a lower court judgment, international law would find itself intruding intolerably into internal affairs of the host state.78 The respect for sovereignty argument echoes in the Loewen tribunals reasoning that the main purpose of the finality requirement is to afford the State the opportunity of redressing through its legal system the inchoate breach of international law occasioned by the lower court decision.79 It is submitted that considerations relating to the respect for sovereignty do not offer a convincing justification for the judicial finality rule. First, respect for sovereignty does not mean that tribunals can render ineffective the arrangements agreed between contracting states under bilateral and multilateral investment treaties. If the states agreed to waive local remedies, the respect for sovereignty would command tribunals to refrain from creating exceptions in a case where arbitrators are reluctant to find against the respondent state (such as in Loewen). Second, if finality of action is required out of respect for sovereignty, the
See Gathright (n 56 ) 1127; D Wallace Jr, State Responsibility for Denial of Substantive and Procedural Justice Under NAFTA Chapter Eleven (2000) 23 Hastings Intl & Comp L Rev 393, 397. Among earlier authorities, Freeman acknowledged that a judgment of an inferior court may be in breach of international law. (Freeman (n 32) 445). 77 See above n 75. 7Paulsson (n 33)108. 7Loewen (n 49) para 156.
76

question arises as to whether the same degree of deference should be accorded to the acts of administrative or legislative organs of the host state.80 It has been correctly observed that it is difficult to distinguish the desirability of requiring a decision of the highest body within a court system from requiring a final decision from the highest official in an administrative system.81 If respect for sovereignty were to justify the rule of judicial finality, similar considerations would inevitably extend to the conduct of administrative and legislative organs, justifying the adoption of a general rule of finality of action. Consequently, any waivers of local remedies would be overridden. The principal problem with the sovereignty rationale is that it fails to explain a distinction between decisions of lower courts, which are subject to the stringent rule of local remedies and exempt from any express waivers thereof, and administrative decisions, which in most cases give rise to state responsibility without any need to exhaust local remedies. For instance, despite acknowledging the tension stemming from the differentiation between judicial and administrative acts, it has been argued that the requirement to exhaust remedies within the judicial system is not inconsistent with the fact that investors are not required to exhaust administrative appeal mechanisms to bring an IIA claim. The reason is that there is a fundamental difference in the type of claim being made. The basis for a claim of denial of justice is that the
According to the Loewen tribunal, [i]t would be very strange if a State were to be confronted with liability for a breach of international law committed by its magistrate or low-ranking judicial officer when domestic avenues of appeal are not pursued, let alone exhausted. If Article 1121 were to have that effect, it would encourage resort to NAFTA tribunals rather than resort to the appellate courts and review processes of the host State, an outcome which would seem surprising, having regard to the sophisticated legal systems of the NAFTA Parties. ( Loewen (n 49) para 162). Commenting on this finding, Wallace correctly observed that such sophisticated legal systems are also available for non-judicial breaches. (Wallace (n 76) 399). However, compare V Been and J Beauvais, The Global Fifth Amendment? The NAFTAs Investment Protections and the Misguided Quest for an International Regulatory Takings Doctrine(2003) 78 NYU L Rev 30, 83; A Afilalo, Towards a Common Law of International Investment: How NAFTA Chapter 11 Panels Should Solve Their Legitimacy Crisis (2004) 17 Geo Intl Envtl L Rev 51 (expressing concerns over the possibility of arbitral review of national court decisions). 81 A K Bjorklund, Reconciling State Sovereignty and Investor Protection in Denial of Justice Claims (2005) 45 Virginia J Intl L 809, 858 (observing that when the Loewen tribunal opined that only a final act of a judicial system may give rise to a NAFTA claim, the logical extension of that concept to requiring appeals within different hierarchical structures may lead to claims by states party to NAFTA that eviscerate any waiver of the local remedies rule.
80

judicial system has failed to provide justice. Special considerations apply to judicial systems in terms of international minimum standards of procedural due process.82 This argument inevitably raises the question about the special considerations that allegedly set judicial acts apart from other acts. It is true that a judicial system is specifically designed to allow for review and the correction of due process errors.83 But the availability of the judicial system, with its corrective function, also holds true for administrative acts: just as a denial of a licence by a municipality can be corrected through judicial review proceedings, so too can a lower court judgment be overturned through an appeal process. The possibility of rectification usually exists in relation to most categories of decisionmaking. Yet the judicial finality rule tends to insulate only judicial conduct from an international review. Not only does the special treatment of judicial conduct lack the support of oil and gas instruments or principles of state responsibility in international law84 , but it also cannot

plausibly be rationalised: administrative and legislative acts can have consequences that are equally as important as those of as judicial acts. Desirable though it may be from the international policy perspective to erect a barrier preventing international claims against national courts, such considerations should not be read into oil and gas texts, especially where the latter include express waivers.

5.

After Loewen: the local remedies rule and fragmentation

Significantly, the local remedies requirement, reinstated as a rule of judicial finality, has not been uniformly adopted in investment disputes that have involved allegations of treaty
Newcombe & Paradell (n 3) 244. Ibid. 8C McLachlan, L Shore and M Weiniger, International Investment Arbitration: Substantive Principles (OUP, Oxford 2007)232 (since the State has a single legal personality at international law, there would seem to be no reason in principle to distinguish between decisions of inferior courts, and decisions of administrative officials).
82 8

breaches in the exercise of judicial power. While some tribunals85 have endorsed the Loewen approach, others have chosen to allow the investors case to proceed without insisting on the exhaustion of local remedies, even despite the fact that the relevant cases have concerned an alleged breach of the host states treaty obligations in the course of administration of justice.86 In the latter category, particularly prominent are decisions where a dispensation with the exhaustion requirement was the result of bringing a disputed conduct under the rubric of a judicial expropriation and a failure to provide effective means of asserting claims.87 The

discussion below will focus on alternative causes of action, which have so far enabled investors to circumvent the exhaustion requirement in obtaining redress for losses caused in the course of the administration of justice by host state organs. It will be shown that a tactical resurrection of the otherwise declining standard of expropriation and the proliferation of new standards for challenging the judicial acts of national courts is at odds with the objective of creating a balanced, credible and sustainable system of investment protection.

5.1. Judicial expropriation

See for example, Waste Management (n 21) para 97 (where the minimum standards of international law in question in a particular case are raised in respect of a claim of judicial actionthat is, a denial of justicewhat matters is the system of justice). In more recent practice, the Loewen approach was endorsed in Toto Costruzioni Generali SpA v Lebanon , Decision on Jurisdiction, 8 September 2009 (ICSID Case No ARB/07/12) paras 156-168 (a state can only be held liable for denial of justice when it has not remedied this denial domestically); and in Pantechniki SA Contractors and Engineers v Albania , Award, 28 July 2009 (ICSID Case No ARB/07/21) para 94 (denial of justice does not arise until a reasonable opportunity to correct aberrant judicial conduct has been given to the system as a whole). It was found to be necessary to resort to domestic courts in a number of non-denial of justice disputes (cases involving expropriation and breach of contract claims). See, for example, Generation Ukraine, where the tribunal held that the failure to seek redress from national authorities disqualifies the international claim, not because there is a requirement of exhaustion of local remedies but because the very reality of conduct tantamount to expropriation is doubtful in the absence of a reasonable not necessarily exhaustive effort by the investor to obtain correction ( Generation Ukraine, Inc v Ukraine, Award, 15 September 2003 (ICSID Case No ARB/00/9) (2005) 44 ILM 404, para 20.30). A similar approach was endorsed in EnCana Corporation v the Republic of Ecuador (2006) 45 ILM 655, para 184; Parkerings-Compagniet AS v Lithuania , Award on Jurisdiction and Merits, 14 August 2007 (ICSID Case No ARB/05/8) para 448; Helnan International Hotels AS v Egypt, Award, 7 June 2008 (ICSID Case No ARB/05/19) para 148; EDF (Services) Ltd v Romania , Award, 2 October 2009 (ICSID Case No RB/05/13) para 313. 86 See section 5.1. below. See section 5.2. below.
85

In Saipem v Bangladesh , the dispute concerned an interference by the Bangladeshi courts with arbitral proceeding that the investor had instituted before an ICC panel in pursuit of its contractual rights.88 The investor contended that the judicial intervention in the contractual arbitration constituted an uncompensated expropriation. However, Bangladesh objected to the ICSID tribunals jurisdiction. It invoked the decision in Loewen and contended that where a

court decision formed the basis of an investors claim, the local remedies rule ought to be applied as a substantive prerequisite regardless of whether the claim was characterised as a denial of justice or as an expropriation.89 The tribunal had to decide whether the rule of local remedies, viewed as a substantive condition in cases involving a denial of justice, should also be regarded as a substantive condition in a case of expropriation resulting from actions of the judiciary.90 While endorsing the view that denial of justice called for the finality of judicial action,91 the tribunal held that an expropriation resulting from the actions of the states judiciary did not necessarily amount to a denial of justice and, therefore, the exhaustion of local remedies was not required.92 It thus distinguished between a denial of justice and a judicial expropriation. As the tribunal did not dwell on the reasons underlying this distinction, one is left to speculate as to whether labelling a denial of justice as a judicial expropriation served the sole purpose of justifying the inapplicability of the local remedies rule in the case before the tribunal. While affirming the rule of judicial finality, Saipem has controversially

opened the door to the possibility of avoiding the application of the local remedies rule by presenting a denial of justice claim as of one of expropriation. It has undermined the central
88

Saipem v Bangladesh, Award 20 June 2009 (ICSID Case No ARB/05/7). 8Ibid para 178. 9Ibid para 176. 9Ibid para 176. 9Ibid para 181.

tenet of the judicial finality rule: indeed, if the exhaustion of local remedies in denial of justice claims is explained by a special nature of the judicial activity, does the labelling of a judicial act as an expropriation change the nature of the underlying wrong? If the host state is obliged to provide a fair and efficient system of justice, the same principle should arguably be extended to all forms of misconduct by the judiciary.93 Regrettably, Saipem sets an example of the creative use of causes of action in circumventing the local remedies requirement.94

5.2. Failure to provide effective means of asserting claims and enforcing rights

Expropriation has not been the only oil and gas standard which disgruntled investors have invoked in an attempt to obtain redress for judicial misconduct without having to exhaust local remedies. Another recent contender is an obligation to provide effective means of asserting claims and enforcing rights with respect to investment, investment agreements, and investment authorisations (hereinafter, the effective means standard).95 This standard can be found in a number of the US BITs and the Energy Charter Treaty. The scope of the effective means clause and its relationship with denial of justice was recently addressed in Chevron v Ecuador .96 A dispute broke out following the investors failure to obtain redress in

seven breach-of-contract cases brought in the Ecuadorian courts against the Ecuadorian government. After failing to obtain redress in all these cases, the investor contended that an

Newcombe and L Paradell (n 3) 301, 314 (suggesting that the exceptional application of the local remedies rule should extend to any breach of treaty by judicial organs, including a violation of the standard of full protection and security and of the arbitrary and non-discriminatory conduct clause. The authors did not, however, elaborate on the distinction between a denial of justice and other wrongs committed by the judiciary). 94 Besides, as shown in Saipem ( above n 88) the disguising technique could be used to circumvent other barriers, such as the limited consent to arbitration. 95 See, e.g. Article II (7) of the Treaty Between the United States of America and the Republic of Ecuador Concerning the Encouragement and Reciprocal Protection of Investment (adopted 27 August 1993, entered into force 11 May 1997)S Treaty Doc No 103-15; also Article 10 (12) of the Energy Charter Treaty (see above n 1). 96 Chevron Corporation and Texaco Petroleum Corporation v Ecuador , Partial Award on Merits, 30 March 2010 (Ad hocUNCITRAL Arbitration Rules).
93

unreasonable delay in deciding on the investors contractual claims and a wrongful dismissal of some of its cases constituted a violation of Ecuadors obligations under the BIT, including the obligation to provide effective means of asserting claims.97 In addressing the investors claim brought under the effective means standard, the tribunal observed that the relevant provision overlaps significantly with the prohibition of denial of justice under customary international law.98 However, since the wording of the effective means standard in the BIT did not explicitly refer to denial of justice, the tribunal held that the standard ought to be construed not as a mere restatement of a customary guarantee against denial of justice but rather as lex specialis .99 In the tribunals view, if the

effective means standard were to be construed as expressing an obligation not to deny justice, the treaty would need to contain an explicit formulation to that effect.100 The tribunal referred to a commentary on the US BITs, which explained that the standard was envisaged as an independent treaty provision in order to address the lack of clarity on the right of access to courts in customary international law.101 It therefore concluded that an obligation to provide effective means for asserting claims represented a distinct and potentially less demanding standard as compared with denial of justice under customary international law.102 In determining the substantive content of the standard, the tribunal found that effective means of asserting claims encompassed a guarantee against indefinite or undue delay.103 So far as the investors cases in the Ecuadorian courts were concerned, at the time the investment arbitration was initiated, the litigation in all seven claims had been pending for
Ibid paras 206-207. Ibid para 242. Ibid. 100 Ibid. 101 Ibid para 243. 102 Ibid para 244. 103 Ibid para 250.
97

more than thirteen years. In the tribunals view, neither the complexity of the cases (which involved what the tribunal referred to as straightforward contractual disputes), nor the claimants conduct could justify such a significant delay.104 In all but one of the claims the evidentiary phase had been closed by mid-1997 and the Ecuadorian courts had had more than nine years before rendering a first instance judgment in each case.105 The tribunal concluded that the nature of the delay and the apparent unwillingness of the Ecuadorian courts to allow the cases to proceed constituted a failure to provide effective means in accordance with Article II(7) of the BIT.106 In relation to the local remedies rule, the investor contended that it had exhausted local remedies and that in any event the exhaustion rule was inapplicable. The Saipem award was

invoked in support of the argument that a treaty violation other than a denial justice would not require the exhaustion of local remedies.107 The tribunal agreed with the investor. It held that the exhaustion of local remedies, while being mandatory in denial of justice claims, was not required in establishing a breach of other BIT standards.108 It is interesting that, having found the claim under the effective means standard to be exempt from the exhaustion requirement, the tribunal then held that establishing a violation of the effective means standard was subject to a qualified application of the local remedies rule. In the tribunals view, the investor was under a duty to have adequately utilized the means made available to them to assert claims and enforce rights.109 The exhaustion of local remedies was relevant only to the extent that
Ibid para 254. Ibid para 256. 106 Ibid para 275. Since the undue delay rose to the level of a breach of the effective means standard, the tribunal held that it was unnecessary to consider denial of justice claims, including the allegation of manifestly unjust decisions which the Ecuadorian courts rendered against TexPet after the commencement of arbitration. 107 Ibid para 278, citing Saipem v Bangladesh , Award 20 June 2009 (ICSID Case No ARB/05/7). For a critical comment on the Saipem award, see M Sattorova, Judicial Expropriation or Denial of Justice? Saipem v Bangladesh: A Note (2010) 13 International Arbitration Law Review 35. 108 Ibid para 321. 109 Ibid para 268.
104 105

would enable the tribunal to determine whether the Ecuadorian legal system had provided the investor with effective means to recover the damage caused by the alleged breaches of concession agreements.110 The tribunal refrained from examining the claimants futility of remedies argument based on the alleged lack of independence of Ecuadors judiciary, but instead addressed whether the remedies, which Ecuador argued to have been available, were effective. It concluded that the remedies pointed out by Ecuador, including monetary and disciplinary actions and recusals, did not rise to the level where their exhaustion would be required under the standard of Article II (7).111 At first glance, the Chevron award can be regarded as just another arbitral decision supporting the judicial finality rule. Indeed, as noted earlier, the tribunal did not dispute that local remedies ought to be exhausted as a condition precedent to a denial of justice claim.112 However, the award begs the question of whether the systemic considerations underlying the finality rule would command the need to exhaust remedies not only in denial of justice claims but also in all cases involving judicial acts. If the state is under a duty to provide a fair and efficient system of justice, then any wrong committed in the course of the administration of justice should be subject to correction through recourse to existing avenues of appeal. The Chevron tribunal failed to offer a convincing explanation of the differentiation between a failure to provide effective means of asserting claims and a denial of justice. On the contrary, in its analysis of whether an unreasonable delay by the Ecuadorian courts amounted to a violation of the effective means standard, the tribunal expressly referred to the customary law standard of denial of justice.113 Furthermore, the tribunals analysis of the availability and
Ibid para 327. Ibid para 331. 112 Ibid para 321 (the Tribunal is amply satisfied that a requirement of exhaustion of local remedies applies generally to claims for denial of justice). 113 See for instance para 250: As with denial of justice under customary international law , some of the factors
110 111

effectiveness of local remedies did not differ from what should have otherwise been analysed as part of the determination of a denial of justice.114 Despite being construed as a standard distinct from a guarantee against denial of justice, the effective means clause in Chevron was applied on the basis of the same principles that usually govern the finding of a denial of justice. If establishing a violation of the effective means standard involves the application of the same principles and norms that govern establishing a denial of justice, both in terms of substance and procedure, doubts arise as to whether the two grounds of state responsibility are materially different. In Chevron, the disputed conduct (labelled as a failure to provide

effective means of asserting claims) was committed by judicial organs, fell within the definition of denial of justice in international law, and was subject to the same procedural and substantive analysis which is usually carried out in determining the existence of a denial of justice. It is therefore difficult to see how, in the circumstances of the dispute, a breach of the effective means standard was different from a denial of justice.115 The tribunals preference for the effective means standard as the basis of Ecuadors liability for the acts of its judiciary is more readily explained as an attempt to avoid the local remedies rule. By accepting the

that may be considered are the complexity of the case, the behaviour of the litigants involved, the significance of the interests at stake in the case, and the behavior of the courts themselves (emphasis added). 114 See ibid paras 328-331 (the tribunal resorting to the customary international law principles on effective remedies). 115 Unlike Chevron, the tribunal in Duke Energy Electroquil Partners and Electroquil SA v Ecuador , Award, 12 August 2008 (ICSID Case No ARB/04/19) looked at the substance of the dispute and refrained from drawing a superficial distinction between a denial of justice and a breach of the effective means clause. The dispute arose in connection with a power purchase agreement concluded between Electroquil, of which the investor was a shareholder, and INECEL, a state-owned entity responsible for the generation, distribution and transmission of energy. The investor contended that Ecuador failed to provide effective means of asserting claims. According to the investor, a failure by the local arbitral tribunal to exercise jurisdiction over Electroquils claim and the governments opposition to arbitration contrary to its earlier commitment amounted to a violation of the effective means standard. The tribunal noted that Article II(7) guaranteed the access to courts and the existence of relevant institutional mechanisms. Hence, it formed part of the more general guarantee against denial of justice(ibid para 391). In examining whether the fact that the government had objected to the jurisdiction of the local tribunal amounted to a denial of justice, the tribunal highlighted the fact that Electroquil had not challenged the final decision of the local arbitral tribunal before the courts of Ecuador. As a result, the Ecuadorian legal system never came into play to rule on the award (ibid para 398). The tribunal dismissed the claim of denial of justice due to the investors failure to show that no adequate and effective remedies existed.

investors claim under the effective means standard, the tribunal found the host state liable without having to distinguish the Loewen ruling on judicial finality. Just as was the case with Saipem, the Chevron award encourages the doubtful practice of obtaining redress for denial of justice by disguising the latter as a different cause of action.

5.3. The effective means standard: beyond denial of justice

The wording of the effective means standard suggests that it may encompass not only the judicial process but also legislation. The latter dimension was prominent in the interpretation given to the standard by the tribunal in brought AMTO v Ukraine.116 AMTOs claim was

before an ECT tribunal by virtue of its shareholding in EYUM-10, an entity which was engaged in supplying services to a nuclear power plant called ZAES. At the time of arbitration, ZAES was a separate division of the National Nuclear Power Generating

Company Energoatom. When the investor purchased its shares in EYUM-10, Energoatom was its largest debtor. At the heart of the investors claims were unsuccessful attempts by EYUM-10 to recover its debts in eleven cases of contractual non-payment and the subsequent bankruptcy proceedings instituted against Energoatom. The investor contended that there was a denial of justice resulting from (1) proceedings in Ukrainian courts, (2) Ukrainian bankruptcy legislation, and (3) state interference in the bankruptcy proceedings. Along with contending that there had been a denial of justice, the investor claimed that Ukraine had failed to ensure that its domestic law provides effective means for the assertion of claims and the enforcement of rights.117 The tribunal observed that in order to determine the existence of a denial of justice, the
116

AMTO v Ukraine (n 37). 117 Ibid paras 75, 85.

treatment of an investor by national courts should be examined in its entirety.118

In

addressing the allegations of a denial of justice in connection with judicial proceedings in Ukrainian courts, the tribunal noted that EYUM-10 had been successful in its claims for contractual non- performance and that irregularities in the bankruptcy proceedings were remediable. While noting that EYUM-10s experience of Ukrainian bankruptcy proceedings might have been frustrating, the tribunal concluded that the investor failed to prove any legal error, abuse, undue delay or interference in the process by the Ukrainian courts.119 No denial of justice by the Ukrainian courts was established as the tribunal observed that the investors submissions demonstrated unrealistic expectations of a simple and rapid result, in a judicial structure where there were many other interests and competing rights to be considered.120 After dismissing the investors allegation of denial of justice, the tribunal proceeded with an analysis of the claims under the effective means provision in Article 10(12) which the investor invoked in support of its contention that the bankruptcy legislation in the Ukraine was clearly inadequate and did not live up to the standard required by international law.121 The investor identified various specific shortcomings in the bankruptcy legislation, such as the absence of remedies in the case where a debtor was protected by a moratorium. The tribunal held that the effective means provision in Article 10(12) implied a qualitative standard: legislation ought to be not only constitutional and accessible but also effective.122 It acknowledged the difficulty of identifying criteria by reference to which the effectiveness of the legislation could be assessed. Taking into consideration the object and purpose of the

Ibid para 78. See also para 76 (The investor that fails to exercise his rights within a legal system, or exercises its rights unwisely, cannot pass his own responsibility for the outcome to the administration of justice, and from there to the host State in international law). 119 Ibid para 84. 120 Ibid. 121 Ibid para 85. 122 Ibid para 87.
118

ECT, the tribunal suggested that effectiveness under Article 10(12) implied a systematic, comparative, progressive and practical standard: [The standard] is systematic in that the State must provide an effective framework or system for the enforcement of rights, but does not offer guarantees in individual cases. Individual failures might be evidence of systematic inadequacies, but are not themselves a breach of Article 10(12). It is comparative in that compliance with international standards indicates that imperfection in the law might result from the complexities of the subject matter rather than inadequacies of the legislation. It is progressive in the sense that legislation ages and needs to be modernized and adapted from time to time, and results might not be immediate. Where a State is taking the appropriate steps to identify and address deficiencies in its legislation in other words improvement in progress then the progress should be recognized in assessing effectiveness. Finally, it is a practical standard in that some areas of law, or the application of legislation in certain circumstances, raise particular difficulties which should not be ignored in assessing effectiveness.123 In examining the investors allegations against the above criteria, the tribunal observed that the Ukrainian bankruptcy law was modern and introduced new concepts. The tribunal found it unsurprising that the application of the law to an enterprise of strategic importance in the energy sector caused certain problems.124 Despite the fact that EYUM-10 had encountered difficulties in collecting its debts from Energoatom, the tribunal was not persuaded that the bankruptcy legislation did not provide an effective means to enforce creditors rights in the Ukraine.125 Neither had the investor succeeded in showing that the legislation in issue otherwise constituted a denial of justice.126 The AMTO award is notable for adding another dimension to the effective means standard of Article 10(12) ECT. As it is evident from the investors claim and its analysis by the tribunal, the effective means standard is not limited to the obligation to provide a fair and efficient system of justice. Indeed, the reading of the pertinent provision suggests that the
123

Ibid para 88. Ibid para 89. 125 Ibid. 126 Ibid.
124

state is obligated to ensure effectiveness of not only the judicial system but also of the legislation, which is necessary for the assertion of claims and the enforcement of rights by foreign investors. The question is whether the need to assess the relevant legislation as a part of the legal system, by analogy with the prevailing views on denial of justice, should imply a mandatory application of the local remedies rule as a substantive element of the delict. If denial of justice requires that the whole system be tried (and failed), then a failure to provide an effective means of asserting claims might be construed as necessitating the same measure of remedial finality in respect of legislative conduct. The AMTO tribunal highlighted that the effective means standard is systematic in that the State must provide an effective framework or system for the enforcement of rights.127 Should this mean that in order to challenge the efficacy of a certain regulation or law the whole framework of remedies should be exhausted? If the rationale behind the judicial finality rule is to be extended to the effective means standard, one could argue that a successful claim under Article 10(12) ECT would necessitate the exhaustion of all available remedies, including, where applicable, an attempt to challenge the inefficiency of certain legislative provisions before a constitutional court of the host state. The systematic nature of a host states obligation under the effective means standard once again brings to the fore problematic aspects of the judicial finality rule which has yet to provide a convincing explanation for exempting administrative making from the exhaustion of local remedies requirement. 5.4. Labelling as a means of avoiding the local remedies? The foregoing discussion has exposed the ramifications of multiple and overlapping standards of treatment being included in oil and gas texts. The
127

and legislative decision-

Chevron and Saipem awards

See above n 157.

enable investors to obtain redress for a denial of justice without having to comply with the rule of judicial finality. Investors are simply encouraged to disguise their claims by invoking an oil and gas standard other than the denial of justice guarantee. The effective means standard and judicial expropriation are not the only causes of action which an investor can rely upon in its attempt to avoid the application of the local remedies requirement and other procedural barriers. In accordance with some of the US BITs, claims under the arbitrary and discriminatory measures clause are also exempt from the local remedies requirement.128 This provision was deployed in the Chevron claim but was not discussed by the tribunal. While it is only logical that, in order to avoid the need to satisfy the cumbersome exhaustion rule, investors would prefer to present their cases as anything but a denial of justice, the willingness on the part of tribunals to accept such tactics of cherry- picking is questionable at best. The exercise in a skillful labelling undermines the principal justification for the rule of judicial finality, which explains the mandatory exhaustion of local remedies by reference to the special nature of judicial activity and the host states duty to provide a fair and efficient system of justice as opposed to ensuring justice at every stage of the judicial process. As argued earlier, if the exercise of judicial power were to be subject to special treatment in international law, the rule of finality would need to be extended to all forms of judicial action. Contradictory interpretations of the effective means standard betray the existing indeterminacy about the role of investment arbitration and the relationship between international tribunals and national courts. Indeed, it remains unclear whether investor-state arbitration ought to function as an alternative to national courts or as a subsidiary mechanism

For example, Article II (3) (b) of the US-Ecuador BIT provides that [a] measure may be arbitrary or discriminatory notwithstanding the fact that a party has had or has exercised the opportunity to review such measure in the courts or administrative tribunals of a Party.
128

of dispute resolution.129

The reinstatement by the

Loewen

tribunal of the local remedies rule in relation to claims involving judicial acts was nothing but an attempt to draw the line between investor-state arbitration and adjudication by host state courts. As explained by the NAFTA tribunal in Loewen, Far from fulfilling the purposes of NAFTA, an intervention on our part would compromise them by obscuring the crucial separation between the international obligations of the State under NAFTA, of which the fair treatment of foreign investors in the judicial sphere is but one aspect, and the much broader domestic responsibilities of every nation towards litigants of whatever origin who appear before its national courts. 130 However, as the rule of judicial finality failed to command uniform acceptance among arbitral tribunals, attempts to circumvent the local remedies requirement have only exacerbated the lack of consistency in arbitral practice. As evidenced by the Chevron award, the investor-state dispute settlement system continues to function as an alternative to domestic courts, however at the expense of conceptual clarity, certainty and predictability. The judicial finality exception to the local remedies rule was created in Loewen only to be departed from in

Chevron and Saipem. In all three cases, the treatment of the investors by the host state courts indeed justified an international review. However, the fact that the exhaustion of local

remedies was found necessary to stop a claim against the US but dispensed with to allow claims against Ecuador and Bangladesh raises the question of whether the rule ought to be so flagrantly moulded to suit the personal convictions of party-appointed arbitrators. Hence, there is a need for redefining, in clear terms, the scope of the local remedies rule and its applicability to various categories of investment disputes. Since arbitral practice exhibits strong disagreement and a varying measure of support for the exhaustion rule, the task of
Kriebaum (n 73) 426 (distinguishing between the ICSID arbitration as an alternative to domestic adjudication, and the dispute resolution bodies in the international law of human rights which operate as a subsidiary mechanism ). See also McLachlan, Shore and Weiniger (n 84) 128 (stating that one of the purposes of investment arbitration is to provide a neutral forum for dispute resolution of investor-State disputes).
129 130

(n

49) para 242.

redefining the role of local remedies in investment arbitration is better deferred to state parties. For its part, the ICSID Convention allows states to make their consent to arbitration subject to the exhaustion of local remedies.131 States must decide if claims arising from the administration of justice, legislative acts, and executive conduct should be subject to the local remedies rule. Until such clarification is introduced, tribunals should enforce existing waivers of local remedies and refrain from creating special categories of international wrong for the sole purpose of granting investor claims. The proliferation of alternative causes of action in recent arbitral practicewhich investors have exploited to circumvent various procedural constraintsalso raises a question about the redundancy of certain treaty provisions. Indeed, violations of investor rights arising in the course of the administration of justice can be brought under FET (which incorporates a guarantee against denial of justice), the prohibition of arbitrary and discriminatory measures, expropriation, and the effective means standard. Does the availability of the largely overlapping standards benefit the system of oil and gas protection? As evidenced by Chevron and Saipem, the principal benefit of having multiple and overlapping standards lies in their ability to replace a denial of justice guarantee in order to allow the investor to avoid the local remedies rule and other procedural barriers. While individual investors may gain from labelling the host states conduct as a breach of the effective means standard or as a judicial expropriation instead of invoking a denial of justice, such practice will significantly compromise the integrity, credibility and sustainability of oil and gas law in the long

See Schreuer (n 46) 2 (emphasising that Article 26 ICSID expressly waives local remedies, except when state parties wish to make their consent to arbitration subject to the exhaustion rule. Israel and Gwatemala both gave notification to ICSID opting for the mandatory exhaustion of local remedies prior to arbitration, but Israel has subsequently withdrawn its notification). See further GR Delaume, ICSID Arbitration and the Courts (1983) 77 AJIL 784, 785 (arguing that by virtue of Article 26 providing for ICSID arbitration as an exclusive remedy, if a court in a contracting state becomes aware that a claim before it may call for adjudication under ICSID, the court ought to stay the proceedings pending proper determination of the issue by ICSID). Also, C Schreuer and others, The ICSID Convention: A Commentary (2nd edn CUP, Cambridge 2009) 386-7.
131

term. It is therefore submitted that both host states and foreign investors would benefit more from abolishing variously overlapping standards. This would preclude claimants and tribunals from deploying the local remedies rule in a selective manner, and would introduce clarity as to what forms of governmental conduct can give rise to the international responsibility of the host state to affected investors. The reliance on the standard of expropriation as a distinct cause of action may be of decisive importance if a dispute is brought under the BIT which allows for investor-state arbitration only in the case of expropriation. The award in Saipem v Bangladesh highlights the practical implications of invoking expropriation in a case where the factual context more readily supports the finding of a denial of justice. Although the conduct complained of also amounted to denial of justice and a breach of fair and equitable treatment, the primary claim was for expropriation, which under Article 9(1) of the BIT was the sole ground giving rise to the jurisdiction of an ICSID tribunal.132 Despite the fact that the case was clearly about a denial of justice, the tribunal preferred to characterise the disputed conduct as an expropriation through judicial acts. Had the Saipem tribunal described the conduct of the

Bangladeshi courts as a denial of justice and not as an expropriation, the investor would have been deprived of the opportunity to have its grievance heard by an oil and gas tribunal. As regards BITs providing for the arbitration of expropriation cases only, the elimination of alternative standards may seem problematic. Such BITs reflect a policy choice that

intentionally limits the availability of investment arbitration to only certain types of host state interference with foreign investment.133 However, it is clear that despite seeking to limit its exposure to investment arbitration by providing consent to only expropriation disputes, a host
Saipem (n 88) para 121. For example, Chinese investment treaties usually provide for state consent to arbitration of disputes relating to the amount of compensation for expropriation only (For detail, see Gallagher & Shan (n 1) 326). A similar practice was characteristic to the USSR BITs many of which were inherited by Russia.
132 133

state may still end up being held liable. Driven by a perceived need to afford the investor an effective remedy, tribunals may prefer to characterise the disputed conduct as an international wrong that they are competent to rule upon. BITs providing for arbitration of expropriation disputes alone fail to limit the exposure of the host state to international responsibility. Host states would gain more from eliminating multiple and overlapping standards. The adoption of a unified standard of treatment with clearly outlined parameters of illegality would introduce clarity as to what forms of governmental conduct can give rise to international responsibility of the host state to affected investors.

CHAPTER 5 COMPARITIVE STUDY INDIAN AND INTERNATIONAL LEGISLATION

Introduction:
In this day and age while one wonders at the enormity of business transactions and globalization taking place simultaneously around the world one really wonders how this is taking place at such a fast pace and what could be the problems corporations and countries face to ensure the smooth functioning of their policies and economies. The solution to the problems faced by economies today may be various forums for settlement, however one of the relatively new and a modern technique used by them is Arbitration.

Arbitration is a form of alternative dispute resolution method which is a technique used legally for the resolution of disputes between parties outside the courts in private, wherein the parties to a dispute refer it to one or more than person as they prefer called Arbitrators to give the disputes an suitable ending through a decision they agree themselves to be bound known as an award.1International Commercial Arbitration has established itself as the best method of determining complex commercial disputes all over the world due to which states have modernized their laws of arbitration to facilitate this new need. 2 There have been new arbitral centers established and there has been a rise in the study of the law and practice of international commercial arbitration as an important subject among students at universities and law colleges. 3

1 2

http://dic.academic.ru/dic.nsf/enwili/3587812 Alan Redfern and Martin Hunter, International Commercial Arbitration, Sweet & Maxwell, 4 th Edition, 2004,pg 1 3 Ibid.

International Commercial Arbitration is a private method of dispute resolution, which is chosen by the parties themselves as an effective way of putting an end to disputes between them, without recourse to the courts of law. It is conducted in different countries and against different legal and cultural backgrounds, with a striking lack of formality in which there are no national flags or other symbols of state authority. 4

International Commercial Arbitration has various benefits over other traditional methods such as litigation and one has to appraise the benefits of it to verify the truth in the above statements. The very basic and primary use of arbitration is the fact that it provides neutrality to parties in cases where two parties may belong to different cultures 5, countries and may have been used to their own jurisdictional courts as such arbitration provides a neutral ground where parties may decide and choose their own venue, seat of arbitration, arbitrators, rules to be followed allowing them to accept a neutral forum on negotiable terms as basic fairness and risk of bias in a foreign court system is of great importance and concern to parties. 6

There are however more than one reasons for the success of arbitration in the modern world which is full of commercial and complex transactions taking place among entities in the field of technology, research, commodities, finance among various others which need fact finding and expertise of someone who has the required capabilities of make a
4
5

Ibid. Huleatt-James and Nicholas Gould, International Commercial Arbitration: A

Handbook 9 (2d ed., LLP 1999) 6 Vijay Reddy & V. Nagaraj, Arbitrability: The Indian Perspective. 19 J. Intl 117, 118 (No. 2, 2002).

well reasoned decision.7 Arbitration allows the parties to choose an arbitrator with the requisite technical knowledge and experience enhancing the quality of decision-making in many cases. 8 The availability of a confidential forum unlike traditional courts where hearings are open and awards and decisions are published there is a degree of comfort for parties in matters where any sensitive information is involved.9 Arbitration also allows parties with greater control to customize and control the proceedings unlike traditional court proceedings.10

Each party in arbitration is free to choose procedural matters to be employed and also the rules pertaining to taking testimony, language, interim measures, substantive law, evidentiary matters, presiding arbitrators and the degree of procedural formality.11

Among others there are also benefits such a speed, efficiency, control, cost and the advantage of awards being internationally enforceable unlike orders of traditional courts due to various agreements and conventions entered into between countries encouraging International Arbitration. 12
7
8

See id at 118. Sandeep S Sood FINDING HARMONY WITH UNCITRAL MODEL LAW: AFTER THE

CONTEMPORARY ISSUES IN INTERNATIONAL COMMERCIAL ARBITRATION IN INDIA ARBITRATION AND CONCILIATION ACT OF 1996
9

Reddy & Nagaraj, supra n.6 Huleatt-James & Gould, supra n. 5 11 Reddy & Nagaraj, supra n.6 12 Ibid.
10

History of Arbitration in the Modern World:

Arbitration as a means for settling disputes may have come a long way but one really wonders where it all started and how this whole system of alternate forum of dispute settlement as it is now known began. According to certain textbooks arbitration is being used in some countries since ancient times. According to an article on a website on Australian Arbitration Arbitration in the modern world has a very long history. Arbitration in the ancient time was a set of trade customs in Ancient Egypt and Babylonia following which it was adopted by the Greek City States and incorporated into the Roman Ius Gentium (the "Law of Nations" later codified by Justinian in the Corpus Juris Civilis).
13

The earliest systems allowed

merchants to adjudicate their own disputes without any Government supervision. Roman Law then spread the system across not only the lands formally within the Empire, but also to those countries with which Rome traded. By this simple means, commercial laws converged across most of continental Europe. 14 In the Middle Ages in Europe, for example, the Hanseatic League was active in promoting its trading systems while, in England, the pie-powder courts (Fr., pied poudr means "dusty foot") offered instant adjudication for those walking in from the local fairs and markets. 15 Over a thirty-two-year period in the Eighteenth Century, Lord Mansfield gently consolidated the Law Merchant into the Common Law, also drawing on the experience in the Court of Admiralty to bring in the best of the Laws of Oleron, the Hansa Towns and other customary maritime systems.

It is believed that King Solomon who ruled from 971-931 B.C also was an arbitrator and Philip the second the father of Alexander the Great used arbitration as a mode for settling disputes arriving from a peace treaty with the southern states of Greece as far back as 337 B.C. 16 As far as the history of Arbitration in England is
13 14

http://www.australianarbitration.com/history-arbitration Ibid. 15 Ibid. 16 Elkouri & Elkouri, How Arbitration Works, Fifth Edition. 1999

concerned it can be said that it is older than the common law system they have and in fact England has been using arbitration as a common means of commercial dispute settlement method from as far back as 1224. 17 Another fact is that even early Native American tribes were also known to use arbitration as a means to resolve disputes within the tribe and as a means to resolve disputes between different tribes. Under English law, by the time the Arbitration Act 1697 was passed arbitration was already common
18

and one of the first recorded judicial decisions on arbitration was in England in 1610.

19

However as the

early arbitrations laws suffered from many weaknesses including the fatal provision that either party in a arbitration could withdraw the arbitrator's mandate right up until the delivery of the award if things appeared to be going against them there needed to be a change in the act which was duly done by the Act of 1697.

However, as times begun to roll and international trade grew it brought with it difficulties and disputes were introduced to the auspices of lex mercatoria leading to arbitration becoming more sophisticated to the extent that it is today even being conducted online with a system known as Online Dispute Resolution or ODR having the parties to file disputes online and proceedings taking place over the internet and judgments given on basis of documents submitted online. There are however various conventions and protocols that were entered into by various countries to bring in sync the rules governing International Commercial Arbitration. In recent times the UNCITRAL Model Law promulgated in 1985 and amended as recently as 2006 has been the source for International Arbitration and many countries like India have also based their legislations on the rules of the UNCITRAL

and Bales, Richard C. Compulsory Arbitration: The Grand Experiment in Employment. 1997.
17

Hill, Marvin F., Sinicropi, Anthony V., Improving the Arbitration Process: A

Primer for Advocates. 1991. 18 9 & 10 Will. III c.15 19 Vynior's Case (1610) 8 Co Rep 80

Model Law. As of February 22, 2009 142 20states have ratified the New York Convention of 1958 which is the most important convention till date. In the past there have been various conventions like the following:

0 The Geneva Protocol of 1923 1 The Geneva Convention of 1927 2 The European Convention of 1961 The Washington Convention of 1965

The growth of International Commercial Arbitration has also given rise to various private and state run associations to conduct arbitration most of them having their own rules and procedures allowing parties to select them as their choice of institutions to conduct and take care of the procedural aspects of Arbitration which is also known as Institutional Arbitration. A few of the prominent associations conducting Arbitrations in the International Arbitration sphere are: 1.The London Court of International Arbitration (LCIA) 2.The International Chamber of Commerce. (ICC) 3.American Arbitration Association (AAA) 4.International Centre for Settlement of Investment Disputes (ICSID)

Thus one can see that there has been widespread growth in the field of International Commercial Arbitration for which various countries have associated themselves with this new phenomenon in the legal field to enhance their economy and development of their countries judicial system through providing alternative
20

http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html

forums for businesses and states.

The Legal Regime of India in International Commercial Arbitration:

India has been one of the fastest growing economic powers in recent times with a growth of 8.3% in its GDP in the year 2008.
21

India has seen many changes in its economic policies in throughout the 1980s leading to

many foreign companies and corporations investing in the countries various profitable sectors thus making it a global economic power also giving its international commercial arbitration system an overhaul for changing times.

The Indian Government enacted the Arbitration and Conciliation Act in 1996 in responding to its erratic and extremely sluggish court system to attract foreign direct investment and also to establish it as a center for International Commercial Arbitration in the global sphere. However even though the new Act has provided impetus and relief there are still a few potholes in the system, which need to be filled and looked at including enforcement and challenging of foreign awards, interim measures, etc. 22

21
22

http://www.usindiafriendship.net/viewpoints1/Indias_Rising_Growth_Potential.pdf Sandeep S Sood FINDING HARMONY WITH UNCITRAL MODEL LAW:

CONTEMPORARY ISSUES IN INTERNATIONAL COMMERCIAL ARBITRATION IN INDIA AFTER THE ARBITRATION AND CONCILIATION ACT OF 1996

History of Arbitration in India:

Though India has expanded in the areas of International Arbitration only recently

23

arbitration has long been

in the Indian culture and practice as a valid mechanism for settling disputes. 24 Historians believe that early Indian law-givers gave more impetus to Arbitration through a three-tier system called Panchayats court system appointed by the Kings
26 25

than the

which only changed after the arrival of the British who overhauled the

traditional Indian legal system including codification of arbitration laws with the passage of the first Code of Civil Procedure of 1859.27 The first legislation to be dedicated entirely to arbitration was framed on English Common law principles was the Indian Arbitration Act of 1899
28

which was later amended by the Indian Arbitration Act of 1940 on

grounds of being drafted in an unsatisfactory manner 29 the latter lasting for 52 years before the current Act of 1996 was enacted.30

India is also a part of various treaties involving International Arbitration including the Geneva Protocol on
23

Justice K.A. Abdul Gafoor, Arbitration Law - Need for Reforms ICA Quarterly,

(Sept 2003).
24

Narayanan, Shri K.R. President of India at the Inauguration of the International

Council for Commercial Arbitration Conference. 17 J. Intl Arb. 153, 154 (Oct. 2000). 25 Raghavan, Vikram. New Horizons for Alternative Dispute Resolution in India: The New Arbitration Law of 1996. 13 J. Intl Arb. 5, 9-24 (No. 4, 1996).
26 27

Raghavan, supra n.25, at 6. Ibid. 28 Ibid. 29 Krishan, Ranbir. An Overview of the Arbitration and Conciliation Act 1996. 21 J. Intl Arb. 263, 265 (No. 3, 2004) 30 Raghavan, supra n. 3, at 7-29

Arbitration Clauses 1923, the Geneva Convention on the Execution of Foreign Arbitral Awards 1927, and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 which have been recognized by the legislature in three Acts: namely the 1940 Act, the 1937 Act, and the 1961 Act.31

For many, who believe that India has always been a progressive country will be astounded to know that it is only in 1991 that India has become a nation synonymous with progress and a got better Standards of International Arbitration attributable to Indias new economic policies. 32

Legislation:
As enunciated previously statutory provisions on Indian Arbitration were contained in three different enactments namely the Arbitration (Protocol and Convention) Act, 1937, the Arbitration Act 1940 and the Foreign Awards (Recognition and Enforcement) Act, 1961 leading to a lot of issued and problems for enforcement and smooth functionality of the arbitration regime. 33 Arbitration under these measures was widely considered to be archaic, unpredictable, untimely, and expensive, thereby discouraging foreign

investment.

34

The need for a consolidated legislation gave birth to the Indian Arbitration and Conciliation

Act, 1996 that is the current law on arbitrations in India. The new Act is based on the Model law on
31

Jambholkar, Lakshmi. Recent Developments in Indian Law. 19 J. Intl Arb. 601,

601 (No. 6, 2002).

32

Work, Tracy, Student Author, India Satisfies Its Jones for Arbitration: New

Arbitration Law in India,10 Transnat'l Law, 217, 220 (1997) 33 http://madaan.com/arbitration.html 34 Raghavan, Vikram. New Horizons for Alternative Dispute Resolution in India: The New Arbitration Law of 1996. 13 J. Intl Arb. 5, 9-24 (No. 4, 1996).

International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 1985 for most parts.
35

The said Act is divided in 2 parts one being applicable to domestic

arbitrations and the other to International Arbitrations and foreign awards. Section 2(1)(f) of the Act defines "International Commercial Arbitration" as arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India where at least one of the parties is: an individual who is a national of, or habitually resident in any country other than India; or

a body corporate which is incorporated in any country other than India; or

a company or an association or a body of individuals whose central

management and control is exercised in any country other than India; or the Government of a foreign country.36

Indias reputation as a viable forum for international commercial arbitration has been enhanced to a great extent after the adoption of the Arbitration and Conciliation Act of 1996
37

and the international business

community has responded positively to it making it a unifying code for arbitration take place in India both on a domestic and international stage.38

35 36

http://madaan.com/arbitration.html Ibid. 37 Bansal, A.K., International Arbitration in India, 6Am. Rev. Int'l Arb. 191 (1995). 38 Krishan, Ranbir. An Overview of the Arbitration and Conciliation Act 1996. 21 J. Intl Arb. 263, 265 (No. 3, 2004)

Furthermore, it has reduced the need for judicial intervention, enforcing awards as judicial decrees resulting in granting greater autonomy to arbitral tribunal decisions
39

leading to a better, organized, and predictable

procedure that is in a better position to handle Indias unprecedented rise in international commercial transactions. However there are still jinks seen in the regime of Arbitration in India with issues regarding

interim measures and whether Indian courts have jurisdiction to grant interim measures of protection where the seat of arbitration is foreign.40

Problems occur when two parties (Indian national v. non-Indian) hold arbitration abroad and the Indian party needs an interim measure of protection of an Indian court to secure their rights (i.e. to secure assets, to appoint receivership, etc). Since interim measures are of great practical importance to the parties involved, the determination of which decision-making body to approach is of critical importance. Unfortunately, the Supreme Court has not yet settled the issue, and the answer has, like a burning ember,

been tossed from court to court.41

Cases of Importance:

39 40

Ibid. Singh & Krishnan, supra n. 38, at 43. 41 Ibid.

India being a relatively new player in the International market of Arbitration has already had its fair share of controversial judgments passed by its various court on the interpretation of Indian Arbitration and Conciliation Act 1996 leading to chaos among jurists and lawyers alike. Here are a few cases are the most important in gaining a idea of the current situation of International Arbitration in India:

1. The ITI Case The ITI case is one of grave importance in the Indian arbitration history. Just after the new Act of 1996 was passed the question of the interpretation of the Court in the said Act came up before the Allahabad High Court and the challenge was to decide if the term Court
42

defined in the new act includes

the Court of the Additional District Judge (ADJ) along with the District Judge and if not then if the District Judge has powers to transfer applications filed under the Act to the ADJ as is done in normal course. On the face of it the question seemed an easy one where lawyers thought answers to both the questions being a simple yes keeping in view that the Legislature would not want to burden the District Judge with all the matters of arbitration if the answer to the second question was in the negative thus creating a hurdle in the administration of justice. However, the answer to this was not as simple as chalk and cheese but a more intelligent one as the Act included the word principal while defining the term Court and the presence of a very interesting Section 42 in the Act which states that where an application

for arbitration is filed all further applications shall be filed in the same court and none else. a) Facts Of the Case A dispute arose between the Indian Telephone Industries (ITI) , an undertaking owned by the Government of India dealing in the manufacture and supply of telephones and transmission equipments and other allied components and K.V.Electronics (KVE) a company dealing in assemblies and transmission equipments over certain over-payments made by ITI to KVE over a few purchase orders regarding a contract to supply equipment and other materials which were issued from time to time by ITI to KVE in the year 1991 , 1992 and 1993.
42

M/s I.T.I. Ltd., Allahabad v. District Judge, Allahabad and Others; All India Reporter 1998 Allahabad

The dispute was submitted to Arbitration pursuant to an arbitration clause in the contract and a sole arbitrator was appointed who gave an award on March 3 1997 to the effect that KVE must pay back the sum of over-payment to ITI following which KVE filed an application under Sec 34 with Court of District Judge in Allahabad who transferred the said application to the court of the third ADJ,Allahabad for disposal . However , when the matter came up ITI raised an objection to the jurisdiction of the third ADJ to entertain the application which was overruled on the grounds that the ADJ is not inferior to the District Judge and was thus entitled to dispose the matter as per Sec 2(e) of the Act also dismissing other applications made by ITI to transfer the application .
43

Aggrieved by the said orders ITI filed a Writ Petition with the High Court of Allahabad challenging the said orders to which the High Court stated that : By no imagination the word Court could include the Court of the ADJ. Legislature made it plain and simple by using words and phrases like, means, includes and does not include. The parliament had exhaustively explained the meaning of the term "Court" in that the word "means" is a term of restriction, while the word "includes" is a term of enlargement and when both the words "means" and "includes" are used together to define a thing, the intendment of the legislature is to supply restricted meaning to the term. The use of phrase but does not include further restricted the meaning of the term Court. Hence, it was not possible to impart any other meaning to the term Court besides the obvious meaning of the Court of the DJ. The Allahabad High Court held that the scheme of the 1996 Act prevented such a transfer on two counts. First, the Court of ADJ was not the principal Civil Court of Original Jurisdiction and secondly, section 42 prohibited such a transfer in the instant case. Thus this case was a watershed case and probably the first case
43

Ibid.

after the new Act was promulgated in 1996.44 It has been more than eleven years sine the ITI judgment was delivered and it has not yet been overruled by the Supreme Court and no other High Court has given a different opinion and has been used in a catena of judgments some of which are :

(a) State of Tamil Nadu, Rep. by Superintending Engineer, and Another vs. R. Sundaram and Another 45,

(b)Globsyn Technologies Limited vs. Eskaaycee Infosys46,

(c) Valliappa Software Technological Park Private Limited, Bangalore vs. C. Sundaram and Others 47, (d) National Thermal Power Corporation vs. R. S. Avtar Singh and Company and Another48, and (e) Managing Director, Sundaram Finance Limited, Madras and Another vs. G. S. Nandakumar 49.
44
45

Ibid. 2006 (1) CTC 178, 2005 INDLAW MAD 579

46

2004 (57) ARBLR 560, 2003 INDLAW AP 162

47

2002 (46) ARBLR 530, 2002 (1) KarLJ 358, 2001 INDLAW KAR 231 2002 (3) ARBLR 8, 2002 (63) DRJ 211, 2001 INDLAW DEL 744 2001 (3) ARBLR 37, 2001 INDLAW AP 66

48
49

2. Venture Global Engineering v Satyam Computer Services Ltd (Foreign awards are open to challenge on merits) :This case is probably the most controversial cases in the history of Indian Arbitration and also in the International sphere of Arbitration reason being it establishes and upturns the Model Law on the basis that foreign awards can be challenged and set aside on merits as having no regard to the rules of the Model Law. This case provides that a foreign award can be challenged in India as a domestic award in terms of s.34 of the Arbitration and Conciliation Act 1996 (the 1996 Act) notwithstanding the enforcement proceedings of the foreign award are pending before a foreign court and deems that the Indian Arbitration and Conciliation Act 1996 provides for Section 34 under Part 1 that permits a valid challenge to a domestic award on ground of Indian public policy if the award is patently illegal.50 The main contention of the Supreme Court in this case was that the extended definition of public policy enumerated in Oil & Natural Gas Corp Ltd v Saw Pipes Ltd 51 cannot be by-passed by taking the award to a foreign country for enforcement.

a) Facts of the Case: The appellant company, Venture Global Engineering (VGE), and respondent No.1,
50
51

2008 (1) Arb L.R. 137 (SC) (2003) 5 S.C.C. 705, wherein the public policy of India has been defined to include; (a) the fundamental policy of India; or (b) the interests of India; or (c) justice or morality; or (d) in addition, if it is patently illegal. The ground of patent illegality was added to the definition of public policy spelt out in another judgment of the Supreme Court in Renusagar Power Co Ltd v General Electric Co (1994 Supp. (1) SCC 644).

Satyam Computer Services Limited (SCL), an Indian company, entered into a joint venture agreement and formed a JV company named Satyam Venture Engineering Services Ltd (respondent No.2/SVES). Both the appellant and respondent No.1 had a 50 per cent equity shareholding. Another agreement executed between the parties was the Shareholders Agreement (SHA) disputes arose between the parties. However as there was an arbitration clause in the contract and the governing law of the contract was the law of the State of Michigan the parties chose to settle the matter accordingly. Satyam Computer Services filed a request for arbitration with the London Court of International Arbitration (LCIA) pursuant to which Mr. Paul B. Hannon was appointed as a sole arbitrator.
52

Thereafter, an award was made directing appellant to transfer the shares to

respondent No.1 after which Respondent No.1 filed a petition to recognize and enforce the award before the United States District Court, Eastern District Court of Michigan (US Court). The appellant defended this proceeding before the US Court by filing a cross petition and objecting to the enforcement of the Award on the grounds that it was in violation of Indian Laws (specifically the Foreign Exchange Management Act, 1999 (FEMA)) and its notifications. 53

Following the above events the Appellant filed a suit before a City Civil Court in India seeking declaration to set aside the award and a permanent injunction on the transfer of shares under the Award to which the District Court passed an ad-interim ex parte order of injunction, inter alia, restraining respondent No.1 from seeking or effecting the transfer of shares either under the terms of the Award or otherwise. Respondent No.1 filed an appeal before the High Court. The High Court however dismissed the said appeal stating that the Award
52

Dharmendra Rautray India: Venture Global Engineering v Satyam Computer Services Ltd - foreign

awards are open to challenge on the merits as domestic awards - NTPC v Singer Co case revisited in International Arbitration Law Review ,2008 , pg 1
53

Ibid at pg 2.

cannot be challenged inspite of it being against the public policy and in contravention of statutory provisions of India. Thereafter a Special Leave Petition against the said order before the Supreme Court of India by the appellant. The appellant further argued before the Supreme Court of India that Pt I of the 1996 Act applies to foreign awards as covered by the judgment in Bhatia International v Bulk Trading SA
54

whereas the first

respondent contented that in view of s.44 of the 1996 Act and the terms of the agreement, no suit would lie in India to set aside the Award, being a foreign Award, and that no application under Sec.34 of the 1996 Act would lie to set aside the Award also relying upon the rule of Res Judicata the case already having been decided earlier by the Arbitration in the United Kingdom .

b) Reasoning of the Supreme Court: The Supreme Court based on its earlier decision in Bhatia International vs. Bulk Trading , and held that it was open to the parties to exclude the application of the provisions of Pt I by express or implied agreement, failing which the whole of Pt I would apply. Further it

held that to apply s.34 to foreign awards would not be inconsistent with s.48 of the 1996 Act, or any other provision of Pt II and that the judgment-debtor cannot be deprived of his right under s.34 to invoke the public policy of India, to set aside the award. The Supreme Court further stated that the Respondent No.1 that the award had an intimate and close nexus to India in view of the fact that, (1) the company was situated in India; (2) the transfer of the ownership interests was made in India under the laws of India; and

54

(2002) 4 S.C.C. 105

(3) all the steps necessary steps had to be taken in India before the ownership interests could be transferred. 55 Hence the appellant cannot be deprived of the right to challenge the award in Indian courts due to the close nexus of the case with India and its laws and even the SHA specifically provided the application of the Indian Companies Act and other applicable acts/rules being in force in India at any time to be followed by the shareholders in all cases and the court thus held that there was violation of the agreement by the Respondent No.1 by seeking to enforce the award in the US courts.

The above judgment was vehemently criticized in the International arena for being contrary to the object and scheme of the New York Convention and also in gross violation of Art.III of the New York Convention in as much as it introduces an additional ground for challenging a foreign award. The decision is also contrary to the intention of the Indian Legislature since it: (a) exposes a foreign award to an additional ground of challenge, (introduced by way of judicial legislation) meant for domestic awards only.5 (b) makes provisions of s.48 of the 1996 Act for enforcement of foreign awards redundant, as every time an enforcement application is filed before Indian courts under s.48, the opposite party would file objections under section 34 availing the benefit of challenging the foreign award on merits .

55

Rautray supra n.50 pg 2

(c) seeks to introduce a procedure to challenge a foreign award, through judicial legislation, in the absence of such a procedure under the 1996 Act. This decision changes the scope of the said Section 48 by allowing the Indian courts to interfere with the foreign awards on the basis of merits which was never the original view of the Indian Legislature by treating a foreign award as a domestic one regardless of the country it was passed it. 56

Current Issues and Judicial Involvement:

International Commercial Arbitration in India has come a long way from its archaic past but there still persist issues which need to be addressed swiftly by the Indian Legislature and the Indian Judicial system which suffers from the disease of slow moving lethargic court practices. Companies and Business on general suffer in the bargain as disputes as not solved for a long time. The very basic virtue of Arbitration is settlement of disputes in a quick manner which unfortunately is not the ground reality in India. Arbitration is being perceived as cost effective and a swift method of dispute resolution and thus arbitration clauses are being included in much more manner than before all over the world.
56
57 57

Ibid. Anurag K. Agarwal Resolving Business Disputes in India by Arbitration:

Problems Due to the Definition of Court , 2008.

India still needs a stronger system of Arbitration thus allowing interference by the courts from time to time as necessary. However too much of judicial intervention defeats the very purpose of Arbitration as seen while observing the perils of the 1940 Act where courts intervened at the drop of the hat and matters kept pending in the courts for years and sometimes decades forcing the Supreme Court to comment, the way law of arbitration is being administered has made lawyers laugh and legal philosophers weep.58

As mentioned earlier in the article Arbitration in India was a widely known but informal practice since ages where business communities had their own very old, time-tested methods of dispute resolution, which have nothing to do with the formal legal system. For instance, farmers, artisans, craftsmen, jewellers, commodity traders, money lenders, etc. had a well established method of resolution of disputes and it is mostly by negotiation or mediation by a well-known, highly reputed third party. However, major problems arose when businesses had to deal with complex matters where the stakes were very high and the documents were complex and legal and contained several clauses, bank guarantees, indemnities, etc. In 1952 Mr. Motilal C. Setalvad, the first Attorney General of Free India, wrote, A burning problem which the citizens, lawyers and judges face alike is that of the congestion of Courts of law and the consequent inordinate delays in the administration of justice 59
58

Guru Nanak Foundation v. Rattan Singh & Sons, All India Reporter 1981 Supreme Court 2075 at 2076

59

Setalvad, Motilal C., 1952 Problems before Legal Profession, All India Reporter (Journal Section),

In fact three and a half decades later, on November 26, 1985, in his Law Day (the day Indian Constitution was adopted by the Constituent Assembly in 1949) speech, the then Chief Justice of India painted a very dismal picture. He said, I am pained to observe that the judicial system in the country is almost on the verge of collapse. These are strong words I am using but it is with considerable anguish that I say so. Our judicial system is creaking under the weight of arrears. 60

It was quoted by Mr. Ashok Desai, Attorney General in 1996, when the situation was no different from 1985.61 More than half a century later, the situation has gone from bad to worse. The Economist wrote three years back,

The number of civil and criminal cases pending before India's courts has exceeded 30m, up from 20m in 1997. Among the reasons are a shortage of judgesjust 11 for every 1m people, compared with 51 in Britain and 107 in America.62
Volume 39, AIR 1952 Journal 2
60
61

Agarwal, N.55 ,pg 8 Desai Ashok H., November 26, 1996 Law Day Speech, 1997 Supreme Court Cases (Journal Section),

Volume 2, pp. 10-12 62 The Economist, India and its Courts, June 29, 2006, available at http://www.economist.com/world/asia/displaystory.cfm?story_id=E1_STNGTJT (last visited May 19, 2008)

Even the current Prime Minister, Dr. Manmohan Singh, expressed his concern about delay in dispensation of justice at a Conference of Chief Justices of the High Courts and Chief Ministers in the following words,

In spite of efforts having been made and being made, and support provided by the Government, it is a matter of concern that there are huge arrears of more than 2 crores (25 million) of cases in courts we take pride in being governed by the Rule of Law. If the Rule of Law has to become a living reality these delays and these arrears have to be effectively curbed. 63

Thus one will see that there are still issues remaining to be addressed by Indian Legislature for a better more effective Arbitration Regime. However, one has to even see the positive effects of the current legislation, which is a far cry than all the previous ones.

63

Prime Ministers address on April 8, 2007, available at http://pmindia.nic.in/lspeech.asp?id=520 (last

visited May 19, 2008)

The Legal Regime of Singapore and its emergence in the sphere of International Commercial Arbitration :

Singapore has for quiet some time been a vibrant centre for alternative dispute resolution processes. Singapore has seen a lot of development in the past quarter of a century in becoming an arbitration friendly nation with a friendly environment and facilities and has become a first choice center for conducting International Commercial Arbitration by international businesses around the world providing them with an avenue to resolve disputes in a neutral Asian country.

Singapore is not averse to hosting any kind of arbitrations catering to a whole range of subjects be it arbitrations administered by institutions such a Singapore International Arbitration Centre(SIAC) or the London Court of International Arbitration or the Parisian International Chamber of Commerce or any other institution and also providing an outlet for ad hoc private arbitrations or arbitrations based on UNCITRAL Model Rules.64

64

http://www.siac.org.sg/facts.html

Introduction and History of Arbitration :

According to a report made by Rajah & Tann a leading Arbitration firm based in Singapore in November 2004, Singapore has been a financial hub in the South East Asian region and serves as a gateway between the East and the West and houses the regional headquarters of many multinational corporations and has slowly become an arbitration hub of choice among them.

A very important impetus to Singapores Arbitration scenario was the establishment of the Singapore International Arbitration Centre (SIAC) in July 1991 and the enactment of the International Arbitration Act (IAA) in 1994 based on the UNCITRAL Model Law on Commercial Arbitration . 65 It is reported that from 2000 to 2008, the Singapore International Arbitration Centre (SIAC) has seen its arbitration caseload increase by almost 50 % to a total of 99 cases. 66 Below given is a Table describing the rise of the SIAC as a center for conducting Arbitration.

65 66

Rajah and Tann, Singapore International Arbitration Centre (SIAC) in July 1991 , 2004 http://www.globalarbitrationreview.com/handbooks/12/sections/48/chapters/493/singapore

TABLE 1

ALL CASES ADMINISTERED BY SIAC67

Yr Description 2000 Cases administered under SIAC rules 52

Yr 2001

Yr 2002

Yr 2003

Yr 2004

Yr 2005

Yr 2006

Yr Yr 2008 2007

57

57

44

65

54

58

67

85

Cases administered under other rules Total 58 64 64 64 78 75 89 86 99 6 7 7 20 13 21 31 19 14

As one can see from the table above the rise of Singapore as a forum for Arbitration is no accident but a very calculated effort on part of the Singapore Government in being pro- active in building up Singapores reputation for arbitration.68 A few of the features of international arbitration in Singapore include:

- having an independent and neutral venue - having a strong rule of law

67 68

http://www.siac.org.sg/facts-statistics.htm Ibid.

-having a minimum intervention practice by the judiciary - a very reputed arbitration association - freedom of choice of choosing counsels -low costs -competent lawyers ,arbitrators and experts -party to the New York Convention 1958 - tax benefits .

Steps taken in recent years by Singapore to Promote Arbitration:

Arbitration in Singapore is governed by two separate legal regimes. In cases where the situs (seat) of arbitration is Singapore the Arbitration Act(revised 2002) or the International Act (IAA) shall apply. All Domestic Arbitrations in Singapore are governed by the Arbitration Act which came into force on 1 st March 2002 repealing the former Arbitration Act in Toto.69 As for the International agreements for Arbitration are concerned the statute applicable would be the IAA, which applies to both domestic and international arbitrations where parties have stipulated the application of PART II of the IAA and the Model Law to apply.70 Under the IAA, an arbitration is international if (a) at least one of the parties has its place of business arbitration agreement was concluded; or (b) the agreed place of arbitration is situated outside the state in which the parties have their place of business; or
71

in any state other than Singapore, at the time the

69 70

http://www.singaporelaw.sg/content/arbitration1.html Sect. 5(1) IAA 71 Sect. 5(3)(a) IAA provides that if the party has more than one place of business, the place of business shall be the one which has the closest relationship to the arbitration agreement. Sect. 5(3)(b) IAA provides that if a party does not have a place of business, a reference to his place of business shall be construed as a reference to his habitual residence.

(c) any place where a substantial part of the obligation of the commercial relationship is

to be performed or the place to which the subject matter of the dispute is most closely connected is situated outside the state in which the parties have their place of business; or (d) the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country.72 One might wonder why Singapore would have two different Acts for Arbitration unlike many other western countries. The answer to that is simple. There is a clear distinction between the two Acts being in the degree of court intervention allowed in the arbitral process affecting the party autonomy. The distinction between the two legal regimes primarily lies in the degree of court intervention in the arbitral process and respect for party autonomy. Under the international arbitration regime, court intervention is limited and restricted to instances expressly provided by law
73

and thus providing limited recourse against

the arbitral award under the IAA which is not so the case under the Arbitration Act where a party may appeal an award on a question of law arising out of the award or by leave of the parties. 74 Singapore being the former colony of the United Kingdom imbibed its common law heritage which is one of the most developed and business friendly legal systems in the world. One of the most distinguishing feature possessed by Singapore is that it has an Enited Value Chain needed to be a world class legal system serving and responding to the needs of the ever evolving business community.

a) Application Of The IAA:

72 73

Sect. 5(2) IAA Mitsui Engineering and Shipbuilding Co Ltd v Easton Graham Rush and Another [2004] 2 SLR 14 (High Court 74 Sect. 49, Arbitration Act

The IAA, the governing Act for International Arbitrations in Singapore has various criteria for regarding an Arbitration as a International one . Them being: at least one of the parties to the arbitration agreement has its place of business in a country other than Singapore; the place of arbitration, as determined pursuant to the arbitration agreement, is in a country which is neither partys place of business; the country in which a substantial part of the obligations of the commercial relationship is to be performed is a country which is neither partys place of business; the country in which the subject-matter of the dispute is most closely connected is a country which is neither partys place of business; or the parties have expressly agreed that the subject-matter of the arbitration agreement relates to more than one country. 75

b) Arbitration Initiatives: The Ministry of law in Singapore introduced two new measures to help make Singapore thrive as an International Arbitration Hub I. Tax exemption Singapore has introduced a tax exemption scheme for law practices in Singapore by abolishing the withholding of taxes from International Arbitrators .

The tax exemption scheme allows up to 5 years of exemption from income derived from International Arbitrations with hearings held in Singapore.

75

Rajah & Tann, supra n.65 ,pg.3

II Waiver of work passes for entry into Singapore: Singapore has eased up the entry requirements for non-residents planning to apply for work passes to carry out arbitration and mediation work in Singapore starting 1 st February 2008 subject to certain conditions being available to arbitrators , legal counsels and other professionals taking part in the arbitration including translators and transcribers to enhance the attractiveness of Singapore as a forum for arbitration . III Integrated Dispute Resolution Complex: Singapore is also planning out a whole complex dedicated to Arbitration in the form of a Integrated Dispute Resolution Complex (IDRC) which shall be a house for both the SIAC and the Permanent Court of Arbitration starting mid 2009.77 The key features of the IDRC include: - hearing rooms that are custom designed for arbitrations; - caucus rooms for break-out sessions; - world-class telecommunications and teleconferencing equipment; - secure document storage facilities;
76

24-hour facility; concierge services for foreign users of hearing rooms.

76 77

http://www.lawyersworldwide.com/content/newsletters/newsletter2008/articles/Singapore_WP_Exemption_Tax.pdf http://www.globalarbitrationreview.com/handbooks/12/sections/48/chapters/493/singapore

IV A Pro-Arbitration Judiciary One of the strengths of Singapores rise has been its judiciary that has helped Arbitrations thrive by having a pro-arbitration attitude and adopting a policy of limited and cautious curial intervention recognizing their role as a supportive facilitator and not a dominating one. 78

78

Ibid.

Cases of Importance:
Singapore being a recent entrant to the sphere of International Arbitration has already seen its fair share of controversial cases inspite of the Judiciary being very cautious to interfere too much with the arbitration regime. Below we look at some of the cases that affected Arbitration in Singapore:

1. VV and Another v VW [2008] SGHC 11 This case is probably the first case in Singapore which deals with an application made by a party to set aside an award on costs under the new IAA . In this case a contract was entered into by VV & another party with VW for design prject in VWs country where disputes arose between the parties and pursuant to an arbitration clause the parties referred the dispute to arbitration where VV claimed a sum of US $927,000 in reply to which VW raised two defenses and 10 counterclaims amounting to US$20 million pursuant to which the arbitrator dismissed VVs claim claiming that he had no jurisdiction to entertain the same and levied a cost of US $2.5 million on VV for legal fees , disbursements and witnesses expenditure to which VV appealed claiming it to be unreasonable and against public policy or reasonable proportionality . However the same was dismissed by the High Court stating that since the parties had submitted to arbitration and agreed to settle their differences by private litigation no matter how unreasonable the award is it would not amount to be injurious to public policy and any mistake on part of the

arbitrator would be a mistake of fact cannot be looked into by the Courts. 79

79

http://www.globalarbitrationreview.com/handbooks/12/sections/48/chapters/493/singapore

2. Insigma Technology Co Ltd v Alstom Technology Ltd [2008] SGHC 134 This case deals with the scope of one institution to conduct proceedings with the ruls of another and the legality of it . The facts of the case are : Insigma Technology Co Ltd and Alstom Technolody Ltd entered into an agreement providing for settlement of disputes through consultations failing which the parties shall refer to arbitration before the SIAC in accordance with ICC rules . Subsequently disputes arose between the parties and after consultations failed Alstom referred the matter to arbitration to the International Chamber of Commerce to which Insigma took an objection the agreement clearly stipulating SIAC as the institution which shall conduct the Arbitration . The tribunal finding itself to have jurisdiction an action was filed by Insigma in the High Court to set aside the tribunals decision which was dismissed by the High Court however the court stated that 'in principle, no problem with one institution administering arbitration proceedings in accordance with another set of rules chosen by the parties. The High court even stated that the supervising authority and the procedural rules to be adopted need not be the same and the two can be in tandem provided there are no significant disparities between them . 80

Practical Problems, Challenges, and Solutions:

Singapore being on the rise in the world of International Commercial Arbitration does not have many problems to begin with. In fact the development of Alternate Dispute Resolution to litigation is ascribed to cheaper and speedier resolution of disputes. However , the practical problem with Singapore is that unlike countries such as China India and Malaysia where court proceedings are slow , the Singapore courts may hear
80

Ibid.

most cases within months leading to not much of a difference than Arbitration in consumption of time to decide cases .81

In a typical Arbitration dispute the Arbitration procedure can get very complex at time requiring full support of the lawyers as it includes large paperwork , handling of huge number of documents thus leading to increase in time and cost of Arbitration . For example in a typical construction dispute the arbitration procedure may even start after the project is over . The inordinate delays make gathering of documents a tedious task and at times the conduct of arbitration is not governed by the rules of the court and

the rules of evidence but construction disputes tend to become slow like trials set down by the court including pleadings, discovery of documents, oral evidence on oath, further and better particulars, cross examination, and argument by counsels leading to cumbersome procedures.82

At times, the non-interventionist stance taken by the courts in Singapore can cause problems of too much freedom being given to Arbitrators causing a lot of grief to the parties.
81
82

P.Chan,. Arbitration as a form of dispute resolution in Singapore, , 2000. Evelyn Ai Lin Teo and Ajibade Ayodeji Aibinu Legal Framework for Alternative Dispute Resolution:

Examination of the Singapore National Legal System for Arbitration , 2007

However, over and above the small number of issues there is not much for the Legislature in Singapore to worry about.

As we saw above the world of International Commercial Arbitration is full of great scope and possibilities for everyone providing the much wanted relief for courts and litigants both. International Commercial Arbitration has grown tremendously in the past few decades and its rise is only imminent with passing time . In the research carried out above there have been several facts brought out before us about the History of Arbitration and the current scenario of International Commercial Arbitration in India and Singapore in particular. I would now like to give a brief description of my conclusion on each legal regime respectively. A) India: India has noticed a great change in its attitude towards International Arbitration after the enactment of the new Act in 1996 . India with its vast population and the current enormous economic growth has great potential to become a world class center for International Commercial Arbitration . India due to its new liberal policies has opened up to foreign investments in various fields and the legal sector must make full use of this opportunity to tap the International market for Commercial disputes by ironing out its issues with the problem of judiciary and faulty systems which are now hindering its progress to become a hub for Arbitration inspite of there being so many reasons for it to progress like cheap work force , a huge resource of lawyers , etc.

B) Singapore: With its new Acts promulgated in 2002 to boost its Arbitration practice Singapore has been one of the main centers of Arbitration around the world providing companies and states with many facilities for conducting a smooth and efficient arbitration regime. Singapore being a smaller nation would still need more work force to provide for the coming onslaught of Arbitration work from around the world. However, the Arbitration regime in Singapore is well established and in place for it

to become the next hub of International Commercial Arbitration with the building up of a new Arbitration complex consisting of the SIAC and the ICC within its premises .

Thus , one can conclude that Arbitration no matter which part of the world it is in is here to stay and increase day by day thus reducing the burden on courts around the world eventually leading to faster disposition of disputes resulting in growth and development to the economy across the world.

CHAPTER 6 SPECIALISED ADVOCACY

ONLINE DISPUTE RESOLUTION Dispute resolution techniques range from methods where parties have full control of the procedure, to methods where a third party is in control of both the process and the outcome. These primary methods of resolving disputes may be complemented with Information and Communication Technology (ICT). When the process is conducted mainly online it is referred to as ODR, i.e. to carry out most of the dispute resolution procedure online, including the initial filing, the neutral appointment, evidentiary processes, oral hearings if needed, online discussions, and even the rendering of binding settlements. Thus, ODR is a different medium to resolve disputes, from beginning to end, respecting due process principles.[6] ODR was born from the synergy between ADR and ICT, as a method for resolving disputes that were arising online, and for which traditional means of dispute resolution were inefficient or unavailable.[7] The introduction of ICT in dispute resolution is currently growing to the extent that the difference between off-line dispute resolution and ODR is blurry. It has been observed that it is only possible to distinguish between proceedings that rely heavily on online technology and proceedings that do not.[8] Some commentators have defined ODR exclusively as the use of ADR assisted principally with ICT tools. Although part of the doctrine incorporates a broader approach including online litigation and other sui generis forms of dispute resolution when they are assisted largely by ICT tools designed ad hoc.[9] The latter definition seems more appropriate since it incorporates all methods used to resolve disputes that are conducted mainly through the use of ICT. [10] Moreover, this concept is more consistent with the fact that ODR was born from the distinction with off-line dispute resolution processes. In ODR, the information management is not only carried out by physical persons but also by computers and software. The assistance of ICT has been named by Katsh and Rifkin as the fourth party because ODR is seen as an independent input to the management of the dispute. In addition to the two (or more) disputants and the third neutral party, the labelling of technology as the fourth party is a clear metaphor which stresses how technology can be as powerful as to change the traditional three side model. The fourth party embodies a range of capabilities in the same manner that the third party does. While the fourth party may at times take the place of the third party, i.e. automated negotiation, it will frequently be used by the third party as a tool for assisting the process. The fourth party may do many things such as organize information, send automatic responses, shape writing communications in a more polite and constructive manner e.g. blocking foul language. In addition, it can monitor performance, schedule meetings, clarify interests and priorities, and so on. The assistance of the fourth party will increase the more technology advances, thus reducing the role of the third neutral party. It has been predicted that virtual "fourth party" avatars will be created to judge disputes and could become more skilled and intelligent over time.[15]Katsh and Wing argue that ICT advance is occurring exponentially since ICT advance speeds up over the time.[16] As a

result, ODR processes are increasing in efficiency providing their disputants with greater advantages in terms of time saving and cost reductions. Alternative definitions In practice it is difficult to provide a self-contained definition of ODR, and given the pace of change it may not even be possible to do so. The use of technology usually involves the use of Internetbased communications technology at some stage, but ODR does not necessarily involve purely online processes further, many could be replicated offline using pen and paper, or could be achieved using computers without Internet connections. The range of terms and acronyms used to describe the field augments the confusion often felt by those unfamiliar with the new field of ODR. These terms include:

Internet Dispute Resolution (iDR) Electronic Dispute Resolution (eDR) Electronic ADR (eADR) Online ADR (oADR)

ODR has emerged as the most used term in recent years. It is uncertain whether these processes form a new discipline of ADR or a tool to aid existing methods of dispute resolution. The most appropriate view would be to view ODR as aninterdisciplinary field of dispute resolution. ODR methods Consensual Automated Negotiation Automated Negotiation relates to those methods in which the technology takes over (aspects of) a negotiation. Most of the ODR services in this area are so-called 'blind-bidding' services. This is a negotiation process designed to determine economic settlements for claims in which liability is not challenged. The blind bidding service may be thought of as a type of auction mechanism where some or all information about the players' bids is hidden. There are two forms of automated negotiation, Double Blind Bidding, which is a method for single monetary issues between two parties, and Visual Blind Bidding, which can be applied to negotiations with any number of parties and issues.

Double Blind Bidding

Double Blind Bidding is a negotiation method for two parties where the offer and demand are kept hidden during the negotiation. It commences when one party invites the other to negotiate the amount of money in dispute. If the other party agrees, they start a blind bidding process whereby

both parties make secret offers or bids, which will only be disclosed if both offers match certain standards. They can usually submit up to three offers and if the bids of both parties come within a predetermined range (usually range from 30% to 5%) or a given amount of money (e.g. 3,000), then the technology automatically settles the dispute in the midpoint of the two offers. Although, it is a simple method, it effectively encourages the parties to reveal their bottom line offers and demands, splitting the difference when the amounts are close.

Visual Blind Bidding

The primary distinction of Visual Blind Bidding is in what is kept hidden from the other parties. In traditional Double Blind Bidding, the offers and demands are kept hidden, whereas with Visual Blind Bidding what is kept hidden is what each party is willing to accept. This method can be effectively applied to the simplest single-value negotiations or the most complex negotiations between any number of parties and issues. Visual Blind Bidding commences when all parties agree to negotiate with one another. They start the process by exchanging visible optimistic proposals, which define bargaining ranges. The system then generates suggestions that fall within the bargaining ranges. Parties may continue to exchange visible proposals or contribute their own suggestions to the mix. Suggestions contributed by the parties remain anonymous, thus avoiding the face saving problem of accepting a suggestion made by another party.[18] A resolution is declared by the system at the end of a negotiating session if all parties have accepted one or more packages (of one or more proposed decision values) at the end of that session. Which of those packages becomes the agreement may be determined by an algorithm that rewards the party that moves soonest into the Zone of Agreement. This algorithm is thought to encourage concessions and quickly indicate that they are willing to accept a fair outcome. This is in contrast to the chilling effect that occurs with the more common split-the-difference algorithm.[19] Automated negotiation has proven to be particularly successful with insurance compensations and commercial activities. It is also a valuable tool for lawyers because they too can use it without revealing what theyre willing to accept (unless an agreement is reached) and more importantly, without waiving their right to access the court, in the case that the negotiation is unsuccessful. Thus, ODR is useful for resolving brick and mortar disputes that arise in businesses, insurance companies and municipalities, who are finding that ODR saves them money and time when dealing with B2C disputes.[20] Assisted Negotiation In Assisted Negotiation the technology assists the negotiation process between the parties. The technology has a similar role as the mediator in a mediation. The role of the technology may be to provide a certain process and/or to provide the parties with specific (evaluative) advice.

Mediators use information management skills encouraging parties to reach an amicable agreement by enabling them to communicate more effectively through the rephrasing of their arguments. Conciliation is similar to mediation, but the conciliator can propose solutions for the parties to consider before an agreement is reached. Also, assisted negotiation procedures are designed to improve parties communications through the assistance of a third party or software. In fact, it has been argued that assisted negotiation, conciliation, and even facilitation, are just different words for mediation. The major advantages of these processes, when used online, are their informality, simplicity and user friendliness.[22]

SquareTrade

The leading ODR provider for consumer mediation was until recently SquareTrade. It was contracted by a number of market places, the largest of which was eBay. However, due to changes in the eBay feedback system in May 2008, SquareTrade decided to stop resolving eBay feedback disputes from June 2008.[23] SquareTrade continues providing services to eBay users, such as warranty services and the trustmark program. It appears that in the last year these services have been taken over by eBay and PayPal dispute resolution services, but results on these services are still scarce. SquareTrade did not handle disputes between users and eBay, only between sellers and buyers on eBay. SquareTrade offered two levels of dispute resolution: assisted negotiation and mediation. SquareTrade was only used after eBays own consumer satisfaction process. In the last few years, SquareTrade has resolved millions of disputes across 120 countries in 5 different languages.[24] The advantage of dealing with large number of disputes is that the same issues arise many times, thus it is possible to divide the disputes into different sections. The SquareTrade process started when a buyer or a seller filed a complaint. To do so, the claimant was asked to fill out a web-based standard claim form that identified the type of dispute and presented a list of common solutions, from which the claimant selected the ones that he agreed to. The other party was contacted by email where he was informed about the SquareTrade process, and asked whether he wished to participate. The parties were often keen on participating because this was the only manner by which the buyer could get redress and the seller positive feedback. The other party filed the response, selecting the resolutions. If both parties agreed on the same resolution, the dispute was resolved. When an agreement could not be reached, parties were put into a negotiation environment. A web interface was used to shape communications into a constructive and polite negotiation. This was achieved with software tools that limited the free text space, encouraged the proposition of agreements, set deadlines and even shaped the tone of exchanges. This software was the key element of the process because it took over some of the expertise of the third party. This process could be defined as mediated negotiation. According to Rabinovich-Einy, SquareTrade technology,

intervenes in the negotiations between the parties and, by allowing parties to formulate and reformulate the problem and the solution, performs some of what would be associated with a mediators role, moving the parties from a problem mode to a solution stance.[25] Most disputes (over 80 percent) were resolved during the first two stages, which was an impressive success rate given that in the majority of cases, the parties had already been involved in some type of failed direct negotiation before engaging with SquareTrade.[26] In the rest of the cases a mediator could be requested for a nominal fee, acting as an expert evaluator or conciliator that made settlement proposals to the parties. This second stage involved the payment of a 29.95 USD fee. According to SquareTrade, [a] sophisticated case management technology enables mediators to handle lower to medium-value consumer disputes in an efficient cost effective manner. The appointed mediator proposed solutions, if required by the parties to do so. Agreements were always kept confidential by SquareTrade, and became binding as contracts. SquareTrade has proven that processes such as online negotiation and online mediation can be efficient tools to resolve e-commerce disputes. One of the key issues for the success of SquareTrade was the simplicity and convenience of this service. In addition, SquareTrade services to eBay were concentrated on a reduced number of issues, such as delays, bad descriptions and negative feedback. This made possible the development of an efficient automatic process that enhanced online negotiation. The success of consensual and automated processes depends on the nature of the dispute, the accuracy of information provided, and the capability of the software or the third neutral party in assessing and evaluating the facts and evidence. SquareTrade was particularly effective because it introduced incentives that encourage parties participation; i.e. both parties wished to resolve their dispute: sellers want to obtain positive feedback and buyers want redress.In general terms, widening the scope of clients' claims to the global market invites extra variables to play: cultural differences, such as high and low culture perceptions and the cross-cultural variations of what constitutes the customer satisfaction experience.[28] Adjudicative Online Arbitration Arbitration is a process where a neutral third party (arbitrator) delivers a decision which is final, and binding on both parties. It can be defined as a quasi-judicial procedure because the award replaces a judicial decision. However, in an arbitration procedure parties usually can choose the arbitrator and the basis on which the arbitrator makes the decision. Furthermore, it is less formal than litigation, though more than any other consensual process. It is often used to resolve businesses disputes because this procedure is noted for being private and faster than litigation. Once the procedure is initiated parties cannot abandon it, unless they both agree to discontinuing it (e.g. when they reached a settlement - although usually the settlement will be communicated to the arbitral tribunal and an award rendered on this basis). Another feature of arbitration is that the award is enforceable almost everywhere due to the wide adoption of the 1958 New York Convention on the Recognition and

Enforcement of Foreign Arbitral Awards.[29] Moreover, arbitral awards prove frequently easier to enforce than court decisions from overseas. The majority of legal studies on online arbitration agree that, neither law, nor arbitral principles, prevent arbitration from taking place online.[30] However, there may be several aspects in online arbitration that need to be regulated. Although online arbitration seems admissible under the New York Convention and the E-Commerce Directive, this is arguably an assumption by most commentators, rather than a legal statement.[31] Since arbitration is based on a contractual agreement between the parties, an online process without a regulatory framework may generate a significant number of challenges from consumers and other weaker parties if due process cannot be assured. Currently, most arbitration providers allow parties to carry out online only part of the arbitration process, e.g. parties may download claim forms, the submission of documents through standard email or secure web interface, the use of telephone hearings, etc.[32] Other providers conduct their proceedings exclusively online, either by email or on a dedicated web platform.[33] The main challenge for online arbitration is that if judicial enforcement is required then it partly defeats the purpose of having an online process. Alternatively, some processes have developed selfenforcement mechanisms such as technical enforcements, black lists and trustmarks. The Uniform Domain Names Dispute Resolution Policy (UDRP) Traditionally arbitration resolves disputes by delivering a decision that will be legally binding, i.e. enforceable by the courts in the same manner as a judgment. Non binding arbitration processes may also be effective when using ODR tools because they often encourage settlements by imparting a dose of reality and objectivity.[34] In addition, self-enforcement measures may reinforce the efficacy of non binding processes. The most significant example is the Uniform Domain Name Dispute Resolution Policy (UDRP) created by the Internet Corporation for Assigned Names and Numbers (ICANN). Some commentators have referred to the UDRP as an administrative process. In any case, the UDRP has developed a transparent global ODR process that allows trade mark owners to fight efficiently cybersquatting. The UDRP is used to resolve disputes between trade mark owners and those who have registered a domain name in bad faith for the purpose of reselling it for a profit, or taking advantage of the reputation of a trademark. Trademark owners accessing the UDRP must prove to the panel three circumstances: 1. similarity of the domain name to the trade or service mark; 2. lack of rights or legitimate interest in the registered domain name; 3. bad faith in the registration and use of the domain name. However, the UDRP presents its own problems that show the challenges that an online adversarial system applied to mainstream e-commerce disputes would have. The main worry is that the evaluation of the panel decisions often shows a lack of unanimous consensus in the interpretation of

the UDRP.[35] This may be due to a number of reasons, such as the lack of an appellative review and panels composed by members from a multitude of jurisdictions and informed by different legal traditions. On the other side, it is undeniable what ICANN with the UDRP has achieved in developing an effective ODR procedure based on contractual adherence that allows trade mark owners to transfer or cancel a domain that blatantly violates IP rights. The UDRP providers have dealt efficiently with over 30,000 domain name disputes. Their success derives from two aspects: First, the UDRP deals only with blatant disputes, which are abusive registrations made in bad faith in order to take advantage of the reputation of existing trademarks. Secondly, it has incorporated a self-enforcement mechanism, which transfers and cancels domain names without the need for judicial involvement. This is a positive accomplishment for the development of e-commerce because it favours consumers confidence in the Internet by reducing the number of fraudulent registered domain names. Chargebacks One of the main focuses of e-commerce up until recently has been related to secure payments. Chargebacks is a remedy used to reverse transactions made with credit or debit cards when a fraudulent use has occurred, or when there is a violation of the contract terms. This method is very popular among online consumers since this is the main mechanism to transfer money online. In addition, consumers are not required to give evidence to cancel a payment. The vendor has the burden of proving that the merchandise or service was given according to the contract terms. Once this is proved the bank makes effective the payment to the vendor. Chargebacks are largely used around the world by banks and the main credit card suppliers i.e. Visa, MasterCard and American Express. Yet, the coverage of debit and credit cards varies considerably amongst different countries.[36] Commonly, debit cardholders have fewer protections than credit card holders, but it also varies depending on the jurisdiction. It is then not surprising why credit cards are the major source of payments for consumers in ecommerce. They provide a remedy that reverses all transactions when a fraudulent use has occurred, or when there is a violation of the contract terms. However this method has limitations; it offers one single remedy (the return of the payment), and not all disputes imply a breach of contract or fraud. Similarly, Online Payment Providers, like Paypal.com, retain temporarily the money paid by a buyer when the latter makes a complaint within 45 days after the payment was made. Paypal.com holds the money until the dispute is settled, but only in those cases where the merchandise did not arrive, or the description of the product was significantly different to the product itself.[37] In these circumstances Paypal.com acts akin to an online arbitrator.[38] However, in those circumstances where the seller takes away the money from his account before the buyer makes the claim, Paypal.com will not be responsible for the buyers loss. Despite this, PayPal is in a very strong position since in most cases it is able to freeze the amount of money and resolve the dispute providing an instant and effective enforcement.

Overall, chargebacks intends to balance the inequality of power between consumers and businesses. It is regarded as a very efficient tool for consumers because the speed, accessibility and lack of charge for their clients, who would just have to notify their banks or card issuers to cancel a transaction. Thus, Edwards and Wilson suggested that it would be advisable to focus on developing chargebacks and other soft ODR methods because they are very effective amongst mainstream consumers.[39] By contrast, the existing processes are considered largely inefficient and not transparent among businesses because puts businesses in bad light since the onus of the proof rests on them. ODR in the European Union The European Small Claims Procedure Small claims procedures provide a middle ground between formal litigation and ADR, where disputes involving small value claims can be resolved in courts faster, cheaply, and less formally. The main limitation of small claims procedures is that they are restricted to particular jurisdictions. In order to overcome this limitation the European Commission has produced a regulation for a European Small Claims Procedure (ESCP).[40] Implementation of the ESCP is expected in all EC Member States by January 2009. The ESCP is predominantly a written procedure that deals with claims under 2,000 arising in cross-border disputes. Its main advantage is that it provides for the enforcement of decisions in any of the member states without the present need to go through the formal mutual recognition of judgements (exequatur).[41] Great expectations are put on the ESCP, which in order to deliver a cost effective process will have to rely on ICT. This will be a significant challenge, because unlike the UDRP, which is becoming a fully online process for dealing with specific complaints,[42] the ESCP will deal with a variety of civil and commercial disputes. The objective of the ESCP is the creation of a cost efficient procedure applicable to small value claims in cross-border disputes. This objective could only be achieved by using a written procedure, assisted by electronic forms such as emails and videoconferencing as foreseen by the ESCP.[43] The Regulation allows the use of new technologies in transferring information and evidence between the courts of the different member states. But, it will be the EC Member States who will decide, through their own regulations, which specific means of communication are acceptable in their courts. Given that the ESCP is a regulation and not a directive, it is arguable whether it has left too many aspects to the discretion of member states, which could call into question the legal certainty expected from a European regulation.[44] Nevertheless, it can be expected that, in due time, electronic communications will reach every possible and reasonable aspect of the judicial procedure to assist in the resolution of online as well as off-line B2C disputes. With the implementation of the ESCP an institutionalized ODR may emerge in Europe in 2009. Many disputes will be resolved by judges communicating with parties through the Internet. It is expected that the ESCP will contribute to mitigate the legitimacy problem which also hampers the

emergence of ODR. Perhaps, within the EU, where we have concern for the fairness of private procedures (i.e. restrictions in consumer arbitration) the ESCP may contribute to increase trust in ODR processes.[45]

ODR in India Online dispute resolution (ODR) in India is in its infancy stage and it is gaining prominence day by day. With the enactment of Information Technology Act, 2000 in India, e-commerce and egovernance have been given a formal and legal recognition in India. Even the traditional arbitration law of India has been reformulated and now India has Arbitration and Conciliation Act, 1996 in place that is satisfying the harmonised standards of UNCITRAL Model. Even the Code of Civil Procedure, 1908 has been amended and section 89 has been introduced to provide methods of alternative dispute resolution (ADR) in India. ODR standards of practice

National Centre for Technology and Dispute Resolution, Standards of Practice.[46] US Federal Trade Commission and Department of Commerce.[47] Canadian Working Group on Electronic Commerce and Consumers.[48] Australian National Alternative Dispute Resolution Advisory Council (NADRAC).[49] Alliance for Global Business.[50] Global Business Dialogue on Electronic Commerce.[51] Transatlantic Consumer Dialogue.[52] Consumers International.[53] European Consumers Organisation (BEUC).[54] International Chamber of Commerce (ICC).[55] American Bar Association.[56]

"DISPUTE RESOLUTION IN THE OIL AND GAS INDUSTRY - RECENT TRENDS" by ANTHONY CONNERTY I. INTRODUCTION This Paper looks at recent trends in dispute resolution in the Oil and Gas Industries. There is probably little doubt that the two major methods of dispute resolution are still litigation in the national courts and international arbitration. But it is clear that other dispute resolution processes are being used, amongst them ADR and Expert Determination. To state the obvious, which type of dispute mechanism will be used in any particular case will depend upon the precise nature of the dispute: a jurisdiction dispute arising out of an international contract is likely to be settled by litigation rather than, say, expert determination. This Paper looks in Section II at some of the types of disputes which can arise, and in Section III at methods of dispute resolution: international conventions, statutory arbitration and, in the case of commercial contracts, litigation, arbitration, ADR and expert determination. Sections IV and V look at dispute resolution in the context of two specific factors which are likely to have an impact on the Energy Industry. Section IV considers the Contracts (Rights of Third Parties) Act 1999. That Act is likely to have an effect on arbitration provisions in Energy contracts. Section V considers Electronic Commerce. E-Com is already being used in the Petroleum Industry. Its use will almost certainly increase. Will new methods of dispute resolution be developed? Will on-line trading lead to systems of on-line dispute resolution? II. TYPES OF DISPUTE IN THE OIL AND GAS INDUSTRY Disputes in the Industry can range from maritime boundary disputes between States through oil and gas trading contract disputes to offshore construction and pipeline disputes. Some of the areas of dispute which are likely to arise include : A.International Maritime Boundary Disputes

B.Equipment C.Jurisdiction Disputes D.Oil Trading Contracts E.Gas Contracts F.Redetermination G.Quality Disputes H.Hedging III. METHODS OF DISPUTE RESOLUTION USED IN THE INDUSTRY Introduction Because of the special nature of the Energy Sector, disputes between States and disputes between corporations and national governments are likely to arise. Resolution of these disputes may be by way of machinery contained in international Conventions or in domestic legislation passed by national governments. On the commercial front, many of the dispute resolution processes used in the Oil and Gas Industry will obviously be similar to those used in other areas of international trade. Given the international nature of many of the contractual arrangements in the Industry, it is understandable that, in addition to litigation in national courts, disputes are likely to be resolved by way of international commercial arbitration. For the future, increased use may be made of two other dispute resolution processes. First, Alternative Dispute Resolution (ADR) in its various forms (particularly mediation/conciliation). Second, expert determination. Set out in this section are some of the dispute resolution processes which are likely to be used in the Oil and Gas Industry. (1) International Conventions The third United Nations Conference on the Law of the Sea (commonly known as UNCLOS III) states in Article 2 that: "(1) The sovereignty of a coastal State extends beyond its land, territory and internal waters... to an adjacent belt of sea, described as the territorial sea. (2) This sovereignty extends to the air space over the territorial sea as well as to its bed and subsoil. (3) The sovereignty over the territorial sea is exercised subject to this Convention and to other

rules of international law". Articles 3 and 5 deal with the breadth of the territorial sea and the "normal baseline" and Article 3 provides that: "Every State has the right to establish the breadth of its territorial sea up to a limit not exceeding 12 nautical miles, measured from baseline determined in accordance with its Convention". Article 5 states that: "... The normal baseline for measuring the breadth of the territorial sea is the low water-line along the Coast...". Given the complexity of the subject matter of UNCLOS III it is unsurprising that the dispute resolution processes contained within the Convention are themselves complex. The first session of the U.N. Convention began in Caracas in 1974 and discussions as to dispute resolution processes continued until the Convention was approved in 1982. Part XV contains provision for the settlement of disputes. Article 279 provides that States which are parties to the Convention "shall settle any disputes between them concerning the interpretation or application of this Convention by peaceful means..." Article 287 says that States shall be free to choose one of the methods of dispute settlement set out in the Convention. These methods include Conciliation in Annex V, Arbitration in Annex VII and "Special Arbitration" in Annex VIII. Under the conciliation procedure in Annex V, the Secretary-General of the United Nations maintains a List of Conciliators, each State's party being entitled to nominate four conciliators. Proceedings are instituted by written notification to the other party. A Conciliation Commission is set up comprising five members. Each party to the dispute appoints two conciliators (preferably chosen from the List). Those conciliators appoint a fifth conciliator who shall be Chairman. The Conciliation Commission determines its own procedure and may "draw the attention of the parties to any measure which may facilitate an amicable settlement of the dispute." The Commission is to hear the parties, examine their claims and objections and "make proposals to the parties with a view to reaching an amicable settlement". The Commission is to report within 12 months of its constitution. The report is not binding upon the parties: Article 7 of Annex V. Arbitration proceedings are instituted by written notification to the other party, such notification being accompanied by a Statement of Claim on the grounds on which it is based: Article 1 of Annex VII. The Secretary-General of the United Nations maintains a list of arbitrators. Each State is entitled to nominate four arbitrators: "each of whom shall be a person experienced in maritime affairs and enjoying the highest reputation for fairness, competence and integrity" : Article 2. The Tribunal is to comprise five members, one each of whom is appointed by the member country concerned from the List of Arbitrators, the other three members being appointed by agreement between the parties: these shall be nationals of a third State. The Arbitral Tribunal determines its own procedures. Decisions are taken by a majority vote. Unless otherwise agreed the award is final and without appeal. The "Special Arbitration" procedure in Annex VIII relates to disputes concerning fisheries, marine environment, marine scientific research, navigation and pollution.

(2) Statutory Arbitration In the UK, the various statutes vesting the ownership of petroleum in the Crown contain provisions for the granting of licenses. Disputes involving licenses are to be referred to arbitration. For example, the Petroleum (Current Model Clauses) Order 1999 contains a provision in Clause 37 that if at any time any dispute, difference or question arises between the Minister and the Licensee: "as to any matter arising under or by virtue of this licence or as to their respective rights and liabilities in respect thereof then the same shall, except where it is expressly provided by this licence that the matter or thing to which the same relates is to be determined, decided, directed, approved or consented to by the Minister, be referred to arbitration as provided by the following paragraph." The Model Clause then goes on to provide that the arbitration is to be by single arbitrator who in default of agreement between the Minister and the Licensee is to be appointed by the Lord Chief Justice of England. (3) Commercial Contracts Introduction The contractual provisions dealing with dispute resolution in commercial contracts are of vital importance. Provision will normally be made as a minimum for the following: 1.Forum: in what country should the dispute resolution process take place? 2.Choice of Law: which country's law is to govern the contract? It is, of course, always open to the parties to provide for a choice of laws rather than a choice of law and to provide that disputes will be resolved by way of reference to general principles of international law or lex mercatoria. However, the choice of a national law is likely to be the norm. 3.Dispute Resolution Process: broadly speaking, there are four dispute resolution processes in common use: litigation, arbitration, ADR and expert determination. If litigation, which country's courts are to have jurisdiction? If arbitration: is this to be institutional or ad hoc? If institutional, which institution? LCIA, ICC, etc.? If ADR, should some form of ADR filter mechanism be inserted in the contract, arbitration then only being triggered off in the event that the ADR process fails? Or is expert determination the appropriate way to resolve disputes? This Section looks at those four dispute resolution processes. A. Litigation

Litigation in the national courts is probably - despite the increasing use of international commercial arbitration backed up by the New York Convention - still the major international dispute resolution process in use. In the context of international contracts the major problem in relation to litigation is the prospect for one of the parties of that litigation taking place in the courts of a foreign country, conducted in a foreign language and under a foreign system of law. However, litigation may be the dispute resolution process used for a variety of reasons: No contractual provision is made for dispute resolution. The bargaining power of one party is such that it is able to insist that litigation takes place in the Courts of a country chosen by that party. A deliberate, consensual, choice of the parties. More than 80% of the cases heard in the Commercial Court in London have no connection with England in the sense that either the subject-matter of the contract has no connection with England or one or more of the parties is not English. Such parties may choose the English courts as the forum for resolution of any disputes which may arise under the contract and additionally may choose English law as the law to govern that contract. Litigation in the national courts may, on the particular facts of the case, be the only realistic option open to the parties. See for example the following cases referred to in the Appendix: (1) Jurisdiction disputes Shell International Petroleum v. Coral Oil; Glencore v. Metro Trading International; Caltex Trading v. Petro Trading International; . (2) No defence to the claim: summary judgment Petrotrade Inc. v.Texaco. (3) Injunctions, etc. Shell International Petroleum v. Coral Oil (4) Challenge to an arbitral process Petroleos de Portugal and Petrogal v. BP Oil International; Total Liban v. Vitol Energy. (5) Challenge to expert determination Shell UK v. Enterprise Oil.

B. Arbitration "The English have always been more given to peaceableness and industry than other people and rather than go so far as London and be at so great charges with attorneys and lawyers, they would refer their difference to the Arbitration of their parish priest, or the Arbitration of Honest Neighbours": Edward Chamberlayne: Angliae Notitia, 12th edition, 1684. (1) Generally There is no international court to deal with international disputes. Therefore if no provision whatever is made in a contract for dispute resolution, any disputes arising out of that contract (which cannot be resolved by negotiation between the parties) are likely to have to be dealt with by litigation in the national courts. If the contract is between, say, a UK party and a non-UK party then that may mean litigation in a "foreign" court. That may not appeal to the UK party. Equally, the non-UK party may be faced with having to sue in the UK courts. In each case, one party will be faced with having to resolve disputes in a foreign country under a foreign legal system and in a foreign language. The way to avoid the problem is to make provision for some other method of resolving disputes. One obvious dispute resolution process to include in an international contract is arbitration. The parties can agree that, instead of their disputes being dealt with in the national courts, any disputes will be heard by an arbitral tribunal. Because arbitration is a consensual process, the parties can decide who will resolve their disputes, in which country the arbitration should take place, what law should be applied to the resolution of that dispute and which language shall be used for the purposes of the dispute hearing. The parties can also choose the rules to be applied for resolving the dispute. Additionally, arbitration being a private dispute resolution process, the parties will know that the proceedings will be confidential. Arbitration may - indeed in many cases should - prove to be a quicker and cheaper means of resolving disputes than the national courts. Many commercial contracts in which the parties have agreed to have their disputes resolved by arbitration will specify one of the well- known international arbitral bodies such as the International Chamber of Commerce in Paris or the London Court of International Arbitration. (2) Arbitration and national laws Arbitrations conducted under, say, the Rules of the ICC or the LCIA, must be conducted in accordance with the relevant national laws, and on an international basis, with an eye to the New York Convention. As to national laws, it is clear that arbitration - as a private dispute resolution system separate from the litigation systems of the national courts - can only operate with the agreement of national governments. Broadly speaking, national governments support arbitration as a private system principally in two ways. First, by staying litigation in the national courts in

circumstances where the parties have agreed to arbitrate. Secondly, by enforcing in the national courts the awards made by arbitral tribunals. In addition, the State courts may aid the arbitral process by, say, granting injunctions. But in return the State expects to exercise a degree of control over the arbitral process by, for example, allowing appeals in certain circumstances to the State courts against arbitration awards. ICC and LCIA arbitrations taking place in England are subject to the mandatory provisions of the English Arbitration Act of 1996. (3) Institutional Arbitration: the ICC and the LCIA ICC Arbitration As an arbitral body, the ICC is amongst the world's foremost arbitral institutions. Its revised arbitration Rules came into force in 1998. The Rules deal with the commencement of the arbitration; the appointment of and challenge to arbitrators; the service of the Claimant's Request and the Respondent's Answer; provisions as to the place of the arbitration, the language of the arbitration and the procedures to be followed at the arbitration hearing; and the provisions relating to the Award and scrutiny of that Award by the ICC Court in Paris. LCIA Arbitration Like the ICC, the LCIA is a truly international organisation. It will arrange and administer arbitrations under any system of law in any part of the world. It will do so either under its own Rules or under the UNCITRAL Rules. There is no more need for an LCIA arbitration to be conducted in London than there is for an ICC arbitration to be conducted in Paris. The LCIA's own Rules have been translated into many languages. The former president of the LCIA (now honourary president), Sir Michael Kerr, has said that: "There are grounds for thinking that LCIA arbitration clauses are nowadays increasingly incorporated into contracts. The new 1985 LCIA Rules are being used world-wide and appear to have achieved world-wide renown". The LCIA Rules have been revised from time to time, the most recent revision taking account of the new English Arbitration Act which came into force in January 1997. The Rules, which follow a recognisable international pattern, took effect from January 1998. An arbitration under the LCIA Rules may well have particular attractions for the Oil and Gas Industry. Although an LCIA arbitration can take place anywhere in the world, the LCIA is, like the Institute of Petroleum, London based. London is one of the world's major arbitration centres. The combination of the revised LCIA Rules and the new English Arbitration Act may increase London's attractiveness as a venue for international commercial arbitration. In addition, there are various aspects of the LCIA's Rules which may be of particular interest. Some of these are set out below: Fast track arbitration:

Article 9 of the Rules provides that, that in exceptional emergency, any party may apply to the LCIA for the expedited formation of an Arbitral Tribunal. In addition Article 4.7 gives power to the Tribunal to extent or abridge periods of time under the Rules and Article 22 gives additional powers to the Tribunal which include the extension or abbreviation of time limits. "Seat" and the place of arbitration: Article 16.1 of the Rules provides that the parties may agree "the seat (or legal place) of their arbitration". Article 16.2 states that hearings may be held at "any convenient geographical place". This follows the provisions of the new English Act which states that the parties may agree upon the "juridical seat" and that the Tribunal can decide procedural matters such as when and where the proceedings are to be held. The result is to give considerable flexibility to the parties and the Tribunal. Language of the arbitration: Article 17 states that the "initial language" of the arbitration shall be the language of the Arbitration Agreement but that, upon formation of the Arbitral Tribunal (unless agreed otherwise), the Tribunal shall decide upon the language of the arbitration. This is to be done after giving the parties an opportunity to make written comment. Interim and conservatory measures: The Arbitral Tribunal is given power under Article 25 of the Rules (unless otherwise agreed by the parties in writing) to order any respondent party to a claim or counterclaim to provide security for all or part of the amount in dispute. This is to be by way of deposit, bank guarantee or some other appropriate form. The Tribunal can also make orders in relation to the preservation, storage, sale or other disposal of property relating to the subject matter of the arbitration and can in addition make provisional orders relating to the payment of money or the disposition of property. Power is also given by Article 25 to make an order in relation to security for costs by any claiming or counter-claiming party in the arbitration. Confidentiality: Confidentiality may well be a matter of considerable importance to the parties in an arbitration. The new English Act makes no provision in relation to confidentiality: the view was that it was difficult to draft a statutory provision which would cover all of the necessary exceptions to confidentiality. However, Article 30.1 of the revised LCIA Rules provides that, unless the parties have otherwise agreed, they undertake "as a general principle to keep confidential all awards in their arbitration, together with all materials in the proceedings created for the purpose of the arbitration and all other documents produced by another party in the proceedings not otherwise in the public domain...". An exception is made to the extent that disclosure may be required "... by legal duty, to protect or pursue a legal right or to enforce or challenge an award in bona fide legal proceedings before a State Court or other judicial authority". Article 30.2 provides that the deliberations of the Arbitral Tribunal are likewise confidential and Article 30.3 states that the LCIA Court does not publish any award without the

prior written consent of the parties and the Tribunal. (4) The New York Convention The ultimate object of referring a dispute to international commercial arbitration is the enforcement of the award made by the Tribunal. The United Nations' Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 is intended to provide for the mutual recognition and enforcement of arbitral awards made in countries which are parties to the Convention. Most of the world's trading nations have ratified the New York Convention. Take the example of a dispute between UK and German companies. An award made against the UK company could be enforced by the German company in the United Kingdom through the UK courts. And if the UK company had assets in, say, France and Italy, the German company could likewise enforce the award through the French and Italian courts since both France and Italy have ratified the Convention. The New York Convention has been described as "... the most important international treaty relating to international commercial arbitration. Indeed, it may be regarded as one of the major contributing factors to the rapid development of arbitration as a means of resolving international trade disputes". C. ADR (1) ADR: development There is nothing new in the concept of ADR: mediation and conciliation have been used in the East for centuries. What is new is the kind of techniques which have been developed in the United States. America has led the way in developing new methods of dispute resolution other than by way of litigation and arbitration. To a great extent those developments were driven by concern at the delays and excessive costs of both litigation and arbitration. That concern was not restricted to the United States; hence the increasing interest in ADR in England (particularly by the English Courts) and the emphasis now laid upon Alternative Dispute Resolution in the Civil Procedure Rules. ADR is generally taken to cover all forms of dispute resolution other than litigation and arbitration. The reason for this is clear: both litigation and arbitration operate regardless of the will of the parties and result in a binding and enforceable outcome. The Defendant/Respondent against whom litigation/arbitration proceedings are launched has no choice as to whether to participate and may be faced with a judgment/award which can be enforced in the national courts. In litigation the process is imposed by the State. In arbitration the result follows from the parties' agreement to arbitrate, coupled with the State's support of the arbitral system. But ADR in its various forms - the most familiar being mediation and conciliation - is a consensual process: the parties do not have to take part in it. And if they do, they do not have to abide by the outcome. Generally speaking, national Courts will not enforce ADR agreements and the ADR process - unlike arbitration - is not subject to any statutory code.

(2) The Civil Procedure Rules Lord Woolf's reforms of the civil justice system in England and Wales are contained in the Civil Procedure Rules 1998. One consequence of the coming into force of those Rules is the increasing importance placed on Alternative Dispute Resolution. The basic thinking of the CPR is set out in Part 1: the new Rules are a "new procedural code with the overriding objective of enabling the Court to deal with cases justly" . Dealing with cases justly includes "saving expense"and ensuring that a case is dealt with "expeditiously and fairly": Rule 1.1. Compare the overriding objective with the provisions of the new English Arbitration Act. Section 1 of the Arbitration Act 1996 sets out the general principles of arbitration which are to "obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense". The overriding objective is to be furthered by case management, which is to include, if appropriate, "encouraging the parties to use an alternative dispute resolution procedure if the Court considers that appropriate and facilitating the use of such procedure" and "helping the parties to settle the whole or part of the case" . (Rule 1.4(2)(e) and (f). Part 3 contains a specific mechanism (used already in the Commercial Court) enabling the Court to put the overriding objective into practice: the Court's general powers of management include the power to stay the whole or part of any proceedings"whether generally or until a specific date or event" .Rule 3.1(2) (f). Part 26 enables the parties themselves to request a stay of proceedings to enable the case to be settled "by alternative dispute resolution or other means" . (Rule 26.4(1)). The Court of its own initiative can stay the proceedings if it considers it appropriate. Whether the impetus comes from the parties or from the Court, a stay of one month can be imposed which can be extended to a specific date or for a specific period. ADR has long been encouraged by the Commercial Court. "This may involve the Commercial Judge inviting the parties to use ADR at the Case Management Conference or even adjourning the case to encourage and enable the parties to use ADR..." The draft ADR order contained in the Commercial Court Guide requires the parties to exchange lists of three neutral individuals who are available to conduct ADR procedures and/or to provide a list identifying the constitution of one or more panels of neutral individuals available to conduct ADR procedures. The parties should then seek to agree a neutral individual or panel. They shall then take "such serious steps as they may be advised to resolve their disputes by ADR procedures before the neutral individual or panel so chosen". Specific time limits are laid down for each part of the process. If the case is not settled, the parties are to inform the Court. The Commercial Court Guide makes it clear that the reference to "ADR"leaves the parties free to use whatever they regard as being the most suitable procedure "be it mediation, early neutral evaluation, non-binding arbitration, etc." (3) Types of ADR

Conciliation and mediation The two words tend to be used interchangeably. Both involve the use of a third party neutral who will seek to bring the parties to a settlement. The extent to which the neutral takes an active part in seeking to bring about a settlement may attract the label of "mediator" or "conciliator". However, reference to "mediation" would seem to be taking the lead, at any rate in the commercial context. The process of "caucusing" is probably the most significant aspect of mediation. The mediator holds a series of separate meetings with the parties in dispute: this process is aimed at seeking to bring the parties to a settlement through the identification of any hidden agendas and the exploration of problem-solving proposals. The mediator may only divulge what has been said to him by one party in a caucus session if express permission is given. Mini-trial This process is often used in disputes between corporations. A "hearing"takes place before a neutral third party and senior executives of the business organisations involved. Those executives will not have been concerned in the dispute itself. Each side presents its case. It is open to the third party neutral to indicate the consequences in terms of time and money should the mini-trial process fail. This system has enjoyed considerable success in the United States. Neutral evaluation Here, the third party neutral may be a lawyer or retired Judge who can deliver a non-binding evaluation of the dispute should the ADR procedure fail and the matter proceed to litigation or arbitration. "Neutral Listener Agreement" This is a system offered by the American Center for Public Resources. Under this CPR process each party submits its best settlement offer to a third party known as "the neutral listener" who indicates to the parties whether he considers the offers to be such as to be negotiable. If so, the "neutral listener"will offer to help to negotiate so as to bring the parties to a possible settlement. (4) ADR in an international context Although ADR in its present form developed in the United States, it is now in use worldwide. Many of the major international arbitration institutions, such as the ICC, the LCIA and the China International Economic & Trade Arbitration Commission in Beijing (CIETAC), offer a wide range of dispute resolution processes which include both arbitration and ADR. Other bodies, such as the Beijing Conciliation Centre and the London-based Centre for Dispute Resolution, are purely ADR bodies. Then there are specialist bodies, such as the ICC's International Centre for Expertise in Paris and the U.N.'s World Intellectual Property Organisation (WIPO). The ICC offers highly specialist

dispute resolution procedures in the area of documentary credits. WIPO is now operating a scheme aimed at resolving Domain Name dispute. On these ICC and WIPO schemes, see Section V below. (5) ADR as a pre-arbitral dispute mechanism ADR has been used with considerable success as a pre-arbitral dispute mechanism in major construction projects around the world. In this context ADR is of particular use in contracts involving a considerable number of parties. Disputes on such projects require to be settled swiftly in order to avoid disrupting the progress of the works. The kind of contractual provision which is likely to be found in connection with such projects will require disputes to go through some form ADR "filter"before proceeding to arbitration. The obvious hope is that the ADR process will in fact render arbitration unnecessary. The type of ADR mechanisms which are used as "filters" are likely to comprise such processes as adjudication by a panel of experts or by a Dispute Review Board. It was this kind of procedure which was used in the Channel Tunnel Group Limited v. Balfour Beattie Construction Limited and Others [1993] 2 W.L.R. 262, House of Lords. Similar ADR mechanisms have been used in the Boston Central Artery/Tunnel Project and in the Hong Kong Airport Core Program. (6) Med-Arb, etc. In addition to ADR being used as a filter mechanism it is possible to use a mixture of arbitration and mediation or mediation and arbitration. Indeed, whatever combination of mechanisms the parties choose. The notion of switching from, say, arbitration to mediation may be difficult for Western lawyers and arbitrators to accept since this must always involve the prospect of a mediator having to revert to the role of arbitrator. But such a course, whilst perhaps strange to the Westerner, would be regarded as perfectly natural in, say, China. For example, provision is made in the CIETAC arbitration rules for an arbitral tribunal to switch to acting as conciliator. ADR in its various forms has much to offer as a dispute resolution process. But it has to be used sensibly. It is not the answer to every dispute. The client whose products are being counterfeited is unlikely to be impressed by the lawyer who suggests that he try ADR. There will always be situations where an application to a national Court for an order or declaration is the only realistic option available. The extent of the use of ADR in the Oil and Gas Industry is unclear. The Centre for Dispute Resolution (CEDR), for example, has dealt with petroleum disputes. However, for obvious reasons, specific information is unavailable.

D. Expert determination (1) Expert determination and arbitration The use of experts to determine technical or valuation matters has been known to English law for hundreds of years. The parties agree to instruct a third party to determine a specific matter. The system has been used in the Energy Industry for redetermination and for the resolution of specific matters identified in the relevant contract. See for example two of the cases referred to the Appendix: Total v. Arco and Shell (UK) v. Enterprise Oil. It may be at times difficult to distinguish between expert determination and arbitration. But the differences between the two are significant. An expert is appointed to obtain the benefits of his expert opinion. It is that expert opinion which will be used to arrive at the determination. Very often the matters to be decided will involve the expert in a valuation exercise. "Due process" may be conspicuously absent from the system of expert determination: the parties may not necessarily present their case or submit evidence. In England, at any rate, there are no statutory provisions governing expert determination. Arbitration, on the other hand, is governed by the provisions of the 1996 Arbitration Act. Due process is very much part and parcel of the arbitral process. Leaving aside documents only arbitrations, the parties will in all probability present their cases to the arbitral tribunal and the decision of that tribunal is based upon the evidence and submissions put forward by the parties and their professional advisers. The arbitral tribunal must, in arriving at its decision, apply the relevant law. The expert on the other hand uses his own expertise and decides the issue in dispute on the basis of his expert opinion. The assistance of the Courts is available to aid the arbitral process. For example, under the English Act the Court can appoint arbitrators. There is no such provision in relation to experts. Similarly, the Courts can assist the arbitral tribunal by enforcing peremptory awards of that tribunal, by securing the attendance of witnesses and by making orders in relation to the taking of evidence, the preservation of evidence and the making of orders relating to any property which is the subject-matter of the proceedings: for example in relation to the preservation and custody of such property. The Court also has powers to grant interim injunctions and appoint receivers in support of the arbitral proceedings. An arbitral award can be challenged on the grounds of "serious irregularity" and there is a limited right of appeal in relation to points of law. No such safeguards apply in the case of expert determination. Any challenge to the determination of an expert can only be on fairly limited grounds relating, for example, to fraud or collusion, or an allegation that the expert had departed from his instructions to a material extent. But perhaps one of the most significant differences between expert determination and arbitration lies in the area of enforcement. On the domestic level, an arbitral award is normally enforced through the national courts. That is the case in England, where an award is enforceable as if it were a judgment of the Court. No such assistance is available in relation to the determination of an expert. Such determination

is enforceable, if it is enforceable at all, purely as a matter of contract. The problem of enforcement on the international level is perhaps even more significant. The determination of an expert is not an arbitral award and therefore cannot be enforced under the New York Convention. (2) Some institutions offering expert determination LCIA Expert determination is one of the dispute resolution services offered by the LCIA. ICC The ICC International Centre for Expertise in Paris provides a set of Rules for Expertise. The International Centre will arrange for the appointment of experts in connection with "international business transactions". The parties may provide in their contract for resort to the Centre. The standard clause recommended by the ICC is: "The parties to this agreement agree to have recourse, if necessary, to the ICC International Centre for Expertise of the International Chamber of Commerce in accordance with the ICC's Rules for Expertise". The parties may agree to submit an existing dispute to the International Centre. The Rules for Expertise provide that the expert may be nominated by the parties by mutual consent and confirmed by the Centre, failing which the Centre will appoint an expert. The expert is "empowered to make findings within the limits set by the request for expertise, after giving the parties an opportunity to make submissions" . The parties are to provide the expert with all necessary facilities and in particular to make available documents and grant him access "to any place where the expertise operations are being carried out." The Rules provide that "Unless otherwise agreed the findings or recommendations of the expert shall not be binding upon the parties". The Centre for Dispute Resolution CEDR offers a "Model Expert Determination Agreement". That agreement explains that expert determination differs from arbitration in its greater informality and says that there is "no need for a trial-type hearing. Unless the parties agree otherwise, the Expert may conduct investigations independently of the Parties, and make the Decision based on those investigations without reference to the Parties." The provisions of the Model Agreement state that the Expert will act as expert and not as an arbitrator and state that unless the parties agree otherwise "This Expert Determination leads to a decision.... being issued by the Expert. The decision will be final and binding on the Parties". The agreement provides that the expert is to conduct the Determination "in accordance with procedural directions which the Expert will seek to agree with the Parties. If they cannot be

agreed, the Expert's Directions will prevail". The agreement enables the parties to provide whether or not the decision of the Expert is to include reasons and whether or not the parties are to be permitted to challenge the decision "in any legal proceedings or otherwise". There is provision for the process to switch to mediation: if successful, the Expert Determination terminates. It is interesting to compare the CEDR Model Agreement with the specimen clause used by Shell International Limited which provides as follows: "Where, pursuant to any provision of this agreement a matter is required to be determined by an Expert, the Expert shall be a reputable person fitted by the possession of expert knowledge and experience for the determination of the matter in question. The Expert shall be appointed by agreement between the Parties or, in default of such agreement, within 30 days after a party has requested the appointment of an Expert, by the President of the Institute of Petroleum of the United Kingdom. Such expert shall determine the matter in question within 60 days after his appointment on the basis of terms of reference agreed between the Parties or otherwise as the Expert shall himself determine, as an Expert and not as an arbitrator and such determination shall be final and binding on the parties..." DISPUTE RESOLUTION AND THIRD PARTIES: THE CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 This Act is likely to be of significance to the Energy Industry. In the context of this Conference, its relevance lies in the fact that it will enable contractual provisions relating to arbitration to be made available to third parties. The effect of the English law doctrine of privity of contract is that only those who are parties to a contract are entitled to its benefits and subject to its burdens. This did not apply to third parties. A further result of the doctrine was that exclusion clauses and limitation clauses were not available to third parties. Himalaya clauses were used in an attempt to deal with the problems of liability and indemnity clauses. The Contracts (Rights of Third Parties) Act 1999 will permit a third party to enforce a benefit given to him by a contract to which he is not a party (the rule on obligations as opposed to benefits remains unchanged). The third party must be identified in the contract and the contract must confirm the benefits upon that third party. There are provisions dealing with variation and rescission. Attempts to deal with the problem of the English privity rule by means of Himalaya clauses and collateral warranties should now no longer be necessary. The provisions of Section 8 of the 1999 Act are intended to ensure that, where the requirements of that Act are satisfied, the Arbitration Act 1996 applies to the enforcement of third party rights under the Contracts (Acts of Third Parties) Act 1999.

E-COM AND THE HOW WILL DISPUTES BE RESOLVED? (1) Generally

PETROLEUM

INDUSTRY:

For the past few years the emergence and development of the Internet has made changes to the life of millions of people worldwide. The rate of development is extraordinary. Even today no one can predict with certainty where the Internet will take us. One of the areas where the Internet has had a particular impact is commerce. Cross-border trading can take place on the Internet virtually without regard to national boundaries. Broadly speaking there are two types of business being transacted on the Internet: that between business and the consumer and that between business and business. The business-to-consumer electronic commerce in America is put at some $8 billion. Many consumers in the UK are now becoming used to shopping on the Internet: not just supermarket shopping, but shopping in increasingly sophisticated areas. In the summer of 1999 Charles Schwab advertised in The Times telling UK private investors that they could trade on-line on the Dow Jones, NASDAQ, Amex and US regional exchanges. The same newspaper carried an advertisement by Icollector offering on-line bidding facilities for millions of pounds worth of sales taking place world-wide by auction houses, antique dealers and art galleries: "... browse through our extensive archives and reference guides to find out what you should be paying. Then you can bid on-line to your heart's content." If the increase in consumer business on the Internet in Britain follows the trend in America, then the rate of growth will be staggering. The estimated business-to-consumer trading in America presently put at $8 billion is reckoned to increase to $108 billion over the next 5 years. Other forecasts have put the business-to-consumer transactions in America at some $20 billion in 1999. This estimate, by Forrester Research, an Internet consulting firm, predicts that the figure will grow to $184 billion by 2004. A survey by Ernst & Young suggests that 39 million Americans, making up 17% of households, shopped on-line in 1999 and that nearly half of them spent $500 or more. Goldman Sachs forecast that by 2010 Electronic Shopping could account for 15-20% of retail sales. The business-to-business consumer (B2C) is small beer compared to the business-to-business trading (B2B). American forecasts for inter-company trading put the present figure at $43 billion increasing to $1.3 trillion in 2003. One factor which might affect those forecasts is the type of company which is presently trading on the Internet. Well known are the new Internet companies such as Amazon and Yahoo! More important may be established firms which have not yet taken full advantage of the benefits which the Internet can offer. The Chief Executive of IBM, Lou Gerstner, is reported as saying that "the storm that's arriving is when the thousands and thousands of institutions that exist today seize the power of this global computing and

communications infrastructure and use it to transform themselves. That's the real revolution." (2) E-Com and the Petroleum Industry Petroleum Review has for the past year or so been running a series of articles on Electronic Commerce and the petroleum sector. Although there is interest in that sector in trading, the main interest to date seems to be concentrated on cost-saving: "the main reason for the projective growth in E-Commerce is seductively simple: it purportedly saves money". General Electric recently announced that it had trimmed $1 billion off its procurement by invoicing exclusively in the electronic domaine. "Oil companies are taking note. BP AMOCO Chairman John Browne has stated that he wants 50% electronic procurement by the end of 1999, and 95% by the end of 2000... supply chain management, also referred to as e-procurement, involves the coordination of a company's purchasing of goods and services. Generally, this entails whittling down suppliers to a core group, then negotiating savings in return for loyalty... Since IBM began to put e-procurement for its office equipment in place three years ago, it has saved an estimated $4 billion. `We'll have gone from six million invoices to nothing by the end of 1999', says Janet Wood, General Manager for e-business solutions at IBM". Shell and Commerce One "a provider of global business-to-business e-commerce solutions" announced a plan to form a joint venture to develop an Internet market place for procurement of "a whole range of supplies and services in the oil, gas and chemicals industry. Shell anticipates that the new system will `significantly' cut procurement cost". BP AMOCO are reported to have started using the Internet to purchase basic catalogue items: "these represent only 15% of its $20 billion annual procurement budget, but 50% of all transactions, and it has targeted $200 million savings annually from these items alone. By the end of 2000, BP AMOCO aims to conduct 95% of all purchases electronically." Another area where electronic commerce is seen as providing cost-cutting opportunities for the industry is in spares inventory management: "If you can locate spare parts in a few minutes using the Internet, and call not just on the reserves of your own company's sites but also those of other operating companies who use much the same equipment, you can afford to hold fewer spares". The provision of information is another area in which the Internet is seen as giving the opportunity to cut costs. DEAL ("Digital Energy Atlas & Library") is a website which provides a library of basic geo-scientific information on the UK Continental Shelf. "Deal is expected to save the industry millions of pounds a year. By providing quick and simply access to reliable sources of information, costly duplication in data storage will be eliminated and search time reduced". (3) E-Com and legal problems In many of the areas where e-commerce is beginning to have an impact upon the petroleum industry - for example in the provision of information -disputes are unlikely to arise. But in the trading areas where the Internet is used in the business of buying and selling - Cybertrade disputes will inevitably arise. The problem there is that trading on the Internet will throw up problems which have never before arisen in relation to traditional "paper" transactions: contract

formation on the Internet, digital signatures, etc. Cybertrade will therefore raise legal problems the like of which have never been faced before. Processes used in paper-based trading may not assist in the resolution of difficulties arising in cross-border trading on the world-wide web. A contract concluded on-line may involve problems not encountered in a written contract executed with the pen and ink signatures of the parties. Trading on the Internet is likely to create problems which will include the following: formation of digital signatures, governing law and jurisdiction; Formation of a Contract Take a simple example. A in Manchester is purchasing a book on the Internet from B Limited in London. What form will this contract take? When and where will it be made? What will be its terms? If disputes develop, how can the existence of that contract be established in litigation or arbitration proceedings? English law, for example, has complex rules dealing with the formation of a contract. One basic rule is that there must be an offer and an acceptance. Does B Limited's Website contain an invitation to treat? Or is there an offer which can be accepted? And how is the acceptance of the offer to be communicated? Does A's click on an icon bring the contract into existence? And if it does, are there terms to be implied into that contract? English law implies terms through Statutes: terms as to fitness for purpose and the like are implied by the Sale of Goods Act. The Unfair Contract Terms Act may strike down clauses in a seller's standard conditions of sale. Digital signatures: encryption, decryption and authentication digital signatures What is the situation if the relevant national law requires that the contract be in writing? How will Cybertrade deal with that? Not only may the national laws require the contract to be in written form, but there may be the further requirement that the written document bear the written pen and ink signatures of the parties. English law starting with the Statute of Frauds in 1677, and more recently in the Law of Property (Miscellaneous Provisions) Act 1989 - requires certain types of contract to be signed. How will E-Commerce handle this? The answer being advanced is the Digital Signature: public key encryption can verify the identity of the sender. In England, two statutes are likely to have an impact on the development of Electronic Commerce. The Electronic Communication Act 2000 is intended to "encourage confidence in Electronic a encryption and contract; authentication;

Commerce and technology underlying it". The Act provides for the legal recognition of electronic signatures and the certification of such signatures in legal proceedings. The second statute is the Regulation of Investigatory Powers Acts 2000. Part III of the Act is concerned with investigation of electronic data protected by encryption. Provisions dealing with electronic signatures and their certification, etc. and with the investigatory powers of the intelligence services, police, and Customs and Excise were originally all contained in the Electronic Communications Bill. In some quarters there was considerable disquiet at the intention to include provisions as to Electronic Commerce and provisions as to investigatory powers in one and the same piece of legislation. [For example "the tipping-off" provisions now contained in Section 54 of the Regulation of Investigatory Powers Act provide for a criminal offence carrying a penalty on conviction of five years' imprisonment]. It remains to be seen what effect the Regulation of Investigatory Powers Act may have upon the development of Electronic Commerce in the United Kingdom. The Particular Problems of Governing Law and Jurisdiction Again, take a simple example: when the contract for the purchase and sale of a vehicle is made between A in London and the B Corporation in Germany, which country's law governs that contract and which country's courts have jurisdiction? The country of the buyer or the country of the seller? In the UK (and most of the European Union) the Rome Convention applies to identify the governing law: it will be the law of the country which is "most closely connected" with the transaction. Likewise, the Brussels Convention deals with the question of which country's courts have jurisdiction over that contract. But what is the position under a trans-border contract entered into between an EU and a non-EU party? Does the law of the seller's country apply? Do the Courts of the seller's country have jurisdiction? Or in one or both cases is it the buyer's country? The particular legal problems of governing law and jurisdiction have always existed in crossborder trading. Because Electronic Commerce is by its very nature a system of trading without national boundaries, problems relating to governing law and jurisdiction are likely to increase. (4) New dispute resolution processes for E-Commerce When disputes arise in E-Commerce transactions, the traditional dispute resolution processes will be available: litigation, international commercial arbitration and so on. But will the advent of E-Commerce bring with it new mechanisms for dispute resolution? Will on-line trading bring on-line dispute resolution? Is it possible that electronic commerce will produce the development of dispute resolution processes which make use of the Internet? Could the costly and time-consuming processes

involving physical arbitration hearings be replaced by on-line electronic dispute resolution processes? Will we see the emergence of the Cyber Arbitrator? Two major international organisations are already looking at the problem: the ICC in Paris and WIPO in Geneva. The ICC : Documentary Credit Disputes The ICC may already have shown the way to resolve cross-border disputes swiftly and costeffectively without the necessity for physical meetings. In October 1997 the ICC published the DOCDEX Rules, the "Rules for Documentary Credit Dispute Resolution Expertise". The system is made available through the ICC's International Centre for Expertise in Paris and can be used to resolve Letter of Credit disputes where the Credit is subject to the ICC's Uniform Customs and Practice for Documentary Credits (the UCP) or the Uniform Rules for Bank-to-Bank Reimbursement under Documentary Credits (URR). The Rules provide for a swift, non-binding determination by a panel of three Experts. There is no hearing. The party seeking a DOCDEX decision submits a Request which must identify the issues. The Request must be accompanied by the Letter of Credit in question and other relevant documents. The Respondent submits an Answer to which is annexed any relevant documents. Three "Appointed Experts" are to draft a decision which is to be submitted to the Centre within 30 days. That decision is based on documents only. The Rules state that the parties may not seek an oral hearing in front of the appointed experts. In all probability the three Experts will be from three different countries. There is no requirement in the DOCDEX Rules that the Experts should physically meet. The communications between the Experts for the purposes of arriving at their decision can therefore be by telephone, fax or E-mail. The way is obviously open for on-line communication between the experts. Parties involved in DOCDEX cases dealt with so far have come from more than 20 countries including Belgium, France, Italy, Spain, Switzerland, Turkey, Bulgaria, Hungary, China, India, USA and Australia. Experts appointed to the DOCDEX Panel in those cases have come from over 25 countries. WIP0 : Domain Name Disputes The World Intellectual Property Organisation is one of a number of specialised agencies operated by the United Nations. For sometime WIPO has been working on an on-line dispute resolution system aimed at dealing with Domain Name disputes. Draft Rules issued in 1997 contained provisions dealing with hearings. These were defined as including telephone or video conferencing and the "simultaneous, authenticated exchange of electronic communications on the same channel in a manner that enables all Parties authorised to use the channel to receive any communications sent and to send communications". Although intended specifically to deal with Domain Name disputes the draft Rules could be adapted to deal with on-line Electronic Commerce disputes generally. Erik Wilbers of the WIPO Arbitration and Mediation Center in Geneva has suggested that the

expansion of Electronic Commerce on the Internet "may soon lead parties to settle disputes in the same manner as their commerce is conducted". The WIPO Domain Name Dispute Resolution Procedure is now operational with effect from December 1999. By mid-2000 WIPO was dealing with more than 700 cases. The WIPO system is based on the ICANN System (Internet Corporation for Assigned Names and Numbers). WIPO was instrumental in the setting up of ICANN. Documents of particular importance in the WIPO scheme are the ICANN Rules and Policy Document and the WIPO Supplementary Rules and Policy Document. How the system works can be explained by a simple example: (1) Party A (to be the Respondent in the future dispute) registers a Domain Name with WIPO. (2) The WIPO "Registration Agreement" for that registration incorporates by reference the ICANN/WIPO Rules. (3) Party B (to be the Complainant in the proceedings) says that the registration was in "bad faith" (e.g. "marksandspencers.com"). (4) The Complainant makes a written complaint to the WIPO Center, setting out the grounds of complaint: the Domain Name is similar to the Complainant's trademark or service mark and the registration was made in bad faith: for example for the purpose of selling that Domain Name to the Complainant for more than mere "out of pocket expenses". (5) The Respondent is to put in a Response. (6) The procedure is on-line although communications can be by mail, fax, and e-mail. Hard copies are also to be provided. (7) A panel is appointed (either one or three). (8) There is no hearing. (9) The panel makes its decision and can either order the transfer or the cancellation of the Domain Name. (10) Within ten days of the issue of the Decision a dissatisfied party can institute proceedings in a national court. (11) Subject to that, the Center notifies the parties, ICANN and the Domain Name Registrar who will, for example, cancel the Domain Name.

What future trends will we see in dispute resolution systems in the Oil and Gas Industries? Litigation in the international courts and international arbitration are likely to continue to be the

major dispute resolution systems in use. Expert determination may well increase, but is likely to be restricted to fairly narrow areas. ADR may also have an increasing role to play. Information is not easy to come by, but the indications are that ADR is being used and may be used more often as lawyers and their clients become accustomed to mediation and what it can achieve. It may well be that ADR will also have a role to play as a filter mechanism of the kind used in the Boston Central Artery/Tunnel Project and in the Hong Kong Airport Core Program: i.e. by way of contractual provisions which specify one or more ADR filter processes, with a long-stop provision for arbitration (or litigation) should the ADR filters fail to resolve the dispute. What of electronic dispute processes? As Electronic Commerce becomes increasingly used in the Energy Sector, will we see new processes added to the existing dispute resolution methods? Will on-line dispute systems be used to resolve E-Com disputes? A distinction has to be drawn between pure on-line dispute systems and the use of electronic means to assist and speed up existing arbitral processes. But in both areas the likelihood is that the use of the Internet in dispute resolution will increase.

CHAPTER 7
CONCEPT OF AN OIL AND GAS BREACH

While the sole effect approach, with its yardstick of substantial deprivation, no longer provides a workable criterion in determining the existence of a compensable event, arbitral practice reveals a burgeoning trend toward the adoption of alternative methods of determining

claims of indirect expropriation. This move coincides with the rise in the number of awards rendered against host states under standards of treatment, such as FET, national treatment, and the prohibition of arbitrary and discriminatory measures. This chapter examines the characterfocused approaches to state responsibility for interference with foreign investment. It traces recent developments in oil and gas practice and arbitration whereby the existence of expropriation as a ground of state responsibility for regulatory action is determined through analysis of the character of a disputed action and its international legality. It argues that the shift from the sole effect doctrine has the potential for a more balanced, conceptually sound, and practically viable framework for determining host state liability for interference with foreign investment. As the finding of a breach of oil and gas standards other than expropriation hinges on the character of the disputed governmental conduct in question, this chapter analyses whether the standard of expropriation, with its focus on the fact of deprivation, retains any role as a distinct standard of investment protection.

2.

The shift from the sole effect to character-focused approaches in addressing expropriation

claims: the police powers doctrine

1.1. Arbitral practice

Although the sole effect doctrine and the substantial deprivation rule both continue to dominate expropriation analyses, the recent practice of investment arbitration exhibits a growing trend towards considering the character of a governments disputed conduct as a key criterion in establishing state responsibility to the investor. Among some of the earlier cases involving investment disputes, the award in Middle East Cement is notable for the tribunals emphasis on discrimination and breach of due process of law as key elements justifying the finding of expropriation.1 The tribunal held that expropriation does not cover any losses occurring to an investor due to commercial risks or due to procedures of the State authorities and courts as long as they are under due process of law and not discriminatory.2

Subsequently, following the rise in the number of regulatory expropriation claims, tribunals increasingly recognised the need for alternative approaches to determining host state responsibility for an allegedly expropriatory regulation. The Methanex v United States and

Saluka v Czech Republic awards are leading cases in articulating the expropriation analysis focused on the character of a disputed governmental action. Both awards are notable for their departure from the classical method under which the assessment of the legality of the conduct of the host state was undertaken as part of establishing whether an expropriation was lawful and not as part of establishing whether an expropriation had occurred.3 Methanex arose in

connection with the Californian government ban on the sale and use of a gasoline oxygenate additive called Methyl Tertiary Butyl Ether (MTBE). Methanex, as the largest supplier of

1 Middle East Cement Shipping and Handling Co Sa v Arab Republic of Egypt, Award, 12 April 2002 (ICSID Case No ARB/99/6) (2003) 18 ICSID Rev- FILJ 602. 2 Ibid para 153. U Kriebaum, Regulatory Takings: Balancing the Interests of the Investor and the State (2007) 8 J World Investment & Trade 717, 726.

methanol to Californian producers of MTBE, contended that the ban amounted to an expropriation in violation of Article 1110 NAFTA. The tribunal regarded the character of the disputed measures to be decisive in establishing the existence of an expropriation. It held that ...as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.4 The tribunal concluded that the ban was made for a public purpose, was non-discriminatory and was enacted in accordance with due process. It held that from the standpoint of international law, the California ban was a lawful regulation and not an expropriation.5 In Saluka, a claim of expropriation was brought in connection with an alleged failure by the Czech government to rescue a failing bank of which the investor was a major shareholder.6 In order to prevent an imminent banking collapse, the government decided to put the bank into forced administration. In considering whether the imposition of forced administration amounted to expropriation, the tribunal noted that [i]t is now established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare.7 The tribunal then pointed to conditions under which the government would be absolved from responsibility for interference with a foreign investment. By reference to the Harvard Draft Convention, the tribunal indicated that no obligation to compensate would arise if the disputed conduct (1) was non-discriminatory; (2) was not an unreasonable departure from the
4 Methanex Corporation v United States, Final Award on Jurisdiction and Merits, 3 August 2005 (Ad hoc UNCITRAL Arbitration Rules) Part IV Chapter D, para7. 5 Ibid, Part IV Ch. D, para 15. Saluka Investments BV v Czech Republic, Partial Award, 17 March 2006 (PCAUNCITRAL Arbitration Rules). 7 Ibid para 255.

principles of justice recognised by the principal legal systems of the world; (3) was not an abuse of the powers of the government.8 Having examined the disputed measure against these criteria, the tribunal concluded that the disputed conduct did not rise to the level of a breach under the expropriation clause of the applicable BIT. In LinkTrade v Moldova, a dispute arose in connection with the investors business as a duty free importer of consumer products into the Free Economic Zone of Chisinau.
9

The

investor contended that the law introducing a change in the rates of duties and VAT exemptions destroyed the economic validity of its investment and constituted an indirect expropriation. The tribunal admitted that fiscal measures might cause the taxpayer to surrender part of his income or property to the state. However, in the tribunals view, the character of the disputed measures was decisive in establishing the existence of expropriation: [f]iscal measures only become expropriatory when they are found to be an abusive taking. Abuse arises where it is demonstrated that the State has acted unfairly or inequitably towards the investment, where it has adopted measures that are arbitrary or discriminatory in character or in their manner of implementation, or where the measures taken violate an obligation undertaken by the State in regard to the investment.10 In Bayindir v Pakistan , the tribunal considered a conduct-based analysis to be crucial in a determination of whether an expropriation has occurred.11 After identifying the assets that

were allegedly expropriated by the state in the exercise of its sovereign powers, the tribunal held that, in order to establish the existence of an expropriation, analysis ought to focus on the lack of public purpose, discrimination and a breach of due process, as well as an absence of

8 Ibid paras 256-257. For the Harvard Draft Convention, see LB Sohn and RR Baxter, Responsibility of States for Injuries to the Economic Interests of Aliens (1961) 55 AJIL 554. 9 LinkTrading Joint Stock Company v Moldova, Final Award, 18 April 2002 (Ad hocUNCITRAL Arbitration Rules). 10 Ibid para 64. Bayindir Insaat TurizmTicaretve Sanayi A v Pakistan, Award, 24 August 2009 (ICSID Case No ARB/03/29) para 446.

compensation and departure from general principles of treatment.12 In addressing the character of the disputed governmental interference with the investors rights under the concession contract, the tribunal discussed whether the conduct was in conformity with the contract and whether the fair and equitable treatment was violated.13 The Waste Management award similarly adopted a conduct-based assessment as part of its expropriation analysis. In addressing the investors claim brought in connection with a failed concession contract, the tribunal held that it is not the function Article 1110 to compensate for failed business ventures, absent arbitrary intervention by the State amounting to a virtual taking or sterilising of the enterprise.14 More recently, the legality test was adopted, albeit somewhat controversially, in Saipem v Bangladesh.15 At the centre of the

dispute was the investors claim that an interference by the Bangladeshi courts with the arbitration of contractual claims resulted in expropriation. The tribunal pointed out that under the sole effect doctrine the deprivation of Saipems ability to enjoy the benefits of the ICC award was not sufficient to conclude that the courts intervention had amounted to an expropriation.16 Rather, the particular circumstances of the dispute called for an inquiry into whether the disputed conduct was also illegal for establishing the existence of expropriation.17 In addressing the question of the legality of the courts intervention with the ICC arbitration, the tribunal found that the Bangladeshi courts had abused their supervisory jurisdiction over the arbitration process by revoking the arbitrators authority without any

It must be noted that while the tribunal adopted a conduct-based analysis as part of its expropriation inquiry, it also considered the substantiality of impact of the alleged conduct and placed emphasis on whether the alleged conduct was exercised by the state in its capacity as a sovereign (see ibid paras 459, 474). 13 Ibid paras 469, 481. 1Waste Management Inc v Mexico, Award, 30 April 2004 (ICSID Case No ARB(AF)/00/3) para 160. 1Saipem v Bangladesh, Award 20 June 2009 (ICSID Case No ARB/05/7). 1Ibid paras 129-133. 1Ibid para 134. The tribunal, however, did not specify the particular circumstances that justified the adoption of the legality test for the purpose of establishing an expropriation.
12

justification.18 According to the tribunal, the standard that the Bangladeshi courts had used in considering the legality of the ICC arbitrators conduct and the manner in which the standard had been applied to the facts of the case constituted an abuse of right.19

1.2. Oil and gas practice

The emphasis on the character of governmental measures can be traced in oil and gas instruments. For example, the 1985 Convention Establishing the Multilateral Investment

Guarantee Agency excludes non-discriminatory measures of general application from the scope of expropriation.20 The relevant provision reads as follows: Any legislative action or administrative action or omission attributable to the host government which has the effect of depriving the holder of a guarantee of host ownership or control of, or a substantial benefit from, his investment, with exception of non-discriminatory measures of general application which governments normally take for the purpose of regulating economic activity in their territory.21 The shift from the sole effect doctrine to a multi-factor analysis features prominently in the recent generation of BITs and FTAs. For instance, Annex A of the 2009 Canada - Czech Republic BIT clarifies the standard of expropriation in Article VI, stating that [t]he determination of whether a measure or series of measures of a Contracting Party constitute an indirect expropriation requires a case-by-case, fact-based inquiry that considers, among other factors: ... iii) the character of the measure or series of measures.
Ibid paras 159-161. Ibid para 170. The Convention Establishing the Multilateral Investment Guarantee Agency (1985) 24 ILM 1605. Ibid 1611. See also C Schreuer, The Concept of Expropriation under the ECT and other Investment Protection Treaties in C Ribeiro, Investment Arbitration and the Energy Charter Treaty (JurisNet, Huntington, NY 2006)113.
18

... Except in rare circumstances, such as when a measure or series of measures are so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith, non-discriminatory measures of a Contracting Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriation.22 An identical provision can be found in the recent US FTAs and the 2004 US Model BIT.23Although the explanatory clause in the addendum refers also to other elements of analysis, such as the impact of measures and the extent to which they interfere with investment-backed expectations, the inclusion of the character of disputed measures as a prerequisite for the finding of expropriation provides the much-needed legal basis to support the shift away from the sole effect analysis.

1.3. Doctrinal approaches

The idea

that the character of a

governments

action will frequently be decisive in

determining the existence of expropriation has long been recognised in scholarly writing. The doctrinal codification of the international law on state responsibility in the Harvard Draft Convention provides procedural the most influential example.24 It acknowledges that, subject to from an

and substantive legality conditions, no international wrong results

uncompensated taking that is carried out as part of the normal operation of the laws or from the pursuit of important public policy objectives.25 Recent scholarly analyses similarly draw a distinction between a normal regulation and the abuse of sovereign powers through
See Annex A to Article VI. See the text of the US Model BIT at < http://ita.law.uvic.ca/documents/USmodelbitnov04.pdf> accessed 30 October 2010. 24 (1961) 55 AJIL 515. Ibid 554.
22

illegitimate interferences in foreign investment activities.26 As summarised in the recent commentary, the character, meaning the purpose and context of the governmental measure also enters into the analysis i.e., whether the measure is normal regulation taken to promote a recognised social purpose or the general welfare when non-discriminatory and in good faith.27 Instead of being limited in their role to the post-factum assessment of the legality of an expropriation, the non-discrimination, public purpose and due process criteria have been geared to establish whether an expropriation has occurred.28 The focus on the character of a governmental measure in determining the existence of the host states responsibility is commonly regarded as the application of the police powers doctrine.29 In the words of the Iran-US Claims Tribunal in Sedco, it is an accepted principle of international law that a State is not liable for economic injury which is a consequence of bona fide regulation within the accepted police power of states.30 An investor-state tribunal in Tecmed has similarly referred to the principle that the State's exercise of its sovereign powers within the framework of its police power may cause economic damage to those subject to its powers as administrator without entitling them to any compensation whatsoever
See R Dolzer and F Bloch, Indirect Expopriation: Conceptual Realignments? (2003) 5 Intl L F 155; AS Werner, Indirect Expropriation: The Need for a Taxonomy of Legitimate Regulatory Purposes (2003) 5 Intl L F 166; I Brownlie, Principles of Public International Law (6th edn OUP, Oxford 2003) 509 (State measures, prima facie a lawful exercise of powers of governments, may affect foreign interests considerably without amounting to expropriation). For recent analyses supporting the finding of the state responsible for an interference that violates certain conduct requirements, such as due process and non-discrimination, see M Gutbrod and S Hindelang, Externalization of Effective Legal Protection against Indirect Expropriation: Can the Legal Order of Developing Countries Live Up to the Standards Required by International Investment Agreements? A Disenchanting Comparative Analysis (2006) 7 J World Investment & Trade 59, 63; V Lowe, Regulation or Expropriation? (2002) 55 Current Legal Problems 447, 459; S Subedi, International Investment Law: Reconciling Policy and Principle (Hart Publishing, Oxford 2008)76, referring to the CAFTA-DR Article 10-C (3)(b). For an earlier work endorsing a similar theory, see BH Weston, Constructive Takings under International Law: A Modest Foray into the Problem of Creeping Expropriation (1975-1976) 16 Va J Intl L 104. 126-130 (pointing to coercion and violation of minimum human rights as factors indicating that regulation is expropriatory). 27 K Yannaca Small, Indirect Expropriation and the Right of the Government to Regulate Criteria to Articulate the Difference in C Ribeiro (ed) Investment Arbitration and the Energy Charter Treaty (JurisNet, Huntington, NY 2006) 161. 28 Kriebaum (n 3) 726. See ibid. Sedco Inc v Iran (1985) 9 Iran-USCTR 248, 275.
26

is undisputable.31Yet analysing indirect expropriation claims merely in terms of the police powers doctrine would be incorrect. A host state becomes exempt from an obligation to compensate not simply because its conduct falls within the police powers exception but because it is also non-discriminatory, non-arbitrary and does not transgress due process of law. It is vital that the emphasis is on the character and not on the fact that a regulation is an exercise of police powers. Some of the criticisms advanced against the character-focused approaches to determining claims of expropriation reflect this problem with applying the police powers
32

doctrine.

One major criticism is directed against the requirement of public purpose, which

is frequently referred to as legitimate welfare objective. It has been observed that since virtually any regulatory interference may be in the public interest, the character-focused analysis that includes a public purpose criterion will be problematic from the perspective of investment protection.33 Facing an almost insurmountable barrier of proving that a disputed regulation is against public purpose, foreign investors may have to bear the economic burden of nearly every realization of a public interest through regulatory measures.34 Consequently, the concept of indirect expropriation would lose its meaning.35 It is submitted that these

concerns over the growing emphasis on the character of the disputed conduct in deciding expropriation claims are misplaced. First, the requirement that the act of a government be for a public purpose is not a dominant criterion in the character-focused expropriation analysis that the Methanex and other investment tribunals have endorsed. By merely arguing that a

Tcnicas Medioambientales Tecmed SA v Mexico , Award, 29 May 2003 (ARB(AF)/00/2) 10 ICSID Rep 130, para 119. 32 Schreuer (n 21) 111 rejecting the idea that arbitrariness and discrimination should be relied on in establishing expropriation. 33 Kriebaum (n 3) 726. Ibid. Kriebaum (n 3) 726-7.
31

governmental measure has been adopted in pursuit of a legitimate public interest, the state cannot escape its responsibility; instead, it must show that the disputed governmental act is also non-discriminatory and in compliance with due process of law.36 In the case where a governments policy is designed to achieve certain welfare objectives, the host state bodies remain bound by the standard of non-discrimination, non-arbitrariness, and due process. As noted above, it is important to distinguish between the two major pillars of the police powers doctrine. These are (1) the principle of sovereignty and freedom to exercise its legislative and regulatory functions in the public interest, and (2) the requirement that in adopting certain policies governments must comply with internationally recognised standards of nondiscrimination, non-arbitrariness, and due process.37 The fact that the disputed conduct of a government is justified by reference to some welfare objective or other valid regulatory purpose cannot alone determine the outcome of the related claim of expropriation but rather operates as an indication that certain governmental acts do not give rise to compensation unless discriminatory, arbitrary or otherwise in violation of international law. Second, contrary to the existing arguments outlined above, analysing claims of expropriation against the character-focused criteria does not deprive investors from protection against the exercise of regulatory power by host states where such power is considered to be internationally impermissible. If a claim of expropriation fails, the investor canin many casesobtain redress through contending that there has been a breach of an FET, national
See A Newcombe, The Boundaries of Regulatory Expropriation in International Law (2005) 20 ICSID Rev Foreign Investment L J 1, 25 (The fact that intent is unnecessary does not make it irrelevant to the determination of whether or not a government measure is expropriatory... That intent is not a necessary element of expropriation simply means that a government cannot use lack of intent as a defence to a claim of expropriation); also K Byrne, Regulatory Expropriation and State Intent (2000) Canadian Ybk Intl L 89 (discussing the relevance of intent and its impact on the finding of an expropriation). See also above nn.4 -5 and accompanying text. 37 See American Law Institute, Restatement (Third) of the Foreign Relations Law of the United States (American Law Institute Publishers, St Paul, Minnesota 1987) vol I 712(1); P Muchlinski, Multinational Enterprises & the Law (OUP, Oxford 2007) 588. For the historical origins of the police powers doctrine, see FA Mann, Outlines of a History of Expropriation (1959) 75 LQR 188.
36

treatment, or arbitrary measures standard.38 Indeed, the emerging tendency for establishing the existence of expropriation by reference to the character of conduct that has been challenged has coincided with the growing recourse to non-expropriatory standards, such as national treatment, non-arbitrariness and FET.39 Under these standards, the investors

entitlement to compensation does not depend on the degree of deprivation. Establishing a nonexpropriatory breach of treaty requires evaluating a disputed measure against the relevant standard of treatment. It is the general concept of international legality that underlies the concept of state responsibility for a breach of non-expropriatory standards of treatment.

3.

Inadequacy of the expropriation model for claims of indirect takings

The rise in prominence of non-expropriatory standards of treatment and the vagaries of the substantial deprivation test raise the question of whether expropriation, as a distinct standard of protection, retains its role in oil and gas law. As shown in Methanex, under the

emerging trend for analysing expropriation claims by focusing on the character of a governments disputed conduct,40 the factors of discrimination, arbitrariness, and a violation of due process of law are regarded as prerequisites for the hosts state responsibility. The same concept of illegality lies beneath non-expropriatory standards of treatment. Under both the new approach to expropriation and also the approach to non-expropriatory standards, compensation is payable for loss which is caused by conduct in violation of non- discrimination, due process and non-arbitrariness requirements. In other words, the mere fact
Exceptionally, some BITs allow for arbitration of only a certain category of dispute, such as claims relating to compensation for an expropriation. 39 See Chapter II. Also, T J Grierson-Weiler and IA Laird, Standards of Treatment in P Muchlinski, F Ortino and C Schreuer (eds), The Oxford Handbook of International Investment Law (OUP, Oxford 2008) 269; J Coe and N Rubins, Regulatory Expropriation and the Tecmed Case: Context and Contributions in T Weiler (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, London 2005) 602; C Schreuer, Interrelationships of Standards in A Reinisch, Standards of Investment Protection (OUP, Oxford 2008) 1-3. 40 The trend is exemplified in Methanex, Saluka and Link Trading , see nn. 49 above.
38

that the investor incurred loss is not sufficient to give rise to the states obligation to compensate. In contrast, under the traditional standard of expropriation, the non-discrimination and due process of law requirements usually operate as the conditions of legality of an expropriation, i.e. in establishing whether an expropriation the existence of which has already been confirmed is illegal.41 Unlike the emerging expropriation analysis and the recent approaches to establishing breaches of non-expropriatory standards, the traditional expropriation rule limits the application of non-discrimination and due process requirements to a post facto assessment of conduct that has already been found to be expropriatory. This approach is illustrated in ADC v Hungary .42 The case involved the cancellation of a

concession for the management of an airport. A tribunal held that the cancellation was expropriatory.43 Only after having established the existence of an expropriation did the tribunal proceed to analysing whether such an expropriation was lawful. Guided by the expropriation standard in the applicable BIT, the tribunal examined whether the cancellation of the contract was discriminatory, in violation of due process of law and accompanied by the payment of compensation. This analysis is based on the idea that expropriation is prima facie lawful and becomes illegal if any of the conditions for the lawfulness have not been complied with.44 It can be argued that the wider adoption of the police powers doctrine can optimise the

See, e.g. A Reinisch, Legality of Expropriations in A Reinisch, Standards of Investment Protection (OUP, Oxford 2008), A Sheppard, The Distinction between Lawful and Unlawful Expropriation in C Ribeiro, Investment Arbitration and the Energy Charter Treaty (JurisNet, Huntington NY 2006) 170, Schreuer (n 21), also S Ripinsky and K Williams, Damages in International Investment Law (British Institute of International and Comparative Law, London 2008) 65-6; M Sornarajah, The International Law on Foreign Investment (CUP, Cambridge 2010) 406. 42 ADC Affiliate Ltd and ADC& ADMC Management Ltd v Hungary , Final award on jurisdiction, merits and damages (ICSID Case No ARB/03/16). 43 Ibid para 476. Sornarajah (n 41) 406.
41

existing approaches to expropriation. If the sole effect doctrine is replaced by characterfocused analyses, the expropriation standard could arguably be applied along with other standards of treatment in dealing with regulatory interference claims. However, embracing the police powers doctrine would not solve the problems underlying the existing role of

expropriation and non-expropriatory standards in determining the scope of state responsibility in oil and gas law. It is submitted that the traditional expropriation model fails to furnish an appropriate legal framework for analysing claims that arise from host state interference with foreign investment; hence, it should be replaced by a more feasible standard. The inadequacy of the expropriation standard stems from the compensation requirement. The problem is that under the traditional expropriation maxim, as reinforced in recent practice and scholarship, compensation is a mandatory requirement: an expropriation is illegal if it has not been compensated for. The status of this requirement in customary international law was fiercely debated by a large group of states, culminating in the adoption by the UN General Assembly of its groundbreaking resolutions.45 In the face of resistance and ensuing uncertainty of the customary international law on expropriation, the compensation rule was introduced by its proponents through the backdoor, in bilateral agreements for the promotion and protection of investments with countries which had previously opposed the customary status of the compensation rule.46 The result is a remarkable uniformity among a growing

On the UN GA Resolution No 1803 (14 December 1962) and No 3281 (12 December 1984) and their impact on customary international law, see D Johnson, The effect of the resolutions of the General Assembly of the UN (1955) 32 British Ybk Intl L97; R Dolzer, New Foundations of the Law of Expropriation of Alien Property (1981) 75 AJIL 553; R Higgins, The Taking of Property by the State: Recent Developments in International Law (1982) 176 Recueil des Cours 259; Subedi (n 26) 22-6. These selected pieces of writing represent only a fraction of the large body of literature generated by the UN Resolutions above and the subsequent adopted documents. 46 See WD Verwey, NJ Schrijver, The Taking of Property Under International Law: A New Legal Perspective? (1984) Netherlands Ybk Intl L 3; T Guzman, Why LDCs Sign Treaties that Hurt Them: Explaining the Popularity of Bilateral Investment Treaties (1998) Va J Intl L 639; KJ Vandevelde, The Bilateral Oil and gas Program of the United States (1988) 21 Cornell Intl L J 201; JW Salacuse, The Treatification of International Investment Law (2007) 13 L & Business Rev Am 155.
45

body of BITs and FTAs which invariably include the prohibition of uncompensated expropriation.47 A typical treaty clause on expropriation reads as follows:

Neither Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization

(expropriation), except: (a) for a public purpose; (b) in a non-discriminatory manner; (c) on payment of prompt, adequate, and effective compensation; and (d) in accordance with due process of law and Article 5 [Minimum Standard of Treatment](1) through (3).48

Under the ordinary and effective interpretation of this provision, the state is allowed to expropriate only if it complies with the public purpose, non-discrimination, due process, and compensation requirements.49 In practical terms, however, compensation is the dominant criterion. The plain meaning of the treaty terms suggests that expropriation becomes illegal unless it is accompanied by the payment of compensation.50 For example, an expropriation

See UNCTAD, Taking of Property (United Nations, New York and Geneva 2000) 26-31; Ripinsky & Williams (n 41) 78-9 (identifying about two thirds of existing BITs endorsing the adequate compensation standard as part of the expropriation clause). 48 The 2004 US Model BIT, available at < http://ita.law.uvic.ca/documents/USmodelbitnov04.pdf > accessed 31 October 2010. See also UNCTAD (n 47). 49 Reinisch (n 41) 176 (noting that while customary international law remains unclear, investment treaties clearly state the rules on legality of expropriation). 50 See Siemens AG v Argentina , Award and Separate Opinion, 6 February 2007 (ICSID Case No ARB/02/8) paras 349-352 and Compaa de Aguas del Aconquija SA and Vivendi Universal SA v Argentina , Award, 20 August 2007 (ICSID Case No ARB/97/3). The Vivendi tribunal expressly held that non-payment of compensation would amount to a violation of the treaty (ibid para 7.5.21.). This view may be at odds with the approach taken by international tribunals which found that non-payment of compensation ought not to render expropriation unlawful. For instance, the Aminoil award and some of the awards handed down by the IranUnited States Claims Tribunal, including INA, Sedco, American International Group , and Starrett Housing involved the finding of a lawful expropriation. Non-payment of compensation does not render an expropriation unlawful. (See M Mohebi, The International Law Character of the Iran-United States Claims Tribunal (Kluwer Law International, Boston 1999) 289). Ripinsky & Williams (n 41) 69 correctly observed that [c]ases of indirect
47

can be for a public purpose, non-discriminatory and compliant with due process, yet in accordance with the traditional viewsupported by a treaty text and contradicted only by a handful of decisionsthe non-payment of compensation would nevertheless render such an expropriation illegal and give rise to the host states responsibility in international law. As a result, the requirements of public purpose, non-discrimination and due process become almost irrelevant at the stage of determining a breach. Instead, they can merely affect the quantum of compensation payable to the investor for its expropriated investment.51 The traditional expropriation maxim thus translates into a rule that any deprivation caused by a governmental In Santa Elena , this theory culminated in the muchmeasure must always be compensated.52 criticised arbitral pronouncement that [E]xpropriatory environmental measures no matter how laudable and beneficial to society as a whole are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes whether domestic or international the states obligation to pay compensation remains. 53 For the reasons explained below, this approach is unsustainable and renders the expropriation model inadequate for determining host state responsibility for interference with foreign investment. First, the expropriation standard fails to accommodate the contemporary role of

expropriation would, almost by definition, fall within the scenario of unlawful expropriation, because the expropriating State does not usually acknowledge the very fact of expropriation, and consequently does not provide for payment of any compensation. Also ibid 67, discussing the caselaw of the ECtHR which takes a position similar to Mohebis argument. The relevance of these views for oil and gas disputes is however belied by the fact that the latter are governed by international oil and gas texts which provide only for a very limited possibility of expropriation being found lawful. The ordinary reading of the expropriation standard in most BITs commands the finding of an illegal expropriation unless compensation has been provisioned. 51 See ADC (above n 42). See also PM Norton, Back to the Future: Expropriation and the Energy Charter Treaty in T Walde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer Law International, London 1996) 374 (noting that non-discrimination, public purpose and due process are considered ...primarily as adding an additional sense of grievance in cases where the host state has, in the first instance, failed to pay the investor prompt, adequate, and effective compensation. Perhaps most significantly, that sense of grievance could affect an arbitral tribunals determination of an investments fair market value). 52 If a governmental measure is discriminatory or violates due process, then the investor may be entitled to a higher compensation. See above n 41-42 and accompanying text. 53 Compaa del Desarrollo de Santa Elena SA v Costa Rica , Final Award, 17 February 2000 (ICSID Case No ARB/96/1) (2000) 439 ILM 1317, para 171.

the state as a regulator. Second, the expropriation standard is inconsistent with the paradigm of state responsibility that forms the foundation of non-expropriatory standards of treatment. Each of these arguments will be further explored in the following section.

2.1. Investment treaties are not insurance policies

A disadvantage of the traditional expropriation model is that it does not account for the fact that an economic loss can be incurred due to the interplay of market forces and individual risk. In a modern global economy, this interplay is largely informed by the interventionist role of a state. Regardless of whether one supports, or opposes, state intervention in economic affairs, it is hardly possible to deny that regulation has become a prominent characteristic of governance.54 Governments frequently adjust the outcome of market processes by taxing here, subsidizing there, regulating everywhere.55 Such is the depth and breadth of regulation in a contemporary state that it can justly be regarded as an inalienable element of any business environment. With the rise of the regulatory state, a risk that investment may be affected by regulation can be regarded as part of a normal business risk which the investor needs to take into account and, if necessary, insure against. Foreign investors, like their domestic

counterparts, are not insulated from the effects of omnipresent regulation. It is therefore unreasonable for investors to expect that the state will always bear the cost of regulation by paying compensation every time regulatory action affects the value of investments. Arbitral tribunals and scholars have frequently stressed the fact that investment treaties are not insurance policies against a business risk. As indicated by the ICJ in Barcelona Traction,
See generally BA Ackerman, Private Property and the Constitution (Yale University Press, New Haven and London 1977). See further P Muchlinski, Caveat Investor? The Relevance of the Conduct of the Investor Under The Fair and Fair Equitable Treatment Standard (2006) 55 ICLQ 527, 528 (noting that administrative action is a highly complex, and virtually indispensable, part of the modern governance). 55 Ackerman (n 54) 1.
54

...when a State admits into its territory foreign investments or foreign nationals ... it is bound to extend to them the protection of the law. However, it does not thereby become an insurer of that part of another States wealth which these investments represent.56 The NAFTA tribunal in Azinian v Mexico similarly emphasised that investors, frequently and variously affected by regulation, should not expect that investment treaties would provide a satisfaction guarantee: It is a fact of life everywhere that individuals may be disappointed in their dealings with public authorities, and disappointed yet again when national courts reject their complaints. It may safely be assumed that many Mexican parties can be found who had business dealings with governmental entities which were not to their satisfaction; Mexico is unlikely to be different from other countries in this respect. NAFTA was not intended to provide foreign investors with blanket protection from this kind of disappointment, and nothing in its terms so provides.57 Likewise, the Feldman v Mexico tribunal warned against construing investment treaties as instruments of compensation for any loss that may investors may incur as a result of governmental action. The tribunal remarked that Governments must be free to act in the broader public interest through protection of the environment, new or modified tax regimes, the granting or withdrawal of government subsidies, reductions or increases in tariff levels, imposition of zoning restrictions and the like. Reasonable governmental regulation of this type cannot be achieved if any business that is adversely affected may seek compensation, and it is safe to say that customary law recognises this.58 Indeed, investment treaties are not intended to insulate investors from risks inherent in conducting business abroad;59 rather they guarantee against treatment that is contrary to the basic principles of international law, such as non-discrimination, non-arbitrariness and due
Barcelona Traction, Light & Power Co., Ltd. (Belgium v Spain) (1970) ICJ Rep 3, para 87. Azinian and ors v Mexico, Award on Jurisdiction and Merits, 18 October 1999 (ICSID Case No ARB (AF)/97/2) (2000) 39 ILM 537, para 83. 58 Marvin Feldman v United States of Mexico , Award 16 December 2002 (Case No ARB(AF)/99/1) 7 ICSID Rep 341, para 103. 59 JE Stiglitz, Regulating Multinational Corporations: Towards Principles of Cross-Border Legal Frameworks in a Globalized World Balancing Rights with Responsibilities (2008) 23 Am U Intl L Rev 451, 46 (arguing that normally, free market advocates view markets as more efficient than government in providing insurance. Is there a rationale, in this case, to rely on publicly provided insurance?). See Maffezini v Spain , Award 13 November 2000 (ICSID Case No ARB/97/7) (2001) 16 ICSID Rev-FILJ 248, para 64 (holding that BITs are not insurance policies against bad business judgments), also Muchlinski (n 54) 542.
56

process of law. As regulation has become an inalienable part of a business environment, investors cannot claim compensation every time a governmental decision negatively affects the value of their investment. Here lies the inadequacy of the expropriation standard. Once it is recognised that any regulation can entail negative change in the value of an investment,60

the existence of the economic loss alone ceases to form a justifiable basis for an obligation to compensate. 61 The standard of expropriation, with its emphasis on the fact of deprivation as a sole criterion, translates into a duty not to regulate unless compensation is provided for. It does transform investment treaties into insurance policies against a regulatory risk.

2.2. Prohibiting regulation or abuse of power?

Understanding the role of regulation in economic relations both globally and at the national level, however, does not mean the exemption of states from responsibility to investors. It has been rightly observed that a blanket exception for regulatory measures would create a gaping loophole in international protection against expropriation.62 In his analysis of risk and its relationship to the international standard of treatment, Brownlie pointed out that whatever risks the alien investor may be expected to reckon with, it is arguable that he cannot be expected to accept a distorted and unforeseeable manipulation of the legal procedures of the host state.63 What is (and should be) prohibited under international law: any regulation that

Newcombe (n 36) 46 (observing that many regulations result in some form of wealth deprivation and arguing that deprivation alone does not provide a sound policy rationale for providing compensation). 61 D Schneiderman, Constitutionalizing Economic Globalization: Investment Rules and Democracy's Promise (CUP, Cambridge 2008) 33 (pointing out that the takings rule potentially poses a significant barrier for the ability of states to intervene in the marketplace). 62 Pope & Talbot Inc v Canada, Interim Award, 26 June 2000 (Ad hocUNCITRAL Arbitration Rules) para 99. 6I Brownlie, Treatment of Aliens: Assumption of Risk and the International Standard in W Flume and others (eds), International Law and Economic Order: Essays in honour of F.A. Mann (Verlag C.H.Beck, Mnchen 1978. 319, referring to the Separate Opinion of Judge Cros in the Barcelona Traction case (1970) ICJ Rep 4, 274.
60

entails a diminution in the investments value or arbitrary, abusive and discriminatory measures that cause an economic loss? In order to protect an investor from the detrimental effects of a governments action, it is important to distinguish between a permissible regulation and an unlawful exercise of state powers. Unlike the traditional expropriation analysis, an inquiry focusing on the nature of a governments conduct does not aim to exempt all regulatory measures from state responsibility in international law. Rather, it intends to ensure that investors are protected against acts and omissions that are discriminatory,

arbitrary, or contrary to due process of law. Focusing on the manner in which the host state interferes with the foreign investment enables the ascertainment of whether a disputed governmental act involves ideological hostility, xenophobic sentiment, political preference, corruption or represents a generally innocuous regulatory activity in pursuit of legitimate economic or social objectives.64

2.3. The theoretical underpinnings of state responsibility for expropriation and nonexpropriatory breaches: expropriation as a loss

It has been suggested that the resilience of expropriationor its ubiquitous presence among standardsis a by-product of intended redundancy on the part of over-cautious treaty drafters.65 Especially in the context of indirect state interference with foreign investment, the reliance on the doctrine of expropriation has been explained as the result of a reluctance to give up a paradigm of law that was developed in the context of direct expropriations, despite
Sornarajah identifies eight different forms of risks to which investors are exposed: political hostility, nationalistic concerns, reneging on promises made by previous governments, deterioration in the law-and-order situation in the country, internal corruption, changes affecting an industry on a global scale, renegotiation or termination of contracts due to changed circumstances, and economic regulation. (Sornarajah (n 41) 70). While the latter three categories would seem to represent a prima facie lawful regulation, they too remain subject to the conduct analysis. 65 Grierson-Weiler& Laird (n 39) 269.
64

the fact that their legal form has meanwhile undergone a change.66 A similar disinclination to give up the concept of expropriation as a distinct international delict can be discerned in scholarship. For example, Montt argues that that expropriation must necessarily be defined as something less extensive than unlawful harm caused by the government lest the notion of expropriation is equated with state liability for injuries to investors.67 The argument points to a long tradition of reserving expropriation for cases dealing with full or substantial

deprivations of property rights.68 This understanding of expropriation is somewhat outdated and therefore inaccurate. As a matter of the international law doctrine, expropriation has been traditionally regarded as one among many forms of delictual responsibility.69 It is true that not all harm caused unlawfully to an investor would constitute expropriation; indeed, the investor may suffer moral and physical injury without being deprived of its investment. However, so far as the economic loss suffered by an investment is concerned, it is undeniable from both a semantic and legal perspective that the effect of a governmental action, i.e. its negative impact on the value and ownership of the investment, amounts to harm. The very fact that

expropriation is frequently analysed in terms of the sole effect doctrine and the related rule of substantial deprivation indicates that an expropriation is commonly understood as an economic loss. Understanding expropriation in terms of an economic harm is instrumental to conceptualising the foundations of state responsibility for interference with foreign
A Hoffman, Indirect Expropriation in A Reinisch, Standards of Investment Protection (OUP, Oxford 2008) 152. 67 S Montt, State Liability in Oil and gas Arbitration: Global Constitutional and Administrative Law in the BIT Generation (Hart Publishing, Oxford 2009) 233. 68 Ibid 233-4. Brownlie (above n 26) 506. That expropriation was one subcategory of state responsibility for injury to foreigners is evidenced by the history of the codification of international rules on state responsibility. See the Special Rapporteurs Forth Report on State Responsibility, FV Garcia Amador, Responsibility of the State for Injuries Caused in its Territory to Persons or Property of Aliens Measures Affecting Acquired Rights UN Doc. A/CN.4/119, Yearbook of International Law Commission (1959-II), see also CF Amerasinghe, State Responsibility for Injuries to Aliens (Clarendon Press, Oxford 1967) 121-32.
66

investment. In contrast with expropriation, which is traditionally deemed as internationally wrongful merely because something of value has been taken and not compensated for, international wrongfulness of non-expropriatory breaches lies in the character of a disputed governmental action, i.e. the presence of discrimination, arbitrariness, and a breach of due process. Analyses applied by arbitral panels in ruling on non-expropriatory treaty breaches are in line with an emerging shift to a character-focused approach in expropriation disputes, and reflect a different, more adequate understanding of the host states role in regulating foreign investment.70 Unlike the general prohibition of uncompensated regulation, state responsibility under non-expropriatory standards of treatment is based on the idea that states should exercise their regulatory functions subject to the restraints of international law, including the principles of non-discrimination, non-arbitrariness, and due process of law. The difference in the legal basis underlying state responsibility for expropriation and non-expropriatory standards of treatment can be presented as follows:

J.

Expropriation (the traditional model)

A failure to compensate loss (taking of something of a value) An obligation to compensate for the loss

II. Non-expropriatory standards of treatment

A governmental measure contrary to the standards of nondiscrimination, non-arbitrariness and due process
70

Loss caused to the investment by a governmental measure

An obligation to compensate for the loss

As noted earlier, the finding of a non-expropriatory treaty breach hinges on the presence of discrimination, due process, arbitrariness; the fact of deprivation is more relevant at the stage of determining a remedy.

It is clear that the ultimate gravamen of the investor claims under either expropriation or nonexpropriatory standards is the economic loss. Yet the asymmetry in the foundation of state responsibility for expropriation and that for non-expropriatory breaches is created by the fact that unlike other standards, the fact of loss dominates the expropriation analysis, with the character of a governments conduct remaining largely irrelevant.71 Furthermore, under the expropriation standard, compensation is both a condition of legality (expropriation is illegal unless compensated for) and a remedy (an uncompensated expropriation must be remedied by the payment of compensation72 ). In contrast, for the host state to be held liable under a non-expropriatory standard of treatment, the existence of an uncompensated economic loss alone will not suffice. Here, the host state will be liable once their disputed conduct is found to have contravened the standard of national treatment, arbitrary measures or FET. The fact that the investor has suffered a certain loss becomes relevant at a later stage, as part of determining the quantum of damages.73 Non-expropriatory standards therefore provide a

better framework for determining a host states responsibility for interference with foreign investment. First, compensation is not one of the mandatory conditions triggering a finding of state responsibility, but rather a remedy to which the investor will be entitled to in the event that the host state acted in a manner contravening a certain standard. Second, nonexpropriatory standards of treatment do not entitle the investor to redress for any deprivation

but only for measures that are discriminatory, in violation of due process, arbitrary or abusive. Hence, the comparative advantage of non-expropriatory standards is that they (1)
This holds true in oil and gas law. The ECHR approaches differ. There is disagreement as to whether an illegal expropriation should attract a different remedy, i.e. higher damages. 73 Unless the remedy sought is injunctive relief. See ATA Construction, Industrial and Trading Company v Jordan, Award, 12 May 2010 (ICSID Case No ARB/08/2). For criticism of the exercise by tribunals of injunctive powers, see Subedi (n 26) 79 (cautiously regarding the possibility of preventative measures in expropriation claims which the tribunal in Enron v Argentina found to be within the competence of international tribunals).
71 7

accommodate the application of the police powers doctrine without exempting host states from responsibility for governmental measures, and (2) do not shield investors from normal regulatory risks.

4.

Expropriation: A Redundant Standard

3.1. Expropriation as a prohibition of lawful measures

While acknowledging the difference in the legal bases of state responsibility for expropriation and non-expropriatory breaches, it can be argued that the two may still coexist and perform their own functions. There is a scope for an argument that by imposing an obligation to compensate for deprivation, the expropriation standard aims to ensure that investors are not left to carry the burden of a lawfully caused harm. For instance, an environmental decree may be for a public purpose (non-arbitrary), non-discriminatory and adopted in compliance with due process of law. Should the investor alone carry the burden of a loss if the society as a whole is to benefit? In the given example, the standard of expropriation would arguably shield the investor from having to bear the loss caused by otherwise lawful measures. Therefore, it could be argued, expropriation should retain its place in oil and gas instruments along with nonexpropriatory standards of treatment which prohibit certain forms of internationally illegal action, such as discrimination, arbitrary conduct, and abuse of power. It is submitted that a distinction between lawful and unlawful harm also fails to furnish an adequate analytical framework for determining a host states liability for interference with a foreign investment. Insisting that expropriation protects against both lawful and unlawful deprivations transforms state responsibility in oil and gas law into strict (or absolute)

liability. Indeed, once we accept that a government should always pay for the loss caused to an investorregardless of whether such loss has been inflicted by a lawful or unlawful measurethen any diminution in the investments value will have to be compensated. Not only is such a guarantee undesirable from a policy perspective, but it is also very broad as it postulates state responsibility for any degree of loss caused by any kind of measure.

3.2. The test of proportionality as a means of discerning between compensable expropriation and non-compensable regulation

It might, however, be argued that the standard of expropriation is designed to protect not against any loss but only against the loss which, although caused by a lawful measure, is disproportionate. Indeed, one of the popular solutions for the problems presented by an overreaching expropriation standard is the test of proportionality, which commands that the disadvantages caused by the measure must not be disproportionate to the aims used.74 In

accordance with this test, any loss can be weighed against the aims pursued by the measure at issue. Thus, the harm caused by a lawful measure, such as an environmental decree, would be compensable if it is disproportionate. Without denying the possibility of deploying the
Case C-331 / 88 R v Ministry of Agriculture, Fisheries and Food, ex parte Fedesa [1990] ECR I-4023, para 14. For discussion of the doctrine generally, see AT Yutaka, The margin of appreciation doctrine and the principle of proportionality in the jurisprudence of the ECHR (Intersentia, Antwerp 2002); R Thomas, Legitimate expectations and proportionality in administrative law (Hart, Oxford 2000). For the application in oil and gas law, see Montt (n 67) 221 (arguing for the use of the proportionality test in investment arbitration); JW Salacuse, The Law of Investment Treaties (OUP, Oxford 2010) 313-5, 317; L Ives Fortier and SL Drymer, Indirect Expropriation in the Law of International Investment: I Know When I See It, or Caveat Investor (2004) 19 ICSID Rev Foreign Investment L J 293, 300; Kriebaum (above n 3) 231 (suggesting that the test of proportionality should be used in combination with the sole effect approach); A Newcombe and L Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International, Alphen aan den Rijn 2009) 363-6. For the leading authorities on the test of proportionality in investment arbitration, see Tcnicas Medioambientales Tecmed, S.A. v. United Mexican States , Award of 29 May 2003 (ICSID Case No. ARB(AF)/00/2) (2003) 23 ILM 133, para 122 (there must be a reasonable relationship of proportionality between the charge or weight imposed to the foreign investor and the aim sought to be realized by any expropriatory measure...) and LG&E Energy Corp and ors v Argentina , Decision on Liability, 3 October 2006(ICSID Case No ARB 02/1) (2007) 46 ILM 36, para 195.
74

proportionality rule at a certain stage in the determination of state responsibility, it is submitted that such a possibility does not justify the existence of the expropriation standard as a standalone treaty provision. In fact, the wording of the expropriation standard would militate against the application of the proportionality test. Consider a scenario involving an

environmental decree which, although non-discriminatory and compliant with due process, causes a loss of revenue on the part of the investor. Does the loss constitute an uncompensated expropriation and give rise to state responsibility? As the investor incurs only a partial deprivation, it can be argued that the means justified the ends and that no compensation should be payable. However, one may object to the proportionality test on the ground that the applicable BIT extends protection not only to the whole investment but also to investment returns.75 It is possible to argue that the loss of investment returns is not to be evaluated against the whole investment but instead should be treated as a standalone entitlement. In other words, while the loss of revenue may not involve the loss of the whole investment, if viewed as a separate asset it would be sufficient to trigger the states obligation to compensate.76 Here, the ordinary meaning of the expropriation clause, coupled with the definition of an investment, would support the existence of an obligation to compensate any expropriation: both that which involves the dispossession of the whole investment (a total expropriation) and that which involves only the loss of a certain entitlement, such as the loss of investment returns. Since the application of the proportionality test may deprive the investor from compensation for an expropriation of its revenue, the test would not quite be compatible with the protection afforded to the investor under the BIT. This downside of the proportionality test has been acknowledged by the supporters of maximal investment
75

See Ch I. For conceptual severance techniques and partial expropriation, see Ch II.

76

protection.77 Applying the proportionality test is thus fraught with problems, stemming primarily from the wording of expropriation clauses in oil and gas instruments. Since the proportionality test may exempt certain measures from the payment of compensation on the ground that they are proportionate, the test would run counter to the prohibition of uncompensated expropriation. Yet, ordering a government to pay for a partial loss caused by a lawful governmental ban would be undesirable from a policy perspective. Deployed by a pro- investor oriented tribunal which is aided by the wording of BITs, the proportionality test would not shield host states from having to compensate for any diminution in the value of an investment.

5.

The proposed framework

The foregoing discussion urges us to revise the existing approaches to expropriation. It is argued that the standard of expropriation is inadequate for dealing with investor claims against governmental measures detrimentally affecting the value of an investment. A typical expropriation clause in an oil and gas instrument, supported by the definition of an investment, provides for the payment of compensation for any deprivation and thus transforms

international investment treaties into blanket protection against any regulatory risks. Undesirable as it is from a policy perspective, the standard of expropriation is also inconsistent with the paradigm of state responsibility which underlies the non-expropriatory standards of treatment, such as FET, the prohibition of arbitrary and discriminatory measures, and the national treatment standards. The crucial difference lies in the fact that the nonSee, for example, Kriebaum (above (n 3) 728-9, arguing that despite its virtues the test of proportionality would lead to unacceptable results as it may rule out compensation to a deprived investor).
77

expropriatory standards of treatment do not outlaw any regulatory measures but only prohibit certain types of governmental conduct, such as abuse of power, arbitrariness, and violation of due process. It is therefore submitted that the non-expropriatory standards of treatment

provide a better and more sound analytical and legal framework for determining state responsibility in international investment law. Once we acknowledge that the standard of expropriation fails to furnish an adequate basis for distinguishing between permissible regulation and compensable deprivation, it becomes effectively redundant. As an alternative to the prohibition of expropriation, this thesis proposes adopting a standard that would reflect a realistic understanding of not only the role regulation plays in economic relations but also the fact that international investment instruments do not provide insurance against regulatory changes. Beneath the proposed framework lies the idea that state responsibility in international investment law is a corrective mechanism aimed at remedying the loss inflicted on an investment by wrongful governmental conduct. It can be expressed in the following tentative formulation: Each contracting party shall accord investments fair and equitable treatment by refraining from measures that are discriminatory, arbitrary, in violation of due process of law, or otherwise contrary to a states obligations under international law. By doing away with the mandatory compensation requirement, the proposed standard introduces a uniform framework for analysing investor claims against a host state. That is, for a host states liability to arise, it would be necessary to show the violation of an oil and gas obligation and the loss inflicted upon an investor. This paradigm is designed to replace an asymmetrical relationship between expropriation and non-expropriatory standards of treatment which currently defines state responsibility under existing investment treaties. Beyond doubt, a proposal of this kind is not easy to implement due to reluctance and unease on the part of oil and gas drafters. Expropriation has long been one of the

central investment protection standards. At the same time, oil and gas instruments and arbitral awards appear to be showing signs of departure from the traditional model. Some treaties have already clarified that non-discriminatory regulatory actions in pursuit of public welfare objectives do not constitute expropriation; nor does an adverse effect on the economic value of an investment provide a sufficient basis for concluding that an expropriation has occurred.78 The greater acceptance of the police powers Methanex and Saluka awards have marked the trend for a

exception and the related shift of emphasis from the effect of the character of such conduct. Although fragmentary and

governmental conduct to unsystematic, such

drafting solutions and arbitral approaches support a conclusion that,

ultimately, it is possible to abandon the expropriation standard which mandates compensation for every act negatively affecting the value of an investment. Likewise, the rise to prominence of non-expropriatory standards and the emergence of a single standard of regulatory treatment have already been acknowledged in academic writing.79 The abandonment of expropriation is not intended as an expansion of host state responsibility to foreign investors. It is not suggested that investors should always carry the burden of loss caused by regulatory measures. Instead, it is submitted that state responsibility should arise where the interference by a government with foreign investment contravenes international rules of non-discrimination, non-arbitrariness, and due process of law. Such framework is already in place under non-expropriatory standards of FET, national treatment and the prohibition of arbitrary measures. The rules of non-discrimination, non-arbitrariness and due process of law operate as international legal restraints on the exercise of regulatory powers by host states and allow a line to be drawn between a permissible regulation and that
See the expropriation clause in the recent generation of the US BITs as well as the Norwegian Model BIT (with commentary), available at <http://ita.law.uvic.ca/investmenttreaties.htm> accessed 31 October 2010. 79 See, e.g. Weiler & Laird (n 39) and Schreuer (n 39).
78

which requires compensation. In contrast with the existing guarantee against uncompensated expropriation, they do not intrude upon a normal exercise of regulatory power; nor do they call for the payment of compensation simply because the investor has suffered a loss in value of its investment or otherwise been restricted in the use and enjoyment of it.

OIL AND GAS LAW

STABILISATION CLAUSE IN INTERNATIONAL AGREEMENT
A stabilisation clause in an international petroleum agreement as its name suggests is utilised as a means of ensuring that the agreement concluded between a host state, or its agent1 and the international oil company (IOC) will not be altered and its terms remain stable2 . The use of the stabilisation clauses in such agreements can be understood when one focuses on the inherent risks that IOCs are exposed to when they invest in foreign countries. The most dramatic of these risks were manifested last century with the large scale expropriations and nationalisations that took place in many oil producing countries, and resulted in many IOCs losing their investment in these countries3 .

The world has changed significantly since the days of direct expropriation, and in light of the current trend of stiff competition for foreign direct investment among countries; it is questionable whether a host state government would attempt such action, without the realisation that it would probably spell the end of such investment4 . In the modern era what is of concern to the IOC is not the threat of direct expropriation, as remedies for such action have been firmly established under international law5 , it is the less drastic action taken by host states to change the fiscal and regulatory conditions that apply to particular projects. As a consequence the stabilisation clause today has become a tool of political risk management. This was clearly pointed out by one commentator
Subsequent changes to the negotiated and established fiscal regime with a detrimental effect on the companys income and cash flow, as well as unexpected restriction on repatriation of foreign exchange 1 The Host States agent in an international petroleum project development is usually a National Oil Company (NOC) specifically set up to hold and manage the Host states interest in the project. 2 Peter, W., Arbitration and Renegotiation of International Investment Agreements 214 (2nd ed. The Haugue: Kluwer Law International, 1995). 3 Smith E., et al., International Petroleum Transactions 338 (3rd ed.,Denver, Colorado: Rocky Mountains Mineral Foundation, 2000) 4 See Peter, supra note 2, at 392 It is clearly established under international law that the payment of full (i.e. prompt adequate and effective) compensation is a necessary precondition for the legality of foreign expropriation. See more detailed discussion on this point in, Ndi, G., Investment Policy Transformation In The Natural Resources Sector: Legal Implications As Regards The Tension Between International Property Rights And Sovereign Rights 238 (Unpublished PHD Thesis, CEPMLP, University Of Dundee, 1994).

earnings, are perhaps the main cases of political risk. These occur far more frequently than outright nationalization6

Stabilisation clauses are also important because the peculiarities of petroleum projects also demand stability. Typically such projects have long durations with each project phase lasting many years7 . They are extremely capital intensive with exploration and development programmes costing from the tens to the hundreds of millions of dollars8 . They pose acute project risks with only an estimated one in ten exploration ventures resulting in a commercial discovery9 , and finally they are heavily reliant on loan finance from a number of different institutions that have strict repayment schedules10 .

In light of this, any action by the host state to change already agreed fiscal and regulatory terms may have the effect of disrupting the profitability of the venture for the IOC, as well as impact on their ability to meet debt service obligations. From the point of view of the host state the enactment of new laws or the amendment of existing ones is an expression of their sovereignty and any expectation that a host state will not have the requirement to alter its laws is ludicrous. However what is at issue is the validity of such action when there has been formal agreement in the form of a stabilisation clause not to effect such change.

On the basis of conflicting perspectives this paper analyses the legal and functional value of the stabilisation clause in international petroleum agreements. Part II discusses the neutralising effect of the stabilisation clause on the host states powers Part III will outline the main types of stabilisation clauses and their implications. Part IV will outline the legal effect of the stabilisation clause. Part V will focus on the functional value of the clause and what they achieve, and part VI will be the conclusion of this paper with some general observations about the effectiveness of such clauses.

6 Walde, T., Stabilising International Investment Commitments: International Law versus Contract Interpretation , CEPMLP Professional Paper PP13, 21(1994). 7 Id., at 14. Id. Id. Id.
10

2.

NEUTRALISING THE HOST STATES POWERS

The emergence of a modern petroleum industry throughout the world has required the need for a close relationship between two parties that bring different bargaining chips to the negotiating table. On the one hand there is the host state or its agent which posses the title to the petroleum resource, and on the other there is the IOC which posses the requisite skill and capital essential for the exploitation of the petroleum resource.

During the concessionary era11 , the level of host state involvement in the exploitation of the petroleum resource was considerably less than it is today. In this period there was substantial investor superiority and it was during this time that the stabilisation clause seems to have emerged12 . In the modern era the arrangement for petroleum exploitation has evolved significantly and varies considerably from country to country, however there are four broad categories recognised internationally for achieving this purpose. They are the concession, the production sharing agreement, the participation agreement, and the service agreement13 .

The inescapable fact that a petroleum project development requires a high level of cooperation between the host state and the IOC, each being dependent on the other to achieve their respective objectives, means that the amount of power that may be asserted by each party is dependent on their respective bargaining strength. Generally it has been said that
a state which is desperate for investment is not going to be too assertive as it will scare away such investment, but a state which is perceived as a safe state from which profits can be made will use

The concessionary era refers to the period where the only means through which petroleum exploitation could be conducted was through the host state granting a concession over certain tracts of land to the oil company, there was virtually no host state involvement in the process except in receiving fees and taxes from the oil company for the privilege. A typical concession agreement grants the exclusive right to explore, explore, search and drill for, produce, store, transport, and sell Petroleum within the designated concession acreage for a specified number of years. See Comeaux, P., and Kinsella, S., Protecting Foreign Investment Under International Law : Legal Aspects of Political Risk 128 (New York: Oceana Publications Inc,1997). 12 See Walde, supra note 6 at 8. 1See Smith (et al ) supra note 3 at 411.
11

techniques through which it could optimise benefits from foreign investment for itself while ensuring that the foreign investor has adequate incentives for him to remain and do business in that state.14

Prior to the IOC making the decision to invest, the balance of power lies very heavily in its favour, because at this stage they are able to pick and choose where to commit their capital based on what the particular country has to offer. In the context of the petroleum industry the host states bargaining power is at its lowest, and that of the IOC as its highest at the pre-exploration stage of operations15 . The reason for this is that at this point no commercial reserves of petroleum have been discovered, so the host state does not know whether it has anything to contribute to the proposed transaction. As a consequence, the IOC will be able to negotiate contractual terms that are most in its favour at this time because of the increased risk that it is being exposed to16 .

After the discovery of commercial reserves of petroleum, this strong IOC position begins to diminish this is known as the concept of the obsolescing bargain17 , which is premised on the fact that a shift in bargaining power will occur between the investor and the host state over time18 . It is at this stage that the host state seeks to exploit this shift in bargaining power on the basis that there is a real or perceived change of circumstances, which requires remedial action19 . Factors which often contribute to the host states desire to change the terms of a previously concluded agreement, include things such as, the petroleum discovered exceed expectation, the price of the commodity rises to unexpected levels, a change of government in the host state, and political pressure caused by anti foreign sentiment20 . These factors pose significant political risks to the IOC, and not addressing them can have very grave consequences. Especially since any decision to alter the contractual terms for a project can have a hostage effect21 on the IOC, as it cannot simply walk
Sornarajah, M., The International Law on Foreign Investment 118 (Cambridge: Cambridge University Press,1994) 15 Hollis, S., and Berresford , J., Structuring Legal Relationships in Oil and Gas Exploration and Development in Frontier Countrie s, in Walde and Ndi (eds) International Oil and Gas Investment Moving Eastward 41 (London: Graham & Trotman,1994). 16 Id. See Walde, supra note 6, at 11. See Peter, supra note 2, at 392. See Ndi, supra note 5, at 172. See Walde supra note 6, at 11. See Ndi supra note 5, at 179.
14

away from a project after it has sunk millions of dollars into developing it. It is precisely for this reason that stabilisation clauses are incorporated into international petroleum agreements as a means of neutralising the host states powers, by alienating its right to unilaterally change the regime and rights relied upon by, and promised to, the IOC22 . 3. MAIN TYPES OF STABILISATION CLAUSES

Stabilisation clauses may be divided into a number of broad categories based on their attributes. A traditional stabilisation clause23 seeks to freeze the law of the host state as it stood at the time the agreement was signed between the parties24 . This action thereby prohibits the application of any law enacted subsequently by the host state to the terms of the already concluded agreement. A slight variation to this traditional approach is what is sometimes referred to as a consistency clause, which requires that any subsequently enacted law must be consistent with terms of the already concluded agreement25 . The aim of the traditional stabilisation clause is to render any change to the terms of an already concluded agreement ineffective, and by express agreement remove the host states power to effect such change.

A further type of clause, which is regarded by some as a stabilisation clause provides that the agreement concluded between the parties must be performed with good will or in good faith, Although a good will clause does not usually expressly curtail the host states right to enact new laws, it requires both parties to perform the agreement in good faith, thereby implicitly precluding the unilateral modification or termination of the agreement by either party26 . A final distinction is sometimes made between a strict stabilisation clause and what is called an intangibility clause, such a clause requires that any modification of the terms of the agreement requires the mutual consent of the

Comeaux, P., and Kinsella, S., Reducing Political Risk in Developing Countries: Bilateral Investment Treaties, Stabilisation Clauses and MIGA& OPIC Investment Insurance , 15 N.Y.LJ Intl & Comp L.1,16 at 23 (1994). 23 This has also been referred to as a stabilisation clause stricto sensu. See Curtis, C., The Legal Security of Economic Development Agreements , 29 Harv. Intl L.J. 317 at 367-47 24 See Ndi, supra note 5 at 179. Id. See Curtis, supra note 23 at 347.
22

parties27 . By its nature an intangibility clause is aimed at achieving a compromise in the event that a change of law affects the terms of an already concluded agreement28 . Unlike the traditional stabilisation clauses an intangibility clause contemplates that a host state may have the requirement to change the terms of an already concluded agreement but such alteration must not be done unilaterally. 3.1 IMPLICATIONS OF SPECIFIC TYPES OF STABILISATION CLAUSES An example of a traditional stabilisation clause which attempts to freeze the law of the host state as it stood at the time the agreement was concluded, is the clause contained in a Concession Agreement of 1933 between the State of Iran and the Anglo Iranian Oil Company. It provided as follows

Concession shall not be annulled by the Government and the terms therein contained shall not be altered either by general or special legislation in the future, or by administrative measures or any other acts whatever of the executive authorities.29

Stabilisation Clauses have evolved considerably since the above clause was drafted, and since petroleum project development is conducted under more advanced and complex arrangements than was previously the case, this fact is reflected in the manner that modern clauses are drafted

A modern adaptation of a stabilisation clause, which is designed for a production sharing, participation, or service agreement provides the following

After the effective date of this agreement, if there is a change in the domestic law that results in a material adverse impact on the economic value derived from operations by the contractor, the state (NOC) will ensure that the

Paasivirta, E., Participation of States in International Contracts and Arbitral Settlement of Disputes 162 (Helsinki: Lakimiesluton Kustannus, 1990). 28 See Ndi, supra note 5 at 181. See Paasivirta, supra note 27 at 162.
27

contractor will derive the same economic benefits as it would have derived if the change in law had not been affected30

The above clause has the effect of a consistency clause, but unlike a standard consistency clause, it does not say that the law has no application to the agreement because it is inconsistent with its terms, instead it puts the onus on the state national oil company (NOC) to restore the IOC to the position that it would have been in had the change in law not taken place. The question of whether a host state would be prepared to agree to such a clause primarily would depend on the bargaining strength and position of the host state. If the host state was desperate for investment it might agree, However if had a strong bargaining position it might seek to negotiate a clause that was more in its favour.

An example of a modern consistency clause, which may also be used to stabilise an international petroleum agreement, is as follows

Nothing in this clause shall be read or construed as imposing any limitation or constraint on the scope, or due and proper enforcement, of legislation of general application that does not discriminate, or have the effect of discriminating against the Contractor, and provides in the interest of safety, health, welfare or protection of the environmentprovided, however that the state will ensure that such measures are in accordance with the current international petroleum industry standards and are not unreasonable.31

This clause is very different from the one above, because the expectations that the contractor has of the host state party is much less. It recognises the host states right to enact laws in the future so long as they are non discriminatory, are in line with recognised standards and reasonable. Such a clause obviously shows that the host state party to this agreement is in a much stronger position than the one in the preceding clause.

O. Anderson , Risk: Emphasising Political Risk , CEPMLP Course Materials, Contracts Used in International Oil Industry Development, Slides p18-19 CEPMLP Jun 2003. 31 Id.
30

The final example is an adaptation of a traditional stabilisation clause and an intangibility clause, which may be used to achieve the same objective. It provides as follows

This agreement shall be construed in accordance with the Petroleum and Tax Laws and related regulations in force on the date of execution. Any amendment to, or repeal of such laws or regulations, shall not affect the contract rights or obligations of the contractor without its consent32

This clause is peculiar because it incorporates attributes of a traditional stabilisation clause by limiting the application of laws to the agreement to only those in force at the date of its execution. However it also extends the consent requirement commonly found in intangibility clauses to the Contractor if they wish to be bound by any new laws. Such a clause would suggest that the bargaining strength of the IOC is quite good, because they ultimately have the right to decide whether any new laws enacted by the host state will bind them.

As can be seen in the modern era stabilisation clauses do not fit into strict categories. This is because lawyers and other contract drafters will choose the language that is considered most appropriate to mitigate risks that such projects face. This is also coupled with the fact that when these clauses are drafted reference is made to a number of other clauses used in previous agreements and these are utilised in the construction of the final clause.

We shall now consider the diverging views concerning the legal and effect validity of stabilisation clauses in international petroleum agreements. 4. THE LEGAL VALIDITY AND EFFECT OF STABILISATION CLAUSES

The process of ascertaining the legal validity and effect of stabilisation clauses contained in international petroleum agreements is a complex one, and has been described by one commentator as
32

Id.

.one of the most complex issues in international economic law in view of the fact that strands of arguments from international law (state responsibility, law of treaties) of national law, of conflict of law (both international and national conflict of laws) and possibly of an international lex mercatoria come together and can be arguably applied.33

For our purposes an analysis will be conducted under domestic and international law, as well as a review of a number of arbitral awards. 4.1 UNDER DOMESTIC LAW When considering the legal validity of the stabilisation clause under domestic law, one is confronted with the fact that a number of domestic legal systems have established legal principles that have the effect of invalidating a stabilisation clause and making it of no legal effect. One such principle is that Parliament or the executive powers of the state may not be fettered by a contract with a private individual or corporation34 . This is a principle of English common law35 and is particularly applicable in many countries that have adopted the common law as part of their domestic law. Consequently if the domestic law of such a country is the governing law of the petroleum agreement it is highly likely that the local courts will interpret a stabilisation clause to be unenforceable and therefore have no binding effect on the host state36 .

In other domestic legal systems a similar situation exists, especially in Middle East and some French speaking African countries, which have modelled their laws on the French civil code37 . Under such a system mineral development agreements have acquired a public character and are therefore understood to depreciate the implications of the sanctity of contract doctrine38 . Therefore it is also arguable whether a
See Walde, supra note 6 at 28. Walde, T., and Ndi, G., Fiscal Regime Stability and Issues of State Sovereignty, in J. Otto (ed) Taxation of Mineral Enterprises 75 (Otto, J., ed. London: Graham and Trotman, 1995). 35 This principle is laid down in Rederiakiebolaget Amphitrite v. R [1921], 2 Kings Bench 500. See Walde and Ndi, supra note 34 at 76. Id. Id.
33

stabilisation clause would of any effect under these systems when domestic law governs the agreement.

In light of this discussion, it would clearly be in the host states interest to insist that the governing law of the agreement was its domestic law, if it ever had the intention of breaching a stabilisation clause contained in an agreement. The problem for the host state is that most IOCs recognise this, and therefore seek to internationalise their agreements, by insisting that international law is the governing law of the contract, and that the dispute resolution mechanism require the use of an independent arbitrator in a neutral forum39 . By doing this, the IOC avoids the risk and effects of a domestic court possibly interpreting the stabilisation clause to be of no effect. As a consequence the majority of debate concerning the validity of stabilisation clauses is centred on whether they are valid under international law. 4.2 UNDER INTERNATIONAL LAW An analysis of stabilisation clauses under international law is focused around two competing concepts, the doctrine of sanctity of contract and ( pacta sunt servanda) versus the doctrine of permanent sovereignty over natural wealth and resources (rebus sic stantibus)40 . Under international law there is a considerable difference of opinion as to the legal validity and effect of such clauses, of which three main views have emerged. The first view is based on the notion that once parties choose international law as the governing law of the contract, it automatically renders the contract applicable to certain legal principle of international law, namely the doctrine of sanctity of contract and pacta sunt servanda and any breach of a stabilisation clause in this circumstance is a breach of international law41 . The crux of this argument is that any unilateral alteration of the stabilisation clause immediately and directly engages the responsibility of the state under international law, without the additional requirement of establishing that there was a breach of other customary international conditions.
For more detailed discussion see Delaume, G., Transnational Contracts: Applicable Law and Settlement of Disputes Law and Practice , Booklet I, Dobbs Ferry, New York 37 (1992). 40 See Walde, supra note 6 at 32. See Walde and Ndi, supra note 34 at 79. For further discussion about this view see also Kissam , L., and Leach, E., Sovereign Expropriation of Property and abrogation of Concession Contracts 28 Fordham Law Review, 177 (1959-60), and C. Greenwood, State Contracts in International Law: The Libyan Oil Nationalisations , 53 Brit..Y.B. Intl L.27, 41 (1982).
39

The second view is that a state has the right to permanent sovereignty over its natural resources and the proponents of this view find their justification in the pronouncements of the United Nations General Assembly42 . The idea espoused here is that the principle of sovereignty does not limit the power of the host state to merely concluding agreements that create binding obligations; its sovereignty also allows the state the lawful basis to terminate such agreements43 . Therefore according to this school of thought the state is free to bind itself by a stabilisation clause, but it also has the right to revoke such an undertaking if the circumstances warrant it to do so.

There also exists a third more moderate view, which recognises that stabilisation clauses have an international effect but its proponents do not believe that they can offer the investor absolute protection44 . It is their belief that the freezing function of the stabilisation clause is only part of a wider picture, as economic, social and political factors must be taken into account when interpreting the validity of such a clause45 .

No dominate view has emerged as yet, what however has been useful is a number of arbitral awards that have taken place over the years. 4.3 ARBITRAL AWARDS An early an example of an arbitration that involved both a choice of law clause as well as a stabilisation clause was Lena Goldfields v. USSR46 . Although the case did not directly comment on the legality of the stabilisation clause, it was the first case to establish that a contract between a private party and a sovereign state might be

Resolution 1803 (XVII) of 14 December 1962, 3021 (S-V1) of 1974 (Declaration on the Establishment of a new Economic Order) and 3281 (XXIX) of 12 December1974 Charter of Economic Rights and Duties of States 43 See Walde and Ndi, supra note 34 at 80. For further discussion see Sornarajah, M., The Pursuit of Nationalised Property 1(Dordrecht, The Netherlands Martins Nijhoff Publishers 1986) and E, Paasivirta, supra note 27at p 182 44 See Walde and Ndi, supra note 34 at 80. 4Id. See also R. Higgins, Legal Preconditions for Foreign Investment , IBA-SERL Seminar Proceedings, Matthew Bender, New York 233-235 46 Lena Goldfields arbitration, Annual Digest of Public International Law Cases (H.Lauterpachted.1929-930).
42

internationalised and not exclusively governed by domestic law47 . In International Petroleum Ltd v. National Iranian Oil Co48

Sapphire

a stabilisation clause

precluded the government of Iran from cancelling, amending or modifying the terms of the agreement except with the consent of both parties. Again in this award the main decision revolved around the choice of law clause and the stabilisation clause was virtually ignored, except for a fleeting comment that where a concession is prematurely terminated there was a duty to compensate, in this award there was no finding that the stabilisation clause had been violated49 An important award in the consideration of the legal effect of stabilisation clauses is Saudi Arabia v. Arabian American Oil Company (Aramco)50 . It involved a conflict between a transportation agreement granted to the Saudi Arabian Maritime Tankers Ltd to transport Saudi oil and a concession granted to Aramco giving it the exclusive right to transport the oil it extracted from the concession area. The tribunal concluded that it was the very sovereignty of the state that gave it the legal power to grant rights which it prohibits itself from breaching until the end of the concession period. This award without any reservation recognised the validity of stabilisation clauses under international law. This same line of argument was also followed in the more recent AGIP v. Popular Republic of Congo51 .When the President of Congo nationalised the assets of AGIP in breach of a stabilisation clause in their concession agreement. AGIP filed an application for arbitration and the tribunal found that the existence of a stabilisation clause in an agreement did not affect the states sovereign or regulatory powers in relation to nationals or foreigners, accordingly the clause was valid and enforceable under international law52 .

Although it appears that arbitral awards clearly recognise the validity of stabilisations clauses in international petroleum agreements a few number of awards have raised some questions about their effect. One basis for controversy arises from the Libyan

M. Coale, Stabilisation Clauses in International Petroleum Transactions 217 at 227 (2002). 48 35 I.L.R 136 (1967). See Coale, supra note 47 at 228. 27 I.L.R 117. 2 I.L.M 726 (1982). See Walde and Ndi, supra note 34 at p 81.
47

, 30 Den. J. Intl L &Poly

nationalisation cases53 , where the Libyan government nationalised the interest and properties of foreign oil companies in Libya, though the awards were favourable to the companies54 . What was of concern was that the arbitrators in two out of the three awards seemed to have reached the conclusion that that stabilisation clauses cannot prevent unilateral change by government in the sense of restitution of the agreement to the status quo ante being required55 . In addition the award in Kuwait v. Aminoil56 has been described as depreciating the international legal value of the stabilisation as a protective device over the long term57 . The tribunal was of the view that stabilisation clauses can only be effective for a limited period of time, because the concession agreement had been renegotiated a number of times in the past and had lost its absolute character58 .

There is still an element of confusion surrounding the legal character and effect of stabilisation clauses, especially under international law. Ultimately the validity of such clauses depends on the school of thought that the person conducting the analysis belongs to, What however cannot be escaped is that such clauses are an integral part of most international petroleum agreements. The final part of this paper will focus on the functional value of stabilisation clauses. 5. FUNCTIONAL VALUE OF STABILISATION CLAUSES

The functional value of stabilisation clauses in international petroleum agreements is a question that is also the subject of many views. Some believe that such clauses serve absolutely no function; on the basis that international law already prohibits arbitrary or unlawful interference by a host state in an international investment agreement59 . The reasoning being that an IOC cannot realistically expect that the freezing effect of a traditional stabilisation clause is capable of insulating it from outside influences

These included BP Exploration Company (Libya) Ltd v. Government of the Libyan Arab Republic 53 I.L.R.297, Texaco Overseas Oil Petroleum Co / California Asiatic Oil Co (TOPCO) v. Government of the Libyan Arab Republic 53 I.L.R. 389 (1979), and Libyan American Oil Co (LIAMCO) v. Government of the Libyan Arab Republic 62 I.L.R 140 (1977) 54 See Coale, supra note 47 at 231. See Walde and Ndi, supra note 34 at 82. 21. I.L.M 976 (1982) See Walde and Ndi supra note 34 at 82. See Coale, supra note 47 at 236. See Ndi, supra note 5 at 228. For further discussion see Higgins, supra note 45 at 243.
53

taking place in the real world, because international law will be sensitive to such changes.

Another view identifies the stabilisation clause as having a financial function for the IOC if it is breached60 . Here the view is that even if the clause is deemed not to have any effect on the host states right to unilaterally alter the terms of the already concluded agreement, breaching it would give the investor a special right of compensation which would be higher than any other form of contractual breach not involving a stabilisation clause61 . Such compensation would extend to prospective gains, or lost profits (lucrum cessans), which are currently not recoverable62 .

A final view is that is that such clauses may serve the function of a secondary protection mechanism; even in the case that international law already provides protection for any arbitrary interference by the host state63 . This view is that the function of the stabilisation clauses would be to give the investor additional protection against any prima facie lawful grounds which international law recognises for affecting changes to the concluded agreements.

From a practical standpoint, the function of the stabilisation clause is that it assists in attracting foreign direct investment. It serves a major risk management function for the IOC, in the form of an undertaking that no changes will be effected to the agreed terms of the agreement; it therefore raises the IOCs confidence in its proposed interaction with the host state64 . Even if there is wrangling about its legal function such argument is academic, because industry practice has developed that stabilisation clauses are considered an essential part of international petroleum agreements. So for the IOC and the host state its function is obvious, above all it provides a high level of
Id. Arechaga de, J., International Law in the Past Third of a Century, 159 Recueli des Cours, 307 (1978). 62 See Ndi, supra note 5 at 229 Id. For instance it is argued that in developing countries stabilisation clauses help to create a secure and favourable legal regime that thereby encourages investment, an example of this is the Nigerian Liquefied Natural Gas Venture discussed by Rawding, Protecting Investments under State Contracts; Some legal and Ethical Issues 99 Arbitration International 341 cited in A. Redfern and M. Hunter, Law and Practice of International Commercial Arbitration, Sweet and Maxwell.103 at footnote 10 (1999).
60

clarity as to the expectations that each party has of the agreement that they have concluded

The nature of the petroleum industry with its many risks means that stability is essential for all the parties involved in it to reach their respective objectives. The question of the legal and functional value of stabilisation clauses from a theoretical perspective is not as important as the purpose that the clause serves in the agreement. The inclusion of the stabilisation clause in an international petroleum agreement means that the IOC has addressed the risks that the project poses to it, and attempted to mitigate one of them. Not directing ones mind to the issue that the fiscal or regulatory stability of a project might be unilaterally altered by the host state would be negligent, because such a risk is a real one.

The controversy surrounding the legal validity of stabilisation clauses under international law should not be used to discount its ability to ensure a projects stability, because in many instances, a host state will honour the stabilisation clause and decide that new laws will not apply to project agreements concluded before the enactment of those laws. The reason being that the disruptive effect that breaching such a clause has for the host state in terms going to arbitration and a probable requirement for the payment of compensation, may be too much trouble. What cannot be escaped is that the bargaining strength of host state and the IOC is what will determine the type of stabilisation clause that is in the agreements and whether one is actually included at all. If the host state has enough petroleum, which may be extracted economically, it becomes solely a cost benefit analysis for the IOC. The specific means through which this may be done is always open to negotiation, and it would be wrong to believe that investment in a host state would be impossible without the inclusion of a stabilisation clause in the agreement. The problem for the host state is that today the level of competition for investment is intense, and IOCs usually invest where they feel most comfortable in terms of taking the least amount of risk, and stabilisation clauses form an essential part of an IOCs risk management measures.

CONCLUSION

The purpose of this study has been to outline the frontiers of responsibility in oil and gas law and to examine the role of the traditional expropriation standard and non- expropriatory standards of treatment in determining the consequences of a host states interference with a foreign investment. From the outset, it has been shown that the indeterminacy and inherent breadth of the notion of investment will frequently allow the extension of the protection afforded to investment to virtually any economic rights arising from a commitment of resources in the expectation of profits. Significantly, the fact that international treaties have adopted the term of investment in lieu of property means that the previous tendency to associate investment protection with protection against expropriation no longer holds true. Rather, the modern oil and gas regime protect investors against a host states interference in a variety of economic settings. A closer look at the tests developed by arbitral tribunals in addressing claims of expropriation has revealed the inadequacy of deploying the conceptual frameworks that had evolved in a different historical and legal context. As shown in Chapter II, the sole effect doctrine and its yardstick of substantial deprivation fails to offer a reliable analytical tool for deciding whether disputed governmental conduct should give rise to a host states international responsibility. The way that investment is defined in international investment instruments, coupled with the availability of corporate structuring and the emphasis on the case-by-case determination of expropriation claims, all enable an investor to easily satisfy or circumvent the substantial deprivation test. Furthermore, not only is it practically and conceptually problematic to identify the point beyond which a deprivation becomes substantial, but the very threshold of substantiality does not have a basis in international

investment agreements, which usually protect the whole investment as well as various rights

arising from it. Neither is it necessary to satisfy the substantial deprivation test in order to

establish a breach of non-expropriatory standards of treatment. As arbitral practice reveals, the

latter can be successfully invoked with a view to obtaining the same remedy as in the case of

expropriation regardless of whether the disputed conduct is substantially destructive and

expropriatory.

The principal failing of the expropriation standard, however, is its focus on the fact of deprivation and the mandatory compensation requirement, both of which effectively allow an investor to claim a breach of treaty every time the investor incurs any loss in the value of its investment or is otherwise restricted in its use and control. As the matter of deprivation becomes a controlling factor, investment treaties are transformed into instruments of insurance against regulatory change. While this is undesirable from the perspective of developing a credible, balanced and sustainable investment protection regime, the

deprivation-focused approach is also at odds with the underpinnings of state responsibility under non-expropriatory standards of treatment. As argued in Chapter III, expropriation should be abandoned in favour of a unified concept of oil and gas breach. Under the proposed standard, a disputed governmental action would give rise to a states responsibility to an investor only if such action has violated the guarantees of non-discrimination, nonarbitrariness, and due process of law.

In justifying the need for a unified concept of oil and gas breach, this thesis draws attention to the existence of multiple and overlapping causes of action. As shown in Chapters IV to VII, a governmental action can be variously challenged as a breach of FET, arbitrary measure, a failure to provide effective means of asserting claims, or a violation of the national treatment standard. Recent arbitral practice reveals that the availability of multiple grounds of recovery has been deployed by investors to circumvent the procedural and substantive pre-conditions to investment arbitration expressly stipulated in international investment instruments.

Inconsistency and uncertainty aside, such practices only exacerbate concerns over the credibility and legitimacy of the whole investment protection regime. Bringing the standards of treatment under the umbrella of an overarching investment protection guarantee might be the way forward. In order for the existing oil and gas network to evolve into a balanced and sustainable international mechanism, both the drafting of international investment agreements and their interpretation should be substantially revised. Along with eliminating multiple and redundant provisions, a high-scrutiny approach to evaluating a host states disputed policies and decisions should be abandoned in favour of judicial and arbitral restraint. Although institutional reform would seem to be necessary, treaty drafters may facilitate the process of change by discarding open-ended and highly contested treaty provisions. Despite existence of a the

large number of BITs containing broadly defined provisions on dispute

resolution, far-reaching umbrella clauses and FET requirements, a number of new generation BITs and FTAs demonstrate the international communitys desire to curb the expansion of oil and gas protection by expressly delimiting the scope of the relevant treaty provisions. Until such revision is undertaken on a larger scale, the meaning and the ultimate reach of oil and gas guarantees remain precariously open to diverse, inconsistent and often ill-founded interpretation reflecting the individual convictions of party-appointed arbitrators.

FET can, it has been argued, serve as an overarching standard of investment treatment and a basis for the concept of an oil and gas breach only if construed in accordance with customary international practice and general principles of law. Investment arbitration and treaty practice both reveal that so far as the substantive protection of investment is concerned, the entitlement of the investor to procedural fairness, non-arbitrary and non-

discriminatory treatment is largely undisputed. Additional guarantees of transparency, stability and predictability should not be regarded as a breach of FET and an international wrong, unless a clearly stated and legally enforceable obligation to that effect has been provided in a relevant treaty text, customary international law or the national legal

framework. Construing FET as a standard of super-protection and as a guarantee of a perfect regulatory regime not only lacks a basis in investment treaties and customary international law but is also highly questionable because of the absence of an equivalent guarantee in national legal systems of developed as well as developing states. Although an expansive and proinvestor interpretation of the standard remains a real possibility under many existing BITs, tribunals should be cognisant of the potential to create a backlash and undermine the long-term availability of investment protection. As regards the proposal to replace expropriation with the FET standard, it can of course be argued that without such an instrumental provision as the prohibition of uncompensated expropriation, an investor would be left unprotected and vulnerable. Indeed, can a standard of non-discrimination, non-arbitrariness or due process of law alone safeguard an investors investment from deleterious effects of governmental intervention? What if an investors land has been directly taken without compensation by virtue of a legislative act aimed at restoring the rights of historically disadvantaged people? Would the legitimate purpose behind such an act suffice for its characterisation as non-arbitrary, non- discriminatory and procedurally

lawful? There may be a valid concern that the proposal to adopt an overarching standard of treatment may work well in the regulatory interference context but fail in a more traditional setting that involves a direct and physical taking of property. Here, it is submitted that a holistic interpretation of the non-discrimination, non- arbitrariness and due process guarantees would allow the protection of investors without having to resort to the expropriation standard. Pursuant to the argument developed in Chapter VI, where the rights in respect of a farm have been bona fide acquired and duly evidenced,

the obligation to treat investments in a non-arbitrary, non-discriminatory and procedurally lawful manner would require the host state to consider the acquired rights when making a provision for compensation (as opposed to guaranteeing full compensation). In particular, an obligation to treat investments in a non-discriminatory and non-arbitrary manner and in compliance with due process would bring into play the provisions of domestic law governing the protection of property and contractual rights and the relevant contractual and proprietary remedies. Since the argument for the replacement of expropriation by an alternative standard of treatment places a greater emphasis on domestic courts and remedies and envisages a greater role for insurance instruments and contracts, it might be argued that this will render the process of investing costly to investors and may hinder the flow of capital that host states need. However, if both a host states economy and an investor were to benefit from the flow of investment, the host state pays rule would clearly be incompatible with the idea of investment protection. Making a host state compensate an investor for failing to put in place a perfect regulatory framework would inevitably cast doubt on the advantages of foreign investment and the necessity of international mechanisms for its protection. Questions will also arise about the propriety of conferring the benefits of protection upon a foreign investor,

when such protection is beyond the reach of domestic investors in either the home state or the host state. The idea of the customary international minimum standard behind the proposed overarching standard of treatment would seem to provide a sufficient degree of protection to a foreign investor without, however, insulating it from the effects of governmental action and creating the overreaching protection guarantees. Bringing the range of investment protection guarantees under the umbrella of FET as a single standard of investment treatment, restrained by reference to customary international

law and general principles of law, would not alone address the existing shortcomings. Even where a government has acted arbitrarily and discriminatorily, an investors entitlement to a monetary redress should depend on the existence of a properly acquired and duly evidenced benefit. Lest the prohibition of discrimination, arbitrariness and procedural unfairness is transformed into a means of conferring upon an investor the benefits to which it had otherwise not been entitled, the determination of a treaty breach should be accompanied by a rigorous analysis of a pre-existing right. Thus, a host states refusal to provide financial aid to a failing enterprise, even if discriminatory and procedurally flawed, would not constitute a breach unless the state had committed itself, in express terms, to render financial assistance. Likewise, the discriminatory character of the enforcement of laws prohibiting the exploitation of certain gaming equipment would not suffice to grant an investor damages for the closure of its gaming business, unless the right to operate such business had been bona fide acquired and duly evidenced. In a similar vein, an arbitrary change in a governments privatisation policy should entitle an investor to compensation for the lost opportunity to acquire additional shares only if the investors right to such acquisition and the corresponding obligation on the part of the government had been expressly agreed in a valid and enforceable contractual or quasi-contractual instrument.

The proposal to do away with expropriation may be regarded as too radical a change in the existing composition of oil and gas protection. However, from both conceptual and practical points of view, expropriation has retained only a limited value as a distinct standard. Furthermore, the maxim that expropriation should always be compensated for did not enjoy the status of an established international rule. The validity of its underlying deprivation compensation formula being strongly doubted in the modern regulatory environment, the treaty standard on expropriation has also become redundant in the face of the growing recourse to non-expropriatory provisions. The process of change can be furthered by states through the overhaul of their international investment agreements. It is hoped that negotiators will find this guide useful in determining which provisions must be included in an arbitration clause and which may be negotiated. Counsel may also find this paper helpful in evaluating the enforceability of the companys arbitration clauses.

CHAPTER -VIII BIBLIOGRAPHY

van Aaken, A., Perils of Success? The Case of International Investment Protection (2008) 9 European Business Organization L Rev 1. van Aaken, A., International Investment law between Commitment and Flexibility: A Contract Theory Analysis (2009) 12 Journal of Intl Economic Law 507. van Aaken, A. and Kurtz, J., Prudence or Discrimination? Emergency Measures, the Global Financial Crisis and International Economic Law (2009) 12 J Intl Econ L 859. Abs, H.J., Proposals for Improving the Protection of Private Foreign Investments (Rotterdam, 1958). Ackerman, B.A., Private Property and the Constitution London 1977) . (Yale University Press, New Haven and

Adede, A., A Fresh Look at the Meaning of the Denial of Justice under International Law (1976) 73 Canadian Ybk Intl L 73. Afilalo, A., Towards a Common Law of International Investment: How NAFTA Chapter 11 Panels Should Solve Their Legitimacy Crisis (2004) 17 Geo Intl Envtl L Rev 51. Al Faruque, A., Mapping the Relationship between Investment Protection and Human Rights (2010) 11 J World Investment & Trade 539. Alexandrov, S., Breaches of Contract and Breaches of Treaty: The Jurisdiction of Treaty-based Arbitration Tribunals to Decide Breach of Contract Claims in SGS v Pakistan and SGS v Philippines (2004) 5 J World Investment & Trade 555. Alexandrov, S., Breach of Treaty Claims and Breach of Contract Claims: Is It Still Unknown Territory? in K Yannaca-Small (ed), Arbitration under International Investment Agreements: A Guide to the Key Issues (OUP, Oxford 2010). Alexandrov, S., Moroney, M., and Porges, A., FDI Growth in Asia: The Potential for Treaty-Based Investment Protection, Global Arbitration Review [accessed 18 May 2010]. Amerasinghe, C.F., Local Remedies in International Law (2nd edn CUP, New York 2004). Amerasinghe, C.F., State Responsibility for Injuries to Aliens (Clarendon Press, Oxford 1967).

de Archaga, E. J., International law in the past third of a century (1978) 159 Recueil des Cours de lAcadmie de Droit International 1. de Arechaga, E.J., State Responsibility for the Nationalization of Foreign Owned Property (1978) 11 NYU J Intl L & Pol 179. Alvarez-Jimenez, A., Minimum Standard of Treatment of Aliens, Fair and Equitable Treatment of Foreign Investors, Customary International Law and the Diallo case before the International Court of

Justice (2008) 9 J World Investment & Trade 51. Asante, S., Stability of Contractual Relations in the Transnational Investment Process (1979) 28 ICLQ 401. Audit, M., Is the Erecting of Barriers against Sovereign Wealth Funds Compatible with International Investment Law (2009) 10 J World Investment & Trade 617. Baade, H.W., Permanent Sovereignty over Natural Wealth and Resources Stanger (eds) Essays on Expropriation (Ohio University Press, Ohio 1967). , in RS Miller and RJ

Balas, V., Saluka Investments BV (The Netherlands) v The Czech Republic: Comments on the Partial Arbitral Award of 17 March 2006 (2006) 7 J World Investment & Trade 371. Barnes, R., Property Rights and Natural Resources (Hart Publishing, Oxford and Portland, Oregon 2009). Baughen, S., Expropriation and Environmental Regulation: The Lessons of NAFTA Chapter Eleven (2006) 18 J Env L 207. Ben Hamida, W., Two Nebulous ICSID Features: The Notion of Investment and the Scope of Annulment Control (2007) 24 J Intl Arbitration 287. Been V., and Beauvais, J., The Global Fifth Amendment? The NAFTAs Investment Protections and the Misguided Quest for an International Regulatory Takings Doctrine (2003) 78 NYU L Rev 30. Bishop R.D., Crawford J. and Reisman, W., Foreign Investment Disputes (Kluwer Law International, The Hague 2005). Bjorklund, A.K., Reconciling State Sovereignty and Investor Protection in Denial of Justice Claims (2005) 45 Virginia J Intl L 809. Bjorklund, A.K., Laird I.A. and Ripinsky, S. (eds) Oil and gas Law: Current Issues III Institute of International & Comparative Law, London 2009). Bjorklund, A.K., Causation, Morality, and Quantum (2009) 32 Suffolk Transnatl L Rev 435. Borchard, E.M., The Diplomatic Protection of Citizens Abroad, or the Law of International Claims (The Banks Law Publishing Co, New York 1915). Bowett, D.W., State Contracts with Aliens: Contemporary Developments on Compensation for Termination or Breach (1988) 59 British Ybk Intl L 49. Broches, A., The Convention on The Settlement of Investment Disputes: Some Observations on Jurisdiction (1966) Col J Transnatl L 261. Brower, C.N., The Future for Foreign Investment Recent Developments in the International Law of Expropriation and Compensation in VS Cameron (ed) , Private Investors Abroad Problems and (British

Solutions in International Business in 1975

(1976).

Brownlie, I., Principles of Public International Law (6th edn OUP, Oxford 2003). Brownlie, I., Treatment of Aliens: Assumption of Risk and the International Standard in Flume W. and others (eds), International Law and Economic Order: Essays in honour of F.A. Mann (Verlag C.H.Beck, Mnchen 1977). Burke-White, W. and von Staden, A., Investment Protection in Extraordinary Times: The Interpretation and Application of Non-precluded Measures Provisions in Bilateral Investment Treaties (2008) 48 Va J Intl L 307. Byrne, K., Regulatory Expropriation and State Intent (2000) Canadian Ybk Intl L 89. Calamita, N. J., The British Bank Nationalizations: An International Law Perspective (2009) 58 ICLQ 119. Caranta, R., Public Law Illegality and Governmental Liability in D Fairgrieve and others (eds), Tort Liability of Public Authorities In Comparative Perspective (British Institute of International and Comparative Law, London 2002). Carlston, K. S., Concession Agreements and Nationalization (1958) 52 AJIL 260. Charnovitz S., Steger, D.P., and Van Den Bossche, P. (eds) Law in the Service of Human Dignity: Essays in Honour of Florentino Feliciano (CUP, Cambridge 2005). Cheng, Bin, General Principles of Law as applied by International Courts and Tribunals Cambridge 1994). Christie, G.S., What Constitutes A Taking of Property Under International law Intl L 307. , (CUP,

(1962) 38 Brit Ybk

Coe, J. and Rubins, N., Regulatory Expropriation and the Tecmed Case: Context and Contributions in Weiler, T. (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, 2005). Cremades B., and Cairns, D.J., Contract and Treaty Claims and Choice of Forum in Foreign Investment Disputes in Horn, N. (ed) Arbitrating Foreign Investment Disputes (Kluwer Law International, The Hague 2004). Chung, O., The Lop-Sided International Investment Law Regime and Its Effect on the Future of Investor-State Arbitration (2006-2007) 47 Va J Intl L 953. Claussen, K., The Casualty of Investor Protection in Times of Economic Crisis (2009) 118 Yale L J 1545. Choudhury, B., Evolution or Devolution: Defining Fair and Equitable Treatment in International Investment Law (2005) 6 J World Investment & Trade 297.

Choudhury, B., Recapturing Public Power: Is Investment Arbitrations Engagement of the Public Interest Contributing to the Democratic Deficit? (2008) 41 Vand J Transnatl L 775. Chow, M.W., Discriminatory Equality v Non-discriminatory Inequality: The Legitimacy of South Africas Affirmative Action Policies under International Law (2009) 24 Conn J Intl L 291. Cohen, M., Property and Sovereignty (1927) 13 Cornell Law Quarterly 8. Cohen, D., Regulating Regulators: The Legal Environment of the State (1990) 40 U Toronto L J 213. Cosbey, A., Mann, H., Peterson, L., and Moltke, K., Investment and Sustainable Development: A Guide to the Use and Potential of International Investment Agreements (International Institute for Sustainable Development, 2004) Crawford, J., Treaty and Contract in Investment Arbitration (2008) 24 Arbitration International 351. Crawford, J., The International Law Commissions Articles on State Responsibility: Introduction, Text and Commentaries (CUP, Cambridge 2002). Culbertson, W.S., Foreign Interests in Mexico (1938) 17 International Affairs 769. Cunnington, R., Contract Rights as Property Rights in A Robertson (ed), Connections and Boundaries (UCL, London 2004). The Law of Obligations:

Curtis, C. T., The Legal Security of Economic Development Agreements (1988) 29 Harvard Intl L J 317. Delaume, G.R., ICSID Arbitration and the Courts (1983) 77 AJIL 784. Dimopolous, A., Shifting the Emphasis from Investment Protection to Liberalization and Development: The EU as a New Global Actor in the Field of Foreign Investment (2010) 11 (1) J World Investment & Trade 5. Denza, E., and Brooks, S., Investment Protection Treaties: United Kingdom Experience (1987) 36 ICLQ 908. Dolzer, R., and Schreuer, C., Principles of International Investment Law (OUP, Oxford 2008). Dolzer R., and Bloch, F., Indirect Expopriation: Conceptual Realignments? (2003) 5 Intl L F 155. Dolzer R., and Stevens, M., Bilateral Investment Treaties (M.Nijhoff, The Hague, London 1995). Dolzer R., and Von Walter, A., Fair and Equitable TreatmentLines of Jurisprudence on Customary Law in F Ortino, L Liberti (eds) Oil and gas Law: Current Issues II (BIICL, London 2007). Dolzer, R., Indirect Expropriation of Alien Property (1986) 1 ICSID Rev Foreign Investment L J 41.

Dolzer, R., New Foundations of the Law of Expropriation of Alien Property (1981) 75 AJIL 553. Dolzer, R., Indirect Expropriations: New Developments? (2002) 11 NYU Envl LJ 64. Dolzer, R., The Notion of Investment in Recent Practice in Charnovitz, S., Steger D.P., and Van Den Bossche P., (eds) Law in the Service of Human Dignity: Essays in Honour of Florentino Feliciano (CUP, Cambridge 2005). Dolzer R., and Bloch, F., Indirect Expopriation: Conceptual Realignments? (2003) 5 Intl L F 155. Doman, N.R., Postwar Nationalization of Foreign Property in Europe (1948) 48 Columbia Law Review 1125. Domke, M., American protection Against Foreign Expropriation in the Light of the Suez Canal Crisis (1956-57) 105 U Penn L Rev 1033. Domke, M., Indonesian Nationalization Measures Before Foreign Courts (1960) 54 AJIL 305. Douglas, Z., The Hybrid Foundations of Oil and gas Arbitration (2004) 74 British Ybk Intl L 151. Douglas, Z., The International Law of Investment Claims (CUP, Cambridge 2009). Douglas, Z., Nothing if Not Critical for Oil and gas Arbitration: Occidental, Eureko, and Methanex (2006) 22 Arbitration Intl 27. Douglas Z., and Paulsson J., Indirect Expropriation in Oil and gas Arbitrations in N Horn and S Krll, Arbitrating Foreign Investment Disputes (Kluwer Law International, The Hague 2000). Dugan, C., Wallace D., Rubins N., and Sabahi B., Investor-State Arbitration (OUP, Oxford 2008). Dupuy P., and Francioni F., (eds), (OUP, Oxford 2009). Human Rights in International Investment Law and Arbitration

Eagleton, C.,Denial of Justice in International Law (1928) 22 AJIL 538. Eagleton, C., The Responsibility of States in International Law (1928) 47-8. Echandi, R., Bilateral Investment Treaties and Investment Provisions in Regional Trade Agreements: Recent Developments in Investment Rulemaking in K Yannaca-Small (ed), Arbitration under International Investment Agreements: A Guide to the Key Issues (OUP, Oxford 2010) 3-37. Eljuri E., and Trevio, C., Venezuela: On the Path to Complete Oil Sovereignty, or the Beginning of a New Era of Investment? (2009) 2 J World Energy L & Business 259. Eljuri, E., Cifuentes, J., The 2007 Nationalization of the Venezuelan Orinoco Oil Belt (2008) 2 OGEL, www.ogel.org

Epstein, R., and the Power of Eminent Domain Cambridge MA 1985).

Takings: Private Property (Harvard University Press,

Fachiri, A. P., Expropriation and International Law (1925) 6 British Ybk Intl L 159. Falsafi, A., The International Minimum Standard of Treatment of Foreign Investors Property: A Contingent Standard (2006-2007) 30 Suffolk Transnational L Rev 318. Fatouros, A. A., International Law and the Internationalized Contract (1980) 74 AJIL 134. Feng, Y., We Wouldnt Transfer Title to the Devil: Consequences of Congressional Politicisation of Foreign Direct Investment on National Security Grounds (2009) 42 NYU J Intl L & Pol 253. Fietta, S., Expropriation and the Fair and Equitable Standard: The Developing Role of Investors Expectations in International Investment Arbitrations (2006) 23 (5) Journal of International Arbitration 375-399. Fietta, S., The Legitimate Expectations Principle under Article 1105 NAFTA: International Thunderbird Gaming Corporation v. The United Mexican States (2006) 3 J World Investment & Trade 423. Firth, S., and Juric, D., Can we afford (not) to regulate sovereign wealth funds? (2008) 11 JIBFL 604. Fitzmaurice, G., The Meaning of the Term Denial of Justice(1932) 13 British Ybk Intl L 93. Fitzmaurice, G., Hersch Lauterpacht The Scholar as Judge Part I (1961) British Ybk Intl Law 37. Fombrun, C., Reputation: Realizing Value from the Corporate Image (Harvard Business School Press, Boston MA 1996). Foster, D., Necessity knows no law! - LG&E v Argentina (2006) 9 Intl Arbitration L Rev 149. Fortier, L.-I., Drymer, S.L., Indirect Expropriation in the Law of International Investment: I Know When I See It, or Caveat Investor (2004) 19 ICSID Rev Foreign Investment L J 293. Franck, S., The Legitimacy Crisis in Oil and gas Arbitration: Privatising Public International Law Through Inconsistent Decisions (2005) 73 Fordham L Rev 1521. Franck, S., International Decision: Occidental Exploration & Production Co v. Republic of Ecuador (2005) 99 AJIL 676. Freeman, A., The International Responsibility of States for Denial of Justice London 1938). Friedman, S., Expropriation in International Law (Steven & Sons, London 1953). Gaffney, J.P., Loftis, J.L., The Effective Ordinary Meaning of BITs and the Jurisdiction of TreatyBased Tribunals to Hear Contract Claims (2007) 8 (1) J World Investment & Trade 5. Gaillard, E., Investment and Investors Covered by the Energy Charter Treaty in C Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (JurisNet, 2006) 64-5. (Longmans & Co.,

Gaillard, E., Oil and gas Arbitration and Jurisdiction Over Contract Claims the SGS Cases Considered in T Weiler (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, London 2005). Gallagher N., and Shan, W., 2009). Chinese Investmenmt Treaties: Policies and Practice (OUP, Oxford

Gallus N., The Influence of the Host States Level of Development on International Oil and gas Standards of Protection (2005) 6 J World Investment Trade 711. Gallus, N., An Umbrella just for Two? BIT Obligations Observance Clauses and the Parties to a Contract (2008) 24 Arbitration Intl 157. Gathright, B. K., A Step in the Wrong Direction: The Loewen Finality Requirement and the Local Remedies Rule in NAFTA Chapter Eleven (2005) 54 Emory LJ 1093. Garcia-Amador, F.V., Responsibility of the State for Injuries Caused in its Territory to Persons or Property of Aliens Measures Affecting Acquired Rights UN Doc. A/CN.4/119, Yearbook of International Law Commission (1959-II). Gardiner, R. K., Treaty Interpretation (OUP, Oxford 2007). Gomez-Palacio, I., Muchlinski, P., Admission and Establishment in Muchlinski, P., Ortino, F., and Schreuer, C., (eds), The Oxford Handbook on International Investment Law (OUP, Oxford 2008) 228. Gill, J., Gearing, M., and Birt, G., Contractual Claims and Bilateral Investment Treaties: Comparative Review of the SGS Cases (2004) 21 J Intl Arbitration 397. Gordon, K., Pohl, J., The response to the global crisis and investment protection: evidence, Columbia FDI Perspectives, No. 25, June 17, 2010. Greenwood, C., State Contracts in International Law The Libyan Oil Arbitrations (1982) 33 British Ybk Intl law 27. Greenwood, C., State Responsibility for the Decisions of National Courts in Fitzmaurice M., and Sarooshi D., (eds) Issues of State Responsibility before International Judicial Institutions (Hart Publishing, Oxford 2004). Gutbrod M., and Hindelang, S., Externalization of Effective Legal Protection against Indirect Expropriation: Can the Legal Order of developing Countries Live Up to the Standards Required by International Investment Agreements? A Disenchanting Comparative Analysis (2006) 7 J World Investment & Trade 59. Guzman, T., Why LDCs Sign Treaties that Hurt Them: Explaining the Popularity of Bilateral Investment Treaties (1998) Va J Intl L 639. Hanna, J., Is Transparency of Governmental Administration Customary International Law in Investor-Sovereign Arbitrations? Courts and Arbitrators May Differ (2005) 21 Arbitration Intl 187. A

Happ, R., Dispute Settlement under the Energy Charter Treaty (2002) 45 German Ybk Intl L 331. Hasic, H., Article 1110 of NAFTA: Investment Barriers to Upward Harmonization Environmental Standards (2005) 12 Southwestern J L & Trade Am 137. of

Hackworth, G. H., Digest of International Law ( US Government Printing Office, Washington 1943) vol 5. Heiskanen, V., Unreasonable and Discriminatory Measures as a Cause of Action Under the Energy Charter Treaty (2007) 10 Intl Arbitration L Rev (3) 104. Heiskanen, V., Arbitrary and Unreasonable Measures, in A Reinisch, Protection (OUP, Oxford 2008) 87. Standards of Investment

Hertz, J., Expropriation of Foreign Property (1941) 35 AJIL 243, BA Wortley, Some Early Theories of Expropriation (1977) Germ Ybk Intl Law 236.
Higgins, R.,The Taking of Property by the State: Recent Developments in International Law (1982) 176 Recueil des Cours 259. Hindelang, S., Bilateral Investment Treaties, Custom and a Healthy Investment Climate (2004) 5 J World Investment & Trade 767. Hindelang, S., The Free Movement of Capital and Foreign Direct Investment: The Scope of Protection in EU Law (OUP, Oxford 2009). Hirsch, M.,Interactions between Investment and Non-investment Obligations in P Muchlinski, F Ortino and C Schreuer (eds), The Oxford Handbook of International Investment Law (OUP, Oxford 2008. 155. Hiscock, M. E., The Emerging Legal Concept of Investment (2009) 27 Penn State Intl L Rev 765. Hobr, K., Investment Arbitration in Eastern Europe: In Search of a Definition of Expropriation (JurisNet, New York 2007). Hoffman, A., Indirect Expropriation in A Reinisch, Oxford 2008). Standards of Investment Protection (OUP,

Hopt, K.J., Kupman, C., Steffek, F., Preventing Bank Insolvencies in the Financial Crisis: The German Financial Market Stabilisation Acts (2009) 10 (4) European Bus Organization L Rev 515. Hudson, A., The unbearable lightness of property in A Hudson (ed) New Perspectives on Property Law, Obligations and Restitution (Cavendish Publishing, London 2004). Hunter M., and Barbuk A., Reflections on the Definition of an Investment in G Aksen and RG Briner (eds), Global Reflections on International Law, Commerce and Dispute Resolution: Liber Amicorum in honour of Robert Briner (ICC Publishing, Paris 2005) 381.

Hunter, M., and Sinclair, A. C., Aminoil Revisited: Reflections on a Story of Changing Circumstances in T Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (London, Cameron May 2005). Hyde, C., International Law Chiefly as Interpreted and Applied by the United States (Little, Brown, & Co, Boston 1922). Hyde, J.N., Economic Development Agreements (1962-1) 105 Recueil des Cours 282-83. ILC, Report on the work of its fifty-third session (23 April - 1 June and 2 July - 10 August 2001) UN Doc A/56/10. ILC, Second Report on State Responsibility (3 May23 July 1999) UN Doc A/CN.4/498. ILC, Report on the work of the twenty-ninth session (9 May 29 July 1977) UN Doc A/32/10. ILC, Second report on diplomatic protection (23 April-1 June and 2 July-18 August 2001) UN Doc A/CN.4/514. Jennings, R., and Watts, A., (eds) Oppenheims International Law (9th edn Longman, Harrow 1992). Jennings, J., State Contracts in International Law (1961) 37 Brit Ybk Int L 156. Jezewski, M., There is No Freedom Without Solidarity: Towards New Definition of Investment in International Economic Law, Society of International Economic Law (SIEL) Inaugural Conference 2008 Paper. Joffe, G., Stevens, P., George, T., Lux J., and Searle, C., Expropriation of Oil and Gas Investments: Historical, Legal and Economic Perspectives in a New Age of Resource Nationalism(2009) 2 J World Energy L & Business 1. Johnson, D., The effect of the resolutions of the General Assembly of the UN (1955) 32 Brit Ybk Intl L 97. Kahn, J.C., A Golden Opportunity for NAFTA (2008) 16 NYU Env L J 380. Kalicki, J., Medeiros, S., Fair, Equitable and Ambiguous: What is Fair and Equitable Treatment in International Investment Law? (2008) 22 ICSID Rev FILJ 24. Kalotay, K., The Political Aspect of Foreign Direct Investment: The Case of the Hungarian Oil Firm MOL (2010) 11(1) J World Investment & Trade 647. Kammerhofer, J., Alexander Orakhelashvili. International Law (2009) 20 EJIL 1282. The Interpretation of Acts and Rulesin Public

Karl, J., International Investment Arbitration: A Threat to State Sovereignty in W Shan, P Simons and D Singh (eds), Redefining Sovereignty in International Economic Law (Hart Publishing, Oxford

2008.

236.

Karl, J. The Promotion and Protection of German Investment Abroad (1996) 11 ICSID Rev Foreign Investment L J 1. Kaushal, A., Revisiting History: How the Past Matters For The Present Backlash Against The Foreign Investment Regime (2009) 50 Harv Intl L J 491. Knahr, C., Investments in accordance with host state law (2007) 4 (5) TDM 1. Kibel, P. S., Grasp on Water: A Natural Resource that Eludes NAFTAs Notion of Investment (2007) 34 Ecology LQ 655. Kill, T., Dont Cross the Streams: Past and Present Overstatement of Customary International Law in Connection with Conventional Fair and Equitable Treatment Obligations (2008) 106 Michigan Law Review 853. Kishoiyian, B., The Utility of Bilateral Investment Treaties in the Formulation of Customary International Law (1994) 14 Northwest J Intl L& Bus 327. Khalil, M., Treatment of Foreign Investment in Bilateral Investment Treaties(1992) 7 ICSID Review Foreign Investment L J 339. Kolo, A., Waelde, T., Environmental Regulation, Investment Protection and Regulatory Takings in International Law (2001) 50 ICLQ 811. Kuhn, A.K., The International Conference on the Treatment of Foreigners (1930) 24 AJIL 570. Kotera, A., Regulatory Transparency in P Muchlinski, F Ortino and C Schreuer (eds), Handbook of International Investment Law (OUP, Oxford 2008) 617. Kriebaum, U., Partial Expropriation (2007) 8 J World Investment & Trade 69. Kriebaum, U., Regulatory Takings: Balancing the Interests of the Investor and the State (2007) 8 J World Investment & Trade 717. Kriebaum, U., Local Remedies and the Standards For the Protection of Foreign Investment in C Binder and others (eds) International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (OUP, Oxford 2009) 417. Krishan, D., A Notion of ICSID Investment (2009) 6 (1) Transnational Dispute Management 1, 20. Kroll, S., The Renegotiation and Adaptation of Investment Contracts in N Horn and S Krll, Arbitrating Foreign Investment Disputes (Kluwer Law International, The Hague 2000). Kundra, P., Looking Beyond the Dabhol Debacle: Examining Its Causes and Understanding Its Lessons (2008) 41 Vand J Transntl L 907. The Oxford

Lang, E.A., Equal Access/Non-discrimination and Legitimate Discrimination in Economic Law (1995-1996) 14 Wis Intl LJ 246.

International

Langland, E., Misplaced Fears Put to Rest: Financial Crisis Reveals the True Motives of Sovereign Wealth Funds (2009) Tulane J Intl Comp L 263. Lissitzyn, O.J., The Meaning of the Term Denial of Justice in International Law (1936) 30 AJIL 632. Lowe, V., Sovereignty and International Economic Law in W Shan, P Simons and D Singh (eds), Redefining Sovereignty in International Economic Law (Hart Publishing, Oxford 2008). Lowe, V., Regulation or Expropriation? (2002) 55 Current Legal Problems 447. Lowenfeld, A.F., Investment Agreements and International Law (2003-2004) 42 Colum J Transnatl L 123. McLachlan, C., Investment Treaties and General International Law (2008) 57 ICLQ 361. Maclachlan, M., Shore, L., Weiniger, M., International Investment Arbitration: Substantive Principles (OUP, Oxford 2007). Malik, M., Fair and Equitable Treatment, IISD Best Practices Bulletin No3, September 2009, available at < http://www.iisd.org/pdf/2009/best_practices_bulletin_3.pdf>. Manciaux, S., The Notion of Investment: New Controversies (2008) 9 J World Investment & Trade 443. Mann, F.A.,Outlines of a History of Expropriation (1959) 75LQR 188. Mann, F.A., British Treaties for the Promotion and Protection of Investments (1981) British Ybk Intl L 241. Mashaw, J.L., Greed, Chaos, and Governance. Using Public Choices to Improve Public Law University Press, New Haven 1997). (Yale

McIlroy, J., Canadas New Foreign Investment Protection and Promotion Agreement: Two Steps Forward, One Step Back? (2004) 5 J World Investment & Trade 621. Lord McNair, The General principles of Law Recognised by Civilised Nations (1957) 33 British Ybk Intl L 1. Metzger, S., Property in International Law (1964) 50 Va L Rev 594. Montt, S., State Liability in Oil and gas Arbitration: Global Constitutional and Administrative Law in the BIT Generation (Hart Publishing, Oxford 2009). Mohebi, M., The International Law Character of the Iran-United States Claims Tribunal (Kluwer

Law International, Boston 1999). Mortenson, J.D., The Meaning of Investment: ICSIDs Travaux and the Domain of International Investment Law (2010) 51 Harv Intl L J 257. McKean, W., Equality and Discrimination under International Law (Clarendon Press, Oxford 1983). Muchlinski, P., Multinational Enterprises & the Law (OUP, Oxford 2007). Muchlinski, P., Trends in International Investment Agreements: Balancing Investor Rights and the Right to Regulate: The Issue of National Security (2008-2009) Ybk Intl Investment L & Pol 35. Muchlinski, P., The Rise and Fall of the Multilateral Agreement on Investment: Where Now? (2000) 34 Intl L 1033. Muchlinski, P., Caveat Investor? The Relevance of the Conduct of the Investor Under The Fair and Fair Equitable Treatment Standard (2006) 55 ICLQ 527. Nassar, N., Internationalization of State Contracts: ICSID, The Last Citadel (1997) 14 Journal Intl Arbitration 185. Newcombe, A., and Paradell, L., Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International, Alphen aan den Rijn 2009). Newcombe, A., The Boundaries of Regulatory Expropriation in International Law (2005) 20 ICSID Rev Foreign Investment L J 1. Norton, P.M., A Law of the future or a Law of the past? Modern Tribunals and the International Law of Expropriation (1991) 85 AJIL 474. Norton, P.M., Back to the Future: Expropriation and the Energy Charter Treaty in T Wa lde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer Law International, London 1996) 365. OECD, Fair and Equitable Treatment Standard in International Investment Law , Working Papers on International Investment (No 2004/3) 10. OConnell, D.P., State Succession in Municipal Law and International Law 1967). , Vol I (CUP, London

Orakhelashvili, A., The Normative Basis of Fair and Equitable Treatment: General International Law on Foreign Investment (2008) 46 Archiv des Vlkerrechts 74. Orakhelashvili, A., The Interpretation of Acts and Rules in Public International Law 2008). (OUP, Oxford

Paradell, L., The BIT Experience of the Fair and Equitable Treatment Standard in F Ortino and L Liberti (eds) Oil and gas Law: Current Issues II (BIICL, London 2007).

Paulsson, J., Denial of Justice in International Law

(CUP, Cambridge 2005).

Paulsson, J., Indirect Expropriation: Is the Right to Regulate at Risk? Symposium co-organised by ICSID, OECD and UNCTAD, 12 December 2005, Paris, available at <http://www.oecd.org/dataoecd/5/52/36055332.pdf> accessed 21 June 2010. Petrochilos, G., Attribution in Katia Yannaca-Small (ed), Arbitration under International Investment Agreements: A Guide to the Key Issues (OUP, Oxford 2010) 287. Poirier, M., The NAFTA Chapter 11 Expropriation Debate Through the Eyes of a Property Theorist (2003) 33 Envtl L 851. Penrose, E., Joffe, G., Stevens, P., Nationalisation of Foreign-Owned property for a Public Purpose: An Economic Perspective on Appropriate Compensation (1992) 55 MLR 351. Peters, P., Exhaustion of Local Remedies: Ignored in Most Bilateral Investment treaties (1997) 44 Netherlands Intl L Rev 233. Picherack, R., The Expanding Scope of the Fair and Equitable Treatment Standard: Have Recent Tribunals Gone Too Far? (2008) 9 J World Investment & Trade 255. Radin, M.J., Reinterpreting Property (University of Chicago Press, Chicago, London 1993). Ratner, S.R., Regulatory Takings in Institutional Context: Beyond the Fear of Fragmented International Law (2008) 102 AJIL 475. Reich, C.A., The New Property (1964) 73 Yale LJ 734. Reinisch, A., Expropriation in P Muchlinski, F Ortino and C Schreuer (eds), The Oxford Handbook of International Investment Law (OUP, Oxford 2008). Reinisch, A., Legality of Expropriations in A Reinisch, Oxford 2008). Standards of Investment Protection (OUP,

Reinisch, A., Necessity in International Investment Arbitration An Unnecessary Split of Opinion in Recent ICSID Cases? (2007) 8 J World Investment & Trade 191. Reisman W.M., and Sloane, R.D., Indirect Expropriation and Its Valuation in the BIT Generation (2004)74 British Ybk Intl L 115. Reisman, W.M., The Regime for Lacunae in the ICSID Choice of Law Provision and the Question of Its Threshold (2000) 15 ICSID Rev 362. Reisman, W.M., Arsanjani, M.H., The Question of Unilateral Governmental Statements as Applicable Law in Investment Disputes (2005) ICSID Rev- FILJ 328. Rosado de Sa Ribeiro, M., Sovereignty over Natural Resources Investment Law and Expropriation: The Case of Bolivia and Brazil (2009) 2 J World Energy L & Business 129.

Ripinsky, S., Williams, K., Damages in International Investment Law International and Comparative Law, London 2008).

(British Institute of

Ripinsky, S., Global Economic Crisis and the Danger of Protectionism: Does International Law Help? (2009) 1 (3) Amsterdam Law Forum. Roberston, M., Liberal, Democratic, and Socialist Approaches to the Public Dimension of Private Property in J McLean (ed), Property and the Constitution (Oxford, Hart Publishing 1999) 248. Roth, A.H., The Minimum Standard of International Law Applied to Aliens Uitgeversmaatschappij: Leiden, Leiden 1949). (A. W. Sijthoffs

Rubins, N., The Notion of Investment in International Investment Arbitration in Horn N., Krll, S.M., (eds), Arbitrating Foreign Investment Disputes. Procedural and Substantive Legal Aspects (Kluwer Law International 2004). Rubins, N., Loewen v. United States: The Burial of an Investor-State Claim (2005) 21 Arb Intl 1. Rumberg, C., New restrictions for investment into Germany by non-EU and EFTA investors, InHouse Lawyer, 10 October 2009. Ryan, C.M., Meeting Expectations: Assessing the Long-Term Legitimacy and Stability of International Investment Law (2008) 29 U Pa J Intl L 725. Sacerdoti, G., Bilateral Treaties and Multilateral Instruments on Investment Protection (1998) 269 Recueil des Cours de lAcadmie de Droit International 251. Saidov, D., Damage to Business Reputation and Goodwill under the Vienna Sales Convention in D Saidov, R Cunnigton, Contract Damages: Domestic and International Perspectives (Hart Publishing, Oxford 2008). Salacuse, J.W., The Law of Investment Treaties (OUP, Oxford 2010). Salacuse, J.W., The Treatification of International Investment Law (2007) 13 L & Business Rev Am 155. Sampliner, G., Arbitration of Expropriation Cases Under U.S. Investment Treaties- A Threat to Democracy or the Dog That Didnt Bark?(2003)18 ICSID Rev FILJ 1. Saxon, M., It Is Just Business or Is It? How Business and Politics Collide with Sovereign Wealth Funds (2009) 32 Hastings Intl & Comp L Rev 693. Shan, W., From North-South Divide to Private-Public Debate: Revival of the Calvo Doctrine and the Changing Landscape in International Investment Law (2006-2007) 27 NWJILB 631. Shany, Y., Contract Claims vs. Treaty Claims: Mapping Conflicts Between ICSID Decisions on Multisourced Investment Claims (2005) 99 AJIL 835.

Schill S., Kingsbury, B., Investor-State Arbitration as Governance: Fair and Equitable Treatment, Proportionality and the Emerging Global Administrative Law (2009) New York University Public Law and Legal Theory Working Papers. Schill, S., The Multilateralization of International Investment Law (CUP, Cambridge 2009). Umbrella Clauses in

Schill, S., Enabling private Ordering: Function, Scope and Effect of International Investment Treaties (2009) 18 Minn J Intl L 1.

Schill, S., Revisiting a Landmark: Indirect Expropriation and Fair and Equitable Treatment in the ICSID case Tecmed (2006) 3 (2) Transnational Dispute Management. Schlemmer, E.C., Investment, Investor, Nationality, and Shareholders in P Muchlinski, F Ortino and C Schreuer (eds), The Oxford Handbook of International Investment Law (OUP, Oxford 2008). Schneiderman, D., Constitutionalizing Economic Globalization: Investment Rules and Democracy's Promise (CUP, Cambridge 2008). Schreuer, C, Calvos Grandchildren: The Return of Local Remedies in Investment Arbitration (2005) 4 L & Practice Intl Courts & Tribunals 1. Schreuer, C., Travelling the BIT Route- Of Waiting Periods, Umbrella Clauses and Forks in the Road (2004) 5 J World Investment Trade 231. Schreuer, C., Kriebaum, U., The Concept of Property in Human Rights Law and International Investment Law in Breitenmoser, S., and others (eds) Human Rights, Democracy and the Rule of Law: Liber Amicorum Luzius Wildhaber (Nomos, Dike 2007) 743. Schreuer C., and others, The ICSID Convention: A Commentary (2nd edn CUP, Cambridge 2009). Schreuer, C., Fair and Equitable Treatment in Arbitral Practice (2005) 6 J World Investment & Trade 357. Schreuer, C., The Concept of Expropriation under the ECT and other Investment Protection Treaties in C Ribeiro, Investment Arbitration and the Energy Charter Treaty (JurisNet, Huntington, NY 2006). Schreuer, C., Protection against Arbitrary or Discriminatory Measures in RP Alford & CA Rogers (eds), The Future of Investment Arbitration (OUP, New York 2009). Schreuer, C., Interrelationships of Standards in A Reinisch, (OUP, Oxford 2008). Standards of Investment Protection

Schreuer, C, Oil and gas Arbitration and Jurisdiction over Contract Claims the Vivendi I Case Considered in T Weiler (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, London 2005). Schwarzenberger, G., Brown, E.D., A Manual of International Law (Professional Books, Abingdon

1976). Schwarzenberger, G., The Protection of Human Rights in British State Practice (1948) 10 The Review of Politics. Schwarzenberger, G., The Abs-Shawcross Draft Convention: On Investments Abroad: A Critical Commentary (1960) 9 J Pub L 147. Schwarzenberger, G., Foreign Investments and International Law (Steven & Sons, London 1969). Schwebel, S., International Arbitration: Three Salient Problems (Grotius Publications, Cambridge 1987). Schwebel, S., Justice in International Law: Selected Writings of Stephen M. Schwebel Cambride 1994). (CUP,

Schwebel, S., The Reshaping of the International Law of Foreign Investment by Concordant Bilateral Investment Treaties in Charnovitz, S., Steger, D.P., and Van Den Bossche, P., (eds) Law in the Service of Human Dignity: Essays in Honour of Florentino Feliciano (CUP, Cambridge 2005). Schwebel, S., The United States Model Bilateral Oil and gas: An Exercise in the Regressive Development of International law in Aksen, G., and Briner, R.G., (eds), Global Reflections on International Law, Commerce and Dispute Resolution: Liber Amicorum in honour of Robert Briner (ICC Publishing, Paris 2005). Sedigh, H, What Level of Host State Interference Amounts to a Taking under Contemporary International Law? (2001) 2 J World Investment & Trade 631. Sheppard, A., The Distinction between Lawful and Unlawful Expropriation in C Ribeiro, Investment Arbitration and the Energy Charter Treaty (JurisNet, Huntington NY 2006). Sinclair, A.C., The Origins of the Umbrella Clause in the International Law of Investment Protection (2004) 20 Arbitration Intl 411. Sinclair, A., The Umbrella Clause Debate in Bjorklund, A.K., Laird, I.A., and Ripinsky, S., (eds), Oil and gas Law: Current Issues III (BIICL, London 2009). Sohn, L.B., Baxter, R.R., Responsibility of States for Injuries to the Economic Interests of Aliens (1961) 55 AJIL 554. Sornarajah, M., The Fair and Equitable Standard of Treatment: Whose Fairness? Whose Equity? in F Ortino and L Liberti (eds) Oil and gas Law: Current Issues II (BIICL, London 2007). Sornarajah, M., The Neo-Liberal Agenda in Investment Arbitration: Its Rise, Retreat and Impact on State Sovereignty in W Shan, P Simons and D Singh (eds), Redefining Sovereignty in International Economic Law (Hart Publishing, Oxford 2008). Sornarajah, M., The pursuit of nationalized property (M. Nijhoff, Dordrecht 1986).

Sornarajah, M., The International Law on Foreign Investment

(2nd edn CUP, Cambridge 2004).

Sornarajah, M., The International Law on Foreign Investment (CUP, Cambridge 2010). Snodgrass, E., Protecting Investors Legitimate Expectations: Recognizing and Delimiting a General Principle (2007) 21 ICSID Rev FILJ 1. Spiegel, H., Origin and Development of Denial of Justice (1938) 3 AJIL 63. Starner, G.M., Taking a Constitutional Look: NAFTA Chapter 11 as an Extension of Member States Constitutional Protection of Property (2002) 33 Law & Policy Intl Bus 405. Subedi, S., The Challenge of Reconciling the Competing Principles within the Law of Foreign Investment with Special Reference to the Recent Trend in the Interpretation of the term Expropriation (2006) 40 Intl Law 121. Subedi, S., International Investment Law: Reconciling Policy and Principle (Hart Publishing, Oxford 2008). Stiglitz, J.E., Regulating Multinational Corporations: Towards Principles of Cross- Border Legal Frameworks in a Globalized World Balancing Rights with Responsibilities (2008) 23 Am U Intl L Rev 451. Thomas, J.C., Reflections on Article 1105 of NAFTA: History, State Practice and the Influence of Commentators (2001) 17 ICSID Review FILJ 21. Tudor, I., The Fair and Equitable Treatment Standard in the International Law of Foreign Investment (OUP, Oxford 2008). Vadi, V.S., Investing in Culture: Underwater Cultural Heritage and International Investment Law (2009) 42 Vand J Transnatl L 853. Vadi, V.S., Trade Mark Protection, Public Health and International Investment Law: Strain and Paradoxes (2009) 20 EJIL 773. Vandevelde, K.J., A Brief History of International Investment Agreements (2005) 12 U C Davis J Intl L & Policy 157. Vandevelde, K.J., U.S. International Investment Agreements (OUP, Oxford 2009). Vandevelde, K.J., The Bilateral Oil and gas Program of the United States (1988) 21 Cornell Intl L J 201. Van Harten, Gus, Oil and gas Arbitration and Public Law (OUP, Oxford 2007)

Vargiu, P., Beyond Hallmarks and Formal Requirements: A Jurisprudence Constante on the Notion of Investment in the ICSID Convention (2009) 10 (5) J World Investment & Trade 753.

Vasciannie, S., The Fair and Equitable Treatment Standard in International Investment Law and Practice (1999) 70 British Ybk Intl L 99. Verwey, W.D., Schrijver, N.J., The Taking of Property Under International Law: A New Legal Perspective? (1984) Netherlands Ybk Intl L 3. Vicuna, F., Foreign Investment Law: How Customary Is Custom? ASIL Proceedings (2005) ASIL Proc 98. Vicuna, F., Regulatory Authority and Legitimate Expectations: Balancing the Rights of the State and the Individual under International Law in a Global Society (2003) Intl L Forum 188 Vinuales, J.E., State of Necessity and Peremptory Norms in International Investment Law (2008) 14 L & Business Rev Americas 79. Waibel, M., Opening Pandoras Box: Sovereign Bonds in International Arbitration (2007) 101 AJIL 711. Walde, T., The Umbrella (or Sanctity of Contract/Pacta Sunt Servanda) Clause in Investment Arbitration: A Comment on Original Intentions and Recent Cases (2004) 1 (4) TDM 1. Wallace Jr, D., State Responsibility for Denial of Substantive and Procedural Justice Under NAFTA Chapter Eleven (2000) 23 Hastings Intl & Comp L Rev 393. Walker H. Jr., Treaties for Encouragement and Protection of Foreign Investment: Present United States Practice (1956) 5 A J Comp L 229. Weiler, T., (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, London 2005). Grierson-Weiler, T., Laird, I., Standards of Treatment in P Muchlinski, F Ortino and C Schreuer (eds), The Oxford Handbook of International Investment Law (OUP, Oxford 2008). Weiler, T., Good Faith and Regulatory Transparency: The Story of Metalclad v Mexico in Weiler, T., (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, London 2005). Weiler, T., Balancing Human Rights and Investor Protection: A New Approach for a Different Legal Order (2004) 27 Boston College Intl & Comp L Rev 429. Weiler, T., A First Look at the Interim Awards in S.D. Myers, Inc v.Canada: Is it Possible to Balance Legitimate Environmental Concerns with Investment Protection? (2001) 24 Hastings Intl & Comp L Rev 173. Werner, A.S., Indirect Expropriation: The Need for a Taxonomy of Legitimate Regulatory Purposes (2003) 5 Intl L F 166. Weston, B., and Dawson, F., Prompt, adequate, and effective?: A Universal Standard of

Compensation (1961-1962) 30 Fordham L R 727. Weston, B.H., Constructive Takings under International Law: A Modest Foray into the Problem of Creeping Expropriation (1975-1976) 16 Va J Intl L 103. Weston, B.H., The Charter of Economic Rights and Duties of States and the Deprivation of ForeignOwned Wealth (1981) 75 AJIL 437. Williams, F., International Law and the Property of Aliens (1928) 9 British Ybk Intl L 1. Wilson, R.R., Property-Protection Provisions in United States Commercial Treaties (1951) 45 AJIL 83. Whiteman, M., Damages in International Law Washington, 1943). (United States Government Printing Office,

Wong, J., Umbrella Clauses in Bilateral Investment Treaties: Of Breaches of Contract, Treaty Violations, and the Divide Between Developing and Developed Countries in Foreign Investment Disputes (2006) 14 Geo Mason L Rev 135. Wortley, B.A., Expropriation in Public International Law (University Press, Cambridge 1959).

Wortley, B.A., Some Early But Basic Theories of Expropriation (1977) 20 German Ybk Intl L 236. Yannaca-Small, K., Definition of Investment: An Open-Ended Search for a Balanced Solution in Yannaca-Small, K., (ed), Arbitration under International Investment Agreements: A Guide to the Key Issues (OUP, Oxford 2010). Yannaca Small, K., Indirect Expropriation and the Right of the Government to Regulate Criteria to Articulate the Difference in Ribeiro, C., Investment Arbitration and the Energy Charter Treaty (JurisNet, Huntington, NY 2006). Yannaca-Small, K., What About This Umbrella Clause ? in Yannaca-Small, K., (ed), Arbitration under International Investment Agreements: A Guide to the Key Issues (OUP, Oxford 2010). Yannaca-Small, K., Fair and Equitable Treatment in Yannaca-Small, K., (ed), Arbitration under International Investment Agreements: A Guide to the Key Issues (OUP, Oxford 2010). Yackee, J.W., Toward a Minimalist System of International Investment Law? (2009) 32 Suffolk Transnatl L Rev 303. Yackee, J.W., Do We Really Need BITs? Toward a Return to Contract in International Investment Law (2008) 3 Asian Journal WTO & Intl Health Law & Policy 121. Yala, F., The Notion of Investment in ICSID Case Law: A Drifting Jurisdictional Requirement? Some Un-Conventional Thoughts on Salini , SGS and Mihaly (2005) 22 J Intl Arbit 105. Zoelner, C.S., Transparency: An Analysis of an Evolving Fundamental Principle in International

Economic Law (2005-2006) Mich J Intl L 579. UNCTAD, World Investment Report 2010: Investing in a Low-Carbon Economy New York 2010). (United Nations,

UNCTAD, Bilateral Investment Treaties 1995-2006: Trends in Investment Rule-Making Nations, New York 2007).

(United

UNCTAD, Preserving Flexibility in IIAs: The Use of Reservations (United Nations, New York 2005). UNCTAD, Transparency (United Nations, New York 2003). UNCTAD, Taking of Property (United Nations, New York 2000). UNCTAD, Fair and Equitable Treatment (United Nations, New York 1999). UNCTAD, National Treatment (United Nations, New York 1999).