DECODING THE DICHOTOMY: REVISITING THE SQUABBLE IN DISPUTE RESOLUTION CLAUSE BETWEEN BIT AND INVESTOR-STATE CONTRACTS

Article by Rishabha Meena,

The sole jurisdictional characteristic of the ICSID Tribunal (“ICSID Tribunal”) is the adjudication of a dispute between a private investor and a State. Pursuant to Article 25 of the Convention, the Tribunal has jurisdiction over the dispute between the parties. Article 41(1) of ICSID Convention (“Convention”) provides that a tribunal shall be the judge of its own competence. Consent is important for ICSID jurisdiction and it is expressed through a BIT where a unilateral offer of consent is made by the Host-State and the Investor later accepts that offer when a dispute between them arises under the BIT (see here, ¶14-15). The issue which the author seeks to analyse is a situation involving conflict in the jurisdiction of ICSID in a case where the BIT provides dispute resolution mechanism and thereby confers jurisdiction to ICSID. On the other hand, the Investor and Host State enters into a contract which provides for a different dispute resolution mechanism other than ICSID. For instance, a BIT between two countries A and B confers jurisdiction to ICSID Tribunal. X, a citizen of country A enters into an investment contract with country B which confers jurisdiction to Tribunal Q. There is a violation of fair equitable treatment by the Host State and X filed a dispute before ICSID. Thus, the article argues that ICSID has the jurisdiction and explains why conferment of jurisdiction to ICSID over Tribunal X is beneficial. The article takes different kinds of situation into consideration with respect to the conferment of jurisdiction to ICSID.

The ICSID Tribunal has held multiple times that the domestic dispute resolution clause does not bar the use of the Investor-State dispute settlement mechanism of a Bilateral Investment Treaty (“BIT”) (See here and here). Consequently, an investor can seek international responsibility of the host state on the basis of BIT notwithstanding the domestic dispute resolution in the contract.

I.                   Jurisdiction of ICSID Tribunal to decide the dispute by virtue of Umbrella Clause in the BIT.

Generally, a BIT provides that “the contracting parties shall observe any obligation it has assumed with regard to specific investments in its territory by investors of the other Contracting Party”. This clause in BIT, called Umbrella Clause (“UC”), is present in multiple BITs (See here, Art.5; here, Art. 2(c) and here, Art. 2(c)). UC in the BIT provides a protective blanket for foreign investments including activities in the Investor-State contract. The UC also provides additional investment protections which have been agreed by the State as a sovereign (See here, ¶85). In other words, UC allows to bring a contractual claim to a tribunal under BIT when a contract is entered in which State is sovereign. The Investor-State contracts are sovereign by its nature due to which ICSID Dispute Resolution Mechanism prevail. Once such an activity falls under the BIT, the Tribunal has the jurisdiction to adjudicate the matter by the elevation of the contractual undertaking to international law obligations (See here, ¶53, 60-62 and here, ¶115).

In Eureko v. Poland, on the basis of UC in Netherlands-Poland BIT, the Tribunal held that ‘any obligations’ means all obligations undertaken with regard to investment. In SGS v. Philippines, the tribunal held that UC “makes it a breach of the BIT for the host state to fail to observe binding commitments, including contractual commitments, which it has assumed with regard to specific investments”. ‘Any obligations’ in UC implies that the parties bound themselves with a substantive obligation to observe any commitments that have been assumed with regard to investment including contractual obligations (See here, ¶116). Further, jurisdiction for beach of contractual arrangements between the investor and host state due to acts attributable to host state lies with the Tribunal as they amount to a breach of BIT itself (See here, ¶250).

II.                A dispute resolution clause in Investor-State contact is not a competing jurisdiction.

Dispute resolution clause in Investor-State contract is not a competing jurisdiction as it cannot encompass a claim under BIT as sources of international law because such a contract is a municipal agreement in which the parties cannot reasonably intend a dispute resolution clause as claims which arises under BIT (See here, ¶153). Further, in such contract, a clear indication of an intention to exclude [a treaty-based] jurisdiction would be required”. Even if such an indication to exclude exists, the contracting parties are prohibited from dispensing with the compliance of a treaty-based obligation under BIT. In other words, treaty jurisdiction cannot be countermanded by contract (See here, ¶295).

An exclusive jurisdiction clause in the Investor-State contract cannot be resorted to avoid the characterization of its conduct as internationally unlawful under a treaty (See here, ¶103). The reason for the same is that same set of facts can give rise to different claims grounded on differing legal orders (See here, ¶147 and here, ¶73,124). BIT expressly limits its effect on Investor-State contracts containing a separate forum selection clause (see here, ¶98,101).

In Vivendi v. Argentina, the Tribunal held that it should give effect to any valid forum selection clause in the contract but in cases where the “fundamental basis of the claim is a treaty laying down an independent standard by which the parties conduct has to be judged, the existence of a forum selection clause cannot operate as a bar to the application of the treaty standard”. Alternatively, whenever the “essential basis” of a claim is a fundamental treaty standard, the contract’s forum selection clause must not be applicable. A breach of contract can, at the same time, amount to a breach of international law and the BIT, if it constitutes a violation of the FET (See here, ¶62).

III.             Non-compliance with the pre-tribunal Dispute Resolution Mechanism under BIT does not bar the jurisdiction of ICSID Tribunal.

Generally, the dispute resolution mechanism in BIT provides that the parties should settle the dispute amicably before approaching the ICSID. This part of the article analyses the jurisdiction of ICSID if a party approaches ICSID before complying with the requirement of amicable settlement of disputes. The Tribunal in Lauder v. Czech Republic found that the waiting period requirements were procedural and therefore not a requirement for jurisdiction, as strict compliance with such procedural requirement does not serve the legitimate interest of the parties (See here, ¶187). Strict compliance with such procedure would lead to an increase the length of arbitration and would hinder flexibility and efficiency, two benefits of international arbitration.

IV.              Conclusion

Despite the existence of a dispute resolution mechanism conferring power to the municipal court to adjudicate the dispute in Investor-State contract, it is the ICSID which should be provided with the power of adjudication of Investor-State contract because violations of such contract amount to the violation of international obligation under the BIT. The adjudication of the dispute by ICSID leads to uniformity in international investment law. Moreover, the ICSID being a body with experience and expertise enable the speedy and efficient adjudication of disputes which benefits both the parties by saving time and money. Thereby, it allows the creation of the investor-friendly environment and hence enable the growth of the economy.

Short Biography of the author

The author is a penultimate year undergraduate law student at National Law University, Jodhpur specializing in international trade and investment law. Through his participation in ELSA Moot Court Competition on WTO Law, he developed his interest in international trade law. The author has also been part of the Editorial Board of Trade, Law and Development. The author has interned with various leading law firms in India. The author has deep interest in international trade and investment law and their relationships with other areas of law. The author can be reached at rishabh.149620@gmail.com.