If you conduct business internationally, you may have heard of investment arbitration, investor-state arbitration (ISA) or investor-state dispute settlement (ISDS) mechanism that protects foreign investors abroad. But do you know what it is exactly and why it is essential for your business success?
What is ISA?
ISA is a mechanism that allows a foreign investor to sue the government of the country where it invested (host state) in a neutral forum through binding international arbitration. ISA agreements are usually part of international bilateral or multilateral treaties between states but can also be found in domestic laws and contracts. In these agreements host states promise to provide certain rights and guarantees to qualified investors.
Why do you need ISA?
ISA is often the only way to ensure that your investment is safe and profitable in a foreign country. Without ISA, you would be at the mercy of the host state, which could treat you unfairly, take away your property, discriminate against you or impose unreasonable restrictions on your business. You may have no other choice but to go to local courts, which may be biased against foreign companies, corrupt or inefficient. You may be unable to get full — or any — compensation. You could potentially have recourse to diplomatic protection, but depending on your state of origin and the relations between your own state and the host state, diplomatic protection may be completely inadequate to address your grievances. Further, a private party has no access to state-to-state dispute resolution, which in any event would turn your business problem into a political issue.
ISA could give you the power to avoid these risks by taking your dispute to a neutral forum, where impartial arbitrators will decide your case based on predetermined clear and transparent rules.
What protections does ISA offer?
Depending on the underlying treaty, law or contract that contains an ISA provision, ISA may offer you many benefits that you cannot get elsewhere. Some of the most important benefits are the guarantees found in ISA agreements, which usually include:
- Fair and equitable treatment standard of protection: This means that the host state must act in good faith, respect your legitimate expectations, provide due process and avoid arbitrary or discriminatory measures. This guarantee protects you from unfair or abusive treatment by the host state that could harm your investment.
- Full protection and security: This means that the host state must protect your investment from violence or harassment by state or non-state actors under certain conditions. This ensures that your investment is safe from physical threats or attacks in accordance with international law. This standard may also extend to include legal protection and security.
- National treatment standard of protection: This means that the host state cannot discriminate against you in favour of domestic investors in similar situations. This guarantees that you have a level playing field with local competitors.
- Most favoured nation treatment standard of protection: This means that the host state cannot discriminate against you in favour of other foreign investors in similar situations. This allows you to benefit from the best treatment that the host state has given to other foreign investors.
- Protection from expropriation without full, prompt and adequate compensation: This means that the host state cannot take or substantially interfere with your property rights without paying adequate compensation. This ensures that you are not deprived of your investment without fair compensation.
- Free transfer of capital: This means that you have the right to freely transfer funds related to your investment in and out of the host state without undue restrictions or delays. This enables you to manage your cash flow and profits efficiently.
The above list is an example of the guarantees and rights that are often contained in ISA agreements. The actual language of the underlying ISA agreement must be examined, however, to understand the full scope of the protections provided to the qualified investors.
If the host state violates any of these rights, you may be able seek remedies such as:
- Declaratory relief: This is a statement by the arbitral tribunal that the host state has breached its obligations under the ISA agreement.
- Compensation: This is money awarded to you for the harm suffered as a result of the host state’s breach. This covers your losses and damages caused by the host state’s actions.
- Restitution: This is an order by the arbitral tribunal that the host state restores the situation that existed before its breach, for example by returning expropriated property or revoking unlawful measures. This puts you back in the position you had been before the host state’s interference.
- Interest: This is an additional amount awarded to you to account for the time value of money between the date of breach and the date of payment. This compensates you for the delay in receiving your money.
- Costs: This is an allocation by the arbitral tribunal of the legal fees and expenses incurred by both parties in relation to the arbitration proceedings. This may reduce your costs or even make the host state pay for them.
Not all the above listed remedies may be available to the qualified investors.
Who is eligible to benefit from ISA?
To be considered a qualified investor and benefit from ISA under a bilateral investment treaty, a foreign entity or person usually needs to meet at least two criteria: (1) be a national of a state that is a party to the relevant treaty containing the ISA provision, and (2) have made an investment in the host state in accordance with the definition of investment in the treaty and during the eligible period of time. The definition of investment may vary from treaty to treaty, but it usually covers assets such as property, shares, contracts, intellectual property rights and loans.
One of the most common instruments for arbitrating ISA disputes is the International Centre for Settlement of Investment Disputes (ICSID) Convention. Under Article 25 of the ICSID Convention, an individual investor must comply with both the ICSID Convention and the investment treaty in order to be eligible to bring a claim against the host state. The ICSID Convention also requires that both the home state and the host state of the investor are parties to the ICSID Convention.
How does ISA work?
ISA works by following a set of procedural rules agreed by both parties or specified in the ISA agreement. The most commonly used rules are those of:
- The International Centre for Settlement of Investment Disputes (ICSID): This is an autonomous institution established by a multilateral treaty under the auspices of the World Bank. It administers arbitrations between investors and states that are parties to its convention or have consented to its jurisdiction. It also provides facilities and support for conciliation and mediation proceedings. ICSID awards are binding and enforceable as if they were final judgments of domestic courts in any ICSID contracting state.
- The United Nations Commission on International Trade Law (UNCITRAL): This is a subsidiary body of the UN General Assembly that develops harmonized legal standards for international trade and commerce. It has adopted a set of arbitration rules that can be used by parties in any type of arbitration, including ISA. UNCITRAL arbitrations are usually administered by an arbitral institution chosen by the parties, such as the Permanent Court of Arbitration (PCA) or the International Chamber of Commerce (ICC), ICSID, etc. Alternatively, the parties may choose to forego an institutional arbitration and decide to have an arbitration administered by the arbitral tribunal itself. UNCITRAL awards are subject to recognition and enforcement under domestic laws. Recognition and enforcement may be available under the New York Convention, a multilateral treaty that facilitates the cross-border enforcement of arbitral awards in over 160 states, to the extent the country where recognition and/or enforcement is sought is party to the New York Convention.
The typical steps involved in an ISA proceeding are:
- Notice of dispute or Trigger Letter: This is a letter sent by the foreign investor to the host state notifying it of the existence of a dispute and the intention to submit it to arbitration, subject to an amicable resolution of the dispute through negotiations. It usually contains a brief description of the facts, the legal basis and the relief sought by the foreign investor. It may also invite the host state to engage in negotiations or consultations to try to settle the dispute amicably. Should the negotiations fail, the investor may be entitled to proceed to the next step. Depending on the underlying ISA mechanism, the investor and the host state may be required to engage in the negotiations for a certain period, usually 6 to 12 months.
- Notice of arbitration: This is a document filed by the foreign investor with the arbitral institution or directly with the host state initiating the arbitration. It usually contains more detailed information about the parties, the dispute, the applicable law, the arbitration agreement and the proposed arbitrators.
- Constitution of the arbitral tribunal: This is the process of appointing the arbitrators who will decide the dispute. The number and method of appointment of arbitrators may vary depending on the arbitration rules and the ISA agreement. Typically, each party appoints one arbitrator, and the two party-appointed arbitrators appoint a third arbitrator as the president of the tribunal. Alternatively, a single arbitrator may be appointed by agreement of the parties or by an appointing authority designated by the arbitration rules or the ISA agreement.
- Written submissions/pleadings: These are documents filed by both parties with the arbitral tribunal setting out their factual and legal arguments on jurisdiction, liability and damages. They are usually accompanied by documentary evidence, witness statements and expert reports. The number and sequence of written submissions may vary depending on the arbitration rules and the procedural timetable agreed by the parties or fixed by the tribunal. Written submissions are often accompanied by documentary discovery where the parties request documents from each other to support their case.
- Oral hearing: This is a session held by the arbitral tribunal where both parties present their oral arguments and examine their witnesses and experts. The oral hearing may also include opening and closing statements, questions from the tribunal and submissions on procedural matters. The duration and format of the oral hearing may vary depending on the arbitration rules and the preferences of the parties and the tribunal. The oral hearing provides an opportunity for the parties to present their case in person and for the tribunal to clarify any issues or ask any questions it may have.
- Award: This is a decision rendered by the arbitral tribunal resolving all or part of the dispute. It usually contains a summary of the facts, a statement of reasons for each decision on jurisdiction, liability and damages, and an order for relief. The award may be final or interim, binding or non-binding, depending on the arbitration rules and applicable law. The final award may be annulled (ICSID) or set aside under certain limited grounds.
- Enforcement: This is a process where one party seeks to enforce an award against another party in a national court or other competent authority. The enforcement may be challenged on limited grounds such as lack of jurisdiction, violation of due process or public policy. The enforcement procedure may vary depending on applicable law and international treaties such as New York Convention.
It must be said that each arbitration is different, and the above-listed steps may significantly vary depending on the case. For example, certain issues may be bifurcated or trifurcated into separate stages, which adds steps to the arbitration process described above.
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