Procedural Hurdles of Counterclaims in Investment Treaty Arbitration

Keywords: counterclaims, investment arbitration, ISDS, jurisdictional competence

Introduction

Counterclaims are common in arbitration proceedings. However, in investment treaty arbitration (‘treaty arbitration’) they are rarely accepted, even when accepted, counterclaims have fallen outside the jurisdictional competence of arbitral tribunals. In this post, I will briefly analyse the difficulties of counterclaims in treaty arbitration. To understand why counterclaims have been unsuccessful, this post will first describe the nature of investment treaties as it essential to understand the core purpose of these treaties. Thereafter, the mandate and jurisdiction of the tribunal will be explained, before discussing why counterclaims fail in treaty arbitration. Finally, this post will conclude with some parting remarks.

Inherent Nature of Investment Treaties

The regime of international investment law comprises of over three thousand trade and investment agreements. Although concluded between sovereign States, the true beneficiaries are foreign private investors, as they are granted procedural and substantive guarantees under these agreements. Thus, by its very nature, trade and investment agreements are asymmetric in favour of foreign private investors.

Under the traditional norm of international law, private actors were deprived of international legal personality. Therefore, the interest of foreign private investors was assumed by their home States as a matter of diplomatic protection. However, with the evolution of international law, the rights of private persons have now been recognised through treaties and jurisprudence in their personal capacity. [1] As a consequence, the invocation of diplomatic protection has become increasingly rare.

The protection of foreign private investors was according to the minimum standard of treatment for aliens under the customary international law; however, with the proliferation of trade agreements and investment treaties, additional guarantees have been introduced to safeguard the interest of foreign private investors. One being dispute resolution clauses, where an eligible investor is given the option to bring a claim against the host State before a neutral forum, often referred to as international arbitration under the Investor-State Dispute Settlement (ISDS) mechanism. [2]

Competence of ISDS Tribunals

Consent is central to any form of international adjudication, including investment arbitration. In treaty arbitration, consent of the host State is derived from the ISDS clause in a trade or an investment agreement concluded with the home State of the foreign private investor. However, consent of the foreign private investor can only be established when the arbitration proceeding is initiated against the host State. After which an ISDS tribunal will have the required consent of both the disputing parties to adjudicate over their dispute.

It is extremely rare for tribunals to adjudicate ‘any dispute’ that may arise between the disputing parties. [3] The jurisdiction of the tribunal is limited to disputes that fall within the consent of the disputing parties. For instance, the International Centre for Settlement of Investment Disputes (‘ICSID’) convention provides:

“The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment […] which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent […].” [4]

Therefore, jurisdiction rationae materiae of an ICSID tribunal will be limited to disputes that arise directly out of an investment, which falls within the ‘direct consent’ of the disputing parties. As for claims, ISDS tribunals have also entertained contractual claims in addition to treaty claims through umbrella clauses in treaty arbitration. The Annulment Committee in Vivendi Universal distinguished a contractual breach as a violation of national laws that poses a separate legal personality than a treaty breach, which is a violation of international law. [5] However, it should be noted that elevating contractual claims to the treaty level have been a contentious issue, and such claims are assessed on a case by case basis in light of the treaty in question.

Counterclaims in Treaty Arbitration

A counterclaim is a claim that is directly related to the primary claim of the claimant-investor, which is determined on its own independent evidence and consent. [6] When an ISDS claim is based on non-treaty arbitration, then the issues related to the asymmetric nature of the regime do not arise, as the rights and duties of both parties are defined in the contract. However, in treaty arbitration, claimant-investors have objected to counterclaims of respondent-State by asserting that such a right does not exist in treaty arbitration. [7]

Given the specificity of the regime, and investment treaties generally lacking explicit provision for counterclaims, tribunals have been reluctant to accept counterclaims. Nevertheless, jurisdiction can be established indirectly, as counterclaims are seen as a procedural right, common to almost all arbitration rules. For example, the ICSID Arbitration Rule 40(1), which should be read in conjunction with article 46 of the ICSID convention notes:

“[…] party may present an incidental or additional claim or counter-claim arising directly out of the subject-matter of the dispute, provided that such ancillary claim is within the scope of the consent of the parties and is otherwise within the jurisdiction of the Centre.”

If such a right exists, then consent to ICSID jurisdiction should establish ipso facto consent of the claimant-investor to a counterclaim. However, the wording of the dispute resolution clause in the treaty is vital, as the precise scope of the clause will determine the jurisdiction of the tribunal. The Metal-Tech tribunal held that non-restrictive dispute resolution clauses will give tribunals jurisdiction over a counterclaim. [8] Furthermore, the Urbaser tribunal noted that host States in addition to their obligations, do enjoy procedural rights. [9] However, if the jurisdictional clause limits ratione materiae to specified claims, then the consent of the claimant-investor cannot be expanded to counterclaims of the host State. [10] Whereas, if a dispute resolution clause notes ‘all disputes arising out of an investment’, then the claimant-investor’s consent to arbitration can be expanded to counterclaims, provided there is sufficient nexus between the subject-matter of the primary claim and the counterclaim. [11]

While consent of the claimant-investor to a counterclaim is vital, it is only half of the jurisdictional battle. It is equally important that the counterclaim is related to the primary claim, which is the admissibility test. For example, the Saluka tribunal held that the board ISDS clause in the treaty gave them jurisdiction over the counterclaim. However, the tribunal held that the counterclaim was inadmissible as it related to non-compliance of national laws by the claimant-investor. [12] This decision has been rightly criticised, when tribunals have jurisdiction over ‘all claims arising out of an investment’, then the scope of a counterclaim is significantly broad. Accordingly, jurisdiction ratione materiae over counterclaims should be extended to counterclaims whatever the legal nature, provided the requisite nexus “between the counterclaim and the investment rights forming the object of the primary claim” is satisfied.[xiii] Therefore, the jurisdictional success of a counterclaim will not only depend on the consent of the disputing parties but also, whether the counterclaim bears sufficient nexus with the primary claim.

Points for Consideration

Although seen as a procedural right, counterclaims have failed in treaty arbitration for two reasons. First, due to restrictive ISDS clauses, consent of the claimant-investor cannot be established. Second, even when accepted, counterclaims fail to meet the requisite nexus with the primary claim of the claimant-investor. This could be attributed to the asymmetric nature of investment treaties as obligations under these treaties are for host States, not for the foreign private investor. However, it should be noted that the investment treaty regime is changing as new treaties are emerging with rights and obligations for both parties. Therefore, it will be interesting to observe how ISDS tribunals will deal with counterclaims in the future.

ENDNOTES

[1] Ilias Bantekas and Lutz Oette, International Human Right Law and Practice (2nd edn CUP 2016), pp. 762-65.

[2] Christop Schreuer, ‘Investment Arbitration’ in C Romano, K J Alter and Y Shany, International Adjudication (OUP 2013), pp. 296-97.

[3] Filip Balcerzak, Investor-State Arbitration and Human Rights, (Brill/Nijhoff 2017), pp. 100-01.

[4] Convention on the Settlement of Investment Disputes between States and Nationals of Other States (entered into force 14 October 1966), Article 25(1) (ICSID).

[5] Compañia De Aguas Del Aconquija S.A. and Vivendi Universal vs the Argentine Republic, Decision on Annulment, ICSID Case No. ARB/97/3, (3 July 2002), ¶ 95 and 96.

[6] Michael Pryles and Jeffrey Weincymer, ‘Multiple Claims in Arbitrations Between the Same Parties’ in International Arbitration Congress: 50 Years of the New York Convention (Kluwer Law International 2009), pp. 449-455.

[7] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, Award, ICSID Case No. ARB/07/26, (8 December 2016), ¶ 1120.

[8] Metal-Tech Ltd. vs The Republic of Uzbekistan, Award, ICSID Case No. ARB/10/3, (4 October 2013), ¶ 410.

[9] Urbaser (n 7) ¶ 1184.

[10] Z Douglas, The International Law of Investment Claims (CUP, 2009), p. 258.

[11] ibid.

[12] Saluka Investments BV vs Czech Republic, Decision on Jurisdiction over the Czech Republic’s Counterclaim, UNCITRAL Arbitral Tribunal (PCA), (7 May 2004), ¶ 78-80.

[13] Douglas (n 10) pp. 262-63.

Ishan Das is an India-qualified lawyer who graduated from Mumbai Univeristy. He has recently pursued his LLM in International Arbitration & Business Law from Erasmus Universiteit Rotterdam.

The views and opinions expressed in the article are those of the author(s) solely and do not reflect the official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.