Annulled Awards as Persuasive Precedent in Investment Arbitration

Keywords: annulment, investment arbitration, precedent, ICSID, arbitral awards

Introduction

In the context of general public international law, judicial and arbitral decisions constitute ‘subsidiary means for the determination of rules of law’[1] On the basis of this assertion and despite the absence of any rule of precedent in general international law and/or in the specific investment arbitration system,[2] investment tribunals “concur on the need to take earlier cases into account.”[3] Against this background, the present paper examines whether annulled arbitral awards could constitute sources of international investment law. The paper analyses and eventually supports the view that a partially or fully annulled arbitral award can be relied upon by a tribunal in support of its reasoning as sui generis persuasive precedent.

The Scope and Effects of Annulment

In principle, the scope of the annulment review is determined by the law of the seat of the arbitration. In ICSID arbitrations, due to the lack of a seat in its traditional definition, annulment is governed by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention”), while in non-ICSID arbitrations, annulment is governed by the law of the seat.[4] The review process, either within or outside the ICSID framework, is essentially one of annulment – and not of ordinary appeal[5] – based on grounds exhaustively listed either in the ICSID Convention or in national arbitration laws.[6] In particular, Article 52 of the ICSID Convention defines the limits and purpose of the remedy on the basis of a model of limited review, providing that an arbitral award may be annulled for limited reasons relating to arbitral nullity:[7]

(a) that the tribunal was not properly constituted;

(b) that the tribunal manifestly exceeded its powers;

(c) that there was corruption on the part of a member of the Tribunal;

(d) that there has been a serious departure from a fundamental rule of procedure; or

(e) that the award has failed to state the reasons on which it is based.

The limited grounds provided for annulment[8] result in annulment being construed as an exceptional remedy of limited scope[9] which turns against the “legitimacy of the process of decision”,[10] and not against its substantive correctness.[11] The legitimacy of the process of decision relates, inter alia, to the adjudicative body (i.e. whether it has been properly constituted, exceeded its powers, and/or been corrupt) and the procedural due process (i.e. whether the fundamental rules of procedure have been observed, whether the decision is reasoned), while the substantive correctness relates to the correct “determination of the facts and the application of the law to those facts”.[12] Annulment thus aims at rectifying “procedural errors in the decisional process”[13] and “violation[s] of the fundamental principles of law governing the […] proceedings”.[14] It “represents a control mechanism that ensures that a decision has remained within the framework of the parties’ agreement to arbitrate and is the result of a process that was in accord with basic requirements of fair procedure”,[15] aiming at safeguarding the integrity and not the outcome of the arbitration proceedings.[16]

When deciding an application for annulment, ad hoc committees and national courts are restricted to an assessment of the legitimacy of the award and not of its correctness,[17] thus having the following options available: either to reject the application for annulment or to annul the award, in whole or in part.[18] No amendment, modification, substitution of the award,[19] or ruling on the merits is permitted, and neither ad hoc committees nor national courts may operate as courts of appeal.[20] Annulment is not an appeal mechanism,[21] it does not constitute “an inquiry into the substance of the award”,[22] and it cannot correct “alleged errors of fact or law”.[23] Annulment essentially offers procedural protection by ensuring “that the resulting award is truly an ‘award,’ i.e., a result arrived at fairly, under due process and with transparency, and hence in the basic justice of which parties will have faith.”[24]

Should one or more grounds for annulment be upheld, the original award is invalidated, thus deprived of any legal force.[25] Once an award has been set aside, it ceases to be legally existent and it can be argued that there is no longer any award to be taken into consideration, as a legal authority or otherwise, in support of a tribunal’s reasoning. [26]

Annulled Arbitral Awards as Persuasive Precedent

In principle, arbitral awards may be taken into account by another arbitral tribunal either as res judicata, provided that the constituent elements of res judicata, namely the triple identity test, are satisfied [i.e. identity of parties, legal grounds (causa petendi) and the relief sought (petendi)],[27] or as precedent.[28] In that context, the question arises whether and, if so, in which form may an annulled award be taken into account by an arbitral tribunal in support of its reasoning.

Following annulment, the award, or any annulled part thereof, is deprived of its res judicata effect,[29] thus forfeiting its binding force and finality.[30] Given that annulment is a safeguard against a violation of the fundamental principles of law governing arbitral proceedings, an annulled award is deprived of its binding and res judicata effects since no party shall be bound by an award that has been rendered in violation of fundamental procedural principles. Consequently, even supposing that the triple identity test is satisfied, annulled awards may not be invoked as res judicata since their binding effect is vacated by virtue of a successful application for annulment.

Yet, an annulled award, albeit deprived of its binding force, maintains a sui generis persuasive doctrine of precedent. Annulment is an action based on procedural grounds concerning the legitimacy of the process of decision, and as such, even following a successful application thereof, the substantive correctness of the award remains unaffected.[31] In fact, when a party requests the annulment of an arbitral award, it seeks not a finding that the interpretation of the law by the tribunal was incorrect, or that the tribunal failed to correctly ascertain the facts or to correctly appreciate the evidence, but a finding that the award has been rendered following an incorrect decisional process.[32]

Moreover, as with every repressive remedy, the effect of annulment is limited to the grounds invoked by the requesting party.[33] Taking into account that the grounds for annulment relate to the procedural legitimacy of the decisional process and not to the substantive correctness of the decision per se, even following annulment, the substance of the award, namely the tribunal’s findings on the merits, remain unaffected, due to their “immunity from judicial review”.[34] As such, annulment nullifies the binding and res judicata effect of the award, but not its substantive validity or the persuasiveness of its legal reasoning.

Conclusion

By consenting to international investment arbitration, the parties agree that the award to be rendered will be final and binding, in the sense that it will be construed as being correct in its substance, irrespective of any errors in the identification of the facts or the application of the law to such facts.[35] Annulment is a limited exception to the principle of finality that safeguards the protection of the parties in cases of illegitimate decision-making processes. It does not constitute an appeal against the substantive findings of the tribunal. The content of the award is final and the only remedy available to the parties is recourse against the legitimacy of the decision-making process.

Consequently, an annulled arbitral award, though not binding, can be considered by the tribunal to the extent that it “sheds any useful light on the issues that arise for the decision”[36] in the case at issue. It will thus be considered as ‘persuasive precedent’, being “a decision that is not binding but is entitled to respect and careful consideration”.[37] That is because despite the absence of a rule of stare decisis in international investment arbitration, arbitral tribunals are allowed to share the interpretation given to particular provisions by other tribunals or ad hoc committees, provided that “the interpretation is well founded in the context of the Convention and in harmony with applicable international jurisprudence”.[38] In fact, in circumstances that are comparable and/or identical, the same line of reasoning as prior tribunals is to be followed provided that such reasoning “is persuasive and illustrative of the legal standards applied in [relevant] cases”.[39] Thus, although each case must be evaluated in view of its particularities, “[arbitral] precedents constitute examples of practice, which must be taken into consideration”,[40] especially in cases where they reflect a jurisprudence constante,[41] not due to their binding effect, but because they are considered legally correct. Under any circumstances, “cautious reliance on certain principles developed in prior awards, as persuasive authority, may advance the rule of law, which in turn may serve predictability”,[42] contribute to the harmonious development of investment law and ensure the sound administration of justice and the coherence of the system. [43]

ENDNOTES

[1] Statute of the International Court of Justice, 33 UNTS 993 (1945) Article 38; Sempra v. Argentina, ICSID Case No. ARB/02/16, Decision on Objections to Jurisdiction, 11 May 2005, para 147. [2] C. Schreuer et al, ‘A Doctrine of Precedent?’, in P. Muchlinksi et al, The Oxford Handbook of International Investment Law, (2008), p. 1189 et seq. See also, inter alia, AES v. Argentina, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, para. 23; Daimler v. Argentina, ICSID Case No. ARB/05/1, Award, 22 August 2012, para. 52. [3] G. Kaufmann-Kohler, ‘Arbitral Precedent: Dream, Necessity, or Excuse’: The 2006 Freshfields Lecture, Arbitration International, (2007), 23 AI 3, p. 368; O. Fauchald, ‘The Legal Reasoning of ICSID Tribunals’, (2008), 19 EJIL, p. 303. [4] C. Dugan, et al, ‘Investor-State Arbitration’, (OUP, 2008) , Chapter XX – Annulment and Set Aside, p. 627. [5] Vivendi v. Argentine, ICSID Case No. ARB/97/3, Decision on Annulment, 3 July 2002, para. 62; CDC v. Seychelles, ICSID Case No. ARB/02/14, Decision on Annulment, 29 June 2005, para. 34; Soufraki v. United Arab Emirates, ICSID Case No. ARB/02/7, Decision on Annulment, 5 June 2007, paras. 20, 24; Sempra v. Argentine, ICSID Case No. ARB/02/16, Decision on Annulment, 29 June 2010, para. 73; Adem Dogan v. Turkmenistan, ICSID Case No. ARB/09/9, Decision on Annulment, 15 January 2016, para. 28 [6] Enron v. Argentine, ICSID Case No. ARB/01/3, Decision on Annulment, 30 July 2010, para. 237; Sociedad v. Chile, ICSID Case No. ARB/04/7, Decision on Annulment, 10 December 2010, para. 236. [7] M. Reisman, ‘The Breakdown of the Control Mechanism in ICSID Arbitration’, (1989), 1989 DLJ 4, p. 754. [8] See Article 52 of the ICSID Convention, as well as, inter alia, Article 34 of the UNCITRAL Model Law, Article 190 of the Swiss Federal Statute on Private International Law, Article 1492 of the French Code of Civil Procedure. Please note, however, that Section 69 of the English Arbitration Act provides that an award may be subject to appellate review by the English courts for substantive errors of law. [9] Consortium RFCC v. Morocco, ICSID Case No. ARB/00/6, Decision on Annulment, 18 January 2006, para. 223; Tza Yap Shum v. Peru, ICSID Case No. ARB/07/6, Decision on Annulment, 12 February 2015, para. 112. [10] D. Caron, ‘Reputation and Reality in the ICSID Annulment Process: Understanding the Distinction between Annulment and Appeal’, (1992), 7 ICSID FILJ, p. 24. CDC v. Seychelles (n 5), para. 34; MCI v. Ecuador, ICSID Case No. ARB/03/6, Decision on Annulment, 19 October 2009, para. 24. [11] Mitchell v. Democratic Republic of the Congo, ICSID Case No. ARB/99/7, Decision on Annulment, 1 November 2006, para. 19; MTD v. Chile, ICSID Case No. ARB/01/7, Decision on Annulment, 21 March 2007, para. 54. [12] Caron (n 10), p. 24. [13] CDC v. Seychelles (n 5), para. 34; Updated Background Paper on Annulment for the Administrative Council of ICSID, 5 May 2016, paras. 7 and 71. [14] Updated Background Paper on Annulment (n 13), paras. 7 and 71. [15] Alapli v. Turkey, ICSID Case No. ARB/08/13, Decision on Annulment, 10 July 2014, para. 32; Tulip v. Turkey, ICSID Case No. ARB/11/28, Decision on Annulment, 30 December 2015, para. 41. [16] Dogan v. Turkmenistan (n 5), para. 28; Soufraki v. UAE (n 5), para. 20. [17] MCI v. Ecuador (n 10), para. 24. [18] Sempra v. Argentine (n 5), para. 73.

[19] MTD v. Chile (n 11), para. 54. [20] C. Schreuer, ‘From ICSID Annulment to Appeal Half Way Down the Slippery Slope’, The Law and Practice of International Courts and Tribunals, (2011) Vol. 10, p. 212. Klöckner v. Cameroon, ICSID Case No. ARB/81/2, Decision on Annulment, 3 May 1985, para. 61; Amco v. Indonesia (Amco I), Decision on Annulment, 16 May 1986, paras. 23, 38-44; Amco v. Indonesia (Amco II), Resubmitted Case: Decision on Annulment, 3 December 1992, paras. 1.14, 7.19, 8.08. [21] Klöckner v. Cameroon (n 20), para. 93; Soufraki v. UAE (n 5), para. 20. [22] A. Broches, ‘Observations on the Finality of ICSID Awards” in Selected Essays: World Bank, ICSID, and Other Subjects of Public and Private International Law (1995), ICSID FILJ, p. 298. [23] Alapli v. Turkey (n 15), para. 232. [24] CDC v. Seychelles (n 5), para. 36 [25] Caron (n 10), p. 23. [26] N. Blackaby, C. Partasides et al., ‘Redfern and Hunter on International Arbitration’, (OUP, 6th edition, 2015), paras. 10.89-10.92; G. Born, ‘International Arbitration: Law and Practice’, (Kluwer Law International, 2nd edition 2015), p. 1195. [27] B. Hanotiau, ‘The Res Judicata Effect of Arbitral Awards’, Complex Arbitrations – Perspectives on their Procedural Implications, ICC International Court of Arbitration Bulletin, Special Supplement 2003, pp. 43 et seq; S. Schaffstein, ‘The Doctrine of Res Judicata before International Arbitral Tribunals’, (2012). [28] P. Duprey, ‘Do Arbitral Awards Constitute Precedents? Should Commercial Arbitration be Distinguished in this regard from Arbitration based on Investment Treaties? in E. Gaillard et al Towards a Uniform International Arbitration Law?, 2005, pp. 251 et seq; M. Weidemaier, ‘Toward A Theory of Precedent in Arbitration’, (2010) 51W&M LR, pp. 1895 et seq; P. Norton, ‘The Role of Precedent in the Development of International Investment Law’, (2018) 33 ICSID Review 1, pp. 280–301. [29] Updated Background Paper on Annulment (n 13), para. 69; MTD v. Chile (n 11), para. 54; CMS v. Argentine (n 5), para. 44. [30] Updated Background Paper on Annulment (n 14), para. 69; Amco v. Indonesia (Amco II) (n 21), para. 1.20. [31] Klöckner v. Cameroon (n 20), para. 83; Amco v. Indonesia (Amco I) (n 20), ICSID Case No. ARB/81/1, Decision on Annulment, 16 May 1986, para. 23; Amco v. Indonesia (Amco II) (n 20), ICSID Case No. ARB/81/1, Decision on Annulment, 17 December 1992, paras. 1.17-1.18. [32] Broches (n 22), p. 324. See also CDC v. Seychelles (n 5), para. 34; Soufraki v. UAE (n 5), para. 24. [33] Amco v. Indonesia (Amco II) (n 20), para. 1.17. [34] Dugan (n 4), p. 627. [35] Caron (n 10), p. 25. [36] RosInvestCo v. Russia, SCC Case No. V079/2005, Final Award, 12 September 2010, para. 285; UP and CD v. Hungary, ICSID Case No. ARB/13/35, Decision on Preliminary Issues of Jurisdiction, 3 March 2016, para. 148. [37] Black’s Law Dictionary, 7th Edition, 1999, p. 1215. [38] Amco v. Indonesia (Amco I) (n 20), para. 44 [39] Metalpar v. Argentine, ICSID Case No. ARB/03/5, Decision on Jurisdiction, 27 April 2006, para. 50. [40] Mitchell v. Congo (n 11), Decision on the Stay of Enforcement of the Award, 30 November 2004, para. 23. [41] Daimler v. Argentine (n 2), para. 93; Murphy v. Ecuador (II), PCA Case No. 2012-16, Final Partial Award, 6 May 2016, para. 520. [42] ADC v. Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2016, para. 293. [43] Saipem v. Bangladesh, ICSID Case No. ARB/05/07, Decision on Jurisdiction, 21 March 2007, para. 67; Cargill v. Poland, ICSID Case No. ARB(AF)/04/2, Final Award, 29 February 2008, para. 224.

Maria Paschou is an International Arbitration Trainee at Hanotiau & van den Berg. She holds an LL.M. in Public International Law from the University of Athens and the MIDS LL.M. in International Dispute Settlement from the University of Geneva and the Graduate Institute for International and Development Studies. She used to work as an Associate in Lambadarios Law Firm (Athens, Greece).

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.