International Arbitration: A Key Protection for Foreign Investments

Transcription

1 Welcome to Our Fall 2006 Seminar Series: International Arbitration: A Key Protection for Foreign Investments October 10,

2 Speakers: John J. Kerr, Jr. Peter C. Thomas Robert H. Smit Janet M. Whittaker 2006 Simpson Thacher & Bartlett LLP. All Rights Reserved.

3 Introduction There is a growing trend towards using international arbitration to resolve cross-border disputes This is reflected in the increased case-load of the main international arbitration institutions, which together handle over 2,700 disputes annually ICC CIETAC requests for arbitration requests for arbitration requests requests LCIA requests for arbitration requests SIAC requests for arbitration requests AAA (ICDR) ICSID requests for arbitration 1996 total of 89 cases handled requests cases handled 3

4 Introduction The facts and figures reveal an international movement towards international arbitration, not just in the United States and Europe The growth in international arbitration goes handin-hand with the increase in international trade and foreign direct investment One issue we will discuss today is how international arbitration plays a central role in protecting cross-border investments 4

5 Introduction Recent surveys and reports confirm that international arbitration is the mechanism of choice for resolving cross-border disputes 5

6 Introduction 2006 survey by PricewaterhouseCoopers canvassed senior in-house counsel at leading corporations worldwide Covered a broad range of industry sectors, including manufacturing, energy, banking, construction, media, and insurance Almost 75% of in-house counsel surveyed stated a preference for using international arbitration 95% of corporations expect to continue using international arbitration to resolve cross-border disputes 6

7 Introduction 1998 survey by Cornell Institute on Conflict Resolution Surveyed senior in-house counsel of U.S. Fortune 1000 companies on views of arbitration and ADR 80% use arbitration to resolve litigation 7

8 Introduction The trend is set to continue Many international contracts include arbitration agreements The number of investment treaties is on the rise, under which international arbitration is the standard mechanism for dispute resolution 8

9 WHY IS INTERNATIONAL ARBITRATION THE DISPUTE RESOLUTION MECHANISM OF CHOICE? 9

10 What are the perceived advantages of international arbitration Faster? Less expensive? Neutrality? Enforceability of awards? Procedural flexibility? Procedural control? Confidentiality? 10

11 What are the perceived advantages of international arbitration Faster Less expensive Neutrality Enforceability of awards Procedural flexibility Procedural control Confidentiality 11

12 What are the perceived advantages of international arbitration Enhanced Enforceability of Awards Almost 140 countries are party to the New York Convention Enforcement of awards is simpler and more predictable than enforcement of court judgments Limited grounds for challenging an award Multilateral and bilateral investment treaties enhance this perception because the treaties require host States to honor awards 12

13 What are the perceived advantages of international arbitration Procedural Flexibility and Party Control Arbitrators have broad procedural powers and discretion under most modern arbitration statutes and commonly used arbitration rules Parties can influence and shape arbitration procedures Possibility of limiting costly and cumbersome procedures (e.g., depositions, document productions, etc.) Ability to select an arbitrator with desirable skills and cultural or legal background and to have significant input into selection of chair 13

14 What are the perceived advantages of international arbitration Other Important Advantages Confidentiality International arbitration is generally private, but not necessarily confidential Neutrality Mitigate the risk of a potential home court advantage or home country advantage 14

15 What are the perceived disadvantages? There are a number of stated concerns about international arbitration Arbitration is no longer considered necessarily faster and more cost-effective than litigation in all cases Arbitrators are still perceived, rightly or wrongly, to split the baby Perceived inability to obtain early determinations The possibilities for appealing an award are limited The potential for national court intervention in arbitration proceedings 15

16 DRAFTING ARBITRATION CLAUSES KEY STRATEGIES 16

17 Strategies for drafting arbitration clauses BASIC APPROACH Stick with model institution or ad hoc arbitration clauses Keep the clause as simple as possible Add provisions dealing with specific procedural issues, as strategically desirable Avoid over-legislating the arbitral process One size does not necessarily fit all 17

18 Strategies for drafting arbitration clauses WHAT KIND OF ARBITRATION? INSTITUTIONAL VS. AD HOC Institutional Appoint arbitrators and rule on challenges; set arbitrators fees Supervise the arbitral procedure In ICC arbitration, the Court reviews awards Ad hoc Use established rules (e.g., UNCITRAL, CPR) Do not draft procedure from scratch 18

19 Strategies for drafting arbitration clauses IDENTIFYING STRATEGIC INTERESTS Identify likely type of claim Identify likely position claimant or respondent? Draft arbitration clause to position for: Common law v. civil law tribunal Discovery needs Speed and enforceability of award vs. opportunity for delay Need for interim relief 19

20 Strategies for drafting arbitration clauses NECESSARY PROVISIONS Governing substantive law Place of arbitration Language of the arbitration Number of arbitrators 1 or 3 20

21 Strategies for drafting arbitration clauses POTENTIAL ADDITIONAL PROVISIONS Arbitrator qualifications Discovery Time limits Excluding remedies Emergency arbitral interim relief 21

22 WHAT ARE INVESTMENT TREATIES AND WHY DO YOU NEED TO KNOW ABOUT THEM? 22

23 What are investment treaties? Prior to the proliferation of investment treaties, when an investment went wrong, the investor s options were limited Attempt suit against the host State in its home courts Maybe arbitration based on an arbitration clause in an investment contract Diplomatic espousal of a claim Now, investment treaties typically confer a Direct right on investor to bring a claim against the State in international arbitration 23

24 What do investment treaties do? Two types of investment treaties: Multilateral (e.g., NAFTA, CAFTA) Bilateral (State to State) Bilateral investment treaties ( BITs ): Stimulate the flow of private capital and investment into contracting States 24

25 What do investment treaties do? 2004 Model U.S. BIT: Desiring to promote greater economic cooperation with respect to investment. Recognizing that agreement on the treatment to be accorded such investment will stimulate the flow of private capital and economic development Agreeing that a stable framework for investment will maximize effective utilization of economic resources and improve living standards. 25

26 What do investment treaties do? In return for stimulating investment, BITs provide for: International protection for investors International arbitration of disputes about investments A host State s offer/consent to arbitrate A procedure unilaterally activated by investor 26

27 Growth in BITs and investment treaty arbitrations EXPONENTIAL GROWTH OF BITS OVER RECENT DECADES From 1 BIT in 1959 to 2,400 worldwide today U.S. has signed BITs with over 45 countries (also NAFTA and CAFTA) For a complete list, see The first BIT award was made in 1990 (Asian Agricultural Products Ltd. v. Sri Lanka) To date, there have been more than 230 treatybased cases 27

28 Growth in BITs and investment treaty arbitrations EXPONENTIAL GROWTH OF INVESTMENT TREATY ARBITRATIONS SINCE THE 1990s Figure 1. Known investment treaty arbitrations, (cumulative and newly instituted cases, by year) a/ Cumulative number of cases ICSID Non-ICSID All cases cumulative 28

29 Growth in BITs and investment treaty arbitrations INVESTMENT TREATY ARBITRATIONS BY FORUM Figure 2. Disputes by forum of arbitration a/ 65 UNCITRAL ICSID (132) Non-ICSID (87) 13 4 SCC ICC Ad-hoc 5 29

30 What do investment treaties protect? EXPANSIVE PROTECTIONS FOR INVESTMENTS Broad scope of protection under BITs BITs cover a wide range of investments, such as: Equity Debt Investment contracts Tangible and intangible property Shares of stock and other ownership interests in companies Licenses and permits 30

31 Who do investment treaties protect? Many entities qualify as an investor Depends on the terms of each BIT Natural persons or legal persons of the nationality of, or constituted under the law of, a Contracting State Investors can include: Foreign controlling or minority shareholders of a local company Foreign indirect shareholders of a local company (i.e., notwithstanding intermediate corporate layers) A local company controlled by foreign investors 31

32 What protections do investment treaties provide? Substantive BIT protections include: Prohibition against expropriation without compensation Fair and equitable treatment Non-discrimination National and Most Favored Nation treatment Full protection and security Umbrella clauses treaty protection for breach of contractual rights Free transfer of funds 32

33 How have investors made use of these broad investment treaty protections in practice? RECENT EVENTS GIVING RISE TO INVESTMENT TREATY CLAIMS Argentina s currency devaluation following the country s economic crisis (CMS v. Argentina) A State s repudiation or default under long-term concession agreements (Azurix v. Argentina) Failure of a provincial authority to renew a license to conduct business (Tecmed v. Mexico) Interference with rights to exclusive broadcasting rights (CME v. Czech Republic) Denial of right to arbitrate (Dabhol) 33

34 How have investors made use of these broad investment treaty protections in practice? DABHOL We represented GE and Bechtel in the recovery of their investments in the Dabhol Power Project in India Largest foreign investment in India $7 billion GE and Bechtel were both 10% shareholders in a local project company created to own the project Dabhol Power Company ( DPC ) Aside from plant and machinery, DPC s main asset was a long-term PPA with the State Electricity Board 34

35 How have investors made use of these broad investment treaty protections in practice? 35 After the Project was largely complete, the State Electricity Board terminated the PPA Political unpopularity of the Project, especially as it was mostly foreign-owned DPC could not sell power elsewhere, as by law only the State Electricity Board could purchase and distribute the plant s power DPC commenced arbitration in London under the Project contracts At the state s request, each of the arbitrations was enjoined by Indian courts The effect was to deny DPC s contractual remedies

36 How have investors made use of these broad investment treaty protections in practice? Our recovery strategy involved a complex series of international arbitrations and ancillary litigation spanning 4 years Our goal: to maximize the investors recovery We achieved this by applying pressure on different parties at different points in time Two key steps in this strategy included: 1. OPIC/PRI arbitration 2. Mauritius-India BIT arbitration 36

37 How have investors made use of these broad investment treaty protections in practice? 1. OPIC/PRI Arbitration Political risk insurance policy issued by Overseas Private Investment Corporation Claim for expropriation of the Project under the policy denied by OPIC GE and Bechtel commenced an AAA arbitration against OPIC and won, recovering the full policy limits The award also provided political impetus to the U.S. government to apply pressure on India 37

38 How have investors made use of these broad investment treaty protections in practice? 2. Mauritius-India BIT Arbitration Mauritius-based GE and Bechtel subsidiaries launched a claim against the Indian government under the BIT The claim was for compensation, including lost profits, for several breaches of the BIT The anti-arbitration injunctions played a key role in the expropriation claim Settlement was reached before the final hearing on very favorable terms 38

39 The key role international arbitration plays in guaranteeing investment treaty protections CONSENT OF HOST STATE TO ARBITRATION IN A BIT PROVIDES THE INVESTOR WITH A POWERFUL TOOL All modern BITs give investors access to international arbitration of disputes relating to investments against the host State The State consents in advance in the BIT to arbitration, giving the investor an open offer to arbitrate 39

40 The key role international arbitration plays in guaranteeing investment treaty protections THE TYPICAL BIT TODAY PROVIDES A SMORGASBORD OF ARBITRATION OPTIONS FOR INVESTORS [A] disputing investor may submit the claim to arbitration under: the ICSID Convention, provided that both the disputing Party and the Party of the investor are parties to the Convention. the Additional Facility Rules of ICSID.; or the UNCITRAL Arbitration Rules 40

41 Arbitration under investment treaties presents strategic advantages Arbitration without privity of contract no need to seek the further consent of the host State Avoids risk of litigating in host State s courts No sovereign immunity concerns, unlike international litigation Potential for attributing acts of State agencies or entities controlled by the State to the State itself without having to prove agency or alter ego relationship (cf. Bancec standard) An alternative or counterpart to contractual arbitration, if treaty violation can be alleged Potentially favorable damages position 41

42 WHAT YOU SHOULD KNOW ABOUT ARBITRATING UNDER INVESTMENT TREATIES 42

43 Broad arbitration options THE RIGHT ARBITRATION OPTION FOR YOU 1. ICSID arbitration Institutional arbitration Established institutional framework and experienced administration Institutional costs set fee schedule An established panel of arbitrators Possibility of selecting outside candidates Fixed arbitrator fees 43

44 Broad arbitration options Limited Annulment Procedure Appeal submitted to an ad hoc committee Limited grounds for review (Article 52) Enhanced enforcement worldwide ICSID Convention explicitly states that an ICSID award is binding and enforceable in any Contracting Party State as if it were a final judgment of a court of that State (Article 54) Reliance on the New York Convention is not necessary 44

45 Broad arbitration options 2. Ad hoc arbitration under the UNCITRAL Rules Next most utilized dispute resolution option Advantage of confidentiality Well-tested rules of procedure, although resort to a court may be necessary if a party refuses to cooperate in the process (e.g., appointment of arbitrators) Enforcement under the New York Convention 45

46 Broad arbitration options 3. Other arbitration options Depends on the terms of the dispute resolution clause of the relevant treaty U.S.-Argentina BIT provides a wide choice ( any other arbitration institution, or in accordance with any other arbitration rules ) Possible options include: ICC arbitration (U.K.-Kazakhstan BIT) Arbitration Institute of the Stockholm Chamber of Commerce (e.g., Energy Charter Treaty, Article 26(4)(c)) 46

47 The key features of investment treaty arbitration DISTINGUISHING FEATURES OF INVESTMENT TREATY ARBITRATION Process and procedures of investment treaty arbitration overlap significantly with international commercial arbitration Nevertheless, there are some distinguishing features of which an investor should be aware 47

48 The key features of investment treaty arbitration Different or additional governing law BITs specifically envisage the application of international law to interpretation of treaty obligations Issues of contractual interpretation are determined by governing law of the investment contract 48

49 The key features of investment treaty arbitration Additional jurisdictional requirements and pitfalls Frequently an obligation to attempt conciliation and negotiation before arbitration Waiting periods are common E.g., Article VII.3(a), U.S.-Argentina BIT: ( provided that six months have elapsed from the date on which the dispute arose, the national or company concerned may choose to consent in writing to the submission of the dispute for settlement by binding arbitration ) 49

50 The key features of investment treaty arbitration Fork-in-the-road provisions BITs commonly include forum selection clauses obligating investors to choose either international arbitration under the BIT or litigation in municipal courts Can result in a waiver of right to international arbitration under the BIT 50

51 The key features of investment treaty arbitration E.g., Article VII, U.S.-Argentina BIT 2. the national or company concerned may choose to submit the dispute for resolution: (a) to the courts or administrative tribunals of the Party that is a party to the dispute; or (b) in accordance with any applicable, previously agreed dispute-settlement procedures; 3. (a) Provided that the national or company concerned has not submitted the dispute for resolution under paragraph 2 (a) or (b) [it may refer the dispute] to binding arbitration 51

52 HOW TO SPOT A POTENTIAL INVESTMENT TREATY CLAIM 52

53 Identifying an investment treaty claim CHECKLIST FOR ESTABLISHING WHETHER YOU HAVE A POTENTIAL BIT CLAIM Is there an applicable investment treaty? Starting point is to locate an applicable BIT or MIT Consider the location of the investment and the nationality or nationalities of the potential investor Investment treaties can be found at: aspx 53

54 Identifying an investment treaty claim Is there a qualifying investor with a qualifying investment? Check the terms of the investment treaty to see who and what is protected Has there been continuity of investment (e.g., following an assignment)? Does the BIT contain a fork-in-the-road clause? If so, has a BIT claim been precluded by steps taken in other proceedings? 54

55 Identifying an investment treaty claim Was the host State or a host State entity involved in the harmful conduct? Defendant is usually the investment s host State Host State is generally responsible for all of: Its own acts Acts of State sub-divisions or organs Acts of entities performing governmental functions Conduct of entities over which it exercises control 55

56 Identifying an investment treaty claim Does the conduct at issue violate one of the guarantees outlined in the BIT? Check to see what protections the BIT allows Same conduct can violate one or more treaty protections Does the BIT impose temporal restrictions on the protections guaranteed? Are disputes covered that arose before the treaty entered into force? 56

57 PRACTICAL TIPS FOR MAXIMIZING THE POTENTIAL FOR INVOKING INVESTMENT TREATY PROTECTIONS WHEN INVESTING ABROAD 57

58 Maximizing the potential to rely on investment treaty protections when investing abroad STRUCTURING A DEAL TO FALL WITHIN A BIT Ensure that the investment qualifies for protection Locate the investment vehicle in country with a favorable BIT with the host country Ensure that the relevant BIT is in force at the time the investment is made 58

59 Maximizing the potential to rely on investment treaty protections when investing abroad Ensure there is a qualifying investor with a qualifying investment Check the precise wording of the BIT on which you wish to rely e.g., treaties may require the investor to have legal personality exclude certain kinds of trusts or stiftungen 59

60 Maximizing the potential to rely on investment treaty protections when investing abroad MAXIMIZE YOUR DAMAGES CLAIM FROM THE OUTSET Provide in contract documents for consequences of investment failure by including, for example, a liquidated damages clause Particularly appropriate in the project finance and concession agreement contexts (e.g., Dabhol) Document that host State is aware of your anticipated revenues and profits from the investment Keep detailed records of all project-related expenditures and costs, as well as funds invested 60

61 Maximizing the potential to rely on investment treaty protections when investing abroad PRESERVE YOUR BIT CLAIM ONCE A DISPUTE ARISES Check whether the BIT contains a fork-in-theroad clause Avoid triggering the fork-in-the-road clause by participating in proceedings dealing with the same dispute either in the local courts; or in contractual arbitration or other forum 61

62 Questions YOUR QUESTIONS? 62

63 NEW YORK LOS ANGELES PALO ALTO WASHINGTON, D.C. HONG KONG LONDON TOKYO 63