The Bits of Bilateral Arbitration Treaties (BATs):: Reflections from Investor-State Dispute Settlement (ISDS)

By Sarthak Malhotra

Mr. Gary Born proposed the idea of a ‘Bilateral Arbitration Treaty’ in his keynote speech on the occasion of the Kiev Arbitration Days titled as “BITs, BATs and Buts”. He proposed that the states could establish a regime whereby the commercial contractual disputes between parties of each state would be submitted to arbitration by default.

Gary Born_Bilateral Arbitration Treaty(BAT)_Criticism_Summary
Courtesy: http://www.legalservice.co.uk

Consent in Investment Arbitration and BITs

Like any other form of arbitration, Investment Arbitration is typically based on the consent of the host state and the investor. However, there are some peculiarities involved which need attention. There are three recognised ways to give consent in investment arbitration.

  1. A typical consent clause in an agreement between the parties. ICSID has developed Model Clauses to facilitate the drafting of consent clauses.[1] (contract based investment arbitration)
  2. A provision in the national legislation of the host State. This idea of a unilateral arbitration clause was first upheld in the case of SPP v. Egypt. Egypt’s consent to ICSID arbitration was found in Egypt’s foreign investment law which had an ‘open offer to arbitrate’.
  3. A treat between the host state and the investor’s State of nationality. Most BITs contain clauses offering arbitration as the mode of dispute resolution. Treaty-based investment arbitration). The first case to recognize and affirm treaty-based consent was Asian Agricultural Products Ltd (AAPL) v. Sri Lanka in 1990 under the investor-state arbitration provision in the Sri Lanka – UK BIT. Jan Paulsson describes this as “arbitration without privity”.[3]

A Primer on the Model Text of the ‘Bilateral Arbitration Treaty’ 

Drawing from the idea of BITs, Gary Born has suggested that the states could enter into a Bilateral Arbitration Treaty (BAT) providing for arbitration as the default mechanism to solve disputes between nationals or entities located in the territory of each contracting state arising from any commercial transaction carried out between those different nationals or entities. Albeit, the parties will have the right to opt out of arbitration and take recourse to national courts instead.

Born released the text of draft Model BAT recently.

The definition of “International Commercial Dispute” is modelled on the interpretation of the word ‘commercial’ given in Article I (1), UNCITRAL Model Law on International Commercial Arbitration. Consumer disputes, employment or labour disputes, domestic relations disputes, marital or child Custody disputes and inheritance disputes have been expressly excluded from the definition.

The treaty provides for a cooling off period/good faith discussions for a period of not less than thirty days, after which the dispute may be referred to arbitration pursuant to UNCITRAL Arbitration Rules.[4] This is subject to the opt-out provisions of Article 5(1) of the Model BAT.  An ‘International Commercial Dispute’ shall not be referred to arbitration if the Enterprises have expressly agreed in writing to exclude the application of the Treaty or arbitration pursuant to this Treaty or to resolve such dispute by arbitration pursuant to any other institutional arbitration rules or to take recourse to any other dispute resolution mechanism, for instance, the national courts of the contracting States.  Article 5(2) recognises the parties’ endeavours to resolve their disputes amicably, including by negotiations, conciliation, mediation, or any similar process, prior to initiating arbitral proceedings.

Article 3 of the Treaty obliges the courts of each State Party to refer the Enterprises that are involved in an International Commercial Dispute to arbitration at the request of one of the parties involved in the dispute. This obligation mirrors the obligation existing Article II of the New York Convention and Article 8(1) of the UNCITRAL Model Law on International Commercial Arbitration. The obligation extends to all judicial organs, administrative or other government tribunals, or any other body that exercises any adjudicative, judicial, or similar governmental authority delegated to it by a Party. [5]

The treaty provides for a definition of ‘Enterprise’, thus defining the scope of applicability of the treaty. It means any legal or juridical entity constituted or organized for profit, including a corporation, company, partnership, limited partnership, trust, sole proprietorship, joint venture, association, or similar organization, whether owned by private persons, private or governmental enterprises, or state or governmental bodies or entities. This definition has been adopted from the 2012 U.S. Model BIT. It should be noted that individuals/natural persons have not been included in the model definition. This has been left to the States’ discretion.

The Model BAT Text adopts Arbitration Rules of UNCITRAL, first adopted in 1976 and subsequently amended in 2010 and 2013. States could adopt other institutional arbitration rules as well.

BAT_Gary Born_Criticism_BIT_Summary_Model Text
Courtesy: Shutterstock.com

Article 4 states that the appointing authority for the arbitration shall be the Secretary-General of the Permanent Court of Arbitration. The number of arbitrators is fixed as one unless in exceptional cases the Secretary-General of the Permanent Court of Arbitration concludes that three arbitrators would be appropriate. This is a departure from the UNCITRAL Arbitration Rules where the default number of arbitrators is three.  The arbitral tribunal shall be obligated to make a final award within 18 months following constitution of the arbitral tribunal. However, this obligation is a ‘best efforts’ obligation. This strikes the right balance between the need to fix a time limit in principle and difficulty in prescribing one absolute time limit for all types of disputes. The assessment of non-performance of this obligation of best efforts should, therefore, call for a judgment based on a comparison with the efforts a reasonable person of the same kind would have made in similar circumstances.[6]

One of the most important lessons learned from Investment Arbitration is of confidentiality.

Many have advocated for a model procedural order on Confidentiality in International Arbitration for some time now. Michael Hwang[7] has been the most vocal amongst them. In Giovanna A Beccara and Others v. The Argentine Republic (2010), a tribunal composed of Pierre Tercier, Georges Abi – Saab, and Albert Jan Van den Berg decided that unless there exist an agreement of the Parties on the issue of confidentiality/transparency, the questions of confidentiality in ICSID Arbitrations should be decided on a case by case basis and, instead of tending towards imposing a general rule in favour or against confidentiality, the endeavour should be to try to achieve a solution that balances the general interest for transparency with specific interests for confidentiality of certain information and/or documents.

The Model BAT has tried to overcome this problem by providing that absent contrary agreement between the Enterprises party to the dispute, the arbitrations conducted pursuant to the Treaty shall be confidential. This obligation includes the following materials-

  1. All materials submitted in or created for the purpose of the arbitration;
  2. All documents produced by another Enterprise in the arbitration, not otherwise in the public domain;
  3. All awards, orders and other communications in the arbitration.

This duty of confidentiality is subject to the following exceptions-

  1. legal duty;
  2. To protect or pursue a legal right;
  3. To enforce or challenge an award in bona fide legal proceedings before a Court or arbitral tribunal.

These exceptions are based on the LCIA and SIAC rules and reflect the international practice. (See generally Dolling-Baker v Merrett [1990] 1 WLR 1205 & Ali Shipping Corporation v Shipyard Trogir [1997] EWCA Civ 3054)

Enforcement of Arbitral Awards

Article 6 provides for the recognition and enforcement of awards made pursuant to the treaty by making them subject to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. Article 6(1) obliges the courts of the States party to the Treaty to recognize awards final and binding and enforce them in accordance with the Treaty. This is modelled on Article III of the New York Convention.  Similar to Article III of the New York Convention, Article 6(2) provides that no state shall impose materially more onerous conditions or higher fees or charges on the recognition or enforcement of Arbitral Awards made pursuant to the Treaty than applicable to New York Conventions or national court judgments. The other ancillary provisions are also substantially similar to those existing under the New York Convention. The grounds for refusal of recognition and enforcement are also based on Article V of the New York Convention.

Comments

It is quite apparent that the Treaty’s basic character is providing a default mechanism for dispute resolution, and not a mandatory forum. This ensures that the consent is not dispensed away with. Moreover, the idea of constructed consent, as found in BITs has gained acceptance around the world. This is evidenced by the fact that the basis of consent invoked to establish ICSID jurisdiction in 61.8% of the cases registered under the ICSID Convention and Additional Facility Rules was BITs.  It has been argued elsewhere that the idea of arbitration envisages party consent to get into arbitration and undergo the process out of their own volition, not to get out of it. However, it needs to be reinforced that the arbitration clause of a BAT is merely a “statutory term” and can be excluded by way of an express contractual provision.[8] The treaty would only come into the picture when the parties have not expressed any intention, expressly or impliedly. The parties, after the dispute has arisen, can agree to take recourse to the national courts or not arbitrate under the treaty. Moreover, this criticism needs to be examined vis-à-vis the advantages arbitration has over litigation. It needs to be understood that arbitration is seen as the best available means of resolving international disputes since it is the most efficient and fair means of resolving disputes.

It is suggested that the state can go a step further and limit the scope of the BAT by providing for the monetary value of the disputes that will be subject to the BAT. But this is something we needn’t worry about right now.

The idea of Bilateral Arbitration Treaty, needless to say, is an unorthodox one and challenges the traditional foundations of arbitration. However, it is certainly not an idea that should be discarded right away. One should not be wary of adopting unorthodox and bold innovation merely because it challenges the existing constructs in law. One should remember the first lesson of the law school- Law should not be rigid or fixed.

The draft Model BAT can be accessed by clicking here. A commentary on the Model BAT’s provisions can be accessed by clicking here

______________________________________________________

[1]ICSID Model Clauses
[2]Southern Pacific Properties (Middle East) Limited v. Egypt  Case No. ARB/84/3 (Decision on Jurisdiction, 27 Nov. 1985) 3 ICSID Rep 112, p. 56, 59.
[3] See Paulsson, Arbitration Without Privity, 10 ICSID L. Rev. 232 (1995
[4] Article 2, Model BAT
[5] Article 1, Model BAT.
[6] The same principle is employed in the assessment of the duty of best efforts under Article 5.1.4, UNIDROIT Principles of International Commercial Contracts,2 010.
[7] “Model Procedural Order on Confidentiality (Goff Lecture 2010)” (Transnational Dispute Management Volume 8 Issue 2 May 2011); “A proposed Model Procedural Order on Confidentiality in International Arbitration: A Comprehensive and Self-Governing Code” (2012) Volume 29 Issue 2 Journal of International Arbitration pp138 – 170; “Confidentiality of Arbitration” LCIA India Newsletter (Volume 2, Issue 1, 2013)
[8]Duarte Gorjão Henriqueson , Bilateral Arbitration Treaties: A Few “Bits” More and No “Buts” Within the Portuguese Jurisdiction
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s