6 September 2017 by Dispute Resolution Alert

The ABC of international investment arbitrations

Do you understand the difference between an international commercial arbitration and an international investment arbitration? Wait, is there any difference? The answer is yes. While both are alternative dispute resolution methods, that is where the similarities end.

An international investment arbitration in international law is akin to administrative law challenges found under domestic law. 

Characteristics that distinguish international investment arbitrations from international commercial arbitration

  • An investment arbitration only occurs as a result of a sovereign state’s conduct (policy changes, regulatory changes and so on) which affects a foreign investor’s investment. 
  • The parties to the investment arbitration are almost always sovereign states and foreign investors; 
  • An investment arbitration only flows from conduct by a sovereign state contemplated under:
  • a valid and enforceable international agreement between two or more sovereign states in compliance with each sovereign state’s constitutional requirements; 
  • a valid and enforceable investment agreement between a foreign investor and the sovereign state in compliance with the sovereign state’s constitutional requirements;
  • customary international law; or
  • domestic legislation which provides for access to investment arbitration.
  • the substantive basis for a foreign investor challenging the conduct of a sovereign state is generally based on a breach of:
  • a guarantee against expropriation of a qualifying investment; or
  • a guarantee of fair and equitable treatment of a foreign investor. 

In resolving these investment disputes, the substantive law is founded in international investment law and customary international law – not domestic law. In contrast, international commercial arbitration disputes are based on contracts with reference to a particular national law selected by the parties or resolved by conflict of law principles found under domestic law. 

  • In most instances, international investment agreements only permit foreign investors to initiate investment claims against a sovereign state – the state is not entitled or able to assert claims or counterclaims against the foreign investor. This is usually referred to as a “one-way” street arbitration. 
  • Investment arbitrations are often subject to a specialised legal regime under the International Centre for the Settlement of Investment Disputes (ICSID) that is more autonomous from national laws and courts than international commercial arbitration. This implies that the jurisdiction of national courts to review and set aside an ICSID arbitral award is removed and the ICSID annulment committee has exclusive jurisdiction to review and annul an ICSID arbitral award. There are, however, distinctions in respect of investment arbitrations under certain investment agreements where national courts will still retain jurisdiction to review and set aside arbitral awards. 
  • Most investment arbitrations awards are made public due to the involvement of the state as a party – transparency is a basic principle. This is in contrast with international commercial arbitrations where one of the deciding factors for parties is the private and confidential nature of the arbitration.

Investors’ last recourse against host states 

Tensions between a host state and foreign investors over policy and regulatory changes - such as expropriation of assets, additional royalties or taxes, onerous operating conditions - often act as catalysts for investment arbitrations. This is particularly common in sectors licenced by a host government (such as mining and energy, and telecommunications). 

During the life-cycle of a project in licenced sectors, it is inevitable that the bargaining power will shift from the investor (capital and skills) to the host government after the investment costs are sunk. This risk, particularly for the resource sector, is increased by the fact that more accessible (good quality) mineral and hydrocarbon reserves continue to dwindle. The result: increasing exploitation of minerals and hydrocarbons in regions with regulatory and political uncertainty. 

It is important for foreign investors to assess the regulatory and political risk associated with long-term projects, specifically whether recourse is available against a host state should its investment be materially impaired by the conduct of a state. When all other remedies fail, investment arbitration against a sovereign state is usually the last hope most investors have of enforcing their rights.

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