NEED FOR MULTILATERAL FRAMEWORK IN INVESTMENT ARBITRATION

FOR DISPUTE RESOLUTION.

INTRODUCTION

In the last two decades of the 20th century, due to the impact of globalization as well as
liberalization, there has been an increase in the free-flow of foreign investments, especially in
developing countries. Due to thatthis, great changes have taken place in the foreign investment
regime, mainly in the form of Bilateral and Multilateral Investment Treaties. These treaties have
had a significant impact on aspects such as national sovereignty, federalism, and public policy
decisions that relate ing to the health and environment of the host countries.

With the tremendous rise in the number of BITs and MITs, there is also an increase in the
amount of investment treaty arbitration. However, concerns have arisen within respect toof
inconsistent arbitral awards, lack of transparency, pParallel arbitration proceedings,
iIndependenceimpartiality and diversity in the and appointment of arbitrators, and delay in the
award making process.i1

In the past two decades, there have been some inconsistent awards delivered by the tribunals in
Investment treaty arbitration, which in turn have faced criticism from created uncertainty and
confusion among aAcademicians, sSovereigns and iInvestors. However, while absolute
consistency in any legal system is not possible, but at least a minimum level of consistency is
necessary in any legal system for certainty., predictability and credibility.

1
World Investment report,2015 (UN 2015)
This article will specifically focus on the SGS arbitrations2ii and Lauder arbitration involving
similar facts and circumstances in which tribunals reached to opposite decisions , which attracted
a great deal of public attention..

SGS ARBITRATIONS

The SGS arbitrationsIt involved two arbitrations proceedings, (i) between SGS Société Générale
de Surveillance S.A. v. Islamic Republic of Pakistan and (ii) SGS Société Générale de
Surveillance S.A. v. Republic of the Philippines, in which tribunals came to different
conclusions regarding the interpretation of the umbrella clause which is or also known as
“observance of undertaking” involving almost similar facts.

SGS v. Pakistan was the first investment treaty arbitration in which the tribunal considered the
meaning of an umbrella clause. SGS, by relying on the Article 11 of the Switzerland-Pakistan
BIT, and claimed that that it was the duty of ” “every state to observe all the obligations that it
should entered in relation to foreign investments”iii.3 The tribunal in that case held that the
claimant failed to provide evidence “that the parties to the BIT intended that umbrella clause
transmute a contractual breach to the level of a treaty breach . The tribunal on the basis of lack of
evidence rejected the broad interpretation and denied the claimant’s claim.

Only after the gap of five months, SGS sued Republic of Philippines and, the facts of the
Philippines case were almost similar to the Pakistan case. In spite of this similarity, the tribunal
reached a different result which is opposite of the previous decision through a different analysis.
2
SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan (ICSID Case No.
ARB/01/13), Decision on Objections to Jurisdiction, Aug. 6, 2003,ines (ICSID Case No. ARB/02/6),
SGS Société Générale de Surveillance S.A. v. Republic of the Philippines (ICSID Case No. ARB/02/6),
Decision on Jurisdiction, Jan. 29,2004,

3
Treaty between United States of America and the Argentine Republic Concerning the Reciprocal Encouragement
and Protection of Investment, art. II(2)(c) (Oct. 20, 1994)
Article X(2) of the Switzerland-Philippines BIT provided that every Sovereign “shall observe
all the obligations undertaken with regard to investments in its territory by the investors of others
Sovereigns.

By relying on the article X (2), the tribunal observed that it was the “duty of every Sovereign to
observe all the obligations it has accepted or will in future accept with investments under the
purview of the BITs”. The tribunal concluded that due to the umbrella clause, “Philippines
breached the binding and contractual commitments that it has presumed under the BIT, with
regard to the specific foreign investments.

The Philippines award is diametrically opposite from the Pakistan award and the decision of the
tribunal is based on the narrow interpretation of the treaty, while in the Philippines award, the
tribunal based its decision on a broad interpretation of the treaty. Therefore, it is undeniable that
one of the decision is based on incorrect interpretation of the treaty, that leads to confuse all the
stakeholders regarding correct implementation of umbrella clause.
The only certain thing is that the decision of one of the tribunals is based on an incorrect
interpretation of the treaty. The confusion regarding the correct implementation of the umbrella
clause is confused both the investors as well as the sovereigns.

THE LAUDER ARBITRATIONS

Lauder v. Czech Republic and CME v Czech Republic are two arbitral proceedings which were
Czech Republic-USA BIT
initiated against the Czech Republic for the violations of and Netherlands-Czech
Republic BIT respectively. Both the tribunals reached very conflicting, and therefore opposite
conclusions in relation to each other, even though the underlying facts were the same.

The Lauder tribunal held that the Czech Republic engaged in discriminatory and arbitrary
treatment of investments. Further, the tribunal held that there was no expropriation, and no
violation of either the duty to provide fair and equitable treatment (FET), or the obligation to
provide full security and protection. Finally, the tribunal concluded that Czech Republic had not
breached its obligations under the investment treaty and no damages were allowed to Lauder.

Only after gap of ten days, the CME tribunal reached a conclusion which was the exact opposite
of the Lauder tribunal. The CME Tribunal held that Czech Republic had not fulfilled its
obligations related to fair and equitable treatment, full security and protection of investments,
obligation to treat investments in conformity with principles of international law and obligations
not to impair investments by unreasonable or discriminatory measures. The tribunal awarded
CME damages worth of US $269,814,000.

Later, Czech Republic moved Sweden’s SveaSeva Court of Appeal to vacate the award of CME
tribunal. The Svea Court of Appeal refused to set aside the award on the ground that it has very
narrow review power and only in exceptional circumstances can an award can be set aside iv4. The
Svea Court of Appeal accepted the existence of parallel proceedings by the Lauder tribunal in
London, but refused to interfere on the ground that it has no jurisdiction and also refused to apply
res judicata or lis pendens because the two awards involved different parties under different
BITs entered between different Sovereigns.

The contradictory decisions rendered in the Lauder cases results in undermining the legitimacy
of investment arbitration, particularly where disputes related to public policy, environmental and
human rights and public health are at stake.

ANALYSIS AUTHOR’S APPROACHES

Various academics literature and practitioners of this discipline have already discussed numerous
the various approaches to reform this problem of inconsistency. A common suggestion has been
the establishment of appellate tribunal under the ICSID framework.

4
Czech Republic v. CME Czech Rep. B.V., Judgment of the Court of Appeal, Case No. T 8735-01
[hereinafter Svea Court of Appeal Judgment], Page no.84-85
 Each BITs is drafted differently depending upon the environmental regulations, Public health,
human rights and the level of development of the negotiating countries, hence obligations differs
from one BIT to another and arbitral awards rendered on the basis of these differently worded
BITsv would leads to inconsistent awards which raises question regarding the legitimacy of this
system. Hence, even though investors from different nations brings claim against same host
nation involving disputes having similar facts, there is likehood of being treated differently by
the tribunals due to different wordings of the BITs .

Inconsistency in treaty arbitration is the foremost result of the fragmentation of investment

treaties over 2500 BITs.5 The obligations provided under each BIT, is different from other BITs
and it depends upon the environmental regulations, Public health, human rights and the level of
development of the negotiating countries. Arbitral awards are rendered on the basis of these
differently worded BITs, 6 in which obligations differ from one BIT to another. Hence, there is
risk of inconsistent awards, and even if investors from different nations bring iInvestments
claims against the same host country involving disputes having similar facts.

Instead of establishing a permanent investment court or appellate facility, a better approach

would be establishing a new centralized dispute resolution mechanism under the ICSID
Convention, 1966 on the lines of World Trade Organization (WTO) agreement, by replacing all
the current BITs with a centralized BIT That would apply to all the signatories of the ICSID
Convention.

The central objective of establishing a centralized dispute resolution mechanism is to provide

security, stability and predictability to the investment treaty system. The participants of the
investment treaties system are both the sSovereigns and private foreign investors, and these
private investors need stability and predictability in the system in which they have invested

5
United Nation Conference on Trade and Development(UNCTAD) ,World Investment Report
2019,http://https://unctad.org/en/PublicationsLibrary/wir2019_en.pdf
6
S. Hindelang, Study on Investor-State Dispute Settlement (ISDS) and Alternatives to Dispute Resolution
International Investment Law( ISSN : 1875-4120 Volume 13,issue 1March 2016)
billions of dollars abroad. Typically, disputes arises when the host countries breach the
obligations mentioned in the clauses, such as fair and equitable treatment, most favoured nation,
expropriation, full protection and security.

As we already have a reliable body like the ICSID which act as a nodal agency for the proper
implementation of the new centralized dispute resolution centre, the ICSID Secretariat would act.
Further, the Secretariat would also draft substantive provisions for interpretation of terms like
Fair and Equitable Treatment, Most Favoured Nation, full protection and security, expropriation,
etc., to ensure consistency. For example, the recently concluded Comprehensive Economic and
Trade Agreement (CETA)vi7 between Canada and European Union (EU) provides list of acts
which constitute violation of FET obligation vii..The tribunal should of interpretation the
provisions of the agreement according to customary of public international law, including those
set out in the Article 31 Vienna Convention on the Law of Treaties. The interpretations should
help the tribunals to clarify the obligations undertaken by the host states.

The ICSID Secretariat would also provide reservations and exceptions to the nations for the
implementation of the cCentralized BIT on the basis of their economic, political and social
conditions, so that an equal ground footing is provided to each nation, just like WTO agreements
where developing nations are provided some special treatments like sSpecial and differential
treatment. It would further increase the applicability and clarity of the new model.

CONCLUSION

Consistency is an important attribute of any legal framework. As it can be seen from the above-
discussed caselaws, lack of a centralised investment treaty has contributed to inconsistencies in
arbitral awards. Adoption of a multilateral framework would potentially rule out such
inconsistencies and would call for a reform in investment treaty dispute resolution regime.
7
Comprehensive Economic Trade Agreement
(16thDecember2016),ec.europa.eu/trade/policy/in-focus/ceta/ceta-chapter-by-chapter/
However, to implement such a multilateral framework, it is important to bring majority of
nations on same page which is a very daunting task. However, it is not impossible, for we
already have a global framework for trade, i.e. WTO. Further, establishing a framework for
investment treaty would require same level of effort like WTO and would also require a strong
political will to bring majority of nations on board for negotiations
To Implement such a multilateral framework, it is important to bring majority of nations on same
page which is a very daunting task, but it is not impossible because we already have a global
framework for trade, i.e. WTO and Establishing a framework for investment treaty requires same
type of effort like WTO and also lots of political will to bring majority of nations on board for
negotiations and it takes years to negotiate a complete framework.
i
World Investment Report 2015 (UN 2015)
ii
SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan (ICSID Case No. ARB/01/13), Decision on
Objections to Jurisdiction, Aug. 6, 2003, ines (ICSID Case No. ARB/02/6),
SGS Société Générale de Surveillance S.A. v. Republic of the Philippines (ICSID Case No. ARB/02/6), Decision on
Jurisdiction, Jan. 29, 2004
iii
Treaty between United States of America and the Argentine Republic Concerning the Reciprocal Encouragement
and Protection of Investment, art. II(2)(c) (Oct. 20, 1994)

iv
Czech Republic v. CME Czech Rep. B.V., Judgment of the Court of Appeal, Case No. T 8735-01 [hereinafter Svea Court
of Appeal Judgment], Page no.84-85
v
S. Hindelang, Study on Investor-State Dispute Settlement (ISDS) and Alternatives to Dispute Resolution International
Investment Law( ISSN : 1875-4120 Volume 13,issue 1March 2016)
vi
Comprehensive Economic Trade Agreement
(16thDecember2016),ec.europa.eu/trade/policy/in-focus/ceta/ceta-chapter-by-chapter/

vii
Article 8.10.2