Difference between International Investment Arbitrations and International Commercial Arbitrations

A foreign investor’s power to sue a host State plays a vital role in investment protection. Investment arbitration is undertaken to resolve disputes between a foreign investor and the host State and is also known as Investor-State Dispute Settlement (ISDS) and differs from an International Commercial Arbitration (ICA/s) dispute due to the nature of the claim and the parties involved. While the former deals with disputes arising under a public treaty between two contracting States, the latter deals with disputes arising out of a commercial contractual obligation[1].

Under a Bilateral Investment Treaty (BIT/s), States ensure certain rights and protections to investors from the other contracting State[2]. These include Fair and Equitable Treatment, National Treatment, Most Favoured Nation (MFN), Protection from Expropriation to name a few. Each of these are protections accorded under international law and are usually negotiated upon by the contracting States, such that any derogation from the protections accorded give rise to the investor’s right to initiate an investment arbitration against the host State. Currently, there are 2,344 BITs and around 314 Treaties with Investment Provisions in force globally[3].

How They Differ

The legal frameworks governing the ICA and investment arbitration are different to the extent that, in an ICA, the only relevant treaty is the New York Convention[4], which deals with the recognition and enforcement of foreign arbitral awards, while in an investment arbitration, treaties of public international law provide the basic framework. The role of national law is also different in both. In an ICA, procedurally the legal system of the “seat” governs the arbitration and gives national courts of the seat supervisory jurisdiction on the arbitral procedure. Further, the substantive national law is applied by the arbitrators to decide the merits of the case.

However, in an investment arbitration, procedurally, mandatory provisions of national law are only relevant if the arbitration is not governed by treaties such as the International Centre for Settlement of Investment Disputes (ICSID) or the North American Free Trade Agreement (NAFTA), but is instead governed by non-governmental organisations such as the London Court of International Arbitration (LCIA) or the International Chamber of Commerce (ICC).

The substantive national law on investment treaties are by default the law of the host State. This also means that the investor will be bound by any future changes in the municipal law of the State, which happens to be an understanding that is highly disputed when a change leads to a breach of the BIT and fails to protect the foreign investors[5], as can be seen in Indian cases such as Vodafone (2017)[6] and Cairn (2016)[7].

In an ICA, jurisdictional disputes mostly relate to the scope of the arbitration clause, consent and its signatories. However, in an investment arbitration, the extent of jurisdictional disputes is quite vast. The consent to arbitration arises under a treaty, and principles of interpretation as laid down in the Vienna Convention become relevant. The State’s consent depends upon: (i) whether an “investment” existed as understood under the BIT; (ii) whether the claimant is a citizen of the home State; and (iii) whether the citizen actually owns and/or controls the investor company.

The MFN clause in the BIT may play an important role, as even if there is no such clause according certain protection to an investor under a BIT, the existence of such protection in another BIT links the impugned BIT to BITs entered into by the host State with other countries, according the same protection to the foreign investor[8]. A simple example of the same would be the dispute between India and White Industries, where White invoked the Kuwait-India BIT to establish breach.[9]

Confidentiality of the proceedings is one of the vital tenets of an ICA. However, in an investment arbitration, foundational instruments such as the ICSID Convention and most BITs are silent on confidentiality. Thus, little or no confidentiality is practiced in investment arbitrations, which is understandable given the disputes concern State interests. A connected attribute would be of precedential value in such awards, while in an ICA, as most awards are confidential there is little precedential value. But, in an investment arbitration, since most awards are available in the public domain, it allows for an analysis of how similarly situated cases may be decided.

Upon the commission of a breach, most agreements provide for a cooling off period wherein the host State and the Investor are required to engage in negotiations to resolve the issue. This period begins upon serving the Notice of Intent to initiate arbitration against the host State. Once negotiations fail, which is often the case as the host State waits to see whether the Investor is willing to pay the high costs for an arbitration, the arbitration is initiated. Such a provision may or may not appear under an ICA agreement.

In some cases, the investor may be required to exhaust all domestic legal remedies prior to moving to arbitration, as is the case in India’s 2015 BIT Model. On the contrary, investors under some agreements may have to decide whether they would like to sue either in domestic courts or by way of arbitration; such clauses are often referred to as the “fork in the road” clause.

Investment arbitrations and ICAs can be ad-hoc or institutional. The ICC, LCIA, and the Singapore International Arbitration Centre (SIAC) are some of the best known arbitration institutions administering international commercial arbitrations, whereas for investment arbitrations ICSID is the preferred institution. Based out of Washington, the ICSID conducts arbitrations for European and Asian parties in Paris. The average duration of an investment arbitration, from the time the tribunal is constituted to the award, is a little over three years. A peculiar aspect of investment arbitration is the lack of an appellate mechanism, although the rules under which the arbitration is initiated may provide certain grounds for annulment or setting aside of the award[10]. Under the 2015 Model BIT, India prescribes an ad-hoc investment arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law or any other rules agreed upon by the parties in writing before the commencement of the arbitration[11].

The selection of an arbitral tribunal is considered as one of the most critical steps in the process of an arbitration. This is because some arbitrators are known for adopting a “pro-State” or a “pro-investor” approach. The ICSID provides for a panel of arbitrators from which the parties may select an arbitrator of their choice.[12] The parties to an investment arbitration usually are extremely cautious about their choice of arbitrator. In an ICA, the parties may choose for the tribunal to be constituted of a sole arbitrator or three arbitrators. Where the parties have opted for a three-member tribunal, each party appoints an arbitrator of their choice, and the two arbitrators in consonance appoint the third arbitrator, who usually acts as the presiding arbitrator.

Due to the high costs of investment arbitration, as parties have to cover individual costs, institutional costs, tribunal costs and legal fees for the counsels, parties often obtain third party funding for the arbitration. Third party funding is the process by which a party who is not privy to the arbitration agrees to finance all or a portion of one party’s legal costs in turn for an agreed percentage of any award or success fee provided that the party funded wins the case. However, the process of acquiring funding may be extensive, as third party funders assess your claim before providing any monetary relief – should one need such assistance, we would advise a timeline for the same should be kept in mind[13]. In an ICA the costs vary depending on the place of arbitration, whether institutional or ad-hoc and the strength of the tribunal.

All parties to the ICSID Convention are required to adhere to Article 53 to 55 of the ICSID Convention for the enforcement of international investment arbitration awards. However, where the host State is not party to the ICSID Convention, the enforcement of the award is done under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958[14].

State Intervention in International Investment Disputes

Even though India has not acceded to the ICSID Convention, Courts in India have recognised the fundamental difference between the nature of the disputes between an ICA and investment arbitration, and have held “the cause of action (whether contractual or not) is grounded on State guarantees and assurances (and are not commercial in nature). The roots of Investment Arbitrations are in public international law, obligations of State and administrative law”. They have time and again reinforced the non-interventionist approach of Indian courts in relation to BIT arbitrations and limited the same to “rare and compelling circumstances”[15]. Indian Courts have recognised their limitation in interfering in investment arbitrations, which leads their respective jurisdictions to shift closer to an investor friendly environment as promised under the BITs.

What Does Experience Tell Us? 

The real difference between an investment arbitration and an ICA lies at the very heart of each dispute. Factors such as parties, nature of the dispute, and the agreement from which the dispute arises play a determinative role in differentiating both arbitrations. For investment arbitrations, in order to reduce the number of proceedings, especially since they are so cost heavy, it is imperative for States to: (i) ensure coherence between the terms of existing BITs and their domestic legal system; (ii) ensure protection to the foreign investor as long as it doesn’t violate domestic public policy; and (iii) engage in effective negotiations once a dispute arises so as to avoid arbitration.

The best approach for an ICA is the arbitration-mediation-arbitration approach, where the flexibility to seek a quick resolution, once a party has been able to ensure that its interests are protected through injunctive reliefs, is one of its most innovative options. Ultimately, the approach to arbitration, whether investment or commercial, is similar yet different. Professionalism and experience counts when advising in specialised arbitrations and therefore it is important to know the differences and similarities of these forms.

[1] Lawrence W. Newman, David Zaslowsky, “The Difference Between Commercial and Investment Arbitration” Part 5 Chapter 43, The Practice of International Litigation – 2nd Edition (2010). Available on: https://arbitrationlaw.com/library/difference-between-commercial-and-investment-arbitration-part-5-chapter-43-practice

[2] Glossary – Bilateral Investment Treaty, Thomson Reuters, Practical Law. Available on: https://uk.practicallaw.thomsonreuters.com/4-502-2491?transitionType=Default&contextData=(sc.Default)&firstPage=true&comp=pluk&bhcp=1

[3] UNCTAD Investment Policy Hub (2019). Available on: https://investmentpolicyhub.unctad.org/IIA

[4] The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1959

[5] Karl-Heinz Bocksteigel, “Commercial and Investment Arbitration: How Different Are They Today?” Arbitration International, The Journal of the London Court of International Arbitration (2012). Available on: https://www.arbitration-icca.org/media/4/20743713842706/media113644853030910bckstiegel_lalive_lecture_offprint.pdf

[6] UNCTAD Investment Policy Hub (2019), Investment Dispute Settlement, Vodafone v India (II) 2017, Available on: https://investmentpolicyhub.unctad.org/ISDS/Details/819

[7] UNCTAD Investment Policy Hub (2019), Investment Dispute Settlement, Vedanta v India 2016, Available on: https://investmentpolicyhub.unctad.org/ISDS/Details/733

[8] Id 4.

[9] White Industries Australia Limited and The Republic of India, Final Award. Available on: https://www.italaw.com/sites/default/files/case-documents/ita0906.pdf

[10] International Arbitration Information, “Introduction to Investment Arbitration”, Online Arbitration Resources. Accessed on March 08, 2019. Available on https://www.international-arbitration-attorney.com/investment-arbitration/ .

[11] Model Text for the Indian Bilateral Investment Treaty, “Bilateral Investment Treaty Between The Government of the Republic of India and ____” Available on: https://www.mygov.in/sites/default/files/master_image/Model%20Text%20for%20the%20Indian%20Bilateral%20Investment%20Treaty.pdf

[12] Id 5

[13] International Arbitration Information, Online Arbitration Resources. Accessed March 08, 2019. Available on: https://www.international-arbitration-attorney.com/

[14] Id 5.

[15] Board of Trustees of the Port of Kolkata Vs. Louis Dreyfus Armatures SAS G.A. 1997 of 2014 decision dated 29th September, 2014 – Calcutta High Court; Union of India v. Vodafone Group, CS(OS) 383/2017 – Delhi High Court