FORUM: Challenges of managing investor treaty arbitrations


Financier Worldwide Magazine

October 2015 Issue

October 2015 Issue

FW moderates a discussion on the challenges of managing investor treaty arbitrations between Andrew Cannon at Herbert Smith Freehills LLP, Alexander A. Yanos at Hughes Hubbard & Reed LLP, and Julie Bédard at Skadden, Arps, Slate, Meagher & Flom LLP.

FW: Could you provide an insight into some of the common legal issues and concepts that arise in investor treaty arbitrations?

Yanos: When investors look to invest abroad, such investments carry with them inevitable risks that cannot be eliminated. However, there are important steps that can be taken to mitigate some of those risks. In particular, with respect to political risk – such as the risk that a foreign government will destroy the value of an investment through measures that are contrary to the investor’s legitimate expectations or measures of expropriation without compensation – the risks can be mitigated when an investor enjoys rights under a bilateral investment treaty (BIT), multilateral investment treaty (MIT) or investment law. BITs are treaties signed by two states in which reciprocal promises are made to protect investments made by nationals from the other state. Each state promises that it will treat those investors fairly – not adopting measures that are contrary to the investors’ legitimate, investment backed expectations and refrain from expropriating their investments, except for public purpose, with due process and with fair market compensation. Then, both states promise that if any qualifying investor feels aggrieved by its treatment under the BIT, it can arbitrate directly against that state. MITs are similar but involve multiple countries. A foreign investment law is also similar, but involves a state’s unilateral promise to foreign investors.

Bédard: Common legal issues and concepts usually begin with a detailed analysis of whether the tribunal has jurisdiction over the parties and the dispute. Under the ICSID Convention, the Tribunal may consider whether a dispute is within its competence, on its own initiative or on the objection by a party. When an objection to jurisdiction is raised, the Tribunal may deal with the objection as a preliminary question with or without suspending consideration of the merits, or it may overrule the objection and resume the proceeding on the merits issuing a decision to that effect, or it may join the objection to the merits of the dispute. Common jurisdictional objections of the host state include arguments that the investor making the claim or the alleged investment is not in fact protected by the relevant treaty or does not meet criteria set forth in international investment awards for the protection of investments. In many cases the host state will claim that the investment was not made in accordance with, or is otherwise in breach of, the relevant legislation. Conceptually, and in practice, treaties are important for investors because they provide the right to companies, as investors, to go to international arbitration to pursue compensation for expropriation and for claims related to breaches of a country’s treaty or other international obligations, including denial of justice in local courts and unfair and inequitable measures taken by host governments, and breaches of investment agreements.

Cannon: Modern investment treaty arbitration is unique: it gives private individuals and corporations standing to bring claims in international law against sovereign states. Historically, international law has been the preserve of states alone. However, modern bilateral and multilateral investment treaties endow foreign investors with legal rights and, importantly, the possibility of direct recourse against the host state should their rights be violated. Common legal issues can be divided into two categories. First, does the arbitral tribunal have jurisdiction to hear the dispute between investor and host state? This will typically entail an examination of whether the investor is in fact allowed to benefit from the treaty in accordance with its provisions, as well as whether the host state accepted international jurisdiction. Second, tribunals will consider how to interpret the investor protections contained in the treaty. For example, exactly what amounts to a violation of ‘fair and equitable treatment’, a common treaty provision, will be the subject of rigorous legal and factual analysis.

As a foreign investor in a host state, a company may face a number of risks including arbitrary or discriminatory regulatory measures.
— Julie Bédard

FW: What steps should investors take when structuring and drafting their overseas investments to ensure they are qualified to receive investment treaty protection?

Cannon: Investment treaty protection is reciprocal. This means that there must be an agreement in place between two or more states, with each state agreeing to grant investors from the other state certain protections. Consequently, as part of the due diligence process prior to the investment, investors should consider whether their home country has an agreement in place with the country where they intend to invest. If not, then the investor may wish to consider structuring the investment through a country which does have such a treaty with the place of investment. The treaty text will typically set down criteria for establishing the nationality of a corporate party. While some treaties provide that corporate nationality is determined by the place of incorporation, others have more stringent requirements that include, for instance, the nationality of shareholders.

Yanos: A problem for some investors looking to invest abroad arises when the state into which they are seeking to invest, the host state, has not signed a BIT or MIT with the investor’s home state or enacted a foreign investment law. There is another option, however. Recent cases have held that foreign investors can, under certain circumstances, structure or restructure their investment to take advantage of a BIT or MIT that the host state has signed with a third state. In other words, an investor looking to invest in the host state could establish a holding company in the third state and, thereby, enjoy the protections that the host state has promised to investors from the third state – even though the holding company would be wholly owned by a company incorporated in the home state. Importantly, this decision to structure an investment in a third state need not be made at the time the initial investment is made. At least under some BITs, as long as the decision to restructure into a third state is made before a dispute arises or is clearly foreseeable, it can also be made after the initial decision to invest is made.

Bédard: As a foreign investor in a host state, a company may face a number of risks including arbitrary or discriminatory regulatory measures, a pre-existing history of investment disputes, the government’s refusal to comply with judicial rulings and various forms of regulatory interference in breach of investment treaty protection. In order for an investor to receive treaty protection, it should make sure that the entity that holds the investment is incorporated in a jurisdiction that negotiated a treaty protecting investments in the host jurisdiction. It should meet the requirements of that treaty and also look to the local law in the host state as it may inform potential future jurisdictional objections.

FW: What advice would you give a claimant investor faced with interference by a host state?

Bédard: An important immediate step in the face of governmental interference that may be in breach of a relevant treaty is to get the advice of legal counsel in order to assess the investor’s potential rights and appropriate response or strategy. Correspondence may need to be delivered describing the alleged treaty violation, consenting to the use of arbitration under the ICSID Convention and giving notice of a treaty claim. The investor may consider avoiding participation in local administrative proceedings. The safety of employees should obviously be considered, as necessary, in addition to potential public relations aspects. Important measures should be taken between the time of the original structuring of the investment and an act of governmental or regulatory interference. A foreign investor should be well organised well ahead of time and prepared for a potential unlawful interference with its investment. Relevant measures, depending on the circumstances, may include the protection of communications and company information, the identification of any arrangements under which the investor shares services, contracts or data with, or otherwise benefits from, other group entities, the review of relevant trademark licences and bank guarantees. Prudent investors also may seek periodically an independent valuation of their assets in the host state. Investors should be alert to any interference and local management should know to report government policy toward the company or the industry. Investors are also well advised to document in detail their relevant interaction with government officials. Key corporate documents and records should be kept in an organised fashion and be accessible outside of the host state.

Yanos: The most important thing for a claimant investor to do when facing interference by a host state is to work with counsel experienced in the field of investor-state arbitration as early as possible. There will be tremendous pressure in the early going to waive all objections to the initial measures in order to keep the project on track. This can be deleterious to the investor as matters progress because an early waiver could reduce the damages available as matters progress. It is not necessary to immediately proceed to arbitration, but it is important to make clear that all rights under international law are reserved. Another mistake to be avoided is allowing counsel in the host state to drive any early disputes into the local courts. Depending upon how the case is litigated in the courts of the host state, factual and legal determinations could be made in an unfavourable jurisdiction that could significantly impact the value of the investor’s rights going forward.

Cannon: When faced with interference by a host state, a foreign investor should consider the protections available under the investment treaty between its home state and the host state. A careful assessment should then take place of the host state actions against those protections in order to ascertain whether a claim may exist, and how, and whether, any arbitration may be brought. Sometimes, a letter to the government of the host state pointing out the potential breaches of the investment treaty may lead to a reversal in policy. Corporate arrangements to maximise investor protections should be made before the facts that lead to the dispute have occurred. Tribunals have rejected claims brought by investors who moved their investment vehicle to third countries so as to benefit from treaty protections once a dispute had already arisen. Investors should also consider any available contractual protections and how they might interact with a treaty claim.

FW: Is investor treaty arbitration growing in popularity as a preferred dispute resolution mechanism when conflicts arise in this context?

Cannon: The number of modern investment treaties, allowing for investors to bring proceedings against states, increased exponentially in the second half of the 20th century. According to statistics published by the United Nations Conference on Trade and Development (UNCTAD) in February 2015, some 2923 BITs and 345 other investment agreements are now in place. After a relatively slow start, investors have begun over the last two or three decades increasingly to avail themselves of the protections at their disposal, and UNCTAD statistics suggest that over 350 investment arbitration cases have now been concluded. Many investment treaties give investors the ability to bring claims directly against the host state in a neutral and international arbitral forum. Previously the investor’s options would have been limited to seeking the diplomatic protection of its home state or bringing legal proceedings against the host state, usually in the courts of the host state under its domestic law.

Bédard: The ICSID statistics show that during the 70s through the 90s, only a handful of cases were filed every year. The 90s saw an increase to approximately a dozen cases every year, and starting in 2003 the average of cases rose to nearly 30 cases with a peak of 50 cases filed in 2012. Interestingly, in 2014 we have seen only 14 cases, which is a number closer to average number of yearly filings in the early 2000s.

Yanos: Awareness of investor treaty arbitration is growing, making it more likely that investors will invoke such a remedy in response to interference from a host state. In addition, the availability of third party litigation financing has made it possible for smaller investors and individual investors to make use of investor-state arbitration without the need to engage a law firm that specialises in contingency fee litigation. This has expanded the range of counsel options available to investors facing interference from the host state. However, investor treaty arbitration remains an extraordinary remedy that is generally reserved for extreme situations.

Awareness of investor treaty arbitration is growing, making it more likely that investors will invoke such a remedy in response to interference from a host state.
— Alexander A. Yanos

FW: To what extent are there fundamental differences between how disputes are resolved under bilateral as opposed to multilateral investment treaties?

Bédard: There are some differences between bilateral and multilateral investment treaties, but they are mostly similar. If it is protected by NAFTA, for example, a foreign investment would be entitled to the protections of Section A of Chapter 11 of NAFTA, including national treatment consistent with that provided to Mexican investors and their investments and MFN treatment at the level afforded to investors of third states and third investments. It would also be guaranteed fair market value compensation in the event of the expropriation of its investment. All of these protections are similar to those granted under individual investment treaties to which Mexico is a party. However, a NAFTA investment is also entitled to a minimum standard of treatment under international law, which some have claimed is a lesser standard than ‘fair and equitable treatment’ or ‘full protection and security’ available under individual BITs.

Yanos: Every BIT or MIT is different. Some BITs have terms identical to some MITs and some have very important differences. There are no shortcuts and one needs to read the text of each treaty very carefully with experienced counsel.

Cannon: The number of multilateral investment treaties remains relatively small compared to the number of BITs. In much the same way each BIT will have specific provisions that determine how disputes are resolved, so too do multilateral investment treaties. The general standards of investment protection tend to be similar, although the more modern multilateral investment treaties may have more sophisticated definitions and qualifications. As increasing numbers of multilateral investment treaties are negotiated and concluded, jurisdictional issues can be caused by what UNCTAD has described as the multiplication of treaty layers. Old BITs may continue to exist between states even where a multilateral regional agreement has come into existence and applies to both states. In short, there may be less clarity and more scope to argue about the exact content and applicability of investor protections.

FW: What role do the ICSID Convention and UNCITRAL Arbitration Rules play in today’s investor treaty arbitration?

Cannon: Each investment treaty will set down the international arbitral rules under which any claim may be brought. This may include a set of options – for example, the Energy Charter Treaty allows the investor to bring a claim under the ICSID Convention, the UNCITRAL Rules or under the Arbitration Institute of the Stockholm Chamber of Commerce. To date, the majority of investor-state arbitrations have been brought under the ICSID Convention. Disputes fall under the jurisdiction of the ICSID Convention when there is an investment dispute between a state that is a contracting party to the ICSID Convention and the national of another contracting party, and the parties consent to ICSID jurisdiction, where ICSID is specified as a dispute resolution option under the relevant investment treaty. The UNCITRAL Arbitration Rules are very different to the system set up under the ICSID Convention. Although the rules address the establishment of an ad hoc arbitral tribunal and the various issues that can arise in an international arbitration, they do not provide any machinery or institutional support to administer the dispute, and the parties may need to have recourse to the national courts of the place where the arbitration is seated. The ICSID Convention also contains its own enforcement regime, whereas an UNCITRAL award must be enforced in the same way as most other arbitral awards – including through the widely-ratified New York Convention on the Recognition and Enforcement of Arbitral Awards 1958.

Bédard: ICSID remains the main international investment dispute forum. There may be more UNCITRAL cases than first meets the eye due to the lack of publicity of these cases and the recent denunciations of the ICSID Convention may be fuelling UNCITRAL arbitrations, but they constitute a smaller portion of the overall number of investment treaty cases, which are dominated by ICSID.

Yanos: Most BITs and MITs offer investors the option of pursuing arbitration at either ICSID or an ad hoc arbitration governed by the UNCITRAL Arbitration Rules. There are important differences in the two options. Most importantly, ICSID Arbitration offers a self contained system for dealing with challenges to the arbitrators or any final award. In contrast, an arbitration under the UNCITRAL rules will require an outside institution to resolve any challenges to the parties’ chosen arbitrators and a final award will be subject to review in the courts of the country in which the arbitration takes place. For example BG Group plc v. the Republic of Argentina was an arbitration under the UNCITRAL Arbitration Rules that took place in Washington DC. Because the arbitration was conducted in Washington, the federal courts in that jurisdiction had legal oversight over any challenge to the award. This resulted in litigation that went from the District Court of the District of Columbia to the United States Court of Appeals for the District of Columbia and ultimately to the Supreme Court of the United States. In contrast, an award rendered under the ICSID Arbitration Rules is only subject to challenge before an annulment committee appointed by ICSID.

Enforcement against states and state-owned entities can be problematic, even under the favourable enforcement regime established under the ICSID Convention.
— Andrew Cannon

FW: In your experience, what challenges tend to arise when enforcing an arbitral award against sovereign and state entities? How can companies surmount the obstacles?

Bédard: Challenges arise when enforcing an arbitral award against sovereign and state entities when their assets are located in the host state and the courts of the host state do not offer an independent and impartial forum that will enforce international treaty obligations of the host state and international arbitration awards rendered pursuant international treaties of the host state. Identifying assets outside of the host state in jurisdictions amenable to the enforcement of international arbitration awards is one way to surmount the obstacles. Another, in the context of an investment agreement, is to seek a guarantee from an entity that is easier to reach.

Yanos: Enforcement of an arbitral award against a sovereign can be complex and the rules concerning sovereign immunity vary from state to state. What is important to recall is that failure to honour an award issued by an arbitral tribunal in an investor-state arbitration – after all challenges are dismissed – is the exception. Although some states take longer than others to come around, and sometimes require some prodding on the part of investors, eventually almost all of them pay the awards because the alternative creates too many difficulties within the interconnected financial system in which everyone operates in the 21st century.

Cannon: Enforcement against states and state-owned entities can be problematic, even under the favourable enforcement regime established under the ICSID Convention, which applies to ICSID awards, and the New York Convention. In principle, ICSID Convention awards are immediately binding in all states party; the domestic courts are limited to checking whether the ICSID award is authentic, and must enforce all pecuniary obligations imposed by the award. Courts in states party to the New York Convention can only refuse enforcement on a very limited number of grounds, although one of those grounds is a public policy exception which should not be, but occasionally is, interpreted widely. However, in each case, the law of state immunity may present another obstacle. The law of immunity that applies will usually be that of the country in which enforcement is sought, which can cause particular difficulties in relation to enforcement against sovereign entities in their own courts. Ensuring that clear and comprehensive waiver provisions are included in relevant contractual or other investment-related documentation is very important.

FW: What improvements would you like to see made to investor treaty arbitration procedures to make the process more efficient and reliable going forward?

Yanos: The biggest problem with investor treaty arbitration today is the length of time that the process takes. In short, investor treaty arbitration takes too long. There are three main reasons for this problem: there are too many challenges to arbitral appointments, there are too many unnecessary challenges to arbitral awards, and many arbitrators take entirely too much time to render an award. To fix these problems, the institutions charged with reviewing arbitral challenges and challenges to awards should be encouraged to fix shorter time periods for briefing and require tribunals hearing a challenge to an arbitrator or the annulment committees considering award challenges to render decisions on a much shorter timetable. ICSID should also be encouraged to adopt a rule that would force arbitral tribunals to wait until a final award is rendered before they receive the bulk of their compensation for their work as an arbitrator.

Bédard: Investor treaty arbitration procedures are generally efficient and reliable. Decisions on the challenges of arbitrators that are made by the remaining members of the panel is a decision-making process that has been criticised and which could be usefully revisited.

Cannon: The investment treaty arbitral process is under real scrutiny at present, with the European Commission having launched a public consultation over the inclusion of investor-state dispute settlement provisions in the investment chapter of the Transatlantic Trade and Investment Partnership (TTIP), and a similar debate raging in the United States in relation to the Trans-Pacific Partnership (TPP). Most stakeholders in the process agree that it can and should be improved. In the first instance, the treaties themselves should be drafted more clearly, so as to avoid debate and inconsistent decision-making over the interpretation of vague and generally-worded clauses. Recent investment treaties have tended to provide greater detail, taking account of previous decisions of arbitral tribunals to include more precise and clear language. Other key issues that have emerged include how to balance the right of the state to regulate in the public interest with the rights of investors who may be affected by such regulation. The establishment of a permanent investment court to oversee investment disputes has been advocated by a number of EU Member States. Both of these issues, and others, are being considered further as part of the EU’s ongoing consultation process.


Andrew Cannon specialises in international arbitration and public international law. He has extensive experience of advising states, state-owned entities and major companies on all aspects of public international law, and has acted in ad hoc and institutional arbitrations across multiple jurisdictions and under a range of governing laws. Mr Cannon has also acted in high profile litigation cases before a range of international and domestic judicial bodies. He can be contacted on +33 1 5357 6552 or by email:

Alexander A. Yanos is a litigation partner in the New York office of Hughes Hubbard and co-chairs the firm’s Treaty Arbitration practice group. His practice focuses on complex disputes, particularly international disputes, both in court and before arbitral tribunals. He can be contacted on +1 (212) 837 6801 or by email:

Julie Bédard concentrates her practice on international litigation and arbitration. Ms Bédard regularly advises clients on the drafting of dispute resolution clauses and has served as counsel in international arbitration proceedings held under the auspices of the International Chamber of Commerce, the American Arbitration Association, the International Centre for Dispute Resolution and the International Centre for Settlement of Investment Disputes. She can be contacted on +55 11 3708 1849 or by email:

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