The Limited Jurisdiction of International (Investment) Arbitral Tribunals - Research Paper Example

The Limited Jurisdiction of International (Investment) Arbitral Tribunals International trade has become a priority in the global economic development effort, and many developing countries seek the cross-border transfer of goods, capital, and technology as a means to fast track their economic progress and consequent social upliftment. However, as more and more commercial transactions are conducted among parties in different countries, there is also the inevitable rise in commercial disputes. This essay treats on arbitration, the dominant form of international dispute resolution, and the limited jurisdiction, or legal authority, of international arbitral tribunals. Arbitration defined Arbitration is the usual means of settling international disputes. It is an out-of-court procedure and is resorted to when parties are unable to arrive at an agreement of their own accord, and requires the intervention of a third party. Should even this fail, then litigation is the next logical step, a measure most parties would prefer to forego because of the time and finances required to pursue court action. Most parties with a commercial dispute would prefer to subject their dispute to arbitration proceedings, for the following reasons:1 (1) Arbitration, being a private process, does not generate the unwanted publicity a court case does, which high profile businesses would prefer to avoid; (2) Arbitration allows for parties to select their own arbitrator, or arbitrators, which is not possible in legal actions. The arbitrator, or arbitrators if more than one is chosen, may be selected for this skill and expertise in the particular legal field; (3) Arbitration proceedings, substance, and results are more flexible, and because it is so adaptable, it moves the process along more quickly and efficiently, and the outcome is acceptable to both parties, precluding a lengthy appeals process. (4) Arbitration fosters continuity. While regular tribunals handle several cases simultaneously, and the case moves through several tribunals through the appeals process, arbitrators usually attend to a case from its start to its final resolution. It must be kept in mind that arbitration agreements may allow dispute settlement based on extra-legal standards2, and thus the arbitration tribunal tasked to decide the arbitration case does not operate as a regular court. Its authority is therefore conditioned upon the consent of the parties, and ends upon the resolution of the case. Jurisdiction of an International Arbitration Tribunal In order for a tribunal to be considered an international tribunal, “it must be created by states or international organizations which, though they may have international legal personalities of their own, are, nevertheless, composed principally of states.” Only states or international organization may create international tribunals.3 Tribunal members are called arbiters, and from them are chosen the individual or individuals who will hear the case and designate the award. An arbitration tribunal does not obtain its jurisdiction in the same manner as judicial tribunals, and relies upon the consent of the parties for its authority. “The [arbitration] court’s jurisdiction is always a limited one, existing only in so far as the States have accepted it; consequently, the Court will, in the event of an objection … only affirm its jurisdiction provided that the force of the arguments militating in favour of it is preponderant.”4 Because an arbitral tribunal is not a regular court, there are several attributes of decisions of the regular court that apply differently to arbitral tribunals. First, the doctrine of Stare Decisis is not applied to arbitration awards, even if they are published with reasons, thus an arbitral award may not be made a precedent for subsequent similar situations. The principle of contra proferentem applies, though, and once constituted the arbitration tribunal has jurisdiction over the case, and neither party who agrees to arbitration may later claim that he did not consent to it. The Principle of Restrictive Interpretation is likewise applied to the arbitral tribunal’s jurisdiction, as with any treaty, because “restrictions on sovereignty cannot be presumed.” This is a principle in customary international law. The execution of any award decided upon by the arbitral tribunal is a limitation upon the sovereignty of the country where the award is applied, since the award subject of the agreement no longer passes judicial review and the scrutiny of the courts. International law thus supersedes municipal law. Finally, Pursuant to the principle of la compétence de la competence, it is a major part of the incidental or inherent jurisdiction of any judicial or arbitral tribunal to have “jurisdiction over its own jurisdiction”. This is likewise observed in the case of international arbitral tribunals, and domestic or international courts could not rule on the jurisdiction of arbitral tribunals. Arbitration Conventions There are a host of regional and bilateral free trade agreements that have proliferated, numbering somewhere about 2,500 by recent count.5 The New York Convention and the ICSID seek to simplify the “tangled web”6 of conventions, treaties and agreements on arbitration. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York” Convention. This convention was adopted by diplomatic conference on 10 June 1958, and is regarded as the most widely recognized foundation instrument of international arbitration. It requires courts of contracting States to given due cognizance and effect to an agreement to arbitrate upon filing of a proper action, on a matter covered by an arbitration agreement and to recognize and enforce awards made in other States, with limited exceptions. The agreement is required to fulfil certain requirements as they are hereunder enumerated: (1) The agreement is in writing, or in electronic media as may be provided for. (2) The agreement deals with differences that have already emerged and are existing, or will still emerge in the future, between the parties. (3) The differences between the parties arise out of a defined legal relationship, whether such relationship is established by contract or not; (4) The differences concern a subject matter capable of being settled by arbitration (5) Parties to the arbitration agreement possess legal capacity pursuant to the law that is applicable to them; and (6) The arbitration agreement is valid under the law to which the parties have subjected it to. Such agreement must not be rendered “null and void, inoperative or incapable of being performed.” 7 Assuming that the above conditions are met, there should be no reason why signatories under the New York Convention should ordinarily refuse to recognize and execute an arbitral award of another signatory. However, there are exceptional cases for which the NYC provides the right to the country where the award is sought to be enforced, the right to refuse such enforcement of award. The exceptions are explicitly stated in Article V comprised of seven grounds all in all, as follows: (1) The lack of capacity of a contracting party (Article V (1) (a)); (2) Failure to observe due process, i.e., lack of compliance with the twin requirements of notice and hearing (Article V (1) (b)); (3) Lack of jurisdiction over the subject matter (Article V (1) (c)); (4) Lack of authority or failure of procedure (Article V (1) (d)); (5) Award is not binding on the parties (Article V (1) (e)); (6) Non-arbitrability of the subject matter (Article V (2) (a)); and (7) Award is contrary to the public policy of the country (Article V (2) (b)). A good number of these cases represent legitimate concerns that pertain to procedural and substantive propriety of the arbitration case. However, some of them tend to be abused by the parties, such as the defence of public policy. The text of Article 2 (b) states: “2. Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that: (1) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or (2) The recognition or enforcement of the award would be contrary to the public policy of that country.”8 There are cases when arbitral awards are refused, the host country vaguely reasoning that it violates the country’s public policy. This limits the effectiveness of the arbitration procedure and the decision arrived at, rendering null the authority and jurisdiction of the arbitral tribunal9. Other states have interpreted public policy as exception, reserved only for the most basic notion of justice and morality,10 such as fraud. 11 There is another international agreement, called the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). The provisions of the Convention deal with the use of conciliation and arbitration as the primary means by which the countries which sign the Convention bind themselves to settle investment disputes between themselves. Like the NYC, the ICSID relies upon a set of basic elements in order to acquire jurisdiction over a case. For it to find jurisdiction, an ICSID tribunal must determine that: (1) There is a legal dispute arising directly out of an investment; (2) One of the parties to the dispute is a national of a Contracting State (an investor); (3) The other party is another Contracting State; and (4) The parties have consented in writing to submit to ICSID for resolution.12 The consent of the parties to submit to ICSID arbitration is an indispensable condition for the jurisdiction of ICSID; however, ratification is not indicative of consent for the purpose of submitting to arbitration. It is required for an additional act to be performed in order that an ICSID tribunal finds jurisdiction – the state must specifically agree that a particular dispute or class of dispute be submitted to dispute resolution under ICSID jurisdiction. For most cases, the existence of a Bilateral Investment Treaty (BIT) is this very act, in the form of the State’s advance consent, that is required to subject an arbitration case to ICSID jurisdiction.13 Arbitral Tribunals v State Courts The settlement of international disputes is vastly different from settlement of local claims. According to the OECD, relatively few disputes have actually reached final awards; however, the few that have were arrived at in consequence of bilateral investment treaties, and were either partially or fully in favour of the private claimants. “According to certain authors, the State court cannot decide on the question of jurisdiction if arbitral proceedings are already pending or can be commenced with no special difficulty… A State court must rule on the arbitration objection and, hence must make a preliminary ascertainment of the jurisdiction of an arbitral tribunal to the exclusion of its own, as it would do with respect to another State court.” 14 Therefore, where the jurisdiction of arbitral tribunals is recognized, this necessitates a limitation on the jurisdiction of the local courts. The constant struggle between the need to impose arbitral awards in settlement of a cross-border commercial dispute, and to exert sovereignty over a foreign decision comprises an important element in the determination of the limits of jurisdiction of the arbitral tribunal. Conclusion International arbitral tribunals are established and recognized through the operation of international conventions and regional multilateral agreements. There are specific requisite elements that must be present for the arbitral court to obtain jurisdiction of the case, though, and these are dependent upon the convention under which the arbitration procedure operates. These elements are those mentioned earlier on in this discussion. Where the jurisdiction is called into question by one of the parties allegedly due to a lack in the essential requirements for jurisdiction, then the burden of proving this fact is on the claimant.15 There are many ways that the jurisdiction of an international arbitral tribunal is limited. Firstly, an international arbitral court is not the same as a regular court; while the latter has a permanent jurisdiction established by law, the arbitral court derives its jurisdiction from the consent of the parties to be bound by its decision. There is no jurisdiction outside of this single case; there is thus a need for privity for an arbitral court to gain jurisdiction.16 Secondly, the arbitral court is temporary, and its jurisdiction ends with the conclusion of the dispute. Its jurisdiction has effect, therefore, over a limited duration of time. Thirdly, the arbitral court’s jurisdiction is limited to a single case. The arbitral court is constituted by the consent of two parties brought together in a single action, and its mandate is to resolve this single controversy, after which it is dissolved. There is thus limitation of jurisdiction as to subject matter. Fourthly, the arbitral court’s jurisdiction is limited as to effect. Its decision affects only the parties and only for the case, and does not constitute a precedent for future similar cases; therefore, for arbitral courts, the doctrine of stare decisis has no application. And finally, there is the good faith limitation, where awards were made which attempted to defeat the host state’s laws17 While the mandatory execution of its awards is supported by the New York Convention and the ICSID, the regular courts in many countries may still elect to refuse the application of these awards based on public policy and national sovereignty. This is because the local courts would only rule on the validity of the jurisdiction and award of the arbitral tribunal to the exclusion of its own jurisdiction. Local courts would prefer to assert its own jurisdiction and apply its power of judicial review over the award. References Alexanrov, S A 2005 ‘The “Baby Boom” of Treaty-based Arbitrations and the Jurisdiction of ICSID tribunals: Shareholders as “Investors “ and Jurisdiction “Ratione Temporis”’. The Law and Practice of International Courts and Tribunals vol. 4, pp. 19-59, in 22. Amerasinghe, C F Jurisdiction of International Law Tribunals. Kluwer Law International (2003), The Hague, Netherlands. American Manufacturing & Trading, Inc. v. Republic of Zaire, ICSIDCase No. ARB/93/1, Award, 21 February 1997, 36 I.L.M. 1534, 1545, para. 5.23 (1997) Barin, B & Rigaud, M-C 2000 Arbitral Tribunals or State Courts / Who must defer to whom? 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Argentine Republic, ICSID Case No. ARB/97/6, Decision on Jurisdiction, 8 December 1998, 40 I.L.M. 457, 471, §43 (2001) Nesser, C M; Andreeva, Y; Feighery, T J; Lemenez, G; & Romano, C P R 2010 “International Courts”. International Lawyer, Spring 2010, Vol. 44 Issue 1, p129-141 Organization for Economic Co-operation and Development (OECD) 2006 International Investment Perspectives. OECD Publishing, Paris, France. Accessed 12 December 2010 from http://books.google.com.ph/books?id=z1-WaVzN3U0C&pg=PA5&dq=need+for+international+investment+arbitration&hl=en&ei=cNcKTbLqGYi4rAefz6HACw&sa=X&oi=book_result&ct=result&resnum=3&ved=0CDsQ6AEwAg#v=onepage&q=need%20for%20international%20investment%20arbitration&f=false United Nations Conference on International Commercial Arbitration. “Convention on the Recognition and Enforcement of Foreign Arbitral Awards.” 1958. Accessed 15 December 2010 from http://www.uncitral.org/pdf/english/texts/arbitration/NY-conv/1958_NYC_CTC-e.pdf Wagoner, D E 1996 Interim Relief in International Arbitration. Dispute Resolution Journal, Oct-Dec96, Vol. 51 Issue 4, p68-73 Case Law AAPL v Sri Lanka (1992) 17 YCA 106; (1991)30 ILM 577 Amco vs Indonesia, ICSID Case No. ARB/81/1 (Award, 20 November 1984 American Manufacturing & Trading, Inc. v. Republic of Zaire, ICSIDCase No. ARB/93/1, Award, 21 February 1997, 36 I.L.M. 1534, 1545, para. 5.23 (1997) Compagnie de Navigation et Transports SA v. Mediterranean Shipping Company SA (1995) Lanco International, Inc. v. Argentine Republic, ICSID Case No. ARB/97/6, Decision on Jurisdiction, 8 December 1998, 40 I.L.M. 457, 471, §43 (2001) Parsons & Whittemore Overseas Co. v. Societe General de l’Industrie du Papier, 508 F.2d 969, 973 (2d Cir. 1974) Phoenix v Czech Republic, ICSID Case No. ARB/06/5 (Award, 19 April 2009) Plana Consortium Ltd. v Bulgaria, ICSID Case No. ARB/03/02 (Award 27 August 2008) Saudi Arabia v Arabian American Oil Co. (Aramco), 27 ILR 117 (1963) Scherck v. Alberto-Culver Co., 417 U.S. 506, 520 n.14 (1974) Read More