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Pursuing Parallel Arbitration Under an Investment Treaty

For various reasons–including fairness, efficiency, and avoiding inconsistent results–courts and arbitration tribunals apply a range of procedural tools to discourage parties from pursuing multiple, separate dispute resolution proceedings between the same parties over related claims arising from a single dispute. In cases involving foreign investment within the coverage of an investment treaty, such as a bilateral investment treaty (BIT) or free trade agreement, however, the investing party may have compelling reasons to simultaneously pursue commercial arbitration pursuant to contract, and investment arbitration pursuant to treaty. And unlike other situations where courts and tribunals may look askance at parallel proceedings, the presence of an otherwise exclusive arbitration clause in a contract between a foreign investor and a host state may not, by itself, preclude an injured investor from pursuing both commercial arbitration as provided in the contract and investment arbitration as provided in a treaty. This has a sound basis in international law and provides potential advantages to parties with claims pending in private commercial arbitration proceedings.

Typical BIT language is drafted broadly to create favorable conditions for foreign investors’ investments in the territory of the host state. Covered investments are broadly defined and construed and BITs grant broad substantive protections against improper conduct by the state actor, typically including national treatment, most favored nation, fair and equitable treatment, and protection against expropriation. An “umbrella clause”—present in some BITs—usually provides that the state shall observe all undertakings it has assumed towards a protected investor with regard to the investments in its territory. Such umbrella clauses have been interpreted to confer substantive treaty protection for breaches of contract by the state party, by elevating a failure of the state to comply with its contractual undertakings to a failure to comply with the BIT.

Although an investment contract may provide for exclusive dispute resolution by commercial arbitration (such as the ICC), that seeming exclusivity does not necessarily preclude an injured investor from also pursuing a parallel treaty claims against the state party under a BIT. This is because a state’s conduct with respect to an investment contract, whether or not it amounts to a breach of contract, may independently amount to a breach of a treaty obligation (such as, fair and equitable treatment guarantee in a BIT). And, a state’s breach of a contractual undertaking may also amount to breach of an umbrella clause under a BIT. Thus, investors may be able to bring contract-related claims within the framework of international investment arbitration.

Depending on the circumstances of the case, at least four key advantages may exist for parties who are able to pursue parallel treaty proceedings in both private commercial arbitration and treaty-based investment arbitration. First, there may be more favorable law for claims brought under a treaty, as compared to claims brought solely as contractual claims in private commercial arbitration. For example, assessment of compensation may be more generous under public international law than it would be under the terms of a contract, or under the otherwise applicable national law.

Second, parallel proceedings may also provide the opportunity to recover additional types of damages. The party claiming breach would not necessarily be limited to the damages recoverable under applicable law for breach of contract nor would the party be limited to the contractual limitations set on liability.

Third, BITs themselves may include express waivers of state immunity by the state party, making the enforcement of a damages award more probable in many jurisdictions. With breach of contract damages awarded in a private arbitration, sovereign immunity may present a subsequent roadblock to effectively enforcing the award. With BIT awards, such roadblocks are less frequent.

Finally, parallel claims may increase pressure on state parties to reach settlement. Both the cost of litigation and the potential damages awards may significantly increase if there are two separate proceedings, increasing the risk for the state.

As long as a sound basis exists for elevating contractual claims to treaty claims, aggrieved investors may consider bringing parallel treaty and contractual claims for the substantive and tactical advantages such a strategy may present. At the same time host governments should be sensitive to the possibility of such parallel claims and be prepared to scrutinize the extent to which the claims are co-extensive.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Hwan Kim, Corporate Attorney, Sheppard Mullin Law Firm
Associate

Hwan Kim is a partner in the Corporate Practice Group and the International Investment Arbitration Team in the firm's Washington, D.C. office and Seoul office.

His areas of practice are in working with public and private companies. He works with shareholders, and deals with company-international dispute claims. Power generation, construction, and petrochemical companies, are among the many clients Mr. Hwan works with. He does multinational work as well, as he works out of the firm's Seoul, Korea offices. He conducts business with the United...

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