The author is a 3rd year student of NLU, Jodhpur.
“Counterclaims: An indispensible component of Investment Arbitration”.
Counterclaims are the claims that are made by the respondent which retaliate the primary claims as put forth by the claimant. It basically lays down the defence of respondent by asserting a separate cause of action taken out by the claimants. It not only defends the respondent, it also attacks the claimant for their actions.
The reason for allowing a counter-claim to be included as part of an existing case is not because it assists in disposition of the principal claim but, rather, to assist in the disposition of two autonomous claims.[i]The counterclaim is allowed to become a part of an existing case ‘in order to ensure better administration of justice, given the specific nature of the claims in question’ and ‘to achieve a procedural economy whilst enabling the Court to have an overview of the respective claims of the parties and to decide them more consistently’.
Counterclaims in various tribunals
The ICSID convention categorically talks about rules of filling counterclaims in arbitration procedures. It says that, the tribunal shall if requested determine any counterclaims arising directly out of the subject matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre.[ii]
If we dissect this provision we will see that this provision sets out certain conditions to be complied with in order to file a counterclaim. First, the counterclaim must fall within the consent of the parties to a dispute. Second, there must be a close factual and legal connection between a counterclaim and the primary claim. This is also known as the close connection test. Finally, the counterclaim must fulfil the requirements as given under Article 25 of the Convention. This is to see that the counterclaim fits within the jurisdiction of the Centre, i.e. the counterclaim must directly arise out of an investment. The ICSID Additional Facility Rules under Article 47 permits the filing of the counterclaims. They just mandate that the counterclaim should fall within the arbitration agreement of the parties. Apart from the condition of consent, they do not pose further restrictions for the filing of counterclaims, leaving it to the consideration of arbitral tribunals whether they fall within their jurisdiction.
UNCITRAL Convention talks about the twin requirements of any counterclaims to be admissible before the tribunal. The Arbitration rules require that the counterclaims should arise “out of the same contract.”[iii]This section when narrowed down is considered as “inappropriate to arbitration arising under international treaties.”[iv]In cases where an investment contract is absent between an investor and a host state, the Arbitration Rules has certain loophole with regard to treaty violations ad as the language of the arbitration rules were discarded by the tribunals. However the UNCITRAL working group on Arbitration and Conciliation proposed to modify the provision that will fill this loophole. The group allowed counterclaim that were substantially connected or arose out of the initial claim as put forth by the investor or claimant.
After the abovementioned modification, the provision was replaced by Article 21(3) of the UNCITRAL Arbitration Rules, 2010. This provision includes a description of counterclaims in the state’s response to the notice of arbitration provided that the arbitral tribunal has a jurisdiction over it. Therefore UNCITRAL in a way give express permission of admissibility of counterclaims.
International Court of Justice
The ICJ Statute does not directly address the issue of the respondent filing a counterclaim against the applicant. Article 80 of the Rules, however, it provides that the Court may entertain such a counterclaim in certain circumstances, as a part of the incidental proceedings of an existing case. The Court has focused on the other language of Article 80(1) of the Rules, which provides that the Court may entertain a counterclaim ‘only if’ two requirements are met: First, when the counterclaim ‘comes within the jurisdiction of the Court’. Second, when the counterclaim is ‘directly connected with the subject matter of the claim of the other party’.
The Court has characterized these two requirements both as requirements on the ‘admissibility of a counter-claim as such’, explaining that admissibility ‘in this context must be understood broadly to encompass both the jurisdictional requirement and the direct-connection requirement’.[v]
Absence of provisions regarding counterclaims in SCC Arbitration Rules
Despite the growing popularity of investment arbitration for the settlement of disputes between investors and host states that are governed by Stockholm Chamber of Commerce, provisions governing counterclaims are not well defined in the SCC arbitration rules.
The rules only lay down general framework regarding filling of counterclaims. A provision of SCC Arbitration Rules says that counterclaims shall be outlined in Respondent’s answer to Claimant’s request for arbitration.[vi]The rules are silent when it comes to any other conditions such as the parties consent or the close connection test between the claim and the counterclaim. However the tribunal in the case of Amto v. Ukraine explained that the jurisdiction of the counterclaims depends on the terms of the dispute resolution provisions of the treaty, the nature of the counterclaim, and the relationship of the counterclaims with the claims in the arbitration.[vii] The tribunal, therefore, confirmed uniform application of these requirements, irrespective of the nature of the rules governing the dispute settlement procedure.
Impact and Consequences
The recent UNCTAD statistics shows that there are over 800 known treaty-based investor-state arbitrations, yet counterclaims were filed and effectively addressed in less than 30 of them.[viii]This is clear enough to indicate why the host states are at certain disadvantage. They do not get adequate opportunity to adopt a more offensive tactics against investors is the language of IIAs that determines whether counterclaims can be heard or not.
Arbitral tribunal has a vital role in smooth functioning of the disputes that arise. They have to lay down the procedures through which any dispute can be amicably resolved. They have to lay down certain guidelines or mandatory requisites which have to be followed in carrying out a particular thing. In case of counterclaims, SCC does not lay down any kind of requisites or essentials through which a counterclaim can easily be filed by the host states. This lack of provision creates ambiguity in the mind of the tribunal while deciding the fate of the counterclaims. The tribunal therefore has to look through various other sources in determining the validity of the counterclaim.
By adding just one provision which explicitly lays down the twin requirements of a valid counterclaim that can be made admissible will save time, money and confusion of the parties. The tribunal can also decide cases with more precision and can pass better judgements regarding the same. Hence the absence of provision governing counterclaims in SCC creates problems which ultimately are suffered by the parties. The concerned law makers should make provisions to bridge the lacuna in the SCC Arbitration Rules.
With every passing day high numbers of BITs are entered by the parties regarding various things. Parties take aid of the above arbitral tribunals in resolving the disputes among themselves. One of the often cited mechanisms which could help to redress these deficiencies is the filing of counterclaims by host states in arbitral proceedings. Counterclaims have been long available to the parties in investment arbitration and hence are governed by the agreed tribunals.
Various tribunals consider counterclaims as an important facet of investment arbitration and hence address counterclaims in the Arbitration rules laid by them. However SCC does not have any well-defined provisions regarding the same. The need of such provision as early as possible will solve many problems. If the provision is amended, hopefully it will aid in better dispute resolution mechanism regarding counterclaims.