[By Sourav Verma and Sunil Singh]
The authors are students at the Hidayatullah National Law University, Raipur.
In the last two decades of the 20th century, due to globalization as well as liberalization, there has been an increase in the free-flow of foreign investments, especially in developing countries. Due to this, great changes have taken place in the foreign investment regime, mainly in the form of Bilateral and Multilateral Investment Treaties. These treaties have had a significant impact on aspects such as national sovereignty, federalism, and public policy decisions that relate to the health and environment of the host countries.
With the tremendous rise in the number of BITs and MITs, there is also an increase in the amount of investment treaty arbitration. However, concerns have arisen with respect to inconsistent arbitral awards, lack of transparency, parallel arbitration proceedings, impartiality and diversity in the appointment of arbitrators, and delay in the award making process[i].
In the past two decades, there have been some inconsistent awards delivered by tribunals in Investment treaty arbitration, which in turn have faced criticism from academicians, sovereigns, investors. However, while absolute consistency in any legal system is not possible, at least a minimum level of consistency is necessary in any legal system to attain certainty.
This article specifically focuses on the SGS arbitrations[ii] and Lauder arbitrations involving similar facts and circumstances in which tribunals reached contradictory conclusions, which attracted a great deal of public attention.
The SGS arbitrations involved two arbitration proceedings, (i) between SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan (‘SGS v. Pakistan’) and (ii) SGS Société Générale de Surveillance S.A. v. Republic of the Philippines (‘SGS v. Philippines’), in which tribunals came to different conclusions regarding the interpretation of the umbrella clause which is also known as “observance of undertaking” involving almost similar facts.
SGS v. Pakistan was the first investment treaty arbitration in which the tribunal considered the meaning of an umbrella clause. SGS, by relying on Article 11 of the Switzerland-Pakistan BIT, claimed that it was the duty of “every state to observe all the obligations that it should enter in relation to foreign investments”.[iii] The tribunal in that case held that the claimant failed to provide evidence “that the parties to the BIT intended that umbrella clause transmute a contractual breach to the level of a treaty breach. The tribunal on the basis of lack of evidence rejected the broad interpretation and denied the claimant’s claim.
Only after the gap of five months, SGS sued the Republic of Philippines and the factual matrix of the SGS v. Philippines was almost similar to that of SGS v. Pakistan. Despite this similarity, the tribunal reached a different result which is the opposite of the previous decision through a different analysis.
Article X(2) of the Switzerland-Philippines BIT provided that every Sovereign “shall observe all the obligations undertaken with regard to investments in its territory by the investors of other Sovereigns.
By relying on the article X (2), the tribunal observed that it was the “duty of every Sovereign to observe all the obligations it has accepted or will, in future, accept with investments under the purview of the BITs”. The tribunal concluded that due to the umbrella clause, “Philippines breached the binding and contractual commitments that it has presumed under the BIT, with regard to the specific foreign investments.
The Philippines award is diametrically opposite to the Pakistan award. While the decision of the tribunal in SGS V. Pakistan is based on a narrow interpretation of the treaty, the tribunal in SGS v. Philippines concluded its decision on rather a broad interpretation. Therefore, it is undeniable that one of the decision is based on an incorrect interpretation of the treaty, that leads to confusing all the stakeholders regarding the correct implementation of the umbrella clause.
The Lauder Arbitrations
Lauder v. Czech Republic and CME v Czech Republic are two arbitral proceedings that were initiated against the Czech Republic for the violations of Czech Republic-USA BIT and Netherlands-Czech Republic BIT respectively. Both the tribunals reached very conflicting, and therefore opposite conclusions in relation to each other, even though the underlying facts were the same.
The Lauder tribunal held that the Czech Republic engaged in discriminatory and arbitrary treatment of investments. Further, the tribunal noted that there was neither expropriation nor violation of either the duty to provide fair and equitable treatment (FET) or the obligation to provide full security and protection. Finally, the tribunal concluded that the Czech Republic had not breached its obligations under the investment treaty and therefore owed no damages to Lauder.
Only after a gap of ten days, the CME tribunal reached a conclusion that was the exact opposite of the Lauder tribunal. The CME Tribunal held that the Czech Republic had not fulfilled its obligations related to fair and equitable treatment, full security and protection of investments, obligation to treat investments in conformity with principles of international law, and obligations not to impair investments by unreasonable or discriminatory measures. The tribunal awarded CME damages worth US $269,814,000.
Later, Czech Republic moved Sweden’s Svea Court of Appeal to vacate the award of the CME tribunal. The Svea Court of Appeal refused to set aside the award opining that it had very narrow review power and only in exceptional circumstances could an award be set aside[iv]. The Svea Court of Appeal accepted the existence of parallel proceedings by the Lauder tribunal in London but refused to interfere on the ground that it had no jurisdiction and also refused to apply res judicata or lis pendens because the two awards involved different parties under different BITs entered between different Sovereigns.
The contradictory decisions rendered in the Lauder cases result in undermining the legitimacy of investment arbitration, particularly where disputes related to public policy, environmental and human rights, and public health are at stake.
Various academic literature, practitioners, etc. of this discipline have already discussed numerous approaches to resolve this issue of inconsistency. A common suggestion has been the establishment of an appellate tribunal under the ICSID framework.
Each BIT is drafted differently depending upon the environmental regulations, Public health, human rights, and the level of development of the negotiating countries, hence obligations differ from one BIT to another and arbitral awards rendered on the basis of these differently worded BITs[v] would lead to inconsistent awards which raises a question regarding the legitimacy of this system. Hence, even though investors from different nations bring claims against the same host nation involving disputes having similar facts, there is the likelihood of being treated differently by the tribunals due to different wordings of the BITs.
Instead of establishing a permanent investment court or appellate facility, a better approach would be to establish a new centralized dispute resolution mechanism under the ICSID Convention, 1966 on the lines of the World Trade Organization (WTO) agreement, by replacing all the current BITs with a centralized investment treaty that would apply to all the signatories of the ICSID Convention.
The central objective of establishing a centralized dispute resolution mechanism is to provide security, stability and predictability to the investment treaty system. The participants of the investment treaty system are both sovereigns and private foreign investors, and these private investors need stability in the system in which they have invested billions of dollars abroad. Typically, disputes arise when the host countries breach obligations stipulated in the clauses, such as fair and equitable treatment, most favored nation, expropriation, full protection, and security.
As we already have a reliable body in the form of ICSID which acts as a nodal agency for the facilitation of dispute resolution, the ICSID Secretariat could be asked to adopt and implement the new centralized dispute resolution mechanism. Further, the Secretariat would also draft substantive provisions for interpretation of terms like Fair and Equitable Treatment, Most-Favoured Nation, full protection and security, expropriation, etc., to ensure consistency. A similar approach was followed in the recently concluded Comprehensive Economic and Trade Agreement (CETA)[vi] between Canada and European Union (EU) too which provided a list of acts that constitute a violation of FET obligation[vii]. The tribunal should interpret the provisions of the agreement, according to customary international law, including those set out in Article 31 of the Vienna Convention on the Law of Treaties. The interpretations should assist the tribunals in clarification of the obligations undertaken by the host states.
The ICSID Secretariat would also provide reservations and exceptions to the nations for the implementation of the centralized investment treaty on the basis of their economic, political, and social conditions. This would ensure that an equal footing is provided to each nation, just like WTO agreements where developing nations are provided some special treatments, including special and differential treatment. It would further increase the acceptability and clarity of the new model.
Consistency is an important attribute of any legal framework. As it can be seen from the above-discussed case laws, the lack of a centralized investment treaty has contributed to inconsistencies in arbitral awards. Adoption of a multilateral framework would potentially rule out such inconsistencies and would call for a reform in the investment treaty dispute resolution regime. However, to implement such a multilateral framework, it is important to bring the majority of nations on the same page which is a very daunting task. However, it is not impossible, for we already have a global framework for trade, i.e. WTO. Further, establishing a framework for an investment treaty would require the same level of effort as WTO and would also require a strong political will to bring the majority of nations on board for negotiations.
[i] World Investment Report 2015 (UN 2015)
[ii] SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan (ICSID Case No. ARB/01/13), Decision on Objections to Jurisdiction, Aug. 6, 2003, ines (ICSID Case No. ARB/02/6),
SGS Société Générale de Surveillance S.A. v. Republic of the Philippines (ICSID Case No. ARB/02/6), Decision on Jurisdiction, Jan. 29, 2004
[iii] Treaty between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement
and Protection of Investment, art. II(2)(c) (Oct. 20, 1994)
[iv] Czech Republic v. CME Czech Rep. B.V., Judgment of the Court of Appeal, Case No. T 8735-01 [hereinafter Svea Court of Appeal Judgment], Page no.84-85
[v] [v] S. Hindelang, Study on Investor-State Dispute Settlement (ISDS) and Alternatives to Dispute Resolution International Investment Law( ISSN : 1875-4120 Volume 13,issue 1March 2016)
[vi] Comprehensive Economic Trade Agreement
[vii] Article 8.10.2