MFN clauses extending to dispute resolution - putting the cart before the horse?

Practical Law UK Legal Update Case Report 9-511-1017 (Approx. 7 pages)

MFN clauses extending to dispute resolution - putting the cart before the horse?

by Mike McClure, Herbert Smith LLP

Background

A bilateral investment treaty (BIT) provides qualifying investors with certain minimum protections in respect of their investments in a state with which the investors' home state has concluded a BIT. Argentina and Germany signed a BIT on 9 April 1991, which came into force on 8 November 1993.

Many BITs contain a "most favoured nation" (MFN) clause. An MFN clause ensures that state parties to a treaty provide treatment no less favourable than the treatment they provide investors from any third state. In practice, their effect is to allow investors to rely on more favourable provisions found in other treaties concluded by the host state. The MFN clause in the Argentina-Germany BIT provides:

"Neither Contracting Party shall subject nationals or companies of the other Contracting Party, as regards their activity in connection with investments in its territory, to treatment less favourable than it accords to investments of its own nationals or companies or to nationals or companies of any third State"

(Article 3(2).)

A BIT will also provide a mechanism for how disputes between investors and the state will be resolved. The dispute resolution clause in the Argentina-Germany BIT provides that:

"(1) Disputes concerning investments within the meaning of this Treaty between one of the Contracting Parties and a national or company of the other Contracting Party shall as far as possible be settled amicably between the parties to the dispute.

(2) If a dispute within the meaning of paragraph 1 cannot be settled within six months from the date on which one of the parties concerned gave notice of the dispute, it shall, at the request of either party, be submitted to the competent courts of the Contracting Party in whose territory the investment was made.

(3) The dispute may be submitted to an international arbitral tribunal in any of the following circumstances:

(a) At the request of one of the parties to the dispute where, after a period of 18 months has elapsed from the moment when the judicial process provided for by paragraph 2 of this article was initiated, no final decision has been given or where a decision has been made but the Parties are still in dispute;

(b) Where both parties to the dispute have so agreed."

(Article 10.)

The inter-relationship between MFN clauses and dispute resolution provisions has been the subject of debate in investment treaty arbitration for many years. In particular, the debate centres on whether MFN treatment includes only substantive rules for the protection of investments (for example, fair treatment or protection from expropriation), or whether it extends to procedural protections, like dispute resolution, and can permit investors to rely on arbitration provisions of other treaties that are perceived as more favourable (for example, because they do not require a period of negotiations or the submission of a dispute to local courts before commencing arbitration). There are decisions from investment treaty tribunals going both ways.

For a detailed discussion on MFN clauses, see Practice note, How most favoured nation clauses in bilateral investment treaties affect arbitration.

Facts

In 1997, Hochtief and a consortium of construction companies were awarded a 25-year concession for the construction, maintenance and operation of a toll road and several bridges in Argentina. Hochtief brought a claim against Argentina, alleging that Argentina had breached several of its obligations under the Argentina-Germany BIT and customary international law.

Hochtief sought to commence ICSID arbitration proceedings. Argentina then challenged the tribunal's jurisdiction on the basis that Hochtief failed to observe the requirement in Article 10(3)(a) that it submit its disputes to the Argentine courts for 18 months before pursuing arbitration. In response, Hochtief asserted that it did not need to submit the dispute to the Argentine courts, as it could import a more favourable dispute resolution clause from the Argentina-Chile BIT. The dispute resolution provision in the Argentina-Chile BIT provides that, if a dispute cannot be resolved by negotiation within six months, either party may choose to submit the dispute for resolution in the domestic court or to international arbitration.

The tribunal noted that there are inconsistencies in the case law of arbitration tribunals on the question of the applicability of MFN clauses that afforded each party the possibility of supporting its position by reference to earlier awards.

Decision

The majority of the tribunal (Professor Vaughan Lowe QC and Judge Charles Brower) held that the MFN clause in the Argentina-Germany BIT allowed Hochtief to benefit from the more generous dispute resolution rules in the Argentina-Chile BIT. The claim will now proceed to a hearing on the merits.

Majority decision on the application of the MFN clause

The main focus of the parties' pleadings was on the application of Article 3(2) of the Argentina-Germany BIT. Indeed, the majority noted that an analysis of Article 3 was a sufficient basis for its decision. Accordingly, as a preliminary point, the majority noted that it was not deciding whether Article 10 imposed a mandatory 18 month submission to the national courts as a precondition to arbitration under the BIT, but stated that it was proceeding on the basis that it did.

The majority first considered whether the MFN provision could apply to dispute settlement. It noted that Article 3(2) was expressed by reference to a contracting state's "activity". The meaning of activity was explained in the Protocol at the end of the BIT, and provided in Ad Article 3 that activity within the meaning of the MFN clause shall be deemed to include "management, utilization, use and enjoyment of an investment". The majority considered that this phrase included recourse to dispute settlement, as an aspect of the management of the investment.

Having determined that MFN treatment could apply to dispute settlement, the next issue was the inter-relationship between the MFN provision and the jurisdictional limits in Article 10. The majority noted that it could not be assumed that Argentina and Germany intended that the MFN clause should create wholly new rights. However, on any interpretation of Article 10, an investor could ultimately exercise its right to submit a dispute to arbitration. Accordingly, reliance on the Argentina-Chile BIT through the MFN clause would not give Hochtief a right to reach a position that it could not reach under the Argentina-Germany BIT. It would simply allow it to reach the same position more quickly and cheaply.

However, the majority did note that the MFN provision did not permit the selective picking of components from each set of conditions, to manufacture a synthetic set of conditions to which no state's nationals would be entitled. The investor must rely on the whole scheme as set out in either the Argentina-Chile BIT or the Argentina-Germany BIT. In this case, Hochtief relied on the Argentina-Chile BIT and, within that mechanism had opted for arbitration over the local courts.

Finally, the majority expressly noted that that it was not stating that litigation in national courts was less favourable than arbitration, or that a right to arbitrate after 18 months of litigation in national courts was less favourable than a right to arbitrate immediately (although it did refer to the 18 month period as "arbitrary" and "to some extent perfunctory and insubstantial"). Rather, the majority considered that, whatever the substantive merits of litigation and of arbitration, it is always more favourable to have a choice of which to employ, than it is not to have that choice.

Dissenting opinion on the application of the MFN clause

J Christopher Thomas QC dissented in relation to the application of the MFN clause. He said that using the MFN clause to "displace" the treaty's threshold requirements and create the tribunal's jurisdiction "seems to me to be putting the cart before the horse".

First, he considered Article 10 of the Argentina-Germany BIT. As a preliminary point, there was no MFN provision within Article 10 itself. If there was, it would have been clear that, if one of the contracting states agreed to another treaty containing more favourable conditions for access to international jurisdiction, those conditions would automatically benefit an investor bringing a claim under this BIT.

Rather, Article 10 set out a staged dispute settlement regime. In respect of the first two steps, the article was stated in mandatory terms, using the word "shall". However, Article 10(3) provided that the dispute "may" be submitted to arbitration, only if one of two conditions were met (being the exhaustion of the 18-month period or the agreement of both parties). If both paragraphs were given effect, the logical conclusion would be that, without the agreement of one party, under the framework of the BIT, the 18 month prior recourse period was mandatory and jurisdiction could not vest in the tribunal until there was compliance with it. It was not the place of international tribunals to second guess the choices of the states even when one could envisage instances where such choices may lead to inefficiency and additional cost to a would-be claimant.

Second, Mr Thomas considered Article 3(2). In particular, he noted that Article 3(2) did not:

Expressly include dispute settlement activities within its scope (in contrast to the UK's Model BIT, which confirms that its MFN clause does apply to dispute settlement).
Refer to the MFN treatment covering "all matters" governed by the BIT. This was important as many decisions that had permitted an MFN clause to import dispute resolution provisions from other treaties had concerned MFN clauses covering "all matters" in the relevant treaty.

In addition, Mr Thomas asserted that Ad Article 3 of the Protocol did not permit "activity" within Article 3(2) to be read as including recourse to dispute resolution. Of seminal importance was the fact that the Protocol's elaboration of what sorts of treatment were "less favourable" addressed state conduct that was entirely different in nature from the conditions governing access to international jurisdiction. While the less favourable measures were not listed exhaustively, those not covered must logically be related to those that were expressly listed. Access to international jurisdiction regulated under Article 10 was simply not comparable to restrictions on the availability of natural resources or the sale of products inside the country or abroad. It was fundamentally different and therefore could not fall within the definition of "activity".

Mr Thomas concluded his dissent by considering the international law position between substantive obligations and jurisdiction-conferring provisions. He referred to a number of International Court of Justice decisions that have drawn a clear distinction between a treaty's substantive obligations and its conferral of adjudicative jurisdiction. Therefore, to treat the BIT's dispute settlement provisions as being the same as the substantive obligations that preceded them (as the majority did) seemed to be at variance with how general international law and practice had distinguished between the two.

Comment

The issue of the application of MFN clauses to dispute resolution provisions has been one of the most hotly debated topics in international investment law in recent years. Indeed, the issue is particularly prevalent at the moment, following the dissenting opinion of Brigitte Stern in July 2011 in Impregilo SpA v Argentina Republic (ICSID Case No ARB/07/17), discussed in Legal update, Stern dissent renews debate on whether MFN clauses extend to dispute resolution provisions.

This decision adds further jurisprudence to an area of international law that is already inconsistent. However, it may also represent a subtle shift in the approach of the majority position. In particular, most previous decisions have focused on whether investors can use an MFN clause to import arbitration provisions from other treaties that are perceived as more favourable (normally because they do not require a period of negotiations or the submission of a dispute to local courts before commencing arbitration). While this decision considered that issue (and the majority decided that MFN clauses do operate in that way), the majority went further and stated that the more favourable treatment is not the access to arbitration in a shorter period of time in itself, but rather the option of national courts or arbitration.

Nonetheless, the decision, and the dissenting opinion in particular, highlight the dichotomy of views that exist on how these clauses should be interpreted. While some states (such as the UK and the US) have sought to make the exact scope of the MFN protection as clear as possible, it would appear that the issue of the proper scope and effect of MFN clauses will remain hotly debated for years to come.

Case

Hochtief AG v Argentine Republic (ICSID Case No. ARB/07/31) (24 October 2011).

MFN clauses extending to dispute resolution - putting the cart before the horse? | Practical Law