UNCITRAL tribunal had no jurisdiction over principle of expropriation and MFN clause did not assist

Practical Law Legal Update 8-502-4817 (Approx. 6 pages)

UNCITRAL tribunal had no jurisdiction over principle of expropriation and MFN clause did not assist

by PLC Arbitration

Background

Treaty between Austria and the Slovak Republic

On 15 October 1990, Austria and the Czech and Slovak Federal Republic entered into a treaty concerning the promotion and protection of investments (BIT), which came into force on 1 October 1991. Following the dissolution of the Czech and Slovak Federal Republic and the emergence of the Slovak Republic (Slovakia) as a sovereign state, the BIT became applicable between Austria and Slovakia by way of state succession on 1 January 1995. The BIT included the following provisions:

Any disputes arising out of the investment between a contracting party and an investor of the other contracting party concerning the amount or the conditions of payment of compensation (for expropriation) or the transfer obligations under the BIT should be settled amicably. If not resolved, the disputes should be decided by way of arbitration under the UNCITRAL Rules (Article 8).
The investor had the right to have the legitimacy of the expropriation reviewed by the competent authorities of the contracting party which prompted the expropriation (Article 4(4)).
The investor had the right to have the amount of compensation and conditions of payment reviewed either by the competent authorities of the contracting party which prompted the expropriation or by an arbitral tribunal according to Article 8 (Article 4(5)).
Each contracting party should accord to investors of the other contracting party and to their investments treatment no less favourable than that accorded to its own investors or investors of any third states and their investments (Article 3(1)); that is, the most favoured nation (MFN) clause.
Article 3(2) set out specific exceptions to MFN treatment only for benefits and privileges granted by one contracting party to investors of a third state in connection with:
- any membership in a free-trade zone or an economic community, or the like;
- an international agreement or national law concerning matters of tax; or
- a regulation to facilitate border traffic.

For detailed discussion on expropriation and MFN clauses, see Practice notes, Expropriation in international investment law and How most favoured nation clauses in bilateral investment treaties affect arbitration, respectively. For more detailed discussion on host states' obligations under investment treaties generally, see Practice note, Investment treaty arbitration: legal issues.

Interpretation of treaties

The Vienna Convention on the Law of Treaties 1969 (Vienna Convention) sets out the principles governing the construction and interpretation of treaties. Article 31(1) of the Vienna Convention provides that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of the treaty's object and purpose. Article 32 sets out the circumstances in which reference may be made to "supplementary means of interpretation". These include where application of the principles in Article 31 leads to a meaning which is "ambiguous or obscure" or a result which is "manifestly absurd or unreasonable".

Facts

In April 2008, the claimant, Austrian Airlines, filed a notice of arbitration against the respondent, the Slovak Republic (Slovakia), under the UNCITRAL Rules. The seat of arbitration was Paris. The claimant alleged that Slovakia had breached the BIT in that it had unlawfully expropriated its investment and had breached its full protection and security obligation and the umbrella clause (which elevates breaches of contract to the status of treaty breaches). The facts underlying the claim are not known, as only a redacted version of the award has been published.

Slovakia objected to the tribunal's jurisdiction on a number of grounds. This update will focus on the following objections:

The dispute resolution provision of the BIT (Article 8) only covered disputes regarding the amount or the conditions of payment of compensation for expropriation (and not the principle of expropriation, that is, whether there had been an expropriation and, if so, its legality).
The claimant could not rely on the MFN clause to replace the dispute resolution mechanism in Article 8 of the BIT.

Decision

The tribunal, by a majority, held that it lacked jurisdiction over the claimant's claims. The third member of the tribunal gave a dissenting opinion.

Scope of dispute resolution provision

The tribunal concluded that it had no jurisdiction over the claimant's expropriation claim under Article 8 of the BIT. Applying Article 31(1) of the Vienna Convention, the ordinary meaning of Article 8 was that only disputes "concerning the amount or the conditions of payment of a compensation" could be submitted to arbitration. Therefore, the scope of Article 8 was limited to disputes about the amount of compensation and did not extend to the review of the principle of expropriation.

That meaning was confirmed by the context of Article 8, which included Articles 4(4) and 4(5) of the BIT. Under Article 4(4), challenges to the legitimacy of an expropriation had to be made before the competent authorities of the host state, while under Article 4(5), an investor could refer challenges regarding the amount of compensation to either the competent local authorities or an arbitral tribunal according to Article 8. Article 4(4) did not refer to arbitration or to Article 8. Therefore, Article 8 provided no jurisdiction over the principle of the claimant's expropriation claim.

For the sake of completeness, the tribunal also considered the parties' arguments regarding the object and purpose of the BIT and the intent of the contracting parties reflected in the travaux preparatoires. With regard to the object and purpose of the BIT, the tribunal distinguished this case from the following:

Specifically, it rejected the claimant's argument that a clause which provided for arbitration only in respect of the amount of compensation is not consistent with the object and purpose of a BIT, which include the protection of foreign investors. The tribunal considered that that argument could not succeed here because, unlike the treaties in EMV and Renta 4, the BIT in question expressly provided a forum for disputes regarding the principle of expropriation. The parties had contracted for the host state's authorities to determine the legality of an expropriation and there was no reason to believe such determination would be ineffective or contrary to the BIT's object and purpose.

The tribunal found further support for its conclusion in the negotiating history of the BIT, which showed that the final wording of Article 8 was deliberately restricted, an earlier draft having referred to disputes "regarding an investment".

Scope of the MFN clause

Having confirmed that it had jurisdiction to rule on the scope of the MFN provision (by virtue of Article 21(1) of the UNCITRAL Rules which gave the tribunal power to rule on jurisdictional objections), the majority of the tribunal rejected the claimant's attempt to rely on the MFN clause to import into the BIT more favourable dispute resolution provisions from other treaties entered into by Austria and Slovakia respectively. The process by which it reached its conclusion was as follows:

The MFN clause should be interpreted objectively and in good faith, in accordance with the usual rules of treaty interpretation in Articles 31 and 32 of the Vienna Convention.
The MFN clause did not specify whether or not it applied to dispute settlement, and referred to "treatment" without distinguishing between substantive and procedural matters, which was ambiguous. It was therefore necessary to look to the context of the clause as a whole, together with the treaty provisions that dealt with dispute settlement (namely, Articles 8, 4(4) and 4(5)), and other elements relevant to its interpretation.
The travaux preparatoires demonstrated that, after initially contemplating broad access to arbitration, the contracting parties ultimately restricted such access.
There was a "manifest, specific intent" to restrict arbitration to disputes over the amount of compensation for expropriation to the exclusion of disputes over the principle of expropriation. As such, it would be "paradoxical" to invalidate that specific intent by virtue of the "general, unspecified intent" expressed in the MFN clause.
The specific intent expressed in Articles 8, 4(4) and 4(5) informed the scope of the general intent expressed in the MFN clause, so the former prevailed over the latter. Therefore, the MFN clause did not apply to the settlement of disputes over the legality of expropriations.
As a result, neither the claim for expropriation nor the other claims brought by the claimant were covered by the arbitration provision in the BIT.

Dissenting opinion

The remaining arbitrator, Charles Brower, dissented on the issue whether the MFN clause conferred jurisdiction on the tribunal. He concluded that he would have confirmed jurisdiction under that clause, on the basis that the MFN clause broadened the tribunal's jurisdiction by incorporating into the BIT the broader arbitration clause contained in the Denmark-Slovakia BIT. The MFN provision in Article 3(1) of the BIT covered both substantive and procedural treatment, including the consent to international arbitration given by Slovakia under any of its other BITs. The dissenting arbitrator's reasoning was as follows:

The only limitations to Article 3(1) were the exceptions articulated in Article 3(2) and there was no basis for implying further limitations by reference to Articles 8, 4(4) and 4(5).
There was no ambiguity in the term "treatment" in Article 3(1) and therefore no justification for referring to the travaux preparatoires of the BIT. In any case, none of the travaux preparatoires presented to the tribunal related to Article 3.
Further, Article 3(2) made clear that the term "treatment" in Article 3(1) covered substantial and procedural rights, including access to the host state's broader consent to arbitration in other instruments. The effect of Article 3(2) was only to exclude such access as contained in the type of instruments referred to there, which would include double taxation treaties.
The majority's view of what was the relevant context for interpreting a broad MFN clause in an investment treaty was problematic. It was not appropriate to consider provisions as context for interpreting an MFN clause that were less favourable than provisions in third state BITs to which the claimant claimed access. If it were, the MFN clause might never be given effect.

Comment

The difference of opinion between the majority of the tribunal and the dissenting arbitrator illustrates the lack of certainty which continues to prevail regarding interpretation of MFN clauses. On the face of it, the MFN clause itself contained express limitations, which the parties could have, but had not, extended to refer to dispute settlement provisions in BITs between the contracting parties and third states. Further, if the purpose of an MFN clause is to replace terms perceived to be unfavourable with more favourable terms from another treaty, then there is some force in the dissenting arbitrator's criticism of the majority's use of the offending provisions in this case as context for interpreting the MFN clause, as it arguably defeated the object of the MFN clause.

Case

Austrian Airlines v Slovak Republic (UNCITRAL, Final award and dissenting opinion, 9 October 2009)

UNCITRAL tribunal had no jurisdiction over principle of expropriation and MFN clause did not assist | Practical Law