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Third time lucky for Argentina as tribunal rules MFN clause does not extend to dispute resolution
Practical Law UK Legal Update 9-518-2509 (Approx. 7 pages)
Third time lucky for Argentina as tribunal rules MFN clause does not extend to dispute resolution
by Mike McClure, Herbert Smith LLP
| Published on 29 Feb 2012 • International |
In ICS Inspection and Control Services Ltd (United Kingdom) v Argentine Republic (PCA Case No 2010-9) (Award on Jurisdiction) (10 February 2012), a tribunal at the Permanent Court of Arbitration in the Hague considered whether the claimant could rely on the "most favoured nation" clause in the Argentina-UK bilateral investment treaty to import a more favourable dispute resolution provision from the Argentina-Lithuania bilateral investment treaty.
Speedread
A tribunal at the Permanent Court of Arbitration in the Hague has held that it does not have jurisdiction to hear a claim brought by a UK investor, on the basis that the UK investor had failed to first submit the dispute to the Argentine courts for 18 months, as required by the UK-Argentina bilateral investment treaty (BIT). That provision acts as a strict limit on Argentina's consent to arbitration and must be strictly complied with before the investor's right to proceed to international arbitration arises.
The tribunal also held that the most favoured nation (MFN) clause in the UK-Argentina BIT did not extend to dispute resolution provisions, to enable investors to "import" arbitration clauses from Argentina's other bilateral investment treaties. However, it is pertinent to note that the rejection of the MFN argument in this case runs contrary to the two most recent decisions to consider this issue (Impregilo SpA v Argentine Republic (ICSID Case No ARB/07/17) (Award) (21 June 2011) and Hochtief AG v Argentina (ICSID Case No ARB/07/31) (Decision on Jurisdiction) (24 October 2011). (ICS Inspection and Control Services Limited (United Kingdom) v Argentine Republic (PCA Case No 2010-9) (Award on Jurisdiction) (10 February 2012).)
Background
A bilateral investment treaty (BIT) provides qualifying investors with certain minimum protections for their investments in a state with which the investors' home state has concluded a BIT. Argentina and the UK signed a BIT on 11 December 1990, which came into force on 19 February 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-UK BIT provides:
"Neither Contracting Party shall in its territory subject investors of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investments, to treatment less favourable than that which it accords to its own investors or to investors 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-UK BIT provides that, without the agreement of both parties to the dispute, disputes shall be submitted to international arbitration only:
- Eighteen months after the dispute has first been submitted to the Argentine national courts.
- Where the Argentine national court has made a final decision, but parties are still in dispute (whichever is earlier).
(Article 8.)
The interrelationship 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).
- 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 submitting 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
ICS sought to commence arbitration proceedings in the Permanent Court of Arbitration in the Hague seeking US$25 million damages for Argentina's alleged failure to pay for auditing services for a government-sponsored scheme to inspect imports bound for the country before they were shipped.
Argentina challenged the tribunal's jurisdiction, on the basis that ICS failed to observe the requirement in Article 8 of the Argentina-UK BIT that it submit its disputes to the Argentine courts for 18 months before pursuing arbitration. In response, ICS asserted that it did not need to submit the dispute to the Argentine courts because it could import a more favourable dispute resolution clause from the Argentina-Lithuania BIT. The dispute resolution provision in the Argentina-Lithuania 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.
Decision
The tribunal declined jurisdiction over the claim. It held that the MFN clause in the Argentina-UK BIT did not allow ICS to benefit from the more generous dispute resolution rules in the Argentina-Lithuania BIT.
The 18 month litigation prerequisite under Article 8
The tribunal started by considering the nature of the provision in Article 8 of the Argentina-UK BIT requiring prior submission to the Argentine courts.
The tribunal noted that, while it holds an inherent power over procedure (under Article 15(1) of the UNCITRAL Arbitration Rules), by contrast, its jurisdiction is based exclusively on consent. The only inherent jurisdiction held by an arbitral tribunal is its Kompetenz-kompetenz (power to determine its own jurisdiction).
As regards admissibility to arbitration, a tribunal does not have discretion to simply disregard a requirement. Rather it has some discretion on how to deal with non-fulfilment of the requirement, such as by staying instead of terminating the proceedings.
Therefore, the question was whether:
- The requirement of prior submission to the Argentine courts falls within the conditions to which Argentina's consent to arbitration is subject.
- Non-compliance nevertheless does not affect the underlying consent to arbitrate the present dispute.
ICS argued that consent to arbitration is merely postponed and is, for all intents and purposes, inevitable. However, the tribunal determined that consent is not yet present. The Argentina-UK BIT explicitly provides strict conditions that must be satisfied before the investor's right to proceed to international arbitration arises. Those conditions were not present in the current dispute and, in these circumstances, the tribunal did not have jurisdiction to hear the claim.
Moreover, the tribunal rejected ICS's argument that the litigation prerequisite was futile, as the dispute would not be resolved within 18 months. The tribunal also noted that its analysis accorded with the recent judgment of a US Court of Appeals in proceedings to set aside the award in Republic of Argentina v BG Group PLC (unreported), 17 January 2012, (DC Cir), also under the Argentina-UK BIT. In that case, the court rejected the tribunal's decision to excuse the claimant's non-compliance with the 18-month litigation prerequisite, notwithstanding the fact that complying with the requirement was very difficult (or even impossible) in the context of the economic emergency (see Legal update, DC Circuit vacates arbitral award for non-arbitrability).
Does the MFN clause at Article 3(2) apply to dispute settlement provisions?
The tribunal concluded that the MFN clause in Article 3(2) of the Argentina-UK BIT did not apply in a way to permit ICS to avail itself of the dispute resolution provision in the Argentina-Lithuania BIT. In particular:
- The tribunal noted that, while the word "treatment" is used in almost all MFN clauses, it is not specifically defined in any BIT. The tribunal concluded that the term "treatment" was most likely meant to refer only to the legal regime to be respected by the host state in conformity with its international obligations, in the absence of any contrary stipulation in the treaty itself. The settlement of disputes meanwhile remained an entirely distinct issue, covered by a separate and specific treaty provision.
- Even if the term "treatment" could be understood as encompassing dispute resolution provisions, the instant MFN clause still does not apply to international arbitration. The host state's obligation extends no further than providing the investor with "treatment" in respect of domestic dispute resolution (that is, dispute resolution "in its territory") that is no less favourable than the domestic dispute resolution treatment provided to investors from third states. Where an MFN clause applies only to treatment in the territory of the host state, the logical corollary is that treatment outside the territory of the host state (that is, international arbitration) does not fall within the scope of the clause.
- The tribunal was also persuaded by Argentina's argument that, if the MFN clause was to apply to dispute resolution provisions, this would run counter to the principle of effectiveness by which it presumed that the provisions were intended to serve some purpose. In particular, after signing the Argentina-UK BIT, Argentina concluded five subsequent BITs that included the 18-month litigation prerequisite. If Argentina had generally intended for its BITs' MFN clauses to apply to their dispute resolution provisions, it concluded those five subsequent BITs for no good reason, given that it had already concluded three BITs without this requirement.
Furthermore, despite its decision on the application of the MFN clause, for completeness the tribunal noted that ICS had failed to show that the dispute resolution clause in the UK-Argentina BIT constituted "less favourable" treatment. In fact, while the Argentina-Lithuania BIT constituted a "fork in the road" provision that gives investors the choice between local remedies and international arbitration, the Argentina-UK BIT gives investors "two bites at the apple: once before the domestic courts … and again before an international arbitral tribunal".
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. This decision adds further jurisprudence to an area of international law that is already such that either side to the argument can support its position by reference to previous awards.
Interestingly, the tribunal's rejection of the MFN argument is in contrast to two recent cases brought against Argentina (Impregilo SpA v Argentina Republic (ICSID Case No ARB/07/17) (Award) (21 June 2011), discussed in Legal update, Stern dissent renews debate on whether MFN clauses extend to dispute resolution provisions and Hochtief AG v Argentina (ICSID Case No ARB/07/31) (Decision on Jurisdiction) (24 October 2011), discussed in Legal update, MFN clauses extending to dispute resolution: putting the cart before the horse?). In both Impregilo and Hochtief, the majority concluded that the claimant could rely on the MFN clause in their respective BITs to benefit from the dispute resolution mechanisms in Argentina's other BITs. This was although both awards included dissenting opinions that cautioned against allowing claimants to bypass a treaty's jurisdictional requirements by invoking an MFN clause.
It will be interesting to see whether the ICS decision, together with the dissenting opinions in Impregilo and Hochtief, represent a sea change in the approach international tribunals take to the issue of whether MFN treatment applies to dispute resolution. In any event, regardless of any sea change in approach, the ICS decision is yet another example of 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.