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Consistently inconsistent: another MFN case, another split decision, another contrasting decision (ICSID)
Practical Law UK Legal Update Case Report 9-521-2506 (Approx. 8 pages)
Consistently inconsistent: another MFN case, another split decision, another contrasting decision (ICSID)
by Mike McClure, Herbert Smith LLP
| Published on 05 Sep 2012 • International, USA (National/Federal) |
In Daimler Financial Services AG v Argentine Republic (ICSID Case No. ARB/05/1) (Award on Jurisdiction) (22 August 2012), an ICSID tribunal considered whether the claimant could rely on the "most favoured nation" clause in the Argentina-Germany bilateral investment treaty to import a more favourable dispute resolution provision from the Argentina-Chile bilateral investment treaty.
Speedread
An ICSID tribunal has held that it does not have jurisdiction to hear a claim brought by a German investor, on the basis that the investor had failed to first submit the dispute to the Argentine courts for 18 months, as required by the Argentina-Germany 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 Argentina-Germany BIT did not extend to dispute resolution provisions. Therefore, it did not enable investors to take advantage of arbitration clauses from Argentina's other bilateral investment treaties. However, in a strongly worded dissenting opinion, Judge Charles Brower described the majority stance as "unconvincing" and "profoundly wrong". In addition, one of the members of the majority, Professor Domingo Bello Janeiro, took a contrasting position on the issue of MFN application in this award compared to the position he took in an award in 2004 and he therefore provided a separate opinion in order to explain his "change of heart". (Daimler Financial Services AG v Argentine Republic (ICSID Case No. ARB/05/1) (Award on Jurisdiction).)
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 Germany signed a BIT on 9 April 1991 and it entered into force on 8 November 1993.
All BITs provide a mechanism for how disputes between investors and the state will be resolved. The dispute resolution clause in the Argentina-Germany BIT provides for a stepped procedure, whereby disputes are first referred to negotiation, then the national courts of the contracting party in whose territory the investment was made, and then to international arbitration (either ICSID or ad hoc under the UNICTRAL Rules (Article 10)). In particular, Article 10(3) of the BIT provides that, absent the consent of both parties, any dispute may only be referred to arbitration: "if, within a period of 18 months of initiation of the judicial proceedings … the tribunal has not rendered a final decision or if such decision has been rendered but the dispute between the parties continues".
Many BITs also 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 key provisions of the MFN clause in the Argentina-Germany BIT (Articles 3(1) and (2)) provide:
"(1) Neither Contracting Party shall accord investments in its territory by nationals or companies of the other Contracting Party, or investments in which nationals or companies of the other Contracting Party are participating, treatment less favorable than the treatment accorded investments of its own nationals or companies or investments of nationals or companies of any third country.
(2) With respect to their activities in connection with investments in its territory, nationals and companies of the other Contracting Party shall not be accorded treatment less favorable by a Contracting Party than its own nationals and companies or nationals and companies of third countries."
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
Daimler commenced ICSID arbitration proceedings seeking damages in relation to the numerous measures Argentina put in place in 2001 in an attempt to control and mitigate its currency crisis.
Argentina challenged the tribunal's jurisdiction on the basis that Daimler failed to observe the requirement in Article 10 of the Argentina-Germany BIT that it submit its disputes to the Argentine courts for 18 months before pursuing arbitration. In response, Daimler 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-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.
Decision
The majority declined jurisdiction over the claim (Professor Pierre-Marie Dupuy and Professor Domingo Bello Janeiro, with Judge Charles N. Browner dissenting). It held that the MFN clause in the Argentina-Germany BIT did not allow Daimler to benefit from the more generous dispute resolution rules in the Argentina-Chile BIT.
The 18 month litigation prerequisite under Article 10
The tribunal started by considering the nature of the provision in Article 10 of the Argentina-Germany BIT requiring prior submission to the Argentine courts. In concluding that the 18 month litigation prerequisite was a mandatory provision, the majority noted that:
- The Article phrases its dispute resolution process in mandatory terms (that is, through the repeated use of the word "shall").
- By ordering the basic steps of the dispute resolution process into four discrete paragraphs (paragraphs 1-4) and imbuing each step with a mandatory character, Article 10 makes clear that the contracting state parties intended for the steps to follow one another in sequential fashion. Article 10 does not provide a menu of dispute settlement options available to disputing parties on an "a la carte" basis. Rather, it provides a specific sequential process whose order must be strictly observed. This is confirmed by the fact that each subsequent step refers explicitly back to the prior step.
- The structure of paragraph 3 underscores that this mandatory and sequential process applies also in the case of international arbitration. Therefore, a dispute may be submitted to international arbitration only if:
- it has already been submitted to the domestic courts for 18 months and no final decision has been rendered or the dispute otherwise continues after that time; or
- the disputing parties so agree.
The paragraph lists these two circumstances and only these two circumstances. There is no mention of possible alternate scenarios under which international arbitration against the host states may be commenced.
The majority dismissed Daimler's argument that the 18 month domestic court requirement constitutes a mere procedural directive and is not a true jurisdictional pre-requisite. The majority considered that in each of the investor-state cases cited by Daimler (including SGS v Pakistan (ICSID Case No ARB/01/13) (Decision on Jurisdiction)), the tribunals allowed claimants to skip prescribed waiting periods, not as a general principle but rather on the basis of the peculiar factual circumstances of each case. Moreover, in each case, the tribunals stressed that the prescribed waiting periods had, in any event, passed in the interim.
The majority also briefly considered whether the 18 month domestic court requirement is "nonsensical". However, they concluded that sovereign states are free to agree to any treaty provisions they choose (whether concerning substantive commitments or dispute resolution provisions or otherwise) provided these provisions are not futile and are not otherwise contrary to peremptory norms of international law. Moreover, there was evidence to suggest that Argentine courts can (and frequently do) resolve disputes in less than 18 months.
Application of the MFN provisions to the dispute resolution provisions
The tribunal then turned to consider whether the MFN provisions in the Argentina-Germany BIT would permit Daimler to avoid the requirement to submit the dispute to the Argentine courts by relying on the dispute resolution provision in the Argentina-Chile BIT. That provision gives an investor the option to decide whether it submits its dispute to arbitration or litigation.
The tribunal noted that while the word "treatment" is used in almost all BITs and MFN clauses (indeed, it is used 13 times across five different provisions in the Argentina-Germany BIT), it is not specifically defined in any BIT. Therefore, it falls to the tribunal to establish, in good faith, the ordinary meaning of this term in the context and in the light of the BIT's object and purpose.
The tribunal relied in part on a set of guidelines issued by the World Bank in 1992. While only "soft law", the majority said the guidelines indicated that the prevailing view among the community of states at the time was that the term referred to a host state's direct treatment of the investment and not to the conduct of any international arbitration arising out of that treatment. However, the majority also stated that the Argentina-Germany BIT provides several other textual clues all pointing in the same direction. In particular:
- One salient textual feature of the German-Argentine BIT's MFN provisions is that they guarantee MFN treatment by the host states in its territory. It is difficult to see how an MFN clause containing this phrase could be applied to international arbitration proceedings without discounting the explicit territorial limitation upon the scope of the clause.
- It is not a broad MFN clause which extends to "all matters" (previous investment treaty tribunals have concluded that the broader "all matters" MFN clauses evince an indication that the contracting states intended the MFN treatment to cover "all matters", including dispute resolution). On the contrary, the MFN provisions refer to the treatment of investors and their investments.
Although not opining on the point, the majority also took issue with the assumption that a treaty requiring litigation as a prelude to arbitration is necessarily less favourable than one that obliges investors to choose one or the other. Finally, the majority rejected the contention that the clarifications issued by some states as to the scope of certain MFN provisions should be viewed as evidence that MFN clauses in other treaties were, in fact, intended to extend to dispute resolution clauses.
A change of heart
Professor Bello Janeiro (who previously sat on a tribunal which concluded that MFN protection can extend to dispute resolution (Siemens AG v Argentine Republic (ICSID Case No. ARB/02/8) (Decision on jurisdiction)) endorsed the majority award. However, he also issued a short separate opinion to explain his "change of heart" on the application of MFN protections to dispute resolution provisions. In particular, he noted that:
- Judicial practice has become more varied and more awards have been rendered that disagree with the position maintained in the Siemens arbitration. In this regard, he endorsed the approach of the tribunal in Wintershall v Argentina (ICSID Case No. ARB/04/14) (see Legal update, MFN clause does not extend to dispute resolution provision) and praised the "wise" dissent of Canadian arbitrator J Christopher Thomas QC in Hochtief v Argentina (ICSID Case No. ARB/07/31) (Decision on Jurisdiction) (see Legal update, MFN clauses extending to dispute resolution – putting the cart before the horse?).
- Several States, including Argentina, have since refined the focus of the Maffezini/Siemens awards.
- The Siemens tribunal did not conduct an analysis of several of the points now covered extensively and very carefully by this award (for example, evidence of understanding of the common use of the word "treatment", Argentine practice, and limitation of the MFN clause).
Professor Bello Janeiro also noted that ICSID arbitrators are not precluded from modifying their opinions between cases. In particular, he referred to:
- Albert Jan van den Berg, upholding Argentina's state of necessity defence in LG&E v Argentina (ICSID Case No. ARB/02/1), but rejecting the same defence in Enron v Argentina (ICSID Case No. ARB/01/3) (see Legal update, Enron v Argentina: ICSID tribunal rejects defence of necessity).
- Gabrielle Kaufmann-Kohler, allowing an MFN claim in Suez v Argentina (ICSID Case No. ARB/03/19) (Decision on jurisdiction), but taking the opposite view in Austrian Airlines v Slovak Republic (Award of October 9, 2009) (see Legal update, UNCITRAL tribunal had no jurisdiction over principle of expropriation and MFN clause did not assist).
Dissenting opinion
Judge Brower dissented from the majority view on the application of the MFN clause and described the majority stance as "unconvincing" and "profoundly wrong". He also accused the majority of mis-characterising the direction of the case law by lumping together factually distinct cases.
In particular, Judge Brower asserted that the majority's reliance on the World Bank guidelines was misplaced and that for decades before the guidelines were published, fair and equitable treatment had been seen to encompass proper and timely access to dispute settlement and observance of due process. He also noted that it is difficult to imagine a more fundamental aspect of an investor's treatment by a host government than that investor's ability to exercise and defend its legal rights by prompt access to dispute settlement mechanisms, and fair and efficient administration of justice.
Moreover, while not considering whether litigation was less favourable than arbitration per se, he concluded, that based on the facts of the current case, having to submit to the jurisdiction of the Argentine courts for 18 months would be less favourable.
Comment
This decision is yet another example of the plethora of issues and views surrounding the application of MFN clauses to dispute resolution provisions. It adds further jurisprudence (and even more contrasting dicta) 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.
However, while it may be too early to draw any conclusions with any degree of conviction, the decision may represent a gradual sea change in the approach of international tribunals to this issue. In particular, of the four significant MFN decisions over the past year or so, the first two decisions (Impregilo SpA v Argentina 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)), both found that an MFN clause can extend to dispute resolution, albeit with strong dissenting opinions in both cases (see Legal updates, Stern dissent renews debate on whether MFN clauses extend to dispute resolution provisions and Legal update, MFN clauses extending to dispute resolution - putting the cart before the horse?). However, in the most recent case before Daimler, ICS Inspection and Control Services Ltd (United Kingdom) v Argentine Republic (PCA Case No 2010-9) (Award on Jurisdiction)), the tribunal went the other way and concluded that MFN provisions cannot extend to dispute resolution provisions (see Legal update, Third time lucky for Argentina as tribunal rules MFN clause does not extend to dispute resolution).
In any event, regardless of any sea change in approach, the Daimler 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.