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Addressing The Conundrum Of “Consent” For Jurisdiction And Admissibility Of Counterclaims In ICSID Arbitration Regime In Light Of Prof. Michael W. Reisman’s dissent In Roussalis v. Romania
In this post, the authors seek to engage with the question of the arbitrability of counterclaims in light of the ICSID regime. To this end, they seek to examine whether incorporation of International Centre for Settlement of Investment Disputes (ICSID) regime in investment treaties and/or filing a claim to the ICSID amount to consent to arbitrate counterclaims in investment arbitration. They engage with both the majority and the dissenting opinion in Roussalis v. Romania to analyse the consent requirement for subjecting counterclaims to arbitral proceedings. Lastly, a case for following the dissenting approach is made out by laying out the benefits arbitration can bring to the issue of counterclaims and the implications of the same are briefly examined.
I. INTRODUCTION
Investment Treaty Arbitration (‘ITA’) regime is often referred to as an asymmetric mechanism, since the paradigm accruing from international treaty allows investor(s) to place a claim against host-states before the arbitral tribunal (‘AT’) for adjudication and not vice-versa.[iii] The current paradigm has generated volumes of scholarly debates and literature reinforcing the need for enhanced Investor-State Dispute Settlement (‘ISDS’). In the same vein, there has been an increased trend in counterclaims before AT by host-states against investors. Generally speaking, counterclaims are claims submitted by host-states in contradiction to investor’s primary claim before the AT.[iv] The notion of counterclaims isn’t alien in international law (‘IL’) jurisprudence as international adjudicating bodies have been consistently dealing with them along with principal claims.
For instance, as per Art. 80 of the International Court of Justice Rules (‘ICJR’), the International Court of Justice (‘ICJ’) can entertain counterclaims provided the counterclaim is closely connected to the principal claim while the jurisdiction of the court prevails over it.[v] In ISDS, reflections of ICJ’s mechanism on jurisdiction and admissibility of counterclaims can be observed.
In this blog, the authors shall propound on the legal question- “will incorporation of International Centre for Settlement of Investment Disputes (ICSID) regime in investment treaties and/or filing a claim to the ICSID amount to consent to arbitrate counterclaims in investment arbitration?” to understand the arbitrability and effectiveness of counterclaims in ICSID arbitrations. While doing so, the authors shall:
[A] explain the vitality and nuances of Art.46 of the ICSID convention;
[B] draw understanding over the elements/essence of counterclaims;
[C] highlight the concept of “Consent” in ICSID arbitration counterclaims in light of Roussalis v. Romania case; and,
[D] place inference as well as argue in favour of Prof. Reisman’s dissent in Roussalis v. Romania case.
II. THE GLORY OF COUNTERCLAIMS UNDER ICSID
Arbitration under ICSID convention provides competence to AT to entertain counterclaims placed by states in reliance of Art. 46 of the Convention & Art.40 of the ICSID. A literal reading of Art.46 suggests that counterclaims can be entertained, provided the following are satisfied;
a) Counterclaims must fall within the ‘scope of consent’;
b) It must arise ‘directly from the subject-matter of the dispute’; and,
c) It must be within the ‘ICSID jurisdiction. [vi]
The opening statement “Except as the parties otherwise agree” by interpretation is clear that counterclaims “shall” be entertained by AT when submitted, unless the parties have voluntarily opt-ed out.[vii] Ttravaux Préparatoires (Travaux préparatoires are the documentary evidence of the negotiation, discussions, and drafting of a final treaty text) affirms the tribunal’s competence over counterclaims and specifies for enhanced dispute resolution.[viii]
A. Essence Of Counterclaims: Nature and Closeness
Arising directly out of Subject-matter of dispute: In principle, Ratione-materiae of an investment dispute is ‘investment’ which qualifies the test specified in Art. 25 of ICSID.[ix] Thus, counterclaims must arise directly out of a legal dispute regarding ‘investment’.[x] However, the requirement ‘arising directly out of investment’ in Art. 25 is different from the requirement ‘arising directly out of subject-matter of the dispute’ in Art. 46.[xi] The difference boils down to ‘dispute’ that is in question concerning investment and ‘nexus’ that counterclaim shares with it.[xii]
Closeness: The legal standing of counterclaims is based on the close connection that it holds with the principal claim submitted by the investor(s). In ITA jurisprudence, it is observed that the claim and counterclaim must be ‘indivisible’ and ‘interdependent’.[xiii] Dilemma between factual or legal closeness is often observed, as IL jurisprudence requires both[xiv]. However, when ITA is examined, it is sufficient if either one is satisfied.[xv]
Consent: In Alternative Dispute Resolution (‘ADR’), specifically in the context of arbitration, consent is the strongest pillar which upholds competence of AT and arbitrability.[xvi] In International Arbitration (‘IA’) jurisprudence, consent can be observed in the arbitration agreement between the parties to the dispute. AT are generally bound by consent as it depicts consensus to submit for arbitration and arbitrate the dispute at question, as well as shows the locus-standi.[xvii] Having said that, AT should be mindful of consent as going beyond it would render the award void.[xviii] In ITA, consent is enshrined in International Investment Treaties (‘IIT’) from where the disputes accrue and are achieved when the standing offer to arbitrate made by states is accepted by investors.[xix] Largely, IIT are limited in their scope of consent to arbitrate and causes asymmetric mechanism that exists in cause célèbre particularly in the realm of counterclaims. However, arbitration rules specified in IIT for adjudication accords AT to entertain counterclaims. Now a legal question arises, i.e., will incorporation of ICSID regime in investment treaties and/or filing a claim to the ICSID amount to consent to arbitrate counterclaims in investment arbitration?
III. THE CONUNDRUM OF 'CONSENT': ROUSSALIS Vs. ROMANIA
The concept of consent is vital in ITA which extends to counterclaims as well.[xx] It has been 50 years of the ICSID Convention and the conundrum of consent still lingers.[xxi] The first case to address the ‘scope of consent’ was Roussalis v. Romania.[xxii] The tribunal arrived at its conclusions possessing divergent views and thereby generated waves of jurisprudence subsequently.[xxiii]
Keynote-Takeaways
3.1.1.Crux of the case: The dispute arose out of Greek-Romanian Bilateral Investment Treaty (‘BIT’) 1997 wherein, claimant Roussalis (Greek-investor) sought arbitration relief and submitted claims for infringement of BIT, against which Romania contested with counterclaims. Thereafter, claimants challenged the jurisdiction of counterclaims as BIT was silent on the scope of consent to arbitrate counterclaims. AT in its majority declined jurisdiction and Prof. Reisman dissented.
3.1.2.Deliberations, scholarly views and jurisprudence: AT made the following discussions and observations which were echoed in various scholarly works and cases as mentioned below.
Consent, Majority and Dissent
Consent
Wordings of BIT: The majority emphasised on consent as a catalyst to competence along with jurisdiction and stated it is reflected in the wordings of BIT concerned. In doing so they concluded that it does not have jurisdiction. As a context reference, Art.9 of the Greek-Romanian BIT specifies the following-
“[d]isputes between an investor of a Contracting Party and the other Contracting Party concerning an obligation of the latter under this Agreement, in relation to an investment of the former, shall, if possible, be settled by the disrupting parties in an amicable way"
Ipso facto incorporation: Prof. Reisman stated that consent is realized when the investor elects ICSID arbitration rules which allows arbitrability of counterclaims[xxiv] and constitutes as ipso facto incorporation of consent. Thus, AT should have jurisdiction.
Approach
Explicit consent (Narrow): The majority observed that consensus to submit claim/counterclaim to arbitrate is demonstrated in BIT and that forms an explicit consent and scope to adjudicate matters presented. Since here there was no explicit consent, jurisdiction could not be concluded.
Implicit consent (Broad): Prof. Reisman opined that the election of ICSID arbitration implicates that the investor is aware of consent being extended to counterclaims as rules permit it and thereby implicit consent to arbitrate counterclaims is established.
Construction
Literal construction: It is observed from the majority’s view that it had evoked literal interpretation rule as it is guided by the words of dispute resolution clause of BIT.
Harmonises: In Prof. Reisman’s dissent, it is observed that dispute resolution clause in BIT must be read in harmony with arbitration rules.
3.1.3.Aftermath of Roussalis v. Romania: AT triggered two different schools of thought in ITA jurisprudence,[xxv] i.e.:
a) Broader construction- Dissent view: Ipso Facto incorporation via Art.46 of the ICSID
b) Narrow construction- Majority view: Dispute resolution clause of BIT.
Subsequent ICSID cases followed either of the views. However, particular attention must be heeded to Antoine Goetz v. Burundi[xxvi] which reflected the limited scope of consent as well. Nevertheless, the AT echoed Prof. Reisman’s dissent on ipso facto incorporation and affirmed jurisdiction over counterclaims. As the AT diverted its views from Roussalis v. Romania’s majority, it paved way for broader construction and trend in acceptance of counterclaims in ICSID regime despite limited scope in BIT.[xxvii]
IV. Weighing scale: Spirit of BIT vs. Spirit of ICSID Convention?
In the ICSID regime, in the backdrop of divergent rulings on ‘scope of consent’,tribunals have either encouraged counterclaims in concurrence with the spirit of the ICSID convention[xxviii] or declined them in the spirit of BIT.[xxix] Having said that, keeping in mind concerns over asymmetric mechanism and addressing the need for equilibrium, in this blog, we argue in favour of Prof. Reisman’s dissent in ITA for the following reasons.
A. Procedural Enhancement
Encouraging counterclaims aids in procedural efficiency. Firstly, it curtails multiple proceedings or frivolous claims that may arise over principal claims which has been settled in earlier proceedings[xxx]. Secondly, As Prof. Reisman stated,[xxxi] it is beneficial to both investors and host-states, as investors don’t have to face claims against them in the latter’s jurisdiction and thereby reinstates the notion of neutrality in arbitration.
B. Accountability and Rule of Law
Prof. Crina Baltag and Ylli Dautaj in their scholarly work state, and we quote, “It is expected that this decade's arbitrators have an indirect duty to serve as guardians of international legal order and therefore to enforce the rule of law beyond investment protection.”[xxxii] Our views agree with them as allowing counterclaims vis-à-vis broader interpretation by arbitrators paves the way for established rule of law and increases investor’s accountability towards states.
C. Interest of States
Backlashes on ISDS are seen because it is a one-way street when it comes to restoring interest of parties. By entertaining counterclaims, we believe interest of states shall be secured especially when environmental and human rights concerns are involved and ISDS shall not be a hostile ground for states as it seems.[xxxiii]
D. Core of ICSID
After delving into Ttravaux Préparatoires of ICSID, it is clear as reverberated in the dissent of Roussalis v. Romania, Art. 46 facilitates dispute resolution and does not complicate it.[xxxiv] Our views are that counterclaims should be entertained under Art. 46 as it enhances ISDS and re-engraves principle of natural justice.[xxxv] Furthermore, when counterclaims are accepted in spirit of ICSID and if investors do not raise any objections, it is understood that there shall be implied consent, thereby balances the scale amicably.[xxxvi]
V. Conclusion
Efforts for neutralizing asymmetric regime era and accepting counterclaims by the AT shall bridge the gap between interests and spark equilibrium. However, the problem on ‘consent’ does not seem to end there and hopes for a “new way forward” as divergent jurisprudence leads nowhere to shore. The current position from the study made it clear that there is a limitation in BIT(s) and that can be addressed by embracing broader interpretation. However, moving forward, to avoid divergence and conundrum, revisiting BITs is of absolute necessity- either to include counterclaims explicitly or expanding the scope of consent.
[i] Inbavijayan Veeraraghavan, FCIArb (UK) Managing Partner Kove Global; Project adviser- Kovise foundation conflict resolution international (KFCRI). [ii] Sameena Syed, LL.M., Investment Treaty Arbitration, Uppsala University Sweden, Research Associate- Kovise Foundation Conflict Resolution International (KFCRI). [iii]Mark A Clodfelter and Diana Tsutieva, C17-Counterclaims in Investment Treaty Arbitration in Arbitration Under International Investment Agreements: A Guide to the Key Issues (2nd ed, OUP). [iv] Yaraslau Kryvoi, ‘Counterclaims in Investor-State-Arbitration’ (2012) Minnesota Journal of International Law 321. [v]Oil Platforms, Separate-Opinion, Judge Oda, [1998] ICJ Rep para 8; Jurisdictional Immunities, Opinion, Judge A A Cançado Trindade, [2012] ICJ Rep para 99-4; Application Genocide Convention [1997] ICJ Rep 243; Asylum case [1950] ICJ Rep paras 266-278. [vi]Stefan Dudas, ‘C-14: Treaty Counterclaims under the ICSID Convention in Crina Baltag, ICSID Convention after 50 Years: Unsettled Issues’ (2016) Kluwer Law International 385-406. [vii] J. Kalicki and M. Silberman, ‘Case Comment: Roussalis v Romania’ 27(1) ICSID-Rev.1-10. [viii] ICSID, II(1) History Of The ICSID Convention, Documents Concerning The Origin And The Formulation Of The Convention On The Settlement Of Investment Disputes Between States And Nationals Of Other States, Analysis Of Documents 337 (2001). [ix] D. Atanasova, C.A. Martínez Benoit and J. Ostřanský, ‘The Legal Framework for Counterclaims in Investment Treaty Arbitration’, (2014) 31(3) J. INT’L ARB. 357, 367; Metal-Tech v. Uzbekistan, ICSID-Case.No.ARB/10/3; Fraport v. Philippines, ICSID-Case.No.ARB/11/12. [x] Z. Douglas, The International Law Of Investment Claims (CUP). [xi] Anne K. Hoffmann, ‘C-36: Counterclaims’ in Meg Kinnear, Geraldine R. Fischer, et al. (eds), Building International Investment Law: The First 50 Years of ICSID (Kluwer Law International 2015) 505-520. [xii] Goetz v. Burundi, ICSID-Case-No.ARB/01/2; P. Lalive & L. Halonen, ‘Availability of Counterclaims in Investment Treaty Arbitration’ (2011) CZECH.Y.B.INT’L.L.141; Urbaser v. Argentine, ICSID-Case-No.ARB/07/26. [xiii] Klöckner. v. Cameroon, ICSID-Case.No.ARB/81/2. [xiv] H.E. Kjos, C.4-The Scope of the Arbitration Agreement: Claims and Counterclaims of a National and/or International Nature in Applicable Law in Investor-State Arbitration (OUP 2013). [xv] Inmaris v. Ukraine ICSID-Case-No.ARB/08/8; Saluka. v. Czech UNCITRAL-May-7-2004; Paushok, v. Mongolia UNCITRAL-28-April-2011. [xvi] Sabahi Rubins, Cp.10-Notion of Investment in Borzu Sabahi, Noah Rubins, Don Wallace.Jr Investor-State Arbitration” (2nd ed, OUP). [xvii] Anne (n 9). [xviii] Christoph H. Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary (CUP 2009); Art.52. [xix] Southern-Pacific Properties v. Egypt ICSID-Case.No.ARB/84/3; Lucy Reed, Jan Paulsson and Nigel Blackaby, A Guide to ICSID Arbitration (Kluwer Law International 2004) 22–23; American Manufactures v. Zaire ICSID-Case.No.ARB/93/1.para.5.18; Andrea M. Steingruber, Consent in International Arbitration (OUP 2012); James Crawford, ‘Treaty and Contract in Investment Arbitration’, (2009) 1(14) Journal of Transnational Dispute Management. [xx] Arnaud de Nanteuil, 'Counterclaims in Investment Arbitration: Old Questions, New Answers' (2018) 17 Law & Prac Int'l Cts & Tribunals 374. [xxi] Stefan Dudas (n 4). [xxii] Roussalis v. Romania ICSID-Case-No.ARB/06/0. [xxiii] Thoma S. Kendra, ‘State Counterclaims in Investment Arbitration - A New Lease of Life?’ (2013) 29(4) Arbitration International. [xxiv] See (n 6) [xxv] Borzu Sabahi, Noah Rubins, Don Wallace, Jr. C-4:The Course of an Investment Arbitration: Overview of the Procedure, in Investor-State-Arbitration (OUP 2019) 112– 226; Anne (n 9). [xxvi] Goetz v Burundi (n 10). [xxvii] Thoma (n 24). [xxviii] Gustav v. Ghana ICSID-Case-No.ARB/07/24,P.353-354; Goetz v Burundi (n 10). [xxix] Gavazzi v. Romania ICSID-Case-No.ARB/12/25; Sebastian Perry, ‘Romania held liable under intra-EU treaty’, Global Arbitration Review-29-April-2015. [xxx] J. Kalicki, ‘Counterclaims by States in Investment Arbitration’ (2013) Investment Treaty News. [xxxi] Roussalis v. Romania (n 23); Declaration of W. Michael Reisman (28 November 2011). [xxxii] Crina Baltag, Ylli Dautaj, Investors, States, and Arbitrators in the Crosshairs of International Investment Law and Environmental Protection (Brill Research Perspectives in International Law 2020). [xxxiii] Thoma (n 24). [xxxiv] Goetz v Burundi (n 10). [xxxv] Gavazzi v. Romania (n 29). [xxxvi] Benvenuti v. Congo, ICSID-Case.No.ARB/77/2.