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Section 5. International law
Dragunova Iuliia, E-mail: [email protected]
MECHANISM OF STATE COUNTERCLAIMS AS MEANS OF REACHING THE BALANCE BETWEEN PRIVATE AND PUBLIC INTERESTS IN INTERNATIONAL INVESTMENT ARBITRATION REGIME
Abstract: Current article is aimed to analyze the mechanism of counterclaims in investment arbitration and its potential to strike the balance between private interests of foreign investors and public interests of host states. It also covers the evaluation of advantages and obstacles related to this procedural mechanism.
Keywords: international investment arbitration, foreign investment, state counterclaims, balance of interests, investor-state dispute settlement.
Introduction
Initially, the international investment law and arbitration system was created with a specific objective to protect foreign investment. International investment arbitration has been considered the most efficient means for dispute settlement between foreign investors and host states. History of development of the law on foreign investment has led to the fact that this purely commercial system was 'threatened' with competing objectives of public interests, such as protection of human rights and environment from the bad impact of multinational commercial enterprises.
Investment protection has always been the main goal of investment agreements providing complex guarantees and rights to foreign investors. However, until recent years, the question of investors obligations has never been aroused, although it created the issue of imbalance between public and private interests within the regime. This issue has become pressing and threatening the legitimacy of the system and resulted in 'dilution' of international investment law with other non-investment implica-
tions, in particular human rights and environmental protection.
Various stakeholders of the regime have been seeking means to eliminate the flaws of the system, to impose obligations on foreign investors and strike the balance between public and private interests. However, the recent mechanism of state counterclaims within international investment arbitration is considered to be potentially the most effective one.
Imperfections of Allegedly the Most Efficient System for Investor State Dispute Settlement
Historic path of the international investment arbitration regime predetermined its current ambiguous position. In general, investment arbitration has been acknowledged as the most efficient means of resolving disputes between investors and states. Popularity of investor-state arbitration has resulted in growth of the caseload in arbitral institutions, as well as a great number of new challenges stated briefly below. As a result, investment law and arbitration as a regime is being challenged by various controversies and its interactions with non-investment obliga-
MECHANISM OF STATE COUNTERCLAIMS AS MEANS OF REACHING THE BALANCE BETWEEN.,
tions. Such points are raised by investors, states and non-party actors.
As for the procedural flaws of the regime of international investment arbitration, it is crucial to name the lack of appellate review mechanism, which leads to states not having a possibility to defend public interest issues within one complex proceeding, and the relation of the scope of tribunal's jurisdiction on the compromissory clause of the BIT, as many of these clauses do not permit to defend public interests within the scope of investment arbitration proceedings. Substantive flaws of the investment arbitration regime include alleged pro-investor interpretation of substantive BIT provisions. Pre- and post-arbitration issues within the system include "regulatory chill" problem, state's lack of will "to enact or enforce bona fide regulatory measures because of a perceived or actual threat of investment arbitration" [1, 68], and alleged diversion of public funds.
Procedural Framework of Counterclaims as the Means of Balancing Private and Public Interests in IIA Regime
International investment arbitration is frequently perceived as a mechanism for quasi-judicial review of states authoritative actions when a host state's regulatory action is analysed from the standpoint of violation of treaty obligations towards a foreign investor. Host state counterclaims method proves this conventional concept as obsolete and, hence, is met with relative resistance [2]. Still, mechanism of counterclaims is considered to be a procedural novelty within the system of investment arbitration. Although most of counterclaims cases were decided in the last five years, the case law on counterclaims is constantly developing. For instance, recent case law depicts the tendency of host states to bring a counterclaim based on its own domestic law rather than investment contracts, as it was before. Therefore, host states are becoming more assertive in fighting by means of counterclaims regardless of the fact that most of these efforts are usually unsuccessful.
Role and Value of State Counterclaims Mechanism in Investment Arbitration Regime
Successful admission ofstate counterclaims in the system of international investment arbitration results not only in the advantages of procedural economy and better administration of justice but also aligns with the general goal of the arbitration to facilitate investor state dispute settlement in a neutral way. In case a counterclaim would not be heard, a host state is most likely to seek relief within its own domestic judiciary system or in other forum agreed by the parties [3, 130]. Hence, such circumstances would lead to incongruous situation where foreign investors and states resolve their disputes in domestic courts, while the core benefit of investment arbitration is avoiding the national judicial systems [4, 146]. Dividing the same proceedings in different tribunals, in particular international and national ones, would also extend the risks of inconsistent decisions in the same dispute [5].
The host states would obtain a possibility to commence an offensive claim rather that just providing defence on the merits. Without an ability to launch an independent claim, although related to the initial dispute, "a state cannot win; the most it can hope to do is not lose" [6, 464]. Therefore, states will become more eager to arbitrate and enforce the arbitration awards. Moreover, the effective framework for counterclaims would deter foreign investors from bringing weak cases, which will save time, efforts, and money, in particular public funds of a host state [6, 476].
The counterclaim mechanism also has a potential to resolve the recent perception that investment arbitration regime creates structural bias against host states. Nowadays, repercussions against the conventional understanding of investment arbitration as a regime created exclusively for foreign investment protection pose a threat to legitimacy of the system [7, 214]. The problem of imbalance within the system leads also to the problem where the arbitral tribunals ignore the social and political public interests of host states, e.g. human rights protection, environmental issues etc. Thus, the counterclaims could
become an effective means to strike the balance between the private and public interests within the regime and to provide for human rights protection.
To conclude, an effective framework for admission of counterclaims in investment arbitration has a great value and a greater potential to resolve the systematic challenges within investment arbitration regime. Moreover, a more permissive tribunals' approach to states counterclaims has a potential to alleviate systems' drawbacks and provide a balance of private and public interests within the regime.
Counterclaims Effectiveness and Obstacles Analysis
Generally, in the current investment arbitration regime, host states counterclaims are rarely pleaded and even more rarely are successful. One commentator even named the history of counterclaims admission as "thirty years of failure" [8]. Until recently, it was not even clear if the host states could successfully admit the counterclaims at all [9, 5]. An interesting part is that most of these cases have been decided in the past ten years [10, 2]. Host states are undertaking more zealous and assertive and admitting counterclaims against foreign investors regardless the fact that most of their efforts go unsuccessful [6, 464].
The obstacles that arise regarding host state counterclaims usually stem from the imbalanced structure of investment treaties. The obstacles are related to the requirements necessary to successfully submit a counterclaim. The first obstacle is related to the scope of disputes and tribunal's jurisdiction over the counterclaim. The investment agreements determine the scope of tribunal's jurisdiction making the scope of the disputes consented by the parties to be fundamental. Hence, the broader scope of arbitration provisions is more counterclaim-friendly in contrast with provision limiting the jurisdiction only to violation of protection standards enshrined in a relevant BIT. The recommendation should be given to states to renegotiate their BITs in order to encompass op-
portunity to counterclaim or to draft investment contracts with such provisions.
Another obstacle is related to the requirement of requisite connection to submit a counterclaim. Two main approaches exist in international law to establish such connectedness, a more flexible one followed by the ICJ, and the more strict one, followed by the Uran-US Claims Tribunal. Recent tribunal practice in Saluka [11] and Paushok [12] has followed the more stringent approach. However, nothing suggests that such approach is necessary in investment arbitration regime. Unfortunately, the current test for connection makes it almost impossible for host states to bring counterclaims successfully.
Still, there is a vast space for development of the jurisprudence and case law on the relevant topic. Moreover, it is commonly acknowledged that the counterclaims mechanism can be an efficient means of striking a balance between private and public interests in international investment arbitration regime. Therefore, the challenge to overcome these obstacles and make the counterclaims framework more effective and workable is established and accepted in academic and practical legal worlds of investment arbitration.
Conclusions and recommendations
The system of international investment arbitration is not devoid of flaws that result in imbalance between public and private interests within the regime. As the practical conclusion, we assert that the mechanism of counterclaims could become effective in providing for public interests promotion on behalf of the states and reaching the balance between all stakeholders interests, provided that a more permissive approach of arbitral tribunal towards establishing the jurisdiction over counterclaims would exist.
We recommend the states to actively engage in BITs renegotiation to provide the explicitly stated procedural opportunity to counterclaim, so the tribunals will not have problems of establishing jurisdiction over counterclaims and human rights.
MECHANISM OF STATE COUNTERCLAIMS AS MEANS OF REACHING THE BALANCE BETWEEN...
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