International Arbitration

By Sze Hian Ng

What is international arbitration?

Arbitration is a private form of binding dispute resolution, conducted before an independent and impartial arbitral tribunal who derive their powers from the agreement of the parties (‘arbitration agreement’). The arbitral proceedings, and the subsequent award rendered by the tribunal is usually regulated and enforced by states, who recognise that arbitration is a mutually exclusive alternative to litigation for the parties to resolve their disputes.

According to Redhern and Hunter, international arbitration is distinct from arbitrations that are purely domestic in nature.

Firstly, international arbitration typically involves a cross-border element. For example, the parties may have chosen London as the place of arbitration, but they have their place of business in another jurisdiction.

Secondly, the awards rendered in international arbitral proceedings are usually much greater than those rendered in domestic arbitrations, as the dispute is more complex and involves larger corporations, states and state entities.

Finally, many states have elected to adopt a separate legal regime to regulate international arbitrations within their territory. In general, the degree of court intervention in international arbitration proceedings is more restricted. This is likely due to the state acknowledging that the parties have no connection to the place of arbitration, and are simply exercising their autonomy to have the arbitration conducted in a neutral venue.

Types of arbitral proceedings

There are three main types of international arbitral proceedings: international commercial arbitration, investment-treaty arbitration and interstate arbitration.

International commercial arbitration

International commercial arbitration refers to a scenario where two private entities seek to resolve their commercial disputes before an arbitral tribunal. It is a popular type of dispute resolution mechanism due to its advantages of confidentiality, procedural flexibility and enforceability.

In essence, arbitral proceedings are private and allows for disputes to be resolved away from the public eye. It also allows for greater procedural flexibility as parties can choose their own rules to govern the proceedings and select an arbitrator of their preference. Finally the arbitral awards are generally recognisable and enforceable across multiple jurisdictions due to the New York Convention of 1958 which many states are a party to.

Due to the rapid growth of international commercial arbitration, states have begun to modernise their national laws of arbitration to make it more arbitration-friendly. Courts will not interfere with the decision of the tribunal, unless there is some form of serious irregularity or the tribunal lacked substantive jurisdiction to hear the case. This has encouraged more parties to adopt arbitration as their go-to method for resolving disputes.

Nonetheless, international commercial arbitration can be extremely costly, especially if the proceedings are lengthy, complex and involve multiple arbitrators. Problems will also emerge if the arbitration agreement is vague. For example, if the arbitration agreement does not specify the place of arbitration, parties may spend a long time contesting over where the arbitration should be conducted, as this has implications on which national law will regulate the proceedings.

Investment-treaty arbitration

Investment-treaty arbitration is best illustrated by an example.

Investor A decides to invest a substantial amount of money in a hydraulic fracking project in Country B, a developing country with an abundance of natural resources. However, after two years, Country B decides to expropriate the assets of Investor A, citing environmental concerns. When there is a breach of investor rights due to a public measure, Investor A will only be able to challenge and set aside the measure through the domestic law of Country B. This is undesirable for Investor A, who may not be treated fairly before a domestic court, particularly in a developing jurisdiction where the rule of law is not adequately respected.

Through signing a bilateral investment treaty (BIT) between Country A and Country B, certain substantive rights, such as the obligation for countries not to expropriate foreign investments without due compensation, are now conferred on Investor A. The BIT will also contain an arbitration clause which allows investors to bring claims against the host Country. This allows Investor A to avoid the aforementioned scenario, and rely on the breach of the BIT before an impartial arbitral tribunal.

It is important to note that the substantive rights are conferred onto both investors from Country A and Country B. In other words, Investor B could also bring a claim against Country A should Country A breach its obligations in the BIT as well Moreover, investment-treaty arbitration is a creature of public international law, since BITs are instruments of international law. As such, arbitral tribunals will also pay attention to general principles of public international law, such as treaty interpretation, when hearing such disputes.

The most common forum for investment-treaty arbitration cases to be heard is the International Center for the Settlement of Investment Disputes (ICSID). ICSID was created in 1965 by the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention). ICSID is a completely neutral and international forum, autonomous from any national laws.

As such, ICSID is an arbitration institution which administers and facilitates investment-treaty arbitrations. Submitting a dispute to ICSID automatically incorporates the ICSID arbitration rules, which are applied to the proceedings.

Next, Art. 25 of the ICSID Convention provides for when disputes can be submitted to the centre.

Finally, awards rendered under ICSID are easily enforceable due to provisions in the ICSID Convention, which call on all parties to the ICSID Convention to recognise and enforce ICSID awards as if these were decisions of domestic courts. These awards can only be set aside by an ad hoc committee composed of arbitrators appointed by the chairman of the ICSID Administrative Council, on limited grounds outlined in Art. 52 of the ICSID Convention.

Interstate arbitration

Interstate arbitrations, refer to situations where two states endeavour to resolve their disputes through arbitration. Disputes arising out of the UN Convention of the Law of the Sea (UNCLOS) is the biggest producer of interstate arbitration.

UNCLOS regulates disagreements over maritime delimitations, but also other matters including disputes over fisheries, shipping and the conservation of the marine environment. Arbitration is one dispute settlement method under UNCLOS, but states parties to the Convention have other choices, such as to have their dispute heard by the International Tribunal for the Law of the Seat and the International Court of Justice.

Case studies

In Methanex Corporation v US, Methanex, a Canadian investor, brought a claim against the US under the auspices of NAFTA, challenging a Californian law which banned certain additives to car fuel for environmental purposes. These additives were used by Methanex, while additives used by US producers were allowed despite there being little evidence that there was any difference between the two substances. Ultimately, the claims of Methanex were rejected by the Tribunal, who found in favour of the US.

In the South China Sea Arbitration, an arbitral tribunal constituted under Annex 7 to UNCLOS, rendered a unanimous award in favour of the Philippines against the People's Republic of China concerning maritime entitlements in the South China Sea. While the tribunal lacked jurisdiction on certain issues, it was able to rule on the lawfulness of certain Chinese activities in the area.