The Rise of Parallel Proceedings in Investment Arbitration

The Rise of Parallel Proceedings in Investment Arbitration

Wednesday 13 April 2016 - Lucinda Chow

Parallel proceedings happen when one cause of action is brought before more than one forum, whether it occurs between domestic and international courts or in several international forums. The problems that arise from parallel proceedings are easily observed; not only does it lead to high costs and inefficiencies, but the potential for conflicting outcomes creates legal uncertainty. Solutions to these problems need to be custom-made in the context of investment arbitration due to the distinct features of non-exclusivity, bilateralism, and other aspects that ultimately make the traditional mechanisms of res judicata[1] and lis pendens[2] difficult to apply.

The complications stemming from distinguishing between contract and treaty-based disputes have contributed to what some may call a boom in parallel proceedings. Thus, the question that surfaces is – why are courts and tribunals not supporting judicial restraint? Additionally, what does this mean for the future of investment arbitration? Recent cases have seen tribunals taking power, setting aside exclusive jurisdiction clauses in contracts and essentially raising issues of sanctity of contract and a lack of judicial restraint.

Aside from the features of bilateral investment treaties (BITs) which make them exceptionally likely to prompt parallel proceedings, such as the exclusion of local remedies and multiple investor claims, key cases can facilitate our understanding of how this trend has come to be. In Vivendi (No 1), it was stated that ‘in a case where the essential basis of a claim brought before [an] international tribunal is a breach of contract, the tribunal will give effect to any valid choice of forum clause in the contract.’

The International Centre for Settlement of Investment Disputes (ICSID) annulment committee established that the question of whether there had been a breach of the BIT was fundamentally different to whether there had been a breach of the contract. Therefore, a distinction was made between formal causes of action and factual similarities between disputes. It also meant that the state could not ‘rely on an exclusive jurisdiction clause in a contract to avoid the characterisation of its conduct as internationally unlawful under a treaty’.

The original tribunal’s decision, in exercising restraint, had amounted to a manifest excess of powers under the ICSID Convention. In Eureko v Poland, the exclusive jurisdiction clause was dismissed on the simple fact that the investor had advanced claims for breach of Treaty and every claim had to be heard and judged by the Tribunal. It appears that an exclusive jurisdiction clause is able to rule out investment treaty arbitration only if it specifically precludes a treaty claim.

Fork-in-the-road clauses are sometimes used as a way to limit the occurrence of parallel proceedings. Such clauses aim to make irrevocable the choice of the investor (who would otherwise have numerous choices of jurisdictions) and thus de facto ban parallel proceedings. Arbitral tribunals have however tended to deprive these clauses of their genuine meaning by rarely applying them in favour of a state. In the case of Toto v Lebanon, the fork-in-the-road provision did not preclude bringing treaty claims before ICSID as the previous contract claims were ‘on a different road’. The court recognised that the two types of claims were ‘different causes of action’.

Umbrella clauses can appear to help avoid parallel proceedings, by permitting an investor to bring both contract and treaty claims to the international arbitral tribunal. However, it can actually have the opposite effect. Due to the diversity in the way the umbrella clause is interpreted in tribunals (previous tribunals have interpreted them in four different ways), there is uncertainty surrounding how they will be treated in future tribunals. These broadly worded clauses can convince an investor that it is worth taking the risk of initiating parallel proceedings, despite the fact that previous agreements and negotiated clauses intended to eliminate this very thing.

Criticism has been directed at ‘for-profit arbitrators’ who adopt a de facto policy, suggesting that investment arbitration is primarily being utilised by investors to claim superior rights (via an exclusive legal system) that would otherwise be unattainable. International arbitration has since been described as a ‘transnational legal order’ in which BITs and investment contracts empower multinational enterprises to become ‘fortified with [their] own custom-made justice.’

It has been argued that commercial needs are being prioritised over public interest, contributing to a decline in sovereign state power. What this means for the future of investment arbitration is an increased wariness by states with regards to international arbitration, especially considering arbitrators are unlikely to fully grasp the social consequences of their awards.

Parallel proceedings are not yet common enough to be seen as a real threat to states, and the fact remains that it is important for investors to have the option to resort to alternative methods of dispute resolution in certain situations. However, in terms of the future of international arbitration, this is perhaps not headed in the right direction. As complicated as the process may be, the trend of parallel proceedings needs to be stalled. This is not only to maintain the reputation of international arbitration as an impartial system, but also to eliminate unnecessary costs and retain legal certainty.

References

Harten, ‘The Boom in Parallel Claims in Investment Treaty

Shavy, ‘Contract Claims vs. Treaty Claims: Mapping Conflicts Between ICSID Decisions on Multisourced Investment Claims’, The American Journal of International Law (2005)

Shookman, ‘Too Many Forums for Investment Disputes? ICSID Illustrations of Parallel Proceedings and Analysis’, Journal of International Arbitration 27(4) (2010)

Yannaca-Small, ‘The Oxford Handbook of International Investment Law’, Chapter 25 (Parallel Proceedings), Oxford University Press (2008)

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[1] A matter that has been adjudicated by a competent court and therefore may not be pursued further by the same parties.

[2] A pending lawsuit.

About the author

Author: Lucinda Chow