Document Type : Research Paper
Authors
1
Associate Professor of Law, Private & Islamic Law Department, University of Tehran, Tehran, Iran.
2
. PhD Candidate in International Trade and Investment Law, Faculty of Law and Political Sciences, University of Tehran, Iran.
Abstract
Counterclaims are very rare in treaty arbitration. According to UNCTAD, there have been over 800 treaty-based investor-state arbitrations to date, but unlike commercial arbitration and litigation, where a respondent is usually entitled to raise a counterclaim, the issue of counterclaims in treaty-based investment arbitration is problematic, or at least challenging, for arbitrators. Host State counterclaims in investment treaty arbitration are rarely raised and never successful, to the extent that one commentator has described their use as "thirty years of failure". This is mainly due to the nature of treaty arbitration, which operates as a triangular system where home and host States enter into an IIA, and investor benefits from the provisions of that IIA. This system often leads to an asymmetry of procedural rights, where only an investor can sue a host state, but not vice versa. This asymmetry in turn often leads to the deprivation of the right to bring counterclaims against investors. Nevertheless, counterclaims have an important role to play in treaty arbitration.
While state counterclaims are permitted in principle under the ICSID Convention and the UNCITRAL Arbitration Rules, meeting the jurisdictional and admissibility requirements has proved more complex. This paper examines several key treaty provisions to identify those treaties that are more or less likely to extend a tribunal's jurisdiction “ratione materiae” over state counterclaims. The paper then examines the requisite connection that must exist between a counterclaim and the principal claim. A survey of international jurisprudence supports the paper's conclusion that recent treaty tribunal decisions have taken an unjustifiably narrow and often inconsistent approach to the requisite connection, to the extent that it may be virtually impossible for states to assert counterclaims under the current formulation. This paper proposes an alternative approach.
This research examines the obstacles host states face in asserting counterclaims in investment treaty arbitration and critiques the reasoning of tribunals that have refused to hear state counterclaims. To this end, the paper proceeds in three substantive parts: it defines counterclaims, explains the overarching purpose of international investment law and arbitration, and promotes the potential value that a more permissive approach to host-state counterclaims could bring to the international investment regime. The paper agrees that investment tribunals should undertake the factual and legal assessment of the requisite nexus. However, in contrast to current practice, this paper recommends that legal nexus should be satisfied if a counterclaim relates to the same investment as the main claim, rather than insisting on symmetry in the legal instruments underlying the claims. This approach is likely to be more consistent with the jurisdiction of the tribunal as reflected in the relevant bilateral investment treaty. Crucially, this alternative approach also leaves open the possibility for state counterclaims to be based on the general domestic law of the host state.
A greater role for host state counterclaims in investment treaty arbitration has the potential to save host states and foreign investors the time and expense of protracted battles in different fora over related disputes. Even in the same form, giving both parties the means to go on the offensive, rather than reserving this right to investors, may make states more willing to arbitrate and deter foreign investors from bringing weak claims. Despite these advantages, host state counterclaims are rarely brought and never successful. The first barrier is jurisdiction. Investment treaties make a standing offer to foreign investors which, once accepted, results in an arbitration agreement. This agreement determines the jurisdiction of the tribunal. The definition of the scope of disputes that the parties have agreed to submit to arbitration is of paramount importance. It will be easier for host states to assert counterclaims if the tribunal's jurisdiction is broad "ratione materiae", whether it is general, referring to "all disputes", or delineates several legal sources, such as authorizations and agreements. resolution clauses may limit the scope of the dispute to host state obligations or to the exclusive application of international law and/or the BIT. Other subsidiary provisions of the BIT may also help to limit the scope of the dispute. It will be easier for host states to assert counterclaims if they have locus standi or if the treaty explicitly directs the tribunal to apply the host state's general domestic law - but neither is determinative.
The second obstacle is the requisite connection. A survey of international jurisprudence shows a general tendency to treat the requisite connection as a matter of both fact and law. The ICJ has adopted a flexible approach to the issue, treating both fact and law as relevant but neither as determinative. The Iran/US Claims Tribunal and treaty-based arbitral tribunals have taken a stricter approach, insisting on the symmetry of the legal instruments underlying the counterclaim and the claim. While a strict approach to legal symmetry may make sense in a commercial context, it does not apply to treaty-based arbitration because host states cannot assert counterclaims under the BIT. Nothing in the BIT test suggests that such a strict requirement is necessary. Moreover, tribunal practice suggests that counterclaims based on domestic law are prima facie inadmissible. The conclusion is that it would be virtually impossible for States to assert a counterclaim under the current formulation of the requisite connection test.
Practice shows that counterclaims are in principle admissible in contract arbitration. However, their admissibility depends on certain factors:
(1) the counterclaims must fall under the consent of the disputing parties (state and investor); and
(2) they must be (closely) related to the main claim.
Keywords
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