Investment arbitration or domestic courts

Arbitration as an alternative form of dispute resolution has gained extraordinary popularity, not only in resolving investment disputes, but also generally in international commercial disputes. This is due to the principle of autonomy of the parties, according to which the parties may submit their dispute to arbitration according to the rules they set.

Another factor contributing to the popularity of this form of dispute resolution is the impartiality of the arbitration tribunal. The parties to the arbitration agreement may choose their own arbitrators, who will (and generally should) be independent. This is important from the perspective of international business transactions. It is hard to expect investors to have full confidence in the national courts of a host country. Arbitration has claimed its place as the most common form of resolving disputes between investors and the state in international investment law.

Domestic courts from teh perscpective of the investor – state disputes

Investors who have been harmed by the state’s action can firstly seek remedy and compensation for this damage before the national courts of the host state. In practice, however, investors face many difficulties following this path. It is not easy to mark a simple division between the well-established judicial systems in developed countries and biased adjudicating pro-national courts in third-world and developing countries. In cases involving expropriation or other invasive measures undertaken by the state in relation to investors, certain barriers are being found in all jurisdictions.

The first of such barriers which impedes investors in obtaining due process is the possible partiality of the court rulings in these cases. Such difficulties were encountered for example by investors conducting investments in Far East countries such as Indonesia and Pakistan. And there are examples closer to home. In the face of the recent economic crisis in Cyprus which started in 2013, during which the State forcibly turned the funds of foreign investors gathered in the two largest banks of Cyprus into shares and halted the transfer of capital, the full Board of the Cyprus Supreme Court refused to hear the case brought by a group of investors and then took further steps in order to effect the longest possible extension of the case. In the latter case, the common courts in Cyprus received the full support of the European Commission and the European Court of Justice.

A further obstacle may be the fact that the liability of a state is restricted in some countries. This results in the domestic courts of the host state lacking jurisdiction to hear and recognise certain issues relating to the responsibility of the state. Another issue is the efficiency and quality of local courts in hearing investment cases. Investors expect that their cases will be heard as quickly as possible, which is often impossible for administrative reasons and the usual overload of domestic courts in general. For all these reasons, investors generally do not trust national judicial systems.

International investment arbitration as an investor’s forum

The basic principle of international investment arbitration is the trust in the institution or arbitration tribunal. In investment arbitration, both parties can choose an arbitrator to the tribunal (unless the case is being heard by a sole arbitrator) and decide upon the place and language of the proceedings. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (i.e. The New York Convention) ratified by most countries, allows the parties to enforce the decision of the arbitration tribunal award in each of the countries that signed and ratified the convention. Depending on the case, arbitration can be faster and less expensive than proceedings conducted before national courts. Also, bearing in mind that the majority of arbitration between investors and states is now public, it is easy to refute the arguments of lack of transparency in this type of proceedings.

Arbitral institutions conducting disputes between investors and states

The most important role in resolving disputes between investors and states rests with the International Centre for Settlement of Investment Disputes (ICSID). This is an institution which was established by the Convention on Settlement of Investment Disputes between States and Nationals of Other States and signed in Washington in the US in 1965. The ICSID currently has 158 countries as members, of which 150 have ratified the Convention. The purpose of this organisation is to provide institutional and procedural support to tribunals established by the parties in investor–state disputes. Whenever a dispute arises between the state of the investor and the country hosting the investment, both countries being members of the ICSID, arbitration proceedings are administered by this institution.

The Republic of Poland is not a signatory to the Washington Convention of 1965. This does not mean, however, that Polish investors cannot access an investor–state dispute under the auspices of the ICSID. A dispute between an investor and a country in a situation where one party is a member of ICSID and the other is not, can be registered on the basis of the "Additional facilities" provided in the Washington Convention. These are regulations governing the arbitration proceedings between a party being a member of the ICSID and one which is not. Therefore, if the Bilateral Investment Treaty (BIT) that is concluded between such countries provides the ICSID Additional Facility as a possible forum, the investor will be able to carry out arbitration proceedings administered by the ICSID.

If the BIT does not provide for such a possibility, the arbitration should be referred to the arbitration court designated in the BIT. Most commonly the Court of Arbitration of the International Chamber of Commerce in Paris (ICC), Court of Arbitration at the Stockholm Chamber of Commerce (SCC) or the Permanent Court of Arbitration (PCA) are the institutions specified in which to conduct arbitration.

Exhaustion of domestic remedies

There is however no general obligation regarding the exhaustion of domestic remedies (recourse to a legal entity) in the host country of the investment. Whether the investor must first complete proceedings in the host country depends on the text of the corresponding BIT. The Washington Convention establishing the ICSID states explicitly that the state, through the signing and ratification of the Convention, must establish investment arbitration as the sole and exclusive way of settling disputes between an investor and the state. As for the BITs signed by the Republic of Poland, they mostly provide only for a cooling off period. In this case, a specific period of time specified in the BIT (usually 6–12 months) is provided for the investor and the state to try to reach an amicable settlement of the dispute through negotiation. If during this period the parties do not reach an agreement, the investor may refer the matter to the international investment arbitration procedure in accordance with the provisions of the relevant BIT.