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DENIAL OF JUSTICE DISGUISED? INVESTMENT ARBITRATION AND THE PROTECTION OF FOREIGN INVESTORS FROM JUDICIAL MISCONDUCT

Published online by Cambridge University Press:  16 February 2012

Mavluda Sattorova
Mavluda Sattorova
Affiliation:
Lecturer in International Economic Law, University of Liverpool.
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Extract

Prior to the rise of international investment treaties and institutionalization of investor–state arbitration, the protection of foreign investors from mistreatment in the host state courts was the preserve of customary international law, which prohibited a denial of justice and provided for diplomatic protection as a principal means of dispute settlement. In contrast, contemporary international investment law offers a whole array of legal standards that can be invoked in seeking redress for the acts of national courts before international arbitral tribunals. In addition to relying on the customary prohibition of denial of justice, investors can challenge judicial conduct under the treaty standards on expropriation, fair and equitable treatment and, in some cases, the obligation to ensure effective means of asserting claims. Although the multiplicity of standards available to aggrieved investors can be regarded as an inalienable part of an effective regime for the protection of foreign investment, it also gives rise to a number of fundamental problems relating to the application of procedural mechanisms designed to control the review of the conduct of national judiciary by international courts and tribunals. Focusing on arbitral cases in which claims of a denial of justice were brought under the rubric of ‘a judicial expropriation’ and ‘a failure to provide effective means of asserting claims’, this article seeks to ascertain when investor claims relating to the administration of justice in the host state courts become amenable to arbitral scrutiny. It argues that, by providing a variety of standards under which the acts of judiciary can be challenged, investment treaty law allows investors to circumvent procedural barriers and thus muddles the boundaries demarcating the scope of international review of national judicial conduct.

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Shorter Articles
Information
International & Comparative Law Quarterly , Volume 61 , Issue 1 , January 2012 , pp. 223 - 246
Copyright
Copyright © British Institute of International and Comparative Law 2012

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References

1 Eagleton, C, ‘Denial of Justice in International Law’ (1928) 22 AJIL 538CrossRefGoogle Scholar, 539; Hyde, C, International Law Chiefly as Interpreted and Applied by the United States (Little, Brown, & Co 1922) 491–92Google Scholar; Adede, A, ‘A Fresh Look at the Meaning of the Denial of Justice under International Law’ (1976) 73 Canadian YBIntlL 73Google Scholar, 82; Lissitzyn, OJ, ‘The Meaning of the Term Denial of Justice in International Law’ (1936) 30 AJIL 632CrossRefGoogle Scholar, 636–38. See also the opinion of the Commissioner Nielsen in the Neer case, suggesting that it was ‘useful and proper to apply the term denial of justice in a broader sense than that of a designation solely of a wrongful act on the part of the judicial branch of the government’ (LFH Neer & Pauline v United Mexican States (1926) 4 RIAA 60, 64). Also, Robert E Brown (United States v Great Britain) (1923) 6 RIAA 120. For criticism, see The Chattin Claim (United States v Mexico) (1927) 4 RIAA 282, 286; also Fitzmaurice, G, ‘The Meaning of the Term “Denial of Justice”’ (1932) 13 British YBIntlL 93Google Scholar, 95 (noting that ‘the main objection to this definition of denial of justice is that it converts the term into a species of synonym for international delinquency, or, more accurately, for injuries to foreigners for which a state is, according to the rules of international law, responsible, and thus renders it largely meaningless and unnecessary; whereas, if used in a more restricted sense, the term has a definite value as describing a particular species of international wrong’).

2 G Guerrero, Annex to Questionnaire N4, Committee of Experts for the Progressive Codification of International Law, Report of the Sub-Committee, League of Nations Pub C196, M70, 1927V, reproduced in Freeman, A, The International Responsibility of States for Denial of Justice (Longmans & Co 1938) 632Google Scholar. The narrow approach to defining denial of justice was espoused by the Spanish Government in the Barcelona Traction Co Case (1962–29) 4 ICJ Pleadings 463. See also Brownlie, I, Principles of Public International Law (6th edn, OUP 2003) 508–09Google Scholar.

3 Amerasinghe, CF, Local Remedies in International Law (2nd edn, CUP 2004) 89CrossRefGoogle Scholar. See also the opinion of the Commissioner Nielsen in the Neer Case, suggesting that it was ‘useful and proper to apply the term denial of justice in a broader sense than that of a designation solely of a wrongful act on the part of the judicial branch of the government’ (Neer (n 1) 60, 64).

4 Hyde (n 1) 491–92. The broad definition of a denial of justice was relied upon by the United States in Robert E Brown (n 1). In this case, all branches of the Government were involved in dispossessing the claimant of his mining rights. In respect of the tendency to view denial of justice as a general ground of diplomatic interposition, the commentators observed that such a tendency was largely confined to diplomatic correspondence of the United States and other countries. Most of the state practice limited denial of justice to the inability of a foreigner to obtain local redress, rather than to original wrongs themselves. For further discussion, see Lissitzyn (n 1) 636–38.

5 United States v Mexico (1927) 4 RIAA 286.

6 Adede (n 1) 77–78. It has been observed that, ‘if by championing the restricted meaning of denial of justice the Latin American states sought to minimize the practice of diplomatic protection of aliens, they actually attempted to eliminate this practice completely by the introduction of the “Calvo Clause” in contracts with aliens carrying on business in their territories’ (ibid 79). See also Paulsson, J, Denial of Justice in International Law (CUP 2005) 22CrossRefGoogle Scholar.

7 Widely supported among Latin American states, this theory found its expression in arts 6 and 7 of the Guerrero Report, which declared that ‘Denial of justice is … a refusal to grant foreigners access to the courts instituted in the State for the discharge of its judicial functions, or the failure to grant free access, in a particular case, to a foreigner who seeks to defend his rights, although, in the circumstances nationals of the State would be entitled to such access’ (Guerrero (n 2), 632).

8 See generally Paulsson (n 6). For earlier arbitral awards where denial of justice claims arose from decisions of judicial organs, see Azinian and others v Mexico (Award on Jurisdiction and Merits) ICSID Case No ARB (AF)/97/2 (18 October 1999), (2000) 39 ILM 537; Mondev International Ltd v United States (Award) ICSID Case No ARB(AF)/99/2 (11 October 2002), (2003) 42 ILM 85.

9 Petrobart Limited v Kyrgyzstan (Award) SCC Case No 126/2003 (29 March 2005).

10 ibid para 120.

11 ibid para 131.

12 AMTO LLC v Ukraine (Final Award), SCC Case No 080/2005 (26 March 2008) para 90.

13 ibid para 94.

14 Spiegel, H, ‘Origin and Development of Denial of Justice’ (1938) 3 AJIL 63CrossRefGoogle Scholar.

15 See further Amerasinghe (n 3).

16 ibid. The prospects of precluding the application of the local remedies rule by an implied waiver are limited, though such a possibility cannot be ruled out altogether. In ELSI, the United States questioned whether the exhaustion of local remedies should apply at all to a case brought under the Friendship, Commerce, and Navigation Treaty, which provided for the submission of disputes to an international adjudication and contained no reference to the local remedies rule. The Chamber of the International Court of Justice (ICJ) admitted that the parties to a treaty can either agree that the local remedies rule shall not apply to claims based on alleged breaches of that treaty or confirm that it shall apply. However, the Chamber was not prepared to acknowledge an implied waiver. It found itself ‘[u]nable to accept that an important principle of customary international law should be held to have been tacitly dispensed with, in the absence of any words making clear an intention to do so’ (Elettronica Sicula SPA (ELSI) (United States of America v Italy) (1989) ICJ Rep 15, para 50). The rigidity of the ICJ ruling in ELSI may explain a subsequent tendency to dispense with the local remedies requirement in bilateral investment treaties (BITs) concluded since the 1980s. See Subedi, S, International Investment Law: Reconciling Policy and Principle (Hart Publishing 2008) 149–50Google Scholar.

17 Peters, P, ‘Exhaustion of Local Remedies: Ignored in Most Bilateral Investment Treaties’ (1997) 44 Netherlands IntlLRev 233CrossRefGoogle Scholar. According to this study, of some 200 BITs concluded during the 1980s, only 3 required exhaustion of local remedies before arbitration of a dispute could be initiated. Other BITs limited the application of local remedies by setting the time limit within which the resolution of a dispute by local means should be undertaken, such period varying from 3 to 24 months (ibid 234). An analysis of the 409 BITs signed in the 1990s showed that 20 agreements specifically excluded the rule of local remedies and 345 implicitly renounced it, while the other 145 BITs referred to the possibility, not an obligation, of bringing a dispute before domestic tribunals. For an argument that recourse to local remedies may not serve the best interests of foreign investors, see Dolzer, R and Schreuer, C, Principles of International Investment Law (OUP 2008) 214–16CrossRefGoogle Scholar, and Schreuer, C, ‘Calvo's Grandchildren: The Return of Local Remedies in Investment Arbitration’ (2005) 4 Law & Practice of International Courts and Tribunals 1CrossRefGoogle Scholar.

18 ICSID, Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (signed 18 March 1965, opened for signature 14 October 1966) 575 UNTS 159 (emphasis added).

19 ibid.

20 Peters’ study (n 17) shows that the application of local remedies has become more of an exception than a rule.

21 Loewen v United States (Award) ICSID Case No ARB(AF)/98/3 (26 June 2003), (2003) 42 ILM 811.

22 ibid para 7.

23 ibid para 39.

24 ibid para 136.

25 ibid para 137.

26 ibid para 142.

27 ibid para 143.

28 ibid para 156.

29 ibid para 161.

30 ibid para 164. It has been observed that, in spite of having distinguished between the rule of local remedies and the rule of judicial finality, the tribunal has on several occasions referred to the exhaustion of local remedies in addressing Loewen's failure to appeal (Gathright, BK, ‘A Step in the Wrong Direction: The Loewen Finality Requirement and the Local Remedies Rule in NAFTA Chapter Eleven’ (2005) 54 Emory LJ 1093Google Scholar, 1105).

31 See Bjorklund, AK, ‘Reconciling State Sovereignty and Investor Protection in Denial of Justice Claims’ (2005) 45 Virginia JIntlL 809Google Scholar; Gathright, BK, ‘A Step in the Wrong Direction: The Loewen Finality Requirement and the Local Remedies Rule in NAFTA Chapter Eleven’ (2005) 54 Emory LJ 1093Google Scholar; Wallace, D Jr, ‘State Responsibility for Denial of Substantive and Procedural Justice Under NAFTA Chapter Eleven’ (2000) 23 Hastings IntlCompLRev 393Google Scholar; Rubins, N, ‘Loewen v United States: The Burial of an Investor–State Arbitration Claim’ (2005) 21 Arbitration International 1CrossRefGoogle Scholar; U Kriebaum, ‘Local Remedies and the Standards for the Protection of Foreign Investment’ in C Binder and others (eds), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (OUP 2009). However, compare Been, V and Beauvais, J, ‘The Global Fifth Amendment? The NAFTA's Investment Protections and the Misguided Quest for an International “Regulatory Takings” Doctrine‘(2003) 78 New York ULRev 30Google Scholar, 83; Afilalo, A, ‘Towards a Common Law of International Investment: How NAFTA Chapter 11 Panels Should Solve Their Legitimacy Crisis’ (2004) 17 Georgetown International Environmental Law Review 51Google Scholar (expressing concerns over the possibility of arbitral review of national court decisions).

32 Loewen (n 21) para 156.

33 International Law Commission (ILC), ‘Second Report on State Responsibility’ (3 May–23 July 1999) UN Doc A/CN4/498, 34. See also Freeman (n 7) 311–12 commenting that the ‘responsibility [of a State] is engaged as the result of a definitive judicial decision by a court of last resort which violates an international obligation of the State’. See further Jennings, R and Watts, A (eds), Oppenheim's International Law (9th ednLongman 1992) 543–44Google Scholar.

34 C Greenwood, ‘State Responsibility for the Decisions of National Courts’ in M Fitzmaurice and D Sarooshi (eds), Issues of State Responsibility before International Judicial Institutions (Hart Publishing 2004) 61 (emphasis added).

35 Paulsson (n 6) 7.

36 ibid 108.

37 Art 20 of the same report dealt with the obligations of conduct. Under the rubric ‘Breach of an international obligation requiring the adoption of a particular course of conduct’, it provided that ‘there is a breach by a State of an international obligation requiring it to adopt a particular course of conduct when the conduct of that State is not in conformity with that required of it by that obligation’. ILC, ‘Report on the Work of the Twenty-ninth Session’ (9 May–29 July 1977) UN Doc A/32/10, 11-9.

38 Greenwood (n 34) 67, referring to ILC ‘Second Report on State Responsibility’. For a criticism of similar views earlier expressed in the ILC Report 1977, see Jiménez de Aréchaga, E, ‘International Law in the Past Third of a Century’ (1978) 159 Recueil des Cours de l'Académie de Droit International 1Google Scholar. Aréchaga argued that the local remedies rule should be applied ‘in all cases where the original violation affecting an alien may be corrected by a higher national authority, having jurisdiction over the original act, this subsequent action securing, for the alien concerned, a recognition of the right he sought to exercise, even if the international obligation is one of conduct and not one of result’ (ibid 296).

39 In support of the judicial finality rule, reference has been made to the observation by the ILC Rapporteur (Professor Crawford) that ‘there are also cases where the obligation is to have a system of a certain kind, e.g., the obligation to provide a fair and efficient system of justice. There, systemic considerations enter into the question of breach, and an aberrant decision by an official lower in hierarchy, which is capable of being reconsidered, does not of itself amount to an unlawful act.’ See ILC, ‘Second Report on State Responsibility’ (n 33) UN Doc A/CN4/498, para 75; also Greenwood (n 34) 67. However, it is worth mentioning that ultimately the Rapporteur suggested that the distinction between obligations of conduct and obligations of result should be abandoned (ILC, ‘Second Report on State Responsibility (n 33) paras 88–92). Before reaching this conclusion, Professor Crawford noted that not all obligations can be classified as obligations of conduct or of result (ibid para 80).

40 Bjorklund (n 31) 858 observes that ‘when the Loewen tribunal opined that only a final act of a judicial system may give rise to a NAFTA claim, the logical extension of that concept to requiring “appeals” within different hierarchical structures may lead to claims by states party to NAFTA that eviscerate any waiver of the local remedies rule’. See also McLachlan, C, Shore, L and Weiniger, M, International Investment Arbitration: Substantive Principles (OUP 2007) 232CrossRefGoogle Scholar, who note that ‘since the State has a single legal personality at international law, there would seem to be no reason in principle to distinguish between decisions of inferior courts, and decisions of administrative officials’.

41 Schwebel, S, International Arbitration: Three Salient Problems (Grotius 1987) 116Google Scholar.

42 ibid.

43 see n 40.

44 Interim award of 26 September 1999 and final award of 16 October 1999 (2000) 25 ICCA Ybk Commercial Arbitration 109. See Paulsson (n 6) 149–54. However, compare Loewen (n 21) paras 120–23. See also Dugan, C and others, Investor–State Arbitration (OUP 2008) 528–29CrossRefGoogle Scholar, who note that some authorities also recognize state responsibility for a breach of arbitration agreement, without, however, having recourse to the language of fair and equitable treatment or denial of justice.

45 Himpurna (n 44) para 184.

46 See n 33 and accompanying text.

47 See n 31.

48 Saipem v Bangladesh (Award) ICSID Case No ARB/05/7 (20 June 2009).

49 The Bangladesh Oil Gas and Mineral Corporation.

50 Saipem (n 48) para 178.

51 ibid para 176.

52 ibid para 181.

53 Newcombe, A and Paradell, L, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International 2009) 301Google Scholar, 314, suggest that the application of the local remedies rule should extend to any breach of treaty by judicial organs, including a violation of the standard of full protection and security and of the arbitrary and non-discriminatory conduct clause.

54 Moreover, as shown in Saipem, the disguising technique could be used to circumvent other barriers, such as the limited consent to arbitration.

55 See eg art II(7) of the Treaty Between the United States of America and the Republic of Ecuador Concerning the Encouragement and Reciprocal Protection of Investment (adopted 27 August 1993, entered into force 11 May 1997); also art 10(12) of the Energy Charter Treaty (signed 17 December 1994, entered into force 16 April 1998) 2080 UNTS 100.

56 Chevron Corporation and Texaco Petroleum Corporation v Ecuador (Partial Award on Merits), 30 March 2010 (ad hoc—UNCITRAL Arbitration Rules).

57 ibid paras 206–07.

58 For example, according to a prevailing view, access to justice is not guaranteed by customary international law (see Francioni, F, ‘Access to Justice, Denial of Justice and International Investment Law’ (2009) 20 EJIL 729CrossRefGoogle Scholar, 731). Hence, the customary prohibition of denial of justice might seem to be narrower than a treaty obligation to provide effective means, the latter clearly encompassing access to justice.

59 See n 34 and accompanying text.

60 Chevron (n 56) para 242.

61 ibid.

62 ibid.

63 ibid para 244.

64 ibid para 250.

65 ibid para 275. Since the undue delay rose to the level of a breach of the effective means standard, the tribunal held that it was unnecessary to consider denial of justice claims, including the allegation of manifestly unjust decisions that the Ecuadorian courts rendered against the claimant after the commencement of arbitration.

66 ibid para 321.

67 ibid, stating that ‘the Tribunal is amply satisfied that a requirement of exhaustion of local remedies applies generally to claims for denial of justice’.

68 See, for instance, ibid para 250: ‘As with denial of justice under customary international law, some of the factors that may be considered are the complexity of the case, the behaviour of the litigants involved, the significance of the interests at stake in the case, and the behaviour of the courts themselves’ (emphasis added).

69 See ibid paras 328–31 (the tribunal resorting to the customary international law principles on effective remedies).

70 It is interesting that unlike Chevron, the tribunal in Duke Energy Electroquil Partners and Electroquil SA v Ecuador (Award), ICSID Case No ARB/04/19 (12 August 2008) looked at the substance of the dispute and refrained from drawing a superficial distinction between a denial of justice and a breach of the effective means clause. The tribunal noted that article II(7) guaranteed the access to courts and the existence of relevant institutional mechanisms. Hence, it ‘formed part of the more general guarantee against denial of justice’ (ibid para 391). The tribunal therefore questioned whether Ecuador's conduct amounted to a denial of justice. This understanding of the relationship between a denial of justice and a failure to provide effective means of justice informed the tribunal's analysis of the applicability of the local remedies rule. In examining whether the fact that the government had objected to the jurisdiction of the local tribunal amounted to a denial of justice, the tribunal highlighted the fact that Electroquil had not challenged the final decision of the local arbitral tribunal before the courts of Ecuador. As a result, the Ecuadorian legal system ‘never came into play to rule on the award’ (ibid para 398). The tribunal dismissed the claim of denial of justice due to the investor's failure to show that no adequate and effective remedies existed.

71 AMTO LLC v Ukraine (Final Award), SCC Case No 080/2005 (26 March 2008).

72 ibid paras 75, 85.

73 ibid para 84.

74 ibid.

75 ibid para 85.

76 ibid para 87.

77 ibid para 88.

78 ibid para 89.

79 ibid.

80 ibid.

81 See n 77 and accompanying text.

82 For example, art II(3)(b) of the US–Ecuador BIT provides that ‘A measure may be arbitrary or discriminatory notwithstanding the fact that a party has had or has exercised the opportunity to review such measure in the courts or administrative tribunals of a Party.’

83 Kriebaum (n 31) 426 (distinguishing between the ICSID arbitration as an alternative to domestic adjudication, and the dispute resolution bodies in the international law of human rights, which operate as a subsidiary mechanism). See also McLachlan, C, Shore, L and Weiniger, M, International Investment Arbitration: Substantive Principles (OUP 2007) 128CrossRefGoogle Scholar, stating that ‘one of the purposes of investment arbitration is to provide a neutral forum for dispute resolution of investor–State disputes’.

84 See ibid.

85 Francioni (n 58) 746 argued that ‘the impressive development of investment arbitration in contemporary international law has helped consolidate access to justice as a principle which partakes both of human rights law and of investment law’. However, unlike foreign investors, victims of human rights violations must exhaust local remedies. See, for example, art 35(1) of the European Convention on Human Rights, which provides for the exhaustion of all remedies as a condition precedent to bringing a claim (Convention for the Protection of Human Rights and Fundamental Freedoms (opened for signature 4 November 1950) 213 UNTS 221). For more detail, see Harris, DJ and others, Harris, O'Boyle & Warbrick: Law of the European Convention on Human Rights (2nd edn, OUP 2009) 764Google Scholar.

86 Loewen (n 21) para 242.

87 See Schreuer (n 17) 2, who emphasizes that art 26 ICSID expressly waives local remedies, except when state parties wish to make their consent to arbitration subject to the exhaustion rule. Israel and Guatemala both gave notification to ICSID opting for the mandatory exhaustion of local remedies prior to arbitration, but Israel has since withdrawn its notification. See further Delaume, GR, ‘ICSID Arbitration and the Courts’ (1983) 77 AJIL 784CrossRefGoogle Scholar, 785, who argues that, by virtue of art 26 providing for ICSID arbitration as an exclusive remedy, ‘if a court in a contracting state becomes aware that a claim before it may call for adjudication under ICSID, the court ought to stay the proceedings pending proper determination of the issue by ICSID’. See also Schreuer, C and others, The ICSID Convention: A Commentary (2nd edn, CUP 2009) 386–87CrossRefGoogle Scholar.

88 European Parliament, Committee on International Trade, Report on the Future European International Investment Policy 2010/2203(INI) (22 March 2011) <http://www.europarl.europa.eu/sides/getDoc.do?type=REPORT&mode=XML&reference=A7-2011-0070&language=EN>.

89 It has already been acknowledged, in a different context, that some investment treaty standards are redundant. See TJ Grierson-Weiler and IA Laird, ‘Standards of Treatment’ in P Muchlinski, F Ortino and C Schreuer (eds), The Oxford Handbook of International Investment Law (OUP 2008) 269; J Coe and N Rubins, ‘Regulatory Expropriation and the Tecmed Case: Context and Contributions’ in T Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May 2005) 602.

90 Saipem (n 48) para 121.

91 For example, Chinese investment treaties usually provide for state consent to arbitration of disputes relating to the amount of compensation for expropriation only (For detail, see Gallagher, N and Shan, W, Chinese Investment Treaties: Policies and Practice (OUP 2009) 326Google Scholar). A similar practice featured in the USSR BITs, many of which were inherited by Russia.