The Investment Treaty Arbitration Review: Parallel Proceedings in the Context of ISD Arbitration
Arbitrations dealing with investor–state disputes have not been immune to the risks associated with parallel proceedings. In the seminal cases of Ronald Lauder v. Czech Republic and CME Czech Republic BV v. Czech Republic,2 for instance, a US citizen invested in a Czech television services company via his holding company in the Netherlands, CME Czech Republic BV. When the investment relationship deteriorated, the claimant and CME BV each initiated an investor–state arbitration against the Czech Republic under the US–Czech Bilateral Investment Treaty (BIT) and the Netherlands–Czech BIT, respectively. Both proceedings were based on the identical facts requesting largely identical relief. While the tribunal in Lauder held that there was only a minor treaty breach and instructed each party to bear half of the fees and expenses, however, the tribunal in CME found the respondent, Czech Republic, to be in violation of the key provisions of the treaty and awarded approximately U$270 million in damages in favour of CME.
In SGS v. Pakistan,3 an International Centre for Settlement of Investment Disputes (ICSID) tribunal had to face the challenge of dealing with two competing arbitrations between the identical parties. One arbitration was seated in Pakistan based on the commercial agreement between the parties, and the other encompassed an investor–state claim under the Switzerland–Pakistan BIT, which was brought before the ICSID tribunal. The factual dispute pertained to a pre-shipment inspection service agreement between the service provider (SGS) and the recipient (Pakistan), and Pakistan had commenced arbitration proceedings in Pakistan relating to the dispute and sought to enforce arbitration provisions in the PSI Agreement. SGS in turn filed preliminary objections in the arbitration in Pakistan and submitted a Request for Arbitration with ICSID against Pakistan for violations of the Switzerland–Pakistan BIT and the PSI Agreement. Subsequently, the issue presented for resolution was whether one of the arbitrations should be stayed to mitigate the concerns associated with parallel arbitrations.
What ensued afterwards is a labyrinth of legal entanglements wherein the Supreme Court of Pakistan initially granted Pakistan's request to proceed with the arbitration in Pakistan and restrained SGS from participating in the ICSID arbitration. Notwithstanding that decision of the Pakistani Supreme Court, however, the ICSID Tribunal proceeded with hearing the case, and the sole arbitrator in the Pakistan arbitration stayed the proceedings until the ICSID Tribunal determined whether it had jurisdiction to consider SGS's claims.
As can be seen above, parallel proceedings in an investor–state context may take various forms – it can arise where two or more disputes involving the identical parties or issues are adjudicated in more than one forum. As was the case in SGS v. Pakistan, it may also arise where an international investor has both a commercial claim against a state under a commercial agreement and an investor–state claim against that same state under an investment treaty involving essentially the same set of facts. Parallel proceedings have also occurred in instances where several international investors of different nationalities are impacted by the same measure from a state and file an investor–state arbitration under their respective bilateral treaties with the state.
Apparently, judicial economy is one of the most apparent casualties in the event of parallel proceedings. Where a dispute is adjudicated by more than one tribunal, it inevitably leads to the risk of duplicated time and costs in resolving an essentially identical dispute. The issue may be further exacerbated when the parallel proceedings end up rendering two inconsistent outcomes, resulting in a significant uncertainty in the enforceability of the award itself. As seen in CME v. Czech Republic (CME) and Ronald Lauder v. Czech Republic (Lauder), inconsistent findings may result in contradictory outcomes in liability and quantum. Where two divergent tribunals construe the identical facts differently and render an inconsistent set of awards, it will inevitably trigger questions as to the enforceability of either award, which in turn runs the risk of renewing another round of disputes solely for the purposes of addressing such dichotomy.
Moreover, the risk is also heightened in cases where parallel proceedings entail an investor–state dispute arbitration (where the proceedings or records are kept public) and a commercial arbitration wherein the proceedings are subject to confidentiality. In such a case, the risk of having a tribunal in the investor–state arbitration unaware of potentially critical information relating to the same dispute in the other commercial arbitration cannot be over-emphasised. Finally, disparate findings on damages in parallel proceedings could lead to the risk of creating windfall for one or more parties.
Against this backdrop, various means to anticipate and to mitigate the risks have been considered and this chapter outlines some of the key practical considerations relating to such measures.
To the extent possible, consolidation of arbitral proceedings may be the most effective means by which the risks associated with parallel proceedings are addressed. If the relevant bilateral investment treaty provides for consolidation or the parties' consent is obtained, the arbitration proceedings could be consolidated without a considerable delay. Absent an express consolidation provision in the treaty, however, the respective provisions in the arbitration rules chosen by the parties or the law of the arbitration seat will have to be considered to determine the feasibility of consolidating the cases. The parties' overall consensus for the consolidation is often a key requirement, and as seen in the case of CME and Lauder against the Czech Republic, the consolidation of the cases is unavailable if a party (the Czech Republic in that case) does not consent.
Ii Stay of proceedings
In the event that no consensus for consolidation can be reached, the next alternative may be to apply to stay one of the parallel proceedings on the grounds that the material risks associated with inconsistent findings and double recovery must be averted. In SGS v. Pakistan, for example, the tribunal had recommended a stay of a parallel arbitration until such time the tribunal issued its jurisdictional award and the ultimate award was no longer subject to the risk of inconsistent outcome under the ICSID Convention.
In case a stay of a parallel arbitration pending the outcome in the investor statement dispute arbitration is not feasible, then consideration may need to be given to alerting the tribunals in parallel proceedings and requesting them to heed the award from the other proceedings. In Ambiente Ufficio SpA and others v. Argentine Republic,4 the tribunal acknowledged the utility in taking into consideration the findings made by the parallel proceedings. In Lauder and CME, the respective tribunals indicated that the amount of damages granted by the second deciding court or arbitral tribunal could take the damages granted by the first arbitral tribunal into account so as to avert double recovery or windfall.
Iii Waiver clause
In the context of investor–state dispute arbitrations, there has been an effort to draft the respective investment treaties so as to contain specific provisions aimed at reducing the risk of parallel proceedings, either by staying parallel proceedings or compelling consolidation of claims by multiple investors.
By way of example, certain investment treaties have been drafted to compel the potential investors or claimants to relinquish their right to commence or to continue parallel investment treaty claims before other tribunals and courts. Article 1121 of the North American Free Trade Agreement (NAFTA) Chapter 11 contains a condition precedent whereby a claimant must:
waive [its] right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceedings with respect to the measure of the disputing Party that is alleged to be a breach . . . [except] for proceedings for injunctive, declaratory or other extraordinary relief, not involving the payment of damages, before an administrative tribunal or court under the law of the disputing Party.5
In line with the provision, the tribunal in Detroit International Bridge Company v. Government of Canada,6 found that for the claim to be adjudicated, the claimant or investor must first comply with the waiver requirement under Article 1121 of NAFTA, and that the non-compliance with the waiver requirement by the claimant or investor voided the respondent or state's consent to arbitrate. Additionally, in Quiborax SA, Non Metallic Minerals SA and Allan Fosk Kaplún v. Plurinational State of Bolivia,7 the tribunal decided that Article 26 of the ICSID Convention (which provided that consent of the parties to an arbitration under the Convention is deemed to be consent to the arbitration to the exclusion of any other remedy) formed a basis to prohibit parallel proceedings. The tribunal in Commerce Group Corporation & others v. Republic of El Salvador8 has also taken a proactive approach towards upholding a waiver clause under the respective bilateral treaty, stating that when the treaty includes a waiver clause, it in turn requires the investor to relinquish any rights to initiate or continue proceedings parallel with an investor–state arbitration. Waiver clauses, however, are not universal nor are they uniformly incorporated in the treaties, leaving room for further consideration of alternatives.
iv Fork-in-the-road provision
In addition to the concept of waiver, 'fork-in-the-road' clauses in bilateral investment treaties compel the claimant or investor to choose between pursuing its claims against the respondent or state either through the investor–state arbitration proceedings (as per the relevant treaty) or via local courts (or other venues as may be applicable under the relevant contractual mechanisms or the applicable law).
The intent behind a fork-in-the-road provision is to prevent the duplication of procedures and claims that trigger the risk of inconsistent outcome. As the tribunal in Supervision y Control v. Costa Rica9 stated, 'the existence of national courts and international arbitration as mechanisms for resolving disputes can generate a significant risk of duplication and a problem in determining what is the proper dispute resolution mechanisms for disputes that may arise during the investment period'. And as the provision requires a claimant or investor to opt between different jurisdictional systems before commencing or continuing the investor–state claim, making the ultimate choice under the provision creates a legal effect whereby the investor is deemed to have irrevocably chosen one dispute resolution forum over the other. The choice thereafter prevents the claimant or investor from conducting parallel proceedings in conjunction with the dispute resolution mechanism it has elected.
In Seo v. the Republic of Korea,10 the respondent state alluded to the applicability of the fork-in-the-road provision11 as an issue of jurisdiction and admissibility. There, the respondent or investor asserted that because the claimant or alleged investor submitted her claim before the domestic court and the administrative committee overseeing expropriation claims, the fork-in-the road provision (Annex 11 E of the treaty) barred the claimant from bringing her investor–state dispute claim before the arbitral tribunal. The respondent or state further submitted that the claimant would also be prevented from bringing the claim before the arbitral tribunal as the claim had the same fundamental basis as the proceedings that had been adjudicated before the Seoul Western District Court and the administrative committee. While the ruling by the tribunal to summarily dismiss the claim was grounded on the fact the alleged investor did not engage in an act commensurate with an investment falling under the purview of the treaty (i.e., lack of jurisdiction), the respondent or state's objection based on the fork-in-the road illustrates the relevance of the provision in forming a basis to challenge jurisdiction.
It may also be worth noting that in applying the fork-in-the road provision, arbitral tribunals often consider a strict set of standards referred to as a triple identity test. Under these standards, the fork-in-the road provisions in the respective investment treaty would deploy its effects and prevent parallel proceedings only if the application brought before the domestic jurisdiction and before the arbitral tribunal is identical in at least three key aspects: the same object, the same cause of action and the identical parties to the dispute. Whether the strict threshold in determining the applicability of the fork-in-the road cause is well warranted has long been in dispute. In Khan Resources v. Mongolia,12 for instance, the respondent or state asserted that the triple identity test was unrealistically onerous and lacked practical value as 'it is unrealistic to expect all three prongs of the test to be satisfied' in most of the disputes. In turn, the arbitral tribunal acknowledged that the triple identity test imposed standards that were stringent for certain intents and purposes. The tribunal further observed that the requirements of triggering the fork-in-the-road provision should remain difficult to satisfy given the chilling effect it could have
on the submission of disputes by investors to domestic fora, even when the issues at stake are clearly within the domain of local law. This may cause claims being brought to international arbitration before they are ripe on the merits, simply because the investor is afraid that by submitting the existing dispute to local courts or tribunals, it will forgo its right to later make any claims related to the same investment before an international arbitral tribunal.13
The strict interpretation of the fork-in-the-road clause has also been observed in Toto Costruzioni v. Lebanon.14 There, the respondent (Lebanon) asserted the fork-in-the-road provision in the applicable investment treaty led to the conclusion that the claimant (Toto)'s application to seek remedies in domestic proceedings estopped the arbitral tribunal from exercising its jurisdiction over the investment treaty claims by the claimant (Toto). However, the tribunal ultimately rejected Lebanon's interpretation of the fork-in-the-road clause and reinforced the distinction between the causes of action. The reasoning behind the rejection highlighted the predominant jurisprudence on point:
[i]n order for a fork-in-the-road clause to preclude claims from being considered by the Tribunal, the Tribunal has to consider whether the same claim is 'on a different road,' i.e. that a claim with the same object, parties and cause of action, is already brought before a different judicial forum. Contractual claims arising out of the Contract do not have the same cause of action as Treaty claims.15
On the other hand, some arbitral tribunals have raised the possibility that the triple identity test is not relevant, especially where the relevant investment treaty does not expressly require it. In H&H Enterprises Investments v. Egypt, the arbitral tribunal held that the relevant clause in:
Article VII of the US–Egypt BIT does not expressly require that the triple identity test be met before the fork-in-the-road provision can be invoked. The triple identity test raised by the Claimant in this case is based on its reading of arbitral jurisprudence as opposed to the specific language of the US–Egypt BIT or its interpretation.16
The arbitral tribunal further stipulated that:
the triple identity test is not the relevant test as it would defeat the purpose of Article VII of the US–Egypt BIT, which is to ensure that the same dispute is not litigated before different fora. It would also deprive Article VII from any practical meaning. The Tribunal notes that the triple identity test originates from the doctrine of res judicata. However, investment arbitration proceedings and local court proceedings are often not only based on different causes of action but also involve different parties. More importantly, the language of Article VII does not require specifically that the parties be the same, but rather that the dispute at hand not be submitted to other dispute resolution procedures; what matters therefore is the subject matter of the dispute rather than whether the parties are exactly the same. Finally, and in any event, it would defeat the purpose of the Treaty and allow form to prevail over substance if the respondents were required to be strictly the same because in practice, local court proceedings are often brought against state instrumentalities having a separate legal personality and not the state itself.17
The dichotomy between the different legal standards for interpreting the fork-in-the-road clause –and the application of each test remains to be seen, while the fundamental basis test may allow a comparatively more substantive approach to assessing the applicability of the fork-in-the-road clause as opposed to the strict triple identity test.
V Application of res judicata or lis pendens
For parallel proceedings involving domestic and international proceedings, it would not be practical to bifurcate them into different judicial processes while it may be preferable to have the dispute heard in a forum with more comprehensive jurisdiction. A domestic litigation may not turn out to be satisfactory to the investor both in speed and outcome, which would then lead to a need for international proceedings to finally resolve the dispute.18
Against this backdrop, there has been a view that final judgments by state courts should have res judicata effect. In Desert Line Projects v. Yemen, for instance, while rejecting the res judicata effect of a previous arbitration between the parties for lacking same parties, causes of action, or requested relief (i.e., failure to satisfy the 'triple identity' test)19 the ICSID tribunal deemed the local award to have such effect on the matters submitted to the local tribunal on contractual claims. Notably, the same res judicata effect was not acknowledged regarding the claimant's claims on substantive standards of the bilateral investment treaty (deprivation of procedural rights by respondent's interference with the proper conduct of the local arbitration).20
The application of res judicata or lis pendens may also be limited depending on the context of the disputes arising out of investment treaties. In Bayindir Insaat Turizm Ticaret Ve Sanayi AS v. Islamic Republic of Pakistan, the tribunal explained the inevitability of proceeding with the merits of the case in the same manner as the arbitral tribunal in Pakistan that was first supposed to decide on the contractual claims at issue, citing the distinct nature of treaty and contract claims.21 In Camuzzi v. Argentina, the tribunal addressed a claim that was founded on both the contract and the investment treaty, and noted that 'this is an issue belonging to the merits of the dispute' for which 'international law and decisions offer numerous mechanisms for preventing the possibility of double recovery'.22
Vi Abuse of process
Another option that has yet to develop fully because of a high threshold is advocacy on the principles of prohibition against abuse of process. This principle would be most fittingly apply to a situation where a claimant has already procured a decision from one tribunal or forum while pursuing further relief in another proceeding. Defined as the use of procedural instruments or rights for purposes that are alien to those for which the procedural rights were established,23 abuse of process is a term that has been coined by courts in the United Kingdom24 while there has been no uniform, established abuse of process doctrine in the United States.
One exception may be the state court precedents in Pennsylvania where the term has developed a more detailed definition (i.e., the tort of abuse of process requires three elements: (1) an 'abuse' or 'perversion' of process already initiated, (2) with some unlawful or ulterior purpose, and (3) harm to the plaintiff as a result).25 The US Supreme Court, however, has held that cognizable injury for abuse of process is limited to the harm caused by the misuse of process, and does not include harm resulting from that process being carried through to its lawful conclusion.26
Against this backdrop, the tribunals' reluctance to entertain the abuse of process claims has been illustrated in Chevron Corporation and Texaco Petroleum Company v. Republic of Ecuador, where 'the doctrines of abuse of rights, estoppel and waiver are subject to a high threshold . . . [t]he high threshold also results from the seriousness of a charge of bad faith amounting to abuse of process'.27 Further, in The Rompetrol Group N.V. v. Romania, the tribunal held that:
the abuse of process argument is one that seeks essentially to impugn the motives behind the Claimant's Request for Arbitration. It may or it may not be appropriate for an ICSID tribunal to enquire into the question whether either a Claimant or a Respondent party is actuated by a proper motive in advancing or defending its interests in prosecuting or defending an arbitration . . . [b]ut, if it were appropriate to do so, the decision would obviously be very closely dependent on the special circumstances of the particular case.28
Accordingly, a valid claim grounded on the doctrine of abuse of process is predicated on the fact that it must be raised with specific references to the nature of investment treaty-based proceedings.
There has been no specific provision in the ICSID Convention or Rules that confers inherent power to dismiss a claim on grounds of abuse of process. The tribunal in the Waste Management, Inc. v. United Mexican States29 has noted that, if such a power exists, 'it would only be for the purpose of protecting the integrity of the Tribunal's processes or dealing with genuinely vexatious claims'.30 While it is well noted that the doctrine of abuse of process may only apply in extreme cases, the duplicity arising out of parallel proceedings that address identical parties on an identical dispute may well be one of such applicable cases. In Orascom TMT Investments S.a.r.l. v. People's Democratic Republic of Algeria, two different notices of dispute (with identical matter) were submitted to arbitration by different companies belonging to the same vertical chain controlled by the same shareholder. To the extent that the company at the lowest level of the corporate chain would have restored its company value through the respective arbitration, all of the companies higher up in the corporate chain would have been sufficiently compensated. Thus, the Tribunal qualified the claimant's pursuit of its claim as an abuse of right and dismissed the claim.31
There are no uniform resolutions to the issues triggered by parallel proceedings, while the perils of inconsistent outcome and duplication are obvious. Accordingly, in jurisdictions where consolidation is not feasible without the parties' consent, strategies to mitigate the perils of parallel proceedings should be anticipated and addressed as clearly and early as possible.
1 Junsang Lee is a managing partner, Sungbum Lee is a partner and Myung-Ahn Kim is a partner and senior foreign attorney at Yoon & Yang LLC, Korea.
2 See Ronald Lauder v. Czech Republic, UNCITRAL, Final Award (3 September 2001) para. 319; CME Czech Republic BV v. Czech Republic, UNCITRAL, Partial Award (13 September 2001) para. 624; CME Czech Republic BV v. Czech Republic, UNCITRAL, Final Award (14 March 2003) para. 650.
3 ICSID Case No. ARB/01/13.
4 ICSID Case No. ARB/08/9.
6 UNCITRAL, PCA Case No. 2012-25.
7 ICSID Case No. ARB/06/2.
8 ICSID Case No. ARB/09/17.
9 ICSID Case No. ARB/12/.
10 HKIAC Case No. HKIAC/18117.
11 The relevant treaty provision is Annex 11-E of the KORUS FTA5, reads as follows:
- Notwithstanding Article 11.18.2, an investor of the United States may not submit to arbitration under Section B a claim that Korea has breached an obligation under Section A either:
- on its own behalf under Article 11.16.1(a); or
- on behalf of an enterprise of Korea that is a juridical person that the investor owns or controls directly or indirectly under Article 11.16,1(b), if the investor or the enterprise, respectively, has alleged that breach of an obligation under Section A in any proceedings before a court or administrative tribunal of Korea.
- For greater certainty, where an investor of the United States or an enterprise of Korea that is a juridical person that the investor owns or controls directly or indirectly makes an allegation that Korea has breached an obligation under Section A before a court or administrative tribunal of Korea, that election shall be final, and the investor may not thereafter allege that breach, on its own behalf or on behalf of the enterprise, in an arbitration under section B.
12 PCA Case No. 2011-09.
14 Toto Costruzioni Generali SpA v. Republic of Lebanon (ICSID Case No ARB/07/12).
16 ICSID Case No. ARB 09/15.
18 Christoph Schreuer, 'Calvo's Grandchildren: The Return of Local Remedies in Investment Arbitration' (2015) 4 LPICT 1, 12.
19 Int'l Law Ass'n, Berlin Conference, Berlin, China, 2004, International Commercial Arbitration Interim Report: 'Res judicata' and Arbitration, 2.
20 Desert Line Projects LLC v. The Republic of Yemen, ICSID Case No. ARB/05/17, para. 136, 204-205.
21 Bayindir Insaat Turizm Ticaret Ve Sanayi AS v. Islamic Republic of Pakistan, ICSID Case No ARB/03/29, Decision on Jurisdiction (14 November 2005) para. 270.
22 Camuzzi International S.A. v. Argentine Republic, ICSID Case No. ARB/03/2, Decision on Jurisdiction of 11 May 2005, para. 89.
23 See Robert Kolb, 'General Principles of Procedural Law' in Andreas Zimmermann, Christian Tomuschat and Karin Oellers-Frahm, The Statute of the International Court of Justice (2nd edn, Oxford University Press 2012) 904.
24 Attorney General v. Baker  EWHC 453 (Admin).
25 Kedra v. Nazareth Hosp., 868 F. Supp. 733, 738 (E.D. Pa. 1994).
26 Heck v. Humphrey, 512 U.S. 477, 486, 114 S. Ct. 2364, 2372, 129 L. Ed. 2d 383 (1994).
27 Chevron Corporation and Texaco Petroleum Company v. Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23, Interim Award (1 December 2008) paras 143–146.
28 The Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Decision on Preliminary Objections (18 April 2008), para. 115.
29 ICSID Case No. ARB(AF)/00/3.
30 Waste Management, Inc v. United Mexican States, ICSID Case No ARB(AF)/00/3, Decision on Mexico's Preliminary Objection concerning the Previous Proceedings, Decision of the Tribunal (26 June 2002) para 49.
31 Orascom TMT Investments S.a.r.l. v. People's Democratic Republic of Algeria, ICSID Case No. ARB/12/35, Final Award (31 May 2017).