International Investment Arbitration and International Commercial Arbitration: A Brief Comparison

Author: Purnima Vashishtha, GLC, Mumbai

Editor: Rahul Kumar Roy, Manipal University Jaipur

Introduction

Investment Arbitration is the settlement of disputes between foreign investors and host states by means of arbitration. It empowers a foreign investor to bring a legal action against the host state, in case of a dispute, and hence have access to an independent and unbiased system to resolve the dispute.


International commercial arbitration on the other hand refers to the procedure of settling disputes arising out of commercial transactions between private parties across national borders. It works as an alternative against the traditional means of solving disputes via litigation.

Section 2(1)(f) of The Arbitration and Conciliation Act, 1996, defines an International Commercial Arbitration as an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is—

1. An individual who is a national of, or habitually resident in, any country other than India; or

2. A body corporate which is incorporated in any country other than India;

3. A company or an association or a body of individuals whose central management and control is exercised in any country other than India;

4. The Government of a foreign country

Legal Setup

Generally, disputes between parties are dealt as per the rules and laws of certain recognized arbitral institutions, however, international investment arbitrations are mostly governed by the international agreement or bilateral treaty between the investor and host state. International commercial arbitration on the other hand is governed as per the agreement between the contracting parties.


Under the public international law, international arbitration is the result of public treaties, particularly bilateral instruments as there are more than thousands of BITs, and multilateral instruments as the ICSID Convention, the Energy Charter Treaty, and regional instruments such as NAFTA and CAFTA. On the other hand, the New York Convention is the only relevant treaty for commercial arbitration which deals with the recognition and enforcement of foreign arbitral awards only.


As a substantive law, national law may become applicable in several ways: In investment contracts between the state and the foreign investor, one will mostly have an express reference that the substantive law of the host state is applicable. Such a choice of law clause will generally have to be interpreted as also meaning that the investor has to accept later changes of the domestic law.[1] The substantive basis for challenging the conduct of the sovereign state is based on the breach of the guarantees provided to it by the state. The most common protections provided to foreign investors include protection form expropriation, national treatment, full protection and security, fair and equitable treatment, etc.


However, in ICA, the substantive national law depends on the contracting parties who agree which country's law would be applied in case of a dispute. Hence, it is the choice of law clause that determines the applicable law in ICA.


Jurisdiction

Jurisdiction plays a different role in commercial and investment arbitration. The jurisdiction of the dispute in ICAs is limited to the scope of the arbitration clause, consent and its signatories, which doesn't leave much space for jurisdictional disputes.

In investment arbitration, there is a much wider scope of jurisdictional issues and we have much more frequently jurisdictional objections. The consent of the parties to arbitration is mostly expressed in a treaty of public international law such as a BIT or the ICSID Convention. Thereby, general principles of treaty interpretation, particularly the Vienna Convention, will become relevant in much detail.[2]


Selection of Arbitrators

Both Investment arbitrations and ICAs can be either ad-hoc or institutional. If the parties set their own rules it is an ad hoc arbitration in which the parties are responsible for deciding the forum, numbers of arbitrators, and all other aspects of the arbitration. On the other hand, if the parties have agreed to have an arbitral institution to administer the dispute, it is an institutional arbitration. Some of the best-known institutions administering commercial arbitrations are the ICC, LCIA, and the Singapore International Arbitration Centre (SIAC), whereas International Centre for Settlement of Investment Disputes (ICSID) is the preferred institution for investment arbitration.


Arbitral Award

Article 53 to 55 of the ICSID Convention provides for the rules for the enforcement of international investment awards. According to the ICSID Convention, "Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State." There are no appeals of investment arbitration awards, although the arbitral rules under which they are brought do provide limited grounds for the annulment or setting aside of an arbitral award, for instance, an arbitral award can be set aside if the tribunal manifestly exceeded its powers.

Unlike many types of domestic arbitration where unreasoned awards (often called "standard awards") are the norms, international commercial arbitration routinely requires arbitrators to produce fully reasoned awards.[3] The New York Convention provides that no further appeals should be available against court decisions in recognizing and enforcing a foreign arbitral award other than those expressly mentioned in the Convention itself. According to Section 34(2A) of The Arbitration and Conciliation Act, 1996, "An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award: Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence."


Conclusion

International investment arbitration and international commercial arbitration differ with respect to their nature of dispute, parties involved, their legal framework, jurisdiction, and even arbitral award. With the massive growth of ADR globally, both these systems hold their respective place and purpose and are major players in the international trade.

[1] Karl-Heinz Bocksteigel, "Commercial and Investment Arbitration: How Different Are They Today?" Arbitration International, The Journal of the London Court of International Arbitration (2012)

[2] Id 1.

[3] See Rain CII Carbon, LLC v. ConocoPhillips Co., 674 F.3d 469, 473-74 (5th Cir. 2012) (distinguishing a standard award from a reasoned award); Cat Charter, LLC v. Schurtenberger, 646 F.3d 836, 844-46 (11th Cir. 2011) (same); see also S.I. STRONG, INTERNATIONAL COMMERCIAL ARBITRATION: A GUIDE FOR U.S. JUDGES 22 (2012) (comparing international commercial arbitration to other forms of arbitration), http://www.fjc.gov [hereinafter STRONG, GUIDE].

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