Aggressive pushing by investors

110

Chapter 4: Causes and Institutional Foundations of the

111

aspects. On one hand, investors have their own claims under the applicable investment treaties. An investor is entitled to submit its own claims against the host state to a treaty tribunal under the applicable investment treaty without having to ask for approval from its home state. The investor may submit a claim of which its home state actually disapproves. And the home state has no control over the investor’s claims. This occurred in GAMI v. Mexico, for instance, in which the United States, the home state of GAMI, filed a submission that the tribunal lacked jurisdiction. The tribunal however ultimately upheld its jurisdiction.²⁹³ On the other hand, investors actually have a diversity of legal techniques to bypass jurisdictional limitations to investment treaty tribunals. In the investors’ arsenal, there are several key weapons which are frequently and effectively utilized in investor-state arbitration. It needs to be further explained as follows.

To illustrate, there are many investment treaties containing provisions limiting investors’ access to international arbitration only to those disputes over the amount of compensation for expropriation. Investors, however, have enough techniques to override such limitation. There are plenty of choices for investors: (1) interpreting the provision as covering disputes over both the existence of an expropriation and the amount of compensation for expropriation; ²⁹⁴ (2) borrowing a wider investor-state arbitration provision from a third-party treaty by relying on the MFN clause in the basic treaty; ²⁹⁵ and (3) treaty shopping, which means structuring its investment through a third state to shop for a favorable third-party investment treaty. ²⁹⁶

Firstly, investors may interpret narrow investor-state arbitration provisions expansively in order to establish the tribunal’s jurisdiction over any dispute relating to compensation for expropriation. Nevertheless, this technique is not without restriction.

For the provision covering only disputes concerning the amount of compensation for expropriation, it has the potential to be interpreted as covering both the dispute over the existence of an expropriation and the dispute over the amount of compensation for expropriation. However, no matter how expansively such a provision is interpreted, it cannot exceed the range of dispute “concerning” the amount of compensation for expropriation. For instance, the investor cannot submit disputes concerning violations of national treatment clauses or fair and equitable treatment clauses to investment

293 GAMI Investments, Inc. v. United Mexican States, UNCITRAL, Final Award, 15 November 2004, paras.

29-33.

294 See supra chapter 3.3.

295 See supra chapter 3.5.

296 See supra chapter 3.2.2.

112

arbitration under such narrow provisions. Therefore, if the dispute between the investor and the host state only concerns an alleged expropriation, it would be sufficient in contending an expansive interpretation of narrow investor-state arbitration provision to establish the tribunal’s jurisdiction. But if the investor believes that the alleged measures of the host state not only constitute an expropriation but also violate other treaty obligations of the host state, the investor would then turn to other options, such as the MFN treatment and treaty shopping, for submitting wider claims to the investment tribunal.

Secondly, investors may borrow a wider investor-state arbitration provision from a third-party treaty by relying on the MFN clause in the basic treaty. For a long time, MFN clauses have been “sleeping beauties” and have rarely been invoked by investors since substantive standards of investment protection offered by various investment treaties shows little difference. However, since the Maffezini tribunal firstly started to expand the application of MFN clauses to procedural matters, MFN clauses have been commonly utilized to import broader and freer investor-state arbitration provisions from third-party treaties. In arbitral practice, MFN clauses have been relied upon to overcome the narrow investor-state arbitration provisions in two circumstances, including overriding procedural preconditions to arbitration and broadening the coverage of investment disputes subject to arbitration. Therefore, investors could submit claims based on any investment treatment standard other than expropriation treatment to investment arbitration in spite of the explicit limitation of narrow investor-state arbitration provisions.

Finally, even if neither the expansive reading of such provisions nor the invocation of MFN clauses is supported by tribunals, investors still have a choice of treaty shopping by structuring its investment through special purpose vehicles or shell companies. It is the safest and surest means for investors to avoid the restrictive arbitration provisions meant to apply. Treaty shopping may take place in two scenarios, including investment via a third state and round-trip investment. In the scenario of investment via a third state, the investor may seek treaty protection for its investment by structuring its investment through a shell company incorporated in a third state that has a favorable investment treaty with the target host state. In the scenario of round-trip investment, an investor investing in its home state may also seek to evade the jurisdiction of local authorities and acquire treaty protection by incorporating a shell company in a foreign state that has favorable treaty terms with

113

its home state. Therefore, through the technique of treaty shopping or nationality planning, the bilateral and reciprocal character of investment treaties can be avoided, and any favorable third-party investment treaty can be shopped by investors.

Without doubt, it cannot be said that investors have everything to gain and nothing to lose in investment arbitration. In practice, investors may hesitate in submitting claims to investment arbitration in view of the relatively high arbitration cost and risk of losing. Investment arbitration involves heavy costs both for the claimant investor and the respondent state. The recently increasing phenomenon of third-party funding in investment arbitration, however, dispels these worries of investors. Investment arbitration claims of investors are treated as an asset by third party funders. Third party funders, sometimes referred to as venture funds or vulture funds, find business opportunities in international investment disputes since the amount of investment claims is extremely large, usually no less than millions of dollars. Third party funders offer to pay the relevant legal fees and arbitration costs of investors in exchange for getting a share of the potential profits at the end. Put differently, third party funders buy into someone else’s arbitration claims in the hopes of dividing the spoils if a favorable award is rendered by the tribunal which can be enforced globally. ²⁹⁷

Therefore, third party funders may profit from disputes between the foreign investor and the host state. By financing the legal fees and costs of arbitration proceedings for the foreign investor, third party funders may receive a certain percentage of the compensation from the respondent state obtained by award or settlement. ²⁹⁸ The involvement of third party funders in investment arbitration proceedings makes the investment claims themselves an asset or commodity. Third party funders may buy and finance any investment claim against the host state after an evaluation of the potential value of such claims. The market for the commoditization and monetization of investment arbitration claims is thus enormous. For this reason, third party funders see funding of investment arbitration claims as a “fast growing industry” and believe that third party funding will play a larger role in investment arbitration. ²⁹⁹

297 For the enforcement mechanism of investment arbitral awards, see infra chapter 5.2.4.

298 Burford Capital is the biggest third-party funder in the international market of litigation and arbitration funding, and it claims to have a particular specialty in investment arbitration funding. According to its Annual Report 2014, the total asset of Burford Capital amounts to 532,246,000 US dollars and its litigation investment income in 2 14 reaches 47,847, US dollars. See Burford’s Annual Report 2 14, available at http://www.burfordcapital.com/wp-content/uploads/2015/03/23032_Burford_RA_2014_WEB.pdf.

299 See Alison Ross, The Dynamics of Third-Party Funding, Global Arbitration Review, Vol. 7, 2012, pp. 13-24;

Bernardo M. Cremades, Jr., Third Party Litigation Funding: Investing in Arbitration, Transnational Dispute

114

Indeed, the use of third-party funding in international investment arbitration is increasing rapidly. In many investment arbitration cases, investors are actually supported and financed by third-party funders. The financing of arbitration claims by third-party funders is also noticed without criticism by investment tribunals.³⁰⁰ In the case of Teinver v. Argentina, for instance, the respondent questioned the claimants’

third-party funding agreement with Burford Capital concerning the financing of the claimants’ litigation expenses in this arbitration. According to the respondent, it was the third-party funder, not the claimants, that was the real party interested in this arbitration, and that the third-party funder did not meet the basic jurisdictional requirements under the applicable investment treaty. On the contrary, the claimants claimed that third-party funding was frequently made in practice and was not illegitimate, unlawful or inappropriate. While noting the existence of third-party funding agreement between the claimants and Burford Capital, the tribunal however found that third-party funding of the claimants’ litigation did not affect the tribunal’s jurisdiction.³⁰¹

The third party funders fund the investment arbitration in return for a certain percentage of the recovery in the case of a successful claim in both jurisdiction and merits. Although bearing the legal costs and risks of losing, the third party funders may still benefit a lot from its funding. Before entering into a funding agreement with the investor, the third party funder will carry out thorough due diligence based on its reach experience in arbitration and thus will increase the chances of obtaining a favourable award. ³⁰² From the perspective of investors, shifting the risk of losing the case and the management of that risk to a third party funder may thus provide the necessary incentive to foreign investors, which may result in an increased recourse to investor-state arbitration against host States. ³⁰³

More importantly, third party funding of investment claims will facilitate access to arbitration and encourage the speculation or gambling of investors in submitting

Management, Vol. 4, 2011.

300 For a detailed discussion of third party funding in investment arbitration, see Xu Shu, Third Party Funding in International Investment Arbitration and Its Regulations, Beijing Arbitration, Vol. 84, 2013, pp. 39-50. (in Chinese)

301 Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. The Argentine Republic, ICSID Case No. ARB/09/1, Decision on Jurisdiction, 21 December 2012, paras. 239-259.

302 Susanna Khouri et al., Third party funding in international commercial and treaty arbitration-a panacea or a plague? A discussion of the risks and benefits of third party funding, Transnational Dispute Management, Vol.

4, 2011; Burford Capital, Third Party Funding in International Arbitration, available at:

http://www.burfordcapital.com/articles/third-party-funding-in-international-arbitration/.

303 Eric De Brabandere & Julia Lepeltak, Third-Party Funding in International Investment Arbitration, ICSID Review-Foreign Investment Law Journal, Vol. 27, No. 2, 2012, p. 383.

115

frivolous claims to investment arbitration. Without outside funding, foreign investors may be reluctant to initiate investor-state arbitration proceedings after taking into account the jurisdictional basis, the prospects of success, the arbitration costs and the quantum of the claim. Investment arbitration involves a heavy cost, and the outcome of arbitration proceedings is uncertain. Once lost in arbitration, foreign investors may have to pay the costs in terms of legal fees, time and other opportunities. With the funding from a third party, however, foreign investors would no longer worry about the legal costs and risks of losing. What foreign investors need to do is to submit investment claims to arbitration in their name. The relevant legal fees and risk of losing will be in the responsibility of the third party funder. If the claim fails, the foreign investor would lose nothing. Therefore, any dispute between the foreign investor and the host state may be regarded as an asset with a price. Even frivolous disputes could be submitted to arbitration using third party funding. Instead of bringing equity and justice to arbitration, third-party funding of investment arbitration claims poses substantial risks of abusing the arbitration process. ³⁰⁴