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Counterclaims by Host States in Investment Treaty Arbitration

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Counterclaims by Host States in
Investment Treaty Arbitration
by H.E. Veenstra-Kjos
Issue :
Vol. 4, issue 4
Published
:
July 2007
This article is part of the New
Aspects of International Investment
Law - 2004 Research Seminar by the
Hague Academy of International
Law TDM special.
The full reports (including other
authors) have been published in:
New Aspects of International
Investment Law / Les aspects
nouveaux du droit des
investissements internationaux, 2004,
Edited by Kahn and Wälde.
Published: July 2007.
Series: Recueil des Cours - Colloques
/ Workshops / Law Books of the
Academy, 26.
ISBN-13: 978 90 04 15372 1
ISBN-10: 90 04 15372 1.
Hardback, 1072 pp.
This collection of essays offers a
precise and evocative image of a
remarkable evolution in concepts
and practices within international
economic law, which may be a
preparatory phase on the way
towards a true law of globalisation.
See www.brill.nl for more
information.
1
COUNTERCLAIMS BY HOST STATES
IN INVESTMENT TREATY ARBITRATION
Hege Elisabeth Veenstra-Kjos1
Abstract
This article explores the possibility for host States to present counterclaims
in arbitration proceedings with foreign investors when the parties’ arbitration agreement is based
on a unilateral offer by those States in a bi- or multilateral investment treaty (“arbitration without
privity”). As will be demonstrated, the focus in these instruments on the investor’s substantive
rights may constitute an obstacle in this regard, as the counterclaim, by virtue of the consensual
nature of arbitration, must fall within the arbitration agreement’s definition of arbitrable claims
(the tribunal’s jurisdiction ratione materiae). A further potential hurdle is the locus standi of the
host State, and more precisely, the extent to which the host State’s offer envisages claims being
presented by either party to the dispute or whether it reserves this procedural right for the investor
(jurisdiction ratione personae). Other issues include forum selection agreements; and the
requirement of connexity between the claim and the counterclaim, for instance, whether a host
State may present a counterclaim based in national law against an investor’s claim founded in
international law, including “umbrella” or “sanctity of contract” clauses.
It will be concluded that these obstacles may be overcome depending on the wording of the
respective treaties and the facts of each particular case. Further, the investor may at all times
choose to consent to the admissibility of the host State’s counterclaim; which it may be advised
to do, considering the time and money that can be saved by consolidating the parties’ claims in
one set of proceedings. In the interest of legal certainty, and an efficient and consistent settlement
1 Ms. Veenstra-Kjos, J.D., is a Lecturer in Law at the Department of International Law, University of Amsterdam.
This article is based on an article entitled Counterclaims by Host States in Investment Dispute Arbitration “Without
Privity, written for the Hague Academy, Centre for Studies and Research, New Aspects of International Investment
Law (2004). The scope has been narrowed to encompass solely treaty-based arbitration, and it expands on the issue
of “umbrella” clauses. The author wishes to thank those who gave helpful comments on earlier drafts of this article.
Apart from co-Fellows at the Centre for Studies and Research and colleagues at University of Amsterdam, particular
mention should be made of Dr. W. Ben Hamida, Mr. Z. Douglas, Dr. A. Escobar, Ms. A.K Hoffmann, Dr. P.A.
2
of investment disputes, States are still urged to consider including specific provisions in
investment treaties in order to facilitate the admissibility of counterclaims.
Karrer, Ms. N. Okany, Prof. Dr. S. Schlemmer-Schulte, Dr. Y. Shany, and Dr. T.W. Wälde. Comments are
welcomed at Veenstra-Kjos@uva.nl.
3
TABLE OF CONTENTS
1. INTRODUCTION...........................................................................................................................4
2. CONSENT........................................................................................................................................9
3. “ARBITRATION WITHOUT PRIVITY” ...............................................................................12
3.1. THE HOST STATE’S OFFER...............................................................................................12
3.2. THE INVESTOR’S ACCEPTANCE.....................................................................................13
4. THE ARBITRATION AGREEMENT......................................................................................14
4.1. ARBITRABLE CLAIMS (JURISDICTION RATIONE MATERIAE).................................14
4.1.1. Inclusion of Investor Obligations....................................................................................15
4.1.2. Exclusion of Investor Obligations...................................................................................18
4.2. POTENTIAL CLAIMANTS (JURISDICTION RATIONE PERSONAE)...........................19
4.2.1. The Host State as Potential Claimant..............................................................................19
4.2.2. The Investor as Sole Potential Claimant.........................................................................20
4.3. EXPRESS, TACIT, AND IMPLIED CONSENT TO COUNTERCLAIMS......................23
4.4. EXPRESS EXCLUSIONS OF COUNTERCLAIMS...........................................................26
4.5. FORUM SELECTION AGREEMENTS...............................................................................27
5. “CONNEXITY” AND THE LEGAL NATURE OF COUNTERCLAIMS.........................29
5.1. FACTUAL CONNEXITY......................................................................................................31
5.2. JURIDICAL CONNEXITY....................................................................................................32
6. CONCLUSIONS ...........................................................................................................................46
4
1. INTRODUCTION
The right of the respondent to file a counterclaim2 in opposition to the applicant’s3 initial claim in
the same legal proceeding is in principle admitted by all national legal systems,4 as well as in
interstate proceedings.5 The underlying rationale for such consolidation of claims is judicial
2 In presenting a counterclaim, the respondent seeks to achieve more than the dismissal of the applicant’s claim, and
it should therefore be distinguished from a defense on the merits. See, e.g., A. Blomeyer, Types of Relief Available
(Judicial Remedies), in VXI INTERNATIONAL ENCYCLOPEDIA OF COMPARATIVE LAW, at para. 126 (M. Cappelletti
ed., 1982); D. Anzilotti, La demande reconventionnelle en procédure internationale, 57 JOURNAL DU DROIT
INTERNATIONAL 867 (1930); G. Scelle, Report on Arbitration Proceedings, submitted to the International Law
Commission in 1949, II YILC 137, para. 78 (1950), also available at
http://untreaty.un.org/ilc/publications/yearbooks/Ybkvolumes(e)/ILC_1950_v2_e.pdf (last visited June 14, 2007);
Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and
Herzegovina v. Yugoslavia), Counter-Claims, Order of December 17, 1997, at para. 27, available at http://www.icj-
cij.org/docket/files/91/7335.pdf (last visited June 14, 2007). A counterclaim should also be differentiated from a
claim of set-off. Whereas the former is a separate claim, the latter is a defensive pleading that money owed by the
applicant to the respondent be counterbalanced against the initial claim. See, e.g., Danværn Production A/S v.
Schuhfabriken Otterbeck GmbH & Co, Case C-341/93 [1995] E.C.R. I-2053 (including the opinion of A.G. Mr.
Léger). Contrary to a counterclaim, a set-off claim may not exceed the amount of the initial claim, and is dismissed if
the initial claim is withdrawn or settled. See M. PELLONPÄA & D.D. CARON, THE UNCITRAL ARBITRATION RULES
AS INTERPRETED AND APPLIED: SELECTED PROBLEMS IN LIGHT OF THE PRACTICE OF THE IRAN-UNITED STATES
CLAIMS TRIBUNAL 348 (1994). Still, a counterclaim could share the fate of an initial claim dismissed for lack of
jurisdiction. See, e.g., Reliance Group, Inc. v. National Iranian Oil Co., et al., Award No. 15-90-2, Award Dismissing
Claim and Counterclaim for Lack of Jurisdiction, 1 IRAN-U.S. C.T.R. 384 ([t]he Counterclaim is similarly
dismissed since it arises out of the same contract as the Claim and is dependent on the jurisdiction of the Tribunal
over the Claim”). Counterclaims are also referred to as “cross action,” demande reconventionelle, reconvención,
Widerklage, motsøksmål, and eis in reconventie/tegenvordering.
3 Cf. Saluka Investments B.V. v. Czech Republic, Decision on Jurisdiction over the Czech Republic’s Counterclaim,
May 7, 2004, para. 49, available at http://ita.law.uvic.ca/documents/Saluka-DecisiononJurisdiction-counterclaim.pdf
(last visited June 14, 2007) (“It is a cardinal principle relating to the bringing of counterclaims […] that the necessary
parties to the counterclaim must be the same as the parties to the primary claim.”); Am. Mktg. Sys. Inc. v. Old THGI,
Inc., Unpublished: Docket # 02-CV-239973 CM1, Ontario Superior Court of Justice, discussed in IV(XIII) ITA
Monthly Report (July 2006), available at http://www.kluwerarbitration.com/arbitration/arb/newsletter/july2006/ (last
visited June 14, 2007).
4 See Blomeyer, supra note 2, at para. 127; H. Thirlway, Counterclaims Before the International Court of Justice:
The Genocide Convention and Oil Platforms Decisions, 12 LEIDEN J. INTL L. 197, 203 (1999); American Law
Institute, ALI/UNIDROIT Principles and Rules of Transnational Civil Procedure, Council Draft No. 2, Comment to
Rule 13(3) (Sept. 29, 2003), available at http://www.ali.org/ali/TransCP-CD2.pdf (last visited June 14, 2007).
5 See generally B. Larschan & G. Mirfendereski, The Status of Counterclaims in International law, With Particular
Reference to International Arbitration Involving a Private Party and a Foreign State, 15-1 DENVER J. INT'L L. &
POL'Y 11 (1986-7); J.L. SIMPSON & H. FOX, INTERNATIONAL ARBITRATION: LAW AND PRACTICE 172-178 (1959);
Islamic Republic of Iran v. The United States of America, Case No. B1 (Counterclaim), Interlocutory Award, Sept.
9, 2004, Award No. ITL 83-B1-FT, at para. 87; id., at fn. 58 (listing mixed arbitral tribunals that recognized a party’s
right to file counterclaims even when their constitutive instruments did not expressly refer to counterclaims). See
also Iran and The United States, Request for Interpretation: Jurisdiction of the Tribunal with respect to claims by the
Islamic Republic of Iran against nationals of the United States of America, Case No. A/2, Decision No. Dec 1-A2-
FT, Jan. 13, 1982, 1 IRAN-U.S. C.T.R. 101, at 103 (“a right of counter claim is normal for a respondent”); id. at 108,
Dissenting Opinion, Kashani, Shafeiei, Enayat (“counter claim is a right that every defendant benefits from; it is not
a right that has to be granted by the Claims Settlement Declaration”); (Moscow) Convention on the Settlement by
Arbitration of Civil Law Disputes Arising from Relations of Economic and Scientific Technical Cooperation, art.
II(3), signed on May 26, 1972, done at Moscow, May 26, 1972, reprinted in I INTERNATIONAL HANDBOOK ON
COMMERCIAL ARBITRATION (CMEA Countries -- Annex I) (P. Sanders & A.J. van den Berg eds., 1993) (a
5
economy and the better administration of justice; and for that reason, one of the main features of
a counterclaim is its connexity or relatedness with the initial claim. When such connexity is
present, separate adjudications would require the examination of the same evidence; result in
delays and corresponding costs; and possibly lead to inconsistent decisions.6 In order to avoid
such adverse consequences, also arbitration rules and arbitration laws envisage the bringing of
counterclaims7 - a possibility of which host States have taken advantage in arbitration
“counterclaim and a set off originating from the same legal case” would be heard by the same arbitration court as
was dealing with the original claim.).
6 Cf. SCHREUER, THE ICSID CONVENTION: A COMMENTARY 720 (2001); Application of the Convention on the
Prevention and Punishment of the Crime of Genocide, Counter-Claims Order, supra note 2, at para. 30; Case
Concerning Armed Activities on the Territory of the Congo (Democratic Republic of the Congo v. Uganda),
Counter-Claims Order, Nov. 29, 2001, at para. 44, available at http://www.icj-cij.org/docket/files/116/8066.pdf (last
visited June 14, 2007); id., Declaration of Judge ad hoc Verhoeven, available at http://www.icj-
cij.org/docket/files/116/8068.pdf (last visited June 14, 2007) (“[j]udged by reference to national practices, the
importance of counter-claims would appear to be twofold: on the one hand, they enable the court to gain a more
thorough and precise understanding of the dispute of which it is seised and, on the other hand, they avoid the risk of
incompatible - or even downright contradictory rulings”); A. Blomeyer, supra note 2, at para. 127; P.A. Karrer,
Verrechnung und Widerklage vor Schiedsgericht, in RECHTSETZUNG UND RECHTSDURCHSETZUNG: ZIVIL- UND
SCHIEDSVERFAHRENSRECHTLICHE ASPEKTE: FESTSCHRIFT FÜR KELLERHALS ZUM 65. GEURTSTAG 52 (M.J. Greiner et
al. eds., 2005); A.D. Renteln, Encountering Counterclaims, 15-(2/3) DENVER J. INT'L L. & POL'Y 11 379, 380 (1987).
Indeed, counterclaims may subsequently be precluded if not raised against the initial claim. See United States
Federal Rules of Civil Procedure, U.S. Fed.R.Civ.P. 13, available at
http://www.access.gpo.gov/uscode/title28a/28a_4_.html (last visited June 14, 2007) (under “Pleadings and
Motions”); Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373 (1985). See also Fougerolles v.
Procofrance, Cass Civ 1er, 25 May 1992, reprinted in XIX Y.B. COMML ARB. 205 (1994) (referring to an ICC
Tribunal applying the U.S. principle of claim preclusion). But see Compagnie générale de l’Orénoque (1905),
Franco-Venezuelan Mixed Claims Commission (1902), RALSTONS REPORT 244 (1905), discussed in B. CHENG,
GENERAL PRINCIPLES OF LAW AS APPLIED BY INTERNATIONAL COURTS AND TRIBUNALS 347 (1953); American Law
Institute, ALI/UNIDROIT Principles and Rules of Transnational Civil Procedure, supra note 4, at Rule 13(3).
7 See, e.g., (ICSID) Convention on the Settlement of Investment Disputes between States and Nationals of other
States, art. 46, Mar. 18, 1965, 17 UST 1270, 575 UNTS 159, also available at
http://www.worldbank.org/icsid/basicdoc/basicdoc.htm (last visited June 14, 2007) (entered into force Oct. 14,
1966); ICSID Additional Facility Rules: Rules Governing the Additional Facility for the Administration of
Proceedings by the Secretariat of the ICSID, art. 47(1), Sept. 27, 1978, 21 I.L.M. 1446, also available at
http://www.worldbank.org/icsid/facility/facility.htm (last visited June 14, 2007); Arbitration Rules of the United
Nations Commission on International Trade Law (UNCITRAL), Report of the United Nations Commission on
International Trade Law, arts. 19(3)-(4), 21(3), OFFICIAL RECORDS OF THE UNITED NATIONS GENERAL ASSEMBLY,
31st Sess., Supp. No. 17 (A/31/17), ch. V § C (1976), also available at
http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1976Arbitration_rules.html (last visited June 14, 2007);
Rules of the Arbitration Institute of the Stockholm Chamber of Commerce, art. 10(3) (Apr. 1, 1999), available at
http://www.chamber.se/arbitration/english/rules/scc_rules_cont.asp (last visited June 14, 2007); Arbitration Rules of
the International Chamber of Commerce (ICC), art. 5 (1998), 22 Y.B. COM. ARB. 345 (1997), also available at
http://www.iccwbo.org/court/english/arbitration/rules.asp (last visited June 14, 2007); Arbitration Rules of the
Netherlands Arbitration Institute (NAI), art. 25(2) (2001), available at
http://www.nai-nl.org/english/rules/rulesENG.doc (last visited June 14, 2007); Arbitration Rules of the London
Court of International Arbitration (LCIA), art. 2 (1998), available at http://www.lcia-arbitration.com/ (last visited
June 14, 2007); International Arbitration Rules of the American Arbitration Association (AAA) International Centre
for Dispute Resolution, R-1., art. 3(2) (2006), available at http://www.adr.org/sp.asp?id=28144 (last visited June 14,
2007); Declaration of the Government of the Democratic and Popular Republic of Algeria Concerning the Settlement
of Claims by the Government of the United States of America and the Government of the Islamic Republic of Iran,
6
proceedings with foreign investors.
Traditionally, arbitral tribunals have accepted such counterclaims where the investor’s claim was
based on a preexisting contract with the host State, which also included an arbitration clause.8 A
question that arises, and that will be addressed in this article, is the extent to which the host State
may also present counterclaims in arbitration proceedings “without privity;” that is, where the
arbitration agreement originates in a unilateral arbitration “offer” by the host State, as provided in
an investment treaty concluded with the investor’s home State.9
As will be demonstrated, a significant obstacle in this respect relates to the consensual character
of arbitration. For a tribunal to have jurisdiction over the counterclaim, it must namely fall within
the scope of the parties’ arbitration agreement. Whereas in the traditional scenario the arbitration
clause would, as a rule, be broad enough to cover claims by both the investor and the host State
on the basis of their mutual rights and obligations under the contract,10 the same is not necessarily
art. II(1), Jan. 19, 1981, reprinted in 1 IRAN-U.S. C.T.R. 9 (1983), also available at http://www.iusct.org/claims-
settlement.pdf (last visited June 14, 2007); UNCITRAL Model Law on International Commercial Arbitration, art.
2(f), U.N. Doc. A/40/17, Annex 1 (1985), reprinted in 24 I.L.M. 1302 (1985), also available at
http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration.html (last visited June 14,
2007); English Arbitration Act, art. 47 (1996), 36 I.L.M .155 (1997), also available at
http://www.hmso.gov.uk/acts/acts1996/1996023.htm (last visited June 14, 2007); German Arbitral Proceedings
Reform Act, § 1046(3) (1998), available at http://www.dis-arb.de/materialien/schiedsverfahrensrecht98-e.html (last
visited June 14, 2007).
8 See, e.g., Lena Goldfields Ltd. v. Soviet Government, Award, Sept. 1930, referred to in A. Nussbaum, The
Arbitration Between the Lena Goldfields, Ltd. and the Soviet Government, 36 CORNELL L.Q. 31, 43, para. 8 (1950);
S.A.R.L. Benvenuti & Bonfant v. People’s Republic of the Congo, ICSID Case No. ARB/77/2, Award, Aug. 8, 1980,
21 I.L.M. 740 (1982); Maritime International Nominees Establishment v. Republic of Guinea (Defendant) ICSID
Case No. ARB/84/4, Award, Jan. 6, 1988, 4 ICSID REP. 61 (1997); Amco Asia Corporation v. Republic of
Indonesia, ICSID Case No. ARB/81/1, Award in resubmitted case, June 5, 1990, 89 I.L.R. 580 (1992); Adriano
Gardella SpA v. Republic of the Ivory Coast, ICSID Case No. ARB/74/1, Award, Aug. 29, 1977, 1 ICSID REP. 283
(1993); Klöckner Industrie-Anlagen GmbH v. United Republic of Cameroon, ICSID Case No. ARB/81/2, Award,
Oct. 21, 1983, 114 I.L.R. 157 (1999); Atlantic Triton Company Limited v. People’s Revolutionary Republic of
Guinea, ICSID Case No. ARB/84/1, Award, Apr. 21, 1986, 3 ICSID REP. 13 (1995).
9 See J. Paulsson, Arbitration Without Privity, 10-2 ICSID REV.-FILJ 232 (1995) (noting that “arbitration without
privity” is also envisaged in investment laws of the host State). See also G. Burdeau, Nouvelles perspectives pour
l’arbitrage dans le contentieux économique intéressant les États, 1 REVUE DE LARBITRAGE 3, 21 (1995); Ch. Leben,
La théorie du contrat d’etat et l’evolution du droit international des investissement, 302 REC. DES COURS 197, 365
(2003) (employing the term arbitrage transnational unilateral); J. Werner, at 5 (referring to “the era of arbitration
without contractual relationships”); Lanco v. Argentina, Decision on Jurisdiction, Dec. 8, 1998, 40 I.L.M 457, para.
43 (2001), also available at http://ita.law.uvic.ca/documents/Lanco-Final.pdf (last visited June 14, 2007).
10 This mutuality is illustrated in the award of Government of Kuwait v. American Independent Oil Company, Award
of 24 March 1982, 66 I.L.R. 518 (1984); 21 I.L.M. 976 (1982), discussed in M. Hunter & A.C. Sinclair, The
Arbitration Between Aminoil and Kuwait: A Story of Balance and Chance in Foreign Investments, in INVESTMENT
LAW AND ARBITRATION: LEADING CASES FROM THE ICSID, NAFTA, BILATERAL TREATIES AND CUSTOMARY
7
the case in treaty arbitration. This is because the host State’s offer tends to focus on investor
rights and host State obligations, not vice versa. In light of this fact, not only may a host State
counterclaim infringe upon the consent requirement, it might also run counter to what has been
suggested to be the object and purpose of treaty arbitration: to grant the investors a one-sided
right of “quasi-judicial review” of national regulatory action contrary to international law.11 Yet a
further complication is the connexity requirement, which in the context of “arbitration without
privity” proceedings raises interesting questions concerning the need for symmetry in the legal
nature of the claim and counterclaim. While this is generally not an issue where the investor’s
claim and the host State’s counterclaim are based on the same contract; the situation is different
in cases in which, for instance, a contractual counterclaim is presented against a treaty claim.
At the same time, the rejection of counterclaims may lead a host State to seek relief in its own
courts or in another, contractually agreed, arbitration forum. As stated above, this is not only time
and money consuming; it could also lead to inconsistent decisions. Hence, the consolidation of
claims may not only be in the interest of both parties; it may also safeguard the integrity of the
legal system as a whole, and investment law as a separate discipline in particular.12 Furthermore,
as host State counterclaims would be a means to enforce investor obligations,13 they could also
ensure a degree of procedural and substantive equality between the parties, and as such, help
correct a perceived asymmetry in the relationship between foreign investors and host States in
treaty arbitration.14
INTERNATIONAL LAW (T. Weiler ed., 2005) (noting that neither Party was willing to be categorized as the
“Respondent,” because each had claims against the other).
11 See infra notes 83-85.
12 Cf. C.H. Brower et al., The Coming Crisis of the Global Adjudication System, 19-4 ARB. INTL. 415, 424 (2003)
(referring to the appearance of multiple and conflicting awards based on the same facts as a fissure in the global
adjudication system). Cf. Saluka, supra note 3, at para. 24 (host State arguing that “the exercise of jurisdiction by the
Tribunal over the Respondent’s counterclaim would advance the goals of economy and efficiency in international
dispute resolution, since otherwise the Respondent would have to pursue its claim elsewhere.”).
13 See, e.g., T. Weiler, Balancing Human Rights and Investor Protection: A New Approach for a Different Legal
Order, 27 B.C. INTL & COMP. L. REV. 429, 449 (2004), also available at
http://www.gasandoil.com/ogel/samples/freearticles/article_73.htm (last visited June 14, 2007) (envisaging host
State counterclaims against the investor for a breach of international law in relation to the activities of the investment
in its territory, and in particular, for human rights violations). For an alternative means of “enforcement,” see O.
SCHACHTER, INTERNATIONAL LAW IN THEORY AND PRACTICE 324 (1991) (interpreting the standard of “appropriate,”
“just” and “equitable” compensation” to mean that “[i]n cases where the company had by practices contrary to good
standards of operation, diminished the value of a natural resource, it would not be unjust for the government to
reduce its compensation to make up for the damage”).
14 Cf. Burdeau, supra note 9, at paras. 28-29; W. BEN HAMIDA, L’ARBITRAGE TRANSNATIONAL UNILATERAL:
RÉFLEXIONS SUR UNE PROCÉDURE RÉSERVÉE À LINITIATIVE DUNE PERSONNE PRIVÉ CONTRE UNE PERSONNE
8
It appears that until today at least two tribunals have been confronted with a host State
counterclaim where the arbitration agreement stemmed from a general offer in an investment
treaty. In Alex Genin v. Estonia, the counterclaim was dismissed on the merits.15 In Saluka
Investments B.V. v. Czech Republic, the counterclaim was denied on the bases, first, that the
contractual counterclaims were subject to arbitration in a different forum; and second, because
the other counterclaims involved non-compliance with the general law of the Czech Republic,
they were not sufficiently closely connected with the subject-matter of the original claim so as to
fall within the Tribunal’s jurisdiction under the Treaty.16 Moreover, the Tribunals in SGS v.
Pakistan17 and SGS v. Philippines18 made a note of, without dismissing, the investors’ suggestion
that there would be jurisdiction over host State counterclaims. Thus, apparently, as of today, no
tribunal has rejected the idea of such counterclaims in treaty arbitration.19
PUBLIQUE 177, para. 280 (Thèse pour le Doctorat en droit de l’Université Panthéon-Assas (Paris II), June 24, 2003).
Cf. A.K. Hoffmann, Counterclaims by the Respondent State in Investment Arbitrations The Decision on
Jurisdiction Over Respondent’s Counterclaim in Saluka Investments B.B. v. Czech Republic, 3(5) TRANSNAT'L DISP.
MGMT. at 9 (2006) (noting that investment treaties are “asymmetric” in that they are not based on reciprocity
between the investor and the State). It could be argued, however, that such “imbalance” is the price the host State
pays for making the offer with the hope of attracting foreign investments and thereby improving the nation’s
economy. See also Nicos Shacolas v. Cyprus, Application No. 20492/92, European Commission of Human Rights,
Second Chamber, March 2 (1994), available at http://cmiskp.echr.coe.int/gentkpss/gen-recent-hejud.asp (last visited
June 14, 2007) (Cyprus was found not to have violated Article 6(1) of the European Convention for the Protection of
Human Rights and Fundamental Freedoms by its courts rejecting the Applicant’s counterclaim: “the Courts of
Cyprus rejected the applicant's counterclaim on the ground that it was not related to the main action. It finds no
indication that the exclusion of the applicant's counterclaim prevented him from effectively presenting his defence in
respect of the main action or that he was otherwise unfairly disadvantaged. Moreover since the applicant can bring a
separate action, as regards his counterclaim in the appropriate jurisdiction, the essence of his right of access to court
has not been affected.”).
15 See Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v. The Republic of Estonia, ICSID Case No.
ARB/99/2, Award, June 25, 2001, para. 376, available at http://www.worldbank.org/icsid/cases/genin.pdf (last
visited June 14, 2007). It has been suggested that where a counterclaim is clearly unfounded, arbitrators may avoid
taking a stand on jurisdictional issues by dismissing the counterclaim on the merits. See M. PELLONPÄA & D.D.
CARON, supra note 2, at 354. This might have been the case in Alex Genin v. Estonia. See Alex Genin, at para. 376
(the Tribunal holding that the “confusion” of the host State’s counterclaim, being expressed in varying fashions,
amounts and places, need not be resolved, as “Estonia has failed to demonstrate to the satisfaction of the Tribunal the
merits of its request”). See also id., fn. 101 (noting that the Republic of Estonia did not appear to be the proper
counterclaimant). Cf. Hoffmann, supra note 14, at fn. 2.
16 See Saluka, supra note 3. See generally Hoffmann, supra note 14.
17 See Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13,
Procedural Order (Oct. 16, 2002), 18-1 ICSID Rev.-FILJ 293, 303 (2003), available at
http://www.worldbank.org/icsid/cases/SGS-order.pdf (last visited June 14, 2007); id., Decision on Jurisdiction, Aug.
6, 2003, para. 108, available at http://www.worldbank.org/icsid/cases/SGS-decision.pdf (last visited June 14, 2007).
18 See Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6, Decision on
Jurisdiction, Jan. 29, 2004, para. 40, available at http://www.worldbank.org/icsid/cases/SGSvPhil-final.pdf (last
visited June 14, 2007).
19 For analogies, see Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt, ICSID Case No.
ARB/84/3), Award, May 20, 1993, 3 ICSID REP. 189, 247-248 (1995) (the Tribunal was constituted on the basis of
an offer by the host State in its foreign investment law, another form of arbitration “without privity.” The
9
In examining these issues more comprehensively, I will start by considering the consent
requirement, before moving on to the special features of “arbitration without privity.” On the
basis of a textual and teleological interpretation20 of various offers by the host State, I will then
seek to distill certain factors relevant to the acceptance or otherwise of counterclaims, such as
forum selection agreements and the connexity requirement, before reaching general conclusions.
2. CONSENT
An inherent feature of arbitration is consent.21 That is, it is up to both parties to the dispute to
agree to settle it through arbitration. It thus differs from litigation in domestic courts in that their
jurisdiction does not depend on the consent of the defendant.22 Rather, it is more akin to
international courts and tribunals, which do require the consent of both States parties in order to
render a judgment or award.23 As a counterclaim constitutes a separate and independent claim by
virtue of which the host State may be awarded a remedy vis-à-vis the investor, it is therefore
counterclaim was dismissed on the merits, as none of the wrongs alleged to have been committed by the investors
were held to have had been proved or imputed to them by the Egyptian authorities as a ground for the cancellation of
the project). See also Paulsson, Arbitration Without Privity, supra note 9, at 242, fn. 18 (referring to an ICC award
rendered pursuant to Lomé III, in which the Government of Kenya submitted a counterclaim. In a private exchange
with the present author, Prof. Paulsson acting as counsel for Kenya - explained that the host State prevailed on the
merits, in what was a routine construction case); Reineccius and others v. Bank of International Settlements,
Permanent Court of Arbitration, available at http://www.pca-cpa.org (last visited June 14, 2007) (where the Bank’s
successful counterclaim was based on a violation of the Claimant of Article 54(1) of the Bank’s Statutes).
20 See Vienna Convention on the Law of Treaties, arts, 31-32, opened for signature May 23, 1969 (entered into force
January 27, 1980), 1155 U.N.T.S. 331, also available at
http://untreaty.un.org/ilc/texts/instruments/english/conventions/1_1_1969.pdf (last visited June 14, 2007). It is
generally accepted that these Articles reflect customary international law. See, e.g., Case Concerning the Territorial
Dispute (Libyan Arab Jamahiriya/Chad), Judgment, I.C.J. REP 6, 21-22, para. 41 (Feb. 3, 1994); Iran and The United
States, Case No. A/2, supra note 5, at 4(B); AMERICAN LAW INSTITUTE, RESTATEMENT OF THE LAW, THIRD: THE
FOREIGN RELATIONS LAW OF THE UNITED STATES, para. 325, Comment a (1987) (the rules of treaty interpretation
“represents generally accepted principles”).
21 See, e.g., Report of the Executive Directors of the International Bank for Reconstruction and Development on the
Convention on the Settlement of Investment Disputes between States and Nationals of Other States, II-2 Documents
Concerning the Origin and Formulation of the Convention on the Settlement of Investment Disputes between States
and Nationals of Other States 1069, 1077, para. 23 (1967) [hereinafter HISTORY OF THE ICSID CONVENTION], also
available at http://www.worldbank.org/icsid/basicdoc/partB.htm (last visited June 14, 2007) (referring to consent as
the “cornerstone” of arbitration).
22 I.e., unless the parties confer jurisdiction by means of a choice-of-forum clause. See, e.g., E. Jimenez de Aréchaga,
The International Court of Justice and the Judicial Settlement of International Disputes, in INTERNATIONAL LAW IN
A CHANGING WORLD 54, 55 (1963). In view of that difference, reliance on the lex loci arbitri would be inappropriate.
23 See Institute of International Law, Resolution on Judicial and Arbitral Settlement of International Disputes
Involving More Than Two States, Session of Berlin, art. I(1) (1999), available at http://www.idi-
iil.org/idiE/resolutionsE/1999_ber_02_en.PDF (last visited June 14, 2007) (“[t]he consent of States is the basis of the
jurisdiction of international courts and tribunals […]”). Because of this similarity, references will be made to the
10
reasonable that the latter must be deemed to have consented to the bringing of that counterclaim.
This is clearly spelled out in the ICSID Convention, according to which a counterclaim must fall
“within the scope of consent of the parties.”24 In a similar fashion, the Rules of the Arbitration
Institute of the Stockholm Chamber of Commerce provide that “the grounds for any counterclaim
[…] must be based on the arbitration agreement.”25 Consent is also implicit in the UNCITRAL
Arbitration Rules, which require the counterclaim to arise “out of the same contract,”26 as well as
in the UNCITRAL Model Law on International Commercial Arbitration.27
The importance of consent should not be underestimated, particularly in view of the possible
sanction of annulment of (a part of) the award and the risk that it may not be recognized and
enforced. The UNCITRAL Model Law, for instance, provides that an award may be set aside by
the court of the State in which the tribunal is seated, if it “deals with a dispute not contemplated
jurisprudence of inter-State courts and tribunals, such as the International Court of Justice.
24 ICSID Convention, supra note 7, at art. 46.
25 Stockholm Arbitration Rules, supra note 7, at art. 10(3). See also ICSID Additional Facility Rules, supra note 7, at
art. 47(1) (a counterclaim must be “within the scope of the arbitration agreement between the parties”).
26 UNCITRAL Arbitration Rules, supra note 7, at art. 19(3). See also Report of the United Nations Commission on
International Trade Law on the work of its eighth session (Geneva, 1-7 April 1975), A/10017, 6 UNCITRAL Y.B. 9,
at 37-38, para. 136 (1976), also available at http://www.uncitral.org/pdf/english/yearbooks/yb-1975-e/vol6-p9-45-
e.pdf (last visited June 14, 2007) (“[i]t was also observed that the counter-claim had to fall within the scope of the
arbitration agreement under which the claim was made”). Cf. Saluka, supra note 3, at para. 27 (Claimant arguing that
“[p]olicy considerations concerning the alleged advantages of economy and efficiency being best served by allowing
the Respondent’s counterclaim are insufficient to override the principle that the scope of the Tribunal’s jurisdiction is
determined by the scope of the parties’ consent.”).
27 See UNCITRAL Model Law, supra note 7, at arts. 2(f), 7; K.P. Berger, Set-Off in International Economic
Arbitration, 15-1 ARB. INTL 53, at § V(a)(i) (1999) (“it was made clear during the deliberations of the Working
Group that this restriction to the scope of the arbitration agreement ‘is self-evident in view of the fact that the
jurisdiction of the arbitral tribunal is based on, and given within the limits of, that agreement’”). Cf. Application of
the Convention on the Prevention and Punishment of the Crime of Genocide, Counter-Claims Order, supra note 2, at
para. 31 (“the Respondent cannot use a counter-claim as a means of referring to an international court claims which
exceed the limits of its jurisdiction as recognized by the Parties […]”). But see P.A. Karrer, Jurisdiction on Set-off
Defences and Counterclaims, 67-2 ARBITRATION 176, 177 (2001) (“an arbitral tribunal should have jurisdiction
over counterclaims between the same parties, even if these counterclaims are not covered by the arbitration
agreement which confers jurisdiction on the arbitral tribunal over the main claim”); and with regard to set-off
defenses, Swiss Rules of International Arbitration, art. 21(5) (2004), available at
http://www.swissarbitration.ch/rules.php (last visited June 14, 2007) (“[t]he arbitral tribunal shall have jurisdiction to
hear a set-off defence even when the relationship out of which this defence is said to arise is not within the scope of
the arbitration clause”); Hong Kong Institute of Arbitrators, Report of Committee on Hong Kong Arbitration Law, at
para. 24.10 (“a claim has to fall within the ambit of an arbitration agreement in order to be raised as a set-off”). Cf.
UNCITRAL Secretariat, Possible Future Work in the Area of International Commercial Arbitration, at paras. 72-79,
Apr. 6, 1999, A/CN.9/460, available at http://www.his.com/~dlevy/english/sessions/unc/unc-32/acn9-460.htm (last
visitedJune 14, 2007); United Nations Commission on International Trade Law, Working Group II (Arbitration),
Settlement of Commercial Disputes: Revision of the UNCITRAL Arbitration Rules, para. 16, Note by the
Secretariat, A/CN.9/WG.II/WP.145/Add.1, available at
http://www.uncitral.org/uncitral/en/commission/working_groups/2Arbitration.html (last visited June 14, 2007).
11
by or not falling within the terms of the submission to arbitration, or contains decisions on
matters beyond the scope of the submission to arbitration.”28 This would also constitute a ground
for non-recognition and enforcement under the New York Convention.29 Although ICSID awards
are immune from annulment in ICSID Member State where tribunals are seated and must be
recognized and enforced by those States as if they were final judgments of one of their courts,30
they may be annulled by a separate ad hoc committee on the basis that the first tribunal
manifestly exceeded its powers.31 Such infringement encompasses a decision to deal with matters
outside the scope of the parties’ consent,32 as well as a failure to exercise the jurisdiction the
tribunal in fact enjoys.33 Thus, as arbitrators must attempt to render enforceable awards,34 they
should be particularly wary of the requirement of consent for counterclaims, especially as (parts
of) the assets of the investor that would be subject to execution are likely to be situated in its
home State.35
28 UNCITRAL Model Law, supra note 7, at art. 34(2)(a)(iii).
29 See (New York) Convention on the Recognition and Enforcement of Foreign Arbitral Awards, art. V(1)(c), opened
for signature June 10, 1958, 330 UNTS 3 (entered into force June 7, 1959), also available at
http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention.html (last visited June 14, 2007). See
also UNCITRAL Model Law, supra note 7, at art. 36(1)(a)(iii).
30 See ICSID Convention, supra note 7, at art. 54(1).
31 See id., arts. 52(1)(b) and 52(3).
32 See Klöckner Industrie-Anlagen GmbH and others v. United Republic of Cameroon and Société Camerounaise des
Engrais, ICSID Case No. ARB/81/2, Decision on Annulment, May 3, 1985, 2 ICSID REP. 95, 98 (1994), 114 I.L.R.
243 (1999) (English translation of French original) (“an arbitral tribunal’s lack of jurisdiction […] necessarily comes
within the scope of an ‘excess of powers’ under Article 52(1)(b). Consequently, an applicant for annulment may […]
contend that the award exceeded the Tribunal’s jurisdiction as is existed under the appropriate interpretation of the
ICSID arbitration clause.”); SCHREUER, THE ICSID CONVENTION, supra note 6, at 937-938.
33 See Compañía de Aguas del Aconquija S.A. & Vivendi Universal v. Argentine Republic, ICSID Case No.
ARB/97/3, Decision on Annulment, July 3, 2003, 41 I.L.M. 1135, at para. 86 (2002); 6 ICSID REP. 340 (2004), 125
ILR 58 (2004), also available at http://www.worldbank.org/icsid/cases/vivendi_annul.pdf (last visited June 14,
2007) (an award may be annulled for committing a manifest excess of powers “if it fails to exercise a jurisdiction
which it possesses under those instruments”).
34 See, e.g., ICC Rules (1998), supra note 7, at art. 35; ICC Case No. 5485, final award (1987), reported in 14 Y.B.
COM. ARB. 156, 162 (1989); LCIA Arbitration Rules, supra note 7, at art. 32(2); K.-H. Bockstiegel, Public Policy
and Arbitrability, in COMPARATIVE ARBITRATION PRACTICE AND PUBLIC POLICY IN ARBITRATION 177, 178 (P.
Sanders ed., 1987) (“[t]he arbitrator has at least a moral obligation to give the parties an award which can be
expected to stand, both in case of setting aside procedures and in case of enforcement procedures, before national
courts”); M. Platte, An Arbitrator’s Duty to Render Enforceable Awards, 20-3 J. INTL ARB. 307 (2003). Arguably,
this obligation only extends to making every effort to issue an award that is valid and enforceable where rendered,
and not all over the world. Still, an annulled award faces the risk of not being recognized and enforced in third
States. See New York Convention, supra note 29, at art. V(1)(e); UNCITRAL Model Law, supra note 7, at art.
36(1)(v). But see G.R. Delaume, 75 AM. J. INTL L. 784, at 792-793 (“the arbitrator should have no more concern for
the ultimate enforcement of his award than a court of law for the recognition and enforcement of a judgment
involving a transnational situation. In both cases, it is the responsibility of the parties to assess, from the point of
view of effectiveness, the respective merits of choosing between arbitral and judicial litigation and to bear the
consequences of their choice”).
35 For an example of an award that faced difficulties being recognized in the home State against the host State, albeit
12
In the remainder of this article, I will examine the concept of “arbitration without privity” more
closely in order to see whether its special features would run counter to this cornerstone of
arbitration and thus prevent a tribunal from having jurisdiction over host State counterclaims.
3. “ARBITRATION WITHOUT PRIVITY”
3.1. THE HOST STATES OFFER
As was noted, the term “arbitration without privity” refers to the practice whereby a State in an
investment treaty extends a generic offer of arbitration to foreign investors nationals of the other
State Party or Parties to the treaty.36 These offers are deemed to be irrevocable so long as the
relevant investment treaty remains in force.37 Accordingly, the ICSID Tribunal in AAPL v. Sri
Lanka, interpreted the following provision in the U.K-Sri Lanka BIT to provide sufficient consent
on the part of the host State:
Each contracting Party hereby consents to submit to the International Centre for the
Settlement of Investment Disputes […] for settlement by […] arbitration under the [ICSID
Convention] any legal dispute arising between that Contracting Party and national or
company of the other Contracting Party concerning an investment of the latter in the
territory of the former.38
on a different ground (New York Convention, art. V(1)(b)), see Iran Aircraft Industries v. Avco Corp., 980 F.2d 141,
145-146 (2d Cir. 1992). See also, A. Desai, Case No. A27: the Iran-United States Claims Tribunal’s First Award of
Damages for a Breach of the Algiers Declarations, 10 AM. REV. INTL ARB. 229 (1999).
36 See supra note 9 and accompanying text.
37 See, e.g., Paulsson, Arbitration Without Privity, supra note 9, at 234; O. Spiermann, Individual Rights, State
Interests and the Power to Waive ICSID Jurisdiction under Bilateral Investment Treaties, 20-2 ARB. INTL 179
(2004); C.H. Schreuer, Consent to Arbitration, in UNCTAD: DISPUTE SETTLEMENT: INTERNATIONAL CENTRE FOR
SETTLEMENT OF INVESTMENT DISPUTES 37-39 (2003), available at
http://www.unctad.org/en/docs/edmmisc232add2_en.pdf (last visited June 14, 2007).
38 See Asian Agricultural Products Limited v. Democratic Socialist Republic of Sri Lanka, ICSID Case No.
ARB/87/3, Award, June 27, 1990, 30 I.L.M. 577, para. 2 (1991). See also Ceskoslovenska obchodni banka, a.s. v.
Slovak Republic, ICSID Case No. ARB/97/4, Decision on Jurisdiction, May 24, 1999, 14 ICSID REV.-FILJ 251,
para. 57 (1999), also available at http://www.worldbank.org/icsid/cases/csob_decision.pdf (last visited June 14,
2007); Burundi Model BIT, art. 8(1), May, 2002, in UNCTAD, INTERNATIONAL INVESTMENT INSTRUMENTS: A
COMPENDIUM 287 (2002) (Vol. IX), also available at http://www.unctad.org/en/docs//dite3vol9_en.pdf (last visited
June 14, 2007); Bolivia-Ecuador BIT, art. IX (1995), available at
http://www.unctad.org/sections/dite/iia/docs/bits/ecuador_bolivia_sp.pdf (last visited June 14, 2007), also referred to
in A.R. Parra, Provisions on the Settlement of Investment Disputes in Modern Investment Laws, Bilateral Investment
Treaties and Multilateral Instruments on Investment, 12 ICSID REV.-FILJ 287, 325 (1997); Swedish Model BIT, art.
8(2) (2002), UNCTAD, INTERNATIONAL INVESTMENT INSTRUMENTS: A COMPENDIUM 309 (2002) (Vol. IX), also
available at http://www.unctad.org/en/docs//dite3vol9_en.pdf (last March 31, 2007).
13
By way of comparison, the BIT between Canada and Hungary provides that a dispute between
the investor and the host State may be submitted to arbitration under the UNCITRAL Arbitration
Rules “upon agreement” between the parties concerned.39 As the host State has yet to agree to
arbitrate, it follows that this treaty does not set forth an irrevocable offer in the sense of
“arbitration without privity.”
3.2. THE INVESTORS ACCEPTANCE
The host State’s offer is merely an offer, and unless the investor accepts it, no arbitration tribunal
will have jurisdiction.40 For that reason, and in accordance with Article 25(1) of the ICSID
Convention, the Report by the World Bank Executive Directors specifies that “the investor might
give its consent by accepting the offer in writing.”41 It is this acceptance, combined with the host
State’s offer, that creates the parties’ arbitration agreement constituting the basis for the tribunal’s
competence to settle the dispute.42
While the investor is generally deemed to have consented to arbitration by instituting
proceedings, some instruments contain explicit provisions in this regard. The Energy Charter
Treaty provides: “In the event that an Investor chooses to submit the dispute for resolution […],
the Investor shall further provide its consent in writing for the dispute to be submitted to
[arbitration].”43
39 See Canada-Hungary BIT, art. IX(2) (1991), available at
http://www.unctad.org/sections/dite/iia/docs/bits/canada_hungary.pdf (last visited June 14, 2007).
40 See, e.g., Lanco v. Argentina, Preliminary Decision on Jurisdiction, supra note 9, at paras. 43-44; American
Manufacturing & Trading Inc. v. Republic of Zaire ICSID Case No. ARB/93/1 (1993), 36 I.L.M. 1531, at paras.
5.17-5.23 (1997); J. Paulsson, Arbitration Without Privity, supra note 9, at 247.
41 Report of the Executive Directors of the World Bank on the ICSID Convention, supra note 21, at para. 24; ICSID
Convention, supra note 7, at art. 25(1). See also UNCITRAL Arbitration Rules, supra note 7, at art. 1(1);
42 See, e.g., A.K. Bjorklund, NAFTA CHAPTER 11: Contract Without Privity: Sovereign Offer and Investor
Acceptance, 2 CHIC. J. INTL L. 183 (2001) (“[y]et despite a lack of privity in negotiating the agreement, the parties
to an arbitration still have an ‘arbitral contract’”); T.W. Wälde, Investment Arbitration Under the Energy Charter
Treaty: From Dispute Settlement to Treaty Implementation, at 12 (1998), available at
www.dundee.ac.uk/cepmlp/journal/html/Vol1/article1-10.pdf (last visited June 14, 2007) (noting that “[t]he tradition
of arbitration with its concept of an arbitration ‘agreement’ lives on, though the substance has moved away”). See
also BEN HAMIDA, supra note 14, at 174, para. 274 (“l’acceptation de l’offre rend irrévocable l’engagement
d’arbitrage de l’État même si la convention internationale est expirée ou la législation nationale révoquée”).
43 Energy Charter Treaty, art. 26(4), opened for signature Dec. 17, 1994, Art. 26(4), 34 I.L.M. 381 (1995), also
available at http://www.encharter.org/fileadmin/user_upload/document/EN.pdf (last visited June 14, 2007). See also
North American Free Trade Agreement (NAFTA), art. 1121, Dec. 17, 1992, U.S.-Can.-Mex., 107 STAT. 2057, 32
I.L.M. 289, also available at http://www.nafta-sec-alena.org/DefaultSite/index_e.aspx?DetailID=78 (last visited June
14
4. THE ARBITRATION AGREEMENT
From the foregoing, it is clear that a tribunal’s jurisdiction over counterclaims depends on the
parties’ arbitration agreement.44 Since this agreement is based on the host State’s offer, I will in
the following analyze the different wording of such offers through a selective survey of
investment treaties.45 The two most important factors in this respect are first, the instrument’s
definition of arbitrable disputes (the tribunal’s jurisdiction ratione materiae), and more
specifically the extent to which it encompasses investor obligations; and second, whether it grants
locus standi to either party, or solely the investor (jurisdiction ratione personae). As will be seen,
jurisdiction and admissibility may also depend on the possibility of the investor, through its
acceptance, to limit the scope of the arbitration agreement; and whether the parties in concert may
expand upon it:
4.1. ARBITRABLE CLAIMS (JURISDICTION RATIONE MATERIAE)
Investment treaties are designed to attract foreign investments, and for that purpose they extend
an array of rights to investors, such as “national,” “most-favored-nation,” and “fair and equitable”
treatment; full protection and security; as well as the prohibition of expropriation of investments
except in the public interest and against compensation.46 Although some instruments do impose
certain obligations on the part of the investors,47 the focus on investor rights may present a hurdle
for host State counterclaims. This is because the offer to arbitrate, and the investor’s acceptance
of that offer, must necessarily be broad enough to encompass investor obligations that could
14, 2007) (requiring as a condition precedent to arbitration that an investor must consent to arbitration when it
submits a claim).
44 See also Berger, supra note 27, at § V(a)(i).
45 For a more comprehensive survey of host State offers, see Parra, supra note 38, at fn. 35; R. DOLZER & M.
STEVENS, BILATERAL INVESTMENT TREATIES (1995). Investment treaties can be consulted at the website of United
Nations Conference on Trade and Development (UNCTAD), available at
http://www.unctadxi.org/templates/DocSearch____779.aspx (last visited June 14, 2007).
46 See, e.g., Parra, supra note 38, at 290-291, 293.
47 See, e.g., UNCTAD, FOREIGN DIRECT INVESTMENT AND PERFORMANCE REQUIREMENTS: NEW EVIDENCE FROM
SELECTED COUNTRIES (2003), available at http://www.unctad.org/en/docs//iteiia20037_en.pdf (last visited June 14,
2007). See also, id., at 18-20 (noting the decline in incidence of performance requirements); id., at 33 (noting that
most of the requirements that are still used tend to be voluntary rather than mandatory in nature); WORLD BANK
DEVELOPING COMMITTEE, WORLD BANK GUIDELINES ON THE TREATMENT OF FOREIGN DIRECT INVESTMENT II(3)
(1992), available at http://ita.law.uvic.ca/documents/WorldBank.pdf (last visited June 14, 2007).
15
constitute the basis for the State’s grievance.48 This partly depends on the treaty’s definition of
arbitrable investment disputes.
4.1.1. Inclusion of Investor Obligations
Most investment treaties are broad in regard to the definition of investment disputes, and permit
“any” or “all” disputes relating to investments to be submitted to arbitration.49 The Swedish
Model BIT, for instance, refers to “[a]ny dispute concerning an investment between an investor
of one Contracting Party and the other Contracting Party.”50 To a similar effect, the BIT involved
in Saluka refers to “[a]ll disputes between one Contracting Party and an investor of the other
Contracting Party concerning an investment of the latter.”51 Yet another definition is exemplified
by the U.S.-Estonia BIT involved in Alex Genin, which lists submittable claims as those “arising
out of or relating to: (a) an investment agreement […]; (b) an investment authorization […]; or
(c) an alleged breach of any right conferred or created by this Treaty with respect to an
investment.”52
Whereas the above definitions would appear to cover disputes concerning alleged wrongful
conduct committed not only by the host State but also by the investor, there appears to be some
controversy whether they would cover contractual disputes in particular. This question is of great
relevance to the admissibility of counterclaims, as many if not most investment disputes have
48 Cf. Hoffmann, supra note 14, at 10 (“any respondent state intending to bring a counterclaim under a BIT will, need
to find a tribunal which, inter alia, is prepared to adopt the extremely ‘liberal’ approach of accepting jurisdiction
based on a widely worded dispute resolution clause in this BIT even for purely contractual claims. Otherwise its
counterclaim will fail due to the asymmetric nature of BITs.”).
49 See Parra, supra note 38, at 320; Z. Douglas, The Hybrid Foundations of Investment Treaty Arbitration, 74 BRIT.
Y.B. INTL 151, 238 (2003); Schreuer, Consent to Arbitration, supra note 37, at 30.
50 Swedish Model BIT, supra note 38, at art. 8(1); Malaysia-Norway BIT, art. 9 (1984), available at
http://www.unctad.org/sections/dite/iia/docs/bits/norway_malaysia.pdf (last visited June 14, 2007); Swiss-Pakistan
BIT, art. 9, available in French, at http://www.unctad.org/sections/dite/iia/docs/bits/switzerland_pakistan_fr.pdf (last
visited June 14, 2007), referred to in SGS v. Pakistan, supra note 17; ASEAN Agreement: An Agreement Among
the Governments of Brunei Darussalam, the Republic of Indonesia, Malaysia, the Republic of the Philippines, the
Republic of Singapore, and the Kingdom of Thailand for the Promotion and Protection of Investments, art. X(1),
Dec. 15, 1987, 27 I.L.M. 612 (1988); Latvia-Kuwait BIT, art. 9(1) (2001), available at
http://www.likumi.lv/doc.php?id=71198 (last visited June 14, 2007).
51 Netherlands-Czech/Slovak BIT, art. 8 (1991), referred to in Saluka, supra note 3, at para. 21.
52 Alex Genin, supra note 15, at para. 325 (referring to U.S.-Estonia BIT, art. VI(1), available at
http://www.unctad.org/sections/dite/iia/docs/bits/us_estonia.pdf (last visited June 14, 2007)). See also U.S. Model
BIT (2004), art. 24, available at http://www.state.gov/documents/organization/38710.pdf (last visited June 14,
2007); Burundi Model BIT, supra note 38, at art. 8(1).
16
a contractual origin,53 and because contracts impose on investors obligations that might form the
basis of host State counterclaims.54 Whereas an affirmative answer would clearly be warranted
with regard to the above-mentioned the U.S.-Estonia BIT,55 tribunals have differed in their
interpretation of more generic and seemingly broader clauses referring to “investment disputes.”
Distinguishing pure contracts claims from those that would also constitute a violation of the BIT
at hand, the Tribunal in SGS v. Pakistan Tribunal reached a negative conclusion in this regard.
Although it recognized that violations of the BIT and the contract could both be characterized as
“disputes with respect to investments,” it held that this phrase,
while descriptive of the factual subject matter of the disputes, does not relate to the legal
basis of the claims, or the cause of action asserted in the claims. In other words, from that
description alone, without more, we believe that no implication necessarily arises that both
BIT and purely contract claims are intended to be covered by the Contracting Parties in
Article 9.56
Other tribunals, as well as scholars, have reached the opposite, and seemingly sounder,
conclusion.57 Indeed, Article 25(1) of the ICSID Convention contains a very similar definition of
53 See, e.g., S.A. Alexandrov, Breaches of Contract and Breaches of Treaty: The Jurisdiction of Treaty-Based
Arbitration to Decide Breach of Contract Claims in SGS v. Pakistan and SGS v. Philippines, JOURNAL OF WORLD
INVESTMENT AND TRADE 555 (2004).
54 Cf. Paulsson, Arbitration Without Privity, supra note 9, at 247 (pointing out that host State counterclaims “would
most naturally arise when the State is in a position to assert breaches of contractual duties owed by the investor to the
State”).
55 Cf. reference to “disputes arising out of or relating to an investment agreement.”
56 SGS v. Pakistan, Decision on Jurisdiction, supra note 17, at para. 161. See also Consortium Groupement L.E.S.I.-
DIPENTA v. Algeria, para. 25, ICSID Case No. ARB/03/08, Award, Jan. 10, 2005, available in French at
http://ita.law.uvic.ca/documents/dipentav.algeria.pdf (last visited June 14, 2007). Cf. E. Gaillard, International
Arbitration Law, N.Y. L. J., Oct. 6 (2005) (noting that “[t]his question has divided practitioners and legal
commentators and remain unsettled in the international arbitral case law” and submitting that “[a]bsent specific
language to the contrary, it may seem odd to interpret a treaty as creating a jurisdictional basis for a treaty-based
tribunal in cases where it is not called upon to rule on alleged violations of that treaty. There is always a danger in
divorcing the jurisdictional provisions from the substantive terms of the same treaty in that this may suggest that the
treaty-based tribunal has jurisdiction but is invited to rule on a vacuum”). Cf. SGS v. Pakistan, Procedural Order,
supra note 17, at 303 (2003) (the host State rejected the possibility of counterclaims on the basis that “there are no
rights” for Pakistan under the BIT and that its “rights solely exist under the contract with SGS,” which it claimed to
be inadmissible). See also id., Decision on Jurisdiction, supra note 17, at para. 59. Pakistan’s refusal to present
counterclaims should be interpreted in light of its attempt to contest the Tribunal’s jurisdiction altogether, on the
basis that the subject-matter of any potential counterclaims was already pending before another arbitral panel. See
id., at para. 52.
57 See, e.g., Salini Construttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4,
Decision on Jurisdiction, July 23, 2001, 42 I.L.M. 609, 623, para. 61 (2003), also available at
http://ita.law.uvic.ca/documents/Salini-English.pdf (last visited June 14, 2007) (interpreting Article 8(1) of the Italy-
Morocco BIT to cover both violations of the Treaty and any breach of a contract that binds the State directly);
17
investment disputes, and it has never been disputed that contractual claims would fall within that
definition.58 The conclusion that a broad definition of arbitrable disputes supports the possibility
that the host State may bring counterclaims is affirmed by the Tribunal in Saluka:
The Tribunal agrees [with the Parties] that, in principle, the jurisdiction conferred upon it by
Article 8 [of the Treaty], particularly when read with Article 19.3, 19.4 and 21.3 of the
UNCITRAL Rules, is in principle wide enough to encompass counterclaims. The language
of Article 8, in referring to “All disputes,” is wide enough to include disputes giving rise to
counterclaims, so long, of course, as other relevant requirements are also met. The need for
a dispute, if it is to fall within the Tribunal’s jurisdiction, to be “between one Contracting
Party and an investor of the other Contracting Party” carries with it no implication that
Article 8 applies only to disputes in which it is an investor which initiates claims.59
There is normally no reason for the investor’s consent to be broader than is necessary to enable
its specific grievance to be submitted to arbitration.60 Accordingly, the investor may seek to limit
Consortium R.F.C.C. v. Kingdom of Morocco, ICSID Case No. ARB/00/6, Decision on Jurisdiction, July 16, 2001,
para. 67, available at http://ita.law.uvic.ca/documents/ConsortiumRFCC-Jurisdiction_000.pdf (last visited June 14,
2007); SGS v. Philippines, supra note 18, at para. 135 (“[i]n principle (and apart from the exclusive jurisdiction
clause in the [Contract]) it was open to SGS to refer the present dispute, as a contractual dispute, to ICSID
arbitration”); Vivendi, Decision on Annulment, supra note 33, at para. 55 (“[r]ead literally, the requirements for
arbitral jurisdiction […] do not necessitate that the Claimant allege a breach of the BIT itself: it is sufficient that the
dispute relate to an investment made under the BIT”). See also O. Spiermann, Applicable Law, at 22 (draft paper
submitted to the International Law Association, Committee on International Law on Foreign Investment), available
at http://www.ila-hq.org/pdf/Foreign%20Investment/ApplicableLaw-4.pdf (last visited June 14, 2007), also
available at 2-5 TRANSNAT'L DISP. MGMT. (2005) (“[i]n contrast, many bilateral investment treaties take a broader
view extending the competence of the arbitral tribunal to all disputes arising out of or in connection with an
investment. Accordingly, they comprise claims based on a contract with the host state (“contract” claims) as well as
claims based on substantive provisions in the treaty (“treaty” claims).”); Douglas, The Hybrid Foundations of
Investment Treaty Arbitration, supra note 49, at 256; C. Schreuer, The Relevance of Public International Law in
International Commercial Arbitration: Investment Disputes, at 6, available at
http://www.univie.ac.at/intlaw/pdf/csunpublpaper_1.pdf (last visited June 14, 2007) (“[u]nder these wider
jurisdictional provisions not only claims arising from international law but also contract claims are covered”); J. Gill
et al., Contractual Claims and Bilateral Investment Treaties: A Comparative Review of the SGS Cases, 21-5 J. INTL
ARB. 397, 412 (2004) (comparing the narrow wording the inter-State dispute resolution clause (referring to disputes
“regarding the interpretation or application of the provisions of this Agreement”) with the broader investor-State
dispute resolution clause (referring to “investment disputes”)).
58 See ICSID Convention, supra note 7, at art. 25(1) (“[t]he jurisdiction of the Centre shall extend to any legal
dispute arising directly out of an investment, between a Contracting State […] and a national of another Contracting
State, which the parties to the dispute consent in writing to submit to the Centre”).
59 Saluka, supra note 3, at para. 39.
60 See, e.g., A.R. Parra & I.F.I. Shihata, The Experience of the International Centre for Settlement of Investment
Disputes, 14 ICSID REV-FILJ 299, 320 (1999); SCHREUER, THE ICSID CONVENTION, supra note 6, at 208; H.C.
Alvarez, Arbitration Under the North American Free Trade Agreement, 16-4 ARBITRATION INTERNATIONAL 393,
410 (2000) (noting that under NAFTA, “investors can be expected to focus their requests for arbitration quite
narrowly on the State Party’s measure which has caused each of them loss or damage”).
18
its acceptance to the part relating to alleged treaty violations, for instance, expropriation. In that
case, the required mutual consent between the parties would only exist to the extent of the
overlap between the host State’s offer to arbitrate and the investor’s acceptance of this offer, i.e.,
the alleged expropriation.61 As will be seen below, this limitation of the arbitration agreement
may, by virtue of the connexity requirement, have consequences for the scope of counterclaims
allowed.62
4.1.2. Exclusion of Investor Obligations
Other treaties, which are in a minority, specifically limit arbitrable claims to an enumerated list of
host State obligations. Such practice is illustrated by the BIT between Malaysia and Ghana,
defining an investment dispute as one “between a national or company of one Contracting Party
and the other Contracting Party concerning an obligation of the latter under this agreement in
relation to an investment of the former.”63 Other noteworthy examples are the North American
Free Trade Agreement (NAFTA),64 and the Energy Charter Treaty.65 An even narrower, but quite
rare, category of instruments allow arbitration only with respect to the quantum payable in the
61 See Parra & Shihata, supra note 60, at 320; Schreuer, Consent to Arbitration, supra note 37, at 30. But see BEN
HAMIDA, supra note 14, at 178, para. 280 (arguing that the investor’s limited acceptance may be qualified as a
counteroffer rather than an acceptance). In the same sense, see, e.g., United Nations Convention on Contracts for the
International Sale of Goods, 1980, art. 19(1) (“[a] reply to an offer which purports to be an acceptance but contains
additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer”); AMERICAN
LAW INSTITUTE, RESTATEMENT 2ND OF THE LAW OF CONTRACTS § 95 (1981).
62 See, e.g., Alvarez, supra note 60, at 411 (“since the investor’s consent will usually be given only after the dispute
has arisen, the scope of its consent can be expected to be quite narrow, thus limiting the possibility of counterclaims
by the disputing State Party”); Parra & Shihata, supra note 60, at 320 (if such connexity is present, “it may be
assumed that the counter-claim will fall within the mutual consent of the parties and thus be admissible”);
SCHREUER, THE ICSID CONVENTION, supra note 6, at 743 (“if a counter-claim is closely connected to the investor’s
complaint, it is arguable that it will be covered by the mutual consent of the parties”). Cf. Saluka, supra note 3, at
para. 26 (Claimant arguing that the host State’s offer to arbitrate “was only accepted by Claimant in respect of claims
based on the Treaty, and the Parties’ mutual consent to arbitration was limited accordingly.”).
63 Malaysia-Ghana BIT (1996), art. 7(1), available at
http://www.unctad.org/sections/dite/iia/docs/bits/ghana_malaysia.pdf (last visited June 14, 2007). See also Malta-
Belgo-Luxembourg Economic Union BIT, art. 8(1), available at
http://www.unctad.org/sections/dite/iia/docs/bits/bel_lux_malta.pdf (last visited June 14, 2007) (defining an
investment dispute as one “between an investor of one of the Contracting Parties and the other Contracting Party
affecting an investment of the former and relating to a matter with respect to which the latter has undertaken an
obligation in favour of the other Contracting Party under this Agreement”).
64 See NAFTA, supra note 43, at art. 1116(1). See also id., art. 1101 (defining the coverage of its investment
provisions as those concerning “measures adopted or maintained by a [Contracting] Party.” One may wish to note
that an earlier draft of NAFTA contained a broader definition of investment disputes. See Draft version of NAFTA of
Dec. 1991, at art. XX07(1), available at http://www.naftaclaims.com/commission.htm (last visited June 14, 2007).
65 See Energy Charter Treaty, supra note 43, at art. 26(1).
19
event of a proscribed expropriation.66
The fact that the arbitration agreement only encompasses disputes concerning host State
obligations does create an obstacle for host State counterclaims. Since the parties have not agreed
to settle through arbitration disputes concerning investor obligations, any grievance against the
investor would not have a basis in the parties’ arbitration agreement, and would consequently
seem to fall outside the jurisdiction of the tribunal.
4.2. POTENTIAL CLAIMANTS (JURISDICTION RATIONE PERSONAE)
The relevance of the scope of arbitrable claims to the acceptance or rejection of counterclaims is
supported by a reference to the tribunal’s jurisdiction ratione personae, as stipulated in the treaty
at hand. Whereas treaties with broader subject-matter jurisdiction may expressly provide that
both the investor and the host State can present claims, the narrower treaties limit the right to
institute proceedings to the investor.
4.2.1. The Host State as Potential Claimant
An example of a treaty of the broader kind is the U.S.-Estonia BIT at issue in Alex Genin, and
which provides that if the dispute cannot be settled amicably, “the national or company
concerned may choose to consent in writing to the submission of the dispute for settlement by
binding arbitration,” according to, inter alia, the ICSID Convention.67 Notably, the BIT goes on
to specify that “[o]nce the national or company concerned has so consented, either Party to the
dispute may initiate arbitration in accordance with the choice so specified in the consent.”68
Similar provisions are found in, for instance, the Norway-Malaysia and U.K-Jamaica BITs;69 the
66 See, e.g., China Model BIT, art. 9(3), UNCTAD, INTERNATIONAL INVESTMENT INSTRUMENTS: A COMPENDIUM,
Vol. III, 155 (1998).
67 U.S.-Estonia BIT, supra note 52, at art. VI(3)(a).
68 Id., at art. VI(3)(b) [emphasis added].
69 See Malaysia-Norway BIT, supra note 50, at art. 9; U.K-Jamaica BIT, art. 9, available at
http://www.unctad.org/sections/dite/iia/docs/bits/uk_jamaica.pdf (last visited June 14, 2007).
20
Iranian and the Peruvian Model BITs,70 and the ASEAN Agreement for the Promotion and
Protection of Investments.71
A reasonable interpretation of these offers that envisage the possibility of the host State
constituting a potential claimant would be that the host State would also be able to present
counterclaims. After all, a counterclaim is “to be treated by the arbitral tribunal essentially in the
same manner as if it were an original claimant’s demand.”72 As argued by the investor in SGS v.
Pakistan, the host State and its home State, Switzerland, must have expressly contemplated that
an ICSID tribunal could consider the host State’s counterclaim because Article 9(3) of the BIT
provides that “each party may start the procedure.”73
4.2.2. The Investor as Sole Potential Claimant
Contrariwise, treaties that restrict the tribunal’s subject-matter jurisdiction to host State
obligations limit the right to institute proceedings to the investor solely. One example is the
Energy Charter Treaty. Defining an arbitrable dispute one “concern[ing] an alleged breach of an
obligation of the [host State] under Part III [of the Treaty],” it provides that “the Investor party to
the dispute may choose to submit it for resolution [by an arbitral tribunal].”74 Also the NAFTA
does not envisage claims being initiated by host States: An investor of a Party (on behalf of an
enterprise of another Party that is a juridical person that the investor owns or controls directly or
indirectly) may submit to arbitration a claim that another Party has breached (a) specified
70 See Iranian Model BIT, art. 12(2), in UNCTAD, DISPUTE SETTLEMENT: INVESTOR-STATE 41 (2003), available at
http://www.unctad.org/en/docs/iteiit30_en.pdf (last visited June 14, 2007); Peru Model Agreement, art. 8, in
UNCTAD, DISPUTE SETTLEMENT: INVESTOR-STATE 41 (2003).
71 See ASEAN AGREEMENT, supra note 50, at art. X(2). See also Law on Domestic and Foreign Private
Investment in Afghanistan, art. XXVI (providing that both parties shall settle their investment dispute according to
either the ICSID Convention or the UNCITRAL Arbitration Rules).
72 UNCITRAL Secretariat, Possible Future Work in the Area of International Commercial Arbitration, supra note
27, at para. 72. Cf. Application of the Convention on the Prevention and Punishment of the Crime of Genocide,
Counter-Claims Order, supra note 2, Declaration of Judge ad hoc Kreca, available at http://www.icj-
cij.org/docket/files/91/7337.pdf (last visited June 14,2007) (objecting to the Court’s characterization of the
Applicant’s claim as the “principal,” rather than the “initial” or “original” claim).
73 SGS v. Pakistan, Decision on Objections to Jurisdiction, supra note 17, at para. 109. See also Iran v. U.S., Case
No. B1, supra note 5, at para. 89 (a lack of an express clause in the Claims Settlement Declaration conferring the
right to present counterclaims in inter-State cases does not warrant the conclusion that such counterclaims are
prohibited, “since each Party could file claims against the other”).
21
provision(s) of the NAFTA.75
If the inclusion of the host State as a potential claimant raises a presumption in favor of
counterclaims, the question naturally arises whether a similar exclusion would give rise to a
contrary presumption. On the one hand, one of the characteristics of a counterclaim is that the
respondent might have brought it in a separate action and recovered judgment.76 As these
instruments do not envisage claims being brought by the host State, more express language in
favor of counterclaims may therefore appear necessary.77 In this respect, the Claims Settlement
Declaration, establishing the Iran-U.S. Claims Tribunal is illustrative, as the drafters expressly
included the possibility of the United States or Iran presenting counterclaims regardless of the
otherwise “one-way street” nature of the proceedings.78
On the other hand, it could be questioned whether this reference to the investor’s locus standi was
intended by the drafters to have this exclusionary effect with respect to counterclaims. The
emphasis on the investor’s procedural right could rather be seen to underline the host State’s
willingness and unequivocal consent to arbitrate. Moreover, in practice, such treaties do not differ
very much from those in which the host State may also institute proceedings, as the separate
74 See Energy Charter Treaty, supra note 43, at art. 26 [emphasis added]. Contrariwise, it is open to both investors
and host States to request amicable settlement. See id.
75 See NAFTA, supra note 43, at arts. 1116-1117. Cf. Malaysia-Ghana BIT, supra note 63, at art. 7(2)(-3).
76 See, e.g., Counterclaim, Recoupment and Setoff, 20 AM. JUR. 2d. § 120 (1965); H. Thirlway, supra note 4, at 202
(interpreting the requirement that the counterclaim come within the jurisdiction of the ICJ to mean that the
counterclaim could equally well have been brought before the Court by way of an application instituting separate
proceedings). But see 28 U.S.C. § 1367(a) on the pendent and ancillary jurisdiction of U.S. federal courts over
“compulsory” counterclaims; McCaffrey v. Rex Motor Transp., Inc., at 248. Another exception is counterclaims as
an exception to sovereign and diplomatic immunity. See infra, under “implicit consent.”
77 Cf. J. Paulsson, Arbitration Without Privity, in THE ENERGY CHARTER TREATY: AN EAST-WEST GATEWAY FOR
INVESTMENT & TRADE 422, 422-423 (T.W. Wälde ed., 1996) (“This new world of arbitration is one where the
claimant need not have a contractual relationship with the defendant, and where the tables could not be turned; the
defendant could not have initiated the arbitration, nor is it certain of being able even to bring a counterclaim.”).
78 See Claims Settlement Declaration, supra note 7, at art. II(1). See also Iran and The United States, Case No. A/2,
supra note 5, at II.B; Gould Marketing, Inc. v. Ministry of National Defense, at 151-152 (although the Tribunal lacks
jurisdiction over claim instituted by Iran against U.S. nationals, claims against nationals are admissible in the form of
responsive counterclaims, even if they exceed the amount of the initial claim); Iran v. U.S., Case No. B1, supra note
5, at para. 89 (“[w]ithout express mention of counterclaims […], the Tribunal would have been prevented from
hearing any type of claims by a State Party against nationals of the other State”); A. Asgarkhani, Compromise and
Cooperation at the Iran-United States Claims Tribunal, 19-2 ARB. INTL 149 (2003).
22
consent of the investor is always required.79 In fact, whereas a narrow definition of investment
disputes tends to dovetail with a limited locus standi, a broad definition of arbitrable claims do
not always go hand in hand with a reference to the right of the host State to present claims against
the investor in the sense of the U.S.-Estonia BIT quoted above.80
This leads to the conclusion that whereas the sole reference to the investor’s locus standi would
not necessarily be conclusive with regard to the inadmissibility of counterclaims; the combined
features of a limited jurisdiction ratione personae and a limited jurisdiction ratione materiae are
more likely to have such effect. In this context, one should note the observation by various
scholars that the narrow type of instruments gives rise to a “paradigm” different from that of
international commercial arbitration in general, in that it creates “une sorte d’instrument de
contrôle du respect par les Etats de la légalité dans le domaine économique.”81 A similar
characterization is offered by Weiler and Wälde, who refer to this type of arbitration as
“international quasi-judicial review of national regulatory action” analogous to judicial review of
administrative acts in national law.82 Although it is open to discussion whether the bringing of
counterclaims would be contrary to such object and purpose,83 or stated differently, that the
79 See, e.g., Burdeau, supra note 9, at para. 28bis (“[m]ême si l’on admet qu’on convention bilatérale
intergourvernementale puisse créer des obligations pour les investisseurs étrangers, elle ne peut réputer acquis le
consentement à l’arbitrage d’un particulier”).
80 See, e.g., Norway-Lithuania BIT, art. IX(2), available at
http://www.unctad.org/sections/dite/iia/docs/bits/norway_lithuania.pdf (last visited June 14, 2007); Norway-
Romania BIT, art. VIII(2), available at http://www.unctad.org/sections/dite/iia/docs/bits/norway_romania.pdf (last
visited June 14, 2007); Bolivia-Ecuador BIT, art. IX, supra note 38; Swedish Model BIT, supra note 38, at art. 8(2);
Burundi Model BIT, supra note 38, at art. 8(1).
81 Burdeau, supra note 9, at para. 29 [emphasis in original]. The author even draws a parallel between this type of
arbitration and the European Court of Human Rights, arguing that while there are important differences between the
two systems, the philosophy is the same, namely the granting to unidentified individuals a right of recourse against a
State in order to give effect to the latter’s undertakings, pursuant to an international treaty, to accord a certain
treatment to private parties. See id., at para. 22. See also E. GAILLARD, LA JURISPRUDENCE DU CIRDI 7 (2004)
(comparing the evolution of control exercised by the tribunals “à celle qui, au XIXe siècle, a vu la naissance du
contrôle de la légalité des actions de l’administration française par le Conseil d’État”); id., at 767-768.
82 T. Weiler & T.W. Wälde, Investment Arbitration under the Energy Charter Treaty in the light of new NAFTA
Precedents: Towards a Global Code of Conduct for Economic Regulation, 1-1 TRANSNAT'L DISP. MGMT. (2004),
available at
http://www.transnational-dispute-management.com/samples/freearticles/tv1-1-article_51.htm (last visited June 14,
2007).
83 For the possibility of the State to present counterclaims in administrative proceedings, see, e.g., German
Verwaltungsgerichtsordnung, § 89 (excluding, however, the possibility of counterclaims against Anfechtungs- und
Verpflichtungsklagen i.e., claims that attack an administrative decision or request one to be taken); Robert B. Lara v.
U.S. Secretary of the Interior (whereas Plaintiff lost the action for judicial review of administrative proceedings that
invalidated his three placer mining claims, Defendant Secretary of the Interior won on his counterclaim seeking an
order that Plaintiff vacate the claims and remove structures on them). Cf. Archer Daniels Midland Company v.
23
intention of the drafters was partly to exclude the possibility of consolidating closely related
claims,84 it cannot be denied that these characteristics do present an obstacle for host State
counterclaims.85
4.3. EXPRESS, TACIT, AND IMPLIED CONSENT TO COUNTERCLAIMS
This obstacle may be overcome by virtue of the investor’s express consent to the counterclaim at
hand. In SGS v. Pakistan, for instance, the investor contended that the host State was “fully
entitled to file a counterclaim.”86 Similarly, in SGS v. Philippines, the host State had alleged fraud
and overcharging on the part of the investor. Whilst denying these allegations, the investor
nevertheless “appeared to accept that they could be considered, if necessary, as a counterclaim if
the Respondent so wished.”87 In these cases, the host States did not so wish, preferring to have
such counterclaims decided by other fora.88 If both parties would consent, however, there would
be jurisdiction based on a corresponding expansion of the arbitration agreement;89 although, in
Commission of the European Communities (examining but rejecting on the merits the Commission’s counterclaim
for an increase in the amount of the fine for violations of EC competition law imposed on and challenged by the
plaintiffs).
84 In fact, Weiler, Wälde and Burdeau seem to envisage the possibility of counterclaims in “arbitration without
privity” situations, regardless of its focus on investor rights. See T. Weiler & T.W. Wälde, supra note 82 (“it seems
difficult to keep counter-claims out of the range of examination as they could impact on the legitimacy of the
investor’s claim”); T.W. Wälde, Investment Arbitration Under the Energy Charter Treaty, supra note 42, at 50;
Burdeau, supra note 9, at para. 21. See also Paulsson, Arbitration Without Privity, supra note 9, at 250, fn. 32;
Alvarez, supra note 60, at 412; F.O. Vicuña, Foreign Investment Law: How Customary Is Custom?, 99 AM. SOC'Y
INT'L L. PROC. 97 (2005 (Proceedings of the Ninety-Ninth Annual Meeting of the American Society of International
Law: New World Order or a World in Disorder? Testing the Limits of International Law: The “New” Regime of
Foreign Direct Investment) (“[…] in spite of the common belief that all such standards are only there to benefit
privileged investors, states too can rely on many features of investment law to protect their own interests, particularly
by means of counterclaims in arbitration proceedings.”).
85 One may wish to note that a restriction of the tribunal’s jurisdiction in this regard cannot be overcome by a
reference to explicit provisions for counterclaims in the relevant arbitration rules. Cf. Iran v. U.S., Case B1, supra
note 5, at fn. 116 (“it seems doubtful that Article 19(3) of the UNICTRAL Rules [on counterclaims] could constitute
a basis for the Tribunal’s jurisdiction over official counterclaims”). But see Alvarez, supra note 60, at 410
(suggesting that counterclaims could be permitted “if provided for in the arbitration rules selected by the investor”).
86 SGS v. Pakistan, Procedural Order, supra note 17, at 303. See also id., Decision on Objections to Jurisdiction,
supra note 17, at para. 108.
87 SGS v. Philippines, supra note 18, at para. 40.
88 See id., at para 17; SGS v. Pakistan, Decision on Objections to Jurisdiction, supra note 17, at para 48.
89 Cf. Berger, supra note 27, at § V(a)(i) ([“[i]f the arbitration agreement does no cover the cross-claim, the parties
may agree to extend the arbitration agreement”); SIMPSON & FOX, supra note 5, at 49 (noting that the applicant,
before the ICJ, may “expressly extend the scope of the initial grant of jurisdiction in the course of the proceedings to
include the matters raised in the counterclaim,” referring to the Asylum case and the U.S. Nationals in Morocco
case); Renteln, supra note 6, at 391 (noting that “even though counterclaim rules offer a narrow definition of what
counterclaims are admissible, the parties may consent to the presentation of counterclaims that do not fit the
24
the SGS cases, the host State’s offer may arguably have been broad enough in and of itself to
encompass the counterclaim at hand.
Similarly, it is also possible for the investor to tacitly consent to a counterclaim by not presenting
any jurisdictional objections.90 As provided in the Arbitration Rules of the Netherlands
Arbitration Institute, “[a] counterclaim is admissible […] if the […] arbitration agreement is
expressly or tacitly made to apply to it by the parties.”91 In view of the lack of reference to any
objections by the investor, such tacit consent may have been present in Alex Genin.92
As exemplified by these cases and as mentioned in the Introduction, it may in fact be in the
investor’s interest that the arbitral tribunal resolves the counterclaim. Since a refusal may lead the
host State to subsequently seek relief in its own domestic courts or another, contractually agreed
arbitration forum, not only is there a possibility of inconsistent decisions the investor will also
have the advantage of a neutral forum.93 Additionally, the acceptance of counterclaims may
arguably render a host State more willing to arbitrate, so that less time is spent on costly
jurisdictional battles.
[counterclaim] rules,” referring to the Del Rio case, Venezuelan Arbitrations of 1903, Jackson H. Ralston, Senate
Doc. No. 316, 58th Congress, 2d sess., at 879-888 (1904)).
90 See, e.g., Berger, supra note 27, at § V(a)(i) (“[a]n agreement to extend the scope of the arbitration agreement may
be effected impliedly if the claimant does not object to the setting off of a cross-claim that lies outside the scope of
the arbitration agreement”). In this respect, an analogy can be made with the doctrine of forum prorogatum, where
the consent of one party is consolidated after the institution of proceedings. See, e.g., CHENG, supra note 6, at 262-
266; S. Rosenne, Counter-Claims in the International Court of Justice Revisited, in LIBER AMICORUM “IN
MEMORIAMOF JUDGE JOSÉ MARIÁ RUDA 457, at 460, 465-466 (C.A. Armas Barea et al. eds, 2000); Case
Concerning the Factory at Chorzów (Ger. v. Pol.), Merits, [1928] PCIJ 6 (Sept. 13, 1928); Application of the
Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v. Serbia and
Montenegro), Judgment, July 11, 1996, Separate Opinion of Judge Shahabuddeen, available at http://www.icj-
cij.org/docket/files/91/7359.pdf (last visited June 14, 2007).
91 NAI Arbitration Rules, supra note 7, at art. 25(2). See also UNCITRAL Arbitration Rules, supra note 7, at art.
21(3) (“[a] plea that the arbitral tribunal does not have jurisdiction shall be raised no later than in […] the reply to the
counter-claim”); ICSID Rules of Procedure for Arbitration Proceedings (Arbitration Rules), Rule 41(1), available at
http://www.worldbank.org/icsid/basicdoc/partF-chap05.htm#r41 (last visited June 14, 2007); ICSID Additional
Facility Rules, supra note 7, at art. 45(2); Swiss Rules of International Arbitration, supra note 27, at art. 21(3).
92 See Alex Genin, supra note 15. Cf. Paulsson, Arbitration Without Privity, supra note 9, at 242, fn. 18 (commenting
on an ICC award rendered pursuant to Lomé III). By way of comparison, the investor in Saluka expressly objected to
the counterclaim. See Saluka, supra note 3, at para. 13. See also Franz Sedelmayer v. The Russian Federation
through the Procurement Department of the President of the Russian Federation, Part III, SCC Institute - 1998 WL
34336629 (APPAWD) (“The parties are at dispute to whether or not the Respondent has filed a counterclaim in this
arbitration. If a counterclaim has been filed, the Claimant has rejected such claim.” As the Tribunal found that it
lacked competence to try the case on its merits under the provisions of the Treaty at hand, this issue became moot).
Cf. Klöckner v. Cameroon, Decision on Annulment, supra note 32, at para. 5.
25
Apart from express and tacit consent, one may ask whether the investor’s consent to
counterclaims could be implied from the very act of bringing a claim. In this respect, an analogy
might possibly be drawn with the field of sovereign and diplomatic immunity. In Banco Nacional
de Cuba v. Sabbatino, the U.S. Supreme Court held that even though a State would normally be
immune from suit by private parties in foreign courts, “fairness has been thought to require that
when the sovereign seeks recovery, it be subject to legitimate counterclaims against it.”94 In other
words, the fact that a State or diplomat presents a claim estops it from benefiting from its
immunity with respect to counterclaims.
While it has been shown that investors might similarly be “immune” to claims by an applicant
host State, and that in many instances, allowing the host State to present counterclaims could
been seen as adding a degree of “fairness” to the proceedings; there are important differences
between the decision of a domestic court to allow a counterclaim to “cut into the doctrine of
immunity”95 and an arbitral tribunal’s decision to exercise jurisdiction over a counterclaim that is
not covered by the arbitration agreement. The doctrine of sovereign and diplomatic immunity is
namely a reason for a court not to exercise the jurisdiction that it already has over a defendant
State or diplomat;96 whereas for an arbitral tribunal, the investor’s consent is the very basis for its
jurisdiction in the first place.
93 See, e.g., BEN HAMIDA, supra note 14, at 177, para. 280; Karrer, Jurisdiction on Set-off Defences and
Counterclaims, supra note 27, at 177.
94 Banco Nacional de Cuba v. Sabbatino, at 438. See also U.S. Foreign Immunities Act, 28 U.S.C.A. 1607 (b);
European Convention on State Immunity, art. 1(2)(a); II-2 YEARBOOK OF THE INTERNATIONAL LAW COMMISSION 30
(1991); Harvard Research in International Law, at 451; R.B. Looper, Counterclaims Against a Foreign Sovereign
Plaintiff, 50 AM. J. INTL L. 647 (1956); Vienna Convention on Diplomatic Relations, art. 32(3), Apr. 18, 1961, 500
U.N.T.S. 95 (entered into force June 24, 1964), available at
http://untreaty.un.org/ilc/texts/instruments/english/conventions/9_1_1961.pdf (last visited June 14, 2007) (“[t]he
initiation of proceedings by a diplomatic agent or by a person enjoying immunity from jurisdiction […] shall
preclude him from invoking immunity from jurisdiction in respect of any counter-claim directly connected with the
principal claim”).
95 See, e.g., Nat’l City Bank of New York v. Republic of China, 348 U.S. 356, 364 (1955) (“It is recognized that a
counterclaim based on the subject matter of a sovereign’s suit is allowed to cut into the doctrine of immunity.”).
96 See, e.g., I. Sinclair, The Law of Sovereign Immunity: Recent Developments, 167 RECUEIL DES COURS 113 (1980)
(defining immunity “as the correlative of a duty imposed upon the territorial State to refrain from exercising its
jurisdiction over a foreign State” and noting that immunity “operates by way of exception to the dominating principle
of territorial jurisdiction.” “In other words,” he explains, “one does not start from an assumption that immunity is the
norm, and that exceptions to the rule of immunity have to be justified.” Rather, “[o]ne starts from an assumption of
non-immunity, qualified by reference to the functional need […] to protect the sovereign rights of foreign States
operating or present in the territory”).
26
This distinction is buttressed by a reference to Article 46 of the ICSID Convention, which lists as
a condition precedent for the admissibility of counterclaims that “they are within the scope of the
consent of the parties and are otherwise within the jurisdiction of the Centre.”97 If the bringing of
a claim could in and of itself be construed as consent to counterclaims, this clause would lose its
meaning.98 Accordingly, and in line with the maxim interpretatio fienda est ut res magis valeat
quam pereat,99 the fact that the investor presents a claim ought not to be construed to create, in
and of itself, the consent necessary for the host State to present counterclaims against the
investor.
4.4. EXPRESS EXCLUSIONS OF COUNTERCLAIMS
While counterclaims should be accepted in case the investor expressly or tacitly consents thereto,
it is clear that an express exclusion of counterclaims in the host State’s offer would be an obstacle
to jurisdiction in this respect. This caveat is mentioned in the ICSID Convention,100 but should
also be deemed implicit under other arbitration rules, as the acceptance of counterclaims in that
case would be contrary to the parties’ arbitration agreement.
Various investment treaties do refer to such exclusions. As provided in the NAFTA, for example,
“a Party shall not assert, as a defense, counterclaim, right of set off or otherwise, that the investor
concerned has received or will receive, pursuant to an insurance or guarantee contract,
indemnification or other compensation for all or part of its alleged damages.”101 Accordingly, a
counterclaim of this nature would not fall within the arbitration agreement, and would therefore
97 ICSID Convention, supra note 7, at art. 46.
98 For a similar interpretation with regard to the ICJ Rules of Court, see H. Thirlway, supra note 4, at 204
(concluding that “advance acceptance of the possibility of counter-claims” is “difficult to square with the provision
as it stands”).
99 See, e.g., H.C. BLACK ET AL, BLACKS LAW DICTIONARY 1697 (1999) (that the matter may have effect rather than
fail). See also R. ZIMMERMAN, THE LAW OF OBLIGATIONS: ROMAN FOUNDATIONS OF THE CIVILIAN TRADITION 637
(1996) (“[a]mbiguous clauses must be construed in a sense which will give them some effect rather than render them
inoperative”).
100 See ICSID Convention, supra note 7, at art. 46 (“[e]xcept as the parties otherwise agree […]”).
101 NAFTA, supra note 43, at art. 1136(2). See also U.S. Model BIT, supra note 52, at art. 28(7); Energy Charter
Treaty, supra note 43, at art. 15(3). It may be noted that earlier NAFTA drafts contained a broader reference to
counterclaims: “The Tribunal may determine any incidental or additional claims or counterclaims arising directly out
of the acts or measures constituting the alleged breach of this Chapter, except as the parties to the investment dispute
otherwise agree […].” See, e.g., Draft version of NAFTA of May 13, 1992, art. XX07(10), available at
http://www.naftaclaims.com/commission.htm (last visited June 14, 2007)..
27
be excluded from the tribunal’s jurisdiction.
It has been suggested that where the relevant instrument excludes a specified category of
counterclaims, it may be presumed that other counterclaims are allowed, at least to the extent to
which the connexity requirement is satisfied.102 Although such e contrario argumentation has
some appeal and might constitute a factor for the tribunal to consider,103 it is doubtful whether it
in and of itself could counterbalance a lack of any inclusion of investor obligations in the
arbitration agreement.
4.5. FORUM SELECTION AGREEMENTS
The situation may arise in which the parties have agreed to settle a particular aspect of their
dispute in a different forum. There is little question nowadays that such forum selection
agreements should generally be enforced, inter alia, by virtue of the pacta sunt servanda
principle.104 Consequently, although a broad arbitration offer may grant a tribunal jurisdiction
over a contractual claim and counterclaim, it would appear that they are both inadmissible where
the contract at hand stipulates that contractual disputes shall be settled by another forum.105
102 See, e.g., BEN HAMIDA, supra note 14, at 177-178, para. 280. Cf. Alvarez, supra note 60, at 410.
103 Also referred to as the maxim expressio unius est exclusion alterius, “negative implication,” or “implied
exclusion.” For a critical analysis of the maxim, see R.N. Graham, In Defence of Maxims, 22-1 STATUTE LAW
REVIEW 45 (2001). See also Iran v. U.S., Case No. B1, supra note 5, at para. 82 (the maxim “does not constitute a
mandatory directive applicable in all cases where a treaty is silent on a subject: it merely reflects a common sense
principle applicable in many, but not all, situations”).
104 See, e.g., Y. SHANY, THE COMPETING JURISDICTIONS OF INTERNATIONAL COURTS AND TRIBUNALS 153 (arguing
that the presumptive validity of choice of forum agreements constitutes a general principle of law); Saluka, supra
note 3, at paras. 52-57 (dismissing the contractual counterclaims on the basis that the contract at issue contained a
clause providing for arbitration pursuant to the UNCITRAL Arbitration Rules in Zurich); Douglas, The Hybrid
Foundations of Investment Treaty Arbitration, supra note 49, at 248. See also SGS v. Philippines, supra note 8, at
para. 138, and the cases cited in paras. 150-153. Cf. English Arbitration Act, supra note 7, at art. 1(b) (“the parties
should be free to agree how their disputes are resolved […]”).
105 See, e.g., Vivendi, Decision on Annulment, supra note 33, at para. 98 ([i]n a case where the essential basis of a
claim brought before an international tribunal is a breach of contract, the tribunal will give effect to any valid choice
of forum clause in the contract”); Z. Douglas, The Hybrid Foundations of Investment Treaty Arbitration, supra note
49, at 259-260. But see Klöckner v. Cameroon, Award, supra note 8; Holiday Inns-Occidental v. Morocco, reported
in P. Lalive, The First ‘World Bank’ Arbitration (Holiday Inns v. Moroccco) Some Legal Problems, 51 BRIT. Y.B.
INTL L. 123, 158-159 (1980); Parra, supra note 38, at 335. Cf. with regard to set-off defenses, Swiss Rules of
International Arbitration, supra note 27, at art. 21(5) (“[t]he arbitral tribunal shall have jurisdiction to hear a set-off
defence even when the relationship out of which this defence is said to arise […] is the object of another arbitration
agreement or forum-selection clause”). Cf. UNCITRAL Secretariat, supra note 27, at para. 75.
28
The same tribunal, however, may retain jurisdiction over the investor’s treaty claim, for instance
an alleged expropriation.106 In case the line between the contractual and the treaty characteristics
of the investor’s claim is sufficiently blurred,107 it could be argued that the Tribunal, in the
interest of judicial economy, should nevertheless retain jurisdiction over a host State
counterclaim based in contract.108 This would especially seem to be the case where the investor
has requested a stay of the proceedings simultaneously taking place in this other agreed-upon
forum. As pointed out in SGS v. Pakistan,
[i]t would be inequitable if, by reason of the invocation of ICSID jurisdiction, the Claimant
could on the one hand elevate its side of the dispute to international adjudication and, on the
other, preclude the Respondent from pursuing its own claim for damages by obtaining a stay
of those proceedings for the pendency of the international proceedings, if such international
proceedings could not encompass the Respondent’s claim.109
106 See, e.g., Vivendi, Decision on Annulment, supra note 33, at para. 98; CMS Gas Transmission Company v. The
Argentine Republic, para. 80, Final Award, May 12, 2005, available at
http://ita.law.uvic.ca/documents/CMS_FinalAward_000.pdf (last visited June 14, 2007) (“as contractual claims are
different from treaty claims, even if there had been or there currently was a recourse to the local courts for breach of
contract, this would not have prevented submission of the treaty claim to arbitration”).
107 For an analysis of awards relating to the characterization of claims as either contractual or treaty based, see J.J.
van Haersolte-van Hof & A.K. Hoffmann, The Relationship Between International Tribunals and Domestic Courts
in Modern Investment Arbitration (forthcoming 2007) (article to appear in a publication by the International Law
Association, Committee on International Law on Foreign Investment). Cf. Occidental Exploration and Production
Company v. the Republic of Ecuador, para. 5, LCIA Case No. UN3467, Final Award, July 1, 2004, available at
http://ita.law.uvic.ca/documents/Oxy-EcuadorFinalAward_001.pdf (last visited June 14, 2007) (“to the extent that
the nature of the dispute submitted to arbitration is principally, albeit not exclusively, treaty-based, the jurisdiction of
the arbitration tribunal is correctly invoked”) [emphasis added]
108 See Karrer, Jurisdiction on Set-off Defences and Counterclaims, supra note 27, at 177 (arguing that although
“simple contract interpretation would first suggest that if parties provide for different […] choice-of-forum
agreements for different obligations […,] if the parties subsequently are in arbitration or litigation, the jurisdiction of
that arbitral tribunal or state court should extend to the counterclaim all the same”). See also Paulsson, Arbitration
Without Privity, supra note 9, at 250, fn. 32 (arguing that an investor’s “disregard” of a preexisting arbitration clause
pursuant to which the host State could have brought a claim, “would intuitively weigh in favor of counterclaims”
under the Energy Charter Treaty”); Alvarez, supra note 60, at 412 (construing NAFTA’s waiver requirement (Article
1121) in favor allowing host State counterclaims, regardless of whether they are subject to a forum selection clause).
While reasons of judicial economy strongly support these remarks, it is submitted that these more practical
considerations would not, in and of themselves, have the necessary broadening effect on the arbitration agreement
where it does not encompass investor obligations.
109 SGS v. Pakistan, Procedural Order, supra note 17, at 303. Cf. Anaconda-Iran, Inc. v. the Government of the
Islamic Republic of Iran and the National Iranian Copper Industries Company, Case No. 167, Award No. ITL. 65-
167-3, Interlocutory Award, Dec. 10, 1986, 13 IRAN-U.S.C.T.R. 199, at para. 106 (“[P]ursuant to Article II,
paragraph 1, of the CSD and Article 19, paragraph 3, of the Tribunal Rules a respondent to a claim brought before
the Tribunal is granted a right to make a counterclaim together with its statement of defense […]. The right so
granted to the respondents obviously constitutes the counterpart to the exceptional grant of jurisdiction over claims
otherwise contractually within the jurisdiction of other fora. The balance of the rights of the two opposing parties
would thus be impaired if the right to submit a counterclaim could be denied the respondent for the reason that the
contract out of which the counterclaim arises contemplated another procedure. It must be added that the right to
29
Still, a consolidation might appear to conflict with the right of the investor to have its separate
contract claim heard by the designated forum. Consequently, the better solution would be for the
parties to agree in concert to rescind the forum selection clause so that the tribunal would be
competent to hear both the contract and treaty claims.110 This would ensure that both the investor
and the host State get their “day in court,” and also prevent any “double-dipping.”111
5. “CONNEXITY” AND THE LEGAL NATURE OF COUNTERCLAIMS
Apart from the fact that the counterclaim must fall within the scope of the arbitration agreement,
and that it should not be subject to a different forum selection clause, it must also be connected to
the investor’s claim. As stated by the Tribunal in Saluka: It is necessary that counterclaims
“satisfy those conditions which customarily govern the relationship between a counterclaim and
the primary claim to which it is a response. In particular, a legitimate counterclaim must have a
close connexion with the primary claim to which it is a response.”112 As with forum selection
submit counterclaims which, if admitted, could result in a set-off against damages awarded to the claimant, is of a
particular importance within the framework of the Algiers Accords, which provide that payments of awards to
successful American claimants will be made out of the Security Account.”).
110 See Karrer, Jurisdiction on Set-off Defences and Counterclaims, supra note 27, at 178 (2001) (“[a]ll it takes is that
[the parties] both agree in this sense, which they can do, in my view, by conclusive action, which may be recorded in
writing for those who still cling to the notion that an arbitration agreement must be in writing”). See also France
Telecom v. Republic of Lebanon, unpublished award rendered in Switzerland, pursuant to the UNCITRAL
Arbitration Rules on Feb. 22, 2005 (Arbs. B. Audit, A. Akl, M. Lalonde), referred to in Swiss Federal Tribunal
Decision I, Nov. 10, 2005, at Part A, available at http://ita.law.uvic.ca/documents/FranceTelecom-
SwissChallenge.pdf (last visited June 14, 2007) (in which the Parties agreed to rescind the forum selection clause and
to grant the Tribunal general jurisdiction to decide both the contractual and the BIT claims: “The parties and FTMI
hereby undertake that they will not pursue or raise any contractual disputes before any court of tribunal other than the
UNCITRAL Tribunal.”); SGS v. Pakistan, Decision on Objections to Jurisdiction, supra note 17, at para. 161 (noting
that the parties can “by special agreement, lodge in this Tribunal jurisdiction to pass upon and decide claims
sounding solely in the contract”). Cf. Douglas, The Hybrid Foundations of Investment Treaty Arbitration, supra note
49, at 255.
111 See, e.g., Occidental, supra note 107, at para. 109 (“in order clearly to forestall any possible double recovery” by
the investor, the Tribunal directed it “to cease and desist from any local court actions, administrative proceedings or
other actions […],” and held that “any and all such actions and proceedings shall have no legal effect”) [emphasis
added]. This holding raises interesting questions relating to the power of an arbitral tribunal to interfere with a State’s
internal affairs; especially in view of the International Court of Justice’s reluctance to do the same. See, e.g., Case
Concerning Avena and Other Mexican Nationals (Mexico v. U.S), Judgment, 2004 I.C.J. (Mar. 31), 43 ILM 581
(2004) (ICJ holding that that the appropriate reparation consists in the obligation of the United States to “provide, by
means of its own choosing, review and reconsideration of the convictions and sentences of the Mexican nationals
[…], by taking account […] of this Judgment) [emphasis added].
112 Saluka, supra note 3, at para. 61. See also id., at paras. 65-75 (for a survey of other cases discussing the connexity
requirement).
30
agreements, connexity is a question of admissibility rather than jurisdiction.113
It was noted in the Introduction that the connexity requirement is intrinsically linked to the two
main objectives for allowing counterclaims: judicial economy and the better administration of
justice.114 As such, it serves an equitable and practical filtering function. In the words of the
International Court of Justice, the Respondent cannot use a counterclaim to
impose on the Applicant any claim it chooses, at the risk of infringing the Applicant’s rights
and of compromising the proper administration of justice; and […] it is for that reason that
[…] the Rules of Court requires [inter alia] “that it is directly connected with the subject-
matter of the claim of the other party.”115
In this light, it seems reasonable to conclude that connexity would not only be required when
explicitly provided for in the relevant arbitration rules and laws,116 but also, for instance, under
the UNCITRAL Model Law.117
113 See SCHREUER, THE ICSID CONVENTION, supra note 6, at 738, para. 49 (“close connection is not a matter of
jurisdiction”). See also S. Rosenne, The International Court of Justice: Revision of Articles 79 and 80 of the Rules of
Court, 14 LEIDEN J. INTL L. 77, 85 (2001); id., Counter-claims Revisited, supra note 90, at 458; H. Thirlway, supra
note 4, at 203 (“claims may exist which come within the jurisdiction of the [ICJ] but which are not ‘directly
connected’ with the claim”).
114 See supra, note 6.
115 Application of the Convention on the Prevention and Punishment of the Crime of Genocide, Counter-Claims
Order, supra note 2, at para. 31. See also Case Concerning Oil Platforms (Islamic Republic of Iran v. United States
of America) Counter-Claim, Order of March 10, 1998, I.C.J. Reports 1998, p. 190, at para. 33, also available at
http://www.icj-cij.org/docket/files/90/7273.pdf (last visited June 14, 2007); Case Concerning Armed Activities on
the Territory of the Congo, Counter-Claims Order, supra note 6, at para. 35. Cf. H. Thirlway, supra note 4, at 215-
216.
116 See, e.g., ICSID Convention, supra note 7, at art. 46; UNCITRAL Arbitration Rules, supra note 7, at art. 19(3)
(according to which a counterclaim must arise “out of the same contract” as the initial claim). It is suggested that the
term “contract” in the UNCITRAL Arbitration Rules should be interpreted to refer to the parties’ arbitration
agreement, rather than any contract as such. This interpretation is consistent with the fact that investment instruments
refer to arbitration pursuant to the UNCITRAL Arbitration Rules also in case of non-contractual disputes between
the investor and the host State, e.g., NAFTA. Cf. United Nations Commission on International Trade Law, Working
Group II (Arbitration), Settlement of Commercial Disputes: Revision of the UNCITRAL Arbitration Rules, supra
note 27, at para. 16 (“Views were expressed in the Working Group that the arbitral tribunal’s competence to consider
counter-claims or set-off should, under certain conditions, extend beyond the contract from which the principal claim
arose and apply in a wider range of circumstances (A/CN.9/614, para. 93). To achieve that extension, it was
proposed to replace the words arising out of the same contract with the words arising out of the same legal
relationship, whether contractual or not (A/CN.9/614, para. 94).”). But see Saluka, supra note 3, at para. 26
(argument by Claimant).
117 See, e.g., Berger, supra note 27, at § V(a)(i) (noting that whereas the UNICTRIAL Model Law does not explicitly
refer to connexity, the incidental claim has to involve a claim concerning “a dispute which has arisen out of or in
connection with the contract” that contains the arbitration agreement.” See id. (noting further that this wording
covers not only contractual claims). See also ICC Standard Arbitration Clause, ICC PUBL. No. 581, at p. 8 (referring
31
In view of the non-jurisdictional nature of connexity, its twin goals also suggest that arbitral
tribunals enjoy a certain degree of flexibility in assessing whether the facts of each particular case
would warrant consolidation of the claims at hand.118 It appears, though, that tribunals would be
guided by the following two considerations.
5.1. FACTUAL CONNEXITY
First, and related to the aspect of judicial economy, there is general agreement that the claim and
counterclaim must be factually linked. This characteristic has the advantage of allowing the
tribunal to gain a more complete overview of the various facets of the dispute at hand;119 and, at
the same time it avoids duplication of effort by a second tribunal examining the same evidence.
As explained by the ICSID Secretariat, the admissibility of a counterclaim under the ICSID
Convention depends on the extent to which “the factual connection between the original and the
ancillary claim is so close as to require the adjudication of the latter in order to achieve the final
settlement of the dispute, the object being to dispose of all the grounds of dispute arising out of
the same subject matter.”120
Since arbitrators have often left the connexity issue unaddressed,121 one may in this context seek
additional guidance from the jurisprudence of the International Court of Justice, whose Rules of
Court contain a definition of counterclaims almost identical to that of the ICSID Convention,
to disputes arising “out of or in connection” with the contract); International Law Commission, Model Rules of
Arbitral Procedure, art. 19 (“[…] the tribunal shall decide on any ancillary claims which it considers to be
inseparable from the subject-matter of the dispute and necessary for its final settlement”); B. Larschan & G.
Mirfendereski, supra note 5, at 35 (interpreting general rules of international law to provide that “a counterclaim is
admissible only when it arises out of the same subject matter as that involved in the principal claim”). In fact, as
early as the 19th century, international law was held to require counterclaims to relate to the initial claim. See id. at
19. See also Iran v. U.S., Case No. B1, supra note 5, at paras. 139, 142(A); id., at fn. 118 (inter-State counterclaims
must arise “out of the contractual arrangements forming the subject matter of the main claim”). But see Alvarez,
supra note 60, at 412 (stating that the lack of reference in the ICSID Additional Facility Rules that the counterclaim
arise directly out of the subject matter of the dispute “could be argued to provide a broader scope of counterclaims”).
118 If there is connexity, however, the consolidation of claims by ICSID tribunals appears to be compulsory. See
Summary Proceedings of the Legal Committee meeting, Dec. 7, 1964, SID/LC/SR/15, reported in II-2 HISTORY OF
THE ICSID CONVENTION, supra note 21, at p. 811.
119 See, e.g., Renteln, supra note 6, at 380 (“[a]dmitting a counterclaim may also yield a more fair result by ensuring
that additional facts and legal obligations are not ignored”).
120 ICSID Secretariat, Explanatory Report, Note B(a) to Arbitration Rule 40 of 1968, 1 ICSID REP. [emphasis
added].
121 In the context of ICSID, see SCHREUER, THE ICSID CONVENTION, supra note 6, at 739, para. 54.
32
namely that they must be “directly connected with the subject-matter” of the initial claim.122 In
applying this criterion, the Court has found it significant that the facts on which the parties rely
form part of the “same factual complex,” and more specifically, that they are alleged to have
occurred on the same territory during the same period; that they are of the “same nature;” and that
the respondent relies on certain identical facts in order both to refute the allegations of the
claimant and to obtain judgment against it .123
5.2. JURIDICAL CONNEXITY
The second consideration for tribunals is juridical connexity. As held by the ICJ in the Armed
Activities case: “as a general rule, the existence of a direct connection between the counter-claim
and the principal claim must be assessed both in fact and in law.”124 Such connexity would seem
to be satisfied when the claim and counterclaim arise out of the same contract. This is because the
parties’ rights and obligations would generally be interpreted by reference to the same national
legal order, which would govern the contract as a whole.
122 Rules of Court of the International Court of Justice, art. 80(1), as amended on Dec. 5, 2000, available at
http://www.icj-cij.org/documents/ (last visited June 14, 2007). It may be noted that the connexity requirement was
first introduced in the 1936 version of the Rules of Court of the Permanent Court of International Justice. See
generally, S. Rosenne, Counter-Claims Revisited, supra note 90, at 458.
123 Case Concerning Armed Activities on the Territory of the Congo, Counter-Claims Order, supra note 6, at para.
38; Application of the Convention on the Prevention and Punishment of the Crime of Genocide, Counter-Claims
Order, supra note 2, at para. 34; Oil Platforms, Counter-Claim Order, supra note 115, at para. 138; Case Concerning
the Land and Maritime Boundary Between Cameroon and Nigeria (Cameroon v. Nigeria: Equatorial Guinea
intervening), Order of June 30, 1999, available at http://www.icj-cij.org/docket/files/94/7447.pdf (last visited June
14, 2007).
124 Case Concerning Armed Activities on the Territory of the Congo, Counter-Claims Order, supra note 6, at para. 36
[emphasis added]. See also id., at para. 38 (“each Party seeks to establish the other’s responsibility based on the
violation of the principle of the non-use of force incorporated in Article 2, paragraph 4, of the United Nations Charter
and found in customary international law, and of the principle of non-intervention in matters within the domestic
jurisdiction of States; whereas the Parties are thus pursuing the same legal aims […]”); id., at para. 40; Application
of the Convention on the Prevention and Punishment of the Crime of Genocide, Counter-Claims Order, supra note 2,
at para. 33 (“as a general rule, the degree of connection between the claims must be assessed both in fact and in
law”); id., at para. 35 (“there is a legal connection between the principal claim and the counter-claim, in so far the
two Parties pursue, with their respective claims, the same legal aim, namely the establishment of legal responsibility
for violations of the Genocide Convention”); id., Declaration of Judge ad hoc Kreca, para. 3 (“[a] preponderance of
the ‘connection in law’ over the strictly understood ‘facts of case’ […] is, in my opinion, a normal consequence of
the relativity of the facts of the case”); Oil Platforms, Counter-Claim Order, supra note 115, at para. 38 (“with their
respective claims, the two Parties pursue the same legal aim, namely the establishment of legal responsibility for
violations of the 1955 Treaty”); Case Concerning the Land and Maritime Boundary Between Cameroon and Nigeria,
Order, supra note 123; Case Concerning the Factory at Chorzów, supra note 90, at p. 38 (PCIJ holding the
33
Juridical connexity is more problematic when investor’s claim concerns an alleged treaty
violation and the host State’s counterclaim is based on breach of contract. In that case, not only
will the nature of the claims be different since the treaty claim, e.g., an alleged failure to accord
the investment “full protection and security,” would be non-contractual in nature; the tribunal
would also be applying norms from different legal orders.125 The reason why this might constitute
an obstacle to the admissibility of counterclaims is linked to the second reason for permitting
counterclaims: the better administration of justice, and more specifically, the avoidance of
conflicting decisions. Whereas this would clearly be a concern for contractual claims and
counterclaims, it is not necessarily so for treaty claims versus contractual counterclaims. As
pointed out by ad hoc Committee in Vivendi, “[a] state may breach a treaty without breaching a
contract, and vice versa, and this is certainly true of these provisions of the BIT.”126 Thus, not
only would the reasons for allowing the counterclaim be less cogent; as cautioned by Judge Oda
in the ICJ Oil Platforms case, a too broad definition of counterclaims may lead to a situation in
which “we put what may have originally been somewhat distinct matters into one melting-pot
without making a careful examination of the essential character of [the] claim[s].”127
counterclaim to be “juridically connected with the principal claim”).
125 Due to the controversy concerning obligations of private parties under international law, the tribunal will
generally apply national law to the host State’s counterclaim, contractual or non-contractual. A. Nollkaemper,
Translating Public International Law into Corporate Liability, in FROM GOVERNMENT TO GOVERNANCE: THE
GROWING IMPACT OF NON-STATE ACTORS ON THE INTERNATIONAL AND THE EUROPEAN LEGAL SYSTEM 224 (W.P.
Heere ed., 2004) (“present international law does not contain rules imposing duties and liability on corporations”);
C.M. Vázquez, Direct vs. Indirect Obligations of Corporations Under International Law, 43 COLUM. J. TRANSNAT'L
L. 927, 932 (2005) (“[a]lthough there are exceptions, it remains true today that, for the most part, the obligations
imposed by international law are obligations of states”).
126 Vivendi, Decision on Annulment, supra note 33, at para. 95. See also SGS v. Pakistan, Decision on Objections to
Jurisdiction, supra note 17, at para. 147. Cf. Douglas, The Hybrid Foundations of Investment Treaty Arbitration,
supra note 49, at 237, 267-274 (referring to “asymmetrical jurisdictional conflicts”).
127 Oil Platforms, Counter-Claim Order, supra note 115, Separate Opinion of Judge Oda, para 8, available at
http://www.icj-cij.org/docket/files/90/7275.pdf (last visited June 14, 2007).
This may suggest that an investor, anxious to avoid counterclaims, ought to characterize its claim as a treaty claim
rather than as a contract claim. Although it is for each claimant to formulate its case, such formulation is nevertheless
subject to objective scrutiny by the tribunal, which may recharacterize the claim as being purely contractual. See,
e.g., Vivendi, Decision on Annulment, supra note 33, at paras. 98, 112; SGS v. Philippines, supra note 18, at para.
157; El Paso v. Argentina, ICSID Case No. ARB/03/15, Decision on Jurisdiction, April 27, 2006, at para. 60,
available at http://ita.law.uvic.ca/documents/elpasoEN.pdf (last visited June 14, 2007) (“the nature of the dispute
must be determined on objective grounds and not only on the basis of statements made by one or the other side.”);
Joy Mining Machinery Ltd v. Egypt, ICSID Case ARB/03/1, Award on Jurisdiction, July 30, 2004, at paras. 71 et
seq., available at http://ita.law.uvic.ca/documents/JoyMining_Egypt.pdf (last visited June 14, 2007); Impregilo SpA
v. Islamic Republic of Pakista, ICSID Case ARB/03/3, Decision on Jurisdiction, April 22, 2005, at paras. 255 et seq.,
available at http://ita.law.uvic.ca/documents/impregilo-decision.pdf (last visited June 14, 2007); Salini Costruttori
SpA and Italstrade SpA v. Jordan, ICSID Case ARB/02/13, Decision on Jurisdiction, Nov. 9, 2004, at paras. 136, et
seq., available at http://ita.law.uvic.ca/documents/salini-decision_000.pdf (last visited June 14, 2007). See also Z.
Douglas, Nothing if not Critical for Investment Treaty Arbitration: Occidental, Eureko and Methanex, 22(1) ARB.
34
The question arises whether there is similar juridical asymmetry in the case of so-called
“umbrella” or “sanctity of contract” clauses inserted in a large number128 of investment treaties;
and which in various terms obligate the host State to observe commitments entered into with
respect to investments.129 Article II(2)(c) of the U.S.-Argentina BIT, for instance, provides that
“[e]ach Party shall observe any obligation it may have entered into with regard to
investments.”130 Another example is Article 11 of the Swiss-Pakistan Bilateral Investment
Treaty: “Each Contracting Party shall constantly guarantee the observance of the commitments it
has entered into with respect to the investments of the investors of the other Contracting
Party.”131
Arbitral tribunals have reached divergent views with respect to the meaning and scope of such
“umbrella” clauses.132 While some have considered them incapable of granting a specific cause
INTL. 27, 40 (2006) (“The essential basis of a claim is not what the claimant says it is. Otherwise it would not be a
judicial test at all. This is a threshold question for the tribunal, which is bound to undertake an examination of the
juridical basis of the claim to determine whether it is properly classified as contractual or founded upon the treaty.”);
id., BRIT. Y.B. INTL L., at pp. 236-289. But see Eureko BV v. Republic of Poland, Partial Award and Dissenting
Opinion, August 19, 2005, available at http://www.investmentclaims.com/decisions/Eureko-Poland-
LiabilityAward.pdf (last visited June 14, 2007), criticized in Z. Douglas, Nothing if not Critical for Investment Treaty
Arbitration, at 38-44.
128 See, e.g., OECD, Interpretation of the Umbrella Clause in Investment Agreements, 3 WORKING PAPERS ON
INTERNATIONAL INVESTMENT, at 5 (2006), available at http://www.oecd.org/dataoecd/3/20/37579220.pdf (last
visited June 14, 2007) (“[i]t is estimated that, of the 2500 or more BITs currently in existence approximately forty per
cent contain an umbrella clause”); Gill et al., supra note 57, at 403, fn. 31 (2004) (“in a sample of bilateral
investment treaties taken from Investment Treaties (ICSID ed., 2003), 94 of 236 (about 40%) contained umbrella
clauses”).
129 See generally OECD, supra note 128, at 3 (noting that other formulations have also been used: “mirror effect,”
“elevator,” “parallel effect,” “sanctity of contract,” “respect clause,” and pacta sunt servanda); A.C. Sinclair, The
Origins of the Umbrella Clause in the International Law of Investment Protection, 20 ARB. INTL 411 (2004); id., at
412; R. DOLZER & M. STEVENS, at 82 (1995); W. Ben Hamida, La clause relative au respect des engagements dans
les traités d’investissement, in NOUVEAUX DÉVELOPPEMENTS DANS LE CONTENTIEUX ARBITRAL TRANSNATIONAL
RELATIF À L'INVESTISSEMENT INTERNATIONAL: NOUVEAUX DÉVELOPPEMENTS, LGDJ 53-106 (Ch. Leben et al., eds.
2006); Germany-Pakistan BIT, art. 7 (1959), available at
http://www.unctad.org/sections/dite/iia/docs/bits/germany_pakistan.pdf (last visited June 14, 2007) (“[e]ither Party
shall observe any other obligation it may have entered into with regard to investments by nationals or companies of
the other Party”).
130 United States-Argentine BIT, art. II(2)(c), available at
http://www.unctad.org/sections/dite/iia/docs/bits/argentina_us.pdf (last visited June 14, 2007), also referred to in El
Paso, Decision on Jurisdiction, supra note 127, at para. 70.
131 See Swiss-Pakistan BIT, supra note 50, at art. 11. See also Energy Charter Treaty, supra note 43, at art. 10 (note
that State Parties may, according to art. 26(3)(c) enter reservations with respect to the application of investor-State
arbitration provisions to the “umbrella” clause). Cf. ENERGY CHARTER SECRETARIAT, ENERGY CHARTER: A
READERS GUIDE, at 26, available at
http://www.encharter.org/fileadmin/user_upload/document/document1158668628.pdf (last visited June 14, 2007)
(four States (Australia, Canada, Hungary and Norway) have opted for the art. 26(3)(c) solution).
132 Cf. C. Schreuer, The Relevance of Public International Law in International Commercial Arbitration: Investment
35
of action for investors; others have held that the clauses allow investors to bring claims against a
host State when the latter have violated rights bestowed on such investors in a contract entered
into with the host State.133 The present author is prepared to follow the latter view. More
specifically, it is argued that the tribunal should follow a three-step process with respect to
“umbrella” clauses.
Since the clause is inserted in a treaty, the tribunal should first interpret the scope of the clause by
international rules of treaty interpretation, such as Articles 31 and 32 of the Vienna Convention
on the Law of Treaties.134 A textual interpretation of various clauses supports the view that they
create an international cause of action for investors, especially in view of the mandatory
language.135 This conclusion is supported by reference to material contemporaneous to the
emergence of the “umbrella” clause, such as documents relating to the Anglo-Iranian Dispute in
the early 1950s,136 the 1956-59 Abs Draft International Convention for the Mutual Protection of
Disputes, supra note 57, at 7 (“Arbitral practice on the effect of umbrella clauses is still unsettled […].”); van
Haersolte-van Hof & Hoffmann, supra note 107 (“This topic has triggered substantial debate and the case law on this
point is far from consistent.”).
133 For the reasoning of various tribunals on the issue of “umbrella” clauses, see, e.g., BP America Production Co.
and Others v. Argentine Republic, paras. 93-115, ICSID Case No. ARB/04/8, Decision on Preliminary Objections,
27 July 2006, available at http://ita.law.uvic.ca/documents/PanAmericanBPJurisdiction-eng.pdf (last visited June 14,
2007).