Updates on Investor-State Arbitration: Frontier Petroleum

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We had, in a previous post, given justifications for not following Investor-State Arbitrations. The main reason why we have not done it so far is because of time constraint: if we begin to deal with non-commercial arbitrations, the focus on commercial arbitration, which is the primary area of focus in this blog, would be lost. However, considering the recent White Industries arbitration and other Investor-State arbitrations invoked against India, lawyers and law students in India cannot afford to ignore the developments taking place in Investor-State arbitration. More importantly, after White Industries, an award which cannot be enforced due to prolonged challenge proceedings pending in India, can be indirectly enforced through a BIT. This development has led to another mode of enforcing, albeit indirectly, a commercial arbitral award. For these reasons, we plan to provide monthly updates of the important developments in Investor-State arbitration. 

Although this post would not be a monthly roundup, we thought we'll provide details of the the final award in Frontier Petroleum Services Ltd. v. The Czech Republic which is more or less similar to the White Industries case but the conclusions are diametrically opposite. Another interesting aspect of Frontier Petroleum  is the holding that the tribunal can review whether the interpretation afforded by the local courts to "public policy" under the New York Convention was arbitrary or discriminatory. Does this mean that the tribunal can hold invalid a substantively broader interpretation of the notion of public policy? The Award elaborates on this aspect. Considering that an award set aside on the ground of public policy of the seat can be questioned under the BIT, this decision should be interesting for the followers of Investor-State Arbitration as well as the followers of commercial arbitration. Several grounds raied in Frontier Petroleum such as fair and equitable treatment, obligations to provide full protection and security have also been raised in the Notice of Dispute given by Vodafone International Holdings BV (see here for more details on the Notice. We quote the relevant portions of the Award in extenso to aid those who would not have the time to go through the 192 page award. For those who want to, we have posted the link to the Award at the end of the post. Happy Reading!

Frontier Petroleum Services Ltd. v. The Czech Republic:

Date of Award: 12 November 2010

Tribunal: David A.R. Williams QC, Presiding Arbitrator, Henri Alvarez QC, & Christoph Schreuer

Registry: Permanent Court of Arbitration

Aspects in the Award:

• Jurisdictional objections- when to be made and waiver of right, interpretation of Article 21(3) of the UNCITRAL Arbitration Rules 1976
• Meaning of "Measure"
• Failure to enforce arbitral award as a breach of the BIT ["The Tribunal also notes that Article 1(a) of the BIT provides that “[a]ny change in the form of an investment does not affect its character as an investment”. Accordingly, by refusing to recognise and enforce the Final Award in its entirety, the Tribunal accepts that Respondent could be said to have affected the management, use, enjoyment, or disposal by Claimant of what remained of its original investment."]
• Obligation to Provide Full Protection and Security ["The wording of these full protection and security clauses suggests that the host state is under an obligation to take active measures to protect the investment from adverse effects that stem from private parties or from the host state and its organs. The mere fact, however, that the investor lost its investment is insufficient to demonstrate a breach of full protection and security. In a number of cases tribunals have suggested that the standard of full protection and security applies exclusively or preponderantly to physical security and to the host state's duty to protect the investor against violence directed at persons and property stemming from state organs or private parties. But, there are also authorities which show that the principle of full protection and security extends beyond protection against physical violence to legal protection for the investor. it is apparent that the duty of protection and security extends to providing a legal framework that offers legal protection to investors – including both substantive provisions to protect investments and appropriate procedures that enable investors to vindicate their rights. In this Tribunal’s view, where the acts of the host state’s judiciary are at stake, “full protection and security” means that the state is under an obligation to make a functioning system of courts and legal remedies available to the investor. On the other hand, not every failure to obtain redress is a violation of the principle of full protection and security. 
• Creation of Favourable Conditions and Fair and Equitable Treatment ["The typical situations [under this head] most relevant to the present case are (i) protection of the investor’s legitimate expectations; (ii) procedural propriety and due process; and (iii) action in good faith. identify some concrete principles. The typical situations most relevant to the present case are (i) protection of the investor’s legitimate expectations; (ii) procedural propriety and due process; and (iii) action in good faith... To assess whether court delays are in breach of the requirement of a fair hearing, [the aspects to be taken] into account [are] the complexity of the matter, whether the Claimants availed themselves of the possibilities of accelerating the proceedings, and whether the Claimants suffered from the delay...  In order to constitute a breach of fair and equitable treatment on the grounds of procedural impropriety and a lack of due process or bad faith, other tribunals have considered factors including a failure to hear the investor, lack of proper notification, persistent appeals to local favouritism, and denial of access to the courts... The refusal of the bankruptcy courts to recognise and enforce the first and second orders granted in the Final Award on the ground that doing so would be contrary to Czech public policy appears consistent with Czech law. Hence it is open for this Tribunal to find in light of all the evidence, and it does so find, that the courts would not have come to a different conclusion had they given Claimant a hearing. This failure to provide a hearing had no bearing on the final outcome."]
• Failure of Officials of the Host State to Assist Claimant, and Failure to Provide Means to Enforce Arbitral Award ["As to the Final Award, the Tribunal rejects Respondent’s argument that this Tribunal does not have the power to review the decision of a national court’s conception of the public policy exception under the New York Convention. The Tribunal’s role under this claim is to determine whether the refusal of the Czech courts to recognise and enforce the Final Award in full violates Article III(1) of the BIT. In order to answer this question, the Tribunal must ask whether the Czech courts’ refusal amounts to an abuse of rights contrary to the international principle of good faith, i.e. was the interpretation given by the Czech courts to the public policy exception in Article V(2)(b) of the New York Convention made in an arbitrary or discriminatory manner or did it otherwise amount to a breach of the fair and equitable treatment standard… It is a cardinal rule of the international law on denial of justice that erroneous decisions of national courts on questions of domestic law do not involve the international responsibility of the state. Therefore, even if Claimant could establish that Respondent incorrectlyapplied the New York Convention public policy exception, such an error of law would not amount to the denial of justice in breach of Article III of the BIT… As to the Final Award, the Tribunal rejects Respondent’s argument that this Tribunal does not have the power to review the decision of a national court’s conception of the public policy exception under the New York Convention. The Tribunal’s role under this claim is to determine whether the refusal of the Czech courts to recognise and enforce the Final Award in full violates Article III(1) of the BIT. In order to answer this question, the Tribunal must ask whether the Czech courts’ refusal amounts to an abuse of rights contrary to the international principle of good faith, i.e. was the interpretation given by the Czech courts to the public policy exception in Article V(2)(b) of the New York Convention made in an arbitrary or discriminatory manner or did it otherwise amount to a breach of the fair and equitable treatment standard… Article V(2)(b) of the New York Convention gives a competent authority in the country where recognition and enforcement is sought the discretion to refuse the recognition and enforcement of an arbitral award if the competent authority finds that the recognition or enforcement of the award would be “contrary to the public policy of that country… In the present case, this refers to the public policy of the Czech Republic. It is widely accepted that while the reference to “public policy” in Article V(2)(b) of the New York Convention refers to international public policy, it is nonetheless a reference to the particular national conception of international public policy that is relevant rather than to a conception of public policy that is in some way detached from the legal system at the place where recognition and enforcement is sought. States enjoy a certain margin of appreciation in determining what their own conception of international public policy is... Put another way, was the decision by the Czech courts reasonably tenable and made in good faith?"]
• Costs under the UNCITRAL Arbitration Rules including costs expended towards the tribunal and cost of legal representation.

The Award can be accessed from here (pdf).