States and State-Owned Entities in Arbitration

Unlike other forms of commercial arbitration, where parties are usually business entities, arbitrations involving States or State-owned entities (“States”) can exhibit quite specific features.

Some key characteristics of disputes involving States could include the following:

• The relationship between the parties could involve important and politicised engagements, often long-term. For example, a country’s population might be dependent on private foreign investment for the provision of essential infrastructure, such as Libya’s man-made river project
• The sums involved in the dispute could be considerably higher than any other form of arbitration
• A substantial proportion of the money involved in the dispute could have originated from public funds
• A dispute could easily turn into a political issue. This is particularly likely where the State is the defendant, and the other party challenges an arbitration article or clause or an act or measure taken (or not taken) by the State, even more so if public funds and interest are at stake, particularly where the State raises a defence of sovereign immunity

This specialist nature of investor-State conflict affects the way parties handle their dispute.

This article looks at why international arbitration is considered the preferred way to resolve disputes involving States, as well as key advantages and disadvantages of the process, when suing a State.

Avoiding arbitration involving States, entirely

Of course, this is a key first step in any dispute process: negating the need to arbitrate, entirely.

The following constituent elements should go a long way to ensure that disputes can be resolved efficiently:

1. A robust contractual framework,
2. A profound working and technical knowledge of the commitment at hand and
3. Legal representatives with expertise in international contracts

Using the following alternative dispute resolution techniques with a suitably qualified third party, can help to resolve the conflict before the need to arbitrate arises:

• Negotiation
• Conciliation
• Mediation

The intention of the parties participating in any of the above methods, is to negotiate an amicable settlement before needing to resort to more formal, expensive and perhaps also, more public methods of dispute resolution.

In an ideal world, avoiding disputes entirely and reaching binding agreements with both parties, would make sense.

In reality, however, methods to avoid disputes completely, or to conclude amicable agreements when one party has been aggrieved (and potentially stands to make a significant loss) are perhaps more successful when utilized by the parties as a pre-condition to commencing any arbitration proceedings.

Why is arbitration preferred to litigation in disputes involving States?

The option to resolve disputes through international arbitration is included in the vast majority of investor-State dispute settlements (ISDS). The ISDS usually forms an integral component of any International Investment Agreement (IIA).

International arbitration features most prominently among investors seeking compensation for damage to their investment by the State.

In theory, there are a few reasons why trials in national courts (litigation) cannot meet the expectations of the investor. However, most importantly, court proceedings cannot eliminate suspicions of an actual or perceived lack of neutrality. In other words, fairness and equality of arms cannot be guaranteed, whereas this is possible in arbitration.

Advantages and disadvantages of arbitration involving States or State-owned entities

Actual or perceived advantages:

• Arbitration can depoliticise the dispute by allowing it to be settled in a neutral forum
• Privacy and security can be better achieved than proceedings through the national courts, such as when highly classified documents are produced for the evidentiary hearing
• States might find it easier to secure foreign financial investment when a reliable arbitration system is in place
• Both parties can ensure enforcement of the award (mitigating the risk of annulment due to unfairness)
• It levels the playing field between parties of different economical status. For example, a “small” State could have a case against a large foreign investor from a powerful State, and still have a fair hearing
• Interactions between a non-State party and a State can be more direct, obviating the need to involve the investor’s home state

Actual or perceived disadvantages:

• The experience of going through arbitration can lead to a breaking down of the relationship between the investor’s State and the defendant State. This might run counter to a primary strategic goal of many countries, especially those most focussed on attracting and promoting foreign investment
• Without rules governing time and cost-efficiency, which are present in litigation, costs of arbitral proceedings involving States, can be extremely high
• It may be particularly difficult to safeguard third-party rights in arbitration proceedings involving States, as they can be much more exclusive and private than in litigation.

Summary

“On balance, the advantages of arbitration in disputes involving States tend to outweigh any potential disadvantages; certainly more so than in the case of litigation.

“Any disadvantages can largely be mitigated through a strong choice of arbitrator, who would prioritise fairness and equality of arms. Furthermore, arbitral legislation worldwide is constantly evolving and improving with the times, meaning that international disputes involving States will similarly progress in the right direction to the benefit of the counterparties thereto.

“However, companies considering legal action against States still have a range of substantive and tactical issues to consider. Such issues could extend much further than those common in private commercial arbitrations.” – Lawrence Jacobson, In-House Barrister at Carlsons Solicitors

For expert legal advice regarding a dispute you may have, get in touch with Carlsons Solicitors.