In Daimler Financial Services AG v Argentine Republic, an ICSID tribunal considered whether Daimler, a German investor, could rely on the ‘most favoured nation’ (MFN) clause in the Argentina-Germany bilateral investment treaty (BIT) to import a more favourable dispute resolution provision from the Argentina-Chile BIT.
It held that it did not have jurisdiction to hear Daimler’s claim, on the basis that it had failed to first submit the dispute to the Argentine courts for 18 months, as required by the Argentina-Germany BIT. That provision acts as a limit on Argentina’s consent to arbitration and must be strictly complied with before the investor’s right to proceed to international arbitration arises.
The tribunal also held that the MFN clause did not extend to dispute resolution provisions. Therefore it did not enable investors to take advantage of arbitration clauses from Argentina’s other BITs. However, in a strongly worded dissenting opinion, Judge Charles Brower described the majority stance as “unconvincing” and “profoundly wrong“. In addition, one of the members of the majority, Professor Domingo Bello Janeiro, took a contrasting position on the issue of MFN application in this award compared to the position he took in an award in 2004 and he therefore provided a separate opinion in order to explain his “change of heart”.
This decision adds further jurisprudence – and even more contrasting dicta – to an area of international law that remains unsettled. Investors should bear this issue in mind and carefully consider the requirements of the dispute resolution provisions in any BIT upon which they may seek to rely, rather than assuming that an MFN provision will assist them to circumvent such provisions.
Daimler commenced ICSID arbitration proceedings seeking damages in relation to the numerous measures Argentina put in place in 2001 in an attempt to control and mitigate its currency crisis.
Argentina challenged the tribunal’s jurisdiction on the basis that Daimler failed to observe the requirement in Article 10 of the Argentina-Germany BIT that it submit its disputes to the Argentine courts for 18 months before pursuing arbitration. The dispute resolution clause in that BIT provides for a stepped procedure whereby disputes are first referred to negotiation, then the national courts of the host state, and then to international arbitration.
In response, Daimler asserted that it did not need to submit the dispute to the Argentine courts because it could import a more favourable dispute resolution clause from the Argentina-Chile BIT. Article 3 of that BIT provides that, if a dispute cannot be resolved by negotiation within six months, either party may choose to submit the dispute for resolution in the domestic court or to international arbitration.
The majority tribunal declined jurisdiction over the claim and held that the MFN clause in the Argentina-Germany BIT did not allow Daimler to benefit from the more generous dispute resolution rules in the Argentina-Chile BIT.
The 18 month litigation prerequisite
They concluded that the 18 month prerequisite was mandatory, noting that:
- the dispute resolution process is phrased in mandatory terms (i.e. with repeated use of the word “shall”).
- by ordering the dispute resolution process into four discrete paragraphs, with each referring back to the last, it makes clear that the contracting state parties intended for the steps to follow one another sequentially. It does not provide a menu of dispute settlement options available to disputing parties on an ‘a la carte’ basis.
- the mandatory, sequential process clearly applies in the case of international arbitration. A dispute may be submitted to international arbitration only if: a) it has already been submitted to the domestic courts for 18-months and no final decision has been rendered or the dispute otherwise continues after that time; or b) the disputing parties so agree.
The majority dismissed the argument that the 18 month domestic court requirement constitutes a mere procedural directive rather than a jurisdictional pre-requisite. In each of the other cases cited by Daimler, the tribunals allowed claimants to skip prescribed waiting periods not as a general principle but rather on the basis of the peculiar factual circumstances of each case. Moreover, in each case, the tribunals stressed that the prescribed waiting periods had, in any event, passed in the interim.
They also stressed that sovereign states are free to agree to any treaty provisions they so choose, provided these provisions are not futile and are not otherwise contrary to peremptory norms of international law. Evidence suggested that Argentine courts can – and frequently do – resolve disputes in less than 18 months.
Application of the MFN provisions to the dispute resolution provisions
The provision in the Argentina-Chile BIT allows an investor to decide whether it submits its dispute to arbitration or litigation. However, the tribunal held that the BIT’s MFN provisions did not permit Daimler to circumvent the requirement in the Argentina-Germany BIT to submit the dispute to the Argentine courts.
The MFN provision provides that neither party should “accord investments in its territory…treatment less favourable than the treatment accorded investments of its own nationals or companies or investments of nationals or companies of any third country“.
The tribunal noted that while the word “treatment” is used in almost all MFN clauses it is not specifically defined in any BIT. Therefore it falls to the tribunal to establish the ordinary meaning of this term in the context and in the light of the BIT’s object and purpose.
The tribunal relied in part on a set of guidelines issued by the World Bank in 1992. While only “soft law”, the majority said the guidelines indicated the prevailing view that the term referred to a host state’s direct treatment of the investment and not to the conduct of any international arbitration arising out of that treatment. This was supported by the text of the MFN. It is not a broad MFN clause which extends to “all matters” (previous investment treaty tribunals have concluded that the broader “all matters” MFN clauses indicate that the contracting states intended the MFN treatment to cover dispute resolution). Although not opining on the point, the majority also took issue with the assumption that a treaty requiring litigation as a prelude to arbitration is necessarily less favourable than one that obliges investors to choose one or the other.
Dissent and a change of heart
Judge Brower asserted that the majority’s reliance on the World Bank guidelines was misplaced and that for decades before the guidelines were published, fair and equitable treatment had been seen to encompass proper and timely access to dispute settlement and observance of due process. He also noted that it is difficult to imagine a more fundamental aspect of an investor’s treatment by a host government than that investor’s ability to exercise and defend its legal rights by prompt access to dispute settlement mechanisms, and fair and efficient administration of justice.
Conversely, Professor Bello Janeiro endorsed the award, despite having previously sat on a tribunal which concluded the reverse (Siemens A.G. v. Argentine Republic). In his separate opinion he noted that:
- judicial practice has become more varied and more awards have been rendered that disagree with the position maintained in the Siemens arbitration, noting in particular the approach of the tribunal in Wintershall v Argentina (ICSID Case No. ARB/04/14).
- the Siemens tribunal did not conduct an analysis of several of the points now covered extensively by this award.
The Daimler decision is yet another example of the dichotomy of views that exist on how these clauses should be interpreted. While some states, such as the UK and the US, have sought to make the exact scope of the MFN protection as clear as possible, it remains almost impossible to predict how a tribunal would rule on this issue.
In particular, of the four significant MFN decisions over the past year or so, the first two decisions - Impregilo SpA v Argentina Republic (ICSID Case No ARB/07/17) and Hochtief AG v Argentina (ICSID Case No ARB/07/31)– both found that an MFN clause can extend to dispute resolution (note also that in both cases there dissenting opinions were issued by one of the arbitrators to the opposite effect). However, in the most recent case before Daimler (ICS v Argentina, UNCITRAL, 10 February 2012), the tribunal went the other way and concluded that MFN provisions cannot extend to dispute resolution provisions. Investors should bear this issue in mind and carefully consider the requirements of the dispute resolution provisions in any BIT upon which they may seek to rely.
Daimler Financial Services AG v Argentine Republic (ICSID Case No. ARB/05/1) (Award on Jurisdiction) (22 August 2012),
A version of this article has previously been published by Mike McClure, Herbert Smith LLP on PLC Arbitration.