Third time lucky for Argentina as tribunal rules MFN clause does not extend to dispute resolution

In ICS Inspection and Control Services Limited (United Kingdom) v The Argentine Republic (PCA Case No. 2010-9), a tribunal at the Permanent Court of Arbitration in The Hague has held that a requirement in the Argentina-UK BIT to first submit disputes to the Argentine courts for 18 months acts as a strict limit on Argentina’s consent to arbitration and must be complied with before the investor’s right to proceed to international arbitration arises.  Accordingly, the tribunal concluded that it did not have jurisdiction to hear a claim brought by a UK investor on the basis that the UK investor had failed to first submit the dispute to the Argentine courts. 

Moreover, the tribunal held that the “most favoured nation” clause in the UK-Argentina BIT did not extend to dispute resolution, so as to enable investors to “import” arbitration clauses from Argentina’s other BITs.  Interestingly, the rejection of the MFN argument in this case runs contrary to two recent awards against Argentina considering the same issue. 

Facts

Argentina and the UK signed a BIT on 11 December 1990.  Like many BITs, it contains a “most favoured nation” (MFN) clause (Article 3), which ensures that state parties to a treaty provide treatment no less favourable than the treatment they provide investors from any third state.  In practice, MFN clauses allow investors to rely on more favourable provisions found in other treaties concluded by the host state.  The Argentina-UK BIT also provides that any dispute shall be submitted to international arbitration only: (i) eighteen months after the dispute has first been submitted to the Argentine national courts; or (ii) where the Argentine national court has made a final decision, but the parties are still in dispute (whichever is earlier), unless the parties to the dispute agree otherwise (Article 8).

ICS sought to commence arbitration proceedings seeking US$25 million damages for Argentina’s alleged failure to pay for auditing services for a government-sponsored scheme to inspect imports bound for the country before they were shipped.  

Argentina challenged the tribunal’s jurisdiction, on the basis that ICS failed to observe the requirement in Article 8 to first submit disputes to the Argentine courts.  In response, ICS 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-Lithuania BIT (which provides that if a dispute cannot be resolved by negotiation within six months, either party may choose to submit the dispute to the domestic court or to international arbitration). 

Decision

The tribunal held that the MFN clause in the Argentina-UK BIT did not extend to the dispute resolution provisions and therefore did not exempt ICS from complying with the litigation prerequisite.

The 18 month litigation prerequisite under Article 8

The tribunal noted that, while it holds an inherent power over procedure, its jurisdiction is based exclusively on consent.  Indeed, the only inherent jurisdiction held by an arbitral tribunal is its power to determine its own jurisdiction within the admissibility parameters agreed by the contracting states.  Accordingly, the key question was whether the requirement of prior submission to the Argentine courts falls within the conditions to which Argentina’s consent to arbitration is subject or whether non-compliance nevertheless does not affect the underlying consent to arbitrate the present dispute.

ICS argued that consent to arbitration is merely postponed and is, therefore, inevitable.  However, the tribunal determined that consent is not yet present.  The BIT explicitly provides strict conditions which must be satisfied before the investor’s right to proceed to international arbitration arises.  Those conditions were not present and, in such circumstances, the tribunal did not have jurisdiction to hear the claim. 

Moreover, the tribunal rejected ICS’s argument that the litigation prerequisite was futile as the dispute would not realistically be resolved within 18 months. Rather, it held that ICS needed to comply with the requirement as set out in the BIT. The tribunal also noted that its analysis accorded with the recent judgment of a US Court of Appeals in proceedings to set aside the award in Republic of Argentina v BG Group PLC, 2012 WL 119558 (DC Cir. Jan. 17, 2012), also under the Argentina-UK BIT.  In that case, the court rejected the tribunal’s decision to excuse the claimant’s non-compliance with the 18-month litigation prerequisite, notwithstanding the fact that complying with such a requirement was very difficult (or even impossible) in the context of the economic emergency.

Does the MFN clause at Article 3(2) apply to dispute settlement provisions?

The tribunal noted that while the word “treatment” is used in almost all MFN clauses, it is not specifically defined in any BIT.  “Treatment”, in the absence of any contrary stipulation in the treaty itself, most likely referred only to the legal regime to be respected by the host state in conformity with its international obligations. The settlement of disputes meanwhile remained an entirely distinct issue, covered by a separate and specific treaty provision.

Even if the term “treatment” could be understood as encompassing dispute resolution provisions, the instant MFN clause still does not apply to international arbitration. The host state’s obligation extends no further than providing the investor with “treatment” that is no less favourable in respect of domestic dispute resolution (that is, dispute resolution “in its territory”).  Treatment outside the territory of the host state – namely, international arbitration – does not fall within the scope of the clause.

The tribunal was also persuaded by Argentina’s argument that, if the MFN clause was to apply to dispute resolution, this would run counter to the principle of effectiveness by which it presumed that each provision of the BIT was intended to serve some purpose.  In particular, after signing the Argentina-UK BIT, Argentina concluded five subsequent BITs which included the 18-month litigation prerequisite.  If Argentina had generally intended for its BITs’ MFN clauses to apply to their dispute resolution provisions, it concluded those five subsequent BITs for no good reason, given that it had already concluded three BITs without this requirement.

Furthermore, notwithstanding its decision on the application of the MFN clause, for completeness the tribunal noted that ICS had failed to show that the dispute resolution clause in the UK-Argentina BIT constituted “less favourable” treatment.  Indeed, while the Argentina-Lithuania BIT constituted a “fork in the road” provision that gives investors the choice between local remedies and international arbitration, the Argentina-UK BIT gives investors “two bites at the apple: once before the domestic courts … and again before an international arbitral tribunal“. 

Comment

The issue of the application of MFN clauses to dispute resolution provisions has been one of the most hotly debated topics in international investment law in recent years.  This decision adds further jurisprudence to an area of international law that is already inconsistent such that either side to the argument can support its position by reference to previous awards. 

Interestingly, the tribunal’s rejection of the MFN argument is in contrast to two recent cases brought against Argentina – Impregilo SpA v Argentina Republic (ICSID Case No ARB/07/17) and Hochtief v Argentina (ICSID Case No. ARB/07/31).  In both Impregilo and Hochtief, the majority concluded that the claimant could rely upon the MFN clause in their respective BITs to benefit from the dispute resolution mechanisms in Argentina’s other BITs, although both awards included dissenting opinions which cautioned against allowing claimants to bypass a treaty’s jurisdictional requirements by invoking an MFN clause. 

It will be interesting to see whether the ICS decision, together with the dissenting opinions in Impregilo and Hochtief, represent a sea change in the approach international tribunals take to the issue of whether MFN treatment applies to dispute resolution.  In any event, regardless of any sea change, the ICS decision is yet another example of the dichotomy of views that exist in relation to how such 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 would appear that the issue of the proper scope and effect of MFN clauses will remain hotly debated for years to come.

Mike McClure, Herbert Smith LLP, Moscow

A version of the Herbert Smith briefing has been published by Practical Law Company.

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