Two recent decisions by tribunals have advanced the body of tribunal practice considering the issue of counterclaims by respondent states in investment treaty arbitration: Burlington Resources Inc. v. Ecuador, in which the tribunal awarded damages against the investor for breach of Ecuadorian environmental law in the performance of its investment, and Urbaser SA and Consorcio de Aguas Bilbao Bizkaia v. Argentina, in which the tribunal accepted jurisdiction to hear Argentina's counterclaim asserting that the investor had violated international human rights obligations. These decisions arise in the context of conceptual challenges to the pursuit of counterclaims in investment arbitration.
The challenges of advancing counterclaims in investment treaty arbitration
The question of whether, as a matter of principle, states can assert counterclaims against investors in investment arbitration remains under consideration. While some tribunals have either accepted jurisdiction to do so or have provided positive indications of their in principle willingness to hear such claims, others have declined to do so, and these decisions have typically relied on the features of the particular treaties being considered. Any wider acceptance by tribunals of the possibility of counterclaims can only develop in an incremental fashion on a case by case basis.
The issue of whether a counterclaim can be brought might be more easily resolved in the context of investment arbitration claims under contractual arbitration clauses. Tribunals may be more willing to accept the possibility of contractual counterclaims by the state as the complement to the contractual claims advanced by the investor, and such counterclaims may be able to be used to offset the amounts claimed by the investor (although such claims may still be afflicted by the same conceptual difficulties discussed below).
In arbitration commenced under investment treaties, however, there are myriad variables which may have a bearing on the way tribunals approach this issue, most of which go either to the critical issue of the scope of the investor's consent to arbitration or to the existence of actionable obligations on the investor (including in the relevant treaty) and the related issue of the tribunal's competence to make rulings on such obligations to the extent that they rely on municipal law or international law principles beyond the realm of investment law.
Chief among these variables is the wording of the treaty in relation to the disputes which can be referred to arbitration. Very few treaties expressly contemplate the possibility of counterclaims by states. A notable exception is the Common Market for Eastern and Southern Africa Investment Agreement 2007, Article 28(9) of which allows counterclaims by states asserting that the investor has not fulfilled its obligations under the Agreement itself, including the obligation to comply with domestic measures. Articles 14.2 and 14.11 of the draft Indian Model BIT published in 2015 also contained provisions expressly permitting counterclaims by the state against the investor for a breach of specific obligations imposed on the investor under the treaty, including with regard to corruption, disclosure standards, taxation and compliance with host state law. However, these provisions were removed in the final version of the Indian Model BIT published in early 2016.
Indeed, some treaties have been interpreted implicitly to exclude the possibility of counterclaims, by permitting only arbitration of disputes in connection with breach of specific obligations in the treaty expressed to apply only to loss or damage incurred by the investor. It was on the basis of such a provision in NAFTA Chapter 11 that the majority of the tribunal in Roussalis v. Romania declined to accept jurisdiction over a counterclaim by the state.
However, most treaties are more neutral in their dispute resolution provisions and many require only a dispute arising between an investor and the host state in connection with an investment, without specifying which party should have occasioned the loss. As discussed further below, the tribunal relied on such a provision in accepting jurisdiction over a counterclaim in the recent Urbaser decision.
In determining whether the investor's consent to arbitration in commencing its claim can be said to encompass a counterclaim by the state, tribunals may have regard to the arbitral rules referred to in the treaty. Many of these rules expressly contemplate counterclaims (for example Rule 40(1) of the ICSID Arbitration Rules, Article 5 of the ICC Rules, Article 4 of the UNCITRAL Rules 2010, Article 2 of the LCIA Rules). However, the fact that some of these arbitral rules were designed to apply to commercial or contractual arbitration, where the asymmetry of investment arbitration and its associated consent issues do not typically arise, may make reliance on these provisions to derive an investor's consent to a state's counterclaim more complicated. Moreover, arbitral rules may in any event make the availability of counterclaims expressly subject to the consent of the parties (such as ICSID Arbitration Rule 40(1) and Article 46 of the ICSID Convention). In this regard, the SIAC Investment Arbitration Rules 2017 are of interest as these are arbitral rules designed specifically for investment arbitration which expressly contemplate counterclaims (see Rule 4, Rule 17 etc.).
Applicable law and the tribunal's competence
Further key questions are what (if any) obligations on the investor are actionable in such a counterclaim and what competence does the tribunal have to make rulings on such obligations.
Investment treaties do not commonly impose substantive obligations on investors, other than perhaps to establish their investments in accordance with host state law. Even then, any such obligation under a treaty is often limited to the initial establishment of the investment and not the performance of the investment thereafter. The wording of any applicable law provision in the treaty, including the existence or otherwise of references to municipal law, may be relevant for a tribunal in deciding its competence to examine alleged breaches of host state law in the context of a counterclaim. For example, in Goetz v. Burundi II, the tribunal relied on both the broadly worded dispute resolution clause in the BLEU-Burundi bilateral investment treaty and the fact that the applicable law clause referred to both municipal law and international law in order to conclude that it had jurisdiction to consider the state's counterclaim.
Where an applicable law clause makes a broad reference to international law, the question is whether obligations can be drawn from international law and imposed upon the investor in the context of a treaty arbitration, and whether it is within the tribunal's competence to rule on such obligations. The tribunal's decision in Urbaser (discussed below), which relied on allegations of the investor's breach of international human rights obligations, is a notable advance in tribunal practice in this regard.
In addition, tribunals may view as significant the degree of connection between the investor's primary claim and the basis for the counterclaim, and may require a connection beyond the mere fact of being a dispute arising out of the same investment. Some tribunals have required the counterclaim to be closely connected to the investor's allegations of breach of the treaty, such as in Saluka Investments B.V. v. Czech Republic.
The question of whether investment arbitration is the appropriate forum to resolve particular categories of dispute (including where the counterclaim is based on types of law which the tribunal may not believe itself to be competent to apply) also involves considering whether the investor is the right party to be subject to the substance of the counterclaim. The investor may not itself have operated in the host state and an allegation of a breach of host state law may properly attach to the investment (such as where the investment is an ownership interest in a local subsidiary) rather than the investor.
Conclusion: the difficulty of asserting counterclaims in investment arbitration
The conceptual difficulties associated with counterclaims by respondent states are, as with many aspects of investment arbitration, likely to continue to be resolved by reference to the peculiarities of particular treaties and the particular claims sought to be advanced by states. State-driven allegations against investors will likely continue to be relevant to investment arbitration in other indirect ways. These include claims of improper conduct by investors used as a basis to justify the state's actions and defend against claims of unfair treatment, or else to seek to reduce damages or costs awards on the basis of an investor's "contributory negligence" (such as in Occidental Petroleum v. Ecuador). States may also seek to rely on conduct by investors in asserting the claims themselves so as to seek "moral damages", such as appear to have been – unusually – claimed by the state (possibly for reputational damage), in Lundin Tunisia B.V. v. Republic of Tunisia, although these were not awarded.
Two recent decisions regarding counterclaims
Urbaser SA and Consorcio de Aguas Bilbao Bizkaia v. The Argentine Republic
In Urbaser, the dispute arose out of the termination of a concession for water and sewerage services in the Province of Buenos Aires granted to the claimants' subsidiary. In the course of the ICSID arbitration under the Spain-Argentina bilateral investment treaty, Argentina sought to introduce a counterclaim against the claimants alleging that through their administration of the concession (notably, an alleged failure to make appropriate investments), they had breached international human rights obligations in the form of the human right to water.
In December 2016, the tribunal issued an Award accepting jurisdiction over Argentina's counterclaim, but dismissing the counterclaim on the merits. In doing so, the tribunal relied on the wording of the treaty's dispute resolution provision which referred only to a dispute arising between the parties and being submitted to arbitration “at the request of either party to the dispute” (with the tribunal even going as far as to suggest that the treaty may permit the host state to commence a claim on its own initiative). The tribunal rejected the claimants' argument that the scope of their consent to arbitration had been implicitly limited to exclude counterclaims, as the claimants had been silent on this point in accepting Argentina's offer of arbitration under the treaty, and, in any event, if such acceptance had been in narrower terms than the offer then it would not have encompassed the claimants' claims either.
The tribunal concluded that there was a manifest connection between Argentina's counterclaim and the claimants' claims, as they were both based on the same investment in relation to the same concession. The tribunal also considered it significant that there was a "legal connection" in the form of the counterclaim not being alleged as a matter of domestic law only. It noted favourably Argentina's argument that what was at issue was a violation of the fundamental right of access to water, which was the purpose for which the claimants' investment – by which the protections of the treaty were engaged – was undertaken in the first place. Finally, the tribunal rejected the claimants' argument that a ruling on human rights obligations was as a matter of principle outside its competence, concluding that the dispute must only relate to the investment in order to be within the scope of the tribunal's authority.
On the merits, the tribunal agreed that the treaty primarily imposed obligations on the host state rather than the investor, but disagreed with the claimants' argument that there were no obligations at all on the investor, noting that the reference of disputes to arbitration under the treaty applied to “disputes arising between a Party and an investor of the other Party in connection with investments within the meaning of this Agreement” without making any distinction as to the basis for the rights to be enforced through the dispute.
The applicable law provision in the treaty referred to the application of the treaty itself as well as to domestic law of the host state and the general principles of international law. In regard to the latter, the tribunal stated that "such reference would be meaningless if the position would be retained that the BIT is to be construed as an isolated set of rules of international law for the sole purpose of protecting investments through rights exclusively granted to investors". It went on to conclude that this reference may in principle incorporate international human rights obligations. In so doing, the tribunal stated that it was "reluctant" to accept the claimants' argument that corporations cannot be the subject of obligations under international law, noting that the BIT itself conveys rights on corporations (as investors) under international law and that it cannot be the case that international law obligations on corporations are necessarily excluded.
The tribunal also relied on a range of human rights instruments and corporate social responsibility principles, such as the Universal Declaration of Human Rights, the UN Guiding Principles on Business and Human Rights and UN General Assembly resolutions, which in the tribunal's view established not only a state obligation to protect human rights (including the right to water) but also an obligation on private parties not to engage in activity aimed at destroying such rights. However, the tribunal considered that this constituted a negative obligation rather than a positive obligation on the claimants to in fact provide water, and that the claimants' obligations under their concession contract enabled Argentina to fulfil its own (positive) human rights obligations but did not amount to a positive obligation on the claimants themselves in this regard.
Accordingly, despite accepting both that it had jurisdiction to determine Argentina's counterclaim and that the consideration of international human rights obligations was within its competence, the tribunal ultimately concluded that there were no applicable human rights obligations which the claimants had breached and the counterclaim was dismissed.
This case is significant as an unusual example of a tribunal's willingness to take account of and apply international law principles beyond the international investment law principles typically considered by tribunals in this context, and to do so at the respondent state's instigation through a counterclaim.
Burlington Resources Inc. v. The Republic of Ecuador
In another recent decision, in February 2017 the ICSID tribunal in Burlington ordered the claimant to pay US$41.7 million to Ecuador in satisfaction of Ecuador's counterclaim. The counterclaim, which was raised in the context of an unlawful expropriation claim under the United States-Ecuador bilateral investment treaty, alleged breaches of Ecuadorian environmental law and contractual obligations by Burlington in failing to maintain certain oilfield infrastructure and return it to Ecuador in good condition.
Significantly, Burlington agreed with Ecuador in 2011 not to contest the tribunal's jurisdiction over Ecuador's counterclaim and consequently the tribunal was able to avoid this issue and address the counterclaim solely on its merits. In considering the Ecuadorian law issues raised, the tribunal reached conclusions on issues such as burden of proof, limitation periods, applicable interest rates and the legal meaning of environmental law concepts under Ecuadorian law.
A similar counterclaim has also been asserted by Ecuador against Burlington's consortium partner, Perenco, in the context of a parallel, related arbitration commenced by Perenco against Ecuador. While the prospect of double recovery by Ecuador through its two counterclaims was considered by the Burlington tribunal, it concluded that it could only reach its decision based on the issues before it.
Given the parties' agreement on jurisdiction, this case is significant less from the perspective of legal principle. However, it is nonetheless an unusual example of a counterclaim being successfully advanced by a respondent state. The damages awarded by the tribunal pursuant to the counterclaim were only a fraction of the US$2.8 billion Ecuador had sought (although a substantial sum nevertheless) and were awarded in parallel with the tribunal's award of damages to Burlington in the order of US$379.8 million (plus interest) for its primary claim. Nevertheless, the tribunal's willingness to engage in a very substantial analysis of Ecuadorian environmental law remediation obligations – a separate issue from the expropriation through windfall taxes alleged by the claimant in the primary claim – is notable.