Precedence in Investment Arbitration

In recent decades, investment arbitration has continued to be an expanding category of public international law. This growth is fueled by the fact that the law applied to international investment disputes is derived from numerous sources. Examples include bilateral investment treaties (“BITs”), multilateral investment treaties (“MITs”) and arbitral awards. Due to this diversity, certain dilemmas arise over the suitable manner in which these legal sources should be interconnected. One frequently asked question is whether it is accurate to say that a system of precedent operates within investment arbitration.

In order to examine this question, it is necessary to distinguish between the two “types” of precedent. The first is binding precedent. This is where the decision of a previous case must be followed in the decision of a new case. The second is persuasive precedent. This is where the ruling in a previous case may be followed, if considered beneficial, in a new case.

There is no unified international system to determine how binding precedent is established. Notwithstanding this, on a comparative level, two main criteria seem to emerge in this respect, leaving aside questions regarding obiter dicta and factual distinctions. Firstly, it is suggested that there needs to be a coordinated legal system in which the separate institutions and laws are purposively designed to interact with each other. For example, one possible aspect in the legal system’s design would be to allow a decision in one court to be appealed to another court. And secondly, this legal system may be required to establish a hierarchy whereby a legal forum at the same or lower level than the forum in which the original decision was rendered, considers itself obliged to follow the ruling in the original dispute.

When we apply these criteria to the investment law system, there is a lack of compatibility which suggests that a full scale adoption of binding precedent into the investment arbitration system cannot take place.

The first criterion is not met because BITs, which are the main source of investment law, have no defined link between them. For example, State A may enact a BIT with State B. It may also enact a BIT with State C. However, the two BITs may regulate investment law topics in a completely different manner depending on the political reality of each individual BIT negotiation process and thus they cannot be said to have any formal relationship with each other.

For the second criterion, there is no (and hardly can be) formal hierarchical relationship between tribunals operating under the auspices of various institutions. While there may be a formalized review procedure in ICSID proceedings, this is lacking in ICC or SCC arbitrations.

In practice, within arbitral case law, there are already so many divergent options that make it impossible to argue that a system of binding precedent exists. One example relates to “cooling off periods”. This term defines the timeframe between the notification of the dispute to the opposing party and the initiation of arbitral proceedings. Negotiations should take place during this period to try and reach an amicable settlement. Different investment arbitration cases have led to contradictory conclusions on whether cooling off periods are of a binding nature or not. Certain cases have stated that they are binding to the extent that if they are not complied with, the tribunal will not accept jurisdiction for the case. This occurred in Limited Liability Company AMTO v Ukraine whereby the tribunal emphasised the importance of how cooling off periods assist amicable dispute settlement and thus they should not be ignored. However, other cases such as Ethyl Corporation v The Government of Canada stated that cooling off periods do not have to be adhered to. Although, in this case the rejection of the claimant’s request to negotiate, and the tribunal’s view that negotiations were unlikely to have changed the mind of the Canadian government regarding the issue at hand, assisted the tribunal in reaching its conclusion.

Despite these problems, there are certain examples where precedent has been widely adhered to in the investment arbitration system. One example is the definition of the term investment. In the case of Salini Costriuttori v Morocco the tribunal set out four criteria to define precisely what an investment is (economic contribution, business risk, a benefit for the development of the host state and a significant duration). These criteria were subsequently cited in numerous cases which followed the Salini dispute. Therefore, it may be argued that precedent was formed in one particular case and thereafter adhered to with respect to the particular issue of outlining how to define an investment.

Thus, on the evidence of current practice, a mixture of opinions on the topic of precedent has arisen in investment arbitration cases. It is certainly admissible to say that some form of precedence has found its way into the system of investor-state disputes. On an overall level, it is possible to say that investment arbitration in practice often operates within a system of persuasive precedence, whereby if a tribunal is convinced that a previous arbitral decision provides suitable guidance, that previous award will influence their decision. However, considering the lack of consistency in case law and the non-fulfillment of the possible criteria listed above, it is unlikely that a system of binding precedent cam be established, whereby tribunals would be obliged to follow previous decisions.