Volume 43 | Number 3

The Convergence of Renewed Nationalization, Rising Commodities, and “Americanization” in International Arbitration and the Need for More Rigorous Legal and Procedural Defenses

by Kevin T. Jacobs & Matthew G. Paulson

Summary

1. Introduction
2. Burgeoning International Arbitration
   1. Overview of International Arbitration
   2. Arbitral Proceedings
   3. "Americanization" of International Arbitration
3. Concession Agreements, Nationalization, and its Resurgence
   1. From Concessions to Contracts: The Birth and Development of Production Sharing Agreements and National Oil Companies
   2. Historical Nationalization
      1. A Brief Overview of Early Arbitrations Involving Nationalization
         1. Libyan Nationalization Cases
         2. Iran-United States Claims Tribunal
   3. Nationalization in Latin America
4. New Challenges in International Arbitrations: More Sophisticated and Aggressive Defenses to Investor Claims and the Need for a More Rigorous Use of Legal Defenses and Procedural Safeguards
   1. Legal Responses: More Rigorous Use of Legal Defenses and Early Resolution of Claims Subject to Them
      1. Prescription
      2. Laches
      3. Estoppel by Representation
      4. Acquiescence
   2. Procedural Safeguards
      1. Arbitral Rules Regarding Preliminary Decisions
      2. Disclosures by Party-Appointed Experts
5. Conclusion

{pagebreak}

I. Introduction

By the end of the 20th century, international arbitration had emerged as the preeminent mechanism to resolve international commercial disputes, particularly disputes between foreign investors and sovereign nations.  Indeed, in the 1990s, globalization grew exponentially with previously-closed markets—such as Latin America—opening to foreign investors for the first time in decades.  Accompanied with this globalization was often the acceptance of international arbitration, as exemplified by its inclusion in dozens of bilateral investment treaties (“BITs”) and regional trade pacts, such as the North American Free Trade Agreement (“NAFTA”).

However, over the past decade new trends have materialized presenting challenges to international arbitration.  First, a rising tide of nationalization emerged in many countries, including some of the countries that welcomed foreign investment and privatization in the 1990s.  Second, many of the foreign investments made in the 1990s related to natural resources such as oil, gas, timber, copper, tin, and other minerals;¹ and the market price for these commodities, which had bottomed out for many in the 1990s, has now risen to all-time high levels.  Accordingly, the monetary consequences of expropriation and breached investment contracts have grown enormously.  Finally, arbitration has evolved from a primarily European institution to one reflecting some degree of American-style aggressive tactics.  Thus, nations now utilize increasingly hard-line, multi-layered, and novel strategies in defending the arbitral claims they face and improving their leverage with aggrieved investors.

To maintain its position as the standard bearer for fair, cost-effective, and timely resolution of disputes, international arbitration must manage these new challenges with strategies of its own.  Part I of this article outlines international arbitration and the trend of “Americanization.” Part II provides a historical perspective on nationalization, from the resolution of significant early arbitral disputes to its current resurgence, along with the development of modern concession agreements.  Part III sets forth the use of more sophisticated and aggressive defenses to expropriation claims, particularly substantial and multi-varied counterclaims.  Finally, we address the need for procedural changes in arbitral practice—as well as the application of well-established legal principles such as prescription, laches, estoppel, and waiver—so that arbitration can fulfill its primary mission to provide justice through cooperation by focusing and resolving “the central issues of the case.”²

II. Burgeoning International Arbitration

A. Overview of International Arbitration

International commercial arbitration can generally be defined as any private adjudication of a commercial dispute with some international facet.³ This term is sufficiently broad enough to encompass both institutional arbitrations, which are administered by organizations specializing in dispute resolution, and ad hoc arbitrations, which are conducted in a manner specified by the parties.  Ideally, international commercial arbitration provides the parties with a private dispute resolution system that is faster and fairer than court proceedings.⁴

Institutional arbitrations proceed before organizations such as the International Chamber of Commerce,⁵ the LCIA,⁶ the International Centre for Dispute Resolution,⁷ the Permanent Court of Arbitration in The Hague,⁸ and the Hong Kong International Arbitration Centre.⁹ Typically, an arbitral institution will have enacted procedural rules setting out the basic framework for the arbitration process, including how to determine whether an agreement to arbitrate exists, procedures for appointing arbitrators and challenging the appointment of arbitrators, determining the location of the arbitration, and even (at some institutes) scrutinizing awards.

Ad hoc arbitrations proceed without the assistance or supervision of an arbitral institution.¹⁰ The parties either adopt a set of procedural rules from one of the arbitral institutions (or the rules of the United Nations Commission on International Trade Law)¹¹ or craft their own set of procedural rules.  Because of the lack of supervision, administration, and structure provided by a governing body, parties must be more careful in planning an ad hoc arbitration.¹²

International commercial arbitration grew from the need to find a suitable dispute resolution system for parties in the international trade, commerce, and investment that blossomed after the conclusion of World War II.¹³ International commercial arbitration allayed three distinct concerns about litigation before local judiciaries: (1) the perception that local courts would be biased in favor of a domestic party; (2) the uncertainties involved in appellate review of a foreign judgment; and (3) the inability to enforce a foreign judgment domestically or abroad.¹⁴ If a state or state-controlled entity is a party to the transaction, these concerns are particularly acute.¹⁵ Accordingly, the desire of each party to avoid having a dispute determined by a foreign judicial forum fueled the growth of international commercial arbitration.

To further the effectiveness of international arbitration, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention, came into force in 1959.¹⁶ The New York Convention requires both the recognition of agreements to arbitrate and reciprocity—that is, the recognition and enforcement of arbitral awards made in other contracting countries.¹⁷ At present, 142 of the 192 United Nations member states have ratified the New York Convention.¹⁸ Moreover, most developed nations (and many developing ones) have enacted national arbitration legislation that respects the integrity of private arbitration by, among other things, limiting judicial interference in the arbitration process, affirming the parties’ capacity to agree to binding arbitration, and enforcing tribunal orders and awards.¹⁹

Consequent to these developments, international arbitration had become (at least since the mid-1980s), and remains today, the preferred method to resolve international commercial disputes:

In this realm of international commercial transactions, arbitration has become the preferred method of dispute resolution.  Arbitration is preferred over judicial methods of dispute resolution because the parties have considerable freedom and flexibility with regard to choice of arbitrators, location of the arbitration, procedural rules for the arbitration, and the substantive law that will govern the relationship and rights of the parties.²⁰

B. Arbitral Proceedings

As noted above, one of the benefits of arbitration is that unlike litigation, particularly American litigation, arbitration affords the parties considerable freedom, flexibility, and control over the proceedings and is designed to assure that parties from different jurisdictions can have their disputes heard and resolved in an efficient and neutral fashion.²¹ Arbitration allows the parties to adopt procedures that focus on the heart of the dispute, avoid expensive and time-consuming pre-hearing discovery and motions, and allow for the selection of the arbitrators (including non-lawyers) who are best equipped to resolve the dispute.²²

International arbitration practice reflects a merging, or “harmonization,” of the civil law practice of continental Europe and common law practice of England and the United States.²³ While the governing rules and procedures can be modified to suit any arbitral proceeding, international arbitration generally adopts the common law traditions of adversarial questioning and the admission of intra-company memoranda, as well as the civil law customs of limited discovery, the allowance of negative inferences based on lack of evidence, and written memorials.²⁴ In addition, unlike litigation before a public court, arbitration enables the parties’ dispute to proceed in confidence, if they so agree.  This not only protects from public disclosure any proprietary or sensitive information that may be at issue, but also guards any ongoing relationship between the parties that could be harmed by publication and grandstanding to trade groups, shareholders, or others.²⁵

Arbitration, of course, is not perfect.  Its potential weaknesses, including the lack of expeditious interim injunctive relief,²⁶ cost,²⁷ perceived inconsistency among arbitrators,²⁸ absence of meaningful review to correct irrational awards,²⁹ the perceived tendency of arbitrators to “split the baby,”³⁰ and limited discovery³¹ have been exhaustively examined by numerous commentators.³² Nonetheless, international arbitration continues to expand globally and is a well-settled feature in many bilateral trade agreements and international contracts.³³ However, there are concerns that the increasing “Americanizing” of arbitration has the potential to undermine its goals, expansion, and acceptance.

C. “Americanization” of International Arbitration

To appreciate the concerns surrounding the perceived “Americanization” of arbitration, it must first be emphasized that modern international arbitration practice has its roots in the 20th century civil law tradition of sitting arbitral panels and institutions in continental Europe.³⁴ When crafting arbitration agreements in the early- to mid-20th century, commercial parties and their respective counsel focused on two fundamental issues: (1) the neutrality of the arbitration seat and (2) the seat’s local laws affecting arbitral proceedings.³⁵ Tensions during the Cold War between East and West and distrust between developed and developing countries created incentives for parties from these various groups to arbitrate in countries not clearly identified with either faction.  Because of the need to identify a neutral site that provided the best local conditions for arbitration to flourish, Switzerland and France were selected as the best alternatives.³⁶ Accordingly, these two civil law jurisdictions became hubs for international arbitration.³⁷

While it cannot be disputed that common law (including American) aspects have become part of international arbitration practice, the relevant inquiry requires an analysis of precisely what “Americanization” is, to what degree it has occurred, and to what extent it has affected the goals of arbitration and the parties’ expectations of the process.  As a result, numerous articles,³⁸ texts,³⁹ and symposia have been devoted to the topic.⁴⁰

Unfortunately, because of the confidential nature of international arbitration, a detailed study on changes in process and outcomes is difficult to perform.  Accordingly, claims of the “Americanization” of international arbitration—loosely defined as employing adversarial and legalistic methods—tend to be based largely on anecdotal evidence.⁴¹ Most claims of Americanization focus on the procedural aspects of arbitration—large teams of lawyers, procedural disputes, extensive motion practice, jurisdictional objections, evidentiary objections, broadening discovery, aggressive cross examination, and witness preparation⁴²—rather than the award or decision making of the arbitral tribunal (although arbitral awards now appear to be citing previous arbitral decisions, at least as persuasive authority, which is more akin to U.S. litigation than civil law practice).⁴³ Based on the anecdotal data and Professor Susan Karamanian’s review of eighteen awards by the International Centre for Settlement of Investment Disputes (“ICSID”), American-style litigation has had a substantial impact on arbitral practice demonstrated by the use of extensive cross examination, production of documents, and presentation of party witnesses.⁴⁴

At least two separate events and two major trends may help explain the increased American-style activity in international arbitration: (1) the three Libyan nationalization arbitrations brought by U.S. oil companies who were represented by U.S. lawyers;⁴⁵ (2) the Iran-United States Claims Tribunal created by the Algiers Declaration⁴⁶ involving claims by U.S. citizens represented typically by U.S. lawyers against Iran for losses caused by the 1979 Iranian revolution;⁴⁷ (3) the transition by U.S. businesses to view arbitration as a preferred way of resolving international disputes;⁴⁸ and (4) the ascendancy of modern international U.S. law firms, of American lawyers as counsel and arbitrators, and of English as the predominant language of international arbitration.⁴⁹ Because the first two of these precipitators are a matter of historical fact, their mark on international arbitration has already been established.  The third and fourth reasons reflect the evolution of U.S. involvement in the global economy and the global legal market over a number of decades—an evolution that appears unlikely to be reversed in the near term.  “Just as the United States has been and will be the dominant force in economic globalization, [American] law firms will be the dominant force in international arbitration.”⁵⁰

Of these four precipitators, it is the involvement of U.S. legal practitioners that carries the most potential for Americanizing international arbitration practice.  Some U.S.-based law firms have established international commercial arbitration departments and practice groups, while others provide arbitration services from within their traditional litigation departments.⁵¹ In fact, eight of the twelve most active law firms in international arbitration were based in the United States.⁵² As a simple matter of human nature and training, American lawyers and American-trained foreign lawyers who practice international arbitration will continue to use American litigation techniques and tactics.⁵³ Therefore, as American and American-trained lawyers become active in the governing bodies for international arbitration, it is likely that their experiences, training, and skills will shape the systems and rules that govern arbitral institutions.⁵⁴ Barring an unforeseen disruption of this trend, American influence on international arbitration will likely expand and further the “Americanization” bemoaned by many.

So long as commercial parties to international transactions believe that American firms give them the best chance for a favorable outcome, Americanization—including aggressive pre-trial discovery, aggressive cross-examination, and presentation of novel and strategic claims—may very well continue and gain increasing acceptance.
{pagebreak}

III. Concession Agreements, Nationalization, and Its Resurgence

A. From Concessions to Contracts: The Birth and Development of Production Sharing Agreements and National Oil Companies

The evolution of international contracts for the exploitation of natural resources (e.g., timber, fossil fuels, minerals, etc.) and its reflection of the economic, political, cultural, and diplomatic changes that occurred throughout the 20th century, is a topic that has been exhaustively examined by numerous authors.⁵⁵ In the 19th and early 20th centuries those contracts took the form of “concessions” in which the sovereign transferred actual title to the natural resources over a large area (perhaps even as large as the entire country) for as many as six to seven decades in exchange for a signature bonus and a royalty.⁵⁶ Under the terms of the concessions the contractor held complete autonomy over operations and could even choose not to undertake efforts to exploit the resource without any consequence.⁵⁷

However, shifts in world politics following the end of colonialism, coupled with the rise of nationalism and oil wealth, enhanced the bargaining power of nations rich in natural resources and led to more favorable terms to the state or sovereign in such agreements.  Whether labeled a “modern concession,” “production sharing agreement,” or “participation agreement,” more recent versions of these international agreements reflect substantial changes from the early 20th century concessions in the resource-bearing nations’ favor.  Depending on the circumstances, such changes include: (1) the host nation retaining title and ownership over the resource; (2) the term of the agreement spanning a far shorter period of time (20–40 years); (3) the grant covering smaller territorial areas; (4) specific monetary commitments being made for exploration and development during early operations with all costs carried by the contractor; (5) a state-owned oil company or ministry being assigned to oversee, or participate in operations with, the contractor; and (6) more generous compensation being paid to the host-country through bonuses, graduated royalty and share levels, and taxes on the contractor’s income.⁵⁸

As part of these negotiations, and in response to rising nationalization, renegotiation requests, and the substantial capital risks involved in these ventures, drafters for the contractors balanced these new, less favorable economic terms with protections for the foreign investor, including choice-of-law clauses to ensure the application of western or international legal principles, mandatory international arbitration clauses before an established arbitral institution such as the ICC, and stabilization clauses.⁵⁹ In conjunction with the principles set forth in the Libyan arbitrations and the growing number of countries ratifying the New York Convention, these provisions served as a means to mitigate the economic and political risks inherent in such projects.  In addition, they served as strong defenses to attempts to renegotiate or terminate contracts through threats of seizure, regulation, taxes, or claims of environmental damage or mismanagement.

By the mid-1970s, the majority of the world’s oil producing countries had established government agencies or ministries and national oil companies⁶⁰ to manage and operate fields themselves, to implement government energy policies, and to oversee operations by contracting multinational companies.⁶¹ This evolution in the sophistication of policy implementation in producing countries has proven critical to defending against claims of environmental damage or mismanagement.  These ministries and national oil companies which have gained expertise in the oil industry play an important role under the modern production sharing agreement (“PSA”), farm-out agreements, and service contracts.  These agreements generally provide that the relevant national agency or company shall retain oversight of the operations, shall receive reports and work programs and budgets, shall be entitled to inspect any operation or facility, shall receive a copy of all data resulting from the operations, and shall assist and consult with the contractor about operations.⁶² For example, Turkmenistan’s model production sharing agreement provides, in part, as follows:

11.1 So long as the Exploration Licence and any Production Licences issued to Contractor hereunder remain in force, at least ninety (90) days prior to the beginning of each Calendar Year, Contractor shall prepare and submit to the Management Committee for its review and approval, pursuant to Article 9, a detailed annual Work Programme and Budget, setting forth the Petroleum Operations which Contractor proposes to carry out in the ensuing Calendar Year, and the estimated costs thereof. . . .

. . .

11.3 Each proposed annual Work Programme and Budget shall include, as a minimum, the following:

(a) a detailed description of the work to be performed during the following Calendar Year, proposals as to subcontractors and suppliers necessary for the implementation of such work and a time schedule for performing it; and

(b) a detailed estimate of the expenditure to be incurred in performing the proposed annual Work Programme and a time schedule for the incurrence of such expenditures.

. . .

11.6 Contractor shall conduct quarterly reviews of the annual Work Programme and Budget. . . .

. . .

ARTICLE 12 DISCOVERY, DEVELOPMENT AND PRODUCTION

12.1 . . . As soon as practicable after the completion of the well-testing program (or where no well-testing is to be undertaken), Contractor shall notify Competent Body of its views as to whether: (i) the Discovery is a Commercial Discovery; or (ii) Appraisal is necessary to determine if the Discovery is a Commercial Discovery; or (iii) the Discovery is not a Commercial Discovery and Appraisal is not warranted; or (iv) the Discovery may, together with any other Discovery within the Contract Area, be capable of constituting a Commercial Discovery.

12.2 (a) In the case of paragraph 12.1(ii), Contractor shall, promptly after the technical evaluation of the test results relating to such Discovery has been completed, prepare and submit for review and approval by the Management Committee an Appraisal Work Programme and Budget relevant to such Discovery. . . .

12.3 Within ninety (90) days following completion of an Appraisal Programme, Contractor shall prepare and submit to the Management Committee a detailed Appraisal report on the conduct of the Appraisal Programme and the detailed data of its results, including, but not limited to, the delineation of the areal extent of the Petroleum Reservoir to which the Discovery relates in terms of thickness, lateral extent, estimate of the quantity of recoverable Petroleum therein, along with the conclusion as to whether, in Contractor’s opinion, the Discovery is a Commercial Discovery.

12.4 Within one hundred and eighty (180) days following the notification under paragraph 12.1(i) or following the submission of the Appraisal report under paragraph 12.3 indicating that the Discovery is a Commercial Discovery, Contractor shall prepare and submit to the Management Committee, for review and approval, pursuant to paragraph 9.4, a Development Plan and Budget on the basis of sound engineering and economic principles, in accordance with international good oil-field practice.  Such Development Plan shall comprise, but shall not be limited to:

(a) designation of the Development Area;

(b) proposals on spacing, drilling and completion of wells;

(c) proposals for production, storage, transportation and delivery facilities;

(d) proposals for necessary infrastructure developments;

(e) proposals for the employment of citizens of Turkmenistan and use of local material and services, in each case, consistent with the requirements of Articles 21 and 20;

(f) an estimate of the reserves together with wells productivity and production forecasts based on the Maximum Efficient Rate principle;

(g) an estimate of the expenditures necessary to implement the Development Plan; and

(h) an estimate of the time required to complete each phase of the Development Plan.

. . .

12.7 Not less than ninety (90) days prior to the beginning of each Calendar Year following the Date of Commencement of Commercial Production, Contractor shall prepare and furnish to the Management Committee for its review and approval a forecast statement setting forth, by Calendar Quarter, the total quantity of Crude Oil (by quality, grade and gravity) and Natural Gas that Contractor estimates can be produced, saved and transported hereunder from any and all Development Areas during such Calendar Year in accordance with international good oil-field practices.  Contractor shall endeavour to produce in each Calendar Year the forecast quantity.⁶³

In sum, both as a matter of national law and as a matter of contract, either the government ministry, the national oil company, or both, may supervise and stand beside the operating company during exploration, development, and production.  This legal and contractual arrangement may prove important to defending claims related to the PSA or concession contract brought by the host nation in response to the contractors breach of contract or expropriation claim.

B. Historical Nationalization

Despite some Western perceptions, “nationalization” is not an aberration from a supposed universal move towards capitalism and privatization, but rather it is part of a privatization-nationalization cycle found in many places throughout the world,⁶⁴ if not the global trend.⁶⁵ Nationalization of numerous industries became a fixture in the Middle East and Latin America decades ago when many vestiges of colonialism, including long-term concessions to Western European and North American companies, were cast aside, thereby leading to a flurry of international disputes.  The reasons underlying nationalization trends and individual expropriations vary widely and include political ideology, foreign relations, decapitalization of the host country, a desire for increased control and independence, market domination, culture, and even religion.⁶⁶

In the early part of the 20th century, in response to the growing role of fossil fuels in energy production, large international oil companies were founded which then expanded to meet the need for exploration, development, production, refining, transportation, and marketing services.⁶⁷ Established in the United States, the United Kingdom, and the Netherlands, these companies mirrored the economic, political, and market power of their home countries.⁶⁸ Major international oil companies began to operate in the Middle East in the 1920s, and by the early 1930s, three European and five American companies controlled most of the oil production in the Middle East.⁶⁹ According to concessions made during those pre-World War II decades, the producing-country governments could not participate in the development of their oil resources, much less play a role in determining which companies would operate in their territory.⁷⁰ The governments did not begin to challenge the international oil companies’ control until after World War II.⁷¹

Although nationalization in Russia and Mexico actually preceded nationalization in the Middle East, the expropriation of oil field operations in the Middle East represents the first time an entire region moved to nationalize a sector of its economy.  As time passed and colonialism ended,⁷² oil-producing countries began to take the first steps toward nationalization by renegotiating their concessions with multinational oil companies.  First, the governments of producing countries bargained for a greater share of profits.⁷³ Next, they moved to increase their roles in the management of the oil companies’ ventures.⁷⁴ Iran was the first Middle Eastern state to challenge the major oil companies.  In what started with a dispute over a greater share of revenues, Iran nationalized the assets of British Petroleum, its sole concessionaire, in 1951.⁷⁵ Others, such as Kuwait, Saudi Arabia, Libya, and Iraq later followed.

1. A Brief Overview of Early Arbitrations Involving Nationalization

i. Libyan Nationalization Cases

Libya’s nationalization of foreign oil concessions in the early 1970s led to three significant arbitrations:  BP Exploration Company (Libya) Ltd. v. Government of Libyan Arab Republic,⁷⁶ Texaco Overseas Oil Petroleum Co./California Asiatic Oil Co. (TOPCO) v. Government of the Libyan Arab Republic,⁷⁷ and Libyan American Oil Co. (LIAMCO) v. Government of the Libyan Arab Republic.⁷⁸ At the time, “[a]rbitrations between private foreign investors and governments [we]re not common events,”⁷⁹ and the nationalization movement among developing countries, particularly former colonies, had been gaining strength.⁸⁰ In fact, fueled by its desire to legitimize its nationalization (without compensating foreign investors) and its “reject[ion] of international arbitration as a ‘Western’ (and hence unfair) system,” Libya refused to take part in the BP arbitration, the TOPCO arbitration and the LIAMCO arbitration.⁸¹ The Libyan arbitrations, nevertheless, recognized the sanctity of contracts between foreign investors and governments and applied the contractual arbitration clause in the concession agreement to permit the aggrieved investor to seek recourse through international commercial arbitration.  Indeed, if one of Libya’s intentions was to weaken arbitration’s role in compensating for expropriation, then its non-participation strategy backfired.

While there are some differences among the arbitral decisions and reasoning in the three Libyan cases (and some criticisms, particularly in the remedies awarded), collectively they established several important legal principles that remain valid today and that have encouraged wider acceptance of arbitration clauses in international relations.  First, in each of the three arbitrations, the arbitrator confirmed that he had jurisdiction to decide issues related to Libya’s repudiation of the concession contract.⁸² Second, the TOPCO and LIAMCO arbitrators analyzed the concession agreement at issue and concluded that it was international in character and thus international legal principles applied to the contract, including the doctrine of pacta sunt servanda:

The state as a sovereign entity possesses the power to grant rights and bind itself to agreed terms.  To permit a state to use its sovereignty to disregard commitments that it freely undertook through the exercise of that very sovereignty would be anomalous.  Such a result would undermine and destroy the legal framework of the international order.⁸³

Accordingly, each arbitrator concluded that Libya had illegally breached its obligations under the concession contracts and rejected the potential arguments justifying such a breach, including sovereignty concepts, administrative contract theory, and the theory of changed circumstances.⁸⁴

Understanding the context of the Libyan awards is critical to recognizing their importance.  In the 1970s, developing nations had been seeking ways to loosen the rules on expropriation, culminating in the UN General Assembly’s adoption of the Charter of Economic Rights and Duties of States.⁸⁵ Among other provisions, Article 2 of this charter provides that “every State has and shall freely exercise full and permanent sovereignty, including possession, use and disposal, over all of its wealth, natural resources and economic activities.”⁸⁶ Indeed, some at the time believed that the adoption of this charter would revive the “Calvo” doctrine, under which the expropriating nation sets the level of compensation for the aggrieved investor.⁸⁷ Developed countries whose corporate citizens invested in developing countries responded to this threat by taking several steps to safeguard those investments.  For example, they sought to conclude bilateral investment treaties requiring international arbitration, they provided guarantees for their citizens’ investments abroad, and they threatened retaliation against expropriating countries.⁸⁸ In this context, the Libyan arbitration awards can be correctly viewed as another response to the threat to international commerce and investment caused by the nationalization trend.

The response by the developed countries (along with the threat of diminished economic investment) was so strong and so powerful that it led some in the developing world to accept international arbitration with more countries, to ratify the New York Convention, to enact national arbitration laws, and to establish arbitration centers as alternatives to those in developed states.⁸⁹

ii. Iran-United States Claims Tribunal

The Iran-United States Claims Tribunal stands as a landmark arbitral and diplomatic achievement, as well as one of the gateways for American and Islamic acceptance of international arbitration in the wake of an international crisis.⁹⁰ In 1979, revolution erupted in Iran, resulting in the overthrow of the Shah of Iran, Mohammad Reza Pahlavi, and in the Iran Hostage Crisis, in which the United States Embassy in Tehran was seized and 66 embassy employees were held hostage for 444 days.  In response, the United States employed diplomatic strategies, military means, and economic sanctions (including the freezing of $8 billion in Iranian funds on deposit in the United States) to pressure the Iranian government to return the hostages.

The Iran Hostage Crisis ended when Iran and the United States agreed to the Algiers Declarations, with arbitration as a key component to the accord.⁹¹ Under the Algiers Declarations, all legal proceedings in United States courts against Iran would be terminated and all future litigation prohibited in lieu of binding arbitration.  The Iran-United States Claims Tribunal became, as the parties intended, a self-contained, internal process to resolve disputes arising from Iran’s revolution.⁹² The Tribunal’s first meeting was held in the Peace Palace in The Hague on July 1, 1981, later moving to its own facility in The Hague in April 1982.  It began conducting arbitrations in accordance with the UNCITRAL Arbitration Rules, subject to some modifications.⁹³ Over the past 26 years, the Iran-United States Claims Tribunal has issued 600 awards, including 83 interlocutory and interim awards, published 133 decisions, and resolved approximately 4,000 claims.⁹⁴

The Iran-United States Claims Tribunal’s impact on international arbitration practice is significant.  First, it reinforced arbitration’s role in the resolution of an international crisis and in creating a forum to decide investor-state and international commercial arbitration claims.  Second, the Iran-United States Claims Tribunal’s publication of its awards has provided an invaluable resource for the arbitration community, especially in the investor-state arena.  Numerous articles⁹⁵ and texts⁹⁶ have been written on the tribunal’s work, and its decisions have become useful authority for international arbitration.⁹⁷ Finally, it has served as a means for American and Iranian parties and counsel to substantially participate in and gain expertise in arbitral practice (in contrast to the Libyans, who refused to participate in arbitration less than a decade before the Iran Hostage Crisis).

Despite the growth of international investment and the adoption of many trade and investment agreements, as well as further acceptance of international accords on arbitration during the 1990s, the dramatic rise in commodity prices since the turn of the millennium has provided renewed vigor for nationalization—both as a purely economic matter and as a political device.⁹⁸ Nationalization can take many different forms.⁹⁹ On one extreme lies outright seizure by the state of a private venture or asset; on the other lies “creeping” or indirect expropriation in which the state uses its authority to regulate via taxes, access, and changes in the law to effect an ultimate relinquishment in favor of the state.¹⁰⁰ Indeed, unlike the disputes in the 1970s and 1980s which focused on direct expropriation and the standard of compensation,¹⁰¹ current international investment disputes are expected to turn on whether a state’s regulation constitutes expropriation or a bona fide, nondiscriminatory exercise of sovereign rights.¹⁰² This renewed wave of nationalization—following the explosion of international investment during the 1990s—has thus far been led by Latin American countries.

C. Nationalization in Latin America¹⁰³

Today, nationalization is the trend in Latin America, where the presidents of Venezuela, Bolivia, and Ecuador have championed it as a potential economic boon and a cultural prerogative.¹⁰⁴ Buoyed by rising oil prices,¹⁰⁵ Venezuela’s President, Hugo Chavez, has led Latin America’s nationalization movement.  In the 1990s, Venezuela opened its oil industry to private investment, resulting in the creation of thirty-two operating service agreements with twenty-two foreign oil companies.  Under these contracts, foreign companies managed the oil fields while the state-owned oil company, PDVSA, purchased the produced oil at a price fixed to market rates.  PDVSA also had the option to purchase minority stakes in projects and held shares in four “strategic associations” that produced heavy crude oil from the Orinoco Belt.¹⁰⁶

When the rise in oil prices began in 2004, Venezuela began to take action against foreign investors.  In what proved to be the first of many steps in this direction, Venezuela initially raised royalties on the four heavy crude oil ventures from 1 to 16 percent.  In 2005, Venezuela’s tax agency notified twenty-two companies that significant back taxes were owed, forcing some companies to pay millions of dollars to settle those tax claims.  Moreover, beginning in 2005, Venezuela issued decrees imposing majority state control over its oil fields,¹⁰⁷ thus requiring that companies with operating contracts grant PDVSA a majority stake in their projects.¹⁰⁸ Many companies, such as Chevron, Total, BP, and Statoil, acquiesced to the demand; others (including ExxonMobil and ConocoPhillips) refused.¹⁰⁹ Finally, in 2006, Venezuela announced that additional “extraction” taxes would be levied on foreign oil companies and placed some properties under government control.¹¹⁰

The surge of nationalization and resistance to foreign investment spread beyond Venezuela’s borders to other Latin American countries.  On May 1, 2006, Bolivian President Evo Morales carried out one of his campaign promises on the 100th day of his new administration when he announced the nationalization of Bolivian hydrocarbon assets,¹¹¹ thereby effectively seizing the interests of twenty-six foreign oil and gas companies that held contracts with Bolivia.  President Morales issued an order giving foreign oil and gas companies six months to comply with all governmental demands (e.g., all foreign energy-firms were required to sign new contracts giving majority ownership to the state-owned company, Yacimientos Petroliferos Fiscales Bolvianos, to agree to higher taxes, and to dedicate as much as 82 percent of revenues to the state) or face eviction by force.¹¹² Finally, on May 2, 2007, Bolivia cemented the perception that nationalization had taken control when it announced its denunciation of ICSID, which became effective on November 3, 2007.¹¹³

Also in May 2006, the same month as the nationalization of Bolivia’s hydrocarbon assets, Ecuador terminated its contract with Occidental Petroleum Company for the operation of Block 15’s oil and gas fields, and the state oil company seized control of the fields.¹¹⁴ This move came only two months after the Ecuadorian legislature amended the Hydrocarbon Laws to require foreign oil companies to pay the country 50 percent of all revenues from production above a benchmarked price—unilaterally changing the economic terms of the contracts to give the government a larger profit (and reducing the contracting companies’ benefit by approximately half)—and after a new leftist leader, Rafael Correa, was elected, having pledged to renegotiate contracts with foreign investors to ensure that Ecuador obtains a greater share of energy revenues.¹¹⁵

In late 2007, an ICSID tribunal ordered Ecuador to cease all domestic legal actions, including criminal proceedings, against City Oriente (a Panamanian oil company) regarding a disputed $28 million in royalties.¹¹⁶ Following Bolivia’s example, Ecuador notified ICSID that, pursuant to Article 25(4) of the ICSID Convention, Ecuador was withdrawing its consent to ICSID arbitration of disputes pertaining to foreign investments in natural resources, including oil, gas, and minerals.¹¹⁷

The debate on whether aggressive resource nationalization will spread beyond Venezuela, Bolivia, and Ecuador continues, although President Chavez’s socialist vision appears to be spreading to other countries and other leaders in the region including Argentina, Brazil, and Chile.¹¹⁸
{pagebreak}

IV. New Challenges in International Arbitrations: More Sophisticated and Aggressive Defenses to Investor Claims and the Need for a More Rigorous Use of Legal Defenses and Procedural Safeguards

Regardless of whether this latest round of nationalization will continue to spread and lead to increasing contract modifications and expropriations, its effect on international arbitral practice thus far is undeniable.

The stakes in arbitrations involving natural resources could not be higher, both from an economic standpoint and from the perspective of maintaining international economic order and ensuring legitimate expectations by investors.  Commodity prices have risen dramatically in recent years.  Oil and natural gas prices have risen more than 500 percent since 2002 and have been highly publicized.¹¹⁹ However, commodity increases extend far beyond energy, including minerals used heavily in manufacturing, such as copper, tin, zinc, aluminum, nickel, and lead, as well as agricultural products such as corn, cotton, and sugar.¹²⁰ Indeed, the monetary values at issue in arbitration today represent sums greater than the gross domestic product of many countries.  According to data collected by the American Lawyer, thirty-seven pending arbitrations involve sums in dispute in excess of $1 billion, with the highest dollar value totaling $28 billion.¹²¹ Simply put, claims of nationalization have created more disputes, and the disputes involve unprecedented monetary amounts.

For example, ICSID reports that it is currently administering a record 130 arbitrations.¹²² This amounts to over half of the total number registered with ICSID since its inception.¹²³ Additionally, half of the 130 arbitral disputes involve countries from Latin and Central America.  Argentina alone received dozens of requests for arbitration stemming from its 2001 economic crisis that led to its defaulting on foreign debt and the devaluation of the peso.  In the midst of its financial problems, Argentina issued an emergency decree in January 2002 that converted all contracts—including those with foreign investors in the public utilities, energy, and telecommunications industries—from dollars to devalued pesos.  This decree prompted a flood of arbitral filings.

Argentina responded with a multi-layer legal defense strategy:  it challenged ICSID’s jurisdiction to hear the disputes and argued that bilateral treaties do not supersede Argentina’s constitution, which requires claims to be brought before Argentine courts;¹²⁴ it proceeded to defend the claims on their merits and asserted the doctrine of sovereign rights and the national emergency clause in its BITs to justify its monetary policies; it scrutinized the compliance with contractual obligations by each contractor since the beginning of the contract and threatened termination; and it challenged the validity and enforceability of awards, including expanded review by the Federal Supreme Court of Argentina.¹²⁵ Argentina’s aggressive tactics may bode poorly for international arbitration and its place as the preferred mechanism for resolving international disputes. 

As noted above, Argentina’s defense, though not always asserted in the ICSID proceeding, includes claiming alleged contractual violations by the foreign investor—a tactic that appears to have become commonplace.  Of the fifty largest arbitrations pending in 2007, ten involved counterclaims ranging in value from hundreds of millions of dollars to $9 billion.¹²⁶ With more nationalization and rising commodity prices, the use of counterclaims as a defensive strategy to claims of expropriation and breach of contract will likely become a standard practice.  As a result, arbitrations will become more complicated, more costly, and less efficient—a trend already noted by many commentators and practitioners caused by the Americanization of arbitral practice.  As one commentator has noted:

The tendency to over-litigate cases is a worrisome feature of adversarial legalism.  It is obviously a concern because it tends to tax the scarce resources (human, financial, and time) of international courts and tribunals, and because it makes litigation costs skyrocket.  Moreover, to the extent that litigation through international courts and tribunals is considered a means to peacefully settle disputes, the end result of the process might perversely be a deterioration of relations between the litigants even outside the framework of the immediate object of the dispute.

Since the early 1990s, the idea that more-is-good seems to have taken hold of the litigation strategy of several countries, and this fuels a perverse vicious cycle.  This applies both to the number of lawyers pleading before the courts, and to the amount of evidence presented, as well as to the procedural wrangling.¹²⁷

We expect an increasing number of counterclaims—including environmental and resource management claims—to be brought against contractors.  These claims can run the gamut on both the environmental—including claims of air pollution, crop damage, deforestation, wildlife habitat destruction, groundwater depletion, groundwater and soil contamination—and the resource side—including claims of gas flaring, energy inefficiency, temporary reservoir or resource damage, and permanent reservoir or resource damage.

Three reasons underlie the potential increase of these types of counterclaims.  First, they follow historical claims and perceptions of developing nations and critics of multinational companies that international investors are poor caretakers of another nation’s natural resources, in that they harm or destroy the environment by focusing on short-term production at the expense of long-term maximization of the resource.  Second, because environmental damage allegations can be massive and given rising commodity prices, these counterclaims result in staggering monetary amounts that can be perceived as potential offsets and allow for “splitting the baby” (from a monetary, public relations, and negotiation perspective) against large expropriation and breach of contract claims (which, too, are driven by rising commodity prices).  And, third, along with more aggressive and litigation-like strategies from lawyers and parties that have developed in arbitral practice, the growth of the expert witness “cottage industry”¹²⁸ to support these claims enables them to be asserted with greater ease and with greater effect. 

Not only will such claims likely involve substantial quanta (potentially tens of millions to billions of dollars), but the foreign investor who has been expropriated will also face substantial challenges in defending such claims.  First, the foreign investor will no longer have access to (or control of) the area to conduct its own investigation into such allegations.  Second, the expropriating state will likely have taken control of the foreign investor’s operations and offices, including its files, computers, data, and many of the employees who may provide evidence in support of their new employer (the state).  Third, many of the allegations may involve alleged activities or omissions from many years ago, making the availability of expatriate employees who can provide witness statements uncertain as many might now be retired, employed with another company, or deceased.  These trends and strategies stand in the way of international arbitration fulfilling its mission to provide a fast and fair resolution.

A response by the arbitral bodies and tribunals is needed if international arbitration is to fulfill that mission.  First, the legal doctrines of prescription, laches, estoppel, and waiver should be clearly defined and codified in model laws that reflect parts of general international legal principles.  Applied more rigorously, application of these doctrines would resolve many of the claims involving practices and actions from many years ago and which were monitored by the contracting nation, one of its ministries, or a national company.  Second, new procedural approaches should be employed to allow parties and their counsel to obtain necessary information about the counterclaims and party-appointed expert witnesses.

A. Legal Responses: More Rigorous Use of Legal Defenses and Early Resolution of Claims Subject to Them

There can be little disagreement that international arbitration has given birth to a system of legal rules or principles governing contracts as part of “transnational law” or the “lex mercatoria.”¹²⁹ The application of international principles to contracts gained renewed momentum in the second half of the twentieth century after its adoption in nationalization arbitrations such as TOPCO v. Libya.¹³⁰ The obvious benefits of such rules and principles include the establishment of predictable standards, known expectations, and reliable outcomes for contracting parties.  While unresolved issues remain regarding the contours of the lex mercatoria,¹³¹ the United Nation’s Convention on Contracts for the International Sale of Goods, UNIDROIT Principles of International Commercial Contracts, and the Principles of European Contract Law provide sources for international contractual principles.

The application of these general legal principles when a contract expressly selects a particular legal regime is inappropriate as it would undermine the parties’ contractual agreement (unless that express choice is the lex mercatoria).¹³² However, some international contracts do not expressly provide for a single legal regime to govern the transaction; instead, they require the application of legal principles common to the contractor’s legal regime and to the host nation’s legal regime, and, in the absence of commonality, the application of the principles of law normally recognized or applied in international trade.¹³³ The lex mercatoria therefore serves an important function—first, as a resource for principles that are common to the two regimes, and second, as substantive law when commonality is not present.

Indeed, as international arbitration has expanded and the body of its work proliferated, a “common law” of international contracts has emerged, including the obligations of good faith, a duty to mitigate damages, and pacta sunt servanda.¹³⁴ Included in these principles are the doctrines of prescription, laches, estoppel, and waiver—all of which provide a tool for arbitral panels to decide complicated claims in an efficient and well-supported manner.  While these principles have generally been recognized, their application has been uneven and almost never at an early enough stage in the proceeding to resolve purely strategic claims and avoid unnecessary expense and delay.

For these defenses to become more effective in resolving claims expeditiously, they should be codified in the model laws on international contracts and should be specifically referenced in arbitral rules as grounds for early resolution of claims.  Accordingly, we explain each of these doctrines below and set forth proposed language for their inclusion in model laws governing international contracts and for revisions to arbitral rules that touch on preliminary rulings.

1. Prescription

Prescription, also called statute of limitations in common law regimes, sets forth a specific period of time in which a party must file a claim, or it will be barred.  Prescription is a “widely recognized principle of law constituting part of international law and has been accepted and applied by arbitral tribunals.”¹³⁵ Generally enacted by a legislative body and, therefore, unlike the other defenses of estoppel, acquiescence, and laches discussed herein, prescriptive periods provide for certainty and predictability by requiring aggrieved parties to bring their claims in a reasonable period of time, while at the same time allowing parties sufficient time to investigate a claim and negotiate a possible settlement without having to file a legal claim.¹³⁶ Prescriptive periods begin to run from the time when the party knows or should have known of the claim or right, commonly known as the point of accrual.  Unlike laches, which involves an equitable balancing of the neglect by the party asserting a claim against the hardships that neglect has caused the defending party, prescription simply requires a determination of when the claim accrued and when it was asserted.¹³⁷ If the claim was asserted outside the prescriptive period, then it is barred without regard to any hardship on the defending party from the late assertion of the claim.  The success of a prescription defense will generally hinge on determining the point of accrual, and may involve allegations that the offending party concealed the effects of its alleged wrongdoing in an attempt to prevent discovery by the other party.

Because many environmental and mismanagement claims will involve decisions made several years before their assertion, the state must establish that it did not know and could not have known of such claims until a time close to their assertion in the arbitration process.  This will generally be no easy task.  Virtually every country has established ministries or agencies overseeing PSAs and concession agreements, and many have state-owned companies as part of the operating consortium.¹³⁸ In addition, almost every PSA and concession agreement requires the contractor to submit reports, programs, and analyses, and to obtain government approval or permits before commencing any project.  Under such a regime, the state will receive a substantial amount of information about the project, the concession, and operations—information that will place the state on notice if any breach of the contract or industry standards occurs.  As the Aminoil Tribunal concluded:  “if the various obligations to report, which were incumbent on the Company under the contracts of Concession, are taken into account, as well as the supervisory powers available to the concessionary Authority, it has to be concluded that the latter was in possession of all the means of being perfectly well informed.”¹³⁹ The state’s failure to assert claims within the prescriptive period bars such claims, and tribunals should identify early in the proceeding the potential for such bars to arise and allow for prescriptive defenses to be heard and resolved early in the process, before the parties submit substantial evidence on the merits of what may be grossly untimely claims.

As in any cross-nation transaction, determining which law is of great significance and results in substantial argument between the parties.  The choice-of-law analysis as it relates to prescription, however, is a relatively simple process.  Choice-of-law clauses in some international transactions provide that common principles between two jurisdictions apply and, in the absence of commonality, then general international principles apply.  In the event that one jurisdiction has not adopted a statute of limitations or refuses to apply the statute to the sovereign, then the tribunal should apply general principles of law in determining whether a claim is time-barred under the doctrine of prescription.¹⁴⁰

In applying “general principles of law,” the tribunal of course is left with the task of determining those principles.  Numerous sources exist to assist the tribunal.  One such source is Chapter 10 of the UNIDROIT Principles of International Commercial Contracts.¹⁴¹ Chapter 10 can be outlined as follows:

- Article 10.2.  The prescriptive period is “three years beginning on the day after the day the obligee knows or ought to know the facts as a result of which the obligee’s right can be exercised” with a maximum prescriptive period of ten years.¹⁴²

- Articles 10.3 and 10.4.  Parties may modify the prescriptive period within certain limitations.¹⁴³

- Articles 10.5 through 10.8.  Running of the prescriptive period is suspended by the filing of judicial or arbitral proceedings, by the initiation of conciliation and other dispute resolution methods, and by force majeur, death, or incapacity.¹⁴⁴

- Articles 10.9 and 10.10.  Prescription must be asserted as a defence to a claim and a right may still be exercised as a defence and set-off even though it cannot be asserted because of prescription.¹⁴⁵

Undoubtedly, these articles represent a balancing of competing interests and legal regimes; however, two primary defects exist under UNIDROIT’s rules.¹⁴⁶ First, although Article 10.9(2) states that prescription must be asserted as a defense by the responding party,¹⁴⁷ Chapter 10 is silent on the burdens of proof for various aspects of prescription including: (1) which party bears the burden of establishing the point of accrual; (2) which party bears the burden of any allegations of fraud, concealment, or inherent undiscoverability of a claim; and (3) which party bears the burden regarding questions of a suspension of the prescriptive period.¹⁴⁸

Because these issues are critical for applying the doctrine of prescription, parties and tribunals alike would benefit from Chapter 10 being amended to clarify the burdens of proof.  We propose that the following text be added to Chapter 10 of the UNIDROIT Principles to set forth clear burdens of proof when prescription is asserted as a defense to a claim:

Under Article 10.9(2) the obligor must assert the limitations period as a defense for it to be effective.  The obligor bears the burden of proof regarding the applicable limitations period under Article 10.2(1), or under the parties’ agreement to modify such period under Article 10.3, by establishing the date the obligee knew or should have known the facts giving rise to the obligee’s claim.

If the obligee asserts that a new limitation period arose under Article 10.4 or that the limitations period was suspended under Articles 10.5, 10.6, 10.7, and 10.8, the obligee bears the burden of proof of establishing the application of those articles’ provision(s).

The second criticism of the UNIDROIT Principles lies in Article 10.9(3),¹⁴⁹ which allows an expired right to be resurrected in defending a claim asserted by the other party to the contract, concession, or PSA.  Comment 3 to Article 10.9 states, “under these principles expiration of period of limitations does not extinguish the right but gives only a defence that must be invoked by the obligor.  It follows that the obligor’s right still exists, although a claim for its performance may be barred by the obligor’s invocation of the expiration of the limitation period.  It can, therefore, be used as a defence, e.g., as a ground for retention of performance owed by the obligee.”150 While this rule may ameliorate the harsh result of prescription, it does not promote the purposes of prescription and invites the assertion of strategic counterclaims that complicate proceedings.

As noted above, prescription serves an important purpose:

[T]he overriding commandment that peace under the law must be restored by finally cutting off the threat of litigation, [and] the more practical consideration that by passing of time matters become obfuscated and the outcome of any litigation hazardous, because witnesses might have died, memories faded, documents destroyed etc.  This, i.e., hazardous results of litigations, may in turn engender the reputation and dignity of the judicial system in its entirety.¹⁵¹

Article 10.9(3) undermines these purposes.  It neither encourages parties to timely assert claims nor to negotiate an extension of the prescription period.  Instead, it encourages respondents to comb through the claimant’s entire history of performance under the life of the contract for potential defenses, thereby requiring the claimant to respond to stale claims it believed to have been extinguished years ago and the Tribunal to resolve claims in which documents, witnesses, and memories may no longer be available to present the facts in the proceeding.  Article 10.9(3) simply cannot be justified when its costs and disadvantages are taken into consideration.

Prescription provides an important tool for tribunals to resolve claims and counterclaims in an efficient, cost-effective, and reasoned manner.  For the doctrine’s full effect to be realized, however, clarity in the burdens of proof must be established and stale claims should not be allowed into the proceeding.

2. Laches

The doctrine of laches (or extinctive prescription) is an equitable principle that bars a stale claim due to the passage of time.¹⁵² The elements of laches are (1) a negligent lapse of time in the assertion of a right or claim, and (2) prejudice to the defending party as a result of the undue delay.¹⁵³ Like prescription, laches is intended to preclude the assertion of untimely claims.  However, unlike prescription which is created by statute and does not require any showing of harm to the defending party, laches is an equitable doctrine and mandates consideration of the prejudice, if any, to the defending party.  Such prejudice, resulting from the passage of time, generally involves the death or unavailability of witnesses or documents needed to respond to the claim.

Despite laches first emerging in international arbitration in the 19th century and continuing to be a viable rule of international law into the 20th century, it remains less established than prescription, estoppel, and acquiescence.¹⁵⁴ Indeed, laches is rarely invoked in arbitrations and is even more rarely the basis for a decision.¹⁵⁵ The invocation of laches by a defending party represents a double-edged sword:  on the one hand, if the defense is successful, the claim is dismissed; on the other hand, if the defense is unsuccessful, the defending party has acknowledged that it is somehow impaired in its ability to fully and adequately respond to the claim.  This raises the question of whether the doctrine of laches is necessary or even viable in light of the acceptance and codification of prescriptive periods.  The answer is yes for at least two reasons.

First, in the event of a difficult choice-of-law analysis for a prescriptive period, or a difficult analysis on the point of accrual for purposes of prescription, laches—which does not include a specific time period—will provide the parties and the tribunal a related doctrine in considering the effect of the delay in bringing a claim.  Second, justice might not be served in requiring a party to defend the merits of some delayed claims even though the prescriptive period has not run.
The formalization of laches as part of the international rules governing contracts could renew its acceptance by parties and tribunals, particularly if a preliminary determination of the defense was encouraged.¹⁵⁶ Recognizing the absence of a fixed time period in this doctrine and the necessity for a broad consideration of the potential prejudice that can arise from the delay in bringing a claim, we propose the following rule governing the laches doctrine:

Regardless of the application or non-application of prescription, a party asserting a claim may be barred from asserting a claim or right due to the delay in its assertion under the doctrine of laches.  Under this doctrine, the tribunal shall consider and balance the fairness of allowing the claim to be asserted, taking into consideration the following factors and any others that may apply to the particular case:

(1) the amount of time that has elapsed between the accrual of the claim or right and its assertion;

(2) any neglect by the party in the delay of the assertion of the claim or right; and

(3) any prejudice to the responding party caused by the delay in the assertion of the claim or right, including, but not limited to, a significant increase in the potential damages at issue and the unavailability of evidence or witnesses.

{pagebreak}

3. Estoppel by Representation

Estoppel arose from common law equity and encompasses a number of different principles used in many different circumstances.  The doctrine is well-established in international law.¹⁵⁷ However, it has been formulated and applied in so many ways that, in the eyes of some, it has become almost meaningless and is merely a catchall to justify an argument couched in, or a decision premised on, perceived fairness.  As one author concludes,

[t]he imprecision that is the hallmark of estoppel theory in international practice, through troubling, is easy to explain.  In the absence of clearly developed procedural rules, a codified and uniform body of doctrine, or anything resembling evidentiary standards, international lawyers and judges are forced to improvise.  When they do, estoppel is a convenient term to offer since it can serve as an emblem for any of a number of notions fundamental to any system of law:  common sense, justice, consistency, fair play, or good faith.¹⁵⁸

In his comprehensive treatment on estoppel, Brown delineates the various applications of the term “estoppel”—estoppel by representation, estoppel by record, estoppel by deed, and estoppel by silence.¹⁵⁹ In the context of defending environmental and mismanagement claims related to PSAs and concessions, we will focus on estoppel by representation.

Estoppel by representation derives from general principles of good faith and fair dealing which are set forth in virtually every set of model laws governing international relations and contracts.¹⁶⁰ While some model rules include additional provisions regarding inconsistent behavior, typically such provisions focus on whether an agreement has been reached or modified.¹⁶¹ For the doctrine to become an effective tool,¹⁶² it must be more narrowly crafted than as a mere outshoot of “good faith and fair dealing” to prevent a party, including a state,¹⁶³ from asserting a claim or right in contradiction to its prior conduct and statements.

In the context of claims against a contractor relating to a concession or PSA, the state, through an agency, ministry, or state-owned company, will be heavily involved in the oversight and implementation of operational decisions.  These decisions typically include what exploitation strategies will be undertaken, what practices will apply to those operations, and which wells or areas will be prioritized over others.  Thus, the state will suggest various courses of action which may or may not comport with the contractor’s judgment.  If they agree, these decisions become the joint work of all parties.  If they are not in full agreement initially, compromises usually result, reflecting the natural give-and-take of all contracting partners.

To allow a state to later complain of those operational judgments after having accepted any benefits from such decision-making would strike even the most casual observer as unjust and unreasonable.  To require the contractor to later defend such judgments years after the fact—judgments that will be assaulted with the hindsight knowledge of commodity price movements, advances in technology, and actual results from those business decisions—results in another injustice.  Such claims could be (and should be) resolved through preliminary rulings on defenses such as estoppel by representation, saving the tribunal and the parties time and money.  The inclusion of a narrowly-defined estoppel by representation doctrine in model laws governing international contractual relations would facilitate such rulings:

A party is precluded from asserting a fact, right, or claim against another party if:

(1) the party acted or made a clear and unambiguous statement regarding that fact, right, or claim that contradicts its arbitration position;

(2) the act or statement was voluntary, unconditional, and authorized; and

(3) the act or statement was relied upon in good faith either to the detriment of the other party or to the advantage of the party making the statement or performing the act.

4. Acquiescence

Tribunals have sometimes collapsed the doctrine of estoppel by representation together with the doctrine of acquiescence.¹⁶⁴ However, they remain distinct doctrines with different legal underpinnings and merit separate recognition.  Specifically, unlike estoppel by representation which requires affirmative conduct or an affirmative statement, acquiescence derives from the notion of consent and applies when a party remains silent with full knowledge of another party’s conduct, thereby tacitly encouraging the party to continue its allegedly harmful conduct.

A robust use of acquiescence would incentivize the host state (who is subject to waiving claims by acquiescence¹⁶⁵) to become a more vocal participant in the PSAs and concessions, and, if necessary, for the host state to assert rights and bring claims in an immediate fashion or risk such claims and rights being lost.  If the doctrine of acquiescence is diluted, the host state has an incentive to silently permit performance by the contractor, accept the benefits from such performance, and later claim breaches related to the performance with full hindsight knowledge after the contractor can no longer alter its course of conduct.  In the words of the Iran-United States Claims Tribunal when faced with the silence of a host nation juxtaposed against its subsequent claim for damages from alleged mismanagement:

As for whether Philips was prejudiced by NIOC’s failure to object, that seems manifest.  Presumably, each of the Parties to the JSA relied on their partners to object in a timely manner to any proposed activity which affected the productivity or profitability of IMINOCO [the operating company established by the parties to the JSA].  A failure to object evidenced acquiescence to the continued policies of the joint venture.  Without some expression of objection at the time, other parties had no opportunity to consider their validity and, if appropriate, to propose alternative policies.  Indeed, because NIOC was the only party which held a blocking share of votes on the Board of Directors, it was especially incumbent upon NIOC to make timely objections to any activities carried out.  The prejudice flowing from that failure to object is now evident.  The Claimant is in no position to attempt to cure or remedy any of the defects in the production policies or activities that are now objected to.  Indeed, the Tribunal notes that the Claimant’s ability to execute such a cure would have been substantially limited since it had only a minority interest in the joint venture.  Nevertheless, the fact that no opposition was made at the time evidenced NIOC’s acquiescence, and indeed complicity, in the practices to which it now objects.  Consequently, the Tribunal holds, as a matter of law, that NIOC is now precluded from bringing this counterclaim.¹⁶⁶

Consistent with these recognized principles, we propose that the following definition of acquiescence be adopted and applied in rules governing international commerce and law:

A party is precluded from asserting a fact, right, or claim against another party if:

(1) the party knew of another party’s acts and their potential for resulting harm; and

(2) the party stood by in silence, accepting or permitting such acts to occur without protesting such acts.

B. Procedural Safeguards

1. Arbitral Rules Regarding Preliminary Decisions

As arbitration practice becomes more complex and aggressive, mechanisms for early resolution of some claims should be considered to keep arbitration as a cost effective and efficient means to resolve disputes.  Consistent with the flexibility and lack of established rules in arbitral practice, arbitral rules presently neither exclude a summary disposition of claims because of a legal defense (such as prescription, laches, estoppel, or acquiescence) nor do they expressly recognize or encourage such a practice.  For example, the IBA Rules on the Taking of Evidence in International Commercial Arbitration provide, “[e]ach Arbitral Tribunal is encouraged to identify to the Parties, as soon as it considers it to be appropriate, the issues that it may regard as relevant to the outcome of the case, including issues where a preliminary determination may be appropriate.”¹⁶⁷ The ICC’s Rules of Arbitration and the UNCITRAL Notes on Organizing Arbitration are similar.¹⁶⁸

The lack of such a mechanism in arbitration rules (or its infrequent use) represents one disadvantage from traditional litigation:

International arbitrations generally do not contemplate the scope of motion practice that exists in American litigation.  One disadvantage of international arbitration is that issues that may be dispositive of a case and appropriate for a motion to dismiss or summary judgment in court litigation may often be considered by arbitrators only after a full evidentiary hearing on all of the issues.  In such cases, international arbitration may in fact take longer than domestic US litigation that could potentially be concluded on a summary basis.¹⁶⁹

Motion practice of course is not unheard of in international arbitration.  Indeed, motion practice has actually become a more frequently utilized arrow in the quiver of parties to arbitration, particularly in ICSID proceedings.¹⁷⁰

Such motions, however, have tended to be limited to jurisdictional issues, not legal defenses that, if sustained, can streamline the proceedings by avoiding evidentiary submissions and hearings on the merits of stale, estopped, or acquiesced claims.  However, in the jurisdictional context, prescription arises, particularly in treaty disputes where a party argues that the tribunal is without jurisdiction because of a prescriptive bar, thus establishing that legal defenses are appropriate for early determination by the tribunals.¹⁷¹ The established practice of preliminary decisions on jurisdiction, challenges to the tribunal’s composition, and requests that a party post security should be considered for formal extension to legal defenses.

While the use of motion practice in international arbitration should not become the norm, it does have an appropriate place in resolving some claims expeditiously and in a cost-effective manner.  Arbitral rules and terms of reference¹⁷² to date have generally not accounted for these benefits—benefits that will increase as parties assert claims relating to practices and activities arising from long-standing contracts and relationships.  Indeed, formally recognizing legal defenses as a basis for preliminary rulings, which can be decided based on written memorials by the parties, harmonizes the common law tradition of summary resolution of issues with the civil law tradition of resolution of issues based on the written submissions of the parties.  International arbitration institutions preparing procedural rules and parties drafting arbitration clauses should consider including express language for such preliminary determinations, thereby reducing costs, resolving issues faster, and more narrowly focusing disputes.

2. Disclosures by Party-Appointed Experts

Some disparity exists between the treatment and perception of expert witnesses in the common law system and the civil law system.  Under common law regimes, parties interview, hire, and present their own experts who are “specialized form[s] of witnesses.”¹⁷³ In contrast, continental European courts and tribunals generally hire and appoint experts who are considered neutral guides and resources for the court or tribunal.¹⁷⁴ Harmonizing these two traditions, international arbitration practice sometimes involves both party-appointed and tribunal-appointed experts and authorizes the tribunal to require experts to meet and confer in an attempt to find common ground and clarify points in contention.¹⁷⁵ However, the effectiveness of this harmonization remains speculative at best, particularly taking into account the “cottage industry” of expert witnesses, the unwillingness of experts on opposing sides of a dispute to reach any meaningful consensus in many cases,¹⁷⁶ the additional costs to the parties in the appointment of a tribunal-appointed expert, and the lack of established procedures for the discovery of experts’ work and methodology.

Given the self-selected information provided by the experts and parties in current arbitration practice, opposing parties and tribunals face great obstacles in eliciting meaningful testimony from experts and in evaluating the competing claims from experts qualified in the same field.  Because of the increasing use of party-appointed experts, their lack of neutrality (whether real or perceived) and the specialization and complexity of the issues, new disclosure procedures specific to expert witnesses may be helpful additions to arbitral procedures, enshrined either in the institution’s rules or in the terms of reference established early in the proceedings.

While current rules requiring that an expert submit a report setting forth his conclusions and analysis and his curriculum vitae provide a starting point,¹⁷⁷ additional mandatory disclosures would promote greater neutrality, transparency, and objectivity as well as allow the parties and arbitrators to better prepare for the experts’ meetings and cross-examinations.  Those additional mandatory disclosures, which would be established early in the arbitration process, should include:

- the expert’s entire file including draft reports, correspondence, data, documents, and notes used in the evaluation of the issues within his or her expertise;

- a list of proceedings and cases in which the expert has provided testimony in the previous five years; and

- if the expert’s work includes any sampling or testing, then the expert and party must take duplicative samples and timely provide them to the opposing party and submit the results of all samples and tests.

These disclosure requirements would ensure even-handedness between parties in evaluating and presenting the technical issues in the proceeding, without imposing any substantial burden on the parties.  Indeed, they would foster greater harmonization of the common law and civil law legal regimes because the transparency in the experts’ work would prevent self-selection by the parties and their experts, requiring a more neutral and complete disclosure similar to the civil law expert model.

V. Conclusion

Globalization’s boom in the 1990s, including the exponential growth of transnational investment and the entry of numerous investment treaties that contain arbitration provisions, set the stage for arbitration to resolve more disputes than ever before.  Additionally, the rise in commodity prices and the renewed wave of nationalization of the early 21st century has led to higher arbitral stakes than ever before.  The trends of Americanization and nationalization, if left unchecked, may result in more complex, more expensive, and more aggressive arbitration tactics, particularly with regard to claims of poor environmental stewardship and poor resource management.  To ensure that arbitration continues to offer a fair and cost effective means to resolve disputes, arbitral institutions and practitioners should consider developing mechanisms to efficiently resolve claims that would be barred by well-established legal principles.  Otherwise, parties and arbitrators will be required to expend precious resources on legally deficient claims instead of focusing on the heart of the dispute.  Accordingly, arbitral institutions and tribunals should formalize legal defenses such as prescription, laches, estoppel, and acquiescence, clearly recognize the resolution of those defenses in a preliminary summary fashion, and require more expansive disclosures by expert witnesses.

Footnotes

For complete footnote citations, download the PDF.