Arbitration is a form of private dispute resolution. The parties involved in the dispute appoint one or more persons – as a rule one or three – who will give a decision on the dispute submitted to them. If parties prefer arbitration, they will have to conclude an arbitration agreement, which will (for the greater part) rule out the matter being decided by the national court. An arbitration agreement may also be formed when parties, either implicitly or explicitly, agree to accept an arbitration clause in the general terms and conditions. There are a number of advantages attached to arbitration, compared with conducting legal proceedings before the national court, but a number of disadvantages should also be mentioned.
The advantages of arbitration
An arbitral award may easily be enforced in the vast majority of countries in the world, something which to a far lesser extent applies, in countries outside the EU, to judgments given by national courts. The simple enforcement of awards is an important advantage of arbitration, particularly in international disputes (outside the EU).
Another advantage may be that a dispute settled by means of arbitration is handled with a far greater degree of confidentiality than a dispute dealt with by the national court. Outsiders, for example, as a rule cannot be aware of the fact that certain parties are involved in arbitration proceedings, nor is it possible for them to attend hearings of the tribunal, unlike in cases dealt with by national courts.
Another advantage of arbitration is that the appointed arbitrators may have special expertise at their disposal, which may be crucial to the dispute submitted to them. An arbitral tribunal that has been asked to hear and determine a takeover dispute may, for example, consist of a registered accountant, an M&A lawyer and a national court judge.
The disadvantages of arbitration
Arbitration may be a time-consuming and expensive way of having a dispute settled. The length of arbitration proceedings in part depends on the persons acting as arbitrators. This is something that will have to be considered by the parties in their choice of arbitrators. Of great importance also to the effectiveness of the procedure is the choice of the place, or legal place, of arbitration.
As a rule the amount in costs a losing party is ordered to pay in arbitration is higher than in cases before the national courts. Obviously this will considerably reduce the costs of a winning party, but the losing party should on the other hand expect having to pay significantly extra costs.
Most arbitration cases are administered by arbitration institutes such as the Nederlands Arbitrage Instituut (NAI), the International Court of Arbitration of the International Chamber of Commerce (ICC)), or one of the many specialist or market segment-oriented arbitration institutes. The link below will provide you with a list of websites of a number of arbitration institutes.
Great deal of freedom in structuring a procedure
Within the limits of the law the parties are free to organize the arbitration proceedings as they see fit. In the vast majority of cases the parties themselves will not draw up all the procedural rules, but they will make a reference to the arbitration regulations. In principle it is permitted to deviate from those regulations.
The legal place of arbitration is determined by the two parties themselves, and if they fail to do so, by the arbitral tribunal. The place of arbitration should be distinguished from the place where the hearings take place, and determines the question by which arbitration laws the proceedings will be governed. If the place of arbitration is in the Netherlands, the Dutch Arbitration Act applies (articles 1020-1073 Dutch Code of Civil Procedure). However, in international arbitration cases in particular specific international rules apply, alongside the arbitration regulations and the applicable laws on arbitration, such as the IBA Rules on the Taking of Evidence in International Arbitration and the IBA Guidelines on Conflicts of Interest in International Arbitration. See also: www.ibanet.org.
A special branch of arbitration is international investment arbitration.
Legaltree’s arbitration partners conduct arbitration proceedings both in this country and abroad, as well as arbitration-related procedures before the national courts, such as procedures for the enforcement of arbitral awards, the annulment of arbitral awards, objecting to the appointment of arbitrators, etc. They also act as arbitrators or as secretaries to arbitration tribunals.
These days many of the conflicts are international in character, giving rise to the following questions:
- Before which court or arbitration panel may the conflict be brought?
- Which law is to be applied to the conflict by the court or arbitration panel?
- How will you make sure that the award given is more than just a paper tiger – how, after having obtained a favourable award, will you actually be paid your money and/or be supplied with your goods or services?
Answering these questions and taking legal action over them is what Legaltree has particularly specialized in.
The Legaltree partners have very extensive experience in arbitration. We can assist your undertaking efficiently and effectively, if necessary by setting up a team of lawyers with different specialisms. You will be assured of the best results if our lawyers are approached at a very early stage of a dispute, or potential dispute. At such a moment we will still be able to steer your case into the right direction. Making or creating the correct tactical choices in time increases the chances of avoiding, or being successful in, legal proceedings.
Website Arbitrage bodies
- International Chamber of Commerce (ICC)
- London Court of International Arbitration (LCIA)
- Nederlands Arbitrage Instituut (NAI)
- Raad van Arbitrage voor de Bouw (RvA)
- Raad van Arbitrage voor de Metaalnijverheid en –Handel
- Stockholm Chamber of Commerce (SCC)
- Swiss Chambers’ Arbitration Institution
- UNUM (voorheen TAMARA)
Our other practice areas
Liability, Damages and Insurance law
Construction, Real Estate and Leasing
Sustainable Energy and Environment
Financing and Securities law
Mergers and Acquisitions
Intellectual Property law (IPR) and Advertising
Insolvency and Restructuring
International Trade and Transport
Competition and Tendering
Corporate criminal law
Government Authorities and Corporate law
Company and Corporate Governance
International investment arbitration
When engaging in international trade and foreign transactions, entrepreneurs are often faced with problems which are caused – or fail to be resolved in time – by a foreign government. For example, a permit that was about to be granted may not be issued after all, taxes or duties may all of a sudden be raised, concessions already granted may be withdrawn as a result of public protests or an investor’s items of property may be expropriated without payment of just compensation.
In many countries such conflicts with the authorities may be put before the local national court. However, in a number of countries this approach does not provide an attractive perspective, due to the absence of an efficiently operating, independent and/or unbiased judiciary. In such cases a solution may be provided by international investment arbitration. The investor’s chances of getting effective legal protection will increase if, prior to making the investment, he has considered the possibilities offered by international investment arbitration. However, the above is not always the subject of (sufficient) attention.
What is international investment arbitration?
International investment arbitration is based on treaties, particularly bilateral investment treaties (Bilateral Investment Treaties: “BITs”). BITs have been concluded by the Netherlands with more than 100 countries. Worldwide the network consists of more than 3,000 BITs. Generally speaking most BITs concern the same way of investment protection. The two countries that have concluded the BIT undertake that they will deal with investments from other countries fairly and equitably.
Most BITs contain a clause under which an investor from one contracting state may put a claim against the other contracting state before an arbitral tribunal. This means that the investor is in that case not obliged to approach the courts of the foreign state where the investment was made. Instead the investor can put the dispute before independent and impartial arbitrators. The award given by those arbitrators is binding and capable of being enforced (practically) worldwide, provided assets belonging to the state in question can be localized, thus preventing the host country from in any way stopping a dispute between the host country where the investment was made and the investor from being settled, or from being settled impartially. Particularly in states with a ‘questionable’ reputation this will provide major protection to investors, but international investment arbitration may also benefit an investor in countries with a sound reputation.
Hieronder wordt in algemene zin uiteengezet welke soorten investeringen zijn beschermd en hoe internationale investeringsarbitrage in zijn werk gaat. Deze uitleg is gebaseerd op de bescherming die BITs in het algemeen geven. Het is echter van groot belang om na te gaan of in een concrete situatie een BIT van toepassing is, en zo ja, welke specifieke bepalingen dat verdrag kent. Hoewel de ongeveer 3.000 BITs grosso modo vergelijkbare bepalingen kennen, kunnen verschillen in de tekst van het verdrag van groot belang zijn voor de mate van bescherming van de investeerder.
What types of investments are protected?
Most Dutch BITs apply to investments made in the form of ‘any kind of asset’. This means that a BIT often has a very wide scope. As a rule the following are in any case covered by the scope of protected investments: stocks, items of movable and immovable property, loans, IP rights, concessions and permits. This means that the form in which an investment has materialized is rarely an obstacle when it comes to providing protection to the investment under a BIT.
Which investors enjoy protection?
Protected are investors from the contracting state, who have made an investment in the other contracting state. Within the context of, for example, a BIT between the Netherlands and China, Chinese investors may enjoy protection against acts of the Dutch state, while Dutch investors may enjoy protection against acts of the Chinese state.
Indirect investments may also enjoy protection, depending on the way the relevant BIT has been phrased. This means that, in principle, an investment made in China by a Luxembourg subsidiary of a Dutch public company with limited liability (N.V.) will enjoy protection under the Dutch-Chinese BIT. In that respect it should be noted that protection on the basis of “smartly” structured investments is put into question these days; in some BITs protection is provided only, if the company actually performs business activities in the home country.
Against what acts is the investment protected?
Protected investments are protected against all acts and omissions on the part of any entity of the host country that are in breach of the protection clauses of the treaty. Again the scope is a very wide one. Examples of situations that might cause the host country to be liable are:
- After protests from residents a municipal council withdraws a permit it had earlier granted to an investor.
- A district or province refuses to perform a contract it had entered into with the investor.
- A minister refuses on improper grounds to grant a permit required for implementing an investment previously approved by the authorities.
- The central bank refuses to take action against the conduct of third parties which is causing unlawful damage to the investor’s investment.
- Parliament approves a bill that seeks to impose stricter conditions on investments in a specific sector, despite earlier promises to the contrary.
- An investor’s plant is looted by soldiers.
- A civil servant on improper grounds withdraws a temporary residence permit that had been granted to the director / sole shareholder of an investment vehicle.
What are the costs of international investment arbitration?
Arbitration proceedings on the basis of a BIT may be a very costly affair. The interests involved are often considerable, not only for the investor, but also for the host country. The host country not only stands to lose money, but its reputation is also at stake, and it will want to do all that is in its power to prevent an investor’s claim from being allowed.
On the other hand a considerable reduction in costs may be achieved by the choice of the law firm that will deal with the matter and the arbitrators who will hear the case. Moreover, it is not uncommon for a settlement to be reached with the host country as soon as the investor informs the host country of its intention to start investment arbitration proceedings.
What is the procedure?
The precise procedure depends (once again) on the text of the applicable BIT. Roughly speaking the procedure will be as follows:
The investor sends a letter to the host country, informing it that arbitration proceedings will be initiated and appointing the arbitrator of its choice. The host country subsequently has the right to appoint an arbitrator as well, after which the two appointed arbitrators will jointly choose a third arbitrator. If the host country fails to appoint an arbitrator, the BIT usually contains a provision allowing a third party to appoint the arbitrator in question, so that the host country cannot prevent the arbitration from going ahead.
The arbitral tribunal will provide the parties with the opportunity to give a brief outline of the dispute, after which the further procedure will be decided in joint consultation with the parties. Both parties have the right to submit pleadings, after which a hearing will be held. After the hearing, and the submission of additional pleadings, if any, an award will be given by the arbitral tribunal.
On the basis of two treaties in particular (the New York convention and/or the ICSID Convention) the arbitral award may be duly enforced in the vast majority of countries, provided the investor is able to localize the host country’s assets in respect of which the award may be enforced. In certain countries, including the Netherlands, attaching by garnishment is an available option.
Investment arbitrage within the EU has become more difficult
A large number of bilateral investment treaties have been concluded by the various Member States of the European Union. However, in 2018 it was ruled by the Court of Justice of the EU that those treaties (and in particular the possibility to put a dispute before an arbitral tribunal on the basis of those intra-EU treaties) are in breach of European law. This ruling has made it a lot more difficult and uncertain to invoke an investment treaty concluded between two EU Member States. For the consequences of the decision by the Court of Justice, see: article (in Dutch) Beschouwingen naar aanleiding van het Achmea-arrest van het Hof van Justitie EU. Further to this 2018 ruling intra-EU treaties have been terminated.
What should I pay attention to when preparing for international investments?
When planning to make cross-border investments, the most favourable tax regime is often considered first. However, attention should also be paid by the investor to the most favourable BIT regime, which means that the investor has to check if a BIT does at all apply to the relationship between his home country and the intended host country. An indicative source for an answer to that question may be http://investmentpolicyhub.unctad.org/IIA.
If no BIT has been concluded between the investor’s home county and the country where the proposed investment is to be made, the option of structuring the investment by way of a third country may be studied, as a result of which investment protection may be obtained after all, for, as stated earlier, indirect investments may under certain circumstances also be eligible for protection. For example, a Dutch investor wishing to start business activities in Italy (no BIT has been concluded between the Netherlands and Italy), may consider structuring the investment by way of a subsidiary in Hong Kong. In this way the investment of the Dutch may still enjoy (indirect) protection under the provisions of the BIT between Italy and Hong Kong, should a dispute arise with the Italian authorities about the investment in question.
Within this context it is important to point out that national investments fall outside the scope of BIT protection. Nevertheless the investor may still seek BIT protection when planning investments in his own country, for example by structuring the investment by way of a subsidiary abroad. Whether this will work inter alia depends on the text of the applicable BIT.
Finally: if the investor plans an investment abroad and within that context enters into an agreement with the host country, an exclusive jurisdiction clause (as is customary in such documents) to the effect that any disputes between the investor and the host country arising from the agreement shall be submitted to the exclusive jurisdiction of the national courts of the host country, does not rule out a BIT procedure.