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Mr Konstantin Christie

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Treaty Claims vs. Contractual Claims in ISDS

I. Definition

1.

The distinction between treaty claims and contractual claims in investment law was first noted in the Decision on Annulment in the Vivendi v. Argentina I case, where the ad hoc committee observed that “whether there has been a breach of the BIT and whether there has been a breach of contract are different questions”.1 Although other tribunals have since argued “a breach of contract does not per se trigger a breach of treaty protection”,2 the distinction continues to stir debate.

2.

To determine whether, as a matter of jurisdiction, the claimant is bringing contract or treaty claims, the ad hoc committee in Vivendi I ruled that the tribunal must consider the fundamental basis of the claimant’s claim.3

3.

The modality by which the investment claims are brought therefore matters, because foreign direct investments (FDI) are often made in the form of direct contractual arrangements between the private investor and the host State’s relevant agency or State-owned company.

4.

Internationalisation clauses are a contractual reference to public international law that internationalises the relationship between the foreign investor and the State, and can be seen as a “choice of law clause for international law”.4 Some internationalisation clauses have attempted to remove investment contracts from the regulatory sovereignty of the host State, and instead make them subject to international law.5 The legal qualification of so-called “State contracts” remains controversial.6

II. Contract breaches as treaty claims

A. Jurisdiction of investment tribunals over contract claims

5.

In addition to the umbrella clauses or fork-in-the-road clauses, an investment arbitral tribunal composed under a Bilateral Investment Treaty (BIT) or Multilateral Investment Treaty (MIT) may derive jurisdiction over a contract claim from two sources.

6.

First, a BIT’s dispute settlement clause could incorporate jurisdiction of the arbitral tribunal over disputes arising from a breach of contract, irrespective of whether the alleged breach of contract simultaneously constitutes a breach of the BIT by means of, for instance, a broadly worded dispute resolution clause that would refer to “all disputes concerning investments”.7 In such a circumstance, the arbitral tribunal would likely have jurisdiction not only over the treaty claims but also over contract claims in light of such all-encompassing consent clause contained in the BIT.8

7.

Second, a breach of contract under certain circumstances may amount to a breach of international law, and in specific investment cases to a breach of a BIT, “where the standard breached and the rights affected by such breach fall within the scope of protection of the treaty”.9

B. Main criteria of distinction between contract and treaty claims

8.

Following the Vivendi I decision, several trends dealing with the distinction between treaty and contract claims have emerged. Practitioners and tribunals have suggested a distinction between treaty and contract claims based on five criteria which are not cumulative. Different tribunals have taken distinct approaches, but at least some of these criteria are present in most decisions:10 

  1. Cause of the Claim: while the cause of a treaty claim is based on a violation of the bilateral or multilateral investment treaty, the cause of a contract claim stems from a violation of a contract provision;11
  2. Content of the Right: usually treaty rights are contained and defined in BITs and international law. Contractual rights are defined by the contractual terms as well as the domestic laws of the host State;12
  3. Parties to the Claim: whereas in investor-State disputes the parties involved are usually any qualifying investor and the host-State, the parties to contractual disputes are only the parties that signed the agreement. This might or might not include the host State;13
  4. Applicable Law: treaty claims are governed by the provisions of the treaty, general principles of international law, and customary international law. Contractual claims are usually governed by the host-State’s domestic laws;14
  5. Host State’s Responsibility: a treaty breach will trigger the host State’s international liability, whereas a contract breach will trigger the host State’s contractual responsibility.15

III. Application of Regional Trade Agreements (RTAs) and International Investment Agreements (IIAs)

A. IIAs and treaty vs. contractual claims

9.

Practitioners should be aware of numerous common considerations arising from relevant IIA provisions, in order to assess the interaction between contractual and treaty claims. These considerations are discussed as follows.

10.

Firstly, a question may arise in relation to whether a tribunal has jurisdiction over pure contract claims. In principle, an investment arbitral tribunal has no jurisdiction over a purely contractual claim.16 It follows that an investment tribunal has jurisdiction only in the case where claimant’s claims arise out of a BIT.17 In this sense a tribunal concluded in a recent award that a contract breach is unlikely to be sufficient to retain a breach of the treaty, “and the State would have to have acted in its sovereign capacity” for a claim to arise under the respective BIT.18 In another case, the tribunal decided that it has no jurisdiction given that claimant’s claim was a simple contractual claim “dressed up as a Treaty case” that had already been decided in a previous arbitration between the same parties by a tribunal whose jurisdiction, contrary to the second tribunal, encompassed treaty claims, but also contractual claims.19

11.

Questions may also arise as to consideration of contract matters by tribunals. It has been noted in multiple awards that arbitral tribunals are sometimes called to distinguish between “deciding” issues relating to the conclusion, performance and termination of a contract (which is beyond the jurisdiction of the tribunal, unless the contract breach is also a breach of the treaty) and “taking into consideration” the facts surrounding the conclusion, performance and termination of such contract in order to decide the treaty claims submitted to the tribunal.20 For example, in the Biwater Gauff award, the tribunal clarified that it did not make determinations on specific contractual issues that were “not necessary to be decided as ingredients of the treaty claims”, but it has “taken into consideration facts concerning the contractual relationship” in order to reach its decision.21 In two other cases, the tribunals found it important to state that their jurisdiction is limited to treaty claims, but that in order to make decisions on such claims the arbitrators would have to consider contract matters “to the extent necessary to rule on the treaty claims”.22 However, both tribunals emphasized that in doing so they would continue to exercise “treaty not contract jurisdiction”.23

12.

Occasionally questions may arise as to whether a contract can be considered a protected investment. Generally, a sale and purchase contract can be considered an investment protected by a BIT only if it meets the requirements of the definition of “investment” as envisaged in the BIT.24

13.

Practitioners may also be required to assess when a breach of contract constitutes a breach of treaty. It is noteworthy that there is no uniform case law providing for circumstances in which a breach of contract would be considered as amounting to a treaty breach. On the one hand, tribunals have considered that typical contract breaches shall not be deemed to be a treaty violation,25 while on the other hand, tribunals have also considered that contractual rights are protected in the context of the standard of fair and equitable treatment.26

14.

Claims for breach of contract and treaty claims are juridically two different types of claims and remain so even where both arise out of the same factual circumstances. In a case where the investor has a right under both the contract and the treaty, it has a self-standing right to pursue the remedy accorded by the treaty.27 Yet, not every violation of a contract entered into by a State with an investor of another State is by itself a violation of international law standards,28 and therefore of a treaty.

15.

Another consideration may include the relevance of the exercise of sovereign State power in contractual performance. Tribunals faced with claims for a contractual breach have considered that a standard of protection under a BIT will only be breached if the host State had acted in the exercise of governmental and sovereign authority.29 

16.

There may also be questions of fact as to whether there is a contractual remedy available. In the Vivendi v. Argentina I Annulment proceedings, the tribunal noted that where the essential basis of a claim brought before an international tribunal is a breach of contract, the tribunal will give effect to any valid choice of forum clause in the contract.30 

17.

This seems to be the current trend. Following the decision in the Vivendi v. Argentina I Annulment proceedings, numerous tribunals held that in cases where the contract between the investor and the State contains a forum selection clause, such a forum clause does not deprive the tribunal of its jurisdiction to hear claims for the breach of treaty.31 Additionally, the said clause does not deprive the tribunal’s jurisdiction to interpret the contract in determining whether or not a breach of the BIT has occurred.32

18.

Gary Born’s dissenting opinion in Biwater Gauff (Tanzania) Limited v. United Republic of Tanzania further noted that an investment tribunal has the authority of deciding claims under a BIT and under international law, while the national court or commercial arbitral tribunal has the mandate of deciding claims under the applicable national law and the parties’ contractual agreement(s).33

19.

More recently, the tribunal in Malicorp v. Egypt cited SGS v. Philippines, Joy Mining v. Egypt, and LESI v. Algeria, in order to conclude that the protection of an investment treaty does not necessarily cover purely contractual claims where the parties to the contract have agreed to another clause granting jurisdiction, provided the parties are the same.34 

20.

Finally, questions may also be raised as to whether the scope of the contractual rights can be changed by the operations of a Bilateral Investment Treaty (BIT). This issue is part of an ongoing discussion and had to be examined on a case by case basis. For example, in ConocoPhillips v. Venezuela, Georges Abi-Saab opined on the question whether the scope of the contractual rights can be changed. In his dissenting opinion, he noted that “a BIT can add to the protection of the contractual rights but cannot change their configuration, i.e. their content, scope and limitations”.35

B. RTAs and treaty vs. contractual claims

21.

In relation to contractual vs. treaty claims in Regional Trade Agreements (RTAs) such as the (now historic) NAFTA, practitioners should consider the impact of a number of key tribunal cases. For example, it has been observed that “unlike many bilateral and regional investment treaties, NAFTA Chapter 11 [on investment] does not give jurisdiction in respect of breaches of investment contracts.”36 Therefore demonstrating a breach of a contract was in itself insufficient.37 Further, it has been found that “something more”38 than a breach of contract is required to establish a NAFTA claim, such as “an outright and unjustified repudiation of the transaction”39 without remedy open to the creditor or an additional breach such as denial of justice or discrimination.40

22.

Under the (now obsolete) NAFTA provisions, arbitral tribunals have dealt with the following situations in practice:

  1. The nullification of a concession by a municipality that had been upheld in three court proceedings was not considered a breach of NAFTA Article 1110 (Expropriation and Compensation). In its analysis, a tribunal noted that there was a “critical distinction between expropriation and an ordinary breach of contract”.41
  2. In a seminal case under NAFTA, an arbitral tribunal had to determine whether NAFTA Articles 1105 (Minimum Standard of Treatment) and 1110 (Expropriation and Compensation) were breached by Mexico. In its review, the tribunal observed that while NAFTA Chapter 11 does not give it jurisdiction “in respect of breaches of investment contracts”, this did not equate with a lack of jurisdiction of the tribunal “to take note of or interpret the contract”.42 In determining whether NAFTA Article 1105 was breached, the tribunal considered that it did not have to determine whether a State development bank complied with a credit agreement as said agreement had its own mechanism for determining compliance.43 The tribunal held that the persistent non-payment of debts by the municipality did not constitute an Article 1105 breach, provided that it was not an outright and unjustified repudiation of the transaction and provided that a remedy was open to the creditor.44 Further, the investor was not considered expropriated and a breach of NAFTA Article 1110 was not retained just because the investor’s debts were not paid or other contractual obligations towards said investor were breached.45

Bibliography

Alexandrov, S., Breaches of Contract and Breaches of Treaty: The Jurisdiction of Treaty-Based Arbitration Tribunals to Decide Breach of Contract Claims in SGS v. Pakistan and SGS v. Philippines, Journal World Investment & Trade, 2004, pp. 555-577.

Borchard E.M., Contractual Claims in International Law, Columbia Law Review, 1913, pp. 457-459.

Cantegreil, J., The Audacity of the Texaco/Calasiatic Award: René-Jean Dupuy and the Internationalization of Foreign Investment Law, European Journal of International Law, Vol. 22, No. 2, 2011, pp. 441-458.

Crawford, J., Treaty and Contract in Investment Arbitration, Arbitration International, Vol. 24, Issue 3, 2008, pp. 351–374.

Dolzer, R. and Schreuer, C., Principles of International Investment Law, Oxford University Press, 2012.

Feit, M., Responsibility of the State under International Law for the Breach of Contract Committed by a State-Owned Entity, Berkeley Journal of International Law, Vol. 28, Issue 1, 2010, pp. 142-176.

Lalive, J-F., Contracts between a State or a State Agency and a Foreign Company: Theory and Practice: Choice of Law in a New Arbitration Case, The International and Comparative Law Quarterly, Vol. 13, No. 3, 1964, pp. 987-1021.

Maniruzzaman, A.F.M., State Contracts in Contemporary International Law: Monist versus Dualist Controversies, European Journal of International Law Vol. 12. No. 2, 2001, pp. 309 – 328.

Martinez, L. and Bray D., The Interplay of Contract Claims and Treaty Claims: Bayindir v. Pakistan, TDM 2 (2006).

Tawil, G.S., The Distinction Between Contract Claims and Treaty Claims: An Overview’, in Van den Berg, A.J. (ed.), International Arbitration 2006: Back to Basics?, ICCA Congress Series, Vol. 13, Kluwer Law International; ICCA & Kluwer Law International, 2007, pp. 492-544.

Savage, J., Investment Treaty Arbitration and Asia: Survey and Comment, Asian International Arbitration Journal, 2005, pp. 1-48.

Schreuer, C., Investment Treaty Arbitration and Jurisdiction over Contract Claims – the Vivendi I Case Considered, in Weiler T. and May, C. (eds.), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, pp. 281-324.

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