At first glance, Geneva’s Hotel Kempinski seems a rather unusual law court. But in addition to its sweeping views of Lake Geneva and the French Alps, the five-star former Hilton hotel boasts considerable experience in conducting legal hearings, making it a favoured venue for international business arbitrations.

Anibal Martin Sabater, an international arbitration adviser at law firm Fulbright & Jaworski, says that the Kempinski and other five-star hotels, like Paris’s George V, are in high demand as de facto law courts.

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As FDI flows continue to rise – UN figures marked an increase of 34% from 2005 to 2006 – legal disputes between investors and governments are unavoidable. In recent years there have been investment arbitrations of all shapes and sizes, including:

  • a $30bn-plus series of arbitrations against Russia for its dismantling of the Yukos Oil Corporation;
  • a billion-dollar claim filed against Ecuador by energy giant Occidental, alleging expropriation of an Amazonian oil concession;
  • and a relatively modest $12.5m claim by Swedish energy firm Svenska Petroleum against the Republic of Lithuania arising out of an exploration and development contract.

 

While investment disputes are often resolved in local courts, many others are entrusted to international arbitrators. And, just as surely as countries compete for FDI, so they are competing for a share of the burgeoning international legal market that has grown up to resolve investment disputes.

Hot competition

In the arbitration world, a handful of long-established bodies like the Paris-based International Chamber of Commerce (ICC) Court of Arbitration and the Washington-based International Centre for Settlement of Investment Disputes (ICSID) enjoy a steady flow of cases.

The ICC, which handles hundreds of run-of-the-mill commercial disputes between businesses, also handles a smaller but significant number of arbitrations between foreign investors and their host governments. But it is the World Bank’s ICSID – a facility tailor-made in the 1960s to handle foreign investment disputes – that appears to be the industry leader.

As an arm of the World Bank, ICSID offers a special breed of arbitration. Governments wishing to join ICSID must sign an international treaty that serves to insulate ICSID arbitrations from review by local court systems. Tom Sikora, an in-house lawyer at US-based energy firm El Paso, says that ICSID arbitration rulings are often easier to enforce and execute, which means that parties are ensured a pay-day if they prevail in arbitration.

Although ICSID is widely viewed as the leading player when it comes to resolving investment disputes, others are vying for position.

Jim Loftis, a London-based partner at law firm Vinson & Elkins, notes that investment disputes represent only a slender piece of the overall arbitration pie – with trade or contract disputes still lying at the heart of most international arbitrations. But with many investment disputes being high stake cases, and often politically sensitive, they are a particularly attractive catch for arbitration venues.

Steady growth in the number of regional arbitration centres points to competition not just among countries, but also sometimes within countries, to provide dispute resolution services. In China, a new Beijing-based arbitration commission is hoping to attract business away from the longer-standing China International Economic and Trade Arbitration Commission.

It seems that every month, one location or another is seeking to sharpen its international profile. The government of Singapore has convened a high-level committee to examine ways in which the city-state can become a more desirable location for international arbitrations.

In March, the Frankfurt International Arbitration Centre hosted a public event exploring Germany’s merits as an international arbitration venue. One panel session asked if there was a distinctive brand of German arbitration and, if so, whether this was “too German” or “not German enough” to suit local and global tastes.

Recently, Madrid launched a major publicity campaign touting its geographic advantages as a bridge between Europe and Latin America, as well as a modernised arbitration law that came into force in 2003.

With so many cities and regions angling for a share of the global arbitration market, what does it take to succeed?

Established centres

According to Matthias Scherer, a partner at Geneva law firm Lalive, businesses are reluctant to take risks when it comes to selecting a place to resolve their disputes. As a consequence, parties tend to gravitate towards the same handful of leading locations, such as France, Switzerland, the UK, and the US. In the Asia-Pacific region, Hong Kong and Singapore are popular venues.

A handful of factors go into choosing such locations. Mr Sabater of Fulbright & Jaworski highlights the need for an abundance of well-trained local arbitration lawyers who can help foreigners to navigate through the local courts. He adds that infrastructure is also a major consideration: need for well-equipped hearing rooms, interpreters, court reporters and other administrative functions are needed.

Where a location lacks an existing arbitration centre, hotels are often tapped as places for arbitrators to ply their trade. Mr Sabater says that a surprising number of cases are administered in hotels, conferring a modest advantage on venues that have top-rate hotels and ease of international air connections.

However, the foremost consideration when choosing an arbitration location is the the local arbitration law and the local court system that will administer that law. Mr Sikora of El Paso says that the favoured locations are those whose legal systems show deference to the international arbitration process – and that can be relied on to enforce the rulings rendered by arbitrators.

Eric Ordway, a partner at Weil, Gotshal & Manges in New York, says that most parties are looking for “[local] laws that leave the arbitrators alone so that they can do their job”.

Mr Ordway represents both investors and governments in arbitration matters, and says that both typically look for a neutral site where the courts do not have a track record of interfering to derail arbitration proceedings.

The perspective of governments may differ depending on whether they are claimants or defendants in such lawsuits. Where governments are suing a foreign investor for non-performance under an investment contract, they will look for a process that can be relied on to yield an efficient and enforceable outcome. However, where governments are perpetually on the receiving end of disputes, as occurs under investment protection treaties – under which only governments can be sued – they may take a different view.

Sensitive issues

Investment treaty disputes sometimes raise sensitive public policy issues that governments might prefer to have reviewed by the courts. When foreign investors sued Canada and Mexico under the North American Free Trade Agreement for allegedly mistreating investments in the hazardous waste sector, both countries turned to the courts in an effort to overturn decisions rendered by arbitrators.

More generally, certain governments appear to be developing a deeper antipathy towards international arbitration. A backlash is brewing in some parts of Latin America, where governments such as Argentina and Venezuela have bristled at finding themselves on the receiving end of multiple investment treaty lawsuits from multinational investors. Recently, Bolivian President Evo Morales called for Latin American governments to withdraw from the World Bank’s ICSID facility due to a perceived bias in favour of multinationals.

From the investor perspective, a handful of usual suspects continues to loom large when it comes to choosing a site for arbitration. Time and again, arbitration practitioners mention Paris, London, Geneva, Zurich, Houston, New York, Singapore and Hong Kong as locations with many years of pro-arbitration decisions by local courts.

Breaking glass ceilings

The lesson for cities like Madrid and Frankfurt, which want to break into the top ranks, is that they face stiff and long-standing competition in the arbitration sweepstakes. Lalive’s Mr Scherer observes that it can be “very dangerous” for parties to stick their necks out and test the waters in new arbitration venues, rather than go with a known commodity.

Assuming that Madrid’s changes to its arbitration laws lead to a more arbitration-friendly climate for disputes, however, there could be some room for the city to grow as an arbitration centre. Mr Loftis of Vinson & Elkins says that Madrid may have some success in selling itself as a suitable place to resolve disputes between European and Latin American interests.

But, even when a location establishes its bona fides as a “pro-arbitration” legal system, it still faces the challenge of drawing away market-share from established players. Mr Sabater concedes that his home city of Madrid has its work cut out for it, with so many major competitors like Geneva, London and Paris on its doorstep.

Asked to pick one up-and-coming arbitration location, Mr Loftis mentions one that is in neither Europe nor North America: “If I had to bet on one emerging regional centre succeeding in attracting a steady following, it would be the Dubai [International Arbitration] Centre.”

The Middle East has several hundred billion dollars in “committed funds” for construction projects, which means that the region may produce a “significant number of disputes, including a growing number of investment disputes on the horizon”, says Mr Loftis.

He reckons that some of those disputes could get resolved in the region, if the Dubai Centre can convince risk-averse investors and governments to rely on its offices.