In large investment projects, it is very important for investors to know that there is a procedure for resolving disputes. Private arbitration tribunals or courts of arbitration play a crucial role in this respect. International trade or large-scale cross-border investments are hardly conceivable without them.
Disputes can arise between investors or between governments, but also between governments and investors. The Brexit agreements provide for such an arbitration scheme, except for disputes relating to Northern Ireland. For that, the European Court of Justice remains competent.
In the relationship between the EU and Switzerland, on the other hand, there is no provision at all for an arbitrator. The EU tried to force the European Court of Justice on the Swiss, but as a result, negotiations on a new framework agreement between the two sides broke down last year.
Many trade agreements, especially those from 15 to 20 years ago, included an arbitration model called “investor-state dispute settlement” (ISDS). As foreign investors can sue governments through international arbitration, opposition to this has grown over the years, especially on the left side of the political spectrum. This is one of the reasons why the proposed trade agreement between the EU and the US called “Transatlantic Trade and Investment Partnership (TTIP)” fell through just a few years ago.
ISDS was also one of the reasons why Wallonia initially refused to ratify a new trade deal between Canada and the EU (CETA) in 2016. Eventually, a compromise emerged whereby a new “Investment Court System”, would be established to serve as a judicial forum to settle disputes. The EU’s highest court has now declared that this new system is in line with the EU Treaties. The main innovation is that ad hoc tribunals are replaced by a permanent tribunal, with an appeal mechanism.
Nevertheless, many disputes around the world continue to fall under the classic arbitration system. This is a good thing in itself, as it offers investors confidence in high-risk international projects. The number of international arbitration disputes is therefore steadily increasing. In 2021, the number was the highest ever worldwide. Still, there are challenges that deserve attention.
A few challenges
Decisions by international arbitration courts are final and binding. In theory, they cannot be appealed. There are, however, internal appeal procedures, as determined by the Convention of the ICSID (International Centre for Settlement of Investment Disputes), an independent department of the World Bank. However, these are often of little help when fraud is involved.
Fraud, however, can be a reason to have the execution of an arbitration award annulled by a regular court. However, the requirements for a court to reach such a decision are extremely high. Moreover, the procedures to obtain information to prove fraud are difficult, which means that the losing party is not in a strong position, especially since such a procedure is also expensive and complex.
The weaknesses in the system of international arbitration can be exploited in various ways. One is to withhold evidence in order to strengthen one’s position or to deliberately delay proceedings and increase legal costs in the hope of securing a settlement. This was the case – according to a decision by an ICSID tribunal – in the case of “Cementownia v. Turkey”. On the other hand, in the case of Sanum Investments v Laos, an international court ruled that there was probably obstruction of justice because witnesses had been paid not to testify.
Less scrupulous actors also do not hesitate to offer forged documents to arbitration tribunals in the hope of winning a case. This was the reason for the Paris Court of Appeal to annul an arbitration award won by Westman International Limited in the case “European Gas Turbines S.A. v. Westman International Ltd”. In the case of “Inceysa v. El Salvador”, it was found that the investor Inceysa had illegally influenced the outcome of the tender procedure by means of false financial statements and forged documents, in order to overestimate the degree of experience of the Spanish company.
Fraud is also sometimes committed during the enforcement procedure of an arbitration award or to prevent attempts to have the arbitration decision set aside. For example, in the case of “Stati v. Kazakhstan”, the Brussels Court of Appeal ruled in late 2021 that the Moldovan f
Sometimes fraud is also committed during the enforcement procedure of an arbitration award or to prevent attempts to nullify the arbitration decision. For example, in the case “Stati v. Kazakhstan”, the Brussels Court of Appeal ruled at the end of 2021 that the Moldovan Stati family had withheld evidence in an arbitration case in 2010 in a dispute with Kazakhstan over the takeover of an oil refinery in Kazakhstan. The family controls Ascom Group, Moldova’s largest oil and gas company. It is worth noting that it took no less than 11 years to overturn the judgment of an arbitration tribunal, which, according to the Brussels court, was thus misled.
Previously, in 2017, the UK Supreme Court had ruled that there was sufficient “prima facie” evidence of fraud, but earlier proceedings before a Swedish court to challenge the arbitration award had failed, which the family used as an argument to seize assets from Kazakhstan in our country, the Netherlands, Luxembourg and Italy, in order to enforce the 2010 arbitration award. In doing so, they had succeeded in having a Belgian bank seize half a billion euros from the Kazakh government, but the Belgian courts did not allow the executive attachment in the end.
Towards better legal protection
Fraud and deception can of course also occur in regular, national courts, but it is often easier to take action against them, because they take place within the same national legal order. In international arbitration, this is by definition not the case.
When governments or legitimate investors have to exhaust themselves in proving that the other party committed fraud in arbitration proceedings, it can be a long and tiresome process. Sometimes they just accept a settlement to get it over with. It would be good to include more safeguards to protect against fraud and abuse of process in the conventions governing international arbitration. After all, arbitration is vital for international trade as it facilitates investment abroad.
