Originally from Leading Arbitrators' Guide to International Arbitration - 2nd Edition

Preview Page 

I. INTRODUCTION

Even though arbitrations between States and commercial enterprises is a relatively new phenomenon in the history of international arbitration, such arbitrations have taken place for a long time. Generally speaking, arbitrations between States and companies started to become prominent after the Second World War. Since then all aspects of modern life have gone through a remarkable globalization, including the areas of trade, finance and investment. The practical importance of such arbitrations is beyond any doubt today. In many former socialist countries, foreign trade was a State monopoly, thus by definition engaging the State and/or State enterprises in commercial activities. In other countries, developing and developed, the State and State enterprises have to varying degrees been engaged in international trade and finance. Such participation has occasionally led to disputes which are often settled through arbitration.

During the last five to eight years there has been a dramatic increase in the number of State arbitrations. No official statistics are available to confirm this statement, but this is certainly the general perception of arbitration lawyers in most parts of the world. As I see it, this is the result of two overlapping and interdependent developments, viz., the transformation of the political and economic systems in Eastern Europe, including the former Soviet Union, and the significant increase in so-called investment arbitrations.

As far as Eastern Europe is concerned the most dramatic aspect is perhaps the dissolution of the Soviet Union resulting inter alia in more than a dozen new States. All the former republics of the Soviet Union have become independent States. All of them are now participants in international trade and finance, albeit to varying degrees. The new States and their State owned entities are actively trying to entice foreign investments in their economies, in particular perhaps in the oil and gas sector and with respect to other natural resources. The opening up of the economies of Eastern Europe has made such markets much more interesting for foreign investors than was the case in the past. Many of the new States have signed bilateral investment protection treaties (“BITS”) as well as other treaties addressing other aspects of foreign investment. Such investment treaties often include arbitration provisions which allow investors to initiate arbitration proceedings against the host State.

The other development – investment arbitration – is primarily the result of the spectacular growth of foreign investment in general during the past few decades. This has in turn led to a dramatic growth in the number of BITS. It is believed that around 2000 BITS are in force today. Most of them have provisions providing for arbitration as the dispute settlement mechanism with respect to disputes between the investor and the host State. In addition to BITS there are several multilateral agreements dealing with foreign investment and the protection thereof. One of the more important multilateral agreements is the North American Free Trade Agreement (NAFTA) entered into by Canada, Mexico and the United States in 1994. While there are several dispute settlement mechanisms in the NAFTA, it is particularly Chapter 11 which is of interest in the present context. Chapter 11 sets out specific standards for the treatment of foreign investments and lays down detailed arbitration provisions. Chapter 11 of the NAFTA has generated several arbitrations, many of which have been widely discussed and debated.