Introduction
Most often, investors engage in investment activities by establishing or investing in a local company in the host State(s) to enable them participate in large-scale projects and take advantage of some economic opportunities in those State(s). By virtue of these investments, there exists a business relationship between an investor and the host State, which occasionally is prone to disputes. A vast majority of bilateral investment treaties (BITs) as well as some regional agreements and other instruments, contain provisions for settlement of disputes between Investors and the host State[1].
A significant provision of investment treaties is the one on settlement of disputes arising from such treaties between the investor and the host State. This provision, although, may be drafted in different terms, provides for recourse to international arbitration (“arbitral tribunal”) or domestic courts of the host State in settlement of disputes, specifying that a choice made by the investor shall be exclusive and final. This is called the fork in the road (“FITR”) clause and by implication, an investor cannot institute an arbitral proceeding to address the same claim for which he had instituted a suit in the domestic court. Thus, the question frequently asked has been the yardstick for determining fork in the road objections in a subsequent claim initiated before an arbitral tribunal by an investor. It has been opined that the answer to the FITR objections rests in the strict application of the principle of triple identity test involving the identity of parties, object, and cause of action[1]. This article seeks to examine the meaning and forms of FITR clauses, and the extent of the scope of triple identity test in resolving FITR jurisdictional objections.
Fork-In-The-Road Clause
FITR clause is simply defined as a clause in investment treaties requiring investors to elect between either litigating investment disputes in domestic courts of the host State or bringing same to the international arbitration tribunal (“arbitral tribunal”), whereby the investors’ choice, once made, is deemed final and operating to the exclusion of the other remedies. It is a clause that prohibits an investor from submitting an investment dispute to a particular court or tribunal if he has previously seized another court or tribunal for the same dispute[3]. In M. C. I. Power Group v. Ecuador[4], FITR clause was summarized by the arbitral tribunal as “an option, expressed as a right to choose irrevocably between different jurisdictional systems. Once the choice has been made there is no possibility of resorting to any other option. The right to choose once is the essence of the fork-in-the-road rule”.
The FITR clause seeks to curb identical parallel litigation which is usually created where domestic courts are foreseen as an alternative forum for the resolution of investment related disputes. The identical parallel litigation[5] is most times associated with the possibility of conflicting legal outcomes, the risk of forum shopping, prospects of double recovery and abuse of process[6]. To this end, most Bilateral Investment Treaties (BIT) contain provisions aimed at preventing investors from re-litigating the same dispute before an arbitral tribunal if it is not satisfied with the outcome of the litigation in the domestic court of the host State, or vice-versa[7].
FITR clause has also been described as a preventive rule which bars the claimant from bringing the same dispute that has previously been submitted to another forums[8]. This is akin to the finality or irrevocability of the choice made by the investor[9]. One of the questions that may arise from the above is the exact scope of the preclusive effect of FITR clause in situations where the initial proceeding was not concluded. For instance, where an investor initiates a suit before the domestic court and subsequently withdraws same, does the withdrawal amount to inapplicability of the FITR provision? In proffering an answer to the above question, Markus A. Petsche[10] submitted that although there appears to be no case law on this issue, a literal interpretation of typical FITR clauses would suggest that the discontinuance of the first proceeding does not have the effect of resurrecting the right to initiate investor-state arbitration proceedings.
Forms Of Fork-In-The-Road Clauses
In practice[11], it can be suggested that there are three main forms of FITR clauses. The first of them all and arguably the most common FITR clauses are the ones which provide that investors may only resort to investor-state arbitration (“arbitral tribunal”) if they have not previously submitted the dispute to any domestic court or tribunal. An example of this is the Article VII of the US-Argentina BIT[12], which allows an investor to commence settlement of disputes before an investor-state arbitral tribunal, provided that the investor “has not submitted the dispute for resolution under any other domestic or administrative tribunal of the host State. Some other examples of this FITR clauses are US-Estonia BIT[13], US-Czech Republic BIT[14] and US-Egypt BIT[15].
Secondly, there are clauses which provide that an investor has a choice between several dispute settlement mechanisms (the cafeteria style approach), specifying that once the investor has made a choice, the choice is final. The preclusive effect of this form of FITR is derived from the irrevocability of the investor’s choice. Some examples of this form of FITR provisions are found in France-Argentina[16], Chile-Spain[17] and Lebanon-Italy BITs[18].
Finally, there are clauses that offer an investor a choice between several dispute settlement mechanisms, without expressly stating that any election of those choices is final or bars it from electing another subsequently. This is regarded as an implied FITR clause and considering that they require investors to choose a particular dispute settlement mechanism, it can indeed be argued that, by implication, the non-chosen options are no longer available once the investor has made his choice[19].
Fork-In-The-Road Clause Jurisdictional Objections
FITR jurisdictional objections are usually raised by the host State at an arbitral tribunal as a shield in a bid to discontinue a claim on issues that had been previously instituted by an investor at the national or domestic court. This usually occurs where the investor had initiated proceedings previously against the host State or its entity before the domestic court of the host State and subsequently initiates a similar claim against the host State before an arbitral tribunal. It is important to note that FITR clause is not triggered unless the domestic proceedings and arbitration concern the same dispute. In arbitral practice, the jurisdictional objections on FITR clauses raise the question of whether the dispute before the domestic court is the same with the dispute brought before the arbitral tribunal such as the International Centre for Settlement of Investment Disputes (“ICSID”) tribunal. For instance, where the local company (indirectly owned by the investor or for which the investor is a shareholder) institutes an action in the domestic court seeking administrative or contractual claims, and subsequently, the investor commences an action at an arbitral tribunal under BIT. In such cases the host State will usually raise an objection relying on the FITR clause under the BIT. In Enron Corp v. Argentina[20], Enron Corporation and Ponderosa Assets, L.P. was the investor and indirectly owned a significant portion of the shares of TGS (major local network for the transport and distribution of gas). TGS instituted proceedings against Argentine provinces in respect of taxes imposed on its operations. Subsequently, the Claimants (Investor) instituted investor-state arbitration proceedings under the US-Argentina BIT, arguing that the tax measures were in violation of the general international law, and the BIT.
From the above, the question that begs for answer in FITR jurisdictional objection is whether the dispute brought before the arbitral tribunal is the same as the one brought before the domestic court, and the yardstick to be used in determining whether the disputes in the two proceedings are actually the same. In proffering answer to the above question, it has been opined that strict application of the triple identity test answers questions of sameness of dispute[21]. In light of the above, we shall subsequently look at the scope of the triple identity test.
Tripe Identity Test
As stated earlier, the triple identity test has been adopted by several arbitral tribunals in determining the FITR jurisdictional objections. For the tribunal, “sameness” of disputes in both proceedings is primarily the requirement for the determination of such objections. This means that for the purpose of establishing whether the dispute submitted to the domestic court jurisdiction is the same as the one submitted to the international arbitration jurisdiction, the arbitral tribunal has applied the triple identity test which requires sameness of parties, object and cause of action [22].
The triple identity test was first applied by the ICSID tribunal in Benvenuti & Bonfant v. Congo[23]. It is important to note that the case was not based on the FITR provision but an objection based on the principle of Lis pendens[24]. In that case, Congo raised a jurisdictional objection in respect of the ICSID arbitration proceeding initiated by Benvenuti & Bonfant in accordance with the arbitration clause contained in the contract, relying on the existence of proceedings which Congo had initiated in the Revolutionary court of Brazzaville against Mr. Bonfant. The arbitral tribunal rejected jurisdictional objection after considering that for a stay of proceedings to apply, the “identity of the parties, of the subject matter, and of the cause of the suits pending before the two tribunals” must be the same.
Despite the differences in the legal bases, several arbitral tribunals have adopted the test established by the Benvenuti & Bonfant tribunal in the context of determination of FITR jurisdictional objections[25]. In determining the FITR jurisdictional objection, the arbitral tribunals have applied the lens of strict conditions known as the triple identity test which stipulates that the dispute submitted to the domestic court must involve the same parties, the claim must have had the same object and the same cause of action as the dispute brought before the arbitral tribunal. The test requires strict satisfaction of the three prongs in determining FITR jurisdictional objection. Arbitral tribunals have also maintained that the requirements of triggering the FITR provision need to remain difficult to satisfy, since it could have a chilling effect on the submission of disputes by investors to domestic fora, even when the issues at stake are clearly within the domain of local law. To create an osmosis of this test, the constituent units of the test will be discussed in seritam.
Identity Of Parties
The identity of parties is the first prong of the triple identity test. It requires that the parties in both proceedings are identical, that is, the parties in the dispute submitted in the domestic court proceeding are the same with the parties before the arbitral tribunal proceeding[26]. Lack of identity of parties in both proceedings creates a bar to the FITR jurisdictional objection. In the Olguin’s case, the Claimant had purchased bonds from a finance company (the payment of which was guaranteed by the Paraguayan government). The domestic court proceeding was brought against the finance company seeking to declare the finance company bankrupt. Subsequently, Olguin initiated arbitration against Paraguay. The lack of identity of the respondents was one of the relevant factors for the decision of the arbitral tribunal in this case. Some other cases where the lack of identity of parties formed the relevant factor for the decision of the tribunal includes the cases of Lauder v. Czech Republic[27], LG&E V. Argentina[28], Pan American v. Argentina[29], and Total v. Argentina[30].
As stated earlier, most investors make their investment in the host State indirectly by investing in a locally incorporated company[31] in the host State. The local company will in turn execute commercial contract(s) which contains a commercial arbitration agreement relating to the investment with the host State or its entity. The local company, although controlled either in part or whole by the investor, does not constitute a separate legal entity under the laws of the host State. However, the investment treaty tribunal deems the investor and the local company as a separate legal entity. Thus, where the local company initiates a contractual based suit against the host State or its entity at the domestic court, the investor can subsequently initiate a BIT based claim against the host State[32] without being barred by the FITR clause.
Cause Of Action
This is the second prong of the triple identity test for the purpose of determining FITR jurisdictional objection. The crux of this limb is to ensure that the claim at the domestic proceeding is different from the one brought before the arbitral tribunal. Arbitral tribunals adopt an approach which prioritises the characterisation of a claim (dispute) and in this context, the tribunals construe treaty claims as being distinct and independent from contractual claims since the two arise under separate legal instruments[33].
The distinction between treaty claims[34] and contract claims[35] is a fundamental distinction of international investment law[36]. It is generally accepted that since contract and treaty claims are distinct, contractual forum selection clauses have no impact on the ability of treaty based arbitral tribunals to hear claims alleging treaty breaches[37]. This is predicated on the basis that the treaty-based jurisdiction of international arbitral tribunals to decide on violations of these treaties is not affected by domestic forum selection clauses in contract. Thus, where the claim brought before the domestic court is based on breach of contractual agreement, a Claimant cannot be estopped from initiating a subsequent action on breach of BIT at the arbitral tribunal. The identity of cause of action views the two breaches as distinct from each other.
In CMS v. Argentina[38], the arbitral tribunal observed that several ICSID tribunals have held that contractual claims are different from treaty claims and even if there had been or is a pending recourse to the domestic courts for breach of contract, it would not prevent submission of the treaty claims to an arbitral tribunal. Thus, in FITR provision, the initial proceeding need not have been concluded in terms of ultimate resolution of the dispute. The proceedings could be abandoned midway especially where the claimant does not foresee positive outcome. This is what distinguishes the FITR clause from the common law doctrine of res judicata. Concordantly, in Occidental v. Ecuador[39], Occidental had undertaken the exploration and production under a participation contract executed with Petroecuador (a State-owned entity). Occidental had on a regular basis applied for and obtained the reimbursement of VAT on various purchases it made in relation to its operations. However, sometime in 2001, the Ecuadorian tax authority adopted policies denying all further reimbursement applications and requiring the return of the amounts previously reimbursed. Occidental filed several suits in Ecuadorian tax court challenging the validity of the policies. While the suits were still pending before the Ecuadorian tax court, Occidental initiated a claim at the arbitral tribunal alleging various breaches of the treaty. Ecuador raised FITR jurisdictional objection at the arbitral tribunal. The objection was rejected on grounds that the dispute before the domestic court was not treaty-based[40].
Notably, the case of Occidental Exploration identified an additional factor for the determination of FITR jurisdiction objections. The case added that the choice must be made freely and not under any form of duress. If the domestic law imposes pressure upon the claimant to submit a claim to the domestic court of the host State, then the freewill of the investor becomes an issue. Ecuadorian tax law in that case, required the taxpayer to apply to the courts within 20 days following the issuance of any policy that might affect the taxpayer; otherwise, the policy would become final and binding. The arbitral tribunal considered this law to exert duress on the Claimant. This was because even if the claimant had taken its dispute to arbitration, the claimant would have forfeited its right to object[41]. The implication of this is that where an investor was compelled to initiate a suit before the domestic court by virtue of an existing domestic law, such an investor cannot be said to have exercised the FITR clause. Therefore, the choice must be exercised freely and not under duress by the host state, save in exceptional cases where umbrella clause has been relied upon to elevate contract breaches to treaty claims.
Accordingly, for a FITR jurisdictional objection to be sustained, the respondent must show that claims at the domestic court are on all fours the same with the one submitted before the international arbitral tribunal. Where the claims are not the same as explained above, the criterion of identity of cause of action will stand in the way of the jurisdictional objection. Where exhaustion of local remedy becomes a condition for activating consent of the host state, FITR objection may not be taken for a Claimant’s compliance with such conditionality.
Identity Of Object
Identity of object is the third prong of the triple identity test. This prong requires that the reliefs or remedies sought by the Claimant in both proceedings must be the same for the jurisdictional objection of FITR provision to preclude a subsequent proceeding. Thus, if the specific domestic remedy is not available in the remedies sought for at the arbitral tribunal, then it is clear from the outset that the FITR provision has not yet been passed. In Olguin v. Paraguay[42], the Respondent raised an objection on grounds that the Claimant had initiated proceedings in the Paraguayan courts, seeking an order declaring the bankruptcy of the finance company whose obligations were allegedly guaranteed by Paraguay. The ICSID arbitration tribunal rejected the FITR objection on grounds that the relief requested by the claimant in the domestic proceedings was not identical to the relief sought in the ICSID arbitration proceeding.
Conclusion
The FITR provisions have been the beauty of international law and have over the years formed the basis for the arbitral tribunal’s rejection of jurisdictional objections usually raised by the host State. The rejection of these objections finds eloquence in the strict satisfaction of the triple identity test, involving the identity of parties, identity of cause of action and identity of object. The arbitral tribunals have also maintained that the requirements of the test need to remain strict on grounds that it has chilling effect on the submission of disputes by investors to domestic fora, even when the issues at stake are clearly within the domain of local law. This may cause claims being brought to international arbitration before they are ripe on the merits, simply because the investor is afraid that by submitting the existing dispute to local courts or tribunals, it will forgo its right to later make any claims related to the same investment before an international arbitral tribunal[43].
However, it is important to note that some other arbitral tribunals have departed from the application of the triple identity test and simply relied on the “fundamental basis” of the claim, which focuses on the subject matter of the dispute (having the same normative sources) brought before the different fora[44]. This departure is informed by the fact that strict application of the triple identity test in relation to FITR clause would deprive the clause from any practical meaning, insofar as the purpose of the clause was precisely to ensure that the same dispute is not litigated before different fora[45]
AUTHORS: Harrison Ogalagu and Nnamdi Ezekwem
Footnotes
[1] United Nations Conference on Trade and Development, ‘Dispute Settlement: Investor-State’, UNCTAD Series on issues in International Investment agreements https://unctad.org/system/files/official-document/iteiit30_en.pdf accessed on 9th April 2023.
[2] Christoph Liebscher, ‘Part II Jurisdiction, 9 Monitoring Of Domestic Courts In Bit Arbitrations: A Brief Inventory Of Some Issues https://opil.ouplaw.com/view/10.1093/law/9780199571345.001.0001/law-9780199571345-chapter-9 accessed on 9th April 2023.
[3] Markus A. Petsche, ‘The Fork in the Road Revisited: An Attempt to Overcome the come the Clash Between Formalistic and Pragmatic Approaches’ https://openscholarship.wustl.edu/cgi/viewcontent.cgi?article=1682&context=law_globalstudies accessed on 10th April 2023.
[4] ICSID Case No. ARB/03/6, Award, 31 July 2007, p. 42
[5] Supervision y Control v. Costa Rica, ICSID Case No. ARB/12/4, Award, 18 January 2017
[6] Sorin Dolea, ‘Effect of Forum Selection in Investment Arbitration’ https://rlw.juridice.ro/17837/effect-of-forum-selection-clauses-in-investment-arbitration.html accessed 9th April 2023; Christer Söderlund, Lis Pendens, Res Judicata and the Issue of Parallel Judicial Proceedings, 22 J. Int’l Arb, (2005).
[7] Prislan, V., ‘Domestic court in investor-State arbitration: partners, suspects, competitors’ https://scholarlypublications.universiteitleiden.nl/access/item%3A2910234/view accessed on 9th April 2023.
[8] Ung Sovanmony, ‘Loopholes in the Application of the “Fork-in-the-Road” provisions in investor-State dispute settlement mechanisms’ https://www.cambridge.org/core/blog/2022/10/12/loopholes-in-the-application-of-the-fork-in-the-road-provisions-in-investor-State-dispute-settlement-mechanisms/ accessed on 9th April 2023.
[9] M. C. I. Power Group v. Ecuador (supra)
[10] Markus A. Petsche, Op Cit P. 396
[11] Markus A. Petsche, Op Cit P. 397
[12] Treaty Concerning the Reciprocal Encouragement and Protection of Investment, Arg.-U.S., Nov. 14, 1991, S. TREATY DOC. NO. 103-2 (1993) [hereinafter U.S.-Argentina BIT].
[13] Treaty for the Encouragement and Reciprocal Protection of Investment, U.S.-Est., Apr. 19, 1994, S. TREATY DOC. NO. 103-38 (1994)
[14] Treaty Concerning the Reciprocal Encouragement and Protection of Investment, U.S.- Czechoslovakia, Oct. 22, 1991, S. TREATY DOC. NO. 102-31 (1992)
[15] Treaty Concerning the Reciprocal Encouragement and Protection of Investments, U.S.- Egypt, Mar. 11, 1986, S. TREATY DOC. NO. 99-24 (1988)
[16] Agreement on the Reciprocal Promotion and Protection of Investments, Fr.-Arg., art. 8(2), July 3, 1991, 1728 U.N.T.S. 297.
[17] Agreement on the Reciprocal Protection and Promotion of Investments, Spain-Chile, Oct. 2, 1991, 1774 U.N.T.S. 24.
[18] Agreement on the Promotion and Reciprocal Protection of Investments, Leb.-It., Nov. 7, 1997
[19] Markus A. Petsche, Op Cit P. 1; See also Pantechniki S.A. Contractors & Eng’rs (Greece) v. The Republic of Alb., ICSID Case No. ARB/07/21, Award (July 30, 2009) http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C113/DC1133_En.pdf
[20] ICSID Case No. ARB/01/3, Decision on Jurisdiction (Jan. 14, 2004), https://www.italaw.com/sites/default/files/case-documents/ita0290.pdf.
[21] Christoph Liebscher, Op Cit P. 1
[22] See Alex Genin, Eastern Credit Limited, Inc and AS Baltoil v The Republic of Estonia (Award) (ICSID Case No ARB/99/2, 25 June 2001)
[23] Benvenuti et Bonfant s.r.l. v. People’s Republic of the Congo, ICSID Case No. ARB/77/2, Award (Aug. 8, 1980), 21 I.L.M. 740 (1982)
[24] Lis pendens is the principle that prohibits a court from hearing a case that is already pending before a different court or tribunal.
[25] Pey Casado v. Republic of Chile, ICSID Case No. ARB/98/2, Award (May 8, 2008), Toto Construzioni Generali S.P.A. v. The Republic of Leb., ICSID Case No. ARB/07/12, Decision on Jurisdiction (Sept. 11, 2009)
[26] Eudoro Armando Olguín v Republic of Paraguay (Decision on Jurisdiction) (ICSID Case No ARB/98/5, 8 August 2000) [30]
[27] Lauder v. Czech Republic, UNCITRAL Award (Sept. 3 2001), 9 ICSID Rep. 66 (2002)
[28] LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Objections to Jurisdiction (Apr. 30, 2004), 21 ICSID Rev. 155 (2006)
[29] BP America Prod. Co. v. Argentine Republic, ICSID Case No. ARB/04/8, Decision on Preliminary Objections (July 27, 2006)
[30] Total S.A. v. Argentine Republic, ICSID Case No. ARB/04/1, Decision on Liability (Dec. 27, 2010)
[31] Dafina Atanasova, Adrián Martínez Benoit, and Josef Ostřanský, ‘The Legal Framework for Counterclaims in Investment Treaty Arbitration’, (2014) 31 Journal of International Arbitration https://kluwerlawonline.com/journalarticle/Journal+of+International+Arbitration/31.3/JOIA2014015 accessed on 13th April 2023
[32] Harshad Pathak, ‘Jurisdictional Conflicts Between Investment Treaty And Commercial Arbitration – The Role Of Lis Penden’ https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4155478 accessed on 11th April 2023
[33] Harshad Pathak, ibid
[34] A treaty claim is a claim in which the claimant alleges that the respondent breached one or several provisions of the applicable treaty.
[35] A contractual claim in this context, is a claim alleging a breach of the applicable investment contract
[36] James Crawford, ‘Treaty and Contract in Investment Arbitration’ https://is.muni.cz/el/1422/podzim2010/MVV61K/um/20201574/Crawford-Treaty_and_Contract-2.pdf accessed on 14th April 2023
[37] Rudolf Dolzer & Christoph Schreuer, ‘Principles of International Investment Law’ http://www.ejil.org/pdfs/20/2/1813.pdf accessed on 14th April 2023
[38] CMS Gas Transmission Co. v. Republic of Arg., ICSID Case No. ARB/01/8, Decision on Objections to Jurisdiction (July 17, 2003), 7 ICSID Rep. 492 (2003)
[39] Occidental Expl. & Prod. Co. v. Republic of Ecuador, Case No. UN 3467, Final Award, (London Ct. Int’l Arb. 2004), https://www.italaw.com/sites/default/files/case-documents/ita0571.pdf
[40] See also Enron Corp. v. Argentine Republic, ICSID Case No. ARB/01/3, Decision on Jurisdiction (Jan. 14, 2004), https://www.italaw.com/sites/default/files/case-documents/ita0290.pdf; & Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Decision on Jurisdiction (Dec. 8, 2003), 43 I.L.M. 262 (2004) http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C5/DC506_En.pdf
[41] Liebscher, Op Cit, P..
[42] 6 ICSID Rep. 156
[43] Khan Resources v. Mongolia (supra)
[44] Pantechniki S.A. Contractors & Eng’rs (Greece) v. Republic of Alb., ICSID Case No. ARB/07/21, Award (July 29, 2009), http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C113/DC1133_En.pdf & H&H Enters. Invs., Inc. v. Arab Republic of Egypt, ICSID Case No. ARB/09/15, Award (May 6, 2014), http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C720/DC9652_En.pdf
[45] H&H Enters. Invs., Inc. v. Arab Republic of Egypt (supra)