14.01  This chapter examines the scope of consent in investment arbitration. The chapter begins by discussing the scope of consent generally and its limitations in the offer of the host State (Section A). The chapter then analyzes issues related to counterclaims (Section B). The chapter further discusses MFN clauses (Section C). The main issue of MFN clauses related to consent to arbitration is whether MFN clauses may lead to an enlargement of the scope of the State’s consent to arbitration. The chapter concludes by delimitating investment arbitration from interstate arbitration provided for in investment treaties (Section D).

14.02  The scope of consent to arbitration offered in investment treaties may vary.¹ Indeed, while Article 25 of the ICSID Convention defines the outer limits of the consent that the contracting State parties may give, there is nothing to stop them from circumscribing it in a narrower way.² The parties are therefore free to delimit their consent by defining it in abstract terms, by excluding certain types of disputes, or by listing the questions they are submitting to ICSID’s jurisdiction.³

14.03  Many BITs contain phrases in their consent clauses such as ‘all disputes. . . concerning investments’⁴ or ‘any legal dispute. . . concerning an investment’.⁵ These provisions do not restrict a tribunal’s jurisdiction to claims arising from the BITs’ substantive standards and, by their own terms, these consent clauses encompass disputes that go beyond the interpretation and application of the BIT itself and would include disputes that arise from a contract in connection with the investment.⁶ In practice, broad inclusive consent clauses⁷ are the norm and are generally to be preferred.⁸ Indeed, narrow clauses, listing only certain questions or excluding some other questions, are liable to lead to difficulties in determining the tribunal’s precise competence, and may also, inadvertently, exclude essential aspects of the dispute.⁹ On the other hand, ICSID Centre’s services are not available for just any dispute that the parties may wish to submit. In particular, it has always been clear that ordinary commercial transactions would not be covered by the Centre’s jurisdiction, no matter how far-reaching the parties’ consent may be.¹⁰

14.04  Limitations of the scope of consent are set by the host State. Indeed, it is the offeror who sets the limitations. Or, in other words, the host State determines how far-reaching the offer is. The investor cannot set limitations, because this would amount to a counter-offer—the investor can only accept or reject the host State’s offer.

14.05  The host State(s) may set limitations in its/their offer contained in national investment legislation, in BITs, or multilateral investment treaties.

14.06  References to ICSID provided for in national investment legislation typically relate to the application and interpretation of the piece of legislation in question.¹¹ While some national laws are more far-reaching and simply refer to disputes (p. 300) ‘concerning foreign investment’,¹² others describe the questions covered by consent clauses in narrower terms which may include the requirement that ‘the dispute is fundamental to the investment itself’¹³ or that the dispute must be ‘in respect of any approved enterprise’.¹⁴ Some national laws clearly circumscribe the issues that are subject to ICSID’s jurisdiction. This is, for example, the case with the Albanian Law on Foreign Investment of 1993 which offers consent to ICSID’s jurisdiction, but limits it to any dispute which arises ‘out of or relates to expropriation, compensation for expropriation, or discrimination and also for the transfers in accordance with Article 7’.¹⁵

14.07  Although clauses contained in BITs are generally quite broad, there are BIT clauses offering consent to arbitration which do not refer to investment disputes in general terms but circumscribe the types of disputes that are submitted to arbitration.¹⁶

14.08  A narrower offer of consent to arbitration in BITs merely covers violations of the BIT’s substantive standards.¹⁷ Moreover, some expressions of consent to arbitration are narrowly confined as to their subject matter.¹⁸ Indeed, some BITs require that the investment has been specifically approved by the competent authority of the host State,¹⁹ whereas others signed by China, the USSR (in the past) and certain Eastern European States limit the consent to investor–State arbitration to disputes regarding the amount of damages for an expropriation.²⁰ However, this last type of limitation is losing importance in new concluded BITs.²¹

14.09  The NAFTA and the ECT both restrict possible claims to violations of the treaties themselves. According to Articles 1116 and 1117 of the NAFTA the scope of the consent to arbitration is limited to claims arising from alleged breaches of the NAFTA itself and, similarly, under Article 26(1) of the ECT the scope of consent is limited to claims arising from alleged breaches of the ECT itself.²²

14.10  The foreign investor can accept or reject the offer of the host State to arbitration. Conversely, he cannot limit or enlarge the host State’s offer. In other words, the foreign investor’s acceptance may not validly go beyond the limits of the host State’s offer.²³ Therefore, any limitations contained in the national investment legislation or investment treaty will apply irrespective of the terms of the foreign investor’s acceptance, whereas if the terms of acceptance do not correspond (p. 301) with the terms of the offer, there is in principle no perfected mutual consent.²⁴ A distinction should however, possibly, be drawn from the ‘intensity’ of the acceptance modifying the offer. Indeed, ‘a reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer’.²⁵ On the other hand, ‘a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror (host State), without undue delay, objects to the discrepancy’.²⁶ Therefore, ‘if the offeror (host State) does not object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance’.²⁷

14.11  The fact that the foreign investor accepts ICSID jurisdiction only with regard to a particular dispute or in respect of certain investment operations is not a real limitation of the scope of consent between the parties,²⁸ but rather a delimitation of the subject matter of the dispute.

14.12  The scope of consent to arbitration offered in investment treaties varies: while many investment treaties contain provisions offering host State’s consent to arbitration, which are wide and unlimited, other investment treaties offering consent to arbitration circumscribe the scope of consent to arbitration in narrower terms.²⁹ Depending on the limitations on consent, the investment treaties can be subdivided into five groups:

1. 1.  The first group of treaties permit ‘all’ or ‘any’ disputes relating to investments to be submitted to an investment treaty tribunal. This is by far the most prevalent type of clause in BITs.³⁰ These provisions do not restrict the arbitral tribunal’s jurisdiction to claims arising from the BIT’s substantive standards, but encompass disputes that go beyond the interpretation and application of the BIT itself including those that arise from a contract in connection with the investment.³¹ An example of this kind of provision is Article 8(1) of the UK Model BIT (2005), Preferred version, which refers to ‘any legal dispute. . . concerning an investment’.

2. 2.  The second group restricts the scope of the treaty tribunal’s ratione materiae jurisdiction to three legal sources for the investor’s cause of action.³² A typical provision of this type—which is common in US BITs—is contained in Article VII(1) of the Argentina–US BIT (1991) offering consent for investment disputes which are defined as follows:

   a dispute between a Party and a national or company of the other Party arising out of or relating to (a) an investment agreement between that Party and such national or company; (b) an investment authorization granted by that Party’s foreign investment authority (if any such authorization exists) to such national or company; or (c) an alleged breach of any right conferred or created by this Treaty with respect to an investment.³³

   (p. 302) The consent provision in Article 24(1)(b)(i) of the US Model BIT (2004), covering breaches of the classical substantive standards in Articles 3–10, of an investment authorization, or of an investment agreement, is similar.³⁴

3. 3.  The third group restricts the subject matter of investor–State arbitration exclusively to alleged violations of the substantive provisions of the treaty itself.³⁵ An example is the BIT between El Salvador and the Netherlands of 1999 containing a submission to arbitration in Article 9 for:

   disputes which arise within the scope of this agreement between one Contracting Party and an investor of the other Contracting Party concerning an investment.

   It is this type of clause that features in the two most prominent multilateral investment treaties, the NAFTA³⁶ and the Energy Charter Treaty (ECT).³⁷ The limitation of consent to violations of the treaty may, however, be offset by an ‘umbrella clause’ contained in the treaty.³⁸

4. 4.  The fourth group restricts consent to one or some of the rights granted under the treaty. An example is Article 7 of the Cyprus–Hungary BIT which provides for submission to arbitration, including ICSID, of:

1. 5.  Finally, there is a fifth group of treaties,⁴⁰ whose membership has been in steady decline, that limit the ratione materiae jurisdiction of a tribunal to disputes about the amount of compensation due after an expropriation.⁴¹

14.13  A counterclaim is a claim made in a proceeding by the respondent,⁴² ie in investment treaty arbitration typically by the host State. Various international tribunals, as for instance the Permanent Court of Justice,⁴³ the International Court of Justice,⁴⁴ and the International Law of the Sea Tribunal,⁴⁵ have adopted procedural rules for the adjudication of counterclaims (p. 303) despite the fact that their constitutive instruments do not confer upon them an express power to do so.⁴⁶

14.15  On the other hand, the situation is less clear where consent is expressed in narrow terms, such as in Articles 1116 and 1117 of the NAFTA.⁵²

(p. 304) 14.17  With the wording ‘except as the parties otherwise agree’, the provision expresses the fact that ‘the parties may vary or exclude the tribunal’s power to deal with ancillary claims in their consent agreement or subsequently’.⁵⁵ Moreover, according to Article 46 of the ICSID Convention only the disputing parties are allowed to initiate ancillary claims—the tribunal cannot do so on its own motion and has no discretion to refuse considering ancillary claims.⁵⁶

14.18  For a counterclaim to be admissible it must arise directly out of the subject matter of the dispute, fall within the scope of consent of the parties, and be within the jurisdiction of the Centre.⁵⁷ The close connection requirement of Article 46 of the ICSID Convention is therefore distinct from the ‘arising directly out of’ condition of jurisdiction in Article 25 of the ICSID Convention.⁵⁸ While the latter is related to ‘an investment’, the former is related to the ‘subject-matter of the dispute’.⁵⁹ In other words, the ‘arising directly out of’ clause in Article 46 presupposes jurisdiction,⁶⁰ which is confirmed by the wording of Article 46 itself.⁶¹

14.19  A more complex question seems to be what is meant by the requirement of Article 46 of the ICSID Convention that a counterclaim has to be ‘within the scope of the consent of the parties’? It is clear that a counterclaim has to fall within the State party’s consent. But what is the role of the foreign investor’s claim? Or, in other words, has the investor’s claim—by which the foreign investor usually expresses his consent to arbitration—an influence on the extent of the mutually reached consent, and therefore indirectly on the possibility of counterclaim by the host State.

14.20  It has been sustained that in cases where jurisdiction is based on a general offer by the host State contained in its national investment legislation or an investment treaty, consent will be restricted to the extent of the foreign investor’s acceptance of the offer.⁶² If the foreign investor accepts the offer by instituting proceedings, such consent exists only to the extent necessary to deal with the investor’s request.⁶³ Consequently, the scope of its consent can be expected to be quite narrow, thus limiting the possibility of counterclaims by the disputing State party.⁶⁴ Following this view a State cannot therefore rely on its general consent to arbitration to extend the tribunal’s jurisdiction.⁶⁵ As a consequence, arbitral tribunals in the case of counterclaims should have systematically denied jurisdiction,⁶⁶ because they are not ‘covered’ by the consent ‘accorded’ by the claim.⁶⁷

(p. 305) 14.21  It is obvious that this view uses contractual terminology, abandoning the contractual approach. Indeed, if one follows rigorously the contractual approach the terms of the State party’s offer cannot be changed by the investor. The foreign investor can accept or reject the terms of the offer, but his reply to the offer cannot contain additions, limitations, or other modifications. A material change of the terms of the offer would be a counteroffer by the investor which would need to be accepted by the State party to reach mutual consent to arbitration.⁶⁸ Douglas observed that ‘the consent is perfected by the investor’s filing of a request for arbitration, which cannot expand or limit the host State party’s standing offer to arbitrate in the investment treaty’.⁶⁹ Therefore, according to him:

• •  If that standing offer confines the scope of the tribunal’s jurisdiction ratione materiae to claims for a breach of one of the investment treaty obligations, then the foreign investor’s acceptance of that offer cannot expand that scope to include counterclaims by the respondent host State.⁷⁰ Moreover it is not to be assumed that a foreign investor would make a counteroffer⁷¹ in that sense.

• •  Conversely, if the host State party’s standing offer to arbitrate in the investment treaty is expressed in terms of ‘all disputes arising out of an investment’, then the tribunal’s jurisdiction ratione materiae may extend to counterclaims by the host State party founded upon contractual obligation, a tort, unjust enrichment, or a public act of the host State party, in respect of matters directly related to the investment.⁷²

14.22  Apart from ICSID proceedings, States parties to investment treaties have regularly included the possibility of arbitration in accordance with the UNCITRAL Arbitration Rules as one of the possible options available for the claimant.⁷³ In Saluka v Czech Republic,⁷⁴ an arbitration proceeding conducted under the UNCITRAL Arbitration Rules (1976), the arbitral tribunal declined its jurisdiction over the Czech Republic’s counterclaims for lack of sufficient connection between the ‘primary claim and the counterclaims’.⁷⁵

This provision was primarily tailored for commercial arbitration. In the case of that narrowly drawn counterclaim provision, it could have been argued that no counterclaim was possible because the host State’s counterclaim would not ‘arise out of the same contract’ within the meaning of Article 19(3) of the UNCITRAL Arbitration Rules (1976).⁷⁶

(p. 306) 14.24  With regard to the wording ‘arising out of the same contract’⁷⁷ of the 1976 version of the UNCITRAL Arbitration Rules the proposal was made to interpret the reference to ‘contract’ in a more general way—as a reference to the source of the rights forming the object of the claim, the source of which, in the investment treaty context, would be the investment.⁷⁸ In this way symmetry between the tribunal’s jurisdiction over primary claims and counterclaims could be achieved.⁷⁹ Otherwise the maxim pacta sunt servanda would operate in only one direction.⁸⁰ Douglas’ observations are particularly justified by the new Article 21(3) of the UNCITRAL Arbitration Rules (2010) which requires that ‘the respondent may make a counterclaim. . . provided that the arbitral tribunal has jurisdiction over it’.

14.25  An MFN clause contained in a treaty extends the better treatment granted to a third State or its nationals to a beneficiary of the treaty.⁸¹ Most BITs,⁸² and some other treaties for the protection of investment,⁸³ include MFN clauses.⁸⁴ As many investment treaties provide that neither contracting State shall submit the investors of the other State to treatment less favourable than it accords to investors of any third country, the question arises whether such ‘no less favourable treatment’ also applies to the dispute settlement options: can one incorporate into a treaty a dispute resolution provision of another treaty in whole or in part?⁸⁵ Or, in other words, if the investment treaty containing the MFN clause does not offer consent to arbitration, is it possible to rely on consent to arbitration in a treaty concluded by the respondent host State with a third State party?⁸⁶

14.26  Another question is then whether it is possible to avoid the limitations/requirements attached to consent to arbitration in an investment treaty—for instance waiting periods—by relying on an MFN clause in the treaty, if the respondent host State has concluded an investment treaty with a third State that provides for a State’s expression of consent to arbitration without the limitation/requirement.⁸⁷

14.27  Investment treaties contain substantive investors’ rights and procedural investors’ rights. MFN clauses are typical substantive commitments of the contracting States to the investment treaty. While their application to substantive investors’ rights is relatively straightforward, the relationship between MFN clauses and dispute settlements provisions is less clear.

14.28  The MFN clause has been defined as ‘a treaty provision whereby a State undertakes an obligation towards another State to accord most-favoured treatment in an agreed sphere (p. 307) of relationships’.⁸⁸ Indeed, in its usual guise, the standard obliges a host State to treat investors from one foreign country no less favourably than investors from other foreign countries.⁸⁹ The basic goal of MFN clauses is to guarantee equality of competitive opportunities for foreign investors in the host State.⁹⁰

14.29  While the MFN standard is a typical substantive commitment of most modern investment treaties, an important question is whether the MFN clause included in most investment treaties can be applied to the procedural arrangements embodied in that particular treaty for the settlement of disputes that may arise under it.⁹¹ Although the MFN clause may specify that it includes or excludes dispute settlement, most MFN clauses are worded in a general way and typically refer only to the treatment of investments.⁹²

14.30  On the other hand, it has also been observed that under most BITs, and some multilateral investment treaties as well, the key to the protection of the investor lies not so much in the substantive provisions of the treatment accorded, which are rather scant and basic, but in the arrangements that allow for the submission of disputes to arbitration.⁹³ However, while some investment treaties have provided expressly that the MFN treatment extends to the provisions on settlement of disputes (see eg Article 3(3) of the UK Model BIT (2005))—and in these cases it is beyond doubt that the State parties intended the MFN clause to include dispute settlement in its scope—in most investment treaties the question is not addressed explicitly.⁹⁴

14.31  While the application of an MFN clause to substantive rights is relatively straightforward, the question about the extension of MFN rights to procedural matters is generally more controversial, particularly as there is conflicting authority on whether an MFN clause will enable an investor to obtain the benefit of a direct right of arbitration contained in other investment treaties.⁹⁵

14.32  In the Maffezini case⁹⁶ the tribunal decided the question of whether more favourable provisions on dispute settlement contained in the basic treaty could be extended to the beneficiary of another treaty by operation of the MFN clause in the affirmative on the ground that procedural and substantive rights were intimately connected.⁹⁷ Indeed the tribunal considered ‘that there are good reasons to conclude that, today, dispute settlement arrangements are inextricably related to the protection of foreign investors’.⁹⁸

14.33  On the other hand, in two cases decided in 2005 and 2006, namely Plama⁹⁹ and Telenor,¹⁰⁰ other ICSID arbitral tribunals considered that the MFN clause could not prevail on the (p. 308) fundamental arbitration requirement which is the meeting of the parties’ consents to arbitrate.¹⁰¹ Therefore, these arbitral tribunals were reluctant to set up a procedural bridge between two bilateral instruments and to consider the possible application of a specific dispute settlement clause provided for in a given BIT to disputes raised under the realm of another BIT, and, consistently with this opinion, they held that an MFN clause must apply merely to the ‘treatment of investments’ understood as ‘substantial’ not ‘procedural’ rights applicable thereto.¹⁰²

14.35  The different treatment in the application of MFN clauses with regard to dispute resolution provisions shows, on the one hand, the importance of differentiation depending on how the application of MFN clauses affects consent to arbitration, and on the other hand the importance of the wording and interpretation of MFN clauses.

14.36  The case law on the applicability of MFN clauses to dispute settlement can be broadly subdivided into cases which concern the avoidance of procedural obstacles to the institution of arbitration proceedings and those which concern attempts to enlarge the State’s consent to arbitration, importing more favourable dispute settlement provisions from third investment treaties.

(p. 309) 14.38  Based on this MFN clause, the Argentinian claimant relied on the Chile–Spain BIT, which does not contain a requirement to try the host State’s courts for 18 months.¹⁰⁹ The tribunal reached the conclusion that the claimant had convincingly demonstrated that the MFN clause included in the Argentina–Spain BIT embraced the dispute settlement provisions of that treaty and that therefore reliance on the more favourable arrangements contained in the Chile–Spain BIT was possible.¹¹⁰ Consequently, the claimant had the right to submit the instant dispute to arbitration without first accessing the Spanish courts.¹¹¹

14.40  The Maffezini tribunal provided examples of some ‘public policy’ provisions that could not be overridden by an MFN clause, namely:

• •  the agreement of a particular forum such as the ICSID;

• •  when the parties have defined a highly institutionalized and very precise procedural mechanism to conduct arbitration, as happens under NAFTA and other specialized arrangements;

• •  the ‘fork in the road’ clause; and

• •  when one party has conditioned the consent to arbitration to the prior exhaustion of local remedies.¹¹³

14.41  In the Siemens case¹¹⁴ the ICSID tribunal had to deal with a very similar issue to that at the centre of the Maffezini case.¹¹⁵ The question was whether, through the functioning of the MFN clause included in the 1991 BIT between Germany and Argentina (the basic treaty), the German claimant could refer to the treatment provided by the dispute settlement provision of another BIT (the 1991 Argentina–Chile BIT) and therefore bring the claim directly to arbitration, rather than pursuing host State domestic court remedies for 18 months before doing so.¹¹⁶

14.42  The Siemens tribunal, whilst relying on Maffezini, articulated a standard that appears to qualify Maffezini by emphasizing the notion that a procedural inconsistency between similar treaties will be deemed arbitrary and subject to MFN invocation in the absence of evidence that such inconsistency derives from a ‘sensitive’ policy objective.¹¹⁷ However, the extent to which the treaties must be similar, and the scope of a ‘sensitive’ policy issue is not entirely clear. Yet the Siemens tribunal established that the term and the expression used in the MFN clause of the basic treaty were ‘sufficiently wide to include dispute settlement’.¹¹⁸

(p. 310) 14.43  The Gas Natural case¹¹⁹ closely resembled Maffezini, being based on the same BIT, namely the 1991 Argentina–Spain BIT.¹²⁰ The issue in this case was also whether or not the MFN clause included dispute settlement and therefore allowed the Spanish claimant to resort to ICSID arbitration, without pursuing host State domestic court remedies for 18 months before doing so. The tribunal rejected all the respondent’s (Argentina’s) objections upholding jurisdiction.¹²¹ In Gas Natural the tribunal also focused on the importance to be attached to the assurance of independent international arbitration.¹²²

14.44  In Suez v Argentina¹²³ and National Grid plc v Argentina,¹²⁴ Argentina strongly objected to the claimants’ requests to uphold jurisdiction, through the MFN clause included in the Argentinian BITs at stake, of an arbitral tribunal without pursuing Argentinian domestic court remedies for 18 months before doing so, as prescribed by the same BITs.¹²⁵ In both cases the arbitral tribunals affirmed jurisdiction after having mentioned relevant previous similar cases, in particular the Maffezini case.¹²⁶

14.45  From these cases it can be inferred that arbitral tribunals have allowed claimants to make recourse to MFN clauses in order to permit the claimant to bypass the requirement to resort to the host State’s domestic courts for a determined time period before the institution of arbitration. The rationale for this case law seems to be that a seemingly arbitrary waiting period for the submission of a dispute is considered to affect the timing of a host State’s consent to arbitration of investment disputes, but will not necessarily undermine the host State’s consent as a whole.¹²⁷

14.46  Attempts by claiming foreign investors to enlarge the scope of the host State’s consent to arbitration ranged from the creation of arbitration jurisdiction where it did not exist to expanding arbitral jurisdiction ratione materiae and ratione temporis.

Hence, according to the Plama tribunal, there is a sort of presumption that an MFN clause does not extend to dispute resolution matters, except when the contracting State parties to the basic investment treaty have expressed a contrary interest.¹³⁴

14.49  It has been observed that what is more threatening to the scope of consent to arbitration is the use of an MFN clause to invoke ICSID or other types of arbitration when there is no arbitration provision in the investment treaty.¹³⁵ This happened in Plama v Bulgaria as a secondary argument in the event that the tribunal would have decided that Bulgaria had not consented to jurisdiction under the ECT, but the argument was not accepted by the Plama tribunal.¹³⁶

14.51  The Italian claimants argued that other BITs between Jordan and countries such as the United Kingdom and the United States clearly allowed investors to refer contractual disputes to ICSID, and thus invoked the MFN clause of the Italy–Jordan BIT to bypass the provision—Article 9(2) of the Italy–Jordan BIT¹⁴⁰—that excluded contractual disputes from ICSID arbitration.¹⁴¹ The tribunal distinguished the MFN clause in the Italy–Jordan BIT, finding that it was not broad enough and did not refer to ‘all matters subject to this agreement’. The tribunal therefore concluded that in this case the claimants had failed to establish that it was the common intention of the contracting State parties to have the MFN clause applied to dispute settlement, and it found that the Italy–Jordan BIT clearly excluded from ICSID jurisdiction contractual disputes between an investor and an entity of a State party.¹⁴²

14.54  In a case presenting similarities to Teleonor, the tribunal of Berschader v Russia¹⁴⁹ rejected the investor’s attempt to enlarge jurisdiction based on the MFN clause contained in the BIT between the Belgo–Luxembourg Economic Union and Russia¹⁵⁰—in relation to Russia’s broader consent to arbitration under third-party investment treaties that did not limit arbitration to disputes concerning the amount of mode of compensation for expropriation.¹⁵¹

14.55  In the Tecmed case¹⁵² the Spanish claimant relied on the MFN clause of the Mexico–Spain BIT in order to make possible the ‘retroactive application’ of the BIT and, again through its MFN clause, the application of the more favourable treatment provided in the Austria–Mexico BIT.¹⁵³ The ICSID tribunal however dismissed this claimant’s request to extend the temporal applicability of the Mexico–Spain BIT based on the treaty’s MFN clause,¹⁵⁴ because it was of the opinion that such a request mainly concerned the applicable ‘substantive protection regime’, ‘rather than matters of procedure or jurisdiction’.¹⁵⁵ Therefore, according to the (p. 313) tribunal, the MFN clause had no role to play in this regard, since the chief point to be considered related to ‘the core matters’ which the contracting States had specifically negotiated.¹⁵⁶

14.56  Although the Tecmed tribunal did not consider the MFN claim, it did not completely reject the Maffezini approach, as it found that the limit on retroactive application of the BIT, unlike other procedural matters, was at the core of the contracting State parties’ negotiations, or formed part of the State parties’ specific will.¹⁵⁷ It also suggested that other procedural requirements would not go to the core of matters specifically negotiated, nor would they expand the consent to arbitration beyond the limits clearly set forth in the relevant investment treaty.¹⁵⁸ The Tecmed tribunal tried therefore to find a rationale behind the differentiation made in the case law.

14.57  In light of the foregoing, there seems to be inconsistency with respect to MFN clause case law: while Maffezini,¹⁵⁹ Siemens,¹⁶⁰ Gas Natural,¹⁶¹ and Suez¹⁶² interpreted silence or ambiguity as indicative that the MFN clause included, with certain limits, procedural provisions, Salini,¹⁶³ Plama,¹⁶⁴ Tecmed,¹⁶⁵ and Telenor¹⁶⁶ concluded just the opposite.¹⁶⁷ However, the following has to be taken into account:

• •  Maffezini, Siemens, Gas Natural, and Suez were about a less fundamental procedural requirement: a mere preliminary step for accessing arbitration;

• •  by contrast, Salini, Plama, Tecmed, and Telenor dealt with core matters¹⁶⁸—basically an extension of jurisdiction—which could easily have been categorized as ‘public policy provisions’ following Maffezini. In all these cases a radical effect was intended by the claimant: in the words of Plama, to replace the dispute resolution clause in the basic treaty in toto by a dispute resolution mechanism from a third treaty.¹⁶⁹

14.58  Professor Kaufmann-Kohler therefore, discussing two of the cases (Maffezini and Plama), underlined that, even though, at first sight, they seem to conflict (Maffezini being for the application of the MFN clause to dispute resolution rights and Plama against it) upon closer examination they appear however, to supplement each other. Indeed, while Maffezini concerned MFN clauses in the presence of an ICSID dispute resolution provision and sought to avoid a waiting period or similar requirement, Plama dealt with attempts to import, in whole or in part, the ICSID dispute settlement mechanism into an investment treaty that (p. 314) either provided for another dispute settlement method or limited the scope of the ICSID arbitration clause.¹⁷⁰

14.59  Hence, although in theory there appears to be a clear distinction between the two lines of case law, in practice they can be reconciled, as, in actual application, they can be combined without conflicting. The rule that appears to emerge from this combination is the following: MFN clauses can be used to overcome waiting periods and comparable admissibility requirements, but not to replace, in whole or in part, or to extend the dispute resolution mechanism provided in the investment treaty upon which jurisdiction is based.¹⁷¹ That the two lines of case law are not irreconcilable is reinforced by the fact that the Maffezini tribunal expressly limited the potential impact of the MFN clause in cases where there would be a change of dispute resolution mechanism.¹⁷² On the other hand the view that there are more fundamental requirements for jurisdiction than others—which has its roots in the Maffezini case—has also been criticized.¹⁷³

14.60  Yet this is not the end of the story, because there are decisions in which arbitral tribunals have not followed the logic behind the differentiation outlined.

14.61  In cases that leave the rationale of the previously described differentiation, arbitral tribunals have taken either a more restrictive approach or a more liberal one.

14.62  A more restrictive approach was taken in Wintershall v Argentina,¹⁷⁴ where the tribunal rejected the argument of the German investor to base its jurisdiction on an MFN clause in the Germany–Argentina BIT in order to incorporate the host State’s more favourable consent to arbitration under the US–Argentina BIT.¹⁷⁵ However, the issue was not whether the tribunal could expand its jurisdiction to encompass a broader range of substantive causes of action, but whether the investor could avoid, in view of the quicker access to investor–State arbitration under the US–Argentina BIT, the requirement to pursue local remedies in Argentine courts for 18 months before commencing international arbitration.¹⁷⁶ Contrarily to the tribunals of Maffezini,¹⁷⁷ Siemens,¹⁷⁸ Gas Natural,¹⁷⁹ and Suez,¹⁸⁰ the Wintershall tribunal qualified this requirement as a condition to the host State’s consent to arbitration and not as an admissibility obstacle.¹⁸¹

14.64  While MFN clauses that expressly apply to matters of dispute settlement provisions, or are expressly limited to substantive investor rights, raise few difficulties, it is a different situation with BITs which do not specify whether an MFN clause applies to dispute settlement or not. Moreover in the latter case, especially with regard to broadly worded MFN clauses, the views differ.

14.66  Conversely, MFN clauses which are expressly limited to substantive investor rights do not permit an enlargement of the scope of the State’s consent to arbitration.

14.67  In the case of neutrally worded MFN clauses scholars have expressed divergent views with regard to the application of MFN clauses to investment treaties’ dispute settlement provisions. Yet the differentiation made by tribunals in the majority of cases appears to be supported by the fact that the interpretation of an MFN clause should not unduly favour the MFN provision over a dispute resolution provision of equal rank.

14.68  On the one hand there are scholars which sustain that the MFN clause will not apply to investment treaties’ dispute settlement provisions, except where the contracting State parties expressly provided so in the treaty.¹⁸⁷ It is therefore not to be presumed that the balance struck in investment treaties between the various dispute (p. 316) settlement options, which is often the subject of careful negotiation between the State parties, selecting from a range of different techniques, can be disrupted by an investor selecting at will from an assorted menu of other options provided in other treaties.¹⁸⁸ In other words, the domain of application of an MFN clause will be as to the substantive rights accorded to investors from third States to which special preferences have been granted.¹⁸⁹

14.69  On the other hand there are scholars who find it difficult to understand why a broadly formulated MFN clause should apply only to issues of substance but not to questions of dispute settlement.¹⁹⁰ A decision like the one in RosInvestCo v Russia¹⁹¹ is therefore to be welcomed.¹⁹²

14.72  The view has been expressed that, if one accepts that the rationale of MFN clauses is to create a level playing field for foreign investors independent of their nationality, drawing a categorical distinction between substantive investor’s rights and their procedural enforcement appears artificial and disregards the fact that different dispute settlement options can have a considerable impact on the competitive framework foreign investors operate in.¹⁹⁸

14.73  This view enters inevitably into conflict with the consensual nature of arbitration, because States may consciously not give their consent to investor–State arbitration or limit their consent to arbitration. A scholar like Schill who is favourable towards multilateralizing jurisdiction recognizes this.¹⁹⁹ However, making recourse to the ejusdem generis rule,²⁰⁰ he distinguishes between establishing arbitral jurisdiction where none had existed before and a situation in which the investor merely attempts to enlarge the jurisdictional basis of an investment tribunal or invoke the host State’s consent to a different arbitral forum.²⁰¹ While the former should not be permitted, the latter should be possible. Permitting the enlargement of the jurisdictional basis of an investment tribunal or invoking the host State’s consent to a different arbitral forum leads to the questionable result that:

If, for example, the host State-Respondent has consented to arbitrate any dispute vis-à-vis third-country investors in accordance with the Arbitration Rules of the Stockholm Chamber of Commerce (SCC), while the basic treaty contains the consent to arbitrate disputes relating to expropriation under UNCITRAL Arbitration Rules, a neutrally worded MFN clause will only allow the investor to import the host State’s consent to SCC arbitration for any disputes, but will not allow it to enlarge the scope of jurisdiction of the tribunal constituted pursuant to UNCITRAL Arbitration Rules. Otherwise, the investor covered by the basic treaty would receive a different treatment.²⁰²

14.74  The consensual nature of arbitration should not make it possible to enlarge the jurisdictional basis of an investment tribunal or to invoke the host State’s consent to a different arbitral forum. For this reason, when, for instance, there are BITs entered into by a State which provide for reference to arbitration of all disputes, and others entered into by the same State that limit consent to arbitration to specified categories of dispute, such as expropriation, it must be obvious that such a State, when reaching agreement on the latter form of dispute resolution clause, intends that the jurisdiction of the arbitral tribunal is to be limited to the specified categories and is not to be inferentially extended by an MFN clause.²⁰³ Moreover, where both parties to a BIT, which restricts the reference to arbitration to specified categories, have entered into other BITs which refer all disputes to arbitration or where they have concluded other BITs, some of which refer all disputes to arbitration while others limit such a reference to specified categories of dispute, then it can fairly be assumed—as was done by the Teleonor tribunal—that in the BIT in question the two contracting State parties share a common intention to limit the jurisdiction of the arbitral tribunal to the categories so specified.²⁰⁴

(p. 318) 14.75  A foreign investor can accept or reject the offer made by the host State, but not change it. Each attempt by a foreign investor to enlarge the host State’s offer of arbitration through a neutrally drafted MFN clause amounts to a counteroffer made by the foreign investor, which would have to be accepted by the host State to reach mutual consent and thus establish jurisdiction. On the other hand, time limits should be considered as ancillary points which are not presumed to affect the binding nature of the contract (arbitration agreement). Therefore, even though the foreign investor through the MFN clause tries to avoid these time limits, by instituting the proceeding the arbitration agreement becomes binding and arbitral jurisdiction is established. Indeed, it would make little sense to consider time limits an essential point of the contract, when the foreign investor wishes to make direct recourse to arbitration, therefore showing that at that point he has no willingness to negotiate with the host State.

14.76  Contrarily to investment arbitration, interstate arbitration is not a recent phenomenon. Indeed, the history of interstate arbitration dates from the 1794 Jay Treaty between the United States and Great Britain, a treaty which sought to resolve contentious issues resulting from the American Revolutionary War.²⁰⁵ Later the practice of including arbitration clauses in commercial and other treaties was increasingly adopted, also following Italy’s repeated use of such clauses in its treaty practice.²⁰⁶ By the end of the nineteenth century, over a hundred treaties made reference to interstate dispute settlement by arbitration.²⁰⁷

14.77  Nowadays, nearly all investment treaties provide for interstate arbitration as a means to resolve disputes between the contracting State parties.²⁰⁸ Investment treaties typically provide for two types of dispute settlement: one type offers arbitration between the host State and a foreign investor, the other provides for arbitration between the contracting State parties to the treaty.²⁰⁹

14.78  Nearly all investment treaties follow the same interstate arbitration model. Interstate arbitration is ad hoc, rather than institutional.²¹⁰ Tribunals consist usually of three arbitrators: one appointed by each contracting party and a third, a national of a third country, who is nominated by the two party appointed arbitrators.²¹¹ If the party-appointed arbitrators cannot agree on a third arbitrator or if one of the parties refuses to appoint an arbitrator, the President of the International Court of Justice will usually act as the appointing authority.²¹²

14.79  While as a general rule investment treaties prescribe that the arbitral tribunal shall determine its own rules of procedure,²¹³ in the rare instances that a model set of rules is specified, those rules designed for public international law arbitrations between States are generally preferred.²¹⁴ (p. 319) Moreover, the arbitration clauses for interstate arbitration are regularly supplemented by provisions that require previous consultation and negotiation.²¹⁵

14.81  The object of arbitration’s consent in interstate arbitration is therefore different than that of investment arbitration, where the object is a dispute between host State and foreign investor concerning an investment done by the latter in the territory of the former. Indeed, the contracting State parties to BITs generally use a wording for their consent to State–State arbitration which ascribes a more limited ratione materiae jurisdiction to the corresponding tribunal than for an investor–State tribunal.²¹⁶

14.82  In interstate arbitration, disputes between the contracting States pertain to the realm of arbitrations governed by public international law. Indeed the rights and obligations as between the State parties to investment treaties arise in the context of a classic bilateral relationship on the international plane.²¹⁷

14.83  The interstate arbitration agreement contained in the treaty is not specific to a dispute. Therefore it is not a submission agreement, but an arbitration clause. The arbitration clause is, however, unlike the one in commercial arbitration, not specific to a commercial contract, but specific to an international investment treaty.

14.84  The expression and reaching of consent with regard to the interstate arbitration clause contained in the treaty happens simultaneously when the contracting State parties reach agreement to be bound by the investment treaty. According to Article 11 of the VCLT ‘the consent of a State to be bound by a treaty may be expressed by signature, exchange of instruments constituting a treaty, ratification, acceptance, approval or accession, or by any other means if so agreed’.

14.85  Due to the fact that disputes between the contracting State parties pertain to the realm of arbitrations governed by public international law,²¹⁸ Articles 31 and 32 of the VCLT are particularly relevant with regard to the interpretation of consent to interstate arbitration and for establishing the validity of the arbitration clause.²¹⁹

14.86  Contrarily to investment treaty arbitration, in interstate arbitration the disputing parties are on an equal footing. The question of inclination in interpretation appears therefore to be irrelevant. Moreover, interstate arbitration is symmetrical, ie both State parties can begin an arbitration proceeding.

14.87  It seems that the idea during the ICSID Convention’s drafting was that State–State arbitration should neither interfere in investor–State cases nor affect the finality of ICSID awards.²²⁰ Interstate cases based on investment treaties, however, are rare. This is essentially due to the fact that most treaties give foreign investors a direct right to claim against a host State, a mechanism that relieves their home States of the need to seek redress for them through interstate arbitration.²²¹

14.88  An exception has been Lucchetti v Peru,²²² where the investor had initiated arbitration against the host State under a BIT. Peru, in response to the ICSID claim against it by Chilean investors, instituted an interstate arbitration against Chile and requested that the ICSID tribunal suspend its proceedings until the interstate arbitration was resolved, arguing that interpretative priority should be given to the State–State proceedings.²²³ The tribunal in the investor–State proceedings, however, declined the request for the suspension of proceedings and Peru did not subsequently pursue the interstate proceedings.²²⁴