Protecting Your Company’s Global Interests Using Treaty-Based International Arbitration

Thursday, June 21, 2012 - 12:35

The Editor interviews Theodore R. Posner, Partner, Weil, Gotshal & Manges LLP.

Editor: Ted, please tell our readers about your background and your practice.

Posner: After graduation from law school in 1994, I clerked for Judge Wilfred Feinberg on the U.S. Court of Appeals for the Second Circuit. I entered private practice for a period of a little more than three years. I then went into government in various capacities, all having to do with international trade and investment law and policy.

I started out in government in 1999 as international trade counsel to Congressman Sandy Levin, who at the time was the Ranking Member on the Trade Subcommittee of the House Ways & Means Committee. In 2001, I moved to the Senate Finance Committee also working on international trade and investment issues. In late 2002, I joined the office of the U.S. Trade Representative, where I counseled trade negotiators and represented the United States in arbitrations before panels and the Appellate Body of the World Trade Organization (WTO). In 2008, I went to the National Security Council working on that same suite of issues and then left government service in 2009 to return to private practice.

I joined the firm of Crowell & Moring as a partner in the international trade and international arbitration group, bringing my government experience to bear on behalf of a new set of clients. I left that firm in early 2012 to join Weil, Gotshal & Manges with three of my international arbitration partners from C&M. We have a very strong international arbitration team that spans our offices in the United States, Europe and Asia.

Our international arbitration practice divides into two broad categories: commercial arbitration and investment arbitration. Commercial arbitration covers dispute settlement provided for by contract that has an international dimension. For example, it may be that the parties to the contract are from different countries and in the interest of both fairness and expedience have decided that they will have recourse to international arbitration in the event of a dispute under the contract.

Investment arbitration entails a company or individual investor from one country that has made an investment in the territory of another country and that host country has done something that has impaired the investor’s investment. If an investment treaty exists between the host country and the investor’s home country, the investor may have access to arbitration. This is known as investor-state arbitration or treaty-based arbitration.

Editor: Has treaty-based arbitration become more frequent?

Posner: There is a growing network of investment treaties. Many companies are aware of this and plan their investments in a way that enables them to gain the protections of investment treaties and thereby help to minimize certain risks. When a dispute arises, those companies often are able to avail themselves of arbitration under a treaty. The number of cases that have been submitted to arbitration under treaties has grown substantially in recent years.

Editor: Are your clients exclusively companies, or do you also represent host countries? What are the factors contributing to the growth in treaty-based arbitration?

Posner: We represent both U.S. and foreign-based companies as well as sovereigns. The trend of increasing investor-State dispute settlement has been triggered by a number of developments.

UNCTAD, the United Nations Conference on Trade and Development, tracks data on investment treaties worldwide. At last count, the number of such treaties was close to 3,000. And most of those treaties provide for international arbitration.

Also, there is an increasing willingness on the part of investors to sue governments. That barrier has now been overcome, particularly where the nature of the dispute is such that the investor does not expect to be doing business again in a country.

Third-party funding also spurs treaty-based arbitration. There are a growing number of hedge funds, banks or other entities that are willing to finance a claim against a government by an investor who might not otherwise have the resources to enable it to pursue that claim. Arbitration against a government can be very expensive -- typically costing in the millions of dollars.

Economic crisis has also contributed to the number of such arbitrations. A major economic event that creates disruption in the expectations that investors have when they go into a foreign country contributes to the willingness of investors to pursue claims against host governments.

Argentina, for example, is the most frequent respondent in treaty-based arbitration under the rules of the International Center for Settlement of Investment Disputes, which is an entity of the World Bank. Many of those cases arise out of the peso crisis that Argentina went through in the early 2000s that led to a devaluation of the peso which culminated in disrupting a number of major infrastructure-related investments in Argentina. In recent weeks, there’s been a lot of media attention centered on Argentina’s expropriation of Repsol, a Spanish company. This is just the latest in a series of investor complaints about actions by the Government of Argentina.

Editor: Has the increased number of treaty-based arbitrations been triggered by the growth of developing countries?

Posner: China has become a more important player on the world stage. It’s now a member of the World Trade Organization (WTO) and has been the focus of several major disputes since joining that organization in 2001. Russia has been sued under a treaty known as the Energy Charter Treaty, which is a specialized treaty providing for arbitration of certain energy-related disputes. Brazil has been less willing to consent to arbitration in the treaties that it enters into. I expect that the rise of major developing countries, including the BRIC countries (Brazil, Russia, India, China), and their desire to become more active players on the world stage will lead to more involvement in international arbitration by those governments.

Editor: Do the incentives that bring about treaty-based arbitration differ from those applicable to international commercial arbitration?

Posner: Historically, what has driven parties to international commercial arbitration is the belief that it will provide them with a neutral forum in which to resolve their disputes expeditiously without the possible bias and transaction costs associated with litigating their cases in national courts.

With respect to treaty-based arbitration, the incentives are somewhat different. One is that the law that typically governs treaty-based arbitration is the law of the treaty as opposed to the national law of the host government. Another is that the investor rights that are conferred by a treaty tend to be similar from treaty to treaty, and there is a certain comfort associated with familiarity. It reduces uncertainty.. Unlike international commercial arbitration, when investors opt for treaty-based arbitration it is not because they expect that the costs will be lower, since such arbitration can be an expensive proposition.

Editor: Do companies seek counsel from you and your colleagues with respect to treaty protections before making investments in particular countries?

Posner: One of the valuable services that we provide to our clients is not just advocating for them when a dispute arises but also advising them on the ways in which the network of treaties that are out there may affect their interests.

Editor: If clients perceive that a treaty is weak in some respects, is this something that you would help them correct through whatever government agency happens to be involved?

Posner: We work with clients in representing their interests in the course of treaty negotiations. Our team includes former government officials like myself and my partner Chip Roh, who served in the State Department and the Office of the U.S. Trade Representative, who know how government officials negotiate treaties and how they analyze the issues. Where the United States, for example, is embarking on a major treaty negotiation that may affect the rights of U.S. investors, we’re able to make our cleints’ interests known through opportunities for comment provided by U.S. negotiators. .

Editor: So you would play a proactive role in connection with alerting your clients to developments about which they might not be aware?

Posner: That’s absolutely right. I’ll give you a real life example that’s very current. The United States is now engaged in negotiating the Transpacific Partnership Agreement, a major multi-country trade and investment negotiation with lots of moving pieces and many different players. One thing that we do for some of our clients is serve as their eyes and ears and as their interface with U.S. negotiators to make sure that their point of view is represented.

Editor: What problems are encountered in enforcing arbitration decisions?

Posner: One of the interesting dimensions of international arbitration that is not always well appreciated is that in addition to the treaties that give rise to arbitration, there are separate treaties that deal with the enforcement of arbitration awards. The courts in the 146 countries of the 193 United Nations member states that have adopted (as of May 2012) the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards are required to enforce international arbitration awards in most instances, subject to certain limited exceptions.

The difficulty is that you may have a bona fide judgment or a bona fide award and you are entitled to recover from the defendant, but the defendant doesn’t have assets to recover against or may have sheltered those assets in a way that makes it very difficult to get at them.

A sovereign state, unlike private parties, enjoys sovereign immunity and is able to shelter many of the assets located outside its territory under the cloak of sovereign immunity. Nevertheless, in many cases, both in commercial arbitration and treaty-based arbitration, where a sovereign respondent loses, it complies voluntarily. The country may be concerned about the hit to its reputation as an investor-friendly state if it fails to voluntarily comply with awards against it. However, possible non-enforcement is certainly an element of risk that any investor or contract party has to take into account when it pursues arbitration. You may analyze the case before you and come to the conclusion that you have an excellent case, a very winnable case, but you cannot neglect the risks associated with enforcement. Those risks may be negligible or they may be quite significant.

Please email the interviewee at ted.posner@weil.com with questions about this interview.