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Saturday, March 04, 2006

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Saturday Feature
 
Disputes in a foreign land
Nikki Tait
3/4/2006
 

          The next few weeks could be crucial to a simmering, potentially expensive dispute between Oxus Gold, the London-listed mining company, and the government of Kyrgyzstan.
At stake is a licence to mine the gold-rich deposits at Jerooy in the central Asian republic -- a permit that has been removed by the Kyrgyz government, although the company continues to develop the site under a non-rescinded construction certificate ahead of a planned production start this summer.
Diplomatic pressure -- including intervention by prime minister Tony Blair -- has so far failed to resolve the row. If all else fails, Oxus and its lawyers acknowledge they may have to turn to international arbitration and invoke protections under Britain's "bilateral investment treaty" with the former Soviet republic.
If so, they will tread an increasingly familiar path. International investment and the globalisation of corporate activities has been a pervasive trend over past decades and so has an associated rise in disputes.
That has thrown a spotlight on the international bilateral investment treaty regime, including the International Centre for the Settlement of International Disputes (ICSID), a World Bank-linked dispute resolution procedure which aims to resolve tension that erupt between international investors and multinational corporations on one side, and develoing country governments on the other.
The problem is that as disputes have multiplied and questions of enforceability surface, lawyers question whether it is the arbitration mechanisms themselves that face challenges.
"For the system to work, you have to have all the players buying in and having confidence in the fairness of decisions," says Audley Sheppard, partner at London's Clifford Chance. Richard Lorenzo, an international arbitration lawyer with Washington-based Hogan & Hartson, is blunter: "The real test will now come as some of the decisions go back to the home countries."
The role of ICSID -- along with a number of other international dispute resolution forums, such as the International Court of Arbitration -- has become hugely more significant as the use of bilateral investment treaties has exploded. These pacts, aimed at encouraging foreign investment by offering explicit protections, expanded dramatically in the 1990s. According to Unctad, the number of BITs rose from 385 worldwide in 1989 to 2,265 in 2003, when 176 countries were involved.
Disputes increased too. At first, foreign investors were slow to invoke their new rights. According to Martin Hunter, a British barrister and co-author of Law and Practice of International Commercial Arbitration, the first case brought by an investor under BIT protections was not decided until 1990.
That is changing. In 1998, ICSID registered just eight new cases and had 19 pending. By 2003, that had risen to 30 and 63 respectively. Today, the pending list of disputes stands at 101. This, in turn, has put a spotlight on the arbitral process.
By its nature, arbitration takes place away from the glare of publicity, on the grounds that a more discreet process may encourage resolution of disputes.
But lack of transparency has a downside. For a start, in the context of BIT-based disputes, it limits scrutiny of government decision-making. More practically, it can leave parties themselves on the sidelines and heavily dependent on their lawyers. "One criticism is that if you are in the know, people are very good at trading information," says Juliet Blanch, dispute resolution partner at McDermott Will & Emery. "But developing country governments can't tap into this world."
On the plus side, ICSID -- unlike some other arbitration forums used to handle BIT-related disputes -- generally publishes its decisions. But this happens only when the arbitration panel has notified its conclusions to the parties, and the award can only be disclosed with their consent. The speed at which decisions come to light can vary.
This, too, can cause inefficiency. One City lawyer tells of presenting an east European government's case in Washington, only to discover that one of the key points had been the subject of a recent but unpublicised decision in another dispute involving different parties.
Another feature of arbitration is that decisions are free-standing: a ruling in one case does not set a formal precedent for the next, although plainly there are efforts to adhere to common principles. Unfortunately, when hundreds of millions of dollars are at stake, it is the contradictory rulings that attract attention.
One example is the case involving cosmetics heir Ronald Lauder. Mr Lauder brought proceedings against Vladimir Zelezny, a Czech entrepreneur, and the Czech Republic, claiming that TV Nova, the country's biggest commercial TV network -- in which Central European Media Enterprises, chaired by Mr Lauder, held a stake -- had been seized illegally. The Czech Republic, the US-based businessman claimed, had failed to protect his investments under the terms of a 1991 bilateral investment treaty. Arbitration panels in London and Stockholm initially came to opposing conclusions, although CME ultimately triumphed.
Lawyers say this much-publicised example emphasised concerns about the potential capriciousness of international arbitral awards. "The concepts are not fully developed yet and jurisprudence is inconsistent so one has the feeling each case is dependent on its tribunal," says Mr Sheppard, although he says the process can still be effective. Ms Blanch agrees: "It makes it harder to advise with confidence."
Concerns about enforceability have also begun to niggle. Last year, ICSID found in favour of CMS Energy, the Michigan-based energy company, in its dispute with Argentina, awarding the company $133m (76m). The case was a landmark in that for the first time emergency economic measures taken by a national government were pitted directly against that state's obligations to foreign investors.
In Argentina, ICSID's decision to make the award to CMS Energy had potential ramifications for another 30-plus claims worth an estimated $17bn. Argentina moved late last year to challenge the decision -- possible, but difficult, under ICSID rules -- partly on the grounds that the arbitral body had exceeded its powers.
To some extent, lawyers say, these are "growing pains" for a system of dispute resolution that is only a few decades old. Others point out that it does offer businesses and governments a relatively impartial means of redress, even if there is roughness round the edges.
Robert de By, head of international arbitration at Dewey Ballantine, describes the system as "travel insurance for investors": "Generally, enforceability is so much better with arbitration than litigation ... People who are trying for reform are trying to solve a problem which is not a problem."
Nevertheless, ICSID itself published a discussion paper, outlining possible change to its arbitration rules just over a year ago. These ranged from opening proceedings to individuals other than the parties and their witnesses, to introducing an appeal mechanism for awards in investment arbitrations. In theory at least, this latter proposal could help to address discrepancies between individual cases.
According to a follow-up paper, many of the rule changes won a sympathetic response-for example, over the publication of awards and the disclosure requirements of arbitrators. But the suggestion of allowing arbitration decisions to be appealed won less support.
Lawyers say clients worry that such a procedure would only add more uncertainty. "There is no quick fix on the books," says Andrew Foyle, an international arbitration partner at Lovells, That said, if a serious loss of confidence in the system were to develop, this could rebound on the use of BITs generally. The point is made that many are 10-year agreements that will need to be renewed.
"One question is, how keen are governments going to be to negotiate a new treaty when the time comes?" says one City lawyer.

 

 
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