Arbitral tribunals have tended to downplay “local remedy first” clauses, but they may gaining a new life
Canadian lawyers have long been familiar with the domestic principles of administrative law that require parties to exhaust their administrative remedies before resorting to appeal or judicial review. As it turns out, international law has a similar principal embodied in the “local remedy first” (LRF) provisions found in bilateral trade or investment treaties (BITs).
Under the International Centre for Settlement of Investment Disputes (ICSID) Convention, which Canada ratified in November 2013 – becoming the 150th state to do so; the Convention became law in Canada on Dec. 1, 2013 – signatory states may require parties to exhaust local administrative or judicial remedies before taking advantage of the arbitration provisions in a treaty. Historically, however, arbitral tribunals have tended to downplay LRF clauses, treating them as procedural obstacles curable by a variety of means, rather than jurisdictional conditions precedent.
But that has changed of late.
“Recent cases are becoming a little more cautious on disregarding local remedy first provisions,” says Martin Valasek in Norton Rose Fulbright Canada LLP's Montreal office. “In the last year or so, there are at least a number of arbitrators taking the position that they lack jurisdiction under ICSID unless the parties have complied with local remedy requirements.”
Indeed, tribunals have put practical teeth into the characterization of LRFs as conditions by taking a stricter view of two of the most common avenues that claimants rely to justify non-compliance: “most favoured nation” (MFN) clauses, and the “futility” argument that resort to the local system would be pointless.
The MFN argument (which of course applies only when the treaty in question contains such a clause) seeks to import less burdensome arbitration provisions from the host country's (the one the investor is claiming against) arrangements with another nation. The theory is that the investor, being from a most favoured nation, has the right to the most favourable conditions surrounding arbitration that the host country has granted to any other state. On this view, which arbitrators have in the past commonly accepted, the LRF provisions are deemed not to apply.
Similarly, while arbitrators have tried to limit the futility argument, the approaches have been inconsistent; so much so that the barest allegations of futility have sufficed to circumvent LRFs.
The trend toward treating LRFs with more significance, however, is evidenced by the recent decision in Kilic Insaat Ithalat Ihracat Sanayi ve Ticaret Anonim Sirketi v Turkmenistan, which engaged a BIT between Turkey and Turkmenistan that contained both LRF and MFN provisions. The Turkish claimant, Kilic, unsuccessfully sought to avoid the LRF by relying on both the MFN and futility arguments.
But as the ICSID tribunal saw it, allowing the MFN argument merely because many of Turkey's other BITs lacked LRFs meant that the LRF clause in the Turkey-Turkmenistan agreement would have been largely redundant from the moment the parties agreed to insert it.
It is noteworthy, however, that the tribunal also found that both Turkey and Turkmenistan did not likely intend that the MFN clause applied to the treaty's dispute settlement provisions.
“This suggests that the success of the most favoured nation argument may depend on how individual MFN clauses are drafted,” Valasek says.
As for the futility argument, the tribunal had no heed for Kilic's simple pleas that resort to Turkmenistan's local tribunals and courts would have been futile. Rather, in what some commentators have called the narrowest interpretation of the futility test to date, the tribunal held that Kilic had to establish futility by presenting specific evidence of its applicability to issues, the parties, and the matters in dispute in the particular case. Studies or reports about the general inadequacies of the Turkmen system were insufficient. Absent such evidence, the fact that Kilic had failed to demonstrate that it had made efforts to comply were fatal to its case.
What remains to be determined is whether Kilic will, for the most part, be restricted to its facts. Commentators are saying that's not likely.
“Recent cases suggest that any future tribunal seeking to treat LRPs with too light a touch will do so against the grain of a number of high-profile cases,” write Deborah Ruff of London and Trevor Tan of Beijing in Norton Rose Fulbright's International arbitration report.
Canadian lawyers have long been familiar with the domestic principles of administrative law that require parties to exhaust their administrative remedies before resorting to appeal or judicial review. As it turns out, international law has a similar principal embodied in the “local remedy first” (LRF) provisions found in bilateral trade or investment treaties (BITs).
Under the International Centre for Settlement of Investment Disputes (ICSID) Convention, which Canada ratified in November 2013 – becoming the 150th state to do so; the Convention became law in Canada on Dec. 1, 2013 – signatory states may require parties to exhaust local administrative or judicial remedies before taking advantage of the arbitration provisions in a treaty. Historically, however, arbitral tribunals have tended to downplay LRF clauses, treating them as procedural obstacles curable by a variety of means, rather than jurisdictional conditions precedent.
But that has changed of late.
“Recent cases are becoming a little more cautious on disregarding local remedy first provisions,” says Martin Valasek in Norton Rose Fulbright Canada LLP's Montreal office. “In the last year or so, there are at least a number of arbitrators taking the position that they lack jurisdiction under ICSID unless the parties have complied with local remedy requirements.”
Indeed, tribunals have put practical teeth into the characterization of LRFs as conditions by taking a stricter view of two of the most common avenues that claimants rely to justify non-compliance: “most favoured nation” (MFN) clauses, and the “futility” argument that resort to the local system would be pointless.
The MFN argument (which of course applies only when the treaty in question contains such a clause) seeks to import less burdensome arbitration provisions from the host country's (the one the investor is claiming against) arrangements with another nation. The theory is that the investor, being from a most favoured nation, has the right to the most favourable conditions surrounding arbitration that the host country has granted to any other state. On this view, which arbitrators have in the past commonly accepted, the LRF provisions are deemed not to apply.
Similarly, while arbitrators have tried to limit the futility argument, the approaches have been inconsistent; so much so that the barest allegations of futility have sufficed to circumvent LRFs.
The trend toward treating LRFs with more significance, however, is evidenced by the recent decision in Kilic Insaat Ithalat Ihracat Sanayi ve Ticaret Anonim Sirketi v Turkmenistan, which engaged a BIT between Turkey and Turkmenistan that contained both LRF and MFN provisions. The Turkish claimant, Kilic, unsuccessfully sought to avoid the LRF by relying on both the MFN and futility arguments.
But as the ICSID tribunal saw it, allowing the MFN argument merely because many of Turkey's other BITs lacked LRFs meant that the LRF clause in the Turkey-Turkmenistan agreement would have been largely redundant from the moment the parties agreed to insert it.
It is noteworthy, however, that the tribunal also found that both Turkey and Turkmenistan did not likely intend that the MFN clause applied to the treaty's dispute settlement provisions.
“This suggests that the success of the most favoured nation argument may depend on how individual MFN clauses are drafted,” Valasek says.
As for the futility argument, the tribunal had no heed for Kilic's simple pleas that resort to Turkmenistan's local tribunals and courts would have been futile. Rather, in what some commentators have called the narrowest interpretation of the futility test to date, the tribunal held that Kilic had to establish futility by presenting specific evidence of its applicability to issues, the parties, and the matters in dispute in the particular case. Studies or reports about the general inadequacies of the Turkmen system were insufficient. Absent such evidence, the fact that Kilic had failed to demonstrate that it had made efforts to comply were fatal to its case.
What remains to be determined is whether Kilic will, for the most part, be restricted to its facts. Commentators are saying that's not likely.
“Recent cases suggest that any future tribunal seeking to treat LRPs with too light a touch will do so against the grain of a number of high-profile cases,” write Deborah Ruff of London and Trevor Tan of Beijing in Norton Rose Fulbright's International arbitration report.
