Introduction
Investor-State Arbitration [“ISA”] has emerged as a key mechanism for resolving disputes between investors and host States, but its structure often tilts in favour of investors, leaving States with limited avenues to assert counterclaims effectively. The challenges faced by States in asserting counterclaims in ISA are profound, hindering requisite fairness and accountability in the arbitration process. They range from navigating procedural and jurisdictional barriers to the complexity of enforcing an award against a non-signatory parent company. Investor-state arbitration, originally designed to protect foreign investments and promote economic cooperation between nations, is increasingly criticized due to its inherent asymmetry.[1] While bilateral investment treaties [“BITs”] provide numerous rights and protections to the foreign investors, they hardly provide reciprocal obligations.[2] This way, States are often placed in a position where they cannot hold investors accountable for misconduct like environmental harm, regulatory violations, or breaches of domestic laws.[3]
This is the persistent imbalance in the ISA framework. In Saluka v. Czech Republic[4], a salient example of this asymmetry arose, wherein the State had sought to raise a counterclaim against the foreign parent company by claiming that the locally incorporated subsidiary was but a facade of the parent’s interests. To defeat an alleged abuse of the corporate form, the State wished to pierce the corporate veil and treat both as one economic unit.[5] However, the tribunal dismissed jurisdiction, relying on the lack of proximity between the counterclaim and the main claim as well as the existence of an alternate forum for resolving the dispute in question.[6] This manifests a broader unwillingness by tribunals to permit the hearing of counterclaims which are not strictly within the parties’ consent to arbitrate.[7]
This article examines these critical issues while proposing action-oriented solutions to redress existing imbalances in ISA. First, it looks at the historical and legal context of counterclaims, which may help the reader understand the background and context in which the main issue is analysed. This is followed by a discussion on the corporate veil dilemma, analysing whether and under what circumstances the corporate veil should be pierced to prevent abuse of the corporate form. In the next section, the impediments encountered by enforcing States when seeking liability by non-signatory parent companies based on counterclaims have been examined. On a concluding note, based on the adequate analysis of the existing literature, the author has made an attempt to propose innovative solutions towards improving the efficacy and credibility of the ISA framework.
Historical and Legal Context of State Counterclaims in Investment Arbitration
In investor-state disputes, a counterclaim refers to a claim brought by the respondent as a defence or in response to the claimant’s primary claim.[8] States, especially developing ones, often face claims in arbitration that challenge their regulatory policies, including policies on health, environment, and labour.[9] The right of States to bring counterclaims aims at correcting the inherent imbalance found within the investor-state arbitration framework, caused by investors being the sole subject of protection in BITs as opposed to a balanced framework of mutual accountability.
Counterclaims are by and large rare, given the reticence displayed by tribunals toward accepting them. This can be exemplified by the case ofRoussalis v. Romania[10], where the Tribunal rejected State counterclaims because the language of the treaty had the effect of limiting the jurisdiction of the Tribunal. In the Saluka case as discussed above,[11] the tribunal dismissed counterclaims against a parent company due to lack of explicit investor obligations.
Since the investor initiates all the investor-state disputes, it is the state which is respondent in majority of cases, therefore it is the state that brings the counterclaim. The Host States redress the inherent asymmetry of the system by filing counterclaims, often driven by the following reasons. Firstly, Counterclaims enable States to hold investors liable for breaches of domestic laws, environmental damage, regulatory violations, or contractual obligations, thereby ensuring fairness in arbitration proceedings.[12]Without this mechanism, States would be placed in an unfair situation in which investors can litigate State breaches but States have no recourse for investor misconduct. An example of this can be seen in the case of Antaris Solar GmbH and Dr. Michael Göde v. Czech Republic[13], where an investor filed a claim against the Czech Republic’s change in its renewable energy incentive citing violation of fair and equitable treatment standard. Subsequently, the Czech Republic attempted to assert counterclaims based on the claim that investor had engaged in fraudulent misrepresentation and had violated domestic laws. However, the tribunal dismissed the state’s counterclaims, citing a lack of jurisdiction, as the investment treaty did not provide for state counterclaims based on domestic law violations.
Secondly, counterclaims promote efficiency by collating disputing claims before the same Tribunal. All major arbitration frameworks, whether the International Centre for Settlement of Investment Disputes [“ICSID”], The United Nations Commission on International Trade Law [“UNCITRAL”], or the Iran-US Claims Tribunal, permit counterclaims if they concern the substance of the dispute.[14]Permitting counterclaims prevents duplication of proceedings because it bars States from taking their cases to domestic courts, which could result in a fractured judgment. Thirdly, counterclaims offer better international enforcement prospects than judgments by domestic courts because ICSID and UNCITRAL awards are recognized and enforced under the ICSID Convention and the 1958 New York Convention, respectively.[15]
While counterclaims are an important tool for host States to respond to investor misconduct and redress the balance in investor-state arbitration, their utility is often compromised by the difficulties of holding the real beneficiaries—the parent companies—accountable.[16] Many foreign investments are structured through locally incorporated subsidiaries, which insulate parent companies behind the shield of limited liability. This corporate structure poses the question of whether piercing the corporate veil in exceptional cases should be permitted to counteract abuse of the corporate form and provide accountability, deliberated in the following section.
[1] Michael Faure and Wanli Ma, ‘Investor-State Arbitration: Economic and Empirical Perspectives’ (2020) 41(1) Mich J Intl L 1.
[2] Axel Marx and Pietro Mattioli, ‘Labour Rights Protection in International Investment Agreements: Evidence, Trends and Impact’ (2020) International Labour Organization https://www.ilo.org accessed 21 December 2024.
[3] Yaraslau Kryvoi, ‘Counterclaims in Investor-State Arbitration’ (2012) 21(2) Minn J Intl L 216.
[4]Saluka Investments BV v Czech Republic (Decision on Jurisdiction over the Czech Republic’s Counterclaim, 7 May 2004) UNCITRAL, 15 ICSID Rep 256 (2010).
[5] Ibid.
[6] Ibid at 25.
[7] Yaraslau Kryvoi, ‘Counterclaims in Investor-State Arbitration’ (2012) 21(2) Minn J Intl L 216.
[8] Black’s Law Dictionary (6th edn, 1990) 349 (citing Fed R Civ P 13).
[9] Crina Baltag, Riddhi Joshi, and Kabir Duggal, ‘Recent Trends in Investment Arbitration on the Right to Regulate, Environment, Health and Corporate Social Responsibility: Too Much or Too Little?’ (2023) 38(2) ICSID Rev-FILJ 381 https://doi.org/10.1093/icsidreview/siac031 accessed 21 December 2024.
[10]Spyridon Roussalis v Romania, ICSID Case No ARB/06/1 (2011) (Separate Opinion of Michael Reisman).
[11]Saluka Investments BV v Czech Republic (Decision on Jurisdiction over the Czech Republic’s Counterclaim, 7 May 2004) UNCITRAL, 15 ICSID Rep 256 (2010).
[12] Yaraslau Kryvoi, ‘Counterclaims in Investor-State Arbitration’ (2012) 21(2) Minn J Intl L 216.
[13]Antaris Solar GmbH and Dr. Michael Göde v Czech Republic, Final Award, PCA Case No 2014-01, 2 May 2018.
[14] Yaraslau Kryvoi, ‘Counterclaims in Investor-State Arbitration’ (2012) 21(2) Minn J Intl L 216.
[15] Ibid.
[16] Yaraslau Kryvoi, ‘Piercing the Corporate Veil in International Arbitration’ (2011) 1(2) Global Bus L Rev 123.