JUDICIAL EXPROPRIATION – PANDORA’S BOX OF INVESTMENT TREATY ARBITRATION?
- By Srishti Banerjee
Keywords : investment law, judicial expropriation, local remedies rule
While the tribunals recognize judicial expropriation, they have emphasized that investment treaty tribunals are not appellate bodies for decisions of national courts. This article seeks to briefly explore whether judicial expropriation has given the investors the discretion to cherry pick between the appellate courts of the host State or the investment arbitration tribunals thereby, resulting into the investment treaty tribunals assuming the role of an international appellate body.
Judicial expropriation vis-à-vis denial of justice
Even though arbitral awards have recognized denial of justice and judicial expropriation as independent concepts, there has been a failure to address their differences and whether the threshold for judicial expropriation is the same or any different than the one for legislative or executive expropriation.
One of the cases which caused the confusion regarding challenging judicial acts under investor state arbitration is Robert Azinian Kenneth v. United Mexican states. The Azinian tribunal held that even though it is possible to hold a State internationally liable for the decisions passed by its courts, it does not automatically mean that the claimant can seek an international review of the national courts’ decisions ‘as though the international jurisdiction seized has plenary appellate jurisdiction.’
In Eli Lily v. Canada, the Tribunal made observations to the effect that there may be circumstances in which a judicial act or omission may engage questions of expropriation under NAFTA Article 1110. However, even though the observations by the Eli Lilly Tribunal are considered to be orbiter dicta, it once again opened the door and confirmed that investment treaty tribunals are willing to entertain independent judicial expropriation claims in the absence of denial of justice. In Rumeli Telekom AS and Telsim Mobil Telekomunikasyon Hizmetleri AS v Republic of Kazakhstan, the tribunal gave a finding of judicial expropriation on a stand alone basis for violation of the effective, prompt and market value compensation which may have been because the judicial valuation was qualified as ‘manifestly and grossly inadequate’.
However, a different view has been taken up by other investment treaty tribunals, that denial of justice is an essential component of judicial expropriation. In Ares International v. Georgia  and MNS v. Montenegro, the tribunals observed that the conclusion of a State being liable for judicial expropriation is linked to a necessary finding of denial of justice.
Given the contradictory conclusions by the investment treaty tribunals, one may wonder how denial of justice and judicial expropriation can be independent concepts considering the similarity of the components which may also result in overlapping claims by foreign investors.
Applicability of Local remedies rule when challenging judicial acts
In the modern BITs/ MIT’s, there has been an insurgence of waiver of exhaustion of local remedies, thus, the investors can directly initiate investment arbitration and are not required to seek redress from the highest court of the host State. This view is also represented in Article 26 of the ICSID Convention. Nonetheless, while a mandatory requirement to exhaust all available judicial avenues prior to initiating an arbitration would also be inharmonious with fork in road clauses, States will not readily accept investment arbitration as an alternative recourse to its judicial system.
First school of thought regarding the applicability of the local remedies rule in judicial expropriation and denial of justice claims is that since they are independent concepts the exhaustion of local remedies is not essential for a foreign investor when establishing a judicial expropriation claim, whereas it might be required as a substantive element of a denial of justice claim. Whereas, the second school of thought is that exhaustion of remedies, which is a requirement for denial of justice is also a requirement for judicial expropriation or that a finding of judicial expropriation is linked to a finding of denial of justice.
Loewen v. United States was one of the first cases which upheld the principle of ‘judicial finality’ which was however, met with severe criticism. The Loewen Tribunal expressed the view that it is an obligation to exhaust remedies which are effective and adequate and are reasonably available to the complainant in the circumstances in which it is situated. Further, in Generation Ukraine Inc. v. Ukraine, the tribunal held that the failure to seek redress from national authorities disqualifies the international claim, not because there is requirement of exhaustion of local remedies but the very reality of conduct tantamount to expropriation is doubtful in the absence of a reasonable not necessarily exhaustive – effort by the investor to obtain correction.
The Award passed by the ICSID Tribunal in Saipem v. Bangladesh was one of the first awards after the Loewen decision which discussed the inconsistency in the judicial finality rule. In this case, the investor relied on the Italy – Bangladesh bilateral investment treaty and claimed judicial expropriation on account of the intervention by the courts of the host State in the contractual arbitration between the investor and state owned entity of Bangladesh. Saipem’s primary arguments were that exhaustion of local remedies did not apply to investor state arbitration and that, if it did, would be inconsistent with the creation of rights to arbitration directly by investors. The tribunal held that the investor need not exhaust local remedies to establish judicial expropriation, since it had exerted reasonable local remedies and spent considerable time and money and had failed to achieve success despite the allegation of misconduct of arbitration being ill founded.
All national legal systems recognize the right of a party to the proceedings to appeal any judicial decision in order to hold lower courts accountable and to reduce the risk of substantive error in adjudicative procedures. There is a general acceptance among national legal systems that substantive errors do occur at the ‘first level of the institutional hierarchy,’ and this omnipresent legal hierarchal structure must be respected by international law. Second Report on State Responsibility International Law Commission, states that 'an aberrant by an official lower in the hierarchy, which is capable of being reconsidered does not of itself amount to an unlawful act.’ However, an argument supporting judicial expropriation can be on the grounds that the beneficiary of the expropriation can organize the taking of property by exercising its influence over the judiciary and thus, exhaustion of all local remedies would be an unnecessary obligation. Further, the ILC Articles on State Responsibility have not differentiated between the forms of expropriation which is then confirmed by Article 31 of the VCLT.
Are Investment Treaty tribunals acting as International Appellate bodies?
Considering the observations reflected above, the question that arises is - Can an investor choose not to appeal the decision of a first instance court which has failed to uphold its supposed substantive rights and thereafter, directly initiate investment arbitration against the host state claiming damage on the ground that the court decision amounts to judicial expropriation?
The standard laid down for independent judicial expropriation claims is ‘manifest arbitrariness’ for espousing a claim against the host State but the doctrine of manifest arbitrariness has been repeatedly applied by appellate courts of States to strike down regulatory and statutory provisions. On the basis of a decision passed by a court of first instance we cannot conclude that a foreign investor has suffered damage until and unless his/her substantive rights have been denied by the highest courts in the host State. There have been consistent warnings embodied in the awards passed by investment tribunals of turning it into an appellate body against the decisions passed by the local courts (even if there was an unfairness towards the foreign investor) unless there is evidence there has been a failure on behalf of the host state to provide an adequate remedy to the claimant.
A recent judgment by the English High court, set aside an SCC award, which held that it had jurisdiction to rule upon one aspect of the claim in the arbitration, namely: whether the judgment of the Warsaw Court of Appeal, as confirmed by the Polish Supreme Court, constituted an “expropriation, nationalization or any other similar measures affecting investments” in violation of the BIT. This essentially implies that the tribunal is of the opinion that it had jurisdiction to examine a judgment of the Warsaw Court of Appeal which could be the subject of investment treaty arbitration. Further, given that in Saipem, the claimant had not made use of its right to appeal two key decisions – decision by the first court of the subordinate Judge of Dhaka to revoke the authority of the ICC tribunal and the decision of the Bangladeshi supreme court, it can be said that the foreign investor creatively but still dubiously replaced the appellate structure of the host state’s court with an investment treaty tribunal.
In my opinion, there is no clarity regarding the threshold of judicial expropriation. Further, to find a substantive violation of international law or a manifest disregard of local law, the investment treaty tribunals examine the merits of the dispute. Therefore, even though the parties may be different before the investment treaty tribunal than before the appellate courts of the host State, letting judicial expropriation stray as a lone wolf would lead to the inevitable conclusion of investment treaty tribunals acting as international appellate court which is not the intent of investment treaty arbitration.
Srishti Banerjee is currently an associate at Wadhwa Law Office, AsiaWise Group. She has completed her masters in law in International Arbitration and Dispute Resolution from the prestigious National University of Singapore.
Preferred Method of Citation - Srishti Banerjee, ‘Judicial expropriation – Pandora’s Box of Investment Treaty Arbitration?’ (ICAR, 5 October 2020) <https://www.investmentandcommercialarbitrationreview.com/post/judicial-expropriation-pandora-s-box-of-investment-treaty-arbitration>
 Eg. Rumeli Telekom AS and Telsim Mobil Telekomunikasyon Hizmetleri AS v. Republic of Kazakhstan, ICSID Case No ARB/05/16, Award (29 July 2008), ¶ 702–704, (‘Rumeli’); ATA Construction, Industrial and Trading Company v. Hashemite Kingdom of Jordan, ICSID Case No ARB/08/2, Award (18 May 2010), ¶ 125–128; Saipem SpA v. People’s Republic of Bangladesh, ICSID Case No ARB/05/07 Award (9 September 2009) ¶ 181, (‘Saipem’); Oil Field of Texas Inc v. The Government of the Islamic Republic of Iran, Iran–USCTR, Award, Case No. 43 (258-43-1) (8 October 1986), ¶ 42.
 Hamid G. Gharavi, Note on Discord Over Judicial Expropriation, ICSID Review, Vol. 33, No. 2 (2018), p. 349, (‘Gharavi’).
 Robert Azinian Kenneth v. United Mexican states, ICSID Case No ARB(AF)/97/2, Award (1 November 1999).
 Eli Lilly and Company v. Canada, ICSID Case No UNCT/14/2, Final Award (16 March 2017) (‘Eli Lilly’).  Rumeli, (note 1).  Ibid, ¶ 706.  Ares International S.r.l v. Georgia, ICSID Case No. ARB/05/23, (‘Ares’).  MNSS B.V. and Recupero Credito Acciaio N.V. v. Montenegro, ICSID Case No. ARB(AF)/12/8.  Jarrod Hepburn, Long Unpublished Award Against Republic of Georgia from Ares International case finds FET breach following bad faith negotiations but frown on broad notions of judicial expropriation, May 16, 2016 referring to Ares (Note 8), available at: https://www-iareporter-com.libproxy1.nus.edu.sg/articles/long-unpublished-award-against-republic-of-georgia-finds-fet-breach-following-bad-faith-negotiations-but-frowns-on-broad-notions-of-judicial-expropriation/.  A Mr. Franck Charles Arif v. Republic of Moldova, ICSID Case No ARB/11/23, Award (8 April 2013), ¶ 307.  Loewen v. United States of America, Award, 16 June 2003, 42 ILM (2003), (‘Loewen’).  Ibid, ¶ 168.  Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award of 15 September, 2003 (‘Generation Ukraine’).  Ibid, ¶ 20.30.  Saipem, (note 1).  Ibid, ¶ 181.  Ibid, ¶ 183.  Zachary Douglas, International Responsibility for domestic adjudication: Denial of Justice deconstructed, International and Comparative Law Quarterly p. 895, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/S0020589314000402.  Gharavi (Note 2), p. 352.  For example, the Indian Supreme Court has applied the doctrine of manifest arbitrariness in various landmark judgment such as Justice K.S.Puttaswamy (Retd.) v. Union of India, 2018 (3) SCC 797; Shayara Bano and Ors. v. Union of India, AIR 2017 SC 4609; and Navtej Singh v. Union of India and Ors., (2019) 1 SCC (LS) 443; Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors., Decided on: 27.11.2019.  Loewen (Note 13) citing Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2, ¶ 137.  GPF GP S.a.r.l. v. Republic of Poland  EWHC 409 (Comm)].  GPF GP S.a.r.l. v. Republic of Poland, SCC Case No. V 2014/168.
 Ibid, ¶ 59.  Saipem (Note 1), ¶ 174.
The views and opinions expressed in the article are those of the author(s) solely and do not reflect the of official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice