The rise of construction disputes in investor-state arbitration
Recent years have seen a growing trend of construction disputes being referred to the International Centre for the Settlement of Investment Disputes (ICSID). Construction disputes have accounted for around 15% of new cases registered at ICSID each year since 2017, more than double the previous five years. When construction disputes serve as the basis of treaty claims, it can significantly increase the overall complexity, duration and cost of the dispute.
It is likely that we will see more construction disputes referred to investment arbitration in 2022 and beyond, in view of:
- complications resulting from the Covid-19 pandemic, which impacted contractors and employers alike;
- the availability of third-party litigation funding for contractors with viable, or potentially viable, claims; and
- continued government investment in infrastructure projects in a number of regions, which is giving rise to increasingly complex construction projects.
We set out below some of the key issues that distinguish these disputes from other investment treaty arbitrations and which must be considered at the outset.
Getting the blend of experience right on the tribunal
Choosing the right tribunal is always important but it is critical for treaty claims arising out of construction disputes. The tribunal should, of course, be experienced in treaty claims and public international law but, ideally, in construction disputes as well.
Construction disputes typically involve a high degree of technical complexity specific to the construction industry. Familiarity with the types of contracts commonly used, the expert disciplines relied upon in construction disputes and the relevant terminology can be a significant advantage. As the rise of construction disputes in public international law is relatively recent, there is at present a comparatively small pool of arbitrators combining these disciplines.
Establishing there is a protected investment
Another key issue will be whether the construction project constitutes a protected investment under the relevant investment treaty and, where relied on, the ICSID Convention. Subject to any particular wording in the treaty, a construction project may qualify as a protected investment, provided it satisfies certain criteria. These include that the project has a certain duration, involves the would-be investor undertaking a degree of risk and making a contribution to the economic development of the host State, i.e. the State where the project is being constructed.
Past examples of construction projects deemed to be protected investments include the reconstruction of a highway (CMC Muratori v Mozambique (ICSID Case No. ARB/17/23), the construction of an airport (Staur Eiendom v Latvia (ICSID Case No. ARB/16/38)), the planning and construction of bridges (Garanti Koza v Turkmenistan (ICSID Case No. ARB/11/20)), and the renovation of a four-star hotel (Alpha Projektholding v Ukraine (ICSID Case No. ARB/07/16)).
Attributing the impugned conduct to the State
It will also be important to address the identity of the employer in the construction project. Where the employer is not the State or government itself, but rather a State-owned or State-funded entity, a critical question will be the extent to which the employer’s conduct can be attributable to the State under international law. Relevant to this assessment will be whether that entity or agency is a State organ, exercises any government or sovereign power, or that it acted under the direct control or instructions of the State.
Proving breach of the construction contract may not be enough to show a breach of treaty
Even where a party has a protected investment and can attribute conduct to the State, it still has to demonstrate a treaty breach. Establishing that alleged conduct amounts to a breach of investment protection standards is a different, and significantly higher, standard than showing a breach of contract. Treaty standards that are commonly invoked in construction disputes include:
Unlawful expropriation: Investment treaties often prohibit a State from expropriating the rights of the investor without compensation. There would be an expropriation if, for instance, the State deprived the investor of remuneration under the relevant contract (e.g. Alpha Projektholding GmbH v Ukraine (ICSID Case No. ARB/07/16)), such that the investment is significantly deprived of its value.
Fair and equitable treatment: Investment treaties commonly oblige States to provide investors with fair and equitable treatment. This far-reaching protection may be breached if, for example, the State unexpectedly and fundamentally changed its legislation and regulations applicable to the project (e.g. PSEG v Turkey (ICSID Case No. ARB/02/5)).
Umbrella clause: Certain investment treaties provide a so-called “umbrella clause”. These require that States comply with undertakings entered into with regard to protected investments. Umbrella clauses are usually highly specific and their effects remain debated. Certain parties have argued that, if a State breaches its contractual undertakings through the exercise of sovereign power, the umbrella clause may elevate the contractual breach to treaty level, resulting in potential liability under international law (e.g. Malicorp v Egypt (ICSID Case No. ARB/08/18)), but this view is not universal.