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Fork-in-the-road provisions in investment treaties

04 November 2009

In Pantechniki S.A. Contractors & Engineers (Greece) v. The Republic of Albania (ICSID Case No. ARB/07/21), the Tribunal, comprised of Jan Paulsson sitting as a sole arbitrator, held that the claimant's earlier court proceedings precluded it from recourse to arbitration before the International Centre for the Settlement of Investment Disputes ("ICSID") under the 1991 Albania-Greece bilateral investment treaty (the "BIT").  

This is the only known or publicly-available decision, to date, in which a tribunal in an investment treaty case has applied a so-called "fork-in-the-road" provision, by which the choice of an investor to submit disputes either to a local court or international arbitration is deemed to be final to the exclusion of the other.

Background

Pantechniki, a Greek company, had entered into contracts with the Albanian State for the construction of roads and bridges in Albania.  Risks of losses due to civil disturbances were allocated to the Albanian Government’s General Road Directorate.  In March 1997, wide-scale ransacking, looting and rioting throughout Albania caused Pantechniki's equipment to be stolen or destroyed, for which it claimed compensation from the Government of approximately US$4.8 million.  A special commission created by the General Road Directorate valued Pantechniki's losses at just US$1.8 million, which the Ministry of Finance nevertheless refused to pay.  Pantechniki commenced litigation in the Albanian Courts to enforce its contractual right to compensation.  The Albanian district courts and the Court of Appeal dismissed Pantechniki's claims on the basis that the contractual provisions allocating the risk of losses to the General Road Directorate were contrary to Albanian public policy.  Pantechniki appealed to the Supreme Court of Albania but withdrew its appeal before the case was decided, choosing instead to commence ICSID arbitration in August 2007 alleging breaches of the BIT.

A number of issues arose for determination including: whether the claimant had made an "investment" in Albania; whether the action before the Albanian courts precluded the BIT arbitration; and whether there had been a violation of the fair and equitable treatment, denial of justice, and full protection and security obligations owed by Albania to the investor.  The Tribunal's contribution to the understanding of what is an "investment", for the purposes of pursuing arbitration under the ICSID Convention, is notable especially in its rejection of a rigid formulae.  However, it is the finding on the significance of the prior court proceedings for the BIT claim that should be noted by parties considering their legal remedies under bilateral investment treaties and the relative merits of litigation in the local courts.

The ruling on the "fork-in-the-road" provision

Article 10(2) of the BIT provided that if disputes could not be settled amicably, "the investor or the Contracting Party concerned may submit the dispute either to the competent court of the Contracting Party or to an international arbitration tribunal...".  The claimant had first submitted its claim to the Albanian courts, but tried to rely on the distinction between a treaty claim and a contractual claim previously accepted by a long line of ICSID tribunals to insist that it was not the same dispute that it had previously submitted to the Albanian courts.  The Tribunal considered that the appropriate test was "whether or not the 'fundamental basis of a claim' sought to be brought before the international forum is autonomous of claims to be heard elsewhere."  In the given factual matrix, the Tribunal found that the BIT claims did not have an autonomous existence outside the prior contractual claims, and therefore ruled that the claimant could not pursue its treaty remedy given that the jurisdiction clause in the BIT made an election of one forum or the other final.

The merits

The Tribunal allowed certain claims under the BIT to proceed to the extent that it was arguable that they had an independent basis, distinct from the contractual proceedings, but dismissed them in their entirety.

Full protection and security.  There was no breach, as the Tribunal found that the Albanian authorities had been unable to intervene, in the face of the civil disturbances of great magnitude.  The Tribunal expressed the view that "although the host state is required to exercise an objective minimum standard of due diligence, the standard of due diligence is that of a host state in the circumstances and with the resources of the state in question."

Fair and equitable treatment.  This claim failed on the facts.  Particular allegations of arbitrary decision-making were also essentially the same as those rendered inadmissible by operation of the fork-in-the-road clause.

Denial of Justice.  The Tribunal ruled that a misapplication of the law (as opposed to an error in interpretation) could result in a denial of justice, provided that "the error must be of a kind which no competent judge could reasonably have made."  However, the Tribunal ruled that by abandoning its appeal to the Supreme Court, the claimant had not afforded the Albanian legal system as a whole a "reasonable opportunity to correct [any alleged] aberrant judicial conduct", and therefore the claim of denial of justice was bound to fail.

Comment

Before Pantechniki, it was widely accepted that for a fork-in-the-road clause to have been triggered, the parties and the claims in the proceedings before the domestic courts and under the treaty, before the investor-state tribunal, must be identical.  Tribunals routinely ruled that claims under contract, governed by municipal law and seeking contractual remedies, were legally distinct from claims under an investment treaty, governed by public international law and invoking state responsibility.  Pantechniki represents a marked departure from the prevailing jurisprudence by adopting a qualitative test that looks at the subject-matter of the claims, as opposed to their legal character.

Even if Pantechniki turned on its own particular facts, the decision is sure to be a source of inspiration for States and future tribunals facing claims involving parallel proceedings.  The possibility that Pantechniki may be followed means that investors and those who advise them need to be aware, when a dispute first arises, that pursuing certain remedies might have a preclusive effect on potential investment treaty rights.  Investors wishing to preserve their treaty rights must exercise caution and carefully study the text of potentially applicable treaties before commencing proceedings before local courts.

Further information

For more information, please contact Andrea Dahlberg, Arbitration Practice Manager, United Kingdom at andrea.dahlberg@allenovery.com or tel +44(0)20 3088 3634.

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