Foreign affairs

As globalisation marches onward, the number and complexity of commercial legal actions arising across national borders are keeping pace. Shaheed Fatima reports

In an era of creeping globalisation, commercial litigation often has an international dimension. This makes it fertile ground for disputes regarding treaty interpretation, sovereign immunity and non-justiciability regarding transactions of, and between, foreign states.

Indeed, the landmark (primarily House of Lords) cases on these issues have been commercial ones – for example Fothergill v Monarch Airlines (1981) (on general principles of treaty interpretation), Trendtex Trading Corp v Central Bank of Nigeria (1977) and I Congreso del Partido (1983) (on the restrictive theory of state/sovereign immunity). For a recent example of state immunity in a commercial context, see AIG Capital Partners Inc v Republic of Kazakhstan (2006), JH Rayner (Mincing Lane) v Department of Trade and Industry (1990) and Buttes Gas and Oil Co v Hammer (No 3) (1982) (on non-justiciability).

The significance of international law and non-justiciability in the commercial context is therefore well established. Moreover, these are issues that arise increasingly and in diverse situations, as illustrated by the recent Court of Appeal judgment in Occidental Exploration & Production Co v Republic of Ecuador (2006).

The facts of this case are as follows. A bilateral investment treaty (BIT) was signed in 1993 between the US and Ecuador. In addition to provisions concerning the “encouragement and reciprocal protection of investment” in each country by the nationals and companies of the other, it contained a provision that, in the event of an “investment dispute”, the investing nationals and companies could enjoy direct dispute resolution rights in and against the other country, for example via arbitration under the United Nations Commission on International Trade Law (Uncitral) rules. A dispute arose between Occidental, a Californian corporation, and Ecuador regarding VAT reimbursements. It was referred to arbitration. The panel of arbitrators determined the place of arbitration as London and made its award in 2004, determining the dispute largely in Occidental’s favour.

Ecuador issued a claim form seeking to have the award set aside by challenging it under Section 67 of the Arbitration Act 1996. Occidental objected to this claim, arguing that Ecuador’s challenge raised issues that were non-justiciable by an English court.

In the Court of Appeal, Occidental put its case in two ways. First, it argued that Ecuador’s challenge would require the English court to enforce or interpret the terms of the BIT. This would be contrary to the principle expressed by Lord Oliver in JH Rayner that municipal courts do not have the competence to adjudicate upon, or to enforce the rights arising out of, transactions entered into by independent sovereign states. In that case, creditors of the International Tin Council sought unsuccessfully to have the Sixth International Tin Agreement (entered into between states on the plane of international law and given no formal, incorporated status in English law) interpreted and enforced by the English courts.

Second, Occidental argued that the challenge required the English court to adjudicate upon the transactions of foreign sovereign states contrary to the principle of judicial restraint described by Lord Wilberforce in Buttes Gas and Oil. In that case, one Californian oil exploration company sued the other for alleged slander in relation to oil concessions granted to the companies in the Persian Gulf by local sovereigns; the other counterclaimed. Lord Wilberforce identified various issues relating to the acts and motives of the sovereigns that would have to be determined if the case continued. On this basis he observed: “Leaving aside all possibility of embarrassment in our foreign relations… there are… no judicial or manageable standards by which to judge these issues… The court would be in a judicial no-man’s land” (at 938) and concluded that the English court could not entertain the claim (or the counterclaim).

Both of Occidental’s submissions depended upon its assertions that the rights it sought to enforce under the BIT were no more than those that the US would have against Ecuador as a matter of international law.

Lord Justice Mance gave the judgment of the Court of Appeal. He set out the elementary principle of international law that a state is entitled to protect its subjects (Sections 14-15). He then went on to examine the particular situation created by BITs.

BITs, including the one in question, often give investors direct standing to pursue the state in which the investment is made (Section 16). On this basis, Mance LJ observed that “it would seem to us both artificial and wrong in principle to suggest that the investor is in reality pursuing a claim vested in his or its home State” (Section 17). This view, and the Court of Appeal’s determination that the agreement to arbitrate was consensual (Section 32), formed the bases for the rest of the judgment. Mance LJ reviewed the salient authorities in relation to both of Occidental’s key submissions (Sections 23-31) before concluding that the BIT clearly attempted to secure for private investors the benefits and protection of consensual arbitration. This was agreed between states at an international level.

National courts should, therefore, in an internationalist spirit, aspire to give effect to this aim (Section 32). And the case was not concerned with an attempt to invoke at a national level a treaty which operates only at an international level. Thus it could not be said that the case related to “transactions between states” so as to invoke the Buttes Gas and Oil principle of non-justiciability (Section 41).

This case is significant for the following reasons:

  • It analyses comprehensively the specific question of whether there is a general principle of non-justiciability which precludes the conventional operation of the Arbitration Act 1996.

  • It provides general guidance on the practical application and limits of the principles in both JH Rayner and Buttes Gas and Oil.

  • It provides yet another illustration of the importance of international law and non-justiciability in commercial law, and a reminder to commercial litigators of the constant relevance and application of such issues.

    Shaheed Fatima is a barrister at Blackstone Chambers