Commercial and Investment Arbitration: What is the difference between them?

04.05.2021

Ketevan Kvetenadze

Arbitration is one of the alternative means of resolving disputes. International Arbitration is especially popular with business disputes.

There are two types of International Arbitration: Commercial Arbitration and Investment Arbitration.

Commercial Arbitration deals with contractual disputes between business entities. Investment Arbitration deals with disputes arising out of an investment agreement, when one party is a business person, namely a foreign investor, and the other party is a state, namely “the host state”. Because of the many commonalities that exist, it is sometimes difficult to see the difference between them.

That is why, in this article we will discuss the main aspects that differs commercial arbitration from investment arbitration.

Commercial arbitration is a well-known and traditional type of arbitration. It has many years of history, both domestically and internationally. Investment Arbitration has also been around for quite some time. However, it started to gain prominence in 1960s and became a universal mechanism for resolving international disputes only when the first Bilateral Investment Agreements (BITs) came into force in 1959 and when the World Bank launched the International Investment Dispute Resolution (ICSID) Convention in 1965.

At its early stage of development, Investment Arbitration was not very popular and mainly only the specialists of the public international law were actively involved. Nowadays, investment arbitration is considered as a means of resolving disputes in thousands of international or investment agreements and many practicing arbitrator, who previously worked only in the field of commercial arbitration, now work in both commercial and investment arbitration. It is also noteworthy that in the case of investment arbitration, parties apply to ICSID, which handles hundreds of disputes between states and foreign companies each year.

Distinguishing between commercial and investment arbitration can sometimes be difficult and often misleading.  Karl-Heinz Böckstiegel, a German emeritus legal scholar who is also a practicing arbitrator, points out that often it is the investment agreements that usually contain “the normal arbitration agreement”, which refers to the institution of commercial arbitration. These are agreements in which one party is a corporation created by a foreign investor in the state and the other party is an enterprise of the same state. If we look closely, we will see that this is in fact an investment relation and therefore the agreement should be not on commercial arbitration but on investment arbitration.

And yet, what is the difference between these two types of arbitration?

As a matter of fact, the answer to the question is not that simple. However, I will try to highlight the approaches recognized in the literature or practice and briefly review the key aspects that distinguish them from each other and are characteristic of each own.

This article will focus on the legal framework under which each of them operates, the procedural issues of both types of arbitration, the applicable law, and the principles of confidentiality and transparency.

The most obvious difference between commercial and investment arbitration is the legal framework under which they operate.

For investment arbitration, the public international law acts are basic, mainly: A bilateral investment treaty (BITs) and the Convention of International Center for the Settlement of Investment Disputes (ICSID), as well as the Energy Charter Treaty (ECT), North American Free Trade Agreement (NAFTA), Central America Free Trade Agreement (CAFTA), etc. Whereas, in commercial arbitration, the main international legal act that plays an important role is the New York Convention (Convention on the Recognition and Enforcement of Foreign Arbitral Awards), which regulates the recognition and enforcement of foreign arbitral awards.

As for domestic, national legislation, it plays a different role in each case.

Commercial arbitration is procedurally governed by the imperative norms of the country in which the arbitration takes place. However, there are some exceptions. For example, when the parties contractually exclude any national law and refer to the principles of the International Institute for the Unification of Private Law (UNIDROIT Principles) or to different combinations or common features of two or more national laws. In the case of investment arbitration, if the arbitration is not conducted in accordance with international instruments such as ICSID or NAFTA, but in accordance with the rules of non-governmental organizations such as the International Chamber of Commerce (ICC) or the London International Court of Arbitration (LCIA), the procedure must comply with the imperative norms of the country where the arbitration takes place.

Generally, substantive national law applies to the court arbitration. However, it can also be used in commercial and investment arbitrations: e.g. Investment contracts between the state and the foreign investor, in most cases, directly indicate the application of the substantive law of the host state. Here we face a number of difficulties, such as the existing legislation at the time of the contract, which was then changed. Even though, investment arbitration is subject to international treaties (acts), national law also has its place in investment arbitration. Conventions (ICSID, BIT), in addition to the norms of international law, also refer to the legislation of the host state. The investment of a foreign investor falls under the jurisdiction of the host country and, consequently, it is obliged to be subject to changes in the law. However, this change should not worsen the condition of the investor.

Arbitration proceedings are subject to any mandatory provisions of the applicable arbitration law. In the case of commercial arbitration, it is national law based on the location of the arbitration, while in the case of investment arbitration, it is the applicable international treaties (acts). However, they mainly contain a very small number of imperative norms, only the fundamental procedural rules. More detailed information can be found in the relevant laws of arbitration itself.

Like the applicable law, the rules of arbitration give the tribunal broad powers and discretion in the proceedings. It appears that when exercising this discretion, the arbitrators consider their many years of experience in international commercial arbitration and use it in both commercial and investment arbitration.

Is the principle of confidentiality, which is so important in arbitration proceedings, presented differently in commercial and investment arbitrations?

The principle of confidentiality in commercial arbitration is primacy. That is why commercial arbitration is preferred by business persons over the court today. In the case of investment arbitration, the ICSID Convention and most BITs say little or nothing about the confidentiality of decisions and procedures. However, sometimes in practice the principle of confidentiality is applied. In the case of investment arbitration, the transparency of the process is a priority, precisely because of the circle of persons to whom it relates to. These are the state interests behind which the public interests stand. That is why transparency of the process is important.

The literature states that the transparency or confidentiality of the process is determined not only by the parties, but also primarily by the subject matter of the dispute. What is the subject of the dispute and whose legal interests is it related to? In the case of commercial arbitration, it is the commercial interest of the business entities, as an investment dispute, it is a public interest.

It can also be noted that commercial and investment arbitration are procedurally different from each other. Investment arbitration is more consistent and transparent than commercial arbitration.

The principle of confidentiality and transparency is what most distinguishes commercial arbitration and investment arbitration from each other.

It is difficult to distinguish between commercial and investment arbitration. Some scholars believe that the parties and the legal framework alone are not sufficient criteria by which to distinguish between the two types of arbitration. We must pay attention to the nature of the dispute and the scale of its impact, whose legal interest it relates to. The difference between commercial and investment arbitration is not only of theoretical, but also of great practical value.

It is important to raise the issue correctly and find the correct, optimal way to solve it.

Finding the optimal path is facilitated by the appropriate legislative framework. This may be especially true for countries that have recently become active participants in international trade. It is important to develop laws or rules for internal arbitration. Guarantees must be provided to protect government and public as well as commercial interests. Arbitration should also be increased in the form of more diverse arbitration laws and institutions.

Keywords:  International Arbitration, Commercial Arbitration, Investment Arbitration.

Sources:

• Karl-Heinz Böckstiegel, “Commercial and Investment Arbitration: How Different Are They Today?” Arbitration International, The Journal of the London Court of International Arbitration (2012)Available at:  [Link]

• Pieter Parmentier, “International Commercial Arbitration v International Investment Arbitration: Similar Game but Somehow Different Rules” (March 1, 2018). Available at SSRN: [Link]