Trade and Investment Law Clinic Papers 20121

COUNTERCLAIMS IN INVESTOR-STATE DISPUTE

SETTLEMENT (ISDS) UNDER INTERNATIONAL
INVESTMENT AGREEMENTS (IIAS)

Dafina Atanasova
Carlos Adrián Martínez Benoit
Josef Ostřanský

1
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Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

Executive Summary
The present report deals with the issue of counterclaims in Investor-State Dispute
Settlement (ISDS) under international investment agreements (IIAs). The
contemporary regime of international investment dispute settlement is often
considered as a ‘one-way street’, enabling foreign investors to file claims against host
States, while these do not seem to enjoy this right to the same extent.

The main task of this project is to apprehend the current state of law and identify the
basic criteria that counterclaims lodged by host States have to fulfil in order to be
entertained by investment tribunals. Adjustments to the current regime that improve
the possibility for host States to make successful counterclaims are drawn from this
analysis.

The report is structured in four parts. Firstly, an introduction of the concept of

counterclaims in international adjudication is made. In this part, the legal
provisions that regulate counterclaims in the most relevant legal texts to investment
arbitration are briefly overviewed. These include the International Court of Justice,
the Iran-United States Claims Tribunal and the International Centre for Settlement of
Investment Disputes among others.

Two fundamental conditions for the admissibility of counterclaims in investment

treaty arbitration are analysed in the second part: the requirement of consent to
counterclaims and the connectedness of the counterclaim with the primary claim.
The core of this part consists of the analysis of the major types of dispute settlement
provisions in IIAs, the case law of investment tribunals and the relevant doctrine. For
comparative purposes, treatment of counterclaims in other international fora is also
examined.

With regards to the requirement of consent, the conclusion that the language of the
offer to arbitrate in an IIA is highly determinative for the scope of possible host
State's counterclaims is reached. Counterclaims are generally permitted if the IIA
provides for settlement of ‘any dispute concerning the investment.’ When the IIA's
arbitration offer is limited to disputes ‘concerning the obligations of the host State
under the IIA’, to the contrary, it is hardly conceivable that a host State counterclaim
will be allowed. The Possible impact of provisions dealing with the parties' locus
standi and express references to counterclaims in IIAs is addressed subsequently.
Options for the limitation or extension of the scope of the consent, as expressed in the
offer to arbitrate in the IIA by the investor are also examined.

As far as the connectedness criterion is concerned, the case law does not offer a
uniform view on the requirement. With the help of jurisprudence of other
international bodies and the commentaries on the issue, various interpretations of the
connectedness criterion for investment treaty arbitration are offered. The case law
shows that counterclaims arising from general domestic law of the host State are not
considered to have the necessary degree of connectedness to be admitted.
Nevertheless, doctrinal opinions articulate a more lenient test of connectedness,
which would allow host States to have such counterclaims entertained. This test,

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

requiring for counterclaims to be linked to the investment considered in the original

claim, seems more adapted to the investment-treaty arbitration context.

The third part focuses on the analysis of other limitations of the host states'
possibility for filing counterclaims. To this end, the relevant causes of action based
on IIAs as well as other sources, i.e. investment contracts and host State's domestic
law, are considered. The general conclusion is that under the current state of law it is
virtually impossible for a host State to assert counterclaims which rely on the IIA or
general international law as a cause of action, as the investor does not assume any
obligations stemming from international law. The possible exceptions exist under the
general principles of law such as good faith, as well as under the procedural
provisions of IIAs. Conclusion with respect to the contractual causes of action and
those based on the host State's domestic law are dependent on various aspects of the
dispute and the applicable legal rules and remains fairly limited in practice. The issue
of party identity on the part of investor and limitations on the counterclaims arising
thereof is considered. In this regard, the major concern is a virtual impossibility of
the host State to file a counterclaim against a local subsidiary that is neither party to
the arbitration agreement nor a party to the proceedings, but might a party to the
contracts concluded with the host State. Finally, contract-based counterclaims are
subject to the additional challenge of conflicting for a, when the contract invoked
contains its own exclusive dispute resolution mechanism.

The forth and final part of the report presents potential adjustments and
suggestions for future treaty drafting which would help to allow host states' to
assert counterclaims. These suggestions concern provisions dealing with jurisdiction
of arbitral tribunal, express reference to a possibility of lodging counterclaims, the
substantive treaty obligations for investors as well as the applicable law. Specific
amendments also address the issues of party identity and umbrella clauses.

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Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

Table of Contents
I. INTRODUCTION .......................................................................................................1
A. General Introduction to Counterclaims in International Law ....................1
B. General Introduction to Counterclaims in Investment Treaty Arbitration
3
C. Legal Basis for Counterclaims........................................................................4
1. International Court of Justice.........................................................................5
2. Iran – United States Claims Tribunal.............................................................6
3. ICSID .............................................................................................................7
4. ICSID Additional Facility Rules....................................................................9
5. UNCITRAL Arbitration Rules ......................................................................9

II. FUNDAMENTAL REQUIREMENTS FOR ADMISSION OF COUNTERCLAIMS IN

INVESTMENT TREATY ARBITRATION .........................................................................11
A. The Requirement of Consent to Counterclaims..........................................12
1. The necessity of consent to counterclaims...................................................12
2. The offer to arbitrate in IIAs ........................................................................13
3. Possibility of modification or limitation of the scope of consent by the
investor.................................................................................................................21
B. The Connectedness Requirement between the Primary Claim and the
Counterclaim ..........................................................................................................25
1. The connectedness requirement in other fora..............................................25
2. The connectedness requirement in investment arbitration...........................29
3. Conclusion ...................................................................................................37

III. ADDITIONAL LIMITATIONS REGARDING THE ASSERTION OF PARTICULAR

CAUSES OF ACTION FOR HOST STATE'S COUNTERCLAIMS .......................................38
A. Limited Causes of Action based on International Law Sources................39
1. Possible causes of action based on the investment treaty ............................39
2. Counterclaims based on international law, the utility of general principles of
law 44
B. Additional Requirements for the Assertion of Counterclaims Arising out
of National Law Sources........................................................................................46
1. The effect of the applicable law provisions in IIAs to the dispute for the
assertion of counterclaims....................................................................................46
2. The ‘party identity’ requirement in investment arbitration context.............50
3. Contract-based counterclaims in the perspective of conflicting fora ..........53

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IV. LIMITS OF THE CURRENT SYSTEM AND SUGGESTIONS TO AMELIORATE THE

CHANCES OF ASSERTING COUNTERCLAIMS ...............................................................54
A. Jurisdiction– including counterclaims in the jurisdiction of the tribunal 56
1. First option: Broad definition of dispute and ample locus standi................56
2. Second option: Express inclusion of counterclaims ....................................57
B. Jurisdiction– attribution of obligations to the investor party to the dispute
58
C. Substantive obligations of investors/investments in IIAs ...........................58
1. Compliance with host State local laws ........................................................58
2. Respect of contract obligations (to be included when an umbrella clause is
present in the relevant IIA) ..................................................................................59
D. Applicable law provisions in the IIA............................................................59

BIBLIOGRAPHY ............................................................................................................ VI

ANNEXES ..................................................................................................................... XII

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 Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

COUNTERCLAIMS IN INVESTOR-STATE DISPUTE SETTLEMENT

(ISDS) UNDER INTERNATIONAL INVESTMENT AGREEMENTS (IIAS)

The analysis of the possibility and modalities for the assertion of counterclaims in
investment treaty arbitration presents two main questions. On the one hand, what are
the relevant requirements for the admission of such counterclaims from a procedural
point of view? On the other, on what legal bases counterclaims thus admitted can be
grounded and under what additional conditions?

The present report moves in four parts addressing those questions. First, a general
presentation of counterclaims in international law and investment arbitration will be
presented with a reference to the particular texts with are the grounds for the
invocation of counterclaims in the systems examined (I.). In the second part the
fundamental common requirements for the admission of counterclaims in investment
treaty arbitration will be analysed (II.). Thereafter, the possible causes of action
available to respondent States will be presented, taking into account the additional
limitations thereto (III.). Finally the limitations to the current state of the law will be
pointed out, with some humble suggestions as to manners in which to facilitate the
presentation of counterclaims on the part of States in investment treaty arbitration
(IV.).

I. INTRODUCTION
A. GENERAL INTRODUCTION TO COUNTERCLAIMS IN INTERNATIONAL LAW

A counterclaim is a claim presented by a defendant in opposition to the one advanced

by the claimant. While advancing a counterclaim, the respondent is not exercising its
right to defence, but exercises ‘…his right to bring an action’ 2 .

Counterclaims are generally admitted in all domestic legal systems. A certain degree
of connectedness with the original claim is required in both civil and common-law
legal systems. For example, in French civil procedural law, the counterclaim must be
‘attached to the original claim by a sufficient bond’. 3 In the United States, it must
arise ‘out of the transaction or occurrence that is the subject matter of the opposing
party's claim’. 4

Pendency of the original claim is a mandatory requirement. There must not be a

judgment over the original claim. Still, in domestic legal systems, once the

2
International Encyclopedia of Comparative Law, vol. XVI, Chapter 4, 62.
3
Códe de Procedure Civile 1975, Article 70.
4
Federal Rules of Civil Procedure, Rule 13.
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Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

counterclaim is filed, ‘…the cross action [counterclaim] is independent of the later

fate of plaintiff’s original action”. 5

As a concept transposed from municipal law, 6 the right to advance a counterclaim

before an international court or tribunal ‘constitutes an acknowledgment of and
response to the complex and multi-faceted nature of international disputes and the
need to address it in a comprehensive and effective fashion.’ 7 Furthermore,
counterclaims have been described as the ‘possibilities open to a party, which is from
a procedural point of view in the position of defendant, to bring in the same
proceedings a claim against the party in the position of plaintiff’. 8 The rationale
behind counterclaims is the principle of sound administration of justice and
procedural economy. The purpose is to deal with all connected claims in single
proceedings, avoiding unnecessary delays and costs related to double or multiple fact-
finding, written submissions, oral proceedings, etc. 9

The possibility to interpose such action has been available since the earliest accounts
of inter-State arbitration. One of the earliest records of counterclaims in this respect is
the Behring Sea Seal Fishing arbitration. The two disputing parties, the United States
of America and the United Kingdom, established the arbitral tribunal by a Treaty of
Arbitration in 1892. The United Kingdom brought a counterclaim against the United
States claim of jurisdictional rights relying on Article VIII of the Treaty:

The High Contracting Parties having found themselves unable to agree upon a
reference which shall include the question of the liability of each for the
injuries alleged to have been sustained by the other, or by its citizens, in
connection with the claims presented and urged by it and being solicitous that
this subordinate question should not interrupt or delay the submission and
determination of the main question, do agree that they may submit to the
Arbitrators any question of fact involved in said claims and ask for a fiindung
(sic) thereon, the question of the liability of either Government upon the facts
found to be the subject of further negotiation. 10

5
International Encyclopedia (n 1) 64-65.
6
Judge A Cançado Trindade has refered to counterclaims as a ‘juridical institute historically transposed
from domestic procedural law into international procedural law.’ Jurisdictional Immunities of the State
(Germany v Italy), Counter-Claim, Order of 6 July 2010, Dissenting Opinion Of Judge A A Cançado
Trindade, para 4 <http://www.icj-cij.org/docket/files/143/16031.pdf> accessed 5 April 2012.
7
C Antonopoulos, Counterclaims before the International Court of Justice (T.M.C. Asser Press, 2011)
10.
8
J L Simpson and H Fox, International Arbitration: Law and Practice (Stevens and Sons Limited,
1959) 172.
9 Case Concerning Oil Platforms (Islamic Republic of Iran v. United States of America), Counter-
Claim, Order of 10 March 1998, Separate Opinion by Judge Oda, ICJ Reports 1998, para. 8.
10
Recueil Général des Traités et Autres Acts Relatifs aux Rapports de Droit International, vol. XVIII
(Goettingue, 1893), 590 (Emphasis added).

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

The rules of the Anglo-Austrian, Anglo-Bulgarian and Anglo-Hungarian Tribunals,

all established in the aftermath of World War I, provided expressly for the
interposition of counterclaims:

Where a Defendant seeks to rely upon any matters contained in his Answer as
the grounds of a counterclaim he must in his Answer state specifically that he
does so by way of a counterclaim. 11

Other inter-State arbitral tribunals entertained counterclaims on a different basis. The

Mexican-Venezuelan Claims Commission was authorized by and exchange of notes
by both parties to ‘take jurisdiction, as against a single private claim presented by
Mexico, of any counterclaims which might be presented by Venezuela.’ 12

The practice of allowing counterclaims was later codified in the rules of the
Permanent Court of International Justice. Article 40 of the Rules of the Court of 1922
allowed the inclusion of counterclaims as long as they ‘[came] within the jurisdiction
of the Court’. 13

B. GENERAL INTRODUCTION TO COUNTERCLAIMS IN INVESTMENT TREATY

ARBITRATION

Unlike traditional arbitration, which is generally based on consent given by both

parties to a dispute in a single instrument, consent in investment treaty arbitration is
often based on the acceptance by the investor of an offer to arbitrate made by the host
State in an IIA.

The arbitration agreement is perfected in two steps. The host State ‘extends a generic
offer of arbitration to foreign investors nationals of the other State Party or Parties to
the treaty.’ 14 This offer remains without any effect until the investor accepts it.
According to Article 25(1) of the ICSID Convention, a preferred venue for investment
arbitration, this acceptance must be in writing. This may also be applied to ad hoc
arbitration.

Institution of arbitral proceedings by the investor is today deemed sufficient to fulfil

the requirements of consent. The first investment tribunal to establish jurisdiction in
this way was AAPL v Sri Lanka. 15 AAPL, a Hong Kong corporation, instituted
arbitral proceedings based on Article 8(1) of the 1980 UK – Sri Lanka BIT:

11
Rule 26 of the Anglo-Austrian, Anglo-Bulgarian and Anglo-Hungarian Mixed Arbitral Tribunals,
cited in Simpson and Fox (n 8) 178.
12
J Ralston, The Law and Procedure of International Tribunals (Stanford University Press, 1926) 211.
13
The Permanent Court of International Justice: Statues and Rules (A. W. Sitjhoff’s
Uitgeversmaatschappij, 1922) 98.
14
H Veenstra-Kjos, Counterclaims by Host States in Investment Treaty Arbitration 4 TDM 1 (2007)
12.
15
Asian Agricultural Products Limited v Republic of Sri Lanka (Resubmitted Case) (Award on merits,
27 June 1990) 4 ICSID Reports (1993) 246-295.
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Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

Each contracting Party hereby consents to submit to the International Centre

for the Settlement of Investment Disputes between States and Nationals of
Other States (…) any legal disputes arising between that Contracting Party
and a national or company of the other Contracting Party concerning an
investment of the latter in the territory of the former.

Since then, it has become ‘established investment treaty practice, therefore, that an
investor may accept a host country’s offer to arbitrate in an investment treaty simply
by instituting arbitral proceedings.’ 16 Jan Paulsson regarded this as ‘arbitration
without privity’. About its purpose, he stated that

The aim here is not to take anything away from States, but to help ensure that
foreigners have faith in their promises. The objective is not arbitration that
favors the foreigner, but one that simply favors neutrality. 17

It has been argued that the interpretation of these treaties ‘in the light of their purpose
of protecting investors creates [a …] constraint for jurisdiction over counterclaims.’ 18
The host State and the investor might not been regarded to be on an equal footing.
Thus, it is important that the wording of the offer made by the host State is wide
enough as to allow the possibility for it to file counterclaims. Some IIAs characterize
as disputes only those relating to breaches of the treaty by the host State, others may
refer to all disputes arising out of an investment. Certain treaties may limit to some
extent the possibility of the host State to act as claimant.

In addition IIAs usually do not create obligations to both parties to the dispute. They
only create obligations for the host State towards the other contracting State and the
investor. Therefore, even if the wording of the dispute settlement clause in the IIA is
broad enough to allow counterclaims, this may not have any practical use, except if
bases outside of the IIA itself – such as other sources of international law, contracts or
domestic law – are admitted as bases for the host State’s counterclaim.

C. LEGAL BASIS FOR COUNTERCLAIMS

A brief overview of the legal provisions that regulate counterclaims in different fora is
necessary. In this section, each provision is accompanied by a short explanation of its
wording and rationale. Practical application of these provisions, where relevant for
investment treaty arbitration, will be further analysed in subsequent sections of this
report.

16
J Salacuse, The Law of Investment Treaties (Oxford University Press, 2010) 382.
17
J Paulsson, ‘Arbitration Without Privity’, 10 Foreign Investment Law Journal 2 (1995) 232, 256.
18
Y Kryvoi, ‘Counterclaims in Investor-State Arbitration’, LSE Law, Society and Economy Working
Papers 8 (2011), 3.

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

1. International Court of Justice

There is no provision regarding counterclaims in the Statute of the International Court

of Justice. According to Article 30(1) of the Statute, ‘the Court shall frame the rules
for carrying out its functions. In particular, it shall lay down its rules of procedure.’
Counterclaims are viewed as a matter of procedure. Article 80 of the Rules of Court
provides for the institution of counterclaims:

1. The Court may entertain a counter-claim only if it comes within the

jurisdiction of the Court and is directly connected with the subject-matter of
the claim of the other party.
2. A counter-claim shall be made in the Counter-Memorial and shall appear as
part of the submissions contained therein. The right of the other party to
present its views in writing on the counter-claim, in an additional pleading,
shall be preserved, irrespective of any decision of the Court, in accordance
with Article 45, paragraph 2, of these Rules, concerning the filing of further
written pleadings.
3. Where an objection is raised concerning the application of paragraph 1 or
whenever the Court deems necessary, the Court shall take its decision thereon
after hearing the parties.

The provision establishes several conditions for the filing of a counterclaim. Firstly, it
must be within the jurisdiction of the Court. Secondly, the counterclaim must have a
direct connection with the applicant’s claim. Thirdly, the counterclaim must be
presented in the counter-memorial. The applicant is entitled to have a right to present
its views in writing regarding the counterclaim. This is meant to guarantee equality of
arms between the parties.

In a majority decision, 19 the ICJ made a general statement on the characteristics of

counterclaims:

Whereas it is established that a counter-claim has a dual character in relation

to the claim of the other party; whereas a counter-claim is independent of the
principal claim in so far as it constitutes a separate "claim", that is to say an
autonomous legal act the object of which is to submit a new claim to the
Court; and whereas at the same time, it is linked to the principal claim, in so
far as formulated as a ''counter" claim it reacts to it: whereas the thrust of a
counter-claim is thus to widen the original subject-matter of the dispute by

19
Judge Weeramantry appended a dissenting opinion where he expressed the view that the nature of
the Genocide Convention obligations as erga omnes precludes submitting counterclaims. He supported
this conclusion by making an analogy with municipal legal systems and the distinction between private
and public/criminal law. Whereas, counterclaims are concept pertaining to the former, it is not possible
to lodge them in the latter. Application of the Convention on the Prevention and Punishment of the
Crime of Genocide (Bosnia and Herzegovina v. Serbia and Montenegro), Order of 17 December, ICJ
Reports 243, 1997 (Dissenting Opinion of Vice-President Weeramantry).
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Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

pursuing objectives other than the mere dismissal of the claim of the
Applicant in the main proceedings. 20

The Court reinstated in that case that the idea behind the institution of counterclaims
is the better administration of justice and procedural economy. For this reason claims
that are generally to be submitted in separate proceedings might be admitted in a
pending case in the form of incidental proceedings. 21

The case law of the ICJ is very helpful to conceptualize the idea of counterclaims. It
can be discerned that by filing a counterclaim the jurisdiction of the Court cannot be
expanded. Counterclaims merely widen the subject matter of a pending case.

2. Iran – United States Claims Tribunal

Article II of the Algiers Accords permits the interposition of counterclaims by the

governments of either party

1. An International Arbitral Tribunal (the Iran-United States Claims Tribunal)

is hereby established for the purpose of deciding claims of nationals of the
United States against Iran and claims of nationals of Iran against the United
States, and any counterclaim which arises out of the same contract, transaction
or occurrence that constitutes the subject matter of that national's claim, if
such claims and counterclaims are outstanding on the date of this agreement,
whether or not filed with any court, and arise out of debts, contracts (including
transactions which are the subject of letters of credit or bank guarantees),
expropriations or other measures affecting property rights, excluding claims
described in Paragraph 11 of the Declaration of the Government of Algeria of
January 19, 1981, and claims arising out of the actions of the United States in
response to the conduct described in such paragraph, and excluding claims
arising under a binding contract between the parties specifically providing that
any disputes thereunder shall be within the sole jurisdiction of the competent
Iranian courts in response to the Majlis position. 22

Counterclaims have to arise out of the same contract, transaction or occurrence of the
national’s claim. On ‘official proceedings’ between the United States and Iran
counterclaims have also been admitted, not withstanding the absence of an explicit
provision for them in Article II.3. 23 Thus it can be inferred that an explicit reference
to counterclaims is not always required for their admission.

20
Genocide Convention case (n 19) para 27.
21
Ibid. para 30.
22
Emphasis added.
23
Article II.3 reads ‘[t[he Tribunal shall have jurisdiction, as specified in Paragraphs 16-17 of the
Declaration of the Government of Algeria of January 19, 1981, over any dispute as to the interpretation
or performance of any provision of that declaration.’

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

3. ICSID

Article 46 of the ICSID Convention allows the filing of counterclaims in procedures

under the Centre’s jurisdiction:

Except as the parties otherwise agree, the Tribunal shall, if requested by a

party, determine any incidental or additional claims or counterclaims arising
directly out of the subject-matter of the dispute provided that they are within
the scope of the consent of the parties and are otherwise within the jurisdiction
of the Centre.

Parties to a dispute must explicitly express their will for the tribunal not to entertain
counterclaims. In an IIA arbitration scenario, the host State may do so in the treaty. A
unilateral decision by the investor to exclude counterclaims from the determination of
the tribunal should not be deemed as an agreement by the parties to the dispute.

Firstly, the counterclaim must be connected with the claim. Connectedness of the
counterclaim with the claim entails both factual and legal elements at the same time.
Reference to the ‘subject-matter of the dispute’ entails a common fact pattern and a
common legal link with original claim. About this, and in relation with the 1968
Arbitration Rules, it has been said that

The test to satisfy this condition is whether the factual connection between a
claim and a counterclaim is so close as to require the adjudication of the latter
in order to settle finally the dispute, the object being to dispose of all the
grounds of dispute arising out of the same subject matter. 24

The second requirement is for the counterclaim to be within the consent of the parties
to the dispute. It must not be understood as a reference to the general jurisdictional
requirements of Article 25 of the ICSID Convention, but to the particular scope of the
arbitration agreement, i.e. the offer to arbitrate made by the host State in the IIA as
accepted by the investor. The Energy Charter Treaty (ECT), for example, has a
narrow dispute settlement provision which covers only ‘an alleged breach of an
obligation of the former [host State] under Part III…’.25 Other treaties, like the China
– Cote d’Ivoire BIT have a broad provision that allows ‘any legal dispute between an
investor of a Contracting Party and the other Contracting Party in connection with an
investment…’ 26 to be solved under it.

Finally, the provision makes reference to the general jurisdictional requirements of

ICSID as established in Article 25. A counterclaim that meets the other requirements

24
Rules of Procedure for Arbitration Proceedings (Arbitration Rules), 1968, 1 ICSID Reports (1993)
63, 100.
25
Energy Charter Treaty (1994), Article 26(1).
26
People’s Republic of China – Republic of Cote d’Ivoire Agreement on the Promotion and Protection
of Investments, Article 9(1).
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Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

set out previously in the provision, but does not arise out of an investment as defined
by Article 25 is effectively outside the arbitral tribunal’s jurisdiction. This is
explained by the limited specialized jurisdictional ambit of the Centre and in practice
creates an additional hurdle for the admission of counterclaims. They must satisfy the
requirements of Article 25 of the Convention as much as the primary claim. In
comparison, Article 80 of the Rules of the ICJ, a body with general jurisdiction
ratione materiae, refers only to counterclaims as coming “within the jurisdiction of
the Court.” 27

To sum up, Article 46 can be envisaged as three concentric circles that a counterclaim
must fit in for it to be entertained by an arbitral tribunal. The outermost circle
mandates the counterclaim to fall under the jurisdiction of the Centre, described in
Article 25 of the ICSID Convention; the following circle requires the counterclaim to
be within the scope of the consent of the parties. Finally, the innermost circle requires
the counterclaim to arise out of the same subject-matter of the dispute.

Rule 40 of the ICSID Arbitration Rules further develops Article 46:

(1) Except as the parties otherwise agree, a party may present an incidental or
additional claim or counter-claim arising directly out of the subject-matter of
the dispute, provided that such ancillary claim is within the scope of the
consent of the parties and otherwise within the jurisdiction of the Centre.

(2) An incidental or additional claim shall be presented not later than in the
reply and a counter-claim no later than in the counter-memorial, unless the
Tribunal, upon justification by the party presenting the ancillary claim and
upon considering any objection of the other party, authorizes the presentation
of the claim at a later stage in the proceeding.

(3) The Tribunal shall fix a time limit within which the party against which
an ancillary claim is presented may file its observations thereon. 28

Similarly as the UNCITRAL rules, counterclaims must be presented in the counter-

memorial (equivalent to the ‘statement of defence’ described in the UNCITRAL
Rules). An opportunity to file a counterclaim after this procedural stage is also
provided, but the arbitral tribunal must consider objections made by the other party.
This last requirement is not present on the UNCITRAL Rules.

The final paragraph mandates the arbitral tribunal to provide the other party an
opportunity to present its observations regarding the counterclaim. Again, equality of
arms between the parties is guaranteed.

27
Similarly see UNCITRAL Arbitration Rules, version 2010, Article 21(3).
28
Emphasis added.

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

4. ICSID Additional Facility Rules

The ICSID Additional Facility Rules were adopted in 1978 to administer disputes that
fell outside the jurisdiction of the Centre as defined in Article 25 of the ICSID
Convention. These rules are mainly used in investment arbitration proceedings under
NAFTA Chapter 11. Although it provides for ICSID Arbitration, proceedings under
the jurisdiction of the Centre are not possible, as long as Canada and Mexico remain
non-signatories of the Washington Convention.

Counterclaims are also permitted under these Rules. Article 47 provides the following
for ‘Ancillary Claims’

(1) Except as the parties otherwise agree, a party may present an incidental or
additional claim or counter-claim, provided that such ancillary claim is within
the scope of the arbitration agreement of the parties.

(2) An incidental or additional claim shall be presented not later than in the
reply and a counter-claim no later than in the countermemorial, unless the
Tribunal, upon justification by the party presenting the ancillary claim and
upon considering any objection of the other party, authorizes the presentation
of the claim at a later stage in the proceeding.

The three-fold test of Article 46 of the Convention is not necessary here. It is tailored
to meet the requirements of ICSID’s jurisdiction. As the disputes to which the
Additional Facility Rules are applicable have to be outside the jurisdiction of the
Centre, the test becomes irrelevant. Article 3 of the Additional Facility Rules confirms
this:

Since the proceedings envisaged by Article 2 are outside the jurisdiction of the
Centre, none of the provisions of the Convention shall be applicable to them
or to recommendations, awards, or reports which may be rendered therein.

Article 47 deals with connectedness in the same way as Article 21(3) of the 2006
UNCITRAL Arbitration Rules. The arbitral tribunal itself will determine whether the
counterclaims fall under its jurisdiction.

5. UNCITRAL Arbitration Rules

Besides the current edition of the UNCITRAL Arbitration Rules, it is pertinent to

examine also its 1976 version. It is this edition that the vast majority of ad hoc
investment treaty tribunals to date have applied.

Article 19(3) of the 1976 edition of the UNCITRAL Rules allows counterclaims in the
following way

9
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

3. In his statement of defence, or at a later stage in the arbitral proceedings if

the arbitral tribunal decides that the delay was justified under the
circumstances, the respondent may make a counter-claim arising out of the
same contract or rely on a claim arising out of the same contract for the
purposes of a set-off. 29

This wording has been regarded as ‘inappropriate to arbitration arising under

international treaties’. 30 This issue was discussed during the sessions of
UNCITRAL’s Working Group on Arbitration and Conciliation:

158. A suggestion was made that the provision should be modified so as to

allow counter-claims that were substantially connected to (or arose out of) the
initial claim. Another suggestion was either to omit the words “arising out of
the same legal relationship, whether contractual or not” or that the provision
should not require that there be a connection between the claim and the
counter-claim or set-off, leaving to the arbitral tribunal the discretion to decide
that question. In that context, the view was expressed that removal of any
connection between the claim and the counter-claim or set-off might
accommodate the needs of specific situations such as investment disputes
involving States but might not sufficiently meet the needs of more general
commercial disputes. 31

After considering various options 32 , the present wording was adopted. Article 21(3) of
the 2010 Rules, which replaced Article 19(3), reads as follows:

3. In his statement of defence, or at a later stage in the arbitral proceedings if

the arbitral tribunal decides that the delay was justified under the
circumstances, the respondent may make a counter-claim or rely on a claim
for the purpose of a set-off provided that the arbitral tribunal has jurisdiction
over it. 33

The present rule is silent regarding on the degree of connectedness that must exist
between the claim and the counterclaim. It poses on the arbitral tribunal the discretion
to assert jurisdiction over it taking into account the particular circumstances of each

29
Emphasis added.
30
J Paulsson and G Petrochilos, Revision of the UNCITRAL Arbitration Rules: A Report (2006), para
174 <http://www.uncitral.org/pdf/english/news/arbrules_report.pdf> accessed 8 April 2012.
31
United Nations Commission on International Trade Law, Report of the Working Group on
Arbitration and Conciliation on the work of its forty-sixth session (New York, 5-9 February 2007)
A/CN.9/619, para 158 <http://daccess-dds-
ny.un.org/doc/UNDOC/GEN/V07/818/18/PDF/V0781818.pdf?OpenElement> accessed 8 April 2012.
32
United Nations Commission on International Trade Law, Report of the Working Group on Arbiration
and Conciliation on the work of its fiftieth session (New York, 9-13 February 2009) A/CN.9/669, paras
27-32 <http://daccess-dds-
ny.un.org/doc/UNDOC/GEN/V09/813/43/PDF/V0981343.pdf?OpenElement> accessed 8 April 2012.
33
Emphasis added.

10
 Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

case. This wording was regarded as ‘broad enough to encompass a wide range of
circumstances and did not require substantive definitions of the notions of claims for
set-off and counterclaims’. 34

Article 21(3) establishes other conditions to be met for submitting counterclaims,

which have remained untouched from Article 19(3). A counterclaim must be
submitted with the statement of defence, in a similar fashion to the requirement set out
on Article 80 of the Rules of the Court of the International Court of Justice.
Nevertheless, the article gives the respondent the possibility to file a counterclaim at a
later stage if it is justified, subject to the approval of the arbitral tribunal. In the Iran –
US Claims Tribunal, whose proceeding is governed by a tailored version of the 1976
Rules, ‘later counter-claims have been frequently rejected for failure to show
circumstances which would justify the delay’. 35

From the above survey, it can be acknowledged that there is a well-established

practice for the possibility of assertion of counterclaims in international tribunals.
Two core requirements for the admission of counterclaims are present in one way or
another in all provisions examined:

 The international tribunal must have jurisdiction to decide over the counterclaim;
and

 The counterclaim must be connected to the main claim.

II. FUNDAMENTAL REQUIREMENTS FOR ADMISSION OF

COUNTERCLAIMS IN INVESTMENT TREATY
ARBITRATION
From the introduction, it can be inferred that two major requirements are connected
with the institution of the counterclaims in international adjudication in general,
which are also safeguards against the abuse of this right. 36 They are the ones
applicable also in investment treaty arbitration.

This part is, thus, divided in two sections. The first one analyses the requirement of
the parties’ consent to counterclaims as understood in international investment law, as
the main feature determining the jurisdiction of tribunals in investment arbitration.
The second section analyses the condition of connectedness. To this end, the case law
of the ICJ and the Iran – U.S. Claims Tribunal will be taken into account for
comparative purposes.

34
UNCITRAL, Report (n 30) para 31.
35
D Caron, L Caplan and M Pellonpää, The UNCITRAL Arbitration Rules: A Commentary (Oxford
University Press, 2006) 410.
36
Genocide Convention case (n 19) para 30.
11
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

A. THE REQUIREMENT OF CONSENT TO COUNTERCLAIMS

 The scope of the parties consent is important for the assertion of counterclaims. It
delimitates the jurisdiction of the arbitration tribunals regarding claims, but also
counterclaims;

 The scope of consent in investment arbitration is mainly determined by the text of

the offer to arbitrate in IIAs. Its formulation determines the possibility to assert a
counterclaim by respondent States;

 The investor cannot limit the scope of the offer to arbitrate provided in the IIA.

1. The necessity of consent to counterclaims

 Inclusion of counterclaims in the scope of the parties consent in investment treaty

arbitration cannot be presumed only by the reference in the arbitration agreement to
a particular set of arbitration rules

International dispute settlement is governed by consent and this principle applies to all
adjudicatory bodies operating on the international plane. 37 Consent is the cornerstone
of the jurisdiction of any arbitral tribunal and plays a major role also in investment
treaty arbitration. With regards to counterclaims there is a general understanding that
for them to be admitted they must fall within the jurisdiction of the particular tribunal,
i.e. within the consent of the parties to arbitrate.

This requirement is expressly provided for in Article 46 of the ICSID Convention, as

the admission of counterclaims is made subject to falling ‘within the scope of the
consent of the parties’. Even though an express provision to this effect does not exist
in the UNCITRAL Arbitration Rules, tribunals dealing with counterclaims brought
under these rules have also consistently considered whether the advanced
counterclaim entered in the parties’ scope of consent. Notably, the Iran-U.S. Claims
Tribunal required for counterclaims to fulfil the conditions set in Article II.1. of the
Algiers Accords, i.e. for them to be pendant by 1981. 38 Similarly, two tribunals
dealing with investment treaty arbitral proceedings under the UNCITRAL Arbitration
Rules (Saluka v Czech Republic and Paushok v Mongolia) assessed to what extent
counterclaims entered within the scope of the parties consent. 39

In the context of investment treaty arbitration, an examination of the IIA basis for the
initiated proceedings, as the instrument providing for the scope of the parties consent,

37
See e.g. Article 36 Statute of the ICJ; Article 25 and 46 of ICSID Convention.
38
A. Marossi, ‘Iran-United States Claims Tribunal, Claims, Counterclaims, Dual Nationality and
Enforcement’ in 23(6) J. of Int. Arb (2006) 493, 497ff.
39
Saluka Investments B.V. v Czech Republic, UNCITRAL, Decision on Jurisdiction Over the Czech
Republic's Counterclaim, 7 May 2004, paras 37-39; Sergei Paushok et al v, The Government of
Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011, para 689.

12
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

is to be undertaken in order to assess the scope of the consent given. It can be stated
that the vast majority of the case law of investment tribunals agrees that the
counterclaims must fall within the scope of consent of the parties as expressed in their
arbitration agreement, based on the relevant IIA. 40 There is a strong rationale behind
such scrutiny on the part of tribunals, as an award rendered outside the scope of their
jurisdiction would be susceptible of annulment and/or refusal of enforcement.

However, a minority view was articulated by Professor W. Michael Reisman in

Roussalis v Romania, specifically regarding the ICSID framework. He expressed
disagreement with the interpretation that counterclaims must fall within the scope of
the parties consent based on an IIA, stating that when the States Parties to a BIT
contingently consent, inter alia, to ICSID jurisdiction, the consent component of
Article 46 of the Washington Convention is ipso facto imported into any ICSID
arbitration which an investor then elects to pursue. 41

As the consent of the parties ultimately circumscribes the jurisdiction of any ICSID
tribunal,, the ‘consent component of Article 46’ cannot extend the jurisdiction of the
tribunal beyond the scope of the original parties agreement. Professor Reisman's
interpretation would mean that bringing a claim could in and of itself be construed as
consent to counterclaims, and the prerequisite of consent under Article 46 ICSID
Convention would lose its meaning.‘ 42

Such interpretation, however, would be contrary to the intention of the creators of the
ICSID Convention. As expressed in the travaux preparatoires, Article 46 was ‘in no
way intended to extend the jurisdiction of the arbitral tribunal’. 43 It was even
expressly stated by Aron Broches that ‘no issue could be brought before a tribunal
unless the parties had agreed that it could be submitted to arbitration’.44 It is
submitted therefore that the policy and efficiency reasons advanced by Prof.
Reismann weighing in favor of having a dispute decided in one forum cannot
outweigh the legal rules of jurisdiction and consent explicitly provided for in the
Convention. Therefore, this opinion would not be followed in the report and the
consent of the parties, pursuant to the IIA will be examined.

2. The offer to arbitrate in IIAs

 ‘Disputes regarding obligations under the IIA’ v ‘all disputes’: A broad definition

40
Saluka v. Czech Republic (n 41) para 39; Paushok v. Mongolia (n 41) para. 689; Spyridon Roussalis
v. Romania, ICSID Case No. ARB/06/1, Award, 7 December 2011, paras 865-869; Gustav W. F.
Hamester GmbH & Co KG v. Republic of Ghana, ICSID Case No. ARB/07/24, Award, 18 June 2010,
paras. 353-354.
41
Dissenting opinion of Prof. M. Reisman in Spyridon Roussalis v Romania (n 42).
42
Veenstra-Kjos (n 14) 26.
43
‘Summary Record of Proceedings, Geneva Consultative Meeting of Legal Experts, February 17-22
1964’ in History of the ICSID Convention, Vol. 2 (ICSID 1970) 367, 422.
44
‘Chairman’s Report on the Regional Consultative Meetings of Legal Experts’ in History (n 45) 557,
573.
13
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

of the material scope of the dispute makes the assertion of counterclaims easier;

 ‘The investor’ v ‘either party’ has the right to start arbitral proceedings: A provision
providing the State with standing to initiate the arbitral proceedings makes the
assertion of counterclaims easier;

 An express permission or prohibition of the right to assert all or certain type of

counterclaims influences the possibility to do so;

 These three features of the offer to arbitrate that influence the State’s possibility to
lodge a counterclaim, should be considered in conjunction with one another and not
as separate criteria (see Table No 1 for practical combinations).

i. The definition of the material scope of the consent

The definition of the disputes which can be submitted to arbitration provided for in
the IIA has a direct influence on the possibility by a State party to bring
counterclaims. It defines the scope of the tribunal’s jurisdiction ratione materiae on
the dispute.

IIAs that limit the offer only to the ‘obligations … under the Agreement [i.e.
IIA]’, 45 make it difficult for States to assert counterclaims. The use of such restrictive
language in the offer to arbitrate limits the tribunals’ jurisdiction only to disputes
regarding the obligations under the IIA itself, 46 which in practice does not contain
obligations for the investor. The view that the narrow language of the offer to arbitrate
is an obstacle to the assertion of counterclaims on the part of the State was adopted by
the majority in Roussalis v Romania 47 and is supported by the majority of scholars. 48

Other IIAs allow more easily for counterclaims on the part of the respondent State, as
they refer to ‘all disputes relating to the investment’ 49 , or even more generically to
‘any dispute’. 50 The tribunal in Saluka v Czech Republic admitted that the offer to
arbitrate in the Netherlands – Czech Republic BIT was broad enough to encompass
counterclaims, stating that the fact that the offer to arbitrate referred to ‘all disputes’
‘is wide enough to include disputes giving rise to counterclaims’. 51 This view was

45
Agreement between the Government of the Republic of France and the Government of the United
Mexican States on the Reciprocal Promotion and Protection of Investments, 1998, Article 9.
46
Spyridon Roussalis v. Romania (n 42) para 869.
47
Spyridon Roussalis v. Romania (n 42) paras 866-869.
48
P Lalive and L Halonen, ‘On the Availability of Counterclaims in Investment Treaty Aritration’,
Czech Yearbook of International Law Vol. II (2011) 141, 146-149; Veenstra-Kjos (n 14) 14-19; Kryvoi
(n 18) 8-11.
49
Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of
The Netherlands and the Czech and Slovak Federal Republic, 1991, Article 8.
50
Agreeement between the Government of New Zealand and the Government of the Republic of Chile
(sic) the Promotion and Protection of Investment, 1999, Article 10.
51
Netherlands – Czech and Slovak Republics BIT (n 51)Article 8. See Saluka v Czech Republic (n 41)
para 39.

14
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

also later adopted in Paushok v Mongolia.

Finally, some treaties, especially the U.S. BITs, follow a more detailed solution,
providing that the claimant may submit a claim regarding ‘an obligation under
Article 3 to 10 [substantive host State's obligations], … an investment
authorization or an investment agreement’ 52 to arbitration. Even though no arbitral
tribunal has yet examined such a clause, it can be reasonably inferred that a
counterclaim on the part of the State could be lodged on its basis. The tribunal’s
jurisdiction would not be limited only to the IIA, but would also encompass
investment authorizations and agreements, which as a rule contain investor
obligations as well. Nevertheless, it seems that counterclaims presented on the basis
of the investment’s host State’s domestic law, pertaining to other matters, would fall
outside of the jurisdiction of the tribunal.

In conclusion, it would be easier on the part of respondent States to assert

counterclaims when the definition given in IIAs of the subject-matter of the disputes
susceptible of being brought to arbitration is broader, independent of the fact whether
it is a generic one referring to all disputes or a more detailed one, which still includes
instruments separate from the IIA as possible bases for a party’s claim.

ii. The party having the right to initiate the proceedings

Another part of the provision containing the State’s offer to arbitrate which has been
taken into account by both tribunals 53 and scholars 54 when examining the possibility
of asserting counterclaims is the right for both parties to the dispute or only to the
investor to institute proceedings pursuant to the offer. As it is generally understood
that in international arbitration counterclaims are to be regarded as primary claims for
the purposes of asserting jurisdiction, limited standing to initiate proceedings would,
without indication to the contrary, bar counterclaims as much as claims on the part of
the State party to the dispute.

As an illustration of the importance of different locus standi provisions for the

purposes of counterclaims, the Iran-U.S. Claims Tribunal’s view on official
counterclaims (between States – Article II.2) 55 , as opposed to counterclaims brought
against individuals (pursuant to Article II.1.) is of great interest. In Iran-United States
case, the U.S. as a respondent argued that there is a general customary international
law right to counterclaim as far as disputes between States are concerned. The
Tribunal ruled that official counterclaims are allowed as a general rule, assuming that
the other conditions are met. The tribunal argued that even though counterclaims are
52
US Model BIT 2004, Article 24(1)(a)(i) <http://italaw.com/documents/USmodelbitnov04.pdf>
accessed 24 Mar 2012.
53
Saluka v Czech Republic (n 41) para. 39; Hamester v Ghana (n 42) para 354.
54
Veenstra-Kjos (n 14) 19-22.
55
‘The Tribunal shall also have jurisdiction over official claims of the United States and Iran against
each other arising out of contractual arrangements between them for the purchase and sale of goods and
services.’
15
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

not specifically mentioned in the provision, the States under Article II.2. are on equal
footing as any of them can always initiate new proceedings. Thus, counterclaims are
allowed as a matter of efficiency and fairness. The need for an explicit mention of
counterclaims in Article II.1 is explained, on the other hand, by the fact that it is only
an individual or an entity that can bring a main claim under this provision. 56

There are IIAs that identify only the investor as a potential claimant, such as the
Energy Charter Treaty, which states that ‘the Investor party to the dispute may
choose to submit [the dispute to arbitration]’. Another example is the United States –
Uruguay BIT, which gives the right to initiate arbitral proceedings to the ‘claimant’,
defined as ‘an investor… party to an investment dispute’. 57 In this case, it has been
argued that in the absence of an indication in the offer to arbitrate itself pointing to the
admission of counterclaims, it would seem that they would fall outside the parties’
scope of consent. 58

Nevertheless, it is noteworthy that arguments have been advanced to the effect that
such one-sided locus standi might be only an expression of the host State’s firm offer
to arbitrate. 59 It is also plausible to imagine that such wording is the reflection of the
practical functioning of investment treaty arbitration, i.e. the investor perfects the
arbitration agreement, usually when he brings a claim against the State. Even more so
since the limited locus standi provision is sometimes found even in broadly worded
offers to arbitrate with regards to the subject matter of the dispute. Thus, a limited
standing provision cannot be seen, in the context of investment treaty arbitration, as
an insurmountable obstacle, but rather as one of many factors influencing the
possibility to assert a counterclaim.

The second types of IIAs, to the contrary, state that: ‘either Party to the dispute may
initiate arbitration’. It provides expressly both parties to the dispute with locus
standi to initiate the arbitral proceedings and thus identifies both the investor and the
State as potential claimants, placing them at equal footing. The possibility for a State
party to the dispute to act as claimant a fortiori gives to it the right to counterclaim. 60

In the same manner, neutrally worded IIAs, providing simply that ‘all disputes …
shall be submitted to arbitration’ can be reasonably included in the category that
does not pose particular problems for the assertion of counterclaims on the part of the
State. As was affirmed in Saluka v Czech Republic, such a neutral wording ‘carries
with it no implication that [the offer to arbitrate] applies only to disputes in which it is
56
Iran-United States, Case No. B1, Interlocutory Award, 9 September 2004, para 89; further see e.g.
Iran v US, Case No.A/2 Decision of 13 January 1982, para II.B.
57
Treaty between United States of America and the Oriental Republic of Uruguay Concerning the
Encouragement and Reciprocal Protection of Investment, 2005, Article 1.
58
Veenstra-Kjos (n 14) 21; A Asgarkhani, ‘Compromise and Cooperation at the Iran-Untied States
Claims Tribunal’, 19(2) Arb. Int’l (2003) 149, 163.
59
Veenstra-Kjos (n 14) 21.
60
Veenstra-Kjos (n 14) 20.

16
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

an investor which initiates claims’. 61 Moreover, the equality of parties in arbitral

proceedings, including their right to initiate the proceedings, is a core principle of
arbitration and civil procedure in general. Therefore it cannot be simply presumed that
a party does not have the right to present a claim.

iii. Express references to counterclaims in the IIA

An express reference to counterclaims in the provision containing the offer to arbitrate

investment disputes can turn the balance in favour of asserting jurisdiction over a
counterclaim, as illustrated by the case of the Iran-U.S. Claims Tribunal. 62 To our best
knowledge there is only one IIA that expressly grants to the host State of the
investment the right to assert counterclaims, namely the COMESA Investment
Agreement of 2007. Article 28(9) of this Agreement provides:

A Member State against whom a claim is brought by a COMESA investor

under this Article may assert as a defence, counterclaim, right of set off or
other similar claim, that the COMESA investor bringing the claim has not
fulfilled its obligations under this Agreement, including the obligations to
comply with all applicable domestic measures or that it has not taken all
reasonable steps to mitigate possible damages.

Although provisions like this one have not been considered until now by tribunals,
they have a certain impact on the interpretation of an IIA's offer to arbitrate as
including counterclaims by the State party to the dispute. The existence of consent to
the counterclaims specified therein is beyond doubt. Nevertheless, in such a scenario
only counterclaims expressly mentioned in the particular provision would seem to be
admissible.

There are other treaties that address the issue of counterclaims in a more implicit
manner – by excluding a particular type of counterclaim. Typically the counterclaims
excluded are the ones based on the recovery of the investor’s loss trough a guarantee
or insurance agreement. An example of such exclusion is Article 24 (7) of the US –
Uruguay BIT, which provides:

A respondent may not assert as a defense, counterclaim, right of set-off, or for

any other reason that the claimant has received or will receive indemnification
or other compensation for all or part of the alleged damages pursuant to an
insurance or guarantee contract. 63

It is arguable that such a provision interpreted a contrario would lead to the

61
Saluka v. Czech Republic (n 41) para 39.
62
See discussion on Article II.1 of the Algier Agreement supra; Gould Marketing, Inc. v. Ministry of
National Defense, Case 49, Award ITL 24-49-2, reprinted in Iran – US CTR, vol. 3, 151–152.
63
Emphasis added.
17
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

conclusion that other types of counterclaims are admissible under the particular IIA. 64
Even though such a provision of itself would not be capable of overcoming an
otherwise narrowly worded offer to arbitrate, 65 it can be used as an argument in
favour of the admission of counterclaims in case of doubt.

Table No. 1
Different Wordings of the ‘Offer to Arbitrate’ in IIAs or how the presented
criteria interact in practice
No IIA Text of the provision Possibility to assert
(Relevant parts) counterclaims
France – 1. This Article [entitled “Settlement of Not possible to assert
disputes between an investor of one counterclaims, as the
Mexico BIT,
Contracting Party and the other Contracting investor’s obligations are
1998, Party”] only applies to disputes between a not within scope of the
Contracting Party and an investor of the offer to arbitrate, which
Article 9
other contracting Party concerning an specifically limits its
alleged breach of an obligation of the scope of application by
former under this Agreement which using the term “only
causes loss or damage to the investor or its applies to”.
investment.
Energy (1) Disputes between a Contracting Not possible to assert
Party and an Investor of another Contracting counterclaims, as:
Charter
Party relating to an Investment of the latter ) only obligations of the
Treaty, in the Area of the former, which concern State are included in the
an alleged breach of an obligation of the offer to arbitrate and
1994,
former under Part III shall, if possible, be ) the investor is the only
Article 26 settled amicably. one having locus standi to
(2) If such disputes can not be settled initiate the proceedings
according to the provisions of paragraph (1)
[...], the Investor party to the dispute may
choose to submit it for resolution:
[...]
(c) in accordance with the following
paragraphs of this Article. [providing for
arbitration under ICSID, ICSID – Additional
Facility, ad hoc arbitration in accordance
with the UNCITRAL Rules and SCC
arbitration]
Germany – 1. Disputes between a national or Virtually possible to
company of one Contracting Party and the assert counterclaims, but
Ghana BIT,
other Contracting Party concerning an problematic legal basis
1995, obligation of the latter under this Treaty for them as:
in relation to an investment of the former ) right to initiate the
Article 9
shall as far as possible be settled amicably proceedings is given to
between the parties to the dispute. both parties and the State
2. If the dispute cannot be settled within is identified as a possible

64
W Ben Hamida, 'L'arbitrage Etat-investisseur cherche son équilibre perdu : Dans quelle mersure
l'Etat peut introduire des demandes reconventionnelles contre l'investisseur privé?' in International Law
FORUM du droit international 7 (2005) 261, 270..
65
Veenstra-Kjos, (n 14) 27.

18
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

No IIA Text of the provision Possibility to assert

(Relevant parts) counterclaims
six months of the date of written notification aggrieved party, but
by one of the parties to the dispute, it shall ) narrow scope of the
be submitted for arbitration if either tribunal’s jurisdiction
party to the dispute so requests. ratione materiae. 66
3. Unless the parties agree otherwise, the
aggrieved party shall have the right to
refer the dispute to: [international
arbitration]
COMESA 1. In the event that a dispute between a Possible to assert
COMESA investor and a Member State counterclaims, as:
Investment
has not been resolved pursuant to good faith - the right to assert
Agreement efforts in accordance with Article 26, a counterclaims is
COMESA investor may submit to specifically provided for
2007,
arbitration under this Agreement a claim in the IIA
Article 28 that the Member State in whose territory - but only for the
it has made an investment has breached types of counterclaims
an obligation under Part Two of this specifically mentioned in
Agreement and that the investment has para. 9.
incurred loss or damage by reason of, or
arising out of that breach by submitting that Counterclaims allowed
claim to any one of the following fora at a regarding:
time: - obligations of the
[...] investor under the
(c) to international arbitration: [...] Investment Agreement
9. A Member State against whom a claim (other than compliance
is brought by a COMESA investor under with domestic measures)
this Article may assert as a defence, - obligation of the
counterclaim, right of set off or other investor to ‘comply with
similar claim, that the COMESA investor all applicable domestic
bringing the claim has not fulfilled its measures’
obligations under this Agreement, - failure to take
including the obligations to comply with steps to mitigate its loss.
all applicable domestic measures 67 or that
it has not taken all reasonable steps to
mitigate possible damages.
United States 1. In the event that a disputing party Reasonably possible to
assert counterclaims, as:
Uruguay BIT, considers that an investment dispute cannot
be settled by consultation and negotiation: - there is no
2005, definition of the subject
(a) the claimant 68 , on its own behalf, may
matter of the dispute in
Article 24 submit to arbitration under this Section a
the BIT;
claim
- even though locus
(i) that the respondent has breached standi is reserved to the
(A) an obligation under Articles 3 investor;
through 10, - use of the

66
Regarding the interpretation of this treaty, see Hamester v Ghana, (n 42) para 354.
67
Article 13 of the COMESA Investment Agreement states ‘COMESA investors and their investments
shall comply with all applicable domestic measures of the Member State in which their investment is
made.’
68
‘Claimant’ is defined under Article 1 of the BIT, as ‘an investor… party to an investment dispute’.
19
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

No IIA Text of the provision Possibility to assert

(Relevant parts) counterclaims
(B) an investment authorization, or exclusion of particular
(C) an investment agreement; and types of counterclaims, to
infer that other
1. that the claimant has incurred loss or
counterclaims are
damage by reason of, or arising out of, that
envisaged under the BIT.
breach.
7. A respondent may not assert as a Counterclaims allowed
defense, counterclaim, right of set-off, or regarding:
for any other reason that the claimant has a. an obligation of
received or will receive indemnification or the investor under an
other compensation for all or part of the investment authorization,
alleged damages pursuant to an insurance b. an obligation of
or guarantee contract. the investor under an
investment agreement
United StatesFor the purposes of this Article, an Possible to assert
investment dispute is a dispute between a counterclaims, as:
Estonia BIT,
Party and a national or company of the other - there is a
1994, Party arising out of or relating to: definition of the subject
(a) an investment agreement between matter of the dispute in
Article VI
that Party and such national or company; the BIT which includes
(b) an investment authorization other sources then the BIT
granted by that Party's foreign investment itself;
authority to such national or company; or - locus standi is
(c) an alleged breach of any right expressly given to States
conferred or created by this Treaty with to assert a claim; and
respect to an investment. - a provision
[…] If the dispute cannot be settled excluding particular types
amicably, the national or company of counterclaims is
concerned may choose to submit the present.
dispute for resolution: […]
(c) in accordance with the terms of Counterclaims allowed
paragraph 3 [to arbitration]. regarding:
a. an obligation of
[…] (b) Once the national or company
the investor under an
concerned has so consented, either Party
investment authorization,
to the dispute may initiate arbitration in
b. an obligation of
accordance with the choice so specified in
the investor under an
the consent.
investment agreement
(6) In any proceeding involving an
investment dispute, a Party shall not assert,
as a defense, counterclaim, right of set-off
or otherwise, that the national or company
concerned has received or will receive,
pursuant to an insurance or guarantee
contract, indemnification or other
compensation for all or part of its alleged
damages.
New Zealand Any dispute between a Contracting Party Uncertain if possible to
– Chile BIT, and an investor of the other Contracting assert counterclaims, as:
Party shall, as far as possible, be settled - there is a very

20
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

No IIA Text of the provision Possibility to assert

(Relevant parts) counterclaims
1999, amicably through negotiations between the broad definition of the
parties to the dispute. subject matter of the
Article 10
If these negotiations do not result in a dispute in the BIT;
solution within six months from the date of - locus standi is
request for negotiations, the investor may reserved to the investor.
submit the dispute either:
Counterclaims allowed
to the competent court or tribunal of the
regarding:
Contracting Party in whose territory the
Virtually every type of
investment was made or to international
claim linked with the
arbitration.
primary dispute.

Netherlands- 1) All disputes between one Contracting Possible to assert

Party and an investor of the other counterclaims, as:
Slovakia BIT,
Contracting Party concerning an - there is a broad
1992, investment of the latter shall if possible, be definition of the subject
settled amicably. matter of the dispute; and
Article
- there is a neutral
2) Each Contracting Party hereby
wording regarding locus
consents to submit a dispute referred to in
standi.
paragraph (1) of this Article, to an arbitral
tribunal, if the dispute has not been settled
Counterclaims allowed
amicably within a period of six months from
regarding:
the date either party to the dispute requested
Every type of claim linked
amicable settlement.
with the primary dispute
and an investment of the
particular investor.
France – (2) Any dispute concerning investments Possible to assert
between one of the contracting parties and a counterclaims, as:
Dominican
national or company of the other contracting - there is a broad
Republic party is settled amicably between the two definition of the subject
parties concerned. matter of the dispute; and
BIT,
If such a dispute was not settled within a - locus standi is
1999, delay of six months starting from the expressly given to States
moment when it was brought by one or the to assert a claim.
Article 7
other party to the dispute, it is submitted by Counterclaims allowed
request of one or the other of the parties, regarding:
[to arbitration]. 69 Every type of claim linked
with the primary dispute
and ‘concerning
investments’.

3. Possibility of modification or limitation of the scope of consent by the

investor

 An investor’s acceptance of the offer to arbitrate in the IIA’s importance for the
scope of consent of the parties is not clearly established in investment treaty

69
Unofficial translation.
21
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

arbitration. Its desirable to adopt an approach that does not allow the investor to
narrow the scope of its consent by accepting it only with regards to the subject
matter of the claim advanced by it;

 When a counterclaim is asserted by the host State and the investor does not object
to it in due time, this silence can be considered as an acceptance of the tribunal’s
jurisdiction over the counterclaim and therefore an extension of the scope of
consent of the parties to include counterclaims.

i. Limitation of consent to counterclaims by institution of arbitral

proceedings by the investor

The limitation of the scope consent given by the host State in an IIA by its acceptance
by the investor is not a settled issue in investment treaty arbitration. It has been argued
that the investor accepts the host State offer to arbitrate as an indivisible whole, and
no limitation is possible. 70 The acceptance of it, in whichever form it is made, mirrors
the host State offer; the IIA is not ‘an à la carte selection of provisions among which
the investor can choose’ 71 and cannot decide to arbitrate only the claims they put
forward. In ICS Inspection and Control Services Limited v Argentina, a tribunal under
the UNCITRAL Rules, explained it in the following way

272. At the time of commencing dispute resolution under the treaty, the investor
can only accept or decline the offer to arbitrate, but cannot vary its terms. The
investor, regardless of the particular circumstances affecting the investor or its
belief in the utility or fairness of the conditions attached to the offer of the host
State, must nonetheless contemporaneously consent to the application of the
terms and conditions of the offer made by the host State, or else no agreement to
arbitrate may be formed. As opposed to a dispute resolution provision in a
concession contract between an investor and a host State where subsequent
events or circumstances arising may be taken into account to determine the
effect to be given to earlier negotiated terms, the investment treaty presents a
“take it or leave it” situation at the time the dispute and the investor’s
circumstances are already known. 72

Acceptance by the investor, which is a private person’s act, can be analysed by

general contract theory. On this view, the investor’s limitation of the host State’s offer
is deemed impossible, as ‘any response by which a private person modifies the scope
of the offer initially determined by the public party should be analysed, not as an
acceptance, but as a refusal of acceptance accompanied by a counteroffer of
70
Lalive and Halonen (n 50) 150; Ben Hamida, (n 66) 269.
71
Lalive and Halonen (n 50) 150.
72
ICS Inspection and Control Services Limited (United Kingdom) v Republic of Argentina, PCA Case
No. 2010-9 (Award on Jurisdiction) (10 February 2012) para 272
<http://italaw.com/documents/ICS_v_Argentina_AwardJurisdiction_10Feb2012_En.pdf> accessed 11
April 2012.

22
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

arbitration at the intention of the State.’ 73

The contrary view does not lack support, however. A limiting effect is given to the
investor’s acceptance, as it ‘defines the scope of the tribunal’s subject matter
jurisdiction both over primary claims and counterclaims.’ 74 Prof. Schreuer, in the
ICSID arbitration context, has stated that

Consent will be restricted to the extent of the investor’s acceptance of the offer.
If the investor accepts the offer only in respect of its specific claim, consent will
be restricted by the terms of the acceptance. If the investor accepts the offer of
jurisdiction by instituting proceedings, consent exists only to the extent
necessary to deal with the investor’s request. But if a counterclaim of the State
is closely connected to the investor’s complaint, it is arguable that it will be
covered by the mutual consent of the parties.75

Upholding the same view, Shihata and Parra have stated that ‘[t]here would normally
be no reason for the consent of the investor to be broader than is necessary to enable
the investor’s grievance against the State to be submitted to arbitration under the
Convention.’ 76

The acceptance of this approach would turn investment treaty arbitration into ‘an
adjudicative mechanism to control the exercise of public authority affecting the assets
of a foreign investor.’ 77 Limiting the scope of the consent only to the claim advanced
by the claimant would deprive the host State of its right to advance counterclaims that
fall inside the offer to arbitrate the contracting States convened to include in the
treaty. The acceptance of such view is neither desirable, nor reasonable.

ii. Extension of investor’s consent by not objecting to arbitral tribunal

jurisdiction over counterclaim

The failure of the investor to contest jurisdiction over counterclaims advanced by the
host State may be interpreted as an extension of the tribunal’s jurisdiction to entertain
them. Some tribunals have endorsed this approach. In the resubmitted case of Amco v
Indonesia, the tribunal stated that

“A dispute” in arbitration is to be understood not merely as subject matter

within the scope of jurisdiction that is contested, nor even arguments that have
been advanced in oral hearings and responded to. (…) A dispute is defined by
claims formally asserted and responded to in a claim and defence, or in

73
Ben Hamida (n 66) 269. [Unofficial translation]
74
Kryvoi (n 18) 9.
75
Schreuer (n 35) 756.
76
I F I Shihata and A Parra, ‘The Experience of the International Centre for Settlement of Investment
Disputes’ 14 ICSID Review – FILJ (1999) 299, 320.
77
G Van Harten and M Loughlin, ‘Investment Treaty Arbitration as a Species of Global Administrative
Law’ 17 EJIL (2006) 121, 143.
23
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

counterclaim and reply to counterclaim – in other words, the causes of action.78

In Klöckner v Cameroon, the tribunal held that consent to ICSID may be furthermore
expressed afterwards the dispute is ongoing:

Once the Centre has been validly seized (as it was in this case by Klöckner’s
Request), consent as to the “ratione materiae” extent of the Tribunal’s
jurisdiction may be expressed at any time, even in the written submissions to the
Tribunal (“forum prorogatum”). 79

In the context of ICSID, the counterclaim will still have to meet the mandatory
requirements of Article 46. Extension of consent in this form may only suffice that the
counterclaim is ‘within the scope of the consent of the parties’. The tribunal should
assess objectively if it is ‘within the jurisdiction of the Centre’.

However the lack of discussion on jurisdiction on counterclaims in several of the

older investment treaty based cases which deal with the question, included under the
auspices of ICSID, may be explained by an extension of jurisdiction trough the waiver
by the investor of its right to challenge the jurisdiction of the tribunal regarding the
asserted counterclaim.

The arbitral rules most used in investment arbitration provide a time frame under
which these objections may be raised. ICSID’s Rule 41(1) provides that objections to
jurisdiction over ancillary claims are to be raised ‘as soon as possible’ and in any case
‘no later than the expiration (…) for the filing of the rejoinder…’. Parties may
exceptionally object the tribunal’s jurisdiction after this procedural phase if it is based
on facts ‘unknown to the party at that time.’

For arbitral proceedings under the UNCITRAL Rules, Article 21(3) of the 1976 Rules
requires objections to jurisdiction over counterclaims to be raised ‘no later than (…)
in the reply to the counterclaim. Article 23(2) of the 2010 Rules, allows a party to also
raise ‘a plea that the tribunal is exceeding the scope of its authority as soon as the
matter alleged to be beyond the scope of its authority is raised during the arbitral
proceedings.’

Thus after the time limits for the presentation for such objections on jurisdiction
regarding counterclaims have passed, it can be reasonably assumed that the investor
has consented to the tribunals’ jurisdiction over the counterclaims in question.

It has been seen, also, in practice that investors are in particular circumstances willing

78
Amco Asia Corporation and others v The Republic of Indonesia, Resubmitted Case, ICSID Case No.
ARB/81/1, Decision on Jurisdiction, 10 May 1988, 1 ICSID Reports (1993) 543, 567.
79
Klöckner Industrie-Anlagen GmbH and others v Republic of Cameroon and Société Camerounaise
des Engrais SA, ICSID Case No. ARB/81/2, Award, 21 October 1983, 2 ICSID Reports (1994) 9, 14.

24
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

to give their consent to counterclaims, where the State party to the dispute rejects such
a possibility. This situation presented itself to the tribunal in SGS v. Pakistan. 80 The
tribunal did not rule on this matter, however, in such cases it would be preferable to
see the acceptance of counterclaims on the part of the investor as an offer to include
counterclaims in the scope of the arbitration agreement towards the host State, rather
than as an automatic extension of the agreement, due to the consensual nature of
arbitration agreements.

B. THE CONNECTEDNESS REQUIREMENT BETWEEN THE PRIMARY CLAIM AND

THE COUNTERCLAIM

 The requirement of connectedness is conceptually an admissibility requirement.

Once not satisfied the respondent may still file a separate claim, assuming other
requirements (especially consent) are met. Tribunals' decisions on admissibility are
reviewable to a limited extent as opposed to decisions on jurisdiction;
 Assessment of the requirement is carried out on a case-by-case basis, taking into
account both facts and law;
 Assessment of the requirement in investment treaty arbitration is restrictive for it
relies on the earlier contract-based case law and the jurisprudence of the Iran-U.S.
Claims Tribunal, which arise from a different legal context;
 In the context of ICSID, assessment of connectedness under Article 46 is not
treated in the same way when applied to counterclaims as opposed to additional
claims, although the same requirement and provision applies to both;
 Assessment of the connectedness based on the investment in dispute shows to be
the most appropriate in the context of investment treaty arbitration and thus
suggested as one which tribunals should adopt in the future.

This chapter analyses the requirement of connectedness between the principal claim
and the counterclaim, which is the second fundamental condition generally,
recognized in international law for a counterclaim to be admitted. As will be shown
hereinafter, virtually every international adjudicatory body dealing with counterclaims
considers this criterion.

1. The connectedness requirement in other fora

i. Direct connection requirement in the PCIJ/ICJ Case Law

The provision related to counterclaims is to be found in Section D of the Rules of the

International Court of Justice (“Incidental proceedings”), Subsection 3. Counter-
Claims, Article 80. Its relevant part on the type of connectedness required for the

80
SGS Société Générale de Surveillance S.A. v Islamic Republic of Pakistan, ICSID Case No.
ARB/01/13, Decision of the Tribunal on Objections to Jurisdiction, 6 August 2003, 18 ICSID Review –
FILJ (2003) para 108.
25
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

admission of counterclaims states that a counterclaim may be entertained if it ‘is

directly connected with the subject-matter of the claim’. 81 Admission of a
counterclaim does not expand the jurisdiction of the Court. It merely extends the
subject-matter of the dispute. The requirement of direct connection is listed in
addition to the jurisdiction over the counterclaim. The older provisions of the Rules,
especially the version of PCIJ adopted on 1936, makes it clear that the counter-claims
can be put forward as a claim in separate proceedings if they fall within the
jurisdiction of the Court but are not directly connected with the primary claim. 82

The first reference in the case law can be found in the Chorzow Factory 1926, where
the Court applied the Rules which were still silent on the requirement of direct
connection to a counterclaim presented by Poland. Even though an express
requirement was absent in the Rules at that time, the Court stated in an obiter dicta
that as it observes that the counterclaim is based on the Treaty of Versailles, it is also
juridically connected to the principal claim. 83

In the Oil Platforms 1998 case, the United States submitted the counterclaims
claiming that Iran's conduct previous to the U.S.' alleged wrongful acts was a
violation of international law and that the U.S.' measures were in fact counter-
measures. 84 Iran claimed the lack of jurisdiction as the U.S.' attacks could not be
considered as related to the commerce and navigation, which was the subject-matter
of the treaty invoked as a jurisdictional title by Iran. Moreover, it contended the
counterclaims were too general, thus there were no direct connection. The ICJ

81
Emphasis added. This wording of the provision applies since 1 February 2001. The older version
stated: ‘1. A counter-claim may be presented provided that it is directly connected with the subject-
matter of the claim of the other party and that it comes within the jurisdiction of the Court. 2. A
counter-claim shall be made in the Counter-Memorial of the party presenting it, and shall appear as part
of the submissions of that party. 3. In the event of doubt as to the connection between the question
presented by way of counter-claim and the subject-matter of the claim of the other party the Court
shall, after hearing the parties, decide whether or not the question thus presented shall be joined to the
original proceedings.’
82
The PCIJ Rules, provided originally in the Article 40(4) which dealt with the content of counter-
cases (statement of defense) that the counter-cases ‘may include counter-claims, in so far as [they]
come within the jurisdiction of the Court.’ The PCIJ Rules were subsequently modified in 1936 when
explicit provision on counterclaims was added: ‘When proceedings have been instituted by means of an
application, a counter-claim may be presented in the submissions of the Counter-Memorial, provided
that such counter-claim is directly connected with the subject of the application and that it comes
within the jurisdiction of the Court. Any claim which is not directly connected with the subject of the
original application must be put forward by means of a separate application and my form the subject of
distinct proceedings or be joined by the Court to the original proceedings.’
83
Case concerning the Factory at Chorzow (Germany v. Poland), Claim for Indemnity, Merits,
Judgment of 13 September 1928, PCIJ Series A, No. 17 (1928) 38. Germany did not dispute that the
counterclaim comes within the jurisdiction of the court.
84
Above the cases analyzed hereinafter, the ICJ ruled on counterclaims also in Asylum case (Colombia
v. Peru), Judgment of 20 November 1950, ICJ Reports 1950, 265; Rights of Nationals of the United
States of America in Morocco (France v. U.S.), Judgment of 27 August 1952, ICJ Reports 1952, 176.
The most recent case, the only one to date applying the 2001 version of the Rules, Jurisdictional
Immunities of the State (n 6), did not proceed to the analysis of the close connection requirement as the
ICJ held it lacked jurisdiction over the Italian counterclaims.

26
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

majority order held the counterclaims admissible as it considered the freedom of

commerce and navigation to be broad enough to encompass anything which might
inhibit it. With respect to the direct connection, the Court stated that due to the lack of
definition of “direct connection” in the Rules it is for the Court in its sole discretion,
to determine on a case-by-case basis, both in facts and in law, whether such
connection exists. 85 The aspects taken into account relate to the spacial and temporal
factual features of the counterclaim as well as to the legal aims. 86 As the
counterclaims submitted by the U.S. related to the same factual complex, arose at
about the same time within the same area and, finally, pursue the same legal aim –
establishment of a violation of the Treaty of Amity 1955 – the Court found them to be
admissible. 87

A similar holding as the majority in the Oil Platforms is found in the earlier case of
Genocide Convention, Bosnia and Herzegovina v. Serbia and Montenegro. 88 As to the
assessment of the close connection, the Court in it laid down virtually the same test as
the one described above used later in the Oil Platforms case. 89 The ICJ case law
shows that the close connection requirement is a matter of admissibility. If it is not
satisfied but the counterclaim is within the jurisdiction of the ICJ, it can be object of a
separate application. The satisfaction of direct connection is evaluated on a case-by-
case basis in facts (space and time of the complained acts) and in law (the legal
instrument invoked and the legal aim) 90

85
Oil Platforms case (n 9) para 37.
86
Ibid.
87
Ibid para 38. The decision was accompanied by two separate opinions and one dissent. Judge Oda
expressed his concern that while admitting counterclaims not connected with the primary claim, the
applicant would be seriously prejudiced. He stated that ‘[w]hile an applicant State is not itself allowed
to bring additional claims, why then may a respondent State be permitted to bring a new claim if this
(counter-)claim is not directly connected with the subject-matter of the Applicant's claim?’ (Separate
Opinion of Judge Oda (n 9) paras 8-9). For this reason he criticized that the Court did not allow the
parties to properly exchange their views on the issue and did not not make a thorough examination of
facts and submissions as it has done in it previous cases on counterclaims (Asylum (n 86), US Nationals
in Morocco (n 86). Judge Higgins criticized the majority because it did not assess the jurisdictional
basis of the U.S.’ counterclaims, although it seemed that the majority had assumed the counterclaims
may be permitted only in so far as they have the same jurisdictional basis. She stated there is nothing in
the Statute or the Rules that would require the same jurisdictional nexus (Oil Platforms (n 9), Separate
Opinion of Judge Higgins, 32). She stated that ‘[w]hat matters in a counter-claim is the jurisdiction
mutually recognized by the parties under the Treaty - not the jurisdiction established by the Court in
respect of particular facts initially alleged by the claimant.’(Ibid 34). Judge ad hoc Rigaux appended a
dissenting opinion and criticized that the Court ruled on the existence of the requisite level connection
only on a summary examination without hearing the parties. Dissenting Opinion of Judge Ad Hoc
Rigaux, para 49. Although relating to the both requirements under Article 80, Judge Cançado in his
dissenting opinion in State Immunities, Germany v. Italy (n 6), expressed a similar concern. He saw the
lack of a hearing with the parties as a violation of the principle of adversary hearing. As the
counterclaims are considered as autonomous claims, they deserve the same attention as the original
claims.
88
Genocide Convention case (n 19).
89
Ibid, para 27.
90
The term of legal aim can be best paralleled with the concept of cause of action, although the latter is
not used by the Court.
27
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

ii. Connectedness requirement in the Iran-U.S. Claims Tribunal

The Article II.1 of the Algiers Accords spells out several requirements for any
counterclaim to be entertained by the Tribunal. 91 One of them is that a counterclaim
must ‘arise out of the same contract, transaction or occurrence that constitutes
the subject matter of [the] national's claim.’ Therefore any counterclaims must be
connected in a qualified manner with the principal claim.

Since its inception the Tribunal has had many opportunities to interpret what can be
regarded as rather concrete criteria for determining the necessary level of connection,
both regarding counterclaims arising from a separate contract than the one invoked by
the claimant in the proceedings, and arising out of domestic law. 92

The seminal decision on admissibility of counterclaims regarding a separate contract

can be found in Westinghouse Electric Corp. v Iran, Case No. 389, 12 February 1987,
Award. The principal claims were based on contracts concerning the development of
Integrated Electronics Depot (weapon system), and counterclaims related to different
contracts, which nevertheless involved the depot, were made by the respondent. The
tribunal in the case started with a general statement that counterclaims in international
adjudication are a matter of elementary fairness, but procedural practice of
international tribunals only permitted counterclaims when directly connected to the
subject-matter of the principal claim. 93 These limits were found to be applicable in a
similar manner to the Tribunal. As the counterclaims are based on contracts legally
separate and distinct from the original claim, the tribunal had to focus its analysis on
the term “transaction” used in Article II(1). 94 It stated that significant factual
interrelationships existed between the two sets of contracts. Although there was no
obligation or right to work beyond the scope of the concluded contracts, the project as
a whole went forward as a joint effort of the parties. 95

The Tribunal also pointed out to, at the time, the only decision admitting
counterclaims which were related to a different contract than the one which the
principal claims in dispute were founded on. 96 In that case, American Bell v Iran,

91
The other types are found in the subsequent paragraphs of the Article 2. Namely, a) so called official
claims between the 2 sovereign states regarding their contractual relations regarding the sales of goods
and services (Article II(2), b) disputes on interpretation of the Algiers Accords (Article II(3), disputes
relating to the U.S.' obligation to return the property of the former Shah of Iran, Reza Pahlavi (General
Declaration, Article 16).
92
Rules on the Tribunal adopts to its text modified UNCITRAL Arbitration Rules, version 1976.
Article 19(3) was inserted without modification. The Tribunal, however, has interpreted in the light of
Article II.1 of the Settlement Declaration.
93
Westinghouse Electric Corp. v Islamic Republic of Iran, Case No. 389, 12 February 1987, Award 6
Iran-US CTR II (1984) para 1.
94
Ibid para 6.
95
Ibid para 7.
96
American Bell International Inc. v. Islamic Republic of Iran, Case No. 48, Award, 31 May 1984, 6
Iran-US CTR II (1984) 83. Another important conclusion of the Tribunal in the concerns the identity of

28
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

there were three successive contracts concluded within a certain period of time
covering the same work on a single project and the counterclaims were submitted on
the basis of the third contract, however, the principal claims were founded on the first
two contracts. As in the American Bell, the Westinghouse Tribunal ultimately upheld
the admissibility of the counterclaims and pointed out that there had been no
reasonable opportunity to obtain the services in question from Claimant's competitors
and, thus, the counterclaims had arisen out of the same transaction. 97

Further conclusions on the issue of connectedness before the Iran-U.S. Claims

Tribunal may be inferred from the decisions on counterclaims arising out of general
domestic law, such as tax law, social security law, custom duties, penal law etc. The
position of the Tribunal on admissibility of such counterclaims is clear, they are not
admissible. The main reason is that any person or entity may find itself in a position to
fulfil these obligations, notwithstanding an existence of any specific contractual or
otherwise relationship with the State. Therefore, these counterclaims do not fulfil the
requirements of Article II.1. 98

2. The connectedness requirement in investment arbitration

iii. ICSID case law

Article 46 of the ICSID Convention provides among the other necessary conditions
that counterclaims are admissible only if ‘arising directly out of the subject-matter of
the dispute’. Evidently, the wording of Article 46 is closer to the requirement of
Article 80 of the ICJ Rules than to Article II.1 of the Algiers Accords. Investment
tribunals operating under the auspices of the ICSID dealing with this provision
addressed the requirement of connectedness in rather a cursory way. The ensuing
paragraphs analyse approaches to the condition by various investment tribunals.

(a) Contract-based arbitrations

In Benevenuti and Bonfant v. Congo, the claimants requested compensation for non-
payment of dividends, for value of their shareholding, non-fulfilment of certain
contractual obligations, seizure of the company, which had been set up for
manufacturing of plastic bottles and for production of mineral water and sought also
other relief (moral damages). The respondent held 60% of the shares in the company
and was involved in other joint projects with the claimants. Respondent filed

the parties against which a counterclaim can be lodged. Iran attempted to counterclaim against the
parent company of American Bell – AT&T, which was not claimant in the proceedings. The tribunal
ruled that ‘Respondents are barred from asserting counterclaims against any person or entity other than
Claimant itself.’
97
Westinghouse Electric Corp.(n 95) 11.
98
See e.g. American Bell v. Iran (n 98) 84; T.C.S.B., Inc. v Iran, Award No. 114-140-2, 6 Iran-US CTR
II (1984) 160; Harris International Telecommunications, Inc. v. Iran, Partial Award of 2 November
1987; 17 Iran-US CTR, 3; Marossi (n 40) 493-519; G H Aldrich, The Jurisprudence of the Iran-United
States Claims Tribunal (Clarendon Press 1996) 166.

29
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

counterclaims for damages for non-payment of duties and taxes on imported goods,
for alleged overpricing of raw materials, for alleged defects on the construction of the
plant and also for moral damages. In the Award, the tribunal did not once refer to
Article 46, but instead focused on the time limits under Rule 40 and on its competence
as laid down in the ICSID arbitration agreement in the contract. The tribunal got away
with nothing more than a tautological statement that ‘[c]onsidering that the
counterclaim relates directly to the object of the dispute, that the competence of the
Tribunal has not been disputed and that it is within the competence of the Centre, the
Tribunal considers, therefore, that it is bound to uphold its competence.” 99 The
counterclaims were eventually dismissed in its entirety on merits.

The original award of 1984 in Amco and Others v. Indonesia includes no explicit
discussion on Article 46 and fulfilment of its requirements whatsoever. The claimants
sought damages for seizure of their investment and cancellation of the investment
license based on expropriation, breach of contract and unjust enrichment. Indonesia
formulated its counterclaim in a way that it was justified to revoke the license due to
claimant's breaches of the license and other violations of applicable rules and thus, PT
Amco (a locally incorporated subsidiary) was obliged to return the amount of all tax
and other concession granted to it. 100 The tribunal merely stated that, as the revocation
of the license was illicit, the revocation of the tax holidays was illicit as a
consequence. The counterclaim was rejected. 101 The finding of the tribunal on the
illegality of the revocation of the license was subsequently annulled, as was, as a
result, the ruling on the counterclaims.

In the resubmitted case, Indonesia reiterated its counterclaims under the heading of
tax fraud with some added contentions. Claimants argued that these constituted new
counterclaims not presented in the original proceedings, and therefore could not be
adjudicated by the tribunal. In the resubmitted case, the tribunal firstly found that the
tax fraud was a new claim, not raised in the first proceedings. Then it stated that
obligations arising as an operation of general law, such as tax obligations, do not even
fall within the jurisdiction of the Centre under Article 25 as they do not arise directly
out of the investment. 102 The award on merits on the resubmitted original
counterclaim was similarly unsuccessful, as the revocation was held illegal also in the
resubmitted case. 103

In Klöckner v Cameroon, the claimant was seeking compensation for outstanding

99
S.A.R.L. Benevenuti & Bonfant v. Congo, ICSID Case No. ARB/77/2, 1 ICSID Reports, p. 362, para.
4.104.
100
Amco Asia Corporation, Pan American Development Limited, PT Amco Indonesia v Republic of
Indonesia, Award of 20 November 1984, 1 ICSID Rep, para. 145.
101
Ibid para 287.
102
Amco, Resubmitted case, Decision on Jurisdiction, (n 80). The tribunal however pointed out that
certain tax issues might be considered, e.g. those which are specifically contracted with the investor
such as specific tax exceptions.
103
Amco Resubmitted case, Award on Merits (n 15), para 161-162.

30
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

balance of the price for supplying a fertilizer factory. Respondent's counterclaims

were for all the losses the State had incurred in the abandoned project. The discussion
on the connectedness in this case led to an obvious result. As all the claims and
counterclaims related to the three same contracts connected with the project of
fertilizer factory which were the basis of the claimant's claim, the tribunal stated that
claims and counterclaims were “an indivisible whole”. 104 Although, the Tribunal
concurred with claimant's assertion that there is no jurisdiction over disputes arising
out of the Management Contract due to the specific exclusive ICC arbitration clause,
it stated that it had jurisdiction to rule over the issues of ‘technical and commercial
management’ of the factory under Article 9 of the Protocol of Establishment
Agreement (the contract containing ICSID arbitration clause). 105 The Tribunal upheld
that there had been a direct connection between the counterclaim and the primary
claims, although it did not refer to Article 46. The counterclaims and the original
claims were reciprocal obligations which had a “common origin, identical sources,
and an operational unity. They were assumed for the accomplishment of a single goal
and [were] thus interdependent.” 106 Ultimately, the counterclaims were rejected on the
merits.

Although the described cases contain almost no discussion on the requirements of

Article 46, the reasoning in AMCO v Indonesia and Klockner v Cameroon are the
ones which tribunals dealing with investment treaty arbitrations have readily used.
The approach to the connectedness criterion in treaty-based arbitration, however,
warrants a different methodology, as the legal context is different as explained
hereinafter.

(b) Treaty-based arbitrations

In treaty-based arbitrations, the question of connectedness between counterclaims and

primary claims deserves a more thorough analysis by tribunals. The host State might
not have any direct legal relationship with the investor, contractual or otherwise, on
which it would base its counterclaim. Given the general absence of investor's
obligations in IIAs, there might be hardly any legal instrument except for general
domestic law to ground a counterclaim on. In such scenarios, it is a major task for a
tribunal, assuming other requirements for counterclaims are met, to explain whether in
the absence of a direct legal relationship the connectedness between the two sets of
claims can be deemed to exist. The few cases dealing with counterclaims under ICSID
do not shed sufficient light on the nature of the close connection in a treaty-based
arbitration and do not provide any articulate methodology for its assessment. In none
of them can we find a discussion on close connection requirement in Article 46. It is,
nevertheless, helpful to scrutinize how the tribunals dealt with the matter.

104
Klöckner v Cameroon (n 81) 17.
105
Ibid.
106
Ibid 65.
31
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

In Alex Genin v Estonia the claimant demanded damages for revocation of banking
license given to Estonian bank under control of the claimant. Besides denying the
claims, Respondent requested damages for losses incurred due to various illicit
transactions of the claimants. According to Respondent, Claimants illegally diverted
money from the bank in question. The arbitral tribunal had held counterclaims
admissible but rejected them on the merits after a brief analysis of the arguments
presented, without even once mentioning Article 46 of the Convention or Rule 40 of
the Arbitration rules. 107

In Desert Line v Yemen, the core of the primary claims were contractual breaches of a
road construction contract which were subject of a subsequent settlement agreement
and later decided in favour of the claimant in a domestic arbitration. Respondent
requested, firstly, a set-off of the payments already received by the claimant and,
secondly, damages for violations of claimant's undertakings under the settlement
agreement and non-fulfilment of its obligations arising from the domestic award. The
tribunal accepted the set-off claim in the calculation of the damages to be awarded.
But it rejected the counterclaim on the merits based on the doctrine of estoppel. No
discussion on admissibility of the counterclaims under Article 46 made. 108

In Hamester v Ghana, we can find the first more detailed discussion on Article 46 in
an ICSID treaty-based arbitration, however without discussing the relevant
connectedness requirement. Hamester alleged that Ghana breached and repudiated a
joint venture contract for an establishment and operation of a cocoa production plants
and, thus, it violated several provisions of the BIT. Respondent requested damages for
losses it had incurred as a result of the claimant's conduct without specifying the cause
of action for the counterclaim. The Tribunal noted that Ghana did not develop the
arguments for Claimant's violation any further and neither did it specify a basis for the
jurisdiction of the Tribunal over its counterclaims.

(c) Additional claims under ICSID and the close connection

requirement

The condition of connectedness is applicable also to any other ancillary claims

mentioned in Article 46. Thus, the cases on additional claims can help to shed some
light on the nature of the connection needed as the requirement of close connection
applies in the same way. In this context the Itera v Georgia case is of particular
interest.

In Itera v Georgia, the Claimant submitted an additional claim during the proceedings

107
Alex Genin and others v. Estonia, ICSID Case No. ARB/99/2, Award of 25 June 2001, paras. 376-
378.
108
Desert Line Projects LLC v. Yemen, ICSID Case No. ARB/05/17 , Award of 6 February 2008, paras
222-225.

32
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

and the Tribunal had to rule on whether this claim could be considered close enough
to the original claim in order to be admitted in the same proceedings. The first set of
claims, the so-called Azot dispute, related to the privatization of Claimant's company
Azot. Itera was to use outstanding Azot tax debts to operate a set-off with some of the
debts owed to Itera by Georgian public sector organizations and State-owned
companies. This dispute concerned the monies covered by the Azot Debt Set-Off
Agreement. The other set of claims, the so-called Sistema Dispute, by contrast,
concerned a separate series of agreements involving Sistema for repayment through
Sistema of energy debts of Georgian public sector organizations and State-owned
companies to Itera. 109 The tribunal concluded that the two disputes, although having
some common links (repayment of Georgian State debts to Itera), were basically
relating to separate investment projects. The State agents dealing with each of the
projects were different, as well as the contracts involved or the method of repayment
chosen. The tribunal held these ancillary claims inadmissible. 110 The tribunal also
distinguished this case from other cases where additional claims were admitted. 111 It
stated that in the present case, the claimant's additional claims were related to a
different investment, thus they were inadmissible. Therefore, the tribunal implicitly
concluded that additional claims must be directly connected to the same investment,
being the subject-matter of the primary claim.

The decision was accompanied by a dissenting opinion of Prof. Orrego Vicuña, who
saw the two set of claims sufficiently linked. He opined that the two disputes could
not be viewed in separation and that an experienced investor would not have
undertaken the Azot purchase as a separate business in the circumstances. 112 The
dissenting arbitrator viewed the two set of claims as aspects of the same dispute and
relating to the same investment. The Itera case, thus, shows the difficulty of defining
the investment in dispute.

iv. Case law under the UNCITRAL Arbitration Rules

It should be emphasized, that the UNCITRAL investment tribunals have addressed

the issue with far greater attention than the ICSID tribunals have done.

According to the 1976 version of the Rules, Article 19(3) for a counterclaim to be
admitted it should ‘[arise] out of the same contract’ as the primary claim. It is patent
from the language used, that UNCITRAL Rules are designed primarily for the
purposes of commercial arbitration, when an arbitration clause used as a basis of the

109
Itera International Energy LLC and Itera Group NV v. Georgia, ICSID Case No. ARB/08/7,
Decision on Admissibility of Ancillary Claims, 4 December 2009, paras. 67-73.
110
Ibid paras 93-99, 103.
111
CMS Gas Transmission Co. v. the Argentine Republic (ICSID Case No. ARB/01/8), Decision on
Objections to Jurisdiction, 17 July 2003, LG&E Energy Corp., LG&E Capital Corp. and LG&E
International, Inc. v. the Argentine Republic (ICSID Case No. ARB/02/1), Decision on Objections to
Jurisdiction, 30 April 2004, Enron Corporation and Ponderosa Assets L.P. v. the Argentine Republic
(ICSID Case No. ARB/01/3), Decision on Jurisdiction (Ancillary Claim), 2 August 2004.
112
Ibid Dissenting opinion of Prof. Orrego Vicuña
33
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

tribunal's jurisdiction is present a contract between the two parties to the dispute. It is
clear that the ‘same contract’ does not refer to the arbitration agreement; it refers to
the contract upon which the primary claim is based. 113 Any other contracts,
notwithstanding how closely related they can be, were not intended to be covered by
the provision. 114 It has been argued that what should be decisive is the scope of the
arbitration agreement which may cover more than one contract and, thus, a
counterclaim based on one of the other contracts or even to tort can be admitted, even
when it was not relied upon it in the primary claim. 115 The Commentators on the
UNCITRAL rules suggest modifying Article 19(3) by mutual agreement of the parties
in order to allow closely connected counterclaims to be heard. 116

Saluka v Czech Republic can be considered a leading case in treaty-based arbitration

as far as counterclaims are concerned. The tribunal had to deal with eleven separate
counterclaims presented by the Czech Republic. The principal claims in the
arbitration brought by Saluka were connected with allegedly unfair and expropriatory
forced administration and subsequent sale of assets of one of the Czech partially
State-owned banks in which the claimant held shares. Respondent’s counterclaims
were aimed at claimant's non-observance of the Share Purchase Agreement (“SPA”)
in question and also at violations of general domestic law. The Tribunal separately
dismissed both of the sets of counterclaims.

With respect to the counterclaims based on the SPA it was held that the parties to the
agreement are not identical as the parties to the arbitration. 117 More importantly, the
tribunal pronounced, relying on the holding of the Vivendi annulment decision, its
lack of jurisdiction over this set of counterclaims because the SPA contained a
separate exclusive arbitration clause. 118

The connectedness requirement came under a close scrutiny with respect to the other
set of counterclaims, those based on mandatory provisions of Czech banking
regulations, commercial law and anti-trust law. 119 After holding that the counterclaim
falls within the jurisdiction of the tribunal as they can be characterized as a ‘dispute
concerning investment’, it stated that it must satisfy the conditions that ‘customarily
govern the relationship between a counterclaim and the primary claim to which it is a
response.’ That is a ‘close connexion’ requirement. 120

113
Caron, Caplan and Pellonpää (n 34) 409.
114
Report of UNCITRAL, 8th Session, Summary of Discussion of the Preliminary Draft, UN Doc
A/10017 (1975) paras 136-137. Such claims were intended to be put forward in separate request and if
possible, subsequently consolidated.
115
Caron, Caplan and Pellonpää (n 34) 414.
116
Ibid.
117
Saluka v. Czech Republic (n 41) para 49.
118
Ibid paras. 56-58.
119
Ibid para 59.
120
Ibid para 61.

34
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

The tribunal stated that no universal attempt to define this requirement is likely to be
successful. Rather it suggested to take into account the facts of the case as well as the
relevant treaty provisions and other applicable texts. 121 It then moved forward to
analyse the previous case law of the ICSID tribunals (Klöckner; Amco) and Iran-U.S.
Claims Tribunal (American Bell; Westinghouse; Harris International and others). It
reached the conclusion that notwithstanding the differences between the language in
applicable instruments (UNCITRAL Rules, Article 19(3); ICSID, Article 46; Claims
Settlement Declaration, Article II.1), a general legal principle on the close connection
can be discerned. 122

Then the tribunal continued to an application of this principle to the case at hand.
Drawing heavily on the language of the Klöckner award, it stated that the rest of the
counterclaims cannot be seen as an indivisible whole, they lack an operational unity
with the primary claims, neither are related to a single goal. These counterclaims shall
be in principle decided according to general procedures under the Czech law. Thus, it
found itself without jurisdiction to hear them. 123

In another UNCITRAL arbitration, Paushok v Mongolia, the tribunal also carried a

more detailed analysis of law on counterclaims and on connectedness. The case
concerned the complaint about the legal measures that negatively affected the
claimant's mineral extraction investment activities. Mongolia asserted counterclaims
on various grounds – tax evasion, claims to pay back of worker fees, illicit inter-group
transfers leading to further tax and levies evasion, violation of a license agreement
obliging the Claimant to extract gold in a certain manner leading to further loss in
taxes and revenues, violation of environmental law and allegations of gold
smuggling. 124

The tribunal referred back to the Saluka case. It stressed particularly two citations of
the previous case law and doctrine made by Saluka the already quoted phrase from
Amco stating that legal disputes concerning general domestic law are not disputes
arising directly out of an investment under Article 25 125 and the well-settled case law
of Iran-U.S. Claims Tribunal on inadmissibility of counterclaims relating to general
domestic law. 126 Subsequently, the tribunal pronounced the test that it applied in the
following terms:

In considering whether the Tribunal has jurisdiction to consider the

counterclaims, it must therefore decide whether there is a close connection
between them and the primary claim from which they arose or whether the
counterclaims are matters that are otherwise covered by the general law of

121
Ibid para 63.
122
Ibid para 76.
123
Ibid paras 79-80.
124
Paushok v Mongolia (n 41) para 678.
125
Amco, Resubmitted case, Decision on Jurisdiction (n 80) 565.
126
See supra p 34.
35
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

Respondent. 127

The quote denies that matters covered by general law can be closely connected, thus
views the issue in a mutually exclusive binary perspective. The tribunal, therefore, in
effect reformulated the test on admissibility of counterclaims by adding a criterion –
the counterclaims cannot arise out of general domestic law. The tribunal further noted
that Article 19(3) of the Rules does not explicitly cover these claims. As to the
counterclaims relating to Mongolian tax law it opined that:

All these issues squarely fall within the scope of the exclusive jurisdiction of
Mongolian courts, are matters governed by Mongolian public law, and cannot
be considered as constituting an indivisible part of the Claimants’ claims
based on the BIT and international law or as creating a reasonable nexus
between the Claimants’ claims and the Counterclaims justifying their joint
consideration by an arbitral tribunal exclusively vested with jurisdiction under
the BIT. 128

This holding stretched to its consequences makes counterclaims arising from anything
else than international law or a BIT impossible. The tribunal further ruled that any
decision to the contrary would in effect mean allowing unacceptable extraterritorial
enforcement of public laws. 129 With respect to other non-public-law-based
counterclaims, the tribunal in a cursory manner dealt with them by stating that they
lack the close connection. 130

Commentators have criticized the holding of Saluka, which found its way into the
subsequent awards for being too strict and not sensitive enough to the specificities of
treaty-based investment arbitration. Pierre Lalive and Laura Halonen have expressed
the view that Saluka's reliance on Klöckner is misplaced in the context of the treaty
arbitration. As in the latter, the reference to “accomplishment of a single goal” and
“interdependence” is unhelpful for the primary claims do not arise out of a contract.131
They also criticize the undue emphasis on the ‘legal basis’ of the primary claim; as for
an IIA claim, the State has no counterpart. 132 They suggest reading the reference to
the ‘same contract’ in Article 19(3) of the UNCITRAL rules as being understood as
relating to the ‘same investment.’ 133 Prof. Douglas makes a similar suggestion when
he expresses the view that Article 19(3) refers to the object of the original claim. In
the context of investment treaty arbitration such object is a particular investment. He
opines that such demanding understanding of the close connection as the one in
127
Paushok v Mongolia (n 41) para 693.
128
Ibid para 694.
129
Paushok v Mongolia (n 41) para 695.
130
Ibid paras 696-699.
131
Lalive and Halonen (n 50) 153.
132
Similarly see A Vohryzek-Griest, State Counterclaims in Investor-State Disputes: a History of 30
Years of Failure, 15 International Law, Revista Colombiana de Derecho Internacional (2009) 85, 115.
133
Ibid 154.

36
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

Saluka ‘indirectly undermines a broadly formulated consent to arbitration; 'all

disputes' concerning an investment is surely capable of including counterclaims
directly relating to that investment even where the claimant investor has elected to sue
on the basis of an investment treaty obligation.’ 134

The same commentators suggest this conclusion to be applicable also to the treatment
of counterclaims under the auspices of the ICSID. A relative closeness of the
counterclaim to the investment in question should be satisfactory for the fulfilment of
this condition.

3. Conclusion

In the ICSID context, when the counterclaims in treaty arbitrations were rejected, this
has been done on the basis of not satisfying one of the other conditions of the Article
46, namely because the counterclaims were not within the scope of the parties’
consent.135 The other requirements of Article 46 than the requirement of close
connection, i.e. within the consent of the parties and otherwise within the jurisdiction
of the Centre, are considered jurisdictional requirements. Even if there exists no
ICSID case when the tribunal held a counterclaim inadmissible for the lack of close
connection, non-satisfying this requirement is better viewed as an issue of
admissibility. It would be non-sensical to hold that even if the counterclaim is within
the consent of the parties and jurisdiction of the Centre, a tribunal does not have
jurisdiction over it. Therefore, the requirement of the close connection is conceptually
best to be viewed as an admissibility requirement.

Using the analogy with the case law of the ICJ, the Court on many occasions
emphasized that if there is a jurisdiction over the counterclaims but these
counterclaims are not directly connected with the subject-matter of the dispute, the
State can always file a separate application. Although in the case of treaty arbitration
the possibility of the host State to act as a claimant is almost never used in practice,
due to the usual lack of the investor's consent to arbitrate before the dispute arises, this
option is theoretically possible.

Moreover, qualifying an issue as a matter of jurisdiction or admissibility may have an

impact on the burden of proof. Tribunals on their own motion scrutinize jurisdictional
issues; meanwhile, questions of admissibility are to be raised by the parties. 136 Further
consequence of viewing the close connection as a requirement of admissibility is the
scope of possible review of the tribunal's decision. The jurisdictional decisions are
reviewable, however decisions on admissibility (which presuppose the existence of

134
Z Douglas, The International Law of Investment Claims (Cambridge University Press 2009) 260.
135
Hamester v Ghana (n 42) para 362(ii); Roussalis v Romania (n 42) operative part a).
136
J Pauwelyn & L E Salles, 'Forum Shopping Before International Courts: (Real) Concerns,
(Im)Possible Solutions, 42 Cornell Int'l L J (2009) 77, 96.
37
 Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

jurisdiction) are generally not. 137

As to the actual assessment of the connectedness, it is assessed on a case-by-case

basis, both in facts and in law. The investment treaty case law seems to rely mostly on
older contract-based cases and the jurisprudence of Iran-U.S. Claims Tribunal. Given
the fact that this older cases arose under different circumstances, of essentially
contractual disputes, it can be questioned if it is not the time to consider more creative
solutions to the issue of connectedness in investment treaty arbitration. In this context
a distinction between the Iran-U.S. Claims Tribunal and investment tribunals is
particularly relevant, as investment disputes involve by definition matters going
beyond a mere commercial transaction and require sometimes the scrutiny of
domestic law measures in various fields of public law. It is submitted that policy
reasons, the idea of sound administration of justice, procedural efficiency and the
principle of finality of dispute settlement weigh in favour of using the test based on
the investment in dispute. That is to say, to treat the requirement of connectedness in
investment treaty arbitrations in a more lenient fashion than as it was treated in Saluka
and Paushok.

The test based on the investment in dispute is therefore seen as the most suitable one
for the purposes of investment treaty arbitration. It is submitted that the test is not too
broad as to cause any prejudice to the claimant. Rather it avoids dealing with several
aspects of the dispute before different fora. In addition, in the ICSID context the test
of close connection based on the investment in the dispute is not a new test as it is
used by case law on additional claims, which applies the same provision, i.e. Article
46.

Finally, the broad scope of consent under some IIAs, which empowers the tribunal to
deal with ‘all disputes concerning an investment’, supports the conclusion that the
investment in dispute should be treated as the subject-matter of an IIA dispute.

III. ADDITIONAL LIMITATIONS REGARDING THE ASSERTION

OF PARTICULAR CAUSES OF ACTION FOR HOST STATE'S
COUNTERCLAIMS
 There are only a limited number of obligations of investors based on international
law sources, which is the natural law applicable to investment treaty arbitration;

 There are also possible limitation to invoke domestic law or contract law based
counterclaims, linked to the requirement of ‘party identity’ (i.e. the need to assert
the counterclaim against the proper debtor of the substantive obligation invoked), as
well as to the possible restrictive applicable law provisions contained in some IIAs;

137
J Paulsson, 'Jurisdiction and Admissibility', in G Aksen, K H Böckstiegel et al (eds),Global
Reflections on International Law, Commerce and Dispute Resolution: Liber Amicorum in Honour of
Robert Briner (ICC Publishing 2005) 601.

38
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

 The existence of a contractually agreed exclusive dispute settlement mechanism in

the contract serving as basis to the counterclaim can finally also constitute a hurdle
for the assertion of a successful counterclaim.

A. LIMITED CAUSES OF ACTION BASED ON INTERNATIONAL LAW SOURCES

1. Possible causes of action based on the investment treaty

 Causes of action based on substantive standards are rare and relate to an express
obligation of the investor to respect the host State’s domestic laws. It may be a
broad respect to domestic legislation or limited to specific areas. However a
connectedness problem remains regarding those obligations;

 Based on the agreement to arbitrate, its breach can be a basis for a counterclaim.
This has limited practical interest due to the nature of investment arbitration.

i. Substantive provisions of IIAs as possible causes of action for

counterclaims

There are two types of substantive IIA provisions which address, directly or not,
investors conduct or issues susceptible of restricting investors rights granted in the IIA
itself, thus making them provisions of choice for to examine in the context of possible
treaty based causes of action for a counterclaim on the part of the State. On the one
hand provisions requiring compliance with the host State of the investment’s domestic
laws, and on the other provisions addressing human rights and environmental
protection. To this lot, the so called umbrella clause should be added, as it is the one
which has been invoked by respondent States as a basis for the admission of
counterclaims in some of the cases dealing with the issue.

(a) Provisions requiring compliance with domestic law of the host

State

Some IIAs require an investment to be made in respect of the host State’s law. This
requirement usually forms part of the definition of protected investment under the IIA
in question. The New Zealand-Chile BIT, for example, provides that investment
‘means any kind of asset or rights related to it provided that the investment has been
made in accordance with the laws and regulations of the Contracting Party receiving
it.’ 138 As the State's standing offer only comprises the investments protected under the
IIA, when such provisions are included the offer to arbitrate would not regard
investments made in violation of the host State’s law. Tribunals have used these
provisions to deny jurisdiction over claims regarding investments made in violation of
the host State’s domestic law. The reference to such provisions is helpful for the
dismissal altogether of investor’s claims. It cannot, however, serve as cause of action
for a counterclaim.

138
Chile-New Zealand BIT (n 52) Article 1 (Emphasis added).
39
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

To our best knowledge there is only a limited number of IIAs, all of them within the
context of the African Regional Integration Organisation, that provide for a clear
obligation upon investors also at the performance stage of their investment. 139 This is
also included in Ghana’s Model BIT of 2008. 140 Most of them require the compliance
of investors and investments with the host State’s ‘laws and regulations’, 141
sometimes with the emphasis of certain particular provisions linked with the
environment, labour and human rights. 142

Article 13 of the COMESA Investment Agreement of 2007, obliges investors, as well

as their investments, to act in compliance with ‘all applicable domestic measures’ of
the host State of the investment. According to the definition of the term ‘measures’ in
the treaty it encompasses ‘any legal, administrative, judicial or policy decision that is
taken by a Member State, directly relating to and affecting an investment in its
territory’. 143 It can be inferred from the broad language used in this definition that the
nature of the provision is one of compliance of the investors and their investments
with all domestic laws relating to investments.

It has been argued by scholars that such inclusion of reference to domestic law
provisions in the IIA place them within the scope of the treaty, making it easier to
assert counterclaims on their basis. 144 When such an obligation is provided for in an
IIA, it seems that the connectedness requirement would be more easily satisfied for
counterclaims based on domestic law provisions ensuring the respect of the above
mentioned standards.

It remains to be seen how this reasoning is to be accommodated with the analysis

made by the Iran-U.S. Claims Tribunal. It holds that even when mentioned in a
particular contract, obligations arising from the general law of State remain based on
domestic law. Investment tribunals have embraced this approach. 145 A solution for
this problem might be the express mention of foreign investors or of the relevant IIA
in the enacted domestic legislation, when it is linked to sectors where investors are
often present.

(b) Provisions providing for human rights and environment protection

Some recent IIAs include provisions aiming at the inclusion of the protection of
human rights - mainly labour rights, as well as the environment protection in the

139
Protocol on Finance and Investment of the SADC, Annex 1, Article 10; ECOWAS Supplementary
Act, Article 11, COMESA Investment Agreement, 2007, Article 13.
140
Republic of Ghana, Model BIT 2008, Article 12.
141
Protocol on Finance and Investment of the SADC, Annex 1, Article 10; ECOWAS Supplementary
Act, Article 11; Republic of Ghana, Model BIT, 2008, Article 12.
142
Republic of Ghana, Model BIT 2008, Article 12.
143
Article 1, para 10.
144
Kryvoi (n 18) 27.
145
See supra p 34 for discussion on relevant case law.

40
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

scope of investment treaties. 146 Those provisions have been referred to as ones
permitting to account for investors behaviour, thus, it is pertinent to examine to what
extent, when present, such provisions can serve as a basis for a host State's
counterclaim. There can be identified three types of provisions that address issues of
this order in IIAs.

The first and weakest one is the inclusion in the preamble of the treaty. In this case,
the provision does not form part of the operative body of the treaty's provisions and
may only be used as a guideline to the proper interpretation to be given to the
operative provisions. Thus, they are not capable of serving as a counterclaim's legal
basis.

A more sophisticated manner of addressing human rights and environmental concerns

is exemplified in the 2005 US Model BIT, mirrored in some BITs already in force,
such as the US-Uruguay BIT. In this treaty, Articles 12 and 13 have been included
which are entitled respectively ‘Investment and Environment’ and ‘Investment and
Labour’. The structure of the two is similar 147 .

The first part recognizes the fact that it is inappropriate for the parties to the BIT to
attract investment by lowering environmental and labour protection in their respective
territories and setting the objective not to do so (using a not obligatory language of the
term ‘strive’). This first part of the provisions is, therefore, specifically addressed to
States, not providing for any particular limitation of investors rights, let alone
obligation upon the latter.

The second part of the provisions constitutes an interpretative note of the parties to the
BIT, which allows the parties to the same to ‘adopt, maintain or enforce’ any measure
‘ensur[ing] that investment activity in its territory is undertaken in a manner sensitive
to labor[/environmental] concerns’, ‘otherwise consistent with [the] Treaty’. The
language used in the last provisions analyzed is not surprisingly referred to as
‘fuzzy’, 148 as it is difficult to give to them a concrete interpretation as to whether there
is a real restriction of the investors rights by the regulatory power of the host State of
their investment in labour and environment related matters. Nevertheless, it is certain
that the provisions in question are not of a nature to result in an obligation susceptible
to enforcement trough arbitration on the part of investors.

Lastly, even the recently concluded EU-CARIFORUM States EPA, 149 which

146
US-Uruguay BIT (n 59); Austria Model BIT 2008.
147
Reservation being made with respect to paragraph 2 of Article 13, which provides for a definition of
the term ‘labor laws’, whereas no similar definition paragraph for the term ‘domestic environmental
laws’ is present.
148
M Toral and T Schultz, ‘The State as a Perpetual Respondent in Investment Arbitration? Some
Unorthodox Considerations’ in M. Waibel, A. Kaushal, et al. (eds), The Backlash Against Investment
Arbitration (Kluwer Law International 2010) 585
149
The EPA is discussed only with reference to the specific provision of Articles 71 and 72. The EPA
does not contain an investor-State dispute resolution mechanism.
41
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

identifies investors’ obligations clearly, still so imposes them only trough the
intermediary of the host and home States of the investors and investments, 150 as the
treaty language reveals itself

The EC Party and the Signatory CARIFORUM States shall cooperate and
take, within their own respective territories, such measures as may be
necessary, inter alia, through domestic legislation, to ensure [respect of the
investors obligations]. 151

Therefore, while such provisions might be helpful for tribunals for assessing the
existence of a breach of the relevant treaty by the host State, or may be relevant for
the possible invocation of breaches of its domestic laws by the State as a cause of
action for a counterclaim, they fail to impose clear obligations on investors which
would allow State parties to investment arbitration to counterclaim on the basis of the
treaty's substantive standards. Thus all of the types of provisions examined above
seem to be deprived of practical utility for the assertion of counterclaims on the part
of the host State.

(c) The umbrella clause

The commonly named umbrella clauses – if worded broadly enough – are typically
understood to oblige the State parties to an IIA to observe particular obligations they
have undertaken with respect to an investment. Without going in detail in the
doctrinal and case law controversies on the proper effect to be given to such clauses, it
will be assumed for the present purposes that umbrella clauses provide for a treaty
based cause of action for investors to invoke contractual breaches on the part of the
State party to the proceedings. Such a clause, as providing for a bridge between
contract and treaty claims, was invoked by Romania in the Roussalis v Romania case
as a basis for the extension of investment treaty tribunals’ jurisdiction over contractual
claims. 152

However such use of the umbrella clause, is rather a misunderstanding of its

functioning. Under an umbrella clause, it is the States, parties to the relevant IIA alone
who undertake obligations and not investors. As it was stated by the tribunal in
Roussalis pursuant to the umbrella clause examined:

(…) the host State commits itself to comply with obligations it has entered into with
regard to investments of investors. It [the clause] does not permit that claims be
brought about obligations of the investor. 153 Thus, at the present state of law the

150
European Union and Member States – CARIFORUM States Economic Partenrship Agreement,
Article 72 (Emphasis added).
151
Ibid (Emphasis added).
152
Spyridon Roussalis v Romania (n 42) paras 781-782.
153
Ibid para 875.

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

conclusion imposes itself that no substantive standard included in an IIA can be used
as a legal basis for a host State's counterclaim.

ii. IIA procedural provisions as causes of action for counterclaims

Turning to the procedural provision of the treaty that is directed at investors – the
State parties standing offer to arbitrate, the analysis leads to a significantly different
solution. By accepting the offer to arbitrate the investor in effect concludes a contract
with the State party to the dispute. 154 The arbitration agreement so derived from the
IIA can impose obligations directly on the investor’s side. And in effect, it so does,
since entering into an arbitration agreement contains the inherent duty to perform the
agreement in good faith 155 The view of admissibility of counterclaims based on the
breach of an agreement to arbitrate was admitted in the contract based – MINE v
Guinea, 156 referred to as possibly the only truly successful counterclaim in investment
arbitration. 157 A similar approach was adopted in the Reineccius & others v Bank for
International Settlements case, where the tribunal awarded costs to the Bank for the
proceedings brought against it in front of the US courts by one of the claimants, in
breach of the 1930 Convention regarding the Bank for International Settlements,
establishing an exclusive dispute resolution mechanism. 158 It has on this basis been
argued by scholars that the breach of the arbitration agreement itself – by pursuing an
arbitration in a different forum from the one agreed upon, would constitute an
admissible counterclaim on the part of States. 159 This is at the present state of law the
only viable basis for a state's counterclaim arising out of the IIA itself.

The interest of such possible cause of action for a State’s counterclaim within the
structure of investment treaty arbitration, remains limited, as investors most often
accept the State’s offer to arbitrate only at the time of filing of their claim. 160 The
breach of the arbitration agreement would seem useful, however, in some particular
circumstances.

The context of denunciation of the ICSID Convention provides an interesting possible

application of this cause of action. Of particular interest is the case of institution of
proceedings in front of the Centre pursuant to an acceptance by the investor of the
offer to arbitrate in an IIA after the receipt by the Centre of the notice of denunciation.
At this point the investor does no longer have the right to institute such

154
J Crawford, ‘Treaty and Contract in Investment Arbitration’ The 22nd Freshfields Lecture on
International Arbitration, London 29 November 2007 (Freshfield Bruckhaus Deringer 2007) 13.
155
Lalive and Halonen (n 50) 149.
156
Maritime International Nominees Establishment (MINE) v Republic of Guinea, ICSID Case No.
ARB/84/4, Award, 6 January 1988.
157
Vohryzek-Griest (n 134) 110.
158
Dr Horst Reineccius, First Eagle SoGeb Funds, Inc., Mr Pierre Mathieu and la Société de Concours
Hippique de la Chatre v Bank of International Settlements, Permanent Court of Arbitration, Partial
Award of 8 January 2001, Final Award of 19 September 2003, cited by Crawford (n 156) 15.
159
Crawford (n 156) 15; Lalive and Halonen (n 50) 149.
160
See Crawford, (n 156) 15.
43
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

proceedings. 161 Those were the facts of the E.T.I. v. Bolivia. 162 Finally the dispute
was discontinued before ICSID and pursued in ad hoc arbitration after two years of
‘protracted jurisdictional arguments’. 163 In a similar situation, in the second
proceedings the host State could invoke the breach of the arbitration agreement, i.e.
the reference to a forum that is not available to the investor, in order to claim its legal
costs for the first proceedings.

A comparable cause of action for a counterclaim might be available for a host State in
the case of an investor breaching the hierarchy of jurisdictions proposed to it in
accordance with the offer in the IIA. An example of such IIA is the Canada –
Venezuela BIT, 1982, according to which the proper forum to submit investor claims
is ICSID and if only one of the contracting parties is party to the ICSID Convention –
ICSID Additional Facility, finally only if both are ‘not available’ the case may be
submitted to an ad hoc arbitration under the UNCITRAL Rules. 164 However, this
basis for a counterclaim would only be available when legal costs have not been
addressed in the course of the first proceedings. 165

2. Counterclaims based on international law, the utility of general

principles of law

 A possible legal basis for a cause of action in international law for a State’s
counterclaim outside of the IIA is provided by general principles of international
law. These, however, can present difficulties regarding compensation, due to their
general character.

Even though not considered by tribunals up to date, it is interesting to examine to

what extent international law could serve as basis for counterclaims on the part of
respondent States. This question brings up a more fundamental one regarding the
possibility for a private person to bear international law obligations. Without
discussing in detail this fundamental question, it will be stated here that in recent
years both scholars 166 and case law 167 have recognised the fact that private persons

161
C Schreuer, ‘Denunciation of the ICSID Convention and Consent to Arbitration’, in M Waibel, A
Kaushal et al (eds), The Backlash against Investment Arbitration, (Kluwer Law International 2010)
353, 364-366.
162
E.T.I. Euro Telecom International N.V. v Plurinational State of Bolivia, ICSID Case No.
ARB/07/28.
163
L E Peterson, ‘Venzuelan Exit from ICSID Raises Questions Both Legal and Financial’, IA
Reporter, 31 January 2012, available at: <http://www.iareporter.com/articles/20120131_3>, accessed
12 March 2012.
164
Canada-Venezuela BIT (1982), Article 12.
165
See on a case where they were: L E Peterson, ‘Venezuela Prevails in Treaty-Based Arbitration, as
Arbitrators Decline Jurisdiction over Investor Claim’, IA Reporter, 15 September 2010, available at:
<http://www.iareporter.com/articles/20100916_12>, accessed 12 March 2012.
166
See Kryvoi (n 18) 17-24; Toral and Schultz (n 150) 579-580; J Ruggie, ‘Business and Human
Rights: Mapping International Standards of Responsibility and Accountability for Corporate Acts,
Delivered to the Human Rights Council’, U.N. Doc. A/HRC/4/35 (9 February 2007).

44
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

and investors, in particular, can be subject to a certain extent to obligations under

international law and thus it should be examined as a possible source for
counterclaims on the part of respondent States in investment treaty proceedings.

The relevant sources of international law would thus be examined in order to identify
the possible grounds to be used as a counterclaim’s basis. In this respect treaty law
and customary international law, do not seem to be very helpful. Despite the growing
idea that States are not the only debtors of international obligations regarding human
rights or sustainable development, with the few exceptions mentioned in this part,
there are hardly any IIAs which would impose such obligations on the part of
investors. They leave, therefore, competent tribunals without any possibility to apply
any obligations with regards to those fields of law to the investors. 168 The same
conclusion has to be arrived at when examining customary international law, as well,
as customary international law has developed as a result of States’ interaction between
them and is not even meant to create obligations for private parties. 169

It is only general principles of law that present a plausible basis for investors’
obligations susceptible of giving rise to a counterclaim on the part of the State in the
proceedings. It is in this context that tribunals found investors liable under
international law. Both tribunals arriving at this conclusion considered the duty of
‘good faith’ imposed on the investors in accordance with international law, in the
particular proceedings in order to reject its claims. 170 It seems that from there to take
the leap to consider good faith as a possible legal basis for a counterclaim is not that
big.

Moreover several other general principles have been applied frequently by investment
treaty tribunals in their decisions, as well as by other international adjudication bodies
as the Iran-U.S: Claims Tribunal. 171 A very detailed list of principles used by
investment tribunals is provided by Y. Kryvoi, who identified the use of the principles
of good faith, pacta sund servanda, obligation to mitigate damages, principle of
restitution in integrum, exception non adimpleti contractus, unjust enrichment,
estoppel and others. 172

There is, in the authors view, no reason for the application of those principles to
remain only interpretative and not be used by respondent States as a possible legal
basis for their counterclaims. The question that remains to be answered is to what
extent the breach of such general principles would be willingly used by tribunals for

167
Phoenix Action Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009; World
Duty Free Company Ltd. v. Republic of Kenya, ICSID Case No. ARB/00/7, Award, 6 October 2006.
168
Kryvoi (n 18) 19-21; Toral and Schultz, (n 150) 577-589.
169
Kryvoi (n 18) 21-22.
170
See (n 169).
171
G Hanessian, ‘‘General Principles of Law’ in the Iran-U.S. Claims Tribunal’ 27 Columbia J.
Transnat’l L (1989) 309.
172
Kryvoi (n 18) 23.
45
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

the evaluation and granting of compensation.

An example, both of the use of a general principle and of the tribunal’s reluctance to
award compensation on their basis is provided by the Uzan family claims against
Turkey. In this case an abuse of process was found, which is the prolongation of the
good faith principle. The cases were based on the Energy Charter Treaty and the
claimants (‘companies owned and controlled by the Uzan family’) 173 were not able to
prove that they had in fact made the investments that they claimed being
expropriated. 174 The respondent in two of the cases requested a formal declaration of
the tribunals that Claimants’ claims were ‘manifestly ill-founded’ 175 and one of the
tribunals granted such a declaration, 176 while the other even though it did not,
acknowledged that claimants conduct amounted to an abuse of process. 177

In both cases the respondent also sought monetary compensation for the moral
damages of the committed abuse. 178 Even though it never presented its request in the
terms of a counterclaim, the request has all the characteristics of one. Such
compensation was not granted, as both tribunals found that the award of costs would
be sufficient remedy for the reputational prejudice suffered by respondent,
differentiating this case from other cases where moral damages were awarded. 179 A
question remains, however, as to whether this result was not entailed by the actors’
reluctance to assess the jurisdiction tribunals would have upon such counterclaim for
damages (defined by the tribunal in the Europe Cement v Turkey case itself as coming
‘close to an ancillary claim’), with regards to the narrow definition of arbitrable
disputes under the Energy Charter Treaty. Within the framework of another IIA, the
situation might have been different.

B. ADDITIONAL REQUIREMENTS FOR THE ASSERTION OF COUNTERCLAIMS

ARISING OUT OF NATIONAL LAW SOURCES

1. The effect of the applicable law provisions in IIAs to the dispute for the
assertion of counterclaims

 Applicable law clauses contained in IIAs are not relevant for the tribunal’s
jurisdiction, as they constitute a choice of law to be applied to the merits of the
dispute;

173
Cementownia “Nowa Huta” SA v Turkey, ICSID Case No ARB(AF)/06/2 Award 11 September
2009, para 162.
174
Cementownia v Turkey (n 175) paras 160-171; Europe Cement Investment and Trade SA v Republic
of Turkey (ICSID Case No. ARB(AF)/07/2) Award 13 August 2009, paras 146-181; Libananco
Holdings Co Limited v Republic of Turkey (ICSID Case No. ARB/06/8) Award 2 September 2011,
paras 127-538.
175
Cementownia v Turkey (n 175) paras 160-171; Europe Cement v Turkey (n 176) paras 146-181.
176
Cementownia v Turkey (n 175) paras 162-163.
177
Europe Cement v Turkey (n 176) para 175.
178
Europe Cement v Turkey (n 176) para 123; Cementownia v Turkey (n 175) paras 106.
179
Europe Cement v Turkey (n 176) para 181; Cementownia v Turkey (n 175) paras 171.

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

 As tribunals have taken them into account, nevertheless, the influence of those
clauses over the admission of counterclaims is studied in detail (see Table No 2).

Restrictive applicable law provisions in IIAs can limit the host State’s chance to
advance an admissible counterclaim. Two of the arbitral decisions on counterclaims,
as well as scholars 180 seem to consider the applicable law provision contained in the
IIA as relevant when assessing their jurisdiction on counterclaims brought by the
respondent State. In AMTO v Ukraine, for instance the tribunal dismissed Ukraine’s
counterclaim, without discussing its jurisdiction separately, solely on the basis that:

Article 26(6) ЕСТ provides that the applicable law to an ЕСТ dispute is the
Treaty itself and 'the applicable rules and principles of international law'. The
Respondent has not presented any basis in this applicable law for [its
counterclaim]. 181

In Roussalis v Romania, the tribunal expressly referred to the applicable law

provision, as much as to the definition of the possible subject matter of the dispute,
when denying jurisdiction over Romania’s counterclaims based on its domestic law.
In this respect the tribunal stated that where the BIT does specify that the applicable
law is the BIT itself, counterclaims fall outside the tribunal’s jurisdiction. Indeed, in
order to extend the competence of a tribunal to a State counterclaim, “the arbitration
agreement should refer to disputes that can also be brought under domestic law for
counterclaims to be within the tribunal’s jurisdiction”. 182 The reference to the
applicable law clause of the IIA is rather surprising when used in the context of
jurisdiction, as an applicable law clause is not determinative for a decision on the
tribunal jurisdiction to entertain a counterclaim. In international arbitration, 183 and in
investment treaty arbitration in particular,184 the applicable law is the one under which
the merits of the dispute are evaluated. It is usually different from the law that governs
the arbitration agreement, which, on its side, determines the scope of the consent of
the parties.

This principle has been constantly respected by tribunals when assessing the existence
of consent of the parties to submit their dispute to arbitration. In the context of treaty
based investment arbitration, it was affirmed on numerous occasions, both in the
context of the ICSID Convention 185 and outside of it, 186 that the existence of the

180
Lalive and Halonen (n 50) 150-151.
181
Limited Liability Company AMTO v Urkaine, SCC Case No. 080/2005 (ECT), Final Award, 26
March 2008, para 118.
182
Spyridon Roussalis v. Romania (n 42) para 871.
183
See G Born, International Commercial Arbitration (Kluwer Law International 2009) 411-421; Y
Derains, ‘Observations on Final Award in ICC Case No 4381’, in S Jervain, Y Derains and J-J Alvarez
(eds), Collection of ICC Arbitral Awards 1986-1990 (ICC 1994).
184
Schreuer, (n 35) 550-552,
185
See Siemens AG v Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction, 3
August 2004; CMS Gas Transmission Company v Argentine Republic, ICSID Case No. ARB/01/8,
Decision on Jurisdiction, 17 July 2003.
47
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

parties' consent is governed by the particular provision of the IIA which contains it, as
well as the relevant procedural rules.

In addition, no analogical restriction of the tribunal’s jurisdiction with regards to the

applicable law clause in the IIA has been made in cases where investors have relied
on bases for their claims, which are outside of the IIA, and in particular in cases
regarding contract claims. Moreover, such importance attached to the applicable law
clause in a particular IIA would not be in line with the fact that the practical
importance of such clauses seems to be fading, as the nature of investment disputes is
such that tribunals are necessarily brought to apply both domestic and international
laws and those clauses are seen as a mere affirmation of the tribunal’s right to
consider a particular source of law. 187

It seems preferable to refer to the applicable law clause when considering the merits
of the counterclaim, i.e. the existence of 'legal basis', referring back to the wording
used in AMTO v. Ukraine of the counterclaim in the particular law chosen as
applicable by the parties.

We will examine how the different types of applicable law clauses in IIAs can affect
the possibility for a respondent State to assert counterclaims. It seems that tribunals
would refuse to examine counterclaims based on the State’s domestic law if the
applicable law clause in the IIA refers only to international law. 188 A similar result
could be expected regarding counterclaims based on a contract, as contracts are
normally subject to a particular domestic law. This statement bears the exception of
express references to contracts made in the applicable law provision, besides the
application of international law, as is done for example in the France – Dominican
Republic BIT. 189 Conversely, when a domestic law is included in the applicable law
provision, it seems reasonable to admit that contractual counterclaims would be more
easily admitted.

To illustrate the questions raised above in simpler terms, a chart is presented showing
the counterclaims that would be capable of being lodged, as having a legal basis in the
applicable law, with regards to different applicable law clauses in IIAs.

186
See Saluka v Czech Republic (n 41); Sergei Paushok v Mongolia (n 41).
187
Y Banifatemi, ‘The Law Applicable in Investment Treaty Arbitration’ in K Yannaca-Small (ed),
Arbitration Under International Investment Agreements: A Guide to the Key Issues (Oxford University
Press 2010) 191, 209-210; Z Douglas (n 136) 42-43.
188
AMTO v Ukraine (n 183) para 118; Spyridon Roussalis v Romania (n 42) para 869.
189
Accord entre le Gouvernement de la République Française et le Gouvernement de la République
Dominicaine sur l’Encouragement et la Protection Réciproque des Investissements, Article 7, see Table
No 2, infra.

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

Table No. 2
Applicable Law Provisions in IIAs
No IIA Text of the applicable law provision Types of counterclaims
(Relevant parts) capable of being lodged
1. Energy (6) A tribunal established under paragraph Counterclaims arising
(4) shall decide the issues in dispute in out of international law
Charter
accordance with this Treaty and applicable only.
Treaty, 1994, rules and principles of international law.
Article 26
2. France – 2. […] Counterclaims arising
The arbitration is rendered on the basis of the out of:
Dominican
present agreement, of the terms of eventual 1. international law;
Republic particular agreements concluded regarding and
the investment, as well as of the rules and 2. contracts regarding
BIT,
principles of international law on the matter. the particular investment
190
1999,
Article 7
3. United States 1. Subject to paragraph 3, when a claim is Counterclaims arising out
submitted [regarding a breach of an of:
Uruguay BIT,
obligation of the substantive provisions of the 1. international law;
2005, BIT], the tribunal shall decide the issues in 2. an investment
dispute in accordance with this Treaty and contract
Article 24
applicable rules of international law. 3. an investment
2. Subject to paragraph 3 and the other authorization
terms of this Section, when a claim is 4. the host State’s
submitted [regarding an investment domestic laws (or another
authorization or an investment agreement], domestic law as may be
the tribunal shall apply: applicable by choice of
(a) the rules of law specified in the the parties to the
pertinent investment authorization or agreement/ authorization
investment agreement, or as the disputing or according to conflict of
parties may otherwise agree; or law rules.
(b) if the rules of law have not been
specified or otherwise agreed:
(i) the law of the respondent,
including its rules on the conflict of laws; and
(ii) such rules of international law as
may be applicable.
4. Bulgaria – 3. The arbitral tribunal established under this Counterclaims arising out
Article shall reach its decision on the basis of of:
Thailand
national laws and regulations of the 1. international law;
BIT, Contracting Party, which is a party to the 2. an investment
dispute, the provisions of the present contract;
2003,
Agreement, as well as applicable rules of 3. the host State’s
Article 9 international law. domestic laws.
5. China - 4. [...] Counterclaims arising out
The tribunal [...] shall adjudicate in of:
Cote d’Ivoire
accordance with the law of the Contracting 1. international law;

190
Unofficial translation.
49
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

No IIA Text of the applicable law provision Types of counterclaims

(Relevant parts) capable of being lodged
BIT, Party to the dispute accepting the investment 2. an investment
including its rules on the conflict of laws, the contract;
2002,
provisions of this Agreement as well as the 3. the host State’s
Article 9 applicable principles of international law. domestic laws (or another
domestic law, as
designated by the
applicable rules of
conflict of laws).
6. Netherlands- 6) The arbitral tribunal shall decide on the Counterclaims arising out
basis of the law, taking into account in of:
Slovakia BIT,
particular though not exclusively: 1. international law;
1991,  the law in force of the Contracting Party 2. possibly other
concerned; ‘relevant’ treaties
Article 8
 the provisions of this Agreement, and between the parties to the
other relevant Agreements between the BIT;
Contracting Parties; 3. an investment
 the provisions of special agreements contract;
relating to the investment; 4. the host State’s
 the general principles of international domestic laws.
law.

In the absence of an express provision on applicable law in the IIA, it is the relevant
arbitration rules that determine the law applicable to the merits of the dispute, thus
those provisions need to be examined as well. In the case of investment treaty
arbitration the most relevant instruments are of course the ICSID Convention, as well
as the UNCITRAL Arbitration Rules. Even though the provisions on applicable law in
the two sets of rules are drafted in a very different manner the outcome when facing
an investment treaty arbitration would be virtually the same, i.e. allowing the arbitral
tribunal to refer to both domestic and international law. 191 Therefore, whether the
proceedings are conducted under the one set or the other would not have a particular
effect on the assertion of counterclaims.

2. The ‘party identity’ requirement in investment arbitration context

 For the successful assertion of counterclaims, there is a need of identity between the
parties to the proceedings and the respective parties to the substantive obligations
arising out of the instrument invoked by the respondent as basis for its
counterclaim.

 Regarding contract-based counterclaims by the host State, their admission is subject

to the condition that the invoked contract was concluded by the investor itself (to
the exclusion of later transferees of rights or subsidiaries), as well as by the State
itself (to the exclusion of legally incorporated State entities or third parties);

191
Banifatemi (n 189) 205.

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

 Regarding host State’s domestic law based counterclaims, their admission is subject
to the participation in the proceedings of an investor operating/incorporated on the
territory of the host State, i.e. subject to its legislative jurisdiction, to the exclusion
of a foreign parent company.

The nature of counterclaims, require them to be advanced between the same parties as
the ones to the original claim. 192 This requirement means that a respondent in the
proceedings would need to have an actionable substantive right against the claimant
only, to the exclusion of third parties.

In the context of investment treaty arbitration this requirement poses some specific
problems, as the claimant in the dispute is not always the party debtor of obligations
to the host State,. The host State itself, especially in a contractual context, is often not
the creditor of the investor’s obligations. The parties to the dispute may well be not
the proper parties to the counterclaim.

In State procedural laws, this type of problems is remedied by the assertion of a

possibility to present a claim also against a third party in the original proceedings, as
for example a cross-claim. This possibility’s interest is limited in the context of
arbitration and investment treaty arbitration in particular. Due to the consensual nature
of arbitration such claims against a third party to the original dispute will often fall
outside of the jurisdiction of the tribunal, as the third party would not have necessarily
agreed to arbitration.

i. Proper parties to the contract forming the legal basis for the
counterclaim

The invocation of a contract as basis for a State’s counterclaim would be possible

only if the parties to the dispute in which the counterclaim is invoked coincide with
the ones bound by the contract itself, both on the State and the investor’s side. In this
respect two criteria can be inferred from relevant case law – one regarding the State
party to the dispute and another with respect to the investor.

On the State's side, the tribunals have been reluctant to admit counterclaims on the
basis of a contract that is not concluded with the State itself or with an organ of the
latter. 193 In this respect it seems logical to apply to counterclaims the same
requirements as the ones for the invocation by the investor of a contractual breach on
the part of the host State in an IIA based arbitration, namely that the contract is not to
be concluded with a State entity having its own legal personality, neither a fortiori
with a third party. 194

On the investor’s side, there is a similar obligation for the State to bring a
counterclaim only against the investor protected under the relevant IIA and party to
the proceedings, This particular requirement was found not to be met in Paushok v
Mongolia, and was addressed as an obstacle to the assumption of jurisdiction in

192
See Saluka v Czech Republic (n 41) para 49.
193
Saluka v Czech Republic, (n 41) para 51 Hamester v Ghana, (n 42) para 356.
194
Crawford (n 156) 13; Kryvoi (n 18) 13-50.
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Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

Saluka v Czech Republic. In both cases the parties to the contract invoked as a basis
for the State’s counterclaim were not the same as the claimant in the particular dispute
and were not bound by the agreement in another manner. 195 In view of this
requirement of identity of the parties, doctrines such as alter ego or piercing the
corporate veil might be a source of inspiration for States bringing a counterclaim
based on a contract not originally signed by the investor party to the dispute,
depending on the applicable law to the question of attribution of the conduct to the
parent company.

ii. The party subject to the domestic law obligation forming the legal basis
for the counterclaim

In a similar manner that with regards to contractual counterclaims, there is an

additional hurdle to the assertion of domestic law counterclaims by the host State in
investment treaty arbitration. In the domestic law breach context, the creditor of the
relevant obligation is necessarily the host State. On the investor’s side it is not usually
the claimant to the particular proceedings who is its debtor. It is a local subsidiary that
is subject to the relevant domestic law obligations. These local subsidiaries of the
investor are rarely parties to the investment dispute. The party to the dispute is usually
only the foreign owner of the subsidiary in question, not subject to the domestic laws
of the respondent State.

The tribunal in Saluka v Czech Republic acknowledged this issue. 196 It was discussed
more in detail by the Tribunal in Paushok v. Mongolia. The tribunal stated that even
though the local subsidiary involved in the dispute was ‘omnipresent’, it remained not
a party to the same dispute, 197 thus the assertion of counterclaims regarding the
foreign investor parties to the dispute, would be equivalent to:

[E]xtend the extraterritorial application and enforcement of [the host State’s]

public laws, and in particular its tax laws, to individuals or entities not subject
to and not having accepted to submit to Mongolian public law or its courts. 198

The tribunal dismissed this possibility, as it rightly qualified the admission of such
counterclaim to be tantamount to an ‘extension of Mongolia’s legislative jurisdiction,
without any legal basis under international law’. 199

In view of the stated above, unless where the local subsidiary of the investor party to
the dispute is also a party to the same proceedings, the only manner of asserting a
counterclaim based on the respondent State’s domestic laws would be if the breaches

195
Saluka v Czech Republic (n 41) para 50; Paushok v Mongolia (n 41) para 696.
196
Ibid paras 40-44.
197
Paushok v. Mongolia (n 41) para. 686.
198
Ibid para. 695.
199
Ibid.

52
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

committed by such local subsidiary are found to be attributable to the foreign investor
itself. An important question in this respect would be the determination of the law that
should be applied to such attribution, however this questions lies beyond the scope of
the present report.

3. Contract-based counterclaims in the perspective of conflicting fora

 For a successful contract-based counterclaim on the part of the State to be asserted,

at the present state of the law, such a contract should not contain its own exclusive
dispute resolution clause (independently of whether the investor’s claim is based on
an umbrella clause or a different standard of protection under the IIA).

The fact that a contract contains its own exclusive dispute resolution clause has been
interpreted by tribunals, particularly in Vivendi v Argentina, to create an obstacle for
the assertion of contractual based claims in investment arbitration in general.
Tribunals formulate this obstacle as lack of jurisdiction regarding/inadmissibility of
the claim in question, due to the need to uphold the respect of contractual obligations
between the parties to the conract, i.e. the use of the principle pacta sund servanda. 200

The Vivendi reasoning was expressly adopted by the tribunal in the Saluka v Czech
Republic case with regards to counterclaims based on a contract which did contain its
own dispute resolution mechanism, when dismissing the counterclaims advances by
the Czech Republic. 201 The ‘fairness’ of such symmetrical respect of contractually
agreed upon dispute resolution mechanisms, i.e. prohibiting States from bringing
contractual counterclaims in front of investment treaty tribunals, in the same manner
as investors are prohibited to do so, was noted by scholars. 202

This affirmation would seem also true when faced with an umbrella clause based
dispute, which provides for an even more undesirable scenario. The claim invoked by
the investor in this case remains a substantive treaty claim 203 – the particular umbrella
clause invoked, while the one advanced by the State is one that finds its legal basis
only in the contract that it invokes. Thus, the Vivendi v Argentina position, relying on
the respect of the contractually agreed forum by both parties, would prevent the State
from asserting its contract-based counterclaim, in the same manner as when another
substantive treaty protection is the basis of the investor’s claim.

However, it has been suggested 204 that, both for reasons of fairness and for reasons of
procedural efficiency the outcome should be different in the case of a dispute based in
an umbrella clause. As it was stated in SGS v Pakistan ‘it would be inequitable if, by
200
Société Générale de Surveillance S.A. v Republic of The Philippines, ICSID Case No. ARB/02/6
Decision of the Tribunal on Objections to Jurisdiction, 29 January 2004; Vivendi Universal S.A. and
Compañía de Aguas de Aconquija v Argentine Republic, ICSID Case No. ARB/97/3, Decision on
Annulment, 3 July 2002, para 98, 41 International Legal Materials (2002), 1135.
201
Saluka v Czech Republic (n 41) paras. 54-58.
202
Lalive and Halonen (n 50) 152.
203
Crawford, (n 156) 18-22.
204
Lalive and Halonen (n 50) 152.
53
 Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

reason of the invocation of ICSID jurisdiction, the Claimant could on the one hand
elevate its side of the dispute to international adjudication, and on the other preclude
the Respondent from pursuing its own claim for damages…’. More than inequitable
such a solution would be contrary to the rationale of procedural efficiency and finality
of decisions, as two claims based - on the merits – on the same legal instrument would
be considered in two different fora, thus increasing both the costs of the proceedings
and the risk of conflicting decisions.

One solution is for tribunals abstain to exercise jurisdiction when the contract the
breach of which is invoked by the investor pursuant to an umbrella clause, contains an
exclusive dispute resolution mechanism of its own. This is the position adopted by the
tribunal in SGS v Philippines. 205 However it is not followed by all tribunals, as was
illustrated by the SGS v Paraguay recent award. 206 Therefore the existing standards
for interpretation of the tribunal’s jurisdiction in view of an umbrella clause might
need to be accommodated in order to promote both equity of parties and procedural
efficiency.

There is still no unanimity on the effect of such contractual dispute resolution clauses
on the tribunal’s jurisdiction neither in case law nor doctrine. 207 It is preferable for the
successful assertion of a contract-based counterclaim, that the contract the State is
relying upon does not contain an exclusive jurisdictional provision.

IV. LIMITS OF THE CURRENT SYSTEM AND SUGGESTIONS TO

AMELIORATE THE CHANCES OF ASSERTING
COUNTERCLAIMS
Before pointing out the particular limits of the current system and offering particular
tools for ameliorating the availability of counterclaims, it is important to recapitulate
the advantages and disadvantages which their increased availability might bring.

The reasons for not setting the threshold for admitting counterclaims too low can be
e.g. the fear of opening for the host States a possibility of adjudicating purely
domestic disputes arising from the general municipal law and allowing for an extra-
territorial enforcement of these. A pragmatic concern is also the question of an
international arbitral tribunal's capability to deal with highly technical and complex
aspects of the national laws, e.g. in the field of tax law. Furthermore, if international
investment law is viewed as a species of international judicial review of the acts of the
sovereign directed towards individuals, that is to say a sort of international

205
SGS v Philippines (n 202) 155.
206
Société Générale de Surveillance S.A. v Republic of Paraguay, ICSID Case No. ARB/07/29, Award,
10 February 2012, paras 175-185
207
See for the opposite opinion: SGS v Paraguay, (n 208) paras 175-185; Aguas del Tunari v Republic
of Bolivia, ICSID Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction, 21
October 2005, paras 115-118.

54
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

administrative law, the availability of counterclaims to the host State is at odds with
this conception of international investment law. As the counterclaims have been
historically admitted in investment arbitration and were also enshrined in the
applicable arbitration rules, it is submitted that such view of international investment
arbitration is unduly reductive, however.

Thus turning to the advantages of increased availability of counterclaims, it is argued

that policy reasons weighing in favour of this availability are overwhelming. First, it
is the reason of efficiency and economy of the settlement of investment disputes
which calls for all aspects of the dispute to be heard and decided in one forum. Neither
party is forced to pursue the remedy of other party's alleged wrongdoings in a
different forum, which saves resources spent in the proceedings and prevents
conflicting decisions. Second, the enforcement of international awards against the
investor is also increased in comparison with the judgments of domestic judiciary and
goes in line with the original intention of the drafters of the ICSID Convention.
Furthermore, the States have on many occasions interest in having different types of
their claims heard in a neutral forum, as this can improve their credibility and avoid
them being accused of bias of their domestic courts. Finally, having counterclaims as
a general possibility can work as prevention against abusive and frivolous investors'
claims.

Several obstacles which the States encounter when asserting counterclaims can be
inferred from the above analysis and need to be remedied in order to enhance the
easier assertion of counterclaims. These obstacles are posed either by the treaty
language employed in IIAs and the applicable rules or by the tribunals' restrictive
reading of the applicable rules:

 Narrowly worded jurisdictional offer in the IIA which excludes the possibility
of States to assert counterclaims and limit the material scope of jurisdiction of the
tribunal only to the host State’s obligations under the IIA;

 Lack of identity between the parties to the dispute and the proper parties to the
instrument invoked as legal basis for the host State’s counterclaim;

 Treaty provisions limiting the applicable law to the merits seen by tribunals as a
hurdle. Although this type of provisions is not conceptually relevant to the
jurisdiction of the tribunal, they must be considered as the reference to them forms
part of the current arbitration tribunals' practice;

 Lack of investors' obligations in the IIAs and under international law in general;

 Tribunals’ restrictive approach to the connectedness requirement limits

artificially the scope of types of obligations that can be invoked as bases for
counterclaims (mainly regarding host State’s general domestic law obligations).

55
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

The obstacles existing under the current state of law can be remedied either through
new approaches of investment tribunals to the interpretation of certain requirements,
particularly to the criterion of the connectedness. The rest of the hurdles are best
addressed trough treaty amendments. These amendments would make clear that
counterclaims can be presented and what are the conditions for their admissibility.
These treaty amendment proposals are presented in the following part of this section.

Such proposals can be made both with regards to procedural provisions of the IIAs
and the substantive standards therein.

A. JURISDICTION– INCLUDING COUNTERCLAIMS IN THE JURISDICTION OF THE

TRIBUNAL

From the analysis above two different patterns can be discerned for the inclusion of
counterclaims in the scope of jurisdiction of tribunals reviewing investment treaty
based disputes, which can be used in conjunction or separately.

On the one hand, it seems that tribunals see the inclusion in an IIA of a broad dispute
settlement provision as including counterclaims – based on sources both in the IIA
and outside of it – in their jurisdiction. Such a provision needs both to give a broad
definition of the disputes which can be subject to the tribunal’s jurisdiction (‘all/any
disputes’ or ‘all/ any disputes concerning investments’), as well as to provide the State
with locus standi as possible claimant in the dispute also (the dispute shall be
submitted ‘by either party’ or ‘by request of one or the other of the parties’ to
arbitration).

1. First option: Broad definition of dispute and ample locus standi

Broad definition of disputes in the jurisdiction of the tribunal and giving to both
parties to the dispute locus standi as claimant (good example is the France-Dominican
Republic BIT:

Any dispute concerning investments between one of the contracting

parties and a national or company of the other contracting party is
settled amicably between the two parties concerned. If such a dispute was
not settled within a delay of six months starting from the moment when it
was brought by one or the other party to the dispute, it is submitted by
request of one or the other of the parties, [to arbitration]. 208

Such a provision might, however, have the adverse effect of bringing an equally broad
scope of claims on the side of investors against the State in the tribunal’s jurisdiction.

208
Emphasis added.

56
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

Thus, another option for the provision jurisdiction of tribunals over counterclaims
asserted by the State, even in the case of a narrow dispute settlement provision in the
IIA, is the express inclusion of counterclaims in the scope of jurisdiction of the
tribunal.

In any case, it seems also useful to provide for an indication as to which connecting
factor should be applied by the tribunal for counterclaims to be admitted. It is argued
throughout this paper that the particular investment which is in the dispute is a proper
connecting factor, as it would be easier to enhance.

2. Second option: Express inclusion of counterclaims

Express inclusion of counterclaims in the dispute settlement offer (this option is of

assistance regarding the interpretation of the connectedness requirement too):

The Respondent shall have the right to assert any and all counterclaims
which arise out of the investment that constitutes the subject matter of
the primary claim.

It can be argued that this provision does in effect extend the jurisdiction of the
tribunal. The effect of the provision depends on its intersection with other treaty
clauses, particularly with the arbitration offer. If we consider the use of this provision
in the context of a narrow jurisdictional offer limited only to the host State’s treaty
obligations, this provision would effectively put respondent in a position of being able
to counterclaim on a larger scope of causes of action than the investor bringing the
original claim. This would switch the perceived imbalance between the possibility of
claiming under IIAs caused by the narrow offer to arbitrate to the other side of the
scale, i.e. favouring the host State. Therefore, this provision should be rather
considered in conjunction with a broad offer to arbitrate.

In the case of a broad jurisdictional provision described above, this provision would
merely expressly confirmed the availability of counterclaims and would further
specify what sort of counterclaims can be brought against the investor, i.e. only those
meeting the connecting factor of “investment that constitutes the subject matter of the
primary.”

Lastly, when the jurisdictional offer of the tribunal is worded in similar terms as the
most of the U.S. BITs [see above U.S.-Uruguay BIT] 209 the provision can be
formulated as follows in order to limit the effect of extending the tribunal's
jurisdiction:

‘The Respondent shall have the right to assert any and all counterclaims which arise

209
Jurisdiction of the tribunal extends to disputes concerning (A) an obligation of the host state under
Articles 3 through 10, (B) an investment authorization, or (C) an investment agreement.
57
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

out of the investment that constitutes the subject matter of the primary claim and are
within the jurisdiction of the tribunal.’

B. JURISDICTION– ATTRIBUTION OF OBLIGATIONS TO THE INVESTOR PARTY TO

THE DISPUTE

In case of espousal of claims of the locally incorporated company which is usually the
party to contracts concluded with the host State and is subject to the host State’s local
laws, this provision, included in the dispute settlement provision in the IIA might
offer the possibility to assert counterclaims directly against the foreign investor.

When an investor submits a claim on behalf of an enterprise of the

respondent State that is a juridical person that the investor owns or
controls directly or indirectly, any and all breaches of the enterprise’s
legal obligations consistent with the present treaty towards the
Respondent State shall be deemed attributable to the investor.

This provision attempts to address the problem of locally incorporated companies

being treated as an investment and, thus, not being a party to the arbitration
proceedings. The clause touches upon a delicate question of piercing of the corporate
veil and separate personality of corporations. In this respect, however, the foreign
investor would agree to assume potential responsibility voluntarily, because the
possibility of such attribution is available only when the foreign investor decides to
bring a claim where the locally incorporated corporation is considered as its
investment. The tribunal would decide the existence of any breach of the local
subsidiary as an incidental question. A potential attribution of the subsidiary’s
responsibility can be viewed as a trade off for the access to the Investor-State dispute
settlement mechanism. It is assumed that under normal circumstances, this clause
should not be considered problematic. The clause operates with the logical reservation
that only the legal obligations that are not in violation of the IIA can be attributed.

C. SUBSTANTIVE OBLIGATIONS OF INVESTORS/INVESTMENTS IN IIAS

1. Compliance with host State local laws

Investors and investments of one Contracting Party in the territory of the

other Contracting Party shall comply with all laws and regulations in
force in that Party, which are consistent with its obligations in the present
Treaty.

This provision makes the compliance with local legislation a treaty obligation on the
part of investor. This would allow the tribunal to hear the host State counterclaims
even when the State’s offer to arbitrate is worded in a narrow terms, limited to
international obligations under the treaty. The requirements on the requisite

58
Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

connectedness must, nevertheless, apply to any counterclaim based on this treaty

provision.

2. Respect of contract obligations (to be included when an umbrella clause

is present in the relevant IIA)

i. First option: A mirror/reverse umbrella clause

Similarly as the previous provision, the reverse umbrella clause makes contractual
commitments with the State treaty obligations under which the State will be able to
counterclaim:

Investors and investments of each Contracting Party shall observe any

obligation it has entered into with the other Contracting Party.

ii. Second option: Limited to counterclaims

In the case of assertion of a claim on the basis of Article X [umbrella

clause] of this Treaty the Respondent shall have the right to assert any
and all counterclaims arising out of the instrument incorporating the
obligations assumed towards the investor.

This option works on the presumption that State would want to keep a narrow
jurisdictional offer in the treaty, which would be limited only to its obligations under
the treaty. On the other hand, the reason for having such a narrow offer in the treaty
on the part of State is because the State wants to limit the ambit of claims investors
will be able to bring. It may be asked how does an offer limited to treaty obligations
including an umbrella clause really limit the ambit of possible claims to be brought by
investor. For the investor will be in fact able to bring the whole variety of State
conducts formulated as a treaty claim and such purportedly narrow jurisdictional offer
in the vast majority of cases will not have the intended effect.

Nonetheless, this provision may be viewed as a possible tool available for the treaty
negotiation, especially between two States having unequal bargaining power. It can be
in the interest of one of the States (the one who is expected to be more often a home
State of investors) not to allow host State's counterclaims. The other State, thus, might
be able to have at least the contractual counterclaims heard.

D. APPLICABLE LAW PROVISIONS IN THE IIA

The arbitral tribunal established under this Article shall reach its
decision on the basis of national laws and regulations of the Contracting
Party, which is a party to the dispute, the provisions of the present
Agreement, as well as applicable rules of international law.

For the easier assertion of counterclaims, in view of arbitral tribunals practice to

59
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

consider applicable law clauses as relevant for the scope of their jurisdiction, the
applicable law clause in the IIA, if at all present, should contain a reference to the
domestic law of the host State, in order to include in the permissible causes of action
for potential counterclaims both contracts and investor’s obligations under the host
State’s domestic law.

60
Counterclaims in Investor-State Dispute Settlement (ISDS) under International
Investment Agreements (IIAs)

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

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Alex Genin and others v. Estonia, ICSID Case No. ARB/99/2, Award 25
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Desert Line Projects LLC v. Yemen, ICSID Case No. ARB/05/17, Award 6
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Gustav W. F. Hamester GmbH & Co KG v. Republic of Ghana, ICSID

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Jurisdiction 6 August 2003, 18 ICSID Review – FILJ (2003)

Société Générale de Surveillance S.A. v Republic of The Philippines,

ICSID Case No. ARB/02/6 Decision of the Tribunal on Objections to
Jurisdiction 29 January 2004

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

LG&E Energy Corp., LG&E Capital Corp. and LG&E International, Inc.
v. the Argentine Republic, ICSID Case No. ARB/02/1, Decision on
Objections to Jurisdiction 30 April 2004

Enron Corporation and Ponderosa Assets L.P. v. the Argentine Republic,

ICSID Case No. ARB/01/3, Decision on Jurisdiction (Ancillary Claim), 2
August 2004

World Duty Free Company Ltd. v. Republic of Kenya, ICSID Case No.
ARB/00/7, Award 6 October 2006

Aguas del Tunari v Republic of Bolivia, ICSID Case No. ARB/02/3,

Decision on Respondent’s Objections to Jurisdiction 21 October 2005

Phoenix Action Ltd. v. Czech Republic, ICSID Case No. ARB/06/5,

Award,15 April 2009

Europe Cement Investment and Trade SA v Republic of Turkey, ICSID

Case No. ARB(AF)/07/2, Award 13 August 2009

Cementownia “Nowa Huta” SA v Turkey, ICSID Case No ARB(AF)/06/2,

Award 11 September 2009

Itera International Energy LLC and Itera Group NV v. Georgia, ICSID

Case No. ARB/08/7, Decision on Admissibility of Ancillary Claims 4
December 2009

Libananco Holdings Co Limited v Republic of Turkey, ICSID Case No.

ARB/06/8, Award 2 September 2011

Société Générale de Surveillance S.A. v Republic of Paraguay, ICSID Case

No. ARB/07/29, Award, 10 February 2012

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Counterclaims in Investor-State Dispute Settlement (ISDS) under International Investment Agreements (IIAs)

ANNEXES
Table No. 3
Contract-based Counterclaims
Title of
Case Forum Claim Counterclaim Outcome
Jurisdiction

1. Damages for non-payment

S.A.R.L. Benvenuti of duties and taxes on imported Tribunal found jurisdiction to
Article 12 of 1. Compensation for non-
& Bonfant goods; entertain Respondent’s
the payment of the capital stock;
ICSID 2. Damages for alleged counterclaim.
v Agreement 2. Non fulfilment of
Case No. overpricing of raw materials;
between contractual obligations by the
People’s ARB/77/2 3. Damages for alleged It dismiss them due to
Claimant and Respondent;
Republic of the defects on the construction of insufficient evidence in their
Respondent 3. Seizure of the company by
Congo the plant; support.
the Respondent.
4. Damages for intangible
losses, among others.
Tribunal assumed jurisdiction
Klöckner
over the counterclaim as it
Industrie-Anglaen
was ‘an indivisible whole’
v with the main claim and
ICSID Compensation for outstanding shared ‘a common origin,
Misrepresentation by Claimant
United Republic Case No. balance of the price for identical sources and an
Invoked by of its management capabilities
of Cameroon and ARB/81/2 supplying the factory. operational unity’ with it.
Société Claimant:
Counterclaim was rejected as
Camerounaise des Article 18 of
Respondent acted with full
Engrasis Supply
understanding of its actions,
Contract for
and could no have been
Fertilizer
Factory
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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

Title of
Case Forum Claim Counterclaim Outcome
Jurisdiction

mislead by claimant.

Invoked by Annulment Committee

Respondent: reaffirmed original tribunal’s
Article 22 of reasoning.
Protocol of
Agreement
and Article 21
of
Establisment
Agreement

Amco Asia Article IX of Compensation for Jakarta’s Before the first tribunal: The first tribunal rejected the
Corporation and P.T. Amco Court order to rescind the Payment of all taxes and counterclaim as they found
ICSID
others Indonesia’s Lease and Managament import duties, except for the P.T. Amco’s license
Case No.
application Contract and cancellation of ‘tax holiday’ granted by the revocation to be illegal. The
v ARB/81/1
(local P.T. Amco’s license by license. annulment committee
subsidiary) Respondent reversed this finding.
Republic of

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Counterclaims in Investor-State Dispute Settlement (ISDS) under International Investment Agreements (IIAs)

Title of
Case Forum Claim Counterclaim Outcome
Jurisdiction

Indonesia Before the resubmission The resubmission tribunal

tribunal: found the tax evasion was
‘Systemic course of tax outside of the jurisdiction of
evasion’ by Claimant. the Centre, as the obligation
no to engage in tax fraud is a
general obligation of law (not
especially contracted for) and
does not arise directly out of
the investment (Art. 25
ICSID).
Atlantic Triton
Tribunal assumed jurisdiction
Company Limited
Joint Venture over the counterclaim. The
Payment of sums due, Damages and interest for
v Contract ICSID breach was not attributable to
management costs and breach of Claimant’s
between Case No. the Claimant.
People’s damages for prejudice contractual obligations under
Claimant and ARB/84/1 Counterclaim was taken into
Revolutionary suffered. the Joint Venture.
Respondent. considerations when
Republic of awarding damages.
Guinea
Southern Pacific Article 8 of Compensation for investment 1. Non-complianc with joint
Properties venture agreement, i.e. None of the alleged breaches
Law No. 43 of made pursuant to a cancelled
(Middle East) ICSID transforming the project into a were committed by the
1974 joint venture agreement with
Limited Case No. residential complex; Claimant; Egypt did not raise
(investment the Government to develop a
ARB/84/3 2. Absence of touristic the issues before cancelling
v protection tourist complex at the
elements in the project’s the project.
law). Pyramids Oasis.
Arabic Republic design;

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

Title of
Case Forum Claim Counterclaim Outcome
Jurisdiction

of Egypt 3. Refusal to cooperate in the

relocation of the project.

1. Reimbursement of legal 1. Reimbursement of legal

fees incurred by Respondent to fees was rejected as
Maritime
reverse outcomes of Respondent failed to raise the
International
Claimant’s actions in breach objection on time before the
Nominees Article XVIII of the arbitration agreement AAA tribunal.
Breach of provisions of the
Establishment of Agreement ICSID (AAA arbitration and US 2. Payment of legal expenses
Agreement to mine bauxite in
(MINE) between Case No. Courts); to release attachments was
conformity with a joint venture
Claimant and ARB/84/4 2. Reimbursement of legal admitted and granted.
v agreement.
Respondent expenses incurred by (USD210,000.00, 33% less
Republic of Respondent to release than original request).
Guinea attachments made pursuant to
the aforementioned legal
actions.
Article 26 of 1. Claimant fraudulently Tribunal denied all
RSM Production the induced Respondent to counterclaims:
Corporation Agreement ICSID Denial of exploration license conclude the agreement trough 1. Claimant
between Case No. by Respondent in breach of the misrepresentation; misrepresentation was made
v Claimant and 2. Claimant failed to take all in good faith, so it was not
ARB/05/14 Agreement.
Grenada Respondent reasonable measures to remove fraudulent;
for the causes of force majeure; 2. Lack of causation in the
exploration 3. Claimant damaged local force majeure counterclaim;

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Counterclaims in Investor-State Dispute Settlement (ISDS) under International Investment Agreements (IIAs)

Title of
Case Forum Claim Counterclaim Outcome
Jurisdiction

and extraction fishermen through 3. Damages to fishermen did

of offshore oil unauthorized research. not arise out of the
and gas. investement (applying
Klöckner criteria).

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

Table No. 4
Treaty-based Counterclaims
Title of
Case Forum Claim Counterclaim Outcome
Jurisdiction

Alex Genin,
Eastern Credit
Some commercial Tribunal assumed jurisdiction over
Limited, Inc. & Revocation of banking
Article VI of ICSID transactions of Claimant counterclaim, but rejected it on the
A.S. Baltoil license of an Estonian
US – Estonia Case No. where made with merits because of the inconsistency
bank controlled by
v BIT. ARB/99/2 speculative purposes up to of its presentation before the
Claimant.
USD3,400,000.00. tribunal.
Republic of
Estonia

The Tribunal declined jurisdiction

Enforcement of over Respondent’s counterclaims
contractual pledge made due to the its limited jurisdiction as
Malicious and
by Claimant’s local expressed in the offer to arbitration
unjustifiable acts by the
subsidiary; in the IIA (only claims by investor
Romanian government
Spyridon Article 9 of ICSID regarding obligations of the host
against the Claimant’s Request to Tribunal to
Roussalis v the Greece – Case No. State)
investment which issue a declaration of the
Romania Romania BIT ARB/06/1
constitutes a breach of illegality of another Arbitrator W. Michael Reisman
FET standard and indirect Claimant’s subsidiary’s submitted a separate declaration. He
expropriation. resolution for the increase considers that when parties consent
of share capital. to ICSID arbitration, the consent to
counterclaims is ‘ipso facto
imported’. He advanced policy

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Counterclaims in Investor-State Dispute Settlement (ISDS) under International Investment Agreements (IIAs)

Title of
Case Forum Claim Counterclaim Outcome
Jurisdiction

reason to support his contention, i.e.

efficiency, resolution of all
investment disputes in a single
neutral forum.

1. Tribunal had no jurisdiction over

Discriminatory, unfair and the first counterclaim because an
Article 8 of 1. Non-observance by
expropriatory forced exclusive dispute resolution
Saluka the Claimant of the Share
Ad hoc administrative actions an provision contained in the same
Investments BV Netherlands – Purchase Agreements (of
(UNCITRAL sale by Respondent of agreement;
Czech and the same commercial
v Arbitration assets in one partially 2. Tribunal had no jurisdiction over
Slovak bank).
Rules). State owned commercial the second type of counterclaims, as
Czech Republic Republics 2. Violations of domestic
bank in which Claimant general domestic law obligations are
BIT commercial legislation.
held shares. not connected with the main claim
(Klöckner criteria).
Sergei Paushok, 1. Violations by
CJSC Golden East Claimants of its obligation
Tribunal declared it had no
Company and Legal measures (tax under the license
jurisdiction over counterclaims as:
CJSC Ad hoc impositions) taken by agreement to extract gold;
Article 6 of 1. They arose of Mongolian
Vostokneftegaz (UNCITRAL Respondent affected 2. Non-payment of fees
the Russia – domestic law;
Compnay Arbitration Claimant’s mineral related to foreign workers
Mongolia BIT 2. There were not connected to the
Rules) extraction activity permits;
v main claim;
negatively. 3. Tax evasion;
3. Claimants were not the proper
The Government 4. Non-compliance with
debtor of the obligations.
of Mongolia environmental obligations
towards Mongolia

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Dafina Atanasova, Carlos Adrián Martínez and Josef Ostřanský

Title of
Case Forum Claim Counterclaim Outcome
Jurisdiction

Breaches by a Respondent
of a Joint Venture contract
Gustav F. W. with Claimant for the
Hamester GmbH establishment and Damages for losses the
Article 12 of ICSID operation of cocoa Counterclaim was dismissed because
& Co KG Respondent has suffered
the Germany Case No. production plant tribunal had no jurisdiction over it
as a result of Claimant’s
v – Ghana BIT ARB/07/24 based on the language of the BIT.
Violations of the BIT conduct.
Ghana regarding Full Protection
and Security, FET and
expropriation.

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Counterclaims in Investor-State Dispute Settlement (ISDS) under International Investment Agreements (IIAs)

Title of
Case Forum Claim Counterclaim Outcome
Jurisdiction

Breaches by Respondent The tribunal made no considerations

of contractual obligations on jurisdiction.
a Road Construction 1. Damages for
Desert Line
Contract. Claimant’s breaches of Counterclaims were rejected on the
Projects LLC
Article 11 of ICSID obligations under the merits in accordance with the
v the Yemen – Case No. Breaches were previously Settlement Agreement; principle of estoppel (reliance on the
Oman BIT ARB/05/17 dealt with in a Settlement 2. Damages for nullity of a document Respondent
The Republic of Agreement (which unfulfilled obligations itself imposed).
Yement Respondent imposed on under the domestic
Claimant) and later in arbitral award. Counterclaim was considered in the
domestic arbitration calculation of damages.

Various violations of
ECT (fair and equitable
Tribunal found that the host State
treatment, non-
Limited Liability Reimbursement of has not presented any basis in the
Article 26 of discrimination, umbrella
Company AMTO SCC arbitral costs and applicable law provision (limited to
the Energy clause, effective means
expanses, and for non- the rules of international law) for a
Charter Case No. obligation etc.) by
v material injury to the claim of nonmaterial injury to
Treaty 080/2005 measures in relation to
host State's reputation. reputation and dismissed the
the Claimant's
Ukraine counterclaim.
participation in EYUM-
10 company.

xx