I. Introduction

Foreign investors often make their investments by setting up or investing in a local company in the host state to carry out large-scale projects for public services such as road construction or electricity supply. A state’s conduct that injures a local company, and causes a loss in share values, may also affect its shareholders, including foreign investors. Domestic law normally prohibits shareholders from claiming their reflective loss on the assumption that only a directly injured company can recover the losses because such a rule is efficient and fair to all other shareholders. Under international investment regime, the investor can take their dispute directly to investment arbitration under the Investor-State Dispute Settlement clause (ISDS) in the relevant investment treaties. The ISDS clause normally provides for domestic as well as international fora. Thereby, it allows for multiple proceedings for essentially the same dispute.

Consequently, some ISDS clauses have incorporated the fork in the road (FITR) clause to prevent the investor from bringing the same dispute to multiple fora. While the definition of “sameness” of dispute is still ambiguous, the fragmentation of the rule interpretation and application still remains a concern in investment arbitration. Arbitral tribunals use at least two standards: (1) the triple identity test and (2) the fundamental basis test to see if the FITR clause is applicable. However, both the tests are ineffective.

II. Functions of the FITR Provisions

The FITR provision is a preventive rule that bars the claimant from bringing the same dispute that has been previously submitted to other forums. The function of the FITR provision is to ensure the non-existence of duplicative proceedings to avoid the risk of (a) double remedies, (b) conflicting decisions, and (c) abuse of process. First, the risk of double remedies exists when the same investor asks for the same compensation in different proceedings. A parent company may own a local company through its wholly-owned subsidiary, and both may have standings under different or the same bilateral investment treaties (BITs) to pursue a claim relating to damages caused to a local company. Therefore, both corporations may separately obtain remedies. The wholly-owned subsidiary’s remedies will flow through to its controlling parent company, and the latter, thus, receives double remedies. Second, the risk of conflicting decisions happen when the dispute has opposite outcomes. In ISDS, an arbitral tribunal is independent of other tribunals in assessing the facts and laws and is not bound by the decisions of other arbitral tribunals. In most investment treaties, there is no appellate body that may ensure consistency, while a judicial review or annulment procedure does not cover errors of facts or laws. Therefore, different interpretations or applications, as far as substantive issues are concerned, may lead to conflicting decisions. Third, the risk of abusing the process happens when investors attempt to maximize their chance of success by initiating multiple proceedings. Therefore, analyzing the appropriateness of the existing standards when applying the FITR provisions is essential to the identified risk prevention.   

III. Triple Identity Test and its Limitations

The triple identity test is a strict standard for assessing three identities: (1) parties, (2) causes of action, and (3) relief. It requires all elements to be identical before different proceedings to activate the FITR provision. For instance, in Lauder v. the Czech Republic, the dispute over a decision to withdraw the broadcasting license led to two arbitrations under two different BITs. Both tribunals used the triple identity test to apply Article VI (3) of the US-Czech Republic BIT to find whether the dispute of Mr. Lauder and his intermediary, CME, is the same. In their awards, the arbitral tribunals concluded that the dispute was not identical for three reasons. First, the claimants—Mr. Lauder and CME—are not identical. Second, the causes of action—the US-Czech Republic BIT and the Netherlands-Czech Republic BIT—are not identical. Lastly, the remedies are not identical because the amount of compensation in one proceeding will be reduced if the arbitral tribunal in other proceedings grants compensation.

Some scholars and arbitral tribunals criticize the triple identity test because it is virtually impossible to pass this test; thus, it deprives the practical effect of the FITR provisions. Under this test, the host state may be required to pay compensation twice for the same dispute because a claimant can initiate different proceedings by using formally distinct entities under its control. OIdV v. Venezuela is a typical example. OIEG, a Dutch corporation, controlled and owned OIdV, a local company that produces glass containers in Venezuela. In 2012, OIEG and OIdV commenced separate arbitral proceedings under the Netherlands-Venezuela BIT and argued that Venezuela expropriated their productions without compensation. In 2015, the arbitral tribunal in OIEG rendered a decision in favor of OIEG and ordered Venezuela to pay compensation of USD 372.40 million. Then, Venezuela asked the arbitral tribunal in OIdV to consider the outcome of the OIEG award to avoid double recovery arising from the parallel proceedings. Although the case was dismissed due to termination of a BIT and denouncement of the ICSID Convention, the situation of double remedies would occur with this test. The conflicting decisions have already also occurred in Lauder v. the Czech Republic because the arbitral tribunals gave opposite holdings over some substantive issues. Since a local company and its parent company typically share the same objective and interests in which an injury to the company adversely affects its parent company or its shareholders, a claimant can easily circumvent the effect of an FITR provision by making a formally distinct entity initiate different proceedings to maximize their chance of success.

IV. Fundamental Basis Test and its Limitations

After a strong criticism of the triple identity test, some arbitral tribunals took a new position by employing a flexible standard, the fundamental basis test, for FITR provisions. The fundamental basis test is of no concern if the parties or objects are the same; however, it focuses on the nature of claims. For instance, if a treaty claim is in fact a contract claim that has previously been brought before a domestic court, the disputes share the same fundamental basis, and the treaty claim is inadmissible under a FITR provision. For instance, H&H v. Egypt is an instance of a dispute over state interference and contract breaches between US corporations and Egypt. After a breach of contract, H&H initiated local arbitral and court proceedings but lost. Later, H&H initiated arbitration proceedings to claim a breach of the US-Egypt BIT in 2014. The arbitral tribunal held that “[expropriation claim and the alleged violation of fair and equitable treatment] have the same fundamental basis and share the same factual components as the claims filed [before local proceedings].” Therefore, the claims are inadmissible in this case.  

Despite its flexible nature, the fundamental basis test has been criticized for three reasons. First, the fundamental basis test is very vague. It compares the fundamental basis of the claims; however, what constitutes “the fundamental basis” is not clear in the first place. The statement of the arbitral tribunal in Pantechniki v. Albania that “[t]he frontiers between claimed entitlements are not always distinct [and e]ach situation must be regarded with discernment” suggests that the arbitral tribunal has broad discretion to decide whether the disputes have the same fundamental basis. Consequently, it is problematic in terms of legal certainty. Second, both Pantechniki and H&H indicate that the fundamental basis test only aims to make a distinction between contract and treaty claims. This standard is only useful when the investor brings the dispute to a domestic court and the arbitral tribunal one after another. However, when the investor brings the same dispute to two arbitral tribunals, such as Lauder, it is unclear how the arbitral tribunal may apply the fundamental basis test. Third, subsequent arbitral tribunals did not support the fundamental basis test. In Charanne v. Spain, a dispute over a new Spanish measure limiting incentives lead to multiple proceedings in an administrative court and in an arbitration. Unlike both Pantechniki and H&H, the arbitral tribunals interpreted the FITR provisions as also requiring the identity of parties and found that Charanne and T-Solar are not identical because there is no evidence that Charanne has decision-making power in T-Solar though Charanne is a part of the same group of T-Solar through its shareholding. Hence, the fundamental basis test is not appropriate because it ignores the parties’ identity.

V. Conclusion

As examined above, when a parent company and its wholly-owned subsidiary initiate multiple proceedings for the same measure and damages (Lauder and H&H), a respondent state tends to invoke a FITR provision, and a question arises as to whether the disputes can be considered to be the same. Some arbitral tribunals have applied the triple identity test, while others applied the fundamental basis test. However, neither of the standards effectively prevents the issue of multiple proceedings for the same dispute because loopholes or limitations persists in their application. 

Ung Sovanmony, obtained an LL.M (Nagoya University) in international investment law and arbitration in 2022. She is currently a Ph.D. student at Graduate School of Law, Nagoya University, Japan.

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