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The English High Court clarifies the proper approach to interpreting BITs, in a recent dispute between European Media Ventures and the Czech Republic.

The Facts

The Czech Republic applied to the English High Court, under section 67(1)(a) of the Arbitration Act 1996 (UK), to set aside an Award on Jurisdiction made in relation to an arbitration between itself and a Luxembourg company, European Media Ventures (EMV). The arbitration had been commenced by EMV against the Czech Republic under a bilateral investment treaty entered into by the Czechoslovak Socialist Republic and the Belgian-Luxembourg Economic Union.

EMV complained of indirect expropriation of its investment in a Czech television station and referred the dispute to an arbitral tribunal comprising Lord Mustill, Dr Julian Lew and Professor Christopher Greenwood, which, finding that it had jurisdiction to hear the dispute both in relation to questions of both liability to pay compensation and the amount of that compensation, went on to make an award.

The Dispute as to Jurisdiction

The Czech Republic brought the matter to the English High Court, arguing that Article 8 of the Treaty, under which EMV referred the dispute to arbitration, did not support the tribunal’s decision concerning its jurisdiction to make an award in relation to questions of liability. Article 8 provides that disputes “concerning compensation due by virtue of” the provisions of the Treaty concerning expropriation could be submitted to arbitration before an ad hoc tribunal.

The Czech Republic argued that under Article 8, the tribunal’s jurisdiction in relation to such disputes is limited to issues as to the amount of compensation to be paid following an expropriation but not to the more substantive question of whether compensation should be paid at all.

In support of its position, the Czech Republic relied upon extrinsic material concerning the policies of communist States at the time the Treaty was entered into. It submitted that the policy of such states was “to agree to arbitration with private investors in relation to disputes as to the amount of compensation following expropriation” and that “wider agreements to arbitrate with investors … were avoided by Communist States as impermissible intrusions on their sovereignty”. Hence, it was argued that Article 8 of the Treaty did not support the arbitral tribunal’s decision that it had jurisdiction to determine questions concerning the liability of a contracting party.

In contrast, EMV argued that the aim of the BIT was to promote and protect investments by providing direct rights between investors and host States and that “there was no immutable policy of the Czechoslovak Socialist Republic to confine Arbitration Agreements to the amount of compensation to be paid”.

Interpreting the Belgium-Czech Republic BIT

The nature of the dispute raised broader questions about the rules to be applied in interpreting treaties. After quoting extensively from the Vienna Convention on the Law of Treaties, the Court affirmed that the proper approach “is to interpret the agreed form of words which, objectively and in their proper context, bear an ascertainable meaning”, rather than trying to identify what the notional underlying intention of using a particular form of words might have been.

Simon J further said that “when considering the object and purpose of a Treaty a Court should be cautious about taking into account material which extends beyond what the Contracting Parties have agreed in the Preamble or other common expressions of intent” (emphasis added).

EMV had argued that, as a matter of context, the Preamble to the Belgium-Czech BIT stated that one of the objects of the Treaty (as distinct from the notional underlying common intent of the parties) was to create favourable conditions for investment in the Czech Republic, and that one of the central features of a favourable investment environment is the availability of international arbitration as an avenue for dispute resolution.

EMV further argued that “so far as the objective of a BIT is to provide effective protection for investors, it is permissible to resolve uncertainties in the interpretation of a BIT in favour of the investor”. In response to these submissions, the Court decided that when interpreting a BIT “the Court is entitled to take into account that one of the objects of the treaty was to confer rights on an investor, including a valuable right to arbitrate” but did not go so far as to say that, as a broad-ranging rule of interpretation, BITs should be interpreted in favour of an investor.

Conclusion

The parties presented a large amount of “contextual material” upon which they relied in arguing for their respective interpretations of Article 8 of the Treaty. The Court dealt with this material by finding that it threw “no clear light” on the interpretation of the disputed words. Furthermore, in Simon J’s view, the scope of the arbitration clause was left unclear “possibly to the satisfaction of both sides”.

In the end, the Court decided that the words “concerning compensation” could not, on their ordinary meaning, be taken to mean “relating to the amount of compensation”. Rather, the word “concerning” should be read broadly, analogously to phrases such as “relating to” or “arising out of”, with the consequence that Article 8 extends to every aspect of the compensation due by virtue of Article 3 of the Treaty concerning expropriation.

Applying these findings, the Court held that the arbitral tribunal did, indeed, have jurisdiction to decide the substantive question of whether EMV was entitled to compensation in addition to having jurisdiction to decide the amount of compensation that should be awarded.