Commentary: Drafting Arbitration Clauses in Contracts Involving Sovereigns

Abstract

I HAVE been asked to discuss the special considerations that arise when entering into a transaction that may involve arbitration with a sovereign authority – in our hypothetical case the imaginary country of Abyssinia. I would like to take you back to 1996 when US Power was negotiating the power purchase agreement and deciding whether to make the investment in Abyssinia, and to run through some of the arbitration-related issues that US Power, or any other investor, should be thinking about when considering an investment with a state or its political subdivision or an agency or instrumentality of that state. These issues should be considered so as to avoid, or at least anticipate, some of the problems that we are going to see unfold during the course of the mock scenario. The availability of a dispute resolution mechanism that has the potential to result in an enforceable award is often a key factor in deciding whether to enter into a transaction with a foreign sovereign or its political subdivision. The first issue to be considered is whether there is a bilateral investment treaty (BIT), a multilateral treaty or a local arbitration law that will assure the enforceability of an arbitration award. Prospective investors should be aware that certain treaties may provide for international arbitration even if the investor is unable to reach agreement with the sovereign or its political subdivision on the terms of an arbitration agreement. Such treaties may in fact provide the investor with the best option for avoiding local court adjudication of the dispute. If multiple treaties are in effect, the investor should then determine which treaty has the best terms for the resolution of disputes through international arbitration. We know that Abyssinia has a BIT with the United States. If Abyssinia has a BIT with another …