Is international arbitration near breaking point?

By Neil Cameron

The latest stage of a seemingly never-ending legal tussle in South America has raised more questions about the effectiveness of international arbitration agreements.

In January, a World Bank arbitration tribunal rejected Venezuela’s attempt to annul a US$8.37 billion award to ConocoPhillips.

This dispute originated in 2007, after the late President Hugo Chávez’s decision to nationalise Venezuela’s oil industry, without offering sufficient compensation for seizing assets from companies such as ConocoPhillips. Nearly 20 years later, following several court cases and arbitration rulings in its favour, ConocoPhillips is still awaiting a final settlement for what the International Centre for Settlement of Investment Disputes (ICSID) described as the “unlawful” expropriation of its investments.

Venezuela is far from the only nation state refusing to abide by arbitration agreements. For example, Djibouti is still refusing to back down in its unsuccessful legal fight with DP World over ownership of the Doraleh Container Terminal (DCT), seven years after the government seized the facility in 2018. Despite being on the wrong side of rulings by the London Court of International Arbitration, and judges in the United States and the United Kingdom, Djibouti has consistently maintained that the initial DCT concession agreement it signed with DP World unfairly favoured the company.

DP World has described Djibouti’s actions as showing “utter contempt for the rule of law”.

At this point, we should declare an interest in the topic. SFA has provided media relations support to Frazer Solar, a company that signed an agreement with the government of Lesotho in 2018 to develop a renewable energy project. However, key government figures did not allow the project to proceed, which led to the matter being referred – as part of a process previously agreed by both parties - to an independent arbitrator. In 2020, the arbitrator awarded Frazer Solar €50 million. To date, Lesotho has deployed a number of delaying tactics to avoid meeting its obligations.

In these three examples, legal processes and rulings have been summarily and consistently ignored by the losing parties, even though Djibouti and Lesotho agreed at the outset that any disputes should be resolved by arbitration.

I’m sure there are many experts who firmly believe that the procedures governing effective international arbitration are still in place. And they may well be right.

But…in a world that’s becoming increasingly fractured, there are fewer and fewer entities with the power and willingness to enforce arbitration rulings.

If a nation decides it doesn’t much like the rules associated with belonging to one bloc, what’s stopping it from joining another group or plotting a different course? Take Venezuela – its recent drift towards the U.S. was halted by last year’s rigged presidential election. It’s hard to imagine the Trump administration supporting further Venezuelan oil imports, so the Maduro regime is likely to increase sales to markets like India and China, neither of whom are likely to show much interest in old ICSID proclamations.

As for Djibouti, it’s home to Camp Lemonnier – America’s only permanent military base in Africa - as well as providing similar outposts for China, Japan and France. Given its considerable geopolitical importance, how worried should Djibouti be about its regular legal drubbings at Dubai’s hands when it has so many international partners near at hand, that are invested in its future stability?

Effective media relations campaigns targeting rogue states can prove useful. For instance, highlighting a country’s contempt for internationally recognised legal regulations in a succession of news stories is embarrassing for the government’s leaders, and should raise important questions for prospective investors.

Also, there’s hope that major law firms, worried about their corporate reputations, will refuse to represent repeat offenders like Venezuela, Djibouti and Lesotho if they continue subverting global arbitration conventions. It’s a better scenario than the alternative, where they may be answering phone calls from other governments, wondering how they can twist and deform legal agreements until they’re broken beyond repair.