Investment arbitration: burden of proof validity arbitration agreement; jurisdiction
On 6 December 2024, the Supreme Court ruled on a number of cases involving investment arbitration. These cases involve investments made by natural persons or companies from one sovereign state in the territory of another sovereign state. In order to stimulate such investments on both sides, states regularly conclude bilateral investment treaties (so-called BITs). In these treaties, member states generally agree that foreign investors from the other state will be treated in (at least) the same way as 'their own’ domestic investors and that these foreign investments will be protected against expropriation.
A BIT often contains the requirement that an investment must have been obtained or made legally, according to the regulations of the host country, in order to fall within the scope of the BIT. Sometimes a BIT also contains a temporal limitation with regard to the scope of the treaty. In order to prevent investors from having to litigate before the courts of the host state in the event of expropriation, a BIT generally provides for arbitration. This guarantees the administration of justice independently of the host state, which is a reassuring thought for foreign investors. This is also the case with the BIT that was concluded between Russia and Ukraine in 1998.
In the cases on which the Supreme Court ruled on 6 December 2024, the issue at hand was how to deal with investments by Ukrainian investors in Crimea. These were investments made in the period prior to the events there in 2014. Russia incorporated Crimea in the spring of 2014. This incorporation is not recognised by the international community. The investments were made by Ukrainian individuals and entities at a time when Crimea was still indisputably part of Ukraine. At the time the investments were made, they were therefore Ukrainian domestic investments that were not protected by the BIT. However, when the investments were expropriated in the period after 2014, the investors believed that their investments did fall under the scope of the BIT.
One of the questions that arose in the annulment proceedings was whether or not Crimea is part of the territory of Russia for the purposes of the BIT. You can read more about this in this article on our website.
Another question that arose was related to the legality requirement. Because the BIT states that only legal investments enjoy protection, the member states only agree to arbitration with regard to such legal investments. Where illegal investments are concerned, there is therefore no valid arbitration agreement and an arbitral tribunal therefore has no jurisdiction to decide on such investments. If an arbitral tribunal does decide on such investments, the state can initiate annulment proceedings, in which it can be argued that there is no valid arbitration agreement.
The question of whether there is a valid arbitration agreement may - unlike in the case of most other grounds for annulment - be fully reviewed by the court. This is related to the fact that by agreeing to arbitration, the parties to the treaty waive their fundamental right to submit a dispute to the court. It is therefore the state court that has the final say on the validity of the arbitration agreement.
In two of the judgements handed down by the Supreme Court on 6 December 2024, it ruled that the burden of proof and the onus of proof regarding the existence of a valid arbitration agreement, rests with the party invoking it. According to the Supreme Court, this also applies in annulment proceedings before the court, in which the absence of a valid arbitration agreement is invoked as a ground for annulment. It is therefore not the party invoking the ground for annulment that must prove that this ground exists. The burden of proof of the validity of the arbitration agreement remains with the party that has invoked it (for the first time in the arbitration).
This ruling by the Supreme Court is in line with old case law of the Supreme Court from 1913 under the Arbitration Act 1838 (HR 21 February 1913 (Offermeier/Portheine)), which rule therefore still applies under the current Arbitration Act 2015.
The Dutch regulation on annulment proceedings deviates from the 1958 New York Convention, which deals with the recognition and enforcement of arbitral awards worldwide. One of the grounds for refusing a request for recognition or authorisation of enforcement is the absence of a valid arbitration agreement, but in such cases the burden of proving the invalidity of the arbitration agreement rests on the party invoking such invalidity.