International Arbitration and Armenia: Arbitrating Animosity

Part II

Investment Arbitration and Armenia: Policies, Risks and Opportunities

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International arbitration cases involving Armenia have been making headlines with increasing frequency. Media coverage of these cases often paints a mixed picture, leaving readers puzzled about what arbitration truly involves, what it means, and its outcomes. This is particularly noticeable in the coverage of two interstate arbitration cases initiated by Azerbaijan against Armenia. The very idea of Azerbaijan taking legal action against Armenia on the international stage only adds to the confusion and fuels public concern.

Beyond these high-profile cases, Armenia’s involvement in international arbitration extends to various contexts, including investment disputes related to the Amulsar mining project, the waste management issues involving Sanitek S.a.r.l., and controversies around Fly Arna, the now-defunct Armenian flag carrier. Despite their differing nature, these cases all implicate matters of public interest, highlighting the pressing need for transparent and comprehensive explanations.

This article aims to dispel the confusion surrounding these proceedings. It tries to explain what arbitration is, distinguishes between its types and contexts, and outlines what each type entails, how it operates, and what stakeholders—governments, investors, or the public—can expect.

What Is Arbitration?

Arbitration is an alternative (to litigation) dispute resolution entirely based on the parties’ explicit consent. An arbitration agreement can be concluded separately or included as a clause within contracts, either when drafting the agreement or even after a dispute has arisen. Thus, parties can refer their dispute to a tribunal of neutral arbitrators chosen for their impartiality, neutrality and expertise. Arbitral tribunals typically consist of a sole or three arbitrators, though other uneven numbers are occasionally used. While arbitrators are often lawyers, they are not necessarily required to be so; they frequently have expertise in specialized fields such as construction, maritime law, engineering, mining technology, IT, or finance, among others. This diversity of expertise enables arbitrators to resolve highly technical disputes without additional expert witnesses that litigation normally requires.

Among its defining characteristics, arbitration is known for confidentiality (though not always applicable) and flexibility. Unlike traditional litigation, parties have significant control over the process; they can select arbitrators, agree on the procedural rules and the place of arbitration, and even choose the substantive law that will govern their dispute. This adaptability makes arbitration especially appealing for resolving complex and cross-border cases.

Another major feature of arbitration is the enforceability of its awards, which is often smoother and more straightforward compared to court judgments. This is largely due to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a treaty with over 170 state parties. Under this convention, an arbitral award issued in one member state can generally be enforced in another, subject to limited exceptions, such as procedural irregularities or conflicts with public policy. This global framework gives arbitration a significant edge in international disputes, ensuring that awards (and arbitration agreements) are recognized and enforced across borders with relative efficiency. 

So far so good with the general theory. Now, let us explore the different types of arbitration and their nuances, using examples from cases involving Armenia to illustrate their application in real-world contexts.

Interstate Arbitration: Azerbaijan v. Armenia

Almost any dispute can be arbitrated—at least in theory. But can you arbitrate animosity? That is neither a legal question nor the focus of this discussion—it is a reflection on the broader strategic use of arbitration in dealing with contentious issues. At any rate, arbitration, like any tool, can be used strategically—and Azerbaijan’s actions leave no doubt about it. 

On January 18, 2023, Azerbaijan initiated arbitration proceedings against Armenia under the Convention on the Conservation of European Wildlife and Natural Habitats (Bern Convention). This is the first interstate arbitration under the Convention. Azerbaijan alleges that Armenia caused environmental destruction and biodiversity loss in Nagorno-Karabakh from 1994 to 2020 and demands full reparation for the alleged damage.

The Bern Convention, to which both Azerbaijan and Armenia are parties, aims to conserve wild flora and fauna and their natural habitats while fostering international cooperation for species and habitats that require cross-border conservation efforts. It aims to protect endangered and vulnerable species, urging contracting parties to adopt necessary legislative and administrative measures to safeguard these ecosystems. Under Article 18(1) of the Convention, the treaty encourages its members to resolve disputes amicably through negotiations. If those efforts fail, Article 18(2) allows one party to bring a dispute to an arbitral tribunal. Armenia and Azerbaijan conceded to this arbitration mechanism by signing the Convention, which is an absolute pre-condition for dispute resolution through arbitration.

Arbitral proceedings typically (not necessarily) unfold in two main stages: the jurisdictional and merits phases. The jurisdictional phase focuses on whether the tribunal has the authority to hear the case, examining issues like the validity of the arbitration agreement, the scope of consent, and whether the dispute falls within the treaty or contract’s provisions. The merits phase, on the other hand, deals with the substantive issues of the dispute, determining whether there has been a breach and, if so, the appropriate remedies. In this case, Armenia, as the Respondent, is expected to argue that the tribunal does not have the authority to hear the case because the Convention requires the parties to negotiate first, which never happened. This could stop the arbitration from moving forward.

The International Court of Justice (ICJ) has repeatedly underscored the importance of this procedural hurdle, most recently in its judgment in the Armenia v. Azerbaijan case (also, Georgia v. Russian Federation and Ukraine v. Russian Federation). There, the ICJ dismissed Azerbaijan’s claim that Armenia had failed to initiate genuine negotiations, highlighting the seriousness of the negotiation requirement. While arbitration proceedings often take a more flexible approach to such preconditions than the ICJ, this case’s prominence under public international law elevates the scrutiny standards.

On March 27, 2023, Azerbaijan notified the Bern Convention Secretariat, claiming that negotiations would have failed and that it had submitted the dispute to arbitration. However, without clear evidence of genuine negotiation efforts, the tribunal might rule it lacks jurisdiction, making this a key issue early in the case. Azerbaijan’s deliberate avoidance of negotiations and cooperation with the Standing Committee of the Convention, the governing body responsible for overseeing the treaty’s implementation and facilitating dispute resolution, undermines the spirit of the Convention. This exposes Azerbaijan’s true intention—strategically exploiting the Convention’s mechanisms as a tool against Armenia. Courts and tribunals are not blind to such tactics and often weigh these realities when deciding the legitimacy of claims. But this is exactly what one would expect from Azerbaijan. The best response is to remain calm, informed, and ready. After all, Azerbaijan will eventually run out of treaties to weaponize, or the international community will grow tired of constant creative allegations, much like the villagers did with the boy who kept crying wolves.

Following its claim under the Bern Convention, Azerbaijan has now turned its sights to the Energy Charter Treaty (ECT), lodging yet another case against Armenia—the first known interstate arbitration under the treaty. On November 19, 2024, Azerbaijan filed its Statement of Claim with the Permanent Court of Arbitration (PCA) in The Hague, accusing Armenia of blocking its access to energy resources and infrastructure in Nagorno-Karabakh and in connection with its landlocked exclave, the Nakhchivan Autonomous Republic. According to Azerbaijan, these actions violate its sovereign rights under the ECT and fundamental principles of international law.

The ECT is a multilateral agreement designed to promote cooperation in the energy sector. It aims to protect investments in energy projects, ensuring that investors can operate in a stable and predictable legal environment. A key focus of the treaty is to facilitate the smooth transit and trade of energy resources across borders, reducing barriers and fostering collaboration among its members. Beyond these practical goals, the ECT is built on the broader principle of trust, encouraging member states to work together to ensure energy security and equitable access. By providing mechanisms for dispute resolution, including interstate arbitration, the treaty seeks to uphold its commitment to fair and cooperative energy relations. Article 27 of the ECT provides a rarely used option for resolving disputes between states through arbitration. Azerbaijan has seized on this mechanism, framing its case as a violation of the treaty and accusing Armenia of blocking its access to vital energy resources. Azerbaijan argues that this goes beyond simple obstruction—it claims Armenia has disrupted its entire energy strategy, including key transit and trade routes, which it sees as critical to its economic ambitions.

However, Azerbaijan’s reliance on the ECT, much like its approach under the Bern Convention, appears to bend the treaty far beyond its intended purpose. The ECT was designed as a bridge for collaboration and energy stability, not a battering ram for political agendas. By weaponizing yet another legal framework against Armenia, Azerbaijan risks turning treaties meant for mutual benefit into tools of antagonism, eroding the trust and cooperation they are supposed to foster. If we scratch beneath the surface, a clear pattern emerges: Azerbaijan’s claims under the Bern Convention and the ECT are not merely legal maneuvers but part of a concerted effort to cement a single narrative. The underlying goal is to convince the international community that Nagorno-Karabakh has always been Azerbaijani territory and to paint Armenia as the aggressor. The legal frameworks and arguments may differ, but the script remains the same.

This strategy becomes glaringly obvious when viewed side by side. Under the Bern Convention, Azerbaijan uses allegations of environmental destruction to assert and manifest its sovereignty over Nagorno-Karabakh. Under the ECT, it pivots to energy resources, claiming Armenia has violated its sovereign rights in the region—yet again emphasizing its claim that Nagorno-Karabakh is indisputably Azerbaijani territory. Ultimately, what ties these disparate claims together is Azerbaijan’s knack for exploiting any international legal tool—even ones only loosely related—to further its territorial narrative. It is a classic case of throwing everything at the wall and seeing what sticks.

The irony is hard to miss. Azerbaijan invokes treaties rooted in principles of cooperation and mutual benefit, only to twist them into instruments of division. The tactic seems to follow a simple rationale: repeat the story enough times, in enough forums, and hope it gains traction. However, from a broader perspective, this is not just about Armenia or Nagorno-Karabakh. It is about the integrity of international legal systems, and whether they can withstand being stretched to fit agendas they were hardly meant to serve. Azerbaijan’s actions, while fairly well-calculated, threaten to turn tools of resolution into weapons of contention—a slippery slope that could undermine the trust and cooperation these treaties are supposed to protect.

Implications

Understanding Azerbaijan’s true motives behind these arbitration cases should not lead us to underestimate their potential impact on Armenia. Regardless of the political agenda, these disputes could have significant consequences, provided the respective tribunals rule in Azerbaijan’s favor. The potential harm is not merely theoretical—it could be substantial and far-reaching.

The relevant precedent in international law can help us understand the possible implications. One such case is the ICJ’s landmark judgment in Certain Activities Carried Out by Nicaragua in the Border Area (Costa Rica v. Nicaragua). On February 2, 2018, the ICJ awarded Costa Rica $378,890 US in compensation for environmental damage caused by Nicaragua’s incursion into Costa Rican territory, excavation of canals, and establishment of a military presence. While this amount was only 5% of Costa Rica’s original claim, the ICJ’s decision was groundbreaking, confirming that under international law, environmental damage—including the loss of ecological goods and services—is compensable. The Court explicitly rejected the argument that uncertainty about how to monetize such damages should preclude compensation.

This case parallels Azerbaijan’s claim under the Bern Convention in certain respects. In both instances, allegations of environmental damage are intertwined with a broader legal and factual background: Nicaragua’s actions were tied to a territorial incursion and occupation, just as Azerbaijan’s claim hinges on its assertion of occupation and control of Nagorno-Karabakh by Armenia. While the ICJ’s judgment attracted both praise and criticism for its failure to fully incorporate advancements in ecological science, it sends a clear message—environmental damages, even in complex contexts, can translate into monetary compensation.

Turning to Azerbaijan’s claim under the ECT, relevant case law is harder to pinpoint. However, the ICJ’s ruling in Armed Activities on the Territory of the Congo (Democratic Republic of the Congo v. Uganda) offers some context. In that case, the Court awarded the Democratic Republic of the Congo $60 million US in compensation for natural resource damages, including looting and exploitation, during Uganda’s occupation of Congolese territory. While this case offers valuable lessons, it is quite different from Azerbaijan’s ECT claim. The ICJ case dealt with broader violations of international law, such as plundering, within a general framework of obligations. In contrast, the ECT is a highly specific treaty focused solely on energy-related issues, making the context and scope of the claims very different.

A Few Takeaways

Armenia must approach these challenges with vigilance and thorough preparation. Azerbaijan’s claims, while often strategically and politically motivated, are not without potential consequences. The risk extends beyond monetary damages to include geopolitical implications that could affect Armenia’s standing on the international stage. Addressing such claims effectively requires strong legal expertise, a deep understanding of the political dynamics, and the ability to anticipate potential fallout.

It is not just about responding to immediate challenges but also about understanding the larger implications these cases can have on a country’s economy, reputation, and ability to face similar tactics in international relations. International disputes of this nature test a nation’s legal acumen, institutional resilience, and capacity to navigate complex legal and political waters. For Armenia, this means strengthening its legal teams, ensuring a well-coordinated strategy across government entities, and actively engaging with international stakeholders to prevent such disputes from escalating further. 

The larger lesson here is that disputes like these are not isolated events. Each case not only challenges the specifics of a claim but also contributes to shaping perceptions of Armenia’s governance, investment climate, and institutional reliability. The broader state policies and strategies employed in such disputes can be understood as a form of “lawfare”—the strategic use of legal systems and mechanisms to achieve political or military goals. Azerbaijan’s approach exemplifies this, with its comprehensive legal actions, including international arbitration and its moves before the ICJ, a topic this author has previously explored in detail. 

This brings us to another critical aspect of Armenia’s engagement with international arbitration: investment arbitration. Unlike interstate disputes, investment arbitration focuses squarely on the relationship between foreign investors and host states. In recent years, Armenia has found itself increasingly in the spotlight of such cases, with high-stakes disputes capturing media attention and public interest alike. The following part of this article will delve into Armenia’s experiences with investment arbitration, exploring how this field operates, its implications, and what recent cases mean for the country’s legal and economic landscape.

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