Combating Climate Change through ISDS

White lily in an environment of green leaves on waterAn article demonstrates how ISDS provides the necessary tools to improve regulatory stability and predictability necessary for low-carbon investment. According to the author, ISDS has the potential to protect low-carbon investments against the risk of regulatory changes that can affect climate policies.

The text takes its starting point at the importance of private capital and technology in the transition to a low-carbon economy. The Kyoto Protocol establishes different implementation mechanisms for State parties to reduce greenhouse gas emissions, mechanisms in which private actors play important roles. In turn, governments may also establish different support schemes for investment in low-carbon technology. Some of the common schemes are guaranteed a minimum price for electricity produced by renewable resources (the so-called feed-in tariff) and investment aid for renewable energy producers.

The article points out some risks for low-carbon investment, including that authorities could withdraw the promised support or shorten its duration.

It further argues that some substantive protections under international investment agreements may play an important role.

One example is the ISDS case, Nykomb v. Latvia. In this case, the tribunal found that the government provided support scheme for low-carbon installations operated by domestic investors, but not for installations operated by foreign investors. The tribunal held that this amounted to discrimination, and the investor obtained compensation.

The article concludes that climate law and investment law are based on comparable principles but having different perspectives. Climate law creates rights and expectations for investors, while investment law aims to protect them. In turn, investment arbitration has the potential to limit the instability that currently affects the implementation of climate change mitigation policies.

Examples of national courts acting in ISDS

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National courts play important roles in safeguarding the rule-of-law outcome of ISDS proceedings. Under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a party to an ISDS proceeding may request a national court to set aside an arbitral award. This can be done however on limited grounds, among others, if one of the parties was unable to present its case and if the arbitral procedure was not in accordance with the agreement of the parties. In addition, arbitration laws of a country also may provide grounds for setting aside an award.

Let’s take a look when this actually happened in practice.

In CME Czech Republic v Czech Republic, the tribunal found that the country’s media authority had destroyed the investor’s exclusive position as services provider for a private Czech TV channel, which left the company with assets but without business. In this case, the tribunal sided with the investor that the actions constituted an expropriation under the Netherlands – the Czech Republic Bilateral Investment Treaty.

The Czech Republic further requested the Svea Court of Appeal in Sweden to set aside the award under the Swedish Arbitration Act, on the grounds that, among others, one of the arbitrators had been excluded from the deliberations and that the award violated Swedish public policy. The Court of Appeal rejected this claim and found that the tribunal had given the arbitrators reasonable time to submit comments. Further, the Court viewed that the Czech Republic had failed to show that the award violated public policy. The Court therefore rejected the request on all grounds.

Meanwhile, in Metalclad v. Mexico, the tribunal found a violation of Chapter 11 of the North American Free Trade Agreement since the investor was denied fair and equitable treatment by the government due to the absence of clear rules about a certain permit. According to the tribunal, this amounted to a failure by the government to ensure transparency for the investor.

Mexico submitted a request to the British Columbia Supreme Court in Canada to set aside the award, on the grounds that the tribunal had incorrectly considered that transparency requirement formed part of minimum standard of treatment and expropriation provisions of Chapter 11 of the NAFTA. The Court agreed with Mexico and ruled that the tribunal had decided a matter beyond its jurisdiction. The award was therefore partly set aside the award.

Philip Morris v. Uruguay

Blogg_v34Our next case summary is Philip Morris v. Uruguay. This summary is prepared based on the publicly-available award rendered in July 2016.

The case reminds us of the one between Philip Morris and Australia. In both cases, Philip Morris claimed that their investment had lost value due to a new tobacco legislation and therefore the company is entitled to compensation.

The case against Australia was dismissed at an early stage, when the tribunal held that Philip Morris unlawfully took advantage of a subsidiary in order to get access to ISDS. Therefore, the tribunal did not examine the main issue of the case, which was the tobacco legislation itself. Meanwhile, the dispute with Uruguay went all the way to the assessment of the measure in dispute, and the majority of the tribunal found that the Uruguayan tobacco legislation did not violate the bilateral investment treaty between Switzerland and Uruguay (BIT).

Philip Morris based its arguments on two main parts of the Uruguayan legislation: first was the decision by the country’s Ministry of Health that bans selling different types of presentations of the same brand of cigarettes (it is not allowed to sell a product that is ”light”, ”menthol” or ”gold”). The second is a presidential decision which requires that the images of health warning on cigarette package increase from 50% to 80%.

The company argued that these measures violated several provisions in the BIT, including a violation of its intellectual property rights.

In the 300-page award, the tribunal asserted that intellectual property rights are indeed protected by the BIT – however it did not find that the state violated the agreement as the company failed to prove that it had suffered a level of damage required to find violation. Further, according to the tribunal, the state has a large policy space to implement reforms aiming to protect legitimate interest – and therefore this type of measure cannot be considered an expropriation or a breach of the fair and equitable treatment standard of protection as long as they are made on rational grounds and in good faith. It found that Uruguay had a genuine interest in protecting public health – and that the government adopted the reforms in a serious and well-motivated manner.

Another argument by Philip Morris was that it was denied a fair trial in the Uruguayan courts, where the company had first tried to appeal the tobacco measures. The company claimed that two different instances of court system in the country had ruled contrary to each other. In this case, even though the Supreme Court sided with the company, an administrative court chose ignore the Supreme Court and rejected the company’s appeal. The tribunal agreed that this was strange but at the same time viewed that this fact was not enough to consider that Philip Morris had been denied a fair trial.

Because Philip Morris’ claims were dismissed on its entirety, the company was ordered to pay the entire cost of the dispute, as well as 70% of Uruguay’s legal fees.

Arbitration throughout history

Close-up of open book and penThe Arbitration Institute of the Stockholm Chamber of Commerce will turn 100 years in 2017. As part of the celebrations in January, a book about the history of arbitration will be published, where lawyers and diplomats from all over the world each write about one particular dispute.

One of the contributions is written by the winner of a large competition initiated by the SCC and aimed at young lawyers. The competition inspired many highly qualified contributions and several were so well-written that they will now be published in a separate edition of Transnational Dispute Management Journal (TDM).

The four texts deal with four different arbitrations that affected international relations: from a border dispute between the United States and Great Britain in what is now Canada, via an early ISDS case from the year 1900 over a Portuguese railway project and a relatively recent arbitration between Singapore and Malaysia, which was concluded at the Permanent Court of Arbitration in 2014.

You can read more about the publication, including the foreword by SCC Secretary-General Annette Magnusson, here.

ICSID Statistics: Increased Diversity of Arbitrators

National flags of different countryThe ICSID Secretariat has recently published its latest case statistics where it reports that up to 30 June 2016, the number of overall ISDS cases has reached 570 cases.

Overall, most respondent states are countries in Eastern Europe, Central Asia and South America.

Investors involved in overall ICSID cases mostly come from the service industry, where information and communication, finance, service and trade, transportation and tourisms sector together make up 29% of claimants.

As for outcome of the cases, States are successful in the majority of cases. ICSID reports that tribunals have declined jurisdiction in 26% of cases, dismissed all claims in 27% of cases and upheld claims in partial or in full in 46% of cases.

The report also covers cases initiated and completed in ICSID Fiscal Year 2016, which is the period of 1 July 2015 –30 June 2016. In this period, most cases involved investors in power and energy industry, followed by the service sector.

There is an apparent increase in diversity of arbitrators in terms of nationality during the Fiscal Year 2016. During this period, arbitrators, conciliators and ad hoc committee members from South America, Central America and the Carribean, Middle East and North America, Sub-Saharan America, South & East Asia and the Pacific, Eastern Europe and Central Asia made up 39% of cases. This represents a significant improvement compared to just 24% in the previous fiscal year.

Investing for sustainable development

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The World Investment Forum was held on 17 – 21 July in Nairobi with the theme ”Investing for Sustainable Development”. Hosted by the United Nations Conference on Trade and Development, this year’s forum brought together more than 6,000 participants from Heads of States, government officers, intergovernmental organizations, academia and civil society.

The UN Secretary General, Ban Ki-Moon, opened the conference with an important message. “The global trade slowdown and a lack of productive investment have sharpened the deep divides between those who have benefited from globalization, and those who continue to feel left behind,” he said.

One of the focuses of the conference was how fill annual USD 2.5 billion investment gap in developing countries. Businesses voiced that policies are hampering investment, for instance in some countries policy cycles follow election cycles. Further, they viewed that policies are not catching up with the rapid progress in technology.

The conference also discussed investment issues beyond financial policies and market structure – such as gender inequality and knowledge gap. Governments asserted that it is still more difficult for women entrepreneur to obtain loans for their business which hampers more participation of women in trade. On the other hand, businesses voiced that it could be difficult to find the right talent to fill different roles within their business activity because of the lack of quality in the education system.

As part of the conference, a seminar on reform on international investment agreements (IIA) was held. Government representatives voiced different ideas on reform proposals, including making the substantive terms more specific, inserting corporate social responsibilities in new treaties, and ensuring ISDS is accessible for small and medium enterprises.

The SCC was invited to contribute in the discussion and SCC statement can be found here.

Transglobal Green Energy v. Panama

Panama2016This case summary is based on the publicly-available ICSID award in the case between the American company Transglobal Green Energy (”Transglobal”) and The Republic of Panama. In the award from June 2, 2016, the arbitral tribunal rejected the case early on and found that the investors attempted to abusively create jurisdiction under an investment treaty.

The case centered around a hydro-electric power plant in Panama. A company owned by Panamian national Julio Cesar Lisac had been awarded a concession to operate the plant for 50 years. After the first year, the Panamian authorities found that Mr. Lisac’s company did not meet the requirements of the concession and therefore terminated the agreement (and later awarded the concession to another company). Mr. Lisac challenged this termination in Panamanian courts.

Subsequent to the termination of the concession, Mr. Lisac transferred part of his company’s interests in the power plant project to Transglobal, a company incorporated in Texas. Using Transglobal’s American nationality, an arbitration was brought against Panama based on the bilateral investment treaty (”BIT”) between USA and Panama. The investors alleged that the termination of the 50-year concession was made in violation of the BIT.

The arbitrators found that they did not have jurisdiction over the case and thus rejected the claim early in the proceedings. Since Mr. Lisac and his comapny both had Panamanian nationality, the move to transfer the interests in the power plant to American-incorporated Transglobal was held to be made with the only purpose of obtaining protection under the BIT between USA and Panama. Therefore the tribunal stated that the investor attempted to create ”artificial jurisdiction over a pre-existing domestic dispute”, thereby abusing the system of investment treaty arbitration.

The tribunal’s reasoning was similar to that in Philip Morris v. Australia, where another tribunal refused to hear Philip Morris’ claims because they were found to constitute an abuse of the investment treaty system.

Both these recent cases demonstrate that there is no room to exploit ISDS to bring unjustified claims. One academic recently described this as a tendency by tribunals to ”police the gates to investment treaty claims against states”.

ISDS not used to change legislation

law concept. studio shotsIt has been perceived that States who entered into international investment agreements (IIAs) with arbitration clause risk being sued by foreign investors when they change legislation which causes negative impact on certain investments. However, a study by German and Dutch researchers have shown that foreign investors have very rarely used ISDS to seek damages due to legislative changes. Neither has ISDS been used to hamper introduction of a new law.

The study shows that most ISDS cases have targeted contracts between a State and foreign investors, or the rejection or modification of licenses. Another study by the Columbia Center on Sustainable International Investment, quoted in the German and Dutch study, shows that among all ICSID cases up to 2014, only 9% of cases dealt with legislation. Only half of the cases concerned government actions, and the rest dealt with decision-making by local governments and state-owned companies.

Previous claims under the North American Free Trade Agreement (NAFTA) for damages caused by legislative changes have all failed, according to the study. In a well-known case where investors brought a claim for damages allegedly caused by legislative changes, the recently-decided Philip Morris v. Australia, the investor’s claims were dismissed at an early stage.

In conclusion, studies have shown that it is very rare that foreign investors used ISDS to challenge States’ legislative powers in areas such as for example environment protection and public health. Instead, the study found that in the vast majority of cases, investors claim compensation on grounds that the State violated its concrete commitments in the form of contracts or licenses.

Mesa Power Group LLC v. Canada

Array of wind power station at the sunsetOur next case summary is Mesa Power Group LLC v. Government of Canada, an arbitration under Chapter 11 of NAFTA. This summary is prepared based on the publicly available award rendered on 31 March 2016.

The claimant in this case was Mesa Power Group LLC (“Mesa”), a U.S. corporation that oversees and develops renewable energy projects, notably in the wind sector. Mesa’s claims centered on the Government of Ontario’s Feed-in Tariff program (the “FIT Program”), enacted to promote the generation and consumption of renewable energy in the province. Under this program, generators of renewable energy could apply for a 20 or 40-year power purchase agreement (a “FIT Contract”) that would guarantee a certain price per kWh for electricity delivered into the Ontario electricity system. Participants in the FIT Program had to satisfy a certain domestic-content requirement, meaning that the 25-50% of the equipment used must be made in Canada. Mesa filed six applications under the FIT Program, but was not awarded any FIT contracts.

Mesa filed for arbitration under NAFTA Chapter 11, claiming that the government had acted in an arbitrary and discriminatory manner in awarding FIT contracts. Specifically, Mesa argued that the program’s domestic-content requirement was impermissible under NAFTA, that the awarding of FIT contracts was irregular and resulted in discrimination against Mesa, and that the government’s changes to the FIT program after applications had been received amounted to arbitrary and unfair treatment. Mesa sought more than CAD 650 million in damages.

Responding to Mesa’s claims, Canada argued the acts of the Ontario Power Authority were not covered by the obligations in Chapter 11 of NAFTA; and that even if the acts were covered, Article 1108 excludes procurement programs from protection under the principles of National Treatment and Most-Favored-Nation (“MFN”) Treatment. Finally, Canada maintained that Mesa had not been treated less favorably than other Canadian or U.S. investors.

In its award, rendered on 31 March 2016, the arbitral found that the claims did properly fall within Chapter 11 of NAFTA, but that the FIT program had not constituted a breach of Canada’s obligations under that treaty. Specifically, the tribunal agreed with the respondent state that, under Article 1108, procurement programs are excluded from Chapter 11’s National Treatment and MFN clauses. The tribunal further concluded that Canada’s conduct in implementing the FIT Program had not breached the “fair and equitable treatment” standard of Article 1105.

The tribunal noted that “at least some criticism” could be levelled at the government’s policy choices and actions with respect to its renewable energy programs. The tribunal concluded, however, that “judged in all the circumstances, this is not criticism that reaches the threshold of a violation of Canada’s international obligations.” Mesa’s claims were thus dismissed in their entirety, and Mesa was ordered to bear the costs of the arbitration, including a portion of Canada’s cost of legal representation.

Just published: UNCTAD report on ISDS development  

?????????????????????The United Nations Conference on Trade and Development (UNCTAD) has recently published a report on developments of ISDS in 2015. The report addresses ISDS cases initiated in 2015 as well as the statistics on overall ISDS cases from 1987 to 2015.

The report finds that there were 70 ISDS cases initiated in 2015, which brings an overall number of publicly known ISDS cases to 696. Most of the cases initiated in 2015 arose from old bilateral investment treaties dating back in the 1990s.

Investors from developed countries made the most frequent claimants in cases initiated in 2015, with the top three home states of investors being the United Kingdom, Germany and Luxembourg. This is also true when it comes to the home states of claimants in total since 1987, where investors from the United States, the Netherlands and the United Kingdom top the list.

On the state side, Spain was the most frequent respondent state in cases initiated in 2015, followed by Russia, Czech Republic and Ukraine. Overall since 1987, most frequent respondent states in ISDS cases are still developing countries, with Argentina and Venezuela top the list.

As for the matters being disputed, a number of cases initiated in 2015 concerned sustainable development sectors such as infrastructure and climate change mitigation. Approximately 30% of cases were triggered by the regulation of renewable energy producers, all of which were brought against EU member States (Bulgaria, Italy, and Spain).

ISDS tribunals rendered at least 51 decisions in 2015, 31 of which were in the public domain at the time of the writing of the report. This brings the number of concluded cases to 444 by the end of 2015, with 36% of the cases decided in favour of the State, 26% in favour of investors and 26% cases were settled.