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Morocco and Nigeria sign new investment treaty

BloggIn December 2016, Morocco and Nigeria signed a new investment treaty, which will enter into force once it has been ratified by both countries’ parliaments. The treaty is in many ways an ambitious update of the content often seen in older treaties, and as such a good illustration of the new “generation” of investment protection.

The majority of investment treaties are relatively old: most were negotiated in the 20th century. Many states have expressed concerns over the content of these treaties and reacted by drafting new “model agreements”, renegotiate existing treaties or even terminate old treaties entirely.

The new Morocco-Nigeria treaty is longer than the average older treaty. Among the more innovative features are a clear role for sustainable development, limits and clarifications to the substantive investment protection, as well obligations on the investor (and not only on the host state).

With respect to dispute resolution, both ISDS and state-state arbitration is available. For ISDS, an investor can choose between ICSID and UNCITRAL. In the latter case, the dispute will automatically be covered by the UNCITRAL Transparency Rules, but it is also made clear by Article 10(5) that every dispute shall be characterized by extensive transparency.

The treaty is available here. That two African states decide to sign a bilateral investment treaty is not only an expression of support for such deals: it also shows the path forward in the balancing of investment protection and state interests, in a manner compatible with sustainable development.

 

Transparency convention enters into force

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On April 18, 2017 Switzerland ratified the Mauritius Convention on transparency in ISDS. This means that the convention will enter into force six months later, October 18, 2017.

The Mauritius Convention is an instrument intended to extend the applicability of the UNCITRAL Transparency Rules. The Rules address many perceived problems with transparency in ISDS and essentially make the disputes more transparent than national courts. However, the Rules only apply to treaties entered into from April 1, 2014. By ratifying the Convention, states extend the applicability of the Rules to older treaties.

Sweden has signed the convention but not yet ratified it.

New article examines the EU Commission proposal

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A new article, which will soon be published in an academic journal but is available in draft form through the science network SSRN, analyzes the appellate mechanism that the EU Commission intends to introduce in future EU investment treaties. The study finds that the new model, which has so far been incorporated in the treaties with Canada and Vietnam, is not compatible with the ICSID Convention. Among other things it finds that the proposed appellate mechanism would constitute a change of the ICSID Convention, which would require a formal procedure that does not look practically possible. Therefore, the ICSID system cannot be used seamlessly, which leads to several practical problems (first and foremost that the resulting awards are not enforceable under the ICSID Convention).

We have previously written more generally on the EU proposal on this blog, both briefly when it was first introduced, but also when the American Bar Association published its report. The new study is published by Jansen Calamita from National University of Singapore. It does not look at the proposed ”Investment Court System” generally but analyzes specific aspects of the proposal in the light of existing legal norms. Furthermore, it is not a policy text – it does not address whether or not the proposal is a good idea. Rather, it focuses on whether the appellate mechanism conforms with existing international rules, primarily the New York Convention and the ICSID Convention. The New York Convention regulates the enforcement of most international arbitral awards and therefore often applies also to ISDS awards. The ICSID Convention, by contrast, is a specific instrument which only covers ISDS.

Although the text finds that the EU proposal is not compatible with the ICSID Convention, it also argues that the proposal meets the definition of ”arbitration” under the New York Convention, which means that the resulting awards could probably be enforced under that convention instead.

The text also proposes that one way to get around some of the problematic issues (especially the question marks concerning enforcement) would be to do like the UNCITRAL Transparency Rules: create a separate convention, through which states can consent separately to the new system.

 

 

Case summary: STATI, ASCOM & TERRA RAF V. KAZAKHSTAN

Landscape with mountains, KazakhstanThis summary of the case Anatolie Stati, Gabriel Stati, Ascom Group SA and Terra Raf Trans Traiding Ltd v. Kazakhstan is based on both the award from December 19, 2013 and the subsequent court decision in Svea Court of Appeal on December 9, 2016. Both documents are available here.

The dispute is based on the Energy Charter Treaty (ECT) and was initiated by Moldovan businessman Anatole Stati, his son Gabriel Stati and two companies owned by them. Together, the men and their companies owned two Kazakh corporations that invested in two oil and gas field in Kazakhstan. According to the investors, they were subjected to significant harassment from the state, with the ultimate purpose of forcing them to sell their investments cheaply. The harassments supposedly reached from interference with the day-to-day business operations to more extreme measures, such as jailing persons with connections to the companies. According to the investors, the value of their investments were affected negatively by the harassment, which was the state’s intention: the state was hoping to take over the fields and was therefore trying to bring the price down.

The investors consistently refused to sell to the state. Instead, they ultimately found an external buyer for the fields – who was supposedly ready to offer substantially more than the state – but that transaction never took place, because the state took over the fields.

Therefore the investors initiated the ECT arbitration, arguing that the state had violated the treaty in several different ways.

Kazakhstan claimed that the fields were badly managed from the outside, and also violated domestic law. Therefore, the state was forced to step in and save the companies from financial collapse. The state also argued that the corporate chain behind the investment was unclear, which would mean that the tribunal did not have jurisdiction under the ECT.

The tribunal found that it did have jurisdiction, and also largely accepted the investors’ arguments. After having gathered extensive evidence, the tribunal found that the state had violated the treaty’s fair and equitable treatment standard. The majority of the tribunal determined that the investors’ losses amounted to some $500 million, which was significantly less than what the investors claimed (one of the arbitrators dissented on the valuation point and considered that the field were in fact worth more than what the tribunal majority found).

The tribunal’s legal seat was in Stockholm, which among other things means that Swedish courts have supervisory jurisdiction. Kazakhstan therefore turned to Svea Court of Appeal in Stockholm in order to attempt to have the award set aside (we have written before on how domestic courts exercise supervisory jurisdiction in ISDS). The state argued that the award was invalid in several ways, as summarized well by the court in the judgment, which is still only available in Swedish. The Svea Court of Appeal ultimately found that the award did not violate Swedish law and therefore decided to uphold it.

UNCTAD updates ISDS statistics for 2016

Blogg_v9United Nation Conference on Trade and Development (UNCTAD) is the UN body responsible for investment issues. It regularly publishes reports and analyses about ISDS, as well as on about general investment treaty trends, including an annual update on recent developments. We have written about the reports from 2014 and 2015, but recently UNCTAD also updated its database with information from 2016.

 

Examples of statistics from this latest development include:

  • There were 62 new ISDS cases in 2016, a relatively high number compared to earlier years, with the exception of 2015, when 74 cases were initiated.
  • Colombia, India and Spain were the most frequent respondent states (with four cases each) but the cases were spread over 49 different host states.
  • The United States and the Netherlands were the most common investor nationalities.
  • Roughly two thirds of the cases were brought under bilateral treaties, but 10 were based on the multilateral Energy Charter Treaty.

All UNCTAD data, including the updates from 2016, are available in a searchable database here.

New report on investment arbitration

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The Arbitration Institute of the Stockholm Chamber of Commerce (SCC) has published a new report prepared by legal counsel Celeste E. Salinas Quero. She describes, among others, the economic sectors involved, the states’ measures most frequently challenged by investors, the outcomes and costs of investment disputes under the SCC Rules.

SCC is a preferred venue for investment arbitrations. Over the past 20 years, the SCC has administered and acted as appointing authority in more than 90 investment arbitrations, both in small-sized and in large-scale disputes.

The report shows that most awards have been rendered in favor of respondent states, with 21% of tribunals declining jurisdiction, 37% denying all of the investor’s claims and 42% of tribunals upholding the investor’s claims in part or in full. As regards costs, the report reveals that while “splitting the baby” is a common approach taken by tribunals, most tribunals allocate and apportion the costs between the parties in a proportion that reflects each party’s relative success and conduct throughout the proceedings.

Read the full article below.

Article: Investor-state disputes at the SCC – by Celeste E. Salinas Quero

ICSID asks the public for input

Blogg_v07ICSID is the World Bank body which administers investor-state arbitrations. In October 2016 the ICSID Secretariat initiated the work with updating the ICSID Arbitration Rules (the last time this was done was in 2006). As part of that work, a public invitation has been circulated in order to compile views from a wide spectrum of the public, including, of course, the contracting states.

The changes that will be made to the rules depend largely on the proposals coming from the public but one stated objective is to make ICSID proceedings more time and cost effective, while still ensuring due process and equal treatment of the parties.

ICSID arbitrations are in fact governed by two sets of rules. The 1965 ICSID Convention sets the outer frames of the proceedings, while the ICSID Arbitration Rules govern the more detailed procedural issues. The Convention acts as the “constitution” of ICSID and has 161 contracting states. Since every state needs to consent to any change, the ICSID Convention is not likely to be changed anytime soon. The Arbitration Rules, however, do not need the consent of every contracting state and are therefore more flexible.

Case Summary: Rusoro v. Venezuela

Moulting gold at a factoryThis case summary is based on the August 2016 award in the case between Rusoro and Venezuela.

Venezuelan president Hugo Chavez nationalized the Venezuelan gold sector through an official decree during the summer 2011. The decree meant that the state took over all assets and rights from foreign gold companies active in the country, and that private companies were prohibited from exporting gold out of Venezuela.

Rusoro, a Canadian company with extensive gold production investments in Venezuela, claimed that the decree violated the bilateral investment treaty between Canada and Venezuela.

During the arbitration, the state did not deny that an expropriation had taken place, but it claimed that it was done in a legal manner (the state did contest the tribunal’s jurisdiction and Rusoro’s damage claims).

The tribunal rejected some of Rusoro’s claims on procedural grounds but found that the state had unlawfully expropriated the investor’s assets. Although the tribunal did concede that Venezuela had a right to expropriate on political grounds, and that it had done so in accordance with its own laws and in a non-discriminatory manner, it said that the state should have compensated Rusoro. Since no compensation had been paid, Venezuela had violated the treaty.

A large part of the award deals with the quantification of Rusoro’s losses (i.e. how much the state should pay as compensation for the expropriation). After hearing both sides’ economic experts, the tribunal valued Rusoro’s losses to $1,2 billion plus interest.

Frequent standards of protection: full protection and security (FPS)

Old and very used wooden Rubber StampOur first text about standards of protection in investment treaties is about the frequently occurring provision giving investors “full protection and security” (FPS). Most investment treaties contain this language, or wording similar to it.
In older treaties, the language is usually relatively short. These clauses have historically been interpreted to provide physical protection against interference with foreign investments, particularly during conflicts and/or in regions where the police power might interfere with foreign property.

The very first ISDS case, AAPL v. Sri Lanka, is an example of this interpretation. AAPL won its case against Sri Lanka, after the state was found to have neglected its duty to take precautionary measures in connection with a security force operation against the rebel group Tigers of Tamil. The operation, and the ensuing battle, destroyed AAPL’s shrimp farm, which the tribunal found could have been avoided if the state had acted differently.

A number of other FPS clauses have been interpreted more broadly, and even been found to encompass legal protection and legal security. Such interpretations of FPS overlap to the aspects of fair and equitable treatment (FET) which protects investors against denial of justice.

How broadly a tribunal interprets full protection and security is largely dependent on the language of the individual clause. Many new treaties therefore clarify the scope of the provision, most commonly by making clear that it only applies to physical protection.

Case Summary: Windstream Energy LLC v. Canada

River Skyline Overlooking Detroit, Michigan as seen from Windsor, OntarioThis case summary is based on the award, which was rendered on September 27, 2016 and published a few months later.

Windstream is an American company, which invested in one of the world’s largest offshore wind power parks, to be located in Lake Ontario. The park has not yet been built, however, and according to Windstream this is due to the Ontario province’s illegitimate cancellation of the project.

In 2010 Windstream received a 20-year contract with Ontario to build the park and initiated the preparatory investments. Shortly thereafter, the province launched a public consultation. In February 2011, the result of that consultation prompted the energy authority in Ontario to halt the project, in order to conduct more scientific studies into the park’s effect on its surroundings.

That paus is still in force and the park has not been built. When Windstream initiated arbitration in 2014, the company argued that Ontario de facto had cancelled the project, since Windstream no longer could meet the deadlines needed to make the project commercially viable. According to Windstream, the conduct violated NAFTA and the company therefore sued Canada, as responsible under international law for the conduct of public bodies in the provinces.

In the award, the arbitral tribunal did not find that the Windstream’s investment had been expropriated, since the company had not been deprived of its assets: the 20-year contract is still in force and could be re-negotiatied.

The tribunal did find, however, that the “fair and equitable treatment” clause of NAFTA had been violated. Although the tribunal stated that the province’s original purpose with the temporary paus seemed genuine, it found that the purpose had not been followed up over time: for example, very little scientific study seems to have taken place. In those circumstances, it was not reasonable to leave Windstream in a “limbo” for such a long time.

Canada was therefore found to be in breach of NAFTA and ordered to compensate Windstream for its losses amounting to some €21 million. This sum was significantly lower than what Windstream had asked for, but the tribunal emphasized that the investor’s contract was still in force and could be re-negotiatied, a fact which limited the losses sustained by the investor.

We have earlier published a summary of a similar dispute, which also arose out of the production of wind power in Ontario. In that case, Mesa v. Canada, the state was successful on all points.