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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.

 

Swedish National Board of Trade investigates Most Favored Nation treatment

Night view of Gamla Stan, the old part of Stockholm, SwedenMany investment treaties contain a clause providing for ”most favored nation” treatment (MFN). Such clauses have been part of trade treaties for centuries and their basic principle is that the treaty states guarantee that if they enter into other more favorable treaties with third states, then the states to the original treaty are entitled to the protection contained in the treaty with third states. The original purpose is to level the international playing field: state A should not be able to give state B (or investors from state B) treatment that is less favorable than the treatment given to state C (or investors from state C).

Sweden’s investment treaties contain MFN clauses. Therefore, the Swedish National Board of Trade, an expert agency within the Swedish government, has published an analysis of these clauses and their meaning for Sweden.

The review shows that all of Sweden’s 66 bilateral investment treaties contain MFN but that the exact scope of the clauses varies significantly. It is thus difficult to say with clarity what the clauses mean for Sweden: what kind of protection an investor could ”import” into Swedish BITs would have to be determined on a case by case basis. The report also analyzes how MFN clauses have been interpreted in arbitration jurisprudence and uses that to explain how the limits of the clauses could be understood more generally, depending on the language of the individual clause.

Several of the more recent treaties – including the non-ratified CETA and TTIP – have clarified the scope of MFN, in order to avoid the very uncertainty that the National Board of Trade points out with respect to the older Swedish BITs.

One concluding recommendation from the National Board of Trade is that Sweden revisits its BITs, in order to clarify the scope of MFN. This, of course, faces certain practical problems since the treaties are bilateral and thus would have to be discussed one by one with Sweden’s counterparts.

Bridging the Climate Change Policy Gap

BLoggIt is clear that to fight climate change, we need to scale up green investment both in terms of amount and geographical reach. However, climate change law, in this case the United Nations Conference Framework on Climate Change and the recently-signed Paris Agreement, do not specifically include terms to promote and protect investment. This is a policy gap.

The SCC, together with the International Bar Association, the International Chamber of Commerce and the Permanent Court of Arbitration, took an initiative to discuss this gap by organising a conference, Bridging the Climate Change Policy Gap: The Role of International Law and Arbitration, in Stockholm on 21 November.

It is noted during the conference that around USD 100 billion in investment over the next fifteen years is needed to combat climate change – a target that is considered achievable. Another speaker emphasised that there is no shortage of capital to address climate change. The challenge is how to get investors to actually invest and how to match the capital with the green investments.

It appeared to be a consensus among the speakers that good policy is key to attracting sustainable investments. Policy needs to be long-term and stable. Short-term policies, often associated with government’s turnover, caused bad impacts, from high transaction costs to the fact that the industry had to fire and re-hire employees depending on how policy is.

A panel of lawyers discussed how litigation has been used to fight climate change, directly and indirectly. Among other things, renewable energy investors have resorted to international arbitration to bring a claim against government for unstable policies and revocation of incentives. Another case being discussed in depth was Urgenda Foundation v. the Netherlands where a Dutch district court ruled that the government has breached its duty of care to its citizens by not doing enough to address climate change.

It may be foreseen that these types of cases, both in domestic and international fora, will propel the right type of government actions.

A report from the conference with more details will be published soon.

 

Case Summary: Pac Rim Cayman LLC v El Salvador

Inside of salt mine shoot on corridorOur next case summary is Pac Rim Cayman LLC v. El Salvador and the summary is prepared based on the award rendered in October 2016.

The claim was brought based on the Central America Free Trade Agreement (CAFTA) and El Salvadoran Investment Law.

The investor held an exploration permit for a largely-underground gold mining site in Eldorado and further applied for an exploitation permit.  The dispute arose from the government’s refusal to grant exploitation license, which, according to the investor, amounted to several breaches of El Salvadoran Investment Law.

Meanwhile, the state based its refusal on the failure of the investor to obtain either ownership rights to all of the surface land in the concession area, or authorisations from all relevant landowners, as required under the Mining Law.

The tribunal decided to hear the claims under El Salvadoran law, which was allowed under the ICSID Convention, after it ruled that it did not have jurisdiction under the CAFTA.

The tribunal sided with the state and disagreed with the investor’s interpretation of the Mining Law which would not require authorisations from surface-level landowners if the activity does not involve surface-level land. According to the tribunal, the mining might pose environmental risks to surface landowners. Therefore, the investor’s interpretation was disproportionate to the risks.

In conclusion, the tribunal found that the investor did not comply with the requirement under the Mining Law to be granted an exploitation permit and therefore the government did not have any obligation to grant such permit to the investor.

The investor was also ordered to pay the majority of the state’s costs in the proceedings.

See other case summaries involving the mining industry here.

 

Just published: Analysis of EU’s ”Investment Court System”

Chicago downtown skyscrapers looking upThe American Bar Association (ABA) is a leading organization in international legal debate. On 14 October, the ABA Task Force on investment law published a report on the EU’s proposal for an “Investment Court System” (ICS). We wrote about ICS when the proposal was first presented.

The authors of the report, a number of American lawyers who have previously expressed different individual perceptions of ISDS, pointed out that they do not take a position on the different views on the legitimacy of the system and the need for reform. Instead, the report focuses more specifically on the EU’s ICS proposal, which is also included in the CETA. The report examines whether the ICS will achieve the objectives that the EU have set itself: is ICS neutral, effective and predictable? Is the proposal practical, effective and feasible?

The short answer is “maybe”. The report identifies a number of aspects where the ICS proposal can be improved to achieve the stated objectives. First is that there is a risk that the proposal will lead to less diversity among the judges who will decide on future disputes. The report recommends that it should be expressly stated that diversity (in terms of geography, legal background and gender) should be sought in the nominations of the judges.

Another significant weakness identified in the report is the enforcement of judgments. There is a risk that ICS judgement might not be able to be enforced outside states that signed the agreement, since ICS is not considered to be arbitration, but rather a quasi-judicial process. The ICSID Convention and the New York Convention might not be applicable in this case which means that the ability to have the judgment enforced globally might sharply deteriorate. As we have written before, the possibility of getting arbitration awards enforced worldwide is one of the most important reasons why arbitration has largely replaced litigation in international trade.

The third concern raised in the report is the imbalance between the parties in dispute. ICS proposal entails the fact that state parties can influence the proceeding, including by changing the court’s procedural rules with binding effect during the proceeding and also when the EU replaces a Member State as a respondent. According to the report, this means an imbalanced proceeding, to the investor’s disadvantage.

Host states’ legitimate expectation

Scenic landscapes of Northern ArgentinaThe investor’s legitimate expectations are often a key question in ISDS cases. Such expectations can be based on, for example, the host state’s laws, policies, or contractual commitments – such as when a host state granted the investor mining rights for a certain number of years. A violation of these expectations can be a ground for the investor to bring an ISDS claim against the host government. Several tribunals have ruled that a host country cannot act contrary to the investor’s legistimate expectations.

Karl P. Sauvant and GüneşÜnüvar have written an article published by Columbia Center for Sustainable Investment, introducing the question of whether or not states can also have legitimate expectations towards the foreign investor. According to the article, such expectations may arise from, for instance, the investor’s statements of its contribution to the host country.

As an example, the article points to Sempra v Argentina, where Argentina argued that it “had many expectations in respect of the investment that were not met or otherwise frustrated … (such as)… work diligently and in good faith…”. The article also notes, however, that since governments currently cannot initiate ISDS proceedings against foreign investors, their reliance on legitimate expectations is limited to counterclaims brought in response to investors’ claims. See our previous post about counterclaims here.

Finally, the article proposes that future international investment agreements (IIAs) could explicitly stipulate that host states’ legitimate expectations are protected, thereby establishing a right for host states to bring a claim on this basis.

Vattenfall v. Germany live stream

Blogg_v41_2In the much-publicised ICSID case between Vattenfall and Germany, the main hearing is currently taking place. The parties have agreed to broadcast the hearing live and those who are interested in ISDS can follow this link to see what a hearing looks like. The broadcast starts at 19.00 CET, every night this week and the next.

Just published: Peter Allard v. Canada

Blogg_v41A much-anticipated award is now released for public, Peter A. Allard v Barbados.

As we have written before, a Canadian investor, Peter Allard, brought a claim against Barbados in Permanent Court of Arbitration in 2010. The case concerned Mr Allard’s environmental sanctuary in coastal Barbados. He grounded his claim on the failure of the government of Barbados to enforce its own environmental law which, as a result, has polluted his sanctuary.

The investor claimed that the government’s failure amounted to violation of Canada – Barbados Bilateral Investment Treaty.

In an award rendered in June 2016, the tribunal rejected the investor’s claim on all grounds.

The tribunal disagreed with the investor that Barbados has failed to accord him full protection and security by failing to prevent pollution from coming to the sanctuary. As a departing point, the tribunal asserted that the obligation of the State to provide the investment with full protection and security standard is of ”due diligence” and ”reasonable care” – not of strict liability.

In this case, the tribunal found that Barbadian officials have taken reasonable steps to protect the sanctuary. Among others, the tribunal pointed out that the officials established a committee tasked with developing plans for preservation of the sanctuary.

The claim of expropriation was also dismissed. The tribunal concluded that there was no substantial deprivation of the investment since the investor remains the owner of the sanctuary and operates a cafe there. The tribunal further referred to the investor’s statement during the hearing that ”there is some kind of business remaining there”.

Meanwhile, Simon Lester, a trade policy analyst for Cato Institute, argues that the case sends an important signal for environmental protection. According to him, the legal standard in BIT may pave the way for future cases that environmentalists could help investors bring against governments who may do too little to protect the environment. An example mentioned is if the impact of climate change, for instance rising sea level, caused damage to an investor’s property.

Practical guide: information about ISDS

Books close up are on the tableIt could be difficult to get an overview of what happens in the ISDS world. This is because the international nature of this field and the fact that it lacks centralized information system. However, things are happening fast – new arbitral awards are rendered and states are concluding and terminating international investment agreements (IIAs)

We offer some practical guides to ISDS through the following sources.

 

Free services:

Italaw

The website, which has been around for a long time, publishes arbitral awards and other documents from ISDS proceedings. Researchers at the University of Victoria are managing the website. If you search for a particular ISDS dispute on the internet, it is often that Italaw comes first, which may indicate that the website has been visited a lot.

UNCTAD

The website of the United Nations Conference on Trade and Development provides user-friendly search functions for both arbitral awards and IIAs that contain ISDS as dispute settlement mechanism. In addition, it publishes reports on new updates and statistics on IIAs and ISDS.

PluriCourts Investment Treaty Arbitration Database (PITAD)

PITAD is a database project of all known ISDS cases, currently under construction by the University of Oslo. The database can be accessed via a request to the responsible researchers.  The researchers behind the project takes empirical approach and uses coded variables to classify hundreds of well-known arbitral awards.

ICSID and PCA

ICSID administers most ISDS cases and automatically publishes information about them (as long as the parties do not actively object to it). PCA, on the other hand, publishes information with the consent of the parties. Both organizations have searchable databases.

 

Service with paid subscription

Investment Arbitrator Reporter

This website publishes news and information about ISDS. IAReporter engages in ongoing investigative reporting, which leads to their reporting on many cases, awards and developments that are otherwise confidential. IAReporter also offers in-depth summaries and analysis of awards and decisions, which could be helpful for those who do not want to read the hundred-pages awards. In principle, one must pay for subscription, however IAReporter also provides free trials and discounts for those who cannot gain access otherwise.

Global Arbitration Review

This publication primarily targets legal practitioners in the arbitration field – but often publishes interesting interviews and summaries of proceedings for those interested in learning more about the practical sides of ISDS work.