Category Archives: International Arbitration

Could the US withdrawal from the Paris Agreement spur ISDS claims?

4The American president Donald Trump has announced that the state will withdraw from the global climate deal that was reached in Paris 2015. It is still unclear what the withdrawal really means, but some lawyers are already saying that the decision might lead to international arbitration claims against the US (as argued, for example, in this article in Global Arbitration Review).

The United States has many investment protection treaties in force with other states. There are many investors in renewable energy, among other sectors, who are protected by these treaties. If the US were to change the regulatory framework in place before Trump’s decision, it is possible that the state could be deemed liable under international law, as determined by an ISDS tribunal. When investments are made based on public commitments later drastically changed or removed – and the changes are not motivated inter alia by legitimate public interests – the state might have to compensate foreign investors.

A similar scenario is currently being played out in cases against Spain and Italy. Both these states attracted long-term foreign investors, primarily in solar energy, by specifically designed and benifical programs. When the states faced financial problems, the programs were revoked or modified. Many investors have now turned to ISDS to have their case heard (with varied success so far).

We have written before on the potential to use international arbiration in order to enforce/implement commitments related to sustainable development, for example in connection with a conference on the topic in Stockholm last year.

 

Could arbitration be a solution for Brexit?

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The discussions about the United Kingdom’s exit from the European Union are ongoing. Recently, it was suggested that some of the open questions are instead determined by an arbitral tribunal.

It is the think-tank Bruegel that launched the idea. It is based on the reports that the EU and the UK differ on how much UK would have to pay in order to leave the union. This divergence stems from the fact that the parties use different calculation models. Since the quantification of the UK’s bill is a relatively technical issue – that often ends up before tribunals in other contexts – Bruegel suggests that it could be put before a tribunal, for example at the Permanent Court of Arbitration in the Hague. Then the two parties could instead focus on their future relationship, rather than disputing over liability and quantification.

It is far from unusual that complicated disputes between states are put before arbitration tribunals; history is full of such cases. However, even if the prospect of such a procedure for the economic and legal consequences of Brexit is attractive, it is not automatically achievable in this case, because of EU law. For example, it is not likely that the Court of Justice of the European Union in Luxembourg would allow an independent tribunal to determine an issue that is so intertwined with EU law. Therefore, it remains to be seen to what extent the proposal is supported by the parties.

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.

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.

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: 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.

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.