Category Archives: International Arbitration

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.

Ban Ki-Moon commends international arbitration

Ban-Ki Moon”I ask all of you to use the great power of arbitration to help the world overcome conflict and hatred and build a future of dignity for all on a healthy planet.”

This was the powerful message of United Nations Secretary General Ban Ki-Moon at the 23rd ICCA Congress in Mauritius earlier this month.

According to Ban Ki-Moon, international arbitration has been a fundamental pillar in the United Nation’s work, going back to the organization’s predecessor the League of Nations.

He emphasized the importance of international arbitration for peaceful resolution of disputes – for both states and private parties – and welcomed the deepening partnership with the business community to meet global challenges of the future.

“The United Nations is proud to have contributed to the development of international arbitration” the Secretary General said, commending in particular the work by UNCITRAL to “create a favourable environment for resolving disputes.” He especially emphasized UNCITRAL’s work with new rules for transparency and pointed out that increased transparency is extra important in disputes between investors and states, where public interests may be involved.

The full speech is available here. Other speakers included Nobel laureate Mohammaed ElBaradei.

Former ICJ President Criticizes EU Investment Court Proposal

?????????????????????????????????????????????????????????????In a May 17 address, independent arbitrator and former president of the International Court of Justice Stephen M Schwebel criticised the EU proposal for the establishment of a permanent investment court in the context of the Transatlantic Trade and Investment Partnership (TTIP). Schwebel spoke in Washington, DC at a public event organized by Sidley Austin, the American Society of International Law, and the District of Columbia Bar Association. Read the full speech here.

The current system of investor-state arbitration – the standard dispute-resolution mechanism in 3,000 bilateral investment treaties – “works reasonably well”, Schwebel noted. He expressed concern that the EC is now seeking to replace that system with “a system that would face substantial problems of coherence, rationalisation, negotiation, ratification, establishment, functioning and financing.” The EU proposal for an investment court, Schwebel argued, is a mere “appeasement” of “uninformed or misinformed critics”.

ISDS critics often presume that an arbitrator appointed by an investor is biased in favor of the investor – a presumption not supported by the record of investor-state arbitration. The EU’s proposal, Schwebel notes, instead risks entrenching pro-state bias by allowing states to appoint all the judges on the investment court, and depriving investors of influence over the appointment process. If the goal is a truly fair and neutral dispute resolution, “is there reason to presume that judges appointed only by states will not be biased in favour of states?”

Philip Morris Asia Limited v. Australia  

Cigarette on the foreground and many cigarettes on a backgroundOur next case summary is Philip Morris Asia Limited v. the Commonwealth of Australia. This summary is prepared based on the publicly-available award rendered on 17 December 2015.

The claimant in this case was Philip Morris Asia Limited (PM Asia), a Hong Kong-registered company. As a result of a corporate restructuring within the Philip Morris group in 2011, PM Asia acquired indirect ownership in an Australian subsidiary, Philip Morris Limited (PML), which sells tobacco products in Australia under different brands.

The dispute arose from the introduction of the so-called plain packaging legislation for tobacco products sold in Australia which aims to reduce smoking. The legislation in essence prohibits use of trademarks, symbols, graphic or images on tobacco products and packaging. Tobacco packaging may only display the name of the tobacco company in standard font and size and this means that it may be difficult for consumers to distinguish one brand from another.

PM Asia initiated an arbitration proceeding under the UNCITRAL Arbitration Rules at the Permanent Court of Arbitration in The Hague in 2011 on grounds that the plain packaging legislation had restricted the use of trademarks by PML on its tobacco packaging.  This restriction, according to PM Asia, constituted an expropriation under Australia –Hong Kong bilateral investment treaty (BIT).

Australia submitted jurisdictional objections, among others things, that PMA’s investment in PML was made only in order to be able to bring an arbitration claim under the BIT. PM Asia commenced the arbitration shortly after it acquired PML and therefore, according to Australia, this should be considered an abuse of rights.

In a recently-published jurisdictional award, the tribunal noted that, based on case law, an arbitration claim constitutes an abuse of rights when an investor has changed its corporate structure to gain the protection of an investment treaty at a point when a specific dispute was foreseeable.

In this particular case, the tribunal observed that PM Asia was aware that the Australian government would pursue the plain packaging policy when it acquired PML. The government had signalled its intention to introduce this policy as early as in 2008, and therefore the dispute was considered to be foreseeable to PM Asia. The tribunal further found that evidence showed that the main and determinative reason for the corporate restructuring was the intention to bring a claim under the BIT, using the Hong Kong entity as claimant.

Based on these facts, the tribunal dismissed the claim on grounds that the commencement of the arbitration by PM Asia constituted an abuse of rights.

Case summary: Nykomb v Latvia

Latvia_Nykomb

This summary is prepared based on the publicly-available award rendered in December 2003. The case concerned an alleged discriminatory treatment by Latvian state, through its state-owned company, against a foreign investor in electricity industry.

Nykomb Synergetics Technology Holding AB (“investor”) is a Swedish company that had a business in electricity generation. It wholly-owned Windau, a Latvian subsidiary company.

In 1997, Windau and Latvenergo, a Latvian state-owned company, concluded a contract in which Windau was to build a plant that will produce electric power. Latvenergo, in turn, was to purchase the power from the plant.

The dispute revolved around electricity pricing, where the investor claimed that Latvian law guaranteed Windau a multiplier of two (double tariff) for the first eight years of the plant operation. The law was changed in 1998 to provide a 0.75 tariff. Latvenergo refused to pay double tariff to Windau and contended that the correct multiplier was 0.75.

The investor brought an ISDS claim against Latvia under the Energy Charter Treaty (ECT), claiming among others that this treatment was discriminatory.

The tribunal sided with the investor and held that according to Latvian law and the contract between Windau and Latvenergo, Windau had a right to a double tariff in the first eight years of the plant’s operation. In this case, the Latvian state was responsible for Latvenergo’s refusal to pay double tariff because Latvenergo was “clearly an instrument of the State in the highly regulated electricity market”.

Further, the tribunal found that Windau has been subject to a discriminatory treatment since Latvenergo were paying double tariff to two Latvian companies. It went on to say that there was no legitimate reason to treat Windau differently than those two companies.

The tribunal ordered Latvia to compensate the investor for the loss suffered before the award was rendered and to pay double tariff for the remainder of the eight years. However, it refused to award compensation for future loss on grounds that this was too uncertain and speculative.

When States file claims against investors in ISDS

CounterclaimsMost ISDS disputes are based on agreement between states, usually bilateral investment treaties (BITs), which aim to provide protection under international law to foreign investors. Since only states are parties to the agreements, it is also only states that have obligations under these agreements. Obligations aimed to give rights to foreign investors. Therefore ISDS clauses are designed so that a proceeding can only be initiated by the foreign investor, not by the state. But there are exceptions.

A state that is being sued may respond by claiming that the investor also breached its obligation, through a counterclaim. This is possible under most investment agreements and arbitration rules as long as the state’s counterclaim is clearly connected with the main dispute. There are many examples of counterclaims, but a notable case is Ecuador’s successful counterclaim against Perenco.

This high-profile ISDS case was an ICSID proceeding in which Perenco initially brought a claim against Ecuador due to changes in Ecuadorian legislation, which, according to Perenco, violated its rights under the investment agreement. Ecuador launched a counterclaim against Perenco, claiming that Perenco violated Ecuadorian environmental legislation, including by not informing the state of several oil spills. According to Ecuador, the failure had led to several environmental disasters in the Amazon, and Ecuadorian environmental laws provide that the company must reimburse the state with USD 2.5 billion for cleaning up of the spills.

The tribunal in Perenco v. Ecuador issued a decision in which they indicated that Ecuador’s allegations at first sight seemed justified but that it was unlikely that the damages could be as large as USD 2.5 billion. Although the tribunal seemed to agree with Ecuador’s argument, it also viewed that it would require a long and expensive investigation to determine the damages, and encouraged the parties to reach a settlement. Negotiations are still ongoing. Meanwhile, Ecuador has launched counterclaims against another energy company with similar factual circumstances, and the case is also still pending.

States have also brought claims against investors directly, which is possible under the ICSID Arbitration Rules. There have been ICSID cases in which the state sued the foreign investor for alleged breach of contract, such as Gabon v. Société Serete S.A. and Tanzania Electric Supply Co. Ltd. v. IPTL (which was launched by Tanzania’s state owned power company, but where, in practice, the state stood behind the process). Another example is when East Kalimantan (a province of Indonesia) launched an ICSID case against several coal mining companies having operation in the province, arguing that these companies had a divestment obligation. The tribunal found that it did not have jurisdiction to hear the dispute. In these types of cases, it is common that the case is not based on agreements between states, but a direct agreement between the state and the investor.

Guest blog in Swedish: The first award in solar panel cases against Spain

Solar panels behind fenceIn a guest blog in Swedish this week, Jonas Hallberg, an analyst at the Swedish National Board of Trade, has written about Charanne B.V. & Construction Investments S.A.R.L v. Spain. The award is the first that has been rendered among at least 26 disputes regarding Spain’s measure to reduce incentives for solar panel sectors.

The award is published and can be downloaded in Investment Arbitration Reporter website.

The investors brought the claim under the Energy Charter Treaty, arguing that the measure violated fair and equitable treatment standard and that it constituted indirect expropriation.

The tribunal rejected the investors’ claims in its entirety and ordered the investors to pay Spain’s legal costs which is equivalent to EUR 1.3 million.

The Public Law Potential of International Arbitration

detail of historic scales with globe on it and metallic weights in dark backIn a recent lecture delivered at the University College London, Yves Fortier spoke about the potential of international arbitration to reach beyond private justice and play a greater role in public international law and the regulation of state conduct. Fortier, an international arbitrator and former diplomat, has previously been ambassador and permanent representative of Canada to the United Nations in New York and served as president of the UN Security Council in 1989.

Fortier acknowledged “the contemporary success of international arbitration and the ability it has had to influence and bend states to a system of international general principles.” He also spoke of “re-conceptualizing” international arbitration as “a tool of international governance”. Arbitration, in Fortier’s mind, has great potential to contribute positively to international law and the public good.

“There is no denying that the success of international arbitration has been limited in some measure to international economic law, where it is actively championed,” said Fortier. But “this should not, in any way, prevent experiments with the practice in other areas of international law.”

Fortier contrasted the effectiveness of international arbitration with the generally limited success of several international courts. Therefore, he urged lawyers to explore more innovative ways of adjudicating international disputes rather than seeing courts as the perfect form of dispute settlement. Fortier recognized that international arbitration sometimes falls short of the ideals of an international court. “But why”, he asked, “should this prevent us from acknowledging its effectiveness?”

A video of the lecture can be accessed here.

Peter Allard vs. Barbados: Investor argues breach of environmental laws

KingfisherPeter Allard, a Canadian investor who owns a nature sanctuary in Barbados, has brought an ISDS claim against Barbados. In a nutshell, he grounds his claim on the failure of the government of Barbados to enforce its own environmental law which, as a result, has polluted his sanctuary. He is also accusing Barbados of refusing to abide by its international obligations under the Convention on Wetlands and Convention on Biological Diversity.

The actions and inactions by Barbados, according to the investor, have destroyed the value of his investment in the sanctuary. The claim is brought under Canada – Barbados Bilateral Investment Treaty (BIT).

The sanctuary, which is an eco-tourism facility, consists of almost 35 acres of natural wetlands situated on the Graeme Hall wetlands, a site protected under the Convention of Wetlands of International Importance in the south coast of Barbados. Mr Allard, as written in his notice of dispute, made investment in this sanctuary with the purpose to conserve the environmental heritage of Barbados.

The investor claims that Barbados has failed to accord him full protection and security under the BIT. Among other things, the investor points out that Barbados has failed to prevent the Barbados Water Authority, a state agency, from repeatedly discharging polluted substances from a sewage treatment facility into the Graeme Hall wetlands. The investor also asserts that Barbados has failed to operate drainage structures into the wetlands that regulate its biological health.

In addition, the investor argues that Barbados has violated fair and equitable treatment standard protection under the BIT due to a change of land use that allows run off of pollution into the sanctuary. The investor underlines that he made the investment in the sanctuary because of Barbados’ previous regulatory frameworks that he believed will protect the environment.

The case is still pending and administered by the Permanent Court of Arbitration in the Hague. Barbados’ reply to this claim is not publicly available and therefore the response of the state is still unknown.