Category Archives: ISDS

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.

 

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.

 

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.

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: 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.

 

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.

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.

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.