Category Archives: Reports & Statistics

ISDS costs – how much and who pays?

Ukrainian small coins on black tableHow much does ISDS dispute cost? Firstly, we have to be clear which costs are being referred to.

ISDS costs typically consist of three elements: the arbitrators’ fee, the administrative fee of the arbitral institution administering the case (not in every case) and the cost of legal representation. In some cases, there can also be additional costs relating to legal experts and an administrative secretary.

Arbitral institutions, such as the SCC, usually have rules on arbitrators’ fees and the administrative fee. The SCC sets these fees based on the amount in dispute.

Legal fees of counsel who represent the party depends on the complexity of the case and time spent. It may not necessarily reflect the amount in dispute, but rather whether facts and other matters in dispute have been complex or not.  In this context it deserves pointing out that the first generation of international investment agreement typically contained relatively broad and vague provisions, which may in itself create complexity in the adjudication of the claims.

A study by the OECD concludes that legal counsel fees and experts are the largest cost component in ISDS, estimated to average 82% of the total cost of a case. Arbitrator fees average about 16% of costs. Administration costs of arbitral institutions are relatively low, generally amounting to about 2% of costs.

The above numbers are interesting for the assessment of an appeal mechanism in ISDS. If the purpose of an appeal is to have the case reheard on its merits, effectively have a re-trial of the case, there is strong reason to believe that the cost of legal fees will double, as the case moves through the procedure for appeal.

Now, who pays? The SCC Rules provides that the tribunal may apportion the administrative fee and the arbitrators’ fee between parties, depending to the outcome of the case. The Rules further mention that the tribunal may order a party to pay reasonable legal representation of another party.  Under UNCITRAL Arbitration Rules, the costs of the arbitration shall in principle be borne by the unsuccessful party, even though the tribunal may allocate the cost between parties should it finds it reasonable.

In Glamis Gold v. USA, the tribunal dismissed all claims by the investor and ordered the investor to pay two-third of the arbitration costs. In Methanex v. USA, the tribunal also dismissed all claims by the investor and went further by ordering the investor to pay all the costs of the arbitration.

This practice has further been incorporated into recent free trade agreement. The TPP specifically provides that tribunal may award the state reasonable costs and attorney’s fees if it determines the investor’s claims to be frivolous.

ISDS key figures and findings

worldisdsA report by Notre Europe Jacques Delors Institute, a think-tank working on European Union issues, summarizes important numbers related to bilateral investment treaties (BITs) and ISDS.

The report puts numbers into perspective – with some of its findings as follows:

  1. The number of BITs increased five-fold between the late 1980s and the end of 1990s.
  2. In parallel, the external stock of FDI demonstrates a ten-fold increase over 20 years with a growth from USD 2,400 billion in 1992 to USD 23,600 billion in 2012.
  3. There is now a total of 3,200 investment agreements worldwide, 93% of them provides an ISDS clause.
  4. Out of the 98 countries who have been a respondent in an ISDS proceeding, about three-quarters were developing countries or economy in transition. Less than one-third of claims were brought against developed countries.
  5. The average compensation claimed was USD 343.5 million, however the average amount awarded was USD 10.4 million.

The European Union member states have signed a total of 1,356 BITs with non-EU member states, in addition to around 190 BITs between themselves.

With regards to the EU – United States relationship, the report notes that nine member states have signed investment agreements with the U.S – all include ISDS as dispute resolution mechanism. These member states consist of Bulgaria, Croatia, the Czech Republic, Estonia, Latvia, Lithuania, Poland, Romania and Slovakia. There have been so far 9 known ISDS claims between the U.S and the EU, all submitted by US investors (4 against Poland, 3 against Romania, 1 against the Czech Republic and 1 against Estonia).

ISDS is included in the EU’s upcoming agreements, including free trade agreements with Canada and Singapore – the negotiations of which have been concluded. According to the report, ISDS is also mentioned in agreements currently negotiated between the EU and China, Myanmar, Morocco, Thailand and Vietnam.

Comprehensive Empirical Study on Impact of BIT to the flow of FDI

isdsbitpostA recent empirical paper by CPB Netherlands Bureau for Economic Policy Analysis, a research institute under the Dutch Ministry of Economic Affairs, explains the effects of BITs (Bilateral Investment Treaties) on bilateral foreign direct investment (FDI) stocks for various regions and country income groups.

The sample in this paper is formed by 217 countries from 1985 to 2011, making it the largest and most recent period utilized in nearly all studies covering the effect of BITs on FDI. Other papers have often used a shorter period of time or a smaller sample. Reference can be made to a paper by the United Nations Conference on Trade and Development which reviews different studies on this issue. Our previous post has discussed this paper.

Below are some findings of the CPB paper:

  1. If countries have ratified a BIT then they invest on average 35% more in terms of stocks than country pairs without a ratified BIT.
  2. The effect differs between countries classified by income group (based on World Bank’s classification). Upper middle income countries seem to benefit the most from BITs. The impact on FDI stocks is about twice the average effect. Examples of upper middle income countries are Romania, Greece and Hungary.
  3. Region-wise, FDI impact is much larger if the host country is located in East Asia or Middle and Eastern Europe.
  4. The number of BITs among developed countries is about 500.

UNCTAD’s Review of ISDS Developments in 2014

Row of european flags against blue sky backgroundThe United Nations Conference on Trade and Development (UNCTAD) recently released a report on ISDS developments in 2014.

Below are some interesting points:

  • In 2014, 60% of the ISDS cases were brought against developing and transition economies.  A quarter of the cases are intra-EU cases.
  • The two types of State conduct most commonly challenged by investors in 2014 were cancellations or alleged violations of contracts and revocations or denials of licenses.
  • The most frequent home States of investors in 2014 were the Netherlands (seven cases), followed by the United States and the United Kingdom (five cases each).
  • As of the end of 2014, the total number of concluded cases become 356, with 37% decided in favour of the State, 25% in favour of investor and 28% of cases settled.
  • Five decisions were rendered in 2014 on applications for annulment of ISDS cases under the ICSID Convention, all of them unanimously rejected the applications.
  • The U.S Supreme Court overturned a ruling by the U.S Court of Appeals for the District of Columbia that has set aside an ISDS award in favour of BG Group Plc. against Argentina. This means that the original award stands.

Just published: A response to the criticism against ISDS

European union flag against parliament in BrusselsThe European Federation for Investment Law and Arbitration (EFILA) recently published the paper “A response to the criticism against ISDS”, addressing 11 specific criticisms commonly voiced by ISDS opponents in the context of the TTIP negotiations.

EFILA is a Brussels-based think tank that brings together leading investment law and arbitration specialists, former judges and investor representatives from various EU member states. To read more about EFILA, go to www.efila.org.

Empirical research does not support perceived bias of ISDS awards

Isdsbiased

A recent academic article by Susan D. Franck, Professor of Law of Washington and Lee School of Law analysed the issue of whether or not ISDS could be said to favour host states from either the developed or the developing world. To this end, all ISDS awards that are publicly available as of 1 January 2012 were analysed.

At the outset, it is noted that ISDS is intended to provide investors with a real forum for non-politicized rule of law adjudication.

The main conclusion of the empirical research is that States’ relative success in ISDS appears to operate independently of development status. This, according to the author, suggests that other factors, such as the host state’s level of democracy and domestic political infrastructure may have more influence in the outcomes of ISDS.

Therefore, purely based on outcomes of the cases, available data does not show that ISDS favours host states from the developed world.

The article also carefully puts numbers into perspective. States won in equal or greater proportions than investors. Even when investors won in ISDS, the tendency is that they recovered less than USD 20 million in compensation on average. Overall, investors roughly obtained only 30% of the amount claimed.

Putting these numbers in mind, it should be difficult, if at all possible, to conclude that ISDS is either pro-investor, or pro-state. As in any well-functioning legal system, the reality of ISDS is more balanced than this and does not lend itself to simplified descriptions of who the system favours, or not.

ICSID Numbers with a Focus on the European Union

The International Center for Settlement of Investment Dispute (ICSID) has released its caseload statistics with a special focus on the European Union. The ICSID is an organization within the World Bank Group, and administers the majority of ISDS cases.

As of March 1, 2014, the ICSID had registered 463 cases under the ICSID Convention and Additional Facility Rules.

The statistics show as follows:

  • Among 463 cases administered by the ICSID, 55 cases or 12% of the cases, involved a member State of the European Union as respondents.
  • Of these 55 cases, 71% were commenced by an investor who was also from an EU member State. In short, the majority are intra-EU cases.
  • Almost a third (27%) of these cases were instituted by individual persons.
  • Sweden, the United Kingdom, Austria, Denmark, Ireland, Luxembourg, Malta, the Netherlands and Portugal are member States that have not been a respondent State in ICSID cases.
  • The EU member States that have appeared most frequent as respondent in ISDS proceedings are Hungary (11 cases) and Romania (9 cases).
  • Investors from an EU member State were involved in 54% of the total of registered ICSID cases. This makes EU investors the most frequent users of ISDS.

The IBA on ISDS

IBAblogpost

The International Bar Association, which has a membership of 55,000 individual lawyers across the globe, recently published a paper on ISDS. It is not only fact-based, but it also brings out some unfounded claims about ISDS that have not been widely addressed.

The paper mentions that it would be incorrect to state that ISDS is biased against developing countries as data on ISDS show no correlation between the success rates against states and their income levels.

Neither does ISDS enable investor to make “a fortune” from the system. Data show that even when investors won in ISDS, they have only recovered on average, less than half of the amount they claimed.

ISDS has at times been described as a one-sided system as it only allows investor to bring a claim against States. From a legal perspective, whether or not States can equally bring a claim in ISDS entirely depends on the exact language of the international investment agreement (IIA). This means that States retain the option to include this in the IIA. Case law also demonstrate that State-owned companies have frequently used ISDS.

Above all, it is not true that ISDS is not needed when domestic courts are already sophisticated. ISDS concerns questions of international law, hence international tribunal is needed to resolve those questions.

The IBA is further taking an initiative to analyse both the benefits and criticism on ISDS to make it a better system. To this end, the IBA is engaging with governments from both developed and developing countries, arbitral institutions, corporations and the legal profession.

Who are the investors?

Investors from a wide range of industries and company sizes have resorted to ISDS to enforce States’ obligations under international investment agreement.

As a recent study concluded that in general ISDS cases are concentrated in sectors like electricity and mining.

ISDS however have not only been used by investors from those sectors. From sustainable development perspective, ISDS has shown the potential to protect investment in climate change mitigation efforts. In the past three years, renewable energy investors such as wind power and solar power investors have brought claims to ISDS alleging, among others, breach of host government’s specific commitment regarding incentives for their investments.

Further, an investor who owns an environmental sanctuary have also recently brought a claim to ISDS, arguing that the host government has failed to enforce its own environmental law which harms the sanctuary.

In addition, many other investors are represented in ISDS, from producers of biscuit, ice cream and paper to eco-tourism businesses. For example, the investor in paper business brought a case arising from government’s ban to import a certain raw material, contrary to a previous authorization that the investor was allowed to do so.

The above has shown that ISDS as an efficient dispute resolution is important not only for rule of law but also for the functioning of the global economy. Foreign investors who have obtained specific promises from a government with regards to their investment, typically in the form of government contracts or permit for certain period, may enforce this promise through ISDS, as an international neutral venue.

Small and medium size enterprises benefit from ISDS procedural efficiency; it is usually faster and less costly compared to proceedings in domestic court.The importance of ISDS for SMEs is also confirmed by an OECD survey according to which 22% of ISDS claimants are either individuals or very small corporations with limited foreign operations. Extremely large multinationals only account for 8% of the claimants in the survey.

2014: A Strong Year for New Investment Protection Regimes

sustainabledevA lot of new development took place last year in the investment protection regime. This is demonstrated for example by a yearly report from the United Nations Conference on Trade and Development (UNCTAD), which summarizes statistics and development surrounding the regime and ISDS.

States, to a large extent, continue to display interest and trust in the investment protection regime. This year’s finding shows that States have concluded 27 international investment agreements (IIAs), which means one every other week.

Sustainable development is at the heart of the newly-adopted IIAs. Most treaties concluded in 2014 include sustainable-development oriented features, for examples by preserving regulatory space for public policies of host countries and discouraging parties to relax environmental standards in order to attract foreign investments.

States maintain control in investment treaty-making and the design of ISDS provisions. In parallel to the adoption of new IIAs, 45 countries are revising their model Bilateral Investment Treaties. New model agreements have been concluded, notably by Brazil and India. This trend may also open up opportunities to include carefully-drafted investment protection in the IIA in support of sustainable development.

The total number of known ISDS claims decreased in 2014, from 54 cases in 2012 and 59 cases in 2013 to 42 cases last year.