Category Archives: Trade agreement

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.

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.

 

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.

IIA reform continues

IIAsBlogStates continue to sign new international investment agreements (IIAs) in recent years, where by the end of 2015, the IIA universe consisted of 3,286 agreements. Among these agreements, 2,928 are bilateral investment treaties (BITs) and 358 are other IIAs (for example, trade agreements with investment chapters).

At the same time, as many as at least sixty countries have developed or are developing new model IIAs.

Here we bring out some progress of the reform.

As noted by the United Nations Conference on Trade and Development (UNCTAD) in its latest report, IIA reform is happening against the backdrop of the global trend to formulate a “new generation of investment policies” that place inclusive growth and sustainable development at the heart of efforts to attract and benefit from investment.

In general, most of the new models include provisions safeguarding the right to regulate, including for sustainable development objectives. It is also clear that states intend to move away from the “protection (only) model” to a more balanced “investment for sustainable development” model.

India’s new model BIT is particularly interesting because it includes some provisions not found in many other BITs. For instance, it promotes transparency by requiring states to ensure that all laws and regulations are published or available for those who are interested. This model also tries to provide more balance in the state-investor relationship by providing obligations to foreign investor, which consists of requirement to comply with host state’s laws, including environmental and human rights law. It further mandates foreign investors to voluntarily incorporate internationally-recognized standards of corporate social responsibility (CSR) in their practices and internal policies.

Meanwhile, the Netherlands model BIT excludes “mailbox” companies from the scope of the BIT. Finally, the recently-signed Trans-Pacific Partnership includes some clarification on expropriation provisions and a special denial of benefits clause for tobacco-related claims.

New Report on the Proposed EU Permanent Investment Court

EFILA_EUThe European Federation for Investment Law and Arbitration (EFILA) recently released a new report on the permanent investment court proposed by the European Commission within the context of the TTIP negotiations. The report is highly critical of the EU proposal, on two main grounds. First, under the proposed court system, states have the exclusive power to appoint judges, while investors lack any influence over who hears the disputes. This removes a significant benefit of arbitration as a method of dispute resolution, and creates an inherent imbalance between investors and states. Second, the proposed system has two tiers – the Tribunal of First Instance and the Appeals Tribunal – and allows parties to appeal an award on issues of law and fact. This undermines the finality of arbitral awards, and is likely to burden small and medium-size investors by increasing the length and cost of proceedings.

EFILA launched the report at its Annual Conference, held in Paris on 5 February 2016. The event, entitled “Investment Arbitration 2.0?”, brought together experienced arbitration experts, state officials, and representatives of investors to discuss current issues in investment arbitration. Panels discussed such topics as third party funding, the role of tribunal secretaries, and the relationship between investment arbitration and the rule of law.

One session of the conference was dedicated to discussing the EU court proposal. Most, but not all, panelists agreed with the criticisms advanced in the EFILA report. One speaker noted that investors are unlikely to trust the neutrality of judges that are appointed and paid by states. A U.S.-based academic retorted with examples from other permanent international courts showing that state-appointed judges are not necessarily pro-state in how they rule. Another panelist noted that the proposed investment court would not have a secretariat or its own set of arbitration rules, and that it would be impossible to apply a pre-existing set of arbitration rules to the proposed two-tier court structure populated by permanent judges.

Someone commented that the EU proposal “appears half-baked”. Nonetheless, as EFILA secretary-general Nikos Lavranos emphasized, the arbitration community must take it seriously.

Philip Morris v. Australia dismissed

AustraliaBlogOn 17 December 2015, the tribunal in Philip Morris Asia Ltd. v. Australia issued the long-anticipated award on the case, declining jurisdiction, as known from a statement from Philip Morris.

The case concerns Australia’s Tobacco Plain Packaging Act 2011 which prohibits use of trademarks, symbols, graphic or images on tobacco products and packaging. The investor argued that the measure has expropriated its intellectual property rights because it cannot use its logo in the cigarette package.

The tribunal’s reasoning for declining jurisdiction remains unknown. However, it is known that Australia has submitted jurisdictional objection among others that the dispute had arisen before the investor obtained protection under the bilateral investment treaty between Hong Kong and Australia and that the commencement of the arbitration shortly after the investor’s restructuring is considered an abuse of rights.

As published by the Permanent Court of Arbitration website, the award will not become public until the parties agree on the redaction of any confidential information contained in the award.

TPP is signed with ISDS provision

Two globes of EarthOn 4 October 2015, twelve countries representing 40% of the world’s economy signed the Trans-Pacific Partnership agreement. These countries consist of the United States, Mexico, Canada, Chile, Peru, Japan, Singapore, Brunei, Vietnam, Malaysia, Australia and New Zealand.

The text is yet to be released but official information about the agreement can be found among others on the U.S government website and the Canadian government website.

The signing of the TPP means that twelve countries with significant share in the world’s economy have been able to agree on one set of investment protection rules. As summarized on the U.S Trade Representatives website, the investment chapter will replicate the terms in the US 2012 Model Bilateral Investment Treaty. The rules require non-discriminatory investment policies and provide terms that assure basic rule of law protections. At the same time the rules ensure governments’ ability to achieve legitimate public policy objectives.

According to the Department of Foreign Affairs, Trade and Development of Canada, the investment chapter provides access to “an independent ISDS mechanism that is prompt, fair and transparent, and subject to appropriate grounds”.

This means that signing countries find ISDS to be relevant and necessary, not least between developed states. It may be noted that ISDS under the US 2012 Model Bilateral Investment Treaty includes a transparent proceeding and a possibility of a third party to participate in the proceeding. There is a good reason to guess the TPP will include these features too.

How investment protection affects the “right to regulate”

Green paragraph between black paragraphsIn discussions of investment protection provisions in the context of the Transatlantic Trade and Investment Partnership (TTIP), issues have been raised regarding the risk of such investment provisions affecting the signatory states’ “right to regulate”.

A report from the Swedish National Board of Trade seeks to bring clarity to these issues by examining how two of the most commonly used investment protection provisions affect states’ “right to regulate”. At the outset, the report explains that the term itself is misleading, for an investment protection agreement never entails a waiver of the states’  right to regulate. Rather, the “right to regulate” in this context refers to the state’s ability to legislate and adopt administrative acts without running the risk of having to pay damages to investors.

Using the concluded trade agreement between the EU and Canada (CETA) and the US model bilateral investment treaty, the report analyzes two investment protection articles that frequently occur in investment disputes, and which also have the greatest potential impact on the state’s “right to regulate”. These two articles relate to (1) fair and equitable treatment and (2) expropriation without compensation.

The “fair and equitable treatment” article protects investors against, inter alia, fundamental breach of due process in judicial and administrative proceedings, manifest arbitrariness, and targeted discrimination. The article is often interpreted to include protection of investors’ “legitimate expectations”, based on the laws, regulations and government commitments that attracted the investment. According to the Swedish National Board of Trade, foreign investors in Sweden already enjoy this type of protection under Swedish law. The article on “fair and equitable treatment” in an investment protection agreement will thus not affect Sweden’s “right to regulate”.

The article regarding “expropriation without compensation” prevents states from nationalizing private property (direct expropriation), or by legislation or other means causing the investor to lose control of the investment or rendering the investment worthless (indirect expropriation). The provision again direct expropriation is broadly consistent with Swedish law; while the provision against indirect expropriation provides investors with some additional protection beyond that offered by Swedish law. According to the National Board of Trade, the expropriation article on the whole has only a slight, if any, impact on Sweden’s “right to regulate”.

The report concludes that, because the protection that these articles provide foreign investors in Sweden is already largely covered by Swedish law, they have a very small impact on Sweden’s “right to regulate”.

Why ICSID was established

national flags of the different states against the blue skyIt is challenging to reach an agreement on a global level on key issues, as shown in the global efforts to regulate greenhouse gas emissions. The investment law regime has long had the same problem. Many attempts to agree on a global standard for the protection of foreign investments have failed because of the countries’ different ideas about which rights to be provided for foreign investors.

It was this failure that motivated the World Bank to establish ICSID (International Centre for Settlement of Investment Disputes). Instead of regulating the level of protection that foreign investors can rely on – and therefore had proved to be very difficult – the solution was to establish a purely procedural framework for settling disputes by way of the ICSID Convention, which was signed in 1965. The Convention does not provide substantive investment protection. This matter has instead been left to countries to agree among themselves, often at a bilateral level.

By focusing on the procedural aspects rather than on substantial, ICSID has gained great support from countries. In addition, a big problem in the mid-twentieth century could be fixed: State’s intervention in economic matters. Previously, disputes between governments and foreign investors could only be solved by government intervention. In a world where major former colonial powers often faced the newly independent countries, the country with the power often won. In addition, some part of world trade took place with countries with a negative view on market economy, such as those who belonged to Soviet’s sphere of interest. By the establishment of ICSID, the playing field could be evened out and independent dispute resolution was first introduced in world trade. Instead of political power, rule of law would decide the disputes.

In hindsight, this has proven to be a recipe for success for ICSID. The Convention has now been signed by 159 countries and the centre in Washington has administered hundreds of disputes. Furthermore, while global attempts to regulate investment protection have failed, ICSID remains strong. The reason was largely because the majority of the thousands of bilateral investment treaties (BITs) refers to the center to solve disputes. Even in modern times new investment agreement continuously refer to ICSID for the settlement of investment disputes.

Today, there have been ideas to create a global system for settling investment disputes. It may be worthwhile to remember that there is already such a system, which for decades has been accepted by the overwhelming majority of the countries, and that this system was established with the aim of creating a neutral playing field for dispute resolution that otherwise tend to be politicized.

Case Summary No. 9: Compaña de Aguas & Vivendi v. Argentina

The water pipe which is connected to the pump swinging a foamy liquid.Our next case summary is Compañiá de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic. The summary was prepared based on the award rendered on 20 August 2007.

The investor was a French company and its Argentine affiliate who entered into a concession agreement with the Province of Tucuman to provide water and sewage services.

According to the investor, the Tucuman authorities – the legislature, the governor and the province’s regulatory authorities – relentlessly “attacked” the investor and the concession agreement almost from its inception. Investors claimed that these actions were taken with a view to pressuring them to renegotiate the tariffs of the concession.

Among other things, the investor pointed out to the statements made by the government that the water could cause cholera, typhoid and hepatitis and that the customers should not pay their bills. Further, the investor argued that the government used their regulatory powers to impose unilaterally modified tariffs, contrary to the terms of the concession agreement. In the end the investor terminated the concession agreement.

The investor brought the claim under the Argentina – France Bilateral Investment Treaty (BIT).

The tribunal found that there was a violation of fair and equitable treatment standard under the BIT. It noted that while it would have been entirely proper for a new government to seek to renegotiate a concession agreement in a transparent and non-coercive manner, it was unfair and inequitable to bring the investor to renegotiation table through threats of termination based on colourable allegations. The evidence did not show the existence of health risk from the water provided by the investor.

The tribunal further held that the actions of the government against the concession was equivalent to an expropriation as they had a devastating effect on the economic viability of the concession. The investor’s recovery rate declined dramatically over the life of the concession, among others because the government’s public statement asking the customers not to pay their bills. The tribunal reasoned that the investor had the right to expect that the government will not engage in damaging campaign against them. Therefore, according to the tribunal, the investor was radically deprived of the economic use of its investment.