Category Archives: TTIP

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.

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?”

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.

The U.S is sceptical of the European Commission’s ISDS proposal

?????????????????????????????????????????????????????????????????????????????In mid-September, the European Commission presented its proposal on dispute resolution in the TTIP, as we have previously discussed on this blog. In our previous post, we find it promising that the Commission’s proposal is built on existing practices but we also note that the proposal raises many questions.

The Commission’s proposal is only a proposal. It must first be accepted at home within the European Union and later be put on the negotiating table with the U.S counterpart. There has been some suspicions that the U.S would have doubted the proposed changes and this suspicion has now been confirmed.

The U.S Trade Representative Michael Froman especially expresses scepticism about the proposal of appeal mechanism in which the entire case will be reheard (in the current system, an award may only be appealed on procedural grounds). The U.S is among the countries that has been sued the most in ISDS nevertheless it has never lost a case, and the U.S Trade Representative is hesitant to give investors a second chance in the proceeding. As he puts it, “It’s not obvious to me why you would want to give companies a second bite of the apple”.

Another aspect of the proposal that has been widely criticized is the closed list of arbitrators to be pre-appointed unilaterally by states, in contrast to the current system in which each party in dispute may appoint an arbitrator.

Michael Froman would prefer that the investment chapter of the TTIP has provisions closer to those in the U.S model investment agreement of 2012. This model agreement is considered to be the most progressive of its kind and is based on international “best practices”.

The text of the completely negotiated TPP, which has recently been released, is based largely on such American model agreement. Froman believes that this should be the starting point of the TTIP.

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.

[ICSID GUEST POST] Appeal, Review, Annulment …. What’s it all about?

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This post is a guest contribution from Ms. Meg Kinnear, Secretary-General of ICSID.

 

The extent to which a legal decision should be reviewable is a question that all legal systems must address.  On the one hand, everyone can agree that decisions should be correct, and that getting the law, the facts and the procedure right are vital to the administration of justice. One of the ways legal systems try to ensure correct outcomes is by having a second body [and in some national systems, a third and even a fourth court!] review the first decision and correct any errors made by the original tribunal.

On the other hand, some argue that an equally important role of legal decision makers is to resolve disputes once and for all, so that the opposing parties have a final outcome, certainty, and the ability to get on with business without spending time and money on legal appeals. Balancing the goals of “correctness” and “finality” is difficult, and defining the right level of review can depend on factors such as cost, timing, the rights in question, and the goals of the legal system.

Discussion about how to balance correctness and finality has also taken place in the international investment context.  Indeed, the States drafting the ICSID Convention debated this question as early as the mid-1960s when they designed the Convention. States finally decided to provide a review called “annulment” which allowed a second look at ICSID awards, but on limited grounds.  These grounds were set out in Article 52 of the ICSID Convention and allowed a new panel [the ad hoc Committee] to annul an award if: [1] the tribunal was improperly constituted; [2] the tribunal manifestly exceeded its powers; [3] a tribunal member was corrupt; [4] there was a serious departure from a fundamental rule of procedure; or [5] the tribunal failed to state reasons for its decision [paraphrased from Article 52 of the ICSID Convention].

In 2004, ICSID issued a public discussion paper outlining possible features of an international investment appeals system.  The paper suggested that an appeal mechanism could be designed to provide a broader range of review on the basis of clear error of law, serious error of fact, or any of the five grounds of review in Article 52 of the ICSID Convention. States decided not to pursue an appeals facility at that time, however ICSID undertook to further study the matter and to offer its assistance and expertise if treaty negotiators decided to pursue this course in the future.

On September 16, 2015, the European Commission [EC] released a draft text on investment under the Transatlantic Trade and Investment Partnership [TTIP].  This draft included a proposal to create an Appeal Tribunal that could review an award issued by an investment tribunal.  The EC proposal builds on the ICSID Convention by suggesting that investment awards under the TTIP could be appealed based on the grounds in Article 52 of the ICSID Convention plus error of law or manifest error of fact [paraphrased from Article 29 of the EC text].

As investment cases grow in number and complexity, and increasingly arise out of an investment treaty, the discussion on the appropriate level of review for such awards will continue. Clearly the task of establishing the optimal level of review between correctness and finality is a difficult one, and it will be interesting to follow treaty negotiations as they grapple with this question.

Ms. Meg Kinnear, Secretary-General of ICSID

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”.

A quick read of the EU Commission’s Investment Court Proposal

CommissionYesterday the EU Commission presented its proposal for the investment chapter in the TTIP, which is the result of a long consultation. The text, which runs to almost 40 pages, is available here. It will now be discussed internally in the EU and then put on the negotiating table with the US.

Below we briefly go through some of the noteworthy aspects:

The dispute procedure

-        A “court system” consisting of one Investment Tribunal and one Appeals Tribunal is set up.

-        The tribunals will work under established arbitration rules: ICSID, UNCITRAL or “any other rules agreed by the parties”, depending on the choice of the investor in the particular case. Instead of reinventing the wheel, the Commission is here relying on established practice.

-        While it is positive that the proposal draws so extensively on established arbitration rules, many areas remain where the interaction between the proposal and those rules must be studied further. This is most obvious when it comes to the enforcement of awards, but also other aspects such as the Appeals Tribunal and the appointment of arbitrators need extensive analysis before being included in a treaty.

-        It is made clear that the tribunal only has the mandate to look at cases through the lens of international law. Consequently, domestic law cannot be applied or reviewed by the tribunal.

-        Mediation provisions have been introduced. While mediation is sometimes often possible under the current system (and most disputing parties so far have elected not to mediate) such a procedure makes sense for reasons of efficiency. Mediation is however a challenge from a transparency perspective as it is hard to mediate openly.

The arbitrators/the system

-        The relationship is unclear between this proposal (which is aimed only at the TTIP) and the ambitious but vague multilateral dispute settlement mechanism envisioned by the Commission (which is to set up some sort of World Investment Court in the future). Under Article 12, many parts of the current proposal will cease to apply when/if a permanent multilateral system is set up. With this solution, the Commission is kicking the can further down the road.

-        Arbitrators can only be drawn from a list established by states. This is problematic because one of the two parties (the state) will set the frames for the disputes when the other (the investor) can only appoint from a list pre-approved by the state. Under the current system, each party can freely choose its own arbitrator.

-        States have to negotiate over whom to put on the list of arbitrators. This risks a politicization of the appointments, which is exactly what investment arbitration is intended to avoid.

-        Furthermore, the arbitrators must fulfill an almost impossible list of requirements to be eligible for the list. Annex II – where the arbitrators’ code of conduct is set down – in combination with the requirements in Article 9(4), leave a very small group of people eligible. In practice, depending on how the requirements are interpreted, it is likely that only retired lawyers (and probably only retired judges) will be able to sit as arbitrators. This restricts the parties’ possibility to appoint the most suitable arbitrator and also ensures that only a small elite gets to adjudicate investment disputes.

-        The Appeals Tribunal, allowing the case to be reheard on its merits, is sure to make disputes much longer and much more expensive; the average dispute would likely be twice as expensive as under the current system, which affects both investors and states.

Transparency

-        An express reference to the UNCITRAL Transparency Rules is included. The proposal even goes further than the Rules by making clear that many documents, including everything from proceedings before the Appeal Tribunal, shall always be made public.

-        The proposal extends the possibility for third parties to intervene. While the general tendency towards transparency is desirable, Article 23 states that the tribunal “shall permit any natural or legal person which can establish a direct and present interest in the result of the dispute”. This seems to (i) restrict the tribunal’s discretion by saying that it “shall” allow such submissions and (ii) considerably widen the scope of who shall be allowed to file submissions. In comparison, the UNCITRAL Rules on Transparency states that the tribunal “may” allow such submissions, after consulting the parties and only if it finds the submission could be helpful.

 

Seminar report: ISDS – A Way Forward

AndrinaSeminariumImage2red3BloggThe SCC, in cooperation with the Association of International Arbitration and Brussels Diplomatic Academy of Vrije Universiteit Brussels organized a seminar, ISDS: Away Forward in Brussels, on 27 May 2015. The speakers were arbitration practitioners from Sweden, Belgium and France, including SCC Legal Counsels and representatives from the International Bar Association Subcommittee on Investment Arbitration. Read the full programme here.

The historical background of ISDS was explained, and how the mechanism was established under the ICSID Convention as a response to inefficient diplomatic protection to foreign investors. The discussion continued with the currently-debated issue, ISDS and environmental protection. SCC presented research findings that the number of ISDS cases where investors brought a claim because of environmental regulation is small. The findings from these cases support a conclusion that arbitral tribunals have not questioned the power of government to regulate for environmental protection.

In addition, some procedural aspects of ISDS were addressed, particularly transparency and public participation. The speakers emphasized that this is in fact not a new development, as tribunals have supported transparency and public participation to an increasing extent in the past decade. A new procedural development of ISDS, emergency arbitrator, was also discussed.

A speaker reminded that when discussing reform of the system, public opinion should always be taken into account.  It is important to ensure that the democratic values are preserved. The International Bar Association (IBA) is working on a project to bring together opinions from different stakeholders in ISDS. The ambition is to address the criticisms surrounding ISDS and to propose improvements of the system, when needed.

IBA has also recently published a statement, addressing facts of ISDS.

The dynamic and forward-looking discussion from the participants were much appreciated. More discussions will follow ahead to preserve the rule of law and ISDS.

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.