ISDS transparency in draft SCC Rules 2017

BloggReglerThe Arbitration Institute at the Stockholm Chamber of Commerce (SCC) turns 100 years in 2017. During this year, the SCC will update its rules for arbitration, and a draft version of those updated rules has now been published. Among the novelties is an annex applicable only to ISDS disputes, which expressly allows for non-parties to participate in an arbitration.

Among the arbitration institutions which administer ISDS cases under their own rules, the SCC is second only to ICSID. These SCC cases are currently governed by the 2010 version of the SCC Rules, but a committee has now published the updated draft version.

The committee consists of in-house counsel, academics and practicing lawyers from both Sweden and nine other jurisdictions. The proposal contains a number of new elements, but from an ISDS perspective it is noteworthy that the new draft rules include a special annex for ISDS disputes. Under this annex, non-disputing parties are expressly given an avenue to provide the tribunal with written submissions. This applies to both third parties and to the investor’s home state.

The proposed provisions on submission by third parties mirror the UNCITRAL Transparency Rules from 2014.

The draft rules will be presented and discussed at a public hearing 9 June in Stockholm.

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.

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.

Ensuring ISDS rule-of-law outcome

AnullmentBlogAs a matter of principle, the outcome of ISDS proceeding, which is the arbitral award, is final and binding. This very feature has made international arbitration a success since it provides a speedy and efficient outcome for both states and foreign investors. International rules such as the ICSID Convention and the New York Convention provide mechanisms to ensure respect for the rule of law outcome in the proceedings. Where a breach of the conventions has occurred, this could result in an annulment or refusal of enforcement of the award.

The ICSID Convention has 153 state parties and most ISDS proceedings are conducted under this convention. The convention provides that both the state and foreign investor can request the award to be annulled for limited procedural reasons. Annulment is fundamentally different from appeal, as it only targets the legitimacy of the decision-making by the tribunal, and not the substantive correctness of the award.

Under the ICSID Convention, an award can be annulled for reasons of flaws on the part of the tribunal, among others, if it has manifestly exceeded its powers or if there was corruption by a member of the tribunal. Further, a serious departure from a fundamental rule of procedures is also a ground for annulment. The Chairman of the ICSID Administrative Council will assign an annulment committee to decide on a particular annulment proceeding.

In Enron v. Argentina, the committee found that the tribunal erred by too simply and quickly drawing legal conclusions from economists’ expert reports. By evaluating Argentina‘s defences in a manner that was so incomplete, according to the committee, it amounted to a failure to apply the applicable law. The award was therefore annulled.

The annulment committee also sided with the state in Klöckner v. Cameroon, where it held that the tribunal assumed that certain principles applied to the case, such as principles of loyalty and openness, rather than actually demonstrated that these principles existed. Therefore, the annulment committee found that the tribunal had manifestly exceeded its powers.

Outside the scope of the ICSID system, the New York Convention serves as an enforcement and recognition tool for arbitral awards. It provides that a domestic court may refuse to enforce an arbitral award on grounds, among others, that a party to the dispute was not given opportunity to present its case or if the award contains matters on issues beyond the scope of the arbitration agreement.

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.

Case Summary: Adel A Hamadi Al Tamami v. Sultanate of Oman

?????????????????????????????????This summary is prepared based on facts described in the award rendered in October 2015.

The investor made an investment in the development and operation of a limestone quarry in Oman through two lease agreements between his corporations and an Omani state-owned enterprise. The dispute arose mainly because of the termination of the lease agreement by the Omani SOE. In addition, the investor based his claim on his arrest and prosecution by the Omani authorities relating to unlawful operation of the quarry.

The investor brought the claim under the U.S – Oman Free Trade Agreement, arguing that the measures by the Omani authorities constituted violation of fair and equitable standard treatment and that it amounted to expropriation.

The tribunal found that it had no jurisdiction to decide on termination of the first lease agreement because it had ceased to exist before the U.S – Oman FTA came into force. Further, the tribunal rejected the expropriation claim due to the termination of the second lease agreement by the Omani SOE, asserting that this action was not attributable to the Omani State.  According to the tribunal, the SOE did not exercise the necessary governmental authority for its actions to be considered those of the Omani State.

The arrest and prosecution of the investor, according to the tribunal, did not amount to a violation of fair and equitable treatment standard protection. The tribunal took note of the fact that the investor was prosecuted and later acquitted for, among others, alleged violation of environmental law by operating quarries without necessary permits. However, in the view of the tribunal, a state must be able to take a legal position when it comes to alleged violation of its laws, even if that position turns out to be wrong, provided it does so in good faith and with appropriate due process.

The Tribunal agreed that in this case, Oman had to defend itself against claims that had been “entirely unmeritorious”. Accordingly it ordered that the investor pay to the Omani State as respondent 75% share of its total litigation costs.

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.