Tag Archives: History

The New York Convention – a success from 1958 serving ISDS

Central Park with Manhattan skyline in New York CityISDS is established and ruled by international agreements. 159 states have submitted to the World Bank’s ICSID system, which is designed specifically for disputes between foreign investors and states. Many ISDS proceedings are conducted outside the ICSID system and for those proceedings, other instruments are in control. The most important of these is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958.

The New York Convention began to be discussed in the mid-50s because it was necessary to support the emerging international trade. The system at that time simply lacked an effective way to enforce arbitral awards across borders. A judgment of a national court was then, as now, difficult to enforce outside the court’s home jurisdiction, which meant that it was fairly easy for the losing parties to international disputes to avoid paying (it has become somewhat easier since the 1950s particularly in the EU, but it is still difficult to get, for example, a Swedish court judgment executed abroad and vice versa).

Arbitration is an important piece of the puzzle for international trade to function, it is by far the most common way to resolve international disputes. The New York Convention guarantees that whoever wins the dispute has not only the right but also gets the right in practice. By signing the Convention, states agree to enforce arbitral awards rendered in another state that is party of the Convention. The Convention has provisions to ensure the rule of law, for example, enforcement of an arbitration award can be rejected if it was rendered with a procedural deficiency.

Most of the states in the world have signed the New York Convention. It is the UN Commission of International Trade Law secretariat in Vienna (UNCITRAL), which takes care of the practical issues when new states accede. According to the UNCITRAL, Andorra is the latest country to ratify the Convention, and this means that the Convention is an applicable law in 156 countries.

The Convention is widely considered to be the most successful international convention ever. Although there are international agreements that have been signed by more states, they rarely contain any direct commitments. The New York Convention requires courts of the state parties to effectively apply the provisions of the Convention, and such strong support from the world’s countries is a major success story for international law and international trade.

The Evolution of BITs

CogwheelInternational investment regime, like any other field of international law, is not static. It continues to evolve and adapt to the present day needs and situation. States as the primary actors of the regime maintain full control in its evolution.

Historically, bilateral investment treaties (BITs) emerged as a response to the inadequacies of international law on protection of property of foreigners. Western states also sought to obtain better market access for their nationals to invest in developing states. See more explanation on the history of BITs here.

Germany is the first state to sign the first BIT, with Pakistan, in 1959. Other states quickly followed this effort: Switzerland in 1961, the Netherlands in 1963, Italy in 1964 and Sweden in 1965. BITs in this period were generally quite short – approximately five to six pages. These BITs focus on core protection such as the obligation to accord non-discriminatory and fair and equitable treatment to foreign investors.

Early on, BITs began providing for binding ISDS in the form of international arbitration. However, international arbitration has been used to resolve claims from foreign investors with respect to their property since the 18th century.

In recent years some states have begun adopting new model BITs which are more elaborate than older treaties. The most recent one is India, where its 2015 model BIT provides more detailed ISDS provisions, among others setting time limit of submitting a claim to ISDS and possibilities of counter-claims by a state against a foreign investor. And the Norway 2007 Model BIT provides for example that the unsuccessful party in ISDS shall bear the costs of arbitration.

The ISDS blog has previously discussed some ISDS reforms embodied in the Comprehensive Trade and Economic Agreement between the European Union and Canada (CETA) and the US 2012 Model BIT.

What caused the rise of ISDS claims?

In a recent report by the European Centre for International Political Economy, Demystifying Investor-State Dispute Settlement, the history of the rise of investment protection and ISDS claims is analyzed.

The report responds to the question whether the increasing use of ISDS is a signal that investors have too much power in challenging actions by States.

It concludes the following:

a. At its core, the number of ISDS cases reflects the amount of investment in the world. The growth of ISDS cases and the growth of foreign direct investment (FDI) largely follow the same trend.

b. The key explanation behind the rise of cases is that the volumes of FDI have grown enormously. A portion of such FDI is made in developing countries and transition economies, hence resulting to greater problems faced by investors.

c. There is a growing support of the principle of international rule of law in commerce, demonstrated by the rising numbers of Bilateral Investment Agreements (BITs), as well as the WTO agreements.

d. The most active claimants in ISDS are investors from EU countries. This is not surprising as the EU is by far the biggest source of FDI in the world, representing 43% of all global outward FDI.

e. ISDS cases are concentrated to specific sectors that are highly dependent on public buyers or political support, for example the electricity sector. This is also not surprising since sectors with significant government involvement naturally have a greater degree of political and regulatory risk.

The increasing number of ISDS cases may be described as an increase of trust and reliance on international law in general, and to international arbitration specifically, both by investors and States.