Tag Archives: International investment

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”.

Arbitrators’ expertise makes ISDS strong

???????As investment and trade develop, disputes will be more diverse. Looking back at history, the International Center for Settlement of Investment Disputes (ICSID) only registered 28 ISDS cases during the first two decades after its establishment. In contrast, there have been 38 cases registered at the ICSID in the year 2014 alone. The substantive issues of disputes have become more diverse, and therefore a wider range of expertise is needed to solve the disputes.

One cannot perceive how future disputes will look like and what expertise will be required. At the same time, the quality of ISDS outcome needs to be ensured. The current practice has served this purpose by allowing parties to the dispute and/or arbitration institutes to appoint arbitrators from a broad range of expertise, as opposed to a pre-determined list.

Let’s look at some of the cases. In Glamis Gold v. USA, the tribunal had to decide whether a requirement to conduct a certain mining technique had constituted an indirect expropriation. This case required expertise to assess the value of the mining project, including evaluation of mineral price. In fact, the tribunal contributed 100-page analysis only on this issue.

In another case, Methanex v. USA, the tribunal was faced with lengthy submissions from parties on whether or not a certain chemical for fuel production was dangerous for the environment. In addition, there have been other complicated disputes on, among other things, electricity pricing and gas pricing. The above cases are only small part in the big pool of ISDS cases which requires specific expertise.

The current system of arbitrator’s appointment has made international arbitration able to adapt with the present needs of dispute resolution. Most importantly, it can keep up with the trade development. It is therefore unwise to replace this important feature with a pre-determined list of arbitrators.

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.

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.

 

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.

ISDS in support of climate change mitigation

Environment concept. Glass globe lying on green leaf surfaceThe challenges and future of ISDS was discussed at length recently in Warsaw at an international event organized by Lewiatan Court of Arbitration.

One of the topics addressed was how the investment protection regime can contribute to a better environment. SCC Secretary General Annette Magnusson, who have spoken and written on this topic on several occasions before, addressed the audience on the need for visionary treaty terms in future treaties.

-  If we can combine treaty terms that truly reflect the role played by private investments for a better environment, and the existing enforcement mechanisms of international arbitration, I believe true progress for the environment could be achieved on a global level, Annette Magnusson said.

The full speech is available here.

Read more about ISDS and sustainable development:

Environment Needs Visionary Treaty Drafting

Climate Change Justice Calls for Enhanced Legal Regimes

Investment Law Reform and Sustainable Development

Case Summary No. 7

Blue chemical cans all over. Outdoors on chemical plant.We continue our series of case summaries with SD Myers v. Canada, a NAFTA dispute decided under the UNCITRAL arbitration rules. The summary is based on the facts as described in the three separate awards rendered by the arbitral tribunal between November 2000 and December 2002.

S.D. Myers, Inc. (“SDMI”) is a United States corporation that processes and disposes of polychlorinated biphenyl (“PCB”), an environmentally hazardous chemical compound used in electronics manufacturing. SDMI created a Canadian affiliate with the aim of soliciting orders for the destruction of Canadian PCBs at its U.S. facility. The U.S. had banned the import of PCB from Canada in 1980, but granted SDMI an exception in 1995. Promptly after SDMI had been granted permission from the U.S. government to import PCB waste from Canada, Canada issued an order prohibiting the export of PCB waste to the U.S. The prohibition was in effect for approximately 16 months.

SDMI filed claims against Canada under the UNCITRAL Rules in October 1998, alleging that Canada’s ban on the export of PCB waste had violated several provisions of Chapter 11 of NAFTA. SDMI claimed that it had suffered economic harm to its investment through interference with its operations, lost contracts and opportunities in Canada. Canada maintained that the ban had been motivated by environmental concerns.

In its first partial award, on liability only, the tribunal found for the investor with respect to its Article 1102 and 1105 claims, holding that Canada had violated NAFTA’s national treatment and minimum standard of treatment provisions. According to the tribunal, the evidence showed that Canada’s ban on PCB export was not driven by environmental concerns, as asserted by Canada, but intended primarily to protect the Canadian PCB disposal industry from U.S. competition. The investor’s claims regarding expropriation and performance requirements were dismissed. Canada challenged the award in its own federal court, on the grounds that the tribunal had exceeded its jurisdiction and that the award was against Canadian public policy. The court dismissed the challenge.

The tribunal issued two subsequent awards, on damages and costs, respectively. On damages, the tribunal reasoned that the investor may only be compensated for harm proximately caused by the breach of the specific NAFTA provision. According to this principle, indirect harm such as loss of opportunity or a damaged reputation are too remote to warrant compensation. The tribunal thus awarded SDMI damages of CAN$ 6 million, a fraction of the US$ 70 million claimed by the investor. 

Case Summary No. 6

Image of blurred store for backgroundOur sixth example of an ISDS case is Franck Charles Arif v. Moldova, a case filed with the International Centre for Settlement of Investment Disputes (ICSID) in Washington, D.C. The summary is based on the facts as described in the award rendered in April 2013.

The claimant, Mr. Franck Arif, a French national, was the sole owner of a company that had won a state tender to operate a series of duty-free stores at five locations along the Romanian border. The company had also secured the exclusive right to operate a duty-free store at the country’s main airport. In filing for arbitration, Mr. Arif argued that the success of his investments had been obstructed by a series of government delays, unnecessary inspections, and domestic judicial decisions that invalidated both the tender for the border-stores and the lease agreement for the airport store. Mr. Arif argued that the Moldovan state’s actions had violated several provisions of the bilateral investment treaty (BIT) between France and Moldova.

The arbitral tribunal rejected most of the claimant’s claims (e.g. expropriation, denial of justice, discrimination), but granted one of his claims based on the fair and equitable treatment standard set forth in the BIT. In short, the tribunal found that the state’s actions had frustrated the investor’s legitimate expectation of a secure legal framework in which to operate the airport store. For this breach, the investor was awarded USD 2.8 million in damages, significantly less than the USD 44 million he had requested. The tribunal also gave Moldova the option of further reducing the damages owed to Mr. Arif by offering restitution instead—in effect allowing him to re-open the store at issue.

Mr. Franck Arif also sued Moldova at the European Court of Human Rights in Strasbourg, on the grounds that the Moldovan government’s actions breached the European Convention on Human Rights. Disputes before European Court last many years; no verdict has yet been reached in the case filed by Mr. Arif.

Investment Treaty Forum in Stockholm

ITFSeminarThe Investment Treaty Forum was recently held for the first time in Stockholm.

The British Institute of International and Comparative Law, in cooperation with the SCC, Mannheimer Swartling and Uppsala University, organized Investment Treaty Forum in Stockholm on 12 June 2015.

The Investment Treaty Forum was founded in 2004 with the aim to provide a global centre for serious high level debate in the field of international law. The theme of the meeting – Europe as an Investment Treaty Actor – brought together speakers and participants from government, legal practitioners, academia, politicians and business. See the full program here.

The importance of investment treaty for European economic development was one of the topics discussed. Investment treaty contributes to predictability, stability and transparency in investment relation. It was further highlighted that investment treaty will benefit not only the industry, but also governments and consumers. Investment treaty has the potential to open up new market opportunities for European investors abroad and also to make Europe a more attractive place for investment. But there were also critical voices raised, questioning the need for investment protection.

The evolution of substantive terms of investment treaty was equally addressed. States retain full control of the regime, among others by issuing interpretation of the treaty and by introducing new provisions of investment protection. The former has been done by the state parties to the North American Free Trade Agreement and the latter by, among others, the European Commission.

The seminar ended with the well-anticipated discussion on the roles of the European Commission in investment law regime. In addition to its role as negotiator of future investment treaty, the Commission has also emerged as litigator and enforcer in the regime.

More pictures and presentation materials from the seminar will be published here shortly.

 Photo: Björn Leijon

 

 

 

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.