Tag Archives: Investment arbitration

New report on investment arbitration

invstatesccnews

The Arbitration Institute of the Stockholm Chamber of Commerce (SCC) has published a new report prepared by legal counsel Celeste E. Salinas Quero. She describes, among others, the economic sectors involved, the states’ measures most frequently challenged by investors, the outcomes and costs of investment disputes under the SCC Rules.

SCC is a preferred venue for investment arbitrations. Over the past 20 years, the SCC has administered and acted as appointing authority in more than 90 investment arbitrations, both in small-sized and in large-scale disputes.

The report shows that most awards have been rendered in favor of respondent states, with 21% of tribunals declining jurisdiction, 37% denying all of the investor’s claims and 42% of tribunals upholding the investor’s claims in part or in full. As regards costs, the report reveals that while “splitting the baby” is a common approach taken by tribunals, most tribunals allocate and apportion the costs between the parties in a proportion that reflects each party’s relative success and conduct throughout the proceedings.

Read the full article below.

Article: Investor-state disputes at the SCC – by Celeste E. Salinas Quero

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.

Host states’ legitimate expectation

Scenic landscapes of Northern ArgentinaThe investor’s legitimate expectations are often a key question in ISDS cases. Such expectations can be based on, for example, the host state’s laws, policies, or contractual commitments – such as when a host state granted the investor mining rights for a certain number of years. A violation of these expectations can be a ground for the investor to bring an ISDS claim against the host government. Several tribunals have ruled that a host country cannot act contrary to the investor’s legistimate expectations.

Karl P. Sauvant and GüneşÜnüvar have written an article published by Columbia Center for Sustainable Investment, introducing the question of whether or not states can also have legitimate expectations towards the foreign investor. According to the article, such expectations may arise from, for instance, the investor’s statements of its contribution to the host country.

As an example, the article points to Sempra v Argentina, where Argentina argued that it “had many expectations in respect of the investment that were not met or otherwise frustrated … (such as)… work diligently and in good faith…”. The article also notes, however, that since governments currently cannot initiate ISDS proceedings against foreign investors, their reliance on legitimate expectations is limited to counterclaims brought in response to investors’ claims. See our previous post about counterclaims here.

Finally, the article proposes that future international investment agreements (IIAs) could explicitly stipulate that host states’ legitimate expectations are protected, thereby establishing a right for host states to bring a claim on this basis.

Transglobal Green Energy v. Panama

Panama2016This case summary is based on the publicly-available ICSID award in the case between the American company Transglobal Green Energy (”Transglobal”) and The Republic of Panama. In the award from June 2, 2016, the arbitral tribunal rejected the case early on and found that the investors attempted to abusively create jurisdiction under an investment treaty.

The case centered around a hydro-electric power plant in Panama. A company owned by Panamian national Julio Cesar Lisac had been awarded a concession to operate the plant for 50 years. After the first year, the Panamian authorities found that Mr. Lisac’s company did not meet the requirements of the concession and therefore terminated the agreement (and later awarded the concession to another company). Mr. Lisac challenged this termination in Panamanian courts.

Subsequent to the termination of the concession, Mr. Lisac transferred part of his company’s interests in the power plant project to Transglobal, a company incorporated in Texas. Using Transglobal’s American nationality, an arbitration was brought against Panama based on the bilateral investment treaty (”BIT”) between USA and Panama. The investors alleged that the termination of the 50-year concession was made in violation of the BIT.

The arbitrators found that they did not have jurisdiction over the case and thus rejected the claim early in the proceedings. Since Mr. Lisac and his comapny both had Panamanian nationality, the move to transfer the interests in the power plant to American-incorporated Transglobal was held to be made with the only purpose of obtaining protection under the BIT between USA and Panama. Therefore the tribunal stated that the investor attempted to create ”artificial jurisdiction over a pre-existing domestic dispute”, thereby abusing the system of investment treaty arbitration.

The tribunal’s reasoning was similar to that in Philip Morris v. Australia, where another tribunal refused to hear Philip Morris’ claims because they were found to constitute an abuse of the investment treaty system.

Both these recent cases demonstrate that there is no room to exploit ISDS to bring unjustified claims. One academic recently described this as a tendency by tribunals to ”police the gates to investment treaty claims against states”.

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.

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.

ISDS AT COP21: ENFORCEMENT OF CLIMATE COMMITMENTS

Globe between two pairs of clasped handsIn a speech in Paris during the COP21 summit, the president of the International Bar Association David Rivkin expressed hope that ISDS could bridge the current enforcement gap in international environmental law.

Specifically, Rivkin highlighted the role of neutral and accessible dispute resolution mechanisms in enforcing commitments and underlying pledges made by state parties to the UNFCCC negotiations. He also noted that the existence of mechanisms for resolving disputes between investors and states is crucial to incentivizing foreign investment in renewable energy.

Noting that the fiercest critics of ISDS tend to focus on the system’s purported chilling effect on a state’s regulatory ambitions, Rivkin explained that this “regulatory chill” relates to the substantive terms of the treaties rather than to ISDS procedure.

Rivkin remarked that in the “new wave” of investment treaties and agreements, “environmental issues are being considered increasingly by states at the outset of drafting investment chapters”. Today, most BITs include some environmental language, and many contain a general reservation of policy space for environmental regulation. Rivkin emphasized that a number of recent BITs have included specific obligations to promote sustainable development, to encourage trade in environmental products, or to facilitate FDI in environmental technologies or eco-labeled goods.

Commenting on these developments, Rivkin noted:

It is clear that we are entering a new era of BITs/FTAs, in which states are delineating more specific obligations in the negotiation of these agreements, both as to standards of investor protection and regulatory autonomy. As we are seeing in the context of TTIP, CETA and TPP, ‘self-calibration’ of the ISDS system is already evident. In the future we may also see more movement in the areas of state counterclaims, which would be particularly relevant for environmental claims.

Rivkin also discussed the recent report by the IBA Task Force on Climate Change Justice and Human Rights, which provides a comprehensive coverage of pro-environment clauses included in investment chapters.

Read the full speech here.

ISDS at the Peace Palace

PeacePalaceFinalYear 1899 marks the beginning of the Philippines – American war. In the same year, the Spanish-American war ended. It also marks the first international peace conference in the Hague, which represents an important point of time for international arbitration.

The Hague Peace Conference was an initiative of Czar Nicholas II of Russia, the aim of which was to ensure a lasting peace and to limit armaments. One of the proposals that was put forward in this conference was to create an institution for international arbitration to settle international disputes in order to replace institution of wars.

One of the biggest achievements of this conference was the signing of the Convention for Pacific Settlement of International Disputes (“Convention”). The Convention created the Permanent Court of Arbitration (PCA) which is housed in the Peace Palace in the Hague.

Since then, the PCA has administered a large number of high-profile arbitration between states. In Grisbådarna Case between Sweden and Norway, the dispute on the maritime boundary between the two countries was resolved. Another case concerned a bloody conflict between Eritrea and Ethiopia. The two countries submitted to the PCA to settle the delimitation of their borders and to settle claims arising out of violations of international law during the conflict.

Today, the roles of the PCA and international arbitration have moved beyond maintaining peace. It continues to contribute to rule of law by administering ISDS cases – which in the end plays a role in promoting economic development and international trade.

One of the high-profile cases is Chemtura v. Canada, in which a U.S investor brought a claim against Canada due to Canada’s decision to ban sale of a pesticide produced by the investor. The tribunal found that there was a legitimate public health reason behind this ban and therefore it rejected the claim of the investor in its entirety.

Further, the PCA is currently administering a case in which a Canadian investor brought a claim against the government of Barbados for, among others, failure to implement the environmental laws and to abide by its environmental treaties commitments. The investor claimed that this failure has damaged natural sanctuary owned by the investor. The case is still pending however it shows that environmental protection is an important question that may appear in ISDS.

Two centuries after the Hague Peace Conference, international arbitration is still highly relevant as a rule of law mechanism to solve international disputes. This is a value that should be appreciated, not undermined.

 

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.