Tag Archives: ISDS

UNCTAD updates ISDS statistics for 2016

Blogg_v9United Nation Conference on Trade and Development (UNCTAD) is the UN body responsible for investment issues. It regularly publishes reports and analyses about ISDS, as well as on about general investment treaty trends, including an annual update on recent developments. We have written about the reports from 2014 and 2015, but recently UNCTAD also updated its database with information from 2016.

 

Examples of statistics from this latest development include:

  • There were 62 new ISDS cases in 2016, a relatively high number compared to earlier years, with the exception of 2015, when 74 cases were initiated.
  • Colombia, India and Spain were the most frequent respondent states (with four cases each) but the cases were spread over 49 different host states.
  • The United States and the Netherlands were the most common investor nationalities.
  • Roughly two thirds of the cases were brought under bilateral treaties, but 10 were based on the multilateral Energy Charter Treaty.

All UNCTAD data, including the updates from 2016, are available in a searchable database here.

Frequent standards of protection: full protection and security (FPS)

Old and very used wooden Rubber StampOur first text about standards of protection in investment treaties is about the frequently occurring provision giving investors “full protection and security” (FPS). Most investment treaties contain this language, or wording similar to it.
In older treaties, the language is usually relatively short. These clauses have historically been interpreted to provide physical protection against interference with foreign investments, particularly during conflicts and/or in regions where the police power might interfere with foreign property.

The very first ISDS case, AAPL v. Sri Lanka, is an example of this interpretation. AAPL won its case against Sri Lanka, after the state was found to have neglected its duty to take precautionary measures in connection with a security force operation against the rebel group Tigers of Tamil. The operation, and the ensuing battle, destroyed AAPL’s shrimp farm, which the tribunal found could have been avoided if the state had acted differently.

A number of other FPS clauses have been interpreted more broadly, and even been found to encompass legal protection and legal security. Such interpretations of FPS overlap to the aspects of fair and equitable treatment (FET) which protects investors against denial of justice.

How broadly a tribunal interprets full protection and security is largely dependent on the language of the individual clause. Many new treaties therefore clarify the scope of the provision, most commonly by making clear that it only applies to physical protection.

Case Summary: Pac Rim Cayman LLC v El Salvador

Inside of salt mine shoot on corridorOur next case summary is Pac Rim Cayman LLC v. El Salvador and the summary is prepared based on the award rendered in October 2016.

The claim was brought based on the Central America Free Trade Agreement (CAFTA) and El Salvadoran Investment Law.

The investor held an exploration permit for a largely-underground gold mining site in Eldorado and further applied for an exploitation permit.  The dispute arose from the government’s refusal to grant exploitation license, which, according to the investor, amounted to several breaches of El Salvadoran Investment Law.

Meanwhile, the state based its refusal on the failure of the investor to obtain either ownership rights to all of the surface land in the concession area, or authorisations from all relevant landowners, as required under the Mining Law.

The tribunal decided to hear the claims under El Salvadoran law, which was allowed under the ICSID Convention, after it ruled that it did not have jurisdiction under the CAFTA.

The tribunal sided with the state and disagreed with the investor’s interpretation of the Mining Law which would not require authorisations from surface-level landowners if the activity does not involve surface-level land. According to the tribunal, the mining might pose environmental risks to surface landowners. Therefore, the investor’s interpretation was disproportionate to the risks.

In conclusion, the tribunal found that the investor did not comply with the requirement under the Mining Law to be granted an exploitation permit and therefore the government did not have any obligation to grant such permit to the investor.

The investor was also ordered to pay the majority of the state’s costs in the proceedings.

See other case summaries involving the mining industry here.

 

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.

Practical guide: information about ISDS

Books close up are on the tableIt could be difficult to get an overview of what happens in the ISDS world. This is because the international nature of this field and the fact that it lacks centralized information system. However, things are happening fast – new arbitral awards are rendered and states are concluding and terminating international investment agreements (IIAs)

We offer some practical guides to ISDS through the following sources.

 

Free services:

Italaw

The website, which has been around for a long time, publishes arbitral awards and other documents from ISDS proceedings. Researchers at the University of Victoria are managing the website. If you search for a particular ISDS dispute on the internet, it is often that Italaw comes first, which may indicate that the website has been visited a lot.

UNCTAD

The website of the United Nations Conference on Trade and Development provides user-friendly search functions for both arbitral awards and IIAs that contain ISDS as dispute settlement mechanism. In addition, it publishes reports on new updates and statistics on IIAs and ISDS.

PluriCourts Investment Treaty Arbitration Database (PITAD)

PITAD is a database project of all known ISDS cases, currently under construction by the University of Oslo. The database can be accessed via a request to the responsible researchers.  The researchers behind the project takes empirical approach and uses coded variables to classify hundreds of well-known arbitral awards.

ICSID and PCA

ICSID administers most ISDS cases and automatically publishes information about them (as long as the parties do not actively object to it). PCA, on the other hand, publishes information with the consent of the parties. Both organizations have searchable databases.

 

Service with paid subscription

Investment Arbitrator Reporter

This website publishes news and information about ISDS. IAReporter engages in ongoing investigative reporting, which leads to their reporting on many cases, awards and developments that are otherwise confidential. IAReporter also offers in-depth summaries and analysis of awards and decisions, which could be helpful for those who do not want to read the hundred-pages awards. In principle, one must pay for subscription, however IAReporter also provides free trials and discounts for those who cannot gain access otherwise.

Global Arbitration Review

This publication primarily targets legal practitioners in the arbitration field – but often publishes interesting interviews and summaries of proceedings for those interested in learning more about the practical sides of ISDS work.

Combating Climate Change through ISDS

White lily in an environment of green leaves on waterAn article demonstrates how ISDS provides the necessary tools to improve regulatory stability and predictability necessary for low-carbon investment. According to the author, ISDS has the potential to protect low-carbon investments against the risk of regulatory changes that can affect climate policies.

The text takes its starting point at the importance of private capital and technology in the transition to a low-carbon economy. The Kyoto Protocol establishes different implementation mechanisms for State parties to reduce greenhouse gas emissions, mechanisms in which private actors play important roles. In turn, governments may also establish different support schemes for investment in low-carbon technology. Some of the common schemes are guaranteed a minimum price for electricity produced by renewable resources (the so-called feed-in tariff) and investment aid for renewable energy producers.

The article points out some risks for low-carbon investment, including that authorities could withdraw the promised support or shorten its duration.

It further argues that some substantive protections under international investment agreements may play an important role.

One example is the ISDS case, Nykomb v. Latvia. In this case, the tribunal found that the government provided support scheme for low-carbon installations operated by domestic investors, but not for installations operated by foreign investors. The tribunal held that this amounted to discrimination, and the investor obtained compensation.

The article concludes that climate law and investment law are based on comparable principles but having different perspectives. Climate law creates rights and expectations for investors, while investment law aims to protect them. In turn, investment arbitration has the potential to limit the instability that currently affects the implementation of climate change mitigation policies.

Philip Morris v. Uruguay

Blogg_v34Our next case summary is Philip Morris v. Uruguay. This summary is prepared based on the publicly-available award rendered in July 2016.

The case reminds us of the one between Philip Morris and Australia. In both cases, Philip Morris claimed that their investment had lost value due to a new tobacco legislation and therefore the company is entitled to compensation.

The case against Australia was dismissed at an early stage, when the tribunal held that Philip Morris unlawfully took advantage of a subsidiary in order to get access to ISDS. Therefore, the tribunal did not examine the main issue of the case, which was the tobacco legislation itself. Meanwhile, the dispute with Uruguay went all the way to the assessment of the measure in dispute, and the majority of the tribunal found that the Uruguayan tobacco legislation did not violate the bilateral investment treaty between Switzerland and Uruguay (BIT).

Philip Morris based its arguments on two main parts of the Uruguayan legislation: first was the decision by the country’s Ministry of Health that bans selling different types of presentations of the same brand of cigarettes (it is not allowed to sell a product that is ”light”, ”menthol” or ”gold”). The second is a presidential decision which requires that the images of health warning on cigarette package increase from 50% to 80%.

The company argued that these measures violated several provisions in the BIT, including a violation of its intellectual property rights.

In the 300-page award, the tribunal asserted that intellectual property rights are indeed protected by the BIT – however it did not find that the state violated the agreement as the company failed to prove that it had suffered a level of damage required to find violation. Further, according to the tribunal, the state has a large policy space to implement reforms aiming to protect legitimate interest – and therefore this type of measure cannot be considered an expropriation or a breach of the fair and equitable treatment standard of protection as long as they are made on rational grounds and in good faith. It found that Uruguay had a genuine interest in protecting public health – and that the government adopted the reforms in a serious and well-motivated manner.

Another argument by Philip Morris was that it was denied a fair trial in the Uruguayan courts, where the company had first tried to appeal the tobacco measures. The company claimed that two different instances of court system in the country had ruled contrary to each other. In this case, even though the Supreme Court sided with the company, an administrative court chose ignore the Supreme Court and rejected the company’s appeal. The tribunal agreed that this was strange but at the same time viewed that this fact was not enough to consider that Philip Morris had been denied a fair trial.

Because Philip Morris’ claims were dismissed on its entirety, the company was ordered to pay the entire cost of the dispute, as well as 70% of Uruguay’s legal fees.

Arbitration throughout history

Close-up of open book and penThe Arbitration Institute of the Stockholm Chamber of Commerce will turn 100 years in 2017. As part of the celebrations in January, a book about the history of arbitration will be published, where lawyers and diplomats from all over the world each write about one particular dispute.

One of the contributions is written by the winner of a large competition initiated by the SCC and aimed at young lawyers. The competition inspired many highly qualified contributions and several were so well-written that they will now be published in a separate edition of Transnational Dispute Management Journal (TDM).

The four texts deal with four different arbitrations that affected international relations: from a border dispute between the United States and Great Britain in what is now Canada, via an early ISDS case from the year 1900 over a Portuguese railway project and a relatively recent arbitration between Singapore and Malaysia, which was concluded at the Permanent Court of Arbitration in 2014.

You can read more about the publication, including the foreword by SCC Secretary-General Annette Magnusson, here.

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”.

ISDS not used to change legislation

law concept. studio shotsIt has been perceived that States who entered into international investment agreements (IIAs) with arbitration clause risk being sued by foreign investors when they change legislation which causes negative impact on certain investments. However, a study by German and Dutch researchers have shown that foreign investors have very rarely used ISDS to seek damages due to legislative changes. Neither has ISDS been used to hamper introduction of a new law.

The study shows that most ISDS cases have targeted contracts between a State and foreign investors, or the rejection or modification of licenses. Another study by the Columbia Center on Sustainable International Investment, quoted in the German and Dutch study, shows that among all ICSID cases up to 2014, only 9% of cases dealt with legislation. Only half of the cases concerned government actions, and the rest dealt with decision-making by local governments and state-owned companies.

Previous claims under the North American Free Trade Agreement (NAFTA) for damages caused by legislative changes have all failed, according to the study. In a well-known case where investors brought a claim for damages allegedly caused by legislative changes, the recently-decided Philip Morris v. Australia, the investor’s claims were dismissed at an early stage.

In conclusion, studies have shown that it is very rare that foreign investors used ISDS to challenge States’ legislative powers in areas such as for example environment protection and public health. Instead, the study found that in the vast majority of cases, investors claim compensation on grounds that the State violated its concrete commitments in the form of contracts or licenses.