Protecting International Commercial Arbitration in Europe

by Chris Wilford, Chartered Institute of Arbitrators*

The current highly politicised debate surrounding the inclusion of investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership (TTIP), which allows investors to bring claims against a State before an international arbitral tribunal, has brought arbitration into the spotlight.

While ISDS is a special form of arbitration and the circulation of myths about the investment protection regime, such as the characterisation of arbitration tribunals as “secret courts” and that they are somehow biased towards investors continue to be spread, this development threatens to bring other forms of arbitration into disrepute: including international commercial arbitration.

In light of this threat of mixing ISDS with international commercial arbitration, it is important to recall the basic notions of arbitration and emphasise the advantages of international commercial arbitration.

Arbitration is a formal and private dispute resolution process where arbitrators imposes an impartial and independent judgement on the parties, with their authority derived from private agreement. Its strengths are that it provides a final and binding award, it is confidential and that those in dispute can choose an independent neutral who usually has significant expertise in the relevant field.

More specifically, international commercial arbitration plays a key role in supporting global commerce and gives businesses confidence that they will have access to redress across the world.

International commercial arbitration is a tool that is regularly used to resolve complex contractual disputes across every sector of the economy. This includes the confidential resolution of disputes associated with construction and infrastructure projects, high value technology solutions, and the pharmaceutical industry.

Europe is the leading centre for international commercial arbitration. It is estimated that over a third of arbitrations in the world that take place annually are seated in Europe, which is home to leading centres such as London, Paris and The Hague. The value of legal exports to the UK economy alone is estimated to be worth some £3.1 billion per annum by TheCityUK.

It is important to highlight that international commercial arbitration is operating within a well functioning legal framework, such as the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the “New York Convention”). This Convention ensures that the over 150 States that are party to it respect arbitration agreements and enforce them by their court systems. In addition, numerous arbitration institutions, such as the ICC and the LCIA, provide the necessary institutional and administrative support for allowing international commercial arbitration to take place effectively and efficiently.

CIArb, which celebrates its 100th anniversary, is itself an important institution that ensures and the high level quality of arbitrators through its training and development programme. It is mandated by its Royal Charter to promote all forms of private dispute resolution worldwide. As well as delivering education, training and qualifications, CIArb works through its international network of members to develop the learned society within alternative dispute resolution (ADR).

With the unprecedented scrutiny of private dispute resolution as a result the inclusion of ISDS in TTIP and the Trans-Pacific Partnership (TPP) negotiations, CIArb has been playing a leading role in engaging politicians, policymakers and wider civil society to tackle the myths being circulated about ADR and promote its benefits. This has included the launch of the CIArb London Centenary Principles for an effective, efficient and ‘safe’ seat in international arbitration at our London Centenary Conference.

The CIArb London Centenary Principles are not another set of model rules for an arbitral institution. They are principles which recognise that the importance of international arbitration today and the loosening of ties between international arbitration and national law requires a number of key characteristics to make a particular place an appropriate and effective arena in which to conduct international arbitration; including professional bodies helping to provide a framework for the ethical conduct of international arbitration at work.

Investors frequently use arbitration to settle disputes between themselves. If arbitration was indeed biased, businesses would not have the confidence to use it international commercial arbitration as a dispute settlement mechanism in commercial contracts.

Indeed, a recent study of the European Parliament came to the conclusion that commercial arbitration may facilitate the EU’s goals of ensuring access to efficiently-delivered justice and dispute resolution.

At a time when Europe is emerging from a deep economic crisis, the EU should recognise that international commercial arbitration supports international investment, jobs and economic growth. Europe also faces increasing competition in international commercial arbitration from emergent centres in the Americas and the Far East. It is therefore critical that any action taken in relation to ISDS does not jeopardise Europe’s leading position in international commercial arbitration.

These are just some of the reasons why international commercial arbitration must be protected in Europe. For the same reasons, international commercial arbitration and ISDS need to be clearly distinguished in the public debate. If not, Europe’s reputation as a neutral and independent destination for commercial arbitration, where the rule and law and right to property as expressed in the Charter of Fundamental Rights of the European Union are respected and upheld, could be tarnished for a generation.


Chris Wilford, Head of Policy & Public Affairs, Chartered Institute of Arbitrators (CIArb), London, CWilford@ciarb.org

Before the Other Shoe Drops: The Current State of Renewable Energy Arbitration in Spain

by Clifford J. Hendel, Araoz & Rueda Abogados

Until three or four years ago, both the Energy Charter Treaty in general and arbitration based on it were essentially unknown in Spain. Investment arbitration itself was a rarified specialty, known only to a handful of intrepid companies and a small cadre of advisors. The experience of the few Spanish practitioners who had any typically involved claims brought by Spanish entities against recalcitrant (and often belligerently recalcitrant) states such as Venezuela and Argentina. For so long as ECT and investment arbitration involving Spain was limited to one or two exceptional cases, rather than the “typical” case in which the Spanish party was the investor claiming denial of its treaty rights, the Spanish press paid little or no attention to the issue and the Spanish public remained blithely ignorant. The recently raging debate over ISDS drew little attention in Spain.

Times have changed. The pigeons have come to roost, some have said: Spain is the new Venezuela or Argentina, others have chimed in. An avalanche of ECT cases (24, as of this writing) has been filed against the country in the past few years; ten of these were filed with ICSID in the year ending June 30, 2015. Legal and financial advisors are falling over each other in order to get in on the action. The Spanish government has created (à la Argentina) a specialized internal team of experts to coordinate the defense against these claims, rather than relying (except in the very first cases) on outside counsel.

None of the cases has reached a decision on the merits. Given the amounts at stake, the time inherent in processing claims of this sort, the jurisdictional issues typically raised and the not uncommon practice of bifurcating liability and damages, this is not surprising.

But the older cases are nearing their end, and jurisdictional objections in some of them have reportedly been rejected. The first decisions on the merits are expected during the course of 2016. Before that shoe drops, it is worth taking a look back to see how it happened that Spain has become such a frequent target of ECT claims.

In the past two decades, Spain adopted a clear and concerted policy favorable to the development of renewable energies of all types. The lynchpin of the then-government’s Renewable Energy Plan 2005-2010 was a series of incentives to long-term investment including especially a generous guaranteed feed-in tariff. The policy worked: investment in Spain renewable energies grew spectacularly, and Spain and a number of Spanish companies became leaders in the field.

But it may have worked too well: the amount of investment attracted was excessive and long-term maintenance of the feed-in tariff and generally generous remuneration system seemed a practical impossibility causing government officials to conclude after the financial crisis of 2008 hit that the country could not afford to maintain the remuneration system in place: for a variety of reasons (many having nothing to do with renewable energy and the renewable remuneration system) a gaping “tariff deficit” had opened, with revenues generated by electricity sales being vastly outweighed by the associated costs. So starting in 2010, Spanish governments (of both stripes) have had a consistent policy – evidenced in a bevy of legal and regulatory measures which have the industry up in arms, accusing the government of creating legal uncertainty and damaging the attractiveness of Spain to foreign investors – of limiting payments to renewable investors and investments so as to reduce and (finally) eliminate the tariff deficit.

An essential and highly-controversial aspect of the reforms is the implementation of a new remuneration scheme for electricity generation, based on assuring “reasonable profitability” (linked to the yield of Spanish government bonds) for renewable plants.

Countless challenges to these measures have been filed in the Spanish courts by domestic investors. But the Spanish Supreme Court’s jurisprudence in the area seems to cast a cloak of immunity on the State in its regulatory (or “re-regulatory”) activity, essentially concluding that sophisticated investors should be aware of the inherent regulatory risk involved in their investments, thus shutting the door on their claims, so long as a reasonable return was provided and subsidies or benefits already granted were not required to be returned.

The recourse of foreign investors, though, is not limited to the Spanish courts. So, what began as a trickle in late 2011 with an ECT claim brought under UNCITRAL by a series of international investors in the Spanish photovoltaic sector, has now become a barrage, with at last report twenty ECT cases pending against Spain under ICSID and three being administered under the Stockholm Chamber of Commerce, in addition to the initial UNCITRAL claim, and involving all types of renewable energy.

It remains to be seen if the arbitral panels will be as dismissive as the Spanish courts (and the Spanish government) have been in casting aside the foreign investors’ ECT-based complaints of denial of fair and equitable treatment, creeping expropriation and improperly retroactive changes in the playing field. Arguments that the reforms were necessary, that they do not discriminate versus international investors and the like may not cut the mustard (i.e., be persuasive or even particularly relevant) before arbitral tribunals with the ECT in hand as much as they do before Spanish courts with Spanish Supreme Court jurisprudence in hand.

From what can be gleaned from press reports, it would seem that Spain has failed in at least one case to have the ECJ declared as the competent body to hear these disputes, rather than (as a national newspaper reported the words of an unidentified government source) “three guys meeting in a hotel in Paris”.

Speculating on the outcome of pending cases is always a difficult exercise. This is particularly true when one has only very limited knowledge of the facts and arguments of each case.

But a reasonable and reasonably sophisticated Spanish taxpayer and consumer of electricity may have very good reason to be concerned that one, another or a whole series of the pending arbitrations may be decided adversely to Spain. If that point is reached, and before a new and even larger wave of similar claims is filed, the Spanish government may have a very difficult decision to make: find a way to “settle” with an entire industry (or, indeed, set of industries), comprising both foreign investors who have filed arbitrations and Spanish investors who cannot, without planting the seeds for the growth of a new tariff deficit; or follow Argentina’s path of resisting enforcement of adverse awards until the bitter end.

This second path seems entirely impossible. Yet the first seems to be a veritable political and economic Rubik’s Cube. The temptation for the government will be to kick the ball down the road for as long as possible. But the road may be getting shorter and shorter. The day of reckoning is fast approaching. The other shoe may be about to drop.

Updated OECD Policy Framework for Investment Supports Green Investment Arbitration

by Orçun Çetinkaya, Moroğlu Arseven

In June 2015, the OECD shared an updated Policy Framework for Investment (“PFI”) with the international community. The OECD aims to continue contributing to the international investment landscape by guiding investors and governments, while supporting dialogue between these parties and promoting sustainable development. The PFI’s main objective is to establish cooperation and balance between the expectations and requests of investors, compared to government investment policies.

The update PFI addresses 12 aspects of international investment:

  • Investment policy,
  • Investment promotion and facilitation,
  • Competition,
  • Trade,
  • Taxation,
  • Corporate governance,
  • Finance,
  • Infrastructure,
  • Developing human resources,
  • Responsible business conduct,
  • Public governance,
  • Support of green growth.

The updated PFI introduces major reforms with regard to environment aspects. Within the investor-state arbitration system, the arbitral tribunal can potentially rule that public measures imposed by governments through environmental policies and regulations are actually contrary to the country’s international investment obligations and liabilities.

Accordingly, the updated PFI regime will play a significant role in setting governments’ environmental policies and ensuring compliance with international investment law. Governments can use the new PFI to determine whether current or prospective environmental policies or applications respect essential investment law principles. Thus, environmental policies and international investment treaties can be better designed from the outset, assisting the parties to avoid becoming involved in later disputes.

To predict the new PFI’s effect on green growth and environmental-related disputes, it is important to first consider the current status of environment-related clauses under international investment treaties and jurisprudence.

Current Status of International Investment Treaties and Jurisprudence

Public awareness has increased in recent years about the importance of sustainable development. Accordingly, governments’ environmental actions have rapidly increased. Environmental policies and relevant regulations have undergone fundamental changes since the 2000’s. However, environmental actions by governments can lead to sudden and unexpected adverse impacts on expensive and well-planned investments. The number of environment-related disputes has risen and taken on a new significance. International investment undertakings and customs require governments to promote and facilitate international investment. However, running contrary to this are governments’ obligation to protect public and environmental health. These competing obligations inevitably lead to conflicts between governments and investors.

International investment treaty jurisprudence shows that arbitral tribunals tend to consider environment-related disputes based on facts, rather than strict legal provisions. During arbitral proceedings, governments generally refer to police powers when discussing the importance of environmental measures in public health. The state party will generally claim that its regulation and measures imposed are non-discriminatory, non-arbitrary and in line with reasonableness and proportionality.

Most investment treaties only include a general clause about protection of the environment, rather than specific environment-related provisions or exceptions. Therefore, most treaties do not specifically refer to the environment and do not adopt a systematic approach to environmental issues.

Having said that, environmental protection and public health and safety are not the primary objectives of international investment treaties. Therefore, investment treaties simply state that governments can regulate environmental matters, as well as promote or impose environmental protection measures, when necessary and to the extent required. The effect of these widely-drafted clauses is that governments have a considerable margin of interpretation. Therefore, arbitrators may decide that government measures or actions are arbitrary or discriminatory. To date, arbitral tribunals have generally adopted approaches and interpretations of environment-related clauses which weigh in favor of investors.

It is normal for governments to seek to protect public and environmental health by suspending or removing certain investor rights and privileges, or by forcing investors to comply with new provisions. However, due to the lack of well-designed environment-related provisions in international investment treaties, governments generally bear the burden of proof. During disputes, the state party must submit relevant scientific evidence, as well as demonstrate compliance with international principles and requirements.

International investment treaties are drafted as one sided undertakings; most do not regulate investor obligations and liabilities. Therefore, since investors are not parties to the investment treaties, arbitral tribunals generally tend to prevent governments filing counterclaims against investors.

Arbitrators’ assessments and evaluations were mainly based on material facts, rather than legal instruments. The limits of government police powers and underlying motives should be clear, predictable and understandable for parties to international investment treaties, as well as to arbitral tribunals. Therefore, international investment treaties should include specific clauses and clear environmental policy goals. Accordingly, a new policy or a guide was necessary, to determine appropriate standards for current and future government environmental activities, as well as allow environment-related arbitral proceedings to be based on clear legal provisions, as well as material facts.

The Updated PFI

To support investment for green growth, the OECD determined key issues for policy makers when planning, negotiating and executing international investment treaties:

  • Ensure strong government commitment to support the green growth and catalyze private green investment, at national as well as international levels;
  • Improve the coherence of investment promotion and facilitation measures to support green growth as a means to sustainable development, including aligning the broad system of investment incentives and disincentives, as well as phasing out inefficient fossil-fuel subsidies;
  • Reform policies to enable green investment, including applying essential investment policy principles such as non-discrimination, transparency and property protection in areas which tend to attract green investment. For example, renewable energy, water resource management, or multi-modal, climate-resilient transport infrastructure systems;
  • Address market and regulatory rigidities that favor incumbent fossil-fuel and resource intensive technologies and practices, for instance in the transport, electricity or water sectors
  • Provide public financial tools, instruments and funds to facilitate access to financing and attract co-financing for green projects (including attracting long-term institutional investment), while ensuring value for public money;
  • Enhance co-ordination and improve public governance across and within levels of government, especially among environment and natural resource management, energy and investment authorities;
  • Establish policies to encourage environmentally responsible business conduct and broad stakeholder participation in green growth, including green investment strategies; and

Address other cross-cutting issues, such as:

  • Establishing policies to support effective private sector participation (international or domestic) in green infrastructure projects, including through joint ventures or public-private partnerships;
  • Addressing outstanding barriers to international trade and investment in environmental goods, services and projects.

Arbitral proceedings initiated against governments regarding environmental issues have increased and seem likely to continue increasing. The updated PFI recommends governments ask themselves either:

“Is the government addressing green protectionist measures (such as local content requirements) that are increasingly being challenged in investor-state dispute settlement (ISDS) and international treaty claims? At the same time, is the government monitoring whether investment treaties are interfering with environmental policies?”

 Or alternatively:

“Does the government respect core investment principles such as investor protection, intellectual property rights protection and non-discrimination in areas susceptible to attract green investment?”

Conclusion

To maintain sustainable development, governments should revise their existing investment treaties and environment-related policies to bring these in line with the OECD’s updated PFI. However, regulations issued or amended in response to the updated PFI could give rise to disputes if the changes have retrospective effects over investments.

For now, it seems difficult for governments to recognize and prioritize environmental protection above promotion of international investment and foreign direct investment. However, governments must adopt sustainable efforts to regulate precise exception clauses for environmentally sensitive sectors. Such clauses will allow investors to predict possible government measures or actions, then invest accordingly. Increased certainty will allow investors to avoid and resolve disputes more easily, without taking recourse to courts or arbitral tribunals. Well considered and clearly drafted exception clauses ensure more protection for governments, compared to general clauses related to public health and safety. Such an approach enables governments to clearly identify environmental areas which are exempt from investment claims.

Current treaties are drafted exclusively from the point of view of governments, with governments unilaterally undertaking to promote and respect foreign investment. Therefore, while it is investors which seek relief in nearly 100% of environmental-related disputes before arbitral tribunals, governments generally do not bring counterclaims against investors. If treaties contained explicit consent from investors in relation to governments’ rights to file counterclaims, the arbitral tribunal would not need to consider whether it is qualified to hear such a claim and the state party may be more eager to file counterclaims.

Within this context, the updated PFI recommends that investors engage in responsible business conduct. Investment treaties can be modified to include a right for governments to file counterclaims before an arbitral tribunal if investors fail to fulfill obligations and responsibilities related to environmental and public health and safety matters.

Governments can include clauses in investment treaties stating that environment-related disputes arising from investor or government actions will be subject to the Optional Rules for Arbitration of Disputes Relating to the Environment and/or Natural Resources.

The Optional Rules were prepared by the Permanent Court of Arbitration and are based on the United Nations Commission on International Trade Law Arbitration Rules. Since environment-related disputes require scientific and technical analysis, the Optional Rules assist the parties and arbitrator to review and evaluate scientific matters.

Governments should regularly and carefully monitor their international investment treaties in light of their own environmental policies. International investment treaties should be clearly drafted, specifically considering environmental matters and be a reflection of national environmental policies. Such an approach allows arbitral tribunals to effectively address, analyze, review and conclude environment-related disputes, as well as ensure scientific evidence is assessed against consistent minimum standards.

Beyond the Blockade: Law and Politics in the Investment Law Debate (A Further Reply)

by Horia Ciurtin LL.M., Managing Editor of the EFILA Blog*

This post represents a counter-reply to Emanuela Matei’s material “Defining International Investment Law for the 21st Century (A Reply)”, published on the EFILA Blog on 11th September.

Prologue: Antagonism and Agonism

There is no doubt that false dichotomies and sophistically (a)moral choices between two imagined evils are at the cause of nowadays chaotic debate regarding international law. Such Manichaean positions tend to polarize theoreticians and practitioners, lawyers and civil society, EU law proponents and investment law defenders, sovereigntists and European federalists in a never-ending race toward the horizon of a new conceptual hegemony.

Therefore, Emanuela Matei is right to argue that such oppositions are nothing but straw men intended to move the attention far away from the pressing issue of the moment (and from a possible real solution). Moreover, all the parties are led – in this manner – into the temptation of legal (and political) self-righteousness, professing isolated monologues and autarchic systems of meaning that are not meant to meet the other side in a common space of discussion. Hostile antagonism thus prevents constructive agonism from arising.

The Dialectics of Investment Law

However, my initial thesis was slightly different than Emanuela Matei’s representation of it. I never argued that allowing any modification of the current BIT structure – and its ISDS clauses – would irremediably compromise the investment regime. Far from me to develop such an apocalyptic scenario or endorse the position of those that argue that the present investment law system is without fault and in need of no reformation.

Rather, the intention was to depict two alternative attitudes that claim to finally solve the ISDS problem: one by modifying its terms of reference and procedures, the other by totally obliterating the investment law regime. However, none of them presents a true solution, a way out of the normative labyrinth, but rather a self-defeating detour that prolongs the stumbling of the entire system.

The first of them, metamorphosis, is not – in my vision – a Kafkaesque transformation, not a tragic and grandiose loss of legal sense. Such a metamorphosis, as experienced by the investment regime today, is rather one in the vein of Apuleius, presenting a tragicomic and ridiculous shape-shifting which awaits a miraculous normative ‘deus ex machina’ to save the day at the end.

Thus, stricter FET qualifications, resisting the enforcement of arbitral awards on the basis of EU law requirements or increasing the presence of the state in the proceedings of fers no great relief from the real issues which confront the investment regime. In reality, such amendments to the system appear only as a ‘bait’ offered by nation-states in order to appease their increasingly vocal civil society and anti-ISDS campaigners. In tactical terms, this is only a different path to continue undisturbed. It is neither a solution for the pro-ISDS side, nor for the anti-ISDS one.

The second strategy, deconstruction, appears – at a first glance – as a postmodern loss of faith in the possibility of (international) law to solve the problems of the global economy. The solution: erasing bilateral treaties. However, such a gloomy vision upon the international normative sphere is genuinely inconsistent with the same ‘deconstructive’ states’ policy in other areas. There, international law seems to still do its old job. The essence of such a position is – generally – also tactic: avoiding present and future investment claims against the host state.

The Westphalian Labyrinth

However, there is (legal) life beyond these paths. And the labyrinth can clearly be evaded. Usually, putting the right questions gives a picture of the real problems and – afterwards – of true solutions. In this regard, one must first inquire about the conceptual origin of today’s legal aporia.

Why does international law – and its self-professed universality – seem to be problematic at the present moment? Why is international investment law even more problematic and why it faces such an intense critique? Until now, it seemed that no one was really interested in such a disparaged fragment of the system and it posed no stake for neither side of the ideological antagonism.

A brief diagnostic – as the space only allows – would lead me to answer that the obsession with Westphalia (either in strongly re-asserting it or in emphatically claiming that it is over) might really be at the root of the problem. Much of the proposed metamorphosis and/or deconstruction stems from either harsh sovereigntists or from post-sovereign proponents. None of them is content with the investment law hybrid and the procedures it offers.

Such a mixed litigation model offers no hegemonic position for state entities or for supra-national entities. It rather channels the dispute in a commercial-inspired manner which leaves little space for Westphalian language-games and public policy objections. Moreover, the investment regime tends to work both ways and it occasionally backlashes against the same actors that initiated it.

For these reasons, the genuine solution is neither Westphalian, nor post-Westphalian. It is non-Westphalian: a mode of thinking that does not need to sacrifice sovereignty in order to acknowledge supranational entities or transnational networks. This latter element is (almost) never taken into account by any side of the dispute: there are actors that shape public policy and international norms, without any tangency with (supra)sovereignty. The influence of such transnational networks and their global reach might – in the end – prove as necessary for the reformation of international investment law as the use of (supra)state normative power.

Clearing the Air: Politics and Legal Discourse

Thus, as Emanuela Matei correctly indicated, the solution might indeed not lie within the legal sphere itself. But it shall take a legal form nonetheless. Law is a privileged discourse of the political realm, its most important language-game. It channels power and gives it a definitive and efficient shape. Even the strongest realist interpretation (a la Hans Morgenthau) would admit that although the origin of the norm is not legal and neither is its purpose, the instrument shall undoubtedly be legal in a global world that takes positive legality as legitimacy.

In such conditions, even though states, supra-states and non-state networks might clash in a bid for hegemony, their normative horizon is inevitably shared. The way beyond the blockade resides in first establishing a common space for reasoned debate. Then – and only then – could a solution be offered to some of the investment regime’s shortcomings. Antagonism must turn into agonism, if any change should appear into the sunset…


 * Horia Ciurtin, Legal Adviser – International Arbitration, Scandic Distilleries S.A; Editor, VERSO Journal [Romania].

Defining International Investment Law for the 21st Century (A Reply)

by Emanuela Matei, Of Counsel – Mircea and Partners*

This post represents a reply to Horia Ciurtin’s material “The Future of Investment Treaties: Metamorphosis or Deconstruction?”, published on the EFILA Blog on 8th September. Another reply will follow from Horia Ciurtin in the following weeks.

Of Two Evils Choose Neither

We are living in a hologram designed by a very confused mind. Witnessing the 21st century we all experience a degree of restlessness and fuzziness. In this context, the choice between two evils may be no more than a false dilemma. The misconception of the limits of international law is part of this holographic picture.

In his post “The Future of Investment Treaties: Metamorphosis or Deconstruction?“, Horia Ciurtin revisits the challenging task of defining – in our not-so brave new world – the concept of international law, in general, and of investment treaties law, in particular. I both agree and disagree with the author’s concerns. I fully agree with him that international law and legal institutions can provide effective means to solve human problems. I disagree with the either-or equation though and I will describe it as a deceiving choice between two evils.

The First Evil

In a world where the interactions are multiple and ubiquitous, it is very often not possible to determine which event occurs first and define it as the cause of a subsequent event, called effect. State interests do not exist outside the social sphere and the actions of states are therefore influenced by the attitudes of non-state constituencies. In other words, the border between state and non-state has been blurred.

It is up to the observer to judge. If the observer believes that coercion is the source of order and well-being in the world, he will naturally think that international law cannot have an influence on actual state behaviour. Such an observer sees international law as a source of democratic concern, arguing against the implementation of international law norms domestically. In my view, this hostile approach is the first evil and – so far – Horia Ciurtin and I agree with each other.

The Second Evil

The affirmation that the sovereign entities are “no longer needed as ‘procedural proxies’ for aggrieved investors, being able themselves to directly involve in international litigation and be compensated for their losses” is on the other hand not immune to criticism. Having a right and being able to exercise it effectively should be seen as two sides of the same coin. A right, which is not enforceable has no legal significance. It has only a symbolic value. States comply with international law as long as the social sphere – in which their interests are continuously defined – requires them to do so.

Moreover, the author pleads for the de-politicisation of the disputes by unconditionally escaping the domestic remedies. My counterargument is that such disputes are nonetheless political in nature, so their de-politicisation would provide no more than an empty gesture.

For a legal pragmatist as I am, the ICSID-convention is a tool designed to serve a set of functions. It is nothing unexpected in the fact that this tool has been designed at a certain moment in time and that time is gone. The question that must be answered is what kind of functional design shall be chosen for the 21st century FTAs? Attention, the designer may be somebody else than before! Again, the political configuration which is part of the social sphere is different now compared with 1950!

Furthermore, the situation of intra-EU BITs is a special case. I believe that the comparison between the South America and the Central-Eastern Europe is a bit misplaced. A conflict between supra-state constitutional law and international law obligations on one side, and between individual rights derived from international law and the obligation of the state to implement supranational law, on the other, constitutes an extra-complication that must be faced by countries like Romania, Hungary or Slovak Republic.

The either-or dilemma is often projected by the advocates of arbitration as a support for the affirmation that without an ISDS-system the protection of the investor will be severely depreciated. It can be true that some strategic contrivances will no longer be available. However, it must be recognised that the accession to the EU of the Central-Eastern European countries had a positive impact on their legal systems and the socio-economic environment is now more stable than in the nineties and early noughties.

More than so, the capital is the most mobile of all factors of production. If some jurisdictions became hostile to investors, the capital would vote with its feet as it does in all other cases, where the regulatory choices of the state or supra-state give an incentive to corporations to move, stay or entry. Thus, my contemplation of the post-Westphalian field of battle is much more optimistic in this particular sense. The second evil – no protection for the investor in the 21st century – is nothing else than a false alarm!

The discussion starts to sound irresistibly interesting to me when we begin to imagine deterritorialised ideas of governance … but this is a different kind of story. This is the true and exciting post-Westphalian realm left unexplored by the mainstream despotique!


* Emanuela Matei, Jurismaster; Of Counsel – Mircea and Partners; Associate Researcher – Centre for European Legal Studies.

The Future of Investment Treaties: Metamorphosis or Deconstruction?

by Horia Ciurtin LL.M, Managing Editor of the EFILA Blog*

Traditionally, the sole subjects of public international law are sovereign states. Therefore, in the Westphalian system, only statal political entities are able to assume obligations and benefit from certain rights at an international level. As a consequence, under this classical approach, only such actors can initiate and can take part in this type of disputes, even though the prejudiced part might not be the entire state, but an administrative division, a group of citizens or a company incorporated in that state.

However, in the aftermath of World War II, public international law suffered structural metamorphosis, allowing both natural persons (due to the human rights theory and its accompanying charters) and legal entities (due to the various bilateral or multilateral investment agreements) to challenge the abusive conduct of a state, without needing the diplomatic intervention of their state of origin. Therefore, in the post-Westphalian international law system, the sovereign entities are no longer needed as ‘procedural proxies’ for aggrieved investors, being able themselves to directly involve in international litigation and be compensated for their losses.

Continue reading “The Future of Investment Treaties: Metamorphosis or Deconstruction?”

Third Party Funders: Game-Changers or Business as Usual?

by Duarte G. Henriques, BCH Advocados*

Some time ago, a question was asked to the members of the ICC Institute of World Business Law, of which I am a member, aiming at contributing to its quarterly newsletter: are third party funders a game-changer or business as usual?

At the time I was not able to timely answer that question, but now I will try to resume my thoughts.

This question is undoubtedly both challenging and distressful, but I would tend to take a different approach.

While it is challenging in consideration of the myriad of issues that may be encompassed by the idea of “third party funding”, it is at the same time capable of producing numerous sentiments, not all of a comforting nature – this is what the commentators will tell us.

Indeed, regarding this topic, it is now common to hear and read that it may raise feelings, and therefore concerns, about honesty, greed, venality, legitimacy, and above all, the integrity of arbitration as a means of resolving disputes.

Without any concern regarding citations, I would sum up some thoughts put forward in some public discussions that have already taken place (I stress that the following are observations made by others).

It has been said that it is unquestionable that third party funders play a significant, if not prevailing, role in most of the major legal actions and arbitral proceedings. They provide funding, and therefore they make an investment that is based purely on financial, patrimonial and risk assessment considerations. At the end of the day, it is “their” money that has (also) been put at stake. Consequently, it may seem obvious that the funder must be allowed to have a “word” when choosing the “players” (arbitral institutions, arbitrators, counsels, etc.). This may seem an admissible intervention, although sometimes this is the least that funders do. Often, their “word” is formally taken as advice, but in practice it may well be an instruction. So those voices say.

Hence, concerns about the independence and impartiality of the arbitrators are immediately put forward. The role of counsels is also at stake: more likely than not, counsel will tend to follow the interests of the funders – who are the players that provide referrals – rather than those of the parties. Indeed, it is not uncommon to find a lawyer or counsel struggling against a settlement (or to reach a settlement) simply because it will allow an easier repayment of funds supplied by funders. Again, as others say.

It has also been asked: who will refuse to be referred by a TPF? Who will say “No” when asked by a funder to provide their CV to an interested party? Will he or she be able to later say “No” to an instruction from the funder? Will he or she be free from any bias to side with the party that appointed him or her by means of the funder’s “advice”? Furthermore, will any ethical problem connected with third party funders be solved by disclosure?

The path is not at all clear.

One may now turn to other questions regarding third party funders.

The most common question is two-folded: what kind of information should be disclosed about third party financing and what the consequences are of such disclosure?

Regarding the information to provide, the recent trend seems to point in the direction of full disclosure. For instance, very recently, in Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan (ICSID Case No. ARB/12/6), the arbitral tribunal ordered the claimant to ‘confirm to Respondent whether its claims in this arbitration are being funded by a third-party funder, and, if so, shall advise Respondent and the Tribunal of the name or names and details of the third-party funder(s), and the nature of the arrangements concluded with the third-party funder(s), including whether and to what extent it/they will share in any successes that Claimants may achieve in this arbitration’ (order no. 3 of 12 June 2015 by Julian Lew). In another recently reported case (Eurogas Inc., Belmont Resources Inc. v Slovak Republic – ICSID Case No. ARB/14/14) the arbitral tribunal decided that the claimant should disclose the identity of the third-party funder.

On the other hand, the arbitration community did not reach consensus as to the conclusions that must be drawn from disclosure nor the consequences that follow the appearance of a third party funding the claimant.

Without regard to the impact that such appearance may have with respect to the independence and impartiality of the arbitrators (see General Standard 6(b) and 7(a) of the IBA Guidelines on Conflicts of Interest in International Arbitration — 2014), some take for granted that third party funders may not be ordered to pay the costs of the arbitration should the claim collapse. However, there is already case law supporting the view that third party funders must bear the costs if they hold a sufficient degree of economic interest and control in relation to the claim (see UK cases Excalibur Ventures LLC v. Texas Keystone Inc. & Ors v. Psari Holdings Limited & Ors and Arkin v. Borchard Lines Ltd. & Ors. See also US case Abu-Ghazaleh v. Chaul). Is this a trend to observe in the near future?

Another topic raises the eyebrows in relation to the consequences of the existence of a third party funder: for the purposes of deciding security for costs, must a funded party be presumed impecunious merely because the funding flows from a third party? To the best of my knowledge, no arbitral tribunal has yet decided according to such assumption. To the contrary, in the case cited above (Eurogas v Slovakia) the arbitral tribunal expressly denied such assumption. However, Gavan Griffit’s assenting reasons to the decision on St. Lucia’s Request for Security for Costs of 13 August 2014 (RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10) gave room to serious concerns and no less criticism. His words deserve nothing less of a serious thinking and a peaceful discussion:

once it appears that there is third party funding of an investor’s claims, the onus is cast on the claimant to disclose all relevant factors and to make a case why security for costs orders should not be made

This is indeed a topic full of questions and with only few clear answers. Nevertheless, the following seems to me clearer.

My first reaction when confronted with TPF for the very first time was: this topic defies the principles of the fundamental right to access Justice. In fact, let us think of a party in financial distress, incapable of supporting the costs of a legal action or of arbitration proceedings. Why upbraid a party (or its counsel) seeking financial support from a funding institution? Why reproach the funder? Is it not in the best interest of every party to have effective access to Justice even if by recourse to a funding system? Don’t those institutions perform a role of social and public interest by allowing an impoverished party to have an effective defense of its rights? It is true that sometimes third party funders may bring unbalance between the parties, but isn’t it also true that they may perform a role of leveling the playing field?

One cannot deny this.

Having this in mind, I believe that the equation stated above may not be accurate. The issue may not be whether this is “usual business” or a “game-changer” simply because third party funders may be both, and may be neither.

The issue should be an assessment of the real role they can play concerning the social and economic public interests involved when funding a legal activity, on one hand, and the close attentiveness to that funding activity that ethical and deontological concerns require, on the other.

Further, reality check is needed, and commentary and other studies concerning third party funder need more fact-finding than just the traditional “anecdotal evidence”.

While I do not question that arbitrators and counsels – at least the large majority of them – will tackle (and some have already done so) these ethical and deontological concerns by full disclosure and by maintaining full independence from third party funders, and while I do not question either that most funders will (and actually do) refrain from intervening, horror stories are not needed to prove the rule by the exception. And those exceptions require future care.


* Duarte G. Henriques, Rua Fialho de Almeida – 32 – 1 E, 1070-129 Lisbon • Portugal, dghenriques@bch.ptwww.bch.pt.

The Rule of Law as the Common Foundation of EU Law and International Investment Law

by Dr. Nikos Lavranos LLM, Secretary General of EFILA*

Ever since the EU started to get into international investment law by developing its own investment policy through the negotiation of several international investment agreements (IIAs), such as CETA, TTIP, EU-Japan, EU-Singapore, and the adoption of two EU Regulations (Regulation 1219/2012 and 912/2014), the relationship between EU law and international investment law has been characterized as being tense, conflicting or even opposite to each other.

EU law is characterized as being based on commonly accepted Rule of Law principles, disputes are resolved before domestic courts of the Member States, which are presumed to be transparent, impartial, independent and free from corruption and collusion, all which is supplemented and controlled by the CJEU and to some extent by the ECrtHR. In short, EU law is portrayed as a special sui generis legal order, based on constitutional foundations, which is to be distinguished from anything else. Or to put it differently, EU law is the perfect legal order, in which all is perfectly organized, democratically legitimized and in which the Rule of Law principles are equally applied in all Member States.

By contrast, international investment law, is based on a web of more than 3,000 IIAs, which delegates dispute settlement to party-appointed ad-hoc arbitral tribunals, which render their awards in clandestine, intransparent manner, without being controlled by any supreme court. In short, international investment law and in particular arbitral tribunals are depicted as uncontrollable bodies, full of conflicts of interests, which develop international investment law as they see fit without any means to restrain them.

Thus, it is no surprise that in light of these characterizations the relationship between EU law international investment law is considered to be full of tension, without little understanding of each other and even less common ground. Indeed, the title of EFILA’s Inaugural conference held in January 2015, “EU Law and Investment Treaty Law: Convergence, Conflict, or Conversation?” perfectly reflects this uneasiness between the two legal branches.

But upon closer inspection, it appears that EU law and international investment law actually have much more in common than is generally acknowledged. In fact, as will be shown below, the Rule of Law principles of which the EU and its Member States are so proud are in fact the common foundation for EU law and international investment law.

In March 2014 the European Commission published its Communication entitled: “A new EU Framework to strengthen the Rule of Law“. The Communication explains that:

“The principle of the rule of law has progressively become a dominant organisational model of modern constitutional law and international organisations (including the United Nations and the Council of Europe) to regulate the exercise of public powers. It makes sure that all public powers act within the constraints set out by law, in accordance with the values of democracy and fundamental rights, and under the control of independent and impartial courts.  The precise content of the principles and standards stemming from the rule of law may vary at national level, depending on each Member State’s constitutional system. Nevertheless, case law of the Court of Justice of the European Union (“the Court of Justice”) and of the European Court of Human Rights, as well as documents drawn up by the Council of Europe, building notably on the expertise of the Venice Commission, provide a non-exhaustive list of these principles and hence define the core meaning of the rule of law as a common value of the EU in accordance with Article 2 TEU. Those principles include:

  • legality, which implies a transparent, accountable, democratic and pluralistic process for enacting laws;
  • legal certainty;
  • prohibition of arbitrariness of the executive powers;
  • independent and impartial courts;
  • effective judicial review including respect for fundamental rights; and
  • equality before the law.”

For EU law practitioners this summary of the Rule of Law principles is well-known and unsurprising.

But the point that I want to make is that the very same Rule of Law principles are also  familiar to practitioners of international investment law, in particular arbitrators and legal counsels.

More specifically, most, if not all, of these Rule of Law principles have been found to be encapsulated in the fair and equitable treatment (FET), most favoured nation (MFN) and national treatment (NT) standards, which are contained in one form or another in practically all IIAs.

For example, the various elements of the FET standard used by the arbitral tribunal in Tecmed can be summarized as follows:

  • The protection of the investor’s legitimate expectations
  • Due process and denial of justice
  • Obligation of vigilance and protection
  • Transparency and Stability
  • Lack of arbitrariness and non discrimination
  • Proportionality
  • Abuse of Authority

Admittedly, the description of these elements is not identical with the EU’s Rule of Law principles, but the thrust and the main aim of all these principles is the same, namely, to protect fundamental rights and to deliver justice.

Domestic courts of the Member States, the CJEU, arbitral tribunals as well as the envisaged permanent investment court (if it were to be established) are all entrusted with same task of delivering justice. Moreover, it is expected and should be presumed that all these judicial bodies are composed of qualified persons who are impartial, independent and have the necessary expertise to exercise that task.

Obviously, that is not always the case, but what matters is that conceptually they are entrusted with same task and must base themselves on the similar Rule of Law principles.

If that is indeed the case, the Rule of Law principles as espoused in the EU’s Communication have to be recognized as the common foundation for EU law and international investment law alike.

Consequently, that common foundation could – and indeed – should provide the basis for a better mutual understanding, removing most of the perceived tensions and opening up the way for an effective co-existence and interplay between both legal branches.

In sum, rather than emphasizing the differences between EU law and international investment law, it makes more sense to appreciate the common foundation.


* Nikos Lavranos, Head of Legal Affairs at Global Investment Protection AG; Secretary-General of EFILA.

Launch of the EFILA Blog – Press Release

Since its establishment last year, the European Federation for Investment Law and Arbitration (EFILA) has developed into a well-known and highly regarded think-tank for the promotion of the knowledge of all aspects of EU and international investment law, including arbitration, at the European level.

EFILA endeavours to facilitate a meaningful exchange of views on relevant and timely issues vital to the development of the European internal market, in order to contribute to a more favourable investment climate in Europe and beyond.

To this end, EFILA developed a Blog platform designed to focus on the present challenges and debates that pertain to the field of international (investment) law and arbitration, EU law and public policy, as well as the dynamics of these multiple legal, political and economic spheres. The Blog will feature opinions and cover the latest developments in this field, on a weekly basis, written by eminent professionals and academics from around the world.

Furthermore, the Blog is intended to offer a common space that fosters dialogue between specialists of different views in an effective and user-friendly manner, allowing discussions to move beyond the stalemate of isolated monologues that fail to truly address the salient issues of the moment. Therefore, the Blog is meant to provide a balanced view that attempts to avoid any hegemonic assumptions.

The Blog invites guest contributors with the relevant expertise to submit their articles for the Blog.

Prof. Loukas Mistelis, Editor-in-Chief
On behalf of the EFILA Blog Editorial Board


Submissions and questions should be addressed to the Managing Editor, Horia Ciurtin [h.ciurtin@efila.org].