ICSID Complaint as Alternative to Supplemental Filing

by Zoltán S. Novák, TaylorWessing

We are used to thinking of international investment arbitration as a remedy against unlawful nationalization, expropriation, and other high-profile state acts depriving a foreign investor of his or her investment. It is pretty rare that the unfair treatment the investor complains about is limited to a simple court order requesting supplemental filing in a legal procedure. Yet, this is exactly what gave rise to the ICSID case Dan Cake vs. Hungary, which was filed by the claimant in response to an order on supplemental filing that the claimant found too onerous. What makes the case even more remarkable is that the claimant won, at least as far as the State’s liability is concerned.

The case was based on a bilateral investment agreement concluded between Portugal and Hungary in 1992. In its decision on jurisdiction and liability, the ICSID Tribunal declared Hungary liable for the breach of the investment agreement. The Tribunal will decide on the amount of damages at a later date.

The case revolves around the liquidation of Danesita, Dan Cake’s Hungarian subsidiary, whose business consisted of supplying biscuits and cookies to Eastern Europe, Southern Europe, and Scandinavia. During its course of business Danesita incurred a debt to one of its suppliers. As a result, the supplier submitted a request for liquidation against Danesita in August 2006. Danesita ultimately paid its debt to the supplier, but failed to inform the bankruptcy court about this development. The bankruptcy court ordered Danesita’s liquidation in a final court order in November 2007.

In April 2008, in the midst of Danesita’s liquidation, Dan Cake tried to save its subsidiary by requesting that the bankruptcy court convene a composition hearing where it hoped to reach a settlement with all of Danesita’s creditors. Instead of convening the composition hearing right away, the bankruptcy court asked Dan Cake to submit some additional documents it deemed necessary for the adjudication of the motion. In the same order, the court expressed its view that the motion for a composition hearing did not warrant the stay of the liquidation procedure.

The court’s reaction, which implied that the liquidation of Danesita’s assets continued even if a composition hearing was eventually convened, discouraged Dan Cake from pursuing its plan to reach a settlement with the creditors. Accordingly, it decided not to submit the requested supplementary filing to the bankruptcy court. As a result, the court did not convene the composition hearing and Danesita was liquidated.

Instead of submitting the requested additional documents, Dan Cake filed a request for arbitration with the International Centre for Settlement of Investment Disputes in 2012. In its complaint, Dan Cake argued that the bankruptcy court’s order constituted a breach of Hungary’s obligation under the investment treaty to (1) ensure fair and equitable treatment of investments, and (2) not impair by unfair measures the liquidation of investments. According to the claimant, Dan Cake had a statutory right to a composition hearing. By demanding additional documents – not explicitly prescribed by law – as a condition of convening it while refusing to stay the liquidation, the bankruptcy court frustrated Dan Cake’s efforts to save its investment in an unfair manner.

Hungary denied its liability throughout the procedure. It argued that according to Hungarian law the goal of the liquidation procedure is to protect the interests of the creditors and not to reorganize the debtor company. Therefore, the bankruptcy court’s decision to ask for additional documents – deemed necessary by the judge for the protection of creditors – was in accordance with relevant Hungarian legislation and could not be deemed unfair.

The Tribunal agreed with Dan Cake. According to its decision, the seven additional documents required by the bankruptcy court were either unnecessary or impossible to submit within reasonable time. The Tribunal found even more manifestly unjust that the bankruptcy court explicitly ruled on the unwarrantedness of the stay of the liquidation without being asked to do so. As the bankruptcy court was found to be an agency of Hungary, the Tribunal concluded that, through the bankruptcy court’s order, Hungary breached its duty under the investment agreement to ensure fair and equitable treatment of investments to Dan Cake and to not impair, by unfair measures, the liquidation of its investments.

It is generally accepted that investment arbitration tribunals cannot act as appellate courts. Accordingly, the seemingly erroneous application of domestic law by a domestic court rarely leads an arbitration tribunal to find the State in breach of an investment agreement. Relying on previous precedent, the Dan Cake Tribunal itself set the standard of such a breach as high as “a willful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety”. It is remarkable that the Tribunal found this standard met by a simple court order for supplementary filing.

Even if the Tribunal’s conclusion is disputable, the facts of the case are far from unique. Foreign investors often face frustrating decisions by domestic courts and authorities, often unable to question effectively their lawfulness before domestic courts. This case demonstrates that foreign investors can use international investment arbitration as a last-resort chance to redemption if they find the decision unfair.

There are of course procedural obstacles that may prevent international investment arbitration from becoming a standard way of challenging such orders. The Hungarian-Portuguese investment agreement, for example, required that cases not arising from expropriation, nationalization and similar measures shall be submitted to the competent domestic courts before an arbitration procedure can be initiated. In the Dan Cake case this procedural obstacle was avoided by Hungary’s decision not to object to the Tribunal’s jurisdiction.

Nonetheless, as there are currently more than fifty investment agreements in force in relation to Hungary – including with countries such as Germany, Austria, France, Belgium, the United Kingdom, the United States, China and Russia – it is worth remembering that international investment arbitration is a viable option not only in the most obvious cases of nationalization and other such blatantly discriminatory acts on behalf of the state. These agreements can provide protection for a business even in such ostensibly mundane situations as a domestic court’s decision to request supplementary filings in a liquidation procedure.

The Tribunal’s decision to declare Hungary liable for the breach of the investment agreement in question shows that foreign investors have more wiggle room than usually assumed when it comes to the presumably final decision of a domestic court or authority, and that international investment arbitration is a tool worth considering when facing such challenges.

 

EFILA, AIA and CIArb Event in Brussels: International Arbitration and EU Law Issues

EFILA together with the AIA and the Chartered Institute of Arbitrators are co-hosting an event which focuses on some of the hot issues regarding the interaction between EU law and International Arbitration. Speakers will deal both with commercial arbitration and investment treaty arbitration issues, as well as their interaction with EU law.

This half-day event takes place in Brussels on 27 May.

See registration form here.

ICC: Policy Statement Foreign Direct Investment

The ICC Commission on Trade and Investment Policy has just issued a Policy Statement on Foreign Direct Investment arguing the necessity of FDI and of ISDS mechanisms for ensuring economic growth in our global society.

Investment, including foreign direct investment (FDI), plays an important role in determining a country’s economic prospects. ICC strongly supports FDI as an effective tool to foster economic growth and sustainable development, and calls on governments to both maintain and strengthen investment protection and promotion agreements.

In the short and medium term, this can be don through high-standard bilateral and regional investment agreements, and in the longer term through an equally high-standard multilateral framework on investment. Investment agreements should continue to include strong dispute resolution provisions, through investor-state dispute settlement (ISDS) with independent proceedings to settle investment disputes.

The full document can be consulted here.

Brexit: Implications for the EU Reform of Investor-State Dispute Settlement

Sophie Nappert, 3 Verulam Buildings

Nikos Lavranos, EFILA

“Reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com or call 020 7542 6664.”

Investor-state dispute settlement (ISDS) is an international arbitration mechanism that allows an investor from one country to bring arbitral proceedings directly against the state in which it has invested, provided that the investor’s home country and the host country of the investment have so agreed by treaty (see box ISDSbelow). ISDS is currently found in most modern international trade and investment agreements.

In the period since the entry into force of the Treaty of Lisbon, conferring on the EU exclusive competence over foreign direct investment in the European space, the European Parliament and the trade ministers of key member states, such as Germany, France and the Netherlands, have perceived that ISDS presents a number of shortcomings. These concerns were crystallised in the responses to a public consultation on the Transatlantic Trade and Investment Partnership (TTIP), currently being negotiated between the EU and the US (see Transatlantic Trade and Investment Partnership (TTIP): tracker).

ISDS

Investor-state dispute settlement (ISDS) is a dispute resolution mechanism modelled on international arbitration, allowing an investor from one country to bring arbitral proceedings directly against the country in which it has invested, pursuant to the provisions of a treaty between the investor’s home state and the state hosting the investment.

ISDS provisions are contained in most modern international agreements including free trade agreements, bilateral investment treaties and multilateral investment agreements. If an investor from one country (the “home state”) invests in another country (the “host state”), both of which have agreed to ISDS, and the host state violates the rights granted to the investor under the international agreement between the home state and the host state (such as the right not to have property expropriated without prompt, adequate and effective compensation), then that investor may take the host state to international arbitration rather than sue in the domestic courts of the host state.

As a result, the European Commission has now tabled a proposal for a new dispute settlement system, the international court system (ICS), to be used in the EU’s future trade and investment treaties and, in the Commission’s words, “paving the way for a multilateral investment court” (see Legal update, European Commission proposes Investment Court System for EU trade agreements).

Instead of investor-state disputes being determined by an arbitral tribunal appointed by the parties, the Commission’s proposal is to create a judicial, two-tiered body consisting of a Tribunal of First Instance and an Appellate Tribunal. Party-appointed arbitrators would be replaced with “judges” unilaterally pre-selected by the state parties. As a result, the resolution of investor-state disputes by way a one-shot final arbitral award will be replaced with a two-instance procedure allowing for appeals on points of both fact and law.

The ICS proposal constitutes a strong push towards the institutionalisation and judicialisation of investor-state dispute settlement and is inspired by the WTO (World Trade Organisation) dispute settlement model applicable to state-to-state trade disputes. The important hallmarks of arbitration such as flexibility, finality and party autonomy will be essentially erased (see box ICS proposal: the concerns).

The EU’s seismic shift on its ISDS policy coincides with the UK’s consideration of its future as a member of the EU. If Brexit comes to pass, there will be legal repercussions on a number of levels as regards the UK’s trade and investment commitments at international law, and the protections currently enjoyed by UK investors abroad, including the ability to enforce arbitration awards worldwide pursuant to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). This is uncharted territory in many respects, and the opacity surrounding the progress of the current negotiations on the TTIP with the US adds to the uncertainty and lack of clarity.

ICS proposal: the concerns

While ISDS has been tested for decades and is a known quantity, it remains to be seen whether the benefits claimed by the proponents of the ICS will actually materialise. The EU’s proposal assumes that the ICS will not be declared by the Court of Justice of the European Union to be incompatible with EU law, as the CJEU has done consistently for other international tribunals, latterly the European Court of Human Rights).

For example, critics of ISDS claim that it has failed to take proper account of other relevant policy areas such as human rights, environmental law, intellectual property law and the “regulatory policy space” of states generally. The current ICS proposal does not specifically address those issues, and thus on its face provides little more credibility and legitimacy than does ISDS.

Another example concerns the qualifications required by the “judges” and the process of their selection by the contracting parties.

The proposal states that the only qualifications required of ICS “judges” for appointment to the Tribunal of First Instance is that they should be qualified for judicial office or a “recognised jurist”. For the Appeal Tribunal, the requirements are of qualification for the highest judicial office or being a “recognised jurist”. Interestingly, while the ICS proposal insists on expertise in public international law for its judges, expertise in investment law is deemed merely to be “desirable”. There is no requirement that (any of) the judges should demonstrate expertise in the policy areas that have fired up public debate and the anti-ISDS sentiment, such as human rights or environmental law.

The ICS proposal leaves the judge selection process entirely to the contracting parties. No transparency, public hearing or consultation with users or investors is currently envisaged. In addition, the “judges” are to be paid by the contracting parties and can be re-appointed by them. The anti-ISDS debate at the root of the ICS proposal claimed that the party selection and payment of arbitrators cast doubt as to the independence and impartiality of those arbitrators. The ICS proposal is open to precisely the same criticism.

Moreover, ISDS has been recognised as providing flexibility and a dispute resolution process which engages both parties, the state and the investor, on an equal footing. By contrast, the ICS replaces this flexibility with a fixed set of rules, removing any participation from the investor claimant regarding for example the choice of arbitration rules and the selection of arbitrators.

These points highlight some of the concerns which call for further reflection and analysis regarding whether the ICS proposal is the improvement on the arbitration-modelled ISDS claimed by its proponents.

We set out below some of the potential implications, at both macro- and micro-levels.

Macro-level implications

The first macro-level issue is that Scotland and Northern Ireland have indicated that they may not wish to remain part of the UK post-Brexit. The prospect of a fragmented Britain (no longer the UK) raises the question of whether the EU or the US would consider it worthwhile to negotiate a trade and investment agreement with a dismembered Britain. It also raises the question of what leverage Britain in its new incarnation would have in such treaty negotiations, as opposed to that which it now enjoys as part of the EU.

Another question is Brexit’s potential impact on the existing 100 or so bilateral investment treaties (BITs) that the UK has with individual EU member states (intra-EU BITs), as well as with third states. A post-Brexit British state might be able to keep all these BITs containing the classic ISDS provisions assuming that its respective state counterparties agreed.

In this scenario, Britain would avoid the untested ICS proposal and its potential shortcomings, and become an interesting safe harbour for foreign investors who may find it attractive to structure their investments through it, thereby avoiding the current insecurity created by the ISDS reforms. If it considers it necessary and useful, post-Brexit Britain could seek to negotiate BITs with the EU (as a single entity), as well as those countries with which the EU has either signed or is negotiating trade and investment agreements, namely Canada, China, the US, Singapore and Vietnam.

The question arises, however, whether Britain, which currently appears to favour retaining ISDS over the ICS, would be able to impose ISDS provisions on potential counterparties given the EU’s push for the ICS to apply to future trade and investment treaties, and the willingness of at least some of the countries on this list to accept ICS.

Britain’s ability to do this is likely to be affected by which dispute settlement system ends up being included in the TTIP. If the ICS comes to feature in the TTIP, ISDS in its current, arbitration-based form faces an uncertain future.

One important aspect of post-Brexit Britain retaining ISDS in its arbitration form rests on the question whether Britain in its new incarnation has the ability to remain a party to the New York Convention, to which over 150 states are parties, and which is a significant part of the protection afforded to investors by ISDS.

Micro-level implications

At a micro-level, the international investment agreements (IIAs) that have recently been agreed by the EU and its relevant trading partners, but are still awaiting signature or ratification (namely, CETA (the Comprehensive Economic and Trade Agreement with Canada), the EU-Singapore Free Trade Agreement (FTA) and the EU-Vietnam FTA), would have to be amended to reflect Brexit.

Whether these trading partners would consider it attractive to negotiate new deals with Britain is an open question. The time and effort involved in the negotiation and conclusion of IIAs is not to be underestimated. The intervening period would be marked by legal uncertainty, to the detriment of UK investors abroad and Britain’s economy.

Another question is whether Brexit would have any impact on the ongoing TTIP negotiations, in particular with regard to the EU’s internal process of consulting with member states in adopting certain negotiating positions. Prime Minister David Cameron is said to be in favour of closing the TTIP as soon as possible because he considers it to have the potential of delivering huge benefits for the UK. At the same time, he appears generally untroubled by the anti-ISDS debate currently raging in many other EU member states.

A real and potentially significant impact

In conclusion, Brexit’s impact on the EU’s trade and investment policy would be real, as would its impact on post-Brexit Britain’s geo-political clout in the trade and investment arena. In contrast, it might offer interesting advantages, for both the UK as a host state and for investors who perceive the EU’s current investment policy as counter-productive. These advantages, however, are likely only to be felt after a significant period of uncertainty whilst post-Brexit Britain finds its footing, and in the short term are outweighed by that uncertainty.

Finally, the prospect of Brexit might cause the European Commission, the European Parliament and other member states to re-think the scope of their proposed “reforms” of investment treaties and ISDS.


Sophie Nappert is an arbitrator in independent practice at 3 Verulam Buildings, and Nikos Lavranos is Secretary General at EFILA.

Avoiding ISDS: National Contact Points for Investor Guidelines and Mediation

by Tabe van Hoolwerff* 

Imagine, you are an EU trade minister and you want to attract foreign investors by offering a stable investment climate. At the same time, you also want to avoid potential claims arising from government measures that seek to protect the environment or labor standards – a fear your non-business stakeholders have been very vocal about. You have also learned from the business sector that Investor-State Dispute Settlement (ISDS) is a means of last resort. So there must be room for maneuvering in the area of conflict prevention. Two keywords from your experience in the policy field of responsible business conduct spring to mind: transparency and mediation. How to go from there?

Despite the public belief that foreign investors will easily sue their host governments when faced with measures that impair their profitability, you realize that by far and large such measures remain uncontested at the investor-to-state level. Moreover, measures aimed at business activities in order to e.g. reduce their environmental impact are also in the self-interest of companies and a business sector as a whole. When a laggard in the industry fails to uphold common yet not mandatory levels of environmental protection, then that may put the social license to operate of the industry as a whole at risk.

So, new legislation requiring particular environmental standards to be upheld for that industry is likely to help them all in the long run. You smile when realizing that it ‘only’ takes a fine minister as yourself and your colleagues to find the right balance between adequate environmental protection and reasonable costs for the business sector. Typical Brussels jargon such as subsidiarity and proportionality may even spring to mind.

Back to transparency. Although you are not likely to be an expert in international investment law, you have learned that cases often center around ‘legitimate expectations’ of the investor. So in order to guide these expectations, you want to inform (potential) foreign investors about the basic regulatory framework in your country and the democratic process for making new laws and regulations, in which they could perhaps even participate. It would indeed be useful to compile this information on such issues as disclosure, corporate governance, labor and consumer rights, environmental standards, anti-bribery laws and taxation into one convenient document.

Of course you want to mention that these laws and regulations are upheld in a non-discriminatory manner, in case an investor might think he could be bullied on the basis of all these norms and standards. You decide to call them ‘Guidelines for Responsible Investment’ or something similar. You want to use that word ‘responsible’ because it reassures your non-business stakeholders what kind of investment and investors you want to attract and it tells investors to be responsible by making themselves aware of laws and regulations and how to appropriately engage in their making.

Obviously, these Guidelines need to be disseminated. If you do not yet have a special agency for attracting foreign investment, you might consider doing so now and give it a catchy name that will send the right signals to all stakeholders, like ‘National Contact Point for Responsible Investment’. This Contact Point can draw a communication plan, visit trade fairs and help organizing incoming trade missions where potential investors learn of both the opportunities and obligations when investing in your country.

But no matter how clearly you and your government communicate about laws, regulations, individual permit procedures and subsidy schemes, a conflict between your government and a foreign investor might still emerge one day. You know investors are not happy to resort to investor-state arbitration – it is expensive and the odds are not with the investors – and neither are you. Investor-state conflicts are bad publicity of course. Similar to legal disputes between private parties, you think that a state and a foreign investor should be able to try amicable venues first, such as mediation.

Of course, when offering mediation, you do want to keep some level of control, but also provide assurance to the investor that the entity providing its good offices knows about doing business and the various risks involved. Well, why not put that same Contact Point in charge here? All it needs is some procedural guidance on how to handle specific instances in which a foreign investor alleges discriminatory government measures have run counter to his legitimate expectations. The objective should not be to render verdicts about right or wrong, but to produce future-oriented recommendations that enable the investor to continue his/her business, so creating jobs and government revenue while observing applicable norms and standards that protect public goods.

In short, you could come up with the idea of drafting Guidelines for Responsible Investment that would be disseminated by a National Contact Point that would also deal with complaints by offering its good offices to aggrieved investors. It would be helpful of course if all your EU colleagues would apply a similar model, for purposes of a level playing field and exchanging experiences with handling investor complaints. Only then you realize that this plan sounds all too familiar. You call your investment policy expert to verify your thoughts. (S)He will indeed confirm that your plan strikingly resembles the 1976 OECD Guidelines for Multinational Enterprises, the related National Contact Points and their tasks, responsibilities and procedural guidance, most recently updated in 2011.

Only that it has been used in the past two decades by civil society to hold companies to account. But indeed, with some creativity the OECD Guidelines and NCPs could also be applied as an ISDS prevention mechanism. After all, the Guidelines are part of the OECD Declaration on International Investment and they include an encouragement of the use of arbitration as an appropriate means of dispute resolution between enterprises and host governments. How come nobody else ever thought of this? Would it not be worth exploring?


Tabe van Hoolwerff is a legal counsel with Shell. This blog was written and published on a personal title and not on behalf of Shell. The views reflected are Tabe’s own and do not necessarily reflect those of Shell.