Stakeholder meeting on a possible future Multilateral Investment Court: Establishment of a Multilateral Investment Court (Brussels, 15 January 2020)

José Rafael Mata Dona1

As in the previous session of the stakeholder meeting organized by the European Commission (see here), this roundup started with a brief recap of the whole process of the UNICTRAL Working Group III (for a more detailed review of the EU’s proposal for a MIC and ISDS reform under the auspices of UNCITRAL see here) and with the clarification that the possibility of identifying new concerns and solutions is not excluded from its current state.

The EC was represented in the stakeholder meeting by Collin Brown (Dispute Settlement and Legal Aspects of Trade Policy, DG TRADE), Blanca Salas Ferrer (Dispute Settlement and Legal Aspects of Trade Policy, DG TRADE) and André von Walter (Team Leader, Investment Dispute Settlement, DG TRADE).

State of play of the latest developments

The proposal for an advisory centre, the discipline for third party funders and ethical rules for adjudicators dominated the discussions of the WG in Vienna during its 38th session October 14–18, 2019 (for the official report of the WG see here).

The 38th session (resumed) of the WG will be held next week 20–24 January 2020 in Vienna. The expectation of the meeting is to further deepen understanding of the following three structural proposed reforms (i) the proposal for the establishment of a multilateral investment court (ii) the selection of its adjudicators and (iii) the establishment of an appeal mechanism. Then, the 39th session 30 March – 3 April 2020 will be held in New York and will focus on (i) dispute prevention and mitigation as well as other means of alternative dispute resolution (ii) treaty interpretation by States parties (iii) security for costs (iv) means to address frivolous claims (v) multiple proceedings including counterclaims and (vi) reflective loss and shareholder claims based on joint work with OECD.

Exchange of views with stakeholders

First set of interventions

A representative of the European Public Health Alliance (EPHA) showed concerns over the risk of a multilateral investment court co-opted to serve industrial interests.

A representative of the European Shippers’ Council (ESC), a non-profit European organization representing cargo owners, questioned the EC on the expected timeframe for the finalization of the whole process at the WG. Additionally, the ESC wanted to know how the outcome of the WG could influence already existing Free Trade Agreements.

Representatives of the European Economic and Social Committee (EESC), the Rapporteur and the Co-Rapporteur of the Opinion of the EESC on the ‘Recommendation for a Council Decision authorizing the opening of negotiations for a Convention establishing a multilateral court for the settlement of investment disputes’ wished to know (i) if the Commission Staff Working Document Impact Assessment (see here) of the Council Decision was still ‘alive’ (ii) more detailed information about the advisory center, its role in terms of capacity building and help to SMEs, location and appointment of advisors and (iii) what has been the level of participation of the United States and the concerns of developing countries in the WG.

A representative of the European trade Union Confederation (ETUC) showed concern about the transparency of the inter-sessional regional meetings that so far have taken place in Guinea, Korea and Dominican Republic and wondered about the expectations of the EU and its Member States from the next meeting in Vienna.

Replies of the EC

The multilateral investment court will build up consistency and predictability over time. The EC argued that the ad hoc system made it very difficult for states and stakeholders to have certainty as to how their cases were going to be decided. The lack of certainty is what a regulated industry uses to protect itself from criticism and interventions that might better advance the public interest.

On the question regarding the expected timeframe for the finalization of the whole process at the WG, the EC first alluded to the current increased regularity of the meetings of the WG per year, expressing desire for even more regular meetings. On that premise, the EC sustained that the WG could relatively quickly arrive at the stage of working on a detailed text by the end of 2020 or 2021 and finalize the whole process one or two years later.

In terms of how the outcome of the WG could influence already existing Free Trade Agreements, the EC stated that at the EU level the multilateral investment court would replace the bilateral investment court system negotiated with other countries. For Member States agreements, the idea is that they can create a single multilateral agreement amending a large number of existing agreements to apply the multilateral investment court to all. However, the EU and its Member States are not at the stage of discussing the details of the latter.

As to the question regarding the concerns identified in phase one of the WG, the EC sustained they largely corresponded to those previously identified in the EU context, except for certain concerns which specifically came up from the multilateral context. For instance, the regional diversity of the adjudicators. Further, the EC observed that this was true not only as to those concerns identified in the 2017 impact assessment, but also as to those which came up from EU previous public consultations dating back to 2013 and 2014. The former to a lesser extent than the latter due to the very specific concerns addressed in the impact assessment.

As to the questions regarding the advisory center, there are a lot of issues that still have to be sorted out, notably the nature of the center. In this sense, the EC remarked that the Advisory Centre on WTO Law (ACWL), suggested as a possible model to follow, was not exactly what developing countries wanted at the 38th session of the WG, as they themselves would like to handle the cases. This discussion will be even certainly enriched by the detailed scoping study being finalized by the Columbia Center on Sustainable Investment (CCSI) on behalf of the Ministry of Foreign Affairs of the Netherlands (for more information on this study see here).

The EC observed that there had been no submission paper from the Government of the United States, one of the biggest delegations within the group, which was very engaged in the discussions but was rather sceptical about the multilateral instrument on investment dispute settlement. To a certain extent, the United States does not need to make a government submission since now the focus is on working through the Secretariat papers. Certainly, some of the American ideas are there. Finally, the EC noticed developing countries shared many of the concerns of the EU delegation. This is the case, for instance, of issues related to costs, duration, predictability and consistency.

On the inter-sessional regional meetings, the EC clarified that these meeting had been organized until now only to raise awareness in different regions of the world. Regrettably, none of them have been thematic.

The EU delegation expects from the inter-sessional meetings, and eventually from the creation of subgroups, to go in greater in-depth and informal thinking on how particular issues should be addressed. Importantly, inter-sessional meetings are not decision binding. They are not necessarily chaired by the chairperson of the WG and not all countries have to be represented either. Lastly, there was supposed to be one regarding the advisory center, but it did not happen.

As a good example of a topic that would be better treated first in an inter-sessional meeting, Collin specifically stressed the one related to shareholder claims for reflective loss due to the fair complexity of the matter (for an OECD paper on this subject see here). In general terms, the EC observed that UNCITRAL usually went from broad conceptual work to more detailed work to legislative or non-legislative instruments, which could be adopted or endorsed by the UNCITRAL Commission and, ultimately, the General Assembly of the United Nations (for an overview of all UNCITRAL texts see here).

Next week, the EU delegation expects the Secretariat to be given instructions to go farther into depth, possibly to the extent of already developing text on different issues.

Second set of interventions

A representative of the Centre for Research on Multinational Corporations (SOMO) questioned how the EU proposal for a multilateral investment court sought to approach the identified concerns within the WG in relation to damages and methods used to calculate compensation thereof, suggesting the exclusion of lost future profits and the implementation of compensation caps.

The representatives of the EESC wished to know the minimum number of countries that should accept the proposal to enter into force.

A representative of Agoria asked whether the model for the multilateral investment court is equal to the WTO approach.

Replies of the EC

As to the question of damages, the EU delegation expects that the permanent character of the multilateral investment court will contribute to greater consistency, correctness and expertise in developing methods of calculation of damages and their implementation, but it may be desirable for treaty parties to develop this subject nonetheless. A Secretariat paper on damages is expected for the discussions in April.

To put the multilateral investment court in place, the EC asserted it basically depended on the countries concerned, the investment flows between them or, inter alia, the expected number of disputes that they may generate. Indeed, a large number of countries is not a precondition for the establishment of the multilateral investment court.

As to the model, the EC sustained it was closer to the WTO approach but was not exactly the same. There are certainly lessons to learn from the current crisis of the appellate body of the WTO model to sharpen any new body. Additionally, the EC highlighted the submission of China for the creation of an appellate mechanism (see here).

Last set of interventions

The ETUC wondered about the desirability of considering questions related to the obligations of investors by the WG and whether the same level of transparency of the WG meetings should apply to the inter-sessional meetings i.e. public reports and audio recordings, invitations to participate, etc.

A representative from the Energy Charter Secretariat asked if amicably dispute resolution mechanisms, and in particular mediation, were taken into account at the WG discussions.

Replies of the EC

Inevitably, there have been decisions on prioritization of issues and the priority is now on dispute resolution mechanisms. Some have argued that there is a need to work on substantive rules, others on obligations of investors but the decision for the moment is that delegations should focus their work on the UNCITRAL mandate, which is on the dispute settlement mechanism.

On the transparency of inter-sessional meetings, the EC observed that for each inter-sessional meeting there had been a report. These reports were respectively submitted by the hosts in Korea, Dominican Republic and Guinea and are publicly available at the website of the WG. The EC shares the view that certain basic standards of transparency must be respected, although without the informal character of the inter-sessional meetings being altered.

On the question of amicable dispute resolution mechanisms, it is one of the issues which are going to be discussed in April. It has the support of the EU and of a number of other delegations. The question for the EC is how to align them to a permanent structure. Also, a Secretariat paper is expected on that issue before the 39th session of the WG.

The EC invited any stakeholder participating next week in Vienna to attend the side event on Monday.

To conclude, the EC recalled that delegates from developing and least developed states, who have been nominated for the Working Group III session, were eligible to request financial assistance for travel and accommodation to The UNCITRAL Trust Fund by means of a specific request to be routed to the UNCITRAL Secretariat through the delegate’s Permanent Mission.


1 Member of the Brussels, Barcelona and Caracas Bars.

Investment Tribunals Are Too Quick to Establish the Existence of Issue and Cause of Action Estoppel in International (Investment) Law

Alexandros-Cătălin Bakos[1]

There is no denying that there is a serious backlash against investment arbitration at the moment. The signs are everywhere: from the latest discussions occurring within UNCITRAL’s Working Group III to the more recent practice of states (see the 22 European Union Member States’ declaration concerning the termination of their intra-EU Bilateral Investment Treaties); the latest ‘battlefront’ seems to be the Energy Charter Treaty, where the investment tribunals seized of disputes on the basis of this treaty consider it immune from the effects of the Achmea decision. The causes for this backlash are manifold. For present purposes, however, I would like to focus my attention on only one of the causes: incorrect decisions. And I would like to go even further and look at a very specific example of incorrect decisions: the application of the principle of estoppel by investment tribunals. I will focus exclusively on the procedural aspect of estoppel, as a bar to a claim. This seems to be its main, although not its only (para. 831), function – at least in international investment law.

Some background information on estoppel

Generally, estoppel is a very strong mechanism which has a preclusive effect against a party contradicting itself if another party has relied (usually to the latter’s detriment) on the initial position of the former (para. 231). Essentially, the party which contradicts itself is prevented from averring the contradictory fact (the subsequent one). ‘[W]hat is relevant for estoppel is that there has been a declaration, representation, or conduct which has in fact induced reasonable reliance by a third party, which means that the State, even if only implicitly, has committed not to change its course’ (idem, para. 246). Furthermore, the element which induces reliance must be unambiguous (paras. 8.46-8.47). Other tribunals refer to the fact that representations must be ‘clear and consistent’ (for example, the Chagos Marine Protected Area Arbitration, para. 438).

In international law, the application of estoppel dates back to the days of the Permanent Court of International Justice: for example, in the Legal Status of Eastern Greenland case, Norway was precluded from asserting sovereignty over Greenland, as the former had expressly recognized the latter as part of Denmark. This form of estoppel, however, seems to heavily overlap with vaguer principles – including the principle of good faith (para. 483).

There are voices in international law which argue that estoppel as such exists in a single form in international law and not in its various iterations found in the domestic common law systems (para. 436). This view, however, is not shared by all international law practitioners. Whether due to fragmentation of international law or not, this divergence becomes obvious once one analyzes arbitral practice. One example of how arbitral tribunals have looked at estoppel in its specific iterations concerns procedural aspects. There, estoppel acts as a more specific and technical mechanism designed to prevent an already litigated claim from being pursued again (similar to res judicata, although with a few important differences which will be mentioned below). The important branches of estoppel which may preclude a claim from being relitigated are: cause of action estoppel;[2] and issue (or collateral) estoppel.[3] It is important to mention that both these doctrines ‘prevent the parties from re-litigating a question that has been determined by a Court of competent jurisdiction, between the same parties or their privies, in a previous action. Once those elements have been made out, and unless there are special circumstances, the parties are precluded from raising the issues. [footnote omitted] The special circumstances which would permit the issue to be raised again include the discovery of further material relevant to issues in the first set of proceedings [footnote omitted] or fraud’.[4] The essential difference between the two doctrines, according to Griffith and Seif, is that cause of action estoppel concerns the claim itself which is precluded, whereas issue estoppel prevents relitigation of a point of law or of fact already decided by a tribunal.[5] Wilken QC and Ghaly point out that the difference is one of specificity.[6] According to them, ‘issue estoppel bites on the facts and issues required to establish the cause of action whereas cause of action estoppel looks only at the cause of action’.[7] Sheppard equates ‘cause of action’ with ‘claim’.[8]

A very important point of difference between estoppel – in both its iterations – and res judicata is that the latter requires (at least traditionally, as Judge Anzilotti mentioned in his dissenting opinion to the Factory at Chorzów case) a three-element identity between the concerned claims (the same person, the same claim and the same legal grounds); also known as the ‘three-element test’. Moreover, estoppel extends to the privies of the relevant parties, while res judicata – if interpreted strictly – does not.[9] Without going into the details of how the three elements of res judicata have been interpreted, especially in investment arbitration (as this is another subject for another date), it can be reasonably stated that estoppel is a stronger tool (than res judicata) in the arsenal of investment tribunals which can be used to prevent abusive re-litigation. The problem, however, is that the existence of such an instrument in international law is not clearly evident and tribunals seem to have taken its existence for granted.

The problems with the investment tribunals’ application of estoppel

Although not a general principle of law,[10] some arbitral tribunals seem to have applied estoppel as such. As will be seen below, however, there is at best inconclusive evidence as to the existence of a general principle of estoppel and at worst clear attempts to disregard this non-existence and apply a principle out of nothing.

At the same time, there are arbitral tribunals which may suggest or clearly determine that estoppel is a principle of law,[11] although this is usually not explained clearly and the reasoning is incomplete. As such, one is left wondering how did the tribunal uncover such a principle and whether it really exists.

For example, the Petrobart tribunal mentioned that ‘while the doctrine of collateral estoppel seems to have primarily developed in American law, other legal systems have similar rules which in some circumstances preclude examination of an issue which could have been raised, but was not raised, in previous proceedings. A doctrine of estoppel is also recognised in public international law’ (at pp. 66-67).

The tribunal, however, was unclear whether this amounted to a principle of law or not. The fact that there exist rules which establish preclusion of issues which could have been raised but were not raised and that these rules occur outside of the American legal system, as well, does not transform estoppel into a principle of law. At the same time, the tribunal did not mention in what form is estoppel recognised in public international law. It may have suggested that this would be applied as a principle, but it stopped short of fully clarifying whether such a principle indeed exists. The alternative may have been the customary law nature of estoppel, but the tribunal neither identified the underlying state practice and opinio juris nor referred to awards/ judgements in which such a custom was established. In the end, the claim preclusion argument was anyway rejected, since – among others – there was no identity between the legal grounds relied on in the relevant proceedings (at pp. 67-68).

Another example is RSM v. Grenada. There, the tribunal explicitly endorsed collateral estoppel as a general principle of law (para. 7.1.2). The tribunal noted ‘that the doctrine of collateral estoppel is now well established as a general principle of law applicable in the international courts and tribunals such as this one. [footnote omitted] (ibid.). However, it did not come to this conclusion itself, but rather relied on other tribunals’ conclusions.[12] What is surprising after looking at the cited cases is that neither of them clearly endorses estoppel as a principle of law.

For example, the Amco v. Indonesia tribunal referred to res judicata as a principle of law (paras. 26-46). One cannot exclude the possibility of this encapsulating estoppel as well, but such a conclusion is not clear. This lack of clarity is further compounded by the fact that the Amco v. Indonesia tribunal mentioned that ‘it is by no means clear that the basic trend in international law is to accept reasoning, preliminary or incidental determinations as part of what constitutes res judicata’ (idem, para. 32). As issue/collateral estoppel necessarily implies the fact that the reasoning of an award must be considered for this mechanism to arise,[13] the finding of the Amco v. Indonesia tribunal raises serious doubts as to the conclusion that estoppel was part of the principle to which that tribunal referred.

As regards the other relevant case (Southern Pacific Railroad Co. v. United States, which arose before the Supreme Court of the United States) it is true that what the cited tribunal referred to was issue estoppel (pp. 48-49). It mentioned that a general principle existed which mandated ‘that a right, question, or fact distinctly put in issue, and directly determined by a court of competent jurisdiction as a ground of recovery cannot be disputed in a subsequent suit between the same parties or their privies, and, even if the second suit is for a different cause of action, the right, question, or fact once so determined must, as between the same parties or their privies, be taken as conclusively established so long as the judgment in the first suit remains unmodified’ (ibid.). What the tribunal does not mention, however, is whether this general principle is a general principle common to all nations or whether this was a general principle specific only to the common law system.

There are tribunals which even seem to rely on estoppel, although, in reality, they are applying res judicata. This was the case with the Marco Gavazzi and Stefano Gavazzi v. Romania tribunal (paras. 164-166). In the first place, the tribunal analyzed whether an initial decision (which was alleged to preclude the claims before the forum) had ‘conclusive effects on the Parties to the present proceedings under the doctrine of res judicata or issue estoppel’ (idem, para. 164). Subsequently, it went on to mention that ‘under international law, three conditions need to be fulfilled for a decision to have binding effect in later proceedings: namely, that in both instances, the object of the claim, the cause of action, and the parties are identical’ (idem, para. 166). Although it did expressly refer to issue estoppel at one point, the tribunal referred to the conditions which were necessary to be fulfilled in order for res judicata to operate (the three-element test, as mentioned above). Moreover, it conflated issue estoppel with cause of action estoppel. As shown earlier, identity of cause of action is only necessary in the case of cause of action estoppel and not in the case of issue estoppel.

All the above examples demonstrate that estoppel as such is not applicable in investment arbitration (by virtue of international law, at least) and that tribunals seem to ignore this. There is no general principle – as understood by Article 38 (1) (c) of the Statute of the International Court of Justice, as an authoritative reflection of the sources of international law – of estoppel. At least no principle which could cover cause of action or issue estoppel. There is no evidence of a customary rule encapsulating estoppel either.[14] Moreover, not even investment treaties seem to contain this mechanism. For example, the 2012 US Model BIT – selected for being relevant to a common law jurisdiction – does not make any reference to estoppel. Neither does one of the latest UK BITs (the UK-Colombia BIT) contain any reference to estoppel – although it does allow the tribunal to address abuse of process; however, this is different than estoppel.


[1] Editor at avocatnet.ro and Associate Expert at DAVA | Strategic Analysis. This post is based on part of my thesis, submitted for the completion of an LL. M. in Law and Economics at Utrecht University. I would like to express my gratitude to Dr. Yulia Levashova, for her continuous support and for an in-depth and comprehensive feedback. In any case, I take full responsibility for the opinions and they are exclusively mine, not reflecting anyone else’s or any other institution’s.

[2] Audley Sheppard, ‘Chapter 8. Res Judicata and Estoppel’ in Bernardo M. Cremades Sanz-Pastor and Julian D.M. Lew (eds.), Parallel State and Arbitral Procedures in International Arbitration, p. 225 (hereinafter referred to as ‘Sheppard’).

[3] Ibid.

[4] Sean Wilken QC, Karim Ghaly, The Law of Waiver, Variation and Estoppel. Third Edition (Oxford University Press 2012), para. 14.08 (hereinafter referred to as Wilken QC, Ghaly).

[5] Gavan Griffith; Isabella Seif, ‘Chapter 8: Work in Progress: Res Judicata and Issue Estoppel in Investment Arbitration’, in Neil Kaplan and Michael J. Moser (eds), Jurisdiction, Admissibility and Choice of Law in International Arbitration: Liber Amicorum Michael Pryles (Kluwer Law International 2018), p. 124 (hereinafter referred to as ‘Griffith; Seif’).

[6] Wilken QC, Ghaly, para. 14.09.

[7] Ibid..

[8] Sheppard, p. 225.

[9] Griffith; Seif, p. 126.

[10] Charles T. Kotuby Jr. and Luke A. Sobota, General Principles of Law and International Due Process. Principles and Norms Applicable in Transnational Disputes (Oxford University Press 2017), footnote 262, p. 200. Such a conclusion (that estoppel is not a general principle of law) is in accordance with one of the major views in international legal relations as to what constitutes a general principle of law: one ‘which can be derived from a comparison of the various systems of municipal law, and the extraction of such principles as appear to be shared by all, or a majority, of them [emphasis added]’, Hugh Thirlway, The Sources of International Law. Second Edition (Oxford University Press, 2019), p. 108.

[11] Stating that estoppel is a principle of law serves two aims: firstly, the tribunal justifies the application of estoppel by reference to a source of international law (usually, part of the applicable law). Secondly, this gives the tribunal legitimacy, as the tribunal grounds its decision to rely on estoppel on a widely-applicable source of law (whether objectively true or not is not as important).

[12] The cases to which the RSM tribunal referred were mentioned at page 27, footnote 34 of the award: Amco Asia Corporation v Republic of Indonesia, ICSID Case No. ARB/81/1, Decision on Jurisdiction (Resubmitted Case), 10 May 1988, para. 30; Company General of the Orinoco Case, 10 R.I.A.A. 184 (1905); and Southern Pacific Railroad Co. v. United States, 168 U.S. 1 (1897). The second tribunal quoted in turn the third one. As such, I will refer only to the first and third tribunals in the remainder of this part.

[13] Sheppard, p. 234; Griffith, Seif, p. 121.

[14] Christopher Brown, ‘A Comparative and Critical Assessment of Estoppel in International Law’, University of Miami Law Review [Vol. 50:369 1996], pp. 384-385;Pan Kaijun, ‘A Re-Examination of Estoppel in International Jurisprudence’, 16 Chinese Journal of International Law (2017), p. 761.

Ensuring Equitable Access to All Stakeholders: Critical Suggestions for the MIC (EFILA Submission to the UNCITRAL WG no. 3 on ISDS Reforms)

EFILA has recently submitted its suggestions to the UNCITRAL Working Group no. 3 on ISDS Reform. The entire document can be found here. An extract can be read below.

The European Federation for Investment Law and Arbitration (EFILA) believes that no discussion about the reform of the investor-State dispute settlement (ISDS) system should occur without taking stock of the interests of all stakeholders. This is particularly true for the proposal for a Multilateral Investment Court (MIC), which is currently being discussed and negotiated in UNCITRAL Working Group III. Without the active participation of all stakeholders (i.e. all potential users of the MIC) – including investors and their legal counsel – any ISDS system will lack legitimacy.

With this in mind, EFILA submits the following, non-exhaustive suggestions for ISDS reform and, in particular, for the MIC proposal:

The Appointment & Selection of MIC Judges: Central to the ISDS system’s ability to effectively resolve disputes between investors and States is the confidence of all stakeholders in their decision-makers. For this reason, EFILA believes that investors should continue to have a direct and indirect say in the choice of their decision-makers. The MIC should:

  1. Let a college of representatives chosen by the investors, as users of the system, participate in choosing candidates for the MIC;
  2. Give all stakeholders a right to strike out a given number of judges assigned to their panel; and
  3. Allow all stakeholders to retain the right to challenge MIC judges on the basis of clearly defined standards before an independent body.

Consistency of MIC Decisions: EFILA agrees that consistency in legal decisions is an important element of any well-functioning dispute resolution system. Consistency, however, must be objective. It cannot be used as a means to “correct” awards that arrive at unwelcome results. Any responses to consistency must respect the rule of law and the equality of the parties.

Accordingly, any final design of the MIC should:

  1. Not allow joint binding interpretations with potentially retroactive effect;
  2. Avoid unnecessarily reducing the material scope of the standards of investment and investor protection; and
  3. Limit exclusions of certain types of investors, investments and sectors to only to the
    extent objectively and reasonably necessary.

Access To Justice For SMEs: Small and medium sized enterprises (SMEs) are an integral part of the global economy. Any proposed reform of the ISDS system cannot disregard SMEs or discourage them from making full use of the ISDS system. The MIC, therefore, must include structural and systemic solutions that effectively ensure access to the system for SMEs. These include:

  1. Adopting cost-efficient rules that promote access to justice by SMEs;
  2. Establishing a process that informs and educates SMEs about the ISDS system and helps them to assess their claims; and
  3. Creating a financial support system for accessibility to the ISDS system for SMEs.

Enforcement of MIC Decisions: The application of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) to MIC decisions (even if just on an interim basis) raises serious potential obstacles to the enforceability of those decisions. Further thought should be given to ensuring that MIC decisions will be enforceable.

These suggestions, EFILA believes, will encourage confidence from all stakeholders in the MIC system and thus make the MIC a fair dispute settlement system for all users.

The entire document can be found here.

Schrödinger’s Investment: the EU’s General Court Considers that the Compensation Ordered by the Micula Tribunal is Not a Form of State Aid (Although it Might as Well Have Been)

Alexandros Catalin Bakos, LL.M. Candidate, Utrecht University

In a somewhat fortunate turn of events for the stability (or what is left of it in any case) of the intra-European Union (intra-EU) investment treaty system, the General Court of the European Union (GCEU) has annulled the EU Commission’s decision rendered against Romania for illegal state aid concerning the enforcement of the Micula arbitral award. Although the GCEU’s decision may be good news for the investors themselves, it does nothing to allay fears regarding the future of intra-EU ISDS. In the grand scheme of things, the effects which culminated with the Achmea judgement are still there.

This latest installment in the long-running saga of intra-EU investment treaties and their conflict with the EU legal order does not substantially change the paradigm. In fact, one may argue that it complicates the matters: the only certain conclusion that can be derived from the General Court’s decision is the fact that there can be no conflict between EU State Aid rules and intra-EU Bilateral Investment Treaties (BITs)/awards based on such treaties if the compensation ordered by the tribunal relates to measures which were taken prior to the entry into force of EU law. However, the Court did not analyze what is the situation of compensation which needs to be paid for measures adopted after the entry into force of EU law.

In any case, before continuing with the decision’s analysis, a short recap of the major developments in this situation is in order.

How did we get here? 

Prior to joining the EU, the Romanian state offered the Micula brothers and the companies controlled by them (the investors) certain custom duty exemptions and other tax breaks (the GCEU’s decision, paras. 5-6). Later, in 2004 and 2005, those exemptions and breaks were suddenly repealed, in an effort to ensure compliance with the EU laws on State Aid – which would become effective from 1 January 2007 (the GCEU’s decision, para 12). Because of this, the investors began ICSID arbitration proceedings, challenging the compliance of the measure with the applicable BIT (the 2002 Sweden-Romania BIT). The arbitral tribunal found in the investors’ favour and ordered Romania to pay compensation amounting to approximately €178 million. The court’s finding was based on a violation of the fair and equitable treatment standard. More specifically, on behaviour contrary to the legitimate expectations of the investors. This is of utmost importance, as what was considered to be in breach of the treaty was not the repealing of the exemptions itself, but the manner in which this occurred. The arbitral tribunal expressly found that ‘by repealing the […] incentives prior to 1 April 2009, Romania did not act unreasonably or in bad faith […] [H]owever […] Romania violated the Claimants’ legitimate expectations that those incentives would be available, in substantially the same form, until 1 April 2009. Romania also failed to act transparently by failing to inform the Claimants in a timely manner that the regime would be terminated prior to its stated date of expiration. As a result, the Tribunal finds that Romania failed to “ensure fair and equitable treatment of the investments” of the Claimants in the meaning of Article 2(3) of the BIT’ (para. 872 of the award).

Subsequently, the investors sought the enforcement of the award. However, this proved difficult because the EU Commission intervened and tried to prevent Romania from enforcing the award. The former argued that an enforcement would constitute a form of illegal state aid. After Romania, nonetheless, partially paid the award, the EU Commission officially adopted a decision against the Romanian state for breach of State Aid rules. The Commission’s argument was that this payment would, in essence, favour the investors in the same way in which the exemptions favoured them in the first place. Romania, thus, was under an obligation to stop paying the award and to recover the amount which had been paid so far. This was eventually challenged by the investors before the GCEU and the judgement analyzed here is the European Court’s decision regarding that challenge.

This turn of events determined other courts where enforcement of the award was sought to stay the proceedings until the European Court will have rendered an award concerning the challenge to the EU Commission’s decision on illegal state aid (see here for an example).

What does the GCEU’s decision entail and what does it not entail?

The GCEU found that the compensation rendered by the Micula arbitral award could not be considered illegal state aid, at least as it regards events which took place before Romania’s accession to the EU (para. 109 of the GCEU’s decision).

The essence of the GCEU’s arguments is based on a clear establishment of the temporal nexus to which the arbitral award referred (paras. 71-93 of the GCEU’s decision). To this end, the Court clarified that all the relevant issues (including the events which gave rise to the right to compensation) arose and produced effects before Romania’s accession to the EU (para. 71). In that respect, even if the arbitral tribunal’s award was rendered after EU law became applicable to Romania, it merely ‘retroactively produced definitively acquired effects which it merely ‘stated’ for the past, that is to say, effects which, in part, were already established before accession’ (para. 84 of the GCEU’s decision). Accordingly, even if the award was rendered after Romania’s accession to the EU, ‘the Commission retroactively applied the powers which it held under Article 108 TFEU and Regulation No 659/1999 to events predating Romania’s accession to the European Union. Therefore, the Commission could not classify the measure at issue as State aid within the meaning of Article 107(1) TFEU’ (para. 92 of the GCEU’s decision).

What is interesting, though, is that the GCEU referred only to a part of the compensation as not being under the Commission’s power of review. It did not exclude the entirety of the award from the Commission’s reach: ‘as regards the amounts granted as compensation for the period subsequent to Romania’s accession to the European Union, namely, the period from 1 January 2007 to 1 April 2009, even assuming that the payment of compensation relating to that period could be classified as incompatible aid, given that the Commission did not draw a distinction between the periods of compensation for the damage suffered by the applicants before or after accession, the Commission has, in any event, exceeded its powers in the area of State aid review’ (para. 91 of the GCEU’s decision). In other words, had the Commission distinguished between the pre-accession and the post-accession periods, the decision may not have been annulled after all (or may have been only partially annulled).

Clearly, the GCEU left open the possibility of finding an incompatibility between State Aid rules and the observance of an arbitral award rendered for acts which occurred after EU law became applicable. And this is what the decision does not entail: it does not clarify whether compensation payable on the basis of an arbitral award is contrary to EU State Aid rules.

It is true that the Court began an analysis of whether compensation offered on the basis of an arbitral award can be considered State Aid, but it stopped short of drawing any relevant conclusions. It limited itself to referring to the general conditions necessary for State Aid to arise (paras. 100-103 of the GCEU’s decision) and concluded that it cannot be considered that the compensation amounted to a form of illegal State Aid, at least not until the accession period. However, after the accession period, the analysis would advance to the issue of whether the objective elements of illegal State Aid were present: this, however, was not undertaken by the Court. It never determined whether the measure was imputable to Romania. And one can clearly see why the Court avoided this. It would be very hard to argue that the compensation ordered by the arbitral award can amount to illegal state aid.

Firstly, how can one impute an investment tribunal’s award to Romania? This would mean that Romania had control over the arbitrators, which is clearly not the case. Quite the opposite, as otherwise arbitration would not have been used so often in the settlement of investor-state disputes. Neutrality is one of the reasons ISDS exists. Additionally, for state aid to exist, one needs to demonstrate effective control of the state over the body which adopts the decision alleged to constitute such state aid (para. 52 of the Stardust case – France v. Commission, Case C-482/99). As shown earlier, this is clearly not the case with an investment arbitral tribunal.

Moreover, the GCEU mentioned that ‘compensation for damage suffered cannot be regarded as aid unless it has the effect of compensating for the withdrawal of unlawful or incompatible aid’ (para. 103 of the GCEU’s decision). This must be read together with the Court’s earlier judgment in the Asteris case. The basis of this case-law is that ‘State Aid […] is fundamentally different in its legal nature from damages which the competent national authorities may be ordered to pay individuals in compensation for the damage which they have caused to those individuals’ (para. 23 of the Asteris judgment). In this context, one must tread carefully before concluding that the subsequent compensation is, in fact, a hidden form of State Aid. Given the evident difference between the two, it is of utmost importance to demonstrate in-depth that in a specific case this difference is diluted.

One underlying premise for this difference to be able to disappear is for the EU Member State to actually be the one which formally re-institutes the illegal aid through the formal measure of compensation. The two measures – the initial state aid and, subsequently, the compensation for the withdrawal of the unlawful measure – must be seen as a whole, as having one purpose and as being able to be imputed to one entity – in this case, the Romanian state. In the Micula case, though, this was not present. The initial measure was indeed adopted by the Romanian state. The compensation, though, was decided by an objective and neutral tribunal. They are related, but they do not constitute one whole. Not to mention the fact that it can be very hard to argue that compensation on the basis of an award could offer unjustified economic advantages.

Secondly, one other condition for the compensation to be considered as re-instituting the illegal State Aid is for the compensation to be structured so as to replace the illegal measure itself. Nonetheless, this was not the case with the Micula award. One aspect must be taken into consideration in order to understand the difference between the customs and tax incentives themselves (the illegal State Aid) and the arbitral award. As mentioned at the beginning of this post, it was not the withdrawal of the incentive schemes that was considered to be the basis of compensation. What led to the present outcome was the manner in which the withdrawal took place, essentially leading to an infringement of legitimate expectations. Those are different and it is clear that, in any case, this would not be a case of re-instituting said state aid through the backdoor.

As such, the GCEU’s award is clearly not a silver lining for intra-EU ISDS, as it does not clarify – in the end – the most important aspect: can compensation rendered by an arbitral award be considered illegal state aid? In this context, when one thinks about the general scheme of things, it becomes evident that nothing has really changed: Achmea is alive (the effects have come sooner rather than later). Additionally, nobody knows its scope, especially when it comes to the Energy Charter Treaty’s (ECT) arbitration mechanism. Although arbitral practice seems to insist that Achmea does not preclude intra-EU ISDS on the basis of the ECT, what is eagerly waited is the CJEU’s position on this. After this, the CETA opinion – although reconciling ISDS with EU law when there is a third party (a party outside the EU) involved – does not mean the endorsement of intra-EU ISDS; it can clearly be seen that the EU’s position within UNCITRAL’s Working Group III is still the one we have been used to for so long: ISDS must be replaced with a standing court.


[1] LL. M. candidate in Law and Economics at Utrecht University.

Do New-Age International Investment Agreements Introduce a Method to the Madness of State Counterclaims in Investment Arbitration?

Vishesh Sharma* and Vishakha Choudhary**

Uniform jurisprudence concerning state counterclaims in investment arbitration remains elusive. Ordinarily, the conditions for their presentation are twofold[1]: parties should have consented to arbitration of counterclaims, and the counterclaims should be connected to the primary claim. However, tribunals have oscillated between strict application[2] of these criteria, to extreme dilution based on liberal interpretations of International Investment Agreements (“IIAs”). Notably, in the recent David Aven[3]award, the jurisprudence on counterclaims took a novel direction – disregarding the traditional ‘close connection’ test, the Tribunal permitted counterclaims simply by noting obligations incumbent upon investors pursuant to the CAFTA-DR.

These winds of change signal a departure from an already shaky trend. To induce certainty in investment protection regimes, the new generation of IIAs should take a decidedly clear approach to counterclaims. In this light, the present inquiry seeks to analyse recent policy response to arbitral awards on counterclaims, and the harmony between extant case law and provisions of these model IIAs. Finally, it offers suggestions for simultaneously achieving judicial efficacy and preventing abuse of the investor-state dispute settlement (ISDS) mechanism vis-à-vis counterclaims.

Arbitrating Counterclaims: Ambiguous Judicial Response to Ambiguous IIAs

IIAs fail to explicitly allow or restrict the arbitration of counterclaims. Accordingly, their jurisdiction and admissibility in investment disputes remain contentious. These issues are largely decided through recourse to treaty interpretation.

With respect to jurisdiction, tribunals primarily assess whether the IIA evinces parties’ consent to submit counterclaims to arbitration. Early tribunals such as Saluka[4]and Paushok[5]found such consent implicit in broad dispute resolution clauses of their respective applicable IIAs, since these clauses did not restrict the scope of arbitrable ‘investment disputes’. More recent decisions in Metal-Tech[6]and Urbaser[7] derived the requisite consent from the neutral phrasing of dispute resolution clauses, which did not limit standing for initiating claims to investors. Conversely, jurisdiction over counterclaims was denied in Rusoro Mining[8], as the IIA in question restricted investment disputes to disputes arising from breaches of the treaty by the host state. Pertinently, in 2011, two controversial and corresponding views with respect to jurisdiction over counterclaims emerged in the form of the Goetz[9]award and the Roussalis dissenting opinion[10] (Prof. Michael Reisman). They conclude that by consenting to arbitration rules (ICSID) permitting Respondents to submit counterclaims, contracting parties to IIAs implicitly agree to arbitration of counterclaims.

The question of admissibility of counterclaims has also seen polarising positions emerge. While the Saluka[11] and Paushok[12] duo emphasised the need for a strict legal connection (“operational unity” and “common origin”) between claims and counterclaims to render the latter admissible, recent decisions have considerably relaxed this requirement. The Goetz[13] Tribunal admitted counterclaims ‘related to’ the subject matter of the claims. The Urbaser[14] Tribunal, in admitting counterclaims, considered that the counterclaims were ‘based on’ the disputed investment rights and ‘related to’ breach of commitments on which investment rights were conditioned. Both these conclusions were founded on the wide notion of ‘investment disputes’ in the IIAs. However, the David Aven[15]award, delivered on 18 September 2018, takes a decidedly novel approach. Despite the limited standing in Article 10.16 CAFTA-DR, allowing only investors to submit ‘investment disputes’, the Tribunal assumed jurisdiction over counterclaims. In its opinion, by imposing obligations upon investors, contracting parties had implicitly consented to arbitration of state counterclaims. Surprisingly, it did not even attempt to ascertain admissibility according to the ‘legal connection’ test, emphasizing the Respondent state’s unconditional right to agitate breaches of environmental obligations by the investor, committed in the course of exercising investment rights.

How does the next generation of IIAs fare?

Incontrovertibly, the fragmentation of judicial discourse on counterclaims stems from the lack of precision in IIAs. The past few years have seen substantial overhauls in investment regimes across nations. Unfortunately, these do not substantially tackle existing ambiguities with respect to counterclaims.

Indian Model BIT, 2016

After terminating its existing BITs, the Indian Government is attempting to renegotiate them according to the 2016 Model BIT. India’s erstwhile BITs were based on the 2003 Model, which did not expressly address counterclaims. Its broad dispute resolution clause (“Any dispute…in relation to an investment”) could potentially have been used to assume jurisdiction over them. Perhaps, however, the scope of admissible counterclaims would be limited, owing to the absence of any obligations imposed upon investors.

The 2016 Model BIT makes marginal improvements over the existing regime. Chapter III compels investors to “comply with all laws regulations, administrative guidelines and policies” of the host state. It additionally demands compliance with taxation laws, corporate social responsibility, and seeks to prevent corruption. However, the dispute resolution clause in Article 13.2 restricts tribunals’ jurisdiction to disputes arising from breaches of the host-state’s obligations. Further, standing to bring claims under Articles 15 and 16 of the Model BIT is limited to investors. By applying the Rusoro reasoning, tribunals could deny jurisdiction over state counterclaims.

Conversely, Article 13.4 allows tribunals to take into account corrupt activities of investors in deciding whether their claim is tenable. Following the reasoning of the decision in David Aven, this may be viewed as an affirmative obligation upon investors not to engage in corrupt practices, which could constitute the legal basis of a counterclaim. Further, both the Oxus[16]and Gavazzi[17]awards disregard words in dispute resolution clauses limiting the standing to ‘bring a claim’– while these provisions would undoubtedly exclude ‘free-standing claims’ by host states, they would not necessarily preclude the host state from raising a ‘closely connected’ counterclaim in defence. Thus, the future interpretation and impact of Articles 15 and 16 on arbitration of counterclaims is unclear.

Hence, India’s attempt to revolutionise its investment protection framework has not resolved any lingering confusion with respect to arbitration of counterclaims. In fact, the seemingly contradictory duties of tribunals under Articles 13.2 and 13.4 might aggravate this conundrum.

Netherlands Model BIT, 2018

The preamble of the Netherlands Model BIT sets its tone, seeking to balance investment protection with legitimate policy objectives such as public health, safety, and environment protection. In furtherance of the same, the Model BIT allows host states to demand environmental protection, compliance with labour standards, and respect for human rights from investors (Articles 2, 6, and 7), under both domestic laws (Article 7.1) and internationally recognised standards (Article 7.2). However, the Model BIT narrowly envisages disputes to be those concerning ‘loss or damage to the investor or its investment(s)’ and grants the right to submit disputes to ‘investors’ (Articles 16 and 18).

Given the prevailing uncertainty about the impact of such ‘limited standing’ clauses, as discussed in the foregoing sections, Articles 16 and 18 do not oust a tribunal’s jurisdiction over counterclaims conclusively. In fact, the extensive obligations for investors prescribed in Articles 6 and 7 make a finding in favour of jurisdiction and admissibility of counterclaims equally likely. To add to this turmoil, Article 23 of the Model BIT allows tribunals to take international human rights standards into account while determining compensation due to investors – providing an additional window of opportunity for state counterclaims seeking set-off of damages.

The US-Mexico-Canada Agreement, 2018

Intended to replace the NAFTA, Chapter 14 of the USMCA governs investment relations. Vide Articles 14.16 and 14.17, the Agreement allows contracting parties to adopt measures concerning environmental, health, safety, or other regulatory objectives. Yet, it fails to address the arbitrability of potential breaches by investors under these clauses. While the right of submission of a ‘claim’ under Annex D of the Chapter is granted solely to the Claimant, the Agreement does not explicitly restrict the Respondent from agitating an ‘investment dispute’ in any provision.

Moreover, in Article 14.D.7, the Agreement prohibits respondents from asserting counterclaims based on indemnification or compensation available to an investor pursuant to an insurance or guarantee contract. Since parties have expressly chosen to exclude certain counterclaims from the domain of arbitrable investment disputes, a contrario, other counterclaims may well be considered admissible before tribunals.

Notably, none of these BITs address the test of admissibility of counterclaims, leaving it to the discretion of tribunals. These tribunals could choose from a variety of options, namely the Saluka reasoning (strict factual and legal connection), the Urbraser reasoning (strict factual connection, diluted legal connection test) or the recent David Aven reasoning (counterclaims based on any state right or investor obligations).

Conclusion

The foregoing discussion confirms the continued uncertainty with respect to questions of jurisdiction and admissibility of counterclaims. Primarily, this necessitates redesigning future IIAs to expressly define the contours of admissible counterclaims, specify jurisdictional requirements, and eliminate seemingly contradictory provisions on tribunals’ powers. Additionally, given the increasing investor obligations envisaged under IIAs, these treaties should either expressly address their arbitrability, or specify the appropriate forum for disputes arising from these obligations. The provisions of the 2015 Draft Indian BIT, surprisingly abandoned in the 2016 Model, achieved this effectively. It not only prescribed detailed obligations for investors in Articles 9 to 12, but also granted an explicit right to the host state to institute counterclaims on these grounds under Article 14.11 – thereby preventing any ambiguity.

Until changes of this nature are implemented in IIAs, the optimum solution would be for tribunals to assume jurisdiction of counterclaims when the definition of ‘investment disputes’ under a IIA is broad. If lack of locus standi to initiate arbitration is equated to the lack of standing to submit counterclaims once the arbitration has commenced, the efficacy of ISDS would be seriously jeopardized by the threat of contradictory decisions. Moreover, while admissible counterclaims should bear a manifest factual connection with the primary claims, a strict legal connection must not be demanded. So long as the IIA recognizes the host state’s right to take measures binding investors (for the protection of environment, human rights, et al), factually related counterclaims on these subject matters should be held to be closely connected. This approach ensures that arbitration continues to be a ‘one-stop-shop’ for adjudication of related disputes, and is not mired with fragmented decisions-making.

Nonetheless, recent trends in arbitral awards and investment treaty drafting indicate that there is no perceivable end to various equivocal interpretations. The debate on counterclaims is bound to continue.


* Vishesh Sharma is a B.B.A., LL.B. (Hons.) Student at Gujarat National Law University, India

** Vishakha Choudhary is an LL.M. Candidate at Europa-Institut, Saarland University, Germany.

[1] Metal-Tech Ltd. v. Uzebekistan, ICSID Case No. ARB/10/3, ¶407.

[2] Saluka v. The Czech Republic, UNCITRAL, ¶76.

[3] David Aven v. Costa Rica, ICSID Case No. UNCT/15/3, ¶738-739.

[4] Saluka Investments BV v. Czech Republic, UNCITRAL, ¶39.

[5] Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. The Government of Mongolia, UNCITRAL, ¶689-694.

[6] Metal-Tech Ltd. v. Uzebekistan, ICSID Case No. ARB/10/3, ¶408-410.

[7] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, ¶1143.

[8] Rusoro Mining Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5, ¶623-627.

[9] Antoine Goetz et consorts v. République du Burundi, ICSID Case No. ARB/95/3, ¶278.

[10] Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Declaration.

[11] Saluka Investments BV v. Czech Republic, UNCITRAL, ¶76.

[12] Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. The Government of Mongolia, UNCITRAL, ¶695.

[13] Antoine Goetz et consorts v. République du Burundi, ICSID Case No. ARB/95/3, ¶285.

[14] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, ¶1151.

[15] David Aven v. Costa Rica, ICSID Case No. UNCT/15/3, ¶734-739.

[16] Oxus Gold v. Republic of Afghanistan, UNCITRAL, ¶948.

[17] Marco Gavazzi and Stefano Gavazzi v. Romania, ICSID Case No. ARB/12/25, ¶152-154.

The End of West Takers in the UK? Anti-suit injunctions post-Brexit: The default ‘No-deal’ Scenario

David Ndolo, Coventry Law School, Coventry University

The UK parliament passed the European Union Withdrawal Act 2018 (“EUWA”) that gained royal accent on 26 June 2018. While the exit day is currently set for 29 March 2019, there is a proposed transition period until December 2020 in case a Brexit deal is agreed upon.

In any event, the default position is set under sections 1 and 2 of EUWA, that EU Law will no longer be a source of law in the United Kingdom after the exit day. This includes the decisions of the Court of Justice of the European Union (“CJEU”).

To avoid legal gaps and uncertainty, the EUWA 2018 copy pasted all EU law, including CJEU case law, into the domestic UK law. As a result, the first and second instance courts will remain bound by previous CJEU cases. The UK Supreme Court, however, under section 6(4) of the EUWA, has the power to depart from previous CJEU decisions in the same way it can depart from its own earlier case law.

In other words, the UK Supreme Court can depart from the West Tankers case removing the restriction on UK courts power to issue anti-suit injunctions to parties in EU national courts. As has been discussed here, the CJEU held in West Tankers [(C-185/07) EU:C:2009:69 (ECJ (Grand Chamber)] that the anti-suit injunctions of this nature run counter to the principle of mutual trust among the EU member states as required by the Brussels I Regulation (replaced by the Brussels Recast Regulation in 2015). As result, EU member state courts, including English courts, cannot issue an anti-suit injunction in favour of arbitration where a party starts foreign court proceedings in an EU state. Despite the controversy that the AG’s opinion raised in Gazprom OAO EU:C:2014:2414., the English courts re-affirmed that they still firmly apply the CJEU’s approach in West Takers in Nori Holdings Ltd v Bank Financial Corp [2018] EWHC 1343 (Comm).

The UK Supreme Court highly values its power to issue anti-suit injunctions in favour of arbitration. In fact, in Turner v Grovit [2001] UKHL 65, it formally referred to anti-suit injunctions as an ‘important valuable weapon’ (emphasis added) and sees it as giving London seat of arbitration an advantage over its competitors. The UK Supreme Court has also twice ruled in favour of court’s power to issue anti-suit injunction in West Tankers [2007] UKHL 4 and Turner v Grovit as not being contrary to principle of mutual trust under Brussels Regulation 1, albeit its decisions were overturned by the CJEU.

Moreover, despite the CJEU ruling in West Tankers, the English courts have continued to grant anti-suit injunctions in favour of arbitration proceeding directed to parties who stated foreign proceeding in non-EU national courts. In fact in 2013, in Ust-Kamenogorsk Hydropower Plant JSC v AES Ust-Kamenogorsk Hydropower Plant LLP [2013] UKSC 35,the UK courts further widen their power to grant anti-suit injunction in favour to restrain foreign proceedings brought in breach of an arbitration agreement, to cases where there is no existing or proposed arbitration.

Following this, it is likely that the UKSC is to overturn West Tankers after the exit day such that UK courts will regain the full power to issue anti-suit injunctions post-Brexit. However, if this were to happen, the adoption of the Brussels I Recast2015 into domestic UK law and the previous CJEU decisions in West Tankers and Turners v Grovit EU:C:2004:228 are indications that the English courts would need to reconsider its power to issue anti-suit injunctions especially those directed to parties EU national courts.

If the UK were to regain the power to issue anti-suit injunctions where the foreign court proceedings are commenced in a European court, this may give the London seat as a practical pro-arbitration advantage over its competitors within the EU. This is because it will give the parties guarantee where there is valid arbitration agreement, the English Court can compel the parties to comply with that voluntarily choice to settle via arbitration even where the proceedings are commenced in EU state court. Indeed, in a recent survey conducted by Queen Mary University the respondents indicated that they will continue to use English law after Brexit because of its support for arbitration and regain of such a remedy may further cement their decisions. (QMU & White Case, ‘International Arbitration Survey: The Evolution of International Arbitration’(2018) at 12 )

However, the corollary to such an approach is that there is also the risk that where an anti-suit injunction is granted to stop proceedings in EU State court, those courts might later refuse to recognise and enforce the arbitral award on the basis its being contrary to the EU member state’s public policy in reliance on the New York Convention, Article V(2)b. In addition to this, as West Tankers only applies to EU State courts, EU State courts would equally be free to grant anti-suit injunctions to restrain a party from pursuing a claim before the English courts. As a result, this approach can be seen by the parties as being too uncertain, restrictive and a disadvantage and thus they prefer an EU Seat where it is clear and well settled that EU state court cannot grant anti-suit injunction directed to a party in EU state court. In such a case it is likely that Paris as a seat of arbitration will most benefit. (QMU Survey 2018)

Bilateral Arbitration Treaties: Are BATs Blind to Existing International Structures and Realities?

by Avani Agarwal

In November 2012, Gary Born proposed the idea of a Bilateral Arbitration Treaty (BAT), in a speech aptly titled “BIT’s, BAT’s and Buts” (available as an essay in the 13th Young Arbitration Review). He suggested developing a system of international treaties whereby countries decide that a particular set of international disputes (such as commercial ones) arising between their respective nationals will be resolved via international arbitration as the default mechanism. Domestic courts in both countries would refuse to hear these disputes and would refer them to arbitration instead. The involved states would determine what procedural rules would be followed in the default arbitration. He qualified his idea by pointing out that the parties actually involved in the dispute could either opt out of the arbitration or alter the procedural mechanism, if they so desire. He based his optimism about the success of such a system on the relative success seen by the International Investment Arbitration framework. 

Unfortunately, this optimism appears to be misplaced. Recently, both investors and countries have been letting go of international arbitration in investment treaties, with countries like India terminating existing agreements and negotiating new ones without Investor State Dispute Settlement (ISDS) mechanisms. More than two hundred lawyers and economists have urged that the USA take similar actions, based on fears that ISDS leads to unaccountability and uncertainty. This movement against investment arbitration appears to be dictated by realities of the existing arbitration and social structures. This post seeks to analyse these concerns and the impact they will have on a network of BATs.

Consent and Party Autonomy. -The consent of the parties is the foundation of any arbitration proceeding, as recognised by courts across the globes. BATs, as previously pointed out, invert the traditional model and do away with this requirement. Born has acknowledged this concern but his response does not seem satisfactory. Giving parties the option to opt out of arbitration is in no way the same thing as requiring them to consent to it. Rather, it is a much lower standard of intent. It is possible to envisage at least some instances where the arbitration will lack active consent from both parties. Courts do uphold pathological clauses but it could be precisely because they reflect the intent of the parties to arbitrate, not the contrary (consider clauses that don’t meet some formal requirements). Moreover, there is an additional level of scrutiny by the arbitration tribunal to ensure that the agreement was valid and the tribunal is competent under the contract to proceed.

The requirement of consent is not a formalistic tool that can be done away with. It reflects real concerns of both the judiciary and commercial entities. It is widely recognized that access to an independent, fair and neutral court is fundamental and necessary. Given that courts are an established and familiar system for most parties, it is possible that they are comfortable with litigation. Further, a fundamental feature of arbitration is that it is final and allows for appeals on very limited factors. A lack of appeals may be seen as grossly unjust by some parties as it implies that they would be helpless against an award they find incorrect or unfair. These two issues were the primary focus of the petition signed by various lawyers and economists against ISDS. Further, in a study conducted in New Zealand, it was shown that a large number of businesses were wary of arbitration. If justice is a subjective idea and parties suspect that arbitration does not do justice, then the necessity of consent serves to ensure that the deeply entrenched ideal of fair trials is not compromised on.

Inequity in Bargaining Positions. – In the structure imagined by a BAT, there are two primary levels of negotiation- states and parties. Arguably, states would be on equal footing and would have the ability to take their particular needs into account. However, some states (such as small and developing countries) need more investments and trade than others. A series of investigative articles highlight how poorer countries have consistently been exploited by foreign businesses via the threat of investment arbitration proceedings.

 Once BATs start being finalized, traders may grow to prefer doing business in countries that offer default arbitration. This means that some states will need BATs more and will thus have a lower bargaining position. Additionally, states don’t really have the freedom to alter BATs to suit the needs of their people. As Born himself notes, “If these BATs are too different from each other, transaction costs will increase and the full potential of efficiency, simplicity, and fairness inherent in the idea of BATs will not be fully realized” (as co-author of a programme paper available here). This means that businesses will prefer countries with similar BATs. Thus countries that need more foreign trade will end up sacrificing other priorities in order to be bound by a model of treaties that may not be the best for them.

At the level of individuals and businesses, the New Zealand Study has found that small and medium sized enterprises, even in a developed country, are inexperienced in arbitration. It is not difficult to imagine transactions between such companies and larger, multinational organizations. In a BAT, it is possible that the disenfranchised party will be forced into arbitration and may even be exploited into agreeing to unfamiliar procedural rules.

Issues with Third-Country Enforcement. – Born has himself stated that universal enforceability is one of the most important benefits of arbitration. It is true that a BAT would streamline enforceability in the contracting states. However, the same cannot be said for third countries.  Currently, the New York Convention is used to guarantee third country enforceability. It requires that an arbitration agreement be in writing. A BAT necessarily does away with this requirement. This creates the possibility of non-contracting states using different standards for enforcing an award. It is impossible to currently predict whether third countries would be willing to apply more liberal requirements to the enforcement of an award (As pointed out by Bruno Guandalini in his article “Bilateral Arbitration Treaties and Efficiency” published in the 38th Issue of Revista Brasileira de Arbitragem (2013)). If and when such enforcement is necessary, parties may have to conclude an arbitration agreement anyway in order to assure it.

Born’s comparisons to BITs are more than just overly optimistic. Insofar as the proposal relies on the Bilateral Investment Treaty (BIT) structure, it fails to note the significant differences that merit a separate analysis of BATs. Most prominently, BITs arose out of a necessity that does not compel a network of BATs and the conceptualisation of constructive consent is drastically different in the two models.

Bilateral Investment Treaties are entered into with the primary goal of creating a favourable environment for international investors, where they are treated fairly and their assets are not expropriated without due process. An undeniable part of such an environment is that there be some accountability if the state does not uphold its side of the bargain. The doctrine of sovereign immunity imposes a natural hurdle in this process. Consequently, states create comprehensive dispute resolution systems and agree in advance to arbitration. Needless to say, such a situation is unlikely to arise in commercial transactions.

In an investment treaty, the state agrees to international arbitration in advance, but only on behalf of itself. Investors make no such promise until a dispute actually arises. At that point, they have the option of pursuing domestic remedies or entering into an arbitration. Thus, both parties to the arbitration have personally displayed their intent to arbitrate before the process begins. On the other hand, a BAT would require that two states give advance consent to arbitration on behalf of their citizens or even individuals who run businesses on their territory. There is a distinct absence of actual intent in this case.

Thus, it appears to be that BATs are inflicted by many of the same issues that affect investment arbitrations, without any of the necessities that have so far justified retaining the BIT structure.

Born concluded his speech by pointing out that BATs should not be rejected merely for being innovative. However, they also cannot be accepted simply because they are innovative. When we consider the costs of negotiating such a massive system of treaties, the existing suspicions against arbitration, the practical restraints posed by the current arbitration framework and the social inequities that such a treaty may reinforce or even exacerbate, novelty is simply not reason enough to try.

The Notion of “Material Breach” as the Ground to Terminate an Inter-State Arbitration Agreement (Compromis): A Criticism over Croatia v. Slovenia Tribunal’s Approach

Trinh Ba Duong (Geneva MIDS)[1]

Croatia v. Slovenia is an exceptionally rare case which deeply touched the matter of terminating an arbitration agreement between two states, particularly a compromis.[2] The dispute addressed in the partial award arose in the context that there was an ex parte communication between Dr. Jernej Sekolec, the arbitrator appointed by Slovenia, and H.E. Ms. Simona Drenik, an agent of Slovenia. In particular, after the hearing and the beginning of Tribunal’s deliberations, audio files and transcripts of the telephone conversations between these two individuals were published which indicated that Dr. Sekolec disclosed co-arbitrators’ preliminary views and positions during deliberations, and Dr. Sekolec received documents from Ms. Drenik to forward to other arbitrators in support of Slovenia’s arguments.

Croatia attempted to shut down the Arbitration Agreement between Croatia and Slovenia concerning the territorial and maritime dispute (“Arbitration Agreement”) by referring to Article 60(1) of the Vienna Convention on the Law of Treaties (“VCLT”), which enunciates that a ‘material breach’ in a bilateral treaty is the ground for one party to invoke the termination of the treaty. Croatia alleged that such misconducts committed by Slovenia had constituted a material breach. The Tribunal addressed this issue by analyzing the notion of material breach under Article 60(3) of the VCLT. This blog aims to explore the Tribunal’s decision before directing some criticism against its approach.

The Croatia v. Slovenia Tribunal’s approach

There are two circumstances under Article 60(3) where an action constitutes a material breach. The first one is where such action is a repudiation of the treaty, meaning that the defaulting party refuses to fulfil the treaty. This is obviously not the case here, as pointed out by the Tribunal that Slovenia not only did not refuse to fulfil the treaty obligations, which were the obligations to arbitrate, but on the contrary supported the Tribunal to continue its jurisdiction over the substantive dispute.

The second circumstance is where an action violates a provision essential to the object or purpose of the treaty. The Tribunal used the traditional method to seek the object and purpose of a treaty, which was to resort to the preamble, and determined the main object and purpose of the Arbitration Agreement being “the settlement of the maritime and territorial dispute between the Parties in accordance with the applicable rules”. The Tribunal took a further step to say if the breaches of Agreement by Slovenia did not made such object and purpose impossible to be accomplished, such breaches would not be considered material breaches.

After the files had been leaked, the Tribunal was recomposed with the replacement of 2 new arbitrators. The new Tribunal also reviewed the documents forwarded by Dr. Sekolec from Ms. Drenik, and concluded that “[t]hese documents contained no facts or arguments not already present in the written or oral pleadings”. No other breach of confidentiality in the proceedings was raised by the Parties. By taking all the remedial action, the Tribunal decided that the continuation of the proceedings was totally possible, thus dismissed the claim by Croatia that Slovenia’s actions constituted a material breach and led to the termination of the Arbitration Agreement.

Criticism over the Tribunal’s Approach

As can be drawn from the above decision, the Tribunal assessed a ‘material breach’ with regard to whether the remedial actions taken could ‘cure’ the mistakes and made the continuation of the proceedings possible. If they could, such mistakes should not be deemed material breaches. This approach should provoke some criticism.

Firstly, the idea of ‘curing’ a breach is not non-existent, but the VCLT never explicitly provides for the curability of a breach. In a very few exceptional cases, a defaulting party is given the right to cure a breach. An example can be found under Article 48(1) of the United Nations Convention on Contracts for the International Sale of Goods (“CISG”), which allows the seller to cure ‘any failure’ to perform his obligations. However, it only applies to sale of goods in a specified context with a clear expression under the law. The law cannot be assumed to provide an opportunity to cure if it does not express so.[3]

A hypothetical question is, even if the VCLT expressly allowed curability, should the defaulting party be given the right to cure a material breach? From the author’s view, curing breach should be made as an exception rather than a widely accepted practice, especially when it comes to curing a material breach. There has been a lot of debate around whether a fundamental breach should leave a room to be cured under the CISG. Despite the provision under Article 48(1), Article 49 (1) gives the buyer the right to avoid the contract in case of a fundamental breach committed by the seller. It leads to the question whether the seller’s right to cure or the buyer’s right to avoid the contract prevails when a fundamental breach occurs. This would solve the similar puzzle in Croatia v. Slovenia, whether Slovenia’s ability to cure the breach should prevail over Croatia’s right to terminate the Arbitration Agreement under Article 60(1). Some authors have applied a strict interpretation on the CISG that the seller’s offer to cure a fundamental breach cannot stop the buyer from avoiding the contract. However, the buyer shall have the right to choose if he accepts the offer to cure by the seller or declare the avoidance of the contract. Likewise in Croatia v. Slovenia, Croatia’s right to terminate the Arbitration Agreement should not be restricted by the curability, unless Croatia found it more convenient and was willing to accept the cure and continue the proceedings, which was not the case in fact.

Secondly, the notion of ‘curing’ breach per se has problems as some breaches simply cannot be cured. To draw an analogy, when you break an egg, you simply cannot un-break it. The egg here can be associated with either the integrity of arbitral process or the confidence of Croatia in such process. Croatia clearly stated that it ‘cannot further continue the process [of the present arbitration] in good faith’, because the ‘entire arbitral process’ was compromised by the Slovenia’s wrongdoings. Curing such breach just by replacing two out of five arbitrators is impossible. The Croatia’s confidence in arbitration, which brought it entering into the arbitration agreement, is the broken egg that cannot be unbroken.

Croatia’s statement on the loss of confidence is absolutely reasonable. Dr. Sekolec divulged the co-arbitrators’ views, including the views of Judge Guillaume, who was not replaced after the recomposition of the Tribunal. Nothing ensured that Ms. Drenik did not retell such information to other individuals of Slovenian side, or as broadly spoken by Croatia, “no reasonable person would conclude that the actions that have occurred may not have influenced other actors in the arbitration process”.

There are those who uphold the Tribunal’s approach since the erroneous actions by Slovenian side only occurred after the oral hearing and Slovenia’s impropriety could not have done anything to influence the Tribunal’s decision after its recomposition. However, a threat to arbitral process like ex parte communication should not be easily cured and tolerated. Otherwise a party would be willing to take the risk to backslide, knowing that it will not receive any severe punishment in case of getting caught again.

The Tribunal may have looked at the preamble of the Arbitration Agreement as if treating a normal ‘object and purpose’ test which it would have done with other treaties. However, arbitration agreements should be separate from the rest as they also possess unique jurisdictional features by establishing the jurisdiction of an arbitral tribunal. Such jurisdiction is built upon the consent of parties, and parties choose arbitration because of their confidence in the integrity of arbitral process. The Tribunal clearly overlooked the importance of preserving of the integrity of arbitral process and the parties’ confidence in such integrity.

Conclusion

The Tribunal in Croatia v. Slovenia should be criticized for looking at the issue of termination of an inter-state arbitration agreement in an unconvincingly weird angle. The ‘curability’ of a material breach has never been widely accepted in the absence of a clear expression of the law allowing a material breach to be cured. Attempting to fix Slovenia’s catastrophic mistakes with a half-hearted solution, not only did the Tribunal create a bad precedent of unacceptable tolerance to ex parte communication – a considerable threat to arbitration, it also failed to fulfil one of the most important duties – preserving the integrity of the arbitral process.



[1] This blog post is developed upon author’s research at Geneva MIDS. My unlimited gratitude goes to Dr. Brian McGarry for his kind guidance, yet noteworthily everything written herein is author’s own view and taken full responsibility by the author.

[2] In the Matter of an Arbitration under the Arbitration Agreement between the Government of the Republic of Croatia and the Government of the Republic of Slovenia, PCA Case No. 2012–04, Partial Award, 30 June 2016.

[3] Robert A. Feldman and Raymond T. Nimmer, Drafting Effective Contracts: A Practitioner’s Guide (Aspen Law & Business), Section 5.09

The new EU Regulation on the screening of foreign direct investments: A tool for disguised protectionism?

Prof. Nikos Lavranos, Secretary General of EFILA

In December 2018, the EU institutions agreed on the text for an EU Regulation establishing a mechanism for screening all foreign investments into the EU.

In just over a year the EU institutions adopted this Regulation, which is unusually fast and reflects the apparent political will of the institutions involved to deliver something tangible that would address the fear against Chinese investments that would essentially take over the European economies.

The Regulation is in particular noteworthy because it introduces an EU-wide screening mechanism at the EU level as well as at the Member States’ level, which in many ways is similar to the US screening mechanism (CFIUS) whose scope of application was recently also significantly expanded. (The revised CFIUS text is part of the very extensive National Defense Authorization Act for Fiscal Year 2019, sections 1701 et seq.)

The EU Regulation is also significant in that it gives the Commission and other Member States the power to directly interfere in the screening of FDI in a particular Member State.

At the Member States’ level, it should be noted that there is a disparity among them regarding their approach of whether or not to screen FDI, and if so, under which conditions and procedures.

According to the Commission, about half of the Member States have currently no screening mechanism at all, while the other half does have one. In addition, the conditions and procedures of the existing screen mechanisms differ.

Accordingly, the Regulation aims to harmonize this situation by grandfathering all existing screenings mechanisms and by encouraging all Member States, which have not yet one, to establish such a mechanism. In addition, common basic criteria for the screening of FDI are laid down in this Regulation. Indeed, all Member States are required to register all incoming FDI and to report them to the Commission and to all other Member States. In fact, the Member States and the Commission are required to set up a dedicated contact point for that purpose.

At the European level, the Regulation gives the Commission – for the first time – the power to actively screen FDI – not only those that are “likely to affect projects or programmes of Union interest on grounds of security or public order”, but also those that are “likely to affect security or public order in more than one Member State”.

The Commission may issue opinions, which the Member State concerned is required to duly take into consideration. Similarly, Member States can comment on the screening of FDI in other Member States.

However, what is most interesting is the wide scope of the sectors that may be screened, which covers, inter alia, the following areas:

(a) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, as well as sensitive facilities and investments in land and real estate, crucial for the use of such infrastructure;

(b) critical technologies and dual use items as defined in Article 2.1 of Regulation (EC) No 428/2009, including artificial intelligence, robotics, semiconductors, cybersecurity, quantum, aerospace, defence, energy storage, nuclear technologies, nanotechnologies and biotechnologies;

(c) supply of critical inputs, including energy or raw materials, as well as food security;

(d) access to sensitive information, including personal data, or the ability to control such information; or

(e) the freedom and pluralism of the media.

Also, noteworthy is the fact that there is no minimum threshold of the amount of the FDI for screening, which means that potentially any FDI from 1 to 100 billion euros could be screened.

While the fear against a Chinese takeover of the European economies is widespread and understandable, it is not supported by facts. Indeed, as a recent study by the well-respected Copenhagen Economics institute shows that countries other than China invest much more into the EU.

According to this study the US is by far the largest investor in the EU and accounted for 51.1% of the M&As by third country investors, followed by Switzerland (10.8%), Norway (4.6%) Canada (3.8%), while China comes only fourth with a meager 2.8%.

When it comes to investments by State Owned Enterprises (SOEs) from third states, Russian investors accounted for 16.6% of M&As, followed by Norway (15.8%), Switzerland (11.8%), while Chinese SOEs account only for 11% of the M&As.

In other words, the amount of Chinese FDI are far lower than from several other third countries, but which seemingly are considered friendlier and thus approached with less hostility.

Be that as it may, the real risk of this Regulation is not so much the screening of FDI but that it could be abused as a tool for disguised protectionism and classic state-governed economic nationalism.

This is so because the big Member States will be able to force smaller Member States to block FDI, for example from China, in order to give preference instead to French, German or Spanish investors.

Similarly, the Commission may force a Member State to block an FDI for unrelated more important geopolitical reasons.

This can also raise the tension among EU Member States which are competing for FDI. For example, if the Rotterdam harbour wants to attract Chinese investments for upgrading and expanding its facilities in order to be able to better compete against the harbour of Hamburg, Germany might very well use the argument of “security or public order” in this Regulation to force the Netherlands to block the Chinese investor and rather accept a European investor instead, or forget about the whole project altogether.

This is not to say that one should be naïve about Chinese, American or Russian investments, which are often connected with geopolitical aims or potentially (business) espionage. The example of Huawei, which has been restricted in developing the 5G network in some Western countries, is telling. At the same time, one should not forget that EU Member States are competing with each other to attract FDI and have the vested interests of their national champions always in mind.

Thus, the line between genuine protection of “security and public order” and disguised protectionism is very thin and tempting to cross for short term political and/or economic gains. However, this Regulation – unsurprisingly – does not contain any effective mechanisms to mitigate this risk.

Therefore, when this EU Regulation enters into force, foreign investors are well-advised to seek proper in-depth advice prior to investing into the EU.

EFILA 2019 Annual Conference: The EU and the future of international investment law and arbitration

Description

4th Annual EFILA Conference

The EU and the future of international investment law and arbitration

With the entering into force of the Lisbon Treaty 10 years ago the EU has become a dynamic policy actor in international investment law and arbitration. In particular, within the context of the increasing public concerns against TTIP, BITs and ISDS, the European Commission has been active in “reforming” and “reshaping” the investment law and arbitration landscape, for example with the EU-Singapore and EU-Vietnam FTAs, which contain many “innovative” features such as the investment court system (ICS). Another area in which the increasing influence and interaction between investment law and EU law is particularly visible is the Energy Charter Treaty (ECT).

The 2019 Annual Conference will take stock of these developments by discussing the EU’s external investment policy generally, by focusing specifically on the EU’s approach towards Asia and by analysing the EU’s impact on the ECT. In addition, a high profile key-note speaker will address the Conference.

As was the case in the previous very successful Annual EFILA Conferences, this Conference will again showcase many distinguished and experienced scholars and practitioners in the area of investment law and arbitration. As always, the Conference will be very interactive and allow for sufficient time for discussion between the speakers and the audience.

Click here for the detail draft programme.

Tickets can be purchased here: https://www.eventbrite.co.uk/e/the-eu-and-the-future-of-international-investment-law-and-arbitration-tickets-48123937994

Date And Time

Thu, 31 January 2019

09:00 – 18:00 GMT

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Location

Herbert Smith Freehills London

Exchange House, Primrose St

London

EC2A 2EG

United Kingdom

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