Unveiling Japan’s Modern BIT Policy: A Review of its Procedural Provisions

by Takashi Yokoyama (SymBio Pharmaceuticals)[i] and Yosuke Iwasaki (Sidley Austin LLP)[ii]

This is the second post in two compositions analyzing Japan’s modern BIT policy.[iii] It aims to underline certain drafting hallmarks of Japan’s recently signed IIAs by examining the procedural provisions from Japan’s seven recent investment agreements, namely the Japan-Argentina BIT (JAGT), Japan-Armenia BIT (JAMT), Japan-Jordan BIT (JJT) and Japan-UAE BIT (JUT), which were all signed in 2018, the Japan-Cote d’Ivoire BIT (JCT) and Japan-Morocco BIT (JMT), which were both signed in 2020, and the Japan-Georgia BIT (JGT)[iv] signed on 29 January 2021 (all seven treaties collectively, “Treaties”). The capitalized terms used herein have the same meanings in the first post that the authors published on substantive provisions earlier last year.

Japan’s Position on ISDS Mechanism

Because the ISDS reform has not been raised as a topic during the negotiations on the modernization of the Energy Charter Treaty[v], the Japanese government’s position is still not clear. On the other hand, the Japanese government has clarified its positions to some extent in the UNCITRAL Working Group III. In the papers submitted by Japan and the other member countries[vi], they say that “[t]he Working Group should have maximum flexibility to develop a menu of relevant solutions, which may vary in form, and that Member States can choose to adopt, based on their specific needs and interests, including those of developing countries” and propose “suite” approaches for flexible solutions to each identified concern in the existing ISDS framework. While there is no reference to the EU’s proposal for Multilateral Investment Court or Investment Court System, it appears that Japan basically supports the existing ISDS framework. This seems to be evidenced by the provisions of the bilateral investment agreements that Japan has recently concluded as follows.

Scope of ISDS

Irrespective of whether the investment protection policy is classified either the Traditional Protection IIAs or Modern Liberalization IIAs, the Treaties adopt an Investor-State Dispute Settlement (ISDS) mechanism which enables investors to invoke their substantive rights under IIAs through arbitration. As we noted in the first post, it is the significant characteristic that the Modern Liberalization IIAs grant investment protection at the pre-investment stage, which is different from the scope of the Traditional Protection IIAs. However, among the Modern Liberalization IIAs, the scope of ISDS is further classified in two categories. The JAMT and JCT grant investors a right of admission or the status of investments at the pre-investment stage, while the JAGT and JGT exclude “an investment dispute with respect to the establishment, acquisition or expansion of its investment” from the ISDS mechanism.[vii] That said investors under the JAGT and JGT may not submit their claim to arbitration relating to a breach of obligations, e.g. National Treatment or Prohibition of Performance Requirement, at the stage of admission of investment. The JAGT and JGT exclusion may appear to prejudice the policy of the Modern Liberalization IIAs, but a mechanism on State-State Dispute Settlement (SSDS) still applies on these disputes. In that case, an investor may consult with the home state’s government about how to solve the situation under the breach of obligations, and the government would consider initiating an arbitration through the SSDS mechanism.[viii] While the SSDS mechanism relies on political questions whether the home state may claim the host state’s breaches under the Treaties on behalf of the investor, the authors humbly consider this is more meaningful for investors than the Traditional Protection IIAs in terms of investment protection at the pre-investment stage.

Condition Precedent to Initiating Arbitration

Except for the JMT, the Treaties mandate three procedural requirements before an investor may initiate arbitrations against the host state; i) consultations and negotiations between the investor and the host state; ii) some certain periods elapsed after an event giving rise to a claim or a written request for consultations or negotiations; and iii) a written notice of intention to submit the claim to arbitration.[ix] JMT Article 16.3 solely does not contain the third requirement.

We note that the Treaties commonly condition the elapse of six months, while each of the beginning date of that six months vary between the Traditional Protection IIAs and Modern Liberalization IIAs. In this regard, The Traditional Protection IIAs provide “six months from the date on which the disputing investor requested in writing the disputing Party for consultations or negotiations,[x] while the Modern Liberalization IIAs stipulate “six months have elapsed since the events giving rise to the claim.[xi] Because an investor does not always request a consultation to the host state soon after an event giving rise to the claim, the beginning date under the Traditional Protection IIAs might be behind the Modern Liberalization IIAs’.

An investor shall deliver to the host state a written notice of its intention with the particularity of the claim to arbitration at least 90 days before the submission. For example, under the Treaties, an investor may submit a claim to arbitration soon after six months of consultation when it gave the 90 days prior written notice to the host state after three months of consultation.[xii]

Finally, the Treaties stipulate the statute of limitation for an investor to submit a claim to arbitration for three years (except for five years under JUT Article 17.9), which is calculated from the date on which the investor first knew or should have first known the alleged breach and the loss or damages incurred, whichever is the earlier.

Fork-in-the-Road/Interim Injunctive Relief

The Treaties manifestly proscribe parallel proceedings before an arbitral tribunal and local remedies under the law of the host state. For example, JAMT Articles 24.8(a)(ii) and (b)(ii) provide that an investor shall waive in writing any rights to access any domestic courts or other dispute settlement proceedings before submitting a claim to arbitration.[xiii] On the other hand, the Treaties prescribe that the waiver shall cease when the tribunal rejects the claim based on procedural or jurisdictional grounds.[xiv] Notwithstanding above, we note that the Treaties preclude an interim injunctive relief from application of the waiver as JUT Article 17.10 provides that “the disputing investor may initiate or continue an action that seeks interim injunctive relief that does not involve the payment of damages before an administrative tribunal or court of justice under the law of the disputing Party.


An Investor-State Dispute Settlement (“ISDS”) system is sometimes criticized in terms of transparency for public interests.[xv] As a response, the CPTPP Article 9.24 obligates the host state to disclose all relevant information of investment arbitration in public, while the Treaties solely provide that the host state “may” make available such information to the public.[xvi] Confidential business information, privileged information under the laws and regulations of either Contracting Party, and information to be withheld under the relevant arbitration rules are also excluded in the scope of disclosure.[xvii] Compared to Article 48.5 of the ICSID Convention requesting both parties’ consents for disclosure, the authors humbly consider that Japan’s modern BIT policy attempts to respond to demands for transparency, while it does not sufficiently overcome this criticism yet.

Right of Non-disputing Party/Amicus Curiae

A right of non-disputing party’s submission and Amicus Curiae provisions function similarly in allowing third-party’s participation in investment arbitration, but the statutory objectives are different. The former grants an opinion’s submission of an investor’s home state who may not resort to diplomatic protection in investment arbitration, while the latter assures a non-party’s participation when an arbitral tribunal may accept its opinion which has its significant interest in the arbitral proceedings and a public interest in the subject matters in investment arbitration.[xviii] In this regard, the Treaties grant non-disputing party’s submissions to interpretation before an arbitral tribunal with a prior written notice to the disputing parties.[xix] For further assurance of a non-disclosing party’s right, they provide that the respondent country shall deliver to the non-disclosing party the notice of arbitration and copies of all pleadings submitted to the arbitral tribunal.[xx]

Amicus Curiae participation in investment arbitration sometimes becomes contentious issues in burdening undue delay and additional costs on the disputing parties, while it may present material benefits in promoting the dispute resolution and enhancing transparency of the proceedings on matters of public interests. In this regard, among the Treaties, JAGT Article 27.1 solely provides written amicus curiae submissions from a non-disputing party with the detailed rules in the arbitral proceedings in order not to unduly burden the arbitral proceedings and unfairly prejudice any disputing party. However, an Amicus Curiae provision is not yet common in Japan’s modern BITs.[xxi]

Appellate Review Body

One of the criticisms to an ISDS system is a lack of mechanisms to correct erroneous arbitral awards. In this regard, the EU advocates the new establishment of an Investment Court System (“ICS”) composing an appellate body as the Comprehensive and Economic Trade Agreement between the EU and Canada (CETA) and the EU-Vietnam Investment Protection Agreement (EUVIPA) endorse.[xxii] On the other hand, any Japan’s BITs manifestly preclude a right of appeal by disputing parties.[xxiii] We nonetheless note that the government of Japan does not clarify its standing to the ICS initiative by the EU.[xxiv] For example, at the UNCITRAL Working Group III for discussions of the ISDS’s reform, the government of Japan asserted with the governments of Chile and Israel that the identification of existing problems in the ISDS system to explore the possible solutions should be conducted without regard to whether the member states would employ a new dispute settlement mechanism such as the ICS or not.[xxv] In addition, Japan-EU EPA does not embrace any investment dispute settlement clauses and its negotiations are ongoing separated from the review negotiations on the EPA.[xxvi]


The Treaties do not adopt mediation provisions in the ISDS provisions. We may humbly assume that this is because settlement agreements of mediation are not enforceable under the existing uniform legal framework that Japan adopts, while arbitral awards are enforceable under the New York Convention. In this regard, the Singapore Convention on Mediation, which applies to international settlement agreements resulting from mediation, was adopted by the United Nations General Assembly on 20 December 2018 and entered into force on 12 September 2020. While 46 countries signed this new instrument, Japan is currently under consideration including adjustments or reforms of its Civil Execution Act and other relevant domestic laws.[xxvii] Nonetheless, we note that international mediation is becoming aware in Japan, as a first permanent dispute settlement body for international mediation, Japan International Mediation Centre in Kyoto (JIMC), is newly established in 2018. In preparation for accession of the Singapore Convention, Japan could discuss the possible mediation provisions in the ISDS provision of its upcoming BITs. 


Under the Treaties, arbitral tribunals may render an investor an arbitral award: i) payment of monetary damages and applicable interest; and ii) restitution of property when the host state breaches the substantive provisions. However, we note the statutory language differences between the JUT and the other Treaties that, JUT Article 17.19 allows a tribunal to interpret other remedies except for the two possible remedies by stipulating that “[t]he award rendered by the arbitral tribunal shall include:” while the other Treaties limit the two remedies by prescribing that “[t]he arbitral tribunal may award only:” In addition, the JAGT and JMT preclude “punitive damage” in the award.[xxviii] Regarding cost and attorney’s fees, the Treaties delegate applicable arbitration rules that the parties agree.[xxix]


Unlike the substantive provisions introduced previously, this post concludes that each Treaty basically own almost the similar procedural provisions that may comprehensively unveil the Japan’s modern BIT policy. However, there are still conceivable provisions remained for upcoming Japan’s BITs. For example, Japan could consider provisions for prevention of frivolous claims which is manifestly without legal merits as CPTPP Article 9.23.4 and Article 9.19.2 clearly prescribe preliminary objections or counterclaims. With reforms of its domestic law and participation of the Singapore Convention, Japan has initiated discussions at the Ministry of Justice.[xxx] Further discussions of the newly established ICS or other dispute settlements mechanism could be leverage for awareness of the ISDS system that Japanese investors may trigger their investment claims to the host state. Finally, the government of Japan has recently published “Action Plan for the Improvement of the Investment Environment, including the Promotion of the Conclusion of Investment-Related Agreements” in March 2021. The Action Plan demonstrates that their BIT strategic policy balancing investment protection and preservation of State rights and holds a flexible position to related discussions of multilateral dispute settlement mechanism including ISDS reforms. Further attention should be paid how the government of Japan moves forward with the Action Plan to the Substantive and Procedural provisions of the forthcoming BITs respectively.

[i] Takashi Yokoyama is a Legal Counsel at SymBio Pharmaceuticals. He has over nine years of experience in the legal departments of Sojitz Corporation and other major companies in Tokyo.

[ii]  Yosuke Iwasaki is an Associate at Sidley Austin LLP in Tokyo, Japan. Prior to joining Sidley, as a legal counsel to the Ministry of Foreign Affairs of Japan, he led the negotiation of Japan’s economic treaties including the EPAs and BITs, and engaged in the dispute settlement procedures under WTO.

[iii] The first post for substantive provisions of Japan’s modern BIT policy published on 25 February 2021 may be read at: https://efilablog.org/2021/02/25/unveiling-japans-modern-bit-policy-a-review-of-its-substantive-provisions/.

[iv] The first post does not analyze substantive provisions of the JGT signed after the submission to the editorial committee. For further clarification to readers, we note that the JGT is categorized as the Modern Liberalization IIA that entails neither an umbrella clause nor investment agreement provision.

[v] See the history of the Modernization of the Energy Charter Treaty.

[vi] A/CN.9/WG.III/WP.163 – Submission from the Governments of Chile, Israel and Japan and A/CN.9/WG.III/WP.182 – Possible reform of investor-State dispute settlement (ISDS), Submission from the Governments of Chile, Israel, Japan, Mexico and Peru.

[vii] See JAGT Article 25.7 and JGT Article 23.4

[viii] See JAGT Article 24 and JGT Article 22

[ix] See, e.g., JAMT Articles 24.1-24.4

[x] See, e.g., JUT Article 17.4

[xi] See, e.g., JAGT Article 25.4

[xii] See JAGT Article 25.3, JAMT Article 24.3, JJT Article 23.3, JUT Article 17.4, JCT Article 23.3 and JGT Article 23.5. Noted that among the Treaties, the JMT Article 16.3 does not stipulate a prior written notice requirement to an investor when bringing a claim to arbitration.

[xiii] See, cf., JUT Article 17.5 does not demand a writing format in waiving, while the other Treaties request.

[xiv] See JAMT Article 24.9 provides that “[t]he waiver provided pursuant to subparagraph 8(a)(ii) or 8(b)(ii) shall cease to apply where the arbitral tribunal rejects the claim on the basis of a failure to meet the requirements of paragraph 3, 4, 7 or 8, or on any other procedural or jurisdictional grounds.”

[xv] Rudolf Dolzer and Christoph Schreuer, Principles of International investment law 2nd ed., Oxford University Press (2012), p.286. the authors shared its views that “[c]onfidentiality is traditionally considered one of the major advantages of international commercial arbitration between private parties. But in investment arbitration the presence of issues of public interest have increasingly led to demands for more openness and transparency…

[xvi] See, e.g., JCT Article 23.17. Please note the JGT does not have disclosure provisions on ISDS such as JCT Article 23.17.

[xvii] See, e.g., JCT Article 23.17. Please note JGT does not have disclosure provisions on ISDS such as JCT Article 23.17.

[xviii] Gary Born and Stephanie Forrest, Amicus Curiae Participation in Investment Arbitration, ICSID Review, Vol. 34, No. 3 (2019), pp. 626–665. This article highlights the requirements for Amicus participation in investment arbitration: i) an applicant’s ability to provide an assistance to the tribunal; ii) matters within the scope of the dispute; iii) an applicant’s significant interest; iv) a public interest in the subject-matter of the investment arbitration; v) fairness and efficiency of arbitral proceedings; and vi) independence and impartiality of the applicant.

[xix] See, e.g., JAMT Article 24.13 “The non-disputing Party may, upon written notice to the disputing parties, make submissions to the arbitral tribunal on a question of interpretation of this Agreement.”

[xx] See, e.g., JAMT Article 24.12

[xxi] See, c.f., CPTPP Article 9.23.3

[xxii] See, CETA Articles 8.27-8.30 and EUVIPA Articles 3.38-3.41

[xxiii] See, e.g., JAMT Article 24.19 “The award rendered by the arbitral tribunal shall be final and binding upon the disputing parties.”

[xxiv] Shingo Yamagami’s response at Foreign Affairs Committee of the House of Representatives, the Japan’s Diet on 28 November 2018. 

[xxv] See A/CN.9/WG.III/WP.163 – Submission from the Governments of Chile, Israel and Japan.

[xxvi] See Japan EU Review Negotiations for Investment Chapters on FTA and EPA. See also Japan-UK EPA Article 8.5.3 that “[i]f, after the date of entry into force of this Agreement, a Party signs an international agreement with an investment chapter that contains provisions for investment protection or provides for investor-to-state dispute settlement procedures, the other Party, after the date of entry into force of that agreement, may request that the Parties review this Section and Section B. Such a review shall be conducted with a view to the possible inclusion within this Agreement of such provisions that could provide for the improvement of the investment environment. Unless the Parties otherwise agree, any such review shall be commenced within two years from the date of the request and shall be concluded within a reasonable period of time.

[xxvii] See Ministry of Justice, Material 7 “United Nations Convention on International Settlement Agreements Resulting from Mediation” in August 2020.

[xxviii] See JAGT Article 25.17 and JMT Article 16.10.

[xxix] See, c.f., JUT Article 17.19 solely does not describe “attorney’s fee.”

[xxx] See, First Session at Arbitration Law Section of Legislative Council on 23 October 2020.

The UNCITRAL Working Group III negotiations and the Multilateral Investment Court: Scrutinizing consistency in Investor State Dispute Settlement

by Sahaj Mathur

(Third Year Bachelor of Law Student at the National University of Juridical Sciences, Kolkata)

  1. Introduction

It has been widely suggested that the International Investment Arbitration regime is undergoing a legitimacy crisis. A major factor behind backlash against the regime is the lack of coherence and consistency in Investment Arbitration. Such inconsistency can be perceived to be a consequence of the existence of more than 3000 International Investment Agreements that form the legal foundation of International Investment Law. Inconsistency further arises due to the absence of binding precedent in Investment Arbitration. Thus, identical or similar Investment Treaty provisions may often be interpreted in different manner by different tribunals leading to inconsistency in lack of coherence in Investment Arbitration awards.

The lack of consistency in Investment Arbitral decisions is a core feature of the currently ongoing deliberations at the UNCITRAL Working Group III, which is assessing the reform of Investor State Dispute Settlement. To address this lack of consistency, among other issues, the European Union proposed the establishment of a Multilateral Investment Court (‘MIC’) as a possible reform option to replace the existing system of Investment Arbitration. The MIC is a permanent body comprising of tenured judges that would adjudicate investment disputes between host states and foreign Investors.

The proposal for the establishment of the MIC has evoked a mixed reaction from within the academic community. In particular, the issue of whether the MIC would lead to greater consistency presents a question of immense importance. The article attempts to contribute to the same by critically examining the interaction between the MIC and the consistency the MIC is proposed to establish in Investor State Dispute Settlement (‘ISDS’). In this regard, the paper identifies three issues that arise when assessing the issue of consistency in ISDS through the lens of the MIC. First, will the MIC necessarily lead to greater consistency in ISDS. Secondly, assuming that such consistency can be achieved by establishing the MIC, is this consistency always desirable? Thirdly, even if such consistency is desirable, what are the costs at which this consistency is achieved? 

2. Towards Resolving concerns of consistency in ISDS: Introducing The Multilateral Investment Court

The proposal to establish the MIC was developed in light of the significant concern regarding the inadequacy of the current mechanisms to ensure consistent decisions in investment disputes. The MIC forms one of the core reforms that is currently being considered by the UNCITRAL Working Group III which is deliberating reforms in ISDS. While the precise design, functioning and other technicalities of the MIC are dependent on these negotiations, the basic conception of the MIC broadly envisages two primary changes from the existing system of Investment Arbitration.

The first change envisaged is that MIC would comprise of tenured adjudicators that are permanently appointed and renumerated, as opposed to arbitrators that are appointed and remunerated by the parties. Secondly, the MIC would comprise of a court of first instance, as well as an appellate body. Therefore, as opposed to the limited grounds to challenge awards under the ICSID Framework, the proposal for the MIC is likely to expand the grounds to appeal a decision. The introduction of a limited number of permanent judges deciding investment disputes, along with the oversight of appeals chamber should, in principle, lead to a more consistent body of decisions in ISDS. As a Recent Report of the UNCITRAL Working Group III shows, it is likely that the appellate mechanism of the MIC would comprise of highly qualified professionals. Thus, in theory, the appellate mechanism can serve as a means to create higher consistency, particularly when the MIC is to rule on a series of non-consolidated cases from an analogous factual scenario, such as in the cases filed against Argentina in the 2000s. The assumption that the introduction of the MIC would lead to greater consistency has been largely unchallenged. However, this assumption merits further consideration. 

Firstly, the consistency proposed by the establishment of the MIC can be attained only if a high number of states become a party to the MIC. This caveat assumes importance given that numerous states such as the United States, Russia, Japan and Chile objected to such systematic reform of ISDS. In the absence of widespread participation, any consistency in decisions would be restricted to only a limited number of BITs and is unlikely to impact the Investment Regime generally.

Secondly, it is important to reiterate that the EU’s proposal for the MIC is inspired by World Trade Organisation’s(‘WTO’) system of dispute settlement. However, unlike the WTO regime which is based on a multilateral legal framework, International Investment Law is characterised by a fragmented framework comprising of over 3000 different International Investment Agreements. It is also important to note that the WTO Dispute Resolution forum interprets the same agreements. The establishment of the MIC could lead to more consistency in the interpretations of the same investment treaty. For instance, if the MIC is called to interpret the India-Brazil BIT, then the interpretation of the provisions of that BIT would be made consistent, as opposed to ad-hoc Investor-State arbitral tribunals that may interpret the same BIT in different ways. Similarly, the MIC could lead to more consistent interpretations of the same rules of Investment Arbitration. At the same time, unlike the WTO system, the MIC would have to interpret agreements from a fragmented network of International Investment Law which comprise of various treaties with diverse objectives, provisions and wordings. Given the fragmented nature of the International Investment Regime, it is unlikely that the MIC would offer the same coherence of decision making as that of the WTO Regime.

3. The Multilateral Investment Court and the limits of consistency

As established in part II, the establishment of the MIC is unlikely to lead to the consistency in ISDS that is assumed by its proponents. However, let us assume for the sake of argument, that the MIC would lead to greater consistency. Existing scholarship on ISDS reform(see, here and here) has typically viewed greater consistency in the Investment Regime as an unconditional positive. However, such a theorisation would amount to an oversimplification.

It is crucial to consider ‘what’ rules are being made consistent and whether the rules being made consistent in their application are desirable. These questions are of particular importance due to the nature of the MIC. In Investment Arbitration, the tribunals are constituted on an ad hoc basis. Therefore, the decision of the tribunal would impact only the outcome of a single case. However, in the case of the MIC, the rules that are created by the judges of the MIC would apply to all subsequent Investment disputes. This concentrates the power to interpret the inconsistent and ambiguous rules of International Investment Law in the hands of the few judges of the MIC. In other words, the judges of the MIC possess an unfettered power to create and develop International Investment Law’s jurisprudence.  Thus, unlike Investment Arbitral tribunals, the MIC possess the power to crystallize the rules of International Investment Law. However, such crystallization and consistency are not an unconditional positive. The establishment of the MIC presents the risk of crystallizing undesirable rules, which would then be universally applied. If such rules are made consistent, it would weaken the regime further, rather than strengthen it.

In large part, the issue of whether the rules that are made consistent are desirable to the regime at large is hinged on the question of who are the judges that are appointed to the MIC, and what are the rules and interpretations they uphold. Based on the current negotiations, the judges of the MIC would be appointed unilaterally by the constituent states. Owing to this, States are likely to appoint judges that typically favor State parties in investment disputes. This would not be wholly unsurprising, given that respondent states in an Investor-State arbitration also appoint arbitrators that are likely to favor them. At the same time, the appointment process would also become more politicised, with the interests of states, rather than investors being upheld. This may lead to the crystallization of rules that are skewed in favour of states, thereby impacting the interests of investors.

Aside from this, an inherent advantage of the Investment Arbitration model has been the appointment of highly qualified arbitrators. However, the lucrative salaries associated with arbitral appointments in Investor-State Disputes, as well as the flexibility of such appointments, where the most sought after investor-state arbitrators often serve as counsel in other matters may diminish the possibility of the MIC appointing a permanent body of judges with a similarly high caliber.

Owing to these reasons, it may be possible that the ‘consistent’ rules created by the MIC are unlikely to represent the high standard of decision making that Investment Arbitration has come to be associated with. In fact, it may be so that the rules created by the judges of the MIC may themselves suffer from deficiencies. However, unlike in investment arbitration, these rules would apply to all subsequent cases, becoming rigid and difficult to modify. These considerations would equally apply to rules created by an appeal’s chamber of the MIC given that it is the same appointment process that would constitute the appeals chamber. This can be juxtaposed with the case of Investment Arbitration, where the decision of a tribunal would be applicable only between the parties, thereby reducing the consequences of on the regime at large. In sum, if undesirable rules are made consistent and predictable by the MIC, it is likely to further contribute to ISDS’s legitimacy crisis, rather than resolve it.

4. Concluding Remarks: The MIC and the costs of consistency

Given the severe backlash against Investment Arbitration, the importance of the ongoing UNCITRAL negotiations cannot be understated. At the core of the UNCITRAL’s deliberations, which range from minor procedural reform of Investment Arbitration to an overhauling structural reform of ISDS, lies a trade-off of values. When the reform process is viewed as a trade-off of values, the UNCITRAL negotiations can undertake reform that best embodies the values that the investment regime aspires to uphold. In this regard, even if we were to assume that the MIC can achieve a desirable form of consistency in ISDS, the need for greater consistency must be weighed against the ‘costs’ of the establishment of such consistency.

Firstly, the widening of the possibility of appealing decisions would impact the efficiency and finality of the proceedings given the proclivity of the losing party to appeal against the decision of the court of first instance.

Secondly, the establishment of a permanent roster of judges is unlikely to offer the same level of expertise offered by arbitration, particularly in highly complex, technical or emerging industries and fields of law, where the existence of specialist arbitrators significantly contributed to the precision, efficiency and accuracy of ISDS proceedings.

Thirdly, the establishment of the MIC would lead to significant issues the recognition and enforcement of the judgement of the MIC, given that the judgement is unlikely to fall within the ambit of an ‘arbitral award’ which can be enforced under the New York Convention. This would, in turn, require deliberation on the possibility of a different enforcement regime, similar to the ICSID Convention. Such an argument, however, is beyond the scope of this piece.

At the same time, this is not to wholly disregard the MIC as a viable reform option. It is merely to outline the trade-off of values that the UNCITRAL Working Group is presented with. While the its obvious benefits of the MIC cannot be disputed, it is important to note that the MIC is not the cure to every problem. In the absence of substantive reform of Investment Treaties, even the establishment of the MIC is unlikely to resolve the underlying issues with Investment Arbitration. The conversation surrounding ISDS reform does not, and should not, end with the MIC.


Krishna Agarwal (Gujarat National Law University, India)

1. Introduction

The unprecedented COVID-19 pandemic has grappled the world and is comparable to the Argentine crisis as the States have taken emergency measures like Argentina in the wake of economic crisis.[1] However, unlike Argentina, the States have taken multiple emergency measures to curb the adverse effects of COVID-19 such as enactment of Emergency Laws, imposition of lockdown, closing non-essential businesses, restricting border movements etc.

Such measures may breach different standards in the Bilateral Investment Treaty (“BIT”) as they may lead to the violation of due process, or constitute abusive treatment to the investors, arbitrariness and discrimination, causing Expropriation, violation of Fair and Equitable Treatment or full protection and security.  Article 36 of the ILC Articles on the Responsibility of State for Internationally Wrongful Acts, 2001 (“ARSIWA”) obligates the State to compensate for the damages caused due to the international wrongful acts and which shall include lost profits if it comes within the ambit of financially assessable damages.

In pursuance of this the Host-State may attempt to apply different defenses provided under the Investment treaty such as the Right to Regulate clause or Non-Precluded Measures (“NPM”) clause or rely on customary international law provided for the plea of necessity or the application of force majeure clauses.

However, a pertinent question which remains is that if such defenses are not accepted by the Tribunal given the facts of the dispute, does the Host-State have any other method to reduce the compensation to take into account the economic well-being of the Host-State?

2. Analysis of Argentinian Cases

In the backdrop of the Argentine crisis, the Tribunals in several cases have dwelled into the concerns pertaining to economic factors. While analyzing the cases, it is important that the researchers comprehend the reasoning given by tribunals while calculating the amount of compensation. Some of the important case-laws during Argentinian crisis are as follows-

2.1 CMS, Enron & Sempra

In CMS v. Argentina, though the Tribunal noted that the Argentinian crisis was severe, yet it came to the conclusion that wrongfulness cannot be precluded by invoking Article 25, ARSIWA keeping in view the relative effect of the crisis and the contribution of Argentinian policies towards the crisis. Additionally, even if the wrongfulness of the act is precluded due to the necessity, still according to the interpretation of Article 27, ARSIWA it does not exclude the duty to compensate the one whose right is violated.[2]

A similar view was taken in Enron v. Argentina and Sempra v. Argentina where Tribunals acknowledged that since the term ‘essential interest’ is not defined under the Article XI, Argentina-US BIT cannot be applied for rescue of the host-state.[3]

However, with regard to the calculation of the quantum of compensation, despite finding that neither the customary international law nor the investment treaty can preclude the wrongfulness of the act, on account of a severe economic crisis, tribunals interestingly in CMS, Enron and Sempra have reduced the compensation.

The Tribunal in CMS has reduced the amount of compensation calculated by the expert by adjusting the demands and tariffs by taking into account the magnitude of the crisis faced by Argentina.[1] In Sempra, the Tribunal differentiated between the standard of compensation and the manner in which law has to be applied; the latter is required to assess the effects of crisis and was duly considered while calculating the Cost of Equity, Market Discount, Tariff increase and other adjustments.[2]  Similarly, in Enron the Tribunal while granting compensation adjusted the Tariff across the time period of six years for a better spread of Weighted Average Cost of Capital.[3] 

The Tribunal while calculating the quantum of compensation noted:-

While these unfortunate events do not in themselves amount to a legal excuse, neither would it be reasonable for the Claimants to believe they are not affected by some of the effects…This is something the Tribunal will duly take into account in considering the compensation that follows such finding of liability and how the crisis period influences its determination.”

Therefore, we can draw a conclusion that the Tribunals in these cases have accepted the view that even if the economic crisis does not preclude the wrongfulness of the act under customary international law still it might have a bearing on the issue of valuation of the compensation.

2.2 LG&E v. Argentina

The LG&E v. Argentina, the Tribunal has taken an opposite view and held that Argentina is liable for damages for the breach of the treaty except during the time period of economic crisis. It considered the Argentinian crisis in different light and has justified the emergency and application of doctrine of necessity for a limited period of time. The Tribunal considered that though Article 25, ARSIWA is not fully satisfied still the findings could be used to conclude that on the application of Article XI, Argentina-US BIT, the state of necessity is the ground of exclusion from the liability till certain level of stability has been recovered. Further as Article XI, Argentina-US BIT and Article 27, ARSIWA are silent on the question if the compensation for the losses is payable during the state of necessity; the damages suffered should be borne by the investor only.[4]

2.3 CMS, Enron, Sempra Annulment Committees

The CMS Annulment Committee has acknowledged the reasoning of the CMS Tribunal for considering the impact of Argentinian crisis with respect to the calculation of the quantum of compensation.[5] At the same time, the CMS, Enron & Sempra Annulment Committees found that the defences provided under Article 25, ARSIWA and Article XI, Argentina-US BIT are distinct in their operation and the Tribunals while assessing them should adopt a two-step approach wherein only if the present circumstances of the dispute are not covered under the NPM clause, customary international law should be applied as a subsidiary means.[6]

This two-step approach was followed by Continental Casualty v. Argentina and the compensation awarded was only concerned with specific commitments in contracts which were not covered by the defence of necessity and Article XI, Argentina-US BIT.[7]

2.4 El Paso & Impregilo

In El Paso v. Argentina and Impregilo v. Argentina, the majority Tribunal observed that Argentina has substantially contributed to its own economic crisis and therefore neither the BIT nor Article 25, ARSIWA can come to rescue.

Whereas, the minority arbitrator, Arbitrator Stern was not convinced with the evidence that Argentinian authorities has substantially contributed to the economic crisis and was against the light assumption of the economic crisis.[8] She was inclined to accept the reasoning given in Continental and if needed she was open to accept the arrangement sort out by the Tribunal in LG&E.[9]

2.5 BG & Suez

In BG v. Argentina, the Tribunal believed that Argentina was unable to meet the conditions laid down in Article 25, ARSIWA and Argentina-UK BIT. However, the Tribunal while calculating the damages did not rely on the MetroGAS 2001 projections which was referred in Wood Collins Report because such projections were oblivious to economic crisis and therefore no compensation for the historical losses were granted.[10]  Similarly, in Suez v. Argentina, the Tribunal has considered the economic crisis while calculating the quantum of compensation, using a but-for scenario with respect to a reasonable regulator.[11]

3. Valuation of Compensation- Balancing the interests

We find that the tribunals were primarily divergent with respect to two questions. First, if the plea of necessity provided in BIT or customary international law is satisfied or not. Second, even if the plea of necessity is not satisfied, can the valuation of the compensation be reduced. We are interested with the second question and the Tribunals in Argentinian cases have taken varied approaches to the answer the second question.

A probable dimension to the divergent reasoning could be seen with reference to the difference between two conceptions of ex aequo et bono and equitable principles. The former is applied when the Tribunal is allowed to disregard a legal rule, after the prior consent of the parties i.e. equity contra legem.[12] Whereas, to apply the latter, no special consent is required as it is inherent in the paradigm of ‘Rule of Law’.

Hence, the Tribunal may reduce the compensation because the objective of the BIT is not to protect foreign property but rather to protect the process of foreign investment. It will be inequitable if the outcome of the BIT entails catastrophic consequences of the livelihood and the economic well-being of the population.[13]. Therefore, in wake of serious economic crisis, even if the host-state has breached the treaty obligations, the process of valuation of compensation can be tweaked to ensure that injustice is not done to the public at large.

4. Doctrine of Abuse of Rights

The Tribunal in Himpurna v. PLN after recognizing the unfettered right of the Claimant to compensation has declined to assess the lost profits and awarded less than 10% of the amount claimed by the investor as it believed that it would lead to ‘abuse of rights’ against the backdrop of economic crisis.[14] In Mobil v. Venezuela, the Tribunal observed that to determine the abuse of rights, it is necessary to take into account all the circumstances of the case.[15] Thus, the concept of doctrine of abuse of rights is generally used in investment jurisprudence when the party seeks to avail the benefit of BIT with regard to the circumstances which were not foreseeable.[16]

Undoubtedly, there might be treaty violations but the question that is needed to be answered is if the circumstances of COVID-19 were foreseeable enough that the host-state has voluntary put the economy and public at large at risk?

The host-state is not a commercial entity; its special character and the responsibilities towards the well-being of the people has to be recognized. It is unreasonable to presume that a State already having a deregulated economy has agreed to a national economic disaster when it has accepted foreign investments. Therefore, when the breach of the IIAs is caused due to the measures taken by the Host-State to curb the adverse effects of COVID-19, the grant of lost profits should be discouraged.

5. Conclusion

To facilitate balance of rights of the Host-State and the investors, the future Investment Treaties should entail an exhaustive list of the exceptions which should clarify the extent of economic crisis covered under the ambit of ‘public interest’ and the reduction of compensation for the same. One such exception should be of ‘public health’ and a caveat may be attached that measures taken in pursuance of public health should not be arbitrary or discriminatory to the investors/investments and shall be temporary and confirm with the basic notions of proportionality.[17]

Additionally, the force-majeure clause included in the IIA should have the scope for the States to limit their financial liabilities that are concerned with COVID-19. States might expressly include a self-judging clause which excepts the measures taken by the States during a serious economic crisis and public health.[18]

With respect to the investment treaties before COVID-19, the Tribunal if not satisfied with the application of Article 25 of the ARSIWA and the NPM clause, should on the basis of equitable principles determine the valuation of the compensation. This is because it is an accepted fact that the investors and their investments to some extent are affected by the unprecedented crisis of COVID-19 and thus all the losses cannot solely be attributed to the host-states.

Moreover, while quantifying the compensation amount according to a particular standard of compensation, the calculation by Tribunal should consider the measures which should have been taken by the reasonable regulatory authority during COVID-19. It can agree not to grant lost profits to the foreign investors as it might lead to catastrophic consequences and in legal perspective might lead to ‘abuse of rights’. It can also mitigate the amount of compensation while calculating the rate of interest and allowing the cost of proceedings to be borne by the respective parties rather than the unsuccessful party i.e. the Host-State.

[1] CMS Gas Transmission Company v. The Republic of Argentina ICSID Case No. ARB/01/8 ¶¶ 456-457.

[2] Sempra Energy International v. The Argentine Republic, ICSID Case No. ARB/02/16, Award.

[3] Enron Corporation and Ponderosa Assets v. Argentine Republic ICSID Case No. ARB/01/3 ¶¶ 232 415.

[1] Suksham Chouhan, Young ISDS Club- Corona Pandemic investment disputes, Efila Blog, Young ISDS Club – Corona pandemic investment disputes – EFILA Blog (9 June 2020).

[2] CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Award ¶ 390.

[3] Enron Corporation and Ponderosa Assets v. Argentine Republic, ICSID Case No. ARB/01/3, Award ¶ 334.

[4] LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc .vArgentine Republic, ICSID Case No. ARB/02/1, Decision on Liability.

[5] CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Ad-Hoc Committee on the Application for Annulment of the Argentine Republic ¶¶ 156.

[6] CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Ad-Hoc Committee on the Application for Annulment of the Argentine Republic ¶¶ 119-128; Enron Creditors Recovery Corp. Ponderosa Assets, L.P. v. The Argentine Republic, ICSID Case No. ARB/01/3, Decision on the Application for Annulment of the Argentine Republic ¶¶ 147-161; Sempra Energy International v. The Argentine Republic, ICSID Case No. ARB/02/16, Decision on the Argentine Republic’s Application for Annulment of the Award pp. 29-34.

[7] Continental Casualty Company v. The Argentina Republic, ICSID Case No. ARB/03/9, Award pp. 70-94.

[8] Impregilo S.p.A. vArgentine Republic, ICSID Case No. ARB/07/17, Award, ¶ 360.

[9] El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15 ¶ 670.

[10] BG Group Plc. v. The Republic of Argentina, UNCITRAL (1976), Final Award ¶ 449.

[11] Suez, Sociedad General de Aguas de Barcelona, S.A.and Vivendi Universal, S.A. vArgentine Republic, ICSID Case No. ARB/03/19 ¶ 41.

[12] Christoph Schreuer, Decisions Ex Aequo et Bono Under the ICSID Convention, 11(1) ICSID Rev. 37-63 (1996).

[13] Ian Brownlie, CME Czech Republic B.V. v. Czech Republic, UNCITRAL (Separate Opinion) ¶¶ 77-80.

[14] Himpurna California Energy Ltd. v PT. (Persero) Perusahaan Listruik Negara, Final Award

[15] Venezuela Holdings B.V. et. al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award.

[16] Orascom TMT Investments S.a.r.l v. People’s Democratic Republic of Algeria, (Award), ICSID Case No. ARB/12/35, 31 May 2017, Award.

[17] Investment Policy Response to the COVID-19 Pandemic, UNCTAD (4 May 2020), https://unctad.org/system/files/official-document/diaepcbinf2020d3_en.pdf.


Call for Papers:

2nd Bucerius Conference on Investment Law & Arbitration

The 2nd BCILA is supported by Dr. Yas Banifatemi and Prof. Dr. Kaj Hobér as Honorary Patrons as well as by the Arbitration Institute of the Stockholm Chamber of Commerce, the Vienna International Arbitral Centre, and the Bucerius Center for International Dispute Resolution as institutional partners.

In preparation for the two conference days, all participants will prepare research papers on issues of international investment law and arbitration. During the conference, the papers will then be discussed in cross-topic discussion panels. All panels will be moderated by experienced professionals from academia and practice. After the conference, the papers will be revised and published in an edited conference volume. Panelists will be admitted based on abstracts submitted in response to our Call for Abstracts.

More information at: www.law-school.de/ila-conference

Moldova v Komstroy: A Moment Of Reckoning For Intra-EU Investment Arbitration Under The ECT?  Considering Its impact On Tribunals, Investors And EU Member States

Stephanie Collins, Associate Attorney, Gibson, Dunn & Crutcher UK LLP

On 2 September 2021, the Court of Justice of the European Union (the “CJEU”) issued its ruling in Republic of Moldova v Komstroy concluding that, as a matter of EU law, Article 26 of the Energy Charter Treaty (“ECT”) is not applicable to “intra-EU” disputes.  This post is concerned with the following questions: (i) to what extent (if indeed at all), can we expect intra-EU ECT tribunals to take  into account the CJEU’s reasoning; (ii) what steps (if any) should investors be taking in light of Komstroy; and (iii) what are the implications of Komstroy on EU Member States? 

To What Extent Can We Expect Intra-EU ECT Tribunals To Take Into Account The CJEU’s Reasoning?

Unquestionably, Komstroy will be relied upon by respondent EU Member States seeking to challenge a tribunal’s jurisdiction in intra-EU ECT proceedings.  Yet, so far as arbitration proceedings brought under the auspices of ICSID are concerned, such tribunals should, in principle, consider Komstroy irrelevant.  This is for numerous reasons. 

First, questions of jurisdiction for an ICSID tribunal are a matter exclusively for the tribunal.  Pursuant to Article 41(1) of the ICSID Convention, the tribunal “shall be the judge of its own competence”.  Thus, an ICSID tribunal can reach a different conclusion to that of the CJEU.

Second, ICSID proceedings (and awards) are creatures of international law and part of a self-contained dispute resolution system.  The EU legal order is separate from international law; accordingly, proceedings (and awards) are, in theory, unaffected by EU law and its developments.   

Third, tribunals are likely to take issue with the CJEU’s conclusion that the ECT should be construed as containing a reference to EU law simply because the EU is a signatory to the ECT.  Does this hence mean that every international agreement to which the EU is a signatory should now be considered as an instrument of EU law? 

In any event, the CJEU’s reasoning is at odds with the CJEU’s Opinion 1/17, in which it was accepted that CETA tribunals – though outside of the EU judicial system – could nonetheless interpret and apply the CETA itself without running afoul of EU law.  The decision does not explain how the CETA – to which the EU is also a party and must likewise be considered an “act of the EU” by the CJEU – can be compatible with EU law, but the ECT cannot. 

Fourth, tribunals are also likely to take issue with the CJEU’s lack of interpretative analysis.  Indeed, Komstroy (like the Achmea judgment)contains no analysis under the Vienna Convention on the Law of Treaties, which – as a matter of public international law – governs the interpretation of the ECT.  It is therefore unclear how the CJEU can purport to explain how the ECT should be “interpreted”.  Further, the judgment does not address the substantial body of case law under the ECT on the interpretation of Article 26 of the ECT.  To date, all ECT tribunals that have considered jurisdictional objections based on the intra-EU nature of the dispute have rejected the suggestion that the ECT does not apply on an intra-EU basis.  Those cases set forth what is now a well-established principle: that EU law is not relevant to the question of jurisdiction under the ECT. 

For all these reasons, Komstroy is unlikely to have a significant impact on ECT tribunals considering whether they have jurisdiction to hear intra-EU disputes.  It is also notable that despite the CJEU’s decision in Achmea, all ICSID tribunals in intra-EU BIT arbitrations have upheld their jurisdiction over intra-EU claims. 

The situation may be more difficult, however, in the non-ICSID intra-EU ECT context – for example,  ad hoc arbitrations conducted under the UNCITRAL Rules or Stockholm Chamber of Commerce (options under the ECT), where the arbitral seat is within the EU.  These arbitrations are subject to the domestic jurisdiction of their seat and its lex arbitri.  Domestic courts in this context will be competent to hear set-aside applications on the basis of Komstroy

What Steps Should Investors Be Taking In Light Of Komstroy?

Notwithstanding the above analysis, EU-based investors considering energy investments in EU Member States may wish to consider their position.  EU Member States will likely rely on Komstroy to challenge a tribunal’s jurisdiction before an ECT tribunal, and to resist enforcement and support a set-aside application before an EU Member State court (where there is an EU seat).   

What steps, then, should EU-based investors be taking?  In circumstances where no dispute is in existence or reasonably foreseeable, EU investors may wish to restructure their investments through a non-EU jurisdiction which benefits from the protections of an extra-EU BIT or is a third state in the context of the ECT (such as through Switzerland).  Post-Brexit, the UK is another option since there should be no issue from an EU law perspective with a UK investor bringing a claim against an EU Member State (the UK has a number of BITs with EU Member States and is a Contracting Party to the ECT).

In the event disputes do arise in an intra-EU context, and an EU investor is seeking to rely upon the ECT, it is advisable that investors opt for arbitration under the auspices of ICSID or else avoid an EU seat.  Where available, investors might also look to enter into bespoke contractual arrangements with the relevant EU Member State with specific arbitration agreements.

At the enforcement stage, Komstroy may decrease the chances of successful enforcement of any resulting intra-EU ECT award within the EU domestic courts.  Intra-EU investors with existing or planned investments may wish to identify whether the EU Member State in which they are seeking to invest has commercial assets (not covered by immunity) outside of the EU.   A number of recent decisions in Australia and the US provide some comfort that enforcement of an intra-EU arbitral award will not be resisted on EU law grounds.  The same can be said for the UK where, in February 2020, the Supreme Court in Micula v Romania lifted a stay of enforcement of an ICSID arbitral award despite an extant State-aid investigation by the European Commission.

What Are The Implications Of Komstroy On EU Member States?

For now, the ECT remains in force between all Contracting Parties, which includes all EU Member States, as well as the EU.  Indeed, a modification of the ECT to remove its application as between EU Member States would require the participation of all 53 Contracting Parties.  Komstroy does not (and cannot) modify the express terms of the ECT itself.  This may be contrasted with the situation post-Achmea: the judgment ultimately led to a treaty between most EU Member States to terminate intra-EU BITs, though the treaty left the signatories to “deal with [the ECT] at a later stage”. 

Meanwhile, the process of “modernising” the ECT is on-going, and Komstroy is likely to accelerate the European Commission’s efforts to make substantial amendments (though the Commission’s draft proposal for Article 26 does not expressly exclude intra-EU disputes).  Indeed, in December 2020, Belgium submitted a request to the CJEU for an opinion on the compatibility of the intra-EU application of the arbitration provisions of the future modernised ECT with the European Treaties in view of the fact that the mechanism could be interpreted as allowing its application intra-EU.

Aside from ECT-related questions, there remains the issue of how EU Member State courts address Komstroy in the context of enforcement proceedings of ICSID awards.  On the one hand, from an EU law perspective, national courts of EU Member States have a duty of “sincere cooperation” under Article 4(3) of the TFEU, pursuant to which they must assist each other in carrying out tasks which flow from the Treaties.  On the other, Article 54(4) of the ICSID Convention places an obligation on Contracting States to recognise awards as bindingand to enforce them as if they are final judgments of a court in that State.  EU institutions have indicated that they will oppose any such enforcement, even if it places an EU Member State in breach of its other public international law obligations.  It is certainly conceivable that an EU Member State court could conclude that its EU obligations trump its ICSID obligations.

Beyond the legal realm, Komstroy may have a more practical impact on EU Member States; EU-based investors considering energy investments in those countries may now view them as too risky.  First, the applicability of Article 26 to intra-EU disputes was not a question that was before the CJEU (it was not one of the three referred to the CJEU by the Paris Court of Appeal) and had no impact on the Komstroy case.  This might undermine investor confidence in the EU judicial system.  Second, Komstroy might create uncertainty regarding the extent of investor protection within the EU.  This could make investments more expensive as it will drive up risk-premiums.  Komstroy may, therefore, undermine investor confidence at a time when the EU and its Member States are seeking substantial private investment in its energy sector as part of its efforts to de-carbonise. 


Like Achmea, Komstroy is unlikely to be a moment of reckoning – at least from the perspective of intra-EU ECT tribunals determining their jurisdiction in an ICSID context.  Enforcement of intra-EU ECT awards within the EU has become more challenging – but in the wake of Achmea such proceedings were unlikely to have been brought in any event. 

With another preliminary reference on the applicability of Article 26 pending before the CJEU, and discussions around the “modernisation” of the ECT on-going, there are undoubtedly many more developments to come.     

Report on the 7th Annual EFILA Lecture delivered by Annette Magnusson (Climate Change Counsel), Brussels, 28 October 2021

Pieter Fritschy (Senior Associate, Nauta Dutilh)


On 28 October 2021, Annette Magnusson delivered the 7th Annual EFILA Lecture in Brussels. The topic of her lecture concerned the relationship between the Energy Charter Treaty and the Paris Agreement, more specifically the question of whether Energy Charter Treaty Arbitrationand the Paris Agreement should be considered “friends or foes”.

First, Prof. Dr. Nikos Lavranos, Secretary-General of EFILA, welcomed both the physical and the digital attendees of the lecture. In this introduction, he also updated the audience on some exciting new developments at EFILA (including the impending establishment of a Young EFILA Network and the upcoming Call for Papers for the European Investment Law and Arbitration Review for the 2022 issue) and on some of the upcoming EFILA events (most notably, the 7th EFILA Annual Conference on 4 February 2022 at NautaDutilh’s offices in Amsterdam).

After that, Annette Magnusson started her lecture by pointing out that there should be no doubt that all lawyers have to play a pro-active role in accelerating the reduction of carbon emissions in the coming years. As John Kerry recently put it at a meeting of the American Bar Association: “you are all climate lawyers now“.

Another observation fundamental to Magnusson’s lecture was that energy-related investments, as well as the stable, long-term policies that foster them, are an essential element of the necessary transition to clean energy. Seen from that perspective, it should be clear that the ECT has the potential to significantly influence the speed of that transition. Indeed, as Magnusson noted, the ongoing ECT modernization process will no doubt play an important role in determining the relationship between the (future) ECT and the Paris Agreement. For instance, one crucial and contentious issue is the question of whether the ECT should remain neutral between fossil and green investments or whether it should rather somehow differentiate between the two.

With respect to the present interplay between the ECT and the Paris Agreement, Magnusson pointed out that there exists a host of views with respect thereto. On one side of the spectrum, there are those who claim that the ECT already supports and strengthens the Paris Agreement, as the ECT provides a framework for the protection of green investments. On the other side of that spectrum, however, there are those who claim that the ECT in fact hinders the goals of the Paris Agreement, as the fear for ECT claims can undermine States’ willingness to implement policies aimed at phasing out fossil fuels. The coal phase-out cases of RWE and Uniper against the Netherlands could, for example, deter States from implementing similar phase-out policies.

With an aim to shed more light on the question of what the interplay between the ECT and the Paris Agreement actually is, the Climate Change Counsel is currently in the process of performing a review of ECT awards. The preliminary findings were presented by Magnusson (a final report is expected in the course of 2022).

Strikingly, although Article 19 ECT (“Environmental Aspects”) is sometimes referred to in ECT awards, climate change turns out almost never to be mentioned in those awards. The same goes for the energy transition, which, remarkably, is similarly missing in the reasoning of most of those awards. Magnusson noted that this raises the question of whether parties to ECT arbitrations might not be underestimating the potential of Article 26(6) ECT (“A tribunal established under paragraph (4) shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law“), which refers to the full spectrum of international law, including the Paris Agreement. As said, as things stand, references to the Paris Agreement have hardly ever made it to ECT awards, although this will no doubt be different in the future awards in the aforementioned phase-out cases of RWE and Uniper against the Netherlands.

So, are the ECT and the Paris Agreement friends or foes? Well, they are neither: as the preliminary findings show, they have never even talked to one another. This is unfortunate because, as Magnusson concluded, the Paris Agreement needs all the friends it can get.

After a lively Q&A session, which prompted questions from both digital participants and the audience physically present in Brussels, the 7th Annual EFILA Lecture came to an end. EFILA looks forward to welcoming everyone interested in investment law and arbitration at the 7th EFILA Annual Conference on 4 February 2022 at NautaDutilh’s offices in Amsterdam (https://efila.org/annual-conference-2022/).

The 7th Annual EFILA Lecture is available online at: https://www.youtube.com/watch?v=Nt1-5_kstYM

Unveiling Japan’s Modern BIT Policy: A Review of its Substantive Provisions

By Yosuke Iwasaki (Sidley Austin LLP) and Takashi Yokoyama (Tenzer Arrieta PLLC)[1]

While Japan has signed 36[2] bilateral investment treaties (“BITs”) with predominantly capital importing countries, historically the Japanese government’s investment treaty policy has been veiled in secrecy. While some countries, such as the United States and India, have officially published their own model BITs, Japan has never announced a model text as a template for negotiations. This may make it difficult for foreign government officials to anticipate the overall treaty structure that Japan will seek to adopt when entering investment treaty negotiations with other states. This post aims to highlight certain drafting hallmarks of Japan’s recently signed international investment agreements (“IIAs”) by examining the substantive and procedural provisions from the Japan-Argentina BIT (JAGT), Japan-Armenia BIT (JAMT), Japan-Jordan BIT (JJT) and Japan-UAE BIT (JUT), which were all signed in 2018, and the Japan-Cote d’Ivoire BIT (JCT) and Japan-Morocco BIT (JMT), which were both signed in 2020 (all six treaties collectively, “Treaties”). We will also explain Japan’s modern BIT policy based on two treaty-making approaches – traditional investment protection and modern investment liberalization.

Traditional Protection vs. Modern Liberalization

The JJT, JMT and JUT are generally classified as “Traditional Protection IIAs” as they only cover foreign investments that traditionally qualify as an “investment.” On the other hand, JAGT, JAMT and JCT are categorized as “Modern Liberalization IIAs” as they grant investors a right of admission or they establish the status of investments at the pre-investment stage. In this regard, a Japanese government official testified on 12 May 2020 that Japan’s default position in negotiating a BIT with potential contracting states is to adopt the Modern Liberalization IIAs approach, though it was open to consider the Traditional Protection IIAs approach.[3] Considering that not many countries presently adopt the approach reflected in the Modern Liberalization IIAs, this policy of Japan promoting market access is remarkable internationally. However, the authors consider the modern liberalization approach fits Japan’s global economic position as a capital exporting country to broadly protect Japanese investors in a host state.

Definition of Investment

The definition of investments is generally broad in the Treaties the authors surveyed. The Treaties define an “investment” on an “asset” basis as “every kind of asset owned or controlled, directly or indirectly, by an investor,” extending its application to “any tangible and intangible, movable and immovable property, and any related property rights,” with a non-exhaustive enumeration of “investment” forms that enables arbitral tribunals to interpret the investor’s activities or expenditures into the treaty’s definition of an “investment,” even if it is not listed.[4] In contrast, Article 1.4 of the India Model BIT 2015 constitutes an “investment” on an “enterprise” basis that is conceptually narrower than the “asset” approach embraced in the vast majority of Japanese IIAs.

Aside from this common definition of investments, the Treaties also feature four notable hallmarks.

First, JAGT, JMT and JUT each refer to the “characteristics of an investment” as part of their definition of “investment.” In using this term, they are likely inspired by the four characteristics for the definition of “investment” set out in the Salini test and other ICSID arbitral awards[5]: i) the commitment of capital or other characteristics; ii) a certain duration of performance; iii) assumption of risk; and iv) a contribution to the economic development of the host state. In addition to the inherent “characteristics of an investment” generally required in any investment disputes,[6] the enumerated characteristics will be scrutinized in particular for alignment with the purpose of each Treaty before an arbitral tribunal.

Second, JAGT, JJT and JMT each stipulate that an investment shall be “made in accordance with applicable laws and regulations” in the host state. The requirement of compliance with applicable laws and regulations is rooted in arbitral awards.[7] In this regard, the footnote of JAGT Article 1(a) provides that “[i]t is confirmed that nothing in this Agreement shall apply to investments made by investors of a Contracting Party in violation of the applicable laws and regulations of either or both of the Contracting Parties.” Notably, the “degree of violation” by an investor could be a contentious issue for a tribunal to consider. For example, if an investor does not submit the registration documents required under the Foreign Exchange Law at the time of incorporation and afterward conducted ordinary business activities without any particular violations of law in the host state, it would be disproportionate if the investment treaty regime were to consistently preclude the business activities or expenditures of the investor from investment protection regardless of whether such violation is material or minor.

Third, JAGT, JJT and JMT each explicitly preclude public debts from the definition of “investments.”[8] Unless a treaty unambiguously precludes public debts from the definition of “investments,” the issue of whether public debts legally have the appropriate characteristics to amount to an “investment” could be a contentious one. For the avoidance of disputes, JAGT, JJT and JMT each preclude public debts from the definition of investments.[9]

Fourth, JUT Article 1(a) precludes “natural resources” in the definition of investments because that constitutes “public property” under the UAE Constitution.[10] However, this does not mean that all kinds of assets or business activities relevant to natural resources are consequently precluded from investment protection. For example, a natural resource refinery funded by an investor could constitute an “investment” under the JUT, apart from the natural resources involved themselves.

Definition of Investor / Denial of Benefits

The Treaties commonly provide that an “investor” shall be either: i) “a natural person having the nationality of that Contracting Party in accordance with its applicable laws and regulations”; or ii) “an enterprise of that Contracting Party,” that “is making or has made an investment.[11] Among the Treaties, JMT Article 1(b) explains in relation to “dual nationality” that “a natural person who is a dual national shall be deemed to be exclusively a national of the State of his or her dominant and effective nationality.” This may not cover a Japanese investor with dual nationality which may be because Japanese immigration law does not recognize dual nationality.

JMT Article 1(b) uniquely qualifies an “investor of a Contracting Party” that is an “enterprise” which is “carrying out substantial business activities” in that Contracting Party. There are some statutory distinctions or differences of legal consequences between JMT and the other Treaties despite the fact that the denial of benefits (“DOB”) clauses in the Treaties also bar an enterprise that does not operate substantial business activities in the home state from enjoying the Treaty’s investment protection.[12] Firstly, excluding such an enterprise from BIT protection through the definition of an investor or DOB clause may result in bifurcation, determining whether the burden of proof shall lie with an investor or a host state. Secondly, there is considerable debate about whether the assertion based on the DOB clause might not go to jurisdiction but rather admissibility or merits,[13] and whether that assertion can be made after the claim is filed or must be invoked at some earlier date in time.[14]

Finally, the Treaties enjoin an enterprise owned or controlled by an investor of a non-Contracting Party that has no diplomatic relations with the host state from enjoying the benefits of the protection.[15]

Most-Favored Nation Treatment

All of the Treaties explicitly preclude the applicability of their MFN provisions to any treatment granted by procedural provisions of any other international agreements. We note that the Modern Liberalization IIAs further proscribe their MFN provisions’ applicability to any treatment granted by substantive and procedural provisions of international agreements signed before the effective dates of the Modern Liberalization IIAs. In this regard, JAGT enjoins its MFN provision’s applicability to any treatment granted by substantive and procedural provisions of international agreements signed before the effective date of JAGT, under Article 3.5, while the other two stipulate the same in the Schedule of Reservation.

Curiously, in barring the MFN provisions’ applicability to substantive and procedural provisions of international agreements signed before the effective dates, the scope of the MFN provisions’ applicability under the Modern Liberalization IIAs is considerably narrower than that provided by the Traditional Protection IIAs despite the investment liberalization policy that Japan wishes to facilitate.

Fair and Equitable Treatment

Each of the Treaties equates FET with the customary international law standard. While India’s Model BIT 2015 Article 3.1 and the Canada-EU Economic and Trade Agreement Article 8.10.2 exhaustively enumerate the elements of FET, Japan is not currently adopting such an approach. Rather, the extremely straightforward wordings of JAMT and JJT’s FET provisions invite interpretation as per their plain and broad meaning by arbitral tribunals. In contrast, the detailed FET provisions in JAGT and JMT may demonstrate that Japan is attempting this type of statutory clarification of the FET standard in some of its IIAs, as endorsed by the Comprehensive and Progressive Trans-Pacific Partnership.[16]

This difference is a result of negotiations between Japan and the other contracting countries. However, we humbly consider this extremely straightforward wordings’ definition could benefit an investor because the FET provision may apply to government action broadly, while the detailed definition could benefit a host state, because an investor shall satisfy the enumerated elements of the FET to prove that the government action breaches it. For broader investment protection, the former approach would be in harmony with Japan’s broader investment protection policy.

Umbrella Clause/Investment Agreement

Among the Traditional Protection IIAs, JUT Article 5.3 adopts an Umbrella Clause providing that: “Each Contracting Party shall observe any obligation it may have entered into with regard to investments … of investors of the other Contracting Party.” In this regard, arbitral tribunals historically diverge on whether and to what extent an Umbrella Clause could apply to a case where an investor alleges a host state’s breach of contract. In SGS v. Pakistan, the tribunal denied the Umbrella Clause’s applicability to a breach of contract between the disputing parties because there was no clear and persuasive evidence that this was the actual intention of the contracting countries.[17] Other tribunals have also underscored that the Umbrella Clause shall solely embrace disputes regarding investment agreements or contracts to which (i) the host state itself is privy as a sovereign (as opposed to separate entities whose actions may be attributable to the state under international law),[18] or which (ii) involve sovereign rather than commercial acts.[19] There are of course, as with many issues arising in investment treaty arbitration, decisions that go the other way. The interpretation of such clauses by a given arbitral tribunal has a potential to limit the scope of obligations arising from an Umbrella Clause of IIAs, such as limiting their application to when a host state acts in a sovereign capacity or when the state itself is a party to the contract. Thus, arbitral tribunals could also restrain the applicability of JUT Article 5.3 depending on their own interpretation of the host state’s actual intention with respect to contractual disputes.

On the other hand, Japan’s Modern Liberalization IIAs cover a breach of contract by the host state by the “investment agreement” provision instead of the Umbrella Clause, as the CPTPP Article 9.19 similarly employed this approach. In this regard, JAMT Article 1 defines an “investment agreement” as a written agreement between an investor (or its investment that is an enterprise in the territory) and a host state’s central or local government or authority. JAMT Article 24.6 entitles an investor to submit a claim for the host state’s breaches of investment agreements through Article 24.2 (a)(i)(B) and (b)(i)(B) to arbitration by the state’s “consent” set out in the Treaty. The latter provision further provides that any dispute settlement clauses in an investment agreement between an investor and a host state shall not supersede this “consent.” Japan’s “investment agreement” provisions may clarify the scope and any limitations on the text of the host state’s obligations and issues of privity under an Umbrella Clause. The authors underline that this “investment agreement” provision’s approach is one of Japan’s remarkable features in the Modern Liberalization IIAs that may replace the traditional function of an Umbrella Clause in IIAs.


Each Treaty establishes the four conditions of lawful expropriation: i) a public purpose; ii) in a non-discriminatory manner; iii) upon payment of prompt, adequate and effective compensation; and iv) in accordance with due process of law. “Compensation” is defined as “the fair market value of the expropriated investments” in the Treaties. “Interest” is calculated as “commercially reasonable rate” in the same manner, while the duration of the interest could be interpreted differently in each Treaty. For example, JAGT, JAMT, JGT and JJT compute “Interest” from the date of expropriation until the date of payment, while JMT and JUT do so by “taking into account the length of time until the time of payment.”[20] These two Treaties might evaluate less amount of the interest than the others in the quantum award accordingly.

We note that JAGT Article 11.2 and 11.3 and JMT Annex referred to in its Article 9 enumerate the three conceivable factors in determining whether a government measure constitutes “indirect expropriation,” which are likely influenced by the investment treaty practice of the U.S. and Latin American countries, comprising[21]: i) economic impact of the government action; ii) interferences with distinct and reasonable expectations arising out of investment; and iii) character of the government action. Both Treaties also delineate that government action for legitimate public welfare objectives, such as public health, safety and the environment, would not constitute “indirect expropriation” except in “rare circumstances.” On balance, the phrase “rare circumstances” is likely provided to benefit an investor.


While substantive provisions in each Treaty vary respectively, the authors conclude that the scope of the investment protection under Japan’s Treaties is comparatively broad. This can be seen from the comprehensive definition of an “investment” or “investor” and the FET provisions, interpretation and application of which are much left to arbitral tribunals. We assume that this is not only because Japan is a capital exporting country, but also because of the fact Japan had never previously been a respondent state in investment arbitrations initiated under its IIAs at least before the signing of the Treaties. Japan’s initiatives on the Modern Liberalization IIAs may explain the recent BIT policy.[22] Finally, preservation of State rights to regulate may also be further area of interest for examining how Japan develops the scope of its IIAs in the near future.

  1. The authors received helpful comments from Shimpei Ishido of Nishimura & Asahi in Japan and Charles Tay of Zhong Lun Law Firm in China. The Japan’s modern BIT policy on procedural provisions will be unveiled at the next piece.

  2. This counting of Japan’s BITs does not include multilateral investment treaties and investment chapters of EPAs except for the Japan-Korea-China Investment Treaty signed in 2012. This piece does not analyze the Japan-Georgia BIT signed on 29 January 2021 after our submission to the editorial committee.

  3. Katsuhiko Takahashi’s response at Foreign Affairs and Defense Committee of the House of Councilors, Japan’s Diet on 12 May 2020

  4. See, e.g., JUT Article 1(a), JMT Article 1(a)

  5. Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco [I], ICSID Case No. ARB/00/4, Decision on Jurisdiction of 31 July 2001. Joy Mining Machinery Limited v. Arab Republic of Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction of 6 August 2004

  6. See, e.g., Romak S.A. v. The Republic of Uzbekistan, Award, 26 November 2009

  7. See, e.g., Phoenix Action, Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award on 15 April 2009

  8. See JAGT Article 1(a)(iii) “a sovereign debt of a Contracting Party or a debt of a state enterprise,” JJT Article 1(a) Note (i) “public debt,” JMT Article 1(a) Note (i) “debt securities issued by a Contracting Party or loan to a Contracting Party or to a public enterprise.”

  9. See, e.g., Abaclat and Others v. Argentine Republic, ICSID Case No. ARB/07/5, Poštová banka, a.s. and ISTROKAPITAL SE v. Hellenic Republic, ICSID Case No. ARB/13/8

  10. Katsuhiko Takahashi’s response at Foreign Affairs Committee of the House of Representatives, Japan’s Diet on 10 April 2020

  11. See, e.g., JJT Article 1(b), JMT Article 1(b)

  12. See, e.g., JAGT Article 23.2

  13. See, e.g., Plama v. Bulgaria Decision on Jurisdiction, 8 February 2005; Empresa Eléctrica del Ecuador, Inc. v. Republic of Ecuador, Award, 2 June 2009, para. 71; Isolux Infrastructure Netherlands, BV v. Kingdom of Spain, SCC Case No. V2013/153, Award, 12 July 2016

  14. See, e.g., Ampal v. Egypt, Decision on Jurisdiction, 1 February 2016, paras. 160-170

  15. See, e.g., JMT Article 20

  16. See Article 9.6.2 of Comprehensive and Progressive Trans-Pacific Partnership

  17. See SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, Decision on Jurisdiction, ICSID Case No. ARB/01/13

  18. See, e.g., Impregilo SpA v The Islamic Republic of Pakistan, ICSID Case No.ARB/03/3, Decision on Jurisdiction, 22 April 2005, para. 223, Gustav F W Hamester GmbH & Co KG v Republic of Ghana, ICSID Case No ARB/07/24, Award, 18 June 2010, para. 347(i)

  19. See, e.g., El Paso Energy International Company v. Argentine Republic, Decision on Jurisdiction, ICSID Case No. ARB/03/15, Pan American Energy LLC and BP Argentina Exploration Company v. Argentine Republic, Decision on Preliminary Objections, ICSID Case No. ARB/03/13, CMS Gas Transmission Company v. Argentine Republic, Award, ICSID Case No. ARB/01/8, Sempra Energy International v. Argentine Republic, Award, ICSID Case No. ARB/02/16

  20. See, e.g., JAGT Article 11.5 and JUT Article 12.3

  21. See, e.g., Middle East Cement v. Egypt, ICSID Case No. ARB/99/6, Award of 12 April 2002. Metalclad v. Mexico, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000

  22. See Japan’s Action Plan for Promotion of Investment Environment Preservation by International Investment Treaties declared on 11 May 2016


(Russian Proverb)

Izabella Prusskaya, Associate, CAREY OLSEN (BVI) L.P.

Africa needs more Russian foreign direct investments to enhance the current Africa-Russian trade ties

Albert M. Muchanga, Commissioner for Trade and Industry of the African Union, during the St. Petersburg International Economic Forum 2018, “Business Dialogue: Russia-Africa”

A changing landscape: industry focus and the nature of investors

Trade between Russia and African countries has strengthened in recent years. For example, the total turnover in trade in 2016 amounted to US$14.5 billion, which is US$3.4 billion more than in 2015,[1] and 2017 again saw record levels of investment.[2] According to the Eurasian Economic Commission, Africa is the only region with which Russia increased its trade in 2016.[3] To dig deeper: in the face of sanctions and unstable political relationships with the United States and Western Europe, Russia is looking for new economic partners.

Russian business interests in sub-Saharan Africa today still mainly lie in the commodities industry. Alrosa, Rosneft, Rostec and Rosatom are already involved in mining projects in Angola, Namibia and Zimbabwe among others. KamAZ and Sukhoi Civil Aircraft are also developing trade projects in the region. VTB has recently opened an office in Angola. Congo, Sudan and Senegal are also cooperating with Russia in the field of oil and gas exploration.

However, these are far from the only areas attracting investment. Agriculture also plays an important role in Russian-African economic relations, with Africa becoming a promising market for Russian grain and agricultural equipment.[4] In turn, many African countries[5] have recently increased the numbers of fruits and vegetables exported to Russia, taking advantage of the favorable market conditions arising after Russia imposed “counter-sanctions” on produce imported from the EU.[6]

Although large companies are still most engaged in the energy and mining sectors, manufacturing, transportation and infrastructure are also growing areas of focus. And this is not the end of a long list of investment opportunities Russian businesses are pursuing in Africa. One interesting example is Lisma, a company from Mordovia, which established a joint venture in Burundi for the production of lamps supplied to the entire East African market. African investors substantially finance the project, and Lisma in turn supplies equipment and technology.

There are some common features associated with the structure of Russian investment into Africa. As a general rule, it is relatively large Russian companies that are operating on the continent. Led by companies such as Gazprom, Lukoil, Rostec and Rosatom, which have investments or interests in Algeria, Egypt, South Africa, Uganda and Angola, Russians are mainly investing in oil, gas and African infrastructure. Most large Russian corporations investing in Africa are at least partially state-owned. Thus, most Russian economic interest in Africa effectively takes the form of public-private partnerships, with the majority of investment projects originating in Moscow, Russia’s financial and industrial center.

New frontiers for Russian investment: two innovative case studies

It is clear that there are an increasing number of Russian investment projects in African nations – and the following examples from Angola highlight that Russia’s presence on the continent is constantly forging new frontiers, in terms of both reach and scale.

Roskosmos has long been a partner of Angola in the space industry and Roskosmos currently plans to produce and launch the second satellite in Angola, Angosat-2.

The first satellite, Angosat-1, was launched into orbit at the end of 2017. The export contract for Angosat-1 amounted to US$327.6 million and was signed on 26 June 2009 between the Angolan Ministry of Telecommunications and Information Technology and Rosoboronexport. The Russian corporation Energy was appointed as the main contractor. In 2011, Vnesheconombank, Roseximbank, VTB and Gazprombank entered into a loan agreement with the Angolan Ministry of Finance, under which the African country got a credit line for US$278.46 million for a period of 13 years. In 2015, the construction of a satellite flight control center began in Luanda, the capital and largest city in Angola. Angola financed the construction of ground infrastructure at a cost of US$54.3 million.

In some cases, Russian investors play a dominant role in key industries – and they are using this position to deepen cooperation with host states. Another large Russian investor in Angola is Alrosa, a Russian group of diamond mining companies accounting for 95% of country’s diamond production and 27% of the global diamond extraction.[7]

According to those documents, Alrosa will participate in the project through the subsidiary company Katoka (Alrosa owns 32.8%), which will receive a 50.5% share in the new structure. Taking into consideration the results of a preliminary feasibility study, the development of Luashe is of a considerable economic interest to the project participants. The Luele kimberlite pipe found in the Luashe exploration field is the largest discovered in the world in the last 60 years.[8]

Substantive protections for investors under bilateral investment treaties

Currently, Russia is a party to eleven BITs with African countries,[9] of which six are currently in force – namely with Angola (2011), Egypt (2000), Equatorial Guinea (2011), Libya (2010), South Africa (2000) and Zimbabwe (2014).[10] Interestingly, while South Africa has terminated its BITs with a significant number of Western nations, its BIT with Russia remains in force.

The BITs in force between Russia and African nations have several features in common as regards the dispute resolution mechanisms. Each of them contains an article providing for investor-state dispute settlement (“ISDS”) and generally reflects a so-called “traditional” approach to dispute resolution, providing for arbitration as one of the available options. All of the dispute resolution clauses in those BITs are multi-tier and provide for negotiations as a preliminary step in resolving investor-state disputes (the “cooling-off period”). If the parties are not able to resolve their disputes in the course of negotiations, then the investor may apply to the competent court of the country where the investment was made or resort to arbitration.

Other features of the BITs’ provisions on arbitration do, however, vary – in particular, as regards the applicable arbitral rules, which govern proceedings between parties and can impact on a wide range of issues including timing of the arbitration, composition of the tribunal, confidentiality and emergency relief. For example, Article 10 of the South Africa-Russia BIT provides for either arbitration under the Arbitration Institute of the Stockholm Chamber of Commerce Rules (“SCC Rules)” or through an ad hoc arbitration in accordance with UNCITRAL Arbitration Rules (“UNCITRAL Rules”) – but not ICSID Rules. The older BITs, which entered into force in 2000, provide a more limited choice of arbitration options for the investors. The Egypt-Russia BIT provides only for UNCITRAL ad hoc arbitration, in its Article 10.

In contrast to the older BITs, the more modern Russian BITs with Angola, Libya and Zimbabwe represent a new generation of texts, which explains why they provide for an ICSID arbitration option. This is in line with Article 11 of the Angola-Russia BIT, Article 12 of the Zimbabwe-Russia BIT and Article 8 of the Libya-Russia BIT, all of which provide for investors to bring a claim via either ad hoc arbitration in accordance with UNCITRAL Arbitration Rules, or arbitration under the ICSID Convention. In practice, the arbitral rules most frequently used by Russian investors in claims against states are UNCITRAL Rules (12 cases) and SCC Rules (6 cases), with three filed under the ICSID Additional Facility Rules, two of which in 2018.[11]

The Russian-African BITs in force provide various types of protection for investors. Compensation shall correspond to the actual value of the expropriated investment and shall be paid without an unjustified delay.

Another substantive protection available for Russian investors under BITs with African countries is an obligation of host states to provide fair and equitable treatment of the investment (“FET” standard). The standard has been developed through case law, protection from discriminatory treatment or damage to investments (that amount to less than expropriation). FET is contained in the vast majority of international investment agreements as one of the main standards for the protection of foreign investors,[12] including in those six Russian-African BITs currently in force.

A third frequently used standard of investment protection, which is closely connected with FET standard, is the Most-Favoured Nation Treatment (“MFN” standard). It requires the host state not to treat an investor differently than other foreign or domestic investors based on the fact that it comes from a particular country. Based on MFN clauses contained in all Russian-African BITs in force, Russian investors shall receive equal trade advantages as the “most favoured nation”, for example, trade or tax advantages.

Where BITs are in force, therefore Russian investors in Africa are covered by the main substantive protections. Enforcing such protections is a matter of dispute settlement, subject to the clauses in the treaty covering the investor’s recourse.

Investor-state dispute settlement under bilateral investment treaties.

Russia is no stranger to investment arbitration – and even though Russia has more famously participated in such proceedings on the side of the host state, there have also been 22 cases where Russian investors filed claims against states under investment treaties.[13] The first such case was brought in 2004,[14] with several investment arbitration proceedings initiated by Russian investors in previous years still pending[15]. There has been a recent surge in claims by Russian investors, with six such cases brought in 2018[16] following just two in 2017[17] and three in 2016.[18] However, only one of these cases to date has involved an African host state – Egypt.

The PCA case of MetroJet (Kogalymavia) Limited v. Arab Republic of Egypt relates to a plane crash that took place in the Egyptian desert region of the Sinai in 2015. This crash killed all 224 passengers, the majority of which were Russian citizens. The Russian airline, Metrojet, together with the Turkish tour operator, Prince Group, are claiming at least US$200 million in an investment treaty claim against over the suspected terrorist attack.[19]

The Claimants brought their claim in 2017, seeking compensation for both direct damages caused by the crash and the loss of their investment in the Egyptian economy. The airline, which stopped flying shortly after the crash and filed for bankruptcy shortly after, is seeking US$90 million in damages. The Turkish tour operator is seeking US$111 million.

Optimizing BIT protections: structuring investment through a third country

In the case that Russian investors are unable to access adequate protections under the applicable BIT between Russia and the African host nation, investment structuring is an important means of optimizing the protections available to the investor. This is generally achieved by choosing a state with a favorable BIT between it and the target nation, in which to incorporate an investment vehicle to act as a conduit for funds. The purpose is to allow the Russian investor, by virtue of the domicile of the investment vehicle, to achieve superior investment protection pursuant to the terms of the preferred BIT.

The United Kingdom is a popular choice for such investment structuring, with 21 BITs with African countries currently in force.[20] However, it remains to further see whether Brexit will make it more attractive to structure investments in certain EU member states through the UK in order to take advantage of BIT protection.

It is to be noted that in March 2018 the Court of Justice of the European Union held, in the famous Achmea case that BITs between EU member states are invalid as their investor-state dispute settlement provisions are incompatible with the EU single market. Based on this, a treaty of 29 August 2020, the so-called “Termination Agreement” will terminate all intra-EU BITs between ratifying states. The UK has declined to join it, so investments under those BITs may continue to be structured via the UK so as to attract relevant BIT protection. This would have the added advantage to Russian investors of potential treaty protection in EU States that would not be provided by structuring through States – such as those mentioned below – which have signed the Termination Agreement. However, this may be in danger due to the infringement procedure which the EC has commenced against the UK for refusing to sign the Termination Agreement.

Another popular choice for investment structuring is France, with 23 BITs in force with African states.[21] Other jurisdictions such as the Netherlands may also be favorable, particularly in circumstances where they offer additional taxation benefits to an investor. These considerations should ideally be considered at the outset of an investment, or at least well before it could be said that any potential treaty dispute has arisen or could likely arise. If a switch comes only after the start of a dispute it is unlikely to benefit from protection.[22] The latter approach may lead an arbitral tribunal to reject a claim on the grounds that the claimant engaged in an abuse of process by switching the investment vehicle after knowing that a dispute had arisen or was likely to arise, as happened for example in Mobil Corporation v Venezuela and Banro American Resources Inc. v. Congo.[23]

There are already two examples of Russian investors taking advantage of third-country investment vehicles in bringing a claim under an alternative BIT, although not yet in Africa. In Naumchenko and others v. India (2012) the claim was brought under the Cyprus-India and Russia-India BITs; and in Nadel & Ithaca Holdings Inc v. Kyrgyzstan (2012), the claim (now discontinued) was brought under the Kyrgyzstan-United States of America BIT. Insofar as alternative BITs provide greater protection, Russian investors considering a new venture should seek advice on the most appropriate jurisdiction for incorporating an investment vehicle, taking into account substantive protections, the ISDS mechanism and any enforceability benefits.

Enforcement of awards: the availability of ICSID arbitration and the New York Convention

Famously, the ICSID Convention provides the most widespread and effective means of enforcing investment arbitral awards among its member states, with mandatory recognition and enforcement of arbitral awards by local courts. According to the survey conducted by ICSID in 2017, Member States reported 85% compliance with ICSID awards of costs and/or damages in favor of the claiming party and post-award decisions issued from 14 October 1966 until 1 April 2017.[24] The ICSID Convention applies only to disputes between state members of the Convention, and nationals and companies of member states. To be a member, a state must both sign and ratify the Convention.

As Russia has signed but not yet ratified the ICSID Convention,[25] Russian investors will need to use third country investment structuring, in order to participate in conventional ICSID arbitrations and benefit from the associated enforcement mechanism. Availability of the ICSID enforcement mechanism will, of course, also depend on the ratification status of the host state. To date, 38 African nations have ratified the ICSID Convention,[26] so the mechanism is in principle quite widely available on the continent.

The ICSID Additional Facility Rules provide one alternative for Russian investors, where investment structuring is not an option. These Rules are available for the arbitration of investment disputes where only one side is a party or national of a party to the ICSID Convention.[27] As such, Russian investors can in principle bring arbitration against an African host state under the ICSID Additional Facility Rules where the host state has ratified the ICSID Convention, and the applicable BIT permits ICSID arbitration. Although awards under the Additional Facility Rules are not enforceable pursuant to the ICSID Convention, such awards still have the advantage of credibility and are generally favorable for enforcement. Further, one of the proposals in ICSID’s current Rules Amendment Project is to extend the Additional Facility Rules to cases where both the claimant and the respondent are not ICSID Contracting States or nationals thereof. If this proposal is ultimately approved, Russian investors would (subject to the terms of the BIT) have access to arbitration under ICSID Additional Facility Rules regardless of the counterparty state.

The New York Convention provides an alternative enforcement mechanism to the ICSID Convention, where the arbitration has been carried out pursuant to other arbitration rules such as UNCITRAL. It is subject to local laws (where assets are based) regarding sovereign assets. However, it is applicable simply if the award is rendered and enforced in New York Convention contracting states – which represent a significant majority of African states.[28] As such, this enforcement mechanism will be more widely accessible to Russian investors in cases where investment structuring is not employed.

Contractual protections and contract-based arbitration

Beyond general investor-state protections, investors may also seek to incorporate an arbitration clause into a written and binding investment agreement with the state – although of course, this is likely to be a heavily negotiated point. Where successful, this approach will enable investors to bring claims against the host state in circumstances where there is no applicable BIT, the applicable BIT offers inadequate substantive protections, or the BIT does not provide for resolution of disputes via international arbitration. In all cases, investors will need to ensure that the investment agreement is drafted to incorporate the requisite substantive protections directly, and that the arbitration clause is appropriately drafted. This mechanism is a powerful but underutilized option: the statistics show that around 16% of all the arbitration cases filed under different ICSID Rules are based on contractual agreements between the parties in the dispute (112 out of 704), with the majority of Respondents from either Latin American or African countries.

ICSID permits arbitration on a contractual basis as well as pursuant to a BIT[29] and suggests a well-developed set of model clauses for this purpose.[30] As for treaty claims, Russian investors will need to structure their investment through a third party vehicle in order to allow investors to take advantage of the ICSID enforcement mechanism, although the arbitration clause could of course specify alternative rules, for example UNCITRAL, and seek to rely on alternative enforcement mechanisms. Contract-based arbitration is also permissible under the ICSID Additional Facility Rules, which as noted above may apply where either the host State or the State of origin of the investor is a Party to the ICSID Convention. ICSID also provides suggested drafting for this scenario in its model clauses.

A role for BRICS organizations in investment disputes?

Since South Africa joined the BRICS in 2010, the dispute resolution mechanisms of this informal grouping of nations have rapidly evolved, leading to new means of settling disputes between Russia and South Africa. The Shanghai International Economic and Trade Arbitration Commission established the BRICS Dispute Resolution Center Shanghai (“BRICS DR Center Shanghai”) in October 2015. This center accepts cases involving parties from BRICS countries and provides arbitration and alternative dispute resolution services. A similar center is now operational in New Delhi.

Moreover, the Moscow Declaration signed on 1 December 2017 proposed the “establishment of a Panel of Arbitrators and common institutional rules to coordinate and merge the functioning of the BRICS Dispute Resolution Centers already established […] and the proposed Centers in Brazil, Russia and South Africa“. Though such a panel has not yet been established, the representatives of the BRICS member states are actively discussing the future structure and functioning of such a panel. The proposed centers in Brazil, Russia and South Africa will, most likely, use BRICS DR Center Shanghai as an analogue.

The BRICS seem to be a good example of regionalizing dispute resolution mechanisms by setting up various centers for settling disputes between the member states. Together with the ever-increasing integration of African economies, recently heralded by the newly implemented African Continental Free Trade Area (“AfCFTA”), and its forthcoming Investment Protocol, this ongoing trend towards regionalization may yet see a specialized dispute resolution center for investment claims between CIS and the African Union.


Africa is a promising investment target with rapidly developing use of arbitration due to the continent’s progressive integration into the global economy and its evolving experience in resolving international disputes. The investment protection measures included in investment treaties allow investors to adapt the structure of their investment to benefit from those protections.

A variety of instruments provide for investment protection for Russian investors in Africa. The scope and level of protection will vary from country to country and depend on the local legislation and treaties in force. Importantly, the scope and level of protection must be evaluated before investing into Africa, since potential investors might be better served by structuring their investment through a third country in order to benefit from stronger protections. While the significant majority of African states have now ratified the New York Convention,[31] which provides a good means of award enforcement, innovation by Russian investors via third-country structuring may allow access to the ICSID Convention, under the egide of the World Bank.

As of today, African countries are parties to more than 900 BITs, generally with non-African countries;[32] and the majority of African states are also Member States of ICSID Convention. Although there has only been one known investment claim by a Russian investor in Africa, cases are likely to develop alongside the growth of Russian investments on the continent. It may be too early to determine whether any of the investors would face particular problems in Africa in connection with the initiation of investment arbitration. However, “forewarned is forearmed” and Russian investors are well advised to analyse investment protections applicable to them, in order to invest and risk with confidence before they drink champagne.

  1. FDI Intelligence. The Africa Investment Report 2016. Available at: Analyseafrica.com.
  2. Trends Report by FDIMarkets.com, 2017: as at the date of this publication, 2017 was the year “in which the highest numbers of projects were recorded”.
  3. Id.
  4. For example, Russia supplies wheat to Morocco, South Africa, Libya, Kenya, Sudan, Nigeria and Egypt.
  5. Egypt, Côte d’Ivoire, Benin, Nigeria, Guinea-Bissau, Central African Republic, Guinea, Burkina Faso, and Mali.
  6. More about Russia’s counter-measures at: https://www.politico.eu/article/putin-extends-counter-sanctions-against-eu/
  7. 2017 global natural diamond production forecasted at 142M carats worth US $15.6B”. Available at: MINING.com
  8. See at: http://www.alrosa.ru/алроса-примет-участие-в-освоении-круп/
  9. BITs not in force with: Morocco, Namibia, Nigeria, Algeria, Ethiopia.
  10. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/international-investment-agreements/countries/175/russian-federation
  11. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/investment-dispute-settlement/country/175/russian-federation/investor
  12. FAIR AND EQUITABLE TREATMENT. UNCTAD Series on Issues in International Investment Agreements II. P. 7. Available at: https://unctad.org/en/Docs/unctaddiaeia2011d5_en.pdf
  13. UNCTAD Investment Policy Hub, accessed at: https://investmentpolicy.unctad.org/investment-dispute-settlement/country/175/russian-federation/investor
  14. Bogdanov v. Moldova (I), which was initiated in 2004 under SCC Rules (Stockholm Chamber of Commerce). Mr. Bogdanov initiated three more claims against Moldova in 2005, 2009 and 2012, with two awards in favour of the investor and two in favour of the state.
  15. See for example Paushok v. Mongolia (2007), Naumchenko and others v. India (2012), Tatarstan v. Ukraine, Deripaska v. Montenegro (2016) and Boyko v. Ukraine (2017).
  16. Gazprom v Ukraine (2018), GRAND EXPRESS v. Belarus (2018), Lazareva v. Kuwait (2018), Manolium Processing v. Belarus (2018), MTS v Turkmenistan (II) (2018), RusHydro v Kyrgystan (2018).
  17. Boyko v. Ukraine (2017); MetroJet (Kogalymavia) Limited v. Arab Republic of Egypt (2017).
  18. Deripaska v. Montenegro (2016), Tatarstan v. Ukraine (2016), Evrobalt and Kompozit v. Moldova (2016).
  19. Garrigues. PCA to decide claim against Egypt over plane crash. Available at: https://www.garrigues.com/en_GB/new/international-arbitration-newsletter-march-2020-regional-overview-middle-east-and-africa
  20. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/international-investment-agreements/countries/221/united-kingdom
  21. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/international-investment-agreements/countries/72/france
  22. See, for example: Philip Morris Asia Limited v. The Commonwealth of Australia, (PCA Case No. 2012-12)
  23. Banro American Resources, Inc. and Société Aurifère du Kivu et du Maniema S.A.R.L. v. Democratic Republic of the Congo, ICSID Case No. ARB/98/7
  24. Including both Convention and Additional Facility awards
  25. Database of ICSID Member States, accessed at https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx
  26. Database of ICSID Member States, accessed at https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx
  27. Article 2 of the ICSID Additional Facility Rules
  28. Database of ICSID Member States, accessed at https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx
  29. Article 25(1) of the ICSID Convention
  30. See at: https://icsid.worldbank.org/en/Pages/resources/ICSID-Model-Clauses.aspx
  31. New York Convention Contracting States, accessed at http://www.newyorkconvention.org/countries
  32. See at: http://aefjn.org/en/bilateral-investment-treaties-a-continuing-threat-to-africa/

The Contents of the European Investment Law and Arbitration Review, Vol. 5 (2020)

Prof. Nikos Lavranos & Prof. Loukas Mistelis (Co-Editors in Chief)

We are very pleased and proud to present the fifth issue of the European Investment Law and Arbitration Review (EILA Rev) 2020.

As of 23 December 2020, all articles of this volume can be ordered online at Brill Publishers:

The stormy developments of the past years regarding international investment law and arbitration broadly understood, which to a large extent were driven by various EU institutions – European Commission, Court of Justice of the EU and the European Parliament – have confirmed the need for a legal journal such as this Review that exclusively tracks these developments and provides a forum for debate on the current state of affairs and future developments.

The Achmea judgment, the termination agreement regarding intra- EU BITs, CETA, Opinion 1/17, Brexit, the ISDS reform efforts in the UNCITRAL Working Group III and the ECT, are just a few of the topics that have been featured and continue to feature in a broad range of different contexts in this Review.

This issue opens with an article by Sarah Vasani and Nathalie Allen, which highlights the need of effective investment protection in order to ensure that the Paris Climate targets are reached by an increase in foreign direct investments in renewable energy. Often investment protection and environmental protection are presented as opposing, mutually exclusive interests; however, the authors convincingly argue that the contrary is true.

Elizabeth Chan’s article turns to Brexit and its potential for post- Brexit UK to design its foreign investment policy anew – independent from the EU.

Subsequently, Alexander Leventhal and Akshay Shreedhar analyze the practice of the European Commission intervening in arbitration proceedings by way of using amicus curiae briefs. They discuss the question whether, and if so, to what extent the European Commission can be considered a neutral friend of the tribunal or rather must be considered a third party with a particular interest – usually in support of the Member State concerned – which would have to be qualified as a potential abuse of the amicus curiae briefs tool.

Brady Gordon’s article provides a critical and sceptical analysis of the CJEU’s case law regarding CETA.

This is followed by David Sandberg and Jacob Rosell Svensson’s article regarding the implications of Achmea for national court challenge proceedings. They highlight the huge impact of Achmea for many on- going proceedings before domestic courts in various jurisdictions.

Samantha Rowe and Nelson Goh (former Managing Editor of this Review) explain how perceived norm conflicts regarding the January 2019 EU Member States Declarations on the consequences of the Achmea judgment can be resolved through principles of treaty interpretation.

Nikos Lavranos concludes this series of Achmea related articles by offering his analysis on the recently signed termination agreement, which would effectively terminate most intra-EU BITs.

As in the past years, we also run an Essay Competition, which resulted in many outstanding submissions. Indeed, this year the quality was so high that the Editorial Team decided to award, next to the first prize winner, two joint second prize winners rather than a second and third prize winner.

Crawford Jamieson is the first prize winner of the Essay Competition 2020 with his submission, which assesses the CJEU’s decisions in Achmea and Opinion 1/ 17 regarding CETA in light of the proposed Multilateral Investment Court (MIC). He shows that there are considerable flaws and inconsistencies in the CJEU’s jurisprudence, which can only be explained by political motivations in order to lend support to the MIC.

Joint second prize winner, Robert Bradshaw, illustrates with his submission that international investment law is in need of a proportionality test. The other joint second prize winners, Florence Humblet and Kabir Duggal, provide an extensive analysis for using Article 37 of the EU Charter as a defence for Climate Change and environmental measures in Investor-State arbitration disputes.

The case-note section is opened by Cees Verburg who analyses the Hague Court of Appeals’ decision, which overturned the lower courts’ decision to annul the USD 50 billion Yukos award. This decision reinstated the award, while at the same time triggered an appeal by the Russian Federation before the Dutch Supreme Court. Thus, there will be another, final, round.

Bianca McDonnell examined the Adamakopoulos v. Cyprus Decision on Jurisdiction by the ICSID arbitral tribunal. This decision is particularly interesting regarding the dissenting opinion of one arbitrator concerning the alleged incompatibility of the bit s and the EU Treaties as well as regarding the aspect of the mass claim nature of the proceeding.

Finally, Alesia Tsiabus and Guillaume Croisant discuss the lessons learned from the Micula saga for the relationship between international investment law and EU competition law.

The focus section on the Young ITA event on investment arbitration and the environment continues the theme, that was initiated by the first article in this Review. The focus section encompasses several written contributions of the presentations given at the Young ITA event held on 5 November 2019 in London.

This section is opened by an extensive analysis of Laura Rees-Evans in which she explains the recent developments and prospects of reform regarding the protection of the environment in international investment agreements.

Crina Baltag looks at the doctrine of police powers in relation to the protection of the environment, while Anna Bilanova explains the option of using environmental counterclaims. This is followed by a discussion of Guarav Sharma on environmental claims by States in investment treaty arbitration.

Finally, Nikos Lavranos, the other Co- Editor-in-Chief of this Review, looks at the (ab)use of third- party submissions in investment treaty arbitration proceedings.

The EFILA focus section contains a summary of the keynote delivered by Meg Kinnear at the 5th EFILA Annual Conference with a particular focus on using ADR tools in investment disputes.

This is followed by the text of the 5th EFILA Annual Lecture delivered by Prof. Laurence Boisson de Chazournes on navigating multiple proceedings in the light of the proliferation of courts and tribunals.

Finally, three book reviews wrap up this issue. Nikos Lavranos looks at the new Practical Commentary on the ICSID Convention, while Nelson Goh (former Managing Editor of this Review) reviews a Case Book on International Law in Domestic Courts and Trisha Mitra (Co- Managing Editor of this Review) examines the book on the future of Investment Treat Arbitration in the EU.

We are confident that this year’s 480 page volume underscores again the raison d’être for publishing this Review, which covers such a dynamic field of law.

In order to produce an interesting volume next year yet again, we invite unpublished, high-quality submissions (long and short articles as well as case notes) that fall within the scope of this Review.

The Call for Papers and the house style requirements are published on the Review’s website:

In addition, we will also again run an Essay Competition. All information regarding the 2021 Essay Competition will be published on the Review’s website:

Table of Contents of the European Investment Law and Arbitration Review 2020


1 No Green without More Green: The Importance of Protecting FDI through International Investment Law to Meet the Climate Change Challenge 3

Sarah Z. Vasani and Nathalie Allen

2 The UK’s Post- Brexit Investment Policy: An Opportunity for New Design Choices 40

Elizabeth Chan

3 The European Commission: Ami Fidèle or Faux Ami? 70

Alexander G. Leventhal and Akshay Shreedhar

4 A Sceptical Analysis of the Enforcement of ISDS Awards in the EU Following the Decision of the CJEU on CETA 92

Brady Gordon

5 Achmea and the Implications for Challenge Proceedings before National Courts 146

David Sandberg and Jacob Rosell Svensson

6 Resolving Perceived Norm Conflict through Principles of Treaty Interpretation: The January 2019 EU Member State’s Declarations 167

Samantha J. Rowe and Nelson Goh

7 The World after the Termination of intra-EU BITs 196

Nikos Lavranos

Essay Competition 2020

8 Assessing the CJEU’s Decisions in Achmea and Opinion 1/ 17 in Light of the Proposed Multilateral Investment Court – Winner of the Essay Competition 2020 215

Crawford Jamieson

9 Legal Stability and Legitimate Expectations: Does International Investment Law Need a Sense of Proportion? – Joint 2nd Prize Winner of the Essay Competition 2020 240

Robert Bradshaw

10 If You are not Part of the Solution, You are the Problem: Article 37 of the EU Charter as a Defence for Climate Change and Environmental Measures in Investor- State Arbitrations – Joint 2nd Prize Winner Essay Competition 2020 265

Florence Humblet and Kabir Duggal

Case- Notes

11 The Hague Court of Appeal Reinstates the Yukos Awards 299

Cees Verburg

12 Theodoros Adamakopoulos and Others v. Republic of Cyprus, ICSID Case No Arb/15/49, Decision on Jurisdiction, 7 February 2020 315

Bianca McDonnell

13 Investment Arbitration and EU (Competition) Law – Lessons Learned from the Micula Saga

Alesia Tsiabus and Guillaume Croisant 330

Focus section on the Young ITA Event: Investment Arbitration and the Environment – Emerging Themes

14 The Protection of the Environment in International Investment Agreements – Recent Developments and Prospects for Reform 357

Laura Rees- Evans

15 Investment Arbitration and Police Powers: Emerging Issues 392

Crina Baltag

16 Environmental Counterclaims in Investment Arbitration 400

Anna Bilanová

17 Environmental Claims by States in Investment Treaty Arbitration 412

Gaurav Sharma

18 The (ab)use of Third- Party Submissions 426

Nikos Lavranos

Focus Section on EFILA

19 ADR in Investment Disputes: The Role of Complementary Mechanisms – Keynote to the 5th EFILA Annual Conference 2020 439

Meg Kinnear

20 The Proliferation of Courts and Tribunals: Navigating Multiple Proceedings – 5th EFILA Annual Lecture 2019 447

Laurence Boisson de Chazournes

Book Reviews

21 The ICSID Convention, Regulations and Rules – A practical Commentary 471

Nikos Lavranos

22 International Law in Domestic Courts: A Case Book 473

Nelson Goh

23 The Future of Investment Treaty Arbitration in the EU: intra-EU BITs, the Energy Charter Treaty, and the Multilateral Investment Court 475

Trisha Mitra

Regulatory Challenges Arising from Sovereign Wealth Funds and National Security: Exacerbate Great Power Competition between China and the United States?

Charles Ho Wang Mak* and I-Ju Chen**

China is now a major player in some of the United States’ (US) most important sectors. China’s impact can be found through the acquisition by some of its most influential companies, which are later acquired by the sovereign wealth funds (SWFs) of China. US’ companies, for example, Apple and IBM, and their distributors, are indirectly controlled by China. This dynamic and tension of the two great economic power may play a significant role in the US-China trade war. Moreover, concerns about regulations of the SWFs and national security have never ceased in the US. While the US presidential election is in fall 2020, the foreign relationship between China and the US is an essential agenda in both Trump and Biden’s campaigns. This post examines regulatory challenges arising from the SWFs and national security under this new era of great power competition between China and the US.

National security is closely associated with the concept of state capitalism. This is because the states’ governments mostly control the enterprises that existed in states that adopted state capitalism. Therefore, investors (with political agendas) may invest in some state enterprises, which might affect national security. National security will be negatively affected by the SWFs made by state-owned enterprises. Inward SWFs might affect individual strategic firms (investing in infrastructure) and different sectors in the host countries. This is because those state-owned enterprises, which invest in those host countries by SWFs, can access sensitive information and technology of those strategic firms and then misuse that information. States investors seek to get improved access to sensitive technologies of other countries through investment. Therefore, to safeguard national interests, policies and strong regulations are necessary.

The Santiago Principle could be a reference for governments to govern international investment. Establishment of the Santiago Principle aims to depoliticise foreign investment flows and to structure and implement transparent and sound governance.[1] The Santiago Principle covers the following areas: legal framework and coordination with macroeconomic policies; institutional framework and governance structure; and investment and risk management framework.[2] Hence, the Santiago Principle is one of the most important features in reframing international perceptions of SWFs.

The balance between the protection of national security and open investment policy of SWFs is complex. In addition, SWFs raise ‘potentially controversial questions for international financial regulation and governance’.[3] China’s SWFs, such as the China Investment Corporation (CIC), have sought more access to markets in the US after Chinese deals are under more and stricter scrutiny. Chinese firms have criticized the US’ investment regulations imposing unfair restrictions on funding coming from China. Moreover, in a high-profile talk with the US government in 2015, Xi Jinping raised the issue of SWFs and relevant regulations in the US. Xi addressed that the US government should relax regulations of foreign investment in high-tech sectors.[4]

However, the investment flow of China into the US has prompted US’ concerns about the government of the People Republic of China’s influence. This is because, from the perspective of the US government, there is a potential risk of national security of SWFs. Although it is clear that the national interest ensures long-term capital availability – because much of it must come from SWFs now – several US pressure groups still urge restricting foreign investors’ choices lest they ‘steal’ technology, trade secrets or jobs.[5] On this controversial point, Bu’s research, however, indicated that China has no intention of investing in sensitive sectors pursuing the controlling stake because it has steered away from deals that would trigger any political backlash.[6]

The US has a series of critical legal regimes applicable to SWFs. The US adopted a protectionist approach towards the SWFs inward investments. Since 2000, the companies in the US that were invested by SWFs became a major issue. In the US the principal regulations that burdened SWFs are the Securities Exchange Act 1934, Foreign Investment and National Security Act (FINSA) 2007, Foreign Corrupt Practices Act of 1977 and Defense Production Act of 1950. FINSA codifies the contemporary views of the Committee of Foreign Investment in the United States (CFIUS). FINSA has dramatically strengthened the regulations introduced by CFIUS, those about inward investment, particularly for state-owned entitled such as SWFs. For instance, critical infrastructure needs to be protected against those SWFs that are invested with a political purpose, since those critical infrastructures will give rise an issue of national security. However, with respect to the unpredictability for the transaction parties, an issue arises as to whether the FINSA can strike a balance between the economic benefits of foreign investment and national security concerns about technology and critical infrastructure.[7] Nonetheless, Chinese scholar, Feng, comments that FINSA is unnecessary and even likely to be detrimental to the US capital markets and the overall economy.[8]

Furthermore, the case of Cede & Co. v. Technicolor, Inc. showed that directors and managers owe the duty of loyalty to both the company and shareholders by providing protections from SWFs’ geopolitical agendas. [9] The US government has treated inward investment by SWFs as an issue of national security. Therefore, Congress has greatly strengthened the regulations on equity investment, especially of state-owned bodies. Also, regarding the definition of strategy towards the notion of national security between the US and China, the US is the most protectionist jurisdiction. Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which predecessor (Trans-Pacific Partnership Agreement, TPP) was led by the US, pertains to regulations of SWFs. Definitions for SWFs are at the start of Chapter 17 of CPTPP.[10] In addition, SWFs must be member(s) of the International Forum of Sovereign Wealth Funds or endorse the Santiago Principles, or such other principles and practices as may be agreed to by the parties of the CPTPP.[11]

The US might adopt the European Union (EU) model in the future. To regulate foreign direct investment (FDI) into the EU within the context of SWFs, the EU and its Member States rely on the treaties and EU legislation. The free trade theory – the free movement of capital within the European Common Market is the most fundamental feature of the EU approach to regulating the SWFs. However, this fundamental freedom is restricted in a limited number of cases. This is because the Treaty on the Functioning of the European Union (TFEU) awarded the EU with the competence to adopt different measures to regulate the establishment of foreign investors within the EU. There are two ways to regulate the movement of capital. According to Article 64 of the TFEU, firstly, the EU can impose measures on the movement of capital from third countries involving direct investment, by a qualified majority; secondly, direct investments can be restricted by measures that are introduced by the EU.[12] Since the TFEU explicitly covers the relationship between the Member States and the so-called third party countries, it seems that the EU laws are favourable to the foreign investors in terms of their important rights vis-à-vis their investments in the EU. However, the principle of free movement of capital is subject to two limitations. The limitations are derogations and safeguard clauses respectively. The scope of the limitations determines the extent to which the governments could restrict FDI within their territories. The narrower these limitations are, the easier it is for SWFs to enter the EU market. On the other hand, if the limitations are broader, governments can impose more restrictions to limit access to the Common Market.

In terms of the securitisation of national security, Article 65 of the TFEU is the most important provision as it describes the power retained by the Member States to restrict the concept of free movement of capital within the European Common Market in the name of protection of public order or public security. It also sets out potential obstacles to SWFs that invest in the EU. O’Donnell acknowledged that there are several Member States in the EU which had adopted various measures to restrict investments of SWFs in the defence sector.[13] In Sanz de Lera and Others, the Court of Justice of the European Union (CJEU) produced mixed results for the development of the EU law on capital movements.[14] In this case, CJEU clarified the unconditional nature of Article 65 TFEU, that the principle of free movement of capital prohibits those obstacles between the Member States, and between third countries and the Member States. Until mid-2015, Article 65 had never been applied by any of the Member States to regulate SWFs. In October 2020, an EU regulation establishing a framework for the screening of FDI into the Union has entered into force.[15] This new EU regulation aims to better scrutinise direct investments coming from third countries on the grounds of security or public order. It enhances the European Commission’s existing powers to review foreign investments under the existing merger control rules and sector-specific legislations of the EU.

Currently, some commentators might argue that there are only a few rules that can be applied to regulate SWFs within the EU. Nonetheless, in no small extent, it seems that the legal framework of the EU has provided a comprehensive regime to tackle the phenomenon that the US can take as a reference. For instance, the US can take the new free trade agreement between the EU and, Singapore and Vietnam, and the parallel EU-Vietnam Investment Protection Agreement as a reference, to incorporate SWF provision in the future free trade agreement with China.

To conclude, it is a well-established principle of international law that sovereign immunity does not extend to a state’s commercial activities in another jurisdiction. Thus, SWFs are subject to be assessed by investment host countries’ national laws. However, too excessive scrutiny of SWFs investment is likely to fuel nationalism, and will further hamper the free foreign capital flow. Hence, it has been suggested that the potential consequence of protectionism caused by strict examinations of SWFs should be avoided.[16] Nevertheless, it has been unclear whether the Trump administration would take a tougher stance on trade and investment with China. Since the trade war between China and the US has not ceased yet, the new president of the US would have to deal with the SWFs issue for a mutually beneficial future of the two countries.

*Charles Ho Wang Mak is a PhD Candidate in international law at the University of Glasgow. He studied law at the University of Sussex in England (LL.B. (Hons.)), The Chinese University of Hong Kong (LL.M. in International Economic Law), and the City University of Hong Kong (LL.M.Arb.D.R.(with Credit)).

**Dr I-Ju Chen is assistant lecturer at Birmingham City University in the UK. She holds PhD in law from the University of Birmingham and LLM from University College London. She studied law at National Chung Hsing University in Taiwan (LLB and LLM).

  1. International working group of sovereign wealth funds: Generally accepted principles and practices, “Santiago Principles” 3, 2008. https://www.ifswf.org/sites/default/files/santiagoprinciples_0_0.pdf
  2. Id. at 5.
  3. Benjamin J. Cohen, Sovereign Wealth Funds and National Security: The Great Tradeoff 85(4) International Affairs (2009) 713, 713.
  4. Sui-Lee Wee, China’s $800 Billion Sovereign Wealth Fund Seeks More U.S. Access, Nytimes.com (2020), https://www.nytimes.com/2017/07/11/business/china-investment-infrastructure.html (last visited Aug 30, 2020).
  5. Patrick DeSouza & W. Michael Reisman, Sovereign Wealth Funds and National Security, in SOVEREIGN INVESTMENT: CONCERNS AND POLICY REACTIONS 283, 290 (Karl P. Sauvant, Lisa E. Sachs, and Wouter P.F. Schmit Jongbloed ed., 2012).
  6. Qingxiu Bu, ‘China’s Sovereign Wealth Funds: Problem or Panacea?’ 11(5) The Journal of World Investment and Trade (2010) 849, 868.
  7. Id, at 870.
  8. Zhao Feng, How Should Sovereign Wealth Funds be Regulated?, 3(2) Brook. J. Corp. Fin. & Com. L. 483, 484 (2009).
  9. Cede & Co. v. Technicolor [1988] 542 A.2d 1182.
  10. See Article 17.1, CPTPP.
  11. Id.
  12. Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community [2007] OJ C306, Article 64.
  13. O’Donnell C. M., ‘How should Europe respond to sovereign investors in its defence sector?’ (Centre For Euroopean Reform- Policy Brief, September, 2010), PAGE <http://www.cer.org.uk/sites/default/files/publications/attachments/pdf/2011/pb_swf_defence_sept10-203.pdf> accessed 21 June 2020.
  14. Sideek M Seyad, European Community Law on The Free Movement of Capital and EMU (Kluwer Law International 1999) 101-102.
  15. Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, OJEU, L 79I , 21.3.2019, p. 1–14, https://eur-lex.europa.eu/eli/reg/2019/452/oj.
  16. Bu, supra note 6, 871.