RUSSIAN INVESTORS IN AFRICA:HE WHO DOES NOT RISK WILL NEVER DRINK CHAMPAGNE

(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.

Conclusion

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/

Taking Investors’ Rights Seriously: The Achmea and CETA Rulings of the European Court of Justice do Not Bar Intra-EU Investment Arbitration

Prof. Dr. Alexander Reuter *

The ECJ’s Achmea and CETA rulings [1]; as well as the entire debate conducted on the issue so far, disregard one legal factor, that is, the binding legal effect of investors’ rights under investment treaties. That factor is, however, at the heart of the matter and decisive. Under EU procedural law that factor can be raised at any time as a “fresh issue of law”. Thus, the Achmea and CETA rulings of the European Court of Justice do not bar intra-EU investment arbitration.

This proposition is not to contribute to the voluminous debate on Achmea and on the compatibility of intra-EU investment arbitration with TFEU art. 344, 267 and 18 or other EU governance principles such as the “principle of mutual trust”. In contrast, that proposition is based on investors’ rights under public international law as third parties, and the binding effect on the EU, its institutions and its member states of such rights. In addition, under the criteria developed by said ECJ rulings, intra-EU ISDS under the ECT fares better than the CETA.

The above propositions are set out in more detail by the author in the Heidelberg Journal of International Law (HJIL) (Zeitschrift für ausländisches öffentliches Recht und Völkerrecht; ZaöRV). [2]

A)   Third party rights under public international law

In Achmea the European Court of Justice (”ECJ“) found intra-EU investment arbitration under the bilateral investment treatybetween Slovakia and the Netherlands to violate the principles of mutual trust and sincere cooperation amongst EU member states, the supremacy of EU law and the protection of the ECJ’s own competence to ensure the uniform application of EU law. All of these principles concern the internal governance of the EU, its member states and its institutions, not investors’ rights. On the other hand, in the last years a great many arbitral tribunals dealt with intra-EU investment arbitrations, most of them under the Energy Charter Treaty (“ECT”), a multilateral investment treaty to which the EU has acceded. None of these tribunals found the proceedings to be incompatible with EU law. [3] The tribunals refer to the general interpretation rules of the Vienna Convention on the Law of Treaties (VCLT) and, as one tribunal has worded it, a carve-out for intra-EU conflicts would be “incoherent, anomalous and inconsistent with the object and purpose of the ECT”, the rules of international law on treaty interpretation, in particular the universal recognition of “the principles of free consent and of good faith and the pacta sunt servanda rule”. [4]

This is in line with the intent of the EU institutions involved with the accession by the EU to the ECT. The internal documents preparing the accession demonstrate that the EU did not intend the ECT to distinguish between intra-EU and extra-EU disputes. In line therewith, the ECT, as adopted not only by all EU member states, but by both the European Commission and the European Council, does not contain any indication that differing rules should apply “intra-EU” on the one hand and in respect of non-EU parties on the other hand. In contrast, by a declaration made when acceding to the ECT (see Annex ID to the ECT) [5] , the European Communities did not only set forth that the “European Communities and their Member States” are “internationally responsible” for the fulfillment of the ECT, it also expressly mentions the “right of the investor to initiate proceedings against both the Communities and their Member States”. Additionally, the declaration expressly deals with the role of the ECJ and documents that the EU acceded to the ECT in full cognizance of the fact that the ECJ can be involved in such proceedings only (1) “under certain conditions” and in particular only (2) “in accordance with art. 177 of the Treaty” [now TFEU art. 267]. Hence, the declaration expresses the acceptance by the EU of the curtailment to the competences of the ECJ resulting from investment arbitration under the ECT.

B)   Taking investors’ rights seriously: Their binding effect within the EU

The reason for this discrepancy between the findings of the ECJ and those of the arbitral tribunals can already gleaned from the above: While the tribunals deal with investors’ rights under the relevant investment treaties, the ECJ is concerned with intra-EU governance issues. [6] However, governance issues do not do away with the fact that investment treaties form part of public international law and bestow private investors with the rights (1) that the host state comply with the treaty’s protection standards and (2) to take the host state to arbitration. Such private enforcement is even one of the essential features of investment treaties. [7] Which consequences does this have within the EU?

Even the ECJ concedes that public international law treaties must be interpreted in accordance with the VCLT, notably “in good faith in accordance with the ordinary meaning to be given to its terms in their context and in the light of its object and purpose”. Thus, for purposes of public international law, the ECJ must be taken to recognize (1) that investment treaty rights vest with the investors and (2) the fact that all arbitral tribunals involved have affirmed the ECT, under public international law, to cover intra-EU investments. There is no indication that such a long, uniform and unequivocal line of arbitral holdings does not constitute an interpretation of the ECT “in good faith in accordance with the ordinary meaning to be given to its terms in their context and in the light of its object and purpose”.

In turn, under TFEU art. 216(2) “Agreements concluded by the Union are binding upon the institutions of the Union and on its Member States”. Admittedly, the ECJ makes an internal exception to TFEU art. 216 (2), that is, an exception as regards the parties to the EU Treaties, the EU and its institutions: Vis-a-vis these parties the ECJ confines the binding effect of treaties under art. 216 to supremacy over secondary EU law, and carves out primary EU law. [8] However, this internal limit to the effect of public international law treaties does not apply to third parties. Vis-à-vis third parties, under public international law the EU is bound by the treaties it has concluded. [9] The ECJ has held „that the Community cannot rely on its own law as justification for not fulfilling [the international treaty at bar].“ [10] As private investors are third parties, this holds true for them as well, and all the more so as their means to analyse the internal governance rules of the EU (or a host state) for potential infringements which may impact the validity of the treaty or of obligations contained therein, are substantially lower than the means of the other state parties which negotiated, concluded, and agreed on the ratification process for, the relevant treaty. In short: Pacta sunt servanda, in particular where investors have made investments which they cannot undo. [11]

In this connection it is irrelevant that intra-EU investment arbitration is typically directed against the relevant host state, not against the EU. As a party to the ECT, the EU is bound not to obstruct the due implementation of the rights and obligations of investors and the relevant host states. In contrast, the obstruction by the EU of the due implementation of the ECT would constitute a treaty violation in itself. [12]

C)   Consequences for Intra-EU bilateral investment treaties

The above considerations do not directly apply to bilateral investment treaties (“BITs”) between EU member states, to which the EU has not acceded. However, rights vesting under a BIT are not without protection under EU law either: First, where a host state has acceded to the EU after it has entered into a BIT, TFEU art. 351 grandfathers rights of investors as third parties. Second, there may have been acts or omissions of the EU in connection with the relevant treaty. Third, while, in general, determining EU law with retroactive effect, under its case-law the ECJ may be “moved” to carve-out “existing relationships” from such effect. [13]

D)   No precedent character of Achmea and CETA

Invoking investors’ rights is not precluded by a “precedent” character of Achmea or CETA: Preliminary rulings under TFEU art. 267 only bind the national court, and thus the parties, to the main proceedings in question [14] . Nevertheless, referral procedures under TFEU art. 267 have the purpose to have EU law interpreted for the EU as a whole and thus have a factual precedent effect. [15] However, the ECJ has confirmed the right to make a (further) reference on a “fresh question of law” or “new considerations which might lead the ECJ to give a different answer to a question submitted earlier”. [16] As a result, Achmea and CETA have no binding or precedent effect beyond the considerations they have dealt with.

These considerations do not include investors’ rights: Achmea, as already mentioned, is confined to EU governance issues. CETA, in contrast, did not fail to consider the position of investors. However, these were ex ante considerations, not the protection of investors who have already made investments in reliance on a treaty. It did thus not deal with a treaty which had already been concluded, had come into force, had bestowed rights on investors, and in reliance on which investors had made investments. [17]

In contrast, the ECT is a concluded treaty which has been in force for many years and under which investors have already made a great many intra-EU investments. Thus, when making their investments, investors were entitled to have the expectation that the ECT would be respected by its parties, including the EU.

E)   Applying the criteria of the CETA Opinion

In the alternative: If one (contrary to the above) were to disregard investors’ rights under public international law, the question arises how the ECT would fare under the criteria selected by Achmea and CETA to assess the compatibility of intra-EU investment arbitration with EU law. A detailed analysis shows that the ECT does not run aful of, but meets, those criteria. [18]

F)   A matter of justice

The conclusion is: Investors are entitled to rely on their investment treaty rights. Under public international law, the EU position regarding intra-EU ISDS is, as the Vattenfall tribunal has expressed it, “unacceptable”, “incoherent”, “anomalous and inconsistent”. [19] This is corroborated by the described conduct of the EU when negotiating and acceding to the ECT. Hence, that investors should not be bereaved of their vested rights is a matter of material justice. This holds all the more true where the EU was instrumental in soliciting the investments and changed its position only at a point in time when such investments had been made. [20]


* Rechtsanwalt and Attorney-at-Law (New York)
Partner, GÖRG Partnerschat von Rechtsanwälten
Cologne

[1] ECJ, 6 March 2018, Case C‑284/16, Achmea; ECJ, ECJ, Opinion 1/17 of 30 April 2019, CETA.

[2] Issue 80 (2/2020), pp. 379 – 427.

[3] Cf. Foresight v. Spain, SCC Arbitration V 2015/150, Award, 14 November 2018, para. 221, with a list of awards affirming intra-EU arbitration; Reuter, note 2, Part B IV.

[4] Vattenfall et al. v. Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue, 17 August 2018, paras. 154/155; Reuter, note 2, Part B

[5] https://energycharter.org/fileadmin/DocumentsMedia/Legal/Transparency_Annex_ID.pdf

[6] The reasons for that stance may be institutional rather than legal: Organizations innately tend to attach high priority to their own competences and inter-institutional governance.

[7] MacLachlan/Shore/Weiniger, International Investment Arbitration, 2007, paras. 1.06, 2.20, 7.01; Reuter, note 2, Part B.

[8] ECJ, 10 January 2006, C-344/04, IATA and ELFAA, para. 35.

[9] For more details Reuter, note 2, Part D.

[10] ECJ, 30 May 2006, Joined Cases C-317/04 and C-318/04, European Parliament v Council, para. 73.

[11] For more details Reuter, note 2, Part D.

[12] As for the liability of the EU on the one hand and member states on the other hand in connection with mixed investment agreements in general Armin Steinbach, EU Liability and International Economic Law, Hart Publishing 2017, pp. 133 et seq., pp. 141 et seq.

[13] For more details Reuter, note 2, Part D; as regards the carve-out ECJ, 13 May 1981, Case 66/80, International Chemical Corporation, paras. 13/14; see also ECJ, 8 April 1976, Case 43/75, Defrenne v Sabena, paras. 71/72.

[14] ECJ, 29 June 1969, Case 29/68, Milch-, Fett- und Eierkontor GmbH v Hauptzollamt Saarbrücken, para. 3.Wegener in Calliess/Ruffert, EUV/AEUV, 5th ed. 2016, art. 267, para. 49.

[15]     ECJ, 24 May 1977, Case 107/76, Hoffmann-LaRoche/Centrafarm, para. 5; Reuter, note 2, C III.

[16] ECJ, 5 March 1986, Case 69/85, Wünsche Handelsgesellschaft GmbH & Co. v. Germany, para. 15; For more details Reuter, note 2, Part B III.

[17] For more details Reuter, note 2, Part B III 3.

[18] For more details Reuter, note 2, Part D.

[19] See note 4.

[20] Reuter, note 2, Part E.

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

Vishesh Sharma* and Vishakha Choudhary**

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

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

Arbitrating Counterclaims: Ambiguous Judicial Response to Ambiguous IIAs

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

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

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

How does the next generation of IIAs fare?

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

Indian Model BIT, 2016

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

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

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

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

Netherlands Model BIT, 2018

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

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

The US-Mexico-Canada Agreement, 2018

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

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

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

Conclusion

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Vodafone Tax Dispute: Abuse of Process in International Investment Arbitration?

by Malcolm Katrak*

Recently, the Delhi High Court in the case of Union of India v. Vodafone Group, passed an ex-parte order restraining the Vodafone Group from pursuing an investment arbitration claim against India under the India-United Kingdom Bilateral Investment Treaty (India- UK BIT). The Court held that multiple claims cannot be permitted by corporate entities in a single vertical chain against the same measure of the host state under various bilateral investment treaties and protection agreements. Thereafter, the court proceeded to pass an anti-arbitration injunction against Vodafone from initiating arbitration proceedings under the India-UK BIT.

Before analyzing the issues in this case, it is necessary to consider the facts that led to the dispute. Vodafone (Netherlands) bought a Cayman Island entity of Hutchison group, in order to acquire controlling interest in the Indian entity Hutchison-Essar Ltd. The Indian Income tax statute, before amendment, did not tax transactions outside India which did not involve transfer of shares of any Indian entity. Thereafter, the Indian government amended the tax statute, which interpreted according to the government, included transactions which changed the control of an Indian entity, as was the Vodafone transaction. The Supreme Court of India rejected the Indian government’s contention that the text of the statute, as it stood then, could be interpreted to include such a transaction under the tax ambit.

In 2012, the Vodafone group initiated proceedings against India under the India-Netherlands BIT before the Permanent Court of Arbitration (PCA). Vodafone was challenging the imposition of a million-dollar tax bill arising out of the retrospective amendment of the Indian Income Tax Act in 2012. Thereafter, Vodafone on 24th January, 2017 issued another BIT arbitration notice for the same cause of action. However, the second BIT arbitration notice was initiated under the India-UK BIT. Since Vodafone had already initiated a BIT against India, on the issue of retrospective taxation, the Indian Government proceeded to the Delhi High Court, seeking an order restraining Vodafone from initiating parallel BIT proceedings on the same issue before another BIT Tribunal citing ‘abuse of process’.

The case has been much publicized and raises several intriguing legal propositions; the first being the domestic court’s jurisdiction to try the dispute, the second being basis to pass an anti-arbitration injunction and the third being whether there is an abuse of process by Vodafone by initiating arbitration proceedings under different BITs.

As far as the jurisdiction of the domestic court is concerned, the Delhi High Court held, “India constitutes a natural forum for the litigation of the defendants’ claim (the India-UK BIT claim) against the plaintiff.” The counsel for the government laid a two-pronged approach for the purpose of facilitating a jurisdictional argument; first being that disputes encompassing tax demands raised by host State are beyond the scope of arbitration provided under the BIT as taxation is a sovereign function and the second being that under the constitutional scheme of India, laws passed by the Parliament cannot be adjudicated by an arbitral tribunal. This, according to me, is a fallacious interpretation of the India-UK BIT. The BIT allows taxation to be considered under its ambit except for the provisions pertaining to National Treatment and Most-favoured Nation. A treaty must not be construed liberally or restrictively but literally. The India-UK BIT being broadly worded allows taxation to come under the ambit of the BIT.

The second issue being the anti-arbitration injunction, it is necessary to analyze when exactly is a domestic court allowed to pass an anti-arbitration injunction. In the case of Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armaturs SAS & Ors (behind paywall), the Calcutta High Court has held that an anti-arbitral injunction could be issued under the following circumstances – first, there is no arbitral agreement between the parties; second, the arbitration agreement is null and void, inoperative or incapable of being performed; third, continuation of foreign arbitration proceeding might be oppressive, vexatious or unconscionable.

The Vodafone case initiated under the India-UK BIT in itself constitutes a valid arbitration agreement and thus, the basis to pass an anti-arbitration injunction falls. However, it must be remembered that in the case of SGS v. Pakistan, the Supreme Court of Pakistan restrained the foreign investor from carrying out arbitration through the BIT albeit the ICSID Tribunal still took cognizance of the matter and exercised its jurisdiction.

The claims which have risen in the India-UK BIT and Indian-Netherlands BIT are based on the same cause of action and the reliefs sought are identical but from two different arbitral tribunals against the same host state. This is a perfect example of abuse of process. Emmanuel Gaillard states, ‘abuse of process in BIT arbitration does not violate any hard and fast legal rule but nonetheless causes significant prejudice to the party against whom it is aimed and can undermine the fair and orderly resolution of disputes by International arbitration.’ To facilitate the argument of abuse of process, the counsel for the State relied on the case of Orascom TMT Investments v. Algeria, wherein the ICSID Tribunal stated:

In particular, an investor who controls several entities in a vertical chain of companies may commit an abuse if it seeks to impugn the same host state measures and claims for the same harm at various levels of the chain in reliance on several investment treaties concluded by the host state. It goes without saying that structuring an investment through several layers of corporate entities in different states is not illegitimate […] Several corporate entities in the chain may be in a position to bring an arbitration against the host state in relation to the same investment. This possibility, however, does not mean that the host state has accepted to be sued multiple times by various entities under the same control that are part of the vertical chain in relation to the same investment, the same measures and the same harm.

As far as the abuse of process goes, it would be correct to say that Vodafone utilized the process which is formulated to enhance economic benefits to the host state and protect investments of the companies, in a negative manner. On the other hand, it can be argued that the law pertaining to abuse of process in international investment arbitration is not clear. For example, Yosef Maimam, a German-born Israeli businessman sought arbitration proceedings against Egypt under the US-Egypt BIT by one of his companies and another arbitration under the Egypt-Poland BIT through his own name. Thus, abuse of process in investment arbitration is not a clear picture.

It is fair to say that the Delhi High Court has exceeded its jurisdiction by restraining Vodafone from proceeding with its arbitration proceedings under the India-UK BIT. On the other hand, it cannot be denied that there was no abuse of process. As far as the consequence of an anti-arbitration injunction goes, the same would be impossible to analyze or presume. However, the Delhi High Court has failed to provide a comprehensive, logical and reasoned backing to its judgment, which only shows how far the Courts have been reluctant to interpret BITs.


Malcolm Katrak is currently a Law Clerk to Justice (Retd.) S. N. Variava, Former Judge, Supreme Court of India. In the past, he has worked under Mr. D. J. Khambata, Former Vice-President, London Court of International Arbitration and Justice S. J. Kathawalla, Jugde, Bombay High Court. He may be contacted at malcolmkatrak@yahoo.in.

Arbitration in Iran: With Focus on International Commercial Arbitration (Part III)

Nasim Gheidi & Parham ZahediGheidi & Associates

(See Part 1 and Part 2 of this post here and here)

Iran’s Bilateral Investment Treaties (BITs)

Iran has signed more than 100 BITs (More than 50 of which are in force) with capital-exporting and neighboring countries for the reciprocal promotion and protection of foreign investment in Iran. The purpose behind these BITs are to guarantee foreign investments’ all necessary permits for the realization of an investment, monetary transfer, full legal protection, compensation for expropriation, observation of commitments (umbrella clause), access to international arbitration and a fair and equitable treatment standard (FET).

The obligations granted by the FET are predictability, transparency, certainty and stability of the legal system of the host state and most important of all principle of due process. An investor must have access to the courts, fair hearings and the right of appeal. Furthermore, it shall be noted that only investors who have been approved and registered by the Organization for Investment, Economic and Technical Assistance of Iran (OIETAI) can enjoy abovementioned substantive investment protection standards. Therefore, foreign investors must obtain an investment license to benefit from those protections.

With regards to dispute settlement, methods of dispute resolution in most of the Iran’s BITs are similar to each other. Iran’s model BIT contains 15 articles and a preamble. Article 12 and 13 are dealing with methods of settlement of potential disputes between the contracting parties or investor of one of the contracting parties. Under Iran’s model BIT, these methods can be categorized into two groups. One is when the contracting parties disagree on the interpretation or application of the BIT and the other is in cases in which a dispute between a contracting party and an investor of the other contracting party arises.

According to the BITs, if any dispute arises between a contracting party and an investor of the other contracting party with respect to an investment, in this case, each party has to wait six months “from the date of notification of the claim by one party to the other.” This intervening period allows parties to negotiate their legal claims and possibly reach an amicable settlement. If a dispute refers to the tribunal prior to the six months, then the dispute is rejected based on admissibility ground and not on jurisdiction. In case they fail to resolve their dispute amicably through negotiation and consultation, they shall either refer their dispute to the competent national court of the host country or arbitration.

The award shall be final and binding on both parties to the dispute. In any circumstances no party can use both methods simultaneously. For instance, if the dispute is referred to national courts, then in that case, only by the consent of both parties, the dispute can be referred to arbitration. In return, national courts shall not have jurisdiction over any dispute referred to arbitration. However, these provisions do not bar the winning party to seek for the enforcement of the arbitral award before national courts.

Under BITs the investor at his choice, may choose to submit its dispute to an ad hoc Arbitral Tribunal in compliance with UNCITRAL rules or refer the dispute to an arbitration institution. Interestingly, in some of the concluded BIT’s, with Austria, Greece, Sweden, Cyprus, France, Venezuela, Malaysia and Spain parties have different choice of institutions to refer their arbitration to. For example, in some of them Parties can either refer their disputes to International Chambers of Commerce (ICC) or International Center for Settlement of Investment Dispute (ICSID) and in some to Stockholm Chambers of Commerce (SCC). However, in some other BITs parties’ choices are limited to only an ad hoc Arbitral Tribunal other than national courts, like China, South Africa, and Switzerland.

With respect to disputes between contracting parties concerning the interpretation or application of the BITs, they shall, in the first place, try to settle their dispute amicably. The period of negotiations defer between two to six months. If no settlement can be reached then the contracting parties are allowed to initiate arbitration proceeding.  The negotiation period is mandatory and in case of non-compliance, the dispute might be rejected by tribunal. The arbitral tribunal shall consist of three arbitrators. Each party has the right to choose one and the chosen arbitrators shall choose the third who will be the chairman.

In case one of the contracting parties fail to choose an arbitrator or the chosen arbitrators fail to choose the third, then either contracting party may invite the president of the International Court of Justice to make any necessary appointment. According to the provisions of BITs, the arbitral tribunal shall reach its decision by a majority of votes. The decision of the tribunal shall be final and binding on both contracting parties.

As previously discussed in the last article[1], requirements of Article 139 of Iranian constitutional Law is a major obstacle to recourse to arbitration in Iran.  Due to this requirement in some Iranian BITs, in the arbitration clause there is a phrase, which might be inserted due to this Constitution obstacle. Paragraph 2 of Article 12 of Iranian Model BIT states:

“…either of them may refer the dispute to the competent courts of the host Contracting Party or with due regard to their own laws and regulations to an arbitral tribunal of three members referred to paragraph 5 below.

As it can be seen a systematic reservation has been directly or indirectly made to Iran BITs regarding referring the dispute to arbitration. The Iranian Government may invoke the constitutional prohibition as an objection to the jurisdiction of the arbitration tribunal in the case of investment disputes.

In a dispute between Iran Ministry of Health and a British Company before Swiss Court of Appeal, Cementation International Ltd v. Republique Islamique d’Iran, the court held that parties could not invoke their constitutional provision in order to set aside the arbitration clause. This is because parties to the contract have implicitly waived their right to invoke all internal conflicting provisions by referring their dispute to arbitration. Moreover, it can be argued that whenever a State with knowledge and intent, consents to arbitration and later tries to nullify it with invocation of its internal law and raise the jurisdictional objection, its objection shall be denied, because it is in contrary with international public order.

However, one shall bear in mind that enforcement of such award cannot be guaranteed in national courts of Iran due to their tendency to comply with public order of the nation.


[1] Gheidi, N. and Zahedi, P. 2017. Arbitration in Iran: With Focus on International Commercial Arbitration (Part II). EFILA Blog

 

What’s the value of investment treaties?

by Dr. Dominic Beckers-Schwarz, Lawyer, Paris

 

On 7 March 2017, one day after the OECD Global Forum on International Investment, over one hundred stakeholders from businesses, trade unions, academics and OECD member states gathered for the one-day “3rd OECD Annual Conference on Investment Treaties”. The conference addressed issues concerning “evaluating and enhancing outcomes of investment treaties”.

How to measure the societal costs and benefits of investment treaties?

Following the previous day’s call for a new globalization narrative, the OECD opened the first conference panel by addressing the need to measure the societal costs and benefits of investment treaties.

Academics first explained the challenges of measuring the effects of investment treaties. While it may be easy to measure the economic exchange between two states, such a quantification is limited to bilateral interactions and does not necessarily address the global cross-fertilization of today’s investment treaties. The panel expressed doubt regarding the possibility of measuring in figures the societal costs and benefits of, for example, investor-state dispute settlements (ISDS) and the political benefits of depoliticizing international investment disputes.

The panel turned to the, sometimes unwritten, fundamental goal of international investment treaties—depoliticizing investment disputes and enhancing international investment flows through clear, stable and enforceable investor rights—a sort of rule of law codification.

But international investments occur frequently, even where no international investment treaties exist. International investment agreements often are not part of national investment promotion programs. However, smaller states especially see the need to conclude investment treaties to enhance cross-border investment.

When an NGO representative asked whether ISDS could cause populist resistance, due to misuse of the system, panelists denied the possibility of potential abuse of ISDS through cherry-picking. Costs of investment arbitration procedures and anti-treaty-shopping clauses in international investment treaties would prevent misuse of the system.

In sum, academics and government officials from OECD and non-OECD countries agreed that the connection between international investment treaties and economic dynamics needs continuing assessment. Further work includes defining more standardized approaches to measuring the effects of investment treaties. The OECD could be an optimal organization to conduct a cost-benefit analysis.

In my view, that governments are seeking out careful analysis of the costs and benefits of the investment treaty approach together is a positive sign to continue and enhance global cooperation in responsible investment policy.

Joint government interpretation of investment treaties—achievements and obstacles

The second panel addressed the topic of governments jointly interpreting international investment treaties in situations where no treaty clause permits the governments to do so (unlike NAFTA).

In general, the panel viewed earlier interpretations as better and more authoritative, since the later an interpretation, the more it may look like a hidden amendment.

Some state representatives explained that joint interpretations are a good way to avoid costly, lasting and complicated renegotiations. Participants mentioned fair and equitable treatment (FET) as a good joint interpretation example. Joint interpretations within the boundaries of the Vienna Convention of the Law of the Treaties might, for example, clarify or adjust an international investment treaty’s broad standards. Evolving views on what international investment treaties should address and how they should function lead to the need for such interpretations.

Another approach to enhancing the certainty and predictability of international investment treaties is a joint interpretation of certain investment treaty standards at the time of the treaty’s conclusion. For example, several provisions of CETA are subject to a joint interpretative instrument in CETA’s annex, which the parties agreed on at the time of signature. Such an expression of the parties’ intent might ensure greater clarity. However, conference participants cautioned that such joint interpretations must be clearly worded, because bad drafting could inspire further confusion rather than clarifying treaty standards.

Discussion participants further agreed that the non-disputing party of a treaty should always be informed about interpretations made by the disputing parties. Some provisions, namely Art. 5 of the UNCITRAL Rules on Transparency in Treaty-based Investor State Arbitration, even enable the non-disputing party to intervene in interpretations, such as by attending the hearings.

Panel members also expressed their interest in working on a plurilateral basis when interpreting standard investment treaty clauses. They saw this as the only way to maintain a common understanding of what an investment treaty covers.

Two participant questions especially showed the need for further work on the topic: (1) How far can a joint interpretation go, and when does it turn into an amendment? (2) As of when is a joint interpretation valid: the moment of the conclusion of the treaty or the moment of the formation of the joint interpretation?

In my view, joint interpretation can be a useful method of clarifying the contracting parties’ intent. However, retrospective joint interpretations might lead to back-door amendments, exceeding the reasonable bounds of the treaty. Further work in this area might seek to establish a clearer understanding of the barrier between legitimate interpretation and unwanted amendment and the impact of such a delineation in the field of international investment law.

Enhancing investment treaty outcomes and addressing globalization concerns

Though shorter in time, the closing panel drew on the Global Forum’s emphasis on “better” globalization from the day before and linked it to the discussions of this conference. Among international organizations—represented in this panel by UNCTAD and OECD—government representatives and NGOs, there is broad consensus on the necessity of further international cooperation and the global exchange of goods and investments. But ideas of whether the system is sufficiently inclusive, or how to make it more inclusive, still differ. The question, how to access the exact societal costs and benefits of these treaties showed the need for further work.

The panel showed, that OECD and UNCTAD both do substantive work on the topic and continue to do so by especially by reviews, reports, analysis and statistics. Governments endorse that work, since it is an important basis for their politics. NGOs use it to point out what may be improved in their view. This OECD conference gave governments as well as NGOs an opportunity to exchange their views on what the problems are and how to tackle them.

In my view, the OECD’s work—especially on topics like inclusive growth and responsible investment—can help promoting a form of broadly beneficial globalization in the investment context and in general. Let’s not ask whether globalization is crumbling away; let’s work on a globalization which fits everyone’s needs.

Iran’s Accession to ICSID: What to Expect?

by Shiva Ghahremani (Konrad & Partners), Amirhossein Tanhaei (CMS)

The signing of the Joint Comprehensive Plan of Action (JCPOA) in July 2015 and subsequently the lifting of the sanctions imposed on Iran, reintroduced the Iranian economy to the international trade and investment, leading Iran to return to the commercial mainstream. Just a few days ago, Tehran signed a $16.6 billion deal for 80 Boeing passenger jets and according to Iranian media, agreements have been concluded for the purchase of dozens more Airbus planes, forming the biggest package of commercial contracts with western companies since Iran’s Islamic revolution in 1979. The lifting of the banking sanctions also means that Iran – despite technical difficulties – is reconnected to the world financial network.

With a population of almost 80 million, most of whom are young and highly educated people, Iran is an attractive hub for investors. Iran has the 26th largest economy in the world with a GDP of $ 425, 3 billion in 2016, and is amongst the largest economies in the Middle East and North Africa region. Besides, Iran ranks second in the world in natural gas reserves and fourth in proven crude oil reserves.  The Iranian sixth ‘Five-Year Development Plan’ for the 2016-2021 period comprises of development plans to envisage an annual economic growth rate of 8%.

In such circumstances, direct foreign investments make essential accompaniments to Iran’s economic development efforts, by contributing toward Iran’s economic growth and development over the long term. Foreign investments can potentially create jobs, build up competitiveness and productivity and transfer knowledge and technology. However, a key issue is to build necessary conditions to facilitate the investment flows. In October 2014, Iran ranked 130th out of 189 countries in the World Bank’s Doing Business Report, which further illustrates that Iran should make efforts to achieve a more transparent, secure and foreseeable investment environment to attract more foreign direct investments. This will be feasible by, amongst other things, offering a reliable, efficient and internationally accepted investment dispute settlement mechanism.

In this respect, the International Centre for Settlement of Investment Disputes (ICSID) provides a platform outside the domestic legal systems, which offers the foreign investors the guarantee that they can take the disputes to a facility which is not part of the legal system of the country in which they are suing. Commentators and investment scholars cite many benefits for the accession of states to the ICSID Convention, including that ICSID provides ‘additional protection’ to the investors abroad by allowing them to provide for recourse to arbitration using ICSID arbitral rules in their contracts with foreign states. Further, ICSID membership would contribute to reinforcing countries’ images as being investment friendly. According to the report published by the United Nations Conference on Trade and Development (UNCTAD), the majority of international investment disputes between UNCTAD members are settled through ICSID. In this regard, as an UNCTAD member, Iran can provide Iranian investors with the opportunity of settling their disputes with foreign governments without the need of direct involvement of the Iranian government by accession to the ICSID.

Iran has developed its domestic laws during the recent years to pave the way for the facilitation of foreign investments. For instance, the enactment of the Law Concerning International Commercial Arbitration was one of the important initiations taken by Iran as a step towards making it a more arbitration-friendly country. In addition, Iran sought to take a noticeable step towards joining the international investment world by enacting Iran’s Foreign Investment Promotion and Protection Act (FIPPA) in 2002. This Act introduces an alternative method for dispute settlement for the Parties other than the exclusive referral to domestic courts, if provided by the Bilateral Investment Agreement. The establishment of the Tehran Regional Arbitration Centre, as well as the Iranian accession to the New York Convention, further highlight Iran’s readiness to adopt international developments in alternative dispute resolution methods. Iran has also frequently had recourse to arbitration over the past decades. For instance, the Iran-United States Claims Tribunal which was established in 1981 to resolve certain claims has finalized over 3,900 cases to date.

However, Iran is not a member state to the ICSID Convention. Despite the long standing discussions in respect to Iran’s becoming an ICSID member, one should bear in mind that in practice there are features in Iran’s jurisdiction which put limitations on Iran from being subject to ICSID arbitrations. Iran’s Constitution places a strict condition on foreign investments in Iran. In particular, Article 81 of the Constitutional Law of the Islamic Republic of Iran states that it is “absolutely forbidden” to give foreigners the right to establish companies in commercial, industrial, and other fields and in the service sector.

However, having passed the Law of Permitting Registration of Branches and Representatives Offices of Foreign Companies in 1997, Iran sought to facilitate the flow of foreign investments and business activities, by recognizing that foreign companies may – under certain circumstances – set up branches and representative offices in Iran to carry out the businesses authorized by the government of Islamic Republic of Iran in due compliance with the Laws of Iran. In addition, Article 139 of said Constitutional Law has conditioned the subjective arbitrability of public and State properties to the approval of the Council of Ministers, and a two-leveled approval system “in cases where the party to the dispute is a foreigner and in important internal cases, it must also be approved by the Assembly”. Therefore, the Iranian accession to the ICSID will have technical complications from the perspective of its Constitution, as it limits the State power to access the ICSID’s arbitration process.

Joining the ICSID will enhance international perceptions of Iran as a welcoming country to invest. Iranian companies and individuals, on the other hand, will also enjoy the protection of their investments abroad, if Iran joins the Convention. Iran has entered into almost 70 BITs with other countries, many of which contain clauses to submit the disputes to the ICSID, ‘if or as soon as both contracting parties have acceded to it’. The inclusion of such clauses in the BITs entered into by Iran demonstrates that the possibility of the Iranian accession to ICSID Convention in the future has been considered by the Iranian government.