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

by Avani Agarwal

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

 

Intra-EU BITs in a Fragile Union: On Non-Papers and Other (Legal) Demons

 

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

The Geo-Economic ‘Great Game’ and Its Symbolic Requirements

The Commission’s endless troubles with intra-EU investment treaties appears as a benchmark for its ability to develop a coherent trade and investment policy. Every single state and non-state stakeholder across the globalized agora is closely watching the manner in which the EU power is shifting from its soft forms to more ‘classical’ forms of constructing internal and external authority. In this sense, the handling of its own member states and their BITs is perceived as a litmus test for the Commission’s capacity to order itself internally and, thus, its future ability to project a coherent stance outward.

Therefore, reaching – or imposing – an internal consensus on the intra-EU BITs is a pre-condition for the EU becoming a truly relevant international player, detaching its future FTAs from those concluded before by member states. In this sense, the Commission is itself constrained to break loose from the MFN network laid down in prior bilateral treaties and to cut off national cabinets from their international capacity in investment law. Autonomy of the EU in foreign (economic) affairs is the keyword for Brussels. Autonomy from its members, autonomy from its often turbulent civil society and autonomy from other international organizations.

In this sense, as the Commission’s goal is to prevent ‘dangerous’ overlaps of projected (and symbolic) authority inside and outside the Union, it feels that the internal network of BITs must be first dismantled. And the extra-EU BITs are next on the list. More precisely, EU law cannot appear to be overrun by other norms within the realm subjected to the control of the Commission. Allowing such a phenomenon would immediately be perceived as a weak spot in the EU’s impenetrable normative armour by all the other actors from the global arena.

In such a geo-economic ‘great game’, no player can be perceived as lacking the force – or determination – to present a unitary and coherent stance. Everything is about leverage in negotiations. And no hesitating actors are allowed at the table.

Act I, A Euro-Tragedy Commencing: Carrying a Big (Legal) Stick

Somehow strangely for its previous benign image, the Commission appears to have lately got fond to Roosevelt’s principle of “speaking softly and carrying a big stick”. The infringement stick carried around and shown vigorously to (some) member states is a symbolic move to show that it really means to end the BIT regime.

After speaking softly – in the parlance of EU law supremacy and unitary treatment for European economic actors – the Commission decided to commence proceedings against those five member states who have been involved in finalized investment arbitrations (either on the claimant side or as respondents): Austria, the Netherlands, Romania, Slovakia and Sweden.

Not immediately compliant with the EU’s newly-discovered policy of terminating such BITs, these five member states found themselves at the whim of the Commission which not only argued for a coherent and non-discriminatory regime for all European investors, but also demanded that they dismantle the investment regime in a manner that might be at odds with good practices in international law.

More precisely, the request to strip away the effects of the so-called ‘sunset clauses’ is largely seen by many specialists in the field as a dishonest artifice on behalf of the signatory sovereigns (or those who push states to such a conduct. In addition, a paradox of the Commission’s stance is to ask investors from one state or another to entirely exclude (independent) arbitration as a justice mechanism and rather imbue this task upon national courts which the Commission itself criticizes on numerous occasions. While international arbitrators are relieved of this function, regular courts (sometimes under MCV scrutiny) from member states – often partisan with their national authorities – are considered as the only ones to properly protect investors’ rights.

When analyzing the distribution of states which have been subjected to this first wave of infringement proceedings, it can be seen that – with the relative exception of the Netherlands – none of them is a traditional or big EU player. For instance, despite the settlement in the Vattenfall v. Germany I case, Germany was not part of this lot. The other EU actors (such as the Franco-German entente or the British outlier) were just ‘warned’ and shown indirectly – but with deference – what could happen in case of non-compliance.

These initial five states rather represented the symbolic sacrifice, meant to give an example (a bad one) to the whole Union, in contrast with the two ‘good’ states (Italy and Ireland) that renounced the ‘treacherous ways’ of intra-EU BITs. Commissioner Jonathan Hill expressly made this point when arguing that “Intra-EU bilateral investment treaties are outdated and as Italy and Ireland have shown by already terminating their intra-EU BITs, no longer necessary in a single market of 28 Member States”.

And thus, the scene was set for the evolution of an unplanned dramatic dynamics.

Act II, A Euro-Comedy Unfolding: Impossible Solutions to Unknown Dilemmas

While it would have been predictable for the five infringing states to take either take a common position against the Commission or to tacitly comply, nobody foresaw that only two of them (Austria and the Netherlands) would attract other non-infringing states (France, Germany and Finland) and together make a counter-offer to the European executive. Their peculiar ‘Non-Paper’ was submitted to the Council – and not directly to the Commission – in a move that emphasizes a more profound power-game within the Union. Concentrating five states from the more prosperous and stable core of the EU (including the Franco-German bloc), with more leverage in negotiations and with a potential to coagulate a larger participation from the remaining member states, this Non-Paper essentially polarized the discussion on a different path, i.e. what comes after the termination of BITs.

While in principle agreeing to the immediate phasing out of investment treaties (obliterating the ‘sunset clauses’ and their effects), the Non-Paper establishes one single condition: general, coordinated and multilateral termination. This might prove feasible on the short term. However, it seems rather strange – given the history of the EU and its numerous normative impasses – to request a similar step in re-building investor protection.

In other words, the Non-Paper does not wish for a multilateral reform of the system – in conformity with EU law desiderates – but rather its total obliteration and then constructing it again from scratch. Although, not very differently. From a substantial perspective, the drafters of the Non-Paper advocate – more or less – the same standards used in classical BIT, but ‘codified’ for all member states and in a EU framework presenting an undisputable degree of deference to European law.

In addition, three procedural options are presented: one momentarily impossible, one politically improbable and one virtually unchanged. Either using the European Court of Justice as an ISDS (or, rather, ICS) EU-inspired proxy, or creating an autonomous body for exactly this type of disputes, or using the PCA under a limited and custom-made procedural framework. Apparently, this last alternative is the preferred one on the short-term, allowing a truly arbitral institution (one of the most prestigious, indeed) to administrate the future investment cases.

Therefore, all changes but everything stays the same.

Awaiting for the Grand Finale: Switching Centers, Merging Peripheries

In reality, this latest Non-Paper (rather a ‘Non’ than a ‘Paper’) might be reasonably perceived as a smoke and mirrors maneuver to coagulate a different type of EU-wide policy. Both the Commission, the ultra-compliant member states and the recalcitrant ones risk to be left on the margins, as a new ‘core’ tends to form. The stake of this strategic gamble is to determine who shall be the ‘center’ and who shall lie on the ‘periphery’.

For a coherent investment regime to emerge inside and outside the Union, perhaps, a less radical stance is needed from all sides involved. The internal power struggles of the EU might uncontrollably spill over its borders and affect its negotiations with other global players, if a majoritarian consensus is not soon reached. The Commission’s push on member states to dismantle the present BIT network might have worked with Italy or Ireland (and seems to be going well with Denmark and the Czech Republic), but it has attracted none of the big power brokers.

On the contrary, the Commission’s attitude managed to bring together the Franco-German entente with the Dutch key player, allowing for a nascent alternative consensus to be formed outside its reach. In parallel, the ground is also fertile for a grouping of dissenting states, including the UK (if it decides to remain in the EU) and Sweden (whose investors are involved in consistent ISDS proceedings) which might form another ‘center’, opposing the Commission’s mission to dismantle the BIT regime.

In such conditions, the global ‘great game’ and the EU’s future as a major international player might well be undermined by its internal divisions. As all enduring troubles, the EU’s start at home. Trying to exert too much force on a very limited – and largely marginal – issue tends to spiral into opposition. Preventing such dissensus to turn to outright defiance entirely rests with the Commission. The velvet gloves must come back on …


 * Horia Ciurtin, Managing Editor, EFILA Blog; Expert, New Strategy Center; Legal Adviser – International Arbitration, Scandic Distilleries S.A;  [see SSRN author page].

 

Russian Sanctions against Turkey and BIT Claims

by Orçun Çetinkaya, Moroğlu Arseven

Following the downing of a Russian jet by Turkey on 24 November 2015, Russian-Turkey relations have entered into a new phase. Russia imposed a series of economic measures and sanctions against Turkey. Turkish individuals and companies who invested in Russia where they spent decades have been negatively affected from those measures. There might be claims in future under Turkey- Russia BIT if those sanctions continue.

SANCTIONS

The first step in this direction was a decree prohibiting Turkish products along with other sanctions, approved by the President of Russia Vladimir Putin on 28 November 2015. With this presidential decree (numbered 583), the legal ground was prepared for economic embargos on Turkey and Turkish goods and services.

Following this decree, the Russian Government fleshed out the decree’s commercial sanctions with an Executive Order on 30 November 2015 (numbered 1296). On 28 December 2015, some amendments were introduced to the previously approved decree, indicating the specifics and scope of previously determined sanctions.

Major sectors that are affected by the commercial sanctions are construction, tourism and hotel management, architecture, engineering-technical projects (technical tests, research, analysis) and woodworking.

Additionally, from 1 January 2016, it is also prohibited for companies that are subject to Turkish legislation and/or controlled by Turkish citizens to do business with the Russian government or municipalities, regardless of the sector these companies operate in. A public statement by the Russian government explains that the sanctions in the Executive Order do not apply to projects contracted before 1 January 2016.

The types of the sanctions, limitations and prohibitions applied by Russia against Turkey include:

Imports of Agricultural Goods, Raw Materials and Food Products Prohibited:

The Russian government imposed an embargo on Turkish products, especially fruits, vegetables, flowers, chicken, turkey and salt. In this regard:

Fruits: Orange, fresh or dried, Tangerine (all kinds and hybrids), fresh or dried, grapes, fresh, apple, fresh, pear, fresh, apricot, fresh, peach and nectarine, fresh, plum and sloe, fresh, strawberry, fresh;

Vegetables: Tomato, fresh or cooled, onion, fresh or cooled, Cauli and broccoli, fresh or cooled, cucumber and gherkin, fresh or cooled;

Birds: Pieces and giblets of chicken, frozen, pieces and giblets of turkey, frozen;

Others: Clove, fresh, salt and pure sodium chloride; sea water.

Turkish Companies Prohibited from Carrying Out Certain Activities in Russia:

In certain operation fields, prohibitions and limitations apply to the activities of companies and organizations which are headquartered in Turkey, or are controlled by Turkish citizens.

Russian legislation defines criteria for “control” in Articles 5(1) and 5(2) of the Federal Law titled Order of Foreign Investment in Economic Structures Strategically Important for State Defense and Security, numbered 57-F3 and dated 29 April 2008. Accordingly, persons are deemed to have authority to control the company or organization where they:

– Hold more than 50% of votes as shareholders,

– Hold less than 50% of votes as shareholders, but control the company’s decision making mechanism,

– Are authorized to appoint the CEO or more than half of the executive body members of the company or organization, or

– Are authorized to appoint more than half of the board of management or the executive body without any conditions,

Another important point is that sanctions in the decree also cover Turkish companies with their headquarters located in Russia. However, the Russian government failed to indicate the fields of operation for companies which are subject to these sanctions.

As for the operation fields included, The Resolution of the Government of the Russian Federation No. 1457 dated 29 December 2015 approved the list of certain types of works which are banned for performance in the territory of the Russian Federation by organizations under the jurisdiction of Turkey as well as organizations controlled by Turkish citizens effective from 1 January 2016.The restriction covers the following operation fields:

– construction of buildings, construction of engineering and special construction works.

– activities in the area of architecture and engineering design, technical testing, research and analysis.

– activities of travel agencies and other organization providing services in the tourism sector.

– operation of hotels and other places of temporary residence.

– works and services for the state and municipal needs.

– woodwork.

It is important to note that here is an exemption from this ban for works (services) performance of which is envisaged by the contracts entered into before the adoption of the Resolution of the Government of Russian Federation No. 1457 dated 29 December 2015, for the term of validity of such contracts.

Employing Turkish Citizens Prohibited

Employers and contractors are prohibited from employing Turkish citizens as of 1 January 2016. However, Turkish employees which were already in an employment or legal relationship with an employer in Russia on 31 December 2015 may continue to be employed.

The Russian government however created an exemption for 53 companies to continue employing Turkish citizens:

Visa-Free Travel Agreement Suspended

The visa-free travel agreement between Russia and Turkey has been suspended from 1 January 2016. Previously, Russian and Turkish citizens could travel freely between the two countries without a visa.

Charter Flights from Russia to Turkey Banned

The Russian government has banned charter flights to Turkey, except those used to bring Russian tourists from Turkey back to Russia. Additionally, supervision of regular commercial flights has increased.

Tourism Banned

Russian tour operators and tourism agencies have abstained from selling Russian citizens tour packages to Turkey.

Transportation Prohibited

Supervision has increased for Turkish sea transportation companies operating in the Sea of Azov and Black Sea ports, as well as companies involved in land transportation through Russia. The number of trucks and lorries from Turkey which are accepted to pass through Russia is now limited. In 2015, around 8,000 trucks and lorries were accepted to pass through Russia. However, this number is set as at a maximum of 2,000 for 2016.

Joint Activities Suspended at Government Level

Commercial and economic activities between Turkey and Russia at the government level have been suspended. However the Russian government has appointed their Ministry of Economy to negotiate with Turkey about:

– The bilateral Agreement on Trade in Services and Investments,

– The Middle-term program for economic, trade, scientific, technical and cultural cooperation for 2016-2019,

– Formation of the joint Fund for Financing Investment Projects in Russia and Turkey.

IMPLICATIONS OF SANCTIONS

Russia’s sanctions directly affect Turkey, Turkish companies and Turkish citizens. However, they also indirectly affect many European and American companies. Some of these companies face severe procurement problems where they have production facilities in Russia, yet source raw materials or parts required for these facilities from Turkey.

On the other hand, it is positive that the sanctions exclude on-going investment undertakings in Russia, as well as Russia’s gas exportation to Turkey. These are the two largest goods and services exchanged between the countries.

It is important to note that penal clause or compensation claims will inevitably arise for Turkish and foreign parties which are unable to fulfil their undertakings and are forced to cancel reservations. It is not a surprise that objective impossibility and force majeure objections are being discussed the parties.

Serious and legitimate concerns emerge regarding the rights and obligations of parties involved in agreements which are already executed in Turkey for future expected businesses in Russia, or agreements which would have been executed in connection with the on-going agreements in Russia.

TURKEY- RUSSIA BIT AND ICSID CLAIMS

Turkey and Russia had been good partners economically and politically for many decades. Foreign trade volume between Turkey and Russia around $31 billion in 201. The impact of sanctions therefore Sea will be hard to swallow for both sides of the Black Sea.

The sanctions have already started to show their effects on Turkish- Russian business relations. Long terms contracts are being re-negotiated if not cancelled already, force majeure or objective impossibility are being raised by the parties in rather an amicable way at this stage.

However, there are rumours now spreading across Turkish business that certain Turkish conglomerates consider withdrawing from Russia by selling out their assets despite their decades-long presence in and dedication to Russia.

Even though Turkish investors assess their options in Russia as amicably as possible there are queries from various circles whether or not those sanctions give rise to treaty claims under Turkish Russia BIT.

The Turkey-Russia Bilateral Investment Treaty:

Usual foreign investment protections can be found in the Turkey-Russia BIT.  Under the BIT both Turkey and Russia promise among others:

 “fair and equitable treatment” (BIT, Art. II.2 and Art. III.1);

 “full protection and security” (BIT, Art. II.2);

that “[n]either Contracting Party shall impede by discriminatory measures the management, operation, maintenance, use, acquisition, expansion or disposal of investments” (BIT, Art. II.2); and

that foreign investments “shall not be expropriated” without “prompt, adequate and effective compensation” (BIT, Art.VI).

Whether or not any negative treatment, emerged as a result of sanctions imposed by Russia, could fall into the relevant BIT in respect of admissibility and merits should obviously be decided on a case by case basis but the fact that the sanctions ultimately affect the interests of private Turkish citizens and companies could be seen by Turkish investors as a reliable foothold.

Should Turkish individuals or companies raise BIT claims, it is likely among others that Russia could put forward that it had to put those sanctions in place as countermeasures against the international wrongful act of Turkey in the form of downing a Russian jet.

Russia must show in such a case that those countermeasures were taken due to the international wrongful act of Turkey and those measures should be directed against Turkey. However, it will be debated heavily whether those measures are aimed at Turkey or harm ultimately its nationals in Russia.

Equally, Russia should prove that sanctions must have called upon Turkey committing the wrongful act to discontinue its wrongful conduct. When this stance is taken by Russia, it will be considered whether the effects of those sanctions are commensurate with the injury suffered the purpose of which must be inducing Turkey to comply with its obligations under international law.

In the ICSID practice, it is now almost settled that countermeasures cannot be adapted in such a way to harm certain foreign investors who are under BIT protection even if those countermeasures are taken with a view to force that state to end its international wrongful act.

In fact, in Archer Daniels Midland et al. v. United Mexican States, in Corn Products International v. United Mexican States and in Cargill v. United Mexican States the view taken by the tribunals was that countermeasures cannot be an excuse to breach BITs the purpose of which is to protect the investors

While the authority set out by ICSID might provide a degree of confidence to Turkish investors in Russia if they are/ will be harmed as a result of sanctions, a thorough consideration should nevertheless be given in respect of admissibility and merits before making any submission to ICSID.

Considering the stadiums and other facilities required to be built for the FIFA World Cup to be held in Russia in 2018 which are by and large contracted to Turkish companies, Sberbank’s activities in Turkey, Rosatom’s nuclear plant construction in Turkey, as well as all other reciprocal commercial projects and benefits, the clear and wise decision might be to lift the sanctions altogether. However, if this cannot be done in the near future, it is best for both Turkey and Russia to ease these sanctions to keep the commercial effects at minimum.

AIA and EFILA Event: Seminar on Arbitration and EU Law

Seminar on Arbitration and EU Law – 7th April 2016, Brussels, Belgium

 

 

Over the years, there has been increasing EU activity in private international law. The interaction and relationship of EU law and international commercial arbitration has had growing interest over the years. In this course, we will consider the key changes in the Brussels Regulation (recast) for commercial parties, the consequences and interpretation of the arbitration exceptions and the relationship between EU state aid and investment protection under bilateral investment treaties.  We will also discuss the procedure, minimum standards, application of Article 6 of the European Convention on Human Rights and compare BITs and EU law in investment arbitration.

 

Confirmed speakers for this event are Mr. K. Adamantopoulos, Mr. Jean-François Bellis, Mr. George A. Bermann, Mr. Damien Geradin, Mr. A. Komninos, Mr. N. Lavranos and mrs. Z. Prodromou.

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

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

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

Prologue: Antagonism and Agonism

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

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

The Dialectics of Investment Law

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

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

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

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

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

The Westphalian Labyrinth

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

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

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

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

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

Clearing the Air: Politics and Legal Discourse

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

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


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