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/

Eiser v. Spain: Reinforcing the Importance of Early Disclosure in Investment Arbitration

By Sumit Chatterjee (National Law School of India University, Bangalore)

An ICSID Committee, chaired by Ricardo Ramirez-Hernandez, recently annulled an arbitral award rendered in favour of a solar power investor in the case of Eiser Infrastructre Ltd. v Republic of Spain. [1] The primary ground on which the award was annulled was the undisclosed relationship between Stanimir Alexandrov, who was one of the arbitrators on the arbitral tribunal that rendered the award, and one of the experts appointed by the Claimants to make their case. The committee came to the conclusion that the undisclosed relationship created a “manifest appearance of bias”, which qualified the threshold of annulment on the grounds of improper constitution of the tribunal, and a serious departure from a fundamental rule of procedure under 52 of the ICSID Rules. [2]

After understanding the decision of the committee, and reconciling the same within the ICSID Rules framework, this post will explore two broader ramifications of this decision on investment arbitration; first, the importance of early disclosure of potential and existing conflicts by arbitrators, and second, the importance of this decision in understanding the double-hatting debate in international arbitration.

Decision of the committee

After the arbitral tribunal chaired by John Cook, and comprising of Stanimir Alexandrov and Campbell McLachlan, had decided the dispute between UK-based infrastructure firm Eiser Infrastructure Ltd. and the Republic of Spain in favour of the former, and ordered Spain to pay €128 million, Spain filed an application to annul the award, and to deliberate upon the same, a three-member committee comprising of Chairman Ricardo Ramírez-Hernández, Dominique Hascher and Teresa Cheng was constituted. After Teresa Chang stepped down from the committee, she was swiftly replaced on the committee by Makhdoom Ali Khan.

Spain had made their case for annulment of the award on two broad grounds. First, that the tribunal had been improperly constituted, under Art. 52(1)(a), as a result of the undisclosed relationship between the nominated arbitrator of the Claimant, Stanimir Alexandrov, and one of the experts of the Brattle group that was appointed by the Claimants, Carlos Lapuerta. The influence that Alexandrov exercised on being a part of the tribunal, and the failure to provide Spain with an opportunity to challenge his appointment on the ground of this relationship, was invoked by Spain to claim a serious departure from a fundamental rule of procedure under Art. 52(1)(d) of the ICSID Rules. Second, they claimed that the tribunal had failed to provide reasons, under Art. 52(1)(e), and had manifestly exceeded their powers, under Art. 52(1)(b), as a result of an improper award of damages.

The committee deliberated on the first ground, and analysed the relationship between Mr. Alexandrov and the expert retained by the Claimants in great detail. It was soon discovered that during the proceedings themselves, Mr. Alexandrov had been acting as counsel of a reputed law firm in other arbitration proceedings, and had employed the services of the Brattle group as experts. Furthermore, in four of these proceedings, the impugned expert, Mr. Lapuerta, had been the testifying expert on behalf of the Brattle group. Thus, these well-established past and present connections between the arbitrator and the expert retained by the Claimants suggested a manifest appearance of bias on the part of the arbitrator, and would thus qualify the threshold under Art. 52(1)(a) of the ICSID Rules to hold that the tribunal had been improperly constituted. The committee referred to the standard laid down in Blue Bank International v Bolivia, [3] by Chairman Kim, wherein it was stipulated that in order to determine whether an arbitrator had failed to comply with the standards of independence and impartiality, the standard should be one of whether “a third party would find an evident or obvious appearance of lack of impartiality on reasonable evaluation of the facts in this case”. [4]

The Committee also stated that the failure on the part of Mr. Alexandrov to disclose this conflict had severe effects on the proceedings themselves, as it hampered the constitution of an independent tribunal, and also adversely affected Spain’s right to a fair arbitration. It thus held that the failure to disclose had a “material effect” on the proceedings, and thus the tribunal had seriously departed from a fundamental rule of procedure under Art. 52(1)(d) of the ICSID Rules. Having considered the first ground sufficient to annul the award rendered by the tribunal, the committee did not delve into the intricacies of the second ground raised by Spain.

The next part of this post will explore the duty of disclosure in the context of investment arbitration, and analyse the decision of the committee from that perspective.

Tracing the contours of the duty to disclose in Investment Arbitration

One of the hallmarks of the arbitral process is having independent and impartial arbitrators on the tribunal to adjudicate the disputes between the parties. While independence and impartiality have often been used interchangeably in the context of understanding the duty of the arbitrators, it is well established that the former refers to a more objective standard of ensuring that the arbitrator does not have any personal, financial or professional ties with any of the parties, witnesses, counsel etc., while the latter is more of a subjective standard that is based on the conduct of the arbitrator during the proceedings. [5] With respect to investment treaty arbitration, the requirement of independence and impartiality assumes much accentuated significance, as a result of the public interest element, and the political and economic ramifications of the decision on the Respondent State. The duty to disclose is a corollary of the independence and impartiality requirement, as it places a positive duty upon the appointed arbitrators to disclose any and all potential and existing conflicts of interest with any of the parties, witnesses, counsel etc. involved in the arbitration. [6] The disclosure is also a safeguard to ensure that the arbitrator is secured from any future challenges on his/her independence or impartiality by one of the parties on the grounds which have been disclosed. [7] Under the ICSID Arbitration Rules of 2003, the disclosure duty is grounded in Article 6, the scope of which was expanded through the amendments made in 2006 to make it a continuing obligation on the part of the arbitrator. [8]

In the Eiser case, the committee assumed the role of a “guardian of the ICSID system [9] and held that the bar must be set high when it comes to disclosure requirements given the importance of early disclosure for a fair and just arbitral process. By holding the same, the committee reinforced the importance of prompt and early disclosure in investment arbitrations. Not only does a disclosure aid the parties in raising a timely challenge to the appointment of the arbitrator if it deems so necessary, it also waives the right of the party from raising such challenge at a later date, or post the rendering of the award, in cases where they fail to make such a challenge within the stipulated time period. The failure of Mr. Alexandrov to make a timely disclosure of the conflict resulted not only in declining Spain the opportunity to challenge his position on the tribunal, but also in influencing the decision of the other members of the tribunal with his continued presence on the tribunal, which in the eyes of the committee, would raise a reasonable suspicion of bias to any independent observer.

While the case certainly emphasised the importance of making prompt and early disclosure of conflicts of interest in Investment Arbitration, it also highlighted an issue that has garnered significant academic interest and debate for a long while: the issue of double-hatting.

Double-hatting in Investment Arbitration: A Necessary Evil?

Double hatting has gained significant traction in the academic discourse on investment arbitration ever since Prof. Phillipe Sands first alluded to the dilemma at the 2009 IBA Conference. [10] It essentially refers to the growing trend in investment arbitration, wherein lawyers who are appointed as arbitrators in particular cases continue to represent other parties as counsel in arbitration proceedings at the same time. Double hatting raises a number of poignant ethical and practical concerns, as a result of the unavoidable conflict of interests that arise in light of the interwoven nexus of relations which lawyers have, both in his/her role as a counsel, and as an arbitrator. One of the overarching concerns in this regard is of role confusion, which refers to the situation where arbitrators try to issue an award that would be favourable for them in a case where they are representing a different client as counsel. [11] Role confusion is also linked to another related concern with double hatting, which is the problem of issue conflict. An issue conflict arises when an arbitrator has to adjudicate on an issue that was in contention in an earlier or ongoing case where he/she served as a counsel, or as an arbitrator. [12] Double hatting thus increases the possibility of an occurrence of issue conflict for an arbitrator, as was evident in the case of Telekom Malaysia Berhad v Ghana, [13] and raise justifiable doubts as to the arbitrator’s impartiality and independence. [14]

The need for reform to combat the predicament of double hatting has been all the more pronounced as a result of the prevailing no-man’s land with respect to ethical standards that prevail in arbitration proceedings, not just for legal counsels, but also for arbitrators. This invigorated call for a reform in the prevailing paradigm has led to a number of recent developments, which also illustrate two extremely different approaches to tackling this predicament.

The Dutch Model BIT has employed a rather extreme approach, explicitly disallowing double hatting, and precluding arbitrators from acting as legal counsels. [15] It also mentions that no arbitrator should have acted as a counsel in any investment arbitration proceeding in the previous five years. [16] Another radical change that the Dutch Model BIT makes is to completely do away with party-appointed arbitrators, and instil the power to appoint arbitrators solely to a competent appointing authority.

This development has come in light of the increasing concern of politicisation of Investor-State arbitrations, and how the appointment of arbitrators to constitute the tribunal accentuate this concern more than any other factor. In fact, in the preliminary identifications of possible areas of reform in investor-state arbitration by the UNCITRAL Working Group III, [17] the concern that arises from completely shifting the burden of appointments from parties to an appointing authority is a re-politicisation of the investment arbitration paradigm. [18] It has been stated, for example, that the influence of States on appointments would continue to exist while the investor would lose out on having any say in the appointment process. While there have been suggestions as to limit the influence of States, and to include investors to be a part of the process, such as screening, consultations etc., there is no black and white position on this issue as of yet. [19]

However, the Working Group III was also responsible for the conceptualisation of the Draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement, released by the ICSID and the UNCITRAL. The Draft Code flags the issue of double-hatting in Article 6, [20] which aims at a “limit on multiple roles” for adjudicators. The Draft Code came into being due to growing concerns about the numerous ethical and practical predicaments in investment arbitration proceedings, due to the different professional relations and roles of the appointed arbitrators. It illustrates the median approach, which seeks to remedy the concerns of double hatting within the prevailing framework in investment arbitration, while also maintaining the balance between the interests of both the investor and the Responding State party in the arbitral process, especially during appointments.

The public interest element, and the fact that proceedings in investment arbitration are indeed public, call for a greater scrutiny of the independence and impartiality of the arbitrators appointed. This tension, between party autonomy in the choice of arbitrators on one hand, and ensuring the right to a fair and independent arbitration on the other, has been the crux of the academic debate surrounding double hatting. And it is in this context that the Eiser case has taken a firm stand. The ICSID committee, by recognising the failure to disclose the conflict as a ground to annul the award, has illustrated the extremely serious implications of double-hatting in an investment arbitration, where it can cast a shadow over a successful award rendered in favour of a party, and ultimately lead to its annulment. Not only does the decision come at a crucial time, given the prevailing debate around double hatting, it also comes as a telling warning for lawyers who serve on tribunals in their roles as arbitrators to recognize and adhere to the duty of being independent and impartial throughout the proceedings. The Eiser case also demonstrated that the wide nexus of connections that a lawyer has, and people he/she engages with in order to represent their clients, leads to a number of potential conflicts, as was observed here with the expert of the Brattle group, retained by the Claimants. Arbitrators must be extremely wary of such conflicts, and comply with the best practice of early and prompt disclosure to the best of their abilities. The jury is still out on whether the setting up of an international investment adjudicatory body is in the best interests of resolving all the problems that exist in the investor-state dispute resolution settlement mechanism, but the Eiser decision has, by taking a firm stand against any minutiae of an appearance of bias, shown that the present system is also well equipped to provide parties what they wish for: a neutral, efficient and fair result.


[1] Eiser Infrastructre Ltd. v Republic of Spain (ICSID Case No. ARB/13/36).

[2] ICSID Rules, Article 52, “(1) Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds: (a) that the Tribunal was not properly constituted; (b) that the Tribunal has manifestly exceeded its powers; (c) that there was corruption on the part of a member of the Tribunal; (d) that there has been a serious departure from a fundamental rule of procedure; or (e) that the award has failed to state the reasons on which it is based.”

[3] Blue Bank International v Bolivia (ICSID Case No. ARB/12/20).

[4] Ibid.

[5] The distinction was emphasized in Suez v. Argentina (ICSID Case no. ARB/03/19).

[6]Noah Rubins and Bernard Lauterberg, ‘Independence, Impartiality and Duty of Disclosure in Investment Arbitration’ in Christina Knahr, Chrishtian Koller et al., Investment and Commercial Arbitration – Similarities and Divergences (Eleven International Publshing, 2010).

[7] M.B. Feldman, ‘The annulment proceedings and the finality of ICSID arbitral awards’ [1987] 2(1) ICSID Rev.

[8] ICSID Arbitration Rules (2003), Article 6. Rubins and Lauterberg (n vi).

[9] Cosmo Anderson and Sebastian Perry, ‘Undisclosed expert ties prove fatal to ICSID award’ (Global Arbitration Review, 12 June 2020) < https://globalarbitrationreview.com/article/1227900/undisclosed-expert-ties-prove-fatal-to-icsid-award&gt; accessed 4 July 2020.

[10] Dennis H. Hranitzky and Eduardo Silva Romero, ‘The ‘Double Hat’ in International Arbitration’ (New York Law Journal, 14 July 2010) < https://www.law.com/newyorklawjournal/almID/1202462634101/The-Double-Hat-Debate-in-International-Arbitration/?slreturn=20200731133829&gt; accessed 4 July 2020.

[11] Frederick A Acomb and Nicholas J Jones, ‘Double-Hatting in International Arbitration’ (2017) 43 Litig 15.

[12] Ibid, at 16.

[13] Telekom Malaysia Berhad v Ghana (UNCITRAL Arbitration at the PCA, The Hague).

[14] In Telekom Malaysia Berhad v Ghana (UNCITRAL Arbitration at the PCA, The Hague), Ghana challenged the presence of the arbitrator nominated by the Claimants, Prof. Emmanuel Galliard, on the ground that he was acting as counsel for Morocco in the annulment proceedings of the award rendered in RFCC v Morocco (ICSID Case No. ARB/00/6), where he was challenging an argument that was being relied on by Ghana in the present case. The matter went up before the District Court in the Hague, which held that the dual roles would certainly hint at an appearance of being influenced by his role as counsel on his position on the tribunal. Subsequent to this decision, Prof. Galliard resigned from his role as the counsel of Morocco in the annulment proceedings and continued to serve as an arbitrator on the tribunal

[15] Netherlands Model Bilateral Investment Treaty, 2018.

[16] ‘The new draft Dutch BIT: what does it mean for investor mailbox companies?’ (HSF Notes, 30 May 2018) < https://hsfnotes.com/arbitration/2018/05/30/the-new-draft-dutch-bit-what-does-it-mean-for-investor-mailbox-companies/&gt; accessed 4 July 2020.

[17] UNCITRAL Working Group III: Investor-State Dispute Settlement Reform 2020.

[18] Fernando Dias Simoes, ‘UNCITRAL Working Group III: Would an Investment Court De-politicize ISDS’ (Kluwer Arbitration Blog, 25 March 2020) < http://arbitrationblog.kluwerarbitration.com/2020/03/25/uncitral-working-group-iii-would-an-investment-court-de-politicize-isds/?doing_wp_cron=1598784017.8404219150543212890625&gt; accessed 4 July 2020.

[19] Ibid.

[20] UNCITRAL and ICSID, Draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement, Article 6 – “Adjudicators shall [refrain from acting]/[disclose that they act] as counsel, expert witness, judge, agent or in any other relevant role at the same time as they are [within X years of] acting on matters that involve the same parties, [the same facts] [and/ or] [the same treaty]”.

Young ISDS Club – ICSID and UNCITRAL Draft Code of Conduct for Adjudicators in ISDS disputes

By Suksham Chauhan, International Arbitration Trainee, Quinn Emanuel Urquhart & Sullivan, Paris  

Young ISDS Club for the second time provided a great platform for a very engaging and interesting discussion on 8 June 2020. The Young ISDS Club remained steadfast to its core value of open discussion. It was a most candid discussion where participants and speakers took strong stances and critically analysed the Draft Code without any inhibitions.

1. Introduction

Ketevan Betaneli (Freshfields), who moderated the session, commenced the webinar by introducing the topic: “ICSID and UNCITRAL Draft Code of Conduct for Adjudicators in ISDS”. She gave a brief overview of the Draft Code of Conduct for Adjudicators (the “Draft Code”).

She noted that the Draft Code was jointly prepared by the Secretariats of ICSID and UNCITRAL and that it deals with duties and responsibilities and independence and impartiality, as well as with conflicts of interest and confidentiality relating to adjudicators. At the outset, she stated that the definition of “Adjudicators” is comprehensive and includes arbitrators, members of international ad hoc, annulment or appeal committees, and judges of a permanent mechanism for the settlement of investor-State disputes.

Thereafter, she introduced the speakers : Margaret Ryan (Shearman & Sterling); Tim Rauschning (Luther); and Nandakumar Srivatsa (Dentons). She remined the participants that the discussions in the webinar remain confidential and no participant or speaker should be quoted unless they had so agreed. She also pointed out that all the speakers and participants would be speaking in their personal capacity and the views expressed did not reflect those of their respective law firms or clients.

In line with the spirit of Young ISDS Club discussions rules – no statement or comment is attributed to any participants or speakers in this report.

2. The First Speaker – Conflicts of Interest: disclosure obligations (Article 5)

At the outset, the first speaker pointed out that Article 5 of the Draft Code is one of the most widely discussed provisions for its extensive and detailed disclosure obligations for adjudicators and candidates.

Discussion then moved onto the second sentence of Article 5 (1) of the Draft Code which states that adjudicators and candidates shall disclose any interest, relationship, or matter that could reasonably be considered to affect their independence or impartiality. The second sentence adopts an objective standard based on the perspective of what a reasonable third person would consider affecting an arbitrator’s independence and impartiality. The current ICSID Rules and the IBA Guidelines on Conflict of Interest in International Arbitration (IBA Guidelines), on the other hand, are based on a subjective test, and require the disclosure of circumstances that might cause the parties to question the arbitrator’s independence and impartiality.

Policy of enhanced disclosure

Thereafter, the first speaker stated that on a bare reading of Article 5 (2) of Draft Code, it is clear that the policy is to enhance disclosures. This is abundantly clear from the Draft Code’s commentary which states that “the policy reason underlying the disclosure requirement is to permit a full assessment by all parties and to avoid possible problematic situations during the proceedings”. The question which arises is whether this formalistic approach to disclosure will have unintended consequences, and might lead to more arbitrator challenges overall resulting in higher cost and delay and eliminating honest candidates. On the other hand, the approach could lead to consistent practice among arbitrators.

Further, the Draft Code under Article 5 (2) (a) proposes that adjudicators and candidates be required to disclose any relationships that have existed within the previous five years. The commentary states that the existence of relationships earlier than five years previous is presumed to be too remote to create a conflict. A relationship that existed before the five-year threshold but could reasonably affect the adjudicators’ independence or impartiality would still be subject to a duty of disclosure in accordance with Article 5(1). It is interesting to note that the amendment to the ICSID Rules also adopts the five -year period. In this context, the question arises whether the five-year period strikes the right balance? Or is it overly burdensome, given the list of items that need to be disclosed under 5(2)(a)?

Disclosure of Third-party interest

The first speaker then discussed Article 5(2)(a)(iv) which obligates the adjudicator or candidate to disclose any significant relationship with any third-party funder within the past five years. It was pointed out that the provision raises various questions. An arbitrator can only know whether it has a relationship with a third-party funder if the identity of the third-party funder is known. This may be possible under the proposed amendments to the ICSID Rules which incorporates an affirmative duty for the parties to disclose the existence of third-party funding when filing the Request for Arbitration. However, the problem arises where the applicable rules don’t require disclosure of third-party funder. In view thereof, how is a prospective arbitrator to know whether they have a relationship with a third-party funder involved in the arbitration?

The Draft Code does not seek to regulate repeated appointments but instead proposes extensive disclosure of “all ISDS [and other [international] arbitration cases]” where the arbitrator has been or is involved in one of various capacities i.e., as counsel, arbitrator, annulment, committee member, expert, [conciliator or mediator]. There is no five-year time limit and it suggests that all ISDS and International cases (both commercial and investment cases) will have to be disclosed. This requirement is wider than under the proposed amendments to the ICSID Rules.

Issue conflict

Similarly, Article 5(2)(d) requires disclosure of all publications and [relevant speeches] without any time limit. Questions arise on necessity and practicability of this requirement, which diverges from the approach of the IBA Guidelines which include previous expressed legal opinions in the list of green items that do not need to be disclosed.

General questions for discussion

The first speaker concluded by stating that various other issues may arise from the interaction between the Draft Code and other rules on disclosure that might govern the arbitration. E.g. the current proposal for amendments of the ICSID Rules has less extensive disclosure obligations as compared to the Draft Code. Similarly, specific investment treaties at issue might have rules on disclosure that differ from the code.

Article 12 addresses the enforcement of the code and contemplates various options for enforcement. However, the Draft Code does not address how the disclosure obligation has to be implemented. Whether the disclosure procedure should be under the control of a central mechanism or should instead rest with the arbitrator (self-policing)? Who might play the role of enforcing the disclosure obligation?

3. The Second Speaker – Article 6 – Limiting of roles

At the outset, the second speaker stated that Article 6 of the Draft Code addresses the concern that an adjudicator who is involved in other ISDS or other international proceedings in different roles would lack sufficient independence and impartiality because of the multiple roles played. Article 6 of the Draft Code essentially aims at limiting additional roles and it is a hotly debated article which is evident from the various square brackets in the Draft Code. Four elements may be considered under Article 6 of the Draft code:

(i) The consequences arising from Article 6 – whether it should prohibit multiple roles or merely seek disclosure of multiple roles;

(ii) The scope of Article 6 – whether it should extend only to counsel and arbitrators or also to witness, experts or any other relevant role;

(iii) Time period – whether it should be limited to concurrent service as arbitrator in one case and counsel (or any other role) in another case or also extend to previous and subsequent service as counsel; and

(iv) The factors to be considered when regulating multiple roles – (a) same parties involved; (b) same facts involved; and/or (c) same treaties involved.

Thereafter, the second speaker stated that, as a code of conduct, the draft does not necessarily only reflect perceived existing rules relating to conflict of interest but may also reflect much broader rules desired for policy considerations. In view thereof, the second speaker first provided an overview of (arbitral) jurisprudence and guidelines addressing conflict of interest due to arbitrators wearing multiple “hats”. Thereafter, various issues from a policy perspective were addressed i.e., issues that may be regulated and the potential consequences of regulating these issues.

Overview of jurisprudence and guidelines regarding multiple roles

The second speaker focused on the most frequent combination of roles, namely that of arbitrators also acting as counsels, and distinguished the following constellations: (i) same parties involved; (ii) same facts involved; or (iii) same treaty involved.

(i) It was explained that, under the IBA Guidelines, serving as an arbitrator concurrently with representing or advising one of the parties in another case is considered a red list item, i.e. one which raises justifiable doubts as to the arbitrator’s impartiality and independence. Additionally, past service as counsel for one of the parties within the last three years is considered an orange list item, i.e. one which should be disclosed.

(ii) Where arbitrators concurrently serve as counsel in cases involving the same or similar facts, in a number of challenge decisions the person concerned has been given a choice to withdraw either as a counsel or as an arbitrator. Accordingly, this jurisprudence takes no issue with past service, including counsel work just terminated. Once a person has terminated their role as counsel, a conflict of interest no longer exists. As an illustration of what kind of issues some courts and tribunals consider as similar or having something in common with another case, the second speaker referred to the example of The Republic of Ghana vs Telekom Malaysia Berhad, where the District Court of The Hague decided that Prof. Gaillard’s role as counsel in the annulment proceedings in RFCC v Morocco was incompatible with Prof. Gaillard’s position as arbitrator in the Telekom Malaysia arbitration because in the latter Ghana relied on the RFCC Award. The District court therefore asked Professor Gaillard to step down from the counsel position which he eventually did.

(iii) As regards cases where the same treaty is involved, the decision in the ECT arbitration KS Invest vs Spain was referred to, where Kaj Hobér was challenged as arbitrator because he was concurrently acting as a counsel for North Stream 2 in an ECT arbitration against the European Union. Spain argued that there would be a conflict of interest as similar legal problems under the same treaty (the ECT) will be discussed. The Chairman of the ICISD Administrative Counsel ruled on the challenge and held that there is no conflict of interest as the disputes concern different parties, different sub-sectors of the energy industry, and different measures.

In conclusion, the second speaker summarised the above jurisprudence and guidelines as follows: Service as arbitrator in one arbitration and as counsel for one of the parties in another is considered incompatible if such service is concurrent, while prior counsel work within the last three years has to be disclosed. In relation to the same facts, concurrent service of arbitrators and counsel is considered to be incompatible. Prior counsel work does not appear to be incompatible. As regards cases involving the same treaty, there is still only limited jurisprudence

Policy Considerations

It was pointed out that if one wanted to further restrict multiple roles for policy reasons, likely the most relevant areas would be rules relating to counsel work before and after acting as arbitrator and whether to limit “double hatting” restrictions to having multiple roles in disputes under the same treaty. In this context, reference was made to the approach adopted by the EU in different multilateral treaties (e.g. CETA, EU-Singapore, and EU-Vietnam). Under these treaties, the provisions dealing with multiple roles are very broad: Concurrent service is prohibit under “any international agreement”. After acting as arbitrator, the person may inter alia not act for one of the parties in arbitrations under the same treaty. The 2019 Dutch Model BIT not only prohibits concurrent counsel work but also prior counsel work in any ISDS disputes in the five years prior to acting as arbitrator. Conversely, the US-Mexico-Canada agreement (USMCA) is less strict as it only prohibits concurrent counsel work in cases under the USMCA.

Questions for discussion

As questions for discussion, the following were proposed, inter alia: What is the reason behind prohibiting arbitrators from subsequently acting as counsel, in particular in cases under the same treaty or with regard to the same facts? Do the participants share the analysis of tribunals that an arbitrator is not influenced by positions argued as counsel on a similar issue? And, of course, what would be the consequence of far-reaching limitations on multiple roles?

4. The Third Speaker – Article 8 – Arbitrator’s availability

The Third Speaker considered a few seminal questions that arose in the context of Article 8 of the Draft Code.

Genesis and drafting history of Article 8 of the Draft code

In considering the genesis and drafting history of Article 8, the third speaker stated that it was manifestly clear from ICSID’s Working Papers II and III on the amendments to the ICSID Arbitration Rules, that member States and the public desired that arbitrators be made to adhere to a code of conduct in relation to their availability. At its 38th Session, the UNCITRAL through its Working Group III considered the possibility of a code of conduct for arbitrators and deliberated on whether such a code should contain any provisions governing the availability of arbitrators. This was a part of the genesis of Article 8 of the Draft Code.

Then the discussion moved on to the drafting history of Article 8. It was pointed out that Article 8 was based on the model declaration annexed to the UNCITRAL Rules on Arbitration, which requires arbitrators to devote the time necessary to conduct the arbitrations in which they sit. The UNCITRAL Rules, however, do not provide any mechanism for enforcing the declaration. UNCITRAL’s Working Group III did not address this issue during the 38th Session and simply noted that arbitrators should not accept appointments if they cannot carry out their duties promptly.

ICSID had a more comprehensive discussion on the question, as is evident from paragraph 307 of the Working Paper I, which reads as follows: “…This requirement has been added in light of the comments expressing concern about delays in proceedings occasioned by extended periods of arbitrator unavailability, and by some arbitrators accepting appointments despite insufficient availability. The requirement is intended to provide the parties with specific information regarding the availability of the arbitrators in their dispute. The addition of this requirement does not convey any change in the applicable standards for the challenge of an arbitrator.”

In view thereof, it is clear that the intention of the declaration under Draft Arbitration Rule 19(3)(b) of ICSID Working Paper IV was to provide the parties with specific information regarding the availability of arbitrators. However, the scope of Article 8 (2) of the Draft Code is much wider, i.e. it does not merely provide information to the parties concerning the availability of arbitrators, but attempts to limit the number of appointments that an arbitrator can accept.

Availability of an arbitrator

The current declaration (under Rule 6.2 of 2006 ICSID Arbitration Rules ) does not require arbitrators to make any commitment as to their availability. However, the declaration under Draft Arbitration Rule 19(3)(b) of ICSID Working Paper IV requires arbitrators to commit their time and availability to the effective and efficient performance of their duties.

Further, ICSID’s Working Paper II reveals that States raised concerns about arbitrators’ availability and one State proposed that there should be a cap on the number of appointments accepted by arbitrators. This suggestion was originally brushed aside by ICSID, which stated that the proposal had already been dealt with in its Working Paper III. Curiously, however, the proposal was implemented in Article 8.2 of the Draft Code, which incorporates a provision capping the number of appointments accepted by an arbitrator.

Thereafter, the third speaker pointed out that the reason for discussing the Draft Code is ICSID’s suggestion to annex the Draft Code, once it has been finalised and adopted, to the arbitrators’ declaration under Draft Arbitration Rule 19(3)(b) . This essentially means that any arbitrator appointed under the ICSID rules will be bound by all of the provisions incorporated in the Draft Code. Therefore, the questions for discussion include whether (i) an arbitrator can be restrained from accepting more than a certain number of appointments, (ii) any efforts can be made to enforce such a policy and (iii) self-restraint on the part of arbitrators is the only plausible approach to the question.

Further, it was pointed out that the rule on incapacity under the ICSID Arbitration Rules has been amended to include an arbitrator’s disqualification on account of his or her failure to perform the required duties. In this regard, it has been suggested that where arbitrators are found not to have sufficient time for tribunal proceedings or hearings, the parties may seek to disqualify the arbitrator in question on the ground that he or she did not perform the required duties. Thus, the rule allowing for the disqualification of an arbitrator owing to his or her failure to perform the required duties is arguably one of the greatest checks against arbitrators’ lack of availability.

The third speaker concluded by pointing to the example of Vacuum Salt, where Judge Jennings advised ICSID that he would accept his appointment (as President) only if he were allowed to remain absent from the Tribunal’s oral proceedings. Further to this arrangement, Judge Jennings was not present at the Tribunal’s first session. He was absent from the Tribunal’s second session too. He ultimately did participate in the deliberations allowing issuance of the award. There was however no suggestion form either party that Judge Jennings had failed to perform the duties required of him as president of the Tribunal.

5. Discussions

Thereafter, Ketevan opened the floor for discussion to the participants. In addition to the questions raised by the speakers, this section incorporates the questions, queries, and issues raised throughout the discussion. Some of the issues raise pertinent legal questions – it would be nice to have the views of the readers on these issues.

1. Overall the feeling was that the Draft Code is a weak document. In addition to the lack of effective substantive provisions, the Draft Code is poorly drafted creating confusion and contradictory statements.

2. Some participants considered that the distinction in Article 6 with respect to the same parties, the same facts, and the same treaties does not answer the problem of double hatting. There were suggestions that the code should have taken a stronger stand regarding double hatting, i.e. either to retain the possibility of multiple roles or do away with multiple roles completely. In this regard, as drafted, the participants questioned the benefit of restrictions on double-hatting and raised concerns with regard to failing to promote diversity and the disadvantage it might have on un-represented groups, or young practitioners, for whom the current article might further reduce the chances of being appointed.

3. Article 5(2)(d) of the Draft Code requires disclosure of any relevant publications or public speeches. It was echoed that this provision is vague, as drafted, as it uses ambiguous terms (e.g. relevant public speeches) that can be interpreted broadly, while serving little purpose for meaningful disclosure, which is likely to aid unmerited arbitrator challenges.

4. Some participants were of the view that issue conflict vis-à-vis prior publication is not a critical point as it is in the green list under the IBA Guidelines. The critical issue which needs consideration is whether there is an issue conflict in relation to a legal position taken by adjudicators in prior cases. The debate of issue conflict vis-à-vis the legal positions taken by adjudicators in prior cases is not dealt with in the commentary on the Draft Code. It was considered unclear whether the Draft Code thereby wanted to leave the debate of issue conflict arising from the legal positions taken by adjudicators in prior cases wide open or confirms the understanding that prior legal positions taken in a case do not pose an issue conflict.

5. Third-party funders – what would be the consequences if an arbitrator were not to disclose the relationship with the third party which has an indirect interest in the dispute? Will mere non-disclosure of a relation with the third party funder amount to lack of independence and impartiality? Some participants were of the view that mere violation of the disclosure obligation in relation to the third party funder without any additional violation is not sufficient for a successful challenge.

The discussion went beyond the scheduled time and Ketevan stepped-in to close an engrossing discussion, which gives reason to continue the discussion with the participants on another occasion, hopefully soon.

A Meeting of the Two Worlds: The Human Rights Regime and International Investment Law – A Critique of Urbaser v. Argentina

Priya Garg*

A plethora of cases have been filed before investment tribunals regarding the issue of interaction or conflict between human rights obligations of investor or State and his or its, as the case may be, duties under international investment law (hereinafter, IIL).[1] The recent case of Urbaser v. Argentina only joins this already long queue. Critique of the case has been made before as well on this blog and it can be accessed here. There have been several other write ups as well analysing this verdict. The present post presents a fresh analysis on certain aspects or furthers the already made analysis of this judgement.

In this case, Claimants are two Spanish shareholders in the company which secured from the Argentinean government the contract for providing water and sewage services to the country’s low-income regions. When the agreement was entered into, only a limited percentage of the Argentinean inhabitants had access to drinking water and sewage services. Therefore, the primary objective behind the agreement was to expand these services in the concerned regions. Subsequently, Argentina faced financial emergency due to which its government began imposing restrictions and conditions upon the foreign investor at hand for securing benefits for its own residents. One of them was the restraint against cutting water and sewage supply of the households which have not paid their dues to the company. This pushed the company into losses, eventually resulting into its insolvency.

Therefore, the Claimant approached the investment tribunal contending the violation by Argentina of its Spain-Argentina BIT obligations. Argentina (Respondent) defended itself by arguing that its IIL obligation did not stand breached because it had acted in the manner which its human rights obligations under its domestic as well as international law required. Additionally, it counterclaimed that the Claimant’s failure to finish in time its pipe laying and other kind of work promised under its contract with Argentina amounted to the violation of the former’s obligations under contract law and the obligations of pact sunt servanda and good faith under international law. Moreover, it argued that since this non-performance of the contractual obligations by the investor denied the Argentinean residents of their basic right to water and sanitation, therefore the Claimant’s contractual breach simultaneously resulted in its violation of its human rights obligations under international law.

It is crucial to note, as will be made clear later as to why, that under the applicable law clause of their BIT, Spain and Argentina agreed that the investment tribunal shall arrive at its decision on the basis of the BIT Agreement and, where appropriate, on the basis of the other treaties between the Parties, the host nation’s domestic law and general principles of international law (Article IX(5), Argentina-Spain BIT (1991)). Hence, the presence of this applicable law clause, which allows the application of international law principles, ultimately made the Respondent take support of its international human rights obligations to defend itself as well as to develop a counterclaim against the Claimant.

Finally, the investment tribunal identified ‘Right to Water’ as a ‘human right’ under international law. It accepted the Respondent’s defence resting on its international human right obligations to conclude that the Respondent’s conduct did not amount to the breach of its IIL obligations. It however denied that the Claimant’s non-adherence to the contractual terms of expanding water and sewage network in the Argentinean regions has amounted to violation of its human rights obligations under international law. Very interestingly, the Tribunal nevertheless went on to state that the international human rights obligations can be ‘imposed’ ‘directly’ on private corporations (i.e. non-state actors) in relation to their conduct with the residents of the host nations. It relied on conventions and international documents such as the UDHR and International Covenant on Economic, Social and Cultural Rights (ICESCR) among others to substantiate its assertion.

Firstly, this case contributes by allowing the host nation to successfully raise the defence of its international human rights obligations against the investor’s allegation of breach of the BIT obligations by the former. In earlier cases, in the similar context, such a defence was either not allowed or was not discussed or it did not influence the tribunal’s final verdict despite its acceptance as a principle.[2]

Secondly, it would be fascinating to notice that the tribunal at one place remarked that Argentina’s constitutional law obligations (which also contain its international law obligations because under the Argentinean Constitution, international law obligations override the country’s constitutional law provisions as well) will ride over its BIT obligations because the investor while undertaking its investment decision could have discovered by conducting its due diligence the existence of these prior obligations of the State of Argentina under its domestic law.[3] Making this kind of observation is also no mean feat for an investment tribunal.

This case is also significant because it stated that the international human rights obligations can be imposed directly on private corporations/investors. I begin with critiquing this stance of the investment tribunal.

Under international law, an entity can be a subject or an object of international law wherein objects are relatively more passive players than subjects. Though objects can be beneficiaries of or adherers to the international law provisions, nevertheless unlike subjects, they can neither directly bring an action nor can they be directly sued in relation to these provisions. Conventionally and as a matter of rule, States and international organisations are considered as subjects while non-state entities such as private corporations or individuals are not. On the basis of the distinction that exists between subjects and objects, obligations and rights under international law can be classified as primary/direct and secondary/indirect.  While obligations can be ‘imposed’ on objects directly, they can be ‘enforced’ only through the State governing these objects and not by directly suing the objects.

However, direct enforcement is possible by a State against the objects belonging to some another State if both of they agree upon creating a legal mechanism (such as constituting a tribunal) for this purpose. Unless this happens, direct enforcement of rights against objects is not legally correct. This is because creation of such an arrangement otherwise would undermine the States autonomy as they would then lose a share of their autonomy and power vis-à-vis their own objects if direct claims against the objects come to be permitted.

In the present case, Tribunal cited international documents and advanced other arguments based on logic[4] to state that human rights obligations such as the Right to Water can be ‘imposed’ directly on private corporations.[5] Even if this assertion and the approach behind arriving at it is considered to be correct, then also this does not ipso facto imply that such obligations can even be directly ‘enforced’ against private corporation by the host nation. As explained above, this direct ‘enforcement’ (and not mere direct ‘imposition’ of obligations) under international law against non-state actors can only happen when the concerned states have agreed to creating an international forum for such direct enforcement. Clearly and for obvious reasons, the states’ consent under their BIT to submit the disputes ‘relating to the BIT’ to the investment tribunal could not be reasonably read as their consent to vest this tribunal with the power to allow direct ‘enforcement’ of international law obligations against the ‘objects’ of international law. Hence, any attempt by the Tribunal, if undertaken at all, to directly ‘enforce’ international law obligations against the non-state actors (here, investor) would infringe upon the sovereignty of the State to which the investor belongs. Hence, this would be inappropriate under international law.

In the present case, though ultimately the Tribunal did not allow the direct ‘enforcement’ of any human right obligation[6] against the private entities and hence did not commit the error of law of the nature just highlighted above; nevertheless, its failure to clarify the difference that exists between direct ‘imposition’ and ‘enforcement’ of obligations existing under international law could lead to a misunderstood interpretation of the tribunal’s stance in this case, in future. Hence this clarification I just brought into notice becomes significant.

There were some loopholes even in the reasoning of the tribunal behind direct imposition of international law obligations on investor. The Tribunal explained that international law obligations, such as human rights obligations, can be directly imposed on investors (in addition to States) because under IIL, investors have the ‘right’ to directly obtain benefits out of the BIT provisions and that hence, it would be unjust to assert that no ‘duty’ can be directly fastened on them under the same regime.[7]

This is fallacious because under a BIT both the party nations ‘mutually’ share the rights and duties. Further, they simultaneously consent to allowing the investors of each other’s nation to carry out investment in the foreign soil on favourable terms. Hence, at very juncture itself, there is no prima facie or blatant asymmetry between the negotiating States and there is an element of consent with respect to the terms of a BIT. Infact, as a matter of fact, this is how BITs have been drafted since their inception. And it is an altogether different ‘policy’ question if we wish to make amendments in the pattern and the format of the BITs so as to impose substantive ‘obligations’ directly on private investors as well instead of imposing them only on the party nations while leaving the investors with only substantive ‘rights’ under BIT. Hence, if any country wishes to impose such direct obligations on private foreign investors they can incorporate a provision to that effect under their BITs. Resultantly, it is not in the realm of an adjudicatory body to suo moto extend the substantive law obligations to private investors when BIT is silent on this point as in the case in the present fact scenario.

Another fallacy in the tribunal’s reasoning is that it has stated its stance on several such issues relating to international human rights law regarding which serious and never-ending debates already exist. For instance, it is debatable if a) right to water is a standalone international human right, b) direct human right obligations have indeed been fastened on private corporations under different human right documents such as UDHR, ICESCR and if so, then what is the extent of such obligations, or c) the UDHR provision(s) imposing obligations on non-state actors fall under customary international law and is hence binding.

The latter point is crucial because UDHR by virtue of being a declaration and not a treaty would be otherwise not binding. Similarly, at another place, while explaining its stance that international human rights obligations can be imposed directly on private corporations, the tribunal reasoned that since as per the documents dealing with obligations of this kind human rights are for everyone, this implies that the obligation to not destroy them ought to be discharged by all, including non-state actors.[8] This kind of reasoning by the Tribunal has been termed beforehand as the ‘natural rights approach’ to understanding the human rights obligations. However the correctness of this approach is itself a matter of debate. Despite this, the tribunal did not delve into the discussion about the arguments and counter-arguments that already exist on each of these contentious matters. Instead, it only outrightly adopted one side of the argument(s) that already has been advanced in each of the debates without explaining why the other side of argument was not endorsed by it.[9] This lack of elaborate reasoning and discussion would make its analysis and verdict prone to being departed from.

Additionally, another problem in the tribunal’s reasoning is that certain portions of its judgement[10] may give an impression that it was trying to use the applicable law clause of the Spain-Argentina BIT, wherein it has been mentioned that the BIT dispute could be decided in accordance with international law provisions as well, to ‘create’ obligations for the private investor which the BIT did not even contain in the first place. This is because unlike in case of Morocco-Nigeria BIT, under the Spain-Argentina BIT, no human right obligation of any kind has been imposed on the investors.

Therefore, the phrase in the applicable law clause of the Spain-Argentina BIT allowing the use of international law provisions by the Tribunal implied that in cases of ambiguity in relation to the BIT provisions, other related areas of law such as the international law can be used to arrive at the correct interpretation by the Tribunal. Hence, the permission given under the applicable law clause to the Tribunal to resort to the international law provisions did not imply that the international law provisions can be used to create a completely new and standalone obligation without it being mentioned in the BIT.

However, I also acknowledge the concern that may exist when I state that a new human right obligation can be imposed by an investment tribunal on investor only when the obligation finds a mention in the BIT. It is that amidst the pressure to attract greater foreign investment, specifically so in case of underdeveloped and developing nations, countries can do away with insisting on incorporating such non-investment related provisions under their BIT. Nevertheless, existence of this concern does not ipso facto imply that investment tribunal begins utilizing its powers to ‘create’ human rights obligations for investors having their existence only under international law while the BIT is completely silent on this point. Therefore, this understanding of the Tribunal of the impact of the applicable law clause under the BIT allowing the reference to international law provisions requires correction.

As corollary to this concern, I have another reservation against the tribunal’s discussing in detail that if in the present case the investor had indeed violated the Argentinian residents’ human rights.[11] This was done to address the Respondent’s counterclaim that the Claimant has violated its international human rights obligations. However, it was not even required of the Tribunal to discuss the merits of this contention of the Respondent. This is because in the Spain-Argentina BIT, there is no umbrella clause. Hence, mere violation of any international human rights obligations without involving the contravention of a BIT provisions would not confer the jurisdiction on the investment tribunal to decide the issue of such contravention.

Finally, I discuss if the verdict actually marks a significant shift in the position of law under the IIL regime so far the interface between human rights and IIL obligations is concerned.

Upon reading this verdict there is likely to be a temptation to overestimate its contribution. Its selective reading is likely to make one believe that this case at least states, if not anything else as being significant, that international human rights obligations can be directly ‘imposed’ on private corporations.[12] This inference, if arrived at, would not be correct as this proposition comes alive only against a specific backdrop.

This is because first of all, in the verdict it has been explicitly stated that international human right obligations cannot be directly imposed on investors where their act does not amount to ‘destruction’ of existing human rights. Hence, ‘omission’ in stopping the ongoing destruction of human rights by someone else or taking positive steps for promotion of human rights of the host nation’s inhabitants would not attract claims of international human rights directly against investor by host nation. Therefore, where host state seeks to compel its foreign investor to perform its contractual obligation to expand water supply and sanitation network and to continue providing water supply and sanitation services to its inhabitants despite their non payment of bill by arguing that international human rights requires this, this judgement would be of no practical utility to the host nation.

Second, very interestingly, this case destroys its own contribution of stating that international law obligations can be imposed directly on corporations (i.e. non-State actors). This is because while awarding the final relief, the tribunal said that even if the investor was found to have been violating its human right obligation to provide water supply nevertheless this cannot allow the host nation to claim damages from him.[13] This is because such duty of reparation by way of damages against the investor (i.e. the aspect of the possibility of direct ‘enforcement’) does not exist under the Spain-Argentina BIT which is often the case with the BITs. Hence the practically useful aspect for the host nation of the tribunal’s stance that international human rights obligations can be directly ‘imposed’ on private corporations is only that this proposition can be used by any tribunal as a mitigating factor thereby reducing the quantum of damages that it was otherwise going to grant to private investor against the host State’s violation of its BIT obligations.

Alternatively, sometime in future this proposition may prod a host State to plead in cases of breach of international human rights obligations by private investor that the investor cannot approach the investment tribunal to claim remedy against the host State for its alleged violation of its BIT obligation. The application of the ‘clean hands doctrine’ should prevent the guilty foreign investor from seeking the tribunal’s assistance in getting its grievance resolved under BIT.

And it is only to this limited extent and for this narrow purpose, the Tribunal’s proposition imposing international human rights obligations directly on investors can be useful to the host nation.

Further, as a matter of conclusion I would also like to state given the several loopholes that exist in the approach of the tribunal in arriving at its verdict, there is uncertainty if this verdict, given all its flaws as highlighted by me in this paper, would at all be followed by investment tribunals ‘as it is’ in the future.


Priya Garg, Student at West Bengal National University of Juridical Sciences, Kolkata.


[1] Marc Jacob, International Investment Agreements and Human Rights, INEF Research Paper Series Human Rights, Corporate Responsibility and Sustainable Development, 14, 03/2010, Institute for Development and Peace (2010).

[2] Tamar Meshel, Human Rights in Investor-State Arbitration: The Human Right to Water and Beyond, 6:2 Journal of International Dispute Settlement 9-17 (2015); Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12; Compañia de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3; Biwater v. Tanzania, ICSID Case No. ARB/05/22; ICSID Case No. ARB/04/4; Técnicas Medioambientales Tecmed S.A. v. United Mexican States, ICSID Case No. ARB (AF)/00/2; Marc Jacob, supra 1, at 16 (Another example of this conservative stand can be found in the Metalclad case where the tribunal did not view the public purpose exceptions favourably. According to the conventional view, only the effect of the impugned state measure on the property rights of an investor is relevant, the purpose of the state’s actions is not relevant. Hence, State’s obligations to pay compensation for expropriation can arise irrespective of the benefits that the measure could carry for the society).

[3] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶514 & 515.

[4] See Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1193 and 1994.

[5] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1193-1205.

[6] Even if it is ‘imposed’ these obligations existing under international law directly on private companies.

[7] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1194.

[8] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1199.

[9] See Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1182-1210.

[10] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1210 (For instance, when the Tribunal remarked that international human rights law might have been resorted to by it for abstaining the investor corporation from committing the act amounting to the destruction of the existing human rights under international law).

[11] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1193-1221.

[12] E.g., Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1193-1210.

[13] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic (Respondent), ICSID Case No. ARB/07/26, ¶1220.

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

 

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.

 

India’s Federalism and Investment Arbitration

by Sarthak Malhotra*

A key area of exposition both in Public International Law and Investment Arbitration is what constitutes an ‘act of state’. The Draft Articles on State Responsibility have been a ground-breaking work in codifying the rules of attribution of responsibility to the states. A related issue in this regard is the attribution of liability to a State in cases of breach of its treaty obligations by its political sub-divisions.

In many countries, numerous policy related issues are not handled by the Central Government. Instead, sub-divisions or states or local governments have been delegated the power to decide on numerous policy and operational issues. There is a federal form of governance in many countries like United States of America, India, Australia, Canada, Brazil albeit in different forms.

The implication of a federal form of government is that the political sub-divisions of a country exercise internal jurisdiction, both regulatory and otherwise, subject to the internal law. For instance, in India, the states reserve exclusive power in issues of inter alia public health and sanitation and taxes on lands and buildings. This means that a foreign investor may find itself pitted against a state government for reasons such as discrimination, expropriation and other such protections guaranteed to it under a BIT. Even though it is the Central Government which enters into treaty obligations and thus owes responsibility to the foreign investor, it may be possible that a state or a local government is in breach of the State’s obligation under the BITs. Could, in such a case, the Central Government be held responsible for the state government’s actions?

Article 25 of the ICSID Convention extends ICSID’s jurisdiction to legal disputes arising directly out of an investment between a Contracting State or any constituent subdivision or agency of a Contracting State designated to it by that State and a national of another Contracting State. Considering that ICSID’s jurisdiction is consent based, Article 25(3) mandates that the consent by a constituent subdivision or agency of a Contracting State shall require the approval of that State unless that State notifies that no such approval is required.

In Vivendi v. Argentina, Argentina relied on its federal system under its Constitution in arguing that the acts of officials of the Province of Tucumán could not be attributed to the federal government and, accordingly, the Tribunal lacked jurisdiction over the Claimant’s claims. Moreover, Argentina had not made any designation or filed any consent pursuant to abovementioned Article 25(3). The Tribunal rejected this contention and observed that under international law, and for purposes of jurisdiction of the Tribunal, it was well established that actions of a political subdivision of federal state are attributable to the central government and that it was clear that the internal constitutional structure of a country could not alter these obligations. The tribunal also took notice of the First report on State responsibility by Prof. James Crawford, the then Special Rapporteur on State Responsibility that referred to the “established principle”  of  the inability of a State federal in structure to “rely on the federal or decentralized character of its constitution to limit the scope of its international responsibilities.” This principle is also enshrined in Article 7 of Draft Articles of State Responsibility. In this regard, the Commentary to Draft articles states that international law does not permit a State to escape its international responsibilities by a mere process of internal subdivision.  (Paragraph No. 7, Commentary)  Therefore, Article 25(3) does not restrict the subject matter jurisdiction of the Tribunal; rather, it expands of the scope of ICSID arbitration ratione personae to include subdivisions and agencies of a Contracting State.

As noted above, the acts of a subdivision are attributable to the State in a treaty-based arbitration. Whether such acts are attributable to the State in a contract-based arbitration is debatable, given how a Central Government is not usually a signatory to a contract between the sub-division and the investor. (See Niko v. Bangladesh)

There are also numerous instances of NAFTA investment disputes involving local regulatory measures. In Metalclad v. Mexico, the tribunal presided by Professor Sir Elihu Lautherpacht made it clear that a State is internationally responsible for the acts of its organs and sub-national units. The Claimant was claiming violations of NAFTA Articles 1105 (“Minimum Standard of Treatment”) and 1110 (“Expropriation”) for the reason that the local municipal governments of SLP and Guadalcazar in Mexico denied a construction permit in an arbitrary and non-discriminatory manner.

Often termed as a quasi-federal constitution- a mixture of federal and unitary elements leaning more towards the latter, the Indian Constitution distributes power to legislate on different issues to both Central and state Governments. The Seventh Schedule to the Constitution lists down subjects on which the Central Government and the state Governments have the power to legislate on. The Concurrent list contains subject on which both levels of Government have concurrent jurisdiction. It is because of this distribution of legislative power that the states do not posses power to enter into treaties and agreements with foreign countries and their implementation. In this regard, Entry 14 of the Union List reads as follows: “14. Entering into treaties and agreements with foreign countries and implementing of treaties, agreements and conventions with foreign countries.”

Therefore, only the central government can enter into treaties and agreements such as Bilateral Investment Treaties with foreign countries. This may give rise to peculiar situation where a foreign investor is aggrieved by any policy/decision formulated by the state government, something in which, as per the constitutional design, the Central government would have had no role to play. The issue that then arises is whether a foreign investor could bring a claim against a state government’s actions? As discussed above, a government cannot escape responsibility in international law by hiding behind its internal federal structure.

Reference must also be made to Calcutta High Court’s judgment in Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures SAS (2014 SCC OnLine Cal 17695), the first decision by an Indian court on a case arising out of an investment treaty arbitration. The Respondent had initiated an investment treaty claim under the 1997 India-France BIT, naming the Republic of India, the State of West Bengal and the Port Trust as respondents. The Petitioner was seeking an anti-arbitration injunction against the Respondent, prohibiting it from proceeding with an investment treaty claim in which the Petitioner was identified as a respondent. The High Court ordered the Respondent to not continue with the proceedings against the Port.

One of the Port’s main contentions was that it did not have an arbitration agreement with the Respondent and therefore it could not be made a party to the BIT arbitration. The Court took note of Respondent’s Notice of Claim under the BIT, which referred to Port as an organ of the Union of India and stated that although the Union of India would be responsible for the acts of Port, it does not necessarily make Port a party to the arbitration agreement under BIT. In arriving on this conclusion the High Court relied on the ruling of the English Court of Appeal decision in City of London v. Sancheti ((2009) 1 LLR 117) in which the court refused to rule that the Corporation of London was a party to the arbitration agreement notwithstanding the fact that under certain circumstance the State may be responsible under international law for the acts of one of its local authorities, or may have to take steps to redress wrongs committed by one of its local authorities.

This judgment underlines the importance of how the courts perceive political sub-constituent units being made party to a treaty based arbitration. As noted by the High Court, although the Central Government would be responsible for its political sub-constituent units, such units cannot be made parties to a treaty based arbitration for the mere reason that there is no arbitration agreement under the BITs between an investor and such units. Moreover, making such units party to the arbitration agreement is wholly unnecessary since a Government would be responsible for their actions in international law.

While the old Model India BIT was silent on the liability for actions of the political sub-divisions or sub-governments, the provisions of India’s new Model BIT seem to reflect the international jurisprudence. Article 4 lays down the standard of national treatment and extends the obligation to the Sub-national Governments. Article 1.2 defines ‘Sub-national Governments’ as a State Government or a Union Territory administration but does not include local governments. Moreover, Article 2.4, states that the BIT will not apply to any measure undertaken by a local government. Therefore, measures undertaken by urban local bodies, municipal corporations, village level governments, or enterprises owned or controlled by either of them are not covered under the new BIT. In absence of any substantive new treaty negotiations, it remains to be seen whether this carve out would be acceptable to other countries.


* Sarthak Malhotra, B.Com./LL.B. (Hons.), Gujarat National Law University, India.

The Helping Hand of the MFN for the Intra-EU Bilateral Investment Treaties

Rimantas Daujotas, Motieka & Audzevicius PLP*

As it was recently announced, Slovakia has succeeded in referring the legality of intra-EU bilateral investment treaties to the European Court of Justice, as part of its bid to stop Dutch insurer Achmea from enforcing a €22 million UNCITRAL award. In a decision on 3 March 2016, Germany’s Federal Court of Justice ruled that it would make a preliminary reference to the ECJ on the question of whether the arbitration clause in the Slovakia-Netherlands bilateral investment treaty conflicts with EU law.

Achmea won the award in 2012 from a tribunal at the Permanent Court of Arbitration in The Hague. The tribunal found the state had breached the Slovakia-Netherlands BIT when it adopted measures prohibiting private health insurers from distributing profits to shareholders. Those measures were overturned by Slovakia’s Constitutional Court in 2010.

But Slovakia argued that the tribunal lacked jurisdiction because the BIT’s offer to arbitrate disputes expired when the state acceded to the European Union. It also contended that the tribunal failed to apply EU law, which the state argued forbids arbitration of investor-state disputes under intra-EU BITs where questions of EU law are involved.

In 2014, the Higher Regional Court of Frankfurt am Main dismissed Slovakia’s argument, ruling that the EU law in question merely prevents member states from submitting EU law disputes with one another to arbitration. Disputes between states and EU national private investors, the court said, could still go to arbitration. Based on the decision of 3 March 2016 by Germany’s Federal Court of Justice, that question will now go to the European Court of Justice to be decided.

The preliminary reference asks the ECJ to consider whether the BIT’s arbitration clause is consistent with Article 344 of the EU Treaty, which provides that “member states undertake not to submit a dispute concerning the interpretation or application of the [EU] Treaties to any method of settlement other than those provided for therein.” It also asks whether the arbitration clause in the Netherlands-Slovakia BIT constitutes discrimination against EU nationals whose home states do not have such a treaty with either the Netherlands or Slovakia, and therefore cannot benefit from the treaty’s arbitration clause. It notes, however, that should the clause be ruled discriminatory, that would not necessarily make it a dead letter: rather, the court suggests, any EU national might be able to access the arbitration clauses of any intra-EU BIT.

The last point of the Germany’s Federal Court ruling is particularly interesting, as it potentially argues on the possibility of any EU national to be able to access the arbitration clauses of any intra-EU BIT. Scholars and practitioners, such as Nikos Lavranos, secretary general of ISDS think tank EFILA, said that EU discrimination law might open the BITs’ arbitration provisions up to all EU nationals – “All EU investors should be treated the same, even if formally the BITs only apply to the signatory parties and their nationals, they should under EU law be open to all EU investors. We all have EU nationality, and discrimination on grounds of nationality is clearly prohibited under the treaties. The BITs have to be interpreted in light of that aspect of the EU treaties”.

The argument that all EU companies have EU nationality is particularly relevant. Similar issue was raised by the respondent in Poštová banka and Istrokapital v. Greece where the Respondent argued that as a societas europeas (“SE”), Istrokapital was formed and existing under the law of the EU and not under Cypriot law. In view of the fact that the EU is not a Contracting State of the ICSID Convention, Istrokapital allegedly did not qualify as an investor under Article 25(1) of the ICSID Convention. In addition, the Respondent contended that if, due to its SE nature, Istrokapital was considered to have been incorporated in Cyprus, as Claimants claimed, it had to be equally considered as incorporated in any of the other EU Member States, including Greece, and would therefore bear Greek nationality as well.

Claimants, on the other hand, argued that the nationality of a juridical person under Article 25(1) of the ICSID Convention is determined by its place of incorporation or registered office. Thus Claimants contended that the Respondent’s arguments to the effect that Istrokapital was not deemed a “national of another Contracting State” under Article 25 of the ICSID Convention mischaracterized and disregarded applicable EU law. Claimants asserted that pursuant to the European Company Regulation, SEs must be treated as public limited-liability companies of the Member State in which they have their registered office. Moreover, Claimants sustained that, per the European Company Regulation, SEs are domiciled in one single State and the fact that they can transfer their registered office within the EU did not mean that they had multiple nationalities or no nationality because such transfer was subject to registration in a Member State at a time.

Unfortunately, the tribunal firstly concluded that it lacked jurisdiction ratione materiae to entertain the dispute and deemed not necessary to examine the remaining objections to jurisdiction concerning absence of jurisdiction ratione personae and ratione temporis.

However, arguments of both sides seem particularly relevant when discussing whether all EU companies have EU nationality and any EU national might be able to access the arbitration clauses of any intra-EU BIT. Notwithstanding the problem concerning EU not being signatory to ICSID Convention (which may be rebutted by the fact that tribunal’s jurisdiction is firstly derived from the relevant BIT or that it would not work in non-ICSID arbitrations), another important aspect should be considered when discussing assess to any intra-EU BIT by EU nationals and that is – the MFN clause.

It is clear that all or most of the intra-EU BITs include the MFN clause which particularly prohibits discrimination on grounds of nationality. Thus, due to the MFN clause, distinctions based on nationality or additional requirements concerning nationality which are not allowed at the merits stage of the dispute, should also be prohibited when considering the jurisdictional phase of the dispute.

For example, if the MFN clause is also applied to the definition of the investor, i.e. to the requirements the investor should possess in order to be afforded protection granted under the basic treaty, does it mean that treatment afforded under the third party treaty (also intra-EU BIT) which is more favourable (e.g. less nationality based requirements) should also be applied to the investor bringing its claim under the basic treaty? In particular, could the investor use more favourable intra-EU BIT in order to be afforded protection under the basic treaty (also intra-EU BIT)? It is clear that this is a question of the scope of the MFN clause and since the definitions of “investor” and “investment” are pre-conditions of the investment-treaty tribunal’s jurisdiction, these questions could only be answered while analyzing the basis for the tribunal’s jurisdiction and relationship of the MFN clause thereof.

The view, as it stands right now on the scope and applicability of the MFN clause for jurisdictional purposes, is very divergent. Some practitioners had fiercely denied the possibility to apply MFN clause to either ratione personae or ratione materiae requirements.

However, applicability of the MFN clause to the jurisdictional provisions of the BITs was confirmed by the tribunals in Bayindir v Pakistan, MTD Equity v Chile were they argued that access to these procedural mechanisms is a part of the protection afforded under the treaty. The tribunal in Siemens v Argentina which considered the applicability of the MFN clause to dispute resolution provision had stated that “dispute settlement is as important as other matters governed by the BIT and is an integral part of the investment protection”. In RosInvestCo UK Ltd v Russia the tribunal held that the MFN clause in the UK-Russia BIT extended to dispute resolution provisions, however, the tribunal found that the UK claimant’s claims alleging breaches of the BIT’s expropriation provisions fell outside the scope of the BIT’s arbitration clause, which limited arbitration to a determination of the amount of compensation once expropriation had been established. Notwithstanding the latter, the tribunal concluded that it had jurisdiction over the expropriation claims because the Denmark-Russia BIT contained an arbitration clause broad enough to encompass the claims. Therefore, the UK-Russia BIT’s most-favored-nation clause allowed the claimant to expand jurisdiction ratione materiae.

Thus, taking into account the above, it seems that there are legitimate grounds to analyze the application of the MFN clause to the definition of investor or the ratione personae as well.

Since the prevailing view is that the appropriate comparator for the aggrieved investor are other investors in the same sector or who are competitors, a hypothetical scenario may be construed where two investors, legal persons, both from the EU invest in similar business sectors in other EU host-states. In this sample scenario, it is clear that the MFN clause would prohibit to impose heavier burdens for such similar investors coming from different EU Member states.

The result is that if one the EU investors is incorporated in the EU Member state or is incorporated as a societas europeas (“SE”) coming from other EU member state, it would only need to prove that it is constituted under the laws of any EU member state and nothing more, similarly as to the investor coming from other EU member state. Since Recital 6 and Article 1(1) of SE Regulation confirms that a SE derives its existence and legal personality from EU law, it could be claimed that such an investor is the EU national for the purposes of tribunal’s jurisdiction. That implies that other EU investors may not be afforded treatment less favourable than any other investor coming from the EU.  Now, if due to its SE nature, EU investor would be considered to have been incorporated in EU as a whole, it would be equally considered as incorporated in any of the other EU Member States, including the host-state. However, this does not seem a problem since most of the BITs also require to accord national treatment, that is, treatment no less favorable than that accorded to its nationals. Thus the result is the same as in the case of the MFN.

Effectively, based on this example, it could be argued that any intra-EU BITs, which provide any additional nationality requirements, in addition to the one which requires establishment in the EU Member state, would be contradictory to the MFN clause. Such a theoretical approach is confirmed by the analogous practice of investment treaty tribunals’ addressing the relationship between dispute resolution clauses or substantive protection clauses and the MFN clause referred to above.


Rimantas Daujotas – PhD Scholar at the Queen Mary University, Senior associate at Motieka & Audzevicius PLP

 

ICSID Complaint as Alternative to Supplemental Filing

by Zoltán S. Novák, TaylorWessing

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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.