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.

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

Alexandros-Cătălin Bakos[1]

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

Some background information on estoppel

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

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

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

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

The problems with the investment tribunals’ application of estoppel

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

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

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

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

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

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

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

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

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


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

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

[3] Ibid.

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

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

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

[7] Ibid..

[8] Sheppard, p. 225.

[9] Griffith; Seif, p. 126.

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

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

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

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

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

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.

The Relationship between EU State Aid law and Obligations Arising under Investment Treaties

by Alexandros Catalin Bakos, LL.M 

I. Introduction:

In recent years, a series of debates have emerged in regard to the relationship between the EU State Aid law[1], on the one hand, and obligations arising under Investment Treaties (to which the EU is not a formal party)[2], on the other hand. Those debates manifest themselves at different levels and have powerful implications: firstly, they clarify the scope of State Aid law and its relationship with one of the most important fields – that of Investment Law. Secondly, they clarify – or complicate, depending on the vantage point from which one analyses the issue – the relationship between EU law and Public International Law[3]. And, thirdly, they raise questions of interpretation of EU law, especially from a historical interpretation point of view and from a teleological point of view – this is a great tool to understand the limits of EU law (the real limits, not the attempts to politically force an interpretation which extends the limits of EU law beyond what the Member States had envisioned initially).

Needless to say, the practical importance of the relationship between State Aid law and obligations arising under ITs can hardly be overstated. One can only look at the recent Micula affair[4] and the unenviable position in which Romania finds itself: on the one hand, it is faced with severe opposition from the European Commission as regards the observing of certain obligations arising under ITs (more specifically, the obligation to pay compensation to the Micula brothers as the final award against Romania dictates). On the other hand, Romania cannot outright ignore the legal framework set by the ITs (including the binding effect of the awards within this field) and show total disregard to the interests (and even rights) of investors.

As such, I endeavour in this study to provide an analysis of this relationship between State Aid law and obligations arising under ITs. I will focus my attention only on the first tier of this issue – the relationship between State Aid law and obligations arising under ITs themselves – and, as such, I will not analyse more general issues such the relationship between General Public International Law and EU law. Moreover, I will ignore general issues of interpretation of EU law. However, those issues will be touched upon where relevant for the analysis conducted through the present study.

II. Analysis:

Before starting, it should be stated that this analysis is composed of two parts. Firstly, I will analyse the relationship between State Aid law and obligations arising under ITs signed by EU Member States (intra-EU ITs) (1). Subsequently, I will analyse what the relationship between State Aid law and obligations arising under ITs when the ITs’ signatories are both from within the EU and from outside the EU (2).

  1. The relationship between State Aid law and obligations arising under ITs signed by EU Member States (intra-EU ITs):

(a) Scope of analysis:

The problem with intra-EU ITs and State Aid law seems to be that compensation given to investors by member states, as a result of an investment tribunal award, is considered illegal state aid, in cases such as the Micula one.[5] As such, the analysis should address the following: can an investment award rendered by an investment tribunal on the basis of an intra-EU IT be considered illegal State Aid? If so, when can it be considered as such (b)? Following, the next question should be: notwithstanding specific issues of whether enforcement of an investment arbitral award can be considered illegal State Aid, is it justified to ever argue for the termination of an intra-EU IT relying on State Aid law? In other words, can the intra-EU IT, by itself, be considered as violating EU rules on State Aid (c)?

(b) Can an investment award rendered by an investment tribunal on the basis of an intra-EU IT be considered illegal state aid? If so, when can it be considered as such?

In order to address this question, the first issue which must be clarified is what exactly is considered illegal state aid[6]: under Article 107 of the Treaty on the Functioning of the European Union[7], state aid refers to any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods in so far as it affects trade between Member States.[8]

In other words, a number of four conditions must be met in order for a measure to be considered State aid: the State must intervene through that measure (and that measure must be imputable to the state[9]); the beneficiary of the intervention must be conferred an advantage; competition must be distorted; and the intervention must be likely to affect trade between member states.[10] As such, (when) is an investment award rendered by an arbitral tribunal on the basis of an intra-EU IT considered State Aid? In order to answer the question, a qualification of an investment award which leads to an obligation on the State to pay compensation to a wronged investor must be made (including its subsequent enforcement).[11] In simple terms, an award is a final judgement or decision, esp. one by an arbitrator or by a jury assessing damages.[12] Continuing, the enforcement of an award is the act or process of compelling compliance with a law, mandate, command, decree, or agreement.[13]

Of course, there is a question which arises, at this moment: supposing an arbitral tribunal renders an award against an EU member-state based on an intra-EU IT and the State enforces it, what is the legal basis for that? The answer can be found in the two most relied-on arbitration frameworks: the ICSID[14] Convention on the Settlement of Investment Disputes between States and Nationals of Other States[15] which provides that the award given under its framework shall be binding on the parties[16] and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards[17] which provides that each Contracting State shall recognize arbitral awards as binding and enforce them[18]. Thus, an obligation to respect and enforce arbitral awards arises for the state under Public International Law.[19]

This leads to an important question regarding State Aid law: is the condition that the measure must be imputable to the State met? The issue of imputable conduct has been defined by the CJEU as follows: this condition is met when the decisions of Member States by which, in pursuit of their own economic and social objectives, they give, by unilateral and autonomous decisions, resources to undertakings or other persons or procure for them advantages intended to encourage the attainment of the economic or social objectives sought.[20]

Can arbitral awards which are enforced as an obligation under Public International Law be considered as being unilateral and autonomous? Enforcement is, in the end, the latter part of a judicial proceeding. There is nothing autonomous or unilateral about it. And it would be artificial to separate the arbitral decision itself from the enforcement. Just because there is no central executive authority to enforce decisions rendered under Public International Law does not mean that the enforcement of those awards can be separated from the framework in which they arose: obligations owed to other legal subjects which, usually[21], have as their ultimate basis a treaty or customary relationship (a bilateral or multilateral relationship).

This view is shared by two other authors who base their approach on the fact that, when enforcing arbitral decisions, states do not act in their sovereign powers, but as agent(s) of the international community[22]. And there is undeniable merit to this view: that States, when undertaking obligations in their sovereign capacity, are giving up part of their sovereignty.[23] Moreover, even EU official bodies have constantly repeated this fact.[24] In other words, because States give up part of their sovereignty when undertaking legal obligations, they can no longer act unilaterally and autonomously within the fields and situations where they are under certain obligations.

Therefore, it can be concluded that, under EU law, as a rule, a state acting on the basis of an investor-state arbitration award, is not acting unilaterally and autonomously and, as such, the analysed measure regarding a possible issue of illegal State Aid cannot be imputable to the State – a condition for a measure to be considered State Aid.

In the following, I shall research whether there are exceptions to this rule and, as such, whether certain cases of compensating investors as a consequence of an arbitral award can be considered illegal State Aid. A practical case may offer better insights into this question.

Perhaps the most important case for the present analysis which could demonstrate whether there can exist exceptions to the rule that enforcement of arbitral awards rendered within the framework of ITs is not illegal State Aid is the Micula case. In short, this is what happened: the Micula brothers were handed, on the basis of a BIT (the Romanian – Swedish Bilateral Investment Treaty) certain custom duty exemptions. This happened before accession to the EU by Romania. Subsequently, close to the moment of accession (in 2004), Romania repealed the said exemptions, as a compliance mechanism with EU State Aid rules. On the basis of this measure, the Micula brothers challenged the measure in an arbitral tribunal under the relevant IT.

During proceedings, the EU Commission intervened as amicus curiae, effectively arguing against any reinstatement of the exemptions since that would amount to illegal State Aid. However, the arbitral tribunal ignored the Commission’s arguments and found against Romania, effectively ruling that a breach of the claimants’ legitimate expectations occurred, awarding damages.[25] As such, the claimants sought the enforcement of the arbitral decision in Romanian courts. They succeeded although the Commission had once again intervened looking to oppose the enforcement. This led the Commission to open a formal investigation into what they argued could constitute illegal State Aid. It was eventually decided by the Commission that the enforcement of the award (the payment of compensation) constituted illegal State Aid[26] and this bore upon Romania the obligation to recover the awarded compensation.[27] Moreover, the Micula brothers challenged the Commission’s decision in the CJEU, the case pending before the Court at the moment (case T-646/14).[28]

The entire Micula case complicates the matters. In order to better analyse the whole issue, two elements should be separated from the facts: on the one hand, there is the issue of the initial exemption, itself. Romania effectively considered the initial exemption to be illegal State Aid and, as a consequence, repealed it. Moreover, it seems that a formal analysis into the whole exemption leads to the same conclusion: this is an act imputable to the State, which offers the beneficiary an economic advantage, distorts competition and can affect trade between Member states. What complicates matters is that the relevant BIT, on the other hand, protects the legitimate expectations, not a specific exemption such as the custom duties exemption offered by Romania. Of course, once a specific benefit offered to the investors generated legitimate expectations, the standard of legitimate expectations set by the BIT becomes applicable and enforceable. However, there is a difference between the exemption and the obligation to guarantee legitimate expectations.

But the questions which have to be addressed now are: firstly, at the moment of the granting of the exemption, which was fairly close to the moment of Romania’s accession to the EU, were the exemptions granted by the Romanian State to be considered as having generated legitimate expectations? And secondly, what is the basis for ignoring the investment tribunal’s award, by the European Commission? I have already mentioned that I do not consider the EU Legal Regime as being totally autonomous. Thus, it is not separated from the framework of general Public International Law. It is just a system which, from a Public International Law point of view, is in (apparent) conflict with another system: that of Foreign Investment Law. Thus, which is to be considered as having primacy and why?

I will now address the first question: I argue that legitimate expectations indeed existed. I base my claim on two elements: firstly, the arbitral tribunal’s decision to award compensation to the Micula brothers, as a result of the repealing of the custom duties incentive scheme[29]. Secondly, it has been found in case-law regarding Foreign Investment that if a benefit awarded by a State to an investor was presented, by representations made to the investor, as having been in compliance with the legal requirements of the host state, the investment must be awarded the expected degree of protection (by respecting the awarded benefits on which the investor relied), even if, in reality it conflicts with the host state’s law.[30] It is true that in the previously-mentioned case the claimant relied on the principle of estoppel[31], which is a specific application of the legitimate expectations doctrine[32], but the principles applied in the Kardassopoulos v. Georgia case clarify the issue for the Micula case, as well.

Thus, it is not for the investor to bear the risk of an investment which is non-compliant with the legal rules of the host state, when the host state created the expectation of conformity. And this is what happened in the Micula case, because the investment had been protected for a few years, before the repealing of the incentive scheme, creating the proper expectations of legitimacy and legality. Therefore, legitimate expectations existed and were violated by Romania through its repealing act.

Subsequently, there is the issue of analysing the (apparent) conflict between obligations arising under BITs and ones arising under EU law. As mentioned earlier, those are two conflicting legal systems with no apparent hierarchy between them (neither the obligations under foreign investment law nor the ones under EU State Aid law can be considered jus cogens – norms of a peremptory character under International Law, from which no derogation is admitted; in other words, norms of a superior value). Therefore, because those norms are considered to be of equal value, the (apparent) conflict must be settled by relying on the principle of lex posterior derogat (legi) priori.[33]

Under this framework, it can be argued that the subsequent legal regime implemented by the EU State Aid legal regime would derogate from schemes of custom duties exemption such as the one presented earlier. Such exemptions constitute State Aid and since both Romania and Sweden are part of the EU Legal Regime, it can be considered that they have derogated from the possibility to implement such State Aid. As such, if there had been an obligation under the ITs to grant such an economic advantage to the investors, there could have been a real conflict between the ITs and the EU State Aid rules.

However, there did not exist any such obligation. And this is why I mentioned earlier that there was just an apparent conflict between those two international legal regimes – the EU legal regime and the Foreign Investment legal regime – and not a real one. The obligations under ITs are not conflicting with the EU State Aid Rules. What is conflicting is the effective benefit given by the Romanian State to the Micula brothers. While this is inherently linked to the IT, it is not identified with it. This may be a nuance, but it is an important one. It demonstrates that, at least as to the relationship between obligations arising under intra-EU ITs and EU State Aid rules there is no formal conflict.

Thus, this custom duties exemption is a different thing to the protection of legitimate expectations – the ones which are actually protected by the Romanian – Swedish BIT –, expectations which had been created before the EU laws prohibiting State Aid became effective. The legitimate expectations, as mentioned earlier, must be protected, even more so when the investors acted in good faith by relying on the representations of the Romanian officials.

Moreover, it has been proved that payment of compensation as a result of an investment tribunal’s award is not a form of State Aid, because it is neither unilateral nor autonomous, as needed for measure to be imputable to the State and, as such, to be considered State Aid. Therefore, the answer to the second question must be that, while the custom duties incentive scheme constitutes State Aid, the protection of legitimate expectations – through granting compensation –, especially when they were created at a moment when the conflicting rules on State Aid had not been effective, is not State Aid.

As such, there is no obligation for Romania, neither under International Law nor under EU law to recover the paid compensation. However, there are two authors who argue that a compensation rendered as an enforcement of an arbitration award under Foreign Investment Law can constitute a violation of Article 107 of the TFEU if the action leading to an obligation to compensate consists of repealing benefits that are themselves illegal state aid under Article 107 of the TFEU[34]. While I do agree, in principle, with the authors and the opinion of Advocate General Ruiz-Jarabo Colomer in Joined Cases C-346/03 and C-529/03 that if an entitlement to compensation is recognized, the damage cannot be regarded as being equal to the sum of amounts to be repaid, since this would constitute an indirect grant of the aid found to be illegal and incompatible with the common market[35], I cannot agree that this is applicable always, as an absolute rule.

The issue should be assessed on a case by case basis. The authors’ and the Advocate General’s statements do not take into account the legitimate expectations created to the investor. And from an Investment Law point of view, not only does the investor have locus standi under arbitral proceedings in Foreign Investment proceedings, but he is considered a subject of Public International Law[36]. As such, who is to make a hierarchy between the investor’s interests – the protection of his legitimate interests – and those of another subject of Public International Law, the EU – where the fundamental interest is that of the effectiveness of the Internal Market, through a proper competition framework which underpins the functional trade between the EU Member States? From a public international law perspective, the EC legal system remains a subsystem of international law.[37]

Thus, I find such a hierarchy between a subject of Public International Law within the Investment Law field, on the one hand, and the officials of the EU, on the other hand, arbitrary and in violation of basic principles of Public International Law. Moreover, as has been stated somewhere else regarding a similar issue of EU law: just because something is mentioned repeatedly does not turn it into reality.[38]

(c) Notwithstanding specific issues whether enforcement of an investment arbitration award can be considered illegal State Aid, is it justified to ever argue for the termination of an intra-EU IT on the basis of that treaty violating the rules on State Aid prohibition?

Can the intra-EU IT, by itself, be considered as violating EU rules on State Aid? The answer, in my view, is in the negative. This is because investment treaties govern issues such as what constitutes an investment[39], admission of investments[40] or what protection does an investor receive once an investment has been made[41]. In other words, such ITs govern the abstract rules applicable to all investments, not referring to a certain specific investment (of course, the specific investment will benefit from the protection, but on the basis of fitting the framework set by the treaty, not by other means). As such, there is no obligation, ipso jure, to grant an economic advantage which can be considered State Aid under EU rules. The choice to grant that advantage is an economic/ political choice of the State, not an obligation under ITs.

Therefore, it can be concluded that investment treaties are not prohibited under State Aid rules. However, this doesn’t render the issue of the validity of intra-EU Bilateral Investment Treaties obsolete. On the contrary, this is a different discussion, which takes into consideration the common trade policy set by the 2009 Lisbon Treaty[42] and various issues such as questions of jurisdiction of investment tribunals when the parties are an EU Member and an investor from another EU Member[43]. Nonetheless, this is a different issue, going beyond the scope of the present analysis.[44]

  1. What does the relationship between State Aid law and obligations arising under ITs entail when the ITs’ signatories are both from within the EU and from without the EU:

This issue should be easier to analyse, given all that has been presented until now. One of the main problems with the relationship between the obligations arising under intra-EU ITs, on the one hand, and EU State Aid rules, on the other hand, was that the parties to the TFEU were, at the same time, parties to those intra-EU ITs. This situation complicated matters because the conflict was noticeable (although from a different perspective than the one of this analysis – that of the validity of intra-EU ITs). In the case of EU State Aid rules and obligations arising under ITs concluded with third parties, the simple answer is that, because the third party is not a party to the EU, the rules on State Aid are not opposable to it.[45] This does not mean that the EU party granting benefits to an investor from a third State, after the TFEU became effective, is not liable for violations of Article 107. But, at the same time, this will not have any bearing on the earlier obligations arising under the ITs. In that case, if the EU member state decides to repeal any State Aid benefit, it may be in compliance with EU rules on State Aid, but its responsibility will be engaged under customary international law for violating a legal obligation arising under ITs. As a consequence, this breach of international obligations gives rise to an obligation of reparation[46], which does not constitute State Aid – as has been proven in the first part.

III. Conclusion:

The debate over whether there exists a conflict between the legal regime instituted by ITs (excluding those where the EU is a party), on the one hand, and the EU’s legal regime, on the other, is neither straightforward nor devoid of political and economic implications. Through this study, I have analysed a part of this debate: the relationship between ITs, on the one hand, and the legal regime of State Aid law, on the other. I demonstrated, firstly, that obligations specifically arising under ITs are not, by themselves, in conflict with State Aid rules, because there is no ratione materiae identity.

In this context, I made a differentiation between the measures which can be considered illegal State Aid and the ITs (and their provisions such as the ones related to the protection of legitimate expectations), which, although inherently linked to such measures (such as in the Micula case) are, in the end, different. Continuing, I demonstrated why something which tends to be considered an absolute truth – the supremacy of EU law – must be qualified in the international sphere: there is no legal basis under Public International Law to consider such a supremacy when the EU legal regime is in conflict with other international legal regimes. And, finally, I analysed the situation where an IT has signatories both from within and without the EU There, I made a clear differentiation between what can amount to liability of an EU State for violations of Article 107 TFEU and responsibility of the same State under the Customary Law on State Responsibility for violations of obligations contained within ITs. I have shown how an EU State can infringe both legal regimes, at the same time, and why the EU legal regime is relative (and opposable) to the EU States only.


[1]Hereinafter referred to as State Aid law

[2] Hereinafter referred to as IT

[3] For a critique of the concept of self-contained regimes (the idea that supranational or international regimes, such as the EU, are self-contained and cannot be influenced by Public International Law rules, such as Treaty Law or the Law on State Responsibility), see Bruno Simma and Dirk Pulkowski, Of Planets and the Universe: Self-Contained Regimes in International Law, The European Journal of International Law, Vol. 17, no. 3, 2006, hereinafter cited as Simma and Pulkowski. This aspect of mutual influence between those regimes is of utmost importance to the present study, since the starting premise of the present study is that there is a mutual link between semi-autonomous regimes – such as the EU –, on one hand, and general Public International Law rules, on the other. See, for the opposite view (that the EU Legal Regime is an autonomous legal order which is not influenced by Public International Law), Laurens Ankersmit, Is ISDS in EU Trade Agreements Legal under EU law?, https://www.iisd.org/itn/2016/02/29/is-isds-in-eu-trade-agreements-legal-under-eu-law-laurens-ankersmit/ (last visited on 10/02/2018, at 20:58)

[4] Kelyn Bacon, BIT arbitration awards and State aid – the Commission’s Micula decision, http://uksala.org/bit-arbitration-awards-and-state-aid-the-commissions-micula-decision/ (last visited on 10/02/2018, at 20:53)

[5] Christian Tietje, Clemens Wackernagel, Outlawing Compliance? – The Enforcement of intra-EU Investment Awards and EU State Aid law, Policy Papers on Transnational Economic Law, June 2014, p. 2, hereinafter cited as Tietje, Wackernagel

[6] Although a thorough analysis should begin with what constitutes an undertaking, under EU law – since those entities are the beneficiaries of state aid –, I will not undertake such an analysis, for reasons of brevity. Thus, the analysis is considered to refer, implicitly, to such elements.

[7] Hereinafter, referred to as The TFEU

[8] EC (European Commission): Communication from the Commission: Draft Commission Notice on the notion of State aid pursuant to Article 107 (1) TFEU, § 5, p. 4

[9] Tamás Kende, Arbitral Awards Classified as State Aid under European Union Law, ELTE Law Journal 2015/1, p. 40

[10] http://ec.europa.eu/competition/state_aid/overview/index_en.html (last visited on 10/02/2018, at 02:55)

[11] It is true that the situation varies from one case to the other, but I have decided to begin the analysis by qualifying an investment award in abstracto, in order to assess its legality under EU State Aid law and only afterwards I shall address specific cases.

[12] Bryan A. Garner (Editor in Chief), Black’s Law Dictionary. Ninth Edition, WEST. A Thomson Reuters business, St. Paul, MN, USA, 2009, p. 157

[13] Idem, p. 608

[14] The International Centre for Settlement of Investment Disputes

[15] Hereinafter referred to as The ICSID Convention

[16] Article 53 of The ICSID Convention

[17] Hereinafter referred to as The New York Convention

[18] Article III of The New York Convention

[19] According to Article 26 of the 1969 Vienna Convention on the Law of the Treaties, every treaty in force is binding upon the parties to it and must be performed by them in good faith.

[20] Case 61/79, Amministrazione delle finanze del- lo Stato v Denkavit italiana [1980] ECR 1205, § 31

[21] Under Public International Law, the sources of legal obligations can include unilateral conduct or general principles of law, as well (see, for a comprehensive analysis, Malcolm N. Shaw, International Law. Seventh Edition, Cambridge, United Kingdom, 2014, Chapter 3: Sources, pp. 49-91). But, for the present study, this is not important, since obligations arising in Investment Law are based mostly on investment treaties (more specifically, obligations to respect and enforce arbitral awards are the relevant ones for the present analysis), while those based on general principles of law cannot be considered to have appeared from a consensual relationship between the parties to a dispute in a specific dispute. Anyway, from a strictly technical point of view, no matter the source of obligation, the ensuing legal relationship is, in the end, always (at least) bilateral (the correlative existence of the right and of the duty): Arthur L. Corbin, Rights and Duties, 33 Yale Law Journal 501, 1923-1924, p. 502. But what is important, as a bottom-line, is that an arbitral award (and the subsequent obligation of enforcement) arose under a legal relationship outside the scope of the State’s discretionary powers.

[22] Tietje, Wackernagel, p. 7

[23] Sir Hersch Lauterpacht, The Function of Law in the International Community, Oxford University Press, Oxford, United Kingdom, 2011, pp. 3-4

[24] For example, see Case 26/62, Van Gend en Loos [1963], p. 2, § 2 and Case 6/64, Costa v. Enel [1964], p. 594

[25] Ioan Micula, Viorel Micula and others v. Romania: Final Award (ICSID Case No. ARB/05/20)

[26] Article 1 of Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid […] implemented by Romania – Arbitral award Micula v. Romania of 11 December 2013

[27] All the factual information regarding the Micula affair mentioned so far has been gathered from: Kelyn Bacon, BIT arbitration awards and State aid – the Commission’s Micula decision, http://uksala.org/bit-arbitration-awards-and-state-aid-the-commissions-micula-decision/ (last visited on 10/02/2018, at 20:53)

[28] Volterra Fietta, Further attempts by the European Commission to eradicate intra-EU BITs, https://www.volterrafietta.com/further-attempts-by-the-european-commission-to-eradicate-intra-eu-bits/ (last visited on 10/02/2018, at 20:54)

[29] Ioan Micula, Viorel Micula and others v. Romania: Final Award (ICSID Case No. ARB/05/20)

[30] Ioannis Kardassopoulos v. Georgia: Decision on Jurisdiction (ICSID Case no. ARB/05/18, §§ 191-192)

[31] Andreas Kulick, About the Order of Cart and Horse, Among Other Things: Estoppel in the Jurisprudence of International Investment Arbitration Tribunals, The European Journal of International Law, Vol. 27, no. 1, p. 119

[32] I will not get into a detailed discussion of what constitutes estoppel and what is the difference between it and other institutions, such as the one of legitimate expectations. For a detailed analysis of estoppel in International Law and its application by the International Court of Justice, see Alexander Ovchar, Estoppel in the Jurisprudence of the ICJ. A principle promoting stability threatens to undermine it, Bond Law Review, Volume 21, Issue 1.

[33] http://www.oxfordreference.com/view/10.1093/acref/9780195369380.001.0001/acref-9780195369380-e-1282 (last visited on 10/02/2018, at 20:55)

[34] Tietje, Wackernagel, p. 7

[35] Joined  Cases C-346/03 and C-529/03. Opinion of Advocate General Ruiz-Jarabo Colomier, delivered on 28 April 2005, § 198

[36] See Robert McCorquodale, The Individual and the International Law Legal System, in Malcolm D. Evans (ed.), International Law. First Edition, Oxford University Press, Oxford, UK, 2003, pp. 299, 311-314 and 321-322

[37] Simma and Pulkowski, p. 516

[38] Ibid.

[39] Matthias Herdegen, Principles of International Economic Law. Second Edition, Oxford University Press,  Oxford, United Kingdom, 2016, pp. 444-446

[40] Idem, pp. 448-450

[41] Idem, pp. 448-477

[42] Francesco Montanaro and Sophia Paulini, United in Mixity? The Future of the EU Common Commercial Policy in light of the CJEU’s recent case law, EJIL: Talk! Blog, https://www.ejiltalk.org/united-in-mixity-the-future-of-the-eu-common-commercial-policy-in-light-of-the-cjeus-recent-case-law/ (last visited on 10/02/2018, at 20:55)

[43] Emanuela Matei, The love-hate story of arbitral jurisdiction  over claims against states in the EU, EFILA Blog, https://efilablog.org/2016/10/25/the-love-hate-story-of-arbitral-jurisdiction-over-claims-against-states-in-the-eu/ (last visited on 10/02/2018, at 20:56)

[44] For an analysis of this aspect, see: Nikos Lavranos, The Lack of Any Legal Conflict Between EU law and intra-EU BITs/ECT Disputes, EFILA Blog, 25 February 2016, https://efilablog.org/2016/02/25/the-lack-of-any-legal-conflict-between-eu-law-and-intra-eu-bitsect-disputes/ (last visited on 10/02/2018, at 20:55)

[45] The 1969 Vienna Convention on the Law of the Treaties provides, in Article 30 (3.) (b) that when the parties to a later treaty (as is the case when various ITs had existed before the TFEU became effective) do not include all the parties to the earlier one […] as between a State party to both treaties and a State Party to only one of the treaties, the treaty to which both States are parties governs their mutual rights and obligations.

[46] See Article 31 of the ILC Articles on State Responsibility

Profit vs. Sustainability: How to pursue a sustainable investment

 

Benedetta Cappiello*

 

It seems that nowadays the debate on fragmentation of international law is not yet ready to reach a prompt solution. On the contrary, every and each occasion, even at the jurisprudential level, seems a good one to offer some new reflections, in brief or at length, on the reason why international law results fragmented within itself and, in parallel, on the instruments suitable to solve that phenomenon.

True the above, we deem, on the contrary, that reference to fragmentation should be avoided, given that the so labeled phenomenon should instead be referred with other concepts such as that of expansion of international law. Today we are indeed witnessing the raise of many different sub-systems of law, almost one for each subject, which “ask” for it. This mean that next or below international law of general character there is a multitude of sub-systems, formed by norms of special character. As such, they reflect the blooming of new needs, deserving a normative qualification, in term of rights and obligations. From this, it derives the raise of conflicts among norms (and values empowered by them), of general and special character, or of norms coming from different sub-systems.

In this respect, our assumption is that sub-systems of law are not completely autonomous. Neither from each other, nor from that of general international law (in which, in case of failure, all fall back to). This interconnection seems to make useless any search for the prevalence of a norm over the other; contrarily, it renders strong the need to find a way to integrate and balance among provisions which, while pursuing opposite aim, result contemporarily binding and applicable to a given situation.

This scenario seems to be well mirrored by the on-going struggle involving norms coming from two sub-systems of law apparently pursuing conflicting interest.

Namely, reference is made to international (and European) investment law and the group of norms empowering the principle of sustainable development (that concept appeared for the very first time in 1967, to later becoming a principle of international law endorsed in binding, or non-binding, normative provisions).

At first sight, the two groups of norms protect opposite interests: investment law has, indeed, been framed in order to guarantee investors’ (economic) rights, thus allowing them to pursue their activity in the most profitable way. The second group of norms aim, instead, to drive economic activity in a sustainable way, thus in respect of all fundamental and social rights involved (such as environment, labor rights, public health).

According to the praxis, host State – especially when developing country – has accepted foreign investment at almost any condition, so to increase investment flow within itself and boost its economy. Accordingly, host State has never asked foreign investor for any special behavior nor it has imposed upon him obligations to contribute to its development. By and large, this has meant investment only with long lasting protection and economic guarantee. Consequently, host State has for long time refused to higher its standard of protection of fundamental right, so to align them to the international ones.

Such an imbalanced relation has been for decades legitimized at the normative level (multilateral and bilateral agreements) and well mirrored by arbitral decision, which have always avoided any chance to reason on (alleged) violation perpetrated by investors against host State’s development. It is enough to remember that, the attempt made in Salini (¶57) case law was not pursued by further jurisprudential praxis.

Despite this, it seems that, in the last decade, a wide spread consensus has evolved on the need to guarantee sustainable development.

The question of this contribution is therefore, whether and how it is possible to pursue a sustainable investment.

A first attempt to remodeled the relation investment law-sustainable development, date back to 2008 when Prof. J. Ruggie, by that time UN SG Special Representative on the issue of Human Rights and Transnational Corporations and other business enterprises, law made a public statement related to the introduction of sustainable development within investment law as a binding concept (§ 12 Protect, Respect, Remedy).

Since then, States have started various tools to integrate SD concerns within FDI sources of law. The relative new born principle on sustainable development has thus started to be empowered also by international investment law, so to render it a binding obligation.

This change seems to have been driven at both political and normative level, where obligations have started to be imposed also on foreign investors, namely if juridical persons (small, medium or multinational enterprises).

To prove this, an excursus through the most recent normative and arbitral praxis is required.

As regard the normative level, it seems on-going a deep reshape of investment treaties (BITs and IIAs) which, for themselves, are not necessarily treacherous legal products. In fact, as any other treaties, they are simply instruments at the disposal of contracting parties to legally protect their respective interests. What really matters is their content, which obviously depends on agendas, choices and concessions of the parties. Consequently, investment agreements have started to change nature, including several innovative provisions able to recalibrate the legal protection of all stakeholders’ interests (host State along foreign investors). This step forward can be expected to enhance the chances for economically, socially and environmentally sustainable investments.

A clear, and virtuous example, comes from the Morocco and Nigeria BIT, which has increased host State’s right to regulate and it has imposed obligation of conduct upon foreign investors. Namely, host State provisions, enacted to pursue a S.D. goal, are legitimate; conversely, foreign investors have to pursue their activity contributing to host State’ sustainable development.

Sustainable Development’ goals are thus not anymore declaration of principle embedded in preambles (thus serving as mere interpretative tools), but they are becoming legally binding provision included right in the text, along with all other clauses on rights and obligations. Parties to the above-mentioned BIT have shown confidence that such an instrument can offer investors solid protection, without compromising on host State’s rights or on social values.

In parallel, also the European Union seems to have endorsed a more sustainable oriented approach, at both the internal and external level (after all, art. 2.5 and art. 21 TFEU oblige the EU to pursue its foreign relation respecting also sustainable development).

As regard the internal level, the European Court of justice, in its Opinion 2/15, found that that the EU has exclusive competence to enter any international agreement including commitments on all aspects of intellectual property and also those concerning sustainable development and environmental protection: all are indeed sufficiently linked to the objective of freeing trade.

At the international level, EU is assuming a leading role in “the sustainability cause”: for instance, it was instrumental in shaping Agenda 2030 and, along with member States, it is fully committed to implementing it and its Sustainable Development Goals into EU policies. This has certainly induced EU negotiator to include provision on SD’ goals in the most recent treaties.

As regard jurisprudential level, it seems that arbitrators have started to allow Respondent-host State’ counterclaims raised versus Claimant-foreign investor for its alleged violation of fundamental rights (Blusun v. Argentina). Besides, it seems spreading the practice to start proceeding against corporations which have allegedly acted, infringing fundamental rights.

Given the above, two last doubt raises.

The first regards the allocation of responsibility: who respond for infringement of a SD obligation? Our tenet is that the same fact could potentially raise joint and several responsibilities of both host State and foreign investor.

Investor responds where international agreement, or contracts, binding the parties involved, include specific obligations on SD. Host State is responsible where it has bound it-self with international treaties (Basel Convention, 1989, Kyoto protocol, 1997; Paris Agreement, 2016) or other instruments (Protocol of finance and investment binding States parties to South African Development Community and requiring them to pursue their investment relations according to SD principle) providing for obligations on SD.

The second doubt is strictly related to the first one: if host State can be held responsible for infringement of a SD provision, any action pursued to align itself to that latter (or other international standard), should not engage State responsibility (in Gabcikovo-Nagymaros, Respondent State casted doubt upon whether “ecological necessity” or “ecological risk” could […] constitute a circumstance precluding the wrongfulness of an act). Some have qualified that circumstance as State of necessity, but this seems of limited practical application. It should, instead, be viewed as exercise of sovereign power in the public interest. Given this, and provided that the measure adopted is necessary to the aim pursued, the act is legitimate and the compensation due should be defined according to proportionality test, as endorsed by the ECtHR.

To conclude, it seems that at both normative and jurisprudential level there is a widespread consensus aimed at legitimizing a more balanced investment relation, leading to a sustainable investment.

The better avenue for a State seeking to further its SD’ goal, is to harmonize them with its investment obligations, rather than to seek outright relief from investment obligations.


Benedetta Cappiello, Post-Doctoral Researcher, Università degli Studi di Milano, Italy.

 

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.

Call for Contributions: EFILA Blog

Given the present debate surrounding the investment and EU law community (enhanced by the Brexit, the TTIP or CETA negotiations), the EFILA Blog editorial board believes that a veritable dialogue must take place, allowing all arguments to be heard and all diverging positions to be defended.

Therefore, The EFILA Blog editorial board welcomes any contribution that pertains to the field of of international (investment) law and arbitration, EU law and public policy, as well as the dynamics of these multiple legal, political and economic spheres.

If you are interested in submitting any material to the EFILA Blog, please contact our Managing Editor, Horia Ciurtin, at the following e-mail address: h.ciurtin@efila.org

 

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.

 

Report on EFILA’s Annual Conference

by  Blazej Blasikiewicz and Juan Pablo Valdivia Pizzaro

Maison du Barreau, Paris

February 5th 2016

I. Introduction

The European Federation for Investment Law and Arbitration (EFILA) set out for a promising year with its Inaugural Conference in London in January of 2015. Last year proved to be full of notorious developments in the area of investment arbitration, especially as the TTIP negotiations and proposals evolved and materialized regarding the implementation of specific Investor State Dispute Settlement (ISDS) mechanisms. The ensuing months were characterized by a rich and often polarized debate on both specific aspects of investment arbitration and on the fundamentals, nature and aims of ISDS mechanisms.

In this context of agitated waters and contrasting ideas, once again EFILA brought together world-class dispute resolution practitioners, prominent arbitration experts, European government officials, leading scholars and representatives from market participants and international organizations in its 2016 Annual Conference entitled “Investment Arbitration 2.0?” which took place on February 5th, at La Maison du Barreau, in Paris.

The framework in which ISDS is being argued is characterized by controversy, heavy criticism and an imperative necessity for an open debate and innovative ideas. Therefore, the venue served as a meeting point for such a wide array of stakeholders to join in an analytical assessment of ISDS and exchange views on the many challenges and opportunities of investment arbitration. In doing so, not only some new features of investment arbitration regarding the EU policy on International Investment Agreements were discussed, but the speakers and participants engaged in a thought-provoking debate on diverse topics such as the pros and cons of investment arbitration, the rule of law and other complex issues such as transparency, states’ right to regulate, protection of property rights and democratic deficits.

This stimulating discussion was led by four panels, which critically explored some of the roots and primary issues of investment arbitration and presented provocative views on several of the most up-to-date issues on ISDS, with the objective of setting the ground for an improved and more robust framework of investment arbitration in the future.

II. Panel 1: Setting the scene: pros and cons of Investment arbitration

Prof. Dr. Gerard Meijer, Partner and Head of Arbitration team at NautaDutilh

Andrew Cannon, Partner at Herbert Smith Freehills LLP

Prof. Dr. Hans van Houtte, President of the Iran-United States Claims Tribunal

Prof. Dr. Robert Howse, Professor of International Law, New York University School of Law

Marie Talašová, Head of International Legal Services Department, Ministry of Finance, Czech Republic

Kamil Zawicki, Partner at Kubas Kos Galkowski

The first panel, acknowledging the importance of taking a step back in order to examine the roots and analyse some of its main traits, explored the pros and cons of investment arbitration. A refreshing view of its history and development was provided through the evolution of the International Centre for the Settlement of Investment Disputes (ICSID). Important emphasis was given to the revolutionary characteristics the system presented when it was introduced – it made the general rule of international law apply also to domestic investor-state contracts and it disconnected arbitration from domestic law – and to some remarkable victories that the system has achieved. The speakers recognized that many current features of the system represent an arguably unexpected feat, such as its importance for international law, the success of the system in relation to the number of cases brought to it, and its adaptation to a truly global era where the burgeoning number of BITs has shaped much of its evolution. In this respect the panel gave an interesting insight regarding ICSID being created primarily as an op-in system to be included in contracts between States and investors, and that it was not until the mid 1970s that BITs began including ICSID clauses. This practice has become standard and one of the main sources of ICSID arbitration.

However, it was also acknowledged that the system faces several important challenges, such as the trend to move towards broader regional economic agreements, the higher number of stakeholders involved (such as NGOs and supranational or regional organizations), new states’ policies regarding investment arbitration and foreign investment, and a growing opposition from different sectors of society. These issues, among others, have lead several States – such as Indonesia, South Africa and more than one South American country – to dramatically reassess their positions on BITs due to the perceived adverse impact that certain matters – e.g. treaty and forum shopping, lack of transparency, limitations to States’ right to regulate on issues of public interest and high costs of the proceedings – have in their internal affairs. This trend of criticism has also been materialized in the adoption of Model BITs by different countries, which reflect States’ policies regarding arbitration and foreign economic investment.

Speakers analysed the issue of contradictory case law in investment arbitration and the differences in the basis and instruments upon which such decision are made. The disparities among the wording or context of certain BITs was presented as one potential explanation for the different interpretations that arbitral tribunals have on arguably similar issues. The panel also put forward the view that time is of essence in the clarification of tendencies that constantly arise in investment arbitration.

There was agreement as to the importance of reforms regarding certain standards of protection, the controversial nature of the differentiated treatment between domestic and foreign investors, and the relevance of the wording of the related instruments and the role of states in shaping their content. Nevertheless, pertinent questions were raised as to the effectiveness of current attempts to solve part of the problem, like the establishment of appeal mechanisms in ISDS. In this regard, the limited success of somewhat similar mechanisms (such as the ICSID annulment mechanism) raises valid doubts as to the effectiveness of appeal bodies or instances within the framework of ISDS.

 The panel also addressed the criticisms as to the lack of transparency and rising costs in investment arbitration, the alleged pro-investor bias and the role of the media, both from the arbitration practitioner’s and the state’s point of view. The relationship between investment arbitration, the media and public opinion, and the suggested lack of empirical evidence to support a claim for pro-investor bias gave rise to an encouraging debate among the panel and the audience. The speakers pertinently pointed out the necessity of embarking upon reforms that would not lead to “killing” a system that, being far from perfect, has proven to be of vital importance.

III. Panel 2: Rule of Law and Investment Arbitration: promoting or holding back its advancement?

Prof. Dr. Loukas Mistelis, Clive M Schmitthoff Professo of Transnational Commercial Law and Arbitration at the Queen Mery University of London

Sir David Baragwanath KNZM QC, Appellate Judge and former President of the Special Tribunal for Lebanon

John Gaffney, Senior Associate, Arbitration at Al Tamimi & Company

Dr. Richard Happ, Partner at Luther LLP

Barton Legum, Head of Investment Treaty Arbitration Practice at Dentons

Dr. Patricia Nacimiento, Partner at Norton Rose Fulbright LLP

Prof. Dr. Mathias Wolkewitz, Head of Legal Affairs, Tax and Insurance at Wintershall Holding

The second panel engaged in a fruitful discussion arising from the necessity of examining investment arbitration as a dispute resolution mechanism from three different – but equally important – perspectives: the point of view of the investors, the recipient state and the citizenship. The panel highlighted that the interplay among these actors is currently characterized by a growing gap, which is reflected in the public disquiet in seeing arbitration as an appropriate means for adjudication of issues relating to public interests. These concerns have echoed in specialized and reputable media, which has also championed the case against the necessity or convenience of using BITs at all. The panel advocated the importance of a prompt and adequate response from the investment arbitration system in order to bridge the gap between the ISDS mechanisms and the public interests from which it cannot be detached.

The panel also discussed the alleged thorny relationship between ISDS, the rule of law and public perception. Transparency, once again, was given a central role in the debate. However, the effectiveness of the mechanisms to achieve transparency was put into question, since their success is often related to the specific interests of the parties involved. Speakers also advanced views highlighting the power of the States and their influence on the media in order to impact public opinion. The current tension between the ISDS system, States and public perception was provocatively referred to as “BITs biting back”.

The panel also provided an enlightening historical account of the “international minimum standard of treatment” (IMST) as the predecessor of investment law and its protection mechanisms, as known today. The difference between standards of protection for foreign and domestic investors brought forward the complex and fundamentally undemocratic nature of investment law as a limit for state action. By putting the relationship between investment law, the IMST, state regulatory powers and the rule of law under the spotlight, a heated debate ensued as the panel presented the argument that the inherent undemocratic nature of investment law does not diminish its contribution to the rule of law. In this regard, the speakers raised an interesting comparison between the IMST, investment law and human rights, as setting the limits for sovereign regulatory power.

The panel also examined the tension between the alleged lack of legitimacy of investment arbitration and its position within a system of check and balances governed by general and legitimate legal rules. Speakers underlined the systemic need to have effective foreign investment protection, the fact that investment treaties increase legal certainty, that investment arbitration is not placed in a vacuum beyond general rules of law and the importance of applying the rule of law as an equal standard to all parties involved. In addition, they recognized the contribution of investment arbitration in levelling the playing field and ultimately upholding the rule of law.

IV. Panel 3: Evolution in dispute resolution: third party funding, the role of secretaries and security of data in investment arbitration

Dr. Daniella Strik, Partner at Linklaters LLP

Dr. Andrea Carlevaris, Secretary General, ICC International Court of Arbitration (Paris) and Director of Dispute Resolution Services of the ICC.

Anya George, Senior Associate at Schellenberg Wittmer Ltd.

Charles Nairac, Partner at White & Case LLP

Prof. Dr. Stavros Brekoulakis, Professor in International Arbitration and Commercial Law, Queen Mary University of London.

Jurriaan Braat, Partner at Omni Bridgeway

 

The following panel looked at several specific issues in investment arbitration. On third party funding, the panel carefully pointed at the main challenges this issue posts regarding matters of confidentiality, conflict of interests, security for costs, and the question of who ultimately owns the claim and makes the decisions of the funded party. Questions were raised by the speakers and participants as to the proper approach to be taken in relation to a party that is being funded on the merits, the presumptions that may arguably be placed on the funded party’s ability to pay, the difficulty in the determination of the “real party” in the arbitration and the responsibilities to be placed on the parties to the proceeding. On the specific topic of providing security for costs, it was discussed if the existence of a third party funding arrangement should affect the outcome of an application for such security and if a presumption against the funded party could be validly placed regarding its potential inability to pay. It was recognized that the current general approach to the issue is to grant such application only in specific and extreme circumstances. It was acknowledged that the increasing number of parties that have sought or secured third party funding in investment treaty claims, the unregulated nature of this issue and the difficulty to determine the content and the extent of disclosure obligations on the funded party are pressing matters in investment arbitration.

Regarding the issue of arbitral secretaries, it was recognized that the main debate revolves around the issue of tasks and duties that secretaries may fulfil without interfering with the nature of the obligations placed on the arbitrators by the parties, often cited as intuito personae. The controversial issue of the core content and scope of the arbitrators’ mandate and the issues of parties’ expectations in relation to the conduct of the arbitration tribunal and the transparency in fulfilling its duties were addressed by the speakers as well. Reference was made to seminal articles on this issue (such as Partasides’ “The Fourth Arbitrator?”), and the importance of the distinction between the decision-making process (which would arguably not be a pre-defined matter of personal mandate) and the decision-making function (which would be much more closely related to the personal mandate entrusted upon the tribunal). Cultural differences between arbitral tribunals – and among the members of the tribunals themselves – were also given a place in the debate, an aspect often overlooked when analysing this issue. The panel underlined the importance of disclosure and strict supervision of the duties of the tribunal’s secretaries. The challenges that the notably large grey area in this topic represent, were also discussed by the speakers and the audience.

Finally, on the issue of data protection, the significant practical implications of the issue were argued and recognized by the panel. The main issues set forth in the debate related to transparency, data integrity protection and data manageability. Speakers encouraged the audience to engage in proper data protection techniques within the setting of investment arbitration despite the technical challenges that this may entail. Attention was drawn into the potential conflict between data protection, confidentiality and the right of free access to information in investor-state disputes.

V. Panel 4: Towards Institutionalization and Judicialisation. The Proposal for a Permanent Court

Dr. Erhard Böhm, Partner at Baier Rechtsanwälte

Yves Derains, Founding Partner at Derains & Gharavi

David Gaukrodger, Senior Legal Advisor, Investment Division, OECD Directorate of Financial and Enterprise Affairs

Dr. Nikos Lavranos, Secretary General of EFILA

Andrea Menaker, Partner at White & Case LLP

Yasmin Mohammad, Senior Counsel at Vannin Capital

 

The final panel analysed one of the hot topics of investment arbitration nowadays in the European arena. In an energizing fashion and through a more informal and open debate among the speakers and the participants in the audience, the panel set out to touch upon many of the issues related to the EU Commission’s proposal for the creation of the Permanent Court for ISDS. The panel put forward a critical analysis of the structure, traits and alleged objectives and benefits of the creation of such a Permanent Court; of the interplay between the proposed system, EU law and the Court of Justice of European Union; and of the effectiveness of the proposed alternative in solving the problems facing the ISDS system.

The problem of recognition and enforcement of awards rendered under the proposed system was critically assessed, including the potential problems that such decisions may face in being recognized as “awards” under and as referred to in the New York Convention of 1958. The panel and the participants also examined the interplay between the proposed alternative and the ICSID system, especially in relation to issues of jurisdiction. In this regard, the proposed mechanism was elegantly criticised as a “medicine being given to the wrong patient”.

The panel also referred to a common perception of an alleged trend of investment arbitration not truly resembling arbitration after the several significant changes that the system has undergone. The perceived standardization, judicialization and lack of adaptability may be seen as drawbacks by investors and may decrease the amount of trust that economic agents may be willing to place in the system.

Also, questions were framed regarding the legitimacy of such a drastic change in the way of dealing with potential investment claims, specifically arguing that a possible cause for such significant deviation could be found in the shift in the position of several countries from usual “claimants” to potential “defendants” in investment disputes. Speakers and the audience advanced provoking arguments on the financial incentives that the judges of such court would have, as well as on possible issues on conflict of interests, political independence, level of required expertise and the challenge of legitimately having both investors and states resorting to a system that enjoys the benefit of their confidence.

VI. Conclusion

The controversial nature of many of the topics presented and discussed during the Conference gave rise to a rich variety of opinions, positions and further debates on related issues. The diversity in the background of the speakers and the participants during the session gave the all parties the opportunity to argue and analyse the most salient matters in investment arbitration from a wide range of angles. Speakers and participants agreed on the importance of strengthening the investment arbitration’s legal framework through properly founded and necessary reforms, of assuring a more transparent relationship between ISDS system and the citizenship, of reaffirming investment arbitration as a vital means for upholding the rule of law and of recognizing and confronting the challenges and drawbacks of the system that have lead to a widespread emergence of social opposition and resistance.

The current state of affairs regarding the future of investment arbitration in the European Union made it important to go back to the fundamentals of investment arbitration with a critical view in order to thoroughly assess the new trends, latest proposals and pressing matters regarding ISDS. The legitimacy and effectiveness of the proposal of the EU Commission regarding the Permanent Court under the TTIP were heavily debated and the complex relationship between investment arbitration, states’ regulatory powers, public opinion, transparency and the rule of law has proven to be a fertile field for further debate and much-needed reforms. Despite the many different positions confronted during the debate regarding the current attempts to modify the framework of investment arbitration, it was generally agreed that amendments must take place in order to reinforce the position of investment arbitration as a modern, legitimate and efficient means for the resolution of investor-state disputes.

The quality and depth of the debate during the session, the presence of many of the top investment arbitration experts, practitioners and authorities, and the wide array of topics covered, keep placing EFILA at a unique position as an open and stimulating meeting point for future debates that are to shape the policies that will impact the ISDS system, its evolution and improvement in the years to come.