The Shortcomings of the Proposal for an “International Court System” (ICS)

by Dr. Nikos Lavranos LLM, Secretary General of EFILA*

During 2015 it became clear that the European Commission was under mounting pressure from the European Parliament (EP), Trade Ministers of several EU Member States, anti-ISDS NGOs and the media to propose more “reforms” of the investor-State dispute settlement (ISDS) system that is contained in CETA and envisaged to be included in TTIP as well.

EFILA decided to establish a Task Force – consisting also of non-EFILA members – to analyse the final proposal for a so-called “International Court System” (ICS), which the European Commission formally adopted on 12 November 2015 and transmitted it to the US as a basis for further negotiations within the context of the TTIP negotiations.

During the debate in the European Parliament and among several Trade Ministers of EU Member States one key issue pointing towards a “solution” and which was continuously repeated was the creation of a permanent investment court consisting of publicly appointed judges. It was argued that in contrast to the current system of ad hoc arbitration consisting of party-appointed arbitrators, which has been characterized as “private”, behind closed doors dispute resolution, which biased towards the investor, a permanent investment court with judges would ensure fairer and better adjudication of investment disputes. Another related key issue, which was considered important for a “solution” was the creation of an appeal mechanism. Again the rather simplified characterization that ISDS disputes have no appeal possibility and are completely beyond the control of national courts, was used as a justification for the need of an appeal mechanism.

The European Commission had to incorporate these points otherwise a ratification of TTIP by the EP and the Member States would seem rather illusory. Having had significant experience as a disputing party in the WTO, which happens to include the Appellate Body as a permanent (quasi)judicial body, it was a small step for the European Commission to copy and paste many of the WTO dispute settlement elements into its ICS proposal.

The structure of the 60-pages EFILA Task Force analysis is as follows:

Chapter 1 analyses not only the ICS proposal as such, but also the process that preceded the proposal. This is important in order to understand the political context in which this proposal is embedded. It critiques certain aspects of the ICS proposal and raises a number of issues which the Task Force considers should be addressed in developing the ICS proposal further.

Chapter 2 provides an extensive overview of the already existing forms of appeal and annulment of investment awards. It also highlights the reform efforts in this regard by the PCA and the ICSID Secretariat. This overview provides a detailed picture of the status quo (including both the mechanisms and methods of operation), from which the ICS proposal departs. This analysis also draws critical attention to features or elements of the current system of ISDS which could be addressed in developing the ICS proposal.

Chapter 3 turns towards the WTO dispute settlement system by first explaining the features of the appeal system and then by examining to what extent this system could successfully be transplanted into the ICS and the limitations in so-doing.

Finally, Chapter 4 wraps up this analysis by providing some general conclusions as to matters which require consideration by the Contracting Parties in developing the ICS proposal further. In particular, the issues highlighted concern the methods of selection of the judges (and the implications of a move towards a system whereby the Respondent maintains, but the Claimant is deprived of, a role), the size of the pool of candidates for the two-tiered system, the relationship between the ICS and the CJEU and how the ICS will operate in the wider context of resolution of investor-state disputes under other instruments.

The conclusions of the Task Force report can be summarized as follows:

  1. The paper concludes that the ICS proposal is, first and foremost, a bold move to appease the EP and the public opinion in many EU Member States, which are critical against TTIP generally, and in particular against including any type of ISDS. The ICS proposal attempts to make the inclusion of an investor-state dispute settlement mechanism in TTIP politically acceptable, while at the same time trying to address the perceived shortcomings of the existing ISDS.
  1. The paper notes that – in contrast to the public perception – mechanisms for limited review of investment arbitration awards are already in place, such as the ICSID annulment mechanism and the setting aside procedure for non-ICSID awards by national courts. These mechanisms – while not perfect – provide useful corrective tools.
  1. The analysis of the WTO dispute settlement mechanism illustrates that caution should be exercised in simply transplanting it to investor-state disputes. The reason is that WTO law is structurally different from investment law, serves different purposes and has different users.
  1. Generally, it can be concluded that the ICS proposal clearly breaks with the current party-appointed, ad-hoc ISDS as provided for in practically all BITs and FTAs. The main result is that it deprives claimants of any role in the appointment of the judges, while giving the respondent States the exclusive authority to do so, albeit in advance of a particular case. The appointment of the judges by the Contracting Parties raises several problems, which the ICS proposal does not sufficiently address.
  1. The pre-selection of the TFI and AT judges by the Contracting Parties carries the inherent risk of selecting “pro-State” individuals, in particular since they are paid by the States (or rather their tax payers) alone. Apart from this danger, it remains doubtful whether a sufficient number of appropriately qualified individuals with the necessary expertise can be found. This is particularly true since many professionals currently working in arbitration may be excluded on the basis that they could be considered to be biased. The pool of TFI and AT judges would seem to be limited to academics, (former) judges and (former) Governmental officials. That might not be sufficient to guarantee the practical experience and expertise needed and/or independence from the State.
  1. The standard of impartiality and independence of the judges is highly subjective, and their independence on a practical level is not assured by the proposed text. Also, the system of challenging TFI judges and AT members can be further criticised for envisaging that the presiding judge will decide the challenge against one of his own colleagues on the bench, rather a decision being made by an independent outside authority.
  1. The system of determination of Respondent (in the case of the EU or Member States), in particular the binding nature of that determination, which is done by the EU and its Member States alone, creates significant disadvantages for the claimant and does not allow the ICS tribunals to correct any wrong determinations. This could result in cases being effectively thrown out because of a wrong determination of the Respondent.
  1. Since the ICSID Convention is not applicable to the EU, the recognition and enforcement of

ICS decisions remains limited to the EU and the US. The proposal also fails to clarify the difficulties elated to the New York Convention 1958.

  1. The ICS proposal does not address the difficult legal situation between the CJEU and other international courts and tribunals. There is no reason to believe that the CJEU would be more positive towards the ICS as compared to its outright rejection of the European Court of Human Rights when it comes to the potential interpretation or application of EU law. Also, the CJEU’s consistent rejection of any direct effect of WTO AB panel reports – even those that have been approved by the DSB and after the implementation deadline has lapsed – raises doubts as to the legal effects of ICS decisions within the European legal order.
  1. In sum, the suggested creation of a two-tier (semi)permanent court system would give the Contracting Parties a significantly stronger role in the whole dispute settlement process – potentially at the expense of both the investor/claimant and the authority of the ICS. In particular, the appeal possibility carries the risk of burdening small and medium investors by increasing the potential length of the proceedings and costs.
  1. While the US position towards the ICS proposal remains unclear for the time being, it also remains unclear how the ICS proposal could be multilateralized. Indeed, the perceived shortcomings of the current ISDS system is based on the fact that more than 3,000 BITs/FTAs are in place, which have been concluded by practically all countries in the world. The ICS proposal – limited to TTIP and perhaps extended to CETA – does not change that. The way the UNCITRAL Transparency Rules of 2014 are incrementally applied by way of an opt-in system established by a separate international treaty could be a possible way forward.
  1. As the TTIP negotiations between the US and the EU are now focusing on the ICS proposal, this is a perfect moment to further improve the proposal by addressing the matters identified in this analysis.
  1. Finally, the US and the EU should also consider whether it would not be more preferable to modify and improve existing systems, such as turning the ICSID annulment procedure into a full appeal mechanism.

This in-depth analysis is very timely and arguably one of the first ones following the formal adoption of the ICS proposal by the European Commission last November.

The EFILA Task Force paper raises many issues and provides some answers, but certainly leaves many problems untouched. At the EFILA Annual Conference which will take place on 5 February in Paris, the last panel will specifically discuss this report. All members of the investment arbitration community are welcome to (still) register for the conference or to submit their constructive comments to Dr. Nikos Lavranos, LLM, Secretary General of EFILA, at: n.lavranos@efila.org

Redefining the ‘Centre’: International Economic Law and Grand Strategy in a Multipolar World

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

(Legal) Multipolarity Revisited: What Lies Beyond Westphalia?

This brief introduction to such an ambitious thematic must undoubtedly commence by positing its adherence to the (non-legal) core concept of ‘grand strategy’ and its realist avatars in international economic law. More precisely, it shall be argued that – at a certain level – the normative sphere is instrumentalised by competing nomothetic actors in order to enhance their power position and joint economic security, in a troubled multipolar world.

Thus, following John Mearsheimer’s influential paradigm and his (in)famous 1994 article regarding the false promise of international institutions, it can be affirmed that the “[international] institutions are basically a reflection of distribution of power in the world” and that the most powerful actors in the system “create and shape institutions so that they can maintain their share of world power, or even increase it”. For these reasons, international law and its main agents – international institutions – represent a formalised, but temporary consensus in the clash of competing interests.

However, this side of the story is entirely accurate only for an international arena dominated solely by sovereign state actors. Presently, as the Westphalian international system of autarchic legalities disintegrates, paving the way for a post-sovereign order, a different relation between legal macro-spaces (or, as Carl Schmitt famously called them, Grossräume) seems to emerge. New power blocs are forged from the global economic bellum omnium contra omnes, allowing them to surpass the notion of sovereignty and building stranger ‘empires’ bound together by the cold letter of international treaties which – eventually – develops into a more stable quasi-constitutional internal order.

The European Union, the NAFTA space and the Eurasian Union are just a few examples of this trend. Each of these blocs implies a loss or – at least – a limitation of state sovereignty in several fields, in the quest for attaining the upper hand in a larger global confrontation with other blocs or singular actors. In a certain way, some sovereignty is individually lost so that the sovereigns might increase its projected power in a joint manner, following their grand strategy for hegemony.

In such circumstances, the classical balance of power cannot any longer occur between single states and their shifting alliances, but rather among macro-spaces united in formal legal agreements (later turned into quasi-constitutional orders). Even though, as posited by Mearsheimer and other realists, self-interest and the desire for hegemony might drive sovereigns into such legal constructs, their origin does not account for their further development.

Thus, once roaming the international arena, macro-spaces appear as a new breed of economic ‘predators’, more powerful and more fit for survival than the sovereigns taken separately, factor which convinces such states that a (post)sovereign structural alignment might take them further in the quest for power and hegemony, despite having to share some part of the spoils with the co-victors.

Normative Mimesis: Imperial Weapon or Remedy for Lingering Divisions?

In such a context, can we still refer to a truly international system or just a series of regional sub-orders that economically interact in an episodic manner? Is the international order now also territorially fragmented, in addition to the already decried functional fragmentation?

If once upon an idealist time, ‘autonomous’ normative systems – such as FTAs, BITs, multilateral trade agreements – and the institutions that administrate them were thought to act as gap-filling mechanisms, offering a cohesive and coherent paradigm to an otherwise centrifugal setting, the new global paradigm reveals the original realist tenet.

More precisely, major power brokers – be it soft or traditional – use such instruments for their own strategic goals. While alignment with like-actors is carefully negotiated in a quest for convergence of paradigms and tactics, the relationship with non-aligned or competing actors is defined in different terms, seeking to advocate for rules that would attract the other in one’s own normative realm.

Setting an example, triggers normative mimesis. A ‘centre’ dominates the periphery solely by creating a model. With a model consistent enough, advocated by an actor strong enough (often adversarial), there commences a process of legal emulation and ‘bandwagoning’. The ones left on the margins will try to imitate the centre’s model in order to gain recognition and reflect its power. Once the peripheries and non-aligned actors had been attracted in the ‘gravitational’ area of a hegemonic actor, other hegemons might succumb to the newly created rules. Imitation is the beginning of legal dominion.

However, such a strategic ‘great game’ in the field of international economic law might not have results as cynical as its origins appear to be. The ailing divisions and fragmentation of this system might benefit from mimetic normativism, forcing reluctant actors in one direction or another and opening the path to an ‘imposed’ con vergence, but nonetheless convergence.

Between TPP and TTIP: Where is the ‘Centre’ of the World?

Such realities and tactics is what determined the BIT ‘European gold standard’ to be quasi-universal in the 20th century. It attracted in its sphere of legal influence both the north-American actors, the ‘Third World’, the Communist and post-Communist states. With few exceptions, such a model became the undisputed norm in international investment law. The trend set by EU (EC) member states in their bilateral relations reverberated across the globe, enveloping former colonies and present allies, benefactors and adversaries, richer and poorer states, without limits or tactical setbacks.

However, the first actor to start diverging from the model was undoubtedly the United States. Near the turn of the century, its FTAs and ‘model BITs’ were developed in an innovative way, reflecting a change of options and a new geopolitical framework. Part of another grand strategy, the US new FTAs and model BITs offered an alternative to the classical ‘neat’ European-inspired BIT, advocating a more expansive view upon international trade and investment.

Following this pattern, the US began the negotiation of two ample FTAs (including consistent investment chapters) along its new comprehensive trade and investment policy. Concentrating in ‘crossing’ both oceans, the US crafted a strategy of gaining an intermediary position between its Asian alterity and European kinship, acting both as a bridge and unavoidable toll-house. With this goal in mind, the US acted so as to transform itself into the epicentre of a globalised world that seems to be increasingly multipolar. Thus, in its design, even though the international arena is unavoidable moving towards plurality, the actors need not be of equal rank. Asymmetry reigns even better in a multipolar setting, allowing north America to be the utmost centre among several centres.

TPP. The first of these two agreements – TPP – involved the strategic lines of concentrating on the Asian ‘pivot’ and attracted twelve states from all around the Pacific Rim (both from North/South America, Asia and Australia), in a multilateral effort to create an open economic space. However, everybody seemed (and still seems) to diplomatically ignore the geopolitical elephant in the room: the total absence of China from the negotiations. If this was merely a legal-economic instrument, such a choice and development would have proved incomprehensible.

If, on the other hand, one analysed the situation (geo)politically, it might lead to different conclusions: (a) either this is one initial step of a ‘containment’ strategy directed against China, (b) or the relationship with China is a privileged one, deserving a bilateral approach between two sovereigns of equal calibre.

Nonetheless, even though China is the great absentee in the TPP game, the conclusion of this agreement – with its myriad of typically American exceptions and derogations – sets the scene for any further development of this legal sphere. The TPP example has been set and – with some effort – it will be ratified and come into full force before the US finishes the negotiations with other high-profile ‘centres’ such, representing a ‘living’ precedent that might compel other actors to follow this model or – at least – to make substantial concessions from their previous practice in the FTA/IIA area.

TTIP. As regards the negotiation of the comprehensive agreement with the European Union, the situation proved to be different from the outset. The 28 member states had a single voice in the negotiation (unlike the 11 Pacific states) with the US and their joint economies accounted for a higher power. One EU tactic for reaching an initial negotiation equilibrium was not to approach the US as part of a larger NAFTA space, but rather to take on individually each of the NAFTA states. Therefore, in the TTIP process, asymmetry was less evident and no decisive ‘upper hands’ appeared during the game.

Moreover, the EU itself also managed to have its ‘model’ tested and set out, in the FTA with Singapore and in the finalised agreement with Canada. At the same time, it also began a more ample FTA programme, envisioning a deal with Vietnam, India, South Korea and – eventually – China. Thus, the EU also strives to be the trend-setter in the FTA/IIA area, introducing its own innovations and idiosyncrasies, concentrating upon Asia and the Pacific Rim itself.

In these circumstances, TPP, EUFSTA, CETA proved to be a ‘prologue’ to the much anticipated clash of EU and US during TTIP negotiations, leaving both actors bound to their own models and with less room for manoeuvre. However, what keeps them wired to the endless rounds of negotiations (so far, eleven) is the idea that – once such an agreement reached – it will transform these two ‘centres’ in a formally allied mega-centre that irremediably sets the example for the entire world.

This is the reason for which each actor wishes to see its own model enshrined in TTIP. Once there, it will be the model. And the normative mimesis triggered thereafter will emulate the rules of the hegemon that managed to formalise its legal strategy in such an influential agreement.


 * Horia Ciurtin, Managing Editor, EFILA Blog; Legal Adviser – International Arbitration, Scandic Distilleries S.A; Editor, VERSO Journal [Romania]; Freelance researcher [see SSRN author page].

 

Call for Papers: Bucerius Law Journal Conference on International Investment Law & Arbitration

Supported by Neil Kaplan and Doak Bishop

In collaboration with Neil Kaplan QC CBE and R. Doak Bishop, the Bucerius Law Journal is proud to announce its first conference on International Investment Law & Arbitration. The conference will take place in the facilities of the Bucerius Law School in Hamburg, Germany on 22nd and 23rd April 2016.

The Bucerius Law Journal was established in 2007 (http://law-journal.de/en/) as a cooperative effort of students and faculty of the Bucerius Law School, one of Germany’s leading law schools. Since then, the Bucerius Law Journal’s mission has been to provide a platform for young and ambitious scholars to publish their work. In line with that goal, the conference is similarly tailored towards international upcoming scholars (research assistants, graduate students, doctoral candidates and young lawyers) with a research interest in Investment Law & Arbitration.

The conference will be based on the scholarly papers of the participants and will feature a strong focus on panel discussions of pre-selected aspects of International Investment Law & Arbitration. To enable such discussions, the selected papers will be circulated between the participants prior to the symposium to allow every participant to familiarize himself with the issues of his or her panel. There will be 6 Panels each consisting of 3 participants which will be moderated independently relating to the following topics.

For more details, please see the complete Call for Papers.

The 2015 EFILA Inaugural Lecture: Escaping from Freedom?

We are pleased to offer you the full text of the 2015 EFILA Inaugural Lecture by Sophie Nappert, “Escaping from Freedom? The Dilemma of An Improved ISDS Mechanism“, delivered on 26 November 2015 in London.

In times such as ours, when freedom is often abandoned for security to be gained, Sophie Nappert’s lecture is a vindication of freedom endorsed by law.

Executive Summary

ISDS in its current international arbitration format has attracted criticism. In response, the EU proposal for ISDS in the TTIP consists of a two-tiered court system, comprising an appeal mechanism empowered to review first-instance decisions on both factual and legal grounds and, the EU says, paving the way for a “multilateral investment court”.

The EU proposal envisages that the courts of first instance and appeal be composed of pre-ordained, semi-permanent judges randomly assigned to cases and subject to compliance with a Code of Conduct worded in general terms.

As it stands the EU proposal walks away from the international arbitration format, and consequently the application of the New York Convention.

The Lecture expresses surprise at the EU proposal of a court mechanism given the CJEU’s unambiguous, historical unease with other similar, parallel international court systems, as most recently expressed in its Opinion 2/13 of 18 December 2014 on the draft Accession Agreement to the
European Convention on Human Rights.

The Lecture examines whether, and how, the EU proposal might provide solutions to critical issues presented in two recent cases taken as illustrations – the Awards in the cases of the Yukos shareholders against the Russian Federation, as well as the case of Croatia v Slovenia currently pending in the PCA.

The Lecture remarks that appeal mechanisms are not free from difficulty, not least of which the real risk of inconsistent decisions between the first and appeal instances, due to different, equally valid approaches to a developing area of international law.

The Lecture also notes that the proposed Code of Conduct provides no practical sanctions to deal with instances of arbitrator misconduct such as that featured in the Croatia v Slovenia matter, and expresses surprise that ethical challenges are to be decided by fellow Judges – probably one of the most problematic features of the current ICSID system.

The Lecture proposes a third way, aimed at addressing these concerns, whereby a Committee – stroke – Interpretive Body, informed by the intentions of the TTIP Parties, would take over the development of TTIP jurisprudence in a more linear and consistent manner, with a longer-term view, whilst ad hoc arbitration tribunals in their current form would focus on the settlement of the discrete factual dispute.

Dissociating the settlement of the factual dispute from the broader interpretive exercise would create a repository of the TTIP jurisprudential function, allowing for a more harmonious and authoritative development of TTIP interpretation and law and alleviating the phenomenon of “overreaching” currently burdening ad hoc tribunals – arguably the real source of the criticism aimed at ISDS.

The Committee/Interpretive Body could also more credibly act as decision-maker in ethical challenges than would fellow Judges, provided the Code of Conduct is reviewed to allow for realistic standards and practical sanctions.

This proposed “third way” retains the arbitration features necessary for the application of the New York Convention, and is not inconsistent with the EU’s own proposal, building as it does on Article 13(5) which contemplates an overseeing Committee that would be well-placed to take over the above role.

See the full text of the Lecture here.

The Greek Sovereign Debt Rescheduling, EU Bail-In and Investment Arbitration

by Prof. Georges Affaki*

Many readers of this Blog spent the summer watching the brinkmanship of the Greek national debt third bailout unfold. Few were aware that part of that debt was being bitterly fought in fora other than the European Commission or the Greek Parliament: investment arbitral tribunals. This article reflects on the future of sovereign debt-related claims before investment arbitral tribunals in the wake of the Poštová Banka award and assesses the impact of recent EU bail-in regulation on property rights and possible challenges thereto.

A creditor of Greek sovereign bonds (GGBs), Poštová Banka claimed before ICSID that the Greek law ordering a forced exchange of its bonds violated its investor rights. It was arguably encouraged by a line of case law where ICSID tribunals have construed the concept of a qualifying investment broadly so as to cover financial instruments. The alternative would have brought the claimant to submit its case to Greek courts pursuant to the jurisdiction clause in the bonds.

Poštová Banka had purchased series of dematerialised GGBs. Because it is not approved by the Bank of Greece as a primary securities dealer, it had in fact purchased rights in a portfolio of GGBs through Clearstream. Greece argued that the claimant’s rights were not protected investments under either the BIT or the ICSID Convention. It argued that that Poštová Banka had never held GGBs, but has acquired a stake in a pool of fungible interests in GGBs on the secondary market. The claimant relied heavily on the Abaclat award where the tribunal upheld its jurisdiction in respect of Italian bondholders’ rights in Argentine bonds purchased from Italian banks, not from Argentina itself. The majority had rejected attempts to separate the primary and secondary markets, in effect finding that investors in the secondary market had provided a contribution to the host State.

The claimant needed also to evidence that its investment is made in the territory of the host State. Contrary to an infrastructure project, the localisation of dematerialised financial instruments may prove challenging. The first ICSID award to rule that financial instruments warranted a specific territorial connection test was Fedax. The tribunal ruled that funds involved in financial transactions need not be physically transferred to the territory of the beneficiary; they can be put at its disposal outside its territory. The majority in the Abaclat and in the Deutsche Bank ICSID awards followed that reasoning. Poštová Banka argued that it was sufficient that its funds were put at the disposal of Greece to foster its economic development, without needing to be linked to a specific project.

Similar to many treaties, the Slovak-Greek BIT provides a broad definition of “investment” followed by a list of examples including corporate debentures and loans. The tribunal did not agree that this means that any category of assets may qualify as an “investment”. It ruled that interpreting a treaty in good faith requires providing some meaning to the examples listed. After offering a review of elementary banking law concepts underscoring the difference between GGBs and corporate debentures or loans, the Tribunal concluded that the GGBs were not qualifying investments under the treaty and, as such, it lacked jurisdiction to rule on the dispute. The majority offered some comments as to whether the GGBs amounted to a qualifying investment under the ICSID Convention. Contrary to the earlier part of the award, they are less persuasive. In particular, it ventured to propose that financial instruments that are not linked with an economic venture cannot be considered as investments per se.

Until the Poštová Banka award, the award on jurisdiction in Abaclat was considered as a persuasive precedent that any forced rescheduling of national debt, haircuts, compulsory introduction of collective action clauses, conversion to equity and other forms of State interference in the terms of sovereign bond loans would lead to a vindication of holdout creditors by way of awarding damages under the relevant investment treaty. The award in the Poštová Banka case demonstrates the limit of that reasoning: similarly-worded broad definitions of “investment” in BITs may lead to different awards.

While the majority reasoning concerning the objective characterisation of an investment under article 25 of the ICSID Convention is unconvincing, the unanimous decision of the tribunal to give effect to the non-exhaustive list of illustrations of investments provided in the treaty, as opposed to stopping at the general definition of investment, is well argued and supported by a cogent interpretation of the Vienna Convention. In the end, each case will stand on the merit of its own facts and the terms of the particular BIT.

On 5 August 2015, Poštová Banka filed an application for partial annulment of the award.

Prospects for the future: EU bail-in and investment arbitration.  As indicated above, the Greek bond exchange act import a bail-in feature that requires creditors, rather than tax payers, to bear the loss. On 15 April 2014, the European Parliament adopted the Bank Recovery and Resolution Directive (BRRD). It requires shareholders and unsecured creditors to bear the costs of recapitalising failing banks in the case of a resolution. This is achieved by canceling shares and writing down debt or converting it into equity which is expected to increase the immediate loss-bearing capacity of the failing bank. It could be argued that measures of this type amount to an interference with constitutional and ECHR-protected fundamental rights to property. While the challenge of the Greek austerity measures before the ECHR has shown that a law that does not leave creditors worse off than what would be their situation in an insolvency is unlikely to be found a violation of their right to property, bailed-in creditors and shareholders of failing banks may seek to assert that the bank resolution decision violates investment law. Rather than arguing that EU law (in this case, the BRRD) itself violates investment law, they might argue that it is the resolution decision itself which does so.

A possible ground for that argument could be expropriation: where the cancellation or conversion of debt deprives the creditor of its original property. As such, it could be considered an expropriation even if the creditor obtains new shares in return. Such a claim would be justified if the claimant establishes that the expropriation was implemented for a purpose other than a legitimate public purpose, was discriminatory or was made without proper compensation. Like the ECHR, an investment arbitration tribunal is expected to recognise a resolution authority’s margin of appreciation when deciding when a resolution decision is to be taken. Should that decision appear to have been taken while the bank was not likely to fail, the bailed-in creditor’s case would have significant chances of success.

As an alternative to expropriation, the bailed-in creditors might argue the violation of their right to fair and equitable treatment. The outcome will largely depend on whether those creditors were given a right to challenge the resolution decision in judicial proceedings that protect their right to due process. An alternative could be a challenge of the proportionality of the decision. The resolution authority would likely counter that the BRRD requires that bail-in only be considered when the other resolution tools listed in BRRD article 37 do not allow bank recapitalisation. This leaves the lack of transparency of the administrative process and the absence of planned consultation with creditors as grounds for a possible challenge. The future will tell how arbitral tribunals will assess these complex parameters.


* Prof. Georges Affaki, Independent Arbitrator, France.

ISDS in TPP and TTIP Negotiations – Lessons for the EU

by Prof. Loukas Mistelis, QMUL*

The Transatlantic Trade and Investment Partnership (TTIP) and, in particular, its Investor-State Dispute Settlement provisions (ISDS) have been the focal point of an intense and polarising debate within the EU. Opponents of TTIP, on the one hand, reject the very idea of a new multilateral trade and investment agreement and see this as a threat to democracy and unconditional surrender to global commercial interests, a development that fully undermines sustainable development and growth. Proponents of TTIP, on the other hand, argue that globalisation of trade is a fact and a developmental process so that the focus should now be on better treaty making; they suggest that globalisation empowers consumers and new multilateral agreements can effectively promote a social and human rights agenda.

In relation to ISDS (or what it used to be called Investment Treaty Arbitration) the attack is even more aggressive. While the negotiating parties consider whether TTIP should offer the opportunity to an investor to sue in arbitration a state signatory to the agreement (since the state is deemed – by virtue of the signature of the treaty and the relevant provisions of the treaty – to have consented to such arbitration), a number of NGOs and a good part of the press, including several well-established newspapers left-of-centre argue that ISDS is a threat to national sovereignty and a vehicle for further privatisation of justice for the benefit of few very wealthy arbitration lawyers and arbitrators. It is also suggested that ISDS cases are designed for the benefit of investors. This, however, is not corroborated by facts.

The EU itself, in its discussion of ISDS (pp. 7-8) summarised that:

  • 37% (132 cases) had been decided in favour of the State, with all claims dismissed either on jurisdictional grounds or on the merits;
  • 28% (101 cases) had been settled;
  • 25% (87 cases) were found in favour of the investor, with monetary compensation awarded;
  • 8% (29 cases) had been discontinued for reasons other than settlement or for unknown reasons;
  • 2% (7 cases) had found in favour of the investor, yet no monetary compensation had been awarded.

In other words in 73% of the cases the state prevailed or settled the cases while in only one in four cases (25%) a damages award was rendered.

In relation to EU Member States the data is even more compelling:

  • In 44% of the cases, all claims were dismissed or jurisdiction was declined;
  • In 36% of the cases, the dispute was settled or otherwise discontinued;
  • In 20% of the cases, the dispute led to an award upholding claims in part or in full.

In 80% of the cases involving an EU Member State as a respondent the state prevailed or settled the matter while only in one in five cases a damages award was rendered.

It is noteworthy that the arbitration community as well as the business community have not been particularly vocal or proactive in this debate, save for a few specialist conferences. It has also been rather impossible to bring together a wider and open public debate despite several efforts of EFILA and other organisations to engage in constructive discussions with NGOs.

In the recently published report of the US-EU TTIP Negotiations, which took place in Washington, D.C and Miami in October 2015, there is no reference to ISDS. This is particularly interesting given that the EU through Commissioner Malmstrom published on 16 September 2015 a comprehensive proposal for a permanent Investment Court System. I suspect that the EU Commission proposal was published too late to be tabled for and discussed during the October negotiations. From the EU press release one can draw the conclusion that the EU Commission is confident that it had addressed various concerns voiced by parts of the press and NGOs. It will be significant to see the reactions of Member States and the EU Parliament. See, for example, the brief report which indicates that the UK government appears to favour a traditional ISDS mechanism but also note that this is not the official UK government response.

This post does not address the merits and disadvantages of a permanent investment court but addresses the question of negotiation strategy and policy. The investment court system proposal was discussed in another EFILA Blog post on 14 October 2015. It perhaps useful to add here merely that the reaction of the USTR Ambassador Froman to the EU suggestion was lukewarm.

While the EU was authorised by the Member States in 2013 to conduct the TTIP negotiations it seems that the negotiations will take some time to conclude. The US presidential elections in 2016 will slow down the negotiations at least until mid or late 2017. A conclusion of TTIP will not be on the agenda for a few years to come.

This is in stark contrast with the conclusion of the Trans-Pacific Partnership (TPP text) which the US accelerated and recently completed. TPP has been signed by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the US in Atlanta a few days ago. The TPP negotiations started in 2008 and it took good seven years to conclude.

The text of TPP will be scrutinised by the EU negotiators, the EU Commission and the Member States. It would suffice to say here that TPP is largely a typical US Trade and Investment Agreement with some variations from previous texts and that ISDS is included. It contains substantive protections found in many investment agreements and essentially mirrors the provisions found in the 2012 US Model BIT. As such TPP differs from the EU-Canada Comprehensive Economic Trade Agreement (CETA) and the EU-Singapore Free Trade Agreement.  For example, it grants minimum standard of treatment in accordance with customary international law. It is also reported that TPP includes a code of conduct (code of ethics for arbitrators) while at the same time more power is conferred upon arbitrators to dismiss summarily frivolous claims. There is also an exclusion for tobacco companies from using ISDS, further enhancing and strengthening the regulatory space of states.

The key conclusion to draw from the ISDS provisions in TPP is undoubtedly a strong and unequivocal endorsement of the current practice of private arbitration of investment disputes (traditional ISDS) where the focus has moved to substantive protection rules rather than arbitration as a method. In this respect TPP dispelled ISDS myths and focused on facts.

In light of the recently concluded TPP it is tactically unhelpful that the EU has published an alternative ISDS Model at this stage of negotiations. One could easily argue that the TPP model for ISDS is “state of art”, widely accepted by a number of developed economies such as Canada, the US, Australia, Japan and Singapore (in fact 40% of the world’s GDP) and that the EU should also operate in a similar system, increasing multilateralism rather than introducing further fragmentation of international investment law. It is also expected that both the EU and the US take a central role in promoting free trade and investment promotion and protection and it would be awkward, to say the least, to have different standards of investment promotion and protection depending on who the counterpart is. The introduction of “formal” discrimination could have negative impact of the global role of the EU as a preferred trading partner of developing countries.

Tactically a very early announcement of the EU basis of negotiation on ISDS in TTIP looks very much like a game theory faux pas. Or it may well be a very shrewd tactic. Any draft which is proposed to merely satisfy domestic or regional needed of the proposing side can be used by the other side to the proposing side’s detriment if the need for a quid pro quo settlement arises. Alternatively it may a tactic to silence the opponents of ISDS by proposing something that can easily be rejected so that both sides would, for example, be satisfied with a permanent investment appellate body while retaining private arbitration at first instance. In such a case the EU could argue that they fought hard for a permanent two-instance investment court and the permanent appellate body is a great success.

Rejecting private arbitration while the statistics are clear that most cases are in favour of states rather than investors and while it is also widely accepted that we should not be depriving investors the access to arbitration (or ISDS) seems to parochial rather than modern and protectionist rather than liberal. The attention should move to improving ISDS and private arbitration by drafting clearer treaties, better procedural rules and enforceable codes of conduct. Polarising the debate does not allow space for regulatory nuances nor does it help to create a convergent if not harmonised investment protection and promotion regime.


* Prof. Loukas Mistelis, Clive M. Schmitthoff Professor of Transnational Commercial Law and Arbitration, Queen Mary University of London, School of Law.

EFILA Blog’s October Recommendation: Proportionality in Investor-State Arbitration

This month’s recommendation from Oxford University Press: Gebhard Bücheler – Proportionality in Investor-State Arbitration.

The new volume by Gebhard Bücheler:

  • Shows that proportionality is a general principle of law relevant to investor-State arbitration
  • Develops an analytical framework for deciding in which legal settings conflicts between the interests of foreign investors and the public interest ought to be resolved by a proportionality analysis
  • Contains an in-depth analysis of the current and potential role of proportionality in expropriation provisions, the standard of fair and equitable treatment, non-precluded measures clauses (Article XI of the US-Argentina BIT), and the customary international law defense of necessity

While international investment law is one of the most dynamic and thriving fields of international law, it is increasingly criticized for failing to strike a fair balance between private property rights and the public interest. Proportionality is a tool to resolve conflicts between competing rights and interests. This book assesses its current role, its potential, and its limits in investor-State arbitration.

Proportionality is often lauded for reconciling colliding interests. This book identifies three factors arbitrators should consider before engaging in a proportionality analysis: the rule of law, the risk of judicial law-making, and the availability of a value system that guides the proportionality analysis. Apart from making suggestions when arbitrators should apply proportionality and when not to, the book outlines what States can do to recalibrate the balance between private property rights and the public interest if they wish to do so without dismantling the current system of investor-State arbitration.

Proportionality in Investor-State Arbitration considers whether and to what extent the notion of general principles of law within the meaning of Article 38(1)(c) of the ICJ Statute and the concept of systemic integration enshrined in Article 31(3)(c) of the Vienna Convention on the Law of Treaties provides a valid legal foundation for applying proportionality in investor-State arbitration.

Bücheler’s book represents a most welcome voice in the present discourse. It not only contributes to academic clarification of its topic, but is also a guide to the practical application of the proportionality principle. I therefore commend Proportionality in Investor-State Arbitration to scholars, counsel and arbitrators as well as to domestic decision-makers, in particular to treaty negotiators.” – Bruno Simma

Defining International Investment Law for the 21st Century (A Reply)

by Emanuela Matei, Of Counsel – Mircea and Partners*

This post represents a reply to Horia Ciurtin’s material “The Future of Investment Treaties: Metamorphosis or Deconstruction?”, published on the EFILA Blog on 8th September. Another reply will follow from Horia Ciurtin in the following weeks.

Of Two Evils Choose Neither

We are living in a hologram designed by a very confused mind. Witnessing the 21st century we all experience a degree of restlessness and fuzziness. In this context, the choice between two evils may be no more than a false dilemma. The misconception of the limits of international law is part of this holographic picture.

In his post “The Future of Investment Treaties: Metamorphosis or Deconstruction?“, Horia Ciurtin revisits the challenging task of defining – in our not-so brave new world – the concept of international law, in general, and of investment treaties law, in particular. I both agree and disagree with the author’s concerns. I fully agree with him that international law and legal institutions can provide effective means to solve human problems. I disagree with the either-or equation though and I will describe it as a deceiving choice between two evils.

The First Evil

In a world where the interactions are multiple and ubiquitous, it is very often not possible to determine which event occurs first and define it as the cause of a subsequent event, called effect. State interests do not exist outside the social sphere and the actions of states are therefore influenced by the attitudes of non-state constituencies. In other words, the border between state and non-state has been blurred.

It is up to the observer to judge. If the observer believes that coercion is the source of order and well-being in the world, he will naturally think that international law cannot have an influence on actual state behaviour. Such an observer sees international law as a source of democratic concern, arguing against the implementation of international law norms domestically. In my view, this hostile approach is the first evil and – so far – Horia Ciurtin and I agree with each other.

The Second Evil

The affirmation that the sovereign entities are “no longer needed as ‘procedural proxies’ for aggrieved investors, being able themselves to directly involve in international litigation and be compensated for their losses” is on the other hand not immune to criticism. Having a right and being able to exercise it effectively should be seen as two sides of the same coin. A right, which is not enforceable has no legal significance. It has only a symbolic value. States comply with international law as long as the social sphere – in which their interests are continuously defined – requires them to do so.

Moreover, the author pleads for the de-politicisation of the disputes by unconditionally escaping the domestic remedies. My counterargument is that such disputes are nonetheless political in nature, so their de-politicisation would provide no more than an empty gesture.

For a legal pragmatist as I am, the ICSID-convention is a tool designed to serve a set of functions. It is nothing unexpected in the fact that this tool has been designed at a certain moment in time and that time is gone. The question that must be answered is what kind of functional design shall be chosen for the 21st century FTAs? Attention, the designer may be somebody else than before! Again, the political configuration which is part of the social sphere is different now compared with 1950!

Furthermore, the situation of intra-EU BITs is a special case. I believe that the comparison between the South America and the Central-Eastern Europe is a bit misplaced. A conflict between supra-state constitutional law and international law obligations on one side, and between individual rights derived from international law and the obligation of the state to implement supranational law, on the other, constitutes an extra-complication that must be faced by countries like Romania, Hungary or Slovak Republic.

The either-or dilemma is often projected by the advocates of arbitration as a support for the affirmation that without an ISDS-system the protection of the investor will be severely depreciated. It can be true that some strategic contrivances will no longer be available. However, it must be recognised that the accession to the EU of the Central-Eastern European countries had a positive impact on their legal systems and the socio-economic environment is now more stable than in the nineties and early noughties.

More than so, the capital is the most mobile of all factors of production. If some jurisdictions became hostile to investors, the capital would vote with its feet as it does in all other cases, where the regulatory choices of the state or supra-state give an incentive to corporations to move, stay or entry. Thus, my contemplation of the post-Westphalian field of battle is much more optimistic in this particular sense. The second evil – no protection for the investor in the 21st century – is nothing else than a false alarm!

The discussion starts to sound irresistibly interesting to me when we begin to imagine deterritorialised ideas of governance … but this is a different kind of story. This is the true and exciting post-Westphalian realm left unexplored by the mainstream despotique!


* Emanuela Matei, Jurismaster; Of Counsel – Mircea and Partners; Associate Researcher – Centre for European Legal Studies.

The Future of Investment Treaties: Metamorphosis or Deconstruction?

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

Traditionally, the sole subjects of public international law are sovereign states. Therefore, in the Westphalian system, only statal political entities are able to assume obligations and benefit from certain rights at an international level. As a consequence, under this classical approach, only such actors can initiate and can take part in this type of disputes, even though the prejudiced part might not be the entire state, but an administrative division, a group of citizens or a company incorporated in that state.

However, in the aftermath of World War II, public international law suffered structural metamorphosis, allowing both natural persons (due to the human rights theory and its accompanying charters) and legal entities (due to the various bilateral or multilateral investment agreements) to challenge the abusive conduct of a state, without needing the diplomatic intervention of their state of origin. Therefore, in the post-Westphalian international law system, the sovereign entities are no longer needed as ‘procedural proxies’ for aggrieved investors, being able themselves to directly involve in international litigation and be compensated for their losses.

Continue reading “The Future of Investment Treaties: Metamorphosis or Deconstruction?”

Third Party Funders: Game-Changers or Business as Usual?

by Duarte G. Henriques, BCH Advocados*

Some time ago, a question was asked to the members of the ICC Institute of World Business Law, of which I am a member, aiming at contributing to its quarterly newsletter: are third party funders a game-changer or business as usual?

At the time I was not able to timely answer that question, but now I will try to resume my thoughts.

This question is undoubtedly both challenging and distressful, but I would tend to take a different approach.

While it is challenging in consideration of the myriad of issues that may be encompassed by the idea of “third party funding”, it is at the same time capable of producing numerous sentiments, not all of a comforting nature – this is what the commentators will tell us.

Indeed, regarding this topic, it is now common to hear and read that it may raise feelings, and therefore concerns, about honesty, greed, venality, legitimacy, and above all, the integrity of arbitration as a means of resolving disputes.

Without any concern regarding citations, I would sum up some thoughts put forward in some public discussions that have already taken place (I stress that the following are observations made by others).

It has been said that it is unquestionable that third party funders play a significant, if not prevailing, role in most of the major legal actions and arbitral proceedings. They provide funding, and therefore they make an investment that is based purely on financial, patrimonial and risk assessment considerations. At the end of the day, it is “their” money that has (also) been put at stake. Consequently, it may seem obvious that the funder must be allowed to have a “word” when choosing the “players” (arbitral institutions, arbitrators, counsels, etc.). This may seem an admissible intervention, although sometimes this is the least that funders do. Often, their “word” is formally taken as advice, but in practice it may well be an instruction. So those voices say.

Hence, concerns about the independence and impartiality of the arbitrators are immediately put forward. The role of counsels is also at stake: more likely than not, counsel will tend to follow the interests of the funders – who are the players that provide referrals – rather than those of the parties. Indeed, it is not uncommon to find a lawyer or counsel struggling against a settlement (or to reach a settlement) simply because it will allow an easier repayment of funds supplied by funders. Again, as others say.

It has also been asked: who will refuse to be referred by a TPF? Who will say “No” when asked by a funder to provide their CV to an interested party? Will he or she be able to later say “No” to an instruction from the funder? Will he or she be free from any bias to side with the party that appointed him or her by means of the funder’s “advice”? Furthermore, will any ethical problem connected with third party funders be solved by disclosure?

The path is not at all clear.

One may now turn to other questions regarding third party funders.

The most common question is two-folded: what kind of information should be disclosed about third party financing and what the consequences are of such disclosure?

Regarding the information to provide, the recent trend seems to point in the direction of full disclosure. For instance, very recently, in Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan (ICSID Case No. ARB/12/6), the arbitral tribunal ordered the claimant to ‘confirm to Respondent whether its claims in this arbitration are being funded by a third-party funder, and, if so, shall advise Respondent and the Tribunal of the name or names and details of the third-party funder(s), and the nature of the arrangements concluded with the third-party funder(s), including whether and to what extent it/they will share in any successes that Claimants may achieve in this arbitration’ (order no. 3 of 12 June 2015 by Julian Lew). In another recently reported case (Eurogas Inc., Belmont Resources Inc. v Slovak Republic – ICSID Case No. ARB/14/14) the arbitral tribunal decided that the claimant should disclose the identity of the third-party funder.

On the other hand, the arbitration community did not reach consensus as to the conclusions that must be drawn from disclosure nor the consequences that follow the appearance of a third party funding the claimant.

Without regard to the impact that such appearance may have with respect to the independence and impartiality of the arbitrators (see General Standard 6(b) and 7(a) of the IBA Guidelines on Conflicts of Interest in International Arbitration — 2014), some take for granted that third party funders may not be ordered to pay the costs of the arbitration should the claim collapse. However, there is already case law supporting the view that third party funders must bear the costs if they hold a sufficient degree of economic interest and control in relation to the claim (see UK cases Excalibur Ventures LLC v. Texas Keystone Inc. & Ors v. Psari Holdings Limited & Ors and Arkin v. Borchard Lines Ltd. & Ors. See also US case Abu-Ghazaleh v. Chaul). Is this a trend to observe in the near future?

Another topic raises the eyebrows in relation to the consequences of the existence of a third party funder: for the purposes of deciding security for costs, must a funded party be presumed impecunious merely because the funding flows from a third party? To the best of my knowledge, no arbitral tribunal has yet decided according to such assumption. To the contrary, in the case cited above (Eurogas v Slovakia) the arbitral tribunal expressly denied such assumption. However, Gavan Griffit’s assenting reasons to the decision on St. Lucia’s Request for Security for Costs of 13 August 2014 (RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10) gave room to serious concerns and no less criticism. His words deserve nothing less of a serious thinking and a peaceful discussion:

once it appears that there is third party funding of an investor’s claims, the onus is cast on the claimant to disclose all relevant factors and to make a case why security for costs orders should not be made

This is indeed a topic full of questions and with only few clear answers. Nevertheless, the following seems to me clearer.

My first reaction when confronted with TPF for the very first time was: this topic defies the principles of the fundamental right to access Justice. In fact, let us think of a party in financial distress, incapable of supporting the costs of a legal action or of arbitration proceedings. Why upbraid a party (or its counsel) seeking financial support from a funding institution? Why reproach the funder? Is it not in the best interest of every party to have effective access to Justice even if by recourse to a funding system? Don’t those institutions perform a role of social and public interest by allowing an impoverished party to have an effective defense of its rights? It is true that sometimes third party funders may bring unbalance between the parties, but isn’t it also true that they may perform a role of leveling the playing field?

One cannot deny this.

Having this in mind, I believe that the equation stated above may not be accurate. The issue may not be whether this is “usual business” or a “game-changer” simply because third party funders may be both, and may be neither.

The issue should be an assessment of the real role they can play concerning the social and economic public interests involved when funding a legal activity, on one hand, and the close attentiveness to that funding activity that ethical and deontological concerns require, on the other.

Further, reality check is needed, and commentary and other studies concerning third party funder need more fact-finding than just the traditional “anecdotal evidence”.

While I do not question that arbitrators and counsels – at least the large majority of them – will tackle (and some have already done so) these ethical and deontological concerns by full disclosure and by maintaining full independence from third party funders, and while I do not question either that most funders will (and actually do) refrain from intervening, horror stories are not needed to prove the rule by the exception. And those exceptions require future care.


* Duarte G. Henriques, Rua Fialho de Almeida – 32 – 1 E, 1070-129 Lisbon • Portugal, dghenriques@bch.ptwww.bch.pt.