Unveiling Japan’s Modern BIT Policy: A Review of its Substantive Provisions

By Yosuke Iwasaki (Sidley Austin LLP) and Takashi Yokoyama (Tenzer Arrieta PLLC)[1]

While Japan has signed 36[2] bilateral investment treaties (“BITs”) with predominantly capital importing countries, historically the Japanese government’s investment treaty policy has been veiled in secrecy. While some countries, such as the United States and India, have officially published their own model BITs, Japan has never announced a model text as a template for negotiations. This may make it difficult for foreign government officials to anticipate the overall treaty structure that Japan will seek to adopt when entering investment treaty negotiations with other states. This post aims to highlight certain drafting hallmarks of Japan’s recently signed international investment agreements (“IIAs”) by examining the substantive and procedural provisions from the Japan-Argentina BIT (JAGT), Japan-Armenia BIT (JAMT), Japan-Jordan BIT (JJT) and Japan-UAE BIT (JUT), which were all signed in 2018, and the Japan-Cote d’Ivoire BIT (JCT) and Japan-Morocco BIT (JMT), which were both signed in 2020 (all six treaties collectively, “Treaties”). We will also explain Japan’s modern BIT policy based on two treaty-making approaches – traditional investment protection and modern investment liberalization.

Traditional Protection vs. Modern Liberalization

The JJT, JMT and JUT are generally classified as “Traditional Protection IIAs” as they only cover foreign investments that traditionally qualify as an “investment.” On the other hand, JAGT, JAMT and JCT are categorized as “Modern Liberalization IIAs” as they grant investors a right of admission or they establish the status of investments at the pre-investment stage. In this regard, a Japanese government official testified on 12 May 2020 that Japan’s default position in negotiating a BIT with potential contracting states is to adopt the Modern Liberalization IIAs approach, though it was open to consider the Traditional Protection IIAs approach.[3] Considering that not many countries presently adopt the approach reflected in the Modern Liberalization IIAs, this policy of Japan promoting market access is remarkable internationally. However, the authors consider the modern liberalization approach fits Japan’s global economic position as a capital exporting country to broadly protect Japanese investors in a host state.

Definition of Investment

The definition of investments is generally broad in the Treaties the authors surveyed. The Treaties define an “investment” on an “asset” basis as “every kind of asset owned or controlled, directly or indirectly, by an investor,” extending its application to “any tangible and intangible, movable and immovable property, and any related property rights,” with a non-exhaustive enumeration of “investment” forms that enables arbitral tribunals to interpret the investor’s activities or expenditures into the treaty’s definition of an “investment,” even if it is not listed.[4] In contrast, Article 1.4 of the India Model BIT 2015 constitutes an “investment” on an “enterprise” basis that is conceptually narrower than the “asset” approach embraced in the vast majority of Japanese IIAs.

Aside from this common definition of investments, the Treaties also feature four notable hallmarks.

First, JAGT, JMT and JUT each refer to the “characteristics of an investment” as part of their definition of “investment.” In using this term, they are likely inspired by the four characteristics for the definition of “investment” set out in the Salini test and other ICSID arbitral awards[5]: i) the commitment of capital or other characteristics; ii) a certain duration of performance; iii) assumption of risk; and iv) a contribution to the economic development of the host state. In addition to the inherent “characteristics of an investment” generally required in any investment disputes,[6] the enumerated characteristics will be scrutinized in particular for alignment with the purpose of each Treaty before an arbitral tribunal.

Second, JAGT, JJT and JMT each stipulate that an investment shall be “made in accordance with applicable laws and regulations” in the host state. The requirement of compliance with applicable laws and regulations is rooted in arbitral awards.[7] In this regard, the footnote of JAGT Article 1(a) provides that “[i]t is confirmed that nothing in this Agreement shall apply to investments made by investors of a Contracting Party in violation of the applicable laws and regulations of either or both of the Contracting Parties.” Notably, the “degree of violation” by an investor could be a contentious issue for a tribunal to consider. For example, if an investor does not submit the registration documents required under the Foreign Exchange Law at the time of incorporation and afterward conducted ordinary business activities without any particular violations of law in the host state, it would be disproportionate if the investment treaty regime were to consistently preclude the business activities or expenditures of the investor from investment protection regardless of whether such violation is material or minor.

Third, JAGT, JJT and JMT each explicitly preclude public debts from the definition of “investments.”[8] Unless a treaty unambiguously precludes public debts from the definition of “investments,” the issue of whether public debts legally have the appropriate characteristics to amount to an “investment” could be a contentious one. For the avoidance of disputes, JAGT, JJT and JMT each preclude public debts from the definition of investments.[9]

Fourth, JUT Article 1(a) precludes “natural resources” in the definition of investments because that constitutes “public property” under the UAE Constitution.[10] However, this does not mean that all kinds of assets or business activities relevant to natural resources are consequently precluded from investment protection. For example, a natural resource refinery funded by an investor could constitute an “investment” under the JUT, apart from the natural resources involved themselves.

Definition of Investor / Denial of Benefits

The Treaties commonly provide that an “investor” shall be either: i) “a natural person having the nationality of that Contracting Party in accordance with its applicable laws and regulations”; or ii) “an enterprise of that Contracting Party,” that “is making or has made an investment.[11] Among the Treaties, JMT Article 1(b) explains in relation to “dual nationality” that “a natural person who is a dual national shall be deemed to be exclusively a national of the State of his or her dominant and effective nationality.” This may not cover a Japanese investor with dual nationality which may be because Japanese immigration law does not recognize dual nationality.

JMT Article 1(b) uniquely qualifies an “investor of a Contracting Party” that is an “enterprise” which is “carrying out substantial business activities” in that Contracting Party. There are some statutory distinctions or differences of legal consequences between JMT and the other Treaties despite the fact that the denial of benefits (“DOB”) clauses in the Treaties also bar an enterprise that does not operate substantial business activities in the home state from enjoying the Treaty’s investment protection.[12] Firstly, excluding such an enterprise from BIT protection through the definition of an investor or DOB clause may result in bifurcation, determining whether the burden of proof shall lie with an investor or a host state. Secondly, there is considerable debate about whether the assertion based on the DOB clause might not go to jurisdiction but rather admissibility or merits,[13] and whether that assertion can be made after the claim is filed or must be invoked at some earlier date in time.[14]

Finally, the Treaties enjoin an enterprise owned or controlled by an investor of a non-Contracting Party that has no diplomatic relations with the host state from enjoying the benefits of the protection.[15]

Most-Favored Nation Treatment

All of the Treaties explicitly preclude the applicability of their MFN provisions to any treatment granted by procedural provisions of any other international agreements. We note that the Modern Liberalization IIAs further proscribe their MFN provisions’ applicability to any treatment granted by substantive and procedural provisions of international agreements signed before the effective dates of the Modern Liberalization IIAs. In this regard, JAGT enjoins its MFN provision’s applicability to any treatment granted by substantive and procedural provisions of international agreements signed before the effective date of JAGT, under Article 3.5, while the other two stipulate the same in the Schedule of Reservation.

Curiously, in barring the MFN provisions’ applicability to substantive and procedural provisions of international agreements signed before the effective dates, the scope of the MFN provisions’ applicability under the Modern Liberalization IIAs is considerably narrower than that provided by the Traditional Protection IIAs despite the investment liberalization policy that Japan wishes to facilitate.

Fair and Equitable Treatment

Each of the Treaties equates FET with the customary international law standard. While India’s Model BIT 2015 Article 3.1 and the Canada-EU Economic and Trade Agreement Article 8.10.2 exhaustively enumerate the elements of FET, Japan is not currently adopting such an approach. Rather, the extremely straightforward wordings of JAMT and JJT’s FET provisions invite interpretation as per their plain and broad meaning by arbitral tribunals. In contrast, the detailed FET provisions in JAGT and JMT may demonstrate that Japan is attempting this type of statutory clarification of the FET standard in some of its IIAs, as endorsed by the Comprehensive and Progressive Trans-Pacific Partnership.[16]

This difference is a result of negotiations between Japan and the other contracting countries. However, we humbly consider this extremely straightforward wordings’ definition could benefit an investor because the FET provision may apply to government action broadly, while the detailed definition could benefit a host state, because an investor shall satisfy the enumerated elements of the FET to prove that the government action breaches it. For broader investment protection, the former approach would be in harmony with Japan’s broader investment protection policy.

Umbrella Clause/Investment Agreement

Among the Traditional Protection IIAs, JUT Article 5.3 adopts an Umbrella Clause providing that: “Each Contracting Party shall observe any obligation it may have entered into with regard to investments … of investors of the other Contracting Party.” In this regard, arbitral tribunals historically diverge on whether and to what extent an Umbrella Clause could apply to a case where an investor alleges a host state’s breach of contract. In SGS v. Pakistan, the tribunal denied the Umbrella Clause’s applicability to a breach of contract between the disputing parties because there was no clear and persuasive evidence that this was the actual intention of the contracting countries.[17] Other tribunals have also underscored that the Umbrella Clause shall solely embrace disputes regarding investment agreements or contracts to which (i) the host state itself is privy as a sovereign (as opposed to separate entities whose actions may be attributable to the state under international law),[18] or which (ii) involve sovereign rather than commercial acts.[19] There are of course, as with many issues arising in investment treaty arbitration, decisions that go the other way. The interpretation of such clauses by a given arbitral tribunal has a potential to limit the scope of obligations arising from an Umbrella Clause of IIAs, such as limiting their application to when a host state acts in a sovereign capacity or when the state itself is a party to the contract. Thus, arbitral tribunals could also restrain the applicability of JUT Article 5.3 depending on their own interpretation of the host state’s actual intention with respect to contractual disputes.

On the other hand, Japan’s Modern Liberalization IIAs cover a breach of contract by the host state by the “investment agreement” provision instead of the Umbrella Clause, as the CPTPP Article 9.19 similarly employed this approach. In this regard, JAMT Article 1 defines an “investment agreement” as a written agreement between an investor (or its investment that is an enterprise in the territory) and a host state’s central or local government or authority. JAMT Article 24.6 entitles an investor to submit a claim for the host state’s breaches of investment agreements through Article 24.2 (a)(i)(B) and (b)(i)(B) to arbitration by the state’s “consent” set out in the Treaty. The latter provision further provides that any dispute settlement clauses in an investment agreement between an investor and a host state shall not supersede this “consent.” Japan’s “investment agreement” provisions may clarify the scope and any limitations on the text of the host state’s obligations and issues of privity under an Umbrella Clause. The authors underline that this “investment agreement” provision’s approach is one of Japan’s remarkable features in the Modern Liberalization IIAs that may replace the traditional function of an Umbrella Clause in IIAs.

Expropriation

Each Treaty establishes the four conditions of lawful expropriation: i) a public purpose; ii) in a non-discriminatory manner; iii) upon payment of prompt, adequate and effective compensation; and iv) in accordance with due process of law. “Compensation” is defined as “the fair market value of the expropriated investments” in the Treaties. “Interest” is calculated as “commercially reasonable rate” in the same manner, while the duration of the interest could be interpreted differently in each Treaty. For example, JAGT, JAMT, JGT and JJT compute “Interest” from the date of expropriation until the date of payment, while JMT and JUT do so by “taking into account the length of time until the time of payment.”[20] These two Treaties might evaluate less amount of the interest than the others in the quantum award accordingly.

We note that JAGT Article 11.2 and 11.3 and JMT Annex referred to in its Article 9 enumerate the three conceivable factors in determining whether a government measure constitutes “indirect expropriation,” which are likely influenced by the investment treaty practice of the U.S. and Latin American countries, comprising[21]: i) economic impact of the government action; ii) interferences with distinct and reasonable expectations arising out of investment; and iii) character of the government action. Both Treaties also delineate that government action for legitimate public welfare objectives, such as public health, safety and the environment, would not constitute “indirect expropriation” except in “rare circumstances.” On balance, the phrase “rare circumstances” is likely provided to benefit an investor.

Conclusion

While substantive provisions in each Treaty vary respectively, the authors conclude that the scope of the investment protection under Japan’s Treaties is comparatively broad. This can be seen from the comprehensive definition of an “investment” or “investor” and the FET provisions, interpretation and application of which are much left to arbitral tribunals. We assume that this is not only because Japan is a capital exporting country, but also because of the fact Japan had never previously been a respondent state in investment arbitrations initiated under its IIAs at least before the signing of the Treaties. Japan’s initiatives on the Modern Liberalization IIAs may explain the recent BIT policy.[22] Finally, preservation of State rights to regulate may also be further area of interest for examining how Japan develops the scope of its IIAs in the near future.

  1. The authors received helpful comments from Shimpei Ishido of Nishimura & Asahi in Japan and Charles Tay of Zhong Lun Law Firm in China. The Japan’s modern BIT policy on procedural provisions will be unveiled at the next piece.

  2. This counting of Japan’s BITs does not include multilateral investment treaties and investment chapters of EPAs except for the Japan-Korea-China Investment Treaty signed in 2012. This piece does not analyze the Japan-Georgia BIT signed on 29 January 2021 after our submission to the editorial committee.

  3. Katsuhiko Takahashi’s response at Foreign Affairs and Defense Committee of the House of Councilors, Japan’s Diet on 12 May 2020

  4. See, e.g., JUT Article 1(a), JMT Article 1(a)

  5. Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco [I], ICSID Case No. ARB/00/4, Decision on Jurisdiction of 31 July 2001. Joy Mining Machinery Limited v. Arab Republic of Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction of 6 August 2004

  6. See, e.g., Romak S.A. v. The Republic of Uzbekistan, Award, 26 November 2009

  7. See, e.g., Phoenix Action, Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award on 15 April 2009

  8. See JAGT Article 1(a)(iii) “a sovereign debt of a Contracting Party or a debt of a state enterprise,” JJT Article 1(a) Note (i) “public debt,” JMT Article 1(a) Note (i) “debt securities issued by a Contracting Party or loan to a Contracting Party or to a public enterprise.”

  9. See, e.g., Abaclat and Others v. Argentine Republic, ICSID Case No. ARB/07/5, Poštová banka, a.s. and ISTROKAPITAL SE v. Hellenic Republic, ICSID Case No. ARB/13/8

  10. Katsuhiko Takahashi’s response at Foreign Affairs Committee of the House of Representatives, Japan’s Diet on 10 April 2020

  11. See, e.g., JJT Article 1(b), JMT Article 1(b)

  12. See, e.g., JAGT Article 23.2

  13. See, e.g., Plama v. Bulgaria Decision on Jurisdiction, 8 February 2005; Empresa Eléctrica del Ecuador, Inc. v. Republic of Ecuador, Award, 2 June 2009, para. 71; Isolux Infrastructure Netherlands, BV v. Kingdom of Spain, SCC Case No. V2013/153, Award, 12 July 2016

  14. See, e.g., Ampal v. Egypt, Decision on Jurisdiction, 1 February 2016, paras. 160-170

  15. See, e.g., JMT Article 20

  16. See Article 9.6.2 of Comprehensive and Progressive Trans-Pacific Partnership

  17. See SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, Decision on Jurisdiction, ICSID Case No. ARB/01/13

  18. See, e.g., Impregilo SpA v The Islamic Republic of Pakistan, ICSID Case No.ARB/03/3, Decision on Jurisdiction, 22 April 2005, para. 223, Gustav F W Hamester GmbH & Co KG v Republic of Ghana, ICSID Case No ARB/07/24, Award, 18 June 2010, para. 347(i)

  19. See, e.g., El Paso Energy International Company v. Argentine Republic, Decision on Jurisdiction, ICSID Case No. ARB/03/15, Pan American Energy LLC and BP Argentina Exploration Company v. Argentine Republic, Decision on Preliminary Objections, ICSID Case No. ARB/03/13, CMS Gas Transmission Company v. Argentine Republic, Award, ICSID Case No. ARB/01/8, Sempra Energy International v. Argentine Republic, Award, ICSID Case No. ARB/02/16

  20. See, e.g., JAGT Article 11.5 and JUT Article 12.3

  21. See, e.g., Middle East Cement v. Egypt, ICSID Case No. ARB/99/6, Award of 12 April 2002. Metalclad v. Mexico, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000

  22. See Japan’s Action Plan for Promotion of Investment Environment Preservation by International Investment Treaties declared on 11 May 2016

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

(Russian Proverb)

Izabella Prusskaya, Associate, CAREY OLSEN (BVI) L.P.

Africa needs more Russian foreign direct investments to enhance the current Africa-Russian trade ties

Albert M. Muchanga, Commissioner for Trade and Industry of the African Union, during the St. Petersburg International Economic Forum 2018, “Business Dialogue: Russia-Africa”

A changing landscape: industry focus and the nature of investors

Trade between Russia and African countries has strengthened in recent years. For example, the total turnover in trade in 2016 amounted to US$14.5 billion, which is US$3.4 billion more than in 2015,[1] and 2017 again saw record levels of investment.[2] According to the Eurasian Economic Commission, Africa is the only region with which Russia increased its trade in 2016.[3] To dig deeper: in the face of sanctions and unstable political relationships with the United States and Western Europe, Russia is looking for new economic partners.

Russian business interests in sub-Saharan Africa today still mainly lie in the commodities industry. Alrosa, Rosneft, Rostec and Rosatom are already involved in mining projects in Angola, Namibia and Zimbabwe among others. KamAZ and Sukhoi Civil Aircraft are also developing trade projects in the region. VTB has recently opened an office in Angola. Congo, Sudan and Senegal are also cooperating with Russia in the field of oil and gas exploration.

However, these are far from the only areas attracting investment. Agriculture also plays an important role in Russian-African economic relations, with Africa becoming a promising market for Russian grain and agricultural equipment.[4] In turn, many African countries[5] have recently increased the numbers of fruits and vegetables exported to Russia, taking advantage of the favorable market conditions arising after Russia imposed “counter-sanctions” on produce imported from the EU.[6]

Although large companies are still most engaged in the energy and mining sectors, manufacturing, transportation and infrastructure are also growing areas of focus. And this is not the end of a long list of investment opportunities Russian businesses are pursuing in Africa. One interesting example is Lisma, a company from Mordovia, which established a joint venture in Burundi for the production of lamps supplied to the entire East African market. African investors substantially finance the project, and Lisma in turn supplies equipment and technology.

There are some common features associated with the structure of Russian investment into Africa. As a general rule, it is relatively large Russian companies that are operating on the continent. Led by companies such as Gazprom, Lukoil, Rostec and Rosatom, which have investments or interests in Algeria, Egypt, South Africa, Uganda and Angola, Russians are mainly investing in oil, gas and African infrastructure. Most large Russian corporations investing in Africa are at least partially state-owned. Thus, most Russian economic interest in Africa effectively takes the form of public-private partnerships, with the majority of investment projects originating in Moscow, Russia’s financial and industrial center.

New frontiers for Russian investment: two innovative case studies

It is clear that there are an increasing number of Russian investment projects in African nations – and the following examples from Angola highlight that Russia’s presence on the continent is constantly forging new frontiers, in terms of both reach and scale.

Roskosmos has long been a partner of Angola in the space industry and Roskosmos currently plans to produce and launch the second satellite in Angola, Angosat-2.

The first satellite, Angosat-1, was launched into orbit at the end of 2017. The export contract for Angosat-1 amounted to US$327.6 million and was signed on 26 June 2009 between the Angolan Ministry of Telecommunications and Information Technology and Rosoboronexport. The Russian corporation Energy was appointed as the main contractor. In 2011, Vnesheconombank, Roseximbank, VTB and Gazprombank entered into a loan agreement with the Angolan Ministry of Finance, under which the African country got a credit line for US$278.46 million for a period of 13 years. In 2015, the construction of a satellite flight control center began in Luanda, the capital and largest city in Angola. Angola financed the construction of ground infrastructure at a cost of US$54.3 million.

In some cases, Russian investors play a dominant role in key industries – and they are using this position to deepen cooperation with host states. Another large Russian investor in Angola is Alrosa, a Russian group of diamond mining companies accounting for 95% of country’s diamond production and 27% of the global diamond extraction.[7]

According to those documents, Alrosa will participate in the project through the subsidiary company Katoka (Alrosa owns 32.8%), which will receive a 50.5% share in the new structure. Taking into consideration the results of a preliminary feasibility study, the development of Luashe is of a considerable economic interest to the project participants. The Luele kimberlite pipe found in the Luashe exploration field is the largest discovered in the world in the last 60 years.[8]

Substantive protections for investors under bilateral investment treaties

Currently, Russia is a party to eleven BITs with African countries,[9] of which six are currently in force – namely with Angola (2011), Egypt (2000), Equatorial Guinea (2011), Libya (2010), South Africa (2000) and Zimbabwe (2014).[10] Interestingly, while South Africa has terminated its BITs with a significant number of Western nations, its BIT with Russia remains in force.

The BITs in force between Russia and African nations have several features in common as regards the dispute resolution mechanisms. Each of them contains an article providing for investor-state dispute settlement (“ISDS”) and generally reflects a so-called “traditional” approach to dispute resolution, providing for arbitration as one of the available options. All of the dispute resolution clauses in those BITs are multi-tier and provide for negotiations as a preliminary step in resolving investor-state disputes (the “cooling-off period”). If the parties are not able to resolve their disputes in the course of negotiations, then the investor may apply to the competent court of the country where the investment was made or resort to arbitration.

Other features of the BITs’ provisions on arbitration do, however, vary – in particular, as regards the applicable arbitral rules, which govern proceedings between parties and can impact on a wide range of issues including timing of the arbitration, composition of the tribunal, confidentiality and emergency relief. For example, Article 10 of the South Africa-Russia BIT provides for either arbitration under the Arbitration Institute of the Stockholm Chamber of Commerce Rules (“SCC Rules)” or through an ad hoc arbitration in accordance with UNCITRAL Arbitration Rules (“UNCITRAL Rules”) – but not ICSID Rules. The older BITs, which entered into force in 2000, provide a more limited choice of arbitration options for the investors. The Egypt-Russia BIT provides only for UNCITRAL ad hoc arbitration, in its Article 10.

In contrast to the older BITs, the more modern Russian BITs with Angola, Libya and Zimbabwe represent a new generation of texts, which explains why they provide for an ICSID arbitration option. This is in line with Article 11 of the Angola-Russia BIT, Article 12 of the Zimbabwe-Russia BIT and Article 8 of the Libya-Russia BIT, all of which provide for investors to bring a claim via either ad hoc arbitration in accordance with UNCITRAL Arbitration Rules, or arbitration under the ICSID Convention. In practice, the arbitral rules most frequently used by Russian investors in claims against states are UNCITRAL Rules (12 cases) and SCC Rules (6 cases), with three filed under the ICSID Additional Facility Rules, two of which in 2018.[11]

The Russian-African BITs in force provide various types of protection for investors. Compensation shall correspond to the actual value of the expropriated investment and shall be paid without an unjustified delay.

Another substantive protection available for Russian investors under BITs with African countries is an obligation of host states to provide fair and equitable treatment of the investment (“FET” standard). The standard has been developed through case law, protection from discriminatory treatment or damage to investments (that amount to less than expropriation). FET is contained in the vast majority of international investment agreements as one of the main standards for the protection of foreign investors,[12] including in those six Russian-African BITs currently in force.

A third frequently used standard of investment protection, which is closely connected with FET standard, is the Most-Favoured Nation Treatment (“MFN” standard). It requires the host state not to treat an investor differently than other foreign or domestic investors based on the fact that it comes from a particular country. Based on MFN clauses contained in all Russian-African BITs in force, Russian investors shall receive equal trade advantages as the “most favoured nation”, for example, trade or tax advantages.

Where BITs are in force, therefore Russian investors in Africa are covered by the main substantive protections. Enforcing such protections is a matter of dispute settlement, subject to the clauses in the treaty covering the investor’s recourse.

Investor-state dispute settlement under bilateral investment treaties.

Russia is no stranger to investment arbitration – and even though Russia has more famously participated in such proceedings on the side of the host state, there have also been 22 cases where Russian investors filed claims against states under investment treaties.[13] The first such case was brought in 2004,[14] with several investment arbitration proceedings initiated by Russian investors in previous years still pending[15]. There has been a recent surge in claims by Russian investors, with six such cases brought in 2018[16] following just two in 2017[17] and three in 2016.[18] However, only one of these cases to date has involved an African host state – Egypt.

The PCA case of MetroJet (Kogalymavia) Limited v. Arab Republic of Egypt relates to a plane crash that took place in the Egyptian desert region of the Sinai in 2015. This crash killed all 224 passengers, the majority of which were Russian citizens. The Russian airline, Metrojet, together with the Turkish tour operator, Prince Group, are claiming at least US$200 million in an investment treaty claim against over the suspected terrorist attack.[19]

The Claimants brought their claim in 2017, seeking compensation for both direct damages caused by the crash and the loss of their investment in the Egyptian economy. The airline, which stopped flying shortly after the crash and filed for bankruptcy shortly after, is seeking US$90 million in damages. The Turkish tour operator is seeking US$111 million.

Optimizing BIT protections: structuring investment through a third country

In the case that Russian investors are unable to access adequate protections under the applicable BIT between Russia and the African host nation, investment structuring is an important means of optimizing the protections available to the investor. This is generally achieved by choosing a state with a favorable BIT between it and the target nation, in which to incorporate an investment vehicle to act as a conduit for funds. The purpose is to allow the Russian investor, by virtue of the domicile of the investment vehicle, to achieve superior investment protection pursuant to the terms of the preferred BIT.

The United Kingdom is a popular choice for such investment structuring, with 21 BITs with African countries currently in force.[20] However, it remains to further see whether Brexit will make it more attractive to structure investments in certain EU member states through the UK in order to take advantage of BIT protection.

It is to be noted that in March 2018 the Court of Justice of the European Union held, in the famous Achmea case that BITs between EU member states are invalid as their investor-state dispute settlement provisions are incompatible with the EU single market. Based on this, a treaty of 29 August 2020, the so-called “Termination Agreement” will terminate all intra-EU BITs between ratifying states. The UK has declined to join it, so investments under those BITs may continue to be structured via the UK so as to attract relevant BIT protection. This would have the added advantage to Russian investors of potential treaty protection in EU States that would not be provided by structuring through States – such as those mentioned below – which have signed the Termination Agreement. However, this may be in danger due to the infringement procedure which the EC has commenced against the UK for refusing to sign the Termination Agreement.

Another popular choice for investment structuring is France, with 23 BITs in force with African states.[21] Other jurisdictions such as the Netherlands may also be favorable, particularly in circumstances where they offer additional taxation benefits to an investor. These considerations should ideally be considered at the outset of an investment, or at least well before it could be said that any potential treaty dispute has arisen or could likely arise. If a switch comes only after the start of a dispute it is unlikely to benefit from protection.[22] The latter approach may lead an arbitral tribunal to reject a claim on the grounds that the claimant engaged in an abuse of process by switching the investment vehicle after knowing that a dispute had arisen or was likely to arise, as happened for example in Mobil Corporation v Venezuela and Banro American Resources Inc. v. Congo.[23]

There are already two examples of Russian investors taking advantage of third-country investment vehicles in bringing a claim under an alternative BIT, although not yet in Africa. In Naumchenko and others v. India (2012) the claim was brought under the Cyprus-India and Russia-India BITs; and in Nadel & Ithaca Holdings Inc v. Kyrgyzstan (2012), the claim (now discontinued) was brought under the Kyrgyzstan-United States of America BIT. Insofar as alternative BITs provide greater protection, Russian investors considering a new venture should seek advice on the most appropriate jurisdiction for incorporating an investment vehicle, taking into account substantive protections, the ISDS mechanism and any enforceability benefits.

Enforcement of awards: the availability of ICSID arbitration and the New York Convention

Famously, the ICSID Convention provides the most widespread and effective means of enforcing investment arbitral awards among its member states, with mandatory recognition and enforcement of arbitral awards by local courts. According to the survey conducted by ICSID in 2017, Member States reported 85% compliance with ICSID awards of costs and/or damages in favor of the claiming party and post-award decisions issued from 14 October 1966 until 1 April 2017.[24] The ICSID Convention applies only to disputes between state members of the Convention, and nationals and companies of member states. To be a member, a state must both sign and ratify the Convention.

As Russia has signed but not yet ratified the ICSID Convention,[25] Russian investors will need to use third country investment structuring, in order to participate in conventional ICSID arbitrations and benefit from the associated enforcement mechanism. Availability of the ICSID enforcement mechanism will, of course, also depend on the ratification status of the host state. To date, 38 African nations have ratified the ICSID Convention,[26] so the mechanism is in principle quite widely available on the continent.

The ICSID Additional Facility Rules provide one alternative for Russian investors, where investment structuring is not an option. These Rules are available for the arbitration of investment disputes where only one side is a party or national of a party to the ICSID Convention.[27] As such, Russian investors can in principle bring arbitration against an African host state under the ICSID Additional Facility Rules where the host state has ratified the ICSID Convention, and the applicable BIT permits ICSID arbitration. Although awards under the Additional Facility Rules are not enforceable pursuant to the ICSID Convention, such awards still have the advantage of credibility and are generally favorable for enforcement. Further, one of the proposals in ICSID’s current Rules Amendment Project is to extend the Additional Facility Rules to cases where both the claimant and the respondent are not ICSID Contracting States or nationals thereof. If this proposal is ultimately approved, Russian investors would (subject to the terms of the BIT) have access to arbitration under ICSID Additional Facility Rules regardless of the counterparty state.

The New York Convention provides an alternative enforcement mechanism to the ICSID Convention, where the arbitration has been carried out pursuant to other arbitration rules such as UNCITRAL. It is subject to local laws (where assets are based) regarding sovereign assets. However, it is applicable simply if the award is rendered and enforced in New York Convention contracting states – which represent a significant majority of African states.[28] As such, this enforcement mechanism will be more widely accessible to Russian investors in cases where investment structuring is not employed.

Contractual protections and contract-based arbitration

Beyond general investor-state protections, investors may also seek to incorporate an arbitration clause into a written and binding investment agreement with the state – although of course, this is likely to be a heavily negotiated point. Where successful, this approach will enable investors to bring claims against the host state in circumstances where there is no applicable BIT, the applicable BIT offers inadequate substantive protections, or the BIT does not provide for resolution of disputes via international arbitration. In all cases, investors will need to ensure that the investment agreement is drafted to incorporate the requisite substantive protections directly, and that the arbitration clause is appropriately drafted. This mechanism is a powerful but underutilized option: the statistics show that around 16% of all the arbitration cases filed under different ICSID Rules are based on contractual agreements between the parties in the dispute (112 out of 704), with the majority of Respondents from either Latin American or African countries.

ICSID permits arbitration on a contractual basis as well as pursuant to a BIT[29] and suggests a well-developed set of model clauses for this purpose.[30] As for treaty claims, Russian investors will need to structure their investment through a third party vehicle in order to allow investors to take advantage of the ICSID enforcement mechanism, although the arbitration clause could of course specify alternative rules, for example UNCITRAL, and seek to rely on alternative enforcement mechanisms. Contract-based arbitration is also permissible under the ICSID Additional Facility Rules, which as noted above may apply where either the host State or the State of origin of the investor is a Party to the ICSID Convention. ICSID also provides suggested drafting for this scenario in its model clauses.

A role for BRICS organizations in investment disputes?

Since South Africa joined the BRICS in 2010, the dispute resolution mechanisms of this informal grouping of nations have rapidly evolved, leading to new means of settling disputes between Russia and South Africa. The Shanghai International Economic and Trade Arbitration Commission established the BRICS Dispute Resolution Center Shanghai (“BRICS DR Center Shanghai”) in October 2015. This center accepts cases involving parties from BRICS countries and provides arbitration and alternative dispute resolution services. A similar center is now operational in New Delhi.

Moreover, the Moscow Declaration signed on 1 December 2017 proposed the “establishment of a Panel of Arbitrators and common institutional rules to coordinate and merge the functioning of the BRICS Dispute Resolution Centers already established […] and the proposed Centers in Brazil, Russia and South Africa“. Though such a panel has not yet been established, the representatives of the BRICS member states are actively discussing the future structure and functioning of such a panel. The proposed centers in Brazil, Russia and South Africa will, most likely, use BRICS DR Center Shanghai as an analogue.

The BRICS seem to be a good example of regionalizing dispute resolution mechanisms by setting up various centers for settling disputes between the member states. Together with the ever-increasing integration of African economies, recently heralded by the newly implemented African Continental Free Trade Area (“AfCFTA”), and its forthcoming Investment Protocol, this ongoing trend towards regionalization may yet see a specialized dispute resolution center for investment claims between CIS and the African Union.

Conclusion

Africa is a promising investment target with rapidly developing use of arbitration due to the continent’s progressive integration into the global economy and its evolving experience in resolving international disputes. The investment protection measures included in investment treaties allow investors to adapt the structure of their investment to benefit from those protections.

A variety of instruments provide for investment protection for Russian investors in Africa. The scope and level of protection will vary from country to country and depend on the local legislation and treaties in force. Importantly, the scope and level of protection must be evaluated before investing into Africa, since potential investors might be better served by structuring their investment through a third country in order to benefit from stronger protections. While the significant majority of African states have now ratified the New York Convention,[31] which provides a good means of award enforcement, innovation by Russian investors via third-country structuring may allow access to the ICSID Convention, under the egide of the World Bank.

As of today, African countries are parties to more than 900 BITs, generally with non-African countries;[32] and the majority of African states are also Member States of ICSID Convention. Although there has only been one known investment claim by a Russian investor in Africa, cases are likely to develop alongside the growth of Russian investments on the continent. It may be too early to determine whether any of the investors would face particular problems in Africa in connection with the initiation of investment arbitration. However, “forewarned is forearmed” and Russian investors are well advised to analyse investment protections applicable to them, in order to invest and risk with confidence before they drink champagne.

  1. FDI Intelligence. The Africa Investment Report 2016. Available at: Analyseafrica.com.
  2. Trends Report by FDIMarkets.com, 2017: as at the date of this publication, 2017 was the year “in which the highest numbers of projects were recorded”.
  3. Id.
  4. For example, Russia supplies wheat to Morocco, South Africa, Libya, Kenya, Sudan, Nigeria and Egypt.
  5. Egypt, Côte d’Ivoire, Benin, Nigeria, Guinea-Bissau, Central African Republic, Guinea, Burkina Faso, and Mali.
  6. More about Russia’s counter-measures at: https://www.politico.eu/article/putin-extends-counter-sanctions-against-eu/
  7. 2017 global natural diamond production forecasted at 142M carats worth US $15.6B”. Available at: MINING.com
  8. See at: http://www.alrosa.ru/алроса-примет-участие-в-освоении-круп/
  9. BITs not in force with: Morocco, Namibia, Nigeria, Algeria, Ethiopia.
  10. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/international-investment-agreements/countries/175/russian-federation
  11. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/investment-dispute-settlement/country/175/russian-federation/investor
  12. FAIR AND EQUITABLE TREATMENT. UNCTAD Series on Issues in International Investment Agreements II. P. 7. Available at: https://unctad.org/en/Docs/unctaddiaeia2011d5_en.pdf
  13. UNCTAD Investment Policy Hub, accessed at: https://investmentpolicy.unctad.org/investment-dispute-settlement/country/175/russian-federation/investor
  14. Bogdanov v. Moldova (I), which was initiated in 2004 under SCC Rules (Stockholm Chamber of Commerce). Mr. Bogdanov initiated three more claims against Moldova in 2005, 2009 and 2012, with two awards in favour of the investor and two in favour of the state.
  15. See for example Paushok v. Mongolia (2007), Naumchenko and others v. India (2012), Tatarstan v. Ukraine, Deripaska v. Montenegro (2016) and Boyko v. Ukraine (2017).
  16. Gazprom v Ukraine (2018), GRAND EXPRESS v. Belarus (2018), Lazareva v. Kuwait (2018), Manolium Processing v. Belarus (2018), MTS v Turkmenistan (II) (2018), RusHydro v Kyrgystan (2018).
  17. Boyko v. Ukraine (2017); MetroJet (Kogalymavia) Limited v. Arab Republic of Egypt (2017).
  18. Deripaska v. Montenegro (2016), Tatarstan v. Ukraine (2016), Evrobalt and Kompozit v. Moldova (2016).
  19. Garrigues. PCA to decide claim against Egypt over plane crash. Available at: https://www.garrigues.com/en_GB/new/international-arbitration-newsletter-march-2020-regional-overview-middle-east-and-africa
  20. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/international-investment-agreements/countries/221/united-kingdom
  21. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/international-investment-agreements/countries/72/france
  22. See, for example: Philip Morris Asia Limited v. The Commonwealth of Australia, (PCA Case No. 2012-12)
  23. Banro American Resources, Inc. and Société Aurifère du Kivu et du Maniema S.A.R.L. v. Democratic Republic of the Congo, ICSID Case No. ARB/98/7
  24. Including both Convention and Additional Facility awards
  25. Database of ICSID Member States, accessed at https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx
  26. Database of ICSID Member States, accessed at https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx
  27. Article 2 of the ICSID Additional Facility Rules
  28. Database of ICSID Member States, accessed at https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx
  29. Article 25(1) of the ICSID Convention
  30. See at: https://icsid.worldbank.org/en/Pages/resources/ICSID-Model-Clauses.aspx
  31. New York Convention Contracting States, accessed at http://www.newyorkconvention.org/countries
  32. See at: http://aefjn.org/en/bilateral-investment-treaties-a-continuing-threat-to-africa/

The Contents of the European Investment Law and Arbitration Review, Vol. 5 (2020)

Prof. Nikos Lavranos & Prof. Loukas Mistelis (Co-Editors in Chief)

We are very pleased and proud to present the fifth issue of the European Investment Law and Arbitration Review (EILA Rev) 2020.

As of 23 December 2020, all articles of this volume can be ordered online at Brill Publishers:

The stormy developments of the past years regarding international investment law and arbitration broadly understood, which to a large extent were driven by various EU institutions – European Commission, Court of Justice of the EU and the European Parliament – have confirmed the need for a legal journal such as this Review that exclusively tracks these developments and provides a forum for debate on the current state of affairs and future developments.

The Achmea judgment, the termination agreement regarding intra- EU BITs, CETA, Opinion 1/17, Brexit, the ISDS reform efforts in the UNCITRAL Working Group III and the ECT, are just a few of the topics that have been featured and continue to feature in a broad range of different contexts in this Review.

This issue opens with an article by Sarah Vasani and Nathalie Allen, which highlights the need of effective investment protection in order to ensure that the Paris Climate targets are reached by an increase in foreign direct investments in renewable energy. Often investment protection and environmental protection are presented as opposing, mutually exclusive interests; however, the authors convincingly argue that the contrary is true.

Elizabeth Chan’s article turns to Brexit and its potential for post- Brexit UK to design its foreign investment policy anew – independent from the EU.

Subsequently, Alexander Leventhal and Akshay Shreedhar analyze the practice of the European Commission intervening in arbitration proceedings by way of using amicus curiae briefs. They discuss the question whether, and if so, to what extent the European Commission can be considered a neutral friend of the tribunal or rather must be considered a third party with a particular interest – usually in support of the Member State concerned – which would have to be qualified as a potential abuse of the amicus curiae briefs tool.

Brady Gordon’s article provides a critical and sceptical analysis of the CJEU’s case law regarding CETA.

This is followed by David Sandberg and Jacob Rosell Svensson’s article regarding the implications of Achmea for national court challenge proceedings. They highlight the huge impact of Achmea for many on- going proceedings before domestic courts in various jurisdictions.

Samantha Rowe and Nelson Goh (former Managing Editor of this Review) explain how perceived norm conflicts regarding the January 2019 EU Member States Declarations on the consequences of the Achmea judgment can be resolved through principles of treaty interpretation.

Nikos Lavranos concludes this series of Achmea related articles by offering his analysis on the recently signed termination agreement, which would effectively terminate most intra-EU BITs.

As in the past years, we also run an Essay Competition, which resulted in many outstanding submissions. Indeed, this year the quality was so high that the Editorial Team decided to award, next to the first prize winner, two joint second prize winners rather than a second and third prize winner.

Crawford Jamieson is the first prize winner of the Essay Competition 2020 with his submission, which assesses the CJEU’s decisions in Achmea and Opinion 1/ 17 regarding CETA in light of the proposed Multilateral Investment Court (MIC). He shows that there are considerable flaws and inconsistencies in the CJEU’s jurisprudence, which can only be explained by political motivations in order to lend support to the MIC.

Joint second prize winner, Robert Bradshaw, illustrates with his submission that international investment law is in need of a proportionality test. The other joint second prize winners, Florence Humblet and Kabir Duggal, provide an extensive analysis for using Article 37 of the EU Charter as a defence for Climate Change and environmental measures in Investor-State arbitration disputes.

The case-note section is opened by Cees Verburg who analyses the Hague Court of Appeals’ decision, which overturned the lower courts’ decision to annul the USD 50 billion Yukos award. This decision reinstated the award, while at the same time triggered an appeal by the Russian Federation before the Dutch Supreme Court. Thus, there will be another, final, round.

Bianca McDonnell examined the Adamakopoulos v. Cyprus Decision on Jurisdiction by the ICSID arbitral tribunal. This decision is particularly interesting regarding the dissenting opinion of one arbitrator concerning the alleged incompatibility of the bit s and the EU Treaties as well as regarding the aspect of the mass claim nature of the proceeding.

Finally, Alesia Tsiabus and Guillaume Croisant discuss the lessons learned from the Micula saga for the relationship between international investment law and EU competition law.

The focus section on the Young ITA event on investment arbitration and the environment continues the theme, that was initiated by the first article in this Review. The focus section encompasses several written contributions of the presentations given at the Young ITA event held on 5 November 2019 in London.

This section is opened by an extensive analysis of Laura Rees-Evans in which she explains the recent developments and prospects of reform regarding the protection of the environment in international investment agreements.

Crina Baltag looks at the doctrine of police powers in relation to the protection of the environment, while Anna Bilanova explains the option of using environmental counterclaims. This is followed by a discussion of Guarav Sharma on environmental claims by States in investment treaty arbitration.

Finally, Nikos Lavranos, the other Co- Editor-in-Chief of this Review, looks at the (ab)use of third- party submissions in investment treaty arbitration proceedings.

The EFILA focus section contains a summary of the keynote delivered by Meg Kinnear at the 5th EFILA Annual Conference with a particular focus on using ADR tools in investment disputes.

This is followed by the text of the 5th EFILA Annual Lecture delivered by Prof. Laurence Boisson de Chazournes on navigating multiple proceedings in the light of the proliferation of courts and tribunals.

Finally, three book reviews wrap up this issue. Nikos Lavranos looks at the new Practical Commentary on the ICSID Convention, while Nelson Goh (former Managing Editor of this Review) reviews a Case Book on International Law in Domestic Courts and Trisha Mitra (Co- Managing Editor of this Review) examines the book on the future of Investment Treat Arbitration in the EU.

We are confident that this year’s 480 page volume underscores again the raison d’être for publishing this Review, which covers such a dynamic field of law.

In order to produce an interesting volume next year yet again, we invite unpublished, high-quality submissions (long and short articles as well as case notes) that fall within the scope of this Review.

The Call for Papers and the house style requirements are published on the Review’s website:

In addition, we will also again run an Essay Competition. All information regarding the 2021 Essay Competition will be published on the Review’s website:

Table of Contents of the European Investment Law and Arbitration Review 2020

Articles

1 No Green without More Green: The Importance of Protecting FDI through International Investment Law to Meet the Climate Change Challenge 3

Sarah Z. Vasani and Nathalie Allen

2 The UK’s Post- Brexit Investment Policy: An Opportunity for New Design Choices 40

Elizabeth Chan

3 The European Commission: Ami Fidèle or Faux Ami? 70

Alexander G. Leventhal and Akshay Shreedhar

4 A Sceptical Analysis of the Enforcement of ISDS Awards in the EU Following the Decision of the CJEU on CETA 92

Brady Gordon

5 Achmea and the Implications for Challenge Proceedings before National Courts 146

David Sandberg and Jacob Rosell Svensson

6 Resolving Perceived Norm Conflict through Principles of Treaty Interpretation: The January 2019 EU Member State’s Declarations 167

Samantha J. Rowe and Nelson Goh

7 The World after the Termination of intra-EU BITs 196

Nikos Lavranos

Essay Competition 2020

8 Assessing the CJEU’s Decisions in Achmea and Opinion 1/ 17 in Light of the Proposed Multilateral Investment Court – Winner of the Essay Competition 2020 215

Crawford Jamieson

9 Legal Stability and Legitimate Expectations: Does International Investment Law Need a Sense of Proportion? – Joint 2nd Prize Winner of the Essay Competition 2020 240

Robert Bradshaw

10 If You are not Part of the Solution, You are the Problem: Article 37 of the EU Charter as a Defence for Climate Change and Environmental Measures in Investor- State Arbitrations – Joint 2nd Prize Winner Essay Competition 2020 265

Florence Humblet and Kabir Duggal

Case- Notes

11 The Hague Court of Appeal Reinstates the Yukos Awards 299

Cees Verburg

12 Theodoros Adamakopoulos and Others v. Republic of Cyprus, ICSID Case No Arb/15/49, Decision on Jurisdiction, 7 February 2020 315

Bianca McDonnell

13 Investment Arbitration and EU (Competition) Law – Lessons Learned from the Micula Saga

Alesia Tsiabus and Guillaume Croisant 330

Focus section on the Young ITA Event: Investment Arbitration and the Environment – Emerging Themes

14 The Protection of the Environment in International Investment Agreements – Recent Developments and Prospects for Reform 357

Laura Rees- Evans

15 Investment Arbitration and Police Powers: Emerging Issues 392

Crina Baltag

16 Environmental Counterclaims in Investment Arbitration 400

Anna Bilanová

17 Environmental Claims by States in Investment Treaty Arbitration 412

Gaurav Sharma

18 The (ab)use of Third- Party Submissions 426

Nikos Lavranos

Focus Section on EFILA

19 ADR in Investment Disputes: The Role of Complementary Mechanisms – Keynote to the 5th EFILA Annual Conference 2020 439

Meg Kinnear

20 The Proliferation of Courts and Tribunals: Navigating Multiple Proceedings – 5th EFILA Annual Lecture 2019 447

Laurence Boisson de Chazournes

Book Reviews

21 The ICSID Convention, Regulations and Rules – A practical Commentary 471

Nikos Lavranos

22 International Law in Domestic Courts: A Case Book 473

Nelson Goh

23 The Future of Investment Treaty Arbitration in the EU: intra-EU BITs, the Energy Charter Treaty, and the Multilateral Investment Court 475

Trisha Mitra

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

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

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

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

Decision of the committee

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

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

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

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

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

Tracing the contours of the duty to disclose in Investment Arbitration

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

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

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

Double-hatting in Investment Arbitration: A Necessary Evil?

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

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

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

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

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

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


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

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

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

[4] Ibid.

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

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

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

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

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

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

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

[12] Ibid, at 16.

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

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

[15] Netherlands Model Bilateral Investment Treaty, 2018.

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

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

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

[19] Ibid.

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

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

Prof. Dr. Alexander Reuter *

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

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

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

A)   Third party rights under public international law

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

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

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

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

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

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

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

C)   Consequences for Intra-EU bilateral investment treaties

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

D)   No precedent character of Achmea and CETA

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

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

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

E)   Applying the criteria of the CETA Opinion

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

F)   A matter of justice

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


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

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

[2] Issue 80 (2/2020), pp. 379 – 427.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[19] See note 4.

[20] Reuter, note 2, Part E.

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.

Young ISDS Club – Corona pandemic investment disputes

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

I was invited by Alexander Leventhal (Quinn Emanuel Urquhart & Sullivan) to participate in a webinar conducted by Young ISDS Club on 26 May 2020. Knowing Alexander’s undefined love for discussions on all things in investment arbitration, I was certain that the webinar would be intellectually stimulating. However, to my immediate surprise, it was not like the typical webinar where one could simply sit back and absorb the information. To the contrary, the webinar was interactive and made me think on my feet.

This is typical of Young ISDS Club. It is a club where members are expected to engage, think on their feet and at times be called upon to share their views and contribute ideas. Throughout the seminar, I sheepishly couched in my seat, with this write-up comprising my only contribution to what was otherwise a very engaging discussion.

  1. Introduction

Aron Skogman (Mannheimer Swartling) welcomed the participants and introduced the topic – Corona pandemic investment disputes. The focus of the discussion was on the potential for State measures passed in response to Covid-19 to violate protections in international investment agreements (“IIA”) and the potential investment claims and the defenses arising therefrom.

Thereafter, Laura Halonen (WAGNER Arbitration) introduced the speakers and explained their roles as discussion leaders to familiarize the legal concepts along with some concrete examples to ignite the discussion to follow. She introduced the speakers and their roles:

  • The first speaker (Isabella Cannata, Lalive) discussed the State measures in response to Covid-19 and various standards which may be invoked by the investors against these measures.
  • The second speaker (Aaron de Jong, HANEFELD) discussed various defenses which the State may invoke to justify the measures.
  • The third speaker (Alexander) gave concrete examples of various measures that the States have taken and may result in potential investment claims.
  1. First Speaker (protections stipulated in international investment agreements)

The first speaker gave a brief overview of the various kinds of measures which the States have taken in response to Covid-19. She categorised the States’ actions into (a) measures responding to public health emergency (b) measures tackling the immediate economic consequences (tax discounts, suspension of loans or direct cash injection); and (c) measures aimed at easing the mid-term economic consequences (bailouts and sovereign debt restructuring).

At outset, she stated that the first wave of investment claims seems already on its way – investors are already considering bringing claims against Mexico after the government restricted the production of renewable energy production due to a fall in demand.

Thereafter, she stated that protection granted to the investors may vary from treaty to treaty and will depend on the exact language of the treaty. However, in the context of Covid-19, the following standards are likely to be invoked: fair and equitable treatment (“FET”), full protection and security standards (“FPS“), expropriation, and national treatment.

Under the FET standard, the investor may challenge the State’s decision in defining which business are essential on the grounds that it is arbitrary and/or disproportionate, if investors are left out. The State actions may also be challenged for failing to accord due process by passing the measure without any legislations or legislating in haste without any transparency. There is also a possibility that FPS may be invoked to argue that the State’s response has been untimely (e.g. if lockdown persists for longer in one State than in another).

The State’s measures of seizing assets for a long time without any adequate compensation may give rise to indirect expropriation. State’s measures may amount to indirect expropriation where business categorised as “non-essential” during the lockdown results into permanent closing of a business. Similarly, series of State measures over a period of time amounting to the closure of business or permanent harm to investment can also constitute indirect expropriation in the form of a “creeping expropriation”. State measures which benefit only national companies but not foreign companies can be potential investment claim for breach of the national treatment standard. Furthermore, where issues of nationality are not involved, investors may seek to rely on the discriminatory measures standard, both in situations where investors within the same sector have been treated differently and where investors within different sectors have been treated differently, without any justifiable reason.

  1. The second speaker (State Defenses)

The second speaker discussed the defenses available to the State under customary international law and as express treaty exceptions, together with the question of the state’s general right to regulate.

Customary International law

At the outset, Aaron noted that the defenses under customary international law were to a large extent codified under the International Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts (2001) (“ILC Articles“). In relation to measures enacted in response to COVID-19, he considered that the defences States were most likely to invoke were necessity (Article 25) and force majeure (Article 23).

Aaron then briefly discussed the main elements required to establish necessity (Article 25). Of those, he suggested that States may struggle to establish that a specific measure was the “only way” to safeguard an essential interest from an imminent peril; in this case, a State’s population from a dangerous pandemic. If other lawful ways to address the threat existed, even if those were more costly or inconvenient, necessity would conceivably fail.

Aaron then discussed the defense of force majeure (Article 23), which covers events beyond a State’s control and which in effect compel it to act in a way inconsistent with its international law obligations. Aaron opined that force majeure was potentially even more difficult to prove than necessity as the State was required to demonstrate that it effectively became impossible for it to perform the particular obligation in question. Such could cause particular difficulty where a State has – necessarily without compulsion – elected to enact an affirmative measure that has violated a foreign investor’s treaty rights.

Treaty exceptions

Aaron then briefly touched on some of the prominent treaty-based exceptions. He noted that these varied from treaty to treaty, and encompassed so-called “essential security clauses” providing States latitude to enact measures, for example, “necessary for the public order”.

More recently, he noted that CETA had included a provision that provides that non-discriminatory regulatory measures designed and applied to protect legitimate public welfare objectives, including public health, would not constitute indirect expropriations, except in “rare circumstances”. Similarly, he noted that the recent China-Australia Free Trade Agreement had potentially gone further, providing that non-discriminatory measures for “legitimate public welfare objectives of public health … shall not be the subject of a claim” by an investor. He noted this could well insulate Covid-19 measures from a broader range of treaty claims than only indirect expropriation.

Aaron concluded by stating that in the circumstances it was potentially going to be difficult for States to establish the narrowly defined customary international law defenses once liability had already been established, and that States may be more successful in arguing for their police powers in times of emergency. It was furthermore noted that if a respondent State were to be successful in arguing that its measures were excusable under ILC Articles 23 or 25, the State may still be held liable to compensate the investor in accordance with ILC Article 27 for any “material loss caused by the act in question”.

  1. Third Speaker (Specific State measures)

Alexander commenced by speaking about State emergency measures and investment arbitration in the context of the 1998 Argentina economic crisis (“Argentina crisis”). He stated that about 15 investment cases resulted from the Argentina crisis. The majority of these cases dealt with one measure i.e. the emergency law that changed the tariff payments from US dollars to Argentine pesos. In all these cases (except in one or two) there was no question that the State’s measures gave rise to breach but the question was whether Argentina’s necessity defense was valid or not.

In the majority of these cases, the following was held: (a) Argentina’s essential interest was not at play, notwithstanding how bad the crisis was; (b) the emergency measure was not the only option available to Argentina, and (c) Argentina’s budgetary practices and policies at the relevant time had a major contribution to the crisis. He stated that Covid-19 and Argentina were similar in as much as the States have taken emergency measures. However, Covid-19 is different as there is no one single measure that has been applied by States as in the Argentina crises.

Thereafter, Alexander reflected on the State measures mentioned by Isabella by giving concrete examples:

  1. Measures responding to the public health emergency

The definition of essential has been different from country to country e.g. eateries shops in Belgium, wine shops in France, and marijuana coffee shops in Netherland are treated as essentials. United States of America’s response to health crises has been the most confusing. The state of Michigan introduced complicated measures by exempting certain critical business. What is interesting is that not only the critical business but its suppliers and further suppliers’ suppliers’ were also exempted. Eventually, it became confusing to assess which business was concerned by confinement and which were not allowed. Similarly, Georgia considered that bowling, gyms, tattoos, hairdressers were all essential.

  1. Immediate responses to the economic impact

There have been various bailouts and state aids e.g. France has announced 10 billion for Air France-KLM and the Dutch government’s proposed 2-4 billion aid package fo KLM. France has granted the moratorium period to pay rents and utilities for small businesses. There have been temporary expropriation of health care facilities in Spain and France.

  1. Long-term measures

The long term measures can be only speculative at this stage. What can be expected is discriminatory bailouts, obligatory bail-ins, sovereign debt default, forced capital restructuring, and nationalization.

He also reflected on the EU Screening guidelines for foreign direct investment which provides for a mechanism that enables member States to define sectors that are essential to national security to protect them from foreign shareholdings. At the end of March 2020, the EU Screening guidelines were extended to the healthcare sector to ensure that any such foreign direct investment does not have a harmful impact on the EU’s capacity to cover the health needs of its citizens.

  1. Discussions

This section incorporates the questions, queries, and moot issues raised throughout the discussion. Some of the issues raise pertinent legal questions – it would be nice to have the views of EFILA members on these issues.

  1. Police power

In the context of State’s Police Power, to what extent can a State negate the allegation of liability by arguing the classic law defense that there was no obligation under the treaty itself e.g. there was no violation of FET standards or expropriation to start with.

  1. Compensation under Article 27 of the ILC

How will compensation as stipulated under Article 27 of the ILC differ from the compensation otherwise owed to the investor in case of a treaty violation? Compensation under Article 27 appears to be narrower than in cases where a treaty violation is not excusable under Article 23 or 25, as the compensation is not intended to achieve full reparation but merely to compensate for “material loss[es]”.

  1. Issue of due process

It was observed that some countries (e.g. Germany) are transparent and explains the reasons/economics behind the measures taken. While some other countries are very secretive and do not provide for a well-reasoned measure. In view of this, the questions were raised on tribunal’s approach in the case where measures are passed transparently in consultation with investors as opposed to measures that are mere dictum and passed secretively without any consultation. Will there be fewer investment claims in jurisdictions where a transparent process is followed while passing the measure as opposed to jurisdictions where measures are mere dictum without any consultations?

  1. Protection of economy under the BITs

In the majority of the BITs, there are no specific provisions which allow the State to take measure to save the economy. The state may take measures for public interest but whether saving the economy comes under public interest is debatable. Further, under the FET standards, there is no coherent view on the State’s role at safeguarding public interest or public welfare. It would be interesting to see how the measures for protecting the economy will be justified under the BITs or MITs.

  1. Discrimination based on nationality

The Swedish government has enacted various measures to provide relief to various businesses. Compensation for loss of revenue over a certain threshold has been announced for certain businesses on criteria that may be perceived as discriminatory and result in treaty claims. Similarly, loans that are being guaranteed to airlines which have their main business in Sweden or seats in Sweden may be perceived as discriminatory, and examples of discontent among investors have already emerged.

It would be interesting to see how discrimination is being judged within sectors or sub-sectors e.g. restaurant are forced to close and not hotels. Some countries have decided that the companies which are based in tax havens will not gain access to certain support schemes. This may give rise to treaty claims for discrimination based on nationality.

Aron summarised by observing that it would be interesting to see how the cases alleging discriminatory measures shape up. States are likely to argue that they must be excused since – in the unusual circumstances – measures that could otherwise be perceived as discriminatory measures within the meaning of the treaty impairment standards are justifiable for public policy reasons. In such cases, however, tribunals are likely to consider whether there is a clear connection between the discriminatory element and a (valid) public policy goal that must be achieved by way of such discrimination. He observed that the consequences of the measures will be dealt with for many years to come. What measure can be excused and what cannot be excused is yet to be seen.

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

Vishesh Sharma* and Vishakha Choudhary**

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

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

Arbitrating Counterclaims: Ambiguous Judicial Response to Ambiguous IIAs

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

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

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

How does the next generation of IIAs fare?

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

Indian Model BIT, 2016

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

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

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

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

Netherlands Model BIT, 2018

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

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

The US-Mexico-Canada Agreement, 2018

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

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

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

Conclusion

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DAA Investment Arbitration Committee Meeting 2019

The new 2018 Dutch Model BIT text: An evolution or revolution?

An event organised by the DAA Investment Arbitration Committee  
Date: Tuesday 21 May 2019
Location: DLA Piper, Amstelveenseweg 638, Amsterdam

In October 2018, the Dutch Government approved a new Dutch Model BIT text, which replaces the 2004 text. The 2018 text has been developed on the basis of a public online consultation round and intensive discussions with various stakeholders. The backdrop of the 2018 text forms the heated debate, which has been surrounding the perceived shortcomings of the current investor-State dispute settlement (ISDS) system and the general scepticism against the benefits of trade and investment agreements. The reform agenda of the EU, which has been implemented in its new trade and investment agreements such as CETA and the creation of the Investment Court System (ICS) are also partly reflected in the 2018 text. The aim of this event is to take stock of the most important changes, which the 2018 text introduces and to discuss their pros and cons – also compared to the 2004 text and in light of awards involving Dutch BITs that have been issued in the past.

The event will be preceded by the Annual General Assembly of Members of the Dutch Arbitration Association.

Program

11.30 – 12.30 General Assembly of Members of the DAA
12.30 – 14.00 Light lunch
14.00 – 14.20 Overview of the new 2018 Dutch Model BIT text by Ralf van de Beek, Dutch Ministry of Foreign Affairs
14.20 – 15.30 Panel discussion with
Hans van Houtte (Professor, KU Leuven)
Carmen Nunez Lagos (Hogan Lovells, Partner)
Niuscha Bassiri (Hanotiau & Van den Berg, Partner)
15.30 – 16.00 Coffee break
16.00 – 17.15 Continuation of Panel discussion
17.15 – 18.30 Closure & drinks

 

Registration

Places are limited. Please register by sending an email to: events@dutcharbitrationassociation.nl.
You can register via email until 17 May 2019

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.