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.

Stakeholder meeting on a possible future Multilateral Investment Court: Establishment of a Multilateral Investment Court (Brussels, 15 January 2020)

José Rafael Mata Dona1

As in the previous session of the stakeholder meeting organized by the European Commission (see here), this roundup started with a brief recap of the whole process of the UNICTRAL Working Group III (for a more detailed review of the EU’s proposal for a MIC and ISDS reform under the auspices of UNCITRAL see here) and with the clarification that the possibility of identifying new concerns and solutions is not excluded from its current state.

The EC was represented in the stakeholder meeting by Collin Brown (Dispute Settlement and Legal Aspects of Trade Policy, DG TRADE), Blanca Salas Ferrer (Dispute Settlement and Legal Aspects of Trade Policy, DG TRADE) and André von Walter (Team Leader, Investment Dispute Settlement, DG TRADE).

State of play of the latest developments

The proposal for an advisory centre, the discipline for third party funders and ethical rules for adjudicators dominated the discussions of the WG in Vienna during its 38th session October 14–18, 2019 (for the official report of the WG see here).

The 38th session (resumed) of the WG will be held next week 20–24 January 2020 in Vienna. The expectation of the meeting is to further deepen understanding of the following three structural proposed reforms (i) the proposal for the establishment of a multilateral investment court (ii) the selection of its adjudicators and (iii) the establishment of an appeal mechanism. Then, the 39th session 30 March – 3 April 2020 will be held in New York and will focus on (i) dispute prevention and mitigation as well as other means of alternative dispute resolution (ii) treaty interpretation by States parties (iii) security for costs (iv) means to address frivolous claims (v) multiple proceedings including counterclaims and (vi) reflective loss and shareholder claims based on joint work with OECD.

Exchange of views with stakeholders

First set of interventions

A representative of the European Public Health Alliance (EPHA) showed concerns over the risk of a multilateral investment court co-opted to serve industrial interests.

A representative of the European Shippers’ Council (ESC), a non-profit European organization representing cargo owners, questioned the EC on the expected timeframe for the finalization of the whole process at the WG. Additionally, the ESC wanted to know how the outcome of the WG could influence already existing Free Trade Agreements.

Representatives of the European Economic and Social Committee (EESC), the Rapporteur and the Co-Rapporteur of the Opinion of the EESC on the ‘Recommendation for a Council Decision authorizing the opening of negotiations for a Convention establishing a multilateral court for the settlement of investment disputes’ wished to know (i) if the Commission Staff Working Document Impact Assessment (see here) of the Council Decision was still ‘alive’ (ii) more detailed information about the advisory center, its role in terms of capacity building and help to SMEs, location and appointment of advisors and (iii) what has been the level of participation of the United States and the concerns of developing countries in the WG.

A representative of the European trade Union Confederation (ETUC) showed concern about the transparency of the inter-sessional regional meetings that so far have taken place in Guinea, Korea and Dominican Republic and wondered about the expectations of the EU and its Member States from the next meeting in Vienna.

Replies of the EC

The multilateral investment court will build up consistency and predictability over time. The EC argued that the ad hoc system made it very difficult for states and stakeholders to have certainty as to how their cases were going to be decided. The lack of certainty is what a regulated industry uses to protect itself from criticism and interventions that might better advance the public interest.

On the question regarding the expected timeframe for the finalization of the whole process at the WG, the EC first alluded to the current increased regularity of the meetings of the WG per year, expressing desire for even more regular meetings. On that premise, the EC sustained that the WG could relatively quickly arrive at the stage of working on a detailed text by the end of 2020 or 2021 and finalize the whole process one or two years later.

In terms of how the outcome of the WG could influence already existing Free Trade Agreements, the EC stated that at the EU level the multilateral investment court would replace the bilateral investment court system negotiated with other countries. For Member States agreements, the idea is that they can create a single multilateral agreement amending a large number of existing agreements to apply the multilateral investment court to all. However, the EU and its Member States are not at the stage of discussing the details of the latter.

As to the question regarding the concerns identified in phase one of the WG, the EC sustained they largely corresponded to those previously identified in the EU context, except for certain concerns which specifically came up from the multilateral context. For instance, the regional diversity of the adjudicators. Further, the EC observed that this was true not only as to those concerns identified in the 2017 impact assessment, but also as to those which came up from EU previous public consultations dating back to 2013 and 2014. The former to a lesser extent than the latter due to the very specific concerns addressed in the impact assessment.

As to the questions regarding the advisory center, there are a lot of issues that still have to be sorted out, notably the nature of the center. In this sense, the EC remarked that the Advisory Centre on WTO Law (ACWL), suggested as a possible model to follow, was not exactly what developing countries wanted at the 38th session of the WG, as they themselves would like to handle the cases. This discussion will be even certainly enriched by the detailed scoping study being finalized by the Columbia Center on Sustainable Investment (CCSI) on behalf of the Ministry of Foreign Affairs of the Netherlands (for more information on this study see here).

The EC observed that there had been no submission paper from the Government of the United States, one of the biggest delegations within the group, which was very engaged in the discussions but was rather sceptical about the multilateral instrument on investment dispute settlement. To a certain extent, the United States does not need to make a government submission since now the focus is on working through the Secretariat papers. Certainly, some of the American ideas are there. Finally, the EC noticed developing countries shared many of the concerns of the EU delegation. This is the case, for instance, of issues related to costs, duration, predictability and consistency.

On the inter-sessional regional meetings, the EC clarified that these meeting had been organized until now only to raise awareness in different regions of the world. Regrettably, none of them have been thematic.

The EU delegation expects from the inter-sessional meetings, and eventually from the creation of subgroups, to go in greater in-depth and informal thinking on how particular issues should be addressed. Importantly, inter-sessional meetings are not decision binding. They are not necessarily chaired by the chairperson of the WG and not all countries have to be represented either. Lastly, there was supposed to be one regarding the advisory center, but it did not happen.

As a good example of a topic that would be better treated first in an inter-sessional meeting, Collin specifically stressed the one related to shareholder claims for reflective loss due to the fair complexity of the matter (for an OECD paper on this subject see here). In general terms, the EC observed that UNCITRAL usually went from broad conceptual work to more detailed work to legislative or non-legislative instruments, which could be adopted or endorsed by the UNCITRAL Commission and, ultimately, the General Assembly of the United Nations (for an overview of all UNCITRAL texts see here).

Next week, the EU delegation expects the Secretariat to be given instructions to go farther into depth, possibly to the extent of already developing text on different issues.

Second set of interventions

A representative of the Centre for Research on Multinational Corporations (SOMO) questioned how the EU proposal for a multilateral investment court sought to approach the identified concerns within the WG in relation to damages and methods used to calculate compensation thereof, suggesting the exclusion of lost future profits and the implementation of compensation caps.

The representatives of the EESC wished to know the minimum number of countries that should accept the proposal to enter into force.

A representative of Agoria asked whether the model for the multilateral investment court is equal to the WTO approach.

Replies of the EC

As to the question of damages, the EU delegation expects that the permanent character of the multilateral investment court will contribute to greater consistency, correctness and expertise in developing methods of calculation of damages and their implementation, but it may be desirable for treaty parties to develop this subject nonetheless. A Secretariat paper on damages is expected for the discussions in April.

To put the multilateral investment court in place, the EC asserted it basically depended on the countries concerned, the investment flows between them or, inter alia, the expected number of disputes that they may generate. Indeed, a large number of countries is not a precondition for the establishment of the multilateral investment court.

As to the model, the EC sustained it was closer to the WTO approach but was not exactly the same. There are certainly lessons to learn from the current crisis of the appellate body of the WTO model to sharpen any new body. Additionally, the EC highlighted the submission of China for the creation of an appellate mechanism (see here).

Last set of interventions

The ETUC wondered about the desirability of considering questions related to the obligations of investors by the WG and whether the same level of transparency of the WG meetings should apply to the inter-sessional meetings i.e. public reports and audio recordings, invitations to participate, etc.

A representative from the Energy Charter Secretariat asked if amicably dispute resolution mechanisms, and in particular mediation, were taken into account at the WG discussions.

Replies of the EC

Inevitably, there have been decisions on prioritization of issues and the priority is now on dispute resolution mechanisms. Some have argued that there is a need to work on substantive rules, others on obligations of investors but the decision for the moment is that delegations should focus their work on the UNCITRAL mandate, which is on the dispute settlement mechanism.

On the transparency of inter-sessional meetings, the EC observed that for each inter-sessional meeting there had been a report. These reports were respectively submitted by the hosts in Korea, Dominican Republic and Guinea and are publicly available at the website of the WG. The EC shares the view that certain basic standards of transparency must be respected, although without the informal character of the inter-sessional meetings being altered.

On the question of amicable dispute resolution mechanisms, it is one of the issues which are going to be discussed in April. It has the support of the EU and of a number of other delegations. The question for the EC is how to align them to a permanent structure. Also, a Secretariat paper is expected on that issue before the 39th session of the WG.

The EC invited any stakeholder participating next week in Vienna to attend the side event on Monday.

To conclude, the EC recalled that delegates from developing and least developed states, who have been nominated for the Working Group III session, were eligible to request financial assistance for travel and accommodation to The UNCITRAL Trust Fund by means of a specific request to be routed to the UNCITRAL Secretariat through the delegate’s Permanent Mission.


1 Member of the Brussels, Barcelona and Caracas Bars.

Stakeholder meeting on a possible future Multilateral Investment Court: Establishment of a Multilateral Investment Court (Brussels, 9 October 2019)

José Rafael Mata Dona[1]

 A week before the autumn session in Vienna of the UNCITRAL Working Group III, the EC held a Stakeholder meeting in Brussels on the subject of the establishment of a Multilateral Investment Court. The initiative took place as part of the EC Commitment to Transparency.

During the introductory speech, Collin Brown (Dispute Settlement and Legal Aspects of Trade Policy, Directorate General for Trade, European Commission) traced the history of the proposal for a multilateral court for the settlement of investment disputes back to September 2017. This was followed by Collin’s general comments on UNCITRAL discussions, mandate and the content covered through its three distinct phases of progress, the last of which ‘Development of relevant solutions for the reform of ISDS’ started on the 4th of April 2019 and is still ongoing in two parallel tracks: one focusing on structural reforms and another involving other types of solutions. Collin highlighted the celebration of inter-sessional meetings, as in September 2019 in Conakry, Guinea.

The EC’s expectation for the 14–18 October 2019 meeting is that the WG will agree to discuss substantive issues and proceed as per the UNCITRAL Secretariat paper on reform options. Also, the EC expects the WG to develop relations to other international bodies e.g. OECD and UNCTAD. Among the submissions to UNCITRAL WG III on possible reform of ISDS, Collin said particular attention should be paid to China’s proposal of a permanent appellate mechanism. He generally commented on the UNCITRAL Secretariat thematic papers and the multidisciplinary approach of the Academic Forum papers. Along those lines, he specifically mentioned the proposal for the creation of ‘An Advisory Centre on International Investment Law’ (See here and here). The slides of the presentation and the video of the meeting are available here.

All the foregoing led to the exchange of views described below.

 

In the first round of questions, participants asked about (i) the role of the USA in the WG (ii) the jurisdiction of the Multilateral Court (iii) the maintenance of the term ‘arbitrator’ in the EC proposal for a multilateral court (iv) the status of the EC in the WG and (v) any particular contribution the EU is or is not willing to support.

In reply to those questions, Collin clarified the US has not submitted a paper but takes a fairly active role in the WG with more focus on reforms already put in place.

He said the EU view on the jurisdiction of the MIC is that it should be kept fairly open, though that debate is yet to happen. Further, he mentioned the EC does not refer any longer either to ‘arbitrators’ nor ‘judges’ in its proposal. It now refers to ‘adjudicators’ as a more neutral term.

Collin signalled accreditation to the WG is directly handled by the UNCITRAL Secretary. The EC submitted a paper on behalf of both, the EU and EU Member States.

For the EC, the WG is not the appropriate forum to discuss about withdrawal of consent. On the contrary, the EC sees coming as a genuine part of the discussions the use of domestic remedies, which in its opinion should be encouraged but not necessarily exhausted.

In the second round of questions, participants asked about (i) the use of an opt-in clause (ii) the level of consent expressed by African groups during the regional meeting in Conakry (iii) expectations in Vienna regarding the two parallel tracks of work streams (iv) the support behind the MIC and how long it could take, (v) how many EU countries have ratified the Mauritius Convention and applied it (vi) the applicability of the New York Convention to the enforceability of the MIC decisions (vii) EU Law conformity in regard with Opinion 1/17 of the CJEU, and (viii) the ability of third parties to have more extended rights than an amicus curiæ.

Collin explained the idea of the opt-in clause is to create an umbrella treaty and remarked there is a discussion as to whether it would be automatically applicable or not. As previous examples of implementation, he quoted the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (the ‘Mauritius Convention’) and the Convention on Mutual Administrative Assistance in Tax Matters developed jointly by the OECD and the Council of Europe.

Collin argued he could not speak on behalf of any African groups. Allegedly, there was a concern on costs, duration of proceedings, how to address more the use of Conciliation, Mediation and other ADRs, cultural diversity in arbitration and the difficulties developing countries face in managing to defend themselves.

As to the two parallel tracks of work streams, the EC will actively participate in both. However, its priority is to work more on a permanent structure. Collin said the idea of the multilateral court has found not only support but also interest. Countries realize there is an opportunity to engage in significant reform and are keen to do that. Obviously, it is quite difficult to predict how long this will take despite the celebration of intersectional sessions to accelerate the process to move forward.

Collin said the number of countries that have ratified the Mauritius Convention is growing steadily, but international law does not move very quickly. So, it takes time. During the last 4 years, the EU has been discussing a Council decision on the adoption of the Convention, but a very small number of EU States does not want to get there. Once that decision is made, it will open the door for EU Member States to ratify the Mauritius Convention, which already many EU Member States have signed.

On enforceability, Collin distinguished two elements. On the one hand, there should not be the ability for domestic courts to review a decision which has been subject to appeal. These rules should be modelled or similar to ICSID enforceability rules. On the other hand, the EC foresees an argument on the enforceability of the decisions of the MIC in third countries. According to the EC, the solution to the latter is to apply the New York Convention. And in this regard, the Iran-United States Claims Tribunal is quoted as an example of the applicability of the New York Convention to the enforceability of the decisions of a permanent body. This does not properly clear the fact that equality of the parties in the appointment of arbitrators constitutes a principle of international public policy. Article V(2)(b) of the New York Convention is understood as providing grounds for nonrecognition of awards for a lack of due process or violation of public policy.

As to EU Law conformity in regard with Opinion 1/17 of the CJEU, the EC envisions to ensure it in part in the MIC itself but much more likely also in the underlying treaties with non-binding decisions on EU Law and the same for the type of remedies.

For the EC, the question on the ability of third parties to have more extended rights than an amicus curiæ is not on the horizon of the discussions that will take place in Vienna from 14 to 18 October 2019. It is a subject for future discussion in a later stage of the reform.

Finally, during the last round of questions Collin observed that it is not immediately clear the Multilateral Court should be a specific structure or have a particular relation to the International Court of Justice.


[1] Member of the Brussels, Barcelona and Caracas Bars.

Ensuring Equitable Access to All Stakeholders: Critical Suggestions for the MIC (EFILA Submission to the UNCITRAL WG no. 3 on ISDS Reforms)

EFILA has recently submitted its suggestions to the UNCITRAL Working Group no. 3 on ISDS Reform. The entire document can be found here. An extract can be read below.

The European Federation for Investment Law and Arbitration (EFILA) believes that no discussion about the reform of the investor-State dispute settlement (ISDS) system should occur without taking stock of the interests of all stakeholders. This is particularly true for the proposal for a Multilateral Investment Court (MIC), which is currently being discussed and negotiated in UNCITRAL Working Group III. Without the active participation of all stakeholders (i.e. all potential users of the MIC) – including investors and their legal counsel – any ISDS system will lack legitimacy.

With this in mind, EFILA submits the following, non-exhaustive suggestions for ISDS reform and, in particular, for the MIC proposal:

The Appointment & Selection of MIC Judges: Central to the ISDS system’s ability to effectively resolve disputes between investors and States is the confidence of all stakeholders in their decision-makers. For this reason, EFILA believes that investors should continue to have a direct and indirect say in the choice of their decision-makers. The MIC should:

  1. Let a college of representatives chosen by the investors, as users of the system, participate in choosing candidates for the MIC;
  2. Give all stakeholders a right to strike out a given number of judges assigned to their panel; and
  3. Allow all stakeholders to retain the right to challenge MIC judges on the basis of clearly defined standards before an independent body.

Consistency of MIC Decisions: EFILA agrees that consistency in legal decisions is an important element of any well-functioning dispute resolution system. Consistency, however, must be objective. It cannot be used as a means to “correct” awards that arrive at unwelcome results. Any responses to consistency must respect the rule of law and the equality of the parties.

Accordingly, any final design of the MIC should:

  1. Not allow joint binding interpretations with potentially retroactive effect;
  2. Avoid unnecessarily reducing the material scope of the standards of investment and investor protection; and
  3. Limit exclusions of certain types of investors, investments and sectors to only to the
    extent objectively and reasonably necessary.

Access To Justice For SMEs: Small and medium sized enterprises (SMEs) are an integral part of the global economy. Any proposed reform of the ISDS system cannot disregard SMEs or discourage them from making full use of the ISDS system. The MIC, therefore, must include structural and systemic solutions that effectively ensure access to the system for SMEs. These include:

  1. Adopting cost-efficient rules that promote access to justice by SMEs;
  2. Establishing a process that informs and educates SMEs about the ISDS system and helps them to assess their claims; and
  3. Creating a financial support system for accessibility to the ISDS system for SMEs.

Enforcement of MIC Decisions: The application of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) to MIC decisions (even if just on an interim basis) raises serious potential obstacles to the enforceability of those decisions. Further thought should be given to ensuring that MIC decisions will be enforceable.

These suggestions, EFILA believes, will encourage confidence from all stakeholders in the MIC system and thus make the MIC a fair dispute settlement system for all users.

The entire document can be found here.

Schrödinger’s Investment: the EU’s General Court Considers that the Compensation Ordered by the Micula Tribunal is Not a Form of State Aid (Although it Might as Well Have Been)

Alexandros Catalin Bakos, LL.M. Candidate, Utrecht University

In a somewhat fortunate turn of events for the stability (or what is left of it in any case) of the intra-European Union (intra-EU) investment treaty system, the General Court of the European Union (GCEU) has annulled the EU Commission’s decision rendered against Romania for illegal state aid concerning the enforcement of the Micula arbitral award. Although the GCEU’s decision may be good news for the investors themselves, it does nothing to allay fears regarding the future of intra-EU ISDS. In the grand scheme of things, the effects which culminated with the Achmea judgement are still there.

This latest installment in the long-running saga of intra-EU investment treaties and their conflict with the EU legal order does not substantially change the paradigm. In fact, one may argue that it complicates the matters: the only certain conclusion that can be derived from the General Court’s decision is the fact that there can be no conflict between EU State Aid rules and intra-EU Bilateral Investment Treaties (BITs)/awards based on such treaties if the compensation ordered by the tribunal relates to measures which were taken prior to the entry into force of EU law. However, the Court did not analyze what is the situation of compensation which needs to be paid for measures adopted after the entry into force of EU law.

In any case, before continuing with the decision’s analysis, a short recap of the major developments in this situation is in order.

How did we get here? 

Prior to joining the EU, the Romanian state offered the Micula brothers and the companies controlled by them (the investors) certain custom duty exemptions and other tax breaks (the GCEU’s decision, paras. 5-6). Later, in 2004 and 2005, those exemptions and breaks were suddenly repealed, in an effort to ensure compliance with the EU laws on State Aid – which would become effective from 1 January 2007 (the GCEU’s decision, para 12). Because of this, the investors began ICSID arbitration proceedings, challenging the compliance of the measure with the applicable BIT (the 2002 Sweden-Romania BIT). The arbitral tribunal found in the investors’ favour and ordered Romania to pay compensation amounting to approximately €178 million. The court’s finding was based on a violation of the fair and equitable treatment standard. More specifically, on behaviour contrary to the legitimate expectations of the investors. This is of utmost importance, as what was considered to be in breach of the treaty was not the repealing of the exemptions itself, but the manner in which this occurred. The arbitral tribunal expressly found that ‘by repealing the […] incentives prior to 1 April 2009, Romania did not act unreasonably or in bad faith […] [H]owever […] Romania violated the Claimants’ legitimate expectations that those incentives would be available, in substantially the same form, until 1 April 2009. Romania also failed to act transparently by failing to inform the Claimants in a timely manner that the regime would be terminated prior to its stated date of expiration. As a result, the Tribunal finds that Romania failed to “ensure fair and equitable treatment of the investments” of the Claimants in the meaning of Article 2(3) of the BIT’ (para. 872 of the award).

Subsequently, the investors sought the enforcement of the award. However, this proved difficult because the EU Commission intervened and tried to prevent Romania from enforcing the award. The former argued that an enforcement would constitute a form of illegal state aid. After Romania, nonetheless, partially paid the award, the EU Commission officially adopted a decision against the Romanian state for breach of State Aid rules. The Commission’s argument was that this payment would, in essence, favour the investors in the same way in which the exemptions favoured them in the first place. Romania, thus, was under an obligation to stop paying the award and to recover the amount which had been paid so far. This was eventually challenged by the investors before the GCEU and the judgement analyzed here is the European Court’s decision regarding that challenge.

This turn of events determined other courts where enforcement of the award was sought to stay the proceedings until the European Court will have rendered an award concerning the challenge to the EU Commission’s decision on illegal state aid (see here for an example).

What does the GCEU’s decision entail and what does it not entail?

The GCEU found that the compensation rendered by the Micula arbitral award could not be considered illegal state aid, at least as it regards events which took place before Romania’s accession to the EU (para. 109 of the GCEU’s decision).

The essence of the GCEU’s arguments is based on a clear establishment of the temporal nexus to which the arbitral award referred (paras. 71-93 of the GCEU’s decision). To this end, the Court clarified that all the relevant issues (including the events which gave rise to the right to compensation) arose and produced effects before Romania’s accession to the EU (para. 71). In that respect, even if the arbitral tribunal’s award was rendered after EU law became applicable to Romania, it merely ‘retroactively produced definitively acquired effects which it merely ‘stated’ for the past, that is to say, effects which, in part, were already established before accession’ (para. 84 of the GCEU’s decision). Accordingly, even if the award was rendered after Romania’s accession to the EU, ‘the Commission retroactively applied the powers which it held under Article 108 TFEU and Regulation No 659/1999 to events predating Romania’s accession to the European Union. Therefore, the Commission could not classify the measure at issue as State aid within the meaning of Article 107(1) TFEU’ (para. 92 of the GCEU’s decision).

What is interesting, though, is that the GCEU referred only to a part of the compensation as not being under the Commission’s power of review. It did not exclude the entirety of the award from the Commission’s reach: ‘as regards the amounts granted as compensation for the period subsequent to Romania’s accession to the European Union, namely, the period from 1 January 2007 to 1 April 2009, even assuming that the payment of compensation relating to that period could be classified as incompatible aid, given that the Commission did not draw a distinction between the periods of compensation for the damage suffered by the applicants before or after accession, the Commission has, in any event, exceeded its powers in the area of State aid review’ (para. 91 of the GCEU’s decision). In other words, had the Commission distinguished between the pre-accession and the post-accession periods, the decision may not have been annulled after all (or may have been only partially annulled).

Clearly, the GCEU left open the possibility of finding an incompatibility between State Aid rules and the observance of an arbitral award rendered for acts which occurred after EU law became applicable. And this is what the decision does not entail: it does not clarify whether compensation payable on the basis of an arbitral award is contrary to EU State Aid rules.

It is true that the Court began an analysis of whether compensation offered on the basis of an arbitral award can be considered State Aid, but it stopped short of drawing any relevant conclusions. It limited itself to referring to the general conditions necessary for State Aid to arise (paras. 100-103 of the GCEU’s decision) and concluded that it cannot be considered that the compensation amounted to a form of illegal State Aid, at least not until the accession period. However, after the accession period, the analysis would advance to the issue of whether the objective elements of illegal State Aid were present: this, however, was not undertaken by the Court. It never determined whether the measure was imputable to Romania. And one can clearly see why the Court avoided this. It would be very hard to argue that the compensation ordered by the arbitral award can amount to illegal state aid.

Firstly, how can one impute an investment tribunal’s award to Romania? This would mean that Romania had control over the arbitrators, which is clearly not the case. Quite the opposite, as otherwise arbitration would not have been used so often in the settlement of investor-state disputes. Neutrality is one of the reasons ISDS exists. Additionally, for state aid to exist, one needs to demonstrate effective control of the state over the body which adopts the decision alleged to constitute such state aid (para. 52 of the Stardust case – France v. Commission, Case C-482/99). As shown earlier, this is clearly not the case with an investment arbitral tribunal.

Moreover, the GCEU mentioned that ‘compensation for damage suffered cannot be regarded as aid unless it has the effect of compensating for the withdrawal of unlawful or incompatible aid’ (para. 103 of the GCEU’s decision). This must be read together with the Court’s earlier judgment in the Asteris case. The basis of this case-law is that ‘State Aid […] is fundamentally different in its legal nature from damages which the competent national authorities may be ordered to pay individuals in compensation for the damage which they have caused to those individuals’ (para. 23 of the Asteris judgment). In this context, one must tread carefully before concluding that the subsequent compensation is, in fact, a hidden form of State Aid. Given the evident difference between the two, it is of utmost importance to demonstrate in-depth that in a specific case this difference is diluted.

One underlying premise for this difference to be able to disappear is for the EU Member State to actually be the one which formally re-institutes the illegal aid through the formal measure of compensation. The two measures – the initial state aid and, subsequently, the compensation for the withdrawal of the unlawful measure – must be seen as a whole, as having one purpose and as being able to be imputed to one entity – in this case, the Romanian state. In the Micula case, though, this was not present. The initial measure was indeed adopted by the Romanian state. The compensation, though, was decided by an objective and neutral tribunal. They are related, but they do not constitute one whole. Not to mention the fact that it can be very hard to argue that compensation on the basis of an award could offer unjustified economic advantages.

Secondly, one other condition for the compensation to be considered as re-instituting the illegal State Aid is for the compensation to be structured so as to replace the illegal measure itself. Nonetheless, this was not the case with the Micula award. One aspect must be taken into consideration in order to understand the difference between the customs and tax incentives themselves (the illegal State Aid) and the arbitral award. As mentioned at the beginning of this post, it was not the withdrawal of the incentive schemes that was considered to be the basis of compensation. What led to the present outcome was the manner in which the withdrawal took place, essentially leading to an infringement of legitimate expectations. Those are different and it is clear that, in any case, this would not be a case of re-instituting said state aid through the backdoor.

As such, the GCEU’s award is clearly not a silver lining for intra-EU ISDS, as it does not clarify – in the end – the most important aspect: can compensation rendered by an arbitral award be considered illegal state aid? In this context, when one thinks about the general scheme of things, it becomes evident that nothing has really changed: Achmea is alive (the effects have come sooner rather than later). Additionally, nobody knows its scope, especially when it comes to the Energy Charter Treaty’s (ECT) arbitration mechanism. Although arbitral practice seems to insist that Achmea does not preclude intra-EU ISDS on the basis of the ECT, what is eagerly waited is the CJEU’s position on this. After this, the CETA opinion – although reconciling ISDS with EU law when there is a third party (a party outside the EU) involved – does not mean the endorsement of intra-EU ISDS; it can clearly be seen that the EU’s position within UNCITRAL’s Working Group III is still the one we have been used to for so long: ISDS must be replaced with a standing court.


[1] LL. M. candidate in Law and Economics at Utrecht University.

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

New from Oxford University Press: China’s International Investment Strategy Bilateral, Regional, and Global Law and Policy

China’s International Investment Strategy
Bilateral, Regional, and Global Law and Policy
International Economic Law Series

Edited by Julien Chaisse

9780198827450
This collection, compiled by award-winning scholar Professor Julien Chaisse, explores the three distinct tracks of China’s investment policy and strategy: bilateral agreements including those with the US and the EU; regional agreements including the Free Trade Area of the Asia Pacific; and global initiatives, spear-headed by China’s presidency of the G20 and its ‘Belt and Road initiative’. The book’s overarching topic is whether these three tracks compete with each other, or whether they complement one another – a question of profound importance for the country’s political and economic future and world investment governance.

Features

• Combines legal, economic and international relations perspectives, to provide a comprehensive analysis of the subject
• Brings together a group of experts in the field, exploring the most recent issues in international trade law
• A variety of illustrations support and elucidate the contributors’ arguments.

Table of Contents
Forward, Zhao Hong
Introduction: China’s International Investment Law and Policy Regime- Identifying the Three Tracks, Julien Chaisse
1: China’s Inward Investment: Approach And Impact, Michael J. Enright
2: China’s Outward Investment: Chinese Enterprise Globalization’s Characteristics, Trends, and Challenges, Hui Yao Wang and Lu Miao
3: Impact of Tax Factors on Chinese FDIs, Na Li
4: SOE Investments and The National Security Protection: Implications For China, Lu Wang
5: Nationwide Regulatory Reform Starting From China’s Free Trade Zones: The Case Of Negative List Of Non-Conforming Measures, Jie (Jeanne) Huang
6: Addressing Sustainable Development Concerns through IIAs: A Preliminary Assessment of Chinese IIAs, Manjiao Chi
7: Lessons Learned from The Canada-China FIPA For The US-China BIT And Beyond: Chinese Whispers Or Chinese Checkers?, Kyle Dylan Dickson-Smith
8: Innovation as a Catalyst in the China-Israel Investment Relationship:The China-Israel BIT (2009) and the Prospective FTA, Hadas Peled and Marcia Don Harpaz
9: Drivers and Issues of China-EU Negotiations for A Comprehensive Agreement on Investment, Flavia Marisi and Qian Wang
10: Issues on SOEs in BITs: The (Complex) Case of the Sino-US BIT negotiations
11: Towards A Fourth Generation of Chinese Treaty Practice: Substantive Changes, Balancing Mechanisms, And Selective Adaption, Matthew Levine
12: Substantive Provisions of East Asian Trilateral Investment Agreement and Their Implications, Won-Mog Choi
13: The RCEP Investment Rules and China: Learning From the Malleability of Chinese FTAs, Heng Wang
14: Towards an Asia-Pacific Regional Investment Regime: The Potential Influence of Australia and New Zealand as a Collective Middle Power, Amokura Kawharu and Luke Nottage
15: A New Era in Cross-Strait Relations? A Post-Sovereign Enquiry in Taiwan’s Investment Treaty System, Horia Ciurtin
16: China Moves The G20 Toward An International Investment Framework And Investment Facilitation, Karl P. Sauvant
17: G20 Guiding Principles for Global Investment Policy-Making: A Stepping Stone for Multilateral Rules on Investment, Anna Joubin-Bret and Cristian Rodriguez Chiffelle
18: Beware of Chinese Bearing Gifts: Why China’s Direct Investment Poses Political Challenges in Europe and the United States, Sophie Meunier
19: The Political Economy of Chinese Outward Foreign Direct Investment in “One-Belt, One-Road (OBOR)” Countries, Ka Zeng
20: China’s Role And Interest In Central Asia: China-Pakistan Economic Corridor, Manzoor Ahmad
21: The International Fraud & Corruption Sanctioning System: The Case of Chinese SOEs, Susan Finder
22: He Who Makes the Rules Owns the Gold: The Potential Ramifications of The New International Law Architects, Joel Slawotsky
23: Investment Treaty Arbitration in Asia: The China Factor, Matthew Hodgson and Adam Bryan
24: Investment Disputes Under China’s Bits: Jurisdiction with Chinese Characteristics?, Jane Willems
25: Protecting Chinese Investment Under the Investor-State Dispute Settlement Regime: A Review In Light Of Ping An V Belgium, Claire Wilson
26: Use Of Investor-State Against China’s Enforcement of The Anti-Monopoly Law: Belling The Panda?, Sungjin Kang
27: Implementing Investor-State Mediation in China’s Next Generation investment Treaties, Shu Shang

For more details, please visit the OUP dedicated page.

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

by Avani Agarwal

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

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

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

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

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

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

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

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

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

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

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

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

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

A New And Improved Investment Protection Regime: Truth Or Myth!

Shilpa Singh Jaswant, LLM (Hamburg)

The proposed investment court system by the European Commission aims to limit criticism revolved around Investor-State Dispute Settlement due to its lack of legitimacy, transparency and appellate mechanism. The investment regime under Comprehensive Economic and Trade Agreement with Canada (hereinafter “CETA”) and European Union-Viet Nam Free Trade Agreement (hereinafter “EUVFTA”) could be a solution by bringing transparency, consistency and institutionalisation in investment protection. The blog addresses the compatibility of the new system with EU law as any violation to autonomy of EU law as laid down in the previous judgments would not be optimistic to its future and followed by other blog in future would address the features of the Tribunal system and its difference from arbitration. Meanwhile Member states of the EU seek opinion from the Court of Justice (hereinafter “the CJEU”) though it is promising and would lay down stepping stones of an improved investment protection.

Achmea ruling and its effect to jurisdiction of the Tribunal under CETA and EUVFTA

Achmea ruling confirms that intra-EU BITs are incompatible with EU law while its effects reverberate to agreements entered by the EU with third countries. As per the CJEU in Achmea in para 58 (also in Opinion 1/09 of 08.03.201, para 89), arbitral tribunals under investment agreements, when entered between Member states, are outside the judicial system of the EU and incompatible with autonomy of EU law since arbitral tribunals were empowered under the principle of lex loci arbitri to include and interpret EU law (the Community treaties and secondary laws). However, the ruling may not be applicable in full since investment protection in CETA and EUVFTA are concluded as mixed agreements meaning the EU and its Member states are parties to them.

A logical conclusion is that the Tribunal established under CETA and EUVFTA would not fall within judicial framework of the EU since its jurisdiction is limited to claims related to breaches of investment agreements and to determine if a measure of a Member state and/ or of the EU is in violation of the standards set in the agreements. It can only resolve a dispute under the applicable law i.e., the provisions of investment agreement.

The CJEU places responsibility on arbitral tribunal to protect autonomy of EU law by not giving inconsistent interpretation to it. In the past the CJEU in Opinion 2/13 of 18.12.2014 and Opinion 1/09 in para 65 has protected autonomy of EU in many cases and call it as the “essential” characteristics originating from an independent source of law, i.e., the Treaties. Further saying that standard of review to protect autonomy of EU law is a matter of these tribunals and Member states too. Since the CJEU has never been eager to open doors of interpretation to a tribunal which is out of the EU judicial framework and Member states are obligated to bring issues related to EU law to the CJEU.

On the contrary, if the CJEU finds that the Tribunal under CETA and EUVFTA is part of judicial framework of the EU and that it could send for preliminary ruling under Article 267 TFEU departing from its previous judgments, even then it has responsibility to protect autonomy of EU law along with uniform and consistent interpretation and application of EU law. In both situations, an interpretation of EU law done by the tribunals may affect the consistency. However, by looking at the features (as discussed below) of the Tribunal assure that autonomy of EU law is protected, at least in theory.

Ensure jurisdiction of domestic courts and CJEU

CETA in Article 8.22(1)(f) & (g) and EUVFTA in Article 3.34 (1) preclude parallel proceedings at a domestic or international court or tribunal so as to not to undermine the authority of tribunals which could mean taking away exclusive jurisdiction of the CJEU.  Even when the agreements do not allow parallel proceedings for disputes related to an alleged measure which is inconsistent with agreements, the Tribunal is under obligation by Article 8.24 CETA and Article 3.34(8) EUVFTA to stay its proceedings or take into account proceedings under international agreement which may affect the findings of the Tribunal or the compensation awarded due to the use of “shall”. Article 8.28 CETA and Article 3.42 (1) EUVFTA assure that in case the Tribunal fail to do so, appellate body has authority to modify or reverse award on “manifest errors in the appreciation of facts, including….. relevant domestic law”. It is important that the tribunals under agreements take into consideration decisions of the CJEU and domestic courts effectively and importantly, ensure supremacy of EU law and full respect to decisions of the CJEU.

Perhaps the limited scope of disputes of the Tribunal done by the drafters of the agreements, especially interpretation and application of EU law is a solution to it. The tribunals under Article 8.31 CETA and Article 3.42(3) EUVFTA are not allowed to interpret and apply the provision of EU Treaties including prevailing domestic laws and shall follow the prevailing interpretation given to the domestic law. While determining consistency of measures, it has to consider the domestic law as matter of fact which also includes EU law.

Issue of competence and international responsibility

After the opinion of the CJEU on EU-Singapore FTA, it is important to look at nature of agreement concluded: CETA and EUVFTA are concluded as mixed. It is clear that the question of competence would not affect the interpretation of the investment agreements done by the tribunals. The question of determining obligation arising from the agreements whether it would be responsibility of the EU or Member states requires interpretation of the agreements and due to their drafting it would be within the jurisdiction of the CJEU. The agreements have placed obligation of international responsibility on the EU to determine respondent.

In other words, the right to access tribunal as per the rules to determine respondent by the EU in both agreements would allow foreign investors to initiate proceedings without affecting the autonomy of EU law, supremacy of EU law and would promote legal certainty. This conclusion would also put away any future doubts on competences, inter alia on law making and concluding the agreement between Member states and the EU which would be mutually exclusive of the determination of respondent done to fix international responsibility. The issue of competence would however justify the reason to conclude the agreements as mixed agreements since some areas are shared between the EU and its Member states.

Unique features of the Investment court system

The institutionalization would ensure legitimacy and consistency to decisions after introducing an appellate body. While allowing participation of non-disputing third parties and interpretations of provisions to the agreements from scholars and person of interest, having compulsory resolution through amicable mechanism like conciliation and mediation and transparency are front runners. The members of tribunals are appointed by a committee as per the agreement while cases are allotted on random basis to a roster of judges much like done in WTO panel. After the award, the Tribunal would be dissolved and question of sending back to the same tribunal after appellate body’s decision is still unanswered. Moreover, it does not contribute to ‘permanent structure’ since members are paid retainer fees and not salary, and are allowed to take up other occupation unless otherwise decided. It can still be said that the system is not balanced out and independent, instead it seems semi-permanent or hybrid.

Due to proliferation of investment agreements, the tribunals organized may give arise to different conclusions relating to similar commercial situation and similar investment rights to the similar in the provisions of these agreements questioning procedural fairness. None of the agreements deal with correlation of the tribunals. Also another procedural flaw observed that both the agreements do not directly deal with a question on jurisdiction and thus the parties have to wait until the final award is issued to appeal a positive or mixed jurisdiction award.

In sum, the investment protection in the agreement has room for improvement and that can be done by creating a new regime of investment protection with a multilateral investment court which would be permanent in nature with full tenured and impartial judges for the problem of coherence and determinacy. The consistency would be ensured with a permanent appellate mechanism and the treaties would be considered at par with one another. As concluding remarks, the present system in the agreements are a way forward to institutionalise investment protection but this optimism should not be taken blindly and hinder improvement and develop a better system.

Report on the 4th Annual EFILA Lecture delivered by Prof. George A. Bermann (Columbia University New York, School of Law), Brussels 25 October 2018

by Adam Marios Paschalidis (NautaDutilh)

Recalibrating the European Union – International Arbitration Interface

Introduction

The 2018 Annual EFILA Lecture by Prof. George A. Bermann (Columbia University School of Law), continues the successful Annual EFILA Lectures series, which were previously delivered by Sophie Nappert (2015), Johnny Veeder (2016) and Sir Christopher Greenwood (2017).

Before giving the floor to Prof. Bermann, Prof. Dr. Lavranos, Secretary General of EFILA set the scene of the Lecture by referring to the EU’s recent trend of re-considering the inclusion of the investment court system (ICS) in its FTAs. While the ICS has been included in EU-Singapore FTA, EU-Vietnam FTA, EU-Mexico FTA and CETA, this is not the case anymore in EU-Japan FTA, and neither is it on the table for the EU-Australia and New Zealand FTAs, whose negotiation phase started after the CJEU’s Opinion on the EU-Singapore FTA in which the CEJU determined that the competence on investor-state dispute settlement (ISDS) provisions is mixed. He, also, referred briefly to the Vattenfall arbitral tribunal on the Achmea issue and predicted that the ECT-related disputes will be the next theatre to watch in the upcoming years.

By way of introduction, Prof. Bermann considered as a fact that there is little new to be said with regard to the EU law-International Arbitration interface, since a lot of ink has already been spilled on this subject. Furthermore, he clarified that the purpose of his speech is to trigger a constructive discussion through the identification of some EU policy features that, if “revisited”, would promote a better relationship between the two regimes. Moreover, he expressed that the relationship between EU law and International Investment Arbitration is experiencing the most dramatic confrontation amongst other legal order’s interactions. In that regard, he further added that, despite the considerable level of fragmentation, different legal orders seldom collide on such a considerable level.

The Lecture was divided primarily in three parts. Firstly, he referred to the initial stages of European law and its rather scattered interaction with international (private) law. He then proceeded with the main part of his Lecture. In that respect, by eloquently addressing the different phases Community law has undergone, he identified three particular features of EU policy, which have affected the interaction between the European and Investment Arbitration legal framework. At the end of his Lecture, he shared his opinion concerning the future image of the ISDS regime and how EU law can be “refurbished” in parallel to the already accelerated re-examination of the ISDS regime.

Initial stages of EU law and its interaction with international (private) law

Prof. Bermann noted that at first EU law and international private law, especially international arbitration, were experiencing a status of “peaceful co-existence”, as early European law was exclusively focused on regulating the Union’s internal matters. As such, both European Treatises, the European Common Commercial Policy, the European Common Agricultural Policy, the European Common Fisheries Policy and so forth were adopted primarily for internal consumption. The result of this “introversion” was that legal instruments, which were also addressing some “external” aspects of the Union’s law, for instance private law affairs, were adopted outside the EU structures and in the form of conventions, such as the Brussels and Rome Conventions. At this point, Prof. Bermann made specific reference to the absolute exclusion of international arbitration from the content of the above mentioned conventions.

However, since the signing of the Amsterdam Treaty a dramatic shift has become evident. Amongst many other reforms, the regulation of private international law became part of the European Community column. As such, the European Union realised a wider role on that field, driven perhaps by its will to achieve a higher level of federalisation. Therefore, European legal instruments began to deal with private international law affairs as the European Commission was gaining more and more competence to address them. Unsurprisingly enough, the Court of Justice of the EU (CJEU) could not remain silent in light of this wave of “extroversion” and started assuming exclusive jurisdiction in a variety of cases. Both of the abovementioned escalations placed European law, as Prof. Bermann illustratively put it, in orbit of collision with international private law, especially international investment law. At this point, it should be mentioned that Prof. Bermann referred to the rise of ISDS arbitration and leading to a quantum shift as an additional crucial factor for the tension amongst the two regimes. Once again, however, he stressed that the purpose of his Lecture was to identify the changes that took place on the EU’s side of the equation.

EU law changes and their impact in investment arbitration

Prof. Bermann underlined three EU law features that have evolved or have been “invented”, thus influencing its correlation with International Investment Arbitration. However, before presenting them he pointed out that the impact of the first two is relatively limited in comparison to the third one.

First of all, European legal instruments initiated by the European Commission assumed wider roles and attempted to regulate fields of law, that fell under the Member States competence at the first stages of the Union. New legal instruments concerning private and commercial relationships were adopted, thus placing EU law, which would arise previously primarily as a defence in arbitral proceedings, in orbit of collision with international commercial arbitration.

As a second EU law feature that contributed to the prospective/already existing confrontation of the EU legal order with investment arbitration, Prof. Bermann specifically referred to the notion of the private enforcement of EU competition law. Stemming primarily from the CJEU judgment in the EcoSwiss case, this special element of EU law could provide a domestic court with the power to place an arbitral award under a special scrutiny regime, and even reject its enforcement on European public policy grounds. In that respect, two facts are of particular interest. First, he referred to the undefined level of review (deferential or non-deferential) that a domestic court can exercise. Second, he was concerned with the possibility of this ground being investigated by a domestic court on its own motion, irrespective of a party’s previously raised objection. Moreover, Prof. Bermann took his thoughts one step further and directed the audience’s attention to the fact that the precise rationale of the EcoSwiss decision could be utilized by the CJEU in different legal contexts and relationships as well.

Before resuming with the identification of the third EU policy feature, Prof. Bermann concluded that both aforementioned features provided the appropriate fuel for a new EU norm to arise, namely, that of European public policy. He even expressed his concern with regard to the implications European public policy will have in the substantive level of the EU law-International Investment Arbitration interface.

With the aforementioned last consideration, Prof. Bermann proceeded to the third European law element, that according to him affects the interaction between EU law and International Investment Arbitration the most. Prof. Bermann noticed that the concept of “autonomy of EU law” constitutes a rather recent trend in CJEU’s decisions. As found in some of the Court’s Opinions, including the Opinion 2/13 on the EU’s accession to the ECHR and in the Achmea case as well, it seems that the CJEU reserves its right to interpret EU law. In fact, not only does it reserve it, but it also assumes a monopoly in applying it. According to Prof. Bermann, the origin of the “EU law’s autonomy” concept can be traced back to the notion of the EU law’s primacy over the domestic law of the Member-States, as the CJEU held already found in Van Gend en Loos and Costa v. ENEL.

However, Prof. Bermann considered that there is a significant gap between these two EU law concepts (autonomy of EU law and primacy of EU law). On the one hand, the legal norm of “primacy” is expected to operate in intra-EU conflicts of law. On the other hand, the “autonomy of EU law” has been invented in order to interact with the international legal order. As it was articulated in its series of Opinions, the CJEU stands in opposition to any EU’s accession in international treaties that establish a Court or Tribunal whose decisions have an “adverse effect on the autonomy of the EU’s legal order”. In that regard, Prof. Bermann was astonished to note there is no other legal order that purports to disallow foreign courts to interpret its law.

In addition, Prof. Bermann invited the audience to “see” the bigger picture. As such, he remarked that the concept of EU law’s autonomy is expected to create turbulence and confusion concerning the EU’s and its Member States’ international legal standing. Obviously, such a monopoly of interpretation can be abused by the CJEU to form a potential rejection of a claim against the EU or one of its Member States. Even worse, the CJEU could force a domestic court not to enforce a decision or award that stands in contradiction with any part of the EU’s superior legal framework. However, Prof. Bermann did also refer to attempts to moderate/limit the concept of autonomy of EU law with respect to CETA and the ICS system contained therein, which, however, awaits approval by the CJEU in Opinion 1/17.

Furthermore, Prof. Bermann accepted that there is a fundamental difference between the CJEU’s Opinions and its Decisions. The Court’s Opinions, such as Opinion 2/13, were asked in order to predict incompatibilities between two separate legal regimes before signature. On the other hand, the Court’s Decisions like Achmea touched upon a Treaty’s validity after having been signed. As such, the Achmea decision “condemned” a Treaty and “dishonoured” an award, creating a considerable level of precedence. Additionally, Prof. Bermann considered that, although the Court in Achmea reassured the validity of investment treaties like the ECT or the CETA, it made clear that it reserves the exclusive right to interpret EU law.

Last but not least, Prof. Bermann could not help but notice the possible startling outcome of the combination of the CJEU’s monopoly of interpretation with the notion of EU public policy. In that regard, he referred to the Micula case, where the CJEU considered the domestic court’s level of scrutiny as insufficient. As such, the CJEU gave a substantive law dimension to the level of control, which a domestic court should exert when confronted with the recognition and enforcement of an arbitral award. Prof. Bermann took his consideration a step further and “painted” a realistic picture of the CJEU’s demands from a domestic court to reject the enforcement of a decision against the EU itself on public policy grounds.

Future image of Investor-State Dispute Settlement (ISDS)

Taking a third person’s sight in respect of European political and legal dynamics, Prof. Bermann specifically mentioned the need for the ISDS system to be re-examined in its entirety. Being a member of the Gabrielle Kaufmann Kohler academic forum, which has been created in the context of the UNCITRAL Working Group on ISDS reforms, Prof. Bermann called for a reconsideration of the basic features of investment arbitration, as this will prove useful in its interaction with EU law as well. At the same time he also referred to the possible steps, which the EU institutions and EU law could take in order to optimize its interaction with international investment arbitration. As such, a clearer delineation and clarification of the aforementioned EU law concepts, such as “European public policy”, “EU law autonomy” and the extent of an arbitral award’s substantial review by domestic courts could be helpful. Last but not least, Prof. Bermann made specific reference to the potential use of the CJEU’s “proportionality” principle in the “re-calibration” of the EU law-Investment Arbitration law relationship. He also expressed his discomfort of the absence of a constructive dialogue between EU institutions and International Arbitration institutions.

 

Q&A session moderated by Mr Kamil Zawicki (KKG)

The following four points of discussion formed the core of the Q&A session.

First, a comment was raised with regard to the relationship between CJEU’s Opinions and post treaty decisions/judgments. It was stated that there is a considerable difference between the two. The first has to do with a matter that may raise concerns in the future and are non-binding, whereas the Court’s decisions/judgments deal with a specific case and provide a solution based on the facts of the case. On this point, Prof. Bermann argued that CJEU’s Opinions are quite abstract and cannot anticipate which points of concern will arise at a later stage. They represent a special kind of precedent and are rarely not followed by the EU’s organs, despite the fact of not being binding. As for the Court’s decisions/judgments, he stated that they refer quite often to generic norms, although they deal with the particular facts of the case at hand.

Second, a question was raised concerning what  possible considerations an arbitrator is forced to make when sitting in ICSID arbitration proceedings, which take place in an EU Member State. Prof. Bermann replied that firstly an arbitrator should take  into consideration  his/her mandate to deliver an enforceable award. Secondly, he noted, in response to another point raised, that the interpretation of the Achmea case should be the same under intra-EU BITs, the ECT and the ICSID contexts. However, Prof. Bermann made a comment of significant value with regard to this question. He stated that even an award delivered in a seat of arbitration located outside the EU, such an award could still be annulled or not enforced for reasons of comity.

Third, a significant difference between the EcoSwiss case and the Achmea case was underlined. It was mentioned that in EcoSwiss the CJEU forced the Dutch courts to annul the arbitral award at hand. On the other hand, in Achmea the CJEU found that the arbitration clause was incompatible with the EU law, thus leaving more space for the domestic court’s deliberation. Prof. Bermann acknowledged the point raised, but he then turned the discussion on the EU law dynamics. Therefore, a domestic court cannot do much when confronted with the notion of EU law’s supremacy over domestic law. At this point, Prof. Lavranos added that indeed there is no room left to a domestic court to decide otherwise. Prof. Lavranos, also, referred to the need for widening the preliminary ruling system. In that respect, he expressed that it is of utmost importance that arbitral tribunals are provided with the right to request a preliminary ruling from the CJEU in case EU law is at issue. According to him, this crucial step would simplify the current situation in terms of consistency and predictability.

Fourth, a rather crucial remark was raised in respect of a very interesting feature of the Achmea case. In that regard, it was mentioned the Achmea case dealt primarily with the preliminary question of the presence or absence of the State’s relevant consent. The CJEU based its interpretation on the fact that the Member States compromised a part of their sovereignty by signing the Lisbon Treaty. Therefore, the CJEU can invoke the “supreme” instruments of EU law in order to determine the element of consent. At this point of the session, a debate took place with regard to the interpretation of Art. 54 ICSID “as it if were a final judgment of the courts of a constituent state”. It was mentioned by the audience that Art. 54 ICSID does not prevent a State from not enforcing an award on one of the grounds for annulment under ICSID or the ones for refusal of enforcement under the New York Convention. Prof. Bermann responded to the second point by mentioning that this depends on a particular State’s reading of the provision and exemplified his position by referring to the US framework concerning ICSID awards under which this kind of decisions are immune.

As far as the interpretation of a consent’s validity and its co-relation with EU law is concerned, Prof. Bermann made the following remarks. He firstly admitted that the supremacy of the EU law is a norm that should be taken into consideration when discussing the interaction of the EU’s and its Member States’ legal frameworks. However, when the concept of “supremacy” transforms into the one of “autonomy” and is used against the international legal order, problems as the one in the Micula case will arise. He further supported his opinion by inviting the audience to adopt a broader view beyond intra-EU BITs and imagine how an individual would investigate the existence of a consent from an international law perspective, by making reference to the Vienna Convention and its relevant provisions. As a last point, Prof. Bermann subscribed that a State is still considered a subject of international law, despite being a member of the EU.