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

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

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

Traditional Protection vs. Modern Liberalization

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

Definition of Investment

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

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

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

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

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

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

Definition of Investor / Denial of Benefits

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

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

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

Most-Favored Nation Treatment

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

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

Fair and Equitable Treatment

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

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

Umbrella Clause/Investment Agreement

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

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

Expropriation

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Call for Contributions – EFILA Blog

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Given the present debate – on both sides of the Atlantic (and beyond) – surrounding the future of ISDS and bilateral investment treaties, the EFILA Blog editorial board believes that a veritable dialogue must take place, allowing all arguments to be heard and all diverging positions to be defended. Discussing the status of an international regime should take place at the very center of the legal community itself and not be left as a mere political bargaining chip.

For these reasons, EFILA offers its Blog as a space for open dialogue, welcoming any contribution that pertains to the field of of international (investment) law and arbitration, EU law and public policy, as well as the dynamics of these multiple legal, political and economic spheres. Moreover, the new impetus of signing regional free trade agreements in Asia-Pacific is of utmost interest for the existing dialogue, showing how other parts of the world advance their investment cooperation despite this troubled global background.

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

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

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

(Legal) Multipolarity Revisited: What Lies Beyond Westphalia?

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

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

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

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

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

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

Normative Mimesis: Imperial Weapon or Remedy for Lingering Divisions?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

 

ISDS in TPP and TTIP Negotiations – Lessons for the EU

by Prof. Loukas Mistelis, QMUL*

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

Protecting International Commercial Arbitration in Europe

by Chris Wilford, Chartered Institute of Arbitrators*

The current highly politicised debate surrounding the inclusion of investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership (TTIP), which allows investors to bring claims against a State before an international arbitral tribunal, has brought arbitration into the spotlight.

While ISDS is a special form of arbitration and the circulation of myths about the investment protection regime, such as the characterisation of arbitration tribunals as “secret courts” and that they are somehow biased towards investors continue to be spread, this development threatens to bring other forms of arbitration into disrepute: including international commercial arbitration.

In light of this threat of mixing ISDS with international commercial arbitration, it is important to recall the basic notions of arbitration and emphasise the advantages of international commercial arbitration.

Arbitration is a formal and private dispute resolution process where arbitrators imposes an impartial and independent judgement on the parties, with their authority derived from private agreement. Its strengths are that it provides a final and binding award, it is confidential and that those in dispute can choose an independent neutral who usually has significant expertise in the relevant field.

More specifically, international commercial arbitration plays a key role in supporting global commerce and gives businesses confidence that they will have access to redress across the world.

International commercial arbitration is a tool that is regularly used to resolve complex contractual disputes across every sector of the economy. This includes the confidential resolution of disputes associated with construction and infrastructure projects, high value technology solutions, and the pharmaceutical industry.

Europe is the leading centre for international commercial arbitration. It is estimated that over a third of arbitrations in the world that take place annually are seated in Europe, which is home to leading centres such as London, Paris and The Hague. The value of legal exports to the UK economy alone is estimated to be worth some £3.1 billion per annum by TheCityUK.

It is important to highlight that international commercial arbitration is operating within a well functioning legal framework, such as the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the “New York Convention”). This Convention ensures that the over 150 States that are party to it respect arbitration agreements and enforce them by their court systems. In addition, numerous arbitration institutions, such as the ICC and the LCIA, provide the necessary institutional and administrative support for allowing international commercial arbitration to take place effectively and efficiently.

CIArb, which celebrates its 100th anniversary, is itself an important institution that ensures and the high level quality of arbitrators through its training and development programme. It is mandated by its Royal Charter to promote all forms of private dispute resolution worldwide. As well as delivering education, training and qualifications, CIArb works through its international network of members to develop the learned society within alternative dispute resolution (ADR).

With the unprecedented scrutiny of private dispute resolution as a result the inclusion of ISDS in TTIP and the Trans-Pacific Partnership (TPP) negotiations, CIArb has been playing a leading role in engaging politicians, policymakers and wider civil society to tackle the myths being circulated about ADR and promote its benefits. This has included the launch of the CIArb London Centenary Principles for an effective, efficient and ‘safe’ seat in international arbitration at our London Centenary Conference.

The CIArb London Centenary Principles are not another set of model rules for an arbitral institution. They are principles which recognise that the importance of international arbitration today and the loosening of ties between international arbitration and national law requires a number of key characteristics to make a particular place an appropriate and effective arena in which to conduct international arbitration; including professional bodies helping to provide a framework for the ethical conduct of international arbitration at work.

Investors frequently use arbitration to settle disputes between themselves. If arbitration was indeed biased, businesses would not have the confidence to use it international commercial arbitration as a dispute settlement mechanism in commercial contracts.

Indeed, a recent study of the European Parliament came to the conclusion that commercial arbitration may facilitate the EU’s goals of ensuring access to efficiently-delivered justice and dispute resolution.

At a time when Europe is emerging from a deep economic crisis, the EU should recognise that international commercial arbitration supports international investment, jobs and economic growth. Europe also faces increasing competition in international commercial arbitration from emergent centres in the Americas and the Far East. It is therefore critical that any action taken in relation to ISDS does not jeopardise Europe’s leading position in international commercial arbitration.

These are just some of the reasons why international commercial arbitration must be protected in Europe. For the same reasons, international commercial arbitration and ISDS need to be clearly distinguished in the public debate. If not, Europe’s reputation as a neutral and independent destination for commercial arbitration, where the rule and law and right to property as expressed in the Charter of Fundamental Rights of the European Union are respected and upheld, could be tarnished for a generation.


Chris Wilford, Head of Policy & Public Affairs, Chartered Institute of Arbitrators (CIArb), London, CWilford@ciarb.org