The continued lack of adequate investment protection in Europe

Nikos Lavranos, Secretary General, EFILA

Recently, the UNCTAD Investment Division announced that it had “completed its regular semi-annual update of the Investment Dispute Settlement Navigator, which is now up-to-date as of 1 January 2017”.

The Navigator is a useful web-based search tool containing information regarding pending and closed investor-State disputes based on the thousands of investment treaties.

According to UNCTAD, the key findings of this update are as follows:

“In 2016, investors initiated 62 known ISDS cases pursuant to international investment agreements (IIAs). This number is lower than in the preceding year (74 cases in 2015), but higher than the 10-year average of 49 cases (2006-2015).

The new ISDS cases were brought against a total of 41 countries. With four cases each, Colombia, India and Spain were the most frequent respondents in 2016.

Developed-country investors brought most of the 62 known cases. Dutch and United States investors initiated the highest number of cases with 10 cases each, followed by investors from the United Kingdom with 7 cases.

About two thirds of investment arbitrations in 2016 were brought under bilateral investment treaties (BITs), most of them dating back to the 1980s and 1990s. The remaining cases were based on treaties with investment provisions (TIPs).

The most frequently invoked IIAs in 2016 were the Energy Charter Treaty (with 10 cases), NAFTA and the Russian Federation-Ukraine BIT (three cases each).

The total number of publicly known arbitrations against host countries has reached 767.”

Some of these above key findings are of particular interest and should be put into a broader perspective.

First, it is interesting to note that the number of new ISDS cases has fallen. This is a trend that can also be seen for example in the ICSID statistics, which show that the number of ICSID cases has been falling as well (in 2015 52 new cases were registered, while in 2016 48 new cases were registered).

UNCTAD does not give any explanation as to the possible reasons for the fall in cases. One could of course think of several reasons: the States have improved their behaviour vis-à-vis foreign investors or investors consider the use of investment treaty arbitration as a less attractive option for dispute resolution and instead prefer to use other options. In this context, it is interesting to note that according to the same UNCTAD Navigator, States continue to win more cases (36.4%) than investors (26.7%), while 24.4% of the cases are settled. Investors/Claimants could perceive this as not such an attractive option to resolve a dispute with a State, in particular in conjunction with the high costs associated with the proceedings.

Second, it is noticeable that the Energy Charter Treaty (ECT) is the most frequently invoked investment treaty in 2016. This has been a trend of the past years with the explosion of disputes in the renewable energy sector, mainly against Spain but also against several other European States. Moreover, in the past 3 months it has been reported that investment arbitration proceedings – not only based on the ECT – have been initiated against Italy, Croatia, Bosnia-Herzegovina, Latvia, Greece and Serbia.

This suggests that European States have a poor track record when it comes to the protection of foreign investors and their investments. Again, one wonders what the reasons are for the fact that the ECT is so popular and why European States face some many disputes. Whatever the reasons may be, the fact that the ECT and BITs are used so frequently against European States underlines the continued lack of adequate investment protection in Europe, which in turn confirms the necessity of investment treaties.

In fact, the World Rule of Law index 2016 indicates very clearly the stark differences among European States regarding their Rule of Law track record. This index ranks Denmark (1), Norway (2), Finland (3), Sweden (4), Netherlands (5), Austria (6), Czech Republic (17), France (21), Spain (24), Romania (32), Italy (35) and Bulgaria (53) out of 113 countries.

The Corruption Transparency index 2016 of Transparency International ranks Denmark (1), Finland (3), Sweden (4), Switzerland (5), Norway (6), Netherlands (8), Germany (10), Poland (29), Lithuania (38) Czech Republic (47), Croatia (55), Romania (57), Italy (60), Greece (69) out of 176 countries.

The Doing Business Report 2017 ranks Denmark (3), Norway (6), UK (7), Sweden (9), Finland (13), Germany (17), Lithuania (21), Bulgaria (39) and Malta (76) out of 190 countries.

Obviously, these rankings have their limitations and must be treated with caution but the emerging general picture is nonetheless very clear. The “Nordic” European countries simply have a better track record than the “Southern” and “Eastern” European countries. In other words, they not only treat foreign investors better but they also have less perceived corruption and less red tape for doing business.

It is about time that this reality is generally accepted also in the European institutions living in the “Schuman bubble”.

These obvious conclusion from this is that – contrary to UNCTAD’s and European Commission’s repeated call for “reforming” the current system by inter alia also terminating investment treaties – all efforts should be focused on improving the Rule of Law track record in those European countries which clearly show deficiencies.

However, in the past decades little progress has been made and there is no reason to believe that things will improve very soon. Consequently, in these circumstance investment treaties are still very much needed – in particular in Europe.

 

Right to Regulation & Investment Court System: Alternative to ISDS? (Part II) – Mediation in Investor-State Dispute: An Option 

 Pratyush Nath Upreti*, Upreti & Associates

In my previous contribution to the EFILA blog, titled Right to Regulation & Investment Court System: Alternative to ISDS?, I analyzed the debate raised by the ISDS provision in TTIP and how the proposed Investment Court may not be able to solve the issues raised by ISDS. It is important to analyze the reasons behind such a huge cry over ISDS set up in the Trade/Investment Agreement. The European Federation for Investment Law and Arbitration (EFILA) in its paper titled A response to the criticism against ISDS has balanced an analysis on the criticism of ISDS.

It is evident that in recent years, there has been a diversion of opinions, which is painful to investors and also encroaching on the national matters of State. Therefore, the global community has to realize that the present ISDS is not always working effectively and alternatives should be proposed. The European Commission’s proposed ‘Investment Court’ might be a step towards formulating an alternative.  No doubt that the proposal is a good attempt but it still needs to be revised.

Recent Trends of International Investment Agreements

In recent years, more countries have been opting for IIAs to continue their existing co-operation with countries or as a way to find an economic development. According to the United Nations Conference on Trade and Development (UNCTAD), there has been rapid growth of IIA from 1980 till 2014 (see Figure 1.)

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Figure 1: Trends of IIAs (Preliminary data for 2014UNCTAD, IIA database)

The above graph highlights the recent trends of IIAs from 1980-2014. It is expected that IIAs number will increase, but the graph indicates that there has been a decline in the last few years. According to UNCTAD data, in 2004 there were 27 IIAs, out of which 14 were Bilateral Investment treaties (BITs) and 13 were ‘other IIAs’, i.e. economic agreements other than BITs like

Free trade agreements (FTAs), bringing the total number of agreements to 3,268 (2,923 BITs and 345 ‘other IIAs). The total number of IIAs was lower down in 2014 as compared to 2013 where there was a total of 44 IIAs (30 BITs and 14 Other IIAs). The interesting fact is that in 2013 the number of BITs terminated was 148, out of which a new treaty replaced 105, 27 were unilaterally denounced and 16 were terminated by consent.

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Figure 2: Most Active negotiator of ‘other IIAs’; treaties under negotiation and partners involved. Source: UNCTAD, IIA database.

The above figure emphasizes the number of treaties under negotiation and partner countries involved in a negotiation. At present, the European Union has 28 treaties under negotiation among 70 different countries as partners. Although the data highlights seven countries under negotiation, but at present there are 45 countries and four regional integration organizations that are revising their model IIAs.

The findings of UNCTAD data highlights that the countries’ willingness to enter into agreements and few IIAs are under revision. This implies three things. First, negotiation is getting more complex because of the increase in the number of countries in the negotiation process, as every country has a share of interest. Furthermore, even if a deal is negotiated in the broader package, then also the question of commitment to those issues is very important.

Second, the interrelation between IIAs and domestic concerns comprising ‘social, environmental and public health’ matters makes negotiation more difficult. Ignoring this issue means that negotiation has a severe impact on the development of host countries. Therefore, finding the proper balance may take more time, which makes negotiation slow.

Third, some of the most recent investment disputes might show that IIAs go beyond the protection and promotion issues and leave no flexibility on some issues that allow member countries to peruse their development agenda, according to their needs.

Fourth, the transparency in negotiation deals creates a public nuisance on some contingent issues, diverse opinions on other issues, which may or may not be discussed, would have a negative impact on negotiations and, as a result, it creates negative public opinion.

Fifth, recent claims of investors under the investor-state dispute settlement mechanism have raised concern on such negotiation deals particularly such claims are encroaching upon host state sovereignty and domestic regulation.

The critics fear that the growing frivolous claims brought to ISDS will slowly discourage investors and states to opt for ISDS.  The data shows that the average cost of arbitration is $8 million per party. Therefore, at international level, there is a need to offer an alternative, which balances both the interest of investors and states. Moreover, such an alternative should be acceptable by both the parties.

Investor-State Mediation

In recent years, the relationship between the state and investors is getting salvaged. The development will be fragile when rift exists between the investor and state. Parties – for own benefit – use the increasing diverse opinions of the arbitration tribunals. This will result in negative consequences in global investment regime. The possible way to balance the system is by revising ISDS provisions or adopting investor-state mediation.

The very idea of arbitration, mediation and conciliation is to resolve the dispute. Among the three, arbitration is overwhelmingly accepted for several years. The growing criticism of ISDS has sorrowed relation between investors and the State and should be looked at with immediate concern. Perhaps, the time has come to also use the mediation process in Investor-State Disputes. There has been an attempt to use mediation in Investor-state disputes with success in a limited jurisdiction. However, scholars argue the very nature in which mediation aims to settle a dispute is different from arbitration, making it difficult for acceptance of mediation.

According to Jacqueline Nolan-Haley in her work ‘Mediation: The ‘New Arbitration’ argues that “the morality of mediation lies in the optimum settlement, a settlement in which early party gives up what he values less, in return for what he values more. The morality of arbitration lies in a decision according to the law of contract.”  The author explains this observation, as the nature of mediation is more adversarial than that of arbitration.

Similarly, authors Welsh & Schneider in their work ‘Becoming Investor –State Mediation’ (2012) analyze a very fundamental difference between ‘mediation’ and ‘arbitration’. According to the authors, mediation is an ‘interest-based’ system of negotiation, which looks like a meeting. Whereas, ‘arbitration’ is a ‘right-based’ system which looks like a hearing. The very fundamental concept, which the authors are trying to convey, is that the mediation facilitates parties to arrive to a decision unlike arbitration, which focuses on adjudication.  Also, the authors clear the misnomer attached to ‘mediation’. They identify several models of  ‘mediation’ such as ‘facilitative’, ‘elective’, and ‘understanding-focused’, ‘therapeutic’ ‘Humanistic,’ ‘narrative,’ ‘insightful,’ ‘transformative’ and focus on facilitating the development of understanding and ‘integrative (or interest-based) solutions’.

Among these models, the authors suggest adopting a model which will improve relationships between the parties and able to acknowledge volatile political situations.  In other words, the authors suggest the last model as a suitable model in the context of investment treaties. Also somewhere in their article, the authors touch the possibilities of the role of state officials as potential ‘quasi-mediators’. I tend to disagree on this, particularly in the context of investor-state disputes. The role of state officials as quasi-mediators will further complicate the process and may create a trust-deficit environment. Therefore, it is important to note that the very foundation of the mediation process is ‘trust’.

Mediation in Investment Agreements

The recent studies show that mediation has been used with great success in international commercial law. The critics argue that success of mediation in commercial law cannot be an assurance for success in the international investment regime. However, the recent Investment Agreements such as EU-Canada: Comprehensive Economic and Trade Agreement (CETA) and ASEAN Comprehensive Investment Agreement (ACIA) have incorporated ‘mediation’ in their provisions..

Also, mediation features in some Model BITs. For example Article 10.4 of the Thai BIT Model states that:

The disputing parties may at any time agree to good offices, conciliation or mediation. Procedures for good office, conciliation or mediation may begin at any time and may be terminated at any time. Such procedures may continue while the matter is being examined by an arbitral established under this article, unless the disputing parties agree otherwise. Proceedings involving good offices, conciliation and mediation and positions taken by the disputing parties during these proceedings shall be confidential and without prejudice to the rights of disputing investor in any further or other proceedings.

This shows that mediation appears in some Investment Agreements and it is just a matter of time until such practice will gain momentum.

Mediation as an alternative?

There is a diversion of opinion within the scholar’s milieu arguing that arbitration is more favorable than other forms of dispute settlement. However, the recent trends urge us to rethink arbitration and finding beyond the arbitration.  This forum shift has been realized in other international communities, as a result of IBA rules on Mediation developed to encourage good practices of mediation. One of the important features of the IBA rules on mediation gives the liberty to the state to make the mediation process private. This will take away unwanted public opinion.

At the end, I think every modern Investment agreement should include ‘Consultation’ & ‘Mediation’ among the methods for amicable settlement of disputes arising out of International Investment Agreements.  I believe adopting mediation would be a right approach because the process does not abide with a strict interpretation of law unlike in ISDS.

Similarly, the mediation process is a more informal proceeding than ISDS and involvement of a neutral party to the dialogue would give rise to a win-win situation for both parties. Moreover, in the broader sense, the inclusion of mediation in IIAs will make a country less skeptical about consequences of litigating intellectual property rights through regular ISDS mechanism. In other words, the mediation process will help the state to main regulatory rights in the host country.

On the other side, it is important to note that the decision of mediation does not gain force as like of arbitration under the ICSID Convention, making mediation a toothless weapon.  This would be the reason for Europe to opt for ‘Investment Court’ model in spite of reference to mediation in CETA, which is similar to the WTO mediation process for trade dispute settlement.

However, there is a school of thought believing that mediation may create transparency and a proper environment to negotiate between the parties.  But the lack of enforcement of such a decision might make the situation worse.  Therefore, it would not be rational to jump to a conclusion that the ‘mediation’ process will immediately solve the problems raised by ISDS. Moreover, the mediation process is yet to be tested in International Investment Agreements.


Pratyush Nath Upreti – is a Lawyer at Upreti & Associates a Kathmandu based law firm, where he is leading commercial and research department. He holds Advanced Master (LLM) Intellectual Property Law & Knowledge Management (IPKM) degree from Maastricht University, Netherlands. He is also an executive member of New IP Lawyers Network, a wing of school of Law and its research centre SCule (Science, Culture and the Law) under University of Exeter, United Kingdom. He can be reached by   p.upreti@student.maastrichtuniversity.nl