Investor Treaty Arbitration : General view

Editor's Notes

• #2: Good morning everybody, thank you for having me again today. On my way here, my 5 year old asked me : “what are you doing today , mama?” I told her I was going to explain how to solve problems. She said “well, you know you should find a job at the crayon making factory, that would be more fun!”. I hope by the end of this presentation you will not recommend that I apply at Crayola! So, why is ISDR important to you (even if you do not intend to join those teams practicing in investor state dispute resolution)? Let us say you are a junior associate at Lathrop and Gage here at Kansas. You get a memo that Black and Veatch wants to consult with your team on its new potable water infrastructure in Ethiopia. As a corporate lawyer, of course, there are many aspects to advising a client of that size going into such a project. One thing you would want to put at the end of your memo is: whether B&V’s investment in Ethiopia is covered under any BIT? And if it is not, then you might consider options to structure a wholly owned subsidiary of B&V in a jurisdiction that has a BIT with Ethiopia. I will begin by looking at what was the state of affairs before Investor treaty arbitration gained track, then I will give you a tour of the system as it stands today (what makes it different from your international commercial arbitration) and then we will finish off by some remarks on the discontents with the current system as well as it immense potential for development.
• #3: First a look at the precursors to the current system: first we had the Diplomatic protection principle developed after WWI, where you have a state – state process over the treatment of foreign nationals in the host state. Problems w that: you have to exhaust local remedies in host state first THEN convince your home to espouse ur claim plus all the politics involved with that. Calvo and Hull Formulas By the 1950s, nationalizations were very common in Latin America and the Middle East some investors had arbitration clauses and most of them had to go through diplomatic protection or litigate in the host state courts. A breakthrough came with the adoption of the ICSID convention in 1965. ICSID created a mechanism for foreign investors to directly bring a claim against the host state government in front of an impartial arbitral tribunal.
• #4: So an Investment treaty will typically have a preamble, a clause defining the scope of application, section on definitions, substantive protections, + or – an umbrella clause, exceptions and exclusions, dispute resolution, subrogation entry into force. What is really important for us today as we focus on the procedural protections of foreign investors are three clauses: We will look into how a dispute resolution clause in a treaty looks like , the scope of treaty arbitration vs contract arbitration, procedural MFN and finally if we are to arbitrate under ICSID the definition of investment and investor becomes crucial in decisding whther ICSID tribunals have jurisdictions.
• #5: Now let us take a look at the substantive protections. I know you have covered those in an earlier classes so I am not going to go into the details FET: very broad, usually means protection against unjust and arbitrary decisions by the host country or any of its branches, denial of justice claims, taxation issues. Expropriation: direct (police forces storming the premises and effectively seizing the property or a populist government nationalizing foreign assets (Nasser – Suez Canal). We do not see that very often now except for two cases against Egypt . What we see coming up in cases these days is the measures “tantamount” to expropriation. Argentinean Gas cases the pesification of the Gas contracts, Methanex a ban on importing a certain chemical, Lauder (cahnge in conditions for televised transmition ) judicial expropriation (indorma) – total deprivation – an effects test. Lawful vs unlawful. Full Protection and security: : physical safety of investor and its employees and property. Desert Line v Yemen.
• #7: Let us take a look at what a dispute resolution clause looks like in an Investment Treaty: typically you have a multi-tiered clause, requiring direct negotaitions, mediation is offered as an option, some require pursuing local remedies, then you have a choice of forum
• #8: ICSID does not operate by itself. You still require host state consent. This consent is mainly found in the BIT between host and home countries. We now have over 3000 BIT and MITs and more than 100 Investment Chapters in FTA (NAFTA). John mentioned to you that at the Multilateral level, there has been little success in negotiating a successful investment treaty. This remains true today even with the ongoing negotiations of the Transpacific partnership involving 12 nations including the United States, Australia, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, Japan and Brunai. We also have the US – EU transatlantic trade and investment partnership.
• #9: We now move on to the special features of the ICSID convention: First off it is important to note that not every Investor State Arbitration is an ICSID arbitration. You could very well have an ad hoc UNCITRAL Investor state arbitration. But ICSID has certain perks: Its an institutional arbitration Wide membership base 147 countries The center maintains a rooster of specialized “repeat player” list of arbitrators. By acceding to the Convention contracting states waive sovereign immunity from jurisdiction (However, host state can still invoke sovereign immunity in enforcement). The center has to publish data of registered claims. Hearings and awards are confidential unless the parties consent to make them public. One of the main features of Investor state arbitration under ICSID is enforcement. John will talk to you in a bit about enforcement of arbitral awards under the NY convention and you will see that the losing party is still able to get the domestic court to refuse enforcement on certain grounds. Under ICSID, awards should be enforced in any Contracting state as a judgment from the highest court of that state. So no recourse in national courts. I should also mention that the fact that ICSID is within the World Bank group, makes host countries reluctant to default on their awards. You kinda want to keep a good track record with the world bank and the IMF. For example last month Argentina was negotiating an IMF loan and one of the “conditions” was that Argentina pays off the 5 outstanding ICSID awards as part of the 1.3 billion dollars loan package. Another special feature of the ICSID convetion is the internal annulment procedure. It is a unique process where an anullment committee apointed by the center examines the award on 5 very limited grounds. (tribunal was not constituted properly, there was a corruption in the tribunal, the tribunal manifestly exceeded its powers, failed to state the reasons of the award, or if there was a serious departure from a fundamental rule of procedure.)
• #11: BITs take a very broad approach to what a protected investment is: any enterprise, company or an equity interest in such; Tangible, intangible, movable or immovable assets and property rights (lease, lien, mortgage usufruct); Stocks, bonds, loans and other financial instruments Franchise, contract, concession, construction and other types of contracts; Intellectual property rights; Licenses, authorizations and permits; What about the definition of Investment under ICSID? Is there a separate test that an investment must pass to qualify for ICSID protection? The Article in question is in fact silent on the definition of investment. One camp says no; based on the decision of the drafters and from the Traveaux preparatoir they discussed defining an investment however they decided against it so it is left to the states themselves to define what they want to protect in their BIT. However, we find tribunals oftenly referring to the “Salini test” which used the “preamble of the ICSID” to create a criteria for qualifying an economic activity as an investment: they refer to an “economic activity of a certain duration, a contribution of assets by the investor, the assumption of risks (not regular commercial CSIG contract of sale will probably fail on this ground), and some go as far as to require a contribution to the development of the host state economy. Duration (immediate NO - Short term Jan de Nul 2 years Salini is not mandatory – volatile capital not protected under ICSID Fedax Risk and contribution of assets (Joy Mining regular commercial risk vs investment risk – خطابات ضمان وتوريد معدات لا تححمل مخاطر التشغيل Contributes to host state development (ICSID Preamble: Argentina Georges Abi Saab) Legality: non criminal cases : Fraport in violation of the Anti Dummy law Non corrupt: (World Duty Free v Kenya Despite the fact that Salini is not hard law, it is very well respected and a host government will often use one or two of those criteria to disqualify an investor’s claim.
• #12: 1) So, in a typical Investor treaty arbitration you will find 2 main actors: The Claimant investor and the respondent state. (The reason why I say respondent state is that the way the system is structured it does not give the host government any cause of action under the treaty. Does that mean that a state is a perpetual loser in investor state arbitration? The answer is NO. Tribunals have found investors to lack jurisdiction or fail on the merits.) 2) Now does an investor has to have a contract with the host government to raise a treaty question? No. Having a contract with the host state or any of its entities does not mean you automatically have a treaty claim and vice versa. You could have both. 3) In order for an investor to qualify for ICSID it has to be a foreign investor. Does that mean that dual nationals are automatically disqualified? No, tribunals will look for the effective nationality. What about class arbitration? Most recently we saw an Investment “class” arbitration against Argentina. Multiple investors were allowed to bring one claim against Argentina for default on its sovereign debt. Corporate investors pose interesting questions too: for example a locally incorporated company which is controlled by a foreign investor is considered a foreign investor and has a right to invoke treaty protections. 4) Host Country held responsible for actions by 3 branches, any of its subdivisions, federal states are liable for actions by individual states, state owned/ controlled companies if carrying out a government responsibility. 5) Finally a third actor which comes into play in Investor state arbitration because of the special public interest factor: under ICSID revised rules of Arbitration, a tribunal could accept submissions by Amici under certain conditions. The Vivendi case involved a water concession contract in Argentina and Amicus were allowed to brief the tribunal on the harms suffered by citizens as a result of the investment. Whereas an UNCITRAL tribunal sitting in the Chevron v Ecuador dispute refused to accept the submissions of NGOs representing the people of Lago Agrio who claim to have suffered from pollution to their waters.
• #13: The next question would be which set of rules govern an investor state dispute? Well the answer is as you might have learnt by heart now is “if the parties to the dispute made a choice on law then the tribunal will most certainly honor that law”. However in absence of a choice of law by the parties, what would an ICSID Tribunal do? Article 42 of the convention stipulates that the law of the host country including the BIT and the host country rules on conflict of laws apply. Article 42 does not stop at that. It adds “and rules of international law”. Therefore you will find tribunals in ICSID cases citing the draft Articles of the International Law commission and other international instruments. It is therefore said that in investment treaty arbitration you have an interesting fusion of International Arbitration, Public International law, political governance and sustainable development. In the Argentinian cases the domestic theory on necessity was argued to apply to the government’s decision to pesofy its dollar contracts (1 dollar = 1 peso) claimant companies argued for ILC articles on necessity and won the case because the Interational law conceot of necssity is a lot srticter than the domestic law. Finally a word of caution: Despite heavy reliance and citing (+ & -) by tribunals on each others awards even from different fora (ICSID – NAFTA – Ad Hoc – Commercial), Investor state arbitration is no a “precedent based system”.
• #14: So, is the Investor state dispute resolution system working as it should be? The answer for the most part is Yes. BUT: Investor state arbitrations are not as quick as you would expect (lagging anywhere from 2 to 4 years). The process is also very expensive (two reasons for that in my view: investors ask for huge amounts of damages, the other reason is: only certain firms in the world specialize in investment state arbitration and the market is pretty exclusive) We are starting to see companies with the primary business of funding Investor state arbitration for insolvent and small business of course with their eye on the big awards. Another discontent with the system is its inability to integrate “sustainable development”. Canada is leading the way in drafting balanced BITs weighing more in favor of the state regulatory powers on the one hand and placing the foreign investor under certain obligations in environmental and human rights areas. A third problem is the conflicting awards. Some look at it and see flexibility others are warning of a legitimacy crises and calling for a centralized precedent base system. Finally, I would like to leave you with a thought on the “efficacy” of the system: does it in fact increase FDI flows? Brazil was never an ICSID member. It is a thriving economy and a major attraction for foreign investments. Australia refuses to include any form of investor state arbitration in their Investment treaties. South Africa on the other hand established a specialized arbitration center in south Africa to deal with investor disputes resulting from south Africa’s BITs. My own views on this is that Investor state arbitration is a useful tool for foreign investors – but it is not the reason why they decided to invest in country A rather than country B. I hope that you find this useful to you and if you recommend that I apply to Crayola please let me know (I will not hold a grudge!) Thank you all for listening and and I now yield the floor to john!