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Mercy McBrayer

The session on International Investment Disputes of the LIDW 2019 was divided in three panels discussing the hot topics in investment law and the Investor-State Dispute Settlement (ISDS) system: investment protection post-Achmea, interim measures, security for costs, emergency arbitration procedures, and transparency in investment arbitration, as well as the wider issue of ISDS reform.

The first panel of the session was moderated by Professor Loukas Mistelis, Queen Mary University of London, and addressed the landscape of investment law and ISDS post-Achmea. The discussion was timely, especially in the light of the recent Decision of the Arbitral Tribunal in Eskosol v. Italy on the applicability of the January 2019 Declarations of the Member States of the European Union (EU) to the Energy Charter Treaty (ECT) and to the case. To begin, Professor Mistelis highlighted that most of the EU developments in investment law are the result of a trade law approach of the European Commission, rather than an investment law approach. He noted the probable lack of a logical basis for this approach. Thomas Sprange QC, King & Spalding, reviewed the Declaration on the Legal Consequences of the Judgment of the Court of Justice (of the European Union) in Achmea (Slovak Republic v Achmea Case C-284/16) and on Investment Protection in the European Union of 15 January 2019, as well as the separate Declarations submitted by Hungary on the one hand, and Finland, Sweden, Luxembourg, Malta, and Slovenia, on the other, on 16 January 2019. Thomas highlighted that the language of the Declaration of 15 January 2019 is aspirational, rather than legally binding. As such, the Declaration sets out a plan for the steps EU Member States should take in the future of intra-EU investment law and ISDS. He also stressed that the Declaration is not retroactive, irrespective of if one considers that such instrument produces have any legal consequences. Siddharth Dhar, Essex Court Chambers, discussed the position on English courts before and after Achmea. He identified two situations where the CJEU judgment is likely to become relevant:

  1. set aside for a BIT arbitration seated in London is sought under Section 67 of the 1996 English Arbitration Act, and
  2. an investor seeks to fight enforcement of a foreign award with the argument that the arbitral tribunal lacked jurisdiction to hear the matter.

Based on existing case law, it appears the English courts may find that international law applies in these situations, rather than EU law, where there is an intra-EU BIT. Siddharth also looked at the enforcement proceedings in England of the arbitral award rendered in Micula v. Romania. On this final point, Siddharth stressed that the consequences of Brexit will likely depend on what the withdrawal agreement negotiated between the EU and UK ultimately says. Matthew Weniger QC, Linklaters, looked at the CJEU Opinion 1/17, where Belgium asked for a ruling on the EU law compatibility of the Investment Court System provided for by the CETA. Matthew pointed out that the Opinion seems to rest on three points of analysis:

  1. whether the ISDS provisions under CETA are compatible with EU legal order;
  2. whether the ISDS provisions under CETA are compatible with the principle of equal treatment; and
  3. whether the court system provisions under CETA are compatible with the right of access to an independent tribunal.

The CJEU appears to have answered all three points in the affirmative.

The second panel was moderated by David Goldberg, White & Case, and focused on four hot topics of investment arbitration, namely: interim measures, emergency arbitration, security for costs, and transparency. Sylvia Tonova, Jones Day, kicked off the discussion of interim measures in the context of the sovereign right of States to prosecute criminal offences. She highlighted that the current view of ISDS in the popular press on this matter is that investment arbitration is nothing but a “get out of jail free card”. Sylvia refuted this by noting that such requests are rarely granted and then focusing on a few key investment arbitration cases dealing with these interim measures, with special focus on Quiborax v. Bolivia, Hydro v. Albania, Munshi v. Mongolia, Boyko v. Ukraine, and Nova Group v. Romania. The conclusion is that the bar is high for a party to be awarded interim measures that avoid criminal proceedings and that they are only given if the party can show that the motive for the criminal proceedings was to interfere with the proceedings of the dispute. David Goldberg focused on the use of emergency arbitration in investment arbitration and discussed the highlights of the procedure available under the SCC Arbitration Rules, first introduced in 2010. David emphasized emergency arbitration decisions in JKX Oil v. Ukraine, TSIKinvest v. Moldova (see the inapplicability of the cooling-off period requirement in emergency arbitration proceedings), and Puma Energy v. Benin. David also raised the question as to whether fairness can be maintained in the ISDS context with the speed of the procedure, given that States barely have time to respond or appoint a counsel and thus sometimes do not even participate in the emergency proceedings. Yasmin Mohammad, Vannin Capital, addressed the issue of security for costs in investment arbitration proceedings and began with the short overview of the evolution of investment treaty protection, noting a growing reversal of roles within the traditional notion of investment importing and exporting states. She noted in this context the significant policy shift from the security for costs measure which was meant to protect respondent States against frivolous claims. Yasmin highlighted that a series of arbitral awards have said that exceptional circumstances must exist in order for a tribunal to order such measure. The discussion also considered the relevance of third-party funding in the context of security for costs, with a focus on the decision in Armas v. Venezuela. Yasmin noted that while funders generally support disclosure of the existence of a third-party funder, the disclosure of the very terms of the funding agreement is usually strongly opposed by clients. Finally, Charles Claypool, Latham & Watkins, discussed the issue of transparency and bullying campaigns in investment arbitration. Charles emphasized that on one hand there is an acknowledged need for transparency in investment arbitration, given that a State is a party to the dispute, while on the other hand there is a need to protect parties and their rights in the dispute. Looking at Biwater Gauff v. Tanzania, Charles noted that, in the light of the active press campaigns by both parties to undermine each other in the dispute, the arbitral tribunal held that aggravating the dispute was the limit of transparency. Charles emphasized that transparency is seen positively, but that when a party engages with the media, transparency is then likely being used as a rationale for undermining the proceedings. At the same time, Charles stressed that while it is notable that States generally seem to agree that transparency in ISDS proceedings is an important public interest, to date only five States have ratified the Mauritius Convention on transparency.

The third panel of the session, moderated by Sylvia Nouri, Freshfields, focused on the ongoing conversation around ISDS reforms. Andrea Bjorklund, McGill University, looked at the development of such reform in the UNCITRAL Working Group III, in the light of the EU proposal of a court system (already present in CETA, for example). Andreas stressed that there appears to be no consensus among the States participating in the Working Group III as to whether there is a clear solution responding to the concerns raised in relation to the ISDS system. While it might be argued that there are two camps, one supporting systemic reform by way of this court system, and the other supporting incremental reform by adjusting the current investment arbitration procedure, Andrea noted that the discussion is still evolving. Andrew Cannon, Herbert Smith Freehills, focused on the steps taken by States in addressing the concerns with ISDS through the provisions in the new generation of international investment agreements. Andrew gave the examples of attempts to make the definition of ‘investor’ more definite in the new Belgium-Luxembourg Model BIT and clarifications added to the fair and equitable treatment standard in the new Dutch Model BIT, as well as the increased emphasis on investor’s responsibility, especially in the context of environmental protection. Toby Landau QC, Essex Court Chambers, looked at the current amendment process of the ICSID Arbitration Rules. In this context, Toby took the position that we are witnessing a collective failure of imagination when it comes to procedural improvements of ISDS. This is explained, Toby said, by the fact that investment arbitration proceedings are modelled on the rules applicable in international commercial arbitration.  He advocated that the time has come to address the real issue in question: whether the current procedure works at all for investment arbitration. As to the ICSID amendment process, Toby emphasized that the current improvements are not radical. To the contrary, the current version of the draft Arbitration Rules released in March 2019 drops several bold amendments suggested in the first draft of August 2018. Toby finalized his presentation by urging stakeholders to think outside the box when it comes to any ISDS reforms. Lola Fadina, UK Department for International Trade, concluded the panel and the session with an overview of ISDS reforms from a State perspective. Lola emphasized that States must provide for the right investment environment, as well as for access to justice while responding to any concerns raised in relation to the current system. She described the balancing act states must perform when protecting the interests of a state’s investors, foreign investors, and public interests. Lola stressed the importance of the new generation of international investment agreements in the context of the current discussion.

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Tigran Ter-Martirosyan

Despite the variety of investment treaty disputes involving assets in the Post-Soviet jurisdictions in Central Asia, assessment of damages in each particular case is often heavily debated by the parties, experts and tribunals. In many instances, selecting an appropriate valuation method is the cornerstone of the tribunal’s decision-making on damages. This article provides an overview of some publicly available investment treaty awards in relation to assets in Kazakhstan, Uzbekistan, Kyrgyzstan and Tajikistan, and analyses the key considerations of tribunals in relation to damages.

An Analysis of Tribunals’ Considerations in Damages Assessment

  1. The Discounted Cash Flows (DCF) Method

DCF valuation is based on the concept that value can be assessed by reference to expected future cash flows.

In performing a DCF valuation, it is necessary to consider the expected financial performance of the subject asset. In doing so, valuers may have regard to projections prepared by management or other stakeholders (such as banks, investors, equity analysts) as at the valuation date, and also consider the historical performance of the asset (although the latter is not necessarily relevant in estimating the future performance).

A survey of publicly available awards rendered for investment disputes in Central Asia demonstrates that the majority of tribunals treat this method with caution, principally because of the uncertainties they face in its application:

  • In AIG Capital Partners et al. v Kazakhstan (2003) [¶¶ 12.1.9-12.1.10], the tribunal referred to the speculative nature of DCF analysis due to the asset not being a going concern and the absence of a track record or advance customer orders to assess future cash flows reliably;
  • In Al-Bahloul v Tajikistan (2010) [¶¶ 71-73] and Caratube International Oil Company et al. v Kazakhstan et al. (2017) [¶¶ 1087, 1098, 1101, 1106-1107, 1119, 1131, 1151], the tribunals raised the issues of going concern, proven track record and “sufficient certainty” of profitability in commenting on the DCF method; and
  • Also in Al-Bahloul v Tajikistan (2010) [¶ 96], the tribunal questioned the applicability of the DCF method if the financing of the asset was uncertain.

Notwithstanding the above, some tribunals have determined that the DCF method is an appropriate approach to valuation, even when the subject business has no track record or limited data is available as to its historical and/or expected financial performance:

  • The tribunal in Al-Bahloul v Tajikistan (2010) [¶ 75] acknowledged that determination of future cash flows from hydrocarbon exploration projects “need not depend on a past record of profitability…and sufficient data allowing future cash flow projections should be available” and a minority arbitrator in Caratube International Oil Company et al. v Kazakhstan et al. (2017) [¶ 1089] stated “that the valuation of a concession or a contract for the exploration of an oil field is calculated by reference to the reserves (and not to the actual profit)”;
  • In Sistem Muhendislik v Kyrgyzstan (2009) [¶ 164], the tribunal stated that DCF may be applied even if available data is scarce, if both parties considered it to be sufficient for the DCF approach;
  • In Rumeli Telekom et al. v Kazakhstan (2008) [¶ 810], the tribunal found that “DCF valuation would likely have formed one of the measures which would have informed a discussion between a willing seller and a willing buyer”, but nevertheless the DCF method “must be understood as an approximation which is dependent on the validity of the assumptions, and not as a mechanical calculation which yields a value whose validity is not open to question”.
  1. The Market Approach / Comparable Multiples Method

Whilst tribunals acknowledge the applicability of the market approach (sometimes referred to as the comparable multiples method), and in some instances even prefer this method over the DCF method (e.g., Stati et al. v Kazakhstan (2013) [¶ 1625]), the market approach has its limitations. It provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available, in particular by considering the latter’s prices as a multiple of their financial and/or operating metrics. Commonly used multiples include enterprise value to EBITDA and price to earnings.

The key shortcoming of the market approach, as identified by tribunals in the past, is that it is limited by the degree of comparability between the subject asset and the benchmark / comparable assets (or between the economic characteristics of the subject asset over time).

Nonetheless, tribunals have concluded that despite (sometimes) limited comparability, circumstances might exist where there are no alternative ways to value the subject asset:

  • In Belokon v Kyrgyzstan (2014) [¶ 312], the tribunal noted that the comparable multiples method to valuing a Kyrgyz bank was “in some respects mechanistic, and unlikely to be wholly consonant” and “the circumstances are not free from difficulty or doubt”, but the “final numbers reflect what the arbitrators believe to be prudent approximations derived from the best available information to them”. Due to the absence of comparable quoted banks in Kyrgyzstan or Central Asia generally, the multiple ultimately applied to value the bank in question was based on the prices of similar banks in Central and Eastern Europe, which had different economic characteristics (not least due to the different country risk levels);
  • In Caratube International Oil Company et al. v Kazakhstan et al. (2017) [¶¶ 1133-1135], the tribunal rejected multiples derived from comparable asset sales and purchase offers for a variety of reasons, including differences in asset location, stage of development, size and arm’s length nature of the bids and actual transactions;
  • In Sistem Muhendislik v Kyrgyzstan (2009) [¶ 162], the tribunal found no adequate basis for application of the comparable multiples approach as the majority of comparables were in more developed markets than Kyrgyzstan (e.g., UK, US, Sweden). The tribunal considered that proposed application of a 30% discount to those multiples to adjust for the conditions of the Kyrgyz market “involve[d] a large measure of speculation”.
  1. Role of Past Transactions in the Subject Asset

The awards analysed suggest that tribunals place significant weight on transactions in the subject asset itself (and even in non-binding or indicative bids that do not result in transactions), and any value indications derived from these. In some instances, tribunals relied on transactions despite them having taken place when the asset’s performance and/or general economic conditions were materially different to those at the damages assessment date. I note that using past transactions to value the subject asset is a variation of the comparable multiples method discussed above.

For example:

  • In Rumeli Telekom et al. v Kazakhstan (2008) [¶¶ 813-817], the tribunal awarded just above 50% of the claimed DCF value without any detailed calculation of the awarded amount, but with reference to transactions in and offers for the subject telecom business that: (a) occurred after the valuation date (i.e., the benefit of hindsight was used); (b) were rejected (in particular, the tribunal states it “does not regard them as relevant to the market value of the shares” at the valuation date); (c) were non-binding; and (d) were made at the “time the very rapid market growth in the market…had not become established”;
  • In Stati et al. v Kazakhstan (2013) [¶¶ 1746-1748], instead of relying upon valuation methods adopted by the parties’ experts, including DCF, comparable multiples and wasted costs, the tribunal considered “the relatively best source for the valuation…accepted by the Tribunal are the contemporaneous bids that were made for the LPG Plant [i.e., one of the subject assets] by third parties after Claimants’ efforts to sell the LPG Plant both before and after” the valuation date. The tribunal considered actual bids for the asset and ultimately awarded the amount offered by a state-owned entity. In other words, the tribunal relied purely on factual inputs (despite those appearing to be non-binding) as opposed to valuation expert opinions.
  1. Third-party Valuations of the Subject Asset

Another reference point that tribunals appear to consider are contemporaneous third-party valuations performed outside of the dispute context.  For example, in Stati et al. v Kazakhstan (2013) [¶ 1643], the tribunal refers in its award to a third-party valuation performed by a bank for a state-owned entity independently of the dispute and which corroborates the claimant’s valuation.

  1. Sunk or Wasted Costs

Notwithstanding the pros and cons of the valuation methods discussed above, the so called “sunk or wasted costs” method appears to have a material impact on tribunals’ awards in investment arbitrations. This method follows the replacement cost approach, which follows the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction, unless undue time, inconvenience, risk or other factors are involved. In practice, tribunals appear to treat wasted costs as a reference point for replacement cost. This consideration is particularly prominent where tribunals are concerned with the speculative nature of other valuation methods, inputs or modelling assumptions.

For example:

  • In AIG Capital Partners et al. v Kazakhstan (2003) [¶¶ 12.1.9, 15], the tribunal criticised the DCF method as applied by the claimant because the fair market value of the investment on the DCF basis was more than 4 times the amount invested at the relevant date. On that basis, the amount invested up to the valuation date was awarded;
  • In Caratube International Oil Company et al. v Kazakhstan et al. (2017) [¶¶ 1087, 1151, 1161, 1164, 1166], the tribunal found that the value of lost future profits did not provide a basis for damages that was sufficiently certain and, therefore, “sunk investment costs best express in monetary terms the damages incurred…as a result of the unlawful expropriation”;
  • In Stati et al. v Kazakhstan (2013) [¶¶ 1687-1688], the tribunal accepted the amount invested in an oil field exploration project as damages, but stated that damages claimed for lost profit / opportunity “provide a much higher threshold for Claimants’ burden of proof…both legally and factually”, referring to a requirement for “track record of profitability rooted in a perennial history of operations, or…binding contractual revenue obligations in place that establish the expectation of profit at a certain level over a given number of years”.

Nonetheless, some awards recognise that cost is not necessarily representative of value, even if easier to establish. For example, the tribunal in Sistem Muhendislik v Kyrgyzstan (2009) [¶ 161] found that, in the context of expropriation, “replacement cost is less helpful than a valuation based upon expected profits…in contrast, because buyers of businesses can be expected to value them according to the profit that they will generate, rather than the cost of creating them, the “multiple deals”…and the DCF method, appears more appropriate”.

Comments and Concluding Remarks

Based on the above analysis, it appears that tribunals in Central Asian investment arbitrations have concerns with the DCF and market approaches due to questions of reliability of the assumptions underpinning the former and comparability of benchmarks in the latter. Tribunals viewed transactions in or bids for the subject asset and wasted costs as valuation reference points or, at least, as helpful cross-checks.

In relying upon historical transactions or bids, it is necessary to consider (a) the similarity in the economic characteristics of the asset at the relevant times (e.g., an asset in the development stage may not be comparable to the asset when it is more mature); (b) changes in external market conditions over time (e.g., interest rates, regulatory regime); and (c) whether the transactions were conducted at arm’s length and, in the case of bids, whether or not they were binding.

As to wasted costs, despite the above raised criticisms of the DCF and market approaches, they are generally accepted business valuation approaches and, as noted in Rumeli Telekom et al. v Kazakhstan (2008) [¶ 810], one would expect these approaches to be considered by a willing buyer and a willing seller in reaching an arm’s length transaction price. This is particularly relevant given that the cost (a historic measure) to build an asset may be substantially different to the asset’s fair market value, which in many instances reflects investor’s expectations as to future benefits that could be derived from that asset.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

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Crina Baltag (Acting Editor) and Cristen Bauer

Reform of Investor-State Dispute Settlement (ISDS) system has become the focus of various initiatives of different international organizations and groups in the past years. Currently, there are various developments taking place at various levels of the ISDS system. For example, (i) the new generation of international investment treaties—in particular, the new Free Trade Agreements signed by the EU, such as the Comprehensive Economic and Trade Agreement between EU and Canada (CETA), the EU-Singapore FTA and Investment Protection Agreement, and the EU-Vietnam FTA and Investment Protection Agreement, as well as the new models of Bilateral Investment Treaties, such as the Dutch Model Bilateral Investment Treaty; (ii) the amendment process of the Arbitration Rules of the International Centre for Settlement of Investment Disputes (ICSID), the most comprehensive one up to date; (iii) the mandate of the United Nations Commission on International Trade Law (UNCITRAL) Working Group III (Investor-State Dispute Settlement Reform) in assessing the concerns with the ISDS system and in finding possible solutions to address them; and (iv) the initiatives of other institutions and organizations in dealing with particular issues relevant in the context of investment protection and promotion and arbitration, such as the project of The Hague Rules on Business and Human Rights Arbitration, led by Judge Bruno Simma.

The UNCITRAL Working Group III began its work in November 2017 and comprises member States, observer States, as well as observer intergovernmental and non-governmental organizations. The mandate of the Working Group III was set at the 50th session of the UNCITRAL in July 2017. As such, the Working Group III was entrusted with a broad mandate which would ensure that the deliberations, while benefiting from the widest possible breadth of available expertise from all stakeholders, would be Government-led. (para. 264 of the Report of the United Nations Commission on International Trade Law, 50th session, A/72/17) Further, the Working Group would proceed to: (a) first, identify and consider concerns regarding investor-State dispute settlement; (b) second, consider whether reform was desirable in the light of any identified concerns; and (c) third, if the Working Group were to conclude that reform was desirable, develop any relevant solutions to be recommended to the Commission. (para. 264 of the Report of the United Nations Commission on International Trade Law, 50th session) For this, the Working Group III meets twice-yearly to tackle its broad mandate. The Group made substantial progress in its previous three sessions, by identifying concerns and considering whether reform in those areas was desirable. These concerns fell into three categories: (1) concerns pertaining to consistency, coherence, predictability and correctness of arbitral awards (UNCITRAL Working Paper no. 150); (2) concerns pertaining to arbitrators and decision-makers (UNCITRAL Working Paper nos 151 and 152); and (3) concerns pertaining to cost and duration of ISDS cases (with focus on arbitration proceedings; UNCITRAL Working paper no. 153). The 37th session in New York was devoted to addressing and identifying some additional concerns and creating a workplan for carrying out phase three of the mandate—developing possible ISDS reform options.1)The authors attended the 37th session on behalf of the observers Queen Mary University of London (Dr Crina Baltag) and the MAA/Moot Alumni Association (Cristen Bauer and Dr Crina Baltag). The opinions expressed in this post are of the authors only.

ISDS Concerns

Starting the week off in New York, the Group discussed a fourth area of concern—third-party funding. While there is no universally accepted definition, third party funding generally includes some form of payment by an actor outside of the disputing parties that covers one side of the legal fees and costs of the proceedings in exchange for compensation (which is contingent upon the outcome of the dispute). It was pointed out that third-party funding is by no means ubiquitous, as funding mechanisms are diverse and continuously evolving. The Group acknowledged and discussed the dynamic nature of third-party funding and expressed a need for the Group to work on a clear definition in order to better outline the scope of UNCITRAL’s work on reform in this area. Opinions were divided between adopting a broad definition of third-party funding, which would allow for it to naturally adapt to evolutions in the market, or a narrow one, which, arguably, would allow for more clarity and precision.

Further, States emphasized that while third-party funding may be a useful tool, there are several concerns raised in relation to it, which include an increase in frivolous claims, lack of impartiality of the arbitrators, the impact on ISDS costs and security for costs, and a potential negative impact on both the possibility for an amicable settlement and foreign direct investment flows more generally. States expressed the need to change and regulate these funding mechanisms, with many emphasizing the need for disclosure and more transparency. Others in the group cautioned that more evidence and research is needed for regulation, in order to understand the nature of the relationship between the concerns raised and the actual impact of third-party funding, as a causal relationship remains unclear. Other States urged to find a balance between the advantages and disadvantages of third-party funding, while highlighting that transparency should be at the heart of ISDS proceedings, including when it comes to third-party funding. States and observers also indicated that the new generation of international investment treaties, such as the new EU Free Trade Agreements, address in detail the issue of third-party funding, but it would be beneficial to have a uniform approach to the issue.

The Group decided that UNCITRAL reform on third-party funding was indeed desirable, and targeted reforms should also be considered alongside other related concerns such as costs and arbitrator impartiality. The Group also decided to work on a clear definition of third-party funding, which would encompass all forms of funding.2) Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-seventh session (New York, 1-5 April 2019), A/CN.9/970, paras 17-25.

Several other ISDS concerns were raised including, the calculation of damages, exhaustion of local remedies, counterclaims, non-disputing party participation and other methods outside of arbitration for settling investor-State disputes. The Group decided not to specifically address any of these concerns on their own, as many of them fall under one or more of the existing three broad categories of concern. In keeping with the previous Working Group sessions, the Group also highlighted the importance of the ongoing substantive international investment treaty reform and the need to balance States’ fears of ISDS claims against their ability to regulate legitimate public policy concerns, such as environmental and social protection. Many delegations emphasized the overlap between those substantive reforms and the procedural mandate of the Working Group and urged the Group to keep these substantive issues in mind. It was agreed while the Group would be guided by those underlying concerns, substantive issues such as investor obligations and regulatory chill fall outside the scope of the Working Group. As such, the Group decided that no additional reforms will be formally recorded at this stage.

Workplan: developing a road map for possible solutions

For the vast majority of the week in New York, the Group discussed proposals for the workplan that will guide their work going forward on reform options and solutions. The discussion included the need to allocate further time to the sessions of the Working Group, in addition to the two weeks in Vienna and New York, as well as the need to employ technological tools, such as teleconference, videoconference, etc., to the discussions, in order to mitigate any risk related to inclusiveness, especially with the view of the additional time proposed for the sessions of the Working Group. Emphasis was also placed on the benefits of having intersessional meetings, which would also involve institutions and other stakeholders.3) Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-seventh session (New York, 1-5 April 2019), A/CN.9/970, paras 42 et seq.

While the debate included various hybrid proposals for a workplan that would guide the work on options and solutions to the identified concerns, the Group split broadly into two sides based on desired reform outcomes of ISDS: the first group advocating for comprehensive, structural reform, including an investment court and appellate body; and the second group preferring to begin work immediately to reform the current system in a step-by-step process, starting with concerns that already have wide consensus in the Group.4) Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-seventh session (New York, 1-5 April 2019), A/CN.9/970, paras 63 et seq.

In view of working amicably towards progress, the Group agreed to pursue both work streams simultaneously, in order to give ample opportunity for both sides to pursue solutions. The Group compromised to create a three step workplan for developing solutions: (1) delegations need to submit solutions to be developed including a timeline of priorities to UNCITRAL by 15 July 2019; (2) the Group will subsequently discuss the submitted proposals and create a project schedule at the next session in October 2019 in Vienna; (3) once the project schedule is created, the Group will begin to substantively discuss and develop potential solutions for recommendation to the Commission.5) Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-seventh session (New York, 1-5 April 2019), A/CN.9/970, para. 83.

Takeaways

Discussions in the Working Group III are still at an early stage and it is expected that some contour of the ISDS reform will become visible in Vienna, at the 38th session of the Working Group. Until then, it is perhaps relevant to highlight here some of the general points raised by the States and observers at the 36th session of the UNCITRAL Working Group III. States acknowledged that specific criteria must accompany any suggested solution and a distinction must be kept between well-founded concerns, which are supported by facts and empirical research, and unfounded concerns, which are based on perceptions. Ignoring this distinction might result in an aggravation of the concerns, rather than in a solution to them. Further, and as highlighted as well at the 37th session of the UNCITRAL Working Group III, it has to be acknowledged that some of the concerns raised with respect to ISDS can be resolved within the framework of international investment treaties, through amendments or interpretive statements.6) Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-sixth session (Vienna, 29 October-2 November 2019), A/CN.9/964.

At the early stage of the UNCITRAL Working Group III work, UNCITRAL highlighted that some doubts have been expressed on the desirability and feasibility of a work on possible ISDS reforms, considering the diverse body of more than 3,000 international investment treaties with significantly different approaches to both substantive investment protection and ISDS mechanisms. (para. 244 of the Report of the United Nations Commission on International Trade Law, 50th session) Arguably, such diversity in approaches reflects thoughtful decisions by sovereign States on what approach best suited their particular legal, political, and economic circumstances and, for this, past attempts, such as the OECD Multilateral Agreement on Investment, to find a uniform solution had failed. (para. 244 of the Report of the United Nations Commission on International Trade Law, 50th session)

For these reasons, no doubt that one would accompany with great interest the future discussions in the UNCITRAL Working Group III. While some states will support the evolution of ISDS, other will be inclined to push for a revolution. Certainly, there are States still to assess and decide on a particular position and, as such, middle solutions are likely to emerge.

 

References   [ + ]

1. The authors attended the 37th session on behalf of the observers Queen Mary University of London (Dr Crina Baltag) and the MAA/Moot Alumni Association (Cristen Bauer and Dr Crina Baltag). The opinions expressed in this post are of the authors only.
2. Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-seventh session (New York, 1-5 April 2019), A/CN.9/970, paras 17-25.
3. Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-seventh session (New York, 1-5 April 2019), A/CN.9/970, paras 42 et seq.
4. Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-seventh session (New York, 1-5 April 2019), A/CN.9/970, paras 63 et seq.
5. Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-seventh session (New York, 1-5 April 2019), A/CN.9/970, para. 83.
6. Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-sixth session (Vienna, 29 October-2 November 2019), A/CN.9/964.
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Kevin Elbert

The signing of the Indonesia-Australia Comprehensive Economic Partnership Agreement (“IACEPA“) on 4 March 2019 marked an important milestone for both States (as covered in a post earlier this week).

Given that both Indonesia and Australia have their reservations on investor-state dispute settlement (“ISDS“) processes, it is interesting to see that the IACEPA contains a chapter on ISDS.

It has been around 5 years since Indonesia announced its policy to “terminate” its bilateral investment treaties (“BITs“). This was spurred by Indonesia’s concern that it has been pressured by multinational companies, which resulted in a number of billion-dollar ISDS claims, such as the Churchill Mining plc and Planet Mining Pty Ltd cases.1)ICSID Case No. ARB/12/14 and 12/40The sentiment was so strong that there was even a call for Indonesia to withdraw from the ICSID Convention.

For Australia, the issue of ISDS has been hotly debated since the Philip Morris case2)PCA Case No. 2012-12. Since that case, the Australian government declared that it would consider ISDS provisions on a “case-by-case” basis. As a result, ISDS provisions have been included in the free trade agreement entered into with Korea in 2014 but not with Japan.

In light of the above, the investment chapter in the IACEPA seems to reflect a compromise achieved by both countries to balance between the public interest and the rights and obligations of investors.

This post seeks to briefly discuss and highlight ‘the good, the not-so-good and the in-between’ under Chapter 14 (Investment) of the IACEPA.

Comments and Observations

At the outset, it is observed that the IACEPA, similar to how the more modern BITs are drafted, provides a greater clarity as to how the substantive obligations and the dispute settlement processes are to be interpreted.

Expectedly, these obligations and processes are generally more refined in comparison to the ASEAN-Australia-New Zealand Free Trade Agreement (“AANZFTA“) (signed in 2009) which both Indonesia and Australia are parties to.

  1. Section A of Chapter 14 – Substantive Obligations

The In-Between

In line with the more modern BITs, the IACEPA provides a clearer demarcation of the substantive obligations therein.

For example, Art 14.11 (Expropriation and Compensation) read together with Annex 14-B clarifies that whether expropriation is made out requires a case-by-case and fact-based inquiry considering a number of factors, e.g. the economic impact of the government action and proportionality. The use of fact-based inquiry is often employed in the modern BITs (such as the AANZFTA) and are in line with widely accepted ISDS jurisprudence.

It is worth highlighting that the IACPEA contains provisions to exclude shell companies from benefiting from the IACEPA by way of a denial of benefit clause under Art 14.13.

In light of the Philip Morris case (where claimant’s (a Hong Kong registered company) investment in its Australian subsidiary was made only in order to be able to bring an arbitration claim under the BIT), it is unsurprising and expected that Australia would want these provisions in the IACEPA.

The Not-So-Good

There are, however, some provisions that could have been clearer and better defined.

They include Art 14.7 (Minimum Standard of Treatment), which provides for the fair and equitable treatment (“FET”). Considering the elusive nature of the FET obligation, Art 14.7 could have been better drafted. Currently, Art 14.7 simply states inter alia that FET does not require treatment in addition to standard required under customary international law; and requires the host State to not deny justice in any legal or administrative proceedings.

Further definition and limitation could have been drafted into the scope of the FET obligation. For instance, under the EU-Singapore Investment Protection Agreement (“EUSIPA”), Art 2.4 (Standard of Treatment) expressly states that a party breaches the FET obligation if its measure or series of measures constitutes:

  • denial of justice in criminal, civil and administrative proceedings;
  • a fundamental breach of due process;
  • manifestly arbitrary conduct; or
  • harassment, coercion, abuse of power or similar bad faith conduct

Another curious provision is Art 14.18 which establishes a Committee of Investment. This Committee’s function shall be, inter alia, to consider and recommend any amendments to Chapter 14. However, unlike the Commission under the NAFTA or the Committee under the EUSIPA, the Committee under the IACEPA does not seem to have a more practical power, such as the power to issue a binding interpretation of the provisions under the IACEPA.

The Good

Interestingly, there are certain ‘bespoke’ provisions / mechanism that are introduced seemingly to address Australia and Indonesia’s concerns with the ISDS regime.

One of them is the exclusion of Art 14.6 (Prohibition of Performance Requirements) from the ISDS mechanism. Art 14.6 (Prohibition of Performance Requirements) provides generally that neither Party shall enforce any requirement to, inter alia, to achieve a given level or percentage of domestic content. For Indonesia, this would inevitably cover vital legislation such as Indonesia’s Law No. 4 of 2009 on Mineral and Coal Mining (the “2009 Mining Law“) which requires minerals to be processed domestically. Given that minerals and coal mining is an important (yet sensitive) industry to Indonesia, and the fact that such mining laws have given rise to ISDS proceedings (Nusa Tenggara Partnership B.V. and PT Newmont Nusa Tenggara v Indonesia3)ICSID Case No. ARB/14/15), it is not surprising that this is kept out of the ISDS regime but is left to state-state settlement.

  1. Section B of Chapter 14 – Dispute Settlement

Generally, the procedures set out under Section B are in line with modern investment arbitration rules.

The In-Between

The procedures set out under Section B seem fairly typical, which require parties to first undergo consultations and conciliation (Arts 14.22 and 14.23) before claims can be submitted to a number of fora including arbitration under the ICSID Convention, ICSID Additional Facility Rules, UNCITRAL Arbitration Rules or such other rules that the disputing parties may agree to.

In line with the more recent innovations in the investment arbitration rules (e.g. the SIAC 2017 Investment Arbitration Rules or the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, Section B also includes provisions such as

  • Art 14.31 (Transparency of Arbitral Proceedings);
  • Art 14.28 (Security for Costs);
  • Art 14.29 (Consolidation); and
  • Art 14.32 (Third Party Funding).

The Not-So-Good

That being said, there are features (normally found in the more modern BITs and/or arbitration rules) that are not found in the IACEPA. This includes provisions relating to third-party submissions or a non-disputing contracting party and interim relief.

It is also worth highlighting that Art 14.21 (Exclusion of Claims) provides that no claim may be brought inter alia if the claim is “frivolous or manifestly without merit”.

However, it is this author’s view that the IACEPA could have provided clearer guidance on the scope of that ground – for instance Rule 26 of the SIAC 2017 Investment Arbitration Rules specifies that the grounds for early dismissal includes where the claim or defence is manifestly without legal merit, outside the jurisdiction of the tribunal or inadmissible; similarly, Rule 40 of the revised draft ICSID Convention Arbitration Rules (second draft) provides that an objection that a claim is manifestly without legal merit may relate to the substance of the claim, the jurisdiction of ICSID or the competence of the Tribunal.

That being said, the above may not be fatal considering that these matters may be further supplemented by the relevant rules of arbitration.

The Good

Similar to the substantive provisions, there are also a number of ‘bespoke’ processes introduced to address Australia and Indonesia’s concerns with the ISDS regime.

To highlight, Art 14.21 (Exclusion of Claims) provides that no claim may be brought where the claim is brought in relation to a measure that is designed and implemented to protect or promote public health. This is presumably introduced to address measures giving rise to cases like the Philip Morris case (which revolves around the plain packaging rules that were implemented to protect public health by reducing tobacco consumption).

Art 14.21 (Exclusion of Claims) also clarifies that no claim may be brought where the claim is brought in relation to an investment that has been established through illegal conduct such as corruption (though, minor or technical breaches of law are excluded from this exception). This clarification is definitely welcomed in light of the issue surrounding the ‘corruption defence‘ (as promulgated in cases such as Metal-Tech4)Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3) and the de minimis rules (as promulgated in cases such as Tokios Tokeles5)Tokios Tokeles v Ukraine, ICSID Case No ARB/02/18).

Conclusion

In conclusion, this author is of the view that, overall, the IACEPA is a balanced compromise achieved by both Indonesia and Australia. Instead of categorically dismissing ISDS, the IACEPA clarifies the protection that the States are willing to grant to investors; and procedural rules that they are willing to adopt.

Perhaps this is one solution moving forward for States (like India and Ecuador) that have similar concerns with ISDS.

References   [ + ]

1. ICSID Case No. ARB/12/14 and 12/40
2. PCA Case No. 2012-12
3. ICSID Case No. ARB/14/15
4. Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3
5. Tokios Tokeles v Ukraine, ICSID Case No ARB/02/18
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Esme Shirlow (Assistant Editor for Australia, New Zealand and Pacific Islands)

Last month, Australia and Indonesia signed the Indonesia-Australia Comprehensive Economic Partnership Agreement (‘IA-CEPA’), containing in Chapter 14 provisions related to the protection of foreign investments. Negotiations of an IA-CEPA were initially announced in 2010, and formally began in September 2012. The negotiations were thereafter suspended, but relaunched in March 2016. Signature and ratification of the treaty have subsequently been waylaid on a number of occasions due to domestic political developments and bilateral tensions, including those stemming from Australia’s announcement in 2018 that it would consider relocating its embassy in Israel to Jerusalem. Despite these delays, the treaty was finally concluded on 31 August 2018, and was then signed on 4 March 2019. This post examines some outstanding questions related to the treaty, which indicate that the IA-CEPA may still have some hurdles to conquer before its ratification.

The Inclusion of ISDS: A Settled Debate, or a Rocky Road to Ratification Ahead?

Both Indonesia and Australia have equivocated on including investor-State dispute settlement (‘ISDS’) provisions in their investment treaties. Some years ago, Indonesia announced its intention to review, revise and/or terminate its investment treaties. This new policy was reportedly a reaction to claims filed against Indonesia under its bilateral investment treaties with Australia and the United Kingdom. In 2011, Australia’s Labor Government similarly announced that it would no longer conclude treaties with ISDS clauses. This policy was later changed by Australia’s Liberal Government, which instead negotiates ISDS clauses on a case-by-case basis.

This debate about the desirability of ISDS also played out during the IA-CEPA negotiations. In June 2017 the Australian Joint Standing Committee on Trade and Investment Growth produced a report considering Australia’s trade and investment relationship with Indonesia. It noted with concern the possible inclusion of ISDS provisions in a future treaty between the two States, and recommended that ‘the IA-CEPA should not include…ISDS provisions’ (Recommendation 4). In March 2018, the Australian Government responded to the Committee’s report. While accepting some of the Committee’s recommendations, it declined to exclude ISDS from the treaty. It noted its policy of taking ‘a case-by-case approach to the inclusion of ISDS commitments in international trade agreements’, and undertook to ensure that any ISDS provisions in the IA-CEPA would contain ‘robust safeguards to preserve the Government’s right to regulate in the public interest’. Ultimately, this view of the desirability of including ISDS won the day, with the IA-CEPA containing numerous provisions concerning the procedures that will apply in future ISDS proceedings under that treaty.

Following the conclusion of IA-CEPA negotiations in 2018, Australia’s Labor Opposition indicated that ‘it would not ratify the deal, or any other FTA in the pipeline’ unless ISDS provisions were removed. In the same month, however, Labor supported the passage of legislation necessary for the ratification of the TPP-11, despite the inclusion of ISDS provisions in that agreement. Labor has since re-iterated that it will – if elected following the May 2019 federal election – ‘seek to remove ISDS provisions from existing free trade agreements’. There are already indications that this policy may be applied to the newly signed IA‑CEPA. Indonesia, too, held a general election in mid-April, the results of which will not be officially announced until May. Both the IA-CEPA and ISDS have both featured in political debates in that electoral campaign. Ratification of the IA-CEPA is therefore likely to be subject to future roadblocks, and will depend upon the outcomes of these elections in both States.

Towards a Treaty Spaghetti Bowl?

In its June 2017 report, the Australian Joint Standing Committee on Trade and Investment Growth noted that the Indonesia-Australia investment treaty and the ASEAN-Australia-New Zealand free trade agreement (‘AANZFTA’), meant ‘there are some questions about coherence and so on’ between the new IA-CEPA and the States’ existing treaties (para. 3.61). Reacting to these comments, an Australian Labor MP noted that the negotiation of the IA-CEPA alongside other ‘better’ multilateral agreements, risked a ‘spaghetti bowl effect’ of trade and investment agreements. He cautioned of the need ‘to tread carefully’, given that ‘the more trade agreements you have with the same country the more confusing it can be for business to figure out’. Unphased by such concerns, the Australian Government instead responded to calls to exclude ISDS from the IA-CEPA by noting that these existing ISDS provisions meant in any case that ‘[b]ilateral investment with Indonesia is already subject to ISDS’.

Prior to the Australian election being called on 11 April, the IA-CEPA was referred to Australia’s Joint Standing Committee on Treaties for review. That Committee has previously raised concerns about the increasingly dense web of Australian treaties with overlapping ISDS provisions. Those concerns have, however, so far been dismissed by the Government. The Government’s current policy indicates that reducing such overlaps is not a particularly pressing objective. Issues of overlap arise in part because of Australia’s relatively ad hoc approach to the negotiation of investment agreements, including parallel negotiations of bi- and multi-lateral agreements with the same treaty partners. In fact, the Government is currently negotiating a Regional Comprehensive Economic Partnership (‘RCEP’) which encompasses the same States that are party to the AANZFTA, and Indonesia is slated as a possible future party of the above-mentioned TPP-11.

Unlike other recently-concluded treaties, the IA-CEPA appears not to include a clause or side letter terminating the application of clauses in other treaties providing for ISDS between Indonesia and Australia. Australia or Indonesia might in the future decide to adopt termination or side agreements to address these overlaps. For now, however, the treaty practice of both States indicates that the relationship between these treaties and their ISDS provisions is likely to become ever more complicated in the future. This reflects broader regional trends, with some commentators referring to an increasing ‘Asian noodle bowl’ of overlapping international investment agreements. It remains to be seen whether the impetus for decreasing such overlaps will come through the ratification process, or the decision of a new (or returned) Government. The answer to these questions is likely some way off, given that Australia’s Joint Standing Committee on Treaties was dissolved when the election was called, and that any new or returning Government will likely take some time to consider and chart its course on these issues.

Indications of New Approaches?

Australia has not released a model investment treaty, and Indonesia has not released a revised version of its model for some time. The IA-CEPA therefore provides useful indications of the potential approaches of these two States to the drafting of contemporary investment treaties. A separate post on the Blog will consider the provisions of the IA-CEPA in more detail in the coming days. For now, the following paragraphs identify two particularly interesting aspects of the treaty.

Treaty Scope

Article 14.2 of the IA-CEPA delineates the treaty’s ‘scope’, specifying that the Investment Chapter applies to measures adopted or maintained by ‘any person, including a state-owned enterprise or any other body, when it exercises any governmental authority delegated to it by central, regional or local governments or authorities of that Party’. A footnote clarifies that:

For greater certainty, governmental authority is delegated under a Party’s law, including through a legislative grant or a government order, directive or other action transferring or authorising the exercise of governmental authority.

A similarly worded provision of the US-Oman FTA was at issue in the case of Adel A Hamadi Al Tamimi v. Sultanate of Oman. That tribunal held that the provision stipulated a test for attribution that was narrower than that under customary international law. This was on the basis that the treaty required the exercise of ‘regulatory, administrative or governmental authority’ which must also have been ‘delegated…by the State’ (para. 322). It held, in light of this ‘specific test’ that ‘the ILC Articles are not directly applicable to the present case’ (para. 324), instead being displaced by a narrower test of attribution. Nonetheless, the tribunal referred to Article 5 of the ILC draft articles as a ‘useful guide’ in applying the treaty provision. The precise impact of the provision – now reproduced in the IA-CEPA – therefore remains unclear, and it is a pity that Australia and Indonesia did not seize the opportunity to clarify the relationship between customary international law rules of attribution and their treaty text.

Alternative Approaches to Investor-State Dispute Settlement

During the drafting of the IA-CEPA, Australia conducted a number of public consultation processes, during which alternative forms of investor-State dispute settlement were raised for consideration. Some submissions, for example, recommended that the treaty be drafted to encourage disputing parties to seek the resolution of investor-State disputes through non-adversarial processes. This included suggestions that the treaty provide for investor-State mediation instead, including because this would be ‘adaptable to fundamental tenets of Indonesian culture such as “musyawarah” – the tradition of amicable discussion and consensus among Indonesian people’. Despite this, the IA-CEPA does not adopt particularly innovative provisions on dispute settlement. The IA-CEPA subjects arbitration proceedings to a cooling off period, with options for referral to consultation or conciliation. The investor is, nevertheless, permitted to initiate investor-State arbitration where ‘an investment dispute has not been resolved by consultations…or conciliation’ within specified timeframes (Article 14.24).

Settled Debates or Open Questions?

Both Australia and Indonesia have previously adopted ISDS policies that indicated that they might become States to watch in respect of future reforms to the investment arbitration regime. Both States have thus-far exhibited ambivalent approaches to reform. Despite potential for new approaches, the IA-CEPA fits the mould of existing investment treaties. At various times during the drafting of the treaty, Australia and Indonesia side-stepped opportunities to adopt more innovative approaches. Whilst indicating that ISDS might be abandoned altogether or otherwise re-envisaged to incorporate alternative approaches to dispute settlement, at the key moments of negotiation, conclusion and signature both States elected not to adopt more novel approaches. Instead, the IA-CEPA adds to a web of overlapping investment treaties, without itself addressing how issues of overlap might be dealt with. It remains to be seen whether opportunities to remove or modify the treaty’s ISDS provisions will be seized in the post-signature and ratification phases. The IA-CEPA thus does not represent a paradigm shift, but its future is far from certain and many open questions remain.

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David Attanasio and Ana Duran (Dechert LLP)

The conference “What to Do About Corruption Allegations? Debating the Options for Investment Law”, was presented by the ILA American Branch Investment Law Committee and the Georgetown International Arbitration Society, and hosted at Dechert LLP’s Washington D.C. office on 19 February 2019. The conference was dedicated to an in-depth exploration of the proof required for corruption allegations and the consequence of corruption in an investment dispute.

As David Attanasio (Co-Chair of the ILA American Branch Investment Committee; Associate, Dechert) set out in his opening remarks, the conference addressed the resolution of corruption allegations in international investment arbitration following the Metal-Tech and Spentex awards.  In the aftermath of those awards, the field of investment arbitration has had to grapple with a set of questions regarding the proof of corruption and response to findings of corruption.  Those awards combined flexible evidentiary techniques for assessing corruption allegations with the outright dismissal of the arbitration upon finding corruption.  The conference addressed whether and to what degree investment arbitration should follow such approaches to corruption allegations.

This blog post will discuss several (of many) important contributions from the conference, focusing on two principal threads: proof of corruption, and the proper response when corruption is found.

  1. What is sufficient proof of corruption?

The first panel, moderated by Susan D. Franck (Professor of Law, American University), focused on the question of the proof of corruption.  This issue has become increasingly heated against the background of the Metal-Tech tribunal’s invocation of red flags to find corruption (see a previous discussion of Metal-Tech on the Blog) and the Spentex tribunal’s finding of corruption on the basis of “connecting the dots.”

To stimulate discussion, Prof. Franck put to the panelists a 2014 empirical study, carried out during the biennial Congress for the International Council for Commercial Arbitration (ICCA) and presented in the article “International Arbitration: Demographics, Precision and Justice”.  The study concluded that practitioners consider that the burden of proof is frequently outcome determinative in international arbitrations, but that it is only occasionally or never identified in advance.

In this regard, Aloysius Llamzon (Senior Associate, King & Spalding) observed that the failure to identify the applicable standard of proof in advance is a common flaw in the adjudication of corruption allegations.  Jason Yackee (Professor of Law, University of Wisconsin) too was of the opinion that parties should know what standard of proof they will be judged by, given that it may be outcome determinative.

There is a question, however, as to the degree to which knowing the standard of proof in advance would significantly alter party behavior, since parties might present whatever evidence they have in order to support their allegations regardless.  This is true even if the standard of proof would be relevant to the tribunal’s analysis of the case.

Nevertheless, the panel reported that the field has splintered in its views on the applicable standard of proof for such allegations.  One division, highlighted by Prof. Yackee, is the difference between the civil law standard of proof of intimate conviction and the probabilistic standards used in the US.  A second division, noted by Mr. Llamzon, is that regarding the stringency of the standards of proof, where there are two main camps: one advocating a higher standard, versus the other advocating an ordinary standard of proof.

As Mr. Llamzon observed, much of the difference is derived from national conceptions of fraud and corruption.  In his view, these different national conceptions are likely to lead to disagreement regarding the standard to adopt when a tribunal is comprised of arbitrators from both civil and common law traditions.

Prof. Yackee observed that, when a probabilistic standard of proof is employed, one analytic approach to setting the standard is to compare the costs of a false positive (i.e., an erroneous finding of corruption) with the costs of a false negative (i.e., an erroneous finding against corruption).  In this regard, a higher standard of proof may be required if the costs of a false positive (for example, the denial of the forum) are considered to be higher than the costs of a false negative.

A major further question is whether the applicable standard of proof can be satisfied by identifying so-called red flags of corruption—an increasingly common tactic by parties following the Metal-Tech award.  Mr. Llamzon took a skeptical view, observing that the concept of red flags comes from the world of compliance where it is used to assess, ex ante, the risks of entering into an agreement with a third party, not for the evidentiary purpose of assessing, ex post, the existence of corruption.  By contrast, in Prof. Yackee’s view, red flags of corruption could go into the “bucket” of evidence, albeit taking into account the specific evidentiary weight of a given red flag.

Nevertheless, the question remains as to whether red flags should in fact constitute evidence and how strong that evidence might be.  This is a question that tribunals will continue to confront in light of the contrast between the seriousness of allegations of corruption, on the one hand, and the limitations on the tribunal’s evidence-gathering powers, on the other.

Meriam Al-Rashid (Partner, Dentons) noted that, whatever standard of proof is ultimately adopted, in accordance with the principle of equality of arms, arbitrators have a duty to apply the same standard of proof to allegations of corruption made by an investor against the state as it applies to allegations of corruption made by the state against an investor.

  1. What is the right response when corruption is found?

The second panel, moderated by Jan Paulsson (Professor of Law, University of Miami School of Law; Partner, Three Crowns), addressed the appropriate response from an investment tribunal following findings of corruption.  This issue too has become increasingly challenging given that some investment tribunals are inclined to take a more flexible evidentiary approach to finding corruption and it is increasingly recognized that “it takes two to tango”—i.e., alleged corruption often involves both the state and the investor.

The panel had doubts as to whether a binary response to corruption—i.e., either ignore the corruption or dismiss the arbitration entirely—is appropriate.  Lucinda Low (Partner, Steptoe) noted that the binary response incentivizes the respondent state not to investigate allegations of corruption.

Arif H. Ali (Partner, Dechert) considered the binary response problematic at its core: a tribunal’s role is not to mete out punishment for corruption.  However, according to him, refusing to address the legality or the economics of the situation on the moral grounds that some tribunals have invoked is an abdication of the arbitrator’s function.  This could be the case, for example, when the tribunal relies on standards of public policy as did the tribunal in World Duty Free.

Further, Mr. Ali noted that arbitrators usually do not examine questions of fact in the same detail and depth as, for example, domestic courts do in a criminal trial, and the procedural forum is far too limited in its evidence-gathering to accommodate the evidentiary challenges of corruption allegations.

Two potential alternatives to the binary response emerged from the panel.

Mr. Ali proposed that the concept of contributory fault could be employed to balance the pertinent considerations of law, morality, and economics.  The corruption could be taken into account (if relevant) in determining the compensation due to the investor for the state action at issue in the investment arbitration. In this case, the compensation could be reduced based on the investor’s contribution to its own loss through its participation in the corruption.  This is an approach that some investment tribunals, such as the MTD tribunal, have adopted, albeit not in connection with corruption.

By contrast, Ms. Low set out—albeit for provisional consideration only—a proportionality approach.  Such an approach might ensure that the state has proper incentives to eliminate corruption, consistent with obligations assumed under international anti-corruption treaties.  Under this approach, tribunals would look to a set of relevant factors to determine the appropriate remedy for its findings of corruption, but would not automatically dismiss the arbitration simply because corruption is found.  Among the factors that a tribunal might consider for this purpose:

  • Was the public sector involved in the investment or the corruption?
  • Did the investor freely offer the alleged bribe, or did a host state official extort it from the investor?
  • Did both the investor and the state comply with their obligations to prevent or investigate the corruption?

A third new option, suggested by these panelist comments, could be to apply a merged version of these two approaches. For example, tribunals might consider some of the factors identified by Ms. Low in order to determine each party’s fault in the case and, thus, the compensation that should be awarded to the investor.

The conference concluded with closing remarks from Malika Aggarwal (Georgetown International Arbitration Society).

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Karl Sauvant

The OECD Secretariat launched, in 2018, a “FDI qualities project”. Its objective is to provide governments with a tool kit to attract investment that contributes as much as possible to sustainable development. For that purpose, the project has identified five clusters of “FDI qualities indicators”: productivity-innovation, skills, job quality, gender, and carbon footprint. These indicators were selected on the basis of a detailed assessment of how FDI can contribute to specific Sustainable Development Goals, and in cooperation with an FDI Qualities Network (consisting of interested stakeholders) established to provide feedback to the project.1)OECD, “FDI Qualities Toolkit: Investment for Inclusive and Sustainable Growth. Progress Report III” (Paris: OECD, March 2019). See also the earlier report “FDI Qualities Toolkit: Investment for Sustainable Growth: Progress Report II” (Paris: OECD, October 2018). This note is a commentary about the OECD’s FDI qualities project, knowing that FDI qualities indicators are the first part of the project, and that the indicators will be complemented (beginning October 2019) by a discussion of policies on FDI qualities, in recognition of the fact that sustainable development outcomes may depend on the country context as well as domestic and international policies. This work will—and should—have implications for future arbitral proceedings, as well as the WTO’s Structured Discussions on investment facilitation.

It is no doubt laudable that the OECD is examining questions related to the quality of FDI.

It would be desirable, too, if the Secretariat, at one point, could look not only into the question of how countries can attract higher quality FDI and ensure that FDI has a positive impact on sustainable development, but also how investors can increase the contribution of their investments to the host countries in which they are established, based on the work already done in relation to the OECD Guidelines for Multinational Enterprises. Since policy questions will be addressed at a later stage of this project, maybe then it is the time to look at this question as well.

We all realize, of course, that “quality”, like “beauty”, is in the eyes of the beholder—and the principal beholder in this case is the host country government. It is therefore necessary to develop quality indicators that reflect the different priorities that governments have, as indicated also in their differing SDG implementation plans.

This leads to the question of how to identify quality indicators.

One approach, the approach that the OECD Secretariat has taken, is to look to the literature, firm and other databases and to experts. That is of course a reasonable approach, and the resulting five indicators are certainly very useful, very well developed and very well discussed in the excellent background paper prepared by the Secretariat.2) OECD, 2019, op. cit.

But one could also take another—perhaps complementary—approach to identify quality indicators or quality characteristics of FDI. And that approach is to look at, on the one hand, what governments say they expect FDI to contribute to the sustainable economic development of their countries and, on the other hand, to look at what investors say they contribute to the sustainable economic development of their host countries. The underlying assumption of this approach is of course that—regardless of what academic experts say—the principal actors in the FDI relationship know best what is good for them (in the case of governments) and what they can contribute (in the case of investors).

This is the approach Howard Mann and I have taken when we sought to develop a list of “FDI sustainability characteristics” (or what the OECD Secretariat calls “qualities indicators”).3) Karl P. Sauvant and Howard Mann, “Towards an indicative list of FDI sustainability characteristics” (Geneva: ICTSD and WEF, 2017). We looked at a wide range of instruments—ranging from international investment agreements to the corporate social responsibility statements of MNEs—to determine what governments expect that investors contribute to the development of their economies, and what investors say they contribute to the development of host countries.

What is interesting is that this research shows that there is in fact a substantial overlap between the qualities that governments seek in FDI and the qualities investors say they bring to host countries to advance sustainable economic development. These include (apart from those identified by the OECD Secretariat), labor rights, human rights, transparency, supply chain standards, and stakeholder engagement. In fact, one could even go so far as to speak about an emerging consensus between governments and investors as to various “quality” indicators. It is a consensus that includes the five indicators identified by the OECD Secretariat.

But the research undertaken by Howard Mann and myself also shows something else, namely that there are considerably more “quality indicators” (or “FDI sustainability characteristics”) than the five indicators identified by the OECD Secretariat. That is important when creating a “toolkit”, as it reflects the reality that different governments do indeed look for different qualities in FDI when seeking to advance their sustainable development.

This, in turn, suggests that the OECD Secretariat might want to aim for a list of “FDI qualities indicators” that is longer than the five clusters it has identified so far and that, in the end, would constitute an indicative list of FDI quality indicators that could provide guidance to governments—and, for that matter, investors—that are interested in seeking to increase the contribution of FDI to sustainable development. Such an approach would also be in line with my earlier observation, namely that “quality” is in the eye of the beholder—and the principal “beholder” in this exercise is, as noted before, the host country.

Importantly, the issue of FDI quality, in terms of the contribution that FDI can make to development, is also beginning to be considered in arbitral proceedings, by bringing various aspects of the sustainability characteristics into their deliberations. Examples include Salini v. Morocco, Biwater v. Tanzania, Inmaris Perestroika Sailing v. Ukraine, and Alpha Projektholding v. Ukraine. These decisions include references to contribution to infrastructure,4) Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, ¶ 57 (23 July 2001). technology transfer,5) Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award, ¶ 320 (24 July 2008). local employee training,6) Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine, ICSID Case No. ARB/08/8, Decision on Jurisdiction, ¶ 132 (8 March 2010). and the generation of government revenue7) Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Award, ¶ 330 (8 November 2010). as characteristics associated with the notion of an investment contribution to development. An indicative list of FDI sustainability characteristics/quality indicators could be a helpful tool for future arbitral tribunals when considering individual cases.

Finally, I should like to note that the work of the OECD Secretariat is especially important and timely at this particular moment, for an additional reason. And that reason is that the WTO Structured Discussions on a multilateral framework on Investment Facilitation for Development are moving along quite rapidly.8) See the “Joint Ministerial Statement on Investment Facilitation for Development”. For an analysis of these Discussions, see ICTSD, “Crafting a Framework on Investment Facilitation” (Geneva: ICTSD, 2018). Most of these discussions have focused so far on the “facilitation” part of the objective, while the explicit and direct “development” part of the objective has not yet received much attention.

Accordingly, the work that the OECD is undertaking in the framework of its “FDI qualities project” could make an important input into the WTO Structured Discussions. It should, therefore, be brought to the attention of the WTO process, to help inform the development part of its deliberations.

Karl P. Sauvant is Resident Senior Fellow at the Columbia Center on Sustainable Investment, a joint center of Columbia Law School and the Earth Institute at Columbia University. This note is based on an intervention prepared for the Third Policy Network Meeting, Paris, OECD, 13 March 2019, on FDI qualities.

References   [ + ]

1. OECD, “FDI Qualities Toolkit: Investment for Inclusive and Sustainable Growth. Progress Report III” (Paris: OECD, March 2019). See also the earlier report “FDI Qualities Toolkit: Investment for Sustainable Growth: Progress Report II” (Paris: OECD, October 2018).
2. OECD, 2019, op. cit.
3. Karl P. Sauvant and Howard Mann, “Towards an indicative list of FDI sustainability characteristics” (Geneva: ICTSD and WEF, 2017).
4. Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, ¶ 57 (23 July 2001).
5. Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award, ¶ 320 (24 July 2008).
6. Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine, ICSID Case No. ARB/08/8, Decision on Jurisdiction, ¶ 132 (8 March 2010).
7. Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Award, ¶ 330 (8 November 2010).
8. See the “Joint Ministerial Statement on Investment Facilitation for Development”. For an analysis of these Discussions, see ICTSD, “Crafting a Framework on Investment Facilitation” (Geneva: ICTSD, 2018).
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Abhisar Vidyarthi

Most investment treaties do not expressly provide for the appointment of assistants or secretaries to the arbitral tribunal. It is an institutional practice that has been subsequently codified by several arbitral institutions, while some institutions are still silent on the subject. Despite the significant attempts being made, the apprehension that arbitral secretaries may overstep their limits continues to haunt the parties and the arbitral process. The same apprehension was shared by Popplewell J in P v Q, wherein he illustrated the considerable and understandable anxiety in the international arbitration community that the use of arbitral secretaries risks them becoming the fourth arbitrators. It is an established institutional practice that the arbitral tribunal may appoint assistants or secretaries after consulting the parties. The tribunal is further required to present the curriculum vitae of the assistants to the parties. Moreover, the same standards of independence and impartiality extend to such assistants and they are required to comply by the disclosure requirements. However, it cannot be assumed that entrusting the assistant with substantive arbitral functions was contemplated by the parties while giving the consent to their appointment.

Prevailing Rules Regarding the Role of Arbitral Secretaries

The ICCA Guide on Arbitral Secretaries attempts to enlist the best practice principles for the appointment and exercise of assistance by secretaries. It also provides that the delegation of work to secretaries may legitimately go beyond the administrative roles. The ICCA Guide elaborates that the role played by arbitral secretaries may include, researching questions of law and questions relating to factual evidence and witness testimony. Moreover, the task of secretaries may extend to drafting and reviewing procedural orders, parties’ submissions and evidence. They may also attend the arbitral tribunal’s deliberations and draft appropriate parts of the award’. Other institutions such as the SCC and LCIA limit the extent of tasks of assistants to purely organisational and administrative work of the arbitral tribunal. The UNCITRAL Notes on Organizing Arbitral Proceedings limits the task of secretaries to listing and briefing in light of fostering a timely decision by the tribunal. The SCC’s 2017 Arbitrator’s Guidelines further provide that, subject to any agreement of the parties to the contrary, ‘the administrative secretary’s duties shall be limited to organisational, clerical and administrative functions’. While there is no conclusive determination as to what the administrative functions might entail, the guidelines explicitly state that the tribunal shall not delegate any decision-making authority to the administrative secretary’. The Singapore International Arbitration Centre (SIAC) is not elaborate on the subject and provides that a secretary may only be appointed with the consent of all the Parties. However, it does not entail the ambit of the secretary’s duties and the same is subject to the   agreement between the parties. Moreover, the same standards of independence and impartiality are extended to the assistants. This is evident from the comparison given in the IBA Guidelines on Conflict of Interest in International Arbitration 2014 (“IBA Guidelines”) that both “secretaries and assistants to the Arbitral Tribunal are bound by the same duty of independence and impartiality (including the duty of disclosure) as arbitrators”.

Impact of delegation of Substantive functions to the Assistants or Secretaries

Over the years, the arbitral practice in Investment Arbitration, shows that arbitral assistants are sometimes appointed to assist the arbitrators. The complexity of the cases and the abundance of the submissions made by the parties triggers the appointment of assistants. The arbitral tribunal in Caratube v. Republic of Kazakhstan justified the appointment of the tribunal’s assistant by the need for logistical assistance on the file in this case. Furthermore, the appointment of assistants is in line with the objective of arbitration i.e. to ensure expedient and efficient resolution. The tribunal secretaries increase the efficiency of the arbitration proceeding by supplementing the arbitrators during the arbitral process. Moreover, they allow the arbitrators to focus on deliberating on the merits, and enable them to decide the cases expediently. Therefore, the appointment arbitral secretaries provide a cost effective mechanism to ensure the efficiency and expediency of the proceedings.

However, it is important to draw the line between the essential functions of the arbitrators and the functions that can be delegated to the assistants. The excessive involvement of arbitral assistants raise the following concerns.

  1. It shall be a ground for the disqualification of the Arbitrator

The delegation of substantive functions breaches the President’s duties to perform his function personally. Article 14 of the UNCITRAL Model Law provides that if an arbitrator becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay, then either party may request the court for the termination of his mandate. Article 14 of the ICSID Convention requires the arbitrators to be of high moral character and recognized competence.1) ICSID Convention, 1986, Art. 14(1). Moreover, the arbitrator must fulfill his role by exercising independent judgement to the best of his skill. The involvement of arbitral assistants and secretaries is contrary to the exercise of independent judgement. Furthermore, the position of arbitrators is voluntary and the same can be declined if they want to delegate essential functions to the secretary. Thus, the delegation of substantive functions by the arbitrator shall be a ground for a disqualification as it would render him unable to perform his duties.

  1. The delegation of substantive functions would raise doubts over the credibility of the award

The duties of the arbitral assistant must be limited to organisational and administrative work not extend to substantive functions such as collecting evidence and drafting the award. It was highlighted by Professor Jan Hendrik Dalhuisen, in his Additional Opinion in Compañía de Aguas v Argentina, that the appropriate role of a tribunal secretary is one of ‘administration and support’ and that the secretary is not the ‘fourth member of ICSID tribunals or ad-hoc committees. The assistants’ role must be limited to organisation and maintenance of the tribunal’s files and other administrative work such as organising hearings and meetings, attending deliberations, performing legal research, and proofreading procedural orders and awards. The ICCA note on arbitral secretaries expressly states that under no circumstances may the Arbitral Tribunal delegate decision-making functions to an Administrative Secretary. The delegation raises concern of quality, impartiality and objectivity. Arbitral Institutions prescribe for certain qualifications for arbitrators in investment arbitration that ensure the integrity of the tribunal. Therefore, as the arbitrators in investment arbitration possess considerable expertise in the subject, the involvement of secretaries and assistants in decision making would raise claims against the authenticity and credibility of the award.

  1. It shall be a ground for subsequent Annulment of the Award

The use of assistants in carrying out the substantive tasks of an arbitrator can directly impact the validity of an arbitral award. It must be noted that almost all domestic jurisdictions as well as international institutions recognise a serious procedural irregularity as a ground for annulling an arbitral award. The question was dealt by the Italian Supreme Court in Sacheri vs Robotto, wherein it was held that delegation of the decision-making function to a third party amounted to a violation of due process and annulled the impugned award. Therefore, the delegation of substantive functions is a fundamental departure from rule of law and would be a ground for annulment of award. The issue was brought to the forefront in the Yukos cases wherein the Russian Federation challenged the delegated substantive responsibilities to the Tribunal’s assistant and argued that the award must be set aside  on the basis of Article 1065(1)(c) of the Dutch Code of Civil Procedure as the arbitrator failed to fulfill its mandate. Though the District Court did not address the issue as it set aside the awards on the grounds that the ECT had not been ratified by the Russian Parliament, the appeal against the assistant playing role in decision making did raise questions of legitimacy over the involvement of secretaries in International Arbitration.

Conclusion

The limited role for tribunal secretaries stems from the intuitu personae nature of appointment of the arbitrators. Therefore, while the appointment of assistants makes the arbitral process smooth and expedient, there should be a line differentiating the role played by party appointment arbitrators possessing the requisite standards set by the arbitral institutions and the assistants appointed by the tribunals to assist in organisational and administrative tasks. In order to ensure greater transparency and evade the possible consequences mentioned in the last section, the work of the secretary must be clearly agreed by the parties, and known to them throughout the process. Moreover, there is a need for uniformity of regulation as the uncertainty regarding the proper role of the secretaries adds a negative connotation to the perceived legitimacy of the arbitral process and the award. Thus, risking the annulment of the award after a lengthy arbitral process.

References   [ + ]

1. ICSID Convention, 1986, Art. 14(1).
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Siddharth S. Aatreya

Introduction

The Delhi High Court’s recent judgment in Union of India v. Khaitan Holdings (Mauritius) marks the third instance of an Indian court adjudicating upon issues related to arbitration under an international investment treaty. Within these three judgments, courts have fundamentally disagreed on a crucial point – the applicability of the Arbitration and Conciliation Act, 1996 (“Act”) to such arbitrations. While the Calcutta High Court in Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures proceeded under the assumption that the Act applies to such arbitrations, the Delhi High Court in Khaitan Holdings and Union of India v. Vodafone Group plc assumed the opposite, holding that the Act only applies to commercial arbitrations.

An oft-ignored (and perhaps unintended) consequence of this disagreement is grave uncertainty on the enforceability of investment arbitral awards in India. Crucially, India is not a party to the ICSID Convention and is consequently under no obligation to recognise any investment arbitral awards like final judgments of its own courts, as provided for by Art. 54. It has also availed of the commercial reservation provided for in Art. I(3) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). Accordingly, Sec. 44 of the Act restricts the New York Convention’s applicability in India to foreign awards arising out of legal relationships “considered as commercial under Indian law”. As this post will show, interpretations of this term by Indian courts are likely to exclude investment arbitral awards from its scope.

Contradictory Assumptions on the Applicability of the Act to Investment Arbitrations

Loius Dreyfus, decided by the Calcutta High Court in 2014 was the first Indian case to deal with investment arbitration. It concerned a request for an anti-arbitration injunction by the Kolkata Port Trust, preventing Louis Dreyfus from continuing proceedings against it before an investment arbitral tribunal constituted under the India-France BIT. The court granted the injunction, observing that the Kolkata Port Trust had been wrongly identified as a Respondent in the arbitration since only the Republic of India was a party to the arbitration agreement in the BIT.

Interestingly, the application for this anti-arbitration injunction was made under Sec. 45 of the Act. When justifying its power to issue an anti-arbitration injunction, in this case, the court simply assumed that the Act applied to this investment arbitration, just like it does to foreign-seated commercial arbitrations. It, therefore, discussed the position on anti-arbitration injunctions under Sec. 45 (as applied to commercial arbitrations) and held that it would interfere in foreign-seated investment arbitrations in rare circumstances only, applying the same standard it applies when considering interference in commercial arbitrations under this section.

Following this, the Delhi High Court decided on another request for an anti-arbitration injunction in Vodafone. Here, the Union of India requested that Vodafone Group plc be barred from proceeding with an arbitration under the India-UK BIT since another arbitration under the India-Netherlands BIT had already been initiated by its Dutch holding company, based on the same cause of action. In denying the request, the court made the opposite assumption, observing that the investment arbitration in question was “not a commercial arbitration governed by the Arbitration and Conciliation Act, 1996”. It, therefore, created its own standard, holding that an Indian court could intervene in an investment arbitration and grant an anti-arbitration injunction only if the arbitration is “oppressive, vexatious, inequitable or constitutes an abuse of the legal process”. In Khaitan Holdings, the Delhi High Court adopted this standard and made the same assumption again, cementing a fundamental disagreement between the two High Courts on the Act’s applicability to investment arbitrations.

Comparison with the UK and Implications for India

As a previous post on this blog observed, the Calcutta High Court’s position would have significant benefits when an investment arbitral award is brought for enforcement to India, since the enforcement mechanism in Part II of the Act would be applicable to it. This is in line with standard practice in the United Kingdom. In Occidental Exploration and Production Company v Republic of Ecuador, [2005] EWCA Civ 1116, a challenge to an investment arbitral award was made under Sections 67 and 68 of the English Arbitration Act, 1996, which otherwise applies to commercial arbitrations. The court affirmed that English courts have jurisdiction to consider challenges to investment arbitral awards under these provisions, even if they arise out of treaties to which the UK is not a party. Indeed, in GPF GP S.à.r.l. v Republic of Poland, the England and Wales High Court affirmed this position in setting aside a London-seated investment arbitral tribunal’s Award on Jurisdiction.

By contrast, the Delhi High Court’s position leaves no option open to parties seeking enforcement of an investment arbitral award in India. Indeed, even if the Delhi High Court’s holding in Vodafone on the principles of India’s Civil Procedure Code applying to investment arbitrations is applied, it will not help parties at the enforcement stage since only decrees of foreign courts (and not tribunals) can be enforced under that legislation.

The Impact of India’s Commercial Reservation to the New York Convention

In China, the New York Convention’s application to relationships between ‘foreign investors and the host government’ has been explicitly precluded through its adoption of the commercial relationship reservation under Art. I(3) of the Convention.1) Notice of the Supreme People’s Court Regarding the Implementation of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards Acceded to by China [1987] Fa Jing Fa No. 5 (10 April 1987) While not provided explicitly, the interpretation of the reservation in Sec. 44 points to a high likelihood of a similar position being adopted in India.

In RM Investment & Trading Co. v. Boeing Company, India’s Supreme Court observed that the New York Convention intends to facilitate the speedy settlement of disputes arising out of international trade through arbitration and that consequently, “the expression commercial should be construed broadly, having regard for the manifold activities that are an integral part of international trade today”. It, therefore, held that a contract for consultancy services fell within the reservation’s scope and an award rendered in that regard could be enforced in India under the Convention.

While seemingly broad in its scope, this interpretation of the reservation has still been limited to relationships between individuals. Thus, in Union of India v. Lief Hoegh Co., the Gujarat High Court held that ‘commercial relationships’ in this context would include “all business and trade transactions in any of their forms, including the transportation, purchase, sale and exchange of commodities between the citizens of different countries”.

However, investment arbitral awards arise out of a relationship between the investor and the state created and governed by treaties under Public International Law, and not a relationship between private citizens. Furthermore, claims in investment arbitrations look to redress a state’s breach of its treaty obligations and not terms of a commercial relationship. Thus, while the Delhi High Court provided no concrete basis for the exclusion of the entire Act from the scope of investment arbitrations, a brief survey of Indian precedent on the issue suggests that this position is likely to prevail. While it would result in a “pro-investment arbitration” outcome that would serve investor interests best, there is, unfortunately, no clear basis on which the Calcutta High Court’s assumption on the Act’s applicability to investment arbitrations can be extended to the applicability of the New York Convention at the enforcement stage.

Conclusion – Solutions to the Present State of Affairs

While the application of the Convention to investment arbitrations has been explicitly precluded in China, there is still no clarity on the exact position in this regard in India. Arguments like the one made presently are merely speculative. The unpredictability of Indian courts’ response to this issue is only compounded by the lack of analysis in the Calcutta and Delhi High Court decisions that hold that Act to be either applicable or inapplicable to investment arbitrations, making it impossible for one to suggest that subsequent courts may prefer one High Court’s approach over the other based on the strength of their reasoning. Given that some foreign investors have already been successful in obtaining investment arbitral awards against India and many others have very large claims against India pending before investment arbitral tribunals, the likelihood of Indian courts having to grapple with the enforceability of these awards in India soon is high. Since courts seem very likely to deny enforceability of these awards, these investors can seek easy enforceability only if the Indian Parliament amends Sec. 44 of the Arbitration and Conciliation Act and explicitly includes investment arbitral awards within the scope of India’s commercial relationship reservation to the New York Convention. Unfortunately, all one can say with any degree of certainty is that parties seeking enforcement of an investment arbitral award in India will face a long, complex battle before Indian courts, which they are ultimately likely to lose.

References   [ + ]

1. Notice of the Supreme People’s Court Regarding the Implementation of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards Acceded to by China [1987] Fa Jing Fa No. 5 (10 April 1987)
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Rutger Metsch

Herbert Smith Freehills

The year of the pig was off to a good start in Hong Kong at the Investor-State Dispute Settlement (ISDS) Reform Conference organised by the Hong Kong Department of Justice and the Asian Academy of International Law on 13 February 2019. Like the fabled pig, ISDS reform has been slow in coming, and the aim of the conference was to explore possible improvements to the existing ISDS system. The line-up of speakers was promising and these expectations were fully met in a day of interesting discussions, (actual) double hatting, and, most of all, mapping the way forward.

As proof, a highlights clip and photos are available here. A conference proceeding is scheduled for publication in June 2019.

 

Opening

Secretary for Justice Teresa Cheng SC opened the conference by commenting on the importance of looking at ISDS reform on an international level as well as on a domestic level, in part due to Hong Kong’s role as a leading global investment hub and its unique position as a bridge between investment into and from mainland China (the PRC).

Dr Jiang Chenghua (PRC Ministry of Commerce), Dr Sun Jin (PRC Ministry of Foreign Affairs) and Dr Anthony Neoh (Asian Academy of International Law) respectively followed by setting the scene for the conference discussions. They commented on the crossroads the ISDS system appears to be at, with UNCITRAL Working Group III considering ISDS reform, the International Centre for Settlement of Investment Disputes (ICSID) conducting a consultation on amending its rules, and several States considering alternatives to the current system of investment treaty arbitration. A state of flux, however, also creates opportunity. With these thoughts in mind, the panel sessions started.

 

Investment Mediation

(Professors Lucy Reed and Jack Coe, Dr Anthony Neoh as moderator, and Paul Starr as commentator. Discussion paper1) In preparation for each of the four panel discussions, arbitration practitioners had prepared discussion papers providing an introduction to the topics considered by the speakers.  These discussion papers are linked in the post and available to download for those who are interested. prepared by David Ng)

The first panel considered opportunities for the increased use of mediation in investor-State disputes. The speakers observed that not all investment treaty disputes could be settled through mediation, but that many more could than is currently the case. The use of investment mediation could be incentivised by, among other options, highlighting the available range of remedies compared to arbitration (including getting new deals, reinstatement, etc), publishing successful examples of investor-State mediations with sensitive information redacted, and building mediation procedures into protocols and treaties so there is no loss of face for a State official if mediation is attempted.

The panel agreed that mediation could be attempted at any stage during the life of the arbitration, operating as a ‘shadow process’ running concurrently with the dispute as it proceeds through its natural phases. Regarding the number of ‘neutrals’ that should be involved in the dispute, the default approach might be three arbitrators and one mediator, but a sole arbitrator shadowed by two mediators could also be considered given the potential benefits in terms of the speed and efficiency of the process. During the Q&A of the panel session, the innovative mediation mechanism under the CEPA Investment Agreement between the PRC and Hong Kong was mentioned as one of the reference models for the design of an effective investment mediation protocol.

Appeal Mechanism for ISDS Awards

(Professors Albert Jan van den Berg and Zhang Yuejiao, Matthew Gearing, Paul Tsang as moderator, and May Tai as commentator. Discussion paper prepared by Antony Crockett)

The second panel considered whether an appeal mechanism for ISDS awards is desirable and practicable.

Regarding the balance between finality and consistency of ISDS awards, the panellists observed that finality was generally preferred over consistency in commercial arbitration. In ISDS, however, consistency played a more important role than in commercial arbitration because (1) the deemed higher public interest in investment disputes and (2) the system will be brought into disrepute if apparently inconsistent decisions exist.

Creating an appeal mechanism was seen as one possible way to address consistency issues in ISDS. However, should such a mechanism be introduced, a possible side effect might be that it would lead to an increase of further proceedings by parties. Currently, about a third of ICSID arbitrations proceed to annulment proceedings, despite the narrow grounds upon which annulment is possible. If there is a possibility to appeal the merits of a decision, this percentage is likely to go up.

Moreover, creating an appeal mechanism raises some complex (and interesting) issues, such as the form and nature of the mechanism and its interaction with existing international instruments.  Design of the appeal mechanism could involve an amendment of the ICSID Convention, an inter se amendment of the ICSID Convention between two or more Contracting States (as suggested by Professor van den Berg in his conference speech), an avenue for appeals in national courts (for non-ICSID ISDS arbitrations), or a separate mechanism through a new treaty establishing an appellate body (in line with the proposal by Gabrielle Kaufmann-Kohler and Michele Potestà). An additional consideration is, however, how effective the mechanism would be (if at all) in achieving consistency if the appellate body is applying inconsistent substantive provisions in the over 3,300 international investment agreements.

Third Party Funding

(Professor Julian Lew, Dr James Ding, and Matthew Hodgson as moderator. Discussion paper prepared by Eric Ng)

The session on third party funding (TPF) was especially timely because legislative amendments clarifying that third party funding is permitted in Hong Kong had come into effect just 12 days earlier, on 1 February 2019.”

The panel observed that the use of TPF is generally accepted as beneficial in commercial arbitration but that questions as to the propriety of TPF in the context of ISDS have been raised. However, use of TPF in ISDS can also have a significant benefit for the system: ISDS can be very expensive and TPF may help parties get access to justice.

The panel flagged several practical questions that arise from the practice of TPF in ISDS, including whether TPF can give rise to a conflict of interest for arbitrators, whether the existence of a TPF arrangement should be disclosed, whether the funder should be made a party to the arbitration in some form, and whether the existence of TPF should justify an order for security of costs. Answers to these questions are often situation-specific and formulating abstract rules to address these issues may therefore be difficult. The panel agreed that part of the problem is that there is a lack of empirical data available on TPF and, as a result, many debates on how to answer these questions have been based on impressions rather than facts.

Appointing arbitrators

(Meg Kinnear, Stanimir Alexandrov, Professor Brigitte Stern, and Caroline Nicholas and Sun Huawei as co-moderators. Discussion paper prepared by Adrian Lai)

The final panel, which was conducted in “Davos-style”, addressed issues related to the appointment of arbitrators.

The panel concluded that party appointment is still strongly preferred in ISDS practice because it gives parties a sense of control over the process and can increase the perceived legitimacy of the arbitration. There are several procedures that parties can use to appoint arbitrators, including:

  • a roster (e.g. the ICSID Panel of Arbitrators);
  • lists with a strike and rank option (a list of potential arbitrators is created, each party can veto one name and then ranks the remaining names in order of preference with the highest ranking arbitrator being chosen);
  • ballot (the parties receive a list of potential arbitrators, each party indicates which arbitrators it can agree to and, if both parties agree to a particular arbitrator, that arbitrator is appointed); and even
  • coin flip (although that is not advised!).

The panel also considered whether it was desirable to forgo the system of ad hoc arbitrators altogether and instead move to a system of full-time ISDS judges. Professor Stern explained that two of the basic fundaments of ISDS arbitration are (1) parties’ consent to an arbitrator (whether directly or indirectly); and (2) the depoliticisation of disputes between host States and investors. A body of full-time ISDS judges could negate these crucial elements of the ISDS framework. Consent to an arbitrator was seen as an effective way to achieve trust in the system by parties and a standing body of judges would therefore come at a high price. Moreover, the process of appointing judges could risk repoliticising ISDS as only one of the parties to the dispute (i.e. the State) would be able to choose the neutrals hearing its case.

Debate on a Permanent Investment Court

The afternoon concluded with an Oxford-style debate moderated by Professor Chin Leng Lim on the motion “the permanent investment court system is the solution to the concerns over ISDS“.

Professor Shan Wenhua and Emmanuel Jacomy were allocated to argue in favour of the motion and Professors Brigitte Stern and Stephan Schill were requested to argue against the motion.  What resulted was a humorous and spirited debate, which included a slideshow with (hardly) anonymised quotes by the conference speakers and Professor Stern wearing three different types of headwear in a literal double-hatting effort. In the end, the ‘against’ side carried the motion with a 76% majority, according to Professor Lim because “Professor Stern in a wig proved in the end irresistible“.

 

Mapping the Way Forward

The conference provided a forum for a diverse line-up of speakers and an engaged audience to consider the future of ISDS by discussing (and challenging) innovative ideas for reform. Such reform seems inevitable and the Hong Kong Department of Justice has demonstrated that it intends to be one of the thought leaders for change. We look forward to seeing some of the ideas discussed at the conference implemented in the future.

References   [ + ]

1. In preparation for each of the four panel discussions, arbitration practitioners had prepared discussion papers providing an introduction to the topics considered by the speakers.  These discussion papers are linked in the post and available to download for those who are interested.
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