Investment Blawg @pvargiu - Tumblr Blog

Adding insult to injury: JKX v. Ukraine, coming soon!

JKX Oil & Gas plc and its wholly owned Ukrainian and Dutch subsidiaries ("JKX") have commenced arbitration proceedings against Ukraine under the Energy Charter Treaty, the bilateral investment treaty between the United Kingdom and Ukraine and the bilateral investment treaty between the Netherlands and Ukraine. In these proceedings, JKX is seeking compensation for the losses it has suffered from Ukraine's treaty violations, including Ukraine's failure to treat JKX's investments in a "fair and equitable" manner and failing to comply with commitments made by Ukraine in respect of JKX's investments.

(read the rest of the release here)

Looks like the FET standard is ready to strike back - although this time some Full Protection and Security looks like it's going to tag along. Indeed, since the beginning of the Ukraine/Russia incident, it was just a matter of time until a few investors decided to activate their treaty rights against Ukraine. This, however, comes at a Hollywood movie-like timing.

#Ukraine #ECT #Fair and equitable treatment #investment arbitration #BITs

Say it like you mean it: some reflection on Born and Moranis' words on investment treaty interpretation

When Gary Born and Mitchell Moranis state that ‘While the investment treaty system may look, talk, and act like a “regime,” it is not a multilateral system’, they can’t be any more right than they are. Investment law, as every student with more than one investment law lecture under their belt knows, is a “system”, in the broadest sense, made of almost 3000 bilateral treaties (2222 in force as per the UNCTAD IIAs Navigator). Yet, arbitrators, practitioners and scholars (including yours truly) always treat it like a coherent system – or, possibly, try to make it into one.

#icsid #investment treaties #BITs #interpretation #VCLT

Nevermind the Standards: Here’s the Fair and Equitable Treatment

The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations. Any and all State actions conforming to such criteria should relate not only to the guidelines, directives or requirements issued, or the resolutions approved thereunder, but also to the goals underlying such regulations. The foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any preexisting decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities. The investor also expects the State to use the legal instruments that govern the actions of the investor or the investment in conformity with the function usually assigned to such instruments, and not to deprive the investor of its investment without the required compensation. In fact, failure by the host State to comply with such pattern of conduct with respect to the foreign investor or its investments affects the investor’s ability to measure the treatment and protection awarded by the host State and to determine whether the actions of the host State conform to the fair and equitable treatment principle. Therefore, compliance by the host State with such pattern of conduct is closely related to the above-mentioned principle, to the actual chances of enforcing such principle, and to excluding the possibility that state action be characterized as arbitrary; i.e. as presenting insufficiencies that would be recognized “…by any reasonable and impartial man,” or, although not in violation of specific regulations, as being contrary to the law because: ...(it) shocks, or at least surprises, a sense of juridical propriety.

In the recent Decision on Liability in Hochtief AG v. Argentina (ICSID Case No. ARB/07/31), treaty-based standards of protection other than the FET have been hit once more, to the point that one may ask why do we even bother drafting and signing BITs and writing about “standards of treatment”, if the FET seems to be the only one that counts.

Hochtief v. Argentina is one of a number of cases arising from the financial crisis that hit Argentina at the end of the past century; this one in particular arises from the problem of ‘pesification’, namely the process of departure of the Argentinian peso from the statutory regime which secured parity with the US dollar, which ‘rested on the enactment on 6 January 2002 of Law 25,561, the Public Emergency and Foreign Exchange System Reform Law (“the Emergency Law”), and the adoption on 3 February 2002 of Decree No. 214/02.’ [Hochtief v. Argentina, Decision on Liability, para. 231]:

232. The pesification process was part of a major economic and commercial upheaval. There is much that can be said about its causes and much that can be said about its consequences, both generally and in the context of this particular case. But the question to be addressed here is straightforward: as a matter of legal principle, does the Argentinian pesification process amount to a violation of Argentina’s BIT obligations?

The analysys of the Tribunal (Lowe, Brower and Thomas) is interesting, and indeed revealing of what seems to be the way forward (whether we like it or not) on the classification of treaty violations. Is pesification ‘prima facie incompatible with the FET standard in circumstances where it has been represented to investors by the Government that dollar-peso parity would be maintained (or to put it in another way, represented that pesification would not take place)’? [para. 233] Moreover,

if it is, the second question is whether there is any provision within the Treaty itself that can affect the question whether pesification is in principle a breach of the Treaty. The third question, which arises only if pesification is in principle a breach of the Treaty, is whether the wrongfulness of pesification under the Treaty can be precluded by the plea of necessity under customary international law.

Here’s how the tribunal answered these questions:

238. […] what Respondent promised, and what Claimant had the right to expect, was the maintenance of the value, in dollar terms, of the revenues under the Contract. Precisely how that value was maintained was, in the view of the majority of the Tribunal, not specified. Claimant did not have a legal right specifically to have that value maintained by means of constant adherence to peso-dollar parity. If parity were abandoned but Claimant was compensated fully and timeously for the fall, in dollar terms, in the value of its revenues, Claimant’s rights and expectations would have been fulfilled, and Claimant could not complain that it had been treated unfairly or inequitably in violation of the BIT.

239. In the view of the majority of the Tribunal, this analysis accords with the facts and the practical realities of the situation. While there was a clear expectation that the commercial balance of the Contract would be maintained by the continuation of peso- dollar parity, no specific promise or undertaking to maintain that parity was explicitly made by Respondent to Claimant. Neither the Bidding Terms nor the Concession Contract, nor any other instrument presented to the Tribunal, contains any specific and absolute undertaking not in any circumstances to pesify the Contract.

[…]

241. The majority of the Tribunal has therefore concluded that while the Claimant had the right to the maintenance of the commercial balance secured by the Contract on the supposition that peso-dollar parity would continue, it had no absolute right to have that commercial balance maintained specifically by the continuation of peso-dollar parity in all circumstances. If parity ceased to exist, Claimant had the right to expect that the resulting disruption of the commercial balance would be corrected fully and timeously, so that it would not be materially disadvantaged. Indeed, that expectation was reflected in the right to apply for renegotiation set out in Section 31.2 of the Contract. But Claimant did not have the right to expect that there would never, in any circumstances, be any departure from parity.

242. The majority has thus concluded that pesification of debts alone did not breach the treaty, and that if appropriate and timely steps had been taken by Respondent to restore Claimant to the position (in terms of the commercial balance of the Contract) that had been secured in the Contract, there would have been no breach of the duty to treat Claimant fairly and equitably.

243. The position might have been different if Respondent had made a deliberate choice to abandon peso-dollar parity in circumstances in which parity could have been maintained and Respondent had freedom of choice in determining its exchange-rate policy. But in the view of the Tribunal, that was not the case in Argentina during the period in question. The majority of the Tribunal accepts that although the abandonment of parity was obviously effected by a deliberate act of the Respondent – the enactment of the pesification law – and was in that narrow sense Respondent’s ‘choice’, that act was an acceptance of what foreign exchange markets had already shown to be an economic fact: the unsustainability of parity. The IMF had endorsed the economic policies pursued by Argentina prior to the crisis; and the Emergency Law adopted in January 2002 by the Respondent was regarded by a range of expert commentators as a sound and coherent approach to the unavoidable facts of the extraordinary financial crisis then confronting Argentina.

244. The majority of the Tribunal accordingly does not find that the adoption and pursuit of the policy of pesification was per se a breach of the FET standard. The policy was not in itself unfair, and it was not in itself inequitable, to the Claimant.

[…]

249. The Tribunal considers that the terms of the commitment that Respondent had made to Claimant did not require Respondent to take action during the time of the crisis actually to restore the commercial balance secured by peso-dollar parity. But it did require Respondent to make provision for restoring the commercial balance after the crisis had ended (as, indeed, it did, in the Emergency Law itself); and restoration of the commercial balance required that Claimant be compensated for losses incurred during the crisis, as well as thereafter.

250. As is explained below, in the section dealing with the renegotiation process, the process provided for in the Emergency Law has not in fact led to the rebalancing of the commercial relationship between Claimant and Respondent in this case. Due to Argentina’s failure to timeously adjust the contract in a manner satisfactory to PdL, Claimant was accordingly deprived of the protection that the dollarization of PdL’s tariffs was designed to secure, and the value of its interest in PdL was thereby reduced, causing it financial loss.

251. The Tribunal thus finds that the manner in which the process for agreeing on the contractual adjustment to offset the effects of pesification was implemented, and specifically Respondent’s failure to implement the promised renegotiation process timeously, constitute a breach of the FET standard under the BIT, for which Respondent is liable to make reparation. More precisely, the pesification caused the Claimant to sustain losses; and the breach of the FET in the BIT consists in the failure to implement within a reasonable period of time a renegotiated agreement to replace the security that had been provided by the dollarization provisions in the original Concession Contract and thereby restore the commercial balance of the Concession Contract between Respondent and the members of the Consortium, including Claimant, and to remedy the losses already sustained.

Up to here, my comment was ‘fair enough’. I don’t have access to the file – parties tend to pay attention to things like confidentiality – but the analysis seems to be on point, and the conclusion that there was a violation of the FET standard in ‘(1) the failure to restore and redress the commercial balance that had been secured by the Concession Contract, after that balance had been disrupted by the pesification Law, Law 25,561, on 6 January 2002’ [para. 288] is definitely consistent with the analysis.

However, the tribunal went hardcore after this: in the words of the panel, ‘[n]ot all BIT standards are the same; nor is the FET standard, despite its undoubted breadth, capable of subsuming every other BIT standard. As a matter of fact, however, it may be evident that where the same facts are said to constitute breaches of more than one BIT standard, and where the alleged losses are the same in each case, equally detailed analysis of the application of each of the treaty standards to the facts of the case is redundant.’ Therefore, at para. 336:

The Tribunal finds that it does not need to resolve Claimant’s claims concerning Full Protection and Security [BIT Articles 2(1) and 4(1)], expropriation [BIT Article 4(2)], arbitrary and discriminatory measures, and ‘observance of obligations’ or ‘umbrella clause’, because they are all based on essentially the same arguments as the claims based upon the FET standard. As noted under paragraph 291, it has not been argued that these other standards entail a different approach to causation or to determination of quantum, or to liability, and the Tribunal considers that these additional grounds for the claims are adequately addressed by its decisions in respect to the FET standard

Indeed, why bother with these other claims? All the violations are covered by the FET. Why bother with other absolute standards of protections at all, when drafting BITs? All possible injuries to the investor fall within the scope of application of the FET. If Hochtief was a una tantum decision, we could just file it under “better not quote” and forget about it. However, Hochtief is only the latest of a series of decisions that apply the FET as a “one size fits all” standard. Well, at least we know now, right?

#Icsid #investment arbitration #argentina #Fair and equitable treatment

Fancy a chair while waiting (a decision on jurisdiction ratione materie in an ICSID arbitration)?

Nothing in the ICSID Convention itself presents an obstacle to considering that bonds are capable of constituting investments; the Tribunal notes in this regard that, when the Convention was under negotiation, sovereign bonds were actually used as an example of the potential breadth of the Convention’s reach in terms of what sorts of future dispute could be put before an ICSID tribunal.

[Giovanni Alemanni and Others v. The Argentine Republic, ICSID Case No. ARB/07/8, Decision on Jurisdiction and Ammissibility, para. 296]

105. As regards the Respondent’s argument to the effect that, for various listed reasons, the Bonds are not an investment made in the territory of Argentina, the Counter- Memorial asserts that this argument deliberately seeks to avoid the real features of the transaction at issue, where what matters is the initial transaction, i.e. the issue of negotiable bonds on the international financial markets, not subsequent sales and purchases on the secondary market. It submits that, in considering the place where the investment was made, account must be taken of the destination of the proceeds of the bond issues, which undisputedly went to the benefit of Argentina, from which it follows that they cannot be held not to have been made in its territory. This is not affected by the fact that, by definition, the bond instrument will be physically held by the owner, presumably at the latter’s place of residence. The Counter-Memorial refers once again to the Fedax Decision, where the Tribunal rejected an almost identical objection that had been raised in relation to an equivalent provision in the relevant bilateral investment treaty. It refers also to the CSOB Decision and asserts that the Respondent’s reliance on SGS v Philippines is misplaced, because in that case the Tribunal expressly referred to “an injection of funds into the territory of” the host State, and pointed out that the provision of services outside of the host State was a very different matter. Likewise in Canadian Cattlemen the would-be investors and their investments had no connection whatever with the Respondent State. The Counter-Memorial further dismisses the Respondent’s argument based on the law governing the Bonds, which it asserts is merely the same argument in another form. It distinguishes the Award in the Bayview arbitration on the basis that there the tribunal was searching for the rationale to distinguish an investment made by an investor in his own home State from one that would be under the protection of a treaty (in that case NAFTA); that was different from the present case where the investors were very much subjecting themselves to the law of the issuing State, or at least assuming the risk that the State would interfere with their investment, and the submission of the Bonds to another system of law did not (unfortunately for the investors) have the effect of protecting them against that risk. Neither that Award nor scholarly commentary justifies adding yet another criterion (that of applicable law) to the supposed list of factors determining the existence of an ‘investment’.

#Icsid #investment arbitration #jurisdiction #notion of investment #argentina #alemanni v argentina

Berlin is pleite: Vattenfall v. Germany (yes, again)

Vattenfall and Germany have been in an (investment) relationship for a long time, as the Swedish company, among other things, operated the Krümmel and Brunsbüttel nuclear power plants. The problems between Vattenfall and the German Government started in 2009, with Vattenfall complaining that the Hamburg Environmental Authority issued a licence imposing water quality standards that made the project of a new coal-fired power plant in Hamburg-Moorburg “unviable.“ Vattenfall claimed the violation of the ECT rules on promotion and protection of foreign investment and commenced ICSID arbitration proceedings seeking compensation for € 1.4 billion. This one was settled, but apparently it was just the beginning.

In the summer of 2011, Germany decided to progressively abandon the use of nuclear energy in order to have a nuclear-free Germany in 2022. The 13th amendment to the Atomic Energy Act was mostly triggered by the nuclear disaster in Fukushima a few months earlier, even though the debate on the use of nuclear energy in Germany had been going on long before. Together with the amendment, Germany also passed a number of laws, effectively establishing a new energy policy and deactivating the 11th Amendment to the Atomic Energy Act that had approved extra energy supplies to prolong the lifespan of nuclear plants by 8 to 14 years. Instead, by 2022 all of Germany’s nuclear plants will be shut down. Understandably, a number of power plant operators were not big fans of the Atomic Energy Law, and made public that they planned to sue the government over the new Act. Vattenfall, in particular, was quite vocal in menacing actions to obtain compensation for the phasing out of nuclear energy, and indeed filed for arbitration under the Energy Charter Treaty at the ICSID in May 2012. Whilst Vattenfall’s financial report for 2011 stated that the damages from the nuclear phase out amounted to € 1.18 billion, such number has been inflated by additional costs and claims, reaching a number that has been reported to be between € 4.6 and € 6 billion. Whatever the number, it will be interesting to see Germany – not only a developed country, but one of the most industrialised and influential in the world – sitting at an ICSID table on the respondent side again. Ironically, the only other time Germany has been at the less comfortable side of an ICSID arbitration was in the first Vattenfall case. As stated above, the first Vattenfall v. Germany dispute was discontinued and settled in August 2010, with the host state agreeing to a weakened environmental permit in favour of Vattenfall. It will be interesting to see how it goes this time around. It’ll be fun – and, however it goes, it will carry consequences reaching far beyond Germany’s pockets; what’s really hard to predict right now is whether it will be an example of the “horrible” consequences of ISDS on sovereign states, or yet another definition of the scope of the fair and equitable treatment standard.

Update (from the Financial Times):

Sigmar Gabriel, Germany’s vice-chancellor, warned Sweden’s new prime minister Stefan Löfven last month that there would be “serious consequences” for electricity supplies and jobs if Sweden’s state-owned utility Vattenfall ditched plans to expand two coal mines in the northeast of Germany.

The intervention is a clear sign of the challenges Germany faces as it grapples with an ambitious switch to renewable energy – the so-called Energiewende.

Under the policy, Germany aims to derive 80 per cent of its electricity from clean sources by 2050. As part of that, it is closing down all of its nuclear power stations by 2022.

But it is making up the energy shortfall caused by the nuclear phase-out by generating power from coal – the dirtiest fossil fuel. Last year, German electricity production from lignite or brown coal, a particularly polluting form of the fuel, reached its highest level since 1990.

Germany’s heavy reliance on coal has left it struggling to meet its targets for cutting greenhouse gas emissions. Meanwhile high levies on bills to pay for renewable power mean that household energy prices are among the highest in Europe.

Angela Merkel’s cabinet is due to meet next week to discuss mothballing some coal-fired power stations as a means of helping the country reach its carbon goals.

But Berlin’s lobbying of Stockholm underlines a view held by some in the German government that coal-fired generation is vital to the security of the country’s power supply.

[...]

Magnus Hall, [Vattenfall's] new chief executive, announced on October 30 that the utility would look at selling off its lignite mining and generation assets in Germany.

“We have a clear strategy to reduce our CO2 exposure and to transform our business into a more renewable-based portfolio,” Mr Hall said in a statement.

Mr Löfven told the FT on Sunday that he had explained to Mr Gabriel in a phone call that Vattenfall’s board acted independently of the government.

“I also told Sigmar that we have a policy that we don’t want to harm Germany, so it is up to the board to handle this situation in the best way,” he said.

He added that Vattenfall’s board had decided to look into selling the German lignite mines and power plants and that “this is in line with government policy that we need Vattenfall to be a leading actor in renewables and clean energy”.

“But this decision was not from the government,” Mr Löfven said. “We are not telling Vattenfall to do something; they made their own decision. But it is in line with our policy, and we will keep that policy.”

Separately, Vattenfall has also filed a lawsuit against Germany seeking €4.7bn in compensation over Berlin’s decision to close the country’s fleet of nuclear power stations.

A spokeswoman for the German economics ministry said Mr Gabriel’s letter concerned Vattenfall’s responsibility to preserve jobs and a secure and affordable energy supply in Germany, “which has arisen from the profitable operation of this business in the past”.

Looks like a settlement may not be off the table just yet...

#Vattenfall v. Germany #ICSID #Energy Charter Treaty #nuclear phaseout

TDM Calls for Papers

Call for papers: TDM Special Issue on the Comprehensive Economic and Trade Agreement between the European Union and Canada (CETA)

http://www.transnational-dispute-management.com/news.asp?key=550

Herfried Wöss, Fabien Gélinas, Andrea Bjorklund, and John Gaffney will be editing a TDM Special Issue on the Comprehensive Economic and Trade Agreement between the European Union and Canada (CETA).

CETA is one of the three landmark agreements – the others are the Trans-Pacific Partnership Agreement (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) – that will shape world trade and investment in the XXI century. Negotiations were launched in 2009 and a political agreement between the EU and Canada was reached on the key elements of CETA on October 18, 2013. The signing of the agreement took place in Ottawa at end of September 2014.

CETA is characterized by the further codification of international standards of investment protection by the Contracting Parties, and the introduction of new topics in international trade in goods and services, such as the efforts to remove regulatory divergence, which has been considered as the most prominent obstacle to trade and which should considerably increase economic growth for the citizens of both parties. This objective is to be achieved through Regulatory Cooperation and the establishment of a Regulatory Co-operation Forum.

CETA contains chapters on:

Bilateral Co-operation on Biotechnology

Bilateral Dialogue on Raw Materials Co-operation

Cross-Border Trade in Services

Dispute Settlement

Domestic Regulation

E-Commerce – Competition – State Enterprises

Financial Services

Government Procurement

Investment

Mutual Acceptance of the Results of Conformity Assessment

Mutual Recognition of Professionals and Temporary Entry

Regulatory Co-operation

Enhanced Co-operation on Science, Technology, Research & Innovation (STRI)

Sanitary and Phytosanitary Measures

Sustainable Development (Trade and Sustainable Development and Trade and Labour)

Taxation

Technical Barriers to Trade

Telecommunications

The four co-editors invite you to contribute to the special edition on CETA with unpublished or previously published articles, conference papers, research papers and case studies dealing with the Agreement and the issues raised by any of its chapters. Of particular interest in the investment chapter are:

clarifications brought to key substantive provisions such as fair and equitable treatment;

the definition of investment, which refers to “income generating assets” in the sense used by economists;

the fair and equitable standard, including manifest arbitrariness, targeted discrimination on manifestly wrongful grounds and abusive treatment of investors, and its interpretation by the Contracting Parties;

the definition of acts de jure imperii, and CETA’s detailed language on what constitutes indirect expropriation.

Also of interest are CETA reaffirmation of the right of the EU and Canada to regulate to pursue legitimate public policy objectives such as the protection of health, safety, or the environment and a number of procedural changes designed notably to respond to criticisms levelled at investment treaties over the past decade.

Feel free to circulate this call for papers amongst friends, colleagues and other people who you think may have an interest in this topic.

Proposals or papers should be submitted directly to the co-editors by January 15, 2015 [email protected], [email protected], [email protected] and [email protected] – please CC [email protected] when submitting your materials – you can find the call for papers on the TDM website.

*******************************

OGEL & TDM Call For Papers: Special Issue on Renewable Energy Disputes

Oil, Gas, and Energy Law Journal and Transnational Dispute Management invite submissions for a joint Special Issue on Renewable Energy Disputes.

Renewable energy production is nothing new: windmills have been used to produce wind-based energy and dams have been used to produce mechanical energy for centuries past. However, the scale of investment in this area and the increased subsidies, regulation of and drive towards this type of electricity generation are unprecedented. Given the surge in activity in renewable energy production, it is no surprise that disputes in this area have started to arise.

Issues that have led to disputes within the EU, the US and globally have, for example, related to the national governments’ objective of ensuring maximum national or regional benefit from governmental measures in this area (similar to what is done in oil and gas-producing countries through local content requirements), miscalculations of subsidies in the planning stages and excessive costs for the state from such subsidies, especially when economic circumstances have changed. Furthermore, the scale of activities has in itself contributed to all kinds of disputes arising at various levels and various forums. These disputes may involve issues of public international law, EU and US law (at the supranational, national and subnational levels), private law and contractual arrangements. The Special Issue examines these types of disputes and analyses their backgrounds and the reasons why they arose. Recent and ongoing renewable energy disputes under international law have concerned international investment law and WTO law. However, recent renewable energy disputes at European level have mostly related to the free movement provisions of EU Treaty law. Contractual arrangements and connection issues serve as illustrations of private and contractual disputes in these areas.

This OGEL/TDM Special Issue on Renewable Energy Disputes will examine all kinds of renewable energy disputes. The basic structure of the special issue is:

Introduction: Renewable energy disputes: an overview - Professor Kim Talus (UEF Law School)

I) Public International Law Disputes

WTO cases: an overview (already in preparation)

WTO case against Canada (Ontario local content requirement) (already in preparation)

Investment Disputes in Renewable Energy (already in preparation)

Further proposals welcome!

II) EU Law Disputes

Judgment Ålands Vindkraft (already in preparation)

Judgment Essent (already in preparation)

Further proposals welcome!

III) National and Subnational Law and Commercial or Contractual Law Disputes

Spain: Spanish Supreme Court and ICSID cases against Spain (already in preparation)

UK Renewable Disputes (already in preparation)

Further proposals welcome!

OGEL and TDM encourage submission of relevant papers, studies, and comments on various aspects of this subject, including International, regional and national disputes on various aspects of renewable energy disputes. Contributions discussing a particular topic within this area, such as need to reform the ISDS with regards renewable energy and climate change, are also welcome.

Papers should be submitted by the 15 January 2015 deadline to Professor Kim Talus (University of Eastern Finland) - [email protected] - as well as a copy to [email protected]

The call for papers can also be found on the OGEL and TDM websites here:

http://www.ogel.org/news.asp?key=458

http://www.transnational-dispute-management.com/news.asp?key=546

#tdm #call for papers #ceta #renewable energy

Requiem for a dream: the international law of expropriation is still alive

The claimants in this case were five subsidiaries of Mobil Corporation. The arbitration was commenced in 2007, with the claimants seeking compensation after Venezuela’s breaches of the BIT between the Netherlands and Venezuela, after measures taken by the host state affected investments in three projects (“Cerro Negro” and “La Ceiba”). While the Tribunal ordered Venezuela to pay the claimants a massive amount of money ($ 9,042,482 in compensation for the production and export curtailments imposed on the Cerro Negro Project, $ 1,411,700,000 in compensation for the expropriation of their investments in the Cerro Negro Project and $ 179,300,000 in compensation for the expropriation of their investments in the La Ceiba Project – and no, I haven’t put too many zeroes), the amount looks pretty much consistent in what was suggested by Venezuela to be due in the course of the arbitral proceedings. In fact, the claimants had asked for $ 16.6 billion [Award, para. 176].

The roots of the dispute are to be found in the Apertura Petrolera of 1980s, a series of measures taken by the Venezuelan Government in order to increase the inflow of foreign investment and aim at the exploitation of the country’s oil reserves. Mobil Corporation started investing in two projects of the Apertura Petrolera in 1996 – the Cerro Negro Project and the La Ceiba project – by means of two subsidiaries. In both projects, Mobil’s subsidiaries were allowed a cheap exploitation tax of 1%, according to a Royalty Reduction Agreement.

However, in 2001, Venezuela President Hugo Chávez issued the Organic Law of Hydrocarbons, according to which ‘production activities were reserved to the State, and private Parties would be authorized to participate in those activities only through mixed enterprises in which the State owned more than 50% of the shares. Any production from a mixed enterprise would be subject to a royalty of 30% and would have to be sold to PDVSA or another State-owned company.’ [Award, para. 88] However, projects like the Orinoco Oil Belt associations, as the Cerro Negro Project was, and the Profit Sharing Agreements such as the La Ceiba Project were not affected by these measures. Nonetheless, the situation changed dramatically in the years between 2004 and 2007, when Venezuela increased the Royalty Rate to 16 2/3% - leading the Cerro Negro project to a royalty rate of 30% for the average monthly production of more than 120,000 barrels per day [Award, para. 212] – and raisedthe Income Tax Rate Applicable to Participants in the Orinoco Oil Belt from 34% to 50% to the rate applicable to income from those projects [Award, para. 208].

What happened in 2007 is best explained in the award itself:

On 8 January 2007, President Chávez announced that all of the projects that had been operating outside of the framework of the 2001 Hydrocarbons Law, including the Cerro Negro Project, would be nationalized. On 1 February 2007, through the Enabling Law (see below), the Respondent made clear that it also intended to nationalize profit-sharing projects such as the La Ceiba Project.

107. On 1 February 2007, the National Assembly enacted a law entitled the “Law that Authorizes the President of the Republic to Issue Decrees with Rank, Value and Force of Law in Delegated Subject Matters” (“Enabling Law”). The Enabling Law authorized President Chávez to take over the Cerro Negro and La Ceiba joint ventures and other similar associations by:

“[D]ecree[ing] norms allowing the State to assume directly or through corporations of its exclusive property, the control of the activities performed by the associations operating in the Orinoco Oil Belt, including the upgraders and the associations for exploration at risk and shared profits, to regularize and adjust their activities within the legal framework that governs the national oil industry, through the contractual form of mixed enterprises or companies [that are] exclusive property of the State.”

108. On 26 February 2007, President Chávez issued Decree No. 5200 on the “Migration to Mixed Companies of the Association Agreements of the Orinoco Oil Belt, as well as of the At-Risk-and-Shared-Profits Exploration Agreements” (“Decree-Law 5200”). The Decree-Law ordered, inter alia, that the associations located in the Orinoco Oil Belt (such as the Cerro Negro Association), and the At-Risk-and- Shared-Profits Associations, (such as the La Ceiba Association), be “migrated” into new mixed companies under the 2001 Organic Law of Hydrocarbons, in which PDVSA or one of its subsidiaries would hold at least a 60% participation interest. This process of transformation from the association form to a mixed company was referred to as “migration”.

109. Decree-Law 5200 provided a roadmap and schedule for the migration of the associations. Article 3 thereof required Operadora Cerro Negro and Operadora La Ceiba, the operators of the Cerro Negro and La Ceiba Projects, to transfer control of all activities and operations related to those projects to Corporación Venezolana del Petróleo, S.A. (or another affiliate of PDVSA) no later than 30 April 2007. Accordingly, on 30 April 2007, Operadora Cerro Negro transferred to PDVSA Petróleo S.A. the operations and control of all activities related to the Cerro Negro Project, with full reservation of rights. On 27 April 2007, Operadora La Ceiba did the same in respect of the La Ceiba Project.

110. Article 4 of Decree-Law 5200 gave Mobil Cerro Negro, Mobil Venezolana and participants in other associations in the Orinoco Oil Belt and in At-Risk-and-Shared- Profits Associations, four months (until 26 June 2007) to agree to participation in the new mixed companies. The mixed companies would be established and would operate under a different statutory framework (the 2001 Organic Law of Hydrocarbons) and under new contractual arrangements that would replace the previous association agreements. Article 5 of Decree-Law 5200 provided that, if no agreement was reached on the establishment and functioning of the new mixed companies by the end of the four-month period, “the Republic, through Petróleos de Venezuela S.A. or any of its affiliates [...] shall directly assume the activities of the associations,” namely, the Cerro Negro Association and the La Ceiba Association.

111. Throughout the four-month period specified in Article 4 of Decree-Law 5200, discussions took place between Mobil Cerro Negro and Mobil Venezolana and the Respondent about the potential participation of the Claimants in the new mixed enterprises. By 26 June 2007, no agreement had been reached on such participation.

112. On 27 June 2007, when the four-month term imposed by Decree-Law 5200 expired, the Respondent seized the investments of Mobil Cerro Negro in the Cerro Negro Project and the investments of Mobil Venezolana in the La Ceiba Project. This is not disputed by the Respondent. The Respondent has admitted that it “nationalized” the Cerro Negro and La Ceiba Projects in 2007.

113. On 5 October 2007, the National Assembly enacted the “Law on the Effects of the Process of Migration to Mixed Companies of the Agreements of the Orinoco Oil Belt, as well as of the At-Risk-and-Shared-Profits Exploration Agreements” (“Law on Effects of the Migration”). The Law ratified the expropriation effected by Decree-Law 5200 and ordered that the interests and assets, formerly belonging to those companies that had not agreed to “migrate”, be formally transferred to the new mixed companies by application of the “reversion principle”.

114. Article 1 of the Law on Effects of the Migration provided that association agreements would “be extinguished as of the date of publication in the Official Gazette [...] of the decree that transfers the right to exercise primary activities to the mixed enterprises constituted according to what is provided in said Decree-Law [Decree-Law 5200]”. Article 1 also provided a special rule for association agreements in which none of the Parties had agreed to “migrate” to mixed enterprises within the four-month period established in Decree-Law 5200. In such a case, the association agreement would be extinguished as of the date of publication of the Law on Effects of the Migration in the Official Gazette.

115. By Decree No. 5916, published on 5 March 2008, the Respondent transferred to PetroMonagas, S.A. “[t]he right to develop primary activities of exploration in search of reservoirs of heavy and extra-heavy crude oil, the extraction of such crude oil in its natural state, and its initial production, transport and storage”. Consequently, pursuant to Article 1 of the Law on Effects of the Migration, the Cerro Negro Association Agreement was terminated as of that date.

116. Neither Mobil Venezolana nor Petro-Canada agreed to “migrate” the La Ceiba Project to a new mixed enterprise. Consequently, the La Ceiba Association Agreement fell under the special rule of Article 1 of the Law on Effects of the Migration. Accordingly, the La Ceiba Association Agreement was terminated as of 8 October 2007, the date of the publication of the Law on Effects of the Migration.

The claimants initiated multiple proceedings against PDVSA. Of particular relevance is the fact that, in 2008, Mobil Cerro Negro commenced an ICC arbitration proceedings against PDVSA and PDVSA-CN. On 23 December 2011, the ICC tribunal issued an award ordering finding PDVSA and PDVSA-CN to pay the claimants $ 746,937,958 plus interest due to the discriminatory measures taking against Mobil Cerro Negro. This was taken into account by the ICSID tribunal that, when calculating the amount due to the claimants, took measures to avoid double recovery.

The ICSID award is long and detailed, and thanks to the effort of the arbitrators the reasoning of the tribunal on the various issues raised in the case is pretty clear. First of all, Venezuela tried to claims that the restructuring of the Mobil Corporation through the creation of a Dutch holding in 2005 was an abuse of rights rather than a legitimate restructuring – and that, therefore, the ICSID tribunal had no jurisdiction. However, the tribunal found that, while restructuring investments with the purpose of gaining the protection of a BIT for such existing disputes would indeed constitute an abuse of rights, the situation was different in this case, and [Award, para. 190]

that it has jurisdiction over the claims presented by Venezuela Holdings (Netherlands), Mobil CN Holding and Mobil Venezolana Holding (Delaware), Mobil CN and Mobil Venzolana (Bahamas) as far as: (i) they are based on alleged breaches of the Agreement on Encouragement and Reciprocal Protection of Investments concluded on 22 October 1991 between the Kingdom of the Netherlands and the Republic of Venezuela; (ii) they relate to disputes born after 21 February 2006 [i.e. the date of the restructuring] for the Cerro Negro Project and after 23 November 2006 [i.e. the date of the restructuring] for the La Ceiba project and in particular as far as they relate to the dispute concerning the nationalization measures taken by the Republic of Venezuela.

The tribunal briefly addressed the claims of violation of the Fair and Equitable treatment under Article 3 of the BIT, dismissing the claims with respect to the creation of the Extraction Tax, the expropriation of the claimant’s assets and the severance payments but accepting that the imposition of production and export curtailments violated the FET. On the first point, it is interesting to read the tribunal’s reasoning in its entirety. At paras. 243-248, it is stated that

Article 4 of the Treaty guarantees national and most favored nation treatment to investors with respect to “taxes, fees, charges, and to fiscal deductions and exemptions.” Article 4 is more specific than Article 3, which is generally concerned with the “treatment of investments”. However, Article 4 contains no mention of “fair and equitable treatment”. In addition, the treatment guaranteed by Article 4 is subject to three exceptions, two of which are not included in Article 3(3). The Tribunal considers that Article 4 comprehensively regulates the standards of treatment with respect to fiscal measures by providing for national and most favored nation treatment, and a list of applicable exceptions.

244. If the Claimants’ argument were followed, namely that Article 3(1) operates in parallel with Article 4 regarding fiscal measures, the two exceptions in Article 4 that do not appear in Article 3(3) would be rendered meaningless, as they could be circumvented by relying on the broader provisions of Article 3(1) of the BIT.

245. Conversely, the one exception covered by both Article 4 and Article 3(3) would be duplicated and therefore redundant. In particular, Article 3(3) of the BIT contains an exception in respect of “agreements establishing customs unions, economic unions, monetary unions or similar institutions”, which is essentially reproduced in Article 4: “participation in a customs union, economic union, or similar institutions.” Thus, the Claimants’ interpretation would result in at least one provision being rendered redundant – an outcome that should be avoided in treaty interpretation.

246. Moreover, if the purpose of the Treaty had been not to carve out fiscal measures from the more general Article 4, then the easiest way to achieve it would have been to incorporate the exceptions contained in Article 4 in Article 3(3) itself. There would have been no need to draft an article dealing with fiscal measures and containing specific exceptions (double-taxation agreements, customs, economic or similar unions and special treatment based on reciprocity with a third State).

247. For the foregoing reasons, the Tribunal considers that the Claimants’ interpretation is not supported by the structure and wording of Articles 3 and 4 of the Treaty, and that the correct interpretation is that Article 3 and Article 4 are distinct provisions, the latter governing fiscal measures exclusively. Therefore, the Tribunal finds that fiscal measures are subject only to the national and most favored nation treatment obligations contained in Article 4 of the Treaty, and are carved out of Article 3(1), which contains the obligation to provide fair and equitable treatment. The Tribunal notes that the claim relating to the extraction tax is based only on Article 3(1) of the Treaty, not on Article 4. Since Article 3(1) does not apply to fiscal measures, the extraction tax claim based on the breach of the FET standard is rejected.

248. The Tribunal’s conclusions regarding FET also apply to arbitrary or discriminatory treatment relating to the extraction tax. The extraction tax claim for arbitrary or discriminatory treatment is made under Article 3(1) of the Treaty, which, for the reasons given, is inapplicable. As a result, the arbitrary or discriminatory claim relating to the extraction tax is equally rejected.

The tribunal further found that the expropriation was conducted in a lawful manner and that there were no additional elements in the record that can lead to a finding of an FET violation with regard to the expropriatory measures [Award, paras. 274-276].

However, the Tribunal also noticed that the FET standard may be violated if the investor’s legitimate expectations – that can result from specific formal assurances given by the host state in order to induce investment - are frustrated. Since Clause 8 of the Association Agreement of the Cerro Negro Project fixed the level of extra-heavy oil production at 120,000 barrels per day, when making their investment, the Claimants could reasonably and legitimately have expected to produce at least such volume. Indeed, the tribunal found that ‘the production and export curtailments imposed from November 2006 were incompatible with the Claimants’ reasonable and legitimate expectations, and thus breached the FET standard contained in Article 3(1) of the BIT.’ [Award, para. 264]

On the issue of indirect expropriation, the claimants contended that the pre-migration measures permanently deprived them of the benefit of their rights. Such measures would be the afore-mentioned higher income-tax rate, the adoption of an extraction tax, the imposition of production and export curtailments [paras. 100-104] and the likes. The tribunal, however, refused to consider such measures as a creeping expropriation, arguing that, under international law, a measure which does not have all the features of a formal expropriation may be equivalent to an expropriation only if it gives rise to an effective deprivation of the investment as a whole, which requires either a total loss of the investment’s value or a total loss of control by the investor of its investment, both of a permanent nature [Award, para. 286]. According to the Tribunal those conditions were not present; hence, the pre-migration measures could not be characterized as equivalent to an expropriation. [Award, para. 287]

However, with regard to the core of the dispute – that is, the expropriation of the Cerro Negro and La Ceiba Projects in June 2007 – the findings were different. While the claimants submitted that the expropriations were unlawful and that therefore they were owed full reparation and damages, the Respondent did not contest that they had expropriated the claimant’s investment, but maintained that the expropriation was lawful and that the claimants were only owed the market value of the investment in June 2007, as provided in Article 6 of the BIT. The tribunal found that ‘the expropriation was the result of laws enacted by the National Assembly and of decisions taken by the President of the Republic of Venezuela, the purpose of which was to create new mixed companies in which the State would own more than 50% of the shares. Negotiations with the oil companies were foreseen to that effect for a period of four months, and nationalization was contemplated only in case of failure of those negotiations.’ The tribunal found that this process, which enabled the participating companies to weigh their interests and make decisions during a reasonable period of time and had indeed been successful in the past, ‘was compatible with the due process obligation of Article 6 of the BIT.’ [Award, para. 297] The tribunal also noted that, since an offer of compensation had been made and that there was no evidence which demonstrate that such proposals were incompatible with the requirement of “just” compensation of Article 6(c) of the BIT, the claim for unlawful expropriation was to be rejected [Award, para. 306].

The Tribunal stated that the “just compensation” under Article 6 of the BIT ‘must be determined immediately after the failure of the negotiations between the Parties and before the expropriation, i.e., on 27 June 2007, and it must correspond to the amount that a willing buyer would have been ready to pay to a willing seller at the time in order to acquire the expropriated interests.’ [Award, para. 307]

The most interesting part of this award, in my opinion, lies in the tribunal’s interpretation of the FET, National Treatment and Most Favoured Nation Treatment standards. Articles 3 and 4 of the now terminated BIT between the Netherlands and Venezuela stated as follows:

Article 3

1) Each Contracting Party shall ensure fair and equitable treatment of the investments of nationals of the other Contracting Party and shall not impair, by arbitrary or discriminatory measures, the operation, management, maintenance, use, enjoyment or disposal thereof by those nationals.

2) More particularly, each Contracting Party shall accord to such investments full physical security and protection which in any case shall not be less than that accorded either to investments of its own nationals or to investments of nationals of any third State, whichever is more favourable to the national concerned.

3) If a Contracting Party has accorded special advantages to nationals of any third State by virtue of agreements establishing customs unions, economic unions, monetary unions or similar institutions, or on the basis of interim agreements leading to such unions or institutions, that Contracting Party shall not be obliged to accord such advantages to nationals of the other Contracting Party.

4) Each Contracting Party shall observe any obligation it may have entered into with regard to the treatment of investments of nationals of the other Contracting Party. If the provisions of law of either Contracting Party or obligations under international law existing at present or established hereafter between the Contracting Parties in addition to the present Agreement contain a regulation, whether general or specific, entitling investments by nationals of the other Contracting Party to a treatment more favourable than is provided for by the present Agreement, such regulation shall to the extent that it is more favourable prevail over the present Agreement.

Article 4

With respect to taxes, fees, charges, and to fiscal deductions and exemptions, each Contracting Party shall accord to nationals of the other Contracting Party with respect to their investments in its territory treatment not less favourable than that accorded to its own nationals or to those of any third State, whichever is more favourable to the nationals concerned. For this purpose, however, there shall not be taken into account any special fiscal advantages accorded by that Party;

(a) under an agreement for the avoidance of double taxation; or

(b) by virtue of its participation in a customs union, economic union, or similar institutions; or

Indeed, Article 3 of the BIT provides for a highly specific definition of the FET – one that prevents arbitrary or discriminatory measures, guarantees full protection and security with a minimum level based on the MFN standard, and provides for a few exceptions based on other international law obligations – while Article 4 sets out three specific exceptions to the NT and MFN standards. It can be said that the claimant’s argument based on Article 3 of the BIT was somehow reckless. Whilst virtually no tribunal accepts the Neer interpretation of the FET standard, the tribunal could have hardly come up with a different interpretation of the BIT. The measures taken by Venezuela were not discriminatory, as the affected the whole oil industry. They could certainly come across as arbitrary (and we could stay here for hours writing and commenting on how the conduct of a sovereign state is, at least to an extent, arbitrary by definition), but one cannot ground an arbitral award on “could”. It must be certain and without doubt – which wasn’t the case with regard to Venezuela’s restructuring of the oil sector. My point is that, in the absence of a detailed formulation of the FET standard in BITs (and here I must point out that Article 3 of the defunct Netherlands-Venezuela BIT is almost a work of art), hard evidence of an unfair and inequitable conduct of the state must be supplied – otherwise the FET standard would really be a dangerous gap-filler provision (an interpretation that many a lawyer, Dolzer in primis, refuse). In the end, Mobil Corporation got what they wanted from the outset, and they did so not via the application of the FET that seems to be the trend among fashionable ICSID tribunals; they got what they were owed by means of the application of the ol’ good law on expropriation – one that, incidentally, also encompasses an assessment of whether the measures taken by the host state were arbitrary or discriminatory. If it ain’t broken, why fix it?

#Icsid #investment arbitration #fair and equitable treatment #expropriation #Mobil v Venezuela

(Don't) Stop the TTIP: A reply to Paul O'Connell

(updated on Oct. 18th, 2014)

#ttip #isds #US-EU #trade

A bit of clarity from the insiders: the SCC launches an ISDS blog

It is not clear yet how this initiative will pan out, but the initiative itself is worth some praise – and, indeed, some publicity. Now that the debate on investor-state dispute settlement (or ISDS – looks like even I will have to accept this acronym) has reached quite a wider audience than the usual suspects amongst academics and practitioners, the folks at the Stockholm Chamber of Commerce have launched an ISDS blog. The good thing is that the SCC is the second-biggest forum for investment arbitration after the ICSID. The bad one is that, well, the blog is written mostly in what I can only assume is Swedish, with the exception of a few posts in English; on top of that, updates seem to be even rarer than the ones on Investmentblawg. Nonetheless, here’s to the debate on investment law, and with the hope that ISDS-Bloggen becomes a hub for investment lawyers webwide.

#investment blog #ICSID #SCC #investment arbitration

Live long enough, You begin to question, There is nothing new under the sun. Enter the TTIP.

The declassification of the TTIP directives, however, looks like much noise about nothing. Whilst commentators such as the folks at BBC called the document a 'key' one that reveals the EU strategy in the talks with the US, anyone who’s been remotely interested in the TTIP from the beginning will only find everything they already knew, just collated in one document.

As far as investment protection is concerned, here are the key paragraphs:

22. The aim of negotiations on investment will be to negotiate investment liberalisation and protection provisions including areas of mixed competence, such as portfolio investment, property and expropriation aspects, on the basis of the highest levels of liberalisation and highest standards of protection that both Parties have negotiated to date. After prior consultation with Member States and in accordance with the EU Treaties the inclusion of investment protection and investor-to-state dispute settlement (ISDS) will depend on whether a satisfactory solution, meeting the EU interests concerning the issues covered by paragraph 23, is achieved. The matter shall also be considered in view of the final balance of the Agreement.

23. As regards investment protection, the objective of the respective provisions of the Agreement should:

- provide for the highest possible level of legal protection and certainty for European investors in the US,

- provide for the promotion of the European standards of protection which should increase Europe's attractiveness as a destination for foreign investment,

- provide for a level playing field for investors in the US and in the EU,

- build upon the Member States' experience and best practice regarding their bilateral investment agreements with third countries,

- and should be without prejudice to the right of the EU and the Member States to adopt and enforce, in accordance with their respective competences, measures necessary to pursue legitimate public policy objectives such as social, environmental, security, stability of the financial system, public health and safety in a non-discriminatory manner. The Agreement should respect the policies of the EU and its Member States for the promotion and protection of cultural diversity.

Scope: the investment protection chapter of the Agreement should cover a broad range of investors and their investments, intellectual property rights included, whether the investment is made before or after the entry into force of the Agreement.

Standards of treatment: the negotiations should aim to include in particular, but not exclusively, the following standards of treatment and rules:

a) fair and equitable treatment, including a prohibition of unreasonable, arbitrary or discriminatory measures,

b) national treatment,

c) most-favoured nation treatment,

d) protection against direct and indirect expropriation, including the right to prompt, adequate and effective compensation,

e) full protection and security of investors and investments,

f) other effective protection provisions, such as an "umbrella clause",

g) free transfer of funds of capital and payments by investors,

h) rules concerning subrogation.

Enforcement: the Agreement should aim to provide for an effective and state-of-the-art investor-to-state dispute settlement mechanism, providing for transparency, independence of arbitrators and predictability of the Agreement, including through the possibility of binding interpretation of the Agreement by the Parties. State-to-state dispute settlement should be included, but should not interfere with the right of investors to have recourse to the investor-to-state dispute settlement mechanisms. It should provide for investors as wide a range of arbitration fora as is currently available under the Member States' bilateral investment agreements. The investor-to-state dispute settlement mechanism should contain safeguards against manifestly unjustified or frivolous claims. Consideration should be given to the possibility of creating an appellate mechanism applicable to investor-to-state dispute settlement under the Agreement, and to the appropriate relationship between ISDS and domestic remedies.

Relationship with other parts of the Agreement: investment protection provisions should not be linked to the market access commitments on investment taken elsewhere in the Agreement. ISDS shall not apply to market access provisions. These market access commitments may include, when necessary, rules prohibiting performance requirements.

All sub–central authorities and entities (such as States or municipalities) should effectively comply with the investment protection chapter of this Agreement.

The most interesting (and innovative) thing in this directives lies in the inclusion of IP rights and, to a lesser extent, portfolio investment under the umbrella of investment protection. It remains to be seen how to deal with portfolio investment should the ICSID remain the preferred means for the settlement of investment disputes (or ISDS, as investment-newbies like to call it these days), although recent and non-recent cases suggest that it won’t be much of a problem (Patrick Mitchell, anyone?). With regard to IP, which have been included in many BITs (one may say ‘merely for the sake of including them’), this is what the Directives states:

28. The Agreement shall cover issues related to intellectual property rights. The Agreement will reflect the high value placed by both Parties on intellectual property protection and build on the existing EU-US dialogue in this sphere.

29. Negotiations should, in particular, address areas most relevant for fostering the exchange of goods and services with IP content, with a view to supporting innovation. The negotiations shall aim to provide for enhanced protection and recognition of EU Geographical Indications through the Agreement, in a manner that complements and builds upon the TRIPS, also addressing the relationship with their prior use on the US market with the aim of solving existing conflicts in a satisfactory manner. After prior consultation with the Trade Policy Committee, additional IPR issues shall be considered in the negotiations.

30. The Agreement shall not include provisions on criminal sanctions.

In other words, bring on the TRIPS and the usual suspects, because investment disputes on IP will surely not be based on the TTIP.

Edit: someone raised to me the point that the Directives expressly states that ‘consideration should be given to the possibility of creating an appellate mechanism applicable to investor-to-state dispute settlement under the Agreement’. This would indeed be a revolutionary development in investor-state arbitration. However, after obtaining a PhD on this very topic and having my heart broken by the United States of America not once but twice, I think I’ll postpone my thoughts indefinitely – that is, until a project for an appellate mechanism gets actually on the table.

#ttip #EU #investment arbitration #investment protection #Icsid #appeal

Third party beneficiaries and arbitration clauses: a way out of arbitration for investors?

A recent Judgment of the First Chamber of the ECJ (Case C-531/12 P - Commune de Millau and SEMEA v Commission) addresses the question on whether third parties not party to a contract may be caught by an arbitration clause. It is a question that, mutatis mutandis, has some relevance for investment arbitration as well, although perhaps more theoretically than practically (at least for the time being).

In Commune de Millau and SEMEA v Commission, one of the questions posed to the ECJ was based on a succession of parties in a contractual relationship. As summarised by AG Kokott in her opinion,

13. In July 1990, the European Economic Community, represented by the Commission of the European Communities, concluded a grant contract for the performance of a local development project with the Société d’économie mixte d’équipement de l’Aveyron (Aveyron semi-public installations company) (‘SEMEA’), which was 50% owned by the Commune de Millau (Municipality of Millau) (France). The parties agreed, on the one hand, that the grant contract would be subject to French law and, on the other hand, that, ‘failing an amicable settlement’, the Court of Justice would have ‘exclusive jurisdiction to rule on any dispute concerning the contract and arising between the contracting parties’.

14. Nevertheless, in agreement with the European Commission, the further performance of the development project was undertaken not by SEMEA, but by an association set up to implement the project. That association did not, however, become a party to the grant contract, with the result that SEMEA continued to be the party to the contract with the Community.

15. After finding that the Community had made overpayments, in 1993, the Commission claimed recovery from SEMEA of the sum of ECU 41 012 (‘the disputed debt’). Although SEMEA did not respond to that request for payment, the Commission did not initially issue any further letters of formal notice.

16. It was not until 2005, that is to say some twelve years later, that the Commission resumed its claim for payment. SEMEA informed the Commission that the company was now being wound up. In addition, SEMEA maintained that the association entrusted with the performance of the subsidised project had assured it that the Commission had waived the disputed debt, which, moreover, had now become time-barred. The Commission disputes that it had in any way waived the disputed debt. Despite further exchanges of correspondence and letters of formal notice, SEMEA did not make any payments. In February 2008, the Commission sent it a final demand for payment.

17. On 21 November 2008, the Extraordinary General Meeting of SEMEA took formal note of the decision of the Commune de Millau, its main shareholder, to take over its assets and liabilities and decided to pay the sum of EUR 82 719.76, representing SEMEA’s available liquidity, to the Commune de Millau. The liquidation report submitted by the liquidator made reference to the disputed debt.

18. On 9 December 2008, SEMEA’s liquidator concluded the winding-up of the company and had SEMEA removed from the Commercial and Companies Register. On 18 December 2008, the municipal council of the Commune de Millau confirmed that it had taken over SEMEA’s assets and liabilities. The disputed debt owed to the Commission was mentioned as one of the liabilities and reference was made in that connection to the fact that SEMEA had claimed the debt to be time-barred and that the creditor had ceased to pursue its demand for payment. That step had not been approved by the Commission.

The relevant piece of legislation to answer the question on whether a third party can be caught by an arbitration clause they had not originally signed is Art. 272 TFEU, according to which ‘[t]he Court of Justice of the European Union shall have jurisdiction to give judgment pursuant to any arbitration clause contained in a contract concluded by or on behalf of the Union, whether that contract be governed by public or private law.’

In the first degree, the General Court found that

it had jurisdiction over the municipality on the ground that, ‘by means of a stipulation for the benefit of a third party between SEMEA and the Commune de Millau, the latter is subject to an arbitration clause in favour of the Union’. It is apparent from the general principles of contract law that ‘[t]he existence of … a provision in favour of a third party may also arise from the purpose of the contract or the circumstances of the case’. The municipality had ‘with full knowledge of the facts’ and without expressing a reservation with regard to the arbitration clause in the grant contract — intended to take on SEMEA’s liabilities and thus rendered itself subject to the arbitration clause in the grant contract.

The Commune de Millau appealed against this finding on grounds of the European Union courts not having jurisdiction to hear and determine the application brought against it. According to the Commune de Millau it is impossible for a legal person governed by French public law to conclude an arbitration clause by means of a stipulation for the benefit of a third party, while at the same time challenging the very existence of such an agreement.

The Court unfortunately did not engage significantly in discussing these issues in detail, mostly because of the failure by the appellants to provide solid points of law to be discussed. As noted by the Court,

45. So far as concerns the first part of the first ground of appeal, the appellants dispute the very fact that an arbitration clause, within the meaning of Article 272 TFEU, can be the subject of a stipulation for the benefit of a third party. In that regard, they refer to their arguments put forward at first instance relating to the prohibition on public-law corporations governed by French law entering into an arbitration clause, submitting that that prohibition must apply, a fortiori, to the stipulation of such a clause for the benefit of a third party.

46. It follows from the foregoing that the appellants are merely developing a line of argument already put forward before the General Court, without, however, stating their views on the reasons given by the General Court for rejecting it.

[…]

49. Accordingly, that argument must be rejected as inadmissible.

50. As regards the reference made to the judgment in Gerling Konzern Speziale Kreditversicherung and Others in paragraph 136 of the judgment under appeal, it should be noted that the General Court cited that judgment to point out that ‘the procedural nature of an arbitration clause does not preclude such a clause being stipulated in favour of the third party’.

51. It is sufficient to note that paragraph 136 of the judgment under appeal contains a ground that was included for the sake of completeness which supports the conclusion to which the General Court came in paragraphs 134 and 135 of that judgment, namely that a clause conferring jurisdiction may be the subject of a stipulation for the benefit of a third party.

52. In so far as the appellants’ argument relating to the judgment in Gerling Konzern Speziale Kreditversicherung and Others cannot therefore call into question the General Court’s finding, that argument must be rejected as ineffective.

53. The argument concerning the principle of freedom of contract, according to which, in the absence of express consent from the Commission, there was no transfer of either the disputed debt or the arbitration clause relating thereto, must also be rejected. The appellants merely reproduce their argument put forward at first instance, without specifying in what way the General Court was wrong to find, in paragraphs 142 and 143 of the judgment under appeal, that the Commission’s express consent was not necessary, in so far as the arbitration clause was stipulated in favour of the European Union.

54. As regards the second part of the first ground of appeal, it is sufficient to note that the appellants, while pointing out certain elements of fact, essentially dispute the assessment made by the General Court, in paragraphs 137 to 140 of the judgment under appeal, of the facts of the case in order to determine whether a stipulation for the benefit of a third party may be inferred from the purpose of the contract at issue.

55. According to Article 256 TFEU and the first paragraph of Article 58 of the Statute of the Court of Justice, there is a right of appeal on points of law only and it must be based on grounds alleging lack of competence of the General Court, a breach of procedure before it which adversely affects the interests of the appellant and the infringement of EU law by the General Court […].

56. The General Court therefore has exclusive jurisdiction to establish the facts except where the substantive inaccuracy of its findings is apparent from the documents submitted to it, and to assess the evidence accepted. The establishment of those facts and the assessment of that evidence do not, save where the clear sense of the evidence has been distorted, constitute a point of law which is subject as such to review by the Court of Justice […].

57. The assessment of the facts carried out by the General Court, leading to the conclusion that the Commune de Millau was under an obligation to pay, does not therefore constitute a point of law which is subject to review by the Court of Justice, save where the facts are distorted, which has not, however, been alleged by the appellants.

58. The second part of the first ground of appeal must therefore be declared inadmissible.

Arbitration clauses for the benefit of a third party are the most peculiar feature of bilateral investment treaties. Without diving into a discussion on the derivative theory and the third party beneficiary theory (for which I remind readers to Andrea Bjorklund, “Private Rights and Public International Law: Why Competition among International Economic Law Tribunals is not Working”, 59 Hastings Law Journal 241 (2008)), it is undisputed that arbitration clauses in BIT signed by two States are stipulated for the benefit of a national of either State. The State has given their consent to arbitration when signing the BIT, the investor gives their consent when they commence the proceedings against the host State, and no one raises an eyebrow.

The number of arbitral cases in which the State acts as claimant against a foreign investors is significantly low, and they are anyways all contract-based claims rather than treaty-based ones. The reasons are to be found in the usual suspects: investors are not parties to BITs, hence they are not under any international law obligation, they cannot be brought to arbitration unless they have expressed their consent and so on. Then again, a few questions can nonetheless be asked, especially now that investment arbitration seems to be more of a weapon in the hands of investors rather than a shield against abuses of host States. First of all, if States can transfer treaty rights to investors, could not they transfer obligations as well? (I am basically thinking out loud now, but every objection that comes to my mind seems capable of being attacked with a counter-objection). Second, as the ECJ case reported above pointed out, the answer to the first question would be a matter of applicable law: in the case of transfer of BIT rights and obligations, would we need to apply anything other than international law? (Again, gut feeling says no, but I am looking forward to talk about this). Third, is there anything in international law that prevents the transfer of obligations to a third party – other than, say, such third party not being a subject of international law? And fourth, if nothing in international law prevents the transfer of treaty rights to entities that are not subjects of international law, why could obligations not be transferred as well? (Yes, we are back to square one). In the context of EU law, the General Court has solved the problem by stating that

134. […] since an arbitration clause is of a contractual nature, there is nothing to prevent the existence of such a clause being examined in the light of the general principles of contract law deriving from the legal orders of the Member States. Indeed, even if one of those principles states that a contract is binding only on the parties, that principle does not preclude those two parties conferring a right on a third party by means of a stipulation for the benefit of a third party.

135. Moreover, the insertion, in the contract between the Commune de Millau and SEMEA, of an arbitration clause allowing the Union to submit a dispute between itself and the Commune de Millau to the General Court is not contrary to the requirement in Article 272 TFEU that such a clause be contained in the contract concluded by the Union or on its behalf. A provision in favour of a third party may be regarded as a provision made on behalf of the Union. On the other hand, that requirement in Article 272 TFEU must be interpreted as precluding the jurisdiction of the General Court over disputes concerning a contract being founded against the wishes of the Union. An arbitration clause stipulated solely in favour of the Union cannot be enforced against its will.

136. Finally, the procedural nature of an arbitration clause does not preclude such a clause being stipulated in favour of the third party. In so far as concerns jurisdiction clauses within the meaning of Article 17 of the Brussels Convention and Article 23 of Regulation No 44/2001, the Court has already accepted such a clause (Case 201/82 Gerling Konzern Speziale Kreditversicherung and Others [1983] ECR 2503, paragraphs 10 to 20).

If we apply the same principle to investment arbitration, the possibility to transfer obligations as well as rights should be contained in the BIT itself. Something along those lines is contained in the SADC Model BIT Template, although it cannot be said that host States could be able to bring foreign investors to arbitration on the basis of a BIT shaped upon the SADC Model. Moreover, it seems to me that an investor may always avoid being brought before an arbitral tribunal by giving up the protection awarded by the BIT (also losing the possibility to commence arbitration against the host State, but at that point it would be the lesser of two evils). Either way, times like these are when I wish my field was EU, where one Court can solve the problem for everybody. Or make it more complex, one may say?

(hat tip to Albert Sanchez-Graells at How to Crack a Nut for slipping me inspiring ECJ judgments under the table)

#investment arbitration #bilateral investment treaties #European Court of Justice #third party beneficiaries

Claimants, Witnesses and Procedural Jokes: What is going on in Abaclat v. Argentina?

the distinction between “cross-examination”, “direct examination” or “examination” tout court, or the distinction between “Claimant Witnesses” and “Claimants who are not Witnesses” are perfectly irrelevant for granting or rejecting the Request as formulated by the Respondent. The factual outcome of the described Majority’s exercise is that the Respondent is denied altogether the right of examination at the next hearing of any purported individual Claimants, except of the 8 “Claimant Witnesses” who are persons chosen by the legal representation of the Claimants themselves!! This is an amazing outcome by all standards, a procedural joke. Moreover - as a consequence of the decomposition of the Respondent’s Request - the refusal by the Majority to give to the Respondent the opportunity to verify by itself by examination at the next hearing the personal and holding data of purported individual Claimants lacks in the Order of an adequate motivation. The relevant reasoning as advanced in the Order relates to the decomposed Request not to the Request formulated by the Respondent. In fact, no legal explanation is given for the rejection as a whole of the Request as formulated by the Respondent.

The quote comes from the Statement of Dissent of Dr. Santiago Torres Bernárdez to Procedural Order no. 27 of 30 May 2014, at para. 8. One can only imagine the discussions taking place behind the curtains of the case, but Dr. Torres seems to have a point – although I wouldn’t support for obvious reasons the use of a term such as “procedural joke” in a Procedural Order.

Another interesting point in the dissenting opinion is this:

16. I do not know any “general principle of public international law” or any “general principle of law” in the sense of Article 38 (c) of the Statute of the ICJ or a “general principle” in international law arbitration of general application to the effect that the right of a Party to call its own witness and experts for direct examination does not apply to those having previously submitted written statements in the case. It may be that some commercial arbitration rules or a given particular arbitration system incorporates such a “principle” but it is not the case of the ICSID instruments. The texts of the ICSID Convention and Arbitration Rules do not set out a “principle” of that kind either explicitly or by necessary implication.

This is Dr. Torres’ dissent from the decision of the majority, according to which ‘there shall in principle be no direct examination of witnesses and experts, unless otherwise justified by special circumstances’ (Procedural Order no. 27, p. 14), which refers to the examination by the Respondent of its own witness and experts that had submitted statements at the written stages of the proceedings. Now, while I may agree in principle with Dr. Torres’ finding that nothing in international law prevents parties from calling their own witness to testify regardless of whether they have already submitted written statements, I am not so sure about it with regard to arbitration law specifically. Given that one of the purposes of arbitration is to avoid the length of judicial proceedings (please note the irony of talking about speed in a 7-year-and-counting long arbitration), isn’t it consistent with the nature of arbitration to give parties one chance to provide expert witnesses and statements, with the caveat that, if they have something to say, they should do so when writing (or being heard)? This principle, obviously, would not apply to the examination of witnesses by the other party, if anything for reasons of procedural fairness. However, if we allow a party to file a witness statement and then call the same witness again and again, how long should we expect arbitral case to go on? We might as well try all these cases in Italian courts then – it would at least be cheaper.

#investment arbitration #due process #abaclat v. argentina #ICSID

Common sense not needed: time for an economic analysis of international investment law

From an economic perspective, we can assume that any State has a list of preferences (in our case, having foreign investors injecting capital in their economies) and limited resources (which, in our case, can be identified with the policies a State can put in place to encourage foreign investment and what a State is willing to concede in terms of sovereign powers – that is, treatment of foreign investors, pre- and post- establishment requirements and, obviously, dispute resolution – and, last but not least, the attractiveness of their legal and economic environment in comparison with that of other states competing for the same foreign capital). A cost-benefit analysis of the pursuit for foreign investment must take all these factors into account.

Observing investment law under the lens of Pareto efficiency raises a few doubts about the desirability of investment law. The concept of Pareto efficiency, to put it in simple terms (that is, simple enough for someone who is not an economist like yours truly) considers efficient an allocation of resources in which it is not possible to make one of the actors better off without making at least another actor worse off. Any occasional observer of investment law and arbitration would probably point out that, even by taking into account all the relevant standards of treatment – MFN and NT especially – the system of investment law is hardly efficient. Although it is theoretically possible to imagine that all the provisions of all the BITs currently in force balance each other – which is not the case, due to the dramatic differences (financial and otherwise) among the different State actors – the unpredictability of investment arbitration makes it impossible to keep the system efficient under Paretian criteria. A State loses a case and the cost of receiving investment goes through the roof, even if the award is later annulled. A State nationalises a few investments, the investor makes a loss. A few more nationalisations, and foreign investors start treating the whole region in which that State is as unstable and not investor-friendly, and everybody in the area is worse off. Under this lens, establishing an investment abroad looks as economically sound as buying a few lottery tickets.

It is interesting though to analyse investment law from the point of view of the Kaldor-Hicks criterion, according to which an outcome is more efficient if those actors in the system that are made better off gain more than those that are made worse off lose. Talking about winners and losers in BITs looks to me preposterous at best. First, investors do not sign BITs – they merely benefit from them. Second, even if we consider a signatory State a BIT loser if it is a capital-importing country, I am reasonably sure that they would not consider them as such; they must think that the cost of foreign investment in terms of sovereignty limitations is worth spending, be it because of the inflow of capital by itself or because they aim at attracting more foreign capital than the other States in the area. Again, investment arbitration is the key to identify the winner and the loser – which, from an economics perspective, may not necessarily be the winner and the loser of the case. I am not embarking in an economic analysis of investment arbitration, as it would require anyone wishing to do such a thing to have a) funding, b) time and c) thirtysomething research assistants (all resources that are quite scarce, to stay within the semantics of the field). However, a quick look at a few ICSID awards (the good ones with all the facts and numbers, I mean) shows that, within the course of an investment – from the signing of the BIT between the host State and the State of the investor to the establishment, the usual catastrophe and the subsequent arbitration – sometimes one of the two actors involved gains more than the other loses (as in a number of cases on nationalisations of, say, hotels or other businesses), while in other cases – taking into account the preferences and resources I wrote about above - the loser is at loss for infinitely more than the winner gets (Argentina, anyone?).

The point of this post is not to provide an economic analysis of the system of investment law - something that, as mentioned beforehand, is not within my powers at the moment. However, such research is definitely needed, if anything to contribute constructively once and for all to the debate on whether the system of international investment law as we know it is broken or, in spite of all its problems, is still the most efficient means we have to regulate foreign investment.

#economic analysis #bilateral investment treaties #efficiency #investment law system

Academic Integrity and the business of higher education

To talk about keeping academic integrity is easy. I’ve never met another academic in my (very limited) experience who would admit to have put their academic integrity on the back burner in exchange for something else (money, fame, prestige, all terms that need to be read in the context of academia – hence next to no money, fame only among our peers, and a prestige which is usually accompanied by the need to explain what we actually do to people who see us as glorified teachers with lots of free time). To walk the walk of academic integrity, well, that’s a different story; a story that comes with a significant reality check anytime we get a reminder that, in today’s world, education is also a business, and a very profitable one too. As in any business, the more customers you have, the more money you make, and students seem more and more to be considered as customers – to the point that in many instances they appear to consider themselves as such. The question, though, is: do we need more customers, or do we need to provide a better service to selected ones?

Before I get into any problematic area, let me get one point clear: I am not in favour, nor would I ever be, of elitist academic institutions. The university system of the 1950s, in which only the rich could get access to higher education, is gone and not really missed. On the other hand, the academic system needs gatekeepers – be them admissions offices or the academic themselves. The task of the former is pretty straightforward: check an applicant’s grades, if they’re high (and I mean high) let them in, if they’re not, thanks but no, thanks. Once the students are in, though – and this is important at every level, be it undergraduate, masters or PhD – the load is on the academics’ shoulders to provide excellence, and demand excellence.

The danger I see with the academic system leaning towards the business side of things is the transformation of universities in degree dispensers: come in, collect 180 credits, get a degree, go home. This is not what higher education is supposed to be. Academic integrity does not only entail integrity in our research, but also – and those not interested in our research would probably say first and foremost – embracing and applying rigorous academic standards in teaching, marking, supervising and examining. A university degree is not a professional qualification: it is something less and something more at the same time. Less, because having a degree does not mean one’s ready to perform a certain job (let alone being qualified, legally or otherwise); more, because a degree is (or should be) the measurement of the level of knowledge one has in a particular field.

Lowering, or simply not upholding, academic standards may make for a few happy customers in the short term. In the long term, however, low academic standards entail proliferation and devaluation of degrees, graduates with superficial knowledge of topics they should be experts on, and worthless academics – for I think the role of the academic is not to sit in their ivory tower and every now and then sharing a few nuts with the plebeians, but to constantly engage in cultural exchanges with their community of reference; a community that includes practitioners, other academics, students, and the occasional observers. Excellence in research is required from academics, and rightly so. Academics should, for their own part, require excellence from themselves and their students, but also be willing to spend time and effort in teaching and, more in general, spreading their knowledge – in other words, creating the conditions for such excellence to be sought and reached. Providing academics with an audience of people less than equipped to reach that level, though, undermines their work, and not just in a snobbish “I think, therefore I talk – but only to geniuses, please” way: the work of an academic can only be perform if the audience is educated, motivated, willing to engage and to put in the hours, and in the end determined to succeed. Lowering our standards to please less equipped people would mean providing a disservice to the desirable audience I just described – let alone shaming the whole academic community (or at least those who care).

#academic integrity #student satisfaction #higher education

Six questions on the ICSID in Latin America

- What will be the consequences in the long term of the denunciation of ICSID by Bolivia, Ecuador and Venezuela? Will it affect the flow of foreign investment towards those countries, given that ICSID arbitration is no longer an option?

- While the political reasons behind those denunciations are clear, are there Latin American scholars that will point to the denunciation of the ICSID Convention as one of the reason for the decrease in foreign investments?

- Would investors from capital-exporting countries be comfortable in submitting their disputes to regional, Latin American dispute resolution centres? Even though many BITs provide for the ICSID as only one of the possible dispute resolution mechanisms, the stats show that the ICSID has been by far the most popular up to this time.

- Is transparency – one of the key features of the UNASUR Centre proposal – really an issue that cannot be addressed in the ICSID forum? Moreover, is it really a legal issue or should it be relegated to the political sphere?

- Can the argument of arbitrators having a bias against Latin American countries be sustained? (my gut feeling says “zero, zilch, none, nada, zip, rien, niets, nichts, niente“, but maybe I am biased myself)

- Would the establishment of an ICSID appeals facility revamp the ICSID’s appeal (no pun intended) among Latin American countries?

#ICSID #latin america #appeal #investment arbitration

Habemus Dictum? er, not really: Finality vs. Discovery of new evidence in ICSID arbitration

The majority of the Tribunal (Judge Kenneth Keith and Mr. L. Yves Fortier) rejected the Respondent request considering their previous decision as having res judicata effect, citing Electrabel S.A. v. Hungary (ICSID Case No. ARB 07/19) to state that decisions that resolve points in dispute between the parties ‘are intended to be final and not to be revisited by the Parties or the Tribunal in any later phase of their arbitration proceedings’ (Decision on Respondent’s Request for Reconsideration, para. 21). The majority of the Tribunal also rejected the Respondent’s argument relying on Article 44, which would allow the Tribunal to fill any gaps in the ICSID procedure, stating that the ICSID Convention provides for (however limited) review of the Tribunal’s decision once the Award has been rendered (Decision on Respondent’s Request for Reconsideration, para. 23).

Georges Abi Saab disagreed with the majority decision, and especially (at least for the purposes of this post) with the consideration of the Tribunal’s decision on jurisdiction and the merits as res judicata. It is worth reproducing his all reasoning on this point:

Para. 38 – […]Article 48, paragraph 3 of the ICSID Convention provides : “The award shall deal with every question submitted to the Tribunal…”. In other words, this provision mandates that the award incorporates any conclusions (findings, decisions) on a question submitted to the Tribunal that it would have formulated before the final award.

39 – If an award is incomplete, in the sense of not integrating earlier decisions on certain questions put to the tribunal, or otherwise omitting to deal with some such questions, it would not correspond (or not as yet) to the substantive definition of the “award” in article 48/3 of the Convention. In other words, it would not be the “final” award envisaged in that definition; “final” being understood not only in its chronological current meaning of “last” (though under the ICSID Convention it should also be); but in its technical procedural meaning of “definitive”, signifying that the Tribunal has deployed and totally discharged its adjudicative function vis-à-vis the treated matter, putting an end to the dispute before it on that matter, and deseizing the Tribunal of it, except for post-adjudicative tasks (unless otherwise provided).

40 – If the award cannot be considered final unless and until it incorporates the prior partial decisions – finality being attached to the all-inclusive character of the instrument – these interlocutory partial decisions a fortiori cannot be considered final until they are thus incorporated as part of the whole.

The issue here is one of finality, rather than one of review stricto sensu. The ICSID Convention provides for an in-built annulment mechanism as well as the possibility for revision of the award ‘on the ground of discovery of some fact of such a nature as decisively to affect the award, provided that when the award was rendered that fact was unknown to the Tribunal and to the applicant and that the applicant's ignorance of that fact was not due to negligence’ (Article 51(1) ICSID). These mechanism, however, can only be activated against arbitral awards, and not against interim or preliminary decisions or procedural orders. The ICSID Convention, as pointed out by Prof. Abi Saab as well, does not even contemplate interim or partial awards (Dissenting Opinion, para. 47, quoting Tanzania Electric Supply Company Ltd v. Independent Power Tanzania Ltd. (ICSID case No. ARB/98/8), Final Award of 22 June 2001, para. 32). Hence, the question is whether the Decision on Jurisdiction and the Merits in ConocoPhillips was, indeed, an award.

What is an award under the ICSID Convention? Article 48 ICSID recites as follows:

(1) The Tribunal shall decide questions by a majority of the votes of all its members.

(2) The award of the Tribunal shall be in writing and shall be signed by the members of the Tribunal who voted for it.

(3) The award shall deal with every question submitted to the Tribunal, and shall state the reasons upon which it is based.

(4) Any member of the Tribunal may attach his individual opinion to the award, whether he dissents from the majority or not, or a statement of his dissent.

(5) The Centre shall not publish the award without the consent of the parties.

The important part of Article 48 is point 3, that defines the Award as the document that deals with every question submitted to the Tribunal and states the reasons behind it. It is not clear whether Article 48(3) can refer to a set of documents, rather than a document, and Prof. Abi Saab in his dissenting opinion points out how divided is the scholarship on this point (paras. 47 and 50). One may argue that, if the Tribunal has decided on one or some of the questions submitted by the parties and has stated the reasons behind it, such decision is indeed part of the Award and therefore is to be considered res judicata. This was also the reasoning of the majority of the Tribunal in ConocoPhillips (Decision on Respondent’s Request for Reconsideration, para. 21). However, the majority also admitted that the Decision on Jurisdiction and the Merits was definitely not to be deemed as an award – or at least this is how I interpret the statement ‘Those decisions in accordance with practice are to be incorporated in the Award’ (ibid.) If there is no award, though, then Prof. Abi Saab is right in affirming that there is no finality either (Dissenting Opinion, paras. 40 and 48); and, if there is no finality, there is no limitation in the ICSID Convention or in the ICSID Arbitration Rules on the Arbitral Tribunal to revise conclusions reached earlier in the proceedings – especially in cases, such as the one presented by the Respondent in ConocoPhillips, where new decisive evidence is brought before an Arbitral Tribunal which is still very much in session. Matthew Weiniger, in the blog post mentioned above, points out the dangers that the fragmentation of proceedings into jurisdiction, merits and quantum may pose if a tribunal is allowed to re-open parts of the proceedings on which it has already decided – one for all, ‘[a] claimant that has established the jurisdiction of ICSID and the competence of an arbitral tribunal would unlikely be at ease knowing that the arbitral tribunal might change its mind right up until an Award is made’. On the other hand, Weiniger himself also raises the point that ‘[i]t might be perceived as being unfair for an arbitral tribunal to ignore new evidence or a significant change in circumstances when this has an impact on an earlier decision in the same proceedings’. Moreover, in the case at hand the veracity of the new evidence was not even contested by the Claimant.

The importance of the issue of review of a tribunal’s decision during the proceedings is one that is to be weighed against the possibility, for the tribunal, to revise an award under Article 51 ICSID. The revision mechanism, in ConocoPhillips, is one that could potentially pull the trigger on the inner contradiction in the majority’s decision. Under Article 51(1), as previously mentioned, the revision process can only be activated if facts ‘of such a nature as decisively to affect the award’ are discovered after the award was rendered. The facts raised by the Respondent in their Request for Reconsideration are definitely of such a nature. If one considers the Decision on Jurisdiction and the Merits to be final and binding, then an application for revision should definitely be filed by the Respondent. However, the Decision on Jurisdiction and the Merits (and here we agree with Prof. Abi Saab) cannot be final and binding, because in the ICSID system finality and binding force are characteristics proper only to arbitral awards – and the Decision on Jurisdiction and the Merits, as stated by the majority as well as the dissenting arbitrator, is not an award. Hence, the facts ‘of such a nature as decisively to affect the award’ cannot possibly be unknown to the Tribunal when the Award will be rendered, thus eliminating the possibility for the Respondent to file for revision under Article 51. Surely annulment remains a possibility – with all the respect that is due to the majority members, this award has ‘manifest excess of powers’ and ‘serious departure from a fundamental rule of procedure’ written all over it. Nevertheless, wouldn’t it be easier to just consider the ConocoPhillips proceedings for what they are – namely, an open session in which no Award, and therefore no final or binding decision, has been reached and therefore new – and decisive – evidence should be analysed and taken into account?

#icsid #investment arbitration #finality #conocophillips #revision #arbitral awards #icsid awards

Stand by me (but not too close): the disqualification of an arbitrator in the ICSID Convention

In a decision that raised few comments so far, at least if compared with previous ICSID cases that had to deal with a similar issue, Dr. Laurent Lévy and Prof. Laurent Aynès, ‘unchallenged’ members of the ICSID tribunal called to hear the dispute between Caratube International Oil Company LLMP & Mr. Devincci Salah Hourani and the Republic of Kazakhstan (ICSID Case No. ARB/13/13), have disqualified the third member of the panel as requested by the Claimants. I guess this case will be referred to as Caratube II, as it’s not the same as one in the post below.

What remains unconvincing, though, is the unchallenged arbitrator’s statement that proving the legitimacy of the first ground was sufficient to find that Mr. X lacked one of the characteristics ex Article 14(1) ICSID and was therefore to be disqualified, as stated in para. 91. The decision remains very valid thanks to the fact that the unchallenged arbitrators, in good form, addressed all the grounds raised by the Claimants, and found the validity of the second ground as well. The combination of the two grounds – namely, the prior exposure to a very similar case against the same host state and the imbalance between the information available to Mr. X and that in the hands of the unchallenged arbitrators – surely made Mr. X ability to provide independent judgment at least questionable. Then again, if one looks closely at the language of Article 14(1) ICSID, nothing related to this imbalance in information can be found. Article 14(1), as stated beforehand, requires arbitrators to be ‘persons of high moral character’ (and the unchallenged arbitrators deemed Mr. X to possess this quality) and to be capable of being ‘relied upon to exercise independent judgment.’ Even if nothing more than the appearance of the lack of these qualities is required by Article 57 for disqualification, there should be nonetheless a bit of effort to define the term “independent”. The decision of the unchallenged arbitrators in Caratube II seems to represent a wasted chance in this regard, given that extensive space has being reserved for the discussion on what “manifest” means, while the definition of the term “independent” is to be inferred from the general discussion in the decision. However, a few things need to be underscored: i) Mr. X himself has provided his own definition as meaning ‘independent of the parties’ (reproduced at para. 47); ii) besides the discussion on the grounds summarised above, virtually all the references to the term “independent” in the decision refer to the suspicion raised by the fact that Mr. X has been appointed several times by the same law firm, and more than once in arbitral disputes involving the same host state – leading to infer that the term “independent” indeed refers to the relationship of the arbitrator with the parties; iii) the question of multiple appointments has led the arbitrators to state at para. 109 that ‘Mr. [X]’s prior appointment by Curtis, Mallet-Prevost, Colt & Mosle LLP and the Respondent in the Ruby Roz case does constitute an objective circumstance demonstrating his inability to exercise independent and impartial judgment in the present arbitration.’ The question of independence and potential bias, in other words, was to be a central one – and one the unchallenged arbitrators could have very well made the core of their decision, using the other aspects (the prior knowledge and the imbalance within the Tribunal) as specifications of the lack of independence of the challenged arbitrator. Instead, the unchallenged arbitrators rendered another decision, along the same lines of other questionable decisions for disqualification of arbitrators, based on a broad and, if I may add, creative interpretation of Articles 14 and 57 of the ICSID Convention. As I pointed out above, I remain convinced that a reasonable and informed third party would have not been convinced of the independence of Mr. X in Caratube II. Nonetheless, the “Chinese wall” issue and the imbalance within the tribunal may merely show one’s inappropriateness to hear a given case, but do not say a thing about one’s dependance of the parties in dispute. Even if the outcome of the decision is the most appropriate one, either Article 14(1) ICSID is to be reformed or the unchallenged arbitrators went beyond the scope of Articles 14(1) and 57. Manifest excess of powers, anyone? (Just kidding…)

#icsid #investment arbitration #disqualification #arbitrator #Caratube v. Kazakhstan #manifest #article 14 icsid #article 57 icsid

Trending Blogs

Recently Viewed Blogs

Investment Blawg