Drawing on US Supreme Court decisions on class arbitration, Professor Abi-Saab finds that there is such a fundamental difference between regular bilateral arbitration and mass proceedings that “special consent” is required for mass proceedings and that this consent cannot be deduced from a simple consent to arbitration.  With respect to ICSID practice, he notes that cases of multi-party arbitration have either proceeded with the consent of the parties or without objection from the respondent.  With respect to mass claims processes in international law, he notes that the practice has been to establish a specific process for the mass claims with the consent of the parties and that the only exception to this uniform practice is the United Nations Compensation Commission, which was established by the Security Council under its Chapter VII powers.

Professor Abi-Saab then turns to a subsidiary objection.  Even if in principle Argentina’s consent to arbitration could be interpreted as consent to mass claims, he finds that the Tribunal does not have the power under the ICSID Convention and Arbitration Rules to adopt procedures for dealing with a mass claims proceeding.  He takes issue with the majority’s distinction between a modification to the arbitration rules without party consent (which, according to the majority, a tribunal may not do) and adopting procedures to address the handling of mass claims (which, according to the majority, a tribunal is entitled to do).  In Professor Abi-Saab’s view, the Tribunal has arrogated itself “the power to set aside, in large measure, the existing Rules of Procedure, and replacing them by another set of rules of its own; acting as a legislator, be it for one case.” (para. 208)

With respect to the concept of admissibility, Professor Abi-Saab appears to affirm that it has a role to play in international arbitration.  He notes that “[g]enerically, the admissibility conditions relate to the claim, and whether it is ripe and capable of being examined judicially, as well as to the claimant, and whether he or she is legally empowered to bring the claim to court.” (para. 18), but goes on to state that “none of these conditions has anything to do with the determination of the scope of consent whether to the general or the  special jurisdiction of tribunals”.  He also notes that “regardless of the classification of the objection as a plea to jurisdiction or to admissibility, the result of the non-fulfilment of the requirements should have been the same, the dismissal of the case.” (para. 25).  He thus takes issue with the approach of the majority, which he views as deciding questions of admissibility in its own discretion based on of its own subjective “balancing of interests” (para. 261).

Although the majority’s decision on consent is certainly controversial, it is sound in principle.  Unlike an arbitration clause in a typical commercial contract, offers to arbitrate in investment treaties are open to the world of qualified investors.  The offer to arbitrate is made to investors with investments.  In principle, this offer to the world should be able to be accepted by a multitude of investors.  If there is consent to arbitrate where one shareholder holds 100,000 shares, why is there not equally consent when there are 100,000 shareholders each holding one share?

Professor Abi-Saab is undoubtedly correct that the existence and scope of a Tribunal’s powers go to jurisdiction.  For example, where an investment treaty provides that a tribunal’s remedial powers are limited to the granting of damages, it would be an excess of jurisdiction for the tribunal to order restitution of property or the specific performance of a contract. However, the Dissent is misguided in finding that the Tribunal exceeded its powers in adapting procedures for a mass claim arbitration.  While it is true that the Abaclat proceedings might diverge from the usual ICSID proceedings, the ICSID Arbitration Rules provide a tribunal significant discretion in how proceedings are organized.  While denouncing the majority’s decision as “replacing” (para. 219) the ICSID Arbitration Rules, the Dissent does not provide any specific examples of where the majority’s proposed adaptation to the proceedings would be contrary to the ICSID Arbitration Rules.  In sum, the Dissent appears to equate what happens in the usual ICSID proceedings with what the ICSID Arbitration Rules require.  For example, the ICSID Rules say very little about the mechanics for taking and considering evidence.

The Dissent expresses valid concerns with the procedures the Majority proposes for the simplification of the examination of claims and whether these procedures satisfy due process.   Nevertheless, it is not possible to say ex ante that simplified procedures for the examination of evidence will necessarily breach the Respondent’s due process rights. The Majority states in conclusion that:

 … the Tribunal remains obliged to examine all relevant aspects of the claims relating to Claimants’ rights under the BIT as well as to Respondent’s obligations thereunder subject to the Parties‘ submissions.  Thus, it is the manner in which the Tribunal will conduct such examination which may diverge from usual ICSID proceedings (para. 533).

Due process is not ignored by diverging from “usual ICSID proceedings”.  The form and mechanics of proceedings are, and should be, a function of the claims to be decided and the evidence to be assessed.  As the Majority notes:

Notwithstanding the high number of Claimants involved, the Tribunal must examine not only the elements necessary to determine its jurisdiction (i.e., the nationality of the Claimants, their status of investor and the existence of their investment, etc.), but also those necessary to establish Claimants‘ claims and relating to the merits of the case (i.e., the existence of a breach by Argentina of its obligations under the BIT, the effect of such breach on Claimants‘ investment, etc.). Thus, the high number of Claimants may not serve as an excuse not to examine such elements and adaptations to the procedure may therefore not affect the object of the Tribunal‘s examination. (para. 529).

The task ahead for the Abaclat Tribunal is gargantuan.  Examining all elements of the claims and ensuring that the Respondent is accorded due process will be extremely time consuming.  Even if one may well wonder if an ad hoc Tribunal of three busy arbitrators is the best mechanism to address this kind of dispute, the majority was correct to find that it can hear a mass claim.

This post is written by Andrew Newcombe as a member of the ITA Academic Council.

Although the Tribunal’s finding that it can hear mass claim has garnered the most interest, various aspects of the Decision have sparked debate.  The Tribunal held that the Claimants’ security entitlements in Argentinean bonds are investments for the purposes of Article 25, ICSID Convention and protected under the Argentina-Italy BIT.  Another controversy arises from the fact that the Decision was issued by the majority of the Tribunal without the simultaneous release of the dissenting opinion. The dissenting opinion, which the Decision states is “Forthcoming”, has yet to be released.

On 15 September 2011, the Argentine Republic filed a request for the disqualification of the majority of the Tribunal (Professors Pierre Tercier (President) and Albert Jan van den Berg), alleging that the two arbitrators could not be relied on to exercise independent judgment.   The disqualification request criticizes the two arbitrators in particularly strident language, arguing that the transmission of the Decision: “(a) without the dissenting opinion of the other arbitrator, (b) without his consent, and (c) without even waiting for a draft of said opinion” together with the majority’s rejection of Argentina’s request for provisional measures “is a manifestation of an absolutely inappropriate conduct” (para. 20).

Although the Decision raises a series of interesting issues (for example, see Sarah Ganz‘s post on the Decision’s treatment of the 18-month litigation requirement in the BIT), in this post I focus on the majority’s distinction between jurisdiction and admissibility, a subject of one of my previous posts.  In its Decision, the majority of the Tribunal (the Tribunal) states that it is appropriate and necessary to distinguish issues relating to jurisdiction and admissibility (para. 248) and that the “guiding thought of the Tribunal for distinguishing issues of jurisdiction from issues of admissibility has been the following cornerstone consideration:

 If there was only one Claimant, what would be the requirements for ICSID’s jurisdiction over its claim? If the issue raised relates to such requirements, it is a matter of jurisdiction. If the issue raised relates to another aspect of the proceedings, which would not apply if there was just one Claimant, then it must be considered a matter of admissibility and not of jurisdiction.” (para. 249)

The Tribunal’s analysis thus takes a two-fold approach.  First, it analyzes the mass claims issue within the context of the Parties’ consent to arbitration (a question of jurisdiction) and second, it analyzes the admissibility of mass claims.

The Decision is perhaps the clearest example of an investment treaty tribunal distinguishing between jurisdiction and admissibility.  The Tribunal highlights at para. 247 that:

 (i)            While a lack of jurisdiction stricto sensu means that the claim cannot at all be brought in front of the body called upon, a lack of admissibility means that the claim was neither fit nor mature for judicial treatment;

(ii)            Whereby a decision refusing a case based on a lack of arbitral jurisdiction is usually subject to review by another body, a decision refusing a case based on a lack of admissibility can usually not be subject to review by another body;

(iii)            Whereby a final refusal based on a lack of jurisdiction will prevent the parties from successfully re-submitting the same claim to the same body, a refusal based on admissibility will, in principle, not prevent the claimant from resubmitting its claim, provided it cures the previous flaw causing the inadmissibility.

With respect to consent, the Tribunal rightly held that if, in principle, it had jurisdiction over one claimant, “it is difficult to conceive why and how the Tribunal could loose such jurisdiction where the number of Claimants outgrows a certain threshold.” Further, it highlighted that “the collective nature of the present proceeding derives primarily from the nature of the investment made.”:

The ICSID Convention aims at promoting and protecting investments, without however further defining the concept of investment and leaving this task to the parties through relevant instruments such as BITs … Thus, where the BIT covers investments, such as bonds, which are susceptible of involving in the context of the same investment a high number of investors, and where such investments require a collective relief in order to provide effective protection to such investment, it would be contrary to the purpose of the BIT and to the spirit of ICSID, to require in addition to the consent to ICSID arbitration in general, a supplementary express consent to the form of such arbitration. In such cases, consent to ICSID arbitration must be considered to cover the form of arbitration necessary to give efficient protection and remedy to the investors and their investments, including arbitration in the form of collective proceedings.  (para. 490).

In conclusion, the Tribunal, rightly held that “the “mass” aspect of proceedings relates to the modalities and implementation of the ICSID proceedings and not to the question whether Respondent consented to ICSID arbitration. Therefore, it relates to the question of admissibility and not to the question of jurisdiction.” (para. 492).

The Tribunal took a purposive approach to the interpretation of the ICSID Convention’s “silence” as to mass claims, holding that it would be “contrary to the purpose of the BIT and to the spirit of ICSID to interpret this silence as a “qualified silence” categorically prohibiting collective proceedings, just because it was not mentioned in the ICSID Convention” (para. 519).

With respect to the adaptations, the Tribunal identified the need to adopt mechanisms to allow a simplified verification of evidentiary materials with respect to each individual claim (para 531) and the manner of the representation of the claimants (paras. 531-532).  In finding that it had the power to adapt procedures to address the “mass claims” aspect of the case, the Tribunal states that adaptations must consider the principle of due process and a must seek a balance between the procedural rights and interests of each party (para. 519).  In assessing that balance the Tribunal considered: (i) under what conditions is it acceptable to change the method of examination from individual to group treatment; (ii) to what extent are Argentina‘s defense rights affected in comparison to 60,000 separate proceedings; and (iii) is it admissible to deprive Claimants of certain procedural rights (para. 539).

Argentina’s had argued that there are strong policy reasons why ICSID is an inappropriate forum to address issues with respect to sovereign debt restructuring.   The Tribunal flatly rejected this argument, rightly stating that “Policy reasons are for States to take into account when negotiating BITs and consenting to ICSID jurisdiction in general, not for the Tribunal to take into account in order to repair an inappropriately negotiated or drafted BIT.”

It its disqualification request, Argentina suggests that the procedural mechanisms set out in the Decision are an unjustifiable limit on Argentina’s right of defence and further evidence of the Tribunal’s alleged lack of independent and impartial judgment (paras. 25 et seq.).   Although Argentina has characterized the majority’s Decision as “egregious” and various Tribunal statements as “shocking” and “absurd”, this hyperbole should seen for what is—a regrettable attempt to appeal a tribunal decision through the guise of a disqualification request.  The majority of the Tribunal’s approach to mass claims is correct in principle and practical, objective and fair-minded in practice.  International arbitration can be an effective and efficient system of dispute resolution because of its ability to adopt flexible procedures to address myriad claims and issues.  The majority’s Decision reflects this approach and will stand the test of time.

In Tidewater, the claimants challenged Venezuela’s appointee, Professor Stern, who had been appointed by Venezuela to three other ICSID tribunals in the past six years.   As is well known, the Orange List in the IBA Guidelines on Conflicts of Interest in International Arbitration addresses multiple appointments in two sections:

3.1.3  The arbitrator has within the past three years been appointed as arbitrator on two or more occasions by one of the parties or an affiliate of one of the parties.

3.3.7  The arbitrator has within the past three years received more than three appointments by the same counsel or the same law firm.

The two remaining members of the Tidewater Tribunal (Professor McLachlan and Dr Rigo), although noting that Section 3.1.3 of the IBA Orange List provides guidance, stated that whether “multiple appointments to arbitral tribunals may impugn the independence or impartiality of an arbitrator is a matter of substance, not of mere mathematical calculation” and that “either fewer or more appointments might, in combination with other factors, be needed to call into question an arbitrator’s impartiality.” (para. 59)  The Two Members then stated that the “starting point is that multiple appointments as arbitrator by the same party in unrelated cases are neutral, since in each case the arbitrator exercises the same independent arbitral function” (para. 60).

This reasoning is also arguably reflected in the most recent disqualification decision, Universal Compression v. Venezuela.  In this decision the Chairman of the Administrative Council, Mr. Robert Zoellick, rejected a challenge to Professor Stern based on her multiple appointments by Venezuela, noting that there was “no objective fact” to suggest her independence or impartiality would be manifestly impacted by the multiple appointments (para. 77).

In contrast, in OPIC Karimum, where the claimant challenged Professor Sands based on multiple appointments by Venezuela and by the law firm representing Venezuela, the two remaining members of the Tribunal (Professors Jones and Tawil), expressly disagreed with the statement in Tidewater that multiple appointments are neutral.  The Two Members state that “multiple appointments of an arbitrator by a party or its counsel constitute a consideration that must be carefully considered in the context of a challenge.” (para. 47).  They continued:

In our view, multiple appointments of an arbitrator are an objective indication of the view of parties and their counsel that the outcome of the dispute is more likely to be successful with the multiple appointee as a member of the tribunal than would otherwise be the case.

The Two Members therefore proceeded on the basis that multiple appointments of an arbitrator by a party or its counsel is a factor that “may lead to the conclusion that it is manifest that the arbitrator cannot be relied upon to exercise independent judgment as required by the Convention.” (para. 50).  Turning to the facts, the Two Members found that the multiple appointments alone in case before them were not sufficient.  In particular, the Two Members noted that there was no issue of the arbitrator being financially dependent on the party or counsel.

Although on their face the two disqualifications decisions appear to disagree over the significance of multiple appointments, from a practical perspective there appears to be little difference in how they address the concrete issues.

The Tidewater decision certainty suggests that multiple appointments in and of themselves are not a basis for disqualification—in that sense they are neutral.  This is consistent with the inclusion of multiple appointments in the IBA’s Orange List.  Depending on the facts, multiple appointments may give rise to justifiable doubts as to the arbitrator’s impartiality or independence.  But as the Tidewater decision notes more than one appointment by the same party is “not necessarily suggestive of a conflict.”

As support for the proposition that multiple appointments are neutral, the Two Members reference the idea that since a claim for recusal would not lie against a judge who had heard prior cases, by the same reasoning, the rule should be no different in arbitral proceedings.  This analogy seems inapposite for two reasons.  First, parties in court proceedings normally do not choose the judge who will hear their case.  Judges are typically assigned, not picked by a party.  Second, judges have security of tenure and salaries that do not depend on reappointment in future cases.  In my view, the argument that multiple appointments are not suggestive of conflict should not rest on the analogy between judge and arbitrator.

The Two Members in Tidewater then state that a conflict of interest may arise from multiple appointments if: “(a) the prospect of continued and regular appointment, with the attendant financial benefits, might create a relationship of dependence or otherwise influence the arbitrator’s judgment; or (b) there is a material risk that the arbitrator may be influenced by factors outside the record in the case as a result of his or her knowledge derived from other cases.” (para. 62)

The Two Members in Tidewater found that the mere fact of holding three other arbitral appointments by the same party does not, without more, indicate a manifest lack of independence or impartiality.  They noted that Professor Stern holds many appointments in ICSID cases and cannot be said to be in any way dependent on one party.  Second, Professor Stern had joined unanimous preliminary decisions rejecting applications made by Venezuela, suggesting Professor Stern had been appointed on subsequent occasions because of her independence (para. 64).

The decisions in both Tidewater and OPIC Karimum suggest that something more is needed then the mere fact of multiple appointment—for example a  relationship of financial dependence or a decision-making history with respect to a party that raises concerns about independence and impartiality.   The statement in Tidewater that multiple appointments are “neutral” suggests that the number of multiple appointments will never, in and of itself be sufficient to sustain a challenge.  Something more is needed.  In contrast, OPIC Karimum can be read as suggesting that multiple appointments alone could be grounds for disqualification.  Yet, without additional contextual factors, disqualification only on the basis of multiple appointments would seen unjustified.  Although one might imagine situations where the sheer number of multiple appointments might be sufficient to establish an evidentiary burden that there is a “manifest” lack of independence, other factors must invariably be part of that determination—including the arbitrator’s actual decision-making history.  The picture is quite different between an arbitrator that has invariably sided with the state (perhaps with multiple dissenting opinions) and a decision-making history that shows mixed results.

The reasoning in OPIC Karimum introduces a healthy dose of realpolitik into the discussion of arbitrator appointment:

In a dispute resolution environment, a party’s choice of arbitrator involves a forensic decision that is clearly related to a judgment by the appointing party and its counsel of its prospects of success in the dispute. In our view, multiple appointments of an arbitrator are an objective indication of the view of parties and their counsel that the outcome of the dispute is more likely to be successful with the multiple appointee as a member of the tribunal than would otherwise be the case.

I wonder, though, about the broader implications of this statement.  Does it not equally apply to multiple appointments by a type of party?   If an arbitrator is repeatedly appointed by either claimant investors or respondent states, does this not equally provide “an objective indication of the view of parties and their counsel that the outcome of the dispute is more likely to be successful with the multiple appointee as a member of the tribunal than would otherwise be the case.”  The statement seems to reflect the truism that counsel’s recommendations and a party’s choice of arbitrator always reflects a forensic assessment that the appointee will play a role in contributing to a successful outcome of the dispute.  But the mere fact that a party or counsel appoints a certain arbitrator repeatedly, or that a certain type of party (either investor or state) appoints the arbitrator, tells us little about independence and impartiality, unless one is willing to stretch the boundaries of those concepts to catch general normative predispositions.  And this is very dangerous territory indeed.

The jurisprudence is clearly and rightly not going down that route.  Taken together, the decisions reinforce the arguably high threshold for disqualification under Art. 57 of the ICSID (“a manifest lack of qualities”).  As noted by the Two Members in OPIC Karimum:

There thus exists a relatively high burden for those seeking to challenge ICSID arbitrators. The  Convention’s requirement  that  the lack of independence be “manifest” necessitates that this lack be clearly and objectively  established. Accordingly, it is not sufficient to show an appearance of a lack of impartiality or independence. (para. 45)

The Draft Statement highlights the positive and vital role that investment can serve in promoting green growth and proposes finding in seven areas:

(i) support for effective international environmental law; (ii) vigilance against green investment protectionism; (iii) updating investment treaty practices; (iv) ensuring the integrity and competence, and improving the transparency of investor-state  dispute settlement; (v) strengthening compliance with international investment law through prior review of proposed environmental measures; (vi) encouraging business’ contribution to greening the economy; and (vii)  spurring  green growth through FDI.

With respect to investor-State arbitration, the Draft Statement recommends as follows:

Governments should seek to ensure that, where relevant, the ISDS system adequately integrates and balances the goals of international environmental and investment law. To the greatest extent possible, governments should strive to ensure that the ISDS system adequately addresses the application of investment law to environmental measures in a transparent and publicly accountable manner that allows, where  appropriate,  participation by interested third parties. In order to ensure a consistent treatment of this issue, governments should consider including provisions on transparency of ISDS in their investment agreements.

In my comments on the Draft Statement, I questioned whether there really has been “significant progress in improving transparency of ISDS since 2005”, as suggested in the text of the Draft Statement.  Although North American BIT practice has certainly embraced transparency, there are still many agreements being concluded that do not include provisions for transparency in investor-State arbitration.

The Draft Papers are excellent, particularly the paper on “Environmental Concerns in International Investment Agreements: A Survey”.  This paper provides a comprehensive empirical survey of investment treaty practice on environmental provisions.  Based on a sample of 1,623 international investment agreements, the study finds that only 133, or 8.2%, contain a reference to environmental concerns.  The paper provides a very useful survey of treaty practice and the language used in various treaty provisions.

With respect to investment treaty practice and the environment, the Draft Statement recommends that:

Governments should examine whether their investment treaty practices are up-to-date with regard to environmental concerns and consider including language in investment treaties or environmental treaties to provide guidance about how environmental and investment law goals are to be reconciled.

What undoubtedly will remain contested is whether IIAs adequately integrate and balance the goals of international environmental and investment law and what constitutes up-to-date treaty practice.

On the issue of integrating and balancing the goals of international environmental and investment law, readers may be interested in a new edited collection published earlier this year called Sustainable Development in World Investment Law.  This collection of 30 papers analyzes the state of international investment law through the lens of sustainable development. The various chapters in the volume identify, characterize, and analyze existing rules, innovations, and best practices in international investment agreements, including the investment measures used by other sustainable development treaties and instruments.  The table of contents and introductory chapter are available here.

Consistent with international arbitration law, the tribunals both confirmed, in the same words, that “the interpretation given to Article 22 by Venezuelan authorities or by Venezuelan courts cannot control the Tribunal’s decision on its competence.” (Mobil, para. 75; Cemex, para. 70). In reviewing ICSID cases, the tribunals noted that previous tribunals had taken differing approaches to interpreting arbitration clauses in foreign investment legislation (Mobil, para. 82; Cemex, para. 76):

– In SPP v. Egypt, the tribunal decided to apply “general principles of statutory interpretation” taking into account both “relevant rules of treaty interpretation and principles of international law applicable to unilateral declarations.”

- In CSOB v. Slovak Republic, the tribunal based its decision on international law without any reservation.

- In Zhinvali v. Georgia, the tribunal opted for domestic law “subject to ultimate governance by international law”.

The Mobil and Cemex tribunals found that the state consent at issue in Art. 22 is not contained in a treaty to be interpreted in accordance with the Vienna Convention on the Law of Treaties, but rather is a unilateral act of a sovereign state—national legislation. The tribunals therefore drew on ICJ jurisprudence interpreting optional declarations of compulsory jurisdiction made by states under Article 36(2) of the ICJ Statute. The tribunals found that standing offers to arbitrate must be “interpreted according to the ICSID Convention itself and to the rules of international law governing unilateral declarations of States.” (Mobil, para. 85; accord Cemex para. 79).

With respect to unilateral declarations, both tribunals stated that international law distinguishes between: (i) declarations formulated in the framework and on the basis of a treaty; and (ii) other declarations made by states in the exercise of their freedom to act on the international plane (Mobil, para. 87; Cemex, para. 81). Further, rules of interpretation are different for the two types of declarations. In the case of general declarations, the ICJ held in the Nuclear Tests Case that “a restrictive interpretation is called for”, but that the rules of interpretation are somewhat different where “unilateral acts are formulated in the framework and on the basis of a treaty, such as the ICSID Convention” (Mobil, para. 90; accord Cemex, para 83). Both tribunals then applied the rules developed by the ICJ in the context of interpreting unilateral declarations of compulsory ICJ jurisdiction. As stated in Fisheries Jurisdiction, the words should be interpreted “in a natural and reasonable way, having due regard to the intention of the State concerned.” Both tribunals emphasized the importance of determining the state’s intention.

The tribunals then turned to Article 22 of the Foreign Investment Law, which can be translated as follows:

Disputes arising between an international investor whose country of origin has in effect with Venezuela a treaty or agreement on the promotion and protection of investments, or disputes to which are applicable the provision of the Convention Establishing the Multilateral Investment Guarantee Agency (OMGI –MIGA) or the Convention on the Settlement of Investment Disputes between States and National of other States (ICSID), shall be submitted to international arbitration according to the terms of the respective treaty or agreement, if it so provides, without prejudice to the possibility of making use, when appropriate, of the dispute resolution means provided for under the Venezuelan legislation in effect. [emphasis added]

The central interpretative issue is whether “if it so provides” means that there is consent if the treaty or agreement in question provides for arbitration (the interpretation favoured by the investors) or there is only consent to arbitration if the treaty or agreement provides for mandatory submission of disputes to international arbitration (i.e. there must be express consent to arbitrate under the other treaty or agreement)—the interpretation favoured by Venezuela. After an in-depth review of the background and context, both tribunals found that there was no intention to consent to arbitrate in Article 22. Both tribunals rightly noted that in light of the clear language in other contemporaneous BITs providing advance consent to arbitration, no intention to consent to arbitrate could be derived from the “ambiguous text” of Article 22 (Mobil, para. 140; Cemex, para. 138).

Although the tribunals found that the unilateral declarations at issue should not be interpreted restrictively because they are “declarations formulated in the framework and on the basis of a treaty” (i.e. the ICSID Convention), I would suggest that the restrictive approach to unilateral declarations from the Nuclear Tests Case, should never apply to the interpretation of offers to arbitrate. For example, if a foreign investment law has an arbitration provision that purports to offer to arbitrate investment disputes under the UNCITRAL Arbitration Rules, this “unilateral declaration” would not appear to be one “formulated in the framework and on the basis of a treaty” (unless perhaps the argument is made that the New York Convention framework applied). It would seem anomalous for different interpretative principles to apply simply because one foreign investment law refers to a treaty regime (ICSID), while another favours ad hoc arbitration.

Rather than distinguishing between different types of unilateral declarations, arbitral tribunals should apply (as did the Mobil and Cemex tribunals) the standard that the ICJ has developed for optional declarations: the “natural and reasonable” meaning of the terms. This standard would appear to be consistent with the general principle identified in Amco Asia Corporation v. Indonesia: “In the first place, like any other conventions, a convention to arbitrate is not to be construed restrictively, nor, as a matter of fact, broadly or liberally.” Although a unilateral declaration is not an agreement and a tribunal cannot apply the fundamental principle pacta sunt servanda, what is called for is an objective assessment of the unilateral offer to arbitrate based on the “natural and reasonable” meaning of the terms and neither a restrictive nor broad presumption of what the state intended by the terms.

This post is written by Andrew Newcombe on behalf of the ITA Academic Council.

We have a shared concern for the harm done to the public welfare by the international investment regime, as currently structured, especially its hampering of the ability of governments to act for their people in response to the concerns of human development and environmental sustainability.

The Statement highlights a number of concerns, including that investment treaties have been given unduly pro-investor interpretations; the award of damages as a remedy of first resort poses a serious threat to democratic choice; and investment treaty arbitration as currently constituted is not a fair, independent, and balanced method for the resolution of investment disputes.

The Statement recommends that governments:

should review their investment treaties with a view to withdrawing from or renegotiating them in light of the concerns expressed above; should take steps to replace or curtail the use of investment treaty arbitration; and should strengthen their domestic justice system for the benefit of all citizens and communities, including investors.

I will focus my comments in this blog on my objection to the guiding premise in the Statement’s preamble—that the regime hampers “the ability of governments to act for their people in response to the concerns of human development and environmental sustainability” and will discuss concerns regarding threats to environmental protection.

Since the mid-1990s, beginning with the first NAFTA investment arbitrations, critics have argued that investment protection standards are a threat to environmental law and protection.  Many of the critiques focused on the early NAFTA cases that involved environmental issues:  Azianian, Ethyl, Metalclad and S.D. Myers.  Later, critics highlighted the claims in Methanex and Glamis as confirming their worst fears.  Yet, these concerns simply have not been reflected in the final results of the cases.  On the whole, tribunals have done a good job distinguishing between legitimate environmental legislation and arbitrary and discriminatory government conduct. In the NAFTA context, there have only been two awards—Metalclad and S.D. Myers—where tribunals have found respondent states, Mexico and Canada respectively, in breach of NAFTA.  In Metalclad, among other things, a cacti reserve was created and Mexico had to pay for the expropriation of the investment.   In S.D. Myers, the border ban on PCB waste was motivated by pure protectionism, not environmental protection.  Although one can criticize aspects of the reasoning in both awards, the tribunals reached the correct result.  In the one other high profile environmental case under an investment treaty (Tecmed), the tribunal’s findings were that Mexico took the measures based on public pressure and not because of environmental infractions.

Overall, the trend is towards a definite rejection of claims challenging environmental measures—Methanex, Glamis and, on 2 August 2010, the award in Chemtura Corporation v. Canada, another NAFTA claim.  All of Chemtura’s claims with respect to the regulatory treatment of lindane, a pesticide primarily used on canola seed, were rejected.  Chemtura was ordered to pay the costs of the arbitration and an additional CAD 2.8 million—half of Canada’s fees and costs.  In Chemtura, the tribunal recognized that its role was not to second judge science-based decision-making (para. 133); characterized the minimum standard requirement under NAFTA as one of “regulatory fairness” (para. 179); and also recognized that valid exercises of a state’s police powers do not constitute an expropriation (para. 266).

Although I have argued elsewhere that the investment treaty regime could do more to promote sustainable development, I do not agree with the Statement’s assessment that the regime has done more harm than good.  The regime has and is serving an important and key role in securing the rule of law—a vital function in a global economy.  Although there have been a number of recent high-profile withdrawals from investment treaties and ICSID, states on the whole appear to continue to have confidence in the system.  The number of new treaties (over 100 in 2009 according to World Investment Report 2010), overwhelms the few terminations.  State support for the system is also reflected in other developments, such as negotiations on a Latin American Advisory Facility on Investor-State Disputes and UNCTAD’s work programme on international investment agreements.  It seems doubtful that many states are going to take up the call in the Statement to withdraw from the current system.  Nor, in my view, should they.

The dispute in Fakes arose out of “various investigations and lawsuits brought against the Uzans, a prominent family in Turkey who controlled a vast group of companies in a variety of business sectors including banking, electricity, television and telecommunication.” (para. 28)  Turkish authorities ultimately froze and sold various assets held directly or indirectly by the Uzans, including Telsim Mobil Telekomunikayson Hizmetleri A.S. (Telsim), a leading Turkish telecommunications company.  The Claimant submitted that, as a result of series of share sale agreements, on 3 July 2003 he became the legal owner of 66.96% of the shares in Telsim shortly before the Turkish conduct at issue.  He claimed an astronomical US$ 19 billion in damages.

The Tribunal ultimately disposed of the claim on the basis that although there were formal share sale agreements for the Telsim shares, Mr Fakes did not hold legal title over the Telsim share certificates because the parties never had any intention to transfer any rights to Mr Fakes nor did they actually transfer any rights.  In coming to this conclusion, the Tribunal highlighted four points.  The Tribunal found that the purpose of the arrangement was to use the name of Mr Fakes as “bait” to attract potential purchasers who might be hesitant to deal with the Uzans.  Second, the low purchase price (US$ 3,800) could not be reconciled with the acquisition of legal rights to the majority of shares in a major telecommunications company, even assuming the amount was paid.  Third, Mr Fakes never obtained possession of the share certificates and was not in a position to obtain possession.  Fourth, Telsim appeared to be unaware of the share transfer.  The Tribunal concluded that, as the parties did not intend to give effect to the alleged share transfer, there was no investment (para. 147).

In defining investment for the purposes of Art. 25, ICSID Convention, the Tribunal noted that two distinct approaches have been taken by tribunals.  On the one hand, some tribunals have identified a number of benchmarks, yardsticks or characteristics that can be used as examples to facilitate the recognition of the objective meaning of investment in any given case.  On the other hand, other tribunals have found that an objective definition of investment must include a certain number of elements.  The Tribunal noted that some decisions, in addition to the four criteria indentified in Salini ((i) a contribution, (ii) a certain duration, (iii) an element of risk, and (iv) a contribution to the host State’s economic development) had added a fifth criteria (regularity of profit and return) and that Phoenix Action had identified two other requirements—that the assets be invested in good faith and in accordance with host State law.  The Tribunal then noted that the ever increasing list of criteria has resulted in some tribunals taking the view that the notion of investment is to be viewed solely through the prism of consent and that, as the ICSID Convention does not define investment, consent to arbitrate an investment dispute is based on the definition of protected investment in the underlying treaty.

The Fakes Tribunal takes the minimalist middle road in this debate.  It affirms that there is an objective definition of investment in the ICSID Convention that cannot be defined simply through the parties’ consent (para. 108).  Second, it finds that the criteria of (i) contribution, (ii) a certain duration, and (iii) an element of risk, are both necessary and sufficient to define an investment within the framework of the ICSID Convention (para. 110).

Despite taking a minimalist approach to defining an objective core meaning of investment for the purposes of Art. 25, the approach in Fakes diverges from what the 30 July 2009 Award in Pantechniki S.A. Contractors & Engineers v. Albania, referred to as an “emerging synthesis”, citing Zachary Douglas’ formulation in The International Law of Investment Claims that: “The economic materialisation of an investment requires the commitment of resources to the economy of the host state by the claimant entailing the assumption of risk in expectation of a commercial return.” (Rule 23)   In Fakes, “a certain duration” is identified as a necessary criterion, while the formulation in Douglas’ Rule 23 includes expectation of commercial return but not duration.  It is unfortunate that the Tribunal in Fakes, in its attempt to set out a definitive test, did not explain in more detail why “a certain duration” is a necessary criterion mandated by the ICSID Convention.  Why should an investment that has been in a host State for a hour not obtain treaty protection?  This would seen to create a perverse incentive for states to expropriate as soon as possible.

On the issue of the definition of investment generally, I find the reasoning in Pantechniki about second-judging state choices persuasive: “For ICSID arbitral tribunals to reject an express definition desired by two States-party to a treaty seems a step not to be taken without the certainty that the Convention compels it.” (para. 42) As the ICSID drafters did not decide to define investments, in my view there are very good reasons for the arbitrator to look solely to the instrument of state consent for the definition of investment, absent very compelling reasons.

The Fakes Tribunal rightly stated that principles of good faith and illegality cannot be incorporated into the text of the ICSID Convention with doing violence to its language.  The requirement to interpret and apply treaties in good faith does not make it a criterion for whether there is an investment for the purposes of the ICSID Convention (para. 112-113).  Likewise, although treaty protection might be conditioned on a requirement of legality, the ICSID Convention does not impose this as a jurisdictional requirement (para. 114).

Although the reasoning in Fakes with respect to the three necessary criteria for an investment under Art. 25, ICSD Convention is not particularly satisfying, Fakes can be commended for providing a succinct and clear rejection of the attempt in Phoenix Action to add further and unwarranted jurisdictional requirements for the purposes of ICSID arbitration.

]]> http://kluwerarbitrationblog.com/blog/2010/08/03/fakes-vs-phoenix/feed/ 0 http://kluwerarbitrationblog.com/blog/2010/06/27/20-years-of-investment-treaty-jurisprudence/ http://kluwerarbitrationblog.com/blog/2010/06/27/20-years-of-investment-treaty-jurisprudence/#comments Sun, 27 Jun 2010 22:27:20 +0000 Andrew Newcombe http://kluwerarbitrationblog.com/?p=2153 Continue reading →]]> 27 June 2010 marks the 20^th anniversary of investment treaty jurisprudence.  On 27 June 1990, the tribunal in Asian Agricultural Products Ltd. v. Sri Lanka (ICSID Case No. ARB/87/3) (AAPL) dispatched its final award to the parties.  The AAPL tribunal (Dr. Ahmed Sadek El-Kosheri (President), Professor Berthold Goldman and Dr. Samuel Asante) was the first to be “seized by an arbitration request exclusively based on a treaty provision and not in implementation of a freely negotiated arbitration agreement directly concluded between the Parties…” (para. 18, Final Award).  This despite the fact that “arbitration without privity” had been available under investment treaties since at least 1969.  AAPL turned out to be the launching point for a body of distinct investment treaty jurisprudence and the first of over 350 investment treaty cases that have arisen over the past 20 years.

The basics facts and outcome in AAPL are well known.  The majority of the tribunal found Sri Lanka had breached its obligation under the Sri Lanka/UK BIT to exercise due diligence in the protection of the investor’s shrimp farm during military operations.  The majority awarded damages of US$460,000 based on AAPL’s 48% shareholding in the joint venture company, Serendib, which operated the shrimp farm.  The damages in question represented the value of Serendib’s tangible assets.   In a forceful dissent, Dr. Asante disagreed with the majority’s interpretation of the treaty, found that the investor had not established Sri Lankan forces were responsible for the damages in question and stated that damages should have been limited to US$ 300,000, the amount of AAPL’s equity investment.

Although the Final Award is probably best known for its finding that a treaty-based “full and protection security” obligation imposes an obligation of due diligence on the state and not strict liability for damages (and that this obligation is essentially a codification of customary international law), the Final Award is regularly cited for a variety of legal issues.  Indeed, AAPL has been cited in over 50 investment treaty arbitration decisions and awards.

Interestingly, and unlike the many cases that have followed, Sri Lanka does not appear to have contested jurisdiction, despite the fact that AAPL was a minority shareholder and was claiming damages in a shrimp farm that was owned by a Sri Lankan company.  As a result, the Final Award is often cited for the proposition that shareholders can bring an investment treaty claim regardless of whether the treaty explicitly permits indirect claims.

AAPL is also cited for the proposition that an investor is entitled to the more favourable treatment in another treaty by virtue of an MFN clause.  The majority was of the view that AAPL could obtain the benefit of more favourable treatment provisions in other investment treaties, but rejected the argument that other treaties provided more favourable treatment.  The case is also regularly cited for its findings on burden of proof, that consent to ICSID jurisdiction can arise from an investment treaty and that claims for future profits should be disregarded where there is an insufficient history of actual operations.

Rereading the award I was struck by the familiarity of the preliminary issues to be addressed—applicable law, interpretation, attribution and the depth of the tribunal’s reference to international law sources, in particular older international arbitration decisions and the writing of publicists.  The Tribunal emphasized that bilateral investment treaties are “not a self-contained legal system” but have to be “envisaged within a wider juridical context in which rules from other sources are integrated though implied incorporation methods, or by direct reference to certain supplementary rules…”   This is an important principle to highlight in light of current debates about the fragmentation of international law and the relationship between a state’s investment treaty and other obligations under public international law.

The graph in the note shows a steadily increasing investment treaty caseload, with significant increases since 2002.  57% of cases have been initiated during the past five years.  The number of cases filed in 2009 (at 32) fell for the third consecutive year.  Although this can hardly be described as a trend, one might wonder whether the growing body of cases dismissing claims against host states, coupled with awards of costs against unsuccessful claimants is having some chilling effect on new claims.  ICSID registrations for all types of cases stand at only 11 for the first five months of 2010.  That said, continued nationalizations in Latin America and potential claims relating to state measures to address the financial and economic crisis might lead to a rise in claims.

The number of state respondents to investment treaty claims also continues to rise, now standing at 81. UNCTAD reports that 49 developing countries, 17 developed countries and 15 countries with economies in transition are involved in claims.  Claimants from developed states continue to predominate, but there are 23 cases from investor claimants from developing states.  Argentina remains the most sued state with 51 cases against it, followed by Mexico (19), the Czech Republic (16), Ecuador (15), Canada (14), Ukraine (14) and the United States (14).

Of the 164 concluded cases, UNTAD reports that “38 per cent were decided in favour of the State (62) and 29 per cent in favour of the investor (47), while 34 per cent (55) cases were settled”.

Whenever there are allegations of misconduct by investors or states references to the principle of good faith are likely to follow. Not surprisingly, good faith has been relevant in cases involving issues of investor misconduct (Plama v. Bulgaria; Phoenix Action, Ltd. v. Czech Republic; Fraport v. Philippines; Inceysa Vallisoletana S.L. v. El Salvador). These cases have, however, involved questions of good faith in the making of the investment and the subsequent conduct of the investor, rather than whether the investor’s claim was made and pursued in good faith (the exception is Phoenix—see below). In contrast, in a 2008 Decision on Preliminary Issues in Libananco Holdings Co. Limited v. Turkey, good faith was discussed in the context of the alleged interception and surveillance by Turkish police of legally privileged communications between the claimant, its counsel and witnesses. In addressing, the parties’ submissions on the issue, the Tribunal (Mr. Michael Hwang S.C.; Mr. Henri C. Alvarez Q.C.; Sir Franklin Berman Q.C.) stated:

Nor does the Tribunal doubt for a moment that, like any other international tribunal, it must be regarded as endowed with the inherent powers required to preserve the integrity of its own process – even if the remedies open to it are necessarily different from those that might be available to a domestic court of law in an ICSID Member State. The Tribunal would express the principle as being that parties have an obligation to arbitrate fairly and in good faith and that an arbitral tribunal has the inherent jurisdiction to ensure that this obligation is complied with; this principle applies in all arbitration, including investment arbitration, and to all parties, including States (even in the exercise of their sovereign powers).

Libananco Holdings Co. Limited v. Turkey, Decision on Preliminary Issues, 23 June 2008, para. 79.

The Tribunal cites no authority for these principles, presumably because they are self-evident ground norms. The idea that there is a duty to arbitrate in good faith is well-established (see Born, International Commercial Arbitration at pp. 1008-1014) and, in the investment treaty context, has been recognized in other investment treaty awards (for example, see Methanex Corporation v. United States of America, Final Award, Part II – Chapter I, para. 54 at p. 56). The second principle flows as a necessary incident of a tribunal’s jurisdiction and is implicit in arbitration rules that allow a tribunal to make decisions regarding the conduct of the arbitration proceedings.

If we accept that there is an obligation to arbitrate fairly and good faith, does that duty also apply to the making of a claim, or does it apply only to the procedural obligations that come with an agreement to arbitrate (i.e. co-operation and conduct in the proceedings)? Here I am thinking of Phoenix v. Czech Republic where the Tribunal referred to the principle that in order to have access to ICSID arbitration, investments must be made in good faith. The Tribunal referred to Phoenix’s “initiation and pursuit of this arbitration” as “an abuse of the system of international ICSID investment arbitration” (para. 144). The Tribunal found an abuse of rights by the Claimant’s “creation of a legal fiction in order to gain access to an international arbitration procedure to which it was not entitled” (para. 143). Phoenix, however, is unlike cases such as Inceysa or Fraport, where there was misconduct (fraud and illegality respectively) in the initial investment. In Phoenix, the Tribunal characterized the claimant’s wrong as a “détournement de procédure”, but the good faith issues in Phoenix are unlike those in Libananco, Quiborax or Methanex, where the issue was party conduct during the proceeding.

The obligation to arbitrate fairly and good faith identified in Libananco applies to party conduct during the proceedings. With respect to the investor’s conduct in bringing a claim, good faith and other concepts, such as abuse of process, abuse of rights and détournement de procedure, may be relevant either as jurisdictional impediments (as suggested in Phoenix) or as issues of admissibility of claims (see my earlier post).