19 April, 2018

Update on the future of ISDS: the discussions within UNCITRAL Working Group III – no apparent consensus to date

After a number of years of public debate in a variety of fora, the discussion of the future development of investor-state dispute settlement (ISDS) has recently moved to the United Nations Commission on International Trade Law (UNCITRAL). UNCITRAL Working Group III (WGIII) has been given a broad mandate to identify concerns regarding ISDS, consider whether reform is desirable and, if so, develop relevant solutions to be recommended to UNCITRAL.

WGIII started its work in the 34th session which took place from 27 November to 1 December 2017. As discussed further below, a number of key points were discussed, including: (i) the duration and costs involved in the procedure; (ii) the allocation of costs; and (iii) transparency. There was also some preliminary consideration of possible developments or changes in relation to the treatment of these issues. The Report of the 34th session indicates that some states advocate a fact-based analysis of ISDS but others note the need to address wider public perceptions of ISDS, as these can raise concerns over the legitimacy of the system.

Bringing the debate about the future of ISDS under the auspices of UNCITRAL, involving high level government representatives from across the world, and also in view of the transparent nature of WGIII’s process, raises the stakes, and perhaps also the prospects, of a more systemic reform. However, whilst the forum has the potential to generate a multilateral plan for ISDS, it is hard to discern any broad consensus at this stage either on the nature of the perceived problems associated with the current system of ad hoc arbitration, or on how those problems may be resolved. This is apparent from the Report and also from the audio recordings (helpfully summarised by IA Reporter, here). The 35th session will take place on April 23 to April 27 2018, following which further clarity on these issues may emerge.

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18 April, 2018

EU Council publishes Negotiating Directives for Convention establishing a Multilateral Investment Court: no real surprises but a couple of gaps

On 20 March, 2018 the Council of the European Union published negotiating directives dated 1 March 2018 authorizing the European Commission to negotiate a convention establishing a multilateral court for the settlement of investment disputes between investors and states. Whilst the detailed characteristics of the proposed multilateral investment court (the MIC) will be developed during the course of the negotiations, the Negotiating Directives give considerable indication of the EU’s intentions as to the MIC’s features.

The Negotiating Directives have their origin in the Commission’s Recommendation for a Council Decision authorising the opening of negotiations for a Convention establishing a multilateral investment court, published in September 2017.  This included a recommendation that negotiating directives be drawn up and made public immediately after their adoption.  The Commission has since commented that “the EU’s new policy on investment is fundamentally based on transparency” and that publication of the Negotiating Directives allows the EU “to continue to work with like-minded partners around the globe” towards creating a MIC, “knowing that EU citizens are fully informed of [its] negotiating instructions”.

Whilst the EU introduced its intention to move towards a multilateral system in a Concept Paper in 2015 (see our blog post here), the Commission’s Recommendation itself came shortly after UNCITRAL indicated in its 50th Session in July 2017 that UNCITRAL Working Group III would consider possible reform of investor-state dispute settlement.  This work began in the Working Group’s 34th session in November 2017, with its next session due to take place on 23 to 27 April 2018.  It will therefore be seen as no coincidence that the EU has chosen to publish these negotiating directives at this stage, and they will set the framework for the participation of the EU and its Member States, as further considered below.  The EU has also submitted a paper to the Working Group in advance of its next session highlighting its concerns over the current system of ISDS.

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13 April, 2018

ICJ determines first ever compensation claim for environmental harm

On 2 February 2018, the International Court of Justice (the “ICJ” or the “Court”) delivered judgment in the case concerning Certain Activities Carried Out by Nicaragua in the Border Area (Costa Rica v Nicaragua), determining the amount of compensation due to Costa Rica for environmental harm caused by Nicaragua’s activities in the northern part of Isla Portillos. This judgment, along with the related judgment delivered the same day in the joined cases concerning Maritime Delimitation in the Caribbean Sea and the Pacific Ocean and Land Boundary in the Northern Part of Isla Portillos (Costa Rica v Nicaragua) aims to bring to a conclusion the boundary dispute between the two neighbouring states stretching back to the 1850s.

The judgment is particularly noteworthy as it is the first time the Court has determined a damages claim for environmental harm. While the award fell short of the amount claimed by Costa Rica, both states have hailed the judgment as an important step in the normalisation of the relations between the two states.

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19 March, 2018

State-to-State Dispute Settlement under the EU’s latest draft of the Withdrawal Agreement: CJEU jurisdiction remains

On 15 March 2018 the European Commission published a revised version of the draft Withdrawal Agreement between the EU and the UK previously published on 28 February 2018 following consultation with the Member States and the European Parliament. The revised document has been transmitted to the UK for negotiation. A comparison between the two drafts is available on our Brexit notes blog here.

In terms of State-to-State dispute settlement, little has changed since our blog post on 2 March 2018.

As was seen in the previous draft, under Part Six, Title III (“Dispute Settlement”), the Withdrawal Agreement proposes that a Joint Committee (co-chaired by representatives from each of the UK and the EU) be established to resolve disputes regarding the interpretation or application of the Withdrawal Agreement. In the event that the dispute cannot be resolved, then the Joint Committee itself, or either one of the UK or the EU, can refer the dispute to the CJEU under Article 162 (para. 1). The ruling from the CJEU is binding, and non-compliance with that ruling may result in the CJEU issuing a “lump sum or penalty payment”.

However, there is a slight change in when the rights of the EU or the UK arise to suspend rights and obligations in the event of such a dispute. Article 162 (para. 2) now states that, in the event that the dispute is not referred to the CJEU under paragraph 1 of that provision, then the EU or the UK may suspend aspects of the Withdrawal Agreement (other than those related to citizens’ rights) or any agreement between them “proportionate” to the gravity of the breach. In a further addition, paragraph 2 now states the EU or the UK, as the case may be, shall inform the other Party of its intention to suspend and allow the other Party, within 20 days, to remedy the situation. Any suspension shall take effect no earlier than 20 days after its notification to the other Party.

In view of the sensitivities over CJEU jurisdiction discussed in our earlier blog post, it will be interesting to see how the UK responds.

For further information, please contact Andrew Cannon, Partner, Vanessa Naish, Professional Support Consultant, Hannah Ambrose, Professional Support Consultant or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
Partner
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+33 15 357 6552
Vanessa Naish
Vanessa Naish
Professional Support Consultant
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+44 20 7466 2112
Hannah Ambrose
Hannah Ambrose
Professional Support Consultant
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+44 20 7466 7585

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7 March, 2018

Security for costs granted by English Court in investment treaty award challenge in which claimants are receiving third-party funding

In its recent judgment in Progas Energy Limited and ors v Pakistan [2018], the English High Court (the Court) granted Pakistan’s request for security for their costs in defending a challenge to an investment treaty award. The Court declined Pakistan’s application for security for its unpaid costs in the arbitration awarded to them by the tribunal. The case is of particular interest because the Court considered the relevance to the applications of the fact that the Claimants were funded by a third-party funder.

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2 March, 2018

State-to-State dispute settlement under the EU’s draft Withdrawal Agreement: CJEU jurisdiction not arbitration

We have known for some time now that the UK and EU have very different views regarding the state-to-state dispute resolution mechanism to be contained in the Withdrawal Agreement between the EU and the UK. The EU has never made any secret of its intention for the CJEU to adjudicate on disputes between the UK and the EU over the interpretation of, and compliance with, the Withdrawal Agreement. Yesterday the EU released a draft Withdrawal Agreement for the UK’s consideration which contains a state-to-state dispute resolution provision which is consistent with that approach. This post provides an initial reaction to this draft provision.

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26 January, 2018

Bear Creek Mining Corp. v. Peru: the potential impact on damages of an investor’s contributory action and failure to obtain a social license

In an award dated 30 November 2017 (the “Award“), an ICSID Tribunal ordered Peru to pay around US$30.4million to Canadian company Bear Creek Mining (the “Claimant“) following its finding that a 2011 decree (“Decree 032“) constituted an unlawful indirect expropriation of the Claimant’s right to operate the Santa Ana mine (the “Project“).

This post discusses the disagreement between Karl-Heinz Bockstiegel (the president of the tribunal) and Michael Pryles (appointed by the Claimant) (together, the “Majority“), and Prof. Philippe Sands QC (appointed by Peru), on the assessment of damages. Prof. Sands considered that the damages should be reduced due to contributory fault on the part of the Claimant.

The impact the Claimant’s conduct had on the Tribunal’s calculation of damages was, in any case, significant. Given the extent of, and reasons for, the opposition to the Project by the time of Decree 032, the Tribunal thought a hypothetical purchaser would not have obtained the necessary ‘social license’ to proceed with the Project. Ultimately it awarded the Claimant only a fraction of the US$522 million claimed. The reduced damages award emphasises the importance of respect for human rights and engagement with indigenous communities by investors.

The respective views expressed by the arbitrators concerning the Claimant’s conduct are also interesting in light of the broader debate about the relevance of the human rights of non-parties in investor-state arbitration.

An overview of the overall Award can be found in the post published on 16 December 2017 on the Kluwer Arbitration Blog. Continue reading →

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24 January, 2018

North American trade and investment developments: No new NAFTA (for now), and Mexico signs the ICSID Convention

One month into 2018, the future of NAFTA continues to hang in the balance. The negotiating parties will reportedly convene in Ottawa for the sixth of seven planned negotiating sessions from January 23 – 29th.[1] The parties initially hoped to conclude the negotiations before the end of 2017, but US President Donald Trump indicated on January 11, 2018 that there was “no rush” in the negotiations.[2] In the same interview, Mr. Trump said that it may be difficult to reach an agreement before the July 1, 2018 federal election in Mexico, suggesting that the negotiations may continue for months. The parties’ agreement to keep the negotiations confidential[3] means that few concrete details about the negotiating texts and parties’ proposals have been made public.

For more analysis of the NAFTA renegotiations, see our previous updates:

August 7, 2017 – NAFTA renegotiation: ISDS reform objectives

August 16, 2017 – What to watch for as NAFTA (re)negotiators get to work

August 24, 2017 – A warning shot for Investor-State Dispute Settlement under NAFTA 2.0?

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17 January, 2018

3rd EFILA annual conference 2018: parallel states’ obligations in investor-state arbitration – 5 February 2018, London

The European Federation for Investment Law and Arbitration (EFILA) will be holding its third Annual Conference on 5 February 2018 at the Senate House in London. The conference will focus on four topics:

  1. non-disputing third parties and their influence on arbitration;
  2. investment regulation and arbitration;
  3. human rights, environment and arbitration; and
  4. the proposed Investment Court System.

For more information and details on how to reserve a place, please see the conference flyer here. Continue reading →

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29 November, 2017

UK Supreme Court confirms the limited scope of state and diplomatic immunity from employment claims: Benkharbouche and Reyes

In two judgments handed down on 18 October 2017, the Supreme Court (the “Court”) has allowed certain employment claims made by foreign nationals employed as domestic workers at the embassies of foreign states and a diplomat’s residence to proceed despite claims of immunity. The judgments consider important aspects of state and diplomatic immunity, the differences between the two, and wider considerations of the interplay between domestic, EU and international law.

In Benkharbouche (Respondent) v Secretary of State for Foreign and Commonwealth Affairs (Appellant) and Secretary of State for Foreign and Commonwealth Affairs and Libya (Appellants) v Janah (Respondent) [2017] UKSC 62, the Court held that certain provisions of the State Immunity Act 1978 (“SIA”) barring the claims were not justified by any rule of customary international law and were therefore incompatible with both Article 6 (right to a fair trial) of the European Convention on Human Rights (“ECHR”) and Article 47 (right to an effective remedy and to a fair trial) of the EU Charter of Fundamental Rights (the “Charter”). The Court affirmed the Court of Appeal’s decision to (i) disapply these provisions of the SIA to the extent that they conflicted with EU law (Article 47 of the Charter), thereby allowing the employment claims that derive from EU law (discrimination, harassment and holiday pay) to proceed, and (ii) to make a declaration of incompatibility in respect of the SIA provisions under Article 6 of the ECHR – this being the only remedy available in respect of the domestic claims not derived from EU law (including unpaid wages and unfair dismissal), which therefore remained barred.

In Reyes (Appellant/Cross Respondent) v Al-Malki and another (Respondents/Cross-Appellants) [2017] UKSC 61, the Court found that a diplomat’s immunity after leaving his or her post is limited by Article 39 of the Vienna Convention on Diplomatic Relations 1961 (the “Vienna Convention”) to acts performed in the exercise of their diplomatic functions, regardless of whether the diplomat was otherwise entitled to immunity at the time the relevant acts took place. The Court held that the employment and mistreatment of domestic staff does not fall under the category of acts performed in the exercise of diplomatic functions and allowed Ms Reyes’ appeal.

Please see here for our previous blog post on both Court of Appeal decisions.
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