On 9 June 2020 the Republic of Djibouti became the 155th state to ratify the ICSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“the ICSID Convention”) following the depositing of its instrument of ratification with the World Bank. The ratification follows Djibouti’s signing of the Convention in April 2019 (see our previous blog post here). Continue reading
Category: Investment Arbitration
On 1 May 2020, the International Centre for Settlement of Investment Disputes (“ICSID“) and the United Nations Commission on International Trade Law (“UNCITRAL“) released the long-awaited Draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement (the “Code”). The Code was prepared jointly by the Secretariats of ICSID and UNCITRAL, and seeks to address a range of ethical issues in investor-State dispute settlement (“ISDS”).
In the recent case of Koza Limited, Mr Ipek v Koza Altin Isletmeleri AS  EWHC 654 (Ch) (subscription required) the English High Court granted an injunction against a UK-based company, Koza Limited, restraining it from providing funding for an ICSID arbitration brought by another UK corporation, Ipek Investment Limited (IIL), against Turkey.
This application related to the ongoing ICSID arbitration between UK-incorporated IIL and Turkey (the ICSID Proceedings). The ICSID Proceedings arose out of Turkey’s 2015 seizure of 22 companies which were previously part of the Koza Group, a multi-billion dollar corporation owned by Turkish businessman, Mr Akin Ipek.
Prior to and alongside the ICSID Proceedings, there has been a protracted dispute before the English courts concerning control of Koza Limited (Koza) which was contested between Mr Ipek and Koza Altin (Koza Altin) – a member of the Koza Group which had been placed under the control of Trustees by the Turkish government. In both the litigation and the ICSID Proceedings, Koza Altin and Turkey contend that the SPA, which placed IIL as the parent company of the Koza Group, was a forgery.
High Court Decision
This case is the latest development in that protracted dispute before the English courts. Mr Ipek had unsuccessfully sought a declaration (before both the High Court and Court of Appeal) that the provision of funds from Koza to IIL to finance the ICSID Proceedings would be permissible in the ordinary course of Koza’s business. Following on from those unsuccessful actions by Mr Ipek, Koza Altin applied to the High Court for an injunction restraining (i) Koza from incurring, or committing itself to, expenditure upon the funding of the ICSID Proceedings, and (ii) Mr Ipek from causing Koza to take such steps.
The case presented two issues (i) whether the application represented an abuse of process in light of the Court of Appeal’s determination not to declare the provision of funding to be permissible, and (ii) the application of the American Cyanamid guidelines in determining whether the court should exercise its discretion to grant an injunction.
Abuse of process
The Court held that the application by Koza Altin did not represent an abuse of process. First, the application was an understandable response to the realisation that, despite Koza and and Mr Ipek failing to achieve the court’s blessing for the proposed conduct, they could nonetheless press on with that course unless restrained from doing so. Second, the Court of Appeal had declined to make either a positive declaration or a negative declaration in respect of whether funding would be in the ordinary course of business and had not had to consider the possibility of alternative funding sources in considering whether to make a positive declaration. As such there was no issue estoppel arising as the Court of Appeal had not finally determined whether Koza was free to fund and whether IIL would be able to rely upon alternative funding sources.
The Court further rejected Koza’s submission that an injunction cannot be granted because it would amount to an injunction on an injunction. The grant of an injunction is to be determined based on whether it is justified by the circumstances of the case.
American Cyanamid Principles
The well-known considerations for a court exercising its discretion to grant an injunction are set out in the American Cyanamid case  AC 396: (1) whether there is a serious issue to be tried; (2) where the balance of convenience lies; and (3) whether damages would be an adequate remedy.
- The Court considered, in light of the fact that “there still remain reasons for very serious doubt as to the SPA’s authenticity”, that there existed a serious issue to be tried.
- When reflecting upon the balance of convenience, the judgment highlighted the clear prejudice from refusal of the application. There was a very high degree of likelihood that there would be, at the least, a significant depletion of Koza’s assets by the funding of the ICSID Proceedings with a consequent diminution of the value of Koza Altin’s subsidiary. By contrast, it would be significantly more likely than not that IIL would be able, through resources inferred to be available to Mr Ipek, to continue with the ICSID Proceedings. Accordingly, the Court considered it unlikely that there would be any prejudice to Koza if the injunction were granted.
- As to the adequacy of a remedy in damages for Koza Altin, the Court determined that there could be little confidence that financial compensation would be available – Koza’s own resources would be depleted by expenditure upon the ICSID Proceedings, and Koza Altin’s prospect of recovery would therefore depend in large part upon Koza being able to recoup money from other quarters via derivative claims against Mr Ipek and IIL (and it was part of Koza’s case that other sources of funding were not available).
Finally, the Court examined the cross-undertaking in damages from Koza Altin and found that whilst not of equivalent value with the ICSID Proceedings, the value of the claim made in those ICSID Proceedings was also not reflective of the loss from Koza in alternative funding. The Court therefore determined the cross-undertaking to be adequate, noting in so doing the “high degree of assurance that … at trial it will appear that the injunction was rightly granted”.
This was an unusual case based on very specific facts. As such, while the discussions regarding the American Cyanamid principles and whether or not the application constituted an abuse of process may be of general interest to arbitration practitioners, its wider implications may be limited.
However, the case does present an interesting illustration of how national courts may still have a role to play alongside ICSID proceedings. While ICSID proceedings are, by their very nature, ‘non-national’, Mr Ipek’s decision to seek a ruling from the English court nevertheless indirectly gave a role to the English courts in those proceedings, ultimately enabling Koza Altin (and Turkey) to frustrate Mr Ipek’s attempt to fund the arbitration via the UK-incorporated Koza.
For more information, please contact Andrew Cannon, Partner, Jake Savile-Tucker, Associate, or your usual Herbert Smith Freehills contact.
In Micula and others (Respondents/Cross-Appellants) v Romania (Appellant/Cross-Respondent)  UKSC 5 the UK Supreme Court (the “SC”) found that the duty of sincere cooperation under EU law does not preclude enforcement of an ICSID Convention (the “Convention”) award against Romania (the “Award”). In what is the enforcement stage of the long-running and well-known saga of Micula v Romania, the SC has lifted an almost three-year enforcement stay, which was ordered by the High Court (the “HC”) and later confirmed by the Court of Appeal (the “CA”). The SC’s decision is interesting because it deals with the interplay of (sometimes) conflicting obligations of national, international and EU law in the context of investment arbitration, and confirms that the UK’s obligations under the Convention to recognise and enforce ICSID awards are not prevented by the duty of sincere cooperation under EU law.
The COVID-19 pandemic has brought about an unprecedented level of state action as governments around the world make difficult decisions in response to the spread of the virus. Over the past few months this has resulted in a variety of measures in different countries, including the suspension of contractual rights, social distancing regulations, the requisitioning or nationalisation of private property, the closure of borders, export and travel restrictions, and bail-outs of state carriers.
In such extraordinary times, a degree of interference with private rights is almost inevitable. Many states are balancing multiple concerns, looking to protect public health and absorbing expert evidence in a fast-moving environment, whilst trying to mitigate both economic and societal damage in the short and longer term. However, even in times of crisis, states nonetheless have domestic and international law obligations (including under investment treaties), which impose standards against which their conduct may be held to account. Depending on the circumstances, state action in response to the COVID-19 pandemic which fails to meet these standards could give rise to claims.
This article describes the potential international investment law protections which may be relevant in response to COVID-19. It also discusses the key considerations for states and foreign investors alike when assessing whether state action may infringe a state’s international law obligations.
Protections for foreign investors under investment treaties
A foreign investor may enjoy protections under an international investment agreement (an IIA), which if breached by state action can give rise to the right to make a claim. An IIA is an agreement between two or more states containing reciprocal undertakings for the promotion and protection of private investments made by nationals of the state signatories in each other’s territories. Such agreements have historically been entered into to provide confidence to foreign investors that their investment will not be negatively affected by certain types of irregular action by the state hosting the investment (the host state) and that if it is, to enable the investor to claim damages. Most commonly, these IIAs are bilateral arrangements (called bilateral investment treaties, or BITs), multilateral treaties or free trade agreements containing investment protections.
The definitions of investor and investment vary between different IIAs but the definition of investment often includes a broad and non-exhaustive list of categories of assets. Whilst IIAs are state-to-state agreements, they usually contain provisions allowing an investor from one state to enforce the guarantees as to the treatment of their investment in the host state through international arbitration before an independent tribunal.
Each treaty must be considered on its terms but IIAs commonly include the following investment protections:
- a protection against the unlawful expropriation of an investment without adequate compensation, whether directly or indirectly through a series of governmental acts which encroach on an investment and result in it being deprived of value;
- the guarantee of fair and equitable treatment (or FET). Claims under FET provisions typically fall into two broad categories: prohibitions against a denial of justice and claims based on administrative decision-making. Not all regulatory changes will constitute a violation of the FET standard, and the existence of such protections does not deprive a state of its ability to exercise its regulatory powers. However, where the state’s exercise of its regulatory power is arbitrary or based on procedural unfairness or lack of due process, bad faith, discrimination or a failure to protect an investor’s legitimate expectations as to how they will be treated, a FET claim may be warranted;
- a guarantee of full protection and security for the investment and for the investor. Whilst this is generally understood to concern physical protection, it may also encompass legal protection;
- guarantees of treatment no less favourable than that given either to nationals of the Host State of the investment or to nationals of third states, which prevent the host state discriminating against the foreign investor; and
- the right to repatriate profit and capital.
Some treaties specifically guarantee non-discriminatory treatment with respect to restitution, compensation or other valuable consideration for losses due to civil strife or state of emergency.
Treaty obligations in the context of COVID-19
On the one hand, states are undoubtedly facing significant challenges in balancing the need to protect public health with the prospect of short and long term economic damage. On the other hand, many foreign investors are facing wide-ranging governmental interference in multiple aspects of their business (including, in many jurisdictions, restrictions on the use and movement of their employees, the use of their property and the enforcement of their contractual rights). Some investors have questioned whether the extent of the measures imposed is justified, or whether the measures are proportionate to the serious economic damage which they can inflict.
Based on the standard protections found in IIAs outlined above, key considerations as to whether a state’s response to COVID-19 is consistent with its international law obligations may include:
- the evidential basis for state measures introduced to address the pandemic in different ways;
- the length of time for which measures are imposed and the regularity with which they are reviewed;
- whether measures restricting private rights and freedoms are proportionate based on the anticipated benefit in terms of fighting the virus and the possible negative impact of those actions on the affected investors;
- whether steps have been taken to mitigate the damage caused by the measures;
- whether the measures impact unequally or disproportionately on one sector, group or type of company or individual impacting the foreign investor;
- whether the enforcement mechanisms used by states to implement COVID-19 regulations are consistent with domestic legislation;
- whether, particularly in the context of any requisitioning or nationalisation, any provision has been made for compensation and, if so,
- how such compensation is calculated; and
- the availability (or otherwise) of compensation for all who are similarly affected (including whether nationals of the host State are placed in a better position than foreign investors);
- whether the measures imposed are capable of, and are being used for, purposes beyond tackling COVID-19;
- whether any assurances have been given to sectors, companies or individuals as to their treatment in the context of COVID-19 and whether those assurances were fulfilled; and
- whether existing laws are being used to address COVID-19 in a manner which is inconsistent with their legislative intent.
States may find it important, for a multitude of reasons, to retain comprehensive contemporaneous records of the reasons for decisions, as well as ensuring that communications with individual investors, as well as industry and sector groups, are clearly documented.
For investors, it will also be important to keep contemporaneous records of the impact on the investment(s) affected by state action. Any communications with states, particularly those seeking or receiving assurances as to treatment, should be carefully recorded and those records preserved.
Other relevant considerations
The fact that state action has negatively affected a foreign investment does not automatically lead to an actionable breach of an IIA. This will depend on the nature of the state action and the circumstances in which it has been taken, the wording and interpretation of the IIA, and whether the IIA contains exemptions or prudential carve outs which apply in certain circumstances (such as national security, public health or public order). In such extraordinary circumstances there may be defences available to a state, either based on the wording of the relevant treaty or on customary international law (including defences based on necessity, distress or force majeure).
In summary, notwithstanding the fact that COVID-19 presents an unprecedented and fast-developing challenge, the guarantees given to foreign investors under IIAs remain relevant to an assessment of state action in response to the pandemic. Whilst the question of whether an investor may be entitled to damages under an IIA is fact and treaty-specific, the prospect of such claims is therefore relevant to states and investors alike.
For more information about our investment treaty practice, and to find a key contact in a relevant jurisdiction, please click here.
Herbert Smith Freehills has helped secure an important victory for the Kingdom of Spain in a long-running investor-state arbitration concerning regulatory changes made by Spain in 2010 to the Feed-in Tariff regulation governing the photovoltaic (“PV”) sector in Spain.
On 12 February 2020, the European Parliament (“EP“) gave its consent to the EU-Vietnam Free Trade Agreement (“EU-Vietnam FTA“) and the Investment Protection Agreement (“EU-Vietnam IPA“). The consent from the EP paves the way for approval of the two agreements by the EU Council of Ministers next month.
In brief, the EU-Vietnam FTA focuses on reducing restrictions on trade in goods and services between the EU and Vietnam. The EU-Vietnam IPA, in turn, establishes specific protections for investors and creates, inter alia, a dispute resolution system that allows private parties to bring actions against measures that impact their investments.
Vietnam is a significant trading partner of the EU, with a population of 95 million. It is expected that the EU-Vietnam FTA will enter into force by the middle of 2020. However, the EU-Vietnam IPA will also need to be ratified by Member States and so its full entry into force will depend on their approval. This process is likely to take a number of years.
Further information on the EU-Vietnam FTA and the EU-Vietnam IPA is below. The full texts of both agreements can be accessed here.
1.) EU-Vietnam FTA in more detail
Central to the EU-Vietnam FTA is the elimination of customs duties on nearly all products traded between the EU and Vietnam. On day one, 65% of EU products will enter Vietnam duty-free and 71% of Vietnam products will enter the EU duty-free. The EU will remove most of the remaining duties it imposes on Vietnamese products within seven years and Vietnam will do the same within ten years. As illustrated by the table below, in many cases, duties will be reduced significantly.
|Product category||Vietnam’s current tariff|
|Machinery and appliances||Up to 35%|
|Chemicals||Up to 25%|
|Dairy products||Up to 20%|
The EU-Vietnam FTA also addresses trade in services – but the liberalisation is generally much more limited than for goods. In particular, like in the WTO, there is no opportunity for “free” trade in services without restrictions. This said, from the EU perspective, a key benefit of the agreement is that Vietnam has agreed to reduce restrictions on services trade for EU companies to a greater extent than it has done for any other trade partner. EU services benefitting from increased access include the following: computer services, financial services, telecommunications, social services, distribution services, courier services, logistic services, air and maritime transport, and environmental services. In accordance with other trade agreements, the EU has not significantly widened its services offering (in particular, because the EU market is relatively open). However, via the FTA, it commits to retain its current level of openness (therefore providing Vietnam a benefit as compared to WTO rules).
Other aspects of the FTA include the following:
- Non-tariff barriers – Trade in goods is hindered not only by at the border measures, including customs duties, but also by differences in regulation. The FTA contains provisions to reduce behind the border barriers to trade in respect of technical regulations, sanitary and phytosanitary measures and others. For example, as a result of the agreement, Vietnam will accept on its market EU parts and equipment certified in the EU as complying with the UN Regulations.
- Public procurement – The FTA provides EU companies with access to procurement markets in Vietnam, which is not available to them today. Rules to make procurement more transparent and enforceable by traders are also included.
- Intellectual Property Rights – The FTA includes comprehensive provisions covering copyright, trademarks, industrial designs, patents and plant varieties. Among other things, the EU pharmaceutical sector will benefit from improved protection of intellectual property rights. Extension of patent protection, up to a limit of two years, will be possible where the effective patent life has been reduced due to unreasonable delays in the process of marketing approval.
- Geographical Indications – The EU-Vietnam FTA extends protection to 169 European foods and drinks. Thus, for example, the rules require that the use of geographical indications such as Champagne, Prosciutto di Parma, Rioja wine and Irish whiskey be reserved for imports from the EU regions from which they originate.
- Environmental protection and labour conditions – In line with other FTAs recently concluded by the EU, the EU-Vietnam FTA includes a chapter on trade and sustainable development – incorporating obligations related to environmental protection, labour policy and climate change. The agreement provides for the establishment of specialised committees on trade and sustainable development to facilitate and monitor the effective implementation thereof – and envisions a number of channels for the involvement of civil society. The terms of environmental and labour protections will not be enforceable through the generally applicable dispute settlement mechanisms established by the agreements. In lieu, the chapters establish the possibility for external review of issues by independent panels of experts (but who will not have the power to issue binding decisions).
- State-owned enterprises: In line with recent trade agreements concluded by the EU, the FTA contains a chapter with rules on state-owned enterprises which, inter alia, require such enterprises to act in a non-discriminatory manner in accordance with commercial considerations. In the case of Vietnam, the provisions are especially significant since state-owned enterprises have traditionally been a central feature of the Vietnamese economy.
- Dispute settlement – The FTA is largely underpinned by state-to-state dispute settlement, involving consultations, optional mediation and ultimately the possibility for binding adjudication by an arbitration panel. The mechanism is modelled on the WTO, but there is no possibility for an appeal. Further, unlike in the WTO, private parties will be able to make interested party submissions in proceedings.
2.) The EU-Vietnam IPA in more detail
The EU-Vietnam IPA establishes substantive protections for investors (e.g. on fair and equitable treatment, on non-discrimination, and on expropriation). It also enables investors of one of the state parties to bring proceedings against the government of the other state party in the event of an alleged infringement of these substantive standards (“investor-state dispute settlement“).
The IPA provides for investor-state dispute settlement claims to be resolved through an “Investment Tribunal System” composed of permanent first instance and appeal tribunals. These permanent tribunals (of nine and six members respectively) will be formed of nationals of Vietnam, EU Member States and third party states who fulfil certain expertise requirements and are subject to a code of conduct regarding their independence and impartiality. The members will be appointed publicly for a fixed term and will be paid a retainer and additional fees when hearing disputes under the treaty. The EU has recently agreed similar, although not identical, investor-state dispute settlement provisions with other countries – namely Canada, Singapore and Mexico. The EU’s approach is intended to address concerns around investor-state dispute settlement, including its transparency and the consistency of the case-law. As with these other treaties, the EU-Vietnam IPA confirms both parties’ commitment to the creation of multilateral dispute settlement mechanisms (such as those currently being discussed by UNCITRAL’s Working Group III) and acknowledges that the provisions of the IPA may be amended subsequently if such multilateral proposals progress.
The IPA contains many of the innovative measures introduced by the EU in other recent treaties, including commitments to transparency, the ability of the state parties’ Joint Committee to propose binding interpretations of the IPA to a tribunal hearing any dispute under it, and the ability of a tribunal to determine that a claim has no legal merit or is unfounded as a matter of law. We also see further development of the EU’s position on certain issues; for example, on Third Party funding and security for costs.
Notably, upon entry into force, the IPA will replace 21 bilateral investment treaties (“BITs“) currently applicable between EU Member States and Vietnam. The EU-Vietnam IPA contains reformed investment protection rules that are not present in existing BITs, including guarantees of best available treatment.
As noted, in order to fully enter into force, the EU-Vietnam IPA must be ratified not only by the EU but also by the Member States individually (and also Vietnam). There is a clause in the IPA that allows for provisional application of matters within EU exclusive competence. In practice, if provisionally applied, this would mean that key substantive investment protections would be applicable. However, there would be no mechanism of investor-state dispute settlement. Nevertheless, the EU-Vietnam IPA does contain provisions on state-to-state dispute settlement which could apply on a provisional basis (assuming that Vietnam would agree to provisional application).
3.) Broader significance of the EU-Vietnam FTA and EU-Vietnam IPA
Beyond the direct impacts on trade and investment, the EU-Vietnam FTA and EU-Vietnam IPA are viewed as important because they further the EU’s broader objective to secure a trade relationship with countries which are a part of ASEAN, i.e. the Association of Southeast Asian Nations (which comprise Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Laos, Myanmar, Cambodia and Vietnam). In 2007, the EU and ASEAN opened negotiations for a trade agreement but these ultimately broke down. In lieu, the EU has focused on seeking trade agreements with individual ASEAN countries, in the hopes of eventually achieving an EU-ASEAN trade framework. In 2018, the EU concluded an FTA and IPA with Singapore, its largest trading partner in the region. The next significant step is likely the conclusion of trade agreement with Indonesia, while negotiations with Thailand, Malaysia and the Philippines are currently on hold.
4.) Impact of Brexit
The United Kingdom (“UK“) ceased to be an EU Member State at 23h00 London time on 31 January 2020. Until at least 31 December 2020, the UK must continue to apply EU law. This means that the UK will apply the EU-Vietnam FTA to the extent that it enters into force during the transition period (similarly, it would apply the EU-Vietnam IPA if it provisionally enters into force during the same period). The EU has similarly written to partner countries to the effect that they continue to apply international agreements to the UK during the transition period. In many instances, there may be no strict legal obligation for them to do so, but it is expected that many countries will in practice. By contrast, the UK will have no vote when the EU Council of Ministers decides whether to conclude the EU-Vietnam FTA and EU-Vietnam IPA (the latter for aspects within the EU competence). The implications for the UK-Vietnam Bilateral Investment Treaty are as yet unclear. Investors in Vietnam potentially affected by these changes may wish to seek specific legal advice.
For more information, please contact Andrew Cannon, Partner, Lode Van Den Hende, Partner, Eric White, Consultant, Jennifer Paterson, Senior Associate, or your usual Herbert Smith Freehills contact.
 The EU-Singapore FTA entered into force on 21 November 2019. The IPA will enter into force after it has been ratified by all EU Member States according to their own national procedures.
The International Centre for Settlement of Investment Disputes (“ICSID”) has released case statistics for 2019 and updated their records for cases since 1972 (available here). ICSID has historically administered the majority of investor-state claims and these statistics remain an important bellwether for trends in such disputes. The 2019 statistics show that a lower number of cases were registered this year. There was a dip in cases involving state parties from Eastern Europe and Central Asia, and the highest proportion of cases involved state parties from South America. As in previous years, cases involving the oil and gas, electric power and other energy sectors dominated.
The United Nations Commission on International Trade Law’s (“UNCITRAL“) Working Group III (Investor-State Dispute Settlement Reform) (“WGIII“) has published its report (the “Report“) on the work conducted between 20 and 24 January 2020 during its resumed 38th session. The Report provides details about the discussions around the following issues: (i) whether the investor-state dispute settlement (“ISDS“) process should provide for an appellate mechanism; (ii) the enforcement of decisions of permanent bodies; (iii) the financing of permanent bodies; and (iv) the selection and appointment of arbitrators and adjudicators.
UNCITRAL has been considering the possible reform of ISDS through the work of WGIII, which has been given a broad mandate to identify concerns regarding ISDS procedure, and develop relevant solutions to be recommended to the main UNCITRAL body. While WGIII enjoys broad discretion in discharging its mandate, any solutions devised will take into account the ongoing work of relevant international organisations, and each State may decide the extent to which it chooses to adopt the proposed solutions. For further information about WGIII’s previous work on ISDS reform, please see our extensive coverage of this topic here: PIL Notes posts of April 2018, January 2019, February 2019 and November 2019.
Some delegations noted that the existing ISDS mechanisms for reviewing arbitral awards were too limited. They considered that an appellate mechanism would enhance the correctness, consistency, predictability and coherence of ISDS awards. Some delegations drew an interesting distinction by querying whether the goal of an appellate mechanism was to ensure the quality of the awards, or to enhance the coherence and consistency of the ISDS regime. In addition, some delegates cautioned against potential increases in costs and duration of proceedings to which such an appellate mechanism might give rise.
Concerns were raised that an appellate mechanism could actually increase incoherence and inconsistency in ISDS. This would be because substantive protections standards are found in different sources of law, such as investment treaties and domestic laws. This multitude of sources results in fragmentation already, which could increase by virtue of multiple tribunals and appellate mechanisms’ interpretations. However, some delegates reiterated that the common standards in those sources of law could be interpreted more consistently and predictably by the relevant appellate body than currently done by ad hoc arbitral tribunals.
The nature and scope of appeal of awards was considered. It was noted that existing annulment grounds (under the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention“) for instance) are limited. The following potential additional annulment grounds were considered: (i) errors in the interpretation and application of law; (ii) (manifest) errors in the finding of any relevant facts; and (iii) the grounds for annulment under the ICSID Convention and the grounds for refusal of recognition and enforcement of awards under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention“).
Concerns were expressed that broader grounds of appeal could entail a review of all issues de novo, which could impact adversely on the costs and duration of the proceedings. In addition, to avoid overburdening the appellate bodies through an unmanageable number of cases, some delegations suggested that certain decisions should not be appealed. Such decisions could include decisions on procedure (such as challenges), interim measures and, potentially, jurisdiction.
In terms of the effect of the appeal, it was generally felt that an appellate body should be able to affirm, reverse or modify the decision of the first-tier tribunal, and render a final decision. It was also considered whether the appellate tribunal should be able to annul or set aside an award, or remand it to the first-tier tribunal. With regard to concerns expressed about possibly incorrect decisions of the appellate body, discussions were held about the possibility for the appellate body to rectify its decision in exceptional circumstances.
WGIII agreed to consider the option of an appellate mechanism in ISDS further as one of its possible reform options. WGIII asked the Secretariat to consider the related discussions of WGIII, and prepare relevant draft provisions, as well as provide further information on the issues raised.
Enforcement of decisions of permanent bodies
WGIII considered how decisions rendered by permanent bodies (i.e. a permanent appellate mechanism or a standing first-tier body) should be enforced and whether reform was needed. The New York Convention and the ICSID Convention already provided a robust enforcement mechanism and WGIII considered the possible application of these existing mechanisms to decisions made by a permanent body. However, it was also suggested that, if a permanent body were to be established, it could be preferable to include an internal enforcement mechanism in its founding instrument. Enforcement in non-participating States would most likely be achieved through the New York Convention or ICSID Convention.
Financing of a permanent body
WGIII had a preliminary discussion on the financing of a permanent body, which could handle appeals, or be composed of two tiers to hear disputes. Key budget components of such a permanent body would include: (i) the remuneration of adjudicators; (ii) case administration costs; (iii) costs of the administrative staff supporting the tribunals; and (iv) the overhead costs of the permanent body. This budget could be covered by States and the disputing parties.
Some delegations took the view that the level of States’ contributions should be assessed by reference to their level of economic development and the number of claims brought against particular States. However, concerns were raised that such a contribution structure could have the negative consequence of some States having more influence in the permanent body than others.
The possibility of voluntary State contributions was also mentioned, but it was thought that this would be a volatile mechanism, which might undermine the independence of a permanent body, as it could subject it to undue influence by the donors. Another view was that the current practice whereby disputing parties pay the costs of the ISDS process should be retained. This existing “user-pay” system could increase accountability, and deter systematic appeals and frivolous claims.
Selection and appointment of ISDS tribunal members
WGIII considered the qualifications and requirements that serving ISDS tribunal members should have. These included knowledge of the subject matter, independence and impartiality, accountability and integrity.
The general view was that ISDS tribunal members should have knowledge of public international law, international trade and investment law. Some views were expressed that ISDS tribunal members should also understand the policies underlying investment, such as sustainable development. Some advised caution in requiring too many or strict qualifications, as this would reduce the pool of individuals significantly at the expense of aims such as achieving diversity. It was also reiterated that geographical, gender and linguistic diversity, as well as equitable representation of the different legal systems and cultures enhances the quality of the ISDS process.
One of the possible reform options expressed was the establishment of a roster of qualified candidates and the setting up of a permanent body composed of full-time adjudicators. By establishing a list or roster, the method of selecting and appointing arbitrators would be regulated, but party autonomy would also be preserved. Suggestions were made that, to preserve the balance of the current party-led appointment system, both States and investors should be involved in the establishment of such a roster. The administration of such a roster could include a procedure to remove an arbitrator.
In terms of the selection and appointment of adjudicators in a permanent body, the general view was that broad geographical representation, and a balance of representation between developed, developing and least developed countries should be sought.
Upcoming WG III session and comment
WGIII is due to meet in March 2020 in New York for its 39th session. It has been agreed that the upcoming session will focus on: (i) dispute prevention and mitigation, and other means of alternative dispute resolution; (ii) treaty interpretation by States; (iii) security for costs; (iv) means to address frivolous claims; (v) multiple proceedings including counterclaims; and (vi) reflective loss and shareholder claims.
WGIII has not decided which particular reform options should be adopted at this stage of the deliberations, and instead requested the Secretariat to provide further information on more concrete possible reform steps. We will continue to follow and update on the deliberations pending WGIII’s final recommendations on these issues.
For more information, please contact Andrew Cannon, Partner, Helin Laufer, Associate, or your usual Herbert Smith Freehills contact.