The USMCA or “NAFTA 2.0” came into force on 1 July 2020

The US-Mexico-Canada Trade Agreement (USMCA), the replacement to the North American Free Trade Agreement (NAFTA), entered into force on 1 July 2020.

Background

On 24 April, 2020 the United States Trade Representative issued a press release confirming that all three NAFTA member states had notified the other parties, in writing, that they had completed the internal procedures required for the entry into force of USMCA. According to Paragraph 2 of the Protocol replacing NAFTA with the USMCA, the USMCA therefore entered into force on the first day of the third month following the last notification, i.e. on 1 July, 2020. Under the sunset clause, NAFTA will remain in effect for three years from this date for legacy investments and pending claims.

Among the differences between the USMCA and NAFTA are the revised Investor State dispute settlement provisions at Chapter 14 of the USMCA. Investor-state arbitration has been removed for Canadian investors and the Canadian state, although there remains potential for investment disputes between Canada and Mexico to be referred to ISDS under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (to which the US is not a party). As between Mexico and the US ISDS remains, but the scope of potential claims are narrowed. Under the USMCA, investor-state claims may be brought for alleged breaches of post-establishment national treatment or most favoured nation treatment, as well as alleged direct expropriations. Claims for fair and equitable treatment and for indirect expropriation are not included. In other changes, the treaty contains a 30-month local remedies requirement, as well as a 4-year limitation period for bringing claims (with a shorter limitation period for certain government contracts). Chapter 14 also includes transparency requirements and “double-hatting” limitations, with arbitrators in one arbitration being forbidden from acting as counsel, expert or witness in any other USMCA proceedings while the arbitration is ongoing (Annex 14-D, Article 6(5)(c)).

For more information or to discuss the implications of the USMCA for you or your business, please contact Christian Leathley, Partner, Amal Bouchenaki, Partner, or your usual Herbert Smith Freehills contact.

Christian Leathley
Christian Leathley
Partner
+1 917 542 7812
Amal Bouchenaki
Amal Bouchenaki
Partner
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ICSID AND UNCITRAL RELEASE DRAFT CODE OF CONDUCT FOR ISDS ADJUDICATORS

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”).

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A BALANCE OF OBLIGATIONS: THE RESPONSE TO THE COVID-19 PANDEMIC AND INVESTMENT TREATY PROTECTIONS

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:

  1. 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;
  2. 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;
  3. 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;
  4. 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
  5. 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.

Andrew Cannon
Andrew Cannon
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Christian Leathley
Christian Leathley
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Hannah Ambrose
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ICSID RELEASES FOURTH WORKING PAPER ON ICSID RULES REVISION: INCREASING CONSENSUS, BUT NOTABLE DEVELOPMENTS

On 28 February 2020, the International Centre for Settlement of Investment Disputes (“ICSID“) Secretariat (the “Secretariat”) released its Fourth Working Paper on Proposals for Amendment of the ICSID Rules (“WP4”), the latest iteration of proposals for amended rules for investor-state dispute settlement (“ISDS“). The proposals build upon the proposed amended ICSID rules in Working Paper 3 (“WP3”), and address issues such as transparency, costs and confidentiality.

Background

ICSID’s overarching goal in its reform efforts is “to modernize, simplify, and streamline the rules, while also leveraging information technology to reduce the environmental footprint of ICSID proceedings”. This large-scale drafting process draws on the lessons learned from hundreds of ICSID cases.

As noted in our previous related PIL Notes post, ICSID’s proposed changes are wide-ranging. The amended ICSID rules comprise the Administrative and Financial Regulations under the ICSID Convention and Additional Facility, the Institution Rules, the Arbitration and Conciliation Rules under the ICSID Convention and Additional Facility, the Fact Finding Rules and the Mediation Rules (together, the “ICSID Rules“).

Given the increased consensus amongst the consulted parties, WP4 has resulted in fewer changes than previous working papers. However, WP4 introduces a number of significant amendments throughout the ICSID Rules. For the purpose of this post, we will address the key amendments proposed in relation to the Institution Rules and Arbitration Rules.

Commencement of arbitral process

Recommended additional information for inclusion in the request for arbitration

WP4 expands the scope of recommended additional information that requesting parties are encouraged to provide when making their request for arbitration (“RFA“). This information now includes any procedural proposals or agreements reached by the parties, including with respect to the procedural language (Institution Rule 3(a)).

First session

WP4 proposes that, when the President of the tribunal cannot convene the parties and the other tribunal members within 60 days after the constitution of the tribunal, the tribunal can decide whether to hold the first session between the President of the tribunal and the parties, or solely among the tribunal members based on the parties’ written submissions (Arbitration Rule 29(3)). This differs from the approach in WP3, which envisaged the tribunal holding the first session without the parties in such circumstances.

Transparency and conflicts of interest

Disclosure of corporate structure

The proposed changes to the Institution Rules in WP4 include the recommendation that, where the requesting party is a juridical person, the party disclose the names of the persons and entities that own or control it at the point of making its RFA (Institution Rule 3(b)). This provision is designed to facilitate the identification of any potential tribunal members’ conflicts of interest at the earliest opportunity.

Arbitrators’ code of conduct

During the consultation period, States suggested that the amended Arbitration Rules contain a commitment to apply the arbitrators’ code of conduct to be produced by the UNCITRAL Working Group III (“WGIII“), or that the Arbitration Rules themselves reflect general principles contained in this upcoming code of conduct. These suggestions were not implemented in WP4 because Arbitration Rule 19(3) allows for incorporation by reference of a code of conduct in the arbitrator declaration. As such, once WGIII develops its proposed code of conduct, the Secretariat will invite states to consider whether this should be included in the Arbitration Rules by way of an arbitrator declaration. For more information on WGIII’s current work, please see our previous PIL Notes posts of April 2018January 2019February 2019, November 2019 and February 2020).

Disclosure of third party funders

The Arbitration Rules in WP4 retain the requirements included in the previous working papers that parties disclose the details of third party funders. However, Arbitration Rule 19 contains more detailed provisions, and now requires parties to disclose information about non-parties providing funds whether directly or indirectly, including their names and addresses. WP4 also proposes that the tribunal may order disclosure of further information relating to third party funders if it deems it necessary.

Costs

WP4 contains various proposals concerning decisions on costs and security for costs. With regard to general decisions on costs, where a party objects under Arbitration Rule 41 that a claim is manifestly without legal merit, there is now a presumption that the prevailing party will be awarded its costs (Arbitration Rule 52(2)).

In addition, WP4 clarifies the relevance of third party funding to security for costs applications. Arbitration Rule 53(4) has been amended slightly to emphasise that, whilst the presence of third party finding is not itself sufficient to justify an order for security for costs, third party funding may be evidence of the circumstances that the tribunal must take into consideration when deciding such applications.

Confidentiality

Publication of Documents Filed in Proceedings

The proposed rules in WP4 continue to provide for the publication of documents filed in the proceedings. However, WP4 proposes a number of key changes. Both parties must now consent to publication of the documents and agree on any redactions (Arbitration Rule 64(1)). Only disputes regarding the redaction of submissions can be referred to the tribunal (Arbitration Rule 64(2)). In contrast to the approach in WP3, disputes about the redaction of other documents must now be resolved between the parties.

Observation of Hearings

Under the proposed provisions in WP3, the tribunal would have had to consult with the parties with respect to allowing non-parties to observe hearings, but would have had the power to make the final decision. The amended Arbitration Rule 65(1) in WP4 now provides that the tribunal shall allow non-parties to observe hearings unless either party objects to this.

 Next Steps

The ICSID Secretary-General has stated that ICSID’s goal is to place the proposed amended ICSID Rules before the Administrative Council for a vote in the latter half of 2020. If adopted, these ICSID Rules could be in place by early 2021. Any proposed amendments to the ICSID Rules must achieve a two-thirds majority approval by the Administrative Council, comprising one representative from each Member State. Should this vote be successful, this would be only the fourth time ICSID will have amended its rules.

Fore more information please contact Andrew Cannon, Partner, Christian Leathley, Partner, Helin Laufer, Associate, or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852

Christian Leathley
Christian Leathley
Partner
+1 917 542 7812

Helin Laufer
Helin Laufer
Associate
+44 20 7466 6425

NEVSUN RESOURCES LTD. V. ARAYA – SUPREME COURT OF CANADA ALLOWS ERITREAN MINERS’ CLAIM FOR VIOLATIONS OF CUSTOMARY INTERNATIONAL LAW TO PROCEED

On 28 February 2020 the Supreme Court of Canada in Nevsun Resources Ltd. v. Araya (2020 SCC 5) issued a 5-4 ruling allowing a claim by Eritrean miners against Nevsun Resources Ltd. (“Nevsun”), a Canadian mining company, to proceed. The miners had initiated proceedings in British Columbia against Nevsun alleging, among other things, breaches of customary international law prohibitions against forced labour, slavery, cruel, inhuman or degrading treatment, and crimes against humanity. Nevsun filed a motion to strike the miners’ pleadings, arguing that these customary international law claims had no reasonable prospect of success. Nevsun’s motion to strike was denied, and its appeals to the Court of Appeal and the Supreme Court were in turn dismissed.

The workers’ claims arose out of an expansion project between Nevsun and the State of Eritrea for the development of the Bisha gold-copper-zinc mine in Eritrea. Nevsun indirectly owns 60% of the company that owns and operates the Bisha mine, with the other 40% owned by the Eritrean National Mining Corporation. The miners alleged that they had been conscripted via the Eritrean military’s national service program into indefinite servitude in the mine, contrary to the customary international law prohibitions noted above and domestic torts of conversion, battery, unlawful confinement, conspiracy, and negligence.

In appealing against the dismissal of its motion to strike, Nevsun argued that the “act of state doctrine” barred the workers’ claims because the Canadian courts could not adjudicate upon the sovereign acts of a foreign State, including Eritrea’s national service program. Nevsun further argued that the miners’ claims based on customary international law had no reasonable prospect of success and should therefore be struck.

The Supreme Court considered two questions on appeal:

  • Whether the act of state doctrine forms part of Canadian common law, and
  • Whether the customary international law prohibitions against forced labour, slavery, cruel, inhuman or degrading treatment, and crimes against humanity may ground a claim for damages under Canadian law.

Majority

On the first issue, the majority of the Supreme Court, in an opinion authored by Justice Abella, concluded that the act of state doctrine was not part of Canadian common law. Rather than an all-encompassing act of state doctrine, the majority considered that Canadian law had developed its own approach to addressing the twin principles underlying the doctrine: conflict of laws and judicial restraint.  Accordingly, the act of state doctrine did not bar the miners’ claims.

On the second issue, the Court considered that, “Canada has long followed the conventional path of automatically incorporating customary international law into domestic law via the doctrine of adoption, making it part of the common law of Canada in the absence of conflicting legislation.” Specifically, the prohibitions against forced labour, slavery, cruel, inhuman or degrading treatment, and crimes against humanity were jus cogens, i.e., peremptory norms fundamental to the international legal order, from which no derogation is permitted. Consequently, these peremptory norms of customary international law were fully integrated into, and formed part of, Canadian law.

In response to Nevsun’s argument that, being a corporation, it was immune to the application of these customary international law norms, the Court considered that “international law has so fully expanded beyond its Grotian origins that there is no longer any tenable basis for restricting the application of customary international law to relations between states.” Given the evolution of international law to encompass individuals and private actors as subjects, it was not “plain and obvious” (the standard for a motion to strike) that corporations “today enjoy a blanket exclusion under customary international law” from liability. However, the Court recognized that the trial judge would have to determine whether the specific norms relied on in this case were of a strictly inter-State character, and if so, whether the common law should evolve to extend the scope of those norms to bind corporations. For the purposes of the appeal, and in the absence of any Canadian laws to the contrary, the Court concluded that the customary international law norms relied upon by the miners formed part of the Canadian common law and potentially applied to Nevsun.

In addition, the Court considered that there was nothing in Canadian law to preclude the “possibility of a claim against a Canadian corporation for breaches in a foreign jurisdiction of customary international law, let alone jus cogens.” The Court further opined that customary international law norms are inherently different from existing domestic torts, as their violation “shocks the conscience of humanity.” Accordingly, relying on existing domestic torts may not do justice to the specific principles in place with respect to the human rights norm.

Partial dissent

Justices Brown and Rowe agreed with the majority’s dismissal of Nevsun’s appeal in relation to the act of state doctrine, but disagreed that the workers had made out a reasonable cause of action based on violations of customary international law. In their partial dissent, the Justices considered that the two theories on which the pleadings of the workers were based were fundamentally flawed.

In particular, on the first theory of the workers’ claims for breach of customary international law, the partial dissent considered that these claims were viable only if international law were “given a role that exceeds the limits placed upon it by Canadian law…. These prohibitive rules of customary international law, by their nature, could not give rise to a remedy.”

The partial dissent further considered that, as a matter of law, corporations cannot be liable at customary international law for human rights violations; at most, the proposition that such liability had been recognised was equivocal, rendering any such norm non-binding. Accordingly, the claims were doomed to fail.

Dissent

Justices Moldaver and Cote agreed with the partial dissent that the miners’ claims were bound to fail, and considered in addition that the extension of customary international law to corporations represented a “significant departure in this area of law.”  They further dissented from the majority opinion in relation to the act of state doctrine, opining that the workers’ claims were within the realm of international affairs and therefore not justiciable.

Does Canadian common law present more fertile ground for international human rights claims than the U.S. Alien Tort Statute?

The Supreme Court of Canada’s ruling in Nevsun raises the potential of Canadian courts as a forum for international human rights claims grounded in jus cogens norms—particularly in the context of recent United States Supreme Court jurisprudence limiting the scope and reach of the Alien Tort Statute (“ATS”), which provides that “[t]he district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.”  28 U. S. C. §1350.

Nevsun presents an interesting contrast with the U.S. Supreme Court cases in two regards: extraterritorial application and corporate liability.  However, it should be noted that, unlike the foreign corporate defendants involved in the U.S. cases discussed here, Nevsun is a Canadian company bound by Canadian law and subject to the jurisdiction of the Canadian courts.  Given the nature of the ATS as a “jurisdictional statute” that creates no cause of action, this distinguishing factor alone may account for the different holdings reached by the Supreme Court of each jurisdiction—if not the Courts’ specific lines of reasoning, which no doubt merit further analysis.

In Kiobel v. Royal Dutch Petroleum Co. et al, 569 U.S. 108 (2012), the petitioners, Nigerian nationals residing in the U.S., filed suit alleging that respondents—certain Dutch, British, and Nigerian corporation—aided and abetted the Nigerian Government in committing violations of customary international law in Nigeria.  The U.S. Supreme Court affirmed the dismissal of the entire complaint by the U.S. Court of Appeals for the Second Circuit, holding that there was nothing in the ATS or its legislative history to rebut the presumption against extraterritorial application. The Court noted, further, that there was “no indication that the ATS was passed to make the United States a uniquely hospitable forum for the enforcement of international norms.”

More recently, in Joseph Jesner et al. v. Arab Bank, PLC, 584 U.S. (2018), the Court held that foreign corporations may not be defendants in suits brought under the ATS. The Court, however, did not foreclose the possibility that U.S. corporations could potentially face liability under the ATS: the portions of Justice Kennedy’s opinion on corporate liability were joined only by Chief Justice Roberts and Justice Thomas, whereas Justices Alito and Gorsuch joined only the parts of the opinion concerning the liability of foreign corporations.

As the first case decided by the Supreme Court of Canada on the issue of corporate liability for human rights violations under customary international law, Nevsun arguably reflects an expansive approach to customary international law as a source of rights and remedies as part of Canadian common law, in contrast to the U.S. Supreme Court’s relatively conservative approach to the scope and reach of the ATS.

Specifically, the fact that the alleged jus cogens violations in Nevsun occurred outside Canada’s territory presented no bar to jurisdiction, whereas the U.S. Supreme Court has upheld the presumption against extraterritoriality in the context of the ATS.  Given that extraterritoriality was not discussed in Nevsun, it is not clear to what extent Nevsun’s Canadian nationality may have influenced the Court’s decision. South of the border, the U.S. Supreme Court has foreclosed foreign corporate liability under the ATS, leaving a definitive holding as regards domestic corporations for another day—at which point, there may yet be occasion for the U.S. Supreme Court to consider the modern approach to international law advocated by the majority in Nevsun.

Substantively, in considering the extent to which customary international law norms form part of U.S. common law (in other words, in respect of which violations of the law of nations shall the U.S. district courts have original jurisdiction pursuant to the ATS?), courts in the U.S. would apply the analytical framework set out by the U.S. Supreme Court in Sosa v. Alvarez-Machain, 542 US 692 (2004).

In Sosa, the U.S. Supreme Court inferred from the legislative history of the ATS that “the ATS was meant to underwrite litigation of a narrow set of common law actions derived from the law of nations,” such as offenses against ambassadors, violations of safe conduct, and piracy.  The Court cautioned that, while nothing “categorically precluded federal courts from recognizing a claim under the law of nations as an element of common law,” there were “good reasons for a restrained conception of the discretion a federal court should exercise in considering a new cause of action of this kind.”  Such reasons included the need to seek legislative guidance before exercising innovative authority over substantive law, the potential implications for foreign relations of recognizing private causes of action for violating international law, and the lack of any congressional mandate to seek out and define new and debatable violations of the law of nations.

Accordingly, “federal courts should not recognize private claims under federal common law for violations of any international law norm with less definite content and acceptance among civilized nations than the historical paradigms familiar when [the ATS] was enacted.”  In addition, “the determination whether a norm is sufficiently definite to support a cause of action should (and, indeed, inevitably must) involve an element of judgment about the practical consequences of making that cause available to litigants in the federal courts.”

It should be noted that the breach of international law alleged in Sosa was arbitrary arrest—a norm the Court described as expressing “an aspiration that exceeds any binding customary rule having the specificity we require.”  U.S. courts have found that jus cogens violations such as torture meet the Sosa standard.  See e.g., Filártiga v. Peña-Irala, 630 F. 2d 876 (2d Cir. 1980).

In recognising customary international law norms that meet the twin requirements of widespread State practice and opinio juris, therefore, Nevsun is not inconsistent with the jurisprudence of the U.S. Supreme Court, although U.S. courts might exercise greater judicial restraint and deference to the legislative and executive branches of government—themes echoed by the partial dissent and dissent in Nevsun.  Further, given that Nevsun is a Canadian corporation, whereas the U.S. Supreme Court has only precluded the liability of foreign corporate defendants, there currently exists no conflict as regards the nationality of corporate defendants.

The key point of divergence therefore lies in the question of extraterritoriality, and in particular in the two Supreme Courts’ contrasting approaches to this issue.  In Nevsun, the discussion was minimal, in the context of the partial dissent’s argument that the proposed torts of cruel, inhuman and degrading treatment should not be recognized for the first time in a proceeding based on conduct that occurred in a foreign territory. The majority did not reach the question of extraterritoriality in dismissing Nevsun’s appeal on its motion to strike. In contrast, the significance of the U.S. Supreme Court’s decision in Kiobel is difficult to overstate: as Justice Breyer’s concurring opinion put it, the majority’s use of the presumption against extraterritoriality risked “placing the statute’s jurisdictional scope at odds with its substantive objectives, holding out ‘the word of promise’ of compensation for victims of the torturer, while ‘break[ing] it to the hope.’” Any hope of extraterritorial application would rest upon a showing that the claim “touch[es] and concern[s] the territory of the United States … with sufficient force to displace the presumption”—a slim hope, perhaps, but a hope nonetheless.

For more information please contact Andrew Cannon, Partner, Christian Leathley, Partner, Stephane Brabant, Partner Antony Crockett, Of Counsel, Liang-Ying Tan, Associate, Aseel Barghuthi, Associate, or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852

Christian Leathley
Christian Leathley
Partner
+1 917 542 7812

Stephane Brabant
Stephane Brabant
Partner
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Antony Crockett
Antony Crockett
Of Counsel
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Liang-Ying Tan
Liang-Ying Tan
Associate
+1 917 542 7831

Aseel Barghuthi
Aseel Barghuthi
Associate
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ICSID’S LONGEST RUNNING DISPUTE: TRIBUNAL DISMISSES APPLICATION FOR ANNULMENT OF RESUBMISSION AWARD

An ad hoc committee (the “Resubmission Committee“) has recently dismissed the claimants’ application to annul a resubmission award issued in September 2016 (and subsequently rectified) in Victor Pey Casado and President Allende Foundation v Republic of Chile (ICSID Case No. ARB/98/2), the longest dispute in the history of the International Centre for Settlement of Investment Disputes (“ICSID“). The award came one month after an UNCITRAL tribunal in a parallel case declined to hear the claimants’ claims, unanimously holding that it lacked jurisdiction. The dispute in Pey Casado, which arose from the confiscation of assets of two Chilean companies (the “Companies“) following the coup d’état led by General Augusto Pinochet in 1973, may have finally come to an end after 22 years of arbitration proceedings. The Resubmission Committee reminded the arbitration community of the limited grounds on which an ICSID award can be annulled and the importance of the res judicata principle which aims to preclude attempts to re-adjudicate a resolved dispute in the context of ICSID dispute resolution.

Background

First Arbitration Proceedings

The original ICSID proceedings (the “First Arbitration“) were initiated by Mr Victor Pey Casado and the President Allende Foundation (the “Claimants“) in 1997 on the basis of the 1994 Spain-Chile bilateral investment treaty (the “BIT“) and the ICSID Convention (the “Convention“). In the First Arbitration, the Claimants alleged that Chile (i) unlawfully expropriated their investments in the Companies (in breach of Article 5 of the BIT); and (ii) discriminated against them and denied them justice in connection with the request Mr Casado filed with the Chilean courts in 1995 seeking reparation for the confiscation of the assets (in breach of Article 4 of the BIT). Specifically, the Claimants argued that, whereas they had unsuccessfully attempted to recover compensation in the Chilean national courts, Chile awarded compensation to other individuals for the same expropriation.

In May 2008, the tribunal in the First Arbitration (the “First Tribunal“) issued an award (the “First Award“) dismissing the expropriation claim (holding that it was beyond the temporal scope of the BIT) but finding that Chile was in breach of Article 4 of the BIT. The First Tribunal also noted that since expropriation fell outside the scope of the BIT, the allegations and evidence regarding the damage caused by the expropriation were not relevant and could not be relied upon in order to establish the damages caused by the breach of Article 4 of the BIT. Nevertheless, the First Tribunal awarded the Claimants US$10 million in damages.

First Annulment Proceedings

As we discussed in detail in our earlier blog post on this case, in December 2012, upon Chile’s application, an ad hoc committee (the “First Committee“) annulled the First Award. The annulment  in part relied on limbs (d) and (e) of Article 52(1) of the Convention, having found an annullable error in the process the First Tribunal followed in deciding to award damages. The order to pay US$10 million in damages and the “corresponding paragraphs” in the First Award were therefore annulled (the “First Annulment Decision“). The First Committee’s failure to delineate clearly the contours of the partial annulment proved to be a source of disagreement at later stages of the proceedings.

Resubmission Arbitration Proceedings

In June 2013, the Claimants filed a new request for arbitration pursuant to Article 52(6) of the Convention, among other things seeking US$150 million in damages for Chile’s alleged breaches of Article 4 of the BIT. Specifically, the Claimants argued that had Article 4 of the BIT not been breached, they would have been able to recover the confiscated property or establish before the First Tribunal that the expropriation was not an instantaneous act in 1975 but rather went on for a number of years (thereby falling within the temporal scope of the BIT).

In September 2016, the tribunal (the “Resubmission Tribunal“) confirmed that (i) the unanulled findings of the First Tribunal (i.e. that Chile was in breach of Article 4 of the BIT and any further or other claims were rejected) were res judicata; (ii) it was open for the parties to re-arbitrate the nature of compensation due to the Claimants following the breach of Article 4 of the BIT; and (iii) refused to award any compensation to the Claimants, as they failed to prove any further quantifiable injury caused by the breach of Article 4 of the BIT as found by the First Tribunal (the “Resubmission Award“). The Resubmission Tribunal therefore left the Claimants without compensation, noting that the finding by the First Tribunal that the Claimants were victims of a denial of justice constitutes in itself a form of satisfaction under international law for Chile’s breach of Article 4 of the BIT.

Resubmission Annulment Proceedings

Claimants’ arguments

In October 2017, the Claimants applied to annul the Resubmission Award (as subsequently rectified) on the following Convention grounds: (i) improper constitution of the tribunal (Article 52(1)(a)); (ii) manifest excess of powers (Article 52(1)(b)); (iii) serious departure from a fundamental rule of procedure (Article 52(1)(d)); and (iv) failure to state the reasons on which the award was based (Article 51(1)(e)).

The Claimants referred to a number of factual circumstances, which could, in their view, justify an annulment of the Resubmission Award on at least one of the above grounds. These circumstances (which will not all be covered in detail in this blog post) included the procedure of appointment of, and dealing with challenges to, the members of the Resubmission Tribunal, as well as various evidential and procedural matters in the Resubmission Annulment Proceedings.

In particular, the Claimants (in reference to annulment grounds under limbs (b), (d) and (e) of Article 52(1) of the Convention) argued that the Resubmission Tribunal (i) incorrectly interpreted the First Annulment Award in that it had disrespected the res judicata effect of the First Award; (ii) distorted the First Award and the First Annulment Decision in order to serve Chile’s interests; and (iii) presented inconsistent arguments with respect to the consideration of evidence and burden of proof, such that that they cancelled each other out.

Decision of the Resubmission Committee

On 8 January 2020, the Resubmission Committee dismissed the Claimants’ application for annulment of the Resubmission Award (“Second Annulment Decision“), confirming that none of the circumstances relied upon by the Claimants were sufficient for their application to succeed.  While Professor Dr Angelet issued a concurring opinion disagreeing with the majority’s reasons on the interpretation of the First Annulment Decision, this did not affect the Second Annulment Decision. Below we discuss some of the conclusions reached by the Resubmission Committee in relation to the Claimants’ res judicata arguments.

As a preliminary point, the majority concluded that the Resubmission Tribunal had not in fact reopened the determinations of the First Tribunal in relation to the BIT breaches, i.e. it correctly treated as res judicata the conclusion that the damages arising out of the breach of Article 4 of the BIT cannot be based on damages caused by expropriation. Further, according to the Resubmission Committee, it was open to the Resubmission Tribunal to disregard evidence relied upon by the Claimants (i.e. as to the damages arising out of expropriation), and to examine whether breaches of Article 4 of the BIT, as a distinct claim, had caused injury and damage.

The majority reiterated that Article 52(1)(b) of the Convention (“manifest excess of powers“) had a dual requirement: (i) the tribunal must do something in excess of its powers (e.g. determine an issue de novo that the original tribunal already determined and that had become res judicata); and (ii) that excess must be sufficiently clear and serious. Given its earlier conclusion that the Resubmission Tribunal respected the res judicata parts of the First Award, the Resubmission Committee rejected the Claimants’ assertions that the Resubmission Tribunal manifestly exceeded its powers in relation to these circumstances.

The Second Annulment Decision confirmed that Article 52(1)(d) of the Convention (“serious departure from a fundamental rule of procedure“) involved a four-part test: (i) the procedural rule must be fundamental (such as fair and equitable treatment of the parties, proper allocation of the burden of proof, absence of bias etc.); (ii) the tribunal must have departed from it; (iii) the departure must have been serious; and (iv) the party had not lost its right to object on this ground as a result of failing to promptly raise its objection upon becoming aware of the departure. The Resubmission Committee concluded that it was unable to discern bias and partiality on the part of the Resubmission Tribunal, therefore the Claimants’ argument relating to the alleged distortion of the First Award and the First Annulment Decision to serve Chile’s interests was unsuccessful.

As for Article 51(1)(e) (“failure to state reasons“) of the Convention, the Resubmission Committee restated that this concerned a failure to state any reasons with respect to all or part of an award, rather than the failure to state correct or convincing reasons. The Resubmission Committee also noted that inconsistencies between different parts of the award did not amount to a lack of reasons, unless the contradiction was of a kind that meant two arguments cancel each other out. The Resubmission Committee came to the conclusion that there was no contradiction in respect of the Resubmission Tribunal’s position regarding the evidence on loss and damages and its analysis as to whether the Claimants met the burden of proof.

Comment

It is well understood that the award of a tribunal constituted under Article 52(6) of the Convention is an award in the terms of Article 52 of the Convention, and can therefore be subject to annulment in the same way. However, those parts of an initial award that have not been annulled and become res judicata are not part of the award of the resubmission tribunal, and therefore cannot be annulled by a second ad hoc committee. While this may at first sight appear straightforward, the Pey Casado case illustrates that questions of interpretation of the first annulment decision, in particular whether or not certain parts of the initial award became res judicata, may result in lengthy and heated disputes. The Pey Casado case is not the first case where res judicata arguments have been raised; similar arguments have been made by the parties, for example, in Amco v Indonesia, and will, no doubt, be raised in future. It is, however, important to bear in mind that, as reiterated by the Pey Casado case, there are limited grounds on which an ICSID award can be annulled, and the consecutive use of Articles 52(1) and (6) of the Convention cannot be seen as an appeal system.

 

For more information, please contact Christian Leathley, Partner, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.

Christian Leathley
Christian Leathley
Partner
+1 917 542 7812

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 6425

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