The new draft Dutch BIT: what does it mean for investor mailbox companies?

The Netherlands has released a new draft investment treaty for public comment (“Draft BIT“).  If adopted, the Draft BIT may raise questions about the Kingdom’s attractiveness for foreign investors who have long taken advantage of Dutch treaty protections by structuring their investment via companies in the Netherlands.  The Netherlands proposes to use the new model as a basis for renegotiating its existing BITs with non-EU states, and, as such, the new draft’s more restrictive provisions may be significant for existing investors with protection under existing BITs, as well as those considering future investments. Key features of the Draft BIT are considered below.

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European Commission publishes draft investment chapter for the TTIP, including investment protection provisions and the establishment of an International Investment Court

On 16 September the European Commission published detailed draft proposals for the investment chapter in the proposed Transatlantic Trade and Investment Partnership treaty between the EU and the US (“TTIP”). The full text is available here. The chapter includes detailed investment protections and the establishment of an International Investment Court to resolve disputes under the TTIP. These proposals follow the Commission’s 5 May 2015 Concept Paper (discussed in our earlier blog here), which looked at reforming the ISDS system and proposed moving away from the current system of Investment Treaty arbitration.

The Commission has made it clear that this draft is for discussion and consideration within the EU before being put to the US as part of the TTIP text.

We explore and summarise below some of the key issues raised in the chapter.

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Video post in “Observations on Arbitration” series: “Introduction to Investment Arbitration”

In this video post in the "Observations on Arbitration" series, Christian Leathley provides an Introduction to Investment Arbitration, discussing the ways in which an investment arbitration can arise, explaining what bilateral investment treaties (BITs) are and outlining the nature of the obligations owed by a state to an investor under such agreements. Continue reading

Repaving the Southeast Asian Silk Road: EU-Singapore Free Trade Agreement negotiations concluded

In the wake of the recent agreement of the EU-Canada Comprehensive Economic and Trade Agreement (EU-Canada CETA) and after just over a year of negotiations, the EU and Singapore have released their free trade Agreement (EUSFTA) to the public.  (See our recent blog post on CETA here). According to a statement released by the European Commission, the EUSFTA aims to ensure a high level of investment protection, whilst preserving the EU and Singapore’s right to regulate.  It will replace the 12 existing Bilateral Investment Agreements (BITs) between Singapore and European Member States.  The text of the EUSFTA can be found here.

Whilst the conclusion of this agreement is highly significant, the reference to the European Court of Justice to which it has given rise could perhaps be even more so.  Please see our recent blog post here, explaining the European Commission’s request for an ECJ Opinion on the EU’s competence to enter into EUSFTA.

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Exxon Mobil is awarded US$1.6 billion in ICSID claim against Venezuela – to be set off against award in parallel contractual arbitration

On 9 October 2014, a tribunal of H.E. Judge Gilbert Guillaume (President), Professor Kaufmann-Kohler and Dr. Ahmed Sadek El-Kosheri rendered a final Award on the case Venezuela Holdings and others v. the Bolivarian Republic of Venezuela, ICSID Case NO. ARB/07/27.

Five subsidiaries of Mobil Corporation (the “Claimants”) initiated the arbitration in 2007 claiming compensation for Venezuela’s alleged breaches of the Netherlands-Venezuela BIT in relation to a series of state actions which affected the Claimants’ investments in the Cerro Negro Project in the Orinoco Belt and the La Ceiba Project adjacent to Lake Maracaibo.

After 7 years of proceedings the Tribunal ordered Venezuela to pay to the Claimants: (i) US$9,042,482 in compensation for the production and export curtailments imposed on the Cerro Negro Project; (ii) US$1,411.7 million in compensation for the expropriation of their investments in the Cerro Negro Project; and (iii) US$179.3 million in compensation for the expropriation of their investments in the La Ceiba Project. The compensation amount is much closer to the valuations put forward by Venezuela in the arbitration, than the US$ 16.6 billion requested by the Claimants.

Of particular note in the Award is the Tribunal’s finding that Venezuela’s expropriation of Claimants’ assets was lawful. Even when no compensation was paid, the Tribunal concluded that: the expropriation was conducted in accordance with due process; it was not carried out contrary to undertakings given to the Claimants; and the Claimants did not establish that the offers made by Venezuela were incompatible with the “just” compensation requirement of Article 6(c) of the BIT.

This approach contrasts with the decision of the majority of the tribunal hearing a similar claim against Venezuela brought by ConocoPhillips (ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30). In that case, the majority found that the expropriation was unlawful because Venezuela did not approach negotiations with ConocoPhillips in good faith and it only offered book-value, rather than fair market value compensation for the assets (Decision on Jurisdiction and Merits dated 3 September 2013).

There are a number of open questions about the level of compensation payable following an illegal expropriation as compared to a legal expropriation. In this case the Claimants submitted that the expropriation was unlawful and that, as a consequence, Venezuela was under the obligation to make full reparation for the damages caused, in conformity with international law. By contrast, Venezuela contended that even if the expropriation were deemed to be unlawful the indemnity to be paid to the Claimants must represent the market value of the investment at the date of the expropriation. The Tribunal decided that since it had found that the expropriation was lawful it did not need to consider the standard for compensation in case of unlawful expropriation or whether it would differ from the standard for compensation to be paid in case of lawful expropriation. It held that the compensation must be calculated in conformity with the requirements of the BIT which required “just compensation” and that “just compensation” should represent the market value of the investments affected immediately before the measures were taken. Therefore, it employed the date of the expropriation of Claimants’ assets (June 2007) as the valuation date, which had considerable significance in the amount of compensation since the market price of oil increased in the years that followed the expropriations.

The Tribunal also grappled with the parties’ respective cases on whether a risk of confiscation is part of the country risk that is taken into account in determining the discount rate for the purposes of valuing the assets using the Discounted Cash Flow Method. The Tribunal concluded that a confiscation risk remains part of the country risk and must be taken into account in the determination of the discount rate.

To avoid double-recovery, the Tribunal held that the amount already received by the Claimants under a parallel ICC Award should be discounted to the total compensation payable to the Claimants.

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Long-awaited EU-Canada trade agreement agreed – a blueprint to set the standard for future investment protection?

On Friday 26 September, after five years of negotiations, the EU and Canada agreed in principle to a text for the Comprehensive Economic Trade Agreement (CETA). It is certainly comprehensive, running to 1,500 pages. It is the first such agreement signed by the EU as part of its policy (since the Lisbon Treaty) of assuming competence for trade and investment from the individual Member States. Its contents have therefore been keenly anticipated as an indication of the tone of future agreements, particularly as regards investment protection and investor-state dispute resolution (ISDS) contained in Chapter X.

CETA’s provisions are comprehensive as regards both of these areas, but with significant caveats, largely mirroring the drafts that have so far been made public in the EU-US forthcoming agreement in the Transatlantic Trade and Investment Partnership (TTIP) (see our earlier post on the TTIP consultation here).

As its Preamble sets out, the agreement expressly recognizes “that the protection of investments… stimulates mutually beneficial business activity“. At the same time, it stresses principles of governmental autonomy (including enforcement of labour and environmental laws) which can in some circumstances limit the rights of the investor. It also points out the responsibility of businesses to respect “internationally recognized standards of corporate social responsibility“, bringing these soft law norms into the ambit of the agreement.

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The largest Arbitration Awards in history: Three Majority shareholders in Yukos awarded total damages of over $50bn from the Russian Federation

On 18 July 2014, the Claimants in three related arbitrations administered under the 1994 Energy Charter Treaty and the 1976 UNCITRAL Arbitration Rules prevailed against the Russian Federation.  The Claimants[1] were former shareholders of the OAO Yukos Oil Company (“Yukos”), which had emerged in the early 2000s as the largest private oil company in post-Soviet Russia.

Although the arbitrations were brought separately by each Claimant and not consolidated, the Parties appointed the same arbitrators to each Tribunal (collectively, the “Tribunals”) and the Tribunals proceeded to hear and decide the claims together in three substantially similar awards (the “Awards”).  The Tribunals found that the Russian Federation had unlawfully expropriated the assets of Yukos, in contravention of its obligations under international law, through a series of targeted measures taken between 2003 and 2007.  Put together, in monetary terms the arbitration Awards are by far the largest ever made public, as the Tribunals awarded total damages to the Claimants of more than US$ 50 billion. The Tribunals also ordered Russia to reimburse the Claimants for arbitration costs of € 4.2 million and costs of representation of more than US$ 60 million.

Of particular note in the Awards is the Tribunals’ consideration of the doctrine of “unclean hands” in international law, along with the application of the doctrine of contributory fault. The Tribunals’ decision to reduce to Claimants’ recovery by 25%, following the same approach adopted in the recent case of Occidental Petroleum and another v Ecuador, is likely to attract significant attention and may set a precedent for future investment treaty cases. However, the Tribunals’ extensive analysis of the Parties’ submissions concerning valuation, damages, and the awarding of interest will also add to the body of jurisprudence available to practitioners and arbitrators faced with similar questions.

The decision could prompt other Claimants (including some of the over 50,000 other minority shareholders in Yukos) to move forward with claims against the Russian Federation. For claimants from ECT signatory states, the Tribunals’ decision to uphold the continued application of the substantive protections of the ECT, at least for qualifying investments made before Russia withdrew from the ECT in August 2009, is likely to make the ECT an attractive option under which to bring such claims.

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No jurisdiction over BIT claims if investor fails to state a prima facie case

In Achmea BV v The Slovak Republic (PCA Case No. 2013-12), the tribunal considered the respondent’s objection that it lacked jurisdiction on the ground that the claimant had failed to establish a prima facie cause of action under the Netherlands – Slovak Republic bilateral investment treaty (BIT).

A tribunal constituted under the BIT has dismissed claims brought by Achmea BV relating to possible future changes in the Slovak private health insurance market including the threatened expropriation of Achmea’s Slovak subsidiary. The tribunal determined that it had no jurisdiction to hear the case because Achmea had failed to make out a prima facie case that the Slovak Republic had breached the expropriation and fair and equitable treatment provisions of the BIT by indicating an intention to expropriate Achmea’s subsidiary.

The case is of interest for its discussion of the prima facie case requirement and also the tribunal’s ruling that it was impossible and impermissible, in circumstances where no expropriation had yet taken place, for the tribunal to attempt to assess the legality of the Slovak Republic’s hypothetical future conduct. (Achmea BV v The Slovak Republic (PCA Case No. 2013-12).

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Europe consults on investment protection and ISDS in the TTIP

The European Commission has launched a public consultation on its proposed approach to investment protection and investor-state dispute settlement (ISDS) provisions in the Transatlantic Trade and Investment Partnership (the TTIP).  The TTIP is a free trade agreement currently in negotiation between the United States and the European Union. Negotiations for the TTIP began in July 2013.

The Commission has described its approach as containing “a series of innovative elements that the EU proposes using as the basis for the TTIP negotiations” and stated that the key issue on which it is consulting is “whether the EU’s proposed approach for TTIP achieves the right balance between protecting investors and safeguarding the EU’s right and ability to regulate in the public interest”.

Whilst the EU is not consulting on a draft text of the TTIP, it has included as a reference text the investment protection and ISDS provisions in the Comprehensive Economic and Trade Agreement (the CETA), between the EU and Canada.

Whilst we are currently a long way from a signed agreement including investment protection and ISDS provisions, stakeholders may nonetheless want to take this opportunity to consider the ways in which the EU’s approach and the negotiations could impact upon them.  The European Commission’s Consultation can be found here and closes on 6 July 2014.

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Dawn of a new era for investment protection in South Africa – draft investment law to replace protections offered under investment treaties published for public comment

On 1 November 2013, the South African Department of Trade and Industry (DTI) has released its new “Promotion and Protection of Investment” bill (PPI Bill) for public comment (for a copy of the PPI Bill, see here).

The PPI Bill follows South Africa’s publicised plans to review its bilateral investment treaties (BITs), in particular those entered into right after the end of the apartheid era. The majority of those BITs have been, or are in the process of being, terminated by the South African government. As part of the DTI review, the South African Government has already issued cancellation notices to various European countries, in respect of its BITs with, amongst others, Belgium, Luxembourg and Spain (to see our previous blog post on this, see here), and most recently, Germany and Switzerland. Existing investors are still entitled to rely on the protections found in those BITs that have been terminated and remain able to do so for a period between 10 to 20 years after the BITs termination, depending on the relevant BITs sunset clause.

The PPI Bill, when passed as law, is intended to regulate the protection of all investments in South Africa in place of BITs.

The following key provisions in the PPI Bill and their implications are discussed further below.

  • Definition of an “investment”.
  • Absence of a fair and equitable treatment (FET) provision.
  • Definition of “expropriation” and new principles of compensation for expropriation.
  • Dispute resolution mechanism.

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