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

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

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

August 7, 2017 – NAFTA renegotiation: ISDS reform objectives

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

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

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ICSID tribunal rules that it is neither necessary nor urgent to grant security for costs from a claimant with the benefit of third-party funding

An ICSID tribunal has rejected a State's application for security for costs in circumstances in which the other party had third-party funding in the form of ATE insurance which specifically provided for cover of the State's costs.

Italy's request for security for costs

The application formed part of arbitral proceedings brought by Eskosol S.p.A. in liquidazione ("Eskosol") under the Energy Charter Treaty and the ICSID Convention against the Italian Republic ("Italy"). Italy sought security for costs in support of its ICSID Arbitration Rule 41(5) application for summary dismissal of Eskosol's claims on the basis that they are manifestly without legal merit. 

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ICSID announces sixteen topics for consideration in its review of the ICSID Arbitration Rules

Following invitations to ICSID member States and the public to submit topics for potential review, ICSID has published a paper on the Rules Amendment Process. The paper lists sixteen topics which are to be canvassed in the next stage of the review. The topics include areas of arbitral practice which have been subject to much broader discussion – such as the disclosure of third party funding (a point picked up in the SIAC Investment Arbitration Rules which took effect earlier this year), and the possible introduction of a code of conduct for arbitrators. Also included for review are aspects of the procedure, such as consolidation, the annulment mechanism, the preliminary objections process and the possible publication of decisions and orders. Further, ICSID will consider security for costs and allocation of costs.

Each of the sixteen topics will be addressed by ICSID in background papers to be published in early 2018.  The goal of the amendments is to (i) incorporate lessons learnt from case law; (ii) to make the process increasingly time and cost effective whilst maintaining due process and a balance between investors and States, and (iii) make the procedure less paper-intensive.

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Live webcast of hearing on jurisdiction and the merits: United Utilities (Tallinn) B.V. and Aktsiaselts Tallinna Vesi v. Republic of Estonia (ICSID Case No. ARB/14/24)

A hearing on jurisdiction and the merits in ICSID Case No. ARB/14/24, United Utilities (Tallinn) B.V. and Aktsiaselts Tallinna Vesi v Republic of Estonia, will be transmitted live via internet feed from Monday, November 7, 2016 to Tuesday, November 15, 2016 (from 9:00 a.m. to approximately 5:00 p.m. CET (Central European Time) on November 10, 2016 and from 10:00 a.m. to approximately 6:00 p.m. CET on all other days).

This webcast is being made available pursuant to the parties’ agreement. To access the webcast, please click here.

Herbert Smith Freehills is co-counsel for the Claimants. 

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The ICSID Convention enters into force in Iraq

The ICSID Convention entered into force in Iraq on 17 December 2015.  This comes after Iraq signed the ICSID Convention and deposited its instrument of ratification on 17 November 2015 to become the Convention's 160th signatory State.

In a climate of on-going challenges facing investments into Iraq, this is a significant step forward in the legal context by the Iraqi Federal Government which has been seeking to attract foreign investment to help stabilise, rebuild and diversify the country's economy. Despite the country's significant security challenges in addition to the financial impact of declining world oil prices, Iraq remains an important market for international investment given that it has the world’s fifth largest proven oil reserves and needs reconstruction and infrastructure development on a massive scale.

The immediate impact of this step on the investment climate in Iraq is likely to be relatively limited given the small number of bilateral and multilateral investment treaties to which Iraq is party to and that are currently in force. However, this may signal a shift of approach and appetite as to how quickly Iraq wants to improve its legal framework for investment protection. This step is expected to be followed by the further ratification of bilateral and multilateral investment treaties and international conventions.

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ICSID issues Practice Notes for Respondents in ICSID Arbitration aimed at helping states avoid investment disputes and demystifying ICSID procedure

ICSID has published Practice Notes for Respondents in ICSID Arbitration (the "Notes"), a 31 page practical guidance note on ICSID arbitration brought under the ICSID Convention or the ICSID Additional Facility Rules. The Notes aim to answer the questions most frequently asked of ICSID by respondent states and investors. In particular, they are intended to assist "novice" states who have never participated in an investment claim before, although their content will be of interest to prospective investor claimants too. The Notes are available in English, French and Spanish.

The Notes begin by considering conflict prevention mechanisms to help states avoid the prospect of an Investment Treaty claim. This section considers points such as:

  • the importance of careful drafting in investment treaties to ensure the scope of their protections are clear; and
  • preventing disputes arising by developing an awareness of investment obligations within government.

The next section of the Notes moves to consider the pre-arbitration phase of an investment dispute. It looks at how notice of a dispute is given by an investor and how states should respond to such notice. It stresses that states "should pro-actively assess the cost-benefit of settlement as soon as they receive notice of a dispute", whether informally through discussions or through formal negotiation, mediation or early neutral evaluation. The section also considers how a state can best prepare once it has become aware of a possible dispute, including developing a case and media strategy, choosing legal counsel and budgeting for legal costs.

The main portion of the Notes aims to demystify the procedural steps in an ICSID arbitration, setting out the typical sequence of the arbitration from the Request of Arbitration through to the Post Award phase. The analysis focuses on aspects of procedure which may be important to a Respondent while arbitral proceedings are ongoing, suggesting factors that may guide the state's position and providing an occasional warning of consequences (e.g. that non-participation will not prevent the formation of a Tribunal). The Notes also offer guidance on the typical split of costs between legal counsel, Tribunal and ICSID fees.

For all sections there is a list of further reading for those interested in more detail.

Comment

This is a useful publication pitched at true ICSID novices, offering both practical and tactical advice for states in how to avoid disputes and prepare effectively when disputes do arise. It also seeks to guide those states through the ICSID process. While relatively high-level, the Notes, together with the additional reading guide in each section, offer a strong foundation for those states with limited awareness of investment arbitration to educate their officials and approach future claims from a firmer foundation of knowledge. In particular, the Notes have the potential to help states to avoid taking steps that may, in the long term, harm their position. Those with practical experience of ICSID arbitration will likely be aware of the majority of what is contained in the Notes, but they may also find one or two helpful reminders or suggestions of matters to think about.

Iain Maxwell
Iain Maxwell
Of Counsel
+44 20 7466 2646
Maximilian Szymanski
Maximilian Szymanski
Associate
+44 20 7466 2596

ICSID tribunal declines jurisdiction on basis of lack of evidence of necessary “control” under BIT and requires claimant to pay 80% of costs of the state

In the ICSID decision of Guardian Fiduciary Trust Ltd f/k/a Capital Conservator Savings & Loan Ltd v Former Yugoslav Republic of Macedonia (ICSID Case No. ARB/12/31) issued on 22 September 2015, the Tribunal declined jurisdiction on the basis that the Claimant failed to establish that it qualified as a national of the Netherlands for the purposes of the Netherlands – Macedonia BIT (the BIT).

The BIT provides a wide definition of "national" which extends to "legal persons….controlled, directly or indirectly…." by a national of a contracting party. The Claimant, Guardian Fiduciary Trust Limited (Guardian), a company incorporated in New Zealand, brought the claim under the BIT, arguing that it qualified as a national of the Netherlands as it was ultimately controlled by a Dutch foundation which had a registered office in the Netherlands. Having determined that the issue of control was ultimately a matter of evidence, and not something to be determined solely on the basis of an analysis of New Zealand law, the Tribunal concluded that the Claimant had failed to provide that necessary evidence. It further concluded that the limited evidence before it suggested that the Claimant was in fact indirectly controlled by another entity of a different jurisdiction.

In issuing the decision, the Tribunal considered it appropriate, in the circumstances, to award the State Respondent, the Former Yugoslav Republic of Macedonia (Macedonia), 80% of its costs.

This decision does not so much highlight the complexities of establishing control in a complex ownership structure, as it does the importance of properly establishing and evidencing the basis for a Claimant's assertion of a Tribunal's jurisdiction over the claim. Failure to do so may, as in this instance, leave a Claimant footing the bill for the State Respondent's costs.

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Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela: when can multiple claimants bring claims under separate BITs in one set of proceedings?

This is the second of two posts discussing the recent award in Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/19. The previous post was published on Thursday last week and it dealt with Venezuela’s objection that Flughafen was a government instrumentality of the Swiss State.  In this post we will discuss Venezuela’s allegation that it did not consent to the Claimants bringing two claims under different BITs in one set of proceedings.

The tribunal’s decision is notable because it upholds the right of multiple claimants to bring joint proceedings under different instruments without the need for the host state’s specific consent to such form of proceedings.

Background

As we reported previously, the arbitral proceedings were brought by Flughafen Zürich A.G. (“Flughafen”), a company incorporated under the laws of Switzerland, and Gestión e Ingenería IDC S.A. (“IDC”), a Chilean corporation. The Claimants had formed a consortium to administer, manage and operate the Isla Margarita airport under a contract with the state of Nueva Esparta. The arbitral tribunal found Venezuela liable for breaching both BITs on the ground of expropriation and denial of justice.

Lack of consent to the consolidation of claims

In bringing the claim, Flughafen relied upon the Venezuela-Switzerland BIT, while IDC relied upon the Venezuela-Chile BIT. Venezuela contended that by doing so the Claimants unduly consolidated their claims in circumstances that Venezuela did not consent to such consolidation. According to Venezuela, the two BITs upon which the Claimants relied contained arbitration provisions which were incompatible, and without Venezuela’s consent, consolidation could not be available. In addition, Venezuela argued that the substantive provisions of each BIT were different.

The arbitral Tribunal began its analysis by reframing the issue to be decided. The Tribunal observed that “consolidation is the joinder of separate proceedings on the basis of common questions of law or fact in the underlying dispute”. In this arbitration, however, the Claimants brought their case jointly right from the outset. There were never two proceedings but just one.

The relevant question was, therefore, whether the Claimants were entitled to bring a joint claim where they rely on different BITs but have made a joint investment and have suffered damages as a result of the same set of facts.

The Tribunal noted that although neither BIT explicitly authorised joint claims, there is no prohibition. Nor does the ICSID Convention or the ICISD Arbitration Rules bar joint claims. In this case, the Claimants shared a single version of the facts, invoked essentially the same rights, and it was “reasonable” to settle their claims in a single arbitration, reducing costs and the risk of contradictory decisions.

The Tribunal saw no reason why the Claimants should be forced to pursue their claims in separate proceedings. Consequently, the Tribunal dismissed Venezuela’s objection and allowed the Claimants to proceed jointly.

This conclusion is of interest because it acknowledges the right of multiple claimants to bring joint proceedings under different instruments without the need to obtain the state’s specific consent to such form of proceedings. This is a convenient route for investors of different nationalities, protected under different BITs, which have embarked upon a joint project and have suffered damages as a result of the host state’s actions.

For further information, please contact Iain Maxwell, Of Counsel, or your usual Herbert Smith Freehills contact.

Iain Maxwell
Iain Maxwell
Of Counsel
+44 20 7466 2646

Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela: when may an entity be considered a “governmental instrumentality”?

On 18 November 2014, an ICSID Tribunal in Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/19, held Venezuela liable for breaching its BITs with Chile and Switzerland on the ground of expropriation and denial of justice. In doing so, the Tribunal considered and rejected a number of jurisdictional challenges by Venezuela. In this post, we will discuss one of them – Venezuela’s objection that Flughafen was a government instrumentality of the Swiss State and, as such, Flughafen was prevented from bringing claims under the ICSID Convention.

The tribunal’s decision is of interest because it provides a useful test to ascertain whether an entity may be considered a “governmental instrumentality” under article 25 of the ICSID Convention.

Background

The arbitral proceedings were brought by Flughafen Zürich A.G. (“Flughafen”), a company incorporated under the laws of Switzerland, and Gestión e Ingenería IDC S.A. (“IDC”), a Chilean corporation. The Claimants had formed a consortium to administer, manage and operate the Isla Margarita airport under a contract with the state of Nueva Esparta.

Flughafen’s status

Venezuela contended that the arbitral Tribunal lacked jurisdiction ratione personae because Flughafen was not a “national of another contracting state” as required by Article 25 of the ICSID Convention but a governmental instrumentality of the Swiss state. Venezuela argued that the public nature of Flughafen was supported by two key facts: first, the Canton of Zurich was one of the shareholders in Flughafen and, second, Flughafen was engaged in essentially governmental activities, namely the control of the air space in Switzerland.

The Tribunal confirmed that article 25 of the ICSID Convection envisages an investor bringing a claim against a host state. States are not allowed to bring claims against one another under the ICSID Convention. The Tribunal observed that doubts may come up where the investor is not the State itself but an entity belonging to or controlled by a State.

Both parties relied in their submission on a passage written by Aaron Broches, former ICSID’s Secretary-General and one of the architects of the ICSID Convention, in his 1972 General Course at The Hague Academy of International Law.

“[I]n today’s world, the classical distinction between private and public investment, based on the source of the capital, is no longer meaningful, if not outdated. There are many companies which combine capital from private and governmental sources and corporations all of whose shares are owned by the government, but who are practically indistinguishable from the completely privately owned enterprise both in their legal characteristics and in their activities. It would seem, therefore, that for purposes of the Convention a mixed economy company or government-owned corporation should not be disqualified as “a national of another Contracting State” unless it is acting as an agent for the government or is discharging an essentially governmental function.”

The Tribunal adopted Broches’ analyses. It first noted that Flughafen was a corporation incorporated in Switzerland and therefore it had to be considered prima facie a national of another contracting state. But Flughafen was also a “mixed economy company” because the Canton of Switzerland, a subdivision of that State, was a shareholder. Therefore, the Tribunal considered that the issue to be decided was whether Flughafen was acting as an agent of the Swiss state and/or was performing essentially governmental functions.

The Tribunal held that Flughafen was not an agent because it did not act on behalf or for the benefit of Switzerland; more than 60% of Flughafen was owned by private shareholders and the Canton did not have control over the board of directors; Flughafen was listed in the SIX Swiss Exchange and Flughafen’s corporate purpose was to create value rather than defending the public interests of Switzerland.

The Tribunal then concluded that Flughafen’s activities could not be considered as governmental. Contrary to Venezuela’s assertions, the Tribunal found that Flughafen was not engaged in the control of Switzerland’s airspace. Its business was rather the management and operation of airports around the world. This is not an “essentially governmental function” because it does not falls within what the Tribunal described as a State’s “core non-delegable public activities”. Rather, the management of an airport is something that can be committed to private parties. That was what had happened when the state of Nueva Esparta decided to engage the Consortium in the administration of the Isla Margarita airport.

The tribunal’s reasoning provides a useful test to consider whether an entity owned or controlled by a state qualifies as a governmental instrumentality and therefore does not qualify as a “national of another contracting State” able to bring a claim under Article 25 of the ICSID Convention. This decision is likely to have an impact on future cases brought by state-related entities.

For further information, please contact Iain Maxwell, Of Counsel, or your usual Herbert Smith Freehills contact.

Iain Maxwell
Iain Maxwell
Of Counsel
+44 20 7466 2646

 

A sardine cannot swallow a whale: ICSID tribunal declines jurisdiction under the Egypt-UAE BIT

In an Award on Jurisdiction rendered earlier this year in National Gas S.A.E. v. Arab Republic of Egypt (ICSID Case No. ARB/11/7), an ICSID tribunal declined jurisdiction to hear a claim brought against Egypt under the Egypt-UAE BIT by an Egyptian corporate claimant whose immediate shareholders were two UAE shell companies but who was ultimately controlled by an Egyptian-Canadian dual national. The claimant had sought to argue that despite being an Egyptian company that it was entitled to take advantage of a limited exception in Article 25(2)(b) of the ICSID Convention which provides that in certain circumstances a national of an ICSID Contracting State can include a national of the State party to the dispute if there is an element of “foreign control“. However, these arguments were rejected by the tribunal, not least because the “control” of the claimant rested ultimately with an Egyptian national and not the two UAE shell companies.

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