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Navigating Arbitration in the UAE with Dr. Gordon Blanke

Kluwer Arbitration Blog - 13 hours 35 min ago

Gordon Blanke

This year, I had the extraordinary pleasure of speaking at the Emirate Maritime Arbitration Centre (the “EMAC”) inaugural event of Dubai Arbitration Week 2019 (for the full presentation, see here). The EMAC, as readers may know, is the only arbitration institution specialized in the administration of maritime disputes through arbitration in the UAE and the wider Middle East (the recently established CIAMA sharing its focus between maritime and aviation dispute). The EMAC is headquartered in the Dubai International Financial Centre (the “DIFC”), but open to the administration of maritime disputes both onshore and offshore. The EMAC embraces the UAE’s unique positioning on the regional and international arbitration landscape as a hybrid civil and common law jurisdiction that has created a fully integrated common/civil law system that allows parties from differing legal traditions to resolve disputes in a common or civil law environment or in a combination of the two in the heart of the Middle East.

In this sense, the UAE offers unique opportunities for forum shopping between onshore and offshore arbitral seats and onshore and offshore enforcement fora. Whereas other jurisdictions, such as Qatar and Bahrain, have experimented with the concept of offshore free zone jurisdictions embedded within a wider civil law environment, the UAE is the only jurisdiction in the world so far that has succeeded in the full functional integration onshore/offshore: In this sense, both Dubai and Abu Dhabi constitute genuine hybrid civil/common law legal systems. Their success has in fact been such that the system has more recently been exported to other developing economies that are intent on providing a safe legal environment for attracting foreign direct investment. One such example is the Astana International Financial Centre in Kazakhstan, which has been closely modeled on the DIFC free zone.

In the following, I discuss in detail the UAE arbitration landscape, explaining the differing legal, judicial and institutional framework of the onshore and offshore systems. In doing so, I will highlight in particular the onshore/offshore area of free movement of judicial instruments, including ratified awards, between the onshore and offshore courts and the role of the offshore UAE courts as a conduit for the enforcement of onshore awards for onward execution onshore.

 

The UAE Arbitration Landscape: Mainland v. Free Zone Arbitration

Arbitrations in the UAE can be seated onshore (i.e., in mainland UAE, typically onshore Dubai or Abu Dhabi) or offshore, i.e., within a judicial free zone. The UAE hosts two judicial free zones, the DIFC and the Abu Dhabi Global Market (“ADGM”). Both constitute autonomous, stand-alone jurisdictions that operate on the English common law model. Both have their own courts, the DIFC and the ADGM Courts respectively, each staffed by their own English-speaking judiciary sourced from leading, arbitration-friendly common law jurisdictions worldwide and local judges. The DIFC common law jurisdiction is carved out of mainland Dubai and the DIFC Courts exist side by side with the Dubai civil law courts. Likewise, the ADGM common law jurisdiction is carved out of mainland Abu Dhabi and the ADGM Courts exist side by side with the Abu Dhabi civil law courts. Importantly, constitutionally speaking, there is no judicial hierarchy between the onshore and offshore courts, both form an integral part of the UAE family of courts. In this sense, both the DIFC and the ADGM form a jurisdiction within a jurisdiction, one common law (the DIFC and the ADGM), the other civil law (local courts).

Both the DIFC and the ADGM have their own body of substantive laws, which are modeled on English common law and statute. At the risk of oversimplification, the ADGM, more specifically, has incorporated English common law and statute wholesale by reference, which turns it into a “little England and Wales” in the heart of the Middle East. From a comparative law perspective, therefore, the DIFC and the ADGM serve as a common law legal transplant fully integrated in the civil law environment of onshore UAE and have, as such, metaphorically been likened to “common law islands in a civil law ocean” by the former Chief Justice of the DIFC Courts, Michael Hwang SC.

 

The Legislative and Judicial Framework of Arbitration in the UAE: Onshore v. Offshore

Each free zone has adopted its own arbitration law, the 2008 DIFC Arbitration Law and the 2015 ADGM Arbitration Regulations, each modeled on the UNCITRAL Model Law. Seating an arbitration in the DIFC or the ADGM will trigger the application of the DIFC Arbitration Law or the ADGM Arbitration Regulations as the procedural law of the arbitration and engage the competent free zone courts as the curial courts of the arbitration. In this way, the free zones support and facilitate common law style arbitration in the heart of the Middle East.

It is worth mentioning that the DIFC Courts more specifically have also adopted a couple of practice directions that make use of the availability of free zone arbitration: PD 2/2015 enables the enforcement of DIFC Court money judgments through arbitration (by dint of conversion into a DIFC-LCIA award that in turn will be enforceable internationally under the New York Convention); PD 1/2017 provides for cost sanctions against recalcitrant award debtors and empowers the DIFC Courts to issue securities in the amount of the awarded debt pending an action for enforcement.

Hence, free zone arbitrations seated offshore offer a viable alternative to arbitration onshore, that is arbitrations seated in mainland Dubai or Abu Dhabi. Seating an arbitration onshore will trigger the application of the UAE Federal Arbitration Law (the “FAL”), which entered into force on 16 June 2018, and engages the curial competence of the onshore local, e.g. Dubai or Abu Dhabi, courts, which in turn operate in Arabic and source their judiciary from other countries in the MENA region, in particular Egypt. The FAL replaces the arbitration-relevant provisions of the UAE Civil Procedures Code, also known as the UAE Arbitration Chapter. The FAL is in part based on the UNCITRAL Model Law and as such codifies best arbitration practice and procedure. That said, it retains some of the procedural idiosyncrasies that made the arbitral process under the former UAE Arbitration Chapter unreliable (for a comparison of the provisions of the FAL and the free zone arbitration laws, see The Procedural Acquis of UAE Arbitration: Onshore v. Offshore, here).

Needless to say, arbitration users that are looking to seat their arbitration in the UAE, are free to shop between a common and a civil law forum, a truly unique proposition that is on offer nowhere else in the world.

 

The Institutional Framework of Arbitration in the UAE: Onshore v. Offshore

The institutional framework of arbitration in the UAE mirrors the common/civil law offering that lies at the heart of the UAE’s hybrid legal system. Thus, arbitration users have a choice between onshore and offshore arbitral institutions, each of which administer arbitration under their own set of procedural rules. The better-known institutions are headquartered in Dubai and Abu Dhabi, whether onshore or offshore.

The Dubai International Arbitration Centre (“DIAC”) is the longest-serving onshore institution. The Abu Dhabi Commercial Conciliation and Arbitration Centre (“ADCCAC”) follows suit and is primarily used for resolving disputes involving Abu-Dhabi based governmental entities. The DIAC has ventured offshore with a DIFC-DIAC representative office and has entered into a Memorandum of Understanding with the offshore Dispute Resolution Authority (“DRA”) with the objective to enhance the enforcement of DIAC awards in the DIFC. The DIFC hosts the DIFC-LCIA, the sister organization of the London Court of International Arbitration (“LCIA”). The DIFC-LCIA Rules are identical to the LCIA Rules bar the default seat being the DIFC rather than London (as provided for under the LCIA Rules). Importantly, all administrative decisions under the DIFC-LCIA Rules, such as in relation to the default-appointment and the challenge of arbitrators, are taken by the LCIA Court in London. In this sense, opting into the DIFC-LCIA Rules with a seat in the DIFC allows the parties to stage an LCIA-style arbitration locally, i.e., in the UAE. As mentioned previously, EMAC also operates offshore and administers its own, maritime-specific set of rules from within the DIFC, default-seating EMAC arbitrations in the DIFC.

By contrast, the Abu Dhabi judicial free zone, the ADGM, does not host any fully operating arbitration institutions. For now, it has opted for hosting ad hoc arbitrations, championing a model of representative offices that operate from within the ADGM. The first one such office is the ADGM-ICC, which operates as a regional arm of the Paris-based arbitration division of the International Chamber of Commerce. For the avoidance of doubt, disputes continue to be administered by the Middle Eastern case teams operating from Paris. Other international arbitration institutions are currently contemplating setting up representative offices within the ADGM. In addition, the ADGM Arbitration Centre (“ADGMAC”) serves as an arbitration logistics provider and arbitration venue, offering state-of-the-art hearing facilities for domestic and international arbitration in the heart of the ADGM. More recently, the ADGM has promulgated the ADGMAC Arbitration Guidelines to assist arbitrators and parties in the conduct of the arbitral proceedings locally and internationally.

 

The Onshore/Offshore Area of Free Movement

In order to achieve the full functional integration of the offshore common law free zones and the onshore civil law jurisdiction into one hybrid legal system, the Emirati legislator has created an area of free movement of judicial instruments, including ratified awards, onshore/offshore and vice versa. This area of free movement is based on a system of mutual recognition and builds on the mutual trust between the onshore and the offshore courts. This is, no doubt, supported by the equal constitutional status accorded to the onshore and offshore courts within the UAE legal system, absent any judicial hierarchy between them. More specifically, according to Article 7 of the Judicial Authority Law (as amended) and the corresponding provisions of the Memorandum of Understanding between the Abu Dhabi Judicial Department and the ADGM Courts, the onshore courts are required to accept offshore orders for recognition and enforcement of an award for execution onshore without any examination on the merits and vice versa. In this context, it is, of course, important to note that both onshore and offshore courts are subject to the same principles of UAE public policy.

Importantly, conflicts of jurisdiction between the onshore Dubai and the offshore DIFC Courts, e.g., in relation to parallel proceedings between the same parties for a challenge of an arbitral award before the onshore Dubai Courts and for enforcement before the offshore DIFC Courts, are presently dealt with by a Dubai-DIFC Joint Judicial Tribunal, which was established by Ruler’s Decree in 2016 and which is composed of a mix of Dubai and DIFC Court judges. It is proposed that conflicts of jurisdiction within this context could be more efficiently addressed by the introduction of a legislative framework based on a first-seized rule and/or requiring the exhaustion of any moratorium for a challenge by an award debtor before the courts at the seat (e.g. 30-day pursuant to Art. 54 FAL) before initiation of any enforcement action by the award creditor offshore and vice versa.

 

The Free Zone Courts as a Conduit

Last but not least, the free zone courts have actively served as so-called conduits for the enforcement of both domestic non-free zone and foreign awards for onward execution onshore, even absent any assets in or any other geographic nexus to the relevant free zone. This essentially allows domestic and international award creditors to enforce their awards through multiple fora. This, in turn, enhances the overall choice of enforcement fora open to an award creditor that is seeking to execute an award in the UAE, whether onshore or offshore. The role of the both onshore and offshore courts as a conduit is facilitated by the existence of the area of free movement onshore/offshore between the onshore Dubai/Abu Dhabi and the offshore DIFC/ADGM Courts. For the avoidance of doubt, like the onshore courts, the free zone courts are bound by the terms of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards with respect to any foreign award, whether Convention or non-Convention, given the fact that the UAE did not enter into the reciprocity reservation.

 

Conclusion

The UAE are uniquely placed in offering arbitration services across a fluid spectrum of civil and common law jurisdictions from a fully integrated civil/common law platform. This enables domestic and international users of arbitration to shop for a common/civil law seat for their arbitration and for multiple civil/common law fora of enforcement, as best suits their needs, without having to look outside the Middle East. The EMAC more specifically serves as a welcome institutional catalyst in maritime dispute resolution between onshore and offshore, offering its services irrespective of the location of the arbitral seat, i.e. whether onshore or offshore.

More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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Call for Papers: Renewable energy dispute resolution included

ADR Prof Blog - Thu, 2019-12-12 15:08
I am pleased to post this Call for Papers for a symposium entitled Decarbonizing America’s Electricity Infrastructure which is taking place next fall at Pace. The Call includes a request for papers related to renewable energy dispute resolution. Pace Environmental Law Review & Pace Energy and Climate Center,  Elisabeth Haub School of Law at Pace … Continue reading Call for Papers: Renewable energy dispute resolution included →

Quebec Court orders “modest” $1 million suretyship for short-term stay of Canadian enforcement pending U.S. annulment

International Arbitration Blog - Thu, 2019-12-12 11:22
In Lakah v. UBS, the Court of Appeal of Québec denied leave to appeal a Superior Court decision that ordered than an arbitral party post a $1 million suretyship...

Rethinking Counsel Ethics in International Arbitration

Kluwer Arbitration Blog - Thu, 2019-12-12 00:04

Iris Ng

Counsel ethics has been a recurring talking point in arbitration circles. Most recently, the topic was raised at the 2018 SIAC Congress, then again by a panel at the 2019 Australian Bar Association Conference. The continued interest in this issue is unsurprising. As arbitration becomes more international, we must increasingly confront the difficulties that arise from diverging ethical standards in multiple jurisdictions. A range of approaches has been proposed, ranging from mandatory regulation through a binding code of conduct, to soft law instruments such as the IBA Guidelines, to a laissez-faire approach of no additional regulation. This article argues that to resolve the counsel ethics issue, it is worth considering a choice of law rule for ethics rules that is implemented via a non-enforcement pact by bar associations or law societies (referred to in short as “ethics enforcement bodies”) around the world.

 

Problems arising from the plurality of ethical views

As explained by Prof Catherine Rogers in her book Ethics in International Arbitration, there are two main problems arising from the plurality of ethical views in international arbitration.

The first is the double deontology problem, which arises where a lawyer is regulated by the legal professional or ethical rules of more than one jurisdiction and these rules conflict. Counsel is then left in the catch-22 position of violating a rule no matter what he or she decides to do. Prof Rogers raises the example of a German attorney who ended up being jailed in England for refusing to make disclosure under English law, when he would have been disciplined for violating a client’s confidence under German law had disclosure been made.

The second is the “inequality of arms” problem, where proceedings are procedurally unfair because one side “gains” an advantage that is not open to the other because its counsel is permitted to engage in conduct the other side’s counsel is not. There are at least three contentious areas:

  • Witness preparation. What happens when an English lawyer is barred from witness preparation, but the opposing side’s American lawyer is obliged to do so by his professional conduct rules?
  • Document disclosure. US-style discovery is infamous for being more extensive than disclosure in civil law traditions.
  • Lawyer-client communications. Lawyers are sometimes subject to different disclosure duties vis-à-vis their clients. This divergence is illustrated by the Commentary on Article 5.3 of the Council of Bars and Law Societies of Europe (CCBE) Code, which states: “In certain Member States communications between lawyers … are normally regarded as to be kept confidential as between the lawyers … [and] cannot normally be passed to the lawyers’ clients … In yet other Member States, the lawyer has to keep the client fully informed of all relevant communications from a professional colleague acting for another party, and marking a letter as “confidential” only means that it is a legal matter intended for the recipient lawyer and his or her client, and not to be misused by third parties …”.

 

Review of current proposed solutions

Two of the more popular proposed solutions to the above problems are a uniform ethical code or institution-specific codes of conduct. The former entails getting an independent third party to formulate a uniform code of ethics for counsel. The most fruitful attempt thus far is the IBA Guidelines on Party Representation in International Arbitration (“IBA Guidelines”). The latter involves arbitral institutions themselves coming up with codes of conduct. Examples include the LCIA’s General Guidelines for the Parties’ Legal Representatives that are annexed to the 2014 LCIA Rules (discussed here and here).

In between is the hybrid approach of uniform ethical codes that are co-opted as part of institutional rules. This has been done in respect of the IBA Guidelines by the 2016 Australian Centre for International Commercial Arbitration Rules and the 2016 Lagos Chamber of Commerce International Commercial Arbitration Centre Rules.

However, all these approaches share one key shortcoming: They do not resolve the double deontology problem, even though they would resolve the inequality of arms issue (given that both sides are bound by a single code). As Prof Gary Born points out, the difficulty with such a regulatory framework is that any guidelines issued would “sit on top of” national ethical standards that apply to counsel. In that sense a uniform ethical code adds to, rather than cuts through, the morass of rules that counsel faces.

 

Solving the double deontology problem through choice of law analysis

My argument is essentially that to solve the double deontology problem what we need is not more rules, but a way to choose which of the existing rules should apply and a mechanism of implementing this rule.

The choice of law solution is the next-best solution to binding, universal harmonisation, given that an international convention is probably too much to hope for in light of the numerous more pressing issues plaguing the international community. There is also the challenge of formulating truly “universal’” or representative codes of conduct (e.g., the IBA Guidelines have been criticised for their North American and European focus) that are also concrete enough to give useful guidance.

 

Formulating an appropriate choice of law rule

Conflict of laws, or private international law, deals with the issue of which law should be applied to a dispute that has cross-border elements (amongst other things). This is done through the formulation of choice of law rules specific to each kind of dispute (e.g., contract, tort or property disputes). There are at least five possible choice of law rules to decide which law governs when the double deontology problem arises:

  • Rule 1: Rules of the lawyer’s jurisdiction of origin prevail.
  • Rule 2: Rules of the qualification that the lawyer is acting under prevail.
  • Rule 3: Seat rules prevail.
  • Rule 4: Contractual approach – the parties’ choice of ethics rules applies to both parties’ lawyers.
  • Rule 5: Self-determination – the lawyer’s choice of ethical rules applies to himself or herself.

I argue that Rule 5 is the most suitable rule.

In favour of Rule 1, a lawyer-centric choice of law rule makes sense because the lawyer is the object of regulation. The jurisdiction of origin would have to be the jurisdiction of first qualification, given that other potential indicia such as nationality and domicile of the lawyer are unhelpful (these are not necessarily connected to the lawyer’s working life). But even leaving aside the arbitrariness of this rule (if first-qualified, why not last-qualified?), Rule 1 is arguably too parochial for international arbitration. Even though a jurisdiction retains an interest in regulating the conduct of its legal professionals no matter where that professional is, that understanding is traditionally formulated in relation to a lawyer qualified in one jurisdiction who would otherwise be unregulated abroad. A more flexible view is arguably needed for lawyers qualified in multiple jurisdictions who act in international arbitration cases.

Rule 2 is a transaction-specific rule that focuses on the capacity in which the lawyer is acting in any given case. For example, for a French and English dual-qualified lawyer, is he or she being retained for expertise in French or English law? While superficially attractive, Rule 2 runs into difficulty when we recall that lawyers are not always retained specifically for their legal expertise in one system of law. Other factors include their commercial acumen, their familiarity with certain subject matter, etc.

Rule 3 – opting for the ethical rules of the seat – is simple, clear, and effort-saving in that it piggybacks on something that must generally be established in international commercial arbitration. Against this, there are three counterarguments. First, we appear to be indirectly allowing parties to select ethical rules for their lawyers because they are allowed to choose the seat (granted, this concern might not be significant in practice because parties arguably have more important factors on their mind than counsel ethics in choosing a seat). Secondly, it would be excessively onerous for the lawyer, who would be subjected to a system of ethics regulation that he or she may be unfamiliar with (and could unknowingly breach). Thirdly, there is the issue of who bears responsibility for disciplining lawyers who fall afoul of seat ethics rules. We could leave this to the ethic enforcement bodies, but they would have little incentive for disciplining lawyers who are not even part of the local bar.

Rule 4 finds some support in the literature. The idea is that “parties may choose the ethics rule applicable to the lawyers in the proceeding, exactly as they may choose the governing law”.1)N M Crystal and F Giannoni-Crystal, ‘”One, No one and One Hundred Thousand” … Which Ethical Rule to Apply? Conflict of Ethical Rules in International Arbitration” (2013) 32 Mississippi College Law Review 283 at 284. jQuery("#footnote_plugin_tooltip_5223_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5223_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Commentators point to the similarity between law and ethics rules to justify this – both embody public policy, regulate conduct, and exist to facilitate transactions.2)J M Little “The Choice of Rules Clause: A Solution to the Choice of Law Problem in Ethics Proceedings” (2010) 88 Texas Law Review 855 at 874. jQuery("#footnote_plugin_tooltip_5223_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5223_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); But there is, in my view, an important conceptual distinction. In choosing the substantive and procedural law, parties are choosing the system of law applicable to themselves and their transaction. In choosing ethical rules, parties are choosing rules to apply to their lawyers. Party autonomy justifies the former (affecting parties inter se) but not the latter. Additionally, there are practical difficulties if parties do not expressly choose the applicable ethics rules. Would we then have to look for an implied choice, or a choice with the closest and most real connection (applying by analogy the test for substantive law of a contract or law governing the arbitration agreement)?

We then come to Rule 5. When faced with the double deontology problem, you allow the lawyer to choose which jurisdiction’s qualification he or she would like to be treated as acting under. That must be declared at the outset of the arbitration and counsel will not be allowed to change his or her mind along the way. Counsel must then play by the chosen ethical rules, or risk being hauled up for disciplinary action before the ethics enforcement body of that chosen jurisdiction. Rule 5 is fair to the lawyer, who will not be subject to an alien system of law. It is efficient because resources need not be spent on an inquiry into the lawyer’s background or connections to the case. It accords with comity, because its foundational assumption is that all ethical systems are equally worthy of consideration and choice. As for the potential objections to Rule 5:

  • It might be argued that lawyers will be opportunistic and simply pick the rules that are perceived as more “lenient”. But even if they do, is that not pursuant to a moral decision that they are entitled to make for themselves? There are various views of what it means to be a good lawyer (see e.g., David Thunder, “Can a Good Person be a Lawyer?” and Stephen Pepper, “The Lawyer’s Amoral Ethical Role: A Defense, a Problem, and Some Possibilities”). The decision of which model of lawyering to adopt is one that can only be made by the lawyer in his or her exercise of autonomy and practical reasonbleness.
  • It might also be argued that it is objectionable for lawyers to be free to choose their fetters. But the objection is misdirected because in Rule 5, lawyers are not choosing whether to be ethically regulated but which set of ethical obligations to be regulated by. The entire premise of invoking Rule 5 is that there are at least two sets of ethical rules the lawyer may be bound by. The lawyer is being asked to pick one; “none” is not an option.

 

The role of ethics enforcement bodies

Any solution to double deontology problem through choice of law analysis must involve ethics enforcement bodies because they are the ultimate decision-makers on whether to prosecute wayward lawyers. I suggest that ethic enforcement bodies could agree on a non-enforcement pact or pledge in accordance with Rule 5. That is, they come to an understanding that they should only initiate proceedings regarding the conduct of a lawyer if the lawyer has opted to be bound, in that arbitration, by that jurisdiction’s ethical rules.

The incentives for ethics enforcement bodies is essentially maximum payoff with minimum effort. There is understandably little appetite for extensive reform because it is not even clear how big of an issue the double deontology problem is in practice. Besides the empirical question of how many lawyers are qualified in multiple jurisdictions, sometimes the conflict that leads to the double deontology problem might be illusory: (a) There may be exceptions that a lawyer can invoke (such as client consent), that would take the sting out of one of the rules and resolve the conflict. (b) National law may carve out international arbitration from general regulation to give counsel some wiggle room. For example, Swiss or French law-regulated counsel may engage in pre-testimonial communication with witnesses in international arbitration, even though this is banned in litigation or domestic arbitration.3)Rogers, Catherine A., Cross-Border Bankruptcy as a Model for Regulation of International Attorneys (June 20, 2010). Making Transnational Law Work In A Global Economy: Essays In Honour Of Detlev Vagts, Pieter H. F. Bekker, Rudolf Dolzer, Michael Waibel, eds., Cambridge University Press, 2010, p 645. jQuery("#footnote_plugin_tooltip_5223_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5223_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Only if these two situations do not apply is there a “true” conflict that bring the double deontology problem into play. With the non-enforcement pact that codifies Rule 5, the onus and initiative is placed on the lawyer (the party with the most interest) to declare which system of rules applies. Only after that determination is made will the chosen jurisdiction’s rules apply, and the ethics enforcement body be called upon to act if there is a breach.

Such a pact can take a similar form to the Equal Representation in Arbitration Pledge or the Women in Law Pledge, albeit one with ethic enforcement bodies as pledgees or signatories.

To sum up, a choice of law rule combined with agreement by bar associations on a non-enforcement pact would go some way towards solving the double deontology problem.

 

*The article is written in the author’s personal capacity, and the opinions expressed in the article are entirely the author’s own views.

References   [ + ]

1. ↑ N M Crystal and F Giannoni-Crystal, ‘”One, No one and One Hundred Thousand” … Which Ethical Rule to Apply? Conflict of Ethical Rules in International Arbitration” (2013) 32 Mississippi College Law Review 283 at 284. 2. ↑ J M Little “The Choice of Rules Clause: A Solution to the Choice of Law Problem in Ethics Proceedings” (2010) 88 Texas Law Review 855 at 874. 3. ↑ Rogers, Catherine A., Cross-Border Bankruptcy as a Model for Regulation of International Attorneys (June 20, 2010). Making Transnational Law Work In A Global Economy: Essays In Honour Of Detlev Vagts, Pieter H. F. Bekker, Rudolf Dolzer, Michael Waibel, eds., Cambridge University Press, 2010, p 645. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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Theory of Change Symposium – Part 4

ADR Prof Blog - Wed, 2019-12-11 16:01
This part of the symposium includes several pieces focusing on key skills in legal and dispute resolution practice.  Lisa Amsler highlights the importance of interpersonal and process skills as technology is radically changing legal practice.  Russ Bleemer identifies deficiencies in mediators’ listening behaviors as mediation practice becomes routinized, and he encourages mediators to keep focusing … Continue reading Theory of Change Symposium – Part 4 →

The Collisions of Law and of Fora: Focus on International Dispute Resolution at the 98th Annual International Law Weekend

Kluwer Arbitration Blog - Wed, 2019-12-11 01:00

David Attanasio, Diora Ziyaeva, Tamar Sarjveladze, Rocio Monzon and Christina Dumitrescu

The 98th Annual Meeting of the American Branch of the International Law Association (“ABILA”), known as ABILA’s International Law Weekend (“ILW”), took place in New York City on 10 – 12 October 2019. ILW, ABILA’s premiere annual event, featured 35 panels covering a broad range of topics of international law.1)The summary of the views expressed by panelists noted herein may not be the express views of such panelists nor the institutions or organizations they are affiliated with. jQuery("#footnote_plugin_tooltip_2701_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2701_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

This year, ILW had a renewed focus on international dispute resolution through the inclusion of a dedicated track of panels on that topic. From those panels, an important theme emerged: the collisions of law and fora that can occur in an ever-changing and ever-more-connected world. While most of the international dispute resolution panels touched on this theme in one form or another, it was front and center in the panels addressing international investment law and investor-State dispute settlement (“ISDS”). The ISDS panels considered this theme in relation to regional sovereignty, national security exceptions, climate change, human rights, which raised many cross-cutting questions, including what fora should address and resolve what sorts of claims and why certain fora are reluctant to address certain forms of law.

This post considers the answers panelists gave to those questions, in various contexts, during the course of ILW. Their answers made it clear that the response in the field when friction arises is far from uniform, and such friction will remain an important point of debate for the foreseeable future.

 

A. What fora should resolve apparent tensions between legal principles?

When legal principles are in tension, a major issue for ISDS is whether a given fora should have to take into account the (alleged) conflict of legal principles, and in particular whether ISDS should take heed of allegedly conflicting bodies of law. This issue received particular attention in the ILW panels on the relationship between ISDS and EU law and on environmental protection before international courts and tribunals. The views expressed by the panelists made clear that there is currently no single view as to when ISDS should be impacted by bodies of law in tension with it.

 

  1. The Effect of Achmea on the Jurisdiction of ISDS Tribunals and Award Enforcement

There is perhaps no better-known recent debate over the apparent collision of international norms than the one that erupted after the Court of Justice of the European Union’s (“CJEU”) controversial 2018 decision in the Achmea case. There, the CJEU determined that the Treaty on the Functioning of the European Union precluded a provision in a BIT between EU Member States that allowed for proceedings before an arbitral tribunal.

The major question raised in relation to Achmea is the extent to which the judgment affects the jurisdiction of ISDS tribunals. As Viren Mascarenhas (Partner, King & Spalding LLP) noted, the majority of the tribunals that have thus far confronted jurisdictional objections on this basis were constituted under the Energy Charter Treaty (“ECT”), not intra-EU BITs. He then observed that all tribunals that have issued public awards have overruled this objection (i.e., see the most recent decision on this issue rendered by the tribunal in Magyar Farming Company Ltd, Kintyre Kft and Inicia Zrt v. Hungary). Mr. Mascarenhas nevertheless predicted that respondent EU Member States would likely continue to raise intra-EU objections, thus lengthening and increasing the cost of proceedings. However, in his view, tribunals would likely continue rejecting these challenges, although they might shift their opinions if the CJEU chose to extend the Achmea decision to cover the ECT.

An equally important question, and one receiving increasing attention as of late, is whether the Achmea judgment affects the enforceability of ISDS awards before the courts of non-EU member states. Professor George A. Bermann addressed this directly during ILW, taking the view that Achmea is relevant to non-EU enforcement courts when investors seek to enforce intra-EU BIT awards outside of the EU. For example, he noted that an EU Member State might argue that a US court could not hear a case to enforce an award because the State has sovereign immunity under the Foreign Sovereign Immunities Act (“FSIA”). But Prof. Bermann pointed out that, since the CJEU determined such arbitration agreements are invalid in Achmea, the exception for valid arbitration agreements to the FSIA would no longer apply.

 

  1. Is an ISDS Tribunal a Proper Forum for Environmental Claims?

The same issue of the effect that ISDS tribunals should give to non-ISDS legal principles arose in connection to international environmental protection as well. As Professor Lisa Sachs (Columbia University; Columbia Center on Sustainable Investment) noted, investment protections for foreign investors can increase the risk of chilling State environmental regulations and stifle access to remedies for victims. Professor Sachs recently commented on the impact that ISDS cases have had in areas of environmental protection and environmental justice, particularly in those related to climate action, protection of water resources, environmental impact assessments, and communities’ rights to representation and access to justice.

Patricia Cruz Trabanino (Associate; Jenner & Block) observed that the issue of a proper forum for environmental claims may emerge when States raise environmental counterclaims before an ISDS tribunal. In her view, it was not clear whether an ISDS tribunal was the optimal forum to address such counterclaims. On the one hand, State counterclaims, as she explained, offer a way to balance the playing field in investor-State arbitration where the state is, for the most part, the respondent. On the other hand, she noted that succeeding on counterclaims is difficult and raises the (unanswered) question of whether ISDS is really the best forum for the types of relief States can and should seek. She observed, in this regard, that a State may actually prefer another fora, to seek injunctive relief against future harm, as ISDS tribunals typically award only compensation for past harm.

 

B. Why Are ISDS Tribunals Reluctant to Address Collisions Between Investment Law and Other Legal Regimes?

When ISDS tribunals fail to give weight to legal principles that are in apparent contradiction with investment protections, a further important question may arise as to why they are reluctant to do so. This issue received consideration at ILW in connection to both national security exceptions to investment treaties, as well as human-rights arguments in ISDS.

 

  1. The Reluctance of ISDS Tribunals to Give Effect to National Security Exceptions

The issue of why ISDS tribunals may not give effect to legal principles limiting investment protections was first addressed at ILW in connection to national security exceptions. There, the focus was on why the WTO typically gives greater effect to national security exceptions than do ISDS tribunals.

Professor Jose E. Alvarez (New York University School of Law) observed that an ISDS tribunal might reach a different outcome than a WTO dispute when applying an identical national security exception. The main reasons for these varied outcomes, in his view, are the differences between trade and investment law regimes, including available remedies, negotiating history, existing checks and balances, notions of the roles of arbitrators, and stakeholders. For example, the WTO panel is limited by Article 3 of the Dispute Settlement Understanding to applying the covered agreements and customary law on treaty interpretation, whereas investment tribunals may address issues such as who caused the emergency (within the national security context) and what the State did to prevent it.

Professor Robert Howse (New York University School of Law) addressed the issue of national security exceptions as well, but focused on the differences in remedies available under trade and investment law regimes. Within the trade regime, he observed, the primary remedy is the removal of the offending measure, and the national security exception serves the objective of providing a political safety valve for especially sensitive measures. By contrast, he noted that the consequence for a breach of international law within the investment regime is generally monetary, making it unlikely that a tribunal would order the removal of the national security measure—this eliminates the need for a political safety valve.

 

  1. ISDS Tribunals’ General Lack of Receptiveness to Human-Rights Defenses

The same issue, of the reasons for failing give effect to legal principles that potentially limit investment protections, also arose in connection to discussions of human rights and investment law.  As Professor Kristen Boon (Seton Hall Law School) noted, human-rights arguments may enter into ISDS disputes in a number of ways, including as the basis of a defense that the state cannot comply simultaneously with its obligations to protect human rights and its obligations to protect foreign investment. Nevertheless, a number of ISDS tribunals (with notable exceptions) have been far from receptive to such human-rights defenses that have been offered by States.

Professor Jena Martin (West Virginia University) surmised that this ongoing tension could be because (1) international human-rights law and international investment law do not share a common language (i.e., corporations want predictability, quantification, and measurement, whereas human-rights advocates find the value of a human life immeasurable); and (2) there is inconsistency in how corporations, as juridical persons, are treated and held accountable under international law. She pointed out that under international investment law, corporations have rights and powers, but under public international law, there is no mechanism for holding them directly accountable for human-rights violations. So, while corporations have power, they are not held responsible for misusing that power when they commit human-rights abuses.

As David Attanasio (Associate, Dechert LLP) observed, some ISDS tribunals have been reluctant to entertain human-rights defenses, even though the ISDS and human-rights systems could potentially be understood to reflect common values. He suggested that structural features might be one explanatory factor, as arbitrators in ISDS may be selected for their particular legal perspectives (which may not include expertise in human-rights law). He also observed that the views of potential or actual victims of human rights are not always presented in the arbitration, and that ISDS disputes are often presented in fact-specific contexts (isolated from broader social and political considerations), which may relieve pressure on tribunals to assess the impact of their rulings in that broader context.

References   [ + ]

1. ↑ The summary of the views expressed by panelists noted herein may not be the express views of such panelists nor the institutions or organizations they are affiliated with. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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ADR Scholarship Share – Inaugural Issue

ADR Prof Blog - Tue, 2019-12-10 11:15
In this inaugural “ADR Scholarship Share,” Peter Reilly (Texas A&M) gathered together short (<100 words) descriptions of recent scholarly projects by our fellow ADR scholars, with links to those works that are available online.  It so exciting to read about all of the interesting work going on across the country (and the world) in our … Continue reading ADR Scholarship Share – Inaugural Issue →

4-word-build, A Conflict Resolution Exercise and Teamwork Exercise

Communication and Conflict Blog - Tue, 2019-12-10 10:18
4-word-build - a conflict resolution exercise for gaining a shared understanding of a concept in a group or team. The exercise enables all present to participate in the creation of the shared view.

Mixing Righteous and Sinners: Summary of the Odebrecht Corruption Scandal and the Peruvian Jailed Arbitrators

Kluwer Arbitration Blog - Mon, 2019-12-09 23:21

Carlos Ríos Pizarro

A recent case has shocked the international arbitration community: pre-trial detention was issued against three renowned arbitrators. Their crime? Determining their fees based on the amount of the dispute and having meetings with both parties to discuss the applicable rules and who will act as the Chairperson. In other words, behave as any other arbitrator would have.

 

What happened in this case?

As it is worldwide known, the Brazilian company Odebrecht admittedly bribed different authorities in order to adjudicate infrastructure projects in Latin America. Peru was no exception, and the confession of Odebrecht’s key executives in 2017 led to a national campaign to investigate what really happened and who was involved.

Odebrecht bribed different governmental authorities to secure auctions for construction projects in Peru. To arouse no suspicion, Odebrecht usually offered a competitive price. Once the company was responsible for the project, it started requesting contract modifications on those projects to significantly increase the contract price. To avoid the control of the Peruvian anti-corruption agency, Odebrecht used arbitration awards to give ‘legal’ appearance to the surcharges.

In most of those cases, the Brazilian company appointed the same arbitrator – Horacio Canepa –, overlooking the independence and impartiality rules and practices. Odebrecht succeeded in most of those arbitrations and obtained surcharges up to six times the original contract price.

The confession of Odebrecht’s executives allowed the Peruvian Prosecutor’s Office to find the evident: Mr. Canepa had been bribed by Odebrecht and issued awards to benefit the company in exchange of generous amounts. Also, on September 2017, the Prosecutor’s Office found out that Mr. Canepa paid government authorities and other arbitrators on behalf of Odebrecht to illegally arrange the arbitrations result.

Apparently, Mr. Canepa pleaded himself guilty and requested to be treated as a protected witness and, in exchange, he would identify all the arbitrators that were part of the Odebrecht scheme. This fact has not been confirmed by the Prosecutor’s Office, but members of the arbitration community and journalists believe it to be truth.

On January 2018, the Peruvian Prosecutor’s Office launched an investigation against all the arbitrators pointed by Mr. Canepa, although he only provided evidence to support an accusation – wire transfers to the arbitrators’ accounts- for thirteen of them. The other three arbitrators that got involved in the investigation (Fernando Cantuarias, Franz Kundmuller and Mario Castillo, all three renowned arbitrators in the Peruvian market) were accused based on similar grounds: determining their fees based on the complexity of the case, determining the tribunals’ fees without using the fees chart of the Lima Chamber of Commerce (“LCC”), which is set forth in its Administrative Regulations; and, in the case of Mr. Cantuarias and Mr. Kundmuller, holding a case management conference with the parties to define the procedural rules and appoint the Chairperson.

The Prosecutor’s Office accused the arbitrators of specific passive bribery, aggravated collusion, aggravated illicit association and money laundering, and requested the Court to issue a pre-trial detention against them. In some cases, this request was grounded on an alleged flight risk of the arbitrators because they ‘have numerous resources’ and ‘go to different conferences and events all over the world’. On November 4, 2019, the Court in charge of the Investigation of Crimes of Corruption issued a pre-trial detention order against the accused arbitrators, accepting the Prosecutor’s theory of the crime.

Finally, on November 28, 2019, the Peruvian Court of Appeals reversed the Criminal Court’s decision and issued a personal recognizance order for Mr. Cantuarias, Mr. Castillo, Mr. Kundmuller and five other arbitrators. The Court of Appeals reasoned that the evidence presented by the Prosecutor did not support pre-trial detention and that the Criminal Court mistakenly considered suspicious standard practices of arbitration such as the case management meetings or the fees calculation procedure.

 

Why this case is a bad precedent for arbitration?

Both the Peruvian Prosecutor’s Office and the Criminal Court showed little understanding of the institution of arbitration. Because of that, they are inferring that a crime was committed even in cases where the arbitrators only acted following the international practice.

First, the Prosecutor’s Office considered that Mr. Cantuarias, Mr. Kundmuller and Mr. Castillo received an ‘indirect bribe’ because the tribunal’s fees were not only higher than those of the LCC’s fee’s chart but also were raised in different occasions. Their theory was simple: since the arbitrator’s fees were higher than the LCC standard, the difference in the amounts had to be a bribe. However, the arbitrations where those arbitrators were involved were ad-hoc arbitrations, and therefore, the LCC fee’s scale chart was not applicable.

Also, the Prosecutors are not taking into consideration that article 71 of the Peruvian Arbitration Law allows arbitrators to increase their fees based on the complexity of the case or the amount of work.1)Peruvian Arbitration Law. Article 71.-“The Tribunal fees and secretary fees will be established in a reasonable basis, taking into account the amount of the dispute, the dimension and complexity of the case, the time dedicated by the arbitrators, the arbitration activity and the generally accepted uses and customs of the arbitration institution (…)”. jQuery("#footnote_plugin_tooltip_3973_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3973_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In the cases where the three arbitrators were involved, the parties constantly increased their claims and counterclaims, which led to a rise in the arbitrator’s fees. Said practice is standard in the arbitration market and dully authorized by Peruvian law.

Second, even if the LCC Administrative Rules were applicable, the Prosecutor’s thesis considered that the arbitrator’s fees should be calculated not by using the amount on dispute, but the amount that the tribunal ordered be paid in the final award. Said proposition, again, reflects a lack of understanding of the arbitration system, as the arbitrators must define their fees before the award to allow the parties to calculate how much the dispute will cost them. All the rules of different arbitration institutions point in that direction.2)See, for example, International Chamber of Commerce Rules of Arbitration, at Art. 38; London Chamber of Commerce Arbitration Rules, at Art. 2 of Appendix III; American Arbitration Association Commercial Arbitration Rules and Mediation Procedures, Administrative Fee Schedules. jQuery("#footnote_plugin_tooltip_3973_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3973_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Also, accepting the Prosecutor’s thesis would create a perverse incentive, as arbitrators would receive no fees in cases where no award of damages is ordered in an award.

Lastly, case management conferences or meetings are also a common practice in international arbitration. The Prosecutor’s Office is considering those meetings as illegal and irregular because it is applying the judge’s impartiality standards to the arbitrators. The Prosecutor’s theory is that the arbitrators were contacted by both Odebrecht and the Peruvian Transport Ministry (the other party in the case) before the arbitration commenced to coordinate the appointment of the Chairperson.

However, holding a meeting or conference to determine the rules and appoint the Chairperson is also a common practice in international arbitration. The International Board Association Guidelines on Conflicts of Interest in International Arbitration considers that there is no conflict of interest if arbitrators have initial contact with a party prior to the appointment, provided that the contact is limited to the arbitrator’s availability and qualifications to serve, or to the names of possible candidates for a Chairperson.

Recently the International Board Association (IBA) sent a letter to the Peruvian Ministry of Justice explaining the above-mentioned rule and why it should be considered in the arbitrators’ case. Along with the IBA, members of the arbitration community such as the International Chamber of Commerce (ICC) and the Spanish Club of Arbitration – among others – have expressed their concerns about the Prosecutor’s and Court understanding of the arbitrators impartiality and fees calculation procedure.

 

What can be done?

The development discussed in this post shows that arbitration as an institution is not understood by some prosecutors or judges. This is an alarming situation for the Latin America arbitration community. Corrupt arbitrators must face justice for their actions. However, there cannot be a presumption that all arbitrations are conducted illegally just because one of the parties was involved in corrupt activities. Moreover, common international practices of arbitration, such as the case management conference/meeting, the determination of the Tribunal fees based on the amount in dispute, or setting of a tribunal’s fees taking into consideration the complexity of the dispute, cannot be considered as ‘bribe evidence’ to send an arbitrator to prison.

The arbitration community must make special efforts to connect and educate the judiciary systems around Latin America. While arbitration as a system has gained a lot of adepts and is rising in popularity, there are still a lot of legal practitioners who have little knowledge of arbitration practices and rules. That is particularly dangerous when those practitioners are the ones who will determine whether an arbitrator committed a crime or only acted according to international practice. If the current status continues, more honest arbitrators are going to face criminal charges and even prison, as ignorance is not only dangerous but bold.

References   [ + ]

1. ↑ Peruvian Arbitration Law. Article 71.-“The Tribunal fees and secretary fees will be established in a reasonable basis, taking into account the amount of the dispute, the dimension and complexity of the case, the time dedicated by the arbitrators, the arbitration activity and the generally accepted uses and customs of the arbitration institution (…)”. 2. ↑ See, for example, International Chamber of Commerce Rules of Arbitration, at Art. 38; London Chamber of Commerce Arbitration Rules, at Art. 2 of Appendix III; American Arbitration Association Commercial Arbitration Rules and Mediation Procedures, Administrative Fee Schedules. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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Investors’ Views on the ISDS Reform: QMUL Investment Arbitration Survey

Kluwer Arbitration Blog - Mon, 2019-12-09 23:00

Loukas A. Mistelis, Caroline Le Moullec and Giammarco Rao

Last week QMUL, in partnership with the Corporate Counsel International Arbitration Group (“CCIAG”), launched its first ever survey focusing exclusively on international investment. This is the tenth major empirical International Arbitration survey conducted by the School of International Arbitration at Queen Mary University of London. A link to the survey can be found here.

The survey comes at a critical time for the investor-state dispute resolution regime. The current regime is characterised by the use of arbitral tribunals to solve a dispute between an investor and a state concerning the former’s investment. Typically this is regulated by a bilateral or multilateral investment treaty and involves an investor bringing a claim directly against the state, the dispute being heard by an arbitral tribunal whose members are appointed by both the investor and the state.

In the last forty years, there has been a steep increase in the number of disputes submitted to arbitral tribunals. While many cases are brought against developing countries and emerging markets, in recent years a very good number of cases is brought against developed countries.

The growth of ISDS as a forum for resolving investment disputes between investors and states has come in for criticism from public opinion, the media and the users of the system. A large number of conferences, keynote speeches and papers have addressed the potential for reform of the current framework. Professor Brigitte Stern, who delivered the 34th Annual Lecture of the Queen Mary University of London School of International Arbitration and Freshfields lecture in November 2019, spoke of a system which has prevented war between states in the last century, and is now at “existential risk”. This has been picked up by states which are now working multilaterally to consider reforms.

In 2017, the United Nations Commission on International Trade Law (“UNCITRAL Commission”), the core legal body of the United Nations system in the field of international trade law, assigned its Working Group III with the task of assessing concerns and potential reforms to ISDS. The Working Group III is now examining potential procedural changes submitted by states with the objective of developing recommendations to the UNCITRAL. As described elsewhere on this blog (here), the fifth session of the UNCITRAL’s Working Group has shown a more concrete approach by governments who have finalised a medium-term work plan. The January 2020 session will focus on three topics, namely the creation of an appellate mechanism, the introduction of a standing multilateral investment court, and the selection and appointment of arbitrators and judges. The session in March/April 2020 will focus on counterclaims, dispute prevention and the reform instruments. Without doubt, the discussion under UNCITRAL Working Group III represents a welcomed effort to improve the system on which investors can rely when making an investment in a foreign country.

So far, the discussion has been limited to the perspectives of states and investors’ voice risks not being heard. As investors are users of the ISDS system as well as states, and the system was established to incentivise and protect foreign investment, QMUL and CCIAG’s survey is seeking their input to facilitate the discussion on reform proposals. We are looking to hear in-house counsel and management representatives and hear how the current system works (or does not work) for them and which reforms to the current system may help resolve disputes and promote foreign investment.

 

Take the Survey

We welcome responses from in-house corporate counsel and management representatives. The Investment Arbitration Survey is available at the following link. The questionnaire is in two parts. Part 1 should take 10-15 minutes to complete and Part 2, which is optional, will take a further 10-15 minutes.

The closing date for responses to this questionnaire is 19 December 2019. Results will be published in January 2020 on the School of International Arbitration website.

We are grateful for your participation and look forward to the Survey’s outcomes. Since the results will benefit from a wide pool of respondents, please feel free to forward this questionnaire to any other potentially interested respondents.

 

Interviews

In addition to the questionnaire phase of the Survey, we plan to conduct individual interviews with a selection of willing respondents. If you would prefer to provide an interview rather than completing the questionnaire, please contact Caroline Le Moullec and Giammarco Rao at [email protected].

More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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Why State Requests for Provisional Measures Fail in Investor-State Disputes?

Kluwer Arbitration Blog - Sun, 2019-12-08 23:42

Yarik Kryvoi

As the number of investor-state disputes grows, so does the number of applications for provisional measures. The recent empirical study conducted by the British Institute of International and Comparative Law and White&Case suggests that investors were more than twice as likely to obtain positive decisions on their requests than respondent states. The study also showed that the geographical region of the respondent states strongly correlated with the outcomes.

Parties request provisional measures, also known as interim measures, interim relief or interim measures, to refrain from aggravation of the dispute, stay parallel proceedings or take other measures to preserve the investments and the exclusivity of investor-state proceedings.

 

Different outcomes under different arbitration rules

The choice of applicable arbitration rules affects procedural rights of the States and investors, as well as the powers of investor-state tribunals. All major modern arbitration rules contain provisions dealing with the tribunals’ authority to make decisions on provisional measures. The majority of public decisions in investor-state disputes were rendered under the ICSID Arbitration Rules, UNCITRAL Arbitration Rules and ICSID Additional Facility rules.

Although arbitration rules have similar provisions dealing with provisional measures and contain little detailed guidance, the study showed that the outcomes of provisional measures application differ. For example, UNCITRAL tribunals were almost twice as likely to grant requests for provisional measures compared to ICSID tribunals.

The tribunals acting under the ICSID Additional Facility Rules granted half of the investors’ requests and none of the requests made by respondent states. It must be noted that the overall number of publicly-available requests under the ICSID Additional Facility rules remains very limited.

The breakout by the party also points to significant differences between UNCITRAL and ICSID practices. The UNCITRAL tribunals granted or partially granted investors’ requests for provisional measures in more than 70% of cases and the respondent state’s requests in only a third of all cases. Investors’ more often succeeded with their requests in the ICSID tribunals.

It is unlikely that different outcomes under different arbitration rules can be satisfactory explained by the “stronger” wording of the UNCITRAL Arbitration Rules, allowing the tribunal to “order” rather than “recommend” provisional measures.  Provisional measures decisions under the UNCITRAL Arbitration Rules are less frequently published compared to decisions under ICSID Rules.

 

Respondent States less successful with requests for provisional measures

Overall, investors end up being almost two times more successful than states in provisional measures applications regardless of applicable arbitration rules. Two possible explanations can clarify why states so frequently fail in their applications.

First, the total number of their applications was much lower than that of investors. Nearly 70% of all requests were made by investors because states usually have all the necessary tools to achieve their goals without the help of tribunals (e.g., courts, law enforcement agencies, access to documents). Second, the vast majority of applications were requesting security for costs, which tribunals currently view with great scepticism as discussed in more detail below.

 

Success of investors correlates with the region of the respondent state

The BIICL/White&Case study shows significant differences in outcomes depending of the region of the respondent states. For instance, requests for provisional measures against North American states fail in 100% cases, while in those concerning the CIS region, as well as Latin America, investors successfully requested such measured in around 40% cases. Over 80% of claimants came from North America and Europe and only around 20% of requests for provisional measures were made against states from these regions.

 

Security for costs requests fail in the vast majority of cases 

Investor-state arbitration is notorious for its costs. The costs often reach millions or even tens of millions of US dollars. Investors often operate through local subsidiaries with little assets of their own or rely on third-party funding to make their claims. Not surprisingly, respondent states may have legitimate concerns over investors’ abilities to cover the respondents’ costs if they prevail and often request that the tribunal order the investor to grant them security for their potential costs. Requests to provide security for costs were made in almost every fifth application for provisional measures.

However, the BIICL/White&Case study shows that arbitral tribunals were ready to grant security for costs only in the most extreme circumstances. Until 2014, none of the investor-state tribunals had granted security for costs. Subsequently, in nearly 90% of cases, tribunals rejected respondent states’ requests for security for costs. It appears that only one tribunal granted security for costs on its own initiative without an express request for it from the respondent state (Chevron Corporation and Texaco Petroleum Corporation v. The Republic of Ecuador). That was done to counterbalance the provisional measures it granted to the investors.

 

Tribunals offer different justifications for not awarding security for costs requests. In Victor Pey Casado and President Allende Foundation v. Republic of Chile the tribunal rejected the request due to the respondent’s failure to show the likely risk of non-payment by the investor. In Emilio Agustín Maffezini v. Kingdom of Spain the tribunal decided that security for costs could not be granted as it did not relate to the subject matter of the dispute.

In fact, no tribunal had ever ordered security for costs before RSM Production Corporation v. Saint Lucia. In that case, the tribunal decided to grant security for costs, first temporarily in its 2013 decision and then for the duration of the case in 2014. The extreme facts of that case showed the high threshold of proving the necessity of security for costs and included the investor’s failure to pay the advances on costs in two prior arbitrations. Overall, the tribunals remained reluctant to order security for costs and they order this type of provisional measure only in the most extreme circumstances.

The BIICL/White&Case study demonstrates that although the approaches of different tribunals to request for provisional measures vary, as the number of decisions grows, it becomes easier to predict their reasoning, which helps to facilitate legal certainty. The authors hope that this study, to be updated regularly, will become an anticipated development in the field of investor-state arbitration.

 

Full study: David Goldberg, Yarik Kryvoi, Ivan Philippov. Empirical Study: Provisional Measures in Investor-State Arbitration, BIICL/ White & Case, London, 2019.

 

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Celebrating 50 Years of the VCLT: Judges Do Well to Remember the VCLT as the Treaty on Treaties: Treaty Compliance and Interpretation By National Judges is Not a Box of Chocolates

Kluwer Arbitration Blog - Sun, 2019-12-08 00:00

Marike R. P. Paulsson

Those applying treaties and interpreting them must remember two salient points: (1) as international adjudicators or as members of the judiciary they must apply a treaty not on the basis of discretionary powers and a judicial hunch but on the basis of the Vienna Convention on the Law of Treaties (VCLT) and (2) lack of proper treaty interpretation can lead to a breach of that treaty by the Contracting State.

First, the primacy that the VCLT gives to the treaty language must be the starting point for all issues regarding treaty interpretation.

Second, the travaux préparatoires can aid a national court judge in ascertaining the treaty’s real object and purpose, in circumstances either where the treaty language is ambiguous, or perhaps equally as important, where the issue before the judge is not one where the treaty provides an immediate answer (thus necessitating a review of the travaux to find a way through to a reasonable interpretation and a result that most people can sensibly live with). The drafting history of a treaty can really elucidate – and give a wider meaning – as to the proper application of a treaty to the situation the judge faces.

 

When national court judges apply an instrument of international law

The VCLT was concluded in 1969 and in the time since its Articles of Interpretation have been declared international customary law. The latter is of particular relevance for States that are either not a Contracting State or have ratified the VCLT fairly late. Its articles of interpretation being of customary international law means adjudicators can rely on it for the purposes of the uniform interpretation of an instrument of international law.

Articles 31-33 are what I refer to as the ‘Vienna Rules on Treaty Interpretation’. They have been created by the drafters as an expression of both existing customs on treaty interpretation and desirable methods of treaty interpretation. The VCLT drafters preferred dominance of the text rather than a primary use of a teleological interpretation of the text. The latter would make the text subordinate to the purpose. This makes little sense as readers of treaties naturally look to the text first. Moreover, drafters of treaties are expected to say what they mean. Thus, the Vienna Rules are built first and foremost on a good faith-based interpretation of its text. That text, on the basis of good faith, must be read bearing in mind the purpose of that treaty and the remaining text of the entire treaty. I refer to this as the bicycle interpretation: a bicycle cannot function without both its wheels and its steering wheel; they are used at the same time. That is how text, context, and purpose are used. One does not take precedence over the other nor can they be used separately while ignoring the other.

Yet, the primary sources of the Vienna Rules, as codified in Article 31, would not do justice to the complexity of a treaty if the reader cannot take into account subsequent practice and interpretation along with other instruments of interpretation concluded by the Contracting States. It is the secondary sources described in Article 32 that have complicated matters a great deal. Yet, this source is today more important than ever. It is the drafting history, also known as the travaux préparatoires that is crucial for understanding treaties today. The drafting history of a treaty is relied upon either to confirm a meaning obtained on the basis of the primary sources or it is used if the use of the primary sources leads to an outcome that is unreasonable or ambiguous. In order to understand the use of all those sources, I developed the Snail Diagram. The challenge is how to determine whether a certain outcome would be unreasonable or ambiguous. In practice, most users of treaties keep the threshold for that determination low and resort to the drafting history.

 

Relying on the judicial hunch instead of Articles 31-33

Today, it is rather unclear as to whether a national court judge relies on proper treaty interpretation as prescribed by the VCLT or just discretionary power and sense of judgment. This is in part due to the fact that often treaties are implemented and thus become part of national law that is the subject to, for example, statutory rules of interpretation. The Vienna Convention itself does not resolve the conflict that ensues.

The reason for relying on the VCLT and the drafting history is clear: the drafting history of the treaty itself, not the parliamentary history of the national enactment, explain the why and how of a treaty provision and will enable the Contracting States through their national courts to comply with their obligations under international law.

For example, the 1958 New York Convention provides proper guidance on its scope: which awards may be enforced under the New York Convention? Article I of the treaty prescribes that foreign and non-domestic awards fall within its scope and so do awards that are rendered by permanent arbitral tribunals. The latter must be understood in the light of its Drafting History though. The delegates in 1958 perhaps faced different challenges than those the community faces today. Yet, the concerns were similar. In the 50s, some delegates at the United Nations working on the New York Convention, emphasized that some Eastern European countries motivated by the communist school of thought attempted to control the resolution of international disputes in international trade, not by subjecting those to their national courts but to sovereign tribunals with ‘permanent arbitral tribunal’ as its nomenclature. The tribunals were not independent, however, and the appointment of permanent members of those courts was in the hands of the State. Even though they were named arbitrators and even though they issued so-called awards, the delegates in 1958 and the drafters of the New York Convention wanted to make certain through the drafting of Article I(2) that such decisions would be excluded from the scope of the New York Convention (see also the discussion here).

In 1958, the delegates shared some concerns in this regard. Article I(2)is instructive not only for understanding the terms ‘award’ and ‘arbitration’ as discussed above, but also for appreciating the importance of party autonomy under the Convention: arbitrations that are of a mandatory nature do not fall under the Convention’s scope. (M. Paulsson, ‘The 1959 New York Convention in Action’, (Kluwer 2016), pp. 120-121.)

Today, proponents for a Multilateral Investment Court view that the New York Convention will apply. Is this an ipse dixit? If one were to predict, judges in the 161 Contracting States might rely on statutory interpretation; they might rely on precedents, they might rely on legal scholars, or they might rely on the treaty’s drafting history. Thus, a great amount of uncertainty exists as so whether semi-judicial decisions of a multilateral investment court are New York Convention awards. One does well to remember the instructions of the Vienna Rules and the intent of the drafters of the New York Convention: only decisions that truly resulted from international arbitration are admissible under the scheme of the New York Convention. The Vienna Rules and the drafting history do matter.

 

This post concludes our celebration of the 50th jubilee anniversary of the Vienna Convention on the Law of Treaties, to see the full series click here

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Celebrating 50 Years of the VCLT: Interpretation of Investment Treaties: VCLT At Play In The Vattenfall Award on Jurisdiction

Kluwer Arbitration Blog - Sat, 2019-12-07 00:00

Deyan Dragiev (Assistant Editor for Europe)

The Cold War era brought to life, in a strange way, a number of all-encompassing treaties dealing with major subjects such as international treaty-making, diplomatic relations, law of seas, etc. Even among the topics covered by these treaties were enforcement of foreign arbitral awards and investment disputes. However, it seems like the world has already left the age of wide-ranging multilateral treaties governing basic State-to-State international relations. Nowadays we can see relative fragmentation and reluctance to multilateral treaties, e.g. the USA pulling out of some multilateral agreements and institutions.

The Vienna Convention on the Law of Treaties (VCLT) is an instrument of key significance to the system of international relations and international law making. Few other multilateral documents provide such fundamental guidance, as the VCLT regulates cornerstone issues such conclusion, validity, termination and, very importantly, interpretation.

Rules of interpretation as per the VCLT have lately become a point of focus for one more reason. Investment treaty arbitration requires the interpretation of international treaties governing investment regimes in an environment where other international instruments function. The Achmea saga is a prime example of a situation that an investment tribunal may face where a number of treaty regimes run in parallel or cross each other so that it becomes crucial to apply Article 31 VCLT to reach a particular reading of the treaty at hand.

 

The Vattenfall Award on Jurisdiction

One of the arguments put forward in the Vattenfall jurisdictional objection by Germany and the European Commission is that EU law forms part of the analysis of the Tribunal’s jurisdiction via Article 31(3)(c) VCLT, as “relevant rules of international law applicable in the relations between the parties”. To the extent that EU law or the Achmea European Court of Justice (ECJ) judgment fall under Article 31(3)(c) VCLT, they could become relevant to take into account when interpreting the Energy Charter Treaty (ECT). The position of the European Commission is that this approach would lead to a “harmonious interpretation” of the ECT.

The Tribunal noted that the correct starting point for the interpretation of the relevance of the ETC is the general rule of interpretation in Article 31(1) VCLT, i.e., “[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms in their context and in the light of its object and purpose”. The Tribunal observed that, contrary to the European Commission’s position, Article 31(3)(c) is not the starting point of the interpretation exercise under the VCLT.

According to the Tribunal, EU law may come into the interpretation analysis if it is to be “taken into account, together with the context” under Article 31(3)(c). Thus, the Tribunal held that it is not the proper role of Article 31(3)(c) VCLT to rewrite the treaty being interpreted, or to substitute a plain reading of a treaty provision with other rules of international law, external to the treaty being interpreted, which would contradict the ordinary meaning of its terms.

The Tribunal considered that allowing for different interpretations of the same ECT treaty provision would be unacceptable, determining that this would be an incoherent and anomalous result and inconsistent with the object and purpose of the ECT and with the rules of international law on treaty interpretation and application.

What could be inferred from these arguments? When States enter into international legal obligations under a multilateral treaty, the principles of pacta sunt servanda and good faith require that the terms of that treaty have a single consistent meaning. State parties to a multilateral treaty are entitled to assume that the treaty means what it says, and that all State parties will be bound by the same terms. It cannot be the case that the same words in the same treaty provision have a different meaning depending on the independent legal obligations entered into by one State or another, and depending on the parties to a particular dispute. The need for coherence, and for a single unified interpretation of each treaty provision, is reflected in the priority given to the text of the treaty itself over other contextual elements under Article 31 VCLT. The need to maintain a uniform meaning of treaty terms is also clearly reflected in Article 33 of the Vienna Convention, dealing with treaties authenticated in two or more languages.

That is not to say that all differences in the substantive obligations of ECT Contracting Parties resulting from differences in the range of other relevant treaties to which each Contracting Party has signed up are entirely ironed out by the ECT. The ECT does make provision for variations among the substantive obligations of the Contracting Parties. For example, ECT Article 10, paragraph 1 identifies the obligations of each Contracting Party towards investors and includes the “treaty obligations” of the State and “any obligations it has entered into with an Investor”, and paragraph 10 identifies obligations under “the applicable international agreements for the protection of Intellectual Property Rights to which the respective Contracting Parties are parties”. But the crucial point is that while the application of those paragraphs may result in the substantive obligations of one Contracting Party differing from those of another, those paragraphs themselves have a uniform meaning for every ECT Contracting Party. Equally important, there is no similar provision in the ECT for differing obligations in relation to the ECT dispute settlement procedures.

The Vattenfall Tribunal found that the effects of such an interpretation in the manner proposed by the European Commission would not ensure “systemic coherence”, but rather its exact opposite. It would create one set of obligations applicable in at least some “intra-EU” disputes and another set of different obligations applicable to other disputes. This would bring uncertainty and entail the fragmentation of the meaning and application of treaty provisions and of the obligations of ECT Parties, contrary to the plain and ordinary meaning of the ECT provisions themselves.

 

Investment Treaty Interpretation In The Light of Art. 31 VCLT: Lessons From Vattenfall

The Vattenfall award on jurisdiction teaches several important lessons concerning use of the VCLT’s interpretative tools.

First, the Tribunal does not see the different paragraphs of VCLT Article 31(2) as separate approaches to treaty interpretation. The Tribunal assumes that one cannot “cherry pick” what approach to undertake. Instead, the Tribunal points out that every interpretative attempt should start at the very fundamental premise of interpretation which is set in Article 31(1): the first component of interpretation is ordinary meaning. Moreover, the means of interpretation is good faith, while the end of interpretation should be its object and purpose. This is outlined as the basis from where each Tribunal should start, including in investment treaty arbitration cases.

Second, the Vattenfall tribunal implies that the interpretative exercise may start but also end there. If the meaning becomes clear at this primary stage, there is no need to look further. If the plain wording of the investment treaty at hand in the particular case reveals in a satisfactory way the meaning underlying the rules and concepts subject to construction, the Tribunal should not move on to Article 31(3).

Third, this may not always be the case, but where it is not the case, this should not at all mean that the approaches enshrined under Article 31(2) should be applied light-heartedly. Paragraph 2 of Article 31 provides additional instruments to help the interpretative exercise. Vattenfall seems to suggest that these should be used cautiously in order not to produce a result which does not correspond to the very ends of Article 31. For instance, Vattenfall might imply that one should not “embed” entire regimes within a particular treaty system which will not help the interpretative task – on the contrary, this will lead to further incoherence as some of the treaty parties would be bound by the treaty at hand, e.g. ECT, while others will have infused within their relations other treaties, e.g. EU instruments. This may lead to contrasting interpretations of one and the same concept used in one and the same document. Further, the Vattenfall Tribunal seems to be quite cautious in using the concept of “relevant rules of international law”. The suggested approach is rather not to undertake an expansive view and look for a relevant rule of law high and low; instead, there should be a precise and defined rule which is relevant. One step further, it may be considered whether the Vattenfall Tribunal actually might have intended to state that not each and every potential rule should be used as a tool for interpretation: this should rather be an established and developed one of strong importance.

Although the Vattenfall award on jurisdiction does not claim to be an exhaustive manual for application of Article 31 of VCLT, it may provide precious guidance on how to make use of the VCLT. It outlines the key approach to interpretation and demonstrates how it can operate in investment treaty disputes so that investment treaty arbitration is not a self-contained island but a breathing part of the larger body of international treaty law.

 

To see our full series of posts celebrating the 50th jubilee anniversary of the Vienna Convention on the Law of Treaties, click here

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Celebrating 50 Years of the VCLT: ‘Supplementary Means’ of Interpretation in Investor-State Arbitrations

Kluwer Arbitration Blog - Fri, 2019-12-06 00:00

Esme Shirlow (Assistant Editor for Australia, New Zealand and Pacific Islands) and Michael Waibel

The growing public interest in investment treaties and investor-State dispute settlement has prompted an increasing number of States to open to public view aspects of investment treaty negotiations. During the negotiation of the Transatlantic Trade and Investment Partnership (‘TTIP’), for example, both the European Union and the United States sought to ‘maximise’ transparency in the negotiations, recognising that this would be ‘indispensable’ to securing understanding and acceptance of the resulting agreement by domestic constituencies.

While the more transparent negotiation of investment treaties is intended to assuage concerns about the legitimacy of investment treaties and investment treaty arbitration, this practice has broader implications. Through transparency efforts, a growing volume of negotiating materials are now publicly available. The impacts of such materials beyond the negotiation phase is an open question. In these circumstances, how arbitral tribunals use such materials during treaty interpretation attains crucial significance.

Materials produced during the negotiation of investment treaties, commonly called travaux préparatoires (‘travaux’), are given formal significance as a ‘supplementary means’ of treaty interpretation under Article 32 of the Vienna Convention on the Law of Treaties (‘VCLT’). This provision provides:

Supplementary means of interpretation

Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:

(a) leaves the meaning ambiguous or obscure; or

(b) leads to a result which is manifestly absurd or unreasonable.

Article 32 reflects that materials like the preparatory work to a treaty might potentially reveal the shared intention of the treaty parties, and thus indicate the scope of treaty party consent.

Investment tribunals face three particular practical difficulties in navigating the use of travaux to interpret investment treaties. First, they encounter practical difficulties associated with ascertaining the existence of travaux and regulating its production in the arbitral proceedings. Second, tribunals may grapple with difficulties when determining the inferences that may be drawn based on travaux. Third, uses of travaux by arbitral tribunals may influence (State) perceptions of the legitimacy of arbitral outcomes.

In this blog post we discuss these issues by looking at different approaches to defining travaux, the challenges that might be caused by using travaux in the interpretation of investment treaties, and a potential response.

 

Defining Travaux: The VCLT’s Concept of ‘Preparatory Work’

The VCLT does not define the concept of ‘supplementary means’ by way of an exclusive list. Instead, it refers to two forms of supplementary means – ‘the preparatory work of the treaty and the circumstances of its conclusion’ – by way of illustration. These two concepts are themselves left undefined.

Investment treaty tribunals generally understand travaux at least to encompass agreed negotiating texts that have been shared between the parties. At the outer reaches, however, tribunals have also held the term to encompass documents not shared between the parties (for example, one State’s record of the negotiations), particularly when there is a dearth of travaux-type material. Tribunals have also accepted into evidence witness statements from persons present at the negotiations as a form of ‘supplementary means’ of interpretation under Article 32 of the VCLT. However, such a broad approach to defining ‘travaux’ and ‘supplementary means’ of interpretation holds risks.

 

Challenges Associated With the Use of Travaux

Article 32 materials – and travaux in particular – are particularly likely to be incomplete, imbalanced and/or, inaccurate. For older treaties, negotiated before the turn to transparency, such materials may also be non-existent or otherwise unavailable. Reference to such materials might also skew the interpretive exercise, for example by introducing self-serving or biased materials. References to travaux and associated materials by treaty interpreters might therefore entail risks. The practical utility of travaux to arbitral tribunals varies significantly in light of their ‘authenticity, completeness and availability’.1)Anthony Aust, Modern Treaty Law and Practice (3rd edn, Cambridge University Press 2013) 218. jQuery("#footnote_plugin_tooltip_2269_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2269_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Travaux may show how the negotiators arrived at the final text, but may also contain misunderstandings and points that the negotiators ultimately discarded. Crucial decisions adopted may not appear in the record because they have been resolved in private, off-the-record meetings. And so on.

A further key practical difficulty associated with the use of travaux in investment treaty arbitration is that of access. Typically only one party to the dispute (the host State) will have ready access to travaux and like materials. As such, where a tribunal acknowledges the utility of travaux to the interpretation of the investment treaty before it, the tribunal needs to ensure that the investor-claimant’s status as a non-party to the investment treaty does not disadvantage it in the presentation of its case. As a rule, investment tribunals deem travaux to be discoverable. For example, many NAFTA tribunals have taken facilitative approaches during the document discovery process to assist claimants to access any travaux held by the respondent State. A minority of tribunals have adopted a more restrictive approach to the discovery of travaux.

Unjustified restrictions on the discoverability of travaux risk falling afoul of principles of equality and fairness that underpin investor-State arbitration. This has interesting parallels to early debates about recourse to travaux in a series of early cases before the Permanent Court of International Justice. The Court hesitated in using travaux where one of the disputing parties before it had not been a participant in the negotiations for the treaty at issue. Of course, this may in time change as more negotiating documents are placed online as part of a general push towards greater transparency of investment treaty negotiations. For most investment treaties, however, discovery rules remain an important means by which tribunals can broaden or narrow the potential role that travaux might play in the interpretative process.

 

Using ‘Supplementary Means’ to Interpret Investment Treaties: A Way Out of the Maze

These challenges in using travaux also explain why the utility of travaux to treaty interpretation is often limited in practice. As is well known, the appropriate role for ‘supplementary’ materials was a matter of considerable controversy during the drafting of the VCLT. It prompted the International Law Commission (ILC) to relegate these materials to a ‘supplementary’ role in the interpretive scheme of the VCLT.

Thus far, investment treaty tribunals have not articulated a general test to assess the relevance of materials under Article 32, instead preferring to confront these issues of relevance on a case-by-case basis. We consider that two approaches could be taken to determine the ambit of the concept of ‘preparatory work’ and/or ‘supplementary means’ under Article 32 of the VCLT.

First, it might be said that particular materials fall outside the scope of these concepts in toto, and thus outside the means of interpretation envisaged by Article 32. Such delineation might occur by reference to the types of materials capable of disclosing the parties’ collective intentions. The advantage of such an approach is that it results in a clear delineation of materials, indicating clearly which materials can play any role in the interpretive process. The disadvantage is that the approach is very binary and risks excluding potentially relevant materials from the interpretive process.

A second, better, option for regulating the use of travaux is to adopt a sliding scale of relevance by reference to the features of a given material. This approach reflects that the reference in Article 32 of the VCLT to ‘preparatory work’ is broad and in any case illustrative only. Tribunals might conclude that a wide range of materials fall within the concept of ‘preparatory work’ or – at least – the broader concept of ‘supplementary means’, but that their relevance in any given case will depend upon their particular features.

Under this second approach, interpreters would not exclude the material in entirety on the grounds of it not constituting ‘preparatory work’ or a ‘supplementary means’ of interpretation. Instead, having determined that the materials under Article 32 are relatively expansive, interpreters could nonetheless recognise differences between the types of materials that might be referred to under Article 32 by adopting a sliding scale of relevance. According to such a scale, an interpreter might, for example, give more weight to materials that are capable of manifesting the joint intent of the parties. While a unilateral internal document might therefore not be excluded ex ante it might nonetheless be given lesser weight than, for instance, a joint report on the negotiations signed by all treaty parties. Such an approach would encompass as relevant all material created during a treaty negotiation, but would confer most weight on materials demonstrating the common intention of the treaty parties.

One implication of our proposed approach is that the growing availability of travaux may render references to unilateral materials less important or even superfluous. This is particularly important for modern investment treaty negotiations, where the issue of State ratification is increasingly subject to widespread domestic appraisal and debate. In these circumstances, the adoption of a cautious approach to the use of unilateral ratification materials in treaty interpretation best balances the potentially one‑sided nature of such materials with their potential utility.

In a forthcoming article, we will propose a four-pronged test to ascertain whether a given material constitutes ‘preparatory work’ within the meaning of Article 32 of the VCLT. These criteria are linked closely to the text of Article 32 and its purpose, which envisages the use of supplementary means of interpretation to uncover the treaty parties’ intentions. The second approach is a better fit for the intent behind Article 32 of the VCLT. It may also assist tribunals to balance the rights and interests of parties to arbitral proceedings when determining issues associated with the access of both parties to travaux.

 

Conclusion

To ensure their continued legitimacy, investment treaty tribunals must utilise all means at their disposal to respect and uphold the bargains struck in investment treaties. Travaux have the potential to offer insights into the intentions underlying treaty provisions that are notoriously open-ended. The test we propose allows the treaty interpreter to harness the benefits of reference to travaux whilst supporting them to avoid its attendant challenges. The utilisation of the proposed sliding scale of relevance to determine the weight to be given to materials that might be referred to as travaux is important to both host States and investors, and to the systemic legitimacy (and independence) of the system more generally.

 

To see our full series of posts celebrating the 50th jubilee anniversary of the Vienna Convention on the Law of Treaties, click here

References   [ + ]

1. ↑ Anthony Aust, Modern Treaty Law and Practice (3rd edn, Cambridge University Press 2013) 218. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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Celebrating 50 Years of the VCLT: Investment Arbitration’s Resurrection of the Principle of Contemporaneity as a Trojan Horse for Subjective Treaty Interpretation

Kluwer Arbitration Blog - Thu, 2019-12-05 00:00

Julian Wyatt

The Vienna Convention rules for treaty interpretation (VCLT) routinely referred to by all international courts and tribunals are known to be the result of a compromise between different schools of interpretation and therefore notoriously flexible, in my view too flexible for the purposes of modern-day international dispute resolution. Cases are therefore won and lost according to how those rules for interpretation — and the principles and doctrines regarded as lying beneath them — are themselves understood by the particular court or tribunal.

This post argues that investment arbitration understands one such principle, the so-called principle of contemporaneity, differently to other international courts of tribunals and thereby uses a singular interpretative approach — particularly when applying VCLT articles 31 through 33 to the vexed question of whether the benefit provided by a most-favoured nation clause extends to importing a more permissive dispute resolution provision from another treaty (the “MFN-DRP issue”).

As promulgated by Sir Gerald Fitzmaurice in 1957, the principle of contemporaneity — or principle of contemporaneous (treaty) interpretation — requires that “[t]he terms of a treaty [are] interpreted according to the meaning which they possessed […] in the light of current linguistic usage, at the time when the treaty was originally concluded”.  Very soon after being proclaimed, the principle of contemporaneity began to decline, with the countervailing doctrine of evolutionary treaty interpretation becoming increasingly recognised and accepted as the default position on how to interpret treaties through time. For various reasons I have detailed elsewhere, the principle of contemporaneity — while still occasionally applied in the specific context of boundary disputes — essentially fell into disrepute, “evolutionary interpretation” decisions such as the 2005 Iron Rhine award and 2009 Related Rights judgment appearing to consign it to the dustbin of history.

Yet the world of investment arbitration apparently didn’t get the memo and, in recent years, has ushered in a renaissance in the principle of contemporaneity. In what has been termed the “fiercely contested no-man’s land” of the MFN-DRP issue, the principle of contemporaneity has been regularly invoked by parties and arbitrators in cases including ICS v Argentina, Daimler v Argentina, Philip Morris v Uruguay, Kiliç v Turkmenistan, Garanti Koza v Turkmenistan, Cheque Déjeuner v Hungary and Venezuela US v Venezuela. While these awards and pleadings define the principle of contemporaneity as the general international law authorities do, they appear to understand it quite differently; most significantly as reintroducing a strongly subjective element to the process of treaty interpretation and even allowing reference to the preparatory work of a treaty as an apparently primary — rather than supplementary — means for interpreting it.

It is well known that, with the conclusion of the Vienna Convention in 1969, international law moved away from the école subjective previously favoured in many international jurisdictions.  The travaux préparatoires that had for so long been the focus of interpretative inquiries were relegated behind the text, context and other “objective” interpretative elements to be considered only in exceptional circumstances. Several international lawyers have since taken the triumph of the objective approach over the subjective approach so seriously that they (wrongly) consider any allusion to “intention” to be out-of-place in the context of treaty interpretation. Prof Schreuer has even reported, as a legal expert in Wintershall v Argentina, that his predecessor in the chair of international law in Vienna, Karl Zemanek, “used to fail students when they gave the answer that the intention of the parties was significant for the interpretation of treaties”.

It is equally clear that general international law does not understand the principle of contemporaneity as endorsing a subjective approach to treaty interpretation or any reference to the travaux préparatoires. Since its emergence in the writings of Wolff and Vattel, development in the Rights of US Nationals in Morocco case and proclamation as a principle of international law by Fitzmaurice, the principle of contemporaneity has been regarded as useful for fleshing out the objective meaning of a treaty term, not the concrete intentions of the specific parties who drafted the treaty provision in which that term appears.

In investment arbitration, however, the principle of contemporaneity is consistently invoked to advocate a very different interpretative approach. In the Daimler award, the tribunal defined the principle as requiring that “the meaning and scope of the term ‘treatment’ be ascertained” at the time when Germany and Argentina negotiated their BIT, but then immediately revealed its view that this meaning would best be found in “direct evidence revealing the particular understanding of ‘treatment’ maintained by Germany and Argentina [at] that date”, “for example from the Treaty’s drafting history”. In replies submitted a matter of months after the ICS and Daimler awards respectively, the respondent States in the Philip Morris v Uruguay and Kiliç v Turkmenistan cases seized the opportunity to plead the principle of contemporaneity in a strikingly subjective form. Uruguay notably insisted on what “an examination of contemporaneous sources reveal[ed …] the parties … [to] have intended” and “the subject matter which the two States had in mind when they inserted the clause in their treaty”, while Turkmenistan asserted that the principle required the tribunal “to appreciate whether Turkey and Turkmenistan intended the term ‘treatment’ to cover the BIT’s DRPs”.  When, in the subsequent Garanti Koza arbitration, Turkmenistan again advanced the principle of contemporaneity as being centred on what the parties in fact contemplated, the Claimant objected that this undermined the hierarchy in VCLT articles 31 and 32 and the Tribunal found it necessary to remind the parties of the primacy of the text of the treaty in treaty interpretation (the objective approach), in apparent opposition to this emerging subjective form of the principle of contemporaneity.

In later cases, tribunals and parties have referred more heavily to the text of the treaty being interpreted, but still appear to understand the principle of contemporaneity as seeking to determine the particular parties’ concrete intentions.  In the Chèque Déjeuner v Hungary dispute, the parties submitted — and the tribunal referred to — “contemporary evidence of the understanding of the parties at the time of the conclusion” of their treaty, while the Venezuela US v Venezuela tribunal’s 2016 interim award partially followed the Respondent State’s extensive reference to the principle of contemporaneity to draw conclusions about what “the Parties had in mind”.

A number of reasons could be offered to explain why investment arbitration seems to have departed from the general international law understanding of the principle of contemporaneity and come to see it as endorsing a subjective interpretative approach.

One might, for example, contend that the MFN-DRP context, being focused on ratione voluntatis and consent, is more inherently subjective than the contexts in which the principle has been applied in other international courts and tribunals. Yet ICJ practice (including in the Rights of US Nationals in Morocco judgment and controversial opinions of the 1966 South West Africa majority) invokes the principle precisely in the context of consent to jurisdiction without understanding it in such a subjective manner and marginalises any attempts, such as Judge de Castro’s Aegean Sea dissenting opinion, to use the principle more subjectively in this context.

One might also follow the key paragraphs of the ICS and Daimler awards on the principle of contemporaneity and argue that bilateral treaties specifically require a more subjective approach to treaty interpretation. After all, it is clear that the policy basis for the VCLT’s selection of the objective approach for the interpretation of treaties at least partially resides in the fact that many parties to large multilateral treaties will not have access to the records of those who drafted them, meaning that a subjective approach would create an asymmetry predominantly in favour of older, developed States. However, just like newly established States who “inherit” treaties from colonial powers, investors who bring claims under BITs are unlikely to have access to the material venerated by subjective interpretation. The non-State-vs-State nature of investment arbitration means that a subjective approach to treaty interpretation only enhances the asymmetry between the parties, cautioning against the use of anything other than an inherently more even-handed objective approach. There may be policy reasons for interpreting bilateral investment treaties more statically, but not for interpreting them more subjectively.

If we really must speculate as to the source of this divergence, it seems safer to suggest that investment arbitration’s understanding of the principle of contemporaneity as authorising a subjective approach to treaty interpretation is in fact a consequence of another of its special features: the involvement of international commercial arbitration practitioners. While all forms of the game of public international law dispute resolution are now played by lawyers, it is only investment disputes that are predominantly argued by practitioners equally or more accustomed to applying domestic laws to the interpretation of contracts, many of which favour a subjective approach. In this light, it is perhaps unsurprising that, in investment arbitration, subjective interpretation has, in the shape of a refashioned principle of contemporaneity, found itself back within the VCLT’s quite porous walls around treaty interpretation.

 

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Celebrating 50 Years of the VCLT: Misapplying the General Rule of Treaty Interpretation – The Salini Test

Kluwer Arbitration Blog - Wed, 2019-12-04 03:00

Roberto Castro de Figueiredo

It is well settled in the practice of ICSID tribunals that the general rule of treaty interpretation embodied in Article 31(1) of the Vienna Convention on the Law of Treaties (“Vienna Convention”) applies to the interpretation of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention”). While the Vienna Convention does not govern the ICSID Convention directly (either because not all Contracting States of the ICSID Convention are parties to the Vienna Convention, or because the ICSID Convention entered into force in 1966, before the Vienna Convention, which entered into force in 1980), Article 31(1) of the Vienna Convention has been applied by ICSID tribunals in interpretation of the ICSID Convention on the basis that Article 31(1) is a codification of the customary international law rule on the interpretation of treaties. But while the applicability of Article 31(1) of the Vienna Convention in the interpretation of the ICSID Convention has been not a problem so far, the correct application of the general rule of treaty interpretation has been a real issue in the practice of ICSID tribunals (see also here).

One of the most relevant examples of misapplication of the general rule of treaty interpretation is the so-called Salini test, named after the decision rendered in 2001 in the case of Salini v Morocco. In deciding whether the dispute arose out of an investment for the purposes of the ICSID Convention, the Salini tribunal, despite the lack of a definition of investment in the ICSID Convention, laid down four elements of a purported notion of investment within the meaning of the ICSID Convention: (i) contribution; (ii) a certain duration of performance of the contract; (iii) a participation in the risks of the transaction; and (iv) the contribution to the economic development of the host State of the investment. Since 2001, except for a small number of decisions, most ICSID tribunals that had to decide on whether the dispute arose out of an investment for the purposes of the ICSID Convention followed the Salini test blindly, without any proper scrutiny as to whether the Salini test is consistent with the general rule of treaty interpretation of the Vienna Convention.

The main problem of the Salini test as a matter of treaty interpretation is the fact that the elements of the purported notion of investment within the meaning of the ICSID Convention confers a special meaning on the term “investment”. Except for the first element — contribution — the other three elements are an unequivocal departure from the ordinary meaning of the term “investment”. They are not typical features of an investment but are elements that qualify the term “investment”, and, as such, they exclude from the ICSID Convention investments that do not have a certain duration, are not subject to risk and/or do not contribute to the economic development of the host State.

Although there is nothing in the ICSID Convention that qualifies the term “investment” in such way, the Salini test is clearly based on the idea that it is not the object and purpose of the ICSID Convention to allow the submission of disputes arising out of any type of investment because not every investment deserves the protection afforded by the ICSID Convention but only the protected investments. As the arbitral tribunal considered in Karkey Karadeniz Elektrik Uretim A.S. v Pakistan, it is “appropriate to take into account the four elements set forth by the tribunal in the Salini v. Morocco case in order to identify an investment protected by the ICSID Convention”.

The teleological interpretation advocated by ICSID tribunals is more obvious in relation to the contribution to the economic development of the host State, the so-called economic development requirement.

The economic development requirement was first applied in the CSOB case. In the decision on objections to jurisdiction of 24 May 1999, quoting the first recital of Preamble of the ICSID Convention — “[c]onsidering the need for international cooperation for economic development, and the role of private international investment therein” — the CSOB tribunal asserted that “[t]his language permits an inference that an international transaction which contributes to cooperation designed to promote the economic development of a Contracting State may be deemed to be an investment as that term is understood in the Convention”. In other words, according to this approach, a transaction that is not an investment may qualify as an investment for the purposes of the ICSID Convention if it contributes to the economic development of a Contracting State.

In Salini, however, the economic development requirement was applied differently, not to expand the meaning of the term “investment” for the purposes of the ICSID Convention, but to restrict it. As pointed out by the tribunal in Salini, “[i]n reading the [ICSID] Convention’s preamble, one may add the contribution to the economic development of the host State of the investment as an additional condition”. As the contribution to the economic development would be a “condition”, an investment will not be an investment within the meaning of the ICSID Convention unless it contributes to the economic development of the host State.

But while the CSOB and the Salini tribunals adopted two different approaches towards the economic development requirement, both decisions have in common the same approach towards the interpretation of the term “investment” as the term is employed in the ICSID Convention. Both decisions conferred on the term “investment” a special meaning, in a clear departure from the ordinary meaning of the term, based on the object and purpose stated in the Preamble of the ICSID Convention, which is taken as a factor operating independently from or alternatively to the ordinary meaning of the term “investment”, either to expand its meaning to transactions that are not investments or to restrict ICSID arbitration to disputes arising out of investments that contribute to the economic development of the host State.

The decisions of the ICSID tribunals that followed the Salini test show that, while the general rule of treaty interpretation is always stated to be applicable in the interpretation of the ICSID Convention without any reservation, it is not unlikely that ICSID tribunals, when required to interpret the ICSID Convention, will fail to apply the general rule of treaty interpretation consistently.

The use of the object and purpose to confer a special meaning on a term employed in an international treaty, allowing a teleological interpretation that departs from the ordinary meaning of the term is not consistent with the general rule of treaty interpretation. While treaty interpretation is the search for the intention of the parties to the treaty in order to give effect to the consent of the parties to be bound by the treaty, the general rule of treaty interpretation establishes a method in which each element plays a relevant role as a source of the parties’ intention. In accordance with Article 31(1) of the Vienna Convention, “[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”. Above all, the primary source of the intention of the parties is the actual terms employed in the treaty — the text of the treaty — which must be assumed to have been employed in accordance with its ordinary or natural meaning.

Pursuant to the general rule of treaty interpretation, a term may only be given a meaning that differs from its ordinary meaning — a special meaning — if the parties to the treaty intended to do so. In this sense, Article 31(4) of the Vienna Convention provides that “[a] special meaning shall be given to a term if it is established that the parties so intended”. But the object and purpose of a treaty may not be relied on in order to establish that the parties intended to confer a special meaning on a term. Under the general rule of treaty interpretation of the Vienna Convention, the reference to the object and purpose of a treaty — which provides for a teleological element in treaty interpretation and is also linked to the principle of effectiveness, or the principle ut res magis valeat quam pereat — is not an autonomous source of the intention of the parties. Its use is a second step and contingent upon the ordinary meaning of the terms and may not be used to override the text of the treaty. Article 31(1) of the Vienna Convention provides that “[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms […] in the light of its object and purpose” and not that the treaty shall be interpreted in the light of its object and purpose.

It is not, therefore, the task of ICSID tribunals to read into the ICSID Convention a special meaning of the term “investment”, even if such ICSID tribunals consider that the ICSID Convention has a special object and purpose. It always worth remembering that, as the International Court of Justice observed in the Interpretation of Peace Treaties with Bulgaria, Hungary and Romania case, “[i]t is the duty of the Court to interpret the Treaties, not to revise them”.

 

To see our full series of posts celebrating the 50th jubilee anniversary of the Vienna Convention on the Law of Treaties, click here

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Celebrating 50 Years of the VCLT: The Legal Reasoning of Investment Arbitration Awards: A Decision-Making Perspective on Interpretation

Kluwer Arbitration Blog - Wed, 2019-12-04 00:00

Mary Mitsi (Assistant Editor)

Legal Reasoning: Interpreting and Applying the Law1)Mary Mitsi, The Decision-Making Process of Investor-State Arbitration Tribunals (Kluwer 2019). jQuery("#footnote_plugin_tooltip_4344_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4344_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

When analysing the process of legal decision-making what might first come to mind is the dichotomy between the interpretation and the application of the law. These terms, in some circumstances, may be employed interchangeably due to the strong link that exists between them. Indeed, jurisdictional clauses in investment treaties refer cumulatively to “disputes over the interpretation or application of the treaty” giving the impression of creating a “portmanteau category” [Franklin Berman, ‘International Treaties and British Statutes’ (2005) 26 StatuteLRev 1, 10.] that may not require the competent tribunal to distinguish the one from the other. However, this distinction is important as it creates two linked but functionally separate spheres.

Interpretation of legal norms is a hermeneutic process through which the meaning of a norm is determined. The concept of “application” can itself be divided into two categories: stricto sensu application (application in its narrow context), and lato sensu application (application in a broader context which contains both the process of interpretation and the process of application stricto sensu). As put by Judge Ehrilich, interpretation is the course of “determining the meaning of a rule” whereas application stricto sensu is the method of “determining the consequences which the rule attaches to the occurrence of a given fact”. [Case concerning the Factory at Chorzow, PCIJ, Claim for indemnity-Jurisdiction, (Dissenting opinion of judge Ehrilich) 39.]

In the investment arbitration scene, Sir Franklin Berman, in his dissenting opinion in the Lucchetti annulment phase, makes reference to the Tribunal’s twofold task:

“[…] interpreting the BIT and then applying it; […] whereas treaty interpretation can often be a detached exercise, it is virtually inevitable that treaty application will entail to some extent an assessment of the facts of the particular case and their correlation with the legal rights and obligations in play”. (para 15)

However, this traditional distinction between the interpretation and application of the law is not always a straightforward task in practice. In some circumstances, the interpretation may be formed based on how this interpretation will apply to the facts. In other clear-cut cases, the treaty provisions are applied to the facts directly without the need for the determination of the meaning of the provision.

Nevertheless, leaving aside the practical difficulties, the dyadic approach to legal decision-making which marks the separation between the process of interpreting and applying the law can become crucial. As an example, the quality of reasoning may vary based on whether the arbitrators make reference only to the process of applying the law to the facts or whether there is also reference to the legal interpretation process.

 

The Vienna Convention-Based Interpretative Arguments

The question that arises at this point, is what tools investment arbitrators use in order to interpret the law. The Vienna Convention on the Law of Treaties (VCLT) constitutes the main point of reference when decision-makers interpret international treaties. Article 31(1) VCLT provides that international treaties must be interpreted in “good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”. Treaty interpretation in this context includes the following approaches: the textual approach (ordinary-plain meaning of the text), the contextual approach, the teleological approach, the relevant rules of international law applicable to the parties, and the negotiating history. This process may be followed in practice step-by-step but there is also the view that considers the application of Article 31 as one combined rule rather than a number of directions to be applied in a specific order.

International courts and tribunals resort to the VCLT interpretive principles for diverse reasons. Apart from consisting a source of guidance as they provide the tools for interpreting treaties, they may also serve as a technique that enables the decision-maker to enhance the credibility of the award’s reasoning entrenching the legal interpretation process within the long tradition of public international law. These well recognised and universally-adopted rules of interpretation confer to investment arbitration tribunals a place in the long interpretive tradition of international courts and tribunals.

 

The Precedent-Based Interpretive Arguments

However, the VCLT-based arguments are better described as a means to an end rather than as the end itself. Even though there is no formal doctrine of precedent, practice shows that arbitrators also refer to relevant case law when interpreting the law. Since there is no set rule regarding the form precedent has in investment arbitration, the practice of citing prior awards and decisions by arbitrators has been connected to the civil law doctrine of ‘jurisprudence constante’. In this context, prior decisions have a persuasive authority, meaning that arbitrators can follow prior awards if they are convinced by the strength of the award’s reasoning. Persuasive authority has the potential to persuade without constraining the decision making power of the adjudicator.

Despite Article 53 ICSID Convention clearly stating that the award shall be binding only between the parties, arbitration tribunals have relied on prior awards when examining issues such as the clause on Fair and Equitable Treatment (FET) or the obligation of the States to compensate damages. It has become common practice not only for governments and private investors to refer to prior investment awards that figure to favour them, but also for investment tribunals to rely upon awards of other tribunals when interpreting similar provisions of investment treaties.

Investment arbitration tribunals refer to previous awards in order to form their own legal reasoning through following a principle well established in the jurisprudence, to fill in gaps in the treaty as well as to draw analogies and a contrario arguments. A prominent example of the reasons behind a tribunal’s reference to case-law can be found in the AES Corporation v. The Argentine Republic decision on jurisdiction. The Tribunal stated that

“it may consider decisions on jurisdiction dealing with the same or very similar issues […] in order to compare its own position with those already adopted by its predecessors and, if it shares the views already expressed by one or more of these tribunals on a specific point of law, it is free to adopt the same solution”. (para 30)

The Tribunal continued by mentioning that another reason for considering precedents, even when the cases had been seised on a basis of another BIT, is that a tribunal “has set a point of law which, in essence, is or will be met in other cases whatever the specificities of each dispute may be”.  On this basis precedents can be considered as a matter of “comparison” and “inspiration”.

Similarly, the Enron tribunal focused on the “correctness” of the ICSID decisions as a justification for referring to them despite not being “a primary source of rules”:

“The citations of and references to those decisions respond to the fact that the Tribunal in examining the claim and arguments of this case under international law, believes that in essence the conclusions and reasons of those decisions are correct”. *(para 40)

Likewise the Chevron Tribunal held that it will consider arbitral decisions and the parties’ arguments based on these decisions “if they shed any useful light on the issues that arise for decision in this case”.

Tribunals refer not only to investment arbitration case law but also to national and international jurisprudence. Equally, legal issues arising in comparative public law regimes such as administrative, constitutional, and international, aim at introducing solutions for arbitral decision-making in investment arbitration whenever there is a gap or need for guidance. Proportionality, for example, is a principle integrated and developed in investment arbitration through the dialogue with international and domestic legal orders and judicial bodies. In the Técnicas Medioambientales Tecmed SA case, the Tribunal relied on the jurisprudence from the European Court of Human Rights, referring to Article 1 of Protocol 1 in order to draw guidance for the use of the proportionality analysis in determining whether a legitimate regulation turned in fact into indirect expropriation.

The human rights law discipline, as well as any chosen interlocutor, may be a useful source of guidance but what should be kept in mind is that the nature of the rights accorded by each discipline is different. It is still disputable, for example, whether investment treaties accord erga omnes substantive rights such as human rights treaties do. Moreover, the investment treaties constitute a type of political risk management tool for the investor and this function should also be taken into account. Another caveat to this cross-referencing practice is that reference to “foreign” jurisprudence should avoid the danger of “faux amis” by selecting carefully the points of reference based on the submissions of the parties and the relevance of the case law.

 

A Culture of Arbitral Decision-Making

Whether it involves the use of the traditional VCLT interpretive principles or a combination of convention-based principles with cross-citation references, understanding the interpretation practices within a specific legal community is a first step towards the knowledge of the law. Going a step further, the process arbitrators follow to interpret the law becomes not only an issue of legal knowledge but also curves the path towards identifying the culture of arbitral decision making and the way this culture has been shaped through the practice of arbitral tribunals in order to respond to the needs of the arbitration community.

 

To see our full series of posts celebrating the 50th jubilee anniversary of the Vienna Convention on the Law of Treaties, click here

References   [ + ]

1. ↑ Mary Mitsi, The Decision-Making Process of Investor-State Arbitration Tribunals (Kluwer 2019). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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Sample Proposal Formats for Star Wars Book

ADR Prof Blog - Tue, 2019-12-03 14:43
Since posting our call for papers, we have received several inquiries about what a proposal for Star Wars and Conflict Resolution should look like. The short answer is that we are not expecting any particular format or presentation. We are delighted to receive proposals that make sense (in terms of organization, structure, specificity, whether to … Continue reading Sample Proposal Formats for Star Wars Book →

Celebrating 50 Years of the VCLT: An Introduction

Kluwer Arbitration Blog - Mon, 2019-12-02 00:00

Esme Shirlow (Assistant Editor for Australia, New Zealand and Pacific Islands) and Kiran Nasir Gore (Associate Editor)

The Vienna Convention on the Law of Treaties (VCLT) was adopted and opened for signature on May 23, 1969, and entered into force on January 27, 1980. In the fifty years since the VCLT was opened for signature, it has become universally regarded as one of the most important instruments of treaty law. It has been ratified by 116 States and even some non-ratifying States (such as the United States) recognize parts of the VCLT as a restatement of customary international law.

This year marks the VCLT’s golden jubilee. In commemoration, we are devoting this week on the Kluwer Arbitration Blog to the VCLT’s history, evolution, and future. Today, we start with an introduction to the VCLT’s history and development, followed by an overview of its content, legacy, and achievements. We then conclude with a brief preview of the posts you will see throughout this week as part of this commemorative series.

 

The VCLT:  Its History and Development

Following World War II, the customary international law rules relevant to the negotiation, validity, and interpretation of treaties had grown to become a fairly comprehensive body of rules. In 1949, the International Law Commission (ILC) of the United Nations, at its first session, identified the law of treaties as a high priority topic. The ILC’s approach and effort is well-documented in the UN’s Audiovisual Library of International Law, which includes a series of preparatory documents and photographs providing a snapshot into the various meetings of the ILC which ultimately led to the VCLT. But even this documentation simplifies the complexity and magnitude of the task faced by the ILC.

The Commission appointed four successive Special Rapporteurs for the topic: J. L. Brierly, Sir Hersch Lauterpacht, Sir Gerald Fitzmaurice and Sir Humphrey Waldock, and kept the topic of the law of treaties on its agenda from 1949 through to 1966. In its sessions, the ILC considered the Special Rapporteurs’ research and work product, information provided by governments, and documents prepared by the United Nations Secretariat.

Despite this focus, the path to the VCLT was not direct. As noted in the report of the ILC’s eleventh session in June 1959 – ten years into its work – the ILC’s Special Rapporteur envisaged that its work might culminate in “a code of a general character”, rather than one or more international conventions:

“the Rapporteur believes that any codification of the law of treaties, such as the Commission is called upon to carry out, should take the form of a code and not of a draft convention. There are two reasons for this. First, it seems inappropriate that a code on the law of treaties should itself take the form of a treaty; or rather, it seems more appropriate that it should have an independent basis. In the second place, much of the law relating to treaties is not especially suitable for framing in conventional form. It consists of enunciations of principles and abstract rules, most easily stated in the form of a code; and this also has the advantage of rendering permissible the inclusion of a certain amount of declaratory and explanatory material in the body of the code, in a way that would not be possible if this had to be confined to a strict statement of obligation. Such material has considerable utility in making clear, on the face of the code itself, the legal concepts or reasoning on which the various provisions are based”. (Report of the ILC on the work of its eleventh session (1959), A/4169, ¶ 18)

This approach was premised on the view that “the law of treaties is not itself dependent on treaty, but is part of general customary international law”. (Id., emphasis in original).

Yet, the decision as to the ultimate form of its output only crystallised with the work of the last Special Rapporteur, Sir Humphrey Waldock. Appointed in 1961, Sir Humphrey focused on preparing draft articles which could serve as a basis for an international convention. (Report of the ILC on the work of its fourteenth session (1962), A/5209) The ILC limited the scope of its draft articles to treaties concluded between States. That is to say, the ILC carved out treaties between States and other subjects of international law (e.g., international organizations). It also decided not to deal with international agreements not in written form.

Over the next five years Sir Humphrey generated six reports. By 1966, the ILC submitted to the UN General Assembly a final draft set of articles, with a mandate to convene a convention, in Vienna, on the subject. The Vienna Convention was duly convened during 1968 and 1969. As noted in the UN’s Audiovisual Library of International Law, the VCLT was the “last great codification conference” that employed a majority-rules voting method. Its “achievement was helped by two circumstances. On the one hand, the customary law covering the more technical side of treaty-making was, except for minor details, practically undisputed. In respect of the potentially more controversial chapter concerning the termination of treaties, on the other hand, many States had achieved a moderate position by balancing, in view of unknown future eventualities, the wish to escape a treaty obligation against the wish to have it kept”.

 

The VCLT: Its Content, Legacy, and Achievements

Today, the VCLT applies to ‘treaties’, which are defined in Article 2(1)(a) as “international agreement[s] concluded between States in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation”. It is non-retroactive and only applies to treaties concluded after its entry into force (27 January 1980 for original parties). Even if the VCLT does not apply (for example, because the instrument in question is not a ‘treaty’ within the meaning of Article 2, or because it is a treaty concluded prior to the VCLT’s entry into force), many provisions of the VCLT are accepted by States to reflect customary international law.

As finalised, the VCLT addresses a range of topics that are fundamental to the law of treaties. It incorporates rules related to: the conclusion and entry into force of treaties (Part II); the observance, application and interpretation of treaties (Part III); the amendment and modification of treaties (Part IV); and the invalidity, termination and suspension of the operation of treaties (Part V), amongst others.

The VCLT has been influential for courts and tribunals in a range of contexts. This week’s series of posts focuses primarily on how the VCLT has informed investment tribunals in their interpretation and application of investment treaties.

Indeed, the VCLT has informed the deliberations of numerous investment tribunals. Investment tribunals have repeatedly recognised that the VCLT rules on treaty interpretation in Articles 31-33 reflect customary international law. Investment tribunals have also recognised that other provisions of the VCLT reflect customary international law, including the Article 26 principle of pacta sunt servanda, the Article 28 principle of non-retroactivity, and the principles on third party rights/obligations in Articles 34 to 36. Investment tribunals have similarly referred to the VCLT when determining the impact of purported reservations to investment treaties. Tribunals confronted with the interaction between investment treaties and the treaties of the European Community have also drawn on the VCLT (particularly Articles 30 and 59) for guidance.

The importance of the VCLT to investment arbitration has been a recurring topic of coverage on the Blog. Many past posts have considered how investment tribunals have used the VCLT in response to both technical issues and matters relevant to broader debates. As these posts have pointed out, the VCLT has often played a pivotal role in the resolution of a range of issues. This includes, inter alia:

 

A Preview Into Our VCLT Series

Each day this week, a different contributor will spotlight an aspect of the VCLT’s enduring nature, exploring uses of the VCLT in the reasoning and decision-making of tribunals resolving disputes through international arbitration. Reflecting the importance of the VCLT to treaty interpretation, many of the posts in the series focus on uses of the VCLT (and its underlying principles) to the interpretation of investment treaties.

First, in Tuesday’s post, Dr Roberto Castro de Figueiredo will explore the relevance of the VCLT to the ICSID Convention’s notion of “investment” and the so-called Salini test. Dr Castro de Figueiredo’s analysis will elucidate the risks of misinterpretation and misapplication of the VCLT’s principles.

Next, we will have two posts which examine issues of temporal interpretation. On Wednesday, Dr Mary Mitsi will provide a preview of the methodology and research encapsulated in her new book, The Decision-Making Process of Investor-State Arbitration Tribunals. In particular, Dr Mitsi will consider the interpretive tools provided by the VCLT and investment arbitration precedent to explore this emerging and specialised practice. On Thursday, Dr Julian Wyatt will explore how investment tribunals have used the principle of contemporaneity in treaty interpretation. Dr Wyatt’s post emphasises an important cross-cutting issue associated with the VCLT and treaty interpretation, highlighting how the same principles of treaty interpretation might be used by different international courts and tribunals in quite distinct ways.

On Friday, Dr Esmé Shirlow and Professor Michael Waibel will examine how tribunals have approached defining and regulating the use of ‘supplementary means’ of interpretation under Article 32 of the VCLT. The post identifies some key challenges associated with using such materials in the interpretation of investment treaties and offers a framework to better regulate their use.

These posts will be followed by two further posts during the weekend which examine uses of the VCLT in associated contexts. On Saturday, Deyan Draguiev will explore lessons learned through the recent Vattenfall decision on jurisdiction. Mr Draguiev will conclude that this decision, and the Achmea saga more broadly, provide a prime example of the need to apply the interpretive guidance of Article 31 of the VCLT to ensure the consistent reading of a treaty. Last but not least, on Sunday, Marike Paulsson will examine the interaction of the VCLT with the New York Convention. In particular, Ms Paulsson will emphasise the obligation of national court judges to properly interpret and apply treaties, rather than following their own “hunches”, which may risk breaching a State’s treaty obligations.

We hope this series will highlight the consistent invocation of the VCLT in the interpretation and application of investment treaty law. This demonstrates that, despite certain trials, the VCLT has been able to withstand and offer solutions to some of the very many major challenges facing the past, present, and future of this field.

We look forward to you joining us in this celebration!

 

To see our full series of posts celebrating the 50th jubilee anniversary of the Vienna Convention on the Law of Treaties, click here

More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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The EU Plurilateral Draft Termination Agreement for All Intra-EU BITs: An End of the Post-Achmea Saga and the Beginning of a New One

Kluwer Arbitration Blog - Sat, 2019-11-30 21:40

Nikos Lavranos

On 24 October 2019, the European Commission announced that the EU Member States have reached agreement on a plurilateral treaty for the termination of all ca. 190 intra-EU bilateral investment treaties (BITs). The agreement follows the political Declarations of the Member States issued in January this year in which they explained the consequences they are drawing from the Achmea judgment of the Court of Justice of the EU.

It will be recalled that on 6 March 2018 the Court of Justice ruled in the Achmea case that the investment arbitration clause contained in intra-EU BITs is incompatible with EU law, which effectively put an end to the intra-EU BITs (more KAB posts on the interim developments regarding intra-EU BITs can be found here).

More specifically, the Achmea judgment means that European investors cannot bring a claim against EU Member States for claiming compensation in case of expropriation, an unfair or discriminatory treatment that resulted in damages to the investors.

Since the Achmea judgment was issued the European Commission has been pushing the Member States to terminate all their intra-EU BITs as soon as possible. Whereas some Member States, in particular Central and Eastern European Member States, have been already in the process of terminating some of their intra-EU BITs, the truth is that nonetheless most of the remaining ca. 190 treaties are still in force today.

However, in January this year, the EU Member States issued three political Declarations. In those Declarations, all Member States announced their intention to terminate all their intra-EU BITs by 6 December this year. In addition, most of the Member States extended the effect of Achmea also to intra-EU disputes within the context of the Energy Charter Treaty (ECT), while a handful of Member States argued that it would be more appropriate to wait until the Court of Justice has explicitly ruled on the compatibility of the ECT arbitration clause with EU law, which has not been the case yet. In a separate Declaration, Hungary rejected the application of the Achmea judgment to the ECT altogether.

Following up on their promise in January, a few weeks ago, the Member States negotiated under the supervision of the European Commission a plurilateral agreement for the termination of the intra-EU BITs (Termination Agreement). In essence, the Termination Agreement regulates two issues:

  1. how the existing intra-EU BITs are to be terminated, including their sunset clauses, and
  2. how to deal with new, pending and concluded arbitration proceedings.

While the text of the Termination Agreement has not yet been officially published, a draft agreement has been leaked, which will be used for the analysis below.

 

Termination of Intra-EU BITs, Including Sunset Clauses, All at Once

The Termination Agreement simply states that all intra-EU BITs, which are listed in an annex, are terminated by this agreement. In addition, it also states that the sunset clauses contained in the intra-EU BITs “shall not produce legal effects”.

Sunset clauses are provisions that protect investments made prior to the termination of the BIT in question for a certain period, usually for an additional 10-20 years after the termination. The purpose of the sunset clauses is to protect the legal expectations of investors who made their investments based on the existence of the respective BITs.

Moreover, the Termination Agreement further states that the BITs and their arbitration clauses are “inapplicable” from the date on which the last Member State joined the EU, i.e., as of 1 January 2007.

Interestingly, the termination agreement only requires ratifications of two Member States in order to enter into force. Also, a provisional application of the Termination Agreement is envisaged.

Consequently, it can be expected that the Termination Agreement will enter into force within the next months.

 

Concluded Arbitrations Remain Untouched

The Termination Agreement states that all intra-EU BIT arbitrations which were concluded before the Achmea judgment, i.e. before 6 March 2018, will remain untouched. In other words, it does not foresee in a retroactive effect for arbitration proceedings that have definitely been concluded with a final award or settlement agreement prior to Achmea. This will also include an award that has already been issued in the pending proceedings (commenced before 6 March 2018), but not yet definitively enforced or executed, if the investor undertakes not to start proceedings for its recognition, execution, enforcement or payment in a Member State or in a third country or, if such proceedings have already started, to request that they are suspended.

 

The Fate of Pending Disputes

The situation is completely different for pending disputes, meaning arbitration proceedings that were initiated prior to the Achmea judgment, i.e. before 6 March 2018 and which have not yet been concluded.

For these pending disputes, the Termination Agreement provides for a so-called “structured dialogue”. This “structured dialogue” allows the investor to initiate a settlement procedure with the Member State concerned, but only within six months from the termination of the respective BIT.

The settlement procedure is to be overseen by an “impartial facilitator” “with a view of finding between the parties an amicable, lawful and fair out-of-court and out-of-arbitration settlement”.

The facilitator shall be selected by common agreement between the investor and the Member State concerned. Interestingly, besides being independent and impartial, the facilitator must explicitly possess in-depth knowledge of Union law, but not in-depth knowledge of investment law. If the disputing parties fail to agree on a facilitator, an appointing authority, which in the draft text has been left open in brackets, shall appoint the facilitator.

The facilitator shall reach a settlement agreement within six months, but parties can agree to a longer period. It is noteworthy that any settlement agreement must take into account the rulings of the Court of Justice of the EU as well as definite decisions of the European Commission. The latter apparently aims to ensure that State aid Decisions of the European Commission, like the ones in the famous Micula case, are not ignored by the facilitator.

Finally, the Termination Agreement provides that the settlement procedure shall be impartial and confidential.

Interestingly, the Termination Agreement does not explain what happens with the dispute if no settlement agreement has been reached. Is the investor allowed to continue the arbitration proceedings or is the dispute suddenly terminated as well?

Besides the access to a facilitator, the Termination Agreement also mentions access to national courts of the Member States within six months of the termination of the respective BIT, even if the time-limits for bringing actions under domestic laws have expired. However, and at the same time, the Termination Agreement stresses that this possibility shall not be construed as creating “any new judicial remedies, which would not be available to the investor under the applicable national law”.

Consequently, this appears to be a very limited option for investors to bring their claim before domestic courts of Member States, which they could have done in any event but have deliberately chosen not to do in the first place.

 

No “New” Intra-EU Disputes

The Termination Agreement simply states that “arbitration clauses [in intra-EU BITs] shall not serve as legal basis for new arbitration proceedings”. New arbitration proceedings are defined as proceedings initiated on or after 6 March 2018, i.e. post-Achmea judgment. This apparently means that dozens of intra-EU BIT proceedings that were initiated post-Achmea are qualified as null and void by this Termination Agreement, despite the fact that most intra-EU BITs are still in force and legally binding on the Member States. In other words, the Termination Agreement imposes a retroactive effect on arbitration proceedings that have been initiated up to almost two years ago. One can seriously question whether such a retroactive effect is compatible with the Rule of Law and the jurisprudence of the European Court of Human Rights. Indeed, some months ago – regarding a slightly different context – in its Opinion on the investment court system (ICS) as contained in CETA, the Court of Justice explicitly prohibited any retroactive effect of joint binding interpretations of the CETA parties. Therefore, it would have been more appropriate and reasonable to qualify “new” arbitration proceedings as those that are initiated after this Termination Agreement has entered into force.

 

Intra-EU ECT Cases Are not Covered

It is noteworthy that this Termination Agreement explicitly states in the Preamble that it does not apply to intra-EU ECT disputes. Instead, the Termination Agreement states that the Member States will deal with this issue at a later stage, presumably in the context of the on-going modernization process of the ECT.

As is well known, Spain and many other EU Member States are facing dozens of intra-EU ECT claims. Their efforts to convince ECT arbitral tribunals to decline their jurisdiction or to toss out pending cases have not been successful yet.

Therefore, it can be expected that the Member States will try to find ways to escape their legal obligations under the ECT.

 

Conclusion

This Termination Agreement marks the culmination of the European Commission’s and several Member States’ efforts over the past decade to abolish intra-EU investment arbitration proceedings from the European legal order.

Prima facie, the agreement indeed puts a definite end to all pending and new arbitration proceedings that have been initiated post-Achmea, with only very limited transitional measures, which, in addition, are designed to be particularly unattractive to investor-claimants.

However, the question must be asked whether the legal expectations of investors and their rights as contained in those BITs are sufficiently respected. In particular, the way the sunset clauses and all post-Achmea disputes are simply declared null and void as of 2007 is hardly in conformity with the Rule of Law and the Vienna Convention on the Law of Treaties.

After all, the very purpose of the sunset clause is to kick in when the BIT is terminated. If the Member States want to avoid that, they must first take out the sunset clauses in all BITs and then terminate the modified treaties. Indeed, this has been done before on a few occasions.

In sum, while this Termination Agreement, when it enters into force, puts an end to intra-EU BITs disputes within the next few months, several legal aspects raise a number of serious questions as to the conformity with the Rule of Law and the legitimate expectation of investors-claimants, which probably will have to be clarified by domestic courts and eventually the Court of Justice of the EU.

 

More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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