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SIAC Rule 29 On Early Dismissal: How Early Is Early?

Kluwer Arbitration Blog - Fri, 2020-04-10 01:33

Introduction

Rule 29 of the 2016 SIAC Rules (“SIAC Rules”) introduced a procedure for enabling an ‘early’ dismissal of claims and defences. Rule 29 is akin to summary judgment and striking out in common law courts. It is aimed at allowing a tribunal to dismiss patently unmeritorious claims and defences without having to conduct full-fledged proceedings. In this article, the authors discuss the interpretation of two legal standards contained in Rule 29, and conclude by proposing certain changes to the standard of exceptional circumstances under Rule 29.

Standard of manifestly without legal merit

Rule 29 permits an application for early dismissal on the basis that a claim or defence is “manifestly without legal merit.” While “manifestly without legal merit” is not defined in the SIAC Rules, guidance may be drawn from cases which have considered the term “manifestly without legal merit” under Rule 41(5) of the ICSID Rules, from which Rule 29 was adopted.1)See also A PRACTICAL GUIDE TO THE SIAC RULES, Nish Shetty, Harpreet Singh Nehal SC, Kabir Singh; and The 2016 SIAC Rules: New Features, Elodie Dulac (Indian Journal of Arbitration Law, Indian Journal of Arbitration Law, Vol. 5, No. 2, January 2017) jQuery("#footnote_plugin_tooltip_1949_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1949_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Relying on the well-known work tracks of Professor Schreuer in the origin of the word ‘manifest’, ICSID jurisprudence on the interpretation of ‘manifest’ has generally been taken to mean something which is ‘easily understood or recognized by the mind’. The word relates not to the seriousness of the excess or the fundamental nature of the rule that has been violated but rather to the cognitive process that makes it apparent.2)See Christoph H. Schreuer, The ICSID Convention: A Commentary (2001); Referred to at paragraph 85 of the decision of the Tribunal in Trans-Global Petroleum, Inc. v. Hashemite Kingdom of Jordan. jQuery("#footnote_plugin_tooltip_1949_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1949_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

For instance, in the first ever decision made under Rule 41(5) of the ICSID Rules, the tribunal in Trans-Global Petroleum, Inc. v. Hashemite Kingdom of Jordan3) ICSID Case No. ARB/07/25. jQuery("#footnote_plugin_tooltip_1949_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1949_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); found that an applicant would have to “establish its objection clearly and obviously, with relative ease and despatch” in order to prove that the claim in question is manifestly without merit. Similarly, in Brandes Investment Partners, LP v. Bolivarian Republic of Venezuela,4)ICSID Case No. ARB/08/3, Decision on the Respondent’s Objection under Rule 41(5) of the ICSID Arbitration Rules (Feb. 2, 2009) jQuery("#footnote_plugin_tooltip_1949_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1949_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the tribunal considered that the scope of the term ‘manifestly without legal merit’ under Rule 41(5) of the ICSID Rules would include “all objections to the effect that the proceedings should be discontinued at an early stage because, for whatever reason, the claim can manifestly not be granted by the Tribunal.” The tribunal concluded that the objection concerning a legal impediment to a claim could be examined on an expedited basis.

Standard of exceptional circumstances

Another legal standard introduced under Rule 29 is that of “exceptional circumstances.” If a tribunal allows an application for early dismissal to proceed under Rule 29.3, the tribunal is required to make an order or award on the application (for which reasons may be in summary form) within 60 days from the date of filing the application. However, the SIAC Rules do not define what “exceptional circumstances” would justify an extension of the time for a tribunal to render an order or award in an early dismissal application.

By way of comparison, Rule 9.8 permits the LCIA Court to extend the 14-day deadline for an emergency arbitrator to decide an emergency relief, in “exceptional circumstances”. Whilst LCIA has set out through certain case studies, what circumstances could constitute an “exceptional urgency” in the LCIA Notes on Emergency Procedures, no comparable exercise has been undertaken to enlist potential scenarios on the interpretation of “exceptional circumstances” in terms of Rule 9.8. Looking at another example, Article 37(c) of WIPO Rules permits the tribunal to extend deadlines set in the arbitral procedure, in “exceptional cases”, and in “urgent cases”. The Commentary on WIPO Arbitration Rules sets out that what constitutes an “exceptional circumstance” for the purposes of Article 37(2), is a matter which is decided by the tribunal in consultation with the parties. The Commentary goes on to note that “…it is difficult to express in the abstract what qualifies as ‘exceptional circumstances’. Some element of unpredictable circumstances will need to be present…

In addition to the above, the expression “exceptional circumstances” has been considered by the courts of England. In Haven Insurance Company Ltd. v. EUI Limited (T/A Elephant Insurance),5)[2018] EWCA Civ. 2494 jQuery("#footnote_plugin_tooltip_1949_5").tooltip({ tip: "#footnote_plugin_tooltip_text_1949_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the English Court of Appeal departed from the usual position that parties should comply with contractual time bars in bringing arbitration proceedings. This was because the facts of the case involved ‘quite exceptional circumstances’ in which the established custom of the Technical Committee (that heard the dispute between the parties) allowed a period of 30 days to file an appeal from the date of the minutes passed by the Technical Committee.

Similarly, in P v. Q,6) [2018] EWHC 1399 (Comm.) jQuery("#footnote_plugin_tooltip_1949_6").tooltip({ tip: "#footnote_plugin_tooltip_text_1949_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The High Court of England and Wales granted an extension of time in terms of Section 12(3) of the Arbitration Act, 1996 in circumstances that were “relatively exceptional”. In both these cases, the English courts also took the view that in order to ascertain what qualifies as “exceptional circumstances”, there has to be an element of unpredictability.

From the broad review of the interpretations of ‘exceptional circumstances’ the authors’ view is that an “exceptional circumstance” must be one that is unpredictable, i.e. something that the parties / the tribunal could not have foreseen.

Proposed changes relating to the standard of exceptional circumstances

The authors, having been involved in separate early dismissal proceedings under Rule 29, were faced with a situation where several simpliciter extensions were granted under Rule 29.4. The respective proceedings lasted for a period of almost five months. Interestingly, six months is the time period prescribed for completion of expedited proceedings under the SIAC Rules. Accordingly, the authors propose certain changes in an attempt to address this.

In order to give practitioners and parties some insight into what “exceptional circumstances” would warrant an extension under Rule 29, SIAC could consider drawing from the LCIA Notes on Emergency Procedures and provide ‘Case Studies’ to supplement Rule 29. The SIAC Annual Reports for 2017, 2018 and 2019 suggest that as on December 2019, SIAC received a total of 30 applications under Rule 29. Of these, 9 were allowed to proceed. As on date, 2 out of the 9 applications are yet to be decided. It is unknown whether the other 7 applications were decided within the prescribed 60-day timeline. If not, SIAC could analyse the circumstances which caused the grant of extensions in passing the order / award and set them out as ‘Case Studies’.

Further when extending the time for passing an order/ award on applications under Rule 29, SIAC could set out, at the least, reasons in brief regarding what unusual circumstances beyond the control of the tribunal made it impossible to render the award within 60 days. The authors have independently identified some circumstances which may warrant the extension of timelines under Rule 29:

  • A party challenges the appointment of an arbitrator;
  • The Registrar receives an application for joinder/ consolidation under the SIAC Rules; and
  • Certain new evidence which was not available to the parties for justifiable reasons (e.g. documents which were earlier not or could not have been in the possession or control of the party) at the time of completion of pleadings/ arguments, under Rule 29.

More importantly, hectic schedules and/or excessive workload of arbitrators should not qualify as an “exceptional circumstance” for the purpose of extending the 60-day time limit for making an order or award.

Alternatively, SIAC could consider re-wording the language used in Rule 29.4. The rule can account for the grant of a simpliciter extension of the 60-day time limit, by subjecting such an extension to the discretion of the Registrar. The SIAC Rules confer discretionary powers upon SIAC’s President,7) Rules 9 and 17 of the 2016 Rules jQuery("#footnote_plugin_tooltip_1949_7").tooltip({ tip: "#footnote_plugin_tooltip_text_1949_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); SIAC’s Registrar,8) Rule 34.7 of the 2016 Rules jQuery("#footnote_plugin_tooltip_1949_8").tooltip({ tip: "#footnote_plugin_tooltip_text_1949_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); as well as tribunals9) Rules 18, 19.4 and 29.3. jQuery("#footnote_plugin_tooltip_1949_9").tooltip({ tip: "#footnote_plugin_tooltip_text_1949_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); constituted under the Rules. Rule 29.4 could simply be brought in line with such rules of discretion.

Either way, any departure from the specified timeline in Rule 29 should be justified with transparency, which would contribute towards the development and clear understanding of this summary procedure in the context of commercial arbitration.

 

References   [ + ]

1. ↑ See also A PRACTICAL GUIDE TO THE SIAC RULES, Nish Shetty, Harpreet Singh Nehal SC, Kabir Singh; and The 2016 SIAC Rules: New Features, Elodie Dulac (Indian Journal of Arbitration Law, Indian Journal of Arbitration Law, Vol. 5, No. 2, January 2017) 2. ↑ See Christoph H. Schreuer, The ICSID Convention: A Commentary (2001); Referred to at paragraph 85 of the decision of the Tribunal in Trans-Global Petroleum, Inc. v. Hashemite Kingdom of Jordan. 3. ↑ ICSID Case No. ARB/07/25. 4. ↑ ICSID Case No. ARB/08/3, Decision on the Respondent’s Objection under Rule 41(5) of the ICSID Arbitration Rules (Feb. 2, 2009) 5. ↑ [2018] EWCA Civ. 2494 6. ↑ [2018] EWHC 1399 (Comm.) 7. ↑ Rules 9 and 17 of the 2016 Rules 8. ↑ Rule 34.7 of the 2016 Rules 9. ↑ Rules 18, 19.4 and 29.3. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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The Republic of Palau Accedes to the New York Convention

Kluwer Arbitration Blog - Thu, 2020-04-09 23:30

On 31 March 2020, the Republic of Palau (“Palau”) became the 163th state to accede to the United Nations Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958 (the “Convention”).1)The authors were engaged by the Asian Development Bank (“ADB”) as part of a team of experts to advise on Palau’s accession to the Convention and continue to assist the ADB with the drafting of Palau’s international arbitration legislation. This is part of a broader technical assistance project promoting international arbitration reform in the South Pacific overseen by the ADB’s Office of the General Counsel’s Law and Policy Reform Program and led by Christina Pak, principal counsel at the ADB. The project includes other countries in the South Pacific such as Fiji, Papua New Guinea, Samoa, Timor Leste and Tonga. jQuery("#footnote_plugin_tooltip_8465_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8465_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Pursuant to Article XII (2) of the Convention, it will enter into force for Palau on 29 June 2020, 90 days after the deposit of its instrument of accession. Palau’s accession to the Convention has been previously reported here.

Palau becomes the 5th state in the Pacific region to accede to the Convention, after Fiji, the Cook Islands, the Marshall Islands and Papua New Guinea. As recognized in the Joint Resolution to ratify the Convention passed by the Palau House of Delegates on 27 January 2020, this significant development sends a powerful signal to potential trading partners and investors that Palau is committed to enforcing and respecting the rights of foreign parties doing business in Palau.

 

Background

Palau is a small island state with slightly over 20,000 people, located in the Northern Pacific, roughly between the Philippines and Guam. Originally the subject of competing claims by Spain, Germany and then Japan, in 1947, after the Second World War, Palau became a part of the United Nations Trust Territory of the Pacific Islands administered by the United States.  Palau became independent in 1994, although the United States still provides financial aid and undertakes responsibility for Palau’s defence under a Compact of Free Association.

Palau’s legal system is modelled after that of the United States. Palau has a federal system with sixteen states, but the national government retains all powers not expressly delegated to individual state governments.  Under Section 303 of the Palau National Code, the “rules of the common law, as expressed in the restatements of the law approved by the American Law Institute and, to the extent not so expressed, as generally understood and applied in the United States, shall be the rules of decisions in the courts of [Palau].” Palauan courts therefore often look towards United States jurisprudence for guidance, although they are not bound to do so in every case, particularly where a local statute applies, and Palauan law has developed in a number of independent directions.

 

Arbitration in Palau

Palau does not currently have an arbitration law in place that sets out a legal framework for supervising arbitration proceedings that are seated in Palau, or that regulates the enforcement of international arbitration agreements or foreign arbitral awards. However, arbitration is referred to under several discrete laws as a method of dispute resolution. For instance, Section 861 of the Palau National Code sets out an arbitration procedure for labour disputes between crew members and vessel owners and provides for the enforcement of such arbitral awards. Section 7 of the Petroleum Act also sets out an arbitration procedure for disputes between the holder of a license issued pursuant to this Act and the national or state governments in Palau.

In the absence of a statutory framework, Palauan courts have applied United States arbitration law principles, pursuant to Section 303 of the Palau National Code, in their resolution of arbitration-related issues. Thus, for example, in Haruo v Resort Trust, Inc., 17 ROP 234 (2010), the Palauan Supreme Court applied United States case law to determine whether the defendant’s participation in litigation and delay in seeking arbitration constituted a waiver of its right to arbitrate under an arbitration agreement.

 

Accession and Next Steps

Following accession, Palau will need to establish a predictable and effective supervisory statutory regime that regulates international arbitration and provides for the enforcement of arbitration agreements and arbitral awards in accordance with the terms of the Convention. The application of United States case law is an imperfect solution, particularly given that much of that case law is based on the United States Federal Arbitration Act, which has no equivalent in Palau. Without an arbitration statute, for example, Palau lacks clear statutory guidance for courts on when they are required to refer disputes subject to an international arbitration agreement to arbitration, including the definition of an “arbitration agreement.” Palau also lacks statutory provisions that provide guidance to courts on the permissible grounds for refusal of enforcement of an arbitral award.

A modern international arbitration statute that is based on international best practices will go some way towards fulfilling Palau’s objectives of attracting international commerce and foreign investment. The UNCITRAL Model Law on International Commercial Arbitration is a tested and well-established model for legislative reform. It is a modern and comprehensive legislative template and is the easiest way for states to assure all parties and arbitration practitioners about the quality of its arbitration legislation. A number of Palau’s larger neighbours, including Fiji and Papua New Guinea, have recently adopted, or are in the process of adopting, legislation based in the UNCITRAL Model Law.

Since the most recent revision of the UNCITRAL Model Law in 2006, there have been a number of significant trends and developments in international arbitration. Palau should also consider a number of modifications, based on international best practices and consistent with the UNCITRAL Model Law, including (i) provisions expressly dealing with the liability and immunity of arbitrators, appointing authorities and institutions; (ii) provisions addressing representation in arbitral proceedings; (iii) provisions expressly setting out an obligation of confidentiality and the exceptions thereto; and (iv) provisions permitting the enforcement of orders or awards made by emergency arbitrators. All of these modifications have been included in Fiji’s International Arbitration Act 2017 and the recently published Papua New Guinea Arbitration Bill 2019 (not in force yet), which are both based on the UNCITRAL Law and provide a template for legislative reform in Palau.

Throughout this process, policy considerations specific to Palau and its unique environment should not be overlooked. Particularly given the importance of the scuba diving and snorkelling tourism sector and the fishing sector to Palau’s economy, careful consideration must be given to the environmental impacts of foreign investment. At the same time, these considerations will need to be balanced against the importance of ensuring a stable and predictable business environment for foreign investment, which can contribute to the flourishing of Palau’s economy and investments in climate adaptation mechanisms.

 

Future Directions  

Palau’s accession to the Convention is a very welcome step. This opens the door for future work, including the development of a statutory arbitration regime, to ensure Palau enjoys the economic benefits that should come with its accession to the Convention. Meanwhile, the authors and the Asian Development Bank will continue to assist Palau as it works to strengthen local institutional capabilities and to educate businesses and lawyers on the use of arbitration. This will ensure that Palauan businesses and lawyers reap the potentially significant benefits of Palau’s accession to the Convention.

References   [ + ]

1. ↑ The authors were engaged by the Asian Development Bank (“ADB”) as part of a team of experts to advise on Palau’s accession to the Convention and continue to assist the ADB with the drafting of Palau’s international arbitration legislation. This is part of a broader technical assistance project promoting international arbitration reform in the South Pacific overseen by the ADB’s Office of the General Counsel’s Law and Policy Reform Program and led by Christina Pak, principal counsel at the ADB. The project includes other countries in the South Pacific such as Fiji, Papua New Guinea, Samoa, Timor Leste and Tonga. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Dispute Prevention and Early Dispute Resolution Framework

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Dispute Resolution in the India-Brazil BIT: Symbolism or Systemic Reform?

Kluwer Arbitration Blog - Wed, 2020-04-08 23:00

On 25 January 2020, India and Brazil signed an investment agreement  (the “India-Brazil BIT”). As an agreement that has been signed at the dawn of the new decade, it is symbolic for a few reasons. First, it is a south-south agreement between two large and growing economies. Second, it abandons investor-state arbitration in favor of state-to-state arbitration with an increased focus on dispute prevention. Third, unlike most investment agreements, it expressly provides that a tribunal cannot award compensation. Instead, it only permits a tribunal to interpret the BIT or order conformity of any noncomplying measure—a move potentially inspired from the WTO dispute settlement mechanism.

The India-Brazil BIT marks a significant shift from the decades-old practice of investor-state arbitration. This BIT instead brings dispute prevention to the center stage with the adversarial form of dispute resolution being a secondary consideration. Further, the adversarial form (by way of an arbitration) is available only between the states party to the treaty, reminiscent of traditional rules of diplomatic protection. This is even reflected in the Preamble, in which India and Brazil note their intention of: “Seeking to maintain a dialogue and foster government initiatives that may contribute to an increase in bilateral investments.” Consequently, the investor has no right under the India-Brazil BIT to directly bring a claim against a state.

 

The Global Rethink on Investor-State Arbitration

This approach of abandoning or moving away from investor-state arbitration is not anachronistic, even though it may appear so. Rather, it is a sentiment that is currently being shared by both the developing and developed world alike. There is a global rethink on investor-state arbitration today. Since 2017, UNCITRAL Working Group III has been evaluating different options for the reform of investor-state arbitration. In Europe, the European Commission has decided to cancel all intra-EU BITs. More than 168 BITs, including their sunset clauses, will terminate if/when the new multilateral treaty is ratified. There is also a proposal by the European Commission to replace investor-state arbitration with a court structure. Similarly, the EU-Canada CETA and EU’s agreements with Singapore, Vietnam, and Mexico adopt an Investment Court System to represent “a new EU approach to investment-related disputes eliminating the risk of abuse and safeguarding the right to regulate in the public interest.” Similarly, since 2018, ICSID has published a set of proposed changes to modernize its rules. Likewise, other countries are redrafting their model BITs, with several recent examples from countries such as Ecuador, Colombia, and the Netherlands, among others.

 

Dispute Resolution in the India-Brazil BIT: More Brazilian than Indian?

India and Brazil (both BRICS countries) have redrafted their model BITs in the recent past after elaborate consultations and discussions. Regarding the dispute resolution model, both countries adopt very different approaches. Where India’s Model BIT permits investor-state arbitration, this is only possible after an investor has exhausted local remedies before domestic courts for five years. The Brazil Model BIT abandons investor-state arbitration to create instead a unique scheme to resolve disputes through joint consultations, failing which it provides for state-to-state arbitration. This model is evocative of traditional rules of diplomatic protection in international law. An earlier post on the Blog discusses how the India-Brazil BIT varies from the India Model BIT. The India-Brazil BIT retains features from both the model BITs while also adding new elements. The approach to dispute prevention and resolution, however, appears to be influenced by the Brazilian Model BIT. Under Art. 18 of the India-Brazil BIT, any state that believes a specific measure constitutes a breach of the BIT can refer the matter to a Joint Committee comprising government representatives of both parties (the “Dispute Prevention Procedure”). Such Joint Committee can recommend findings in relation to the alleged breach of the BIT. The referral can relate to a general measure or can be in relation to a specific investor and, if it is in relation to the latter, representatives of the affected investor “may be invited to appear before the Joint Committee” (Art. 18(3)(b)). If the dispute cannot be resolved through the Dispute Prevention Procedure, the matter may be referred to arbitration between the states if both parties mutually agree to do so (Art. 19).

 

Prohibition on Compensation in the India-Brazil BIT

The dispute resolution clause of the India-Brazil BIT may appear to be similar to the Brazilian Model BIT, but it is different on one crucial point. It expressly takes away the power of the tribunal to award any compensation. The Brazil Model BIT in Art. 24.13 provides that the states may enter into a specific arbitration agreement and request an arbitration tribunal to examine the existence of damages and establish compensation for such damages through an arbitration award. Art. 24.13(c) further states that if the arbitration award provides monetary compensation, the state receiving such compensation shall either transfer to the holder of rights of the investment or request the arbitral tribunal to order the transfer of compensation directly to the holders of rights. However, the India-Brazil BIT does not stipulate the possibility of any specific agreement by way of which an arbitration tribunal may award any sort of compensation to either of the parties. Rather, the language appears to be prohibitory in nature. The table below contrasts the approach for dispute resolution among the various instruments in relation to the power to award monetary compensation:

India Model BIT Brazil Model BIT India-Brazil BIT “A tribunal can only award monetary compensation for a breach of the obligations under Chapter II of the Treaty. Monetary damages shall not be greater than the loss suffered by the investor or, as applicable, the locally established enterprise, reduced by any prior damages or compensation already provided by a Party.” (Art. 26.3)

  “[T]he Parties may, through a specific arbitration agreement, request the arbitrators to examine the existence of damages caused by the measure in question under the obligations of this Agreement and to establish compensation for such damages through an arbitration award.” (Art. 24.13) “The purpose of the arbitration is to decide on interpretation of this Treaty or the observance by a Party of the terms of this Treaty. For greater certainty, the Arbitral Tribunal shall not award compensation.” (Art. 19(2))

The clause in the India-Brazil BIT appears to be inspired by the WTO regime where the Dispute Settlement Body appoints panels that decide whether disputed trade measures break a WTO agreement or an obligation. It recommends measures to conform with the WTO rules and how this could be done. It does not, however, award any compensation to either of the disputing parties. It remains to be seen whether remedies under customary international law such as restitution are available if they could be couched as matters dealing with the “interpretation” or “observance by a party of the terms of this Treaty” under Article 19 of the India-Brazil BIT. What is clear is that this BIT seeks to promote a dialogue between the states to resolve any outstanding issues even after they have been interpreted by the arbitration tribunal.

 

Evaluating the Dispute Resolution Mechanism

Critics might note that the exclusion of the possibility of investor-state arbitration requires investors to depend on diplomatic avenues between states to resolve their disputes. This they argue may hamper investor sentiment and prevent further investments. For example, an investor will likely need to have a good relationship with its state machinery to be able to persuade it to initiate a dispute on its behalf. The home state’s decision to engage with the host state may also depend on several other factors such as: the relationship with the other state at the time when a dispute has arisen; the political climate within both the states; and other deals which may be in the pipeline between both the states, giving either one of them a better bargaining power.

Others would counter that Brazil is an example of a growing economy that continues to receive substantial investments without ever having ratified a treaty providing for investor-state arbitration. Similarly, after finalizing its revised Model BIT, India sent notices terminating or not renewing BITs that had expired to at least 57 countries. The revised Indian Model BIT was largely a result of a spate of claims against India after it lost the White Industries case. The change in India’s approach towards investor-state arbitration has not necessarily hindered its image as a lucrative destination for foreign investment. India was among the top ten recipients of foreign investment in 2019. Similarly, it is among the world’s top ten improvers in the World Bank’s Doing Business report for the third consecutive year, being the only large economy to maintain the streak in the last two reports.

The efficacy of this genre of BITs remains to be established, but as is evident, states appear to be interested in testing new water. Several countries are creating and adopting different models for dispute resolution, including maintaining investor-state arbitration, abandoning investor-state arbitration, or restricting investor-state arbitration. The India-Brazil BIT fits into this narrative and provides another model for consideration to the global community. Ultimately it remains to be seen which model will prevail in this highly polarized debate. As stated by Michael J. Gelb, “Confusion is the welcome mat at the door of creativity.”

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Investment Treaty Claims in Pandemic Times: Potential Claims and Defenses

Kluwer Arbitration Blog - Wed, 2020-04-08 02:00

In response to the escalating COVID-19 crisis, States around the world have taken a variety of measures seeking to stem the spread of COVID-19 and to provide for medical supplies and protective equipment, including emergency declarations empowering governments to take control of private businesses, closure of borders, quarantines, stay-at-home orders, suspension of mortgage and utility payments, closure of non-essential businesses, and in some cases, export controls. While States have begun to undertake measures to support their citizens and businesses, it is likely that some foreign investors may seek relief and/or compensation for any losses resulting from State measures. In this post we analyze the main substantive treaty standards that could become the basis for claims arising out of State measures regarding COVID-19, and address potential public health defenses for host States. If investors are able to establish violations of substantive treaty obligations, States may also have defenses based on treaty-specific exceptions or under customary international law.

 

Fair and Equitable Treatment (FET) and Full Protection and Security (FPS)

The fair and equitable treatment standard is one of the most invoked substantive standards in investment treaty arbitrations, and encompasses both procedural and substantive elements.

Procedurally, fair and equitable treatment requires a State to afford due process to investments. One tribunal has determined that a State is required to “act in a consistent manner, free from ambiguity and totally transparently” in relation to foreign investors (Tecmed v. Mexico, ¶ 154).  Under such a strict view, State responses downplaying the risks of COVID-19 and subsequently reversing course and imposing drastic measures could violate the fair and equitable treatment standard. For example, in Azurix v. Argentina the State’s misrepresentation of its failure to remove algae contributed to a water quality crisis and was a consideration for finding a breach of fair and equitable treatment standard (¶¶ 143, 374).

Substantively, tribunals differ on the degree of deference they afford to States when evaluating measures aimed to protect public interests. Under a proportionality approach, State conduct could violate the fair and equitable treatment standard if the tribunal determines that a State’s interference with the investment was not proportionate in light of the public interest pursued by State policy (Occidental v. Ecuador II, ¶ 338). Moreover, a tribunal is more likely to find that a discriminatory measure, such as any arbitrary border closures, violates the fair and equitable treatment standard.

A related standard, often contained in the same treaty provision, obligates the host State to provide “full protection and security” for investors and their investments. Once aware of risks to investments, the host State is required to “take all measures of precaution to protect the investment” in its territory. (AMT v. Congo, ¶ 6.05; see also Wena Hotels v. Egypt, ¶¶ 85, 131).  While such “protection and security” is predominantly concerned with the State’s due diligence obligations to ensure physical security of investments, some tribunals have given weight to the term “full” and indicated that “security” cannot be confined to physical security (Biwater Gauff v. Tanzania, ¶ 729). A State’s failure to take early measures to contain the spread of the virus could violate this obligation to provide “full protection and security” if such failure necessitated avoidable and drastic State measures at a later time period that harmed the investments significantly.  See, for example,  Azurix v. Argentina, where the State’s disinvestment in infrastructure contributed to the crisis on water quality (¶¶  144, 408).

 

Expropriation

Expropriation claims under investment treaties include both direct expropriation and indirect expropriation. While direct expropriation—the State’s outright seizure or assumption of legal title over the assets without adequate compensation—is relatively rare nowadays, State measures having the equivalent effect, resulting in effective control or interference with the use, value, or benefit of the investment, can constitute indirect expropriation.

To determine whether an indirect expropriation occurred, some tribunals adopt a “sole effects” approach, looking at whether the investor is being deprived of the “use or reasonably-to-be-expected economic benefit of property.” (Metalclad v. Mexico, ¶ 103). Even under this relatively expansive approach, the loss of value must “amount to a deprivation of property” before a claim for indirect expropriation can be established (Charanne v. Spain, ¶ 464).

Moreover, while “ephemeral” deprivation of property would not constitute indirect expropriation, and such determination is likely context-specific, tribunals have found the suspension of an export license for four months (Middle East Cement v. Egypt, ¶ 107), and investor’s loss of control of property for one year (Wena Hotels v. Egypt, ¶ 82) can constitute indirect expropriation. If the seizure of a private production lines to produce medical equipment, as the Spanish government now is empowered to do and the U.S. has done under the Defense Production Act, lasts for a sufficiently long period of time without adequate compensation,  investors could have a claim for unlawful indirect expropriation.

As more countries follow Spain’s lead in taking control of private hospitals and clinics, investors in the healthcare industry could also have indirect expropriation claims if turning over control was involuntary. Similarly, if the State does not return control after the end of the outbreak or if the State’s control left permanent harm to the investment, investors could also have a claim for indirect expropriation.

A series of State measures over a period of time amounting to such a result can also constitute indirect expropriation in the form of a “creeping expropriation” (Generation Ukraine Inc. v. Ukraine, ¶ 20.22). Therefore, under this approach if a series of COVID-19 measures, such as border closures or lockdown orders, results in the investment shutting down permanently, the investor could have a claim for indirect expropriation.

Some tribunals consider not only the effect of State measures, but also its purpose and characteristics (Feldman v. Mexico). Under such an approach, it is less likely that State measures aimed to protecting its population from COVID-19 would amount to indirect expropriation.

On the other hand, as States are weighing nationalization options, foreign investors could have a strong claim for expropriation if a State, taking advantage of plummeting commodity and stock prices, nationalizes or engages in a forced bailout of businesses not directly related to its responses to COVID-19, such as airlines, utilities and natural resources companies. Forced bailout at a low price by the State can give rise to compensation claims when the values of such companies recover at a later point (See Ping An v Belgium: Belgian government’s forced bailout of Fortis gave rise to BIT claims).

 

National Treatment

The national treatment standard deals with situations where the host State affords less favorable treatment, either de facto or de jure, to a foreign investor compared to a domestic investor in similar situations. Analysis under this standard generally depends on a tribunal’s interpretation of “similar situations.”  While border closures to non-citizens may on its face raise a national treatment claim, a tribunal could consider justification such as the more fundamental right of a citizen to enter its own country.

In determining comparable investments, tribunals may look to competitive relationships of different products or industries (Cargill v. Mexico, ¶ 211). Therefore, bailout measures that only support certain domestic industries but not industries with significant foreign investments with a competitive relationship may constitute a violation of the national treatment standard.

 

Public Health Defenses

In defending an investment treaty claim, a State could seek to justify its measures to protect the public health. Some more recent investment treaties, such as Canada-EU Trade Agreement, offer a carve-out for non-discriminatory regulatory measures aimed to protecting legitimate public welfare objectives, such as public health. Some tribunals could analyze a State’s pursuit of public health interests and therefore adopt a balancing approach in evaluating a claim for breach of substantive treaty obligations.

Overall, tribunals almost certainly will need to consider the pursuit of public health as a legitimate State goal. But investors may be able to argue that (1) the State measures in pursuant of public health were discriminatory, and therefore cannot be justified on that ground; (2) public health was used as a pretext for another motive in the attempt to justify certain aspects of a State’s COVID-19 related measures, such as community pressure (Tecmed v. Mexico) or electoral motivations (Azurix v. Argentina), as would be the case if a State nationalizes airlines, utilities companies, or natural resources industries controlled by foreign investors during COVID-19; (3) State actions worsened the extent of the crisis and therefore harmed the investments at a later time (Azurix v. Argentina); or that (4) States could have adopted measures to fulfill both investment obligations and its obligations to protect the public health (AWG v. Argentina).

 

Lucas Bento FCIArb FRSA is Of Counsel at Quinn Emanuel Urquhart & Sullivan LLP’s New York office.  Jingtian Chen is an associate at the firm.  The views expressed in this post are the authors’ personal views, and do not reflect the opinions of Quinn Emanuel or of its clients.  The authors would like to sincerely thank the heroic work done by healthcare workers in these challenging times.

 

The Kluwer Arbitration Blog is closely following the impact of COVID-19 on the international arbitration community, both practically and substantively.  We wish our global readers continued health and success during this difficult time.  All relevant coverage can be found here

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