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TWN Info Service on WTO and Trade Issues (Apr13/05)
23 April 2013
Third World Network  

Dear friends and colleagues,

Please find below a report by the South-North Development Monitor (SUNS) dated 17 April, 2013, shedding light on important findings by the United Nations Conference on Trade and Development (UNCTAD) over the rise of international investment disputes.

In its report entitled "Recent Developments in Investor-State Dispute Settlement (ISDS)", UNCTAD said it found that the total number of known treaty-based Investor-State dispute settlement (ISDS) cases rose to 518 by the end of 2012. Since most arbitration forums do not maintain a public registry of claims, the total number of cases is likely to be higher.

In particular, 2012 saw:

  • 62 new ISDS cases initiated, the highest number of known treaty-based cases ever filed in one year under international investment agreements (IIAs);
  • 68% (42 out of 62) of the new cases involved governments of developing- and transition economies as respondents;
  • 63% (39) of the new cases brought on by developed country investors;
  • 70% (17) of the public decisions addressing the merits of the dispute saw investors' claims being accepted, at least in part, reflecting the highest percentage of rulings against the State; and
  • US$1.77 billion was awarded to Occidental in its case against Ecuador, the highest award in the history of ISDS, from a case that arose out of a unilateral termination by the State of an oil contract.
    ISDS arbitrations have been initiated most frequently by claimants from the US (123 cases, or 24% of all known disputes), the Netherlands (50 cases), the UK (30) and Germany (27). The three investment instruments most frequently used as a basis for ISDS claims have been NAFTA (49 cases), the Energy Charter Treaty (29) and the Argentina-United States BIT (17).

The UNCTAD report emphasises a number of cross-cutting issues and concerns that have been brought to light on account of the developments in ISDS in 2012:

  • The issue of transparency of ISDS, as ISDS proceedings generally have been characterised by a high level of confidentiality; the very existence of a dispute has frequently been unknown;
  • The persistence of divergent and contradictory findings by arbitration tribunals having different interpretations of the same or similar investment provisions;
  • The persistence in 2012 of investor claims, or threats, against governments over measures introduced on environmental grounds as well as over governments’ crisis-related and financial austerity measures; and
  • The practice of involving specialised firms to finance IIA claims against States in exchange for a share in a possible future award or settlement in favour of the claimant.

Accordingly, said UNCTAD, the public discourse about the usefulness, legitimacy and deficiencies of the ISDS mechanism is gaining momentum, especially given that the ISDS mechanism is on the agenda in numerous bilateral and regional investment agreement negotiations.

The UNCTAD calls for a multilateral policy dialogue that could help to develop a consensus about the preferred course for reform of ISDS and ways to put such reform into action.

It is noteworthy that the concerns raised in the UNCTAD report will also apply to the ISDS contained in the investment chapter of bilateral trade agreements and the Trans Pacific Partnership Agreement.

With best wishes,

Third World Network

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United Nations: International investment disputes on the rise

Published in SUNS #7568 dated 18 April 2013

Geneva, 17 Apr (Kanaga Raja) -- The year 2012 saw the highest number of known treaty-based investor-State dispute settlement (ISDS) cases ever filed in one year under international investment agreements (IIAs), according to the United Nations Conference on Trade and Development (UNCTAD).

In its report, "Recent Developments in Investor-State Dispute Settlement (ISDS)" - available at www.unctad.org/diae - UNCTAD said that with 62 new cases initiated last year, foreign investors are increasingly resorting to investor-State arbitration.

Among the main findings of the report are that in 68% of the new cases, respondents are developing or transition economies. While the number of cases initiated by developing country investors has increased, the majority of new cases (63%) still originate from developed countries, it said.

According to UNCTAD, claimants have challenged a broad range of government measures, including those related to revocations of licences, breaches of investment contracts, irregularities in public tenders, changes to domestic regulatory frameworks, withdrawal of previously granted subsidies, direct expropriations of investments, tax measures and others.

In 70% of the public decisions addressing the merits of the dispute, investors' claims were accepted, at least in part. Nine public decisions rendered in 2012 awarded damages to the claimant, including the highest award in the history of ISDS (US$1.77 billion) in Occidental v. Ecuador, a case arising out of a unilateral termination by the State of an oil contract.

"Recent developments have amplified a number of cross-cutting challenges that are facing the ISDS mechanism, which gives credence to calls for reform of the investment arbitration system," James Zhan, Director of UNCTAD's Division on Investment and Enterprise, said in a press release.

"The ISDS mechanism is already a source of considered reflection in numerous bilateral and regional IIA negotiations. However, a multilateral dialogue on ISDS could prove more effective in bringing about a harmonised approach to reform," he added.

According to the press release, ISDS proceedings are provided for by a majority of the 3,200 international investment agreements in existence today.

According to UNCTAD, in 42 of the 62 new cases initiated in 2012, respondents are developing or transition economies and in 15 cases they are developed countries. For five cases, the respondent country is unknown.

In 2012, Venezuela, for the second consecutive year, responded to the largest number of cases (9); followed by India (7); Pakistan (4); Algeria, Egypt and Hungary (3 each). In 2012, Belgium, Equatorial Guinea, Republic of Korea and Laos faced their first ISDS claims.

Of the 62 new cases, 39 were filed by investors from developed countries. Of these 39 cases, 29 were against developing countries or economies in transition; the remaining ten cases were by investors from developed countries against host developed countries.

UNCTAD said that 2012 also witnessed a surge in the number of cases filed by investors from developing countries (17, compared to nine in 2011). For six cases, the investor's home country remains unknown.

The year 2012 further saw at least eight new intra-EU investment disputes, i.e. claims by EU investors against EU Member States, which brought the overall number of such claims to 59.

Of the eight new claims, two were brought pursuant to the Energy Charter Treaty (to which all Member States are party) and the other six pursuant to provisions of intra-EU bilateral investment treaties (BITs). Hungary was the most popular respondent, having to cope with three new intra-EU claims.

The total number of known treaty-based cases rose to 518 by the end of 2012, and since most arbitration forums do not maintain a public registry of claims, the total number of cases is likely to be higher, said UNCTAD.

The majority of cases have been brought under the International Centre for Settlement of Investment Disputes (ICSID) Convention and the ICSID Additional Facility Rules (314 cases) and the UN Commission on International Trade Law (UNCITRAL) Rules (135).

In total, said UNCTAD, over the past years, at least 95 governments have responded to one or more investment treaty arbitration: 61 developing countries, 18 developed countries and 16 countries with economies in transition.

"Argentina continues to be the most frequent respondent (52 cases) followed by Venezuela (34), Ecuador (23) and Mexico (21)," it noted.

Investor-State arbitrations have been initiated most frequently by claimants from the United States (123 cases, or 24% of all known disputes), the Netherlands (50 cases), the United Kingdom (30) and Germany (27), and the three investment instruments most frequently used as a basis for ISDS claims have been NAFTA (49 cases), the Energy Charter Treaty (29) and the Argentina-United States BIT (17).

In 2012, ISDS tribunals rendered at least 42 decisions in investor-State disputes, 31 of which are in the public domain (at the time of writing).

Of the 31 public decisions, twelve addressed jurisdictional issues, with seven decisions upholding the tribunal's jurisdiction (at least in part) and five decisions rejecting jurisdiction.

Seventeen decisions on the merits were rendered in 2012, with twelve accepting - at least in part - the claims of the investors, and five dismissing all of the claims.

"Compared to previous years, this represents a higher percentage of rulings against the State," stressed UNCTAD.

Of the twelve decisions finding State's liability, six found a violation of the FET (fair and equitable treatment) provision, five of the expropriation provision, two of the umbrella clause and one of the prohibition of certain performance requirements.

At least nine decisions rendered in 2012 awarded compensation to the investor, among them the highest award in the history of ISDS. Some decisions on liability have postponed the question of damages to the next phase of the arbitration.

The report found that at least nine decisions rendered in 2012 awarded damages to the investor. The highest amount - which also represents the highest known award of damages in the history of investment treaty arbitration - featured in Occidental v. Ecuador II where the investor was awarded US$1.77 billion plus pre- and post-award compound interest by the majority of the tribunal.

In EDF v. Argentina, the claimant was awarded US$136.13 million plus compound interest, while in Deutsche Bank v. Sri Lanka, the claimant was awarded US$60.36 million plus interest. In SGS v. Paraguay, the claimant was awarded US$39.02 million plus interest and in RDC v. Guatemala, the claimant was awarded US$11.2 million plus compound interest.

Smaller awards were granted in Marion and Reinhard Unglaube v. Costa Rica (US$3.1 million plus interest), Renta 4 v. Russia (US$2 million plus compound interest), Antoine Goetz v. Burundi (US$2 million plus interest), and Swisslion v. Macedonia (350,000 euros plus compound interest).

UNCTAD emphasised that developments in ISDS in 2012 have brought to light a number of cross-cutting issues and concerns.

Among these is the issue of divergent findings in that different interpretations of the same or similar International Investment Agreement (IIA) provisions persist.

According to UNCTAD, a vivid example for 2012 is the "umbrella" clause – a clause which obliges the contracting States to honour commitments extended to individual investors (e.g. by means of investment contracts).

It found that tribunals adopted contradictory decisions on three key issues: (i) whether an IIA claim under the umbrella clause can proceed if the underlying investment contract sets out its own dispute resolution mechanism; (ii) whether the relevant State conduct must be an exercise of sovereign powers (ius imperii); and (iii) whether the parties in IIA arbitration need to be the parties to the investment contract concerned (i.e. for example whether it is enough for the claimant in the IIA arbitration to be a majority shareholder in the company that concluded an investment contract with the State).

"Sometimes, divergent outcomes can be - at least partially - explained by the differences in wording of a specific IIA applicable in a particular case; however, for the most part they represent the differences in the views of individual arbitrators."

In the absence of a mechanism that would ensure uniformity of IIA interpretation, divergent findings can be expected to persist, UNCTAD cautioned.

UNCTAD also pointed to claims arising out of crisis-related and financial austerity measures: in 2012, a number of cases emerged that have their origin in the recent financial crisis and the ongoing economic recession.

For example, a pair of Chinese investors brought an ISDS claim against Belgium relating to that Government's treatment of Fortis, a Belgian-Dutch financial institution, in the midst of the financial crisis. The claimants reportedly allege damages of US$2.3 billion.

A Cypriot bank notified its intention to initiate arbitration proceedings against Greece, arguing that the latter had discriminated against the claimant's Greek subsidiary when implementing its bank bail-out programme.

Similarly, a number of claims have been brought, or threatened, against governments who have introduced austerity measures affecting renewable energy producers.

Reportedly, Italy, the Czech Republic and Spain have been put on notice with respect to possible arbitrations regarding those countries' withdrawal of subsidies for solar energy, introduced at a time of a more favourable economic climate.

UNCTAD further underscored that in 2012, States have continued to face investor claims concerning measures of general application introduced on environmental grounds.

Thus, Canada was on notice with respect to two potential NAFTA claims – one arising out of the moratorium on offshore wind farms introduced by the Government of Ontario (pending further research into such farms' environmental and health effects), which allegedly destroyed the claimant's contractual rights; the other regarding a ban by the Government of Quebec on oil and gas activities in certain areas.

A Swedish investor filed a case against Germany under the Energy Charter Treaty demanding compensation for the damage allegedly incurred due to the Government's announced phase-out of nuclear power plants.

The UNCTAD report noted that enforcing awards against sovereign States remains a difficult issue as some governments continue not paying earlier arbitral awards rendered against them.

Some investors prefer to settle with the respondent State, often for an amount lower than that awarded but with a guarantee of prompt payment, or with the monetary award being fully or partially replaced by other benefits.

Other claimants seek to locate respondent State's assets abroad and start enforcement procedures in the relevant third countries.

Still others bring the non-payment of awards to the attention of their home governments, with a view to receiving their support. One such example from 2012 is the United States excluding Argentina from the list of countries benefiting from trade preferences, until Argentina pays on ICSID awards in favour of US investors.

Highlighting the issue of transparency of ISDS, UNCTAD said that a notable development has been the UNCITRAL Working Group's completion of a legal standard on transparency in IIA arbitrations.

Until now, ISDS proceedings under the UNCITRAL Arbitration Rules have been characterised by a high level of confidentiality and, frequently, the very existence of a dispute has been unknown.

In January 2013, the UNCITRAL Working Group II agreed on a set of rules (still to be formally adopted by UNCITRAL itself) that provide for a significantly increased level of transparency, including a public registry of disputes, open oral hearings as well as publication of key documents (notices of arbitration, pleadings, transcripts, and all decisions and awards issued by the tribunal).

These rules will apply to arbitrations under future IIAs that refer to UNCITRAL rules (unless the parties to these future treaties expressly opt out), and thus exclude the multitude of existing IIAs from their coverage, said UNCTAD.

Also noteworthy is the decision of the Warsaw District Administrative Court of 13 December 2012, where reportedly, the court held that arbitral awards rendered under investment treaties constitute public information eligible for release by the Polish government. Although under appeal, the decision may eventually oblige the Government to release the unpublished award.

"At a broader level, there is the possibility that freedom-of-information laws – in those countries where they exist - can help bring to light disputes and arbitral awards that have thus far been unknown," said UNCTAD.

As for third party funding (TPF) of claims, UNCTAD said that the practice of involving specialised firms to finance IIA claims against States in exchange for a share in a possible future award or settlement in favour of the claimant has been gaining prominence in the past year and attracted the attention of commentators and scholars.

The practice of litigation finance exists in a few countries (Australia, the United States, the United Kingdom and some others) and, in some circumstances, can be viewed as giving access to justice to those claimants who do not have the means to pay hefty legal fees and other litigation costs.

On the other hand, UNCTAD stressed, there are serious policy reasons against TPF of IIA claims - for example, it may increase the filing of questionable claims.

From a respondent State's perspective, such frivolous claims, even if most of them fail, can take significant resources and may cause reputational damage. There are other concerns which put the practice of TPF into direct or indirect conflict with professional ethical rules in some countries.

While there is no international regulation of TPF and public knowledge about financing of claims is limited, IIA-related TPF developments need to be monitored closely with a view to better understand trends and their policy implications, said UNCTAD.

According to the report, the 2012 peak in the number of new cases confirms that foreign investors continue to rely on IIA-based ISDS.

The increasing number of victories for claimants (70% in 2012) and, on some occasions, high amounts of damages awarded (e.g. US$1.77 billion in the case of Occidental v. Ecuador) demonstrate the protective potential of the IIA/ISDS regime.

"The continuing trend of investors challenging generally applicable public policies, contradictory decisions issued by tribunals, an increasing number of dissenting opinions, concerns about arbitrators' potential conflicts of interest, all illustrate the problems inherent in the system."

Accordingly, said UNCTAD, the public discourse about the usefulness, legitimacy and deficiencies of the ISDS mechanism is gaining momentum, especially given that the ISDS mechanism is on the agenda in numerous bilateral and regional IIA negotiations.

"While reform options abound, their systematic assessment including with respect to their feasibility, expected effectiveness and implementation method (e.g. at the level of IIAs, arbitral rules, institutions) remains wanting. A multilateral policy dialogue on ISDS could help to develop a consensus about the preferred course for reform and ways to put it into action," it concluded.+

 


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