Contemporary Issues in International Arbitration and Mediation: the Fordham Papers 2015 [1 ed.] 9789004334557, 9789004334540

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Contemporary Issues in International Arbitration and Mediation: The Fordham Papers 2015

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Contemporary Issues in International Arbitration and Mediation The Fordham Papers 2015 Edited by

Arthur W. Rovine

LEIDEN | BOSTON

The Library of Congress Cataloging-in-Publication Data is available online at http://catalog.loc.gov LC record available at http://lccn.loc.gov/2009247017

Typeface for the Latin, Greek, and Cyrillic scripts: “Brill”. See and download: brill.com/brill-typeface. isbn 978-90-04-33454-0 (hardback) isbn 978-90-04-33455-7 (e-book) Copyright 2017 by Koninklijke Brill nv, Leiden, The Netherlands. Koninklijke Brill nv incorporates the imprints Brill, Brill Hes & De Graaf, Brill Nijhoff, Brill Rodopi and Hotei Publishing. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill nv provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, ma 01923, usa. Fees are subject to change. This book is printed on acid-free paper and produced in a sustainable manner.

Contents Keynote Address Outlook for the Continued Vitality, or Lack Thereof, of Investor-state Arbitration 1 Stephen M. Schwebel

Part 1 Innovations in International Arbitration 1 Merit Appeals in International Arbitration: Undermining Arbitration or Facilitating True Party Autonomy 9 Justice Barry Leon and Cenobar Parker 2 Are Emergency Awards Enforceable in the United States? A Guide for the Perplexed 31 William G. Bassler 3 Soft Law and Transnational Standards in Arbitration: The Challenge of Res Judicata 52 William W. Park 4 Precedential Value of International Arbitral Awards 72 Josefa Sicard-Mirabal, Esq.

part 2 Investor-State Arbitration 5 Motions to Dismiss in International Treaty Arbitrations 89 Edward G. Kehoe 6 ex aequo et bono: Dispelling Misconceptions—A Viable Choice for Governments and for Foreign Investors 95 Klaus Reichert sc 7 The Role of Damages Calculations in the Legitimacy of International Investment Arbitration 108 Catherine Amirfar

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8 Should icsid have or not have a New Appellate Process, Including a Standing Body to Hear Annulment Applications? 119 Nicholas Fletcher qc 9

Crafting Appropriate Dispute Settlement: The Politics of International Investment Disputes 134 Susan D. Franck

part 3 The Confluence of eu Law and International Arbitration—Both Commercial and Investor-State 10

Overview of Recent EU-Related Developments in Commercial and Investor-State Arbitration 153 John Gaffney

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Investor-State Arbitration—The European Union as Amicus Curiae? 163 Fidelma Macken sc

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Application of eu Law in Investment Treaty Arbitration 179 Kaj Hobér Prof. Dr.

part 4 Corporate Issues 13

Material Adverse Change Clauses: Some Practical Thoughts 203 Wolfgang Peter

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International Arbitration of Patent Claims 214 Thomas H. Lee

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Corporate Interest and the Right to Regulate in Investor-State Arbitration 226 Vera Korzun

Index 241

Keynote Address

Outlook for the Continued Vitality, or Lack Thereof, of Investor-State Arbitration Stephen M. Schwebel It may be recalled that the Covenant of the League of Nations and the Statute of the Permanent Court of International Justice were separate treaty instruments. A state could be a member of the League while not being party to the Court’s statute, and a state could be party to the Court’s statute without being a member of the League—quite different from the u.n. arrangement, where a party to the u.n. Charter automatically is party to the statute of the Court, which is an appendix to the Charter. In the mid-1930s President Roosevelt called on the United States Senate to give its advice and consent to the United States’ adherence to the statute of the Permanent Court of International Justice. That elicited widespread public and political support. But the powerful press of William Randolph Hearst took the lead in mounting an incendiary campaign of isolationist misinformation. The result was that while a majority of the Senate favored adhering to the Court’s statute, the required two-thirds’ majority was not achieved. That was a serious setback to international adjudication and international responsibility. In recent years, investor-state arbitration, one of the most progressive developments in international law and relations in the history of international law, has been under attack, not from the reactionary right but from a mélange of academics, some eminent,1 by labor union spokesmen, by others antagonistic

1 In April 2015, for example, a group of law professors, judges and a leading economist sent a letter to United States Congressional leaders in which they urged Congress to oppose investor-State dispute settlement (isds) provisions in proposed trade deals. Prof. Laurence Tribe, the Carl M. Loeb University Professor of Constitutional Law at Harvard, Judith Resnik, Arthur Liman professor of law at Yale Law School, Cruz Reynoso, professor of law emeritus at the University of California, Davis School of Law and a former associate justice of the California Supreme Court; H. Lee Sarokin, former United States circuit judge of the United States Court of Appeals for the Third Circuit and Joseph E. Stiglitz university professor, Columbia University signed the letter. A copy of the letter is available on-line at , last visited on 30 December 2015.

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004334557_002

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to globalization, such as the greens,2 by often well-meaning critics, which does not mean that they are right. In my view they are largely and profoundly wrong. But their clamor has had remarkable resonance, as Nic Fletcher and Klaus Reichert have said so well this morning, so much so that taxi drivers in Germany reputedly inform their passengers that they are opposed to investorstate arbitration. Why in Germany, the fount of investor-state arbitration?3 Apparently, at least in part, because the German government decided to abandon nuclear power after the nuclear disaster in Japan, provoking an arbitration case against it by Vattenfall, a Swedish nuclear enterprise owned by the Swedish government. I am not informed about that case,4 but my impression is that Vattenfall does not seek to interdict Germany’s sovereign choice to abandon its nuclear power but rather seeks damages for breach of contract. And why not? Insofar as Vattenfall seeks damages in German courts, as it has, German public opinion reportedly finds that bearable. But insofar as it seeks damages through investor-state arbitration, that is objectionable. I am reminded of the volte face of the United States in nafta, the interpretation of the North American Free Trade Agreement after the United States discovered that it, too, could be sued.5

2 See e.g., “Green Party: ttip trade deal is a corporate power grab, that must be stopped” dated 11 July 2015, available at https://www.greenparty.org.uk/news/2014/07/11/green-party-ttiptrade-deal-is-a-corporate-power-grab,-that-must-be-stopped/.last visited on 30 December 2015. 3 As described in Antonia R. Parra’s History of icsid, in the chapter on the Origins of the icsid Convention. See Draft Convention on Investments Abroad, April 1959, 9 Journal of Public Law 115 (1960) (Abs-Shawcross Draft Convention). As described in A.R. Parra, The History of icsid, Oxford University Press, 2012, pp. 13–14. In addition, Germany’s Bilateral Investment Treaty (bit) with Pakistan of 1959, modeled on the provisions of the Abs-Shawcross Draft is the first recorded bit. As described in A.R. Parra, supra, p. 20. 4 See Luke Peterson, Germany’s Economic Ministry Floats A Fleshed-Out Vision of What a Permanent Investment Tribunal Might Look Like, ia Reporter 5 May 2015, available at http:// www.iareporter.com/articles/european-commission-favors-more-judicialization-of-isds-in -near-term-a-multilateral-court-in-the-longer-term/ last visited 30 December 2015. 5 nafta Article 1131(2) provides that “[a]n interpretation of the [nafta] Commission of a provision of this Agreement shall be binding on a Tribunal established under this Section.” The nafta Free Trade Commission on 31 July 2001 issued a note of interpretation concerning, inter alia, the minimum standards of treatment under Article 1105 of nafta. See also, Stephen M. Schwebel, The United States 2004 Model Bilateral Investment Treaty: An Exercise in the Regressive Development of International Law, in G. Aksen et al., (eds.), Global Reflections on International Law, Commerce and Dispute Resolution—Liber Amicorum in honour of Robert Briner 815 (2005).

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An upshot of the manufactured uproar in Europe is that the eu now proposes to replace investor-state arbitration with an international investment tribunal and an appeals recourse of that tribunal, which would be composed of judges designated by states and only states. It so proposes in the context of negotiations with the United States for a transatlantic trade and investment partnership, the so-called ttpi, but it looks to the eventual displacement of investor-state arbitration altogether by an international investment court. The pertinent press release of the European Commission, a “fact sheet” dated 16 September 20156 advances this in terms that appear to be designed to knock down the straw men that critics of investor-state arbitration have constructed. It breathlessly begins, “An article on the right to regulate This is new.” The fact sheet continues, “It”—that is, the eu’s proposal—“clearly states that the right to regulate for public policies is fully preserved and clarifies that investment protection shall not be interpreted as a commitment from governments not to change the legal framework, including in a manner that may negatively affect the investors’ expectations of profits.” But it may be asked, what bilateral or multilateral investment treaty questions the government right to regulate? What awards of investor-state arbitral tribunals have done so? What arbitral tribunal has simply ruled in favor of the investors’ expectations of profits? The press release then goes on to propose an investment court system. “This is new. This is a fundamental change compared to the old isds system, which operates on an ad hoc basis with arbitrators chosen by the disputing parties. The elements proposed for the operation of an investment tribunal are an effective way to insulate judges from any real or perceived risk of bias.” The inference of the passage I have just read is that the system of arbitrators chosen by the parties found in bilateral investment treaties was not insulated from any real or perceived risk of bias. Yet the parties to cases before the new investment court will be investors and states. The tribunal will be composed of judges “publicly appointed” only by states. The fact sheet recounts that the proposed treaty provision on the 6 European Commission—Fact Sheet, Reading Guide dated 16 September 2015, available at http://europa.eu/rapid/press-release_MEMO-15-5652_en.htm,. On 16 September 2015, the European Commission issued a press release as well as the text of its proposal for a new investment court system for the Transatlantic Trade and Investment Partnership (ttip). The press release is available at http://europa.eu/rapid/press-release_IP-15-5651_en.htm. On 12 November 2015, the European Commission transmitted its proposed text to the United States for further negotiations of ttip. That text is available here: http://trade.ec.europa.eu/doclib/ docs/2015/november/tradoc_153955.pdf, last visited 30 December 2015.

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right to regulate is “a direct instruction to the judges which the appeal tribunal will ensure is properly respected.” It specifies that “the members of the appeal tribunal will ensure that there could be no doubt as to the legal correctness of the decisions of tribunals.” There would be “government control of interpretation,” presumably of interpretation of the treaty in the vein of nafta’s precedent. The question arises, if there is a risk, real or perceived, of bias of ad hoc arbitral tribunals, as the eu Commission appears to insinuate, is there not a risk, real or perceived, of bias in favor of states and against investors in the eu Commission’s proposals? If the fact of appointment by a party of an arbitrator is taken to import bias, real or perceived, is not appointment of arbitrators solely by states a formula for establishment of a court biased against investors? I do not believe that it is the intention of the eu to entrench such bias in the courts proposed by the eu Commission. But if it is to be presumed that an arbitrator appointed by an investor is biased in favor of the investor, a presumption that the record of investor-state arbitration does not sustain, is there reason to presume that judges appointed only by states will not be biased in favor of states? The truth is that no judge and no arbitrator can be totally objective. We are all prisoners of our own experience. But it is also true that courts of states essentially governed by the rule of law largely, not entirely but largely, achieve sufficient objectivity—and that is true as well of international courts and international arbitral tribunals, and it is true of arbitral tribunals dealing with investor-state disputes. For my part I find Susan Franck’s statistics instructive. I don’t think the fundamental setup of investor-state arbitration is asymmetrical. Just as the u.s. Court of Claims is a forum for claims against the United States, or human rights courts are claims of individuals against states, so investor/State tribunals are for claims against states. That is their fundamental structure. So arbitration in bilateral investment treaties enables the investor to bring a case against the state which otherwise has a plentitude of levers to pull in asserting its authority over the foreign investor. All that said, I don’t think there is any fundamental objection in principle to governments agreeing to establish an international investment court and an international investment court of appeals. Even if the proposals of the European Commission, as they are worded and particularly described in its fact sheet, seem to be designed to appease the uninformed critics of investor-state arbitration; even if they have snide remarks, as they do, that the European Commission favors the rule of law but not the rule of lawyers, nevertheless, I think their proposals merit every consideration. And they have positive elements,

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among them affirming guarantees of no expropriation without compensation, though the extent of compensation is undefined in the eu fact sheet. The eu Commission’s scheme also provides for a general guarantee of fair and equitable treatment and physical security; that is, fair and equitable treatment and physical security of foreign investment. And it contains a commitment that “governments will respect their own written and legally binding contractual obligations towards an investor.” That is a quotation from the fact sheet. These are reassuring provisions, indicating that however much the eu Commission endeavors to appease the critics of investor-state arbitration, it does not propose to embrace the extremities of the discredited so-called new international economic order that disfigured u.n. resolutions of the 1970s. Now, whether in fact the parties to the projected ttpi will agree to replace investor-state arbitration with investment courts remains to be seen. It is notable that the European Union and Canada have concluded, but not yet ratified, an investment treaty that provides for investor-state arbitration relatively recently, within the last year or so. It is also striking that the negotiators of the Trans-Pacific Trade Agreement reportedly have agreed to include provision for investor-state arbitration, though with carve-outs. The European Union, estimable as it is—and in all, it is estimable, and anyone who has the least sense of the history of the last few hundred years will recognize what a great achievement the European Union is—nevertheless, the European Union has its own hang-ups and peculiarities. Its enactment in respect of genetically modified seeds was simply anti-scientific While the European Union is in a commendable lead in matters of climate control, in matters of seeds, the eu’s position is akin to that of the deniers of climate change, too many of whom pollute the Congress of the United States. The current approach of the eu to investor-state arbitration may be seen on balance, in my view, as questionable, not only with respect to investor-state arbitration at large but in the singularities of its attempts to neuter investor-state treaties between members of the European Union based on the dubious but factually questionable proposition that the levels of adjudication are the same throughout the Union. It is understandable that the European Commission takes that position, but it doesn’t happen to correspond with the facts. It is also unclear whether the international community as a whole—north, south, east, west—is prepared to agree not only on investment courts but on the legal principles to be applied by those courts. The history of United Nations negotiations and resolutions on permanent sovereignty over natural resources, the new international economic order, and the Charter of Economic Rights and Duties of States, as well as the aborted history of the oecd in respect of a

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multilateral agreement on international investments, suggests that agreement will not be easily achieved, or achieved at all. For some three or four decades, the heated yet sterile debates in the u.n. on these issues appear to have been dropped into the dustbin of history, to be replaced by the refreshing and realistic terms of bilateral investment treaties. The critics of bilateral investment treaties and the effort of the eu Commission to appease their misguided criticism will have much to answer for if bilateral investment treaties are put aside in favor of regressive international confrontation.

Part 1 Innovations in International Arbitration

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chapter 1

Merit Appeals in International Arbitration: Undermining Arbitration or Facilitating True Party Autonomy Justice Barry Leon and Cenobar Parker As a party driven process, over the years international arbitration has evolved to meet the changing needs and demands of its users. In recent years, emergency arbitrator provisions, fast-track options and specialized tribunals are but some of the examples of how the international arbitration community, and arbitral institutions in particular, have sought to adapt to the needs and demands of the international business community or segments of it. One recent and somewhat controversial innovation has been the introduction of arbitration appeal rules that provide for appeals of arbitral awards on their merits, meaning a review for errors of law, errors of fact and/or errors of mixed fact and law, to a second arbitral tribunal (“merit appeals”). On November 1, 2013, the American Arbitration Association/International Centre for Dispute Resolution (“aaa/icdr”) introduced Optional Appellate Arbitration Rules (“aaa/icdr Appeal Rules”). The aaa/icdr Appeal Rules provide a process for merit appeals, by agreement of the parties. While not the first institution to introduce rules for merit appeals, the aaa/icdr in some ways reignited a broader debate in the international arbitration community, not just about the benefits of merit appeals but about whether they are fundamentally inconsistent with international arbitration as a dispute resolution process. The proponents of merit appeals highlight the desirability of correcting an arbitration award that is based on a material error, whether by error in law and/or a misapprehension of the facts. Given the significant interests often at stake in international commercial disputes, parties often choose between, on the one hand, the risk of a flawed arbitration decision for which they may not have a remedy and, on the other hand, what may be thought of as the less attractive process of court litigation (whether because of considerations of enforcement, time and cost, privacy and confidentiality, choice of and experience of adjudicators, or otherwise), but which offers avenues of appeal to correct errors. Merit appeals of arbitration awards are a direct answer to this sometimes unpalatable choice. However, with finality being one of the traditional basic underlying principles of arbitration, many in the international arbitration community world argue that merit appeals “just ain’t international arbitration”. © koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004334557_003

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This paper challenges this position, suggesting that arbitration is, first and foremost, a party driven process. The cornerstone of arbitration is party autonomy. If parties—the true users of international arbitration—want merit appeals, does it not behoove providers to offer merit appeals? This is not to say that merit appeals are desirable in many situations— parties desiring efficiently achieved finality certainly should think twice about agreeing to merit appeals—but ultimately it is the parties, not the service providers, who should make the assessment. Where parties consider that the risk reduction or other advantages of having a merit appeal makes sense, why should the providers of arbitration services deny that to them? In challenging the no-merit appeals perspective, this paper canvasses the limited means otherwise available to review an arbitration award and data that suggests that a material segment of the international business community may shy away from arbitration due to the limitations on merit appeals. It then reviews the current landscape of optional merit appeals procedures and identifies important criteria to consider in crafting the most appropriate merit appeals processes for the particular situation. The paper concludes that the cornerstone of arbitration—party autonomy—should prevail, leaving it to the parties to craft arbitration procedures that they consider best suits their needs. To support party autonomy, arbitral institutions should provide institutional rules for optional merit appeals, or at the very least make their rules compatible with the parties’ choice of merit appeals. If parties agree to merit appeals, there is no principled basis to deny them. i

Statute Based Judicial Review and Institutional Restrictions on Merit Appeals

The question for many parties, whether before entering into an arbitration agreement, or after an award has been rendered, is what to do if there are grounds to believe that the arbitral tribunal misinterpreted the law and/or misapprehended the facts. While domestic arbitration statutes often provide parties with an option to agree to—or opt out of—an appeal of the arbitration award to the courts on questions of law,1 in international arbitration there is usually no ability to review the merits of an arbitration award. If a party disagrees with the outcome of an arbitration award, it is generally restricted to an application to set aside the award or it may oppose, on 1 See for example, the Ontario Arbitration Act, 1991, so 1991 c 17, section 45.

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comparable limited grounds, the successful party’s application for recognition and enforcement of the arbitral award. While in some instances parties have sought to expand the grounds of judicial review of international arbitration awards, they have largely failed. Lastly, given that a significant number of international arbitrations are administered through arbitral institutions, the institutional rules themselves pose a significant barrier to merit appeals: in agreeing to an administered or institutional arbitration, parties often waive any recourse to an appeal of the arbitration award, to the extent an appeal might otherwise be available. A Statute Based Judicial Review Most jurisdictions limit the grounds upon which an arbitration award may be set aside on judicial review to correspond with the following six grounds in the Model Law on International Commercial Arbitration of the United Nations Commission on International Trade Law (uncitral) (“Model Law”), Article 34:2 1. 2. 3. 4. 5. 6.

invalidity of the arbitration agreement; lack of notice to a party or its inability to present its case; an award on matters outside the scope of the arbitration agreement; irregularity in the composition of the arbitral tribunal; non-arbitrability of the subject matter; and violation of public policy.

The Model Law has been adopted (with or without modifications) in some 100 jurisdictions. Article 34 of the Model Law provides that in respect of arbitration awards, the exclusive recourse to a court in respect of an arbitration award is an application to set aside the award on the stated six bases.3 2 For example, the French Code of Civil Procedure provides in article 1518 that an international arbitration award may only be challenged through an application to set aside. Similarly, in the United States, The Federal Arbitration Act, 9 usc § 1, which applies to international arbitration awards, limits judicial intervention to the grounds set out in sections 10 and 11, which include the partiality of the arbitrator, the adjudication of matters outside the scope of the arbitration agreement, and procedural misconduct that prejudices the rights of any party. 3 Article 34. Application for setting aside as exclusive recourse against arbitral award (1) Recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of this article. (2) An arbitral award may be set aside by the court specified in article 6 only if: (a) the party making the application furnishes proof that: (i) a party to the arbitration agreement referred to in article 7 was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of this State, or

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These grounds largely correspond to the exceptions to recognition and enforcement of arbitration awards set out in Article v of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.4 (ii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case, or (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside, or (iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; or (b) the court finds that: (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State, or (ii) the award is in conflict with the public policy of this State. (3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the award or, if a request had been made under article 33, from the date on which that request had been disposed of by the arbitral tribunal. (4) The court, when asked to set aside an award, may, where appropriate and so requested by a party, suspend the setting aside proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the arbitral tribunal’s opinion will eliminate the grounds for setting aside. 4 Article v 1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that: (a) The parties to the agreement referred to in article ii were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or (b) The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or (c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted

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Some jurisdictions provide for a limited exception to the general rule that a court will not consider the merits of an arbitration award by allowing parties, where the arbitration is seated in the jurisdiction, to appeal an arbitration award on a question of law. Notably, section 69 of the English Arbitration Act 1996 provides that, subject to the parties’ agreement, an award may be appealed on a question of law. This appeal right is subject to (absent agreement of the parties) leave of the court on the following grounds: 1. 2. 3. 4.

the determination of the question will substantially affect the rights of one or more of the parties; the question is one that the tribunal was asked to determine; on the basis of the tribunal’s findings of fact, the decision on the question is obviously wrong, or the question is one of general public importance and the decision of the tribunal is at least open to serious doubt; and it is just and proper for the court to determining the question notwithstanding the parties’ agreement to arbitrate.5

The limited grounds of appeal on questions of law in some jurisdictions are therefore the only meaningful means of recourse to a court on the merits of an international arbitration award.6 to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or (d) The composition of the arbitral authority or the arbitral procedure was not in ­accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or (e) The award has not yet become binding, on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made. 2. Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that: (a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or (b) The recognition or enforcement of the award would be contrary to the public policy of that country. 5 The uk is not the only jurisdiction with an exception for appeals on questions of law. See also the New Zealand Arbitration Act, 1996 which is discussed in more detail below and which contains a similar provision to section 69 of the English Arbitration Act, 1996. 6 Interestingly, a recent debate has commenced in England concerning the appropriate scope of section 69 of the Arbitration Act, 1996 and merit appeals to the judiciary, more generally. The debate was initiated by Lord Thomas, Lord Chief Justice of England and Wales, in his

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These statutory limits on judicial review of arbitral awards pose a problem for parties seeking an appeal of an arbitration award based on errors for two reasons: 1.

2.

to the extent institutional rules do not preclude such a review, or where the parties have not adopted institutional rules, the parties’ agreement is unlikely to be sufficient to confer the judiciary with appellate jurisdiction, absent statutory authority; and as already alluded to, generally speaking arbitral institutions require parties to waive any limited rights they may otherwise have had for a merit appeal.

B Expanding the Scope of Judicial Review Attempts by parties to expand judicial review of arbitration awards is, in and of itself, evidence that some parties desire an error correcting review in speech at the Bailli Lectures in March 2016, suggesting that in narrowing judicial powers of intervention in the English Arbitration Act since its 1979 version, English lawmakers and the judiciary made a mistake. Lord Thomas stated that restricting judicial oversight on questions of law and resolving legal disputes behind the closed doors of private arbitration hinders the development of the common law, “‘retard[s] public understanding of the law and public debate over its application’ and means issues are not exposed on which legislation is needed. Individuals are hindered from accessing the law to gain legal certainty and thus from fully understanding their rights and obligations so they can plan their affairs”. Lord Thomas would provide the courts with more flexibility in permitting appeals, which he suggests would lead the way to more judicial consideration of questions of public importance. Lord Saville and Sir Bernard Eder, both English judges turned arbitrators, responded in writing to Lord Thomas. According to Saville and Eder, expanding the scope of judicial intervention in section 69 of the Arbitration Act, 1996 would be inconsistent with the judicial intervention in arbitration proceedings allowed in most jurisdictions around the world. As a result, more interventionist English courts could deter parties from resolving their disputes in England using the London Court of International Arbitration. Moreover, it is considered unfair to require parties to an arbitration to bear the burden, in the form of additional time and cost, of promoting the development of English common law. Lastly, and most importantly, Sir Eder pointed out that parties to an arbitration have exercised a choice to resolve their dispute outside the scope of judicial scrutiny, and such exercise of party autonomy ought to be supported. See: Alison Ross, “Arbitration hinders development of common law—Lord Chief Justice of England and Wales”, Global Arbitration Review, March 31, 2016, and Alison Ross, “Judges-turned-arbitrators resist expansion of right to appeal awards”, Global Arbitration Review, April 29, 2016. See also the response to Lord Thomas’ speech from J William Rowley, qc, “London Arbitration Under Attack” Global Arbitration Review, May 16, 2016. As with the choice to exclude judicial intervention on the merits of an award, parties ought to be entitled to choose arbitration appeals.

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arbitration.7 There are two notable instances where parties have attempted— but failed—to expand the statutory scope of judicial review. The 2008 United States Supreme Court decision in Hall Street Associates, llc v Mattel, Inc. (“Hall Street”)8 held that the grounds for vacatur set out in the Federal Arbitration Act are exhaustive and cannot be expanded by agreement of the parties to include a merit appeal. The parties in Hall Street executed an arbitration agreement which contained the following provision for judicial review of the arbitration award: …the court shall vacate, modify or correct any [arbitration] award: (i) where the arbitrator’s findings of facts are not supported by substantial evidence, (ii) where the arbitrator’s conclusions of law are erroneous.9 The majority of the Supreme Court, considering the plain language of section 9 of the Federal Arbitration Act, held that it requires that a court “‘must’ confirm an arbitration award ‘unless’ it is vacated, modified, or corrected ‘as prescribed’ in sections 10 and 11.”10 The Court relied on what it considered the policy underlying the Federal Arbitration Act, and specifically, the desire to put arbitration proceedings on equal ground with other contracts by limiting judicial interference. The Supreme Court rejected the argument that the parties could expand the grounds of review set out in sections 10 and 11 of the Federal Arbitration Act by agreeing to have the Federal Court review an arbitration award for general legal errors on the ground of “manifest disregard” for the law, and it rejected the argument that the parties’ agreement to expand the grounds for judicial review is consistent with the purpose of the Federal Arbitration Act, namely to enforce agreements to which parties entered.11 The Court expressed a concern that if the limited grounds of judicial review were expanded, the doors to full legal and evidentiary appeals would swing wide open rendering the actual arbitration “merely a prelude to a more cumbersome and time-consuming judicial review process.”12 7

8 9 10 11 12

William H. Knull, iii and Noah D. Rubins, Betting the Farm on International Arbitration: Is it Time to Offer an Appeal Option? 11 The American Review of International Arbitration 4, p 531 (2000) (“Knull and Rubins”) at page 534. 128 S Ct 1396 (2008). Hall Street, pages 1400–1401. Hall Street, pages 1405. Hall Street, page 1404. Hall Street, page 1405.

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Of particular interest is that while Hall Street closed the door on merit appeals to courts under the Federal Arbitration Act, the Court did not say that sections 9–11 of the Federal Arbitration Act “exclude more searching review based on authority outside the statute…”13 Presumably, therefore, nothing in the Federal Arbitration Act prevents parties from agreeing to private merit appeals, though interesting questions arise as to what powers the appeal tribunal has in respect of the initial arbitration award (i.e. to confirm, vary, remit, or overturn the underlying arbitration award), and of what consequences the exercise of those powers has for the recognition and enforcement of the underlying arbitration award. Another example of the judiciary’s hesitation to expand its powers of judicial review of arbitration awards is found in the New Zealand Supreme Court’s decision in Carr v Gallaway Cook Allan (“Carr”).14 The parties in Carr executed an arbitration agreement which provided that each side had a right of appeal to the High Court on any question of law or fact. The applicable statute, the Arbitration Act 1996,15 which applies to both domestic and international arbitrations, includes in section 5 of Schedule 2 an optional appeal to the High Court on questions of law. There is no statutory authority for any appeal in respect of questions of fact. By the time the case reached the Supreme Court, it was agreed that the parties were unable to expand the scope of the Arbitration Act 1996 to include appeals of questions of fact. The issue before the Supreme Court was whether such invalid agreement rendered the whole arbitration agreement invalid, which the Court held that it did. While Carr did not involve an international arbitration, the same provision at issue in the Arbitration Act 1996 allows parties to an international arbitration to agree to an appeal on a question of law if the arbitration was or would have been in New Zealand.16 Where the international arbitration does not take place in New Zealand, parties are limited to the traditional grounds for refusing recognition and enforcement.17 Given the Court’s rejection of the parties’ agreement, it is unlikely that parties to an international arbitration would be able to expand the scope of judicial review under the Arbitration Act 1996. As in Hall Street, Carr highlights the unwillingness of some courts, even where the parties agree, to permit judicial review of arbitration awards beyond the explicit grounds of judicial review set out by statute. 13 Hall Street, page 1406. 14 [2014] nzsc 75. 15 Arbitration Act, 1996 (nz). 16 Arbitration Act 1996, section 6. 17 Arbitration Act 1996, articles 35 and 36 of Schedule i.

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By contrast, there is one decision of the Ontario Superior Court of Justice (a court of first instance) that leaves open the question of whether parties could expand the court’s powers of review under Ontario’s International Commercial Arbitration Act (“icaa”),18 which adopts the Model Law. In Noble China v Lei (“Noble China”),19 the parties agreed to resolve their dispute by arbitration, and included in the terms of arbitration a provision that “[n]o matter which is to be arbitrated is to be the subject matter of any court proceeding other than a proceeding to enforce the arbitration award.” Before the court was the arbitration award and supplemental arbitration award in favor of Noble China. Noble China brought an application for enforcement of the arbitration award pursuant to Article 35 of the Model Law, while Lei brought an application under Article 34 of the Model Law, to have the award set aside. In dismissing Lei’s application, the Court found that Lei had “clearly and unambiguously” agreed “the only proceeding which would not be resolved by arbitration would be a proceeding to enforce the award”.20 Of importance to the Court was the sophistication of the parties and their exercise of autonomy, not only in choosing to arbitrate their dispute, but in choosing to apply the icaa (and therefore the Model Law), which gives the parties the freedom to determine their own rules of procedure. The Court noted that the icaa does not prevent parties from contracting out of the right to set aside an award under Article 34 of the Model Law. Had the legislature intended to do so, the Court noted that it would have done so, as it did in Ontario’s domestic Arbitration Act, 1991,21 which prohibits parties from explicitly or implicitly contracting out of the judicial application to set aside an arbitration award on grounds largely analogous to Article 34 of the Model Law.22 The Court concluded that, unlike certain other provisions of the Model Law, Article 34 is not a mandatory provision. It held that the philosophy and structure of the Model Law is that “[t]he parties make their own agreements, so long as they do not derogate from its mandatory provisions [and] Article 34 is not such a provision.”23 The Court highlighted that Article 34 uses permissive language, for example, providing that an “arbitral award may be set aside” 18 19 20 21 22 23

rso 1990, c I9. (1998), 42 or (3d) 69 (onsc). Noble China, page 15. so 1991, c 17. See Sections 3 (Contracting Out) and 46 (Setting Aside) of the Arbitration Act, 1991. Noble China, page 93.

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and it rejected the argument that Article 34 must be read in conjunction with the mandatory requirements in Article 18—Equal Treatment of the Law—and Article 19—Determination of the Rules of Procedure.24 Rather, the Court concluded that the parties may agree to restrict the review of the arbitration award so long as in so doing they do not agree to anything that is contrary to a mandatory provision, which it found they did not in this case. While this decision did not expand the traditional grounds of judicial review of an arbitration award, it upheld the parties’ agreement to narrow or restrict these grounds which one may surmise suggests that had the parties agreed to expand them, a similar conclusion may have been reached. However, what this case did not address is how parties could confer jurisdiction on the court in the absence of statutory authority. (In Canada, the provincial and territorial superior courts are courts of first instance with inherent jurisdiction, but not all first instance courts in Canada or elsewhere have inherent jurisdiction). It is of note that a 2004 decision by the Ontario Court of Appeal in Brent v Brent, held that absent statutory authority parties could not confer jurisdiction on that court.25 While the Court of Appeal is a statutory court in Ontario, given the legislative schemes for judicial intervention set out in the Arbitration Act, 1991 and the icaa, it is unlikely that parties could confer jurisdiction not provided for in those legislative acts, even in respect of a court of inherent jurisdiction. Despite the decision in Noble China, which dealt with limiting rather than expanding rights of review by courts, given that parties in Ontario likely do not have the authority to confer jurisdiction on courts to hear merit appeals of arbitration awards, it seems unlikely that courts in Ontario will hear merit appeals absent statutory authority. C Institutional Rules The majority of arbitral institutional rules are a further obstacle for parties seeking merit appeals. While party autonomy permits parties to deviate from 24

25

Noble China, pages 91–93. Article 18. Equal treatment of parties The parties shall be treated with equality and each party shall be given a full opportunity of presenting his case. Article 19. Determination of rules of procedure (1) Subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings. (2) Failing such agreement, the arbitral tribunal may, subject to the provisions of this Law, conduct the arbitration in such manner as it considers appropriate. The power conferred upon the arbitral tribunal includes the power to determine the admissibility, relevance, materiality and weight of any evidence. (2004), 69 or (3d) 737 (onca).

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most provisions,26 in adopting most institutional rules, the default rules provide that parties agree that every award is final and binding such that they waive any available right of appeal or review on the merits of an arbitration award. For example, the Arbitration Rules of the London Court of International Arbitration state in Article 26.8 that “… the parties also waive irrevocably their right to any form of appeal, review or recourse to any state court or other legal authority, insofar as such waiver shall not be prohibited under any applicable law.” Article 34(6) of the Arbitration Rules of the International Chamber of Commerce states that “[b]y submitting the dispute to arbitration under the [icc] Rules, the parties undertake to carry out any award without delay and shall be deemed to have waived their right to any form of recourse insofar as such waiver can validly be made.”27 ii

Institutional Responses to Interest in Merit Appeals

Optional merit appeals rules are not a new development. In fact, the International Institution for Conflict Prevention & Resolution (“cpr”) adopted its Arbitration Appeal Rules (“cpr Rules”) in 1999 and amended them in 2007. However, it seems that the adoption of the aaa/icdr Appeal Rules reignited the debate about merit appeals. This may be tied, in part, to the fact that the aaa/icdr is the first international arbitration institution to adopt optional international merit appeals—the cpr rules are limited to appeals of arbitrations conducted in the United States.28 In addition to the cpr Rules and the aaa/icdr Rules, at least two other arbitral institutions have adopted merit appeal procedures

26 27

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Irene M. Ten Cate, International Arbitration and the Ends of Appellate Review, 44 International Law and Politics 1109 (2012) (“Ten Cate”) at page 1117. Other examples include Rule 28.9 of the 2013 Arbitration Rules of the Singapore International Arbitration Centre, which provides that in agreeing to arbitration under the Rules, the parties “irrevocably waive their rights to any form of appeal, review or recourse to any state court or other judicial authority insofar as such waiver may be validly made and the parties further agree that an award shall be final and binding on the parties from the date it is made.” Rule 34.2 of the Administered Arbitration Rules of the Hong Kong International Arbitration Centre provides that “[t]he parties and any such person shall be deemed to have waived their rights to any form of recourse or defence in respect of enforcement and execution of any award, in so far as such waiver can validly be made.” Rule 1.1.

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1.

jams Optional Arbitration Appeal Procedure (“jams Rules”), adopted in 2003; and European Court of Arbitration’s Arbitration Rules of the European Court of Arbitration (“eca Rules”), as of January 1, 2011.

2.

It is of note that while both the cpr Rules and the aaa/icdr Rules are available to parties whether or not the underlying arbitration was conducted pursuant to the institution’s arbitration rules, the jams Rules and the eca Rules apply in respect of arbitration awards rendered pursuant to their respective institutional arbitration rules.29 Lastly, in the Spring of 2015, Arbitration Place, an international arbitration hearing centre in Toronto, released its Arbitration Appeal and Review Rules. While Arbitration Place is not an arbitral institution, these rules are lightly administered and provide for both private reviews of arbitral awards on Model Law grounds of review alone, or merit appeals on errors of law, fact or mixed fact and law. As all of these merit appeal rules illustrate, there are many dimensions to the possible structure of merit appeals procedures. Each choice can either reduce or enhance the alleged benefits of a merit appeal. Among the issues—and the choices that merit appeals rule drafters need to consider—are the following 15 considerations: Should Merit Appeals be an Option in Institutional Rules, with the Default Position being No Appeal? This consideration speaks to whether institutions wish to encourage merit appeals, or simply support parties that request it. With one exception, all of the merit appeals rules apply by agreement of the parties either before or after the original award is rendered. The eca Rules are unique in that unless otherwise agreed by the parties, all arbitrations conducted pursuant to the eca Rules have available merit appeals, unless contrary to an applicable mandatory law or expressly excluded by agreement of the parties.30 In support of party autonomy, arbitral institutions may wish to consider making their rules compatible with the parties’ choice of merit appeals.

1

Should there be Restrictions on When Merit Appeals Can be Taken or Should there be Disincentives to Pursuing Merit Appeals? As noted above, one of the suggestions in the commentary to the cpr Rules is to have the parties agree to a monetary threshold before merit appeals rights 2

29 30

Rule B(i) of jams Rules and Rule 28.2 of the eca Rules. Rules 1.4 and 28.1.

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becomes available or to preclude merit appeals where a three-member tribunal has unanimously rendered the award. Another disincentive, which has been incorporated into most of the merit appeals rules, may be the requirement that the appellant ­deposit in escrow all or part of the amount awarded in the underlying arbitration and/or pay the fees from the arbitration. For example, the jams Rules require all of the fees for the underlying arbitration to be paid in full before the appeal will be scheduled.31 Similarly, the aaa/icdr Rules require that the aaa’s fees and costs from the underlying arbitration be paid in full before the appeal is initiated.32 The eca Rules provide that an appeal will only be admissible if the appellant pays or provides a guarantee payable on demand in the amount equal to the principal sum with interest and costs that may have been awarded against it by the award under appeal.33 How Much Can the Parties Tailor Merit Appeals Rules to their Specific Needs? The aaa/icdr Rules, the jams Rules and the eca Rules are silent on this issue. The commentary to the cpr Rules suggests that parties can supplement their rules by, among other things, stipulating a monetary threshold for appeals and limiting appeals to underlying awards that are not determined unanimously by panels of three tribunal members.34 One of the innovations in the Arbitration Place Rules is that they explicitly limit the modification or exclusion of specific rules, including the scope of application of the rules.35 As each dispute will vary significantly, with the exception of those rules that pertain to minimum fairness or equal treatment between the parties, the parties ought to be able to tailor the appeal rules in order to craft whatever the parties consider to be the most appropriate appeal process for their needs.

3

Will the Merit Appeals Cover Legal, Factual and/or Mixed Legal and Factual Errors? The scope of permitted merit appeals is probably one of the more controversial aspects of merit appeals as it directly opposes the notion of finality. Neither the aaa/icdr Rules nor the cpr Rules expressly provide for any appeal of an error of mixed fact and law. Both sets of rules are limited to appeals on

4

31 32 33 34 35

Rule B(vi). Rule A-12. Rule 28.3. See “Party Modifications” in the cpr Rules commentary. Rule 2(d).

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errors of fact or errors of law.36 The Arbitration Place Rules are unique in that they explicitly provide for a right of appeal in respect of an “erro[r] of mixed fact and law which [is] clearly unreasonable…”37 Additionally, the Arbitration Place Rules and the cpr Rules are the only rules that provide for reviews by way of an arbitral process for applications seeking to set aside an arbitration award. While the Arbitration Place Rules refer to an application on “any ground upon which an arbitral award may be set aside under the law of the seat of the arbitration”, the cpr Rules explicitly refer to the grounds set out in section 10 of the Federal Arbitration Act.38 Lastly, the jams Rules allow appeals on the same standard of review “that the first-level appellate court in the jurisdiction would apply to an appeal from the trial court decision”,39 while the eca Rules provide for a full rehearing on the merits.40 What is the Standard of Review? What is the Test for a Reversible Error? The aaa/icdr Rules allow an appeal tribunal to intervene in respect of “an error of law that is material and prejudicial” or “determinations of fact that are clearly erroneous”.41 Similarly, the cpr Rules indicate that a reversible error is a “material and prejudicial error of law”, “factual findings clearly unsupported by the record” or the establishment of a ground in section 10 of the Federal Arbitration Act.42 The Arbitration Place Rules provide for the appeal of errors of law that are material to the award, factual determinations, or errors of mixed fact and law that are clearly unreasonable and material to the award.43 As already noted, the Arbitration Place Rules, similar to the cpr Rules, entitle a party to request to set aside any arbitration award on “any ground upon which an arbitral award may be set aside under the law of the seat of arbitration.”44 The jams Rules apply “the standard of review that the first level

5

36 37 38 39 40 41 42 43 44

A-10 and 8.2. Rule 7(a)(iii). See Arbitration Place Rule 7(b) and cpr Rule 8.2(b). Rule D. Rule 28.4. Rule A-10. Rule 8.2. Rule 7(a). Rule 7(b).

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appellate court in the jurisdiction would apply”,45 and most broadly, the eca Rules provide for a full rehearing on the merits.46 Does there Need to be a Transcript of the Oral Evidence for Merit Appeals Involving Issues of Fact? In common law court systems, usually the transcribed oral evidence is crucial to the appeal procedure where evidentiary-based errors are alleged. Without a transcript of the oral evidence, it would be almost impossible to evaluate the merits of the underlying award in such cases. The Arbitration Place Rules are the only rules which provide that merit appeals based on oral evidence presented in the underlying arbitration will only be heard where the evidence was recorded and transcribed.47 The other sets of rules deal with the record more generally, but do not address the issue of oral evidence. For example, the jams Rules and cpr Rules require the complete record accepted by the original tribunal,48 while the aaa/icdr Rules as well as Arbitration Place Rules are more flexible, requiring the filing of “relevant” portions of the evidence.49

6

7 Will there be an Oral Appeal Hearing? The procedure to be used to present merit appeals is an important consideration for the parties, and can have a significant impact on the costs of the appeal process. The increased cost associated with merit appeals is one of their most significant drawbacks. For this reason, it seems that most of the merit appeals rules default to a written appeal process, unless otherwise requested by the parties or the appeal tribunal deems oral argument necessary.50 The Arbitration Place Rules are an exception in that they require an oral hearing “absent an agreement by the parties or a determination of the tribunal after affording the parties’ an opportunity to make submissions.”51 8 Will there be Limits on Written Submissions? Parties may use limits on appeal submissions to control the costs of merit appeals. The aaa/icdr Rules and the jams Rules limit parties to a maximum 45 Rule D. 46 Rule 28.4. 47 Rule 7(c). 48 See jams Rule B(iii) and cpr Rule 1.3(b). 49 See aaa/icdr Rule A-16 and Arbitration Place Rule 18(b). 50 See aaa/icdr Rule A-15, jams rule B(v), and cpr rule 7.4. 51 Rule 12.

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number of pages in written submissions.52 The Arbitration Place Rules leave it to the appeal tribunal to set the parameters for written submissions.53 9 Will New Evidence be Admitted, and if so, in What Circumstances? The appeal tribunal’s ability to accept new evidence significantly increases its scope of authority on the appeal and also has the potential to increase costs significantly. Instead of sitting in review of the underlying award, the ability to consider new evidence tips toward the appeal tribunal hearing the arbitration de novo. Each of the merit appeals rules deal with this slightly differently. The aaa/icdr Rules allow the appeal tribunal to extend the time within which it is to render its award by requesting additional information not initially submitted.54 The jams Rules allow for consideration of evidence not considered as part of the hearing leading to underlying award where it is the non-acceptance of evidence by the original tribunal that is a ground of appeal, or where the appeal tribunal “determines that there is good cause to re-open the record”.55 The cpr Rules provide that the appeal tribunal may “request the parties to supplement” the appeal record as it deems appropriate.56 The Arbitration Place Rules require the submission of any new evidence to be with leave of the appeal tribunal. What Should be the Cost Consequences of Different Merit Appeals Outcomes? Cost consequences can have an important role to play in disincentivizing proceedings that have limited merit. Most of the merit appeals rules make some provision for the appeal costs. The cpr Rules mandate that the appellant shall pay the costs of the appeal if it is unsuccessful.57 The aaa/icdr Rules provide that in the event the appellant is unsuccessful, it may be assessed the appeal costs.58 Lastly, the Arbitration Place Rules simply provide the appeal tribunal with the authority to make an award of costs.59 10

52 See jams Rule B(iv) and aaa/icdr Rule A-17. 53 Arbitration Place Rule A-19. 54 Rule A-19(a)(3). 55 Rule B(iii). 56 Rule B(iii). 57 Rule 12. 58 Rule A-11. 59 Rule 21.

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11 How Will the Appeal Tribunal be Chosen? Most of the merit appeals rules provide that, absent agreement by the parties, the administering institution will appoint the appeal tribunal members.60 The eca Rules and the cpr Rules restrict the parties’ ability to choose the appeal tribunal. The former does not allow for any involvement by the parties in appointing the appeal tribunal,61 while the cpr Rules mandate that cpr submit to the parties a list of not less than seven potential appeal arbitrator candidates, pre-screed for conflicts and availability.62 One commentator has suggested that there is a benefit to restricting party input in the selection of arbitrators for merit appeals tribunals because there is a view that a party-appointed tribunal is at odds with the purpose of error correction, since party-appointed arbitrators may be more open to creative solutions for dispute resolution over the rigorous application of legal standards.63 Will the Appeal Tribunal Consist of a Sole Arbitrator or Three Arbitrators? How and When Will the Size of the Appeal Tribunal be Decided? Due to the nature and purpose of merit appeals, most merit appeals rules default to the appointment of three-member tribunals. The eca Rules are the only rules that mandate a three-member appeal tribunal.64 Given the added costs of using three-member tribunals at both stages of the dispute resolution process, there is a solid argument for parties who anticipate the necessity of an appeal to use a sole arbitrator at first instance. Some commentators argue that parties who agree to the availability of merits appeals in their arbitration agreement should opt for a sole arbitrator in the underlying arbitration and a panel of three arbitrators for the merit appeals because the increase in number of adjudicators “is a critical condition for the effectiveness of review for error.”65 Moreover, in the event no appeal is commenced, using a sole arbitrator at first instance will be more cost-effective than a three-member tribunal for the underlying arbitration. As noted in the commentary to the cpr Rules, it is the inability to appeal arbitration awards that often leads parties to opt for costlier three-member tribunals at first instance.66

12

60 See jams Rule A; aaa/icdr Rule A-5 and Arbitration Place Rule 8. 61 Rule 28.5. 62 Rule 4.2. 63 Ten Cate, supra note 25 at pages 1143–1154. 64 Rule 28.5. 65 Ten Cate, supra note 25 at page 1157. 66 See under the heading “Rationale” in the Commentary following the cpr Rules.

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Will Specific Qualifications be Specified for the Merit Appeals Arbitrators? The cpr Rules are the only merit appeals rules that specify that members of an appeal tribunal will consist entirely of former federal judges.67 This is not surprising given the ability of parties to use the appeal tribunal to decide applications under section 10 of the Federal Arbitration Act. Parties will want to consider whether experience hearing appeals is an asset for prospective merit appeals tribunal members. Parties should also consider many of the factors they would consider in selecting any arbitral tribunal based on the context of their particular dispute.

13

14 What Remedies are Open to the Merit Appeals Tribunal? Common remedies provided for merit appeals tribunals are to affirm, modify or reverse the underlying award.68 A more controversial question is whether the merit appeals tribunal ought to have the authority to order a new arbitration hearing or remit the award back to the original tribunal with directions. In addition to the cost of remanding the matter back for a third opportunity to be adjudicated, practical issues may arise where the original tribunal is no longer available. The Arbitration Place Rules are the only merit appeals rules that allow the merit appeals tribunal to remand the arbitration back to the original tribunal, but this may only be done where the original tribunal is available and willing and the merit appeals tribunal “considers it appropriate and efficient.”69 15 How Will the Merit Appeals Tribunal’s Award be Implemented? There is a need to consider whether the merit appeals award is subject to court review in the ordinary way, and how the underlying award and merits appeals award will be subject to recognition and enforcement. In jurisdictions in which court review can be curtailed, should the appeal rules curtail or limit the review of merit appeals awards by requiring the parties to waive it? Most merit appeals rules provide that upon appeal, the underlying award is no longer considered final for the purposes of any court proceeding, whether

67 68

69

Rule 1.2. cpr Rule 8.3 allows the merit appeals tribunal to approve, modify or set aside an award. aaa/icdr Rule A-19 allows the merit appeals tribunal to adopt the underlying arbitration award or substitute its own. jams Rule D allows the merit appeals tribunal to “affirm, reverse or modify” the underlying award. Rule 20.

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seeking to have it set aside or seeking to have it recognized and enforced.70 But what happens, particularly to applications seeking recognition and enforcement, in situations in which the underlying award is upheld or varied in part? Is it both awards that are being recognized and enforced? The eca Rules do not directly address the impact of merit appeals on the underlying awards but state that when a party disputes the first instance award, “[i]t may be in the interest of the parties to provide that any other possible attacks, available at the time of the issue of the first instance award or after it, be preserved.”71 iii

Merit Appeals are a Live Issue in International Arbitration

There is limited data available on the impact of the lack of merit appeals in international commercial arbitration. In preparing for this paper, we contacted the aaa/icdr, the cpr, and jams for information concerning the use of their merit appeals procedures. As of November 2015, the cpr Appeal Procedures were initiated three times, all by first time users of the cpr Appeal Procedures and mid to large sized companies. In one instance the parties modified the cpr Rules to provide for a single arbitrator. The financial impact of the disputes ranged from between $1-10 million, to over $24 million. In the last five years, jams has conducted 24 appeals, not all of which were necessarily conducted pursuant to jams’ Optional Arbitration Appeal Procedure—some were pursuant to an appellate procedure written into the parties’ arbitration agreement. Lastly, the aaa/icdr could not confirm any specific data, but reported that a few cases may have invoked the Optional Appellate Arbitration Rules. At minimum, these anecdotes, in addition to some broader survey studies discussed below, appear to confirm that there is a material part of the international arbitration community which identify a lack of a merit appeal in international arbitration as an impediment to the choice of arbitration as the method of dispute resolution. The 2011 Cornell-Pepperdine/Straus Institute—cpr Survey (“CornellPepperdine Survey”), which canvassed predominantly general counsel in Fortune 1000 companies, suggested that companies view the lack of appeal mechanisms in arbitration as a deterrent to choosing arbitration: over one-half 70 71

aaa/icdr Rule A-2(a); jams Rules C; cpr Rule 2.4; Arbitration Place Rule 3. Rule 23.14.

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of respondents indicated that they did not choose arbitration because awards are difficult to appeal.72 More recently, the White & Case / Queen Mary University of London International Arbitration Survey, “Improvements and Innovations in International Arbitration”, published in October 2015 (“White & Case Survey”), canvassed corporate counsel (8% of respondents), arbitration counsel, arbitrators and arbitration academics. The study found that the lack of appeals is an issue in international arbitration among a material number of the 763 respondents. Seventeen percent of those responding indicated that the lack of merit appeals is one of the “three worst characteristics of international arbitration” and only 18% of respondents stated that finality is one of the “three most valuable characteristics of international arbitration.”73 Although at first blush it may seem that in four years views have changed drastically, considerable weight must be given to the demographic of respondents in each study. The Cornell-Pepperdine Survey, as noted above, focused predominantly on general counsel in Fortune 1000 companies, while the White & Case Survey focused on arbitration practitioners and academics, with a smaller contingent of corporate counsel participants. The overall results of the White & Case survey do not necessarily reflect the extent of the views of corporate counsel, and indeed may point to a material divergence in views between corporate counsel and arbitration practitioners on the importance of arbitration appeals. Focusing only on corporate counsel respondents to the White & Case Survey, there is a greater concern over the lack of merit appeals in international arbitration than in the overall survey results. For example, 23% of corporate counsel thought there should be merit appeals mechanisms in international commercial arbitration. Moreover, in contrast to the overall results which ranked the lack of appeal mechanisms as the seventh worst characteristic of international arbitration, among corporate counsel it was the third most frequently cited worst characteristic of international arbitration.74

72

73

74

Thomas Stipanowich and J. Ryan Lamare, Living with “adr”: Evolving Perceptions and Use of Mediation, Arbitration and Conflict Management in Fortune 1,000 Corporations, 19 Harvard Negotiation Law Review 1 (2014) at page 51. 2015 International Arbitration Survey: Improvements and Innovations in International Arbitration prepared by White & Case llp and Queen Mary University of London, School of International Arbitration (available online at: http://www.whitecase.com/sites/whitecase/files/files/download/publications/qmul-international-arbitration-survey-2015_0. pdf) at page 7. White & Case Survey, page 8.

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While opinions certainly may vary, the data seems clear that there is significant interest among users in having merit appeals available in international arbitration and it appears quite likely that providing merit appeals options will help to increase the choice of arbitration as a dispute resolution process. One of the interesting questions answered in the White & Case Survey concerned the structure of merit appeals mechanisms. Fifty-two percent of respondents indicated that merit appeals should be within the system of international arbitration, meaning by appeal arbitration.75 iv Conclusion Finality is only the end of any debate concerning merit appeals in arbitration if two basic assumptions are true: (1) arbitrators never make material mistakes; and (2) the interests at stake in the arbitration are small enough that the risk of error is outweighed by the desire for a quick and efficient dispute resolution process.76 Of course, it is not difficult to imagine a dispute where neither of these assumptions hold true. Moreover, whether merit appeals are good or bad in theory, in practice it appears that a substantial body of users want merit appeals options to reduce the risks of bad, or even worse, “off-the-wall” outcomes. This appears to be the case despite all of the concerns that users also express about the time and cost of international arbitration, and of dispute resolution generally. What is not known—although the studies may have produced enough data to get at it—is the profile of the user-respondents who responded to survey questions in support of appeals—or for that matter, against appeals. For example, it would be useful to know how those individuals and companies favoring arbitration appeals break down on various dimensions including: • • • • 75 76

experience / sophistication with arbitration; size of company; industry; and geography. White & Case Survey, page 9. Knull and Rubins, supra note 7 at page 532–533.

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If there is user demand for merit appeals, there is a compelling case to be made that international arbitration should offer appeal options or at least make their default rules compatible with parties being able to choose merit appeals. This would be consistent with the segmentation of the market for international arbitration and dispute resolution more generally. If there is a segment of the dispute resolution market that wants merit appeals in international arbitration— and it seems clear that there is—it behooves providers to offer various appeal options to those who are interested, just as arbitration is seeing a growth in regional options, fast-track options, industry specialized options, and so forth. Offering merit appeals options does not mean that endeavors should not continue to raise awareness among users and potential users about the benefits of faster, less expensive options to attain a final outcome. These include making more informed arbitrator appointments or by using three-member rather than one-member tribunals instead of providing for merit appeals. The desire among users for merit appeals in international arbitration at the very least deserves the attention of the major institutions and others poised to offer the most responsive and flexible merit appeals procedures that enable parties to make informed decisions on whether to adopt a merit appeals options, and if so, on what bases.

chapter 2

Are Emergency Awards Enforceable in the United States? A Guide for the Perplexed William G. Bassler* In the United States, the arbitral community is accustomed to having arbitrators issue interim orders, interim awards and partial final awards. However, an emergency measure of protection ordered by an emergency arbitrator before the panel has even been formed is a relatively new concept. In response to a real or perceived need, the major arbitral institutions over the past ten years have amended their rules to allow a party to obtain urgent temporary relief before the tribunal is constituted.1 In addition, surveys and reports from the institutional providers indicate that parties are seeking emergency measures in an increasing number of cases.2 * The Honorable William G. Bassler, FCIArb, is a retired u.s. District Court Judge of New ­Jersey. He is actively mediating and arbitrating as well as teaching Arbitration as an adjunct ­professor at Fordham University School of Law. He is a member of ali’s Consultative Group on the Restatement Third, The u.s. Law of International Commercial Arbitration. Judge Bassler was assisted in writing this article by Leah Kristina Charlesworth. Ms. Charlesworth is a j.d. Candidate (2016) at Fordham University School of Law. 1 Institutions early adopting provisions for emergency relief were: the International Center for Dispute Resolution (icdr) in 2006 updated in 2014; the Singapore International Arbitration Centre (siac) in 2010 updated in 2013; the Stockholm Chamber of Commerce (scc) in 2010; and the Netherlands Arbitration Institute (nai) in 2010. Institutions that later adopted emergency arbitrator provisions in their rules include: the Swiss Chambers Arbitration (Swiss Chambers) in 2012; the American Arbitration Association (aaa) in 2013; the International Institute for Conflict Prevention & Resolution (cpr) in 2013; the Hong Kong International Centre (hkic) in 2013; the London Court of International Arbitration (lcia) in 2014; jams in 2014; and China International Economic and Trade Arbitration Commission Arbitration Rules (cietac) in 2015. 2 The following numbers show the number of applications received as of March 2015 for each arbitral institution, in comparison to when the institution adopted emergency arbitrator provisions. icdr—2006; 49 applications received; 24 cases applicant was successful in obtaining full or partial emergency measures; applicant was unsuccessful in 14; 8 cases settled; 2 withdrawn scc—2010; 13 applications received; icc—2012; 15 applications received; 4 granted; 4 denied; 4 terminated by agreement;

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004334557_004

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As of 6 March 2015, arbitration users filed forty-nine applications for emergency measures pursuant to the procedures of the International Centre for Dispute Resolution (icdr).3 Since the International Chamber of Commerce (icc) adopted its emergency procedures in 2012, thirteen applications have been filed for emergency measures through 2014.4 As of March 2015, forty-two parties had sought relief under the Singapore International Arbitration Centre’s (siac) Emergency Measures provisions, which came into force in 2010.5 According to the Stockholm Chamber of Commerce (scc) reports, parties submitted thirteen applications under its emergency arbitrator procedures from 2010–2014, four of which were lodged in 2014.6 But the emergency arbitrator has a shadow side: the uncertainty of the arbitral community as to just how effective emergency awards are. This misgiving helps to explain why parties prefer to use relevant domestic courts for emergency relief.7 What causes most of the uncertainty about emergency arbitration is whether the emergency arbitrator’s decision will be enforced because it is not a final award.8 At the international level, the doubt about enforcement under the New York Convention arises because interim decisions do not dispose­of all

aaa—2013; 15 applications received; 4 decisions made; 3 cases withdrawn; 5 settled; 1 resulted in a final award hkiac—2013; 2 applications received jams—2014; 6 applications received; 3 went to a decision; 1 settled lcia—2014; 0 applications received See E. Sussman and A. Dosman, Evaluating the Advantages and Drawbacks of Emergency Arbitrators, New York Law Journal Special Report on Alternative Dispute Resolution, 3–4 (March 2015). 3 Sarah Vasani, The Emergency Arbitrator – An Effective Option for Urgent Relief, 17 Young Arb. Rev. 4 (Apr. 2015). 4 icc Statistics, http://www.iccwbo.org/Products-and-Services/Arbitration-and-ADR/Arbitra tion/Introduction-to-ICC-Arbitration/Statistics/ (last visited Mar. 30, 2016). 5 N. Vivekanada, The siac Emergency Arbitrator Experience, 19 Corporate Dispute Resolution Magazine (Jan. 2014). 6 Lotta Knapp, Five Years of Emergency Arbitrator Proceedings Under the scc Rules, http:// www.sccinstitute.com/media/62010/vinge-6604011-v1-berlin-_presentation_knapp_150306-2 .pdf. 7 See White & Case, 2015 International Arbitration Survey: Improvements and Innovations in International Arbitration, (2015) at 22, online: . 8 See id at 17. Stating that 79% of respondents point to concerns about the enforceability of emergency arbitrator decisions as one of the most important factors influencing their choice between seeking emergency relief from an arbitral tribunal versus a domestic court.

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the claims submitted.9 The New York Convention obliges contracting States to grant recognition and enforcement to foreign arbitral awards.10 However, the decisions of emergency arbitrators are not always classified as “awards” under institutional rules, and if the decision takes the form of an order or is not considered final, it is unlikely that the decision will be enforceable under the New York Convention.11 A similar uncertainty also arises with respect to emergency awards under the Federal Arbitration Act (faa).12 The cases on enforcement of interim awards are many, but cases on the enforcement of emergency decisions are few. We will evaluate the validity of the objection that emergency awards are ineffective because they are unenforceable by examining judicial opinions in the United States that have held interim arbitral decisions as final awards in arbitrations under the faa and domestic arbitrations under the New York Convention. Does the rationale enforcing interim awards apply equally to rulings of an emergency arbitrator? The following is a broad analysis keeping in mind the wisdom of the Medieval Jewish philosopher Maimonedes in the introduction to his Guide for the Perplexed: “A sensible man should not demand of me, or hope that when we mention a subject, we shall make a complete exposition of it.”

What is Emergency Relief?

Before exploring the issue of finality as it applies to interim measures by a fully constituted panel, we will first take a closer look at how various arbitral institutions implement the concept of emergency relief by a single emergency arbitrator appointed by the institution as distinguished from interim measures by the fully constituted panel or tribunal. In the words of Article 29 of the icc Arbitration Rules, emergency relief refers to “a party that needs urgent interim or conservatory measures that cannot await the constitution of an arbitral 9 10 11 12

Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Convention on the Recognition and Enforcement of Foreign Arbitral Awards art. 3 and 5 (1958). Guillaume Lemenez & Paul Quigley, The icdr’s Emergency Arbitrator Procedure in Action Part ii: Enforcing Emergency Arbitrator Decisions, 63 Disp. Res. J. 66, 68–69 (Jan. 2009). Federal Arbitration Act, 9 u.s.c. §§ 1–16 (2012); see also Chinmax Med. Sys. Inc. v. Alere San Diego, Inc., No. 10CV2467 wqh nls, 2011 wl 2135350, at 5 (s.d.Cal. May 27, 2011) (refusing to vacate order of emergency arbitrator under icdr Rules ordering production of documents to insure registration renewals on ground that it lacked jurisdiction over non final decisions).

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tribunal.”13 In the language of the London Court of International Arbitration Rules (lcia Rules), a party seeking such relief must submit an application that includes “the specific claim, with reasons, for emergency relief.”14 Similarly, the International Centre for Dispute Resolution Rules (icdr Rules) Article 6 speaks in terms of allowing a party to “apply for emergency relief.”15 Rule 38 of the Commercial Arbitration Rules and Mediation Procedures of the American Arbitration Association (aaa Rules) captures the concept of urgent emergency relief by saying that “immediate and irreparable loss or damage shall result in the absence of emergency relief.”16 The only sets of rules to explicitly use the term “emergency” with regard to the order or award itself are the Stockholm Chamber of Commerce Rules (scc Rules) and the Hong Kong International Arbitration Centre Administered ­Arbitration Rules (hkiac Rules). Specifically, scc Rules Appendix ii ­Emergency Arbitrator, Article 8 refers to an emergency arbitrator’s award or order as an “emergency decision.”17 The hkiac Rules Article 23.1 defines “emergency relief” as “urgent interim or conservatory relief”18 and in Appendix 4 further refers to the emergency arbitrator’s decision as the “emergency decision.”19 Most institutions refer to an emergency arbitrator’s decision as an order or award. The icdr Rules Article 6 provides that “the emergency arbitrator shall have the power to order or award any interim or conservancy measures the emergency arbitrator deems necessary.”20 Article 6(4) clarifies that “any 13

14 15

16

17

18

19 20

Int’l Chamber of Commerce, Rules of Arbitration art. 29 (2012), available at http://www .iccwbo.org/products-and-services/arbitration-and-adr/arbitration/icc-rules-of -arbitration/. London Court of Int’l Arbitration, lcia Rules art. 9.5 (2014), available at http://www.lcia .org/Dispute_Resolution_Services/lcia-arbitration-rules-2014.aspx. Int’l Ctr. For Dispute Resolution, Arbitration Rules art. 6 (2014), available at https:// www.adr.org/cs/groups/international/documents/document/z2uy/mdiw/~edisp/ adrstage2020868.pdf. American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures rule R-38(e) (2013), available at https://www.adr.org/aaa/ShowProperty?nodeId=/ UCM/ADRSTG_004103&revision=latestreleased. Stockholm Chamber of Commerce, scc Arbitration Rules 2010 appendix ii art. 8 (2010), available at http://www.sccinstitute.com/media/40120/arbitrationrules_eng _webbversion.pdf. Hong Kong Int’l Arbitration Ctr., Administered Arbitration Rules art. 23.1 (2013), available at http://www.hkiac.org/sites/default/files/ck_filebrowser/PDF/arbitration/2013_hkiac _rules.pdf. Id. appendix 4, art. 16. Int’l Ctr. For Dispute Resolution, Arbitration Rules art. 6(1)-(2) (2014), available at https:// www.adr.org/cs/groups/international/documents/document/z2uy/mdiw/~edisp/ adrstage2020868.pdf.

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interim award or order shall have the same effect as an interim measure made pursuant to Article 24 and shall be binding on the parties when rendered.”21 Article 24 of the icdr Rules provides that “the arbitral tribunal may order or award any interim or conservatory measures it deems necessary” and that “such interim measures may take the form of an interim order or award.”22 The icdr Rules use the term “interim” for both emergency measures sought before a tribunal has been constituted, and interim measures sought after a tribunal has been constituted. The icc Rules shy away from referring to the decision of the emergency arbitrator as an award, mandating in Article 20(2) that the emergency arbitrator’s decision shall “take the form of an order.” On the other hand, the aaa Rules allow an emergency arbitrator to “enter an interim order or award granting the relief and stating the reason therefore.”23 The aaa Rules also refer to the interim award as an “interim award of emergency relief.”24 jams Comprehensive Arbitration Rules and Procedures (jams Rules) use the terms “emergency relief,” “order” and “award.” While Rule 2 for Party Self-Determination and Emergency Relief Procedure refers to “emergency relief,” jams Rule 2(c)(iv) clarifies that “the Emergency Arbitrator shall enter an order or Award granting or denying the relief, as the case may be, and stating the reasons therefor.”25 The cpr Administered Arbitration Rules do not refer specifically to emergency relief, award or order. Instead, Rule 14 provides for “Interim Measures of Protection by a Special Arbitrator.”26 The special arbitrator may state in such award or order whether or not the award or order is final for purposes of any judicial proceedings.27 While the terminology is different, the process for obtaining emergency relief is basically the same and relatively straightforward. The party seeking emergency relief must file a written request for emergency relief with the

21 22 23

24 25

26

27

Id. art. 6(4). Id. art. 24. American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures rule R-38(e) (2013), available at https://www.adr.org/aaa/ShowProperty?nodeId=/ UCM/ADRSTG_004103&revision=latestreleased. Id. at rule R-38. jams, Comprehensive Arbitration Rules and Procedures art. 2(c)(iv) (2014), available at http://www.jamsadr.com/files/Uploads/Documents/JAMS-Rules/JAMS_comprehensive _arbitration_rules-2014.pdf. Int’l Institute for Conflict Prevention & Resolution, Administered Arbitration Rules rule 14 (2013), available at http://www.cpradr.org/RulesCaseServices/CPRRules/Administered ArbitrationRules.aspx. Id. rule 14.10.

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arbitral institution.28 Although the time frames may differ depending on the arbitral institution, the rules uniformly provide for the speedy appointment of a solo emergency arbitrator by the institution.29 The emergency arbitrator then has to promptly schedule a hearing and issue an award or an order. Generally, the emergency arbitrator may grant relief if the party shows that immediate and irreparable loss or damage will result if emergency relief is not granted, and that the requesting party is entitled to such relief.30

The Experience of the Enforceability of Interim Awards

While the emergency arbitrator is a relatively new kid on the block, arbitrators appointed by the parties have a long track record with respect to interim orders and awards. The major arbitral institutions uniformly provide that the arbitral panel has the authority to issue interim measures deemed necessary for the protection or conservation of property.31 28

29

30

31

See Hong Kong Int’l Arbitration Ctr., Administered Arbitration Rules schedule 4, art. 2 (2013), available at http://www.hkiac.org/sites/default/files/ck_filebrowser/PDF/arbitra tion/2013_hkiac_rules.pdf; American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures rule R-38(b) (2013), available at https://www.adr.org/aaa/ ShowProperty?nodeId=/UCM/ADRSTG_004103&revision=latestreleased; Int’l Chamber of Commerce, Rules of Arbitration art. 29 (1)(2012), available at http://www.iccwbo.org/ products-and-services/arbitration-and-adr/arbitration/icc-rules-of-arbitration/; Int’l Ctr . For Dispute Resolution, Arbitration Rules art. 6 (2014), available at https://www.adr.org/ cs/groups/international/documents/document/z2uy/mdiw/~edisp/adrstage2020868 .pdf; London Court of Int’l Arbitration, lcia Rules art. 9.4-9.5 (2014), available at http:// www.lcia.org/Dispute_Resolution_Services/lcia-arbitration-rules-2014.aspx. Int’l Chamber of Commerce, Rules of Arbitration appendix v, art. 2 (1)(2012), available at http://www.iccwbo.org/products-and-services/arbitration-and-adr/arbitration/iccrules-of-arbitration/; Int’l Ctr. For Dispute Resolution, Arbitration Rules art. 6(3) (2014), available at https://www.adr.org/cs/groups/international/documents/document/z2uy/ mdiw/~edisp/adrstage2020868.pdf; American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures rule R-38 (2013), available at https://www.adr .org/aaa/ShowProperty?nodeId=/UCM/ADRSTG_004103&revision=latestreleased. Peter Michaelson, When Speed and Cost Matter: Emergency and Expedited Arbitration, 218 n.j.l.j. 50 (2014); see also Joe Matthews and Karen Stewart, Time to Evaluate the Standards for Issuance of interim Measures of protection in International Investment Arbitration, 25(4) Arb Int’l 529 (2009). See American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures R-37 (2013), available at https://www.adr.org/aaa/ShowProperty?nodeId=/ UCM/ADRSTG_004103&revision=latestreleased; Int’l Ctr. For Dispute Resolution,

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However, the prevailing view worldwide is that because interim awards, including emergency awards, can be rescinded or varied by the tribunal, they are not final awards and therefore judicially unenforceable.32 The minority view, on the other hand, is that the finality requirement should be construed broadly so as to allow enforcement of emergency awards of provisional measures.33 Under the New York Convention, which is applicable to international arbitration awards enforced in countries that have adopted the convention, an award must be binding in order to be recognized and enforced.34 Although the New York Convention does not explicitly state than an award must be final, many jurisdictions conclude that it must be.35 What constitutes finality under the New York Convention has been open to debate since the New York Convention’s inception in 1958. Generally, an award is considered final if it deals with all the claims on the merits, or if the award denies the tribunal’s jurisdiction over the dispute submitted to it.36 In ruling on whether an arbitration award is

32

33

34

35

36

Arbitration Rules art. 24 (2014), available at https://www.adr.org/cs/groups/international/ documents/document/z2uy/mdiw/~edisp/adrstage2020868.pdf; Conflict Prevention and Resolution, Administered Arbitration Rules rule 14 (non administered) (2013), available at http://www.cpradr.org/RulesCaseServices/CPRRules/AdministeredArbitrationRules. aspx. Peter J.W. Sherwin & Douglas C. Rennie, Interim Relief Under International Arbitration Rules and Guidelines: A Comparative Analysis, 20 Am. Rev. of Int’l Arb. 317, 326 (2010); see also Paata Simsive, Indirect Enforceability of Emergency Arbitrator’s Orders, Kluwer Arbitration Blog (Apr. 15, 2015), available at http://kluwerarbitrationblog.com/2015/04/15/ indirect-enforceability-of-emergency-arbitrators-orders/; see also Marc S. Palay & Tanya Landon, A Comparative Review of Emergency Arbitrator Provisions: Opportunities and Risks, The Int’l Comparative Legal Guide to Int’l Arb., 5 (9th ed., 2012). Paata Simsive, Indirect Enforceability of Emergency Arbitrator’s Orders, Kluwer Arbitration Blog (Apr. 15, 2015), available at http://kluwerarbitrationblog.com/2015/04/15/ indirect-enforceability-of-emergency-arbitrators-orders/. Convention on the Recognition and Enforcement of Foreign Arbitral Awards art. 5(1)(e) (1958); see also Albert Jan van den Berg, The New York Convention of 1958: An Overview, Int’l Council for Commercial Arb., 17 (2008). Nadia Darwazeh, Article V(1)(e), in Recognition and Enforcement of Foreign Arbitral Awards: A Global Commentary on the New York Convention 301 (Kluwer Law International 2010); see also Daniel E. Gonzalez and Maria Eugenia Ramirez, International Commercial Arbitration: Hurdles When Confirming a Foreign Arbitral Award in the u.s., 83(10) Fla. Bar J. 59, 61 (2009). See icca’s Guide to the Interpretation of the 1958 New York Convention: A Handbook for Judges (International Council for Commercial Arbitration, 2011), p. 17.

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final, courts look to the subject matter of the decision rather than whether the tribunal uses the word order or award.37 Our focus here, however, is the United States, where an award must be final to be enforceable. The primary u.s. federal law applicable to almost all domestic arbitrations is the faa.38 But the New York Convention, is also a part of federal law having been incorporated into American law at 9 u.s.c. §201.39 Section 207 of the faa requires an international award to be confirmed unless the court finds that one of the grounds for refusal or deferral of recognition or enforcement of the award specified in Article v of the New York Convention applies.40 One of those grounds is the lack of a final award.41 The requirement that an award be final before it can be enforceable finds its origin in judicial precedent interpreting the faa,42 policy considerations,43 and the language of the faa itself.44 Section 9 of the faa obligates courts to confirm an award unless it is “vacated, modified, or corrected” pursuant to Sections 10 and 11.45 Under Section 10(d), a court can vacate an award that is not “mutual, final and definite.”46 Thus, unless the award is final, a court in the United States is without jurisdiction to either confirm or deny an award.47

37 38

39 40 41

42 43

44 45 46 47

See id. Federal Arbitration Act, 9 u.s.c. § 1 (2012), et seq. See David E. Wagoner, Interim Relief in International Arbitration: Enforcement is a Substantial Problem, in aaa Handbook on Int’l Arb. and adr 145, 148 (2nd ed. 2010). Sections  301–307 govern awards subject to the Inter-American Convention on International Commercial Arbitration (Panama Convention). Federal Arbitration Act, 9 u.s.c. § 207 (2012). Albert Jan van den Berg, The New York Convention of 1958: An Overview, International Council for Commercial Arbitration, 17 (2008); see also Ecopetrol, S.A. v. Offshore Exploration and Production, 46 F. Supp. 3d 327, 328 (s.d.n.y. 2014) (“Under the Convention, district courts lack authority to confirm arbitral awards that are not final awards.”). See Rocket Jewelry Box, Inc. v. Noble Gift Packaging,157 F.3d 174, 176 (2d Cir.1998) (per curiam). “[A] district court should not ‘hold itself open as an appellate tribunal’ during an ongoing arbitration proceeding, since applications for interlocutory relief result only in a waste of time, the interruption of the arbitration proceeding, and delaying tactics in….” Michaels v. Mariforum Shipping, 624 F.2d 411 (2d Cir.1980) quoting Compania Panemena Maritima, v. J.E.Hurlwy Lumber Co., 244 F.2d 286 at 288–89 (2d Cir. 1957). Michaels v. Mariforum Shipping, 624 F.2d 411, 414 (2d Cir. 1980). Federal Arbitration Act, 9 u.s.c. § 9 (2012), et seq. Federal Arbitration Act, 9 u.s.c. § 10(d) (2012). Metallgesellshaft A.G. v. Capitan Constante, 790 F.2d 280 (2d Cir. 1985) (“Lack of finality is a statutory ground for vacating an arbitration award and for refusing confirmation …”).

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A classic example that an award must be final before it is enforceable can be found in the often cited case of Michaels v. Mariforum Shipping.48 There the panel, delivering what it called a “Decision & Interim Award,” held the Charterer liable on some of the owner’s counterclaims, deferred consideration on others, postponed consideration of the damages on the counterclaims, and did not decide any of the Charterer’s claims. The Court had no difficulty in identifying this “Interim Award” as premature and interlocutory, thus denying statutory jurisdiction to review it because the “Interim Award” did not decide all the claims submitted. The Court quoted with approval the New York Court of Appeals observation that: For the court to entertain review of intermediary arbitration decisions involving procedure or any other interlocutory matter, would disjoint and unduly delay the proceedings, thereby thwarting the very purpose of conservation.49 On the other hand, it is now black letter law in the United States that if an arbitral tribunal issues an award that finally and definitely disposes of at least one separate independent claim, that claim can be confirmed even if the award does not decide all the claims that were submitted. That principle is exemplified in the case of Metallgesellschaft a.g. v. Capitan Constante.50 In deciding one of the issues submitted to them, the arbitrators entered an award for freight charges admittedly due and owing under well-established maritime law that where freight is payable on delivery, it must be paid concurrently with the delivery of the goods. Rejecting the argument that the award could not be confirmed because not all of the issues submitted were resolved, the Court noted that Metallgesellschaft’s liability for freight was independent and separate from the charterer’s claims of unseaworthiness and voluntary deviation and could be finally determined without reference to those issues.51 Another case, Island Creek Coal Sales Company v. City of Gainsville,52 demonstrates that, under United States jurisprudence, an interim award that finally and definitively disposes of a separate, independent claim may be confirmed even when all the claims submitted to arbitration have not yet been decided. 48 49 50 51 52

624 F.2d 411 (2d Cir. 1980). Mobil Oil Indonesia Inc. v. Asamera Oil (Indonesia) Ltd., 43 N.Y.2d 276, 278 (1977). 790 F.2d 280 (2d Cir. 1985). Id. at 282. 729 F.2d 1046 (6th Cir. 1984) (abrogated on ground of venue by Cortez Byrd Chips, Inc. v. Bill Harbert Const. Co., 529 u.s. 193, 120 S. Ct. 1331, 146 L. Ed. 2D 171 (2000)).

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In Island Creek Coal Sales Company v. City of Gainsville, Gainsville requested in the arbitration proceedings a declaration that Island Creek had breached the long term coal sales agreement and that it had the right to terminate it.53 After a full evidentiary hearing but before the panel had concluded the hearing until receipt of post-hearing briefs, Gainsville announced that it intended to terminate the agreement. The arbitrators ruled that Gainsville was required to continue performance of the contract by accepting shipments of coal until further order of the panel. Although the contract was silent on the question of equitable relief, the Court recognized that the parties had adopted the aaa Commercial Rules by reference and Rule 43 (now Rule 47) provided that “the arbitrator may grant any remedy or relief which the arbitrator deems just and equitable and within the scope of the agreement of the parties, including but not limited to specific performance of a contract.”54 Gainsville argued that under Section 10(d) of the faa that the interim order was not final and therefore not subject to confirmation. The Court responded that the requirement of finality was satisfied because the interim award disposed of “one self-contained issue, namely, whether the City [was] required to perform the contract during the pendency of the arbitration proceedings.”55 Since the award disposed of a “separate, discrete, independent, severable issue,” it could be confirmed.56 Severability of a self-contained issue is not the only ground for enforcing an interim award. Courts also consider as final, interim awards that grant temporary equitable relief to preserve the integrity of the award. For example, in Sperry International Trade v. Government of Israel,57 Sperry initiated arbitration proceedings seeking a declaration that Israel had breached its contractual obligation and demanded damages of approximately $10 million. Israel denied that it had frustrated Sperry’s attempts to perform and countered with eleven counterclaims, including Sperry’s nonperformance of the contract. The panel responded to Sperry’s request to enjoin Israel from drawing down on a $15 million irrevocable letter of credit, by entering an award ordering that the proceeds of the letter of credit be held in an escrow account in the joint names of Israel and Sperry. In the hearing before the District Court to confirm the award, Israel contended that the award was an interim decision not ripe 53 54 55 56 57

Id. Id. at 1049. Id. Id. 689 F.2d 301 (2d Cir. 1982).

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for confirmation, citing Michaels v. Mariforum Shipping.58 This contention was later withdrawn.59 The Court of Appeals held that the arbitrators acting under the aaa Rules could grant interim injunctive relief by exercising the “power to prevent” drawing down the proceeds of a letter of credit, “pending a decision [by the arbitrators] of the claims.”60 There is now a jurisprudential consensus among trial and appellate courts that interim relief that is essential to preserve assets or enforce performance will be considered final awards.61 As the Ninth Circuit Court of Appeals in Pacific Reinsurance Management Corp v. Ohio Reinsurance Corp observed, such awards in the United States are considered final awards even though the equitable relief is temporary.62 In Banco de Seguros del Estado v. Mutual, the Second Circuit Court of Appeals recognized as a ground for enforcement the parties’ contract: “it is not the role of the courts to undermine the comprehensive grant of authority to arbitrators by prohibiting an arbitral s­ ecurity award that ensures a meaningful final award.”63 And the Fourth Circuit concluded in Arrowhead Glob. Sols, Inc. v. Datapath, Inc64 that courts in the United States have the power to confirm and enforce equitable relief as final “in order for the equitable relief to have teeth.”65 So far we have been looking at interim awards deemed to be final for purposes of enforcement under the faa. Would there be a different result if the arbitration were conducted in the United States and subject to the New York Convention? An action arises under the Convention where the agreements at issue are commercial and not entirely between citizens of the United States.66

58 59 60 61

Id. Id. at n. 3. Id. at 306. Yonir Techs., Inc. v. Duration Sys. (1992) Ltd., 244 F. Supp. 2d 195, 204 (s.d.n.y. 2002) (finding that emergency awards that ordered outsiders to distribute an account for joint venture assets and restriction on outlays were final because they protected the final award from being meaningless, whereas an emergency award that distributed copies of joint venture bank statements and reports was too attenuated from asset preservation to be considered a final award). 62 935 F.2d 1019, 1023 (9th Cir. 1991). 63 344 F.3d 255, 262 (2d Cir. 2003). 64 166 F. App’x 39, 41 (4th Cir., 2006). 65 Id. 66 Federal Arbitration Act, 9 u.s.c. §202 (2012); see also Republic of Ecuador v. Chevron Corp, 638 F.3d 384, 391 (2d Cir. 2011).

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Article v of the New York Convention provides the exclusive grounds for refusing confirmation under the Convention. Article v(1) of the Convention provides in relevant part: Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that … (c) The Award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration …; or (e) The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.67 In Yusuf Ahmed Alghanim & Sons v. Toys “R” Us, Inc., the Second Circuit ­interpreted Article vi(1)(e) of the New York Convention “to allow a court in the country under whose law the arbitration was conducted to apply domestic arbitral law … to a motion to set aside or vacate that arbitral award.”68 Thus, if an interim award is not final, it can be vacated under the faa, 9 u.s.c. §10(a)(4). The lack of finality was one of the arguments made in an unsuccessful effort to vacate an interim award in Ecopetrol, s.a. v. Offshore Exploration and Production.69 In an arbitration seated in the United States under the New York Convention, the arbitral panel issued an interim award requiring that Offshore reimburse the purchasers, Ecopetrol, s.a. and Korea National Oil Corporation, $75,000,000 for taxes paid the Peruvian government as required by the Stock Purchase Agreement as a prerequisite to the arbitration. In a second interim award, the panel ordered that Offshore satisfy the interim award with funds not derived from the Escrow Amount.70

67 68 69 70

Convention on the Recognition and Enforcement of Foreign Arbitral Awards art. 5 (1958). See Yusuf Ahmed Alghanim & Sons v. Toys “R” Us, Inc.,126 F.3d 15, 20 (2d Cir. 1997) (citing New York Convention, art. v). 46 F. Supp. 3d 327 (s.d.n.y. 2014). In addition to requiring arbitration by the American Arbitration Association under its International Arbitration Rules, the Stock Purchase Agreement provided “the arbitrators shall have the power to grant any provisional measures that they deem appropriate including but not limited to provisional injunctive relief, and any provisional measures ordered by the arbitrators may the extent permitted by applicable law, be deemed to be a final award on the subject matter of the measures and shall be enforceable as such.” Id. at 332–33.

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The panel noted that its decision to require Offshore to pay initially for taxes assessed against the purchasers had no bearing on the ultimate issue of liability for the tax obligations. Judge Koetle, drawing on a substantial reservoir of federal jurisprudence, concluded: The Interim Arbitral Awards thus required specific action, resolved the rights and obligations of the parties with respect to the interim period at issue and did so without in any way affecting future decisions of the arbitral panel. Accordingly, the Interim Arbitral Awards are final and confirmable awards.71(Citation omitted) That an interim decision is labeled an order does not prevent it from being considered an interim final award. Publicis Communication v. True North Communications, Inc. involved arbitration before the lcia under the United Nations Commission on International Trade Law Arbitration Rules (uncitral Rules).72 The tribunal ordered Publicis to turn over tax records that True North said it needed to file with the Internal Revenue Service and the Securities Exchange Commission. Since the uncitral Rules Articles 31–37 refer to final decisions as awards and because the New York Convention speaks only of recognizing and enforcing an arbitral “award,” according to Publicis the order of the tribunal was unenforceable and it refused to turn over the records.73 When Publicis failed to comply with the order, True North went to the United States District Court for the Northern District of Illinois for confirmation of the arbitrators’ decision.74 In affirming the decision, the Court dismissed Publicis’ argument that the Order was not labeled as an award as “extreme and untenable formalism.”75 The Court noted that “[p]roducing the documents wasn’t just some procedural matter—it was the very issue True North wanted arbitrated. The finality of the tribunal’s ruling [was] demonstrated by the deadline. The tribunal explicitly carved out the tax records issue for immediate action 71 72 73

74 75

Id. at 337. 206 F.3d 725 (7th Cir. 2000). See id. at 728. The New York Convention only uses the word “award” and does not refer to an arbitral order or any other comparable term. The court notes that “commentators describe ‘awards’ as final and enforceable”, citing to Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration 360 (1991);Mauro Rubino Sammartano, International Arbitration Law, 410 (1989); Douglas D. Reichert, Provisional Remedies in the Context of International Commercial Arbitration, 3 Int’l Tax & Bus. Lawyer 368, 395 (1986). 206 F.3d, at 727 (7th Cir. 2000). Id. at 728.

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from the bulk of the matters still pending, stating that ‘[t]he delivery of the documents should not wait final confirmation in the Final Award.’”76 Although the arbitration was controlled by the New York Convention, not the faa, the Court reasoned that the logic of the decisions under the faa enforcing certain interim awards as final awards could be called upon to guide the interpretation of finality under the New York Convention.77 Finally, it should be noted that the draft Restatement of the Law Third/The u.s. Law of International Commercial Arbitration takes the position that an arbitral award may consist of a grant of interim relief.78 The following excerpt from the Comments is relevant to when we discuss the enforceability of emergency awards: ordinarily, interim measures are issued to preserve the status quo, to help secure satisfaction of an eventual award, or otherwise to promote the efficacy or fairness of the arbitral process. The precise relief they embody varies, but attachments of assets and grants of preliminary injunctive relief are common modes. An arbitral tribunal that awards interim measures retains the power to revise, suspend, or retract those remedies as required by the circumstances; that prerogative distinguishes interim measures from other types of awards, which are not ordinarily subject to being revised, suspended, or retracted by the issuing tribunal.79 The question now remains whether the analytical framework employed by courts of the Unites States for the enforcement of certain interim awards as final awards can throw any light on whether the rulings of emergency arbitrators can be judicially enforced when a recalcitrant party ignores the emergency arbitrator.

76 77 78

79

Id. at 729. Id. at 729. Restatement, sec. 1-1(a): “An ‘arbitral award’ is a decision in writing by an arbitral tribunal that sets forth the final and binding determination on the merits of acclaim, defense, or issue, regardless of whether that decision resolves the entire controversy before the tribunal Such a decision may consist of a grant of interim relief.” The definitions have been approved and are official ali work product. The Restatement, which is still a work in process, has not addressed the question of the enforceability of awards by an emergency arbitrator. See id. at 19.

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Are Emergency Awards Enforceable Interim Awards?

As we have seen with our discussion of interim awards, the predominant global view is that an emergency award is not final because it can be rescinded or varied by the arbitral tribunal.80 The icc Rules Article 29(3) expressly provides that the arbitral tribunal is not bound by any decision of the emergency arbitrator.81 The rules of the other institutions similarly provide that the tribunal, once constituted, can modify the emergency arbitrator’s ruling.82 This apparent lack of finality is called upon to support the argument that emergency orders are not awards and cannot be judicially enforced. Nevertheless, some scholars recognize that emergency awards and orders are enforceable because they may be “final” in terms of the issues they intend to address.83 In other words, emergency awards share enough finality with interim awards to justify enforcement.84 As previously noted, there are only a few published cases dealing with decisions by an emergency arbitrator. The most prominent case so far has been Yahoo! Inc. v. Microsoft Corporation.85 It deserves our attention. In 2009, the Emergency Arbitrator appointed by the aaa issued an award granting 80

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Peter J.W. Sherwin & Douglas C. Rennie, Interim Relief Under International Arbitration Rules and Guidelines: A Comparative Analysis, 20 American Review of Int’l Arbitration 317, 326 (2010); see also Paata Simsive, Indirect Enforceability of Emergency Arbitrator’s Orders, Kluwer Arbitration Blog (Apr. 15, 2015), available at http://kluwerarbitrationblog. com/2015/04/15/indirect-enforceability-of-emergency-arbitrators-orders/; see also Marc S. Palay & Tanya Landon, A Comparative Review of Emergency Arbitrator Provisions: Opportunities and Risks, The Int’l Comp. Legal Guide to Int’l Arb., 5 (9th ed., 2012). icc art. 29(3) states that the tribunal “may modify, terminate or annul the order or any modification thereto made by the emergency arbitrator”. See also Luis A. Perez & Francisco A. Rodriguez, A New International Option: The “Emergency Arbitrator”, Akerman Practice Update (Sept. 26, 2014), available at http://www.akerman.com/documents/res .asp?id=2072. E.g., Int’l Ctr. For Dispute Resolution, Arbitration Rules art. 6(5) (2014), available at https:// www.adr.org/cs/groups/international/documents/document/z2uy/mdiw/~edisp/ adrstage2020868.pdf. A. Yesilirmak, Provisional Measures in International Commercial Arbitration, paras 4–38 (Kluwer Law International, 2005). E.g., Publicis Communications v. True North Communications, 206 F.3d 725 (7th Cir. 2000) (finding that interim order was “final” and could be confirmed under the New York Convention); Pacific Reinsurance Management Corp v. Ohio Reinsurance Corp, 935 F.2d 1019, 1023 (9th Cir. 1991); Arrowhead Glob. Sols., Inc. v. Datapath, Inc., 166 F. App’x 39, 44 (4th Cir. 2006). 983 F. Supp. 2d 310 (s.d.n.y. 2013).

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Microsoft’s­request for injunctive relief. Microsoft and Yahoo had agreed to merge their search engines Bing and Panama so that their international search capabilities could better compete with Google. In fourteen out of sixteen geographic markets, Yahoo completed the transition of its advertising business to Microsoft’s Bing Ads system. But when Yahoo informed Microsoft that it was not proceeding with the migration of its Taiwan and Hong Kong markets Microsoft considered Yahoo had breached its contract and initiated an emergency arbitration under their agreement, which provided explicitly for emergency arbitration in some circumstances. The Emergency Arbitrator issued a decision eighteen days after initiation of the emergency award, finding that by refusing to proceed with the scheduled Taiwan and Hong Kong migrations, Yahoo had breached the parties’ Agreement. Finding further that the transition was critical because advertiser orders and preferences change over time, the Arbitrator concluded that the emergency required of the Emergency Rules in the contract was satisfied and that Yahoo’s breach established irreparable harm to Microsoft. The Arbitrator then enjoined Yahoo from continuing any pause in transitioning and “commanded [it] to use all efforts to complete the Taiwan transition by October 28, 2013 and the Hong Kong transition by November11, 2013.”86 Following the issuance of the award, Yahoo moved in the Federal District Court for the Southern District of New York to vacate the emergency award. Microsoft countered with a petition for confirmation of the award. Lack of finality was one of Yahoo’s objections to the confirmation of the award, citing the holding in the now familiar case of Michaels v. Mariforum Shipping, that “[w]here arbitrators make an interim ruling that does not purport to resolve finally the issues submitted to them, judicial relief is unavailable.”87 The time sensitive nature of the Hong Kong and Taiwan transitions and the concerns that Yahoo would not comply with the emergency award without judicial confirmation supported the Court’s conclusion that “the parties [had] a clear interest in enforcing the equitable award made by the Arbitrator as soon as possible.”88 In contrast to Yahoo! Inc. v. Microsoft Corporation, the poster child for the unenforceability of decisions by emergency arbitrators is Chinmax Medical Systems v. Alere San Diego.89 Chinmax, with its principal place of business in 86 87 88 89

Id. at 315. 983 F. Supp. 2d at 319. (citing Michaels v. Mariforum Shipping, 624 F.2d 411, 414 (2d Cir.1980)). Id. No. 10CV2467 wqh nls, 2011 wl 2135350 (s.d. Cal. May 27, 2011).

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Shanghai, was the exclusive distributor of medical devices manufactured by Alere, a Delaware Corporation. Claiming that Chinmax was in material breach of the distribution agreement for failing to make payments on delivered products totaling in excess of $2.5 million dollars, Alere informed Chinmax that it would not renew the agreement. Chinmax retained $2.5 million as a set off for damages Chinmax contended it suffered from Alere’s illegal sales. Alere filed a request for an emergency interim award pursuant to the ­Article  37 (now Article 6) of the icdr rules. The Emergency Arbitrator ­issued an “Order re [Alere’s] Request for Emergency Interim Award Pending ­Arbitration.” The interim award acknowledged the parties’ mutual interest in assuring the product registrations be renewed on time and not allowed to expire. ­Recognizing that the parties could not agree on a process, the Emergency Arbitrator ordered Chinmax to promptly deliver into escrow documents to insure that the product registrations would be timely renewed with China’s product registration and renewal agency. Since Chinmax had admitted it owed $2.8 million to Alere, the Emergency Arbitrator also ordered that Chinmax within ten days of the order to provide Alere a listing of all current bank accounts, bank contact information, bank account numbers and balances “in order to facilitate any consideration by the full panel of conservancy or other orders regarding payment of this amount.”90 In an interesting reversal of roles, Alere did not seek confirmation of the award but instead successfully opposed Chinmax’s motion to vacate the award on the ground that the Court did not have jurisdiction to review the interim order because it was not a final award. Citing Publicis Communication v. True North Communications, Inc.91 and Pacific Reinsurance Management Corp v. Ohio Reinsurance Corp,92 the Court concluded that the emergency interim award lacked finality because the icdr Rules allow the tribunal once it is constituted to “reconsider, modify or vacate the interim award or order of emergency relief and the emergency arbitrator did not intend the interim order to be final since the arbitrator stated that the interim order was issued to facilitate a conservancy order by the full arbitration panel.”93 It is questionable whether this decision has much of a judicial shelf life in light of the cases holding that interim awards that insure the viability of the final award possess sufficient indicia of finality to be enforceable. Interim awards by the fully constituted panel are also subject to later modification by 90 91 92 93

Id. at *3. 206 F.3d 725,729 (7th Cir. 2000). 935 F.2d 1019,1023 (9th Cir. 1991). No. 10CV2467 wqh nls, 2011 wl 2135350, at *5.

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the panel due to changed circumstances, but that has not deprived interim awards of being enforced. The decision also ignores the very agreement of the parties. When parties have agreed to arbitrate disputes pursuant to rules of an arbitral institution, the parties are deemed to have made the rules a part of their agreement.94 One of the basic concepts of arbitration is that the parties are within certain limits, “generally free to structure their arbitration agreements as they see fit…”95 As Professor Carbonneau has written: “Freedom of contract allows the parties to the arbitration agreement to write their own rules of arbitration-in effect, to have the agreement to arbitrate establish the law of arbitration for their particular transaction.”96 As the Supreme Court has stated, the faa “requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms.”97 Refusing to enforce an emergency award when the parties have granted the emergency arbitrator the power to issue emergency awards depreciates the principle of freedom of contract. Of what value is a contractual provision as important as emergency relief if it is unenforceable? It is true, of course, that parties by agreement cannot invest courts with jurisdiction where none exists.98 However, since neither the faa nor the New York Convention define award, it is not necessary to construe it by denying judicial enforcement of an emergency ruling. In the first place, as to defining final, the dictionary definition of “final” includes both the concept of “reached or designed to be reached as the outcome of a process or series of events” as well “allowing no further doubt or dispute.”99 As Judge Weinfeld succinctly noted in Southern Seas 94

See, e.g., Int’l Ctr. For Dispute Resolution, Arbitration Rules art. 1 (2014), available at https:// www.adr.org/cs/groups/international/documents/document/z2uy/mdiw/~edisp/ adrstage2020868.pdf; Int’l Chamber of Commerce, Rules of Arbitration art. 6 (2012), available at http://www.iccwbo.org/products-and-services/arbitration-and-adr/arbitration/ icc-rules-of-arbitration/; American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures rule R-1 (2013), available at https://www.adr.org/aaa/ ShowProperty?nodeId=/UCM/ADRSTG_004103&revision=latestreleased; Preston v. Ferrer, 552 u.s. 346, 128 S. Ct. 978, 979, 169 L. Ed. 2D 917 (2008) (contract providing for arbitration in accordance with aaa rules incorporated the rules by reference). 95 Volt Info Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 u.s. 468 (1989). 96 Thomas E. Carbonneau, Arbitration Law and Practice (7th ed. 2013). 97 489 u.s. 468 (1989). 98 See Hall Street Associates v. Mattel, 552 U.S, 576 (2008) (Parties can’t by contract expand faa’s exclusive grounds for vacating, modifying or correcting arbitration award). 99 The New Oxford American Dictionary (3d ed. 2015).

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Navigation­v Petroleos Mexicanos of Mexico,100 an interim award of equitable relief based upon a finding of irreparable harm “is not ‘interim’ in the sense of being an ‘intermediate’ step toward a further end. Rather, it is an end in itself, for its very purpose is to clarify the parties’ rights in the ‘interim’ period pending a final decision on the merits.”101 The rationale applies equally to an interim award of equitable relief by the emergency arbitrator. Drawing upon the extensive precedent and the public policy for enforcing interim awards by a fully constituted panel, an emergency award by a single emergency arbitrator should be considered final enough to be enforced where (1) the decision disposes of a separate independent claim or issue; (2) the decision enforces the parties’ agreement by disposing of whether one party is entitled is entitled to emergency relief; or (3) the decision avoids irremediable harm and prevents the award from being rendered meaningless.102 A latitudinarian construction of finality informed by sound public policy should not invite judicial interference with the arbitration process. In the first place, the emergency arbitrator will be constrained by the contractual standards for relief. The concept of emergency relief is broad, but is not limitless. The interim measures of emergency arbitrators are easily distinguishable from the kinds of arbitral decisions that are immune from judicial scrutiny such as routine scheduling, evidentiary rulings, and procedural rulings that serve organizational purposes.

Emergency Arbitrator: Quo Vadis?

The answer is: “I’m here to stay.” The emergency arbitrator is institutionalized in the rules selected by the parties to govern their domestic and international arbitrations103 and accepted by the arbitral community as evidenced by their use.104 Since the degree of voluntary compliance with interim measure issued by the arbitral tribunal is high,105 there is every reason to expect a similar­ 100 606 F.Supp. 692 (s.d.n.y. 1985) (confirming interim award of equitable relief removing charterer’s notice of claim on lien on vessel because it was preventing owner from transferring vessel and in a transaction vital to its continued financial viability). 101 606 F. Supp. 692, 694 (s.d.n.y. 1985). 102 Diora Ziyaeva, Interim and Emergency Relief in International Arbitration, 302 (2015). 103 See supra n. 1. 104 See supra n. 2. 105 Cooper v. Ateliers de la Motobecane, s.a., 442 N.E.2d 1239, 1242 (n.y. 1982) (“Voluntary compliance with arbitral awards may be as high as 85%”); see David L. Zicherman, The Use of Pre-Judgment Attachments & Temporary Injunctions in International Commercial

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degree of compliance with emergency measures issued by the emergency arbitrator.106 Such voluntary compliance may be expected because noncompliance could entail serious consequences. It could impair the credibility of the nonperforming party or afford the aggrieved party with a claim for damages, or under some rules a claim for specific performance as well as laying the groundwork for drawing adverse inferences.107 But there still remains the possibility that a recalcitrant party will ignore the emergency ruling which could seriously undermine the effectiveness of a final award later on. That possibility was present, as we saw earlier in the discussion of Yahoo!, Inc. v. Microsoft Corporation.108 The Courts of the United States have developed a fairly uniform method of construing finality to insure enforceability of interim awards. This jurisprudence should be available to serve the enforceability of rulings of emergency arbitrators that fall within that jurisprudential framework and the applicable institutional standards governing emergency relief. Because of the importance of enforcing emergency awards, some states, such as Singapore and Hong Kong, have adopted legislation expressly providing for the recognition and enforcement of emergency arbitrator’s orders. On April 9 2012, the Singapore Parliament introduced amendments to the International Arbitration Act which ordered that an emergency award has the same legal status as those handed down by regularly constituted arbitral tribunals.109 Under hkiac Administered Arbitration Rules (2013 Edition), Article 23.1 allows Arbitration Proceedings: A Comparative Analysis of the British & American Approaches, 50 U. Pitt. L. Rev. 667, 667 (1989) (“The [icc] estimates that there are problems with enforcement or execution of the award in fewer than ten percent of the cases resolved by its Court of Arbitration”); see also Peter J.W. Sherwin & Douglas C. Rennie, Interim Relief Under International Arbitration Rules and Guidelines: A Comparative Analysis, 20 Am. Rev. of Int’l Arb. 317, 324 (2010). 106 Fabio G. Santacroce, The Emergency Arbitrator: A Full-Fledged Arbitrator Rendering an Enforceable Decision?, 31(2) Arb. Int’l 213 (2015). 107 Id. at 289; see also David R. Haigh and Joanne Luu, Provisional Remedies and Interim Relief in Oil & Gas Arbitrations, in The Leading Practitioners’ Guide to International Oil & Gas Arbitration 751, 771 (James M. Gaitis ed., juris 2015). 108 983 F. Supp. 2d 310 (s.d.n.y. 2013). 109 See siac, Singapore makes key amendments to the International Arbitration Act, (June 26, 2012), available at http://www.siac.org.sg/2013-09-18-01-57-20/2013-09-22-00-31-29/ archive-2012/236-singapore-makes-key-amendments-to-the-international-arbitration -act; see also, Paata Simsive, Indirect Enforceability of Emergency Arbitrator’s Orders, Kluwer Arbitration Blog, (April 15, 2015).

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enforcement of the emergency arbitrator’s decision under sections  22A and 22B of the Hong Kong Arbitration Ordinance (in force since 19 July 2013 under Ordinance No. 7 of 2013).110 While such legislation is the optimal solution, it is not likely to happen any time soon in the United States. Nor is it necessary. Following the well-established case law in the United States on the enforceability of interim awards under certain circumstances, courts are free to focus on the object and purpose of the emergency award in assessing whether a given emergency decision may be considered final. The enforcement of arbitral interim measures is key to fulfilling the aim of the faa and the New York Convention. Absent a statutory definition of “award,” a purposive interpretation of the finality requirement for emergency arbitrator awards would enhance the effectiveness of arbitration and enforce the consensual arrangements and expectations of the parties. Whether the Circuit Courts of Appeal will embrace that approach, of course, remains to be seen.

110 Stephen Balthasar, hkiac: What Will the New Arbitration Rules Change?, Kluwer Arbitration Blog (Sept. 30, 2013), available at http://kluwerarbitrationblog.com/2013/09/30/ hkiac-what-will-the-new-arbitration-rules-change/.

chapter 3

Soft Law and Transnational Standards in Arbitration: The Challenge of Res Judicata William W. Park* Abstract Among the legal artifacts of international arbitration, few prove more significant in practice than the norms governing the nitty gritty conduct of proceedings in matters like evidence and discovery. In proceedings between adversaries from different countries, a transnational “soft law” often finds expression in rules, guidelines and canons of professional associations which serve to supplement the “hard law” of national statutes and court decisions. Memorializing the experience of those who sit as arbitrators or serve as counsel, such standards contain a degree of circularity, in that relevant norms both derive from and apply to cross-border arbitration. When a key procedural question eludes the parties’ agreement, either expressly or by reference to rules, arbitrators called to decide the quarrel often look to international standards as one analytic tool to balance efficiency and fairness. On many topics a reasonable consensus indicates shared pre-dispute expectations. Written witness statements stand as evidence in chief, with oral hearings devoted to cross-examination. Pre-trial discovery restricts itself to narrow and specific categories of documents. And the deontology of modern arbitration normally precludes ex parte communication about the case between arbitrator and counsel. By contrast, a common culture eludes other questions, such as when and why the loser should pay legal costs of the prevailing party, a mater that has long divided British and American legal traditions. Neither the nature nor the limits of “soft law” always present themselves with clarity. One salient illustration lies in the challenges faced by arbitrators applying doctrines of res judicata. When will an earlier judgment or award bind an arbitrator deciding a later case? Although most legal systems impose some finality for prior decisions, differences remain on many questions, including the preclusive effect of reasoning (as opposed to holding) and the right to relief on a theory that could have been, but was not, asserted in an earlier action. Often the litigants’ agreement fails to provide

* Professor of Law, Boston University. President, London Court of International Arbitration. General Editor, Arbitration International. The author acknowledges with thanks the helpful assistance of Maria Slobodchikova. Copyright 2016 © William W. Park.

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004334557_005

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standards on controverted questions whose answers fall beyond common practice. In such instances, the integrity of the process requires a healthy humility from scholars and practitioners professing to summarize arbitral standards.

…

The life of the law has not been logic: it has been experience.†

⸪ i

Soft Law in International Arbitration

When people talk about law, they usually invoke governmental instruments such as statutes, court cases, treaties, and administrative regulations. Increasingly, however, the field of international arbitration has witnessed the appearance of a “soft law” derived from an emerging legal culture common to participants in the arbitral process.1 These principles build on institutional rules and professional guidelines addressing procedural questions such as presentation of evidence and conflicts of interest.2 Examples include International Bar Association pronouncements (fixing rules on taking of evidence and ethical conduct),3 along with the International Law Association recommendations on matters such as res judicata and applicable law.4

† Oliver Wendell Holmes, Jr., The Common Law 1 (1881). 1 On the culture of international arbitration, to which we shall later revert in more detail, see generally Joshua Karton, The Culture of International Arbitration and the Evolution of Contract Law (2013). 2 See e.g., Hanneke van Schooten & Jonathan Verschuuren, International Governance and Law State Regulation and Non-State Law 19 (2008); William W. Park, Procedural Default Rules Revisited, in Arbitration Insights: Twenty Years of the Annual Lecture of the School of International Arbitration (Julian D.M. Lew & Loukas A. Mistelis, eds. 2007). 3 iba, Guidelines on Conflict of Interest in International Arbitration (2014); iba Rules on the Taking of Evidence in International Arbitration (2010); iba, Guidelines on Party Representation in International Arbitration (2013). See also College of Commercial Arbitrators, Guide to Best Practices in Commercial Arbitration (James M. Gaitis, Carl F. Ingwalson, Jr. & Vivien B. Shelanski, eds. 3rd ed. 2013). 4 See generally Filip de Ly & Audley Sheppard, ila Final Report on Res Judicata in Arbitration, 25 Arb. Int’l 63 (2009); International Law Association International Commercial Arbitration

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On some topics “soft law” addresses problems lying in the interstices between substantive norms and arbitral procedure. A notable example presents itself in the body of awards addressing when arbitration clauses extend to non-signatories, a matter encompassing arbitral practice as well as contract law principles on doctrines like agency or estoppel.5 Some scholars object to the term “soft law” seeing law as having a binary character, either on or off, lacking a dimmer making norms brighter or darker.6 In this connection, the legitimacy of “soft law” has been obscured by conflation of two notions. On the one hand, an inappropriate form of “soft law” seeks simply a fig leaf to hide an arbitrator’s idiosyncratic personal preferences, pressed into service to justify derogation from a duty to apply relevant and predictable norms. On the other hand, “soft law” which represents a fruit of careful thought by experienced practitioners, hailing from different legal cultures, provides a tool to help fill procedural gaps on matters like document production, witness statements and conflicts of interest.7 Debate on the nature of “soft law” recalls the proverbial controversy over whether public international is really “law” in the same sense as national law. Clearly, differences exist. The Massachusetts Consumer Protection Act, protecting buyers of footwear in Boston shops, differs in quality from the customary

Committee’s Report and Recommendations on Ascertaining the Contents of the Applicable Law in International Commercial Arbitration, 26 Arb. Int’l 193 (2010). 5 See William W. Park, Non-signatories and International Contracts: An Arbitrator’s Dilemma, in Multiple Party Actions in International Arbitration 3 (Permanent Court of Arbitration, 2009), adapted n William W. Park, Arbitration of International Business Disputes 297 (2d Ed 2012) (Chapter ii-A-6). 6 Thomas Schultz, Transnational Legality: Stateless Law and international Arbitration 18–19 (2014); W. Michael Reisman, Soft Law and Law Jobs, 2 J. Int’l Disp. Settlement 26–27 (2011). Compare Reisman’s earlier exploration of “micro legal systems” such as staring or standing in line: W. Michael Reisman, Law in Brief Encounters (1999). 7 See, e.g., Gabrielle Kaufmann-Kohler, Soft Law in International Arbitration: C ­ odification and Normativity, 1 J. Int’l Disp. Settl’t 283, 297 (2010) (“It is clear from these ­developments that soft law enjoys some degree of normativity, which could be called soft normativity. This normativity may be considered soft because soft law exercises a certain influence and is regarded with deference without being perceived as mandatory in the classic sense of the word.”); see also Lawrence W. Newman & David Zaslowsky, Soft Law Guides Parties on Procedures in International Arbitration, 24 March 2011 New York Law Journal nylj p.3, col.1 Volume 245; Issue 56 (2011); Thomas Stipanowich, Soft Law in the Organization and General Conduct of Commercial Arbitration Proceedings (2014), http://papers.ssrn.com/sol3/papers .cfm?abstract_id=2407187.

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“law of nations” elaborated through state practice on maritime boundaries and diplomatic protection.8 Yet each category of law serves a similar purpose. Each legal system assists those entrusted with authoritative dispute resolution by providing information on community expectations, substantive and procedural. Much the same might be said of “soft law” norms. To ask whether the different legal orders should be lumped together as “law” may be a bit like inquiring whether chess should be called a game. Chess differs dramatically from baseball, football, squash and tennis, involving little vigorous physical activity, and lacking round objects to throw or to hit. Yet chess, just like baseball, football, squash and tennis, represents activity engaged in for amusement to which common parlance assigns “game” as a generic tag. Sometimes “soft law” dovetails into hard law, finding its way into national court cases to fill procedural interstices.9 This has happened, for example, in American cases involving judicial annulment of awards for “evident partiality”10 and non-disclosure of negotiations with one side to the proceedings.11 Thus 8

To expand the analogy, one notes that English legal tradition differs in significant ways from foundations of law in Continental Europe, the latter restricting law-making power of courts, an attitude derived from anxiety in Revolutionary France over judicial tyranny in the ancien régime. Article 5 of French Code civil forbids judges from purporting to make general rules: “Il est défendu aux juges de prononcer par voie de disposition générale et réglementaire sur les causes qui leur sont soumises.” (It is forbidden for judges to decide cases submitted to them by general or regulatory dispositions.) In practice, of course, French judges remain mindful of hierarchy, often citing scholarly summaries. See generally, Denis Tallon, Précedent, in Dictionnaire de la Culture Juridique 1185–1187 (2003). 9 Compare George A. Bermann, “International Standards” as a Choice of Law Option in International Commercial Arbitration, Liber Amicorum en l’Honneur de William Laurence Craig 17 (2016), listing a category of topics that includes joinder of non-signatories and the waiver of a right to arbitrate. 10 See Applied Indus. Materials Corp. (aimcor) v. Ovalar Makine Ticaret Ve Sanayi, a.s., 2006 wl 1816383, at *1 (s.d.n.y. June 28, 2006) aff’d 492 F.3d 132 (2d Cir. 2007). In vacating an award for arbitrator failure to investigate relevant business contacts with one party’s affiliate, the district court made reference to the iba Guidelines on Conflict of Interest as well as the American Arbitration Association Code of Ethics of Arbitrators. 11 See New Regency Prods., Inc. v. Nippon Herald Films, Inc.501 F.3d 1101 (9th Cir. 2007), upholding challenge to an award between a film distribution company and production company, where the arbitrator failed to disclose work as a senior executive with a company negotiating with one of the parties to finance a motion picture. The Ninth Circuit stated that although the iba Guidelines on Conflict of Interest are “not binding authority and do not have the force of law, when considered along with an attorney’s traditional duty to avoid conflicts of interest, they reinforce [the conclusion] that a reasonable impression

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soft-law instruments give rise to hard-law rulings providing guidance to emerging norms of a more permanent character. ii

Content of Soft Law

A Easy Cases Determining its content of “soft law” will be easier in some instances than in others.12 Some cases implicate relatively strong consensus among practitioners and scholars about what represents best practice, where rules and guidelines have crossed the line from the parties’ will in a particular case to a broader consensus on related scenarios.13 In the category of generally accepted rules one might list principles on disclosure and witness statements, where a broad consensus has arisen that document requests must be tailored more narrowly than in United States courts, even if broader in scope than in France or Switzerland. Similarly, it will be rare to find direct testimony in an international arbitration given orally rather than through written witness statements, with evidentiary hearings devoted to cross examination. In each of these areas, consensus among different legal traditions yielded a hybrid of transnational procedure, initially generated in the lore of international arbitration as presented in symposia speeches and professional articles, with codification through efforts of professional associations articulating common traditions and industry standard.14

12

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of partiality can form when an actual conflict of interest exists and the lawyer has constructive knowledge of it.” Id. at 1110. Larry A. DiMatteo, Soft Law and the Principle of Fair and Equitable Decision Making in International Contract Arbitration, 1 Chin. J. Comp. L. 221, 234 (2013), quoting Commitment and Compliance: The Role of Non-Binding Norms in the International Legal System 30–1 (Dinah Shelton, ed. 2000). Paula Hodges, The Proliferation of “Soft Laws” in International Arbitration: Time to Draw the Line?, in Austrian Yearbook on International Arbitration 2015 205 (Christian Klausegger et al. eds., 2015) (“These guidelines and rules seek to codify best, or at least internationally accepted, practice and to offer parties the chance to introduce a degree of consistency and predictability to the arbitral process.”). In some instances, however, guidelines go beyond consensus. See William W. Park, A Fair Fight: Professional Guidelines in International Arbitration, 30 Arb. Int’l 409, 419 (2014). See e.g., Detlev Kuhner, The Revised iba Rules on the Taking of Evidence in International Arbitration, 27 J. Int’L. Arb. 667, 667 (2010) (“Reference to the iba Rules [on the Taking of Evidence] has steadily increased over the last decade; as a result it may be said, without exaggeration, that the iba Rules have developed into a commonly accepted standard in international arbitration proceedings.”); Raymond Bender, Presenting Witness Testimony

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Another example presents itself in the iba Guidelines on Conflict of Interest, which aim to summarize commonly accepted practices in international arbitration, with reasonable arbitrators consulting the Guidelines prior to making decisions on disclosure. Arbitral institutions like the London Court of International Arbitration (lcia) often refer to the iba Guidelines on Conflicts of Interest for guidance on the parameters of required independence and impartiality.15 Things which go without saying may go even better said. Memorialization of a general practice conveys useful information to those entering the community. Although seasoned arbitrators rarely attempt ex parte communications with counsel,16 not all arbitrators possess the same experience. Until 2004, practice in the United States presumed party-nominated arbitrators to be nonneutral and thus allowed unilateral communication with their appointers. Even today, the arbitration rules of the International Chamber of Commerce remain silent on ex parte communications. In one case, an arbitrator doing his first icc arbitration objected that nothing prohibited him from talking alone to his appointer. While this was true under those rules, a unilateral information lead would have threatened the integrity of the arbitration. Thus the presiding arbitrator’s only recourse was to tender a resignation, hardly an easy path.17 B Harder Cases Sometimes “soft law” norms must address more difficult cases. One example would be the relationships of one British barrister to another for conflicts of interest purposes. Barristers’ chambers will not generally be equated with American law firms, in that barristers share expenses but not profits. Understandably, however, the iba Guidelines on Conflicts of Interest include shared

15 16

17

in u.s. Domestic Arbitration: Should Written Witness Statements Become the Norm?, Disp. Res. J., 2014, Vol.69(4), 39–58. See Thomas W. Walsh & Ruth Teitelbaum, The lcia Court Decisions on Challenges to Arbitrators: An Introduction, 27 Arb. Int’l 283 (2011). See Canon iii An arbitrator or prospective arbitrator should not discuss a proceeding with any party in the absence of any other party; see also Ben H. Sheppard, A New Era of Arbitrator Ethics for the United States: The 2004 Revision to the aaa/aba Code of Ethics for Arbitrators in Commercial Disputes (“Discussion of the merits of the case is specifically prohibited.”). The European tradition has long condemned ex parte communication between counsel and the arbitrators. Until recently, however, American practice presumed party-nominated arbitrators to be non-neutral and thus permitted ex parte communication with. William W. Park, A Fair Fight: Professional Guidelines in International Arbitration, 30 Arb. Int’l 409, 415 (2014).

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chambers as one item for disclosure, under the so-called “orange list” of situations which may, depending on circumstances, give rise to doubts about an arbitrator’s impartiality or independence.18 Overlap can exist between “soft law” and the parties’ agreement, particularly in reference to institutional rules. Article 18.3 of the 2014 lcia Rules contains a provision permitting an arbitral tribunal to disqualify counsel because of a change in representation that occurs late in the proceedings. Concern arises when a respondent surprises a tribunal by appearing at oral hearings represented by an individual from the same firm or chambers as an arbitrator, thus putting into question the integrity of the proceedings. In this respect, the parties’ agreement to lcia Rules tracks earlier decisions giving a tribunal power to police such behavior.19 Difficult situations can arise with respect to procedural norms which share rough analogues, yet on closer examination also diverge sharply in detail. Attorney-client privilege in the United States shares common attributes with professional secrecy in some parts of Europe. However, in-house counsel in Switzerland and Germany do not qualify as lawyers for that purpose. Bar association rules there require an independence considered incompatible with a salaried relationship.20 Thus communications between managers of American companies and their in-house lawyers might be privileged,21 while similar information would not be protected in communication between managers and legal departments in European corporations.22 An arbitrator might be faced with the need to devise rules on privilege which respect equality of arms between the two sides, while recognizing that notions diverge dramatically on what it means to be a lawyer for purposes of professional secrecy.

18 19 20

21 22

Section 3.3.2 of the Guidelines defines a disclosable relationship to include one where two arbitrators, and an arbitrator and counsel for one side, share same barristers’ chambers. See Hrvatska Elektropriveda, dd v. Slovenia, icsid Case No. ARB/05/24 (2008). In Switzerland, the notion of lawyer (avocat / Rechtsanwalt) depends on activity of an independent character. Employment as an in-house counsel disqualifies from lawyer status. See Article 231, Code Pénal and Article 13, Loi fédérale sur la libre circulation des avocats (23 June 2000), establishing the obligation of professional secrecy. See also Article 29 of the Loi fédérale d’organisation judiciaire (limiting a right to represent clients to practicing lawyers and university professors). See Peter Burckhardt, Legal Professional Secrecy and Privilege in Switzerland, iba Int’l Litigation News 33 (Oct. 2004); Bernard Corboz, Le Secret professionnel de l’avocat selon l’article 321 cp, Semaine Judiciaire 77 (1993). See, e.g., nck Organization Ltd v. Bregman, 542 F. 2d 128, 133 (2d Cir. 1976). See Catherine A. Rogers, Fit and Function in Legal Ethics: Developing a Code of Conduct for International Arbitration, 23 Mich. J. Int’l L. 341, 378 (2002).

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The allocation of costs also proves fertile breeding ground for conflicts, as between contract terms and applicable law, as well as among legal cultures. England restricts attempts to avoid the “loser pays” principle, sometimes termed “fee shifting” for legal expenses and arbitrator fees. In advance of the dispute, parties may not tell an arbitrator to allocate costs in disregard of who wins. In contrast, the so-called “American rule” expects each side to pay its own costs regardless of the litigation outcome, absent abuse or frivolous conduct.23 The English provision casts a wide net, catching even informed arrangements between sophisticated managers.24 iii

Res Judicata: Consensus and Divergence

A The Arbitrator’s Dilemma As arbitral “soft law”, notions of res judicata pose special intellectual challenges. From one legal culture to another, the nature of res judicata carries both considerable consensus and deep divergence.25 The core principle of res 23

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See Section 60, Arbitration Act of 1996. Section 61 goes on to set forth the general principle that “costs should follow the event except where it appears to the tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs.” This standard, however, is made subject to the parties’ agreement otherwise, which in context with Section 60 would be an agreement after the dispute has arisen. The rule’s most understandable application lies in an anti-abuse mechanism to prevent clauses that would require weaker parties to pay all costs, thus discouraging otherwise legitimate claims. See generally John Leubsdorf, Toward a History of the American Rule on Attorney Fee Recovery, 47 J. Law & Contemporary Problems 9 (1984); John F. Vargo, The American Rule on Attorney Fee Allocation: The Injured Person’s Access to Justice, 42 Am. U. L. Rev. 1576 (1993); Arthur L. Goodhart, Costs, 38 Yale L. J. 849 (1929). Imagine, for example, that an international contract provides for arbitration in London but with New York law applicable to interpret the agreement. The contract also stipulates that each side bears its own legal costs. A conscientious arbitrator falls between Scylla and Charybdis, faced with inconsistent mandates from the law of the arbitral situs and the applicable substantive law. Aiming at fidelity to the parties’ contract, an arbitrator may let the costs lie where they fall. To do so, however, risks award annulment in London. The contrary course, allocating expenses in disregard of the parties’ agreement, carries its own risk in the form of annulment for excess of arbitral authority as viewed by a New York court asked to enforce an award contrary to clearly accepted contract provisions and the party-selected substantive law. Notions of res judicata take various formulations in different legal systems, such as the literal “chose jugée” in France and the concept of “Rechtskräftig” in German, whereby a a judgment takes on “formelle Rechtskraft” see zpo Articles 704–707.

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judicata (from Latin for “a thing adjudged”) holds that the same case should not be litigated twice. Thus the first decision will be considered as binding. To say that a tribunal should recognize principles of res judicata begs the question of which version of that doctrine the arbitrators should implement. Although national law generally operates in harmony with two cases involving several classical unities (same parties, same claim, and same legal theory),26 divergence exists among legal systems in defining and in applying those unities. For example, American jurisdictions often follow a transactional method, precluding a second litigation arising from the same occurrence, even if raised on a different theory and implicating slightly different facts.27 Thus if a claimant could have brought five causes of action but presented only four (excluding a fraud claim, for example), the omitted theory will normally be barred in a second action. Moreover, American jurisdictions generally endorse what has been called “issue preclusion” (collateral estoppel) which binds a party to a determination of a matter of law or contract construction, even in a later case on a different cause of action. By contrast, Continental courts often deny binding effect to the reasoning of an earlier decision, even between the same parties as to related claims. Illustrative in this connection, a decision of Switzerland’s highest court addressed the relationship between two arbitral awards concerning performance under the same contract by the same individual, but for different years. The Swiss approach (unlike that of many American jurisdictions) denied binding effect to the contract interpretation in first award.28 26

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See generally, Audley Sheppard, Res Judicata and Estoppel, in Parallel State and Arbitral Procedures in International Arbitration 219, 224 (Bernardo M. Cremades & Julian D.M. Lew, eds., 2005); Kaj Hobér, Res Judicata and Lis Pendens in International Arbitration, 366 Recueil des Cours 99, 121 (2013) (“Despite the general acceptance of res judicata, and its constituent parts, there are…significant differences between legal systems.”); Pedro J. Martinez-Fraga & Harout Jack Samra, The Role of Precedent in Defining Res Judicata in Investor-State Arbitration, 32 Nw. J. Int’L & Bus. 419, 423 (2012). See, e.g. Edcare Management v. Delisi, 50 A.3d 448 (d.c. Court of Appeals, 2012), barring actions against a hospital on a tort after an arbitration award issued for breach of contract; also Restatement (Second) of Judgments § 24 (Am. Law. Inst. 1982). See Swiss Tribunal Fédéral/Bundesgericht, atf/bge, 4A_633/2014, 29 May 2015, discussed infra. A dispute between an American firm and one of its German partners led to a first award in Frankfurt addressing years 2009 and 2010, and a second award in Zürich concerning 2011 and 2012. See generally, Charles Poncet & Luisa Mockler, Res Judicata: A Contribution to the Debate on Claim Preclusion in International Arbitration, in Liber Amicorum en l’Honneur de William Laurence Craig 309, at 311 (2016) (“The preclusive effects of a judgment in Switzerland are strictly interpreted to attach only to the dispositive part of the decision.”).

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Judges who address res judicata usually look to the law of the forum, consulting published cases, civil procedure codes, and scholarly writings relating to their own jurisdiction. In some cases, arbitrators also will also be able to apply the norms of a given substantive legal system agreed by the two sides. Not always, however. In many instances the path for arbitrators will prove less certain, due to ambiguity in the parties’ choice-of-law provision. In such instances, one path not normally be open to a conscientious arbitrator or scholar would be the invention of a purported procedural standard where no established principles in fact exist. Even the most sincere convictions about the best policy should not parade as disguised advocacy. Absent special authorization by the parties (such as a power of amiable composition) arbitrators remain law appliers, not law makers. The starting point for commercial arbitrators seeking guidance would normally be the litigants’ agreement itself. It will always be possible for the contracting parties to include a provision such as “questions of collateral estoppel and issue preclusion will be governed by the civil procedure law of Indiana.” The choice-of-law clause will not always, however, be drafted with such precision. Having come to the end of a long negotiation, when things are finalized at 2:18 in the morning after hard fighting on the basic commercial terms of price and delivery, the contracting parties will sometimes content themselves with simply stating, “Contract interpreted according to the law of New York.” On its face, such a clause may not say much about issue preclusion. In some instances, however, the contracting parties will go further, providing more than simply rules for contract construction. The relevant clause might say, for example, “The Contract and any matter arising therefrom, as well as the determination of any dispute related to this transaction, shall be governed by the laws of Massachusetts.” From such a clause the arbitrators would likely find more assistance. On occasion, reference to particular arbitration rules may be of assistance. Certain rules require awards to be reasoned, causing some commentators to argue that by agreeing to such rules, parties implicitly accept that the reasons given in an earlier award bind them in subsequent proceedings.29

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icc Arbitration Rules, Article 31(2) (specifying that the award will contain reasons for tribunal’s decision), 34(6) (stating that the award will be binding). See also discussion, infra, Apotex ii Award, ¶7.33, noting Respondent’s submission on the combined effect of Articles 32(2) and 32(3) of the uncitral Arbitration Rules 1976, whereby reasons in the earlier award would have effect res judicata as between the Parties just as much as its operative part.

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At least one arbitration institution revised its rules to reflect this approach explicitly.30 B Points of Divergence: National Law 1 Overview When the choice-of-law clause leaves loose ends, the arbitrators may be urged to adopt some transnational solution, whether labelled “soft law” or something such as international arbitral procedure. The content of any such principles, however, will not always yield to facile analysis. National systems, like public international law and scholarly commentary,31 recognize some res judicata principle as extended to arbitral awards.32 Major legal jurisdictions usually look to certain “identities” that precludes re-­ litigation, such as (i) the same parties; (ii) the claim (petita) (also referenced as “object”, “subject matter”, “cause of action” or “prayer for relief”), and (iii) the same legal theory (causa petendi). Consensus does not go much further, however. Many civil law countries understand claim (petita) narrowly as a relief sought, permitting a litigant to get a second bite at an apple. In contrast, as discussed below, for common law jurisdictions the notion of “same claim” has often been viewed broadly, so as to open doors for preclusive effect of the earlier court’s determination of issues and reasoning, or the legal and factual premises on which a ruling rests.33 30 31 32

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lcia Arbitration Rules 2014, Article 26(8), providing “every award (including reasons for such award) shall be binding on the parties.” See e.g., Sections 4–9 and 4–10 of American Law Institute, Restatement of the Law Third: The u.s. Law of International Commercial Arbitration. Kaj Hobér, Res Judicata and Lis Pendens in International Arbitration, 366 Recueil des Cours 99, 120 (2013); Gretta Walters, Fitting a Square Peg into a Round Hole: Do Res Judicata Challenges in International Arbitration Constitute Jurisdictional or Admissibility Problems?, 29 J. Int’l Arb. 652, 652 (2012); Audley Sheppard, Res Judicata and Estoppel, in Parallel State and Arbitral Procedures in International Arbitration 219 (Bernardo M. Cremades & Julian D.M. Lew, eds., 2005) (“As well as applying in national court proceedings, res judicata is a well-recognized principle of international law.”); Waste Management v. Mexico, icsid Case No. ARB(AF)/00/3, ¶39 (2June 2002), 41 ilm 1315 (2002) (“There is no doubt that res judicata is a principle of international law.”); Pedro J. Martinez-Fraga & Harout Jack Samra, The Role of Precedent in Defining Res Judicata in Investor-State Arbitration, 32 Nw. J. Int’L & Bus. 419, 421 (2012); Vaughan Lowe, Res Judicata and the Rule of Law in International Arbitration, 8 Afr. J. Int’l & Comp. L. 38, 40 (1996). Luca G. Radicati di Brozolo, Res Judicata and International Arbitral Awards, in Post Award Issues, asa Special Series no. 38, at 127 (P. Tercier, ed., 2011) (“The consensus does not go much further. Indeed, most of the crucial issues relevant for the solution of concrete problems remain open.”); Silja Schaffstein, The Doctrine of Res Judicata Before International

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2 Claim Preclusion Broadly speaking, claim preclusion prevents parties from rearguing a claim already decided by a competent decision-maker. In civil law countries the element of claim (petita) has often been interpreted narrowly, causing some to suggest a party must seek identical relief in the second case in order to trigger res judicata.34 Some countries require that the second claim be founded in the same legal theory, a reading of the “unities” in res judicata that may cause a slight modification in a prayer for relief to prevent preclusive effect to the earlier decision.35 In German law, it appears that subsequent proceedings may be permitted where the parties request different relief albeit arising from the same factual circumstances.36 Thus a car accident victim is not precluded from bringing a later case for property damages after an earlier the judgment for personal injury, even though both losses resulted from the same occurrence.37 A similar

Commercial Arbitral Tribunals ¶1.118 (2016) (discussing French understanding of civil procedure); Hanno Wehland, The Coordination of Multiple Proceedings in Investment Treaty Arbitration 6.64 (2013) (discussing res judicata in international law and noting that petitum as “requested relief” is closer to civil law tradition); Kaj Hobér, Res Judicata and Lis Pendens in International Arbitration, 366 Recueil des Cours 99, 121 (2013) (“Despite the general acceptance of res judicata, and its constituent parts, there are…significant differences between legal systems.”). 34 See ila Report p. 52 (discussing French approach). 35 Pedro J. Martinez-Fraga & Harout Jack Samra, The Role of Precedent in Defining Res Judicata in Investor-State Arbitration, 32 Nw. J. Int’l & Bus. 419, 427 (2012). Some might suggest that difference between civil and common law traditions derives from an emphasis, in civil law jurisdictions, on a judicial search for truth rather than resolution of a dispute between two adversaries. The former approach requires a more active role of the court and could perceive a broad notion of res judicata as an unnecessary limitation on judicial authority. See Keith A. Findley, Adversarial Inquisitions: Rethinking the Search for the Truth, 56 n.y. l. Rev. 911, 929 (2011). 36 See Jacob van de Velden & Justine Stefanelli, Comparative Report: The Effect in the European Community of Judgments in Civil and Commercial Matters: Recognition, Res Judicata and Abuse of Process 16 (2006), http://www.biicl.org/files/4608_comparative_ report_-_jls_2006_fpc_21_-_final.pdf. 37 Christian A. Heinze, The Effect in the European Community of Judgments in Civil and Commercial Matters: Recognition, Res Judicata and Abuse of Process 18 & 21 (2006), http://www.biicl.org/files/3482_germany_final_c.pdf. It may be that civil law traditions reject a broad scope for preclusion due to the more active role of civil law judges in case administration. See Keith A. Findley, Adversarial Inquisitions: Rethinking the Search for the Truth, 56 n.y. l. Rev. 911, 929 (2011).

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approach seems to be taken in Switzerland where notions of “claim” would be interpreted narrowly, covering only prayers for relief.38 For claim preclusion to apply, some civil law countries, appear to require an identity of the legal cause of action and the relief claimed,39 although commentators have noted that neither relief nor cause of action is clearly defined in French law.40 Moreover, although civil law claim preclusion has traditionally been narrower than analogous common law concepts, some Continental jurisdictions show a disposition towards “concentration of claims” which expands the notion of claim or object of proceedings.41 In common law systems, res judicata takes a more transactional hue, with transaction understood broadly as facts giving rise to a remedy, thereby precluding a second bite at the apple with respect to the same basic occurrence.42 A claim comprises rights with respect to all or any part of a series of connected events from which the action arose.43 38

It has been suggested that in Switzerland a judgment dismissing a contract claim not precluding the same damages sought based on the same facts but asserted in later proceedings based on an alleged tort. Paul Oberhammer & Urs H. Hoffmann-Nowotny, The Effect in the European Community of Judgments in Civil and Commercial Matters: Recognition, Res Judicata and Abuse of Process (Switzerland) 18 (2006), http://www.biicl.org/ files/3487_switzerland_final_c.pdf. 39 Hobér, supra, at 131; Jacob van de Velden & Justine Stefanelli, Comparative Report: The Effect in the European Community of Judgments in Civil and Commercial Matters: Recognition, Res Judicata and Abuse of Process 16 (2006), http://www.biicl.org/files/4608_ comparative_report_-_jls_2006_fpc_21_-_final.pdf; Silja Schaffstein, The Doctrine of Res Judicata Before International Commercial Arbitral Tribunals ¶1.118 (2016) (the need for parties in both proceedings to ask for the same thing and assert the same rights). 40 Emmanuel Jeuland, The Effect in the European Community of Judgments in Civil and Commercial Matters: Recognition, Res Judicata and Abuse of Process (France) 23 (2006), http://www.biicl.org/files/3481_france_final_c.pdf; see also Silja Schaffstein, The Doctrine of Res Judicata Before International Commercial Arbitral Tribunals ¶1.116 (2016) (explaining that in France the exact notion of “identity of object” remains uncertain). 41 Silja Schaffstein, The Doctrine of Res Judicata Before International Commercial Arbitral Tribunals ¶1.124 & 1.126 and n.259 (2016), discussing Cesareo v. Cesareo, Cour de cassation, 7 July 2006, where in the first action the plaintiff brought a claim for deferred wages, while in the second case he claimed unjust enrichment and noting that Cour de cassation held that both claims were based on identical causes(“[B]y imposing on the parties an obligation to raise all possible legal grounds underlying their claim in the first action…the position of the Cour de cassation…also echoes the us doctrine of claim preclusion.”). 42 See ila Interim Report, at 36, 52. 43 See Car Carriers, Inc. v. Ford Motor Co., 789 F.2d 589, 593 (7th Cir. 1986), emphasizing that transaction is understood as “a single core of operative facts’ which give[s] rise to a remedy”. Thus when a set of facts causes injury all claims arising from that transaction must

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English law takes the approach that all claims arising from a single event and relying on the same evidence will be treated as the same cause of action. Other than for fraud or collusion, there may be no re-litigation of the action on grounds not raised in the earlier proceedings.44 The identity of causes of action is determined as a matter of substance. The cause of action consists of all facts and circumstances necessary to give rise to relief. Courts in the United States American courts take a similar approach to claim preclusion.45 New York courts explained that “once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy.”46 Moreover, when alternative theories are available to recover what is essentially the same relief for harm arising out of the same or related facts, the mere existence of different elements of proof will not justify presenting the claim by different actions. Federal court dictum in the United States seems to have affirmed this approach. In Citigroup, Inc. v. Abu Dhabi Investment Authority,47 Citigroup and Abu Dhabi Investment Authority (adia) were parties to the Investment Agreement, pursuant to which adia invested in Citigroup. Arguing that Citigroup by

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be brought in one suit or be lost. The Court concluded that rico claims were barred by res judicata doctrine because the earlier judgment addressed an antitrust suit arising from the same events. Spenser Bower and Handley, Res Judicata 94–95 (2009); see also Silja Schaffstein, The Doctrine of Res Judicata Before International Commercial Arbitral Tribunals ¶1.20 (2016) (citing Lord Diplock in Letang v. Cooper [1965] 1 qb 232). The Restatement (Second) of Judgments requires that courts in defining a “transaction” for purposes of claim preclusion “giv[e] weight to such considerations as whether the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties’ expectations or business understanding or usage.” Restatement (Second) of Judgments § 24 (Am. Law Inst. 1982); Yuval Sinai, Reconsidering Res Judicata: A Comparative Perspective, 21 Duke J. Comp. & Int’l L. 353, 359 (2011). See Edcare Management v. Delisi, 50 A.3d 448 (d.c. Court of Appeals, 2012), discussed supra, where a tort action against a hospital by an emergency-care management agency, was held to barred after an arbitration award against the hospital for breach of contract. ubs Sec. llc v. Highland Capital Mgmt., l.p., 927 N.Y.S.2d 59, 64 (2011). 776 F.3d 126 (2d Cir. 2015). The Second Circuit held that the issue of res judicata must be left for the arbitrators to decide, rather than for the courts. The holding itself was that the “extraordinary remedies” authorized by the All Writs Act, 28 u.s.c. § 1651, does not permit a district court to enjoin an arbitration based on the claim-preclusive effect that may result a prior judgment that merely confirmed the earlier arbitration award without considering its merits.

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its actions diluted the value of the investment, adia initiated the arbitration and asserted several claims.48 The arbitrators found for Citigroup. Unsatisfied with the result, adia initiated the second arbitration asserting claims slightly different from those in the first arbitration, but also related to breach of contract the implied covenant of good faith and fair dealing. Citigroup sought to enjoin the second arbitration invoking the doctrine of claim preclusion in the u.s. district court. The district court as well as the Court of Appeals ruled that the arbitrators in the second arbitration should decide if adia’s second set of claims is barred by the doctrine of claim preclusion. In passing, however, the Second Circuit explained that “the doctrine of claim preclusion, or res judicata, bars the subsequent litigation of any claims that were or could have been raised in a prior action.”49 3 Issue Preclusion Unlike civil law countries, common law jurisdictions usually extend preclusive effect not only to the disposition part of the award but also to the award’s reasoning.50 This is done by means of issue preclusion, also called issue estoppel, a notion that precludes a party in subsequent proceedings from contradicting an issue of fact or the legal consequences already raised and decided in earlier proceedings.51 Issue preclusion does not confer binding effect on every statement in the earlier award. However, a determination essential to the judgment would be conclusive in a subsequent action, whether on the same or a different claim.52

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These claims sounded in fraud, securities fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, breach of implied covenant of good faith and fair dealing. Citigroup, Inc. v. Abu Dhabi Inv. Auth., 776 F.3d 126, 128 n.1 (2d Cir. 2015). ila Interim Report, at 42, 47. Audley Sheppard, Res Judicata and Estoppel, in Parallel State and Arbitral Procedures in International Arbitration 219, 225 (Bernardo M. Cremades & Julian D.M. Lew, eds., 2005). S. Pac. R. Co. v. United States, 168 u.s. 1, 38 (1897) (“A right, question, or fact distinctly put in issue, and directly determined by a court of competent jurisdiction, as a ground of recovery, cannot be disputed in a subsequent suit between the same parties or their privies; and, even if the second suit is for a different cause of action, the right, question, or fact once so determined must, as between the same parties or their privies, be taken as conclusively established…”). ila Interim Report at 42, 47; V.V. Veeder, Issue Estoppel, Reasons for Awards and Transnational Arbitration, in Complex Arbitrations, Special Supplement 2003, icc International Court of Arbitration Bulletin at 75 (quoting Mills v. Cooper [1967] 2 Q.B. 459 at 468–69).

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In contrast, in civil law jurisdictions seem generally disposed to accept that an earlier judgment’s reasons are not binding in a second litigation. Nevertheless, reasons may sometimes be taken into account to interpret the operative part of a prior judgment.53 As mentioned earlier, a recent decision of the Swiss Federal Supreme in a dispute between an international law firm and its attorney illustrates a civil law approach to res judicata.54 One of the German partners of the u.s. law firms had a special arrangement concerning his remuneration in the Business Combination Agreement (bca), which provided a “Floor Amount” representing minimum amount per annum payable to the partner. The agreement subject to German law and contained an arbitration agreement providing for an arbitration under the icc Rules in Zurich, Switzerland. The first arbitration concerning the payment for 2009–2010 between the German partner and the u.s. law firm was decided by the icc Tribunal seated in Frankfurt.55 The Frankfurt tribunal denied lawyer’s claims. In particular, the tribunal interpreted the bca and indicated that the Floor Amount pursuant to Art. 5.2 bca was owed only if a partner had fulfilled the prerequisites under the bca providing for “activities, devotion and performance” and concluded that the partner had not satisfied such prerequisites in the relevant period. Later the German partner initiated a second arbitration against the u.s. law based on the same contract, the same legal theory, but for a different time period: 2011 and 2012. An icc Tribunal seated Zurich offered a different interpretation of the bca and found in favor of the partner notwithstanding the law firm arguments that the second tribunal was bound by the first tribunal’s finding as to the interpretation of the bca. The case reached the Swiss court when the u.s. law firm tried to set aside the award of the second tribunal. The Swiss Supreme Court concluded that the legal force of an arbitral award restricts itself to the dispositive portions, with considerations forming no part of res judicata regardless of the desirability of having transnational concepts applicable res judicata.

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See French civil code article 1351, limiting res judicata effect only the “dispositif” part of the award, roughly analogous to the “holding” in common law. (L’autorité de la chose jugée n’a lieu qu’à l’égard de ce qui a fait l’objet du jugement Il faut que la chose demandée soit la même ; que la demande soit fondée sur la même cause ; que la demande soit entre les mêmes parties, et formée par elles et contre elles en la même qualité.) 54 Swiss atf/bge, 4A_633/2014, 29 May 2015. 55 Apparently, for the purposes of this second arbitration the parties changed the seat of the proceedings.

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4 Other Preclusive Doctrines Some countries developed other preclusive doctrines that go beyond traditional triple identity res judicata and nonetheless prevent litigants from taking inconsistent positions in subsequent cases. In the United States a concept of judicial estoppel serves this preclusive role. Judicial estoppel as the traditional res judicata aims to protect the adjudicatory system from abusive use by the parties,56 promote fairness of dispute resolution and finality of judicial rulings, and purports to avoid inconsistent results.57 Although no uniform formulation of judicial estoppel exists in the United States, most states apply this doctrine when a party in an earlier case has relied on a position, accepted by the earlier court, which is incompatible with arguments in a second case.58 American judicial estoppel bears some similarities to English doctrine on abuse of process, which precludes a party from raising in a subsequent proceeding issues that could have been raised during a prior proceeding.59 Both doctrines aim to protect the integrity of the judicial system as well as parties’ interests in finality.60

56 57 58

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George Klidonas & Keith R. Murphy, Judicial Estoppel Revisited, 31(5) Am. Bankr. Institute J. 18–19, 89–90 (2012). Eric A. Schreiber, Judicial Estoppel, 30 Loy. l.a. l. Rev. 323, 326 (1997). Kira A. Davis, Judicial Estoppel and Inconsistent Positions of Law Applied to Fact and Pure Law, 89 Cornell L. Rev. 191 (2003); Eric A. Schreiber, Judicial Estoppel, 30 Loy. l.a. l. Rev. 323, 324 (1997). Application of judicial estoppel might following if: (i) the same party took two positions; (ii) these positions were taken in judicial or quasi-judicial proceedings; (iii) the party was successful in adopting the first position, the tribunal accepting it as true; (iv) the two positions are inconsistent; and (vi) the first position was not taken as a result of ignorance, fraud or mistake. See International Engine Parts Inc. v. Fedderson, 64 Cal. App. 4th 345 (Cal App. 1998); Aguilar v. Lerner, 32 Cal 4th 251 (Cal App. 2004). Audley Sheppard, Res Judicata and Estoppel, in Parallel State and Arbitral Procedures in International Arbitration 219, 236 (Bernardo M. Cremades & Julian D.M. Lew, eds., 2005). See also David A.R. Williams & Mark Tushingham, The Application of the Henderson v. Henderson Rule in International Arbitration, 26 Singapore Academy of Law Journal 1036 (2014), commenting on seminal English judgment concerning abuse of process, Henderson v. Henderson, 1844 6 qb 288. Following a debt action in Newfoundland, a court in England refused to hear a defense that a widow was not entitled to sue in the name of her husband, since that argument could have been raised in the earlier action. ila Interim Report, at 43 (“[T]he doctrine of abuse of process prescribes that subsequent proceedings should be precluded if it is necessary for a court to prevent a misuse of its procedure in the face of unfairness to another party, or to avoid the risk that the administration of justice might be brought into disrepute among right-thinking people.”); see also Arbitration Matters: Spring 2007, Osborne Clarke (Apr. 19, 2007) http://www.osborneclarke

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In contrast, civil law countries seem less inclined to accept notions of judicial estoppel or abuse of process. Nevertheless, in some instances the doctrine of abuse of rights (abus de droit) stands not far in function from English notion of abuse of process,61 although the French legal tradition may be more inclined to requiring the abusive party to pay damages rather than to dismiss the second set of claims62 C Public Law Standards: Apotex as a Case Study The search for relatively clear standards of res judicata vexes public law disputes as well as commercial arbitration. In recent nafta proceedings addressing expropriation, denial of national treatment, and violation of fair and equitable treatment, an arbitral tribunal had to grapple not only with the meaning of res judicata but also with the sources of authority for determining the contours of relevant doctrine. Three international arbitration claims were brought by the members of the same Canadian pharmaceutical group Apotex. All alleged violations of Chapter 11 of the North American Free Trade Agreement. All were decided pursuant to the uncitral Arbitration Rules and the icsid Additional Facility. In 2013, an initial award decided two different claims brought by Apotex which were heard concurrently, although not formally consolidated. This Award held that the Canadian claimant did not qualify as an investor within the meaning of nafta Chapter Eleven. Certain marketing authorizations (Abbreviated New Drug Applications or “anda’s”) were held not to constitute “investments” for purposes of nafta.63 A little more than a year later, in a second arbitration,64 a different tribunal gave res judicata effect to the earlier award, dismissing for want of jurisdiction

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.com/connected-insights/publications/arbitration-matters-spring-2007/ (quoting Johnson v. Gore Wood & Co [2001] 1 All er 481). Audley Sheppard, Res Judicata and Estoppel, in Parallel State and Arbitral Procedures in International Arbitration 219, 236 (Bernardo M. Cremades & Julian D.M. Lew, eds., 2005). Emmanuel Jeuland, The Effect in the European Community of Judgments in Civil and Commercial Matters: Recognition, Res Judicata and Abuse of Process (France) 33 (2006), http://www.biicl.org/files/3481_france_final_c.pdf. See also Michael Byers, Abuse of Rights: An Old Principle, A New Age, 47 McGill L.J. 389, 392 (2002). So-called Apotex i & ii, Award rendered on 14 June 2013. Apotex Holdings Inc. & Apotex Inc. v. usa, icsid Case arb(AF)/12/1, decided 25 August 2014 (icsid Additional Facility, uncitral Rules). Tribunal of V.V. Veeder, John R. Crook and J. William Rowley, with Rowley dissenting in part. A certain confusion sometimes creeps into discussion of these decisions. Three cases were brought, but only two awards were rendered. The 2013 Award addressed claims in Apotex i and Apotex ii, and the 2014

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claims brought by the same Canadian group based on the same marketing authorizations. As suggested by the dissent, one difference between the two sets of proceedings lay in the fact that the marketing authorizations relevant to the later award had been given final approval by the United States authorities, as contrasted with tentative approval to the authorizations considered in the earlier arbitrations.65 In both sets of claims, the Canadian group manufactured generic drugs for export to the United States pursuant to authorizations permitting exclusive sales of certain generic drugs for six months following expiration of patents for the brand name drugs. In an arbitration seated in New York addressing the duration of exclusivity period, the first tribunal found that the marketing authorizations could not be considered property within the scope of nafta Chapter 11, thus permitting no jurisdiction over claims by Apotex.66 The facts giving rise to the second award were slightly different, in that the United States fda issued an import alert which prevented importation of drugs produced in certain facilities. The claimants again alleged breaches of treaty-granted protections for nafta investors. In response, the United States argued that the marketing authorizations were not within the definition of investment set out in nafta. This argument rested on an assumption that res judicata effect extended the reasoning of the first award, which defined “investment” for nafta purposes, rather than simply the dispositive portions relating to similar although different marketing authorizations. By a majority vote, the 2014 Award held that that Apotex was barred from re-litigating the question of whether the marketing authorizations qualified as investments under nafta. Trying to avoid making any clear choice for a the broader “common law” approach rather than the stricter “civil law” tradition, the 2014 award purported to discern no “sharp divide between these two legal systems,” finding instead that courts and tribunals deciding cases under international law have taken account of a prior tribunal’s “reasoning, and the argument it considered, in determining the scope, and thus the preclusive effect, of the prior award’s operative part.”67 The majority found the reasoning of the

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award addressed claims in the Apotex iii. To avoid unduly muddling analysis, the present discussion generally employs the labels “2013 Award” and “2014 Award”. Apotex 2014 Award, at ¶2.53. Apotex 2013 Award, ¶358, finding “Apotex does not qualify as an ‘investor’, who has made an ‘investment’ in the u.s., for the purposes of nafta Articles 1116 and 1139, and accordingly both the Sertraline and Pravastatin Claims are hereby dismissed in their entirety, on the basis that the Tribunal lacks jurisdiction in relation thereto.” Apotex 2014 Award, ¶¶7.18 & 7.23.

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2013 award to be an integral part of its determination.68 Consequently, the tribunal did not, in its view, apply the first award’s reasons independently from its operative part.69 iv Conclusion The observation that the life of the law remains logic rather than experience applies with special force in exploring the role of “soft law” for cross-border arbitration. In elaborating international standards, sound analysis requires both restraint and rigor in ascertaining those principles which have, and have not, found consensus in the international community. Just as general propositions do not necessarily decide concrete cases, so the propositions themselves will often prove stubbornly elusive. In this connection, arbitrators often face particular challenges in finding res judicata principles without express application of a national legal tradition. Most legal systems accord some degree of finality to a prior judgment or award. Less agreement exists, however, with respect to questions the preclusive effect of reasoning, rather than result, and the definition of claims decided.70 On any particular topic, prophecy remains highly problematic with respect to both when and how compromise will evolve to bridge the gap between legal cultures. A measure of modesty befits any attempt to portray or to pronounce cross-border consensus. 68

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Apotex 2014 Award, ¶7.35. A careful observer will note that even absent res judicata the tribunal said it would have reached the same conclusion, finding that Apotex Inc. never had any “presence, activity or other investment in the territory of the usa, including the non-payment of any relevant us taxes.” Id. ¶7.62. The Tribunal found additional support for its decision in choice of the uncitral Arbitration Rules for the first set of arbitration proceedings, which in Article 32 make an award final and binding and also requires a tribunal to state reasons on which the award is based. It was Respondent’s case that the combined effect of those two parts of Article 32 meant that the reasons in the first award had as much effect as its operative part. The Tribunal ultimately did not have to rely on this argument, but did express an inclination “to accept this submission as a matter of legal logic.” Id. at ¶7.35. See generally, Charles T. Kotuby Jr. & James A. Egerton-Vernon, Apotex Holdings Inc and Apotex Inc v The Government of the United States of America, 30(3) icsid Rev. 486, 487 (2015), suggesting that the 2014 award accepted collateral estoppel under the uncitral Arbitration Rules. See generally Pierre Mayer, Autorité de la chose jugée et arbitrage (Colloque du Comité français de l’arbitrage, Paris 23 Oct 2015), 2016 Revue de l’Arbitrage 91; Stavros Brekoulakis, The Effect of an Arbitral Award and Third Parties in International Arbitration: Res judicata revisited. 16 Am. Rev of Int’l Arb 1 (2005).

chapter 4

Precedential Value of International Arbitral Awards Josefa Sicard-Mirabal, Esq.1 Introduction The topic of the precedential value of arbitral awards still represents an interesting and, at times, contradictory point of discussion. It is well known that in international arbitration there is no doctrine of precedent, as the term precedent is intended in a common law system. It is also well known, however, that arbitrators tend to rely on prior cases. What is the motivation behind this tendency? “Do they merely seek some guidance, an excuse or mask for the deficiencies in their own reasoning, an opportunity to contradict an esteemed colleague, or a chance to give lessons to the arbitration community? Alternatively, do they apply a de facto doctrine of precedent out of a sense of obligation?”2 In addition, “there are definitely psychological factors that give certain authority to previous arbitration awards, since faced with a problem, people want to know what others have decided in similar situations, and tend to imitate. Such phenomenon has been labelled by scholars as persuasive precedent.”3 It is thus, appropriate to ask: “what is the real value of arbitral awards?” First of all, we should point out that the reason why arbitral awards are having this impact—as regards to their precedential value—is because we have become aware of awards; particularly, we have become aware of awards involving huge sums of money and awards with even contradictory results. In other words, some awards are now publicly and readily available—either in their entirety or in abstract form. More recently, due to environmental and health 1 Josefa Sicard-Mirabal, is an adjunct professor of law at Fordham law School and an External Member of the iadb’s Sanction Committee; she concentrates her practice in international business transactions and dispute resolution. I would like to acknowledge and give credit to Veronica Mazzoleni for assisting me with this article. Veronica is the Corporate Counsel for Sinkrom Corp., an international business development company. She concentrates her practice in the area of international dispute resolution and is involved in different projects and studies committed toward advancing intercultural negotiation matters. 2 Gabrielle Kaufmann-Kohler, Arbitral Precedent: Dream, Necessity or Excuse?, Arbitration ­International, Vol. 23, No. 3, at 357 (2007). 3 M. Florencia Villaggi, International Commercial Arbitral Awards: Moving from Secrecy ­Towards Transparency? 14.

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004334557_006

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concerns, the public at large has begun questioning and weighing the pros and cons of investor-State arbitration. In the past, when awards were not publicly available there was a completely different understanding of the work of arbitral tribunals. Indeed, when discussing this issue, Sir Robert Y. Jennings commented: A glance at many recent volumes of the International Law Reports strikingly demonstrates the contemporary phenomenon of the proliferation of such international tribunals applying international law, but there are many that do not appear in the International Law Reports. There are all the administrative tribunals, human rights courts… the very large number of ad hoc tribunals… and very many others. “But how many others? And what do they all do? Where do they all sit? It is not easy to find out. There is no kind of structured relationship between most of them. There is not even the semblance of any kind of hierarchy or system. They have appeared as a need or desire or ambitions promoted by one another. In this particular respect, contemporary international law is just a disorderly medley. Suffice it to say that it is very difficult to try to make a sort of pattern, much less a structured relationship, of this mass of tribunals, whether important or petty. It is sometimes too difficult to find out what is going on, much less to study it.” (Emphasis added)4 Sir Jennings expressed the foregoing in 1996, and I submit that some commentators would consider this to be valid today. In 2007, Judge Schwebel, offered a different view, by arguing that: “It has been suggested that the proliferation of legal fora poses a danger to the unity and development of international law. However, complete unity has never existed in international law and its development has always been uneven. The body of international law has been able to absorb a measure of diversity in judicial and arbitral decisions. The processes of the incremental development of customary international law are neither uniform nor unified, treaty-making is bilateral as well as multilateral, and many multilateral treaties are not designed to attract, and do not attract, universal adherence. There is a measure of diversity among the different

4 R.Y. Jennings (1996). The Judiciary, International and National, and the Development of International Law. International and Comparative Law Quarterly, 45, p 5. doi:10.1017/ S0020589300058632.

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regional traditions in international law, among competing political ideologies, and between the approaches of developed and less developed States of the international community. The divergence of view among international lawyers on questions of international law is obvious.” Judge Schwebel goes on to say: “These diverse, differing elements have contributed to the development of international law rather than impeded it. Whether the recent proliferation of judicial bodies is likely to upset the balance by increasing diversity to such degree as to jeopardize the coherence of international law is a matter of speculation.”5

The Role of Precedent

The role of precedent and the stare decisis principle are common law doctrines. One must bear in mind, that save a few statutes and laws, common law is uncodified. Under common law, prior judicial decisions are given a binding effect to similar facts so that cases yield a similar and consistent outcome. The term precedent is generally used to indicate a binding precedent under the doctrine of stare decisis et non quieta movere (meaning to stand by what is decided). Where such doctrine is applicable, courts must follow precedents and treat like cases alike. The term is also used to refer to a persuasive precedent, a de facto stare decisis, implying that courts do not have a legal obligation to ­follow precedents; prior cases however, have a persuasive value and effect. It has been argued that a doctrine of stare decisis promotes certainty, ­predictability, reliability, and equality. In different national legal systems, prior cases have a different binding value. The most common distinction is between civil law systems and common law systems. In particular, civil law countries do not recognize a doctrine of stare decisis, whereas common law countries do. Of course, this represents only a general distinction, but still relevant; even more so, if we consider that there are more civil law traditions around the world. In addition, a different legal system means also a different juridical approach, a different thinking process, and even a different way of making decisions. From the point of view of a civil law jurisdiction, precedents are not binding. There is, however, the notion of jurisprudence constante, the doctrine under which a court is required to take prior decisions into account only if there

5 Stephen M. Schwebel. (2011). The proliferation of international tribunals: threat or promise? In: Justice in International Law. pp. 101–102. Cambridge: Cambridge University Press.

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is sufficient uniformity and consistency in prior cases on a given issue. Once uniform case law develops—jurisprudence constante—courts treat precedents as a persuasive source of law, taking them into account when reaching a decision. In very broad terms, the difference between civil law’s jurisprudence constante and common law precedent is that under the doctrine of precedent a single court decision may provide sufficient foundation for stare decisis and thus binding, whereas, under jurisprudence constante, there must be a series of consistent decisions for it to become persuasive. But what happens in international arbitration?

Precedent in International Commercial Arbitration

From the start, it is important to point out that in international commercial arbitration, there is no doctrine of stare decisis and no formal system of jurisprudence constante. In commercial arbitration, awards have much less weight and authority because they are rarely seen in whole—it is mostly in extracts. In addition, commercial cases are very fact-specific and contract-specific. There is no certitude that you are seeing the whole universe of decisions because there is no systematic reporting. And if you do not have a full view of what the matter was and how it was dealt with, it is very hard for it to even be persuasive. For instance, if we consider the International Chamber of Commerce (icc), “out of the 190 awards reviewed, about 15 per cent cited other arbitral decisions. These citations were mostly made with regard to matters of jurisdiction and procedure…Reference to earlier cases was also made in connection with the determination of the law governing the merits… By contrast, substantive issues rarely prompt reference to arbitral awards. If they do, then it is in conjunction with scholarly writings and court decisions. Whether on substantive or procedural matters, reference to prior cases generally is made out of an abundance of caution. The rule relied upon most often arises, in any event, out of the applicable national arbitration law or the relevant institutional rules. Aside from procedural issues, perhaps, one can see no precedential value or self-standing rule creation in commercial arbitration awards.”6 In commercial arbitration, “the arbitrator’s sweeping freedom to apply the law that allows him or her to mint the rules to take account of the specificities

6 Gabrielle Kaufmann-Kohler, Arbitral Precedent: Dream, Necessity or Excuse?, Arbitration International, Vol. 23, No. 3, at 362–63 (2007).

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of each case—or the case-driven propensity to transnationalise the applicable law—are in direct contradiction with the very idea of precedent.”7 In fact, the idea that a prior decision is well-reasoned is not the only factor in determining its the precedential value. “Precedent in international arbitration is not—or not only—the product of the intrinsic qualities of one or more particularly well-reasoned awards. It is not, either, the product of the arbitrators’ own will…Their relevance will of course depend from the rules of law applicable to the case… As far as issues of procedure are concerned, it is beyond doubt that solutions adopted in past arbitration awards are likely to be considered as precedents by arbitrators…As far as issues of substance are concerned, reference to arbitral precedents will be possible when, absent a choice-of-law, the arbitral tribunal decides to apply transnational principles, trade usages. If non-national rules of law are to play any role in the adjudication of international trade disputes, arbitral precedents cannot but be an important source.”8 However, in commercial arbitration, it is probably unnecessary to adopt a doctrine of precedent because it is a field of arbitration guided by the specific facts of each contract and each case. “The outcome revolves around a unique set of facts and upon the interpretation of a unique contract that was negotiated between private actors to fit their specific needs.”9 In addition, it is difficult to fully recognize a doctrine of precedent because it is rare to see published awards in commercial arbitration, unlike in investment arbitration. Indeed, past awards in commercial arbitration are in some way “secret”, and transparency is not an established goal of this method of dispute resolution. Arbitral awards become public or accessible only when challenged in national courts, and, of course, the lack of publication fosters neither imitation nor predictability. In general, few commercial arbitration awards are published, and when published, they are available often times only through specialized sources, without access to the majority of arbitration users. Only “repeat players accumulated knowledge of past arbitrations and knew how to research and present arguments in accordance with governing norms.”10 7 8

9 10

Id. 365. Alexis Mourre, Arbitral Jurisprudence in International Commercial Arbitration: The Case for a Systematic Publication of Arbitral Awards in 10 Questions, Kluwer Arb. Blog (May 28, 2009), http://kluwerarbitrationblog.com/blog/author/alexismourre/. Gabrielle Kaufmann-Kohler, Arbitral Precedent: Dream, Necessity or Excuse?, Arbitration International, Vol. 23, No. 3, at 376 (2007). W. Mark C. Weidemaier, Toward a Theory of Precedent in Arbitration, 51 wm. & Mary L. Rev. 1895, 1923 (2010).

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Precedent in International Investment Arbitration

In investment arbitration, the value of precedents is different. In international investment arbitration, there is again no doctrine of stare decisis, but it is a practice for arbitrators to consider and cite previous cases. The main reason for this is based on the fact that investment cases are generally published. Indeed, icsid awards are published in order to develop a coherent interpretation of the law and a consistent jurisprudence. It must be noted, however, that icsid itself stresses the notion that there is no doctrine of binding precedent as is confirmed and supported under the icsid Convention, Article 53, by stating: “The award shall be binding on the parties.” Notwithstanding the foregoing, in this particular field of arbitration, there is general assent between arbitrators for accepting some form of precedent, even if only persuasive precedent. In El Paso v. Argentina, the arbitral tribunal held that “icsid arbitral tribunals are established ad hoc,…and the present Tribunal knows of no provision,…establishing an obligation of stare decisis. It is, nonetheless, a reasonable assumption that international arbitral tribunals, notably those established within the icsid system, will generally take account of the precedents established by other arbitration organs, especially those set by other international tribunals.”11 Similarly, the arbitral tribunal in Amco v. Indonesia12 and in letco,13 in which the tribunals found that it, is instructive to consider the interpretation of other icsid tribunals, even if not bound by such precedents. Also in aes v. Argentina, the tribunal stated that “under the benefit of the foregoing observations, the Tribunal would nevertheless reject the excessive assertion which would consist in pretending that, due to the specificity of each case and the identity of each decision on jurisdiction or award, absolutely no consideration might be given to other decisions on jurisdiction or awards delivered by other tribunals in similar cases. In particular, if the basis of jurisdiction for these other tribunals and/or the underlying legal dispute in analysis present either a high level of similarity or, even more, an identity with those met in the present case, this Tribunal does not consider that it is barred, as a matter of principle, from considering the position taken or the opinion expressed by these other tribunals… From a more general point of view, one can hardly deny that the institutional dimension of the control mechanism 11 12 13

El Paso Energy International Co. v. Argentine Republic, icsid Case No. ARB/03/15, Decision on Jurisdiction, ¶ 39 (Apr. 27, 2006). Amco v. Indonesia, Decision on Annulment, 1 icsid Reports 509, 521 ¶ 44 (May 16, 1986). letco v. Liberia, Award, 2 icsid Reports 346, 352 (Mar. 31, 1986).

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provided for under the icsid Convention might well be a factor, in the longer term, for contributing to the development of a common legal opinion or jurisprudence constante, to resolve some difficult legal issues discussed in many cases, inasmuch as these issues share the same substantial features.”14 In particular, even when tribunals deviated from earlier decisions, they addressed the issue of precedent. In sgs v. Philippines, in order to justify its different interpretation, the tribunal held that “the icsid Convention provides only that awards rendered under it are binding on the parties (Article 53(1)), a provision which might be regarded as directed to the res judicata effect of awards rather than their impact as precedents in later cases. In the Tribunal’s view, although different tribunals constituted under the icsid system should in general seek to act consistently with each other, in the end it must be for each tribunal to exercise its competence in accordance with the applicable law, which will by definition be different for each bit and each Respondent State.”15 Again, in adc v. Hungary, the tribunal held that “it is true that arbitral awards do not constitute binding precedent. It is also true that a number of cases are fact-driven and that the findings in those cases cannot be transported in and of themselves to other cases. It is further true that a number of cases are based on treaties that differ from the present bit in certain respects. However, cautions reliance on certain principles developed in a number of those cases, as persuasive authority, may advance the body of law, which in turn may serve predictability in the interest of both investors and host States.”16 In Saipem v. Bangladesh, the icsid tribunal stated as well that “the Tribunal considers that it is not bound by previous decisions. At the same time, it is of the opinion that it must pay due consideration to earlier decisions of international tribunals. It believes that, subject to compelling contrary grounds, it has a duty to adopt solutions established in a series of consistent cases. It also believes that, subject to the specifics of a given treaty and of the circumstances of the actual case, it has a duty to seek to contribute to the harmonious development of investment law and thereby to meet the legitimate expectations of the community of States and investors towards certainty of the rule of law.”17 14 15 16 17

aes Corporation v. The Argentine Republic, icsid Case No. ARB/02/17, Decision on Jurisdiction (Apr. 26, 2005). sgs Société Générale de Surveillance s.a. v. Republic of the Philippines, icsid Case No. ARB/02/6, Decision on Jurisdiction, 8 icsid Reports 515 (Jan. 29, 2004). adc Affiliate Limited v. Republic of Hungary, icsid Case No. ARB/03/16, Award (Oct. 2, 2006). Saipem S.p.A. v. The People’s Republic of Bangladesh, icsid Case No. ARB/05/07, Decision on Jurisdiction, ¶ 67 (Mar. 21, 2007).

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Some provisions in bits, such as the umbrella clause, the mfn clause, and the fair and equitable treatment, represent generally accepted standards that “seem sufficiently established to influence future tribunals. At the same time, it is true that they are rather broad and imprecise, which will leave enough room for future tribunals to use their own discretion in applying these standards. Broad standards are malleable and leave room for interpretation.”18 “Another reason why it may be more important to rely on precedents in investment arbitration than in commercial arbitration is the relative indeterminacy of the rules and principles to be applied in this field of the law. While commercial arbitration frequently deals with highly technical and well-­ regulated legal issues, investment tribunals often have to apply the relatively meager set of substantive investment standards contained in international investment agreements. Those vague and highly general standards require judicial and quasi-judicial interpretation in order to be actually applied.”19 Furthermore, publication of investment arbitration awards is another factor favoring a doctrine of precedent; investment treaty awards and decisions are now readily accessible and available from a number of sources. “In an analysis of icsid awards issued between 1990 and 2006, Jeffery Commission found that tribunals cited to awards rendered by other icsid panels nearly 80 percent of the time. Commission also found that, over that time period, icsid panels grew increasingly likely to cite prior awards and that the number of such citations per award increased.”20 Based on the foregoing, it is clear that, at best, prior cases have a persuasive value with respect to investment arbitration. Thus, with the understanding that there is no binding system of precedent, why do arbitrators and parties cite and rely on prior decisions?

Interviews with Arbitrators, Users and Academics

In endeavoring to find the answer to the question posed above, I sought to interview arbitrators, users and academics, for the purpose of reaching a conclusion regarding the precedential value of international arbitral awards. Among the interviewees were: David Arias, Bernardo Cremades, Rusty Park, Alejandro 18 19 20

Gabrielle Kaufmann-Kohler, Arbitral Precedent: Dream, Necessity or Excuse?, Arbitration International, Vol. 23, No. 3, at 373 (2007). August Reinisch, The Role of Precedent in icsid Arbitration at 3. W. Mark C. Weidemaier, Toward a Theory of Precedent in Arbitration, 51 wm. & Mary L. Rev. 1895, 1908 (2010).

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Garro, Eric Schwartz, Yves Derains, Fernando Mantilla-Serrano, Andres Rigo, Claus von Wobeser, Stacie Strong, Michael McIllwrath, Mark Morill and Mark Baker, among others. I asked the following questions: • Do you believe that you are bound by prior awards? If so, under what circumstances? • Do you consider awards jurisprudence constante and useful for developing a body of law? • If yes to either of the above, how do you account for the different and sometimes contradictory awards by different tribunals? • Would you agree that in practice, and depending on your legal training and background—common law, civil law—some arbitrators and practitioners will feel more or less inclined to follow prior decisions? • What are the consequences for not following prior decisions? These are some revealing answers, from personalities and experts in the international arbitration arena. In general, when considering the first question, the unanimous position was that prior awards are not binding. However, additional and interesting responses were elicited by the questions. “A prior award will have weight/authority if it is convincing.” “Nothing happens if you don’t follow a prior award.” “I believe that prior awards are at times abused because they are used out of context and simply as moral support.” One interviewee feels that sometimes awards are abused by people who do not really believe in it or are not truly convinced of what is being said, but they just want to put it into their award as moral support. I do not believe I am bound by prior awards. Yet, they have a convincing value, as they oblige the arbitrator to find good reasons not to follow them in a specific case. An appropriate follow up question is: a prior award has to be “convincing” to whom? To the person that is sitting on a tribunal that may want to use the relevant case or reasoning for or against his/her case at hand? “They are very useful, especially when several awards have decided in the same way, there is a strong presumption that they are right.” “All arbitrators are inclined to follow prior decisions. The consequence for not

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following an award is only the need to present a stronger and more elaborated reasoning.” Others asserted that awards are useful in creating bodies of legal principles to inform arbitrators. The explanation offered for contradictory awards is that they are to be expected because, similar to national courts, there are different approaches to the same issue, different perspectives, and different evaluations of public policies. There are usually difficult matters involved, subject to interpretation. Below are a few statements made by the interviewees. Although arbitrators are not bound by prior awards in the same sense as judges in hierarchical national legal systems, awards certainly can be useful in creating bodies of legal principles to inform arbitrators. Different and sometimes contradictory awards should not be a mystery. Even within the most hierarchical of national legal systems, courts take varying approaches, seeing facts from varying perspectives, and weighing competing policy considerations in different manners. Individual arbitrators certainly vary in their inclination to give deference to prior decisions. However, in my observation, this has nothing at all to do with common law vs. civil law backgrounds. The consequences for not ‘following’ a prior award depend on whether the earlier decisions were clearly wrong or were wise and sound. Arbitrators often use prior rulings to justify their decision to the rest of the world and to enhance the prospect that similar cases will be treated similarly. An arbitrator would need to be bold indeed to assume that nothing could be learned from reading how others struggled with comparable issues, even if their awards are not binding in the sense of precedent. I see awards as persuasive, and some are particularly influential when they deal with a procedural matter, especially under the same rule set and especially if the arbitral tribunal includes well-known arbitration experts. I would not rely on an award for substantive law. Even then, the award would be persuasive authority, creating a body of authority that should be respected and considered. Courts, even within the same jurisdiction, have equally contradictory outcomes on similar facts/law or even in the same case, through the string of appeals. These are difficult issues that are subject to interpretation. Some inconsistency is to be expected. I wouldn’t see a breakdown by legal background. I think most arbitrators will consider the legal authorities submitted to them by the parties and give those authorities the weight they consider appropriate. However, since an award is not binding, I don’t think there should be any

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consequences for not following a single previous award. If there is a large body of agreed principles, reflected in numerous awards, commentary and case law, then an anomalous decision is problematic, but failure to follow one single award is not. The issue is still somewhat open. Arbitrators are not bound by prior awards. Generally, they are not even useful as a body of law because they are not accessible. I would love it if this was the case, and awards were published. I don’t also believe that the background plays a part. And there are no consequences for not following a prior award, and I think it is a problem. Prior awards are not binding. This does not imply that they lack value. I believe that they may be useful to inspire and confirm later decisions. These are some other answers to the questions asked. I am not bound, under any circumstances. However, prior awards are definitively useful to create a body of law. There are various reasons for contradictory awards, including: arbitrator´s lack of responsibility to do his or her job to find out, study, and examine prior cases decided under similar facts; different facts, which the arbitrator in any event should disclose and highlight; and arbitrator´s lack of institutional responsibility. The legal background of course influences the arbitrator’s practice. And there are no consequences for not “following” a prior award. Therefore, what is relevant when considering the precedential value of arbitral awards? Based on the interviews, which were many and still ongoing, the weight given to prior awards by arbitrators, counsel and users can be divided or classified into four categories. The first finding them persuasive, an authority to be respected and considered. The second is to distinguish them from prior awards. The third is to use them to reinforce a particular interpretation. The fourth is to consider it a duty to take them into consideration. Some interviewees mentioned, interestingly, that aside from persuasive, prior awards are inspirational, useful to inspire. They are useful as a body of law, to create a body of law, and to create jurisprudence constante, when accessible, but they are not binding. Based on what people have said in the interviews, it is also not certain whether prior arbitral awards are even persuasive, at least for some arbitrators. In addition, it was not clear whether the civil law or common law background influences the deference that arbitrators give to prior awards. For the common law arbitrators, the background does not matter, but for some civil law arbitrators, of extreme relevance.

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With respect to the last question, there was a clear unanimity in stating that there is no consequence if you do not follow a prior decision. The truth is that if a prior award is not binding and there are no consequences for not following a prior decision, then you are less inclined to do it. Users find the lack of consequence the biggest problem with the system. Users clearly stated that they are less inclined to use arbitration because they would expect some consequences in favor of consistency and predictability.

What Supports a Theory of Precedent in International Arbitration?

The first reason for a doctrine of binding precedent in international arbitration is to support predictability and consistency of the law. When I refer to “binding precedent,” I am referring to a system of precedent borne out of jurisprudence constante. “[T]he driving force of arbitral precedent is rather the arbitrators’ desire to meet the parties’ legitimate expectation that their dispute will be resolved by international adjudicators according to internationally accepted procedures and from an international perspective.”21 A precedent theory in international arbitration is supported by different reasons. The first reason for a doctrine of binding precedent in arbitration is to support predictability and consistency of the law. In investment arbitration, it is even more important to advance consistency and predictability because there are usually similar standards involved. A precedent theory supports also the uniformity and stability of the law. In addition, publication of arbitral awards is necessary to achieve transparency, and transparency means also public control and observation of arbitrator’s decisions and conduct to increase integrity. In investment arbitration, it is even more important to advance consistency and predictability because there are usually similar standards involved, “which must be resolved by the application of one and the same rule of law. For the predictability of investments and the credibility of the dispute resolution system, that rule cannot change from one proceeding to another.”22 A precedent theory supports also the uniformity and stability of the law.

21

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Alexis Mourre, Arbitral Jurisprudence in International Commercial Arbitration: The Case for a Systematic Publication of Arbitral Awards in 10 Questions, kluwer Arb. Blog (May 28, 2009), http://kluwerarbitrationblog.com/blog/author/alexismourre/. Gabrielle Kaufmann-Kohler, Arbitral Precedent: Dream, Necessity or Excuse?, Arbitration International, Vol. 23, No. 3, at 376 (2007).

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Publication of arbitral awards is relevant in order to “develop consistent rules through persuasive precedents; improve arbitrator’s integrity and quality of awards; and obtain several other advantages.”23 “If awards were known and accessible in sufficient quantity, predictability of the results of arbitration proceedings could certainly increase. If this is true, not only will it contribute to the stability of the international arbitration system, but would also help the parties manage their businesses, control the possible risks, evaluate their disputes, and avoid future disputes to some extent.”24 Even in commercial arbitration, “if arbitration is to remain the normal avenue for resolving business disputes, it needs to provide the business community with greater predictability of the possible outcome of trade disputes. In turn, better knowledge of arbitral jurisprudence would allow the business community to have a clearer idea of the realities and advantages of arbitration.”25 Publication represents also a way to improve arbitrator’s integrity. Indeed, while publication means transparency, transparency means also public control and observation of arbitrator’s decisions and conduct to increase integrity and reduce misconduct. In addition, “public scrutiny will give the general public a real insight of the arbitrators’ legal reasoning, level of expertise, and the fairness of the decisions, which will help to assess future appointments.”26 This is also a way to increase transparency regarding arbitrators and their work. Such scrutiny “could in the long term increase the quality of awards, since it may strengthen the sense of responsibility on arbitrators, who will be even more accountable knowing that whatever they rule will be reviewed by the arbitration community as a whole.”27 Finally, publication of arbitral awards leads also to other advantages, particularly in commercial arbitration. Such benefits include: a pedagogic effect, by allowing arbitrators, practitioners, and law students to understand coherent solutions to procedural and substantive matters; the possibility to assess the neutrality of arbitration; increase of users, caused by a greater understanding of the process; reduction of disputes, by allowing the parties to learn from the 23 24 25

26 27

M. Florencia Villaggi, International Commercial Arbitral Awards: Moving from Secrecy Towards Transparency? 10. Id. at 14. Alexis Mourre, Arbitral Jurisprudence in International Commercial Arbitration: The Case for a Systematic Publication of Arbitral Awards in 10 Questions, kluwer Arb. Blog (May 28, 2009), http://kluwerarbitrationblog.com/blog/author/alexismourre/. M. Florencia Villaggi, International Commercial Arbitral Awards: Moving from Secrecy Towards Transparency? 15. Id. at 16.

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mistakes of others; and the possibility to assess arbitral institutions, by allowing the institutions to show their expertise and professionalism.28 To be sure, a system of precedent ensures a uniform application of the law. Furthermore, “predictability and coherence leads to confidence in the system and enhance its perception of being legitimate and just.”29 A system of precedent serves also “important functional qualities, including the possibility that precedent facilitates private ordering by articulating rules that parties expect future arbitrators to follow. As another example of these functional qualities, consider the possibility that precedent may legitimize the result of the arbitration for the losing party, perhaps by suggesting that the result is justified by some normative criterion—say, the belief that similarly situated litigants should receive equal treatment—that the losing party is likely to accept.”30 In commercial arbitration, for the reasons already expressed herein, we do not see precedent we do whereas in investment arbitration, there is a practice of citing prior cases, especially consistent past cases. In addition, it seems that there is more need for consistency in investment arbitration because investment law deals with public issues involving States. “Because most investment-related disputes are resolved in arbitration, arbitrators bear the primary responsibility for lending certainty and predictability to investment transactions.”31 In general, the modern trend in international arbitration is to rely on previous consistent rulings, even if not as binding precedents but as persuasive authorities. Following or taking into account and consideration earlier decisions fosters predictability and legal certainty, creating a jurisprudence of arbitral decisions. It is clearly a concept of persuasive precedent, rather than a strict doctrine of stare decisis, that can be applied to international arbitration, meaning a “de facto tendency for an international arbitrator to accept what has been consistently decided in a significant number of past arbitral decisions… Arbitral precedent is no more and no less than this capacity of past arbitration awards to convince future tribunals to adhere to the solution they embody.”32 In the end, it is “the persuasiveness of the reasoning in the previous case, besides 28 29 30

Id. at 17–18. August Reinisch, The Role of Precedent in Icsid Arbitration at 1. W. Mark C. Weidemaier, Toward a Theory of Precedent in Arbitration, 51 wm. & Mary L. Rev. 1895, 1902 (2010). 31 Id. at 1954. 32 Id.

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the reputation of those who have previously decided, that will ultimately make a given decision a leading case, commanding respect and which will be followed.”33 Conclusion The dispute resolution system is suffering. It is suffering because there is no consistency. Credibility and predictability are also wanting. Transparency, although improving, it is not all it should be. The body of jurisprudence constante is slow in developing. Arbitral tribunals consistently acknowledge that in international law there is no doctrine of binding precedent and that they are not bound by precedents. Based on the interviews I conducted, the many articles and speeches I have read on the subject, it is not even clear, and there is no general consensus, on whether prior arbitral awards are persuasive. The consequences of this conclusion are lack of certainty and lack of transparency, causing the system to suffer and people to lose confidence in it. I believe that it behooves us all to work towards a more credible, transparent and cohesive body of jurisprudence constante. The arbitration community can only gain from the interpretation of prior awards; it would bolster the development and harmonization of international law and provide legitimacy to the dispute resolution system.

33

Giorgio Sacerdoti, Precedent in the Settlement of International Economic Disputes: The wto and Investment Arbitration Models 15.

part 2 Investor-State Arbitration

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chapter 5

Motions to Dismiss in International Treaty Arbitrations Edward G. Kehoe My remarks will focus on a relatively new feature of treaty arbitration that in some cases requires investment treaty tribunals to decide legal questions at the outset of the case, which may dispose of some or all of the claims as a matter of law. This is the so-called motion to dismiss. As Judge Bressler noted in his remarks this morning concerning emergency arbitrators, international arbitration has demonstrated the ability to adapt its procedures to changing circumstances and needs of the arbitral process over time. The United States first introduced the motion to dismiss in investment arbitration in its 2004 Model bit, and since that time, it has been included in various treaties to which the United States is a party, which I will turn to in a few moments after these introductory remarks. When a respondent brings a motion to dismiss, all of the facts as alleged by the claimant are assumed to be true. The argument by the respondent is that even taking as true all of the facts as alleged by the claimant in its Notice of Arbitration, or Memorial if that is already filed, the substantive claim fails as a matter of law, so there is no need for a lengthy evidentiary process if the respondent prevails. And if the respondent does not prevail at this preliminary stage of the proceedings, it still has the opportunity to win the case on the merits when the facts are joined with the law later in the proceedings. There has been confusion among arbitration practitioners, and even arbitration tribunals, as to the scope of this power, and this treaty imposed obligation on the tribunal to hear these objections; and particularly whether it requires tribunals to decide questions of jurisdiction/competence as a preliminary question. The short answer, as the law has evolved on this point, is “no”. When a treaty contains a provision that requires a tribunal to decide an objection as to the legal sufficiency of an underlying claim, that provision does not require the tribunal to determine jurisdictional objections as a preliminary objection under the motion to dismiss standard where all of the facts are assumed to be true. It is important to understand the distinction between a motion to dismiss and a jurisdictional objection. Confusion on this point can have serious strategic and cost consequences for a claimant, because it could give the respondent

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two bites at the apple to which it is not entitled under the treaty (or two bites at the cherry as our colleagues from the uk would say). Under these new treaties that are modeled on the 2004 us Model bit, the respondent is given the right to make an immediate application objecting to the tribunal’s jurisdiction. And if the respondent makes a jurisdictional objection soon after the tribunal is convened, the tribunal must hear and decide the objection. But this expedited jurisdictional application is different than a motion to dismiss application, because with the expedited jurisdictional objection the claimant’s facts are not assumed to be true. The issue of the tribunal’s competence is decided once and for all in the expedited process. The facts and the law are considered together. And if the claimant wins, the respondent does not get another chance to make jurisdictional objections. That concludes my overview. So let’s get into the details in the allotted time that I have. The language that appears in Article 28.4 of the us Model bit is as follows: Without prejudice to a tribunal’s authority to address other objections as a preliminary question, such as an objection that a dispute is not within the tribunal’s competence, a tribunal shall address and decide as a preliminary question any objection that, as a matter of law, a claim submitted is not a claim for which an award in favor of the claimant may be made under Article 10.26. (emphasis added). Professor Vandevelde explains that the United States government added this language to its 2004 Model bit because of bad experiences defending frivolous claims under nafta; in particular, the Methanex v. us arbitration, which lasted for many years. This article in the us Model bit has been adopted and incorporated into the US-Peru Trade Promotion Agreement, and various cafta treaties. It is based on what American practitioners will understand as a “motion to dismiss for failure to state a claim” under Rule 12(b)(6) of the Federal Rules of Civil Procedure. This is confirmed in the Report of the United States Congress approving the United States-Peru tpa, which states on page 22: “the Chapter includes provisions similar to those used in u.s. Courts to dispose of claims a tribunal finds to be frivolous.” As I mentioned at the outset of my remarks, when a respondent makes an application under this standard, all of the facts that the claimant included in its Request for Arbitration (and its Memorial if it has filed one) are assumed to be true, such that the tribunal will decide whether particular claims can

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survive and be heard on the merits as a matter of law. The argument is that even assuming everything the claimant says from a factual perspective is true, it still cannot win because the law prevents it. Now, switching gears. For any of you who have had experience with an investment treaty arbitration, you know that jurisdictional objections inevitably are raised, which are different than arguments that go to the legal viability of the underlying claim. For example, an investment treaty tribunal only has jurisdiction over the dispute if the claimant has made an investment in the host country and that investment is protected by the substantive provisions of the treaty. So if a party merely has entered into a contract to purchase goods manufactured in the country, that contract is not an “investment”, it is just a contract of trade, and thus an international investment arbitration tribunal has no jurisdiction to hear and decide that dispute because it does not relate to an “investment.” If the party built and owns a manufacturing facility in the host country, on the other hand, that might be a protected investment. Another typical jurisdictional objection is that all of the acts of the respondent State of which the claimant complains took place before the treaty came into effect, and thus the tribunal has no jurisdiction over the dispute because the treaty which conveys the jurisdiction does not apply to the dispute. These are a typical jurisdictional objections in a treaty arbitration that go to the competence of the tribunal to hear the case. But the motion to dismiss is different. An application under Article 10.20.4 (or similar provisions with different article numbers in different treaties) is not focused on jurisdictional objections. The motion to dismiss considers the legal sufficiency of the underlying claim, assuming all facts as alleged by the claimant to be true, whereas a jurisdictional objection looks to the competence of the tribunal to hear the claim in the first instance, irrespective of its legal merit. And this is where the confusion has arisen. The editors of the Oxford Handbook of International Investment Law explain “A new generation of investment treaties involving the usa includes an express provision allowing a respondent State to make an application akin to a motion to dismiss.” The editors go on to explain that “[A] motion to dismiss is not a challenge to the court’s jurisdiction, but a challenge to the legal sustainability of the claim at a very early state of the proceedings.”1

1 Oxford Handbook of International Investment Law 957–59 (Peter T. Muchlinski, Federico Ortino and Christopher Schreuer eds., 2008).

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As Professor Jan Paulsson explained in an article in 2005 entitled Jurisdiction and Admissibility, a jurisdictional objection is one in which the respondent argues that the claim is quote “unhearable”, whereas in a motion to dismiss ­objection, the respondent argues that the claim is quote, “legally hopeless.” (emphasis added). Professor Paulsson noted in the article that the quote “confusion of these terms comes at a cost when it blurs such a fundamental distinction.”2 In the context of litigation, the Circuit Court of Appeals for the Fourth Circuit in the United States, deciding a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure, recently made an observation similar to that of Professor Paulsson concerning the confusion by many over the distinction between the two types of objections, stating: The parties, and indeed the district court itself, have quite blurred the fundamental difference between a Rule 12(b)(1) motion for lack of subject matter jurisdiction and a Rule 12(b)(6) motion for failure to state a claim, failing to recognize the distinction between the Rules. A 12(b)(1) motion addresses whether [plaintiff] has a right to be in the district court at all and whether the court has the power to hear and dispose of his claim, and a 12(b)(6) motion addresses whether [plaintiff] has stated a cognizable claim, a challenge to the sufficiency of the complaint.3 Motions to dismiss are not new to the American legal regime. They have been part of the legal fabric for many decades. But they are new to international arbitration, having been first introduced by the United States in its newer treaties since 2004. And because motions to dismiss have not been common in treaty disputes previously, some practitioners and tribunals have misunderstood the distinction and concluded that the treaty compelled lengthy jurisdictional arguments at the outset of a case, assuming all facts to be true, followed by a second jurisdictional round of briefing and argument when the facts were not assumed to be true. This can have serious strategic consequences for a claimant, because the respondent can recast its jurisdictional objections in the second round to account for whatever the tribunal’s ruling was in the first round. Not to mention the cost and inconvenience of two jurisdictional phases. 2 Jan Paulsson, Jurisdiction and Admissibility, in Global Reflections on International Law, Commerce and Dispute Resolution, Liber Amicorum in Honour of Robert Briner, 607–08 (2005). 3 Holloway v. Pagan River Dockside Seafood, Inc., 669 F.3d 448, 452 (4th Cir. 2012).

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This happened, for example, in the rdc v. Guatemala case where the tribunal seemed erroneously to believe that it was compelled to hear the jurisdictional objections in a motion to dismiss context even though, according to the tribunal in that case: “This lead in the present case to two jurisdictional hearings on different points, which is inconvenient, to say the least.” This issue came up again earlier this year in a dispute between the Renco Group, a us investor, and the Republic of Peru, with treaty language identical to that which the tribunal confronted in rdc v. Guatemala, and the Renco v. Peru Tribunal disagreed with the rdc v. Guatemala tribunal. The Renco v. Peru tribunal concluded, just as Professor Paulsson had written in a different context, that there is a difference between claims that are legally hopeless versus those that are unhearable, and the motion to dismiss is focused on legally hopeless substantive claims—claims that fail as a matter of law—not jurisdictional claims that cannot be heard at all. In its decision on this point of Dec. 18, 2014 the Renco v. Peru tribunal noted that “Not all of the same points on construction were apparently argued in these other cases as have been argued here, and, insofar as they differ from the points set out in the Tribunal’s decision, ultimately the Tribunal is unpersuaded by the analysis and conclusion of these other tribunals.”4 Importantly since the United States first rolled out its Model bit in 2004, the treaties which contain this motion to dismiss requirement also contain a provision that enables a Respondent to bring jurisdictional objections as a preliminary objection, which the Tribunal must hear, but it is not in the context of a motion to dismiss where all the facts are assumed true and that could result in multiple jurisdictional hearings. Rather, it is a normal jurisdictional objection where the facts and the law are heard together on an expedited schedule as a preliminary question. For example, both the Guatemala treaty and the Peru treaty have an Article 10.20.5, immediately following article 10.20.4, which states: “In the event that the respondent so requests within 45 days after the Tribunal is constituted, the tribunal shall decide on an expedited basis an objection under paragraph 4 and any objection that the dispute is not within the Tribunal’s competence.” This means that a respondent can be assured that its jurisdictional objections will be heard and addressed at the outset of the case if it so wishes. But it requires the respondent to seek such a decision within 45 days of the date of the tribunal’s constitution, and the issue will be determined with finality.

4 The Renco Group, Inc. v. The Republic of Peru, icsid Case No. UNCT/13/1, Decision as to the Scope of the Respondent’s Preliminary Objections under Article 10.20.4, p. 49.

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The respondent will not get two bites at the apple under a motion to dismiss standard. Similarly, even if a respondent does not file its request for an expedited jurisdictional decision, the tribunal may decide in its discretion to bifurcate jurisdictional objections from the merits and hear the jurisdictional objections first. Under the uncitral Rules, for example, this authority derives from Article 23. But again, should the tribunal decide to do this, the jurisdictional objections will be heard only once, the facts are not assumed to be true, and the respondent will not be allowed to re-argue the points later in the merits phase should the case proceed to the merits. This was probably not the most riveting topic you will hear about today. But I thought it was important to discuss because the motion to dismiss is such a new feature of some international arbitration treaty cases, and with the confusion among tribunals and practitioners and potentially important consequences in terms of strategy and cost to the client I felt it was good for you to hear. With that, I will turn the floor over to my friend Klaus Reichert.

chapter 6

ex aequo et bono: Dispelling Misconceptions—A Viable Choice for Governments and for Foreign Investors Klaus Reichert SC Introduction The phrase ex aequo et bono is not unknown to those who have an engagement with international dispute resolution. It is a phrase recognized widely, mostly though in passing and often dismissed as either unpredictable, or an unknown quantity. This article seeks to dispel these misconceptions, and also demonstrate that it is a viable choice for both governments and foreign investors when considering a “governing law” clause. This article is arranged as follows: (1) the legal sources which authorize a tribunal to rule ex aequo et bono; (2) a pertinent historical antecedent in international dispute resolution; (3) what does ex aequo et bono mean; and (4) conclusions for governments and for foreign investors.

Legal Sources

The wide recognition of ex aequo et bono stems from it being expressly ­referenced in many international instruments, most particularly for present purposes, in the Convention on the Settlement of Investment Disputes between States and Nationals of other States (“the icsid Convention”)(emphasis added): Article 42 (1) The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable. (2) The Tribunal may not bring in a finding of non liquet on the ground of silence or obscurity of the law.

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(3) The provisions of paragraphs (1) and (2) shall not prejudice the power of  the Tribunal to decide a dispute ex aequo et bono if the parties so agree. The presence of this option in the icsid Convention is critical. It provides the legal foundation1 for a government and an investor to elect to choose to empower a tribunal to decide a dispute ex aequo et bono. As regards arbitration procedures, a similar provision can be found in the uncitral Arbitration Rules (2010)(Article 35), though the option of amiable compositeur is offered: 2. The arbitral tribunal shall decide as amiable compositeur or ex aequo et bono only if the parties have expressly authorized the arbitral tribunal to do so. This alternative choice between ex aequo et bono and amiable compositeur (and the confusion which may arise by conflating the two concepts) is something to which this article will later return. The current (2012) version of the icc Arbitration Rules has a similar provision at Article 21(3) to the uncitral Rules allowing for the tribunal to rule, if the parties agree, either ex aequo et bono or amiable compositeur. There is a similar option available under Article 22(3) of the currently applicable Rules of the Arbitration Institute of the Stockholm Chamber of Commerce. Without belabouring the point too much further,2 the icdr International Dispute Resolution Procedures (2014), are to much the same effect with Article 31(3) prohibiting a tribunal from ruling ex aequo et bono or as amiable compositeur save with the agreement of the parties. One particular set of arbitration rules does approach the matter rather differently from the various other rules consulted for the purposes of this article, namely, the jams International Arbitration Rules. The applicable law provision in those rules, Article 18, makes no express reference to ex aequo et bono or amiable compositeur, rather mandates a tribunal to decide the merits of the dispute “on the basis of the rules of law agreed upon by the parties”. As will be seen later in this article, “rules of law” is not the same as ex aequo et bono or amiable compositeur. However, there is 1 In a similar vein, see Article 28(3) of the uncitral Model Law on International Commercial Arbitration (1985). 2 See, also: Article 27(2) of the siac Rules (2013); Article 35(2) of the hkiac Rules (2013); Article 22(4) of the lcia Rules (2014), though the concept of “honourable engagement” is also added; and Article 27(3) of the viac Rules (2013).

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a specific reference, though, in Article 30 of those rules to both concepts in the context of the remedies which a tribunal may award if the parties agree. In summary, if parties empower a tribunal to rule ex aequo et bono, then the legal architecture surrounding the usual forms of dispute resolution in the investor-state context supports such a choice.

A Pertinent Historical Antecedent

In 1922 a treaty3 was entered into between Great Britain and Costa Rica “for the submission to arbitration of certain claims against the government of Costa Rica”. These claims arose out of a period of political turbulence in Costa Rica from 1917 to 1922, with governmental power oscillating between various factions (the principal focus on the “Tinoco Governement”, named after one Frederico Tinoco). Ultimately, on August 22, 1922, the Constitutional Congress of the restored Costa Rican government passed a law invalidating all contracts between the executive power and private persons made in the period January 27, 1917, to September 2, 1919. That Congress also nullified a decree of June 28, 1919, authorizing the issue of fifteen million colones [a Costa Rican gold coin] currency notes. Finally, that Congress invalidated a decree of July 8, 1919, authorizing the circulation of 1,000 colones notes; all transactions with such notes between holders and the state were annulled. The Royal Bank of Canada and the Central Costa Rica Petroleum Company, both [then] British corporations owned by British subjects, were not best pleased at the Congress. The Royal Bank of Canada held 998 one thousand colones notes, and the Central Costa Rica Petroleum Company was granted the right to explore for oil deposits in that country. Great Britain espoused claims against Costa Rica on behalf of her subjects asking that an award to have the claim of the Royal Bank of Canada paid, and, further, to have the oil exploration concession recognized. Costa Rica denied liability, stating that the acts of the Congress were legitimate exercises of its legislative governing power (in addition to denying the validity of the claims on the merits). Article 1 of the treaty provided that, in part and emphasis added: The Arbitrator shall have the necessary jurisdiction to establish procedure and to dictate without any restriction whatsoever other resolutions which may arise as a consequence of the question formulated, and 3 My thanks to Prof. Susan Franck for giving me this reference: United Nations, Reports of International Arbitral Awards, 18 October 1923, Volume i, pp. 369–99.

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which, in conformity with his judgment, may be necessary or expedient to fulfil in a just and honourable manner the purposes of this Convention; Article 3 of that treaty recorded the agreement to appoint the Chief Justice of the United States of America as arbitrator. William H. Taft, rendered his Opinion and Award on October 18, 1923. First, he addressed a general issue, formulating it as follows: Great Britain contends, first, that the Tinoco government was the only government of Costa Rica de facto and de jure for two years and nine months; that during that time there is no other government disputing its sovereignty, that it was in peaceful administration of the whole country, with the acquiescence of its people. Second, that the succeeding government could not by legislative decree avoid responsibility for acts of that government affecting British subjects, or appropriate or confiscate rights and property by that government except in violation of international law; that the act of Nullities is as to British interests, therefore itself a nullity, and is to be disregarded, with the consequence that the contracts validly made with the Tinoco government must be performed by the present Costa Rican Government, and that the property which has been invaded or the rights nullified must be restored. To these contentions the Costa Rican Government answers: First, that the Tinoco government was not a de facto or de jure government according to the rules of international law. This raises an issue of fact. Second, that the contracts and obligations of the Tinoco government, set up by Great Britain on behalf of its subjects, are void, and do not create a legal obligation, because the government of Tinoco and its acts were in violation of the constitution of Costa Rica of 1871. Third, that Great Britain is stopped by the fact that it did not recognize the Tinoco government during its incumbency, to claim on behalf of its subjects that Tinoco’s was a government which could confer rights binding on its successor. Fourth, that the subjects of Great Britain, whose claims are here in controversy, were either by contract or the law of Costa Rica bound to pursue their remedies before the courts of Costa Rica and not to seek diplomatic interference on the part of their home government. As the scope of this article and space available is limited, the following point is made briefly, but with some confidence: it can readily be seen that many of these points resonate with contemporary cases (or put another way, plus ça change, plus c’est la même chose).

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Chief Justice Taft engaged in a searching analysis of the factual position regarding how, and by whom, Costa Rica was governed during the material period; concluding that the Tinoco Government was the lawful sovereign, and that Costa Rica was bound by the acts of that government. For present purposes, it is apparent from the award that the Chief Justice engaged in a searching factual analysis, and in no way might it be said that his authority to rule ex aequo et bono (just and honourable) led him to engage in some rudimentary palm-tree-justice. Having dismissed the objections of Costa Rica as to its attempt to impugn the acts of the previous government, Chief Justice Taft turned to the merits of the case. Taking the claim espoused by Great Britain on behalf of the Royal Bank of Canada, Chief Justice Taft’s analysis bears repetition in full, not only for the thoroughness of its conclusions, but also for the general hilarity of what was behind the transaction in question: It thus appears that the present claim of the bank rests on its payment of $200,000 to the Tinocos, $100,000 to Frederico Tinoco. “for expenses of representation of the Chief of State in his approaching trip abroad”, and $100,000 to Jose Joaquin Tinoco, as Minister of Costa Rica to Italy for four years’ salary and expenses of the Legation of Costa Rica in Italy, to which post the latter had been appointed by his brother. The Royal Bank cannot here claim the benefit of the presumptions which might obtain in favor of a bank receiving a deposit in regular course of business and paying it out in the usual way upon checks bearing no indication on their face of their purpose. The whole transaction here was full of irregularities. There was no authority of law, in the first place for making the Royal Bank the depositary of a revolving credit fund. The law of June 28th authorized only the Banco Internacional to be made such a depositary. The thousand dollar colones bills were most informal and did not comply with the requirements of law as to their form, their signature or their registration. The case of the Royal Bank depends not on the mere form of the transaction but upon the good faith of the bank in the payment of money for the real use of the Costa Rican Government under the Tinoco régime. It must make out its case of actual furnishing of money to the government for its legitimate use. It has not done so. The bank knew that this money was to be used by the retiring president, F. Tinoco, for his personal support after he had taken refuge in a foreign country. It could not hold his own government for the money paid to him for this purpose. The case of the money paid to the brother, the Secretary of War, and the appointed Minister to Italy, is much the same. The government book

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entry charges him with this as a payment for expenses to be incurred in the establishment of a legation in Italy. It includes the salaries and expenses for four years. To pay salaries for four years in advance is a most unusual and absurd course of business. All the circumstances should have advised the Royal Bank that this second draft, too, was for personal and not for legitimate government purposes. It must have known that Jose Joaquin Tinoco in the fall of his brother’s government, which was pending, could not expect to represent the Costa Rican Government as its Minister to Italy for four years, that the reasons given for the payment of the money were a mere pretense and that it was only, as in the case of his brother Frederico, an abstraction of the money from the public treasury to support a refugee abroad. As regards the claim of the Royal Bank of Canada, the conclusion Chief Justice Taft reached, again following an extremely searching analysis of the facts, was as follows (emphasis added): The present Government of Costa Rica prosecuted a suit for $100,000 against Joaquin Tinoco’s estate in a Costa Rican Court, based on the payment by the Royal Bank of this sum to him. The suit was compromised by a mortgage given by his widow upon two estates of his for a full $100,000, of date December 21, 1922, the same to be paid within five years. The Government of Costa Rica in repudiating any obligation to the Royal Bank for paying $100,000 to Jose Joaquin Tinoco, of course, deprived itself of any just claim to real ownership of the mortgage upon his estates for that amount. This should enure to the benefit of the Royal Bank. Proceeding in this matter ex aequo et bono, therefore, I must hold that the bank is subrogated to the title of Costa Rica in the mortgage and that as a condition of the award against the bank, as to the whole 998,000 colones claimed by it, Costa Rica should transfer and assign the mortgage to the bank for its benefit, together with any interest which may have been meantime collected thereon. Turning briefly to the claim for the recognition of the oil concession, the most serious objection was that it was granted by a body without power to grant it. This objection was upheld by Chief Justice Taft, having reviewed the Costa Rican Constitution and the delineation of powers between the Executive, Legislative, and Judicial organs of government. The award of Chief Justice Taft deserves a wide audience, even after almost a century, given that it addresses a number of issues which, to this day, find their way into many treaty arbitration disputes. The award is a model of clarity, lucidity, and economy of language; but, most of all, it demonstrates that

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ex aequo et bono was considered entirely appropriate for the resolution of an early investor-state-style dispute, enjoying the confidence of a major trading nation in Great Britain (probably by 1923 she had been overtaken by the United States, but was certainly still close to the apex of global importance).

What does ex aequo et bono mean?

As already noted, the phrase ex aequo et bono is widely known, and is referenced in both the icsid Convention and many arbitration rules. However, those instruments give little away as to what is meant by the phrase, with tribunals only ruling ex aequo et bono if authorized to do so by the parties. Thus, a pertinent question is what is ex aequo et bono? Put another way, if a tribunal can only rule ex aequo et bono when it is expressly authorized to do so, it does need to know exactly what it is meant by that phrase so that it does not blunder over an impermissible line! The icsid Convention—A Commentary (2ed)(2009), a major (if not the major) commentary on the icsid Convention gives the following (pp. 631–32) as a general meaning: Art. 42(3) provides that a tribunal, if so authorized by the parties, may base its award on extra-legal considerations which it regards as equitable. In other words, it may disregard the rules of law otherwise applicable under Art. 42(1) in favour of justice and fairness. In a sense, this provision is an extension of Artic. 42(1), first sentence. The parties are free not only to choose the rules of law to be applied but may also go beyond these rules and choose equity. But it must be borne in mind that while an authorization under Art. 42(3) achieves maximum flexibility it does so at considerable cost to predictability. …………… An agreement to authorize the tribunal to decide ex aequo et bono may be particularly appropriate in the case of complex long-term relationships. As an investment evolves over time, new circumstances may appear which were not taken into account originally. If a re-negotiation turns out to be impossible, the tribunal’s power to decide ex aequo et bono may be a second-best method to achieve a result which is fair and suitable to changed circumstances. This extract from such a major commentary would not give much confidence in ex aequo et bono, either to a government, or to an investor. However, the question posed now, and was posed during the course of the oral remarks in

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Fordham in November 2015, is whether this description of ex aequo et bono can be looked at again? Experience of use of ex aequo et bono in the commercial arbitration sphere can inform the answer to this question, and one can look to both Switzerland and France where the courts of those countries have had opportunity to deal with challenges to awards using that concept. Arbitration in Switzerland—The Practitioner’s Guide (Arroyo, ed.)(2013) does describe a choice by parties to authorize a tribunal to rule ex aequo et bono as giving rise to an “unpredictable” outcome (p.175), but then develops the discussion as follows: A decision ex aequo et bono is not based on rules of law but on considerations of justice in the individual case. When deciding ex aequo et bono, the tribunal is not bound by any law, not even by mandatory provisions, unless they belong to public policy. Accordingly, the arbitrators decide the case as they deem fair and just given the circumstances of the case before them. As a result, the decision they reach might differ from the result under the law that would otherwise be applicable to the merits of the case. Despite the fact that the tribunal is left with broad discretion when deciding ex aequo et bono, it is not totally free to decide however it wishes. The tribunal still has to based its decision on the contract between the parties and may not disregard clear contractual provisions, unless of course the parties have agreed otherwise. Although generally the tribunal may not disregard clear contractual provisions merely because they seem unfair, it may under certain circumstances consider to adapt a contract (clausula rebus sic stantibus) or reduce inadequate contractual penalties. As decisions at law, decisions ex aequo et bono have to be disclosed to the parties in a reasoned award. This means that the tribunal will have to establish the facts of the case and then apply rules (although not rules of law) to the facts, which it has to explain in a reasoned award. With regard to the rules of evidence, some authors are of the opinion that a tribunal deciding ex aequo et bono is bound nevertheless by the fundamental principle that each party has to proof those facts which it bases its claims or defense on. This approach deserves support in our view and the equal treatment of the parties is particular important in this context (i.e., it would not be permissible for the tribunal to put the burden of proof for all facts upon one party). Beyond this general principle for a­ llocating the burden of proof, however, the tribunal is not bound by more specific national rules in this respect.

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From the above it emerges that a decision ex aequo et bono under Art. 187(2) pils4 is not the same as a common law equity decision or an amiable composition under French law. Amiable composition means that the tribunal first establishes what the result would be under the applicable law and may then correct this result if it finds it to be unfair. The authors of the The icsid Convention—A Commentary, notwithstanding the cautionary note about unpredictability, do agree with aspects of this Swiss commentary, as, at p. 637, they state that a tribunal, ruling ex aequo et bono, must not act arbitrarily, and must base its decision on stated objective and rational considerations (put another way, it must give reasons). However, the authors do make the further proposition that “the burden of reasoning may be somewhat lighter than in the case of decisions based on law”. This writer does not share that viewpoint. A reasoned award is what it is, and it should be no different with ex aequo et bono. There is no doubt that ex aequo et bono is a different matter entirely to amiable compositeur, though often the concepts are considered as being roughly similar. In France, amiable compositeur, has been noted as giving powers to arbitrators to override to some extent the consequences of contractual provisions.5 The case law of the French courts referenced in the icc awards examined by Kiffer for her article shows that arbitrators whom the parties have vested with the authority to rule as amiable compositeurs have the power to attenuate contractual obligations, and thus “moderate the rights deriving from the contact and depart from a strict application of the contractual clauses without, however, modifying the economics of the contract”. This approach seems to resonate with the cautionary note expressed by the authors of The icsid Convention—A Commentary. A tribunal, authorized to rule as amiable compositeur, may well give rise to unpredictable results for parties. That does not translate into a similar fate for parties when a tribunal rules ex aequo et bono as the discussion in Arbitration in Switzerland—The Practitioner’s Guide noted above demonstrates the importance of the contractual language chosen by parties, and departure from those is only exceptional (which, if any lawyer examines their own system—even the most rigidly black letter doctrine—there are many ways by which contractual terms are not translated into enforced obligations). Simply stated, pacta sunt servanda is at the heart of ex aequo et 4 This is the Swiss Private International Law Statute, part of which sets out the international arbitration law for arbitrations seated in Switzerland. 5 Amiable Composition and icc Arbitration, Kiffer, icc International Court of Arbitration Bulletin—Col. 19/No. 1–2007.

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bono, as there can be no more basic principle of justice than holding parties to the bargain to which they adhered themselves. As pacta sunt servanda is at the core of ex aequo et bono, then predictability must follow, subject of course to the boundaries of public policy. None of this should be remotely scary to either investors or governments. In the field of sports arbitration, specifically the international arbitration system established by the Basketball Arbitral Tribunal,6 ex aequo et bono has a flourishing life earning the trust of professional athletes, agents, coaches, and clubs. Across more than 800 cases, the fundamental principle of pacta sunt servanda has been the cornerstone of the decision-making process informing a large number of reasoned awards. While many of the arbitrations are modest in size, or complexity, that does not detract in any way from the rigours of reasoned awards, analyzing the content of the agreements entered into by parties, and holding such parties to their obligations. In a recent bat award,7 the discussion of interpretation of contracts (in the international basketball sphere) and possible attenuation of the effect of their clauses was discussed at some length: 58. This question has a number of aspects. First, the proper interpretation of an agreement is of foremost importance, as the contents of the “pacta” must be known thoroughly before one can say, with confidence, what must be performed (the “sunt servanda”). Secondly, in what circumstances might the strict terms of the agreement, once properly construed, be attenuated or moderated? 59. Taking the first aspect, namely, proper interpretation of an agreement, it is abundantly clear that an arbitrator, sitting in Switzerland and mandated to rule ex aequo et bono, is not bound by any particular set of national legal rules. However, it is also the case that such an arbitrator is not free to do whatever it is they want and, for example, completely disregard the words used by parties in their contractual documentation. The sort of principles which might inform the exercise of interpretation in the context of a bat arbitration include: – looking at all of the contractual language chosen by parties through the eyes of a reasonable reader to see what is the ordinary and natural meaning of the words used;

6 The writer is a member of the “bat” panel of arbitrators—www.fiba.com/bat. 7 bat case 0756.

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– the overall background context of professional basketball and general common understanding amongst such users together inform the ordinary and natural meaning of the words used; – when it comes to considering the centrally relevant words to be interpreted in a particular case, the less clear they are, or, to put it another way, the worse their drafting, the more ready an arbitrator might be to depart from the ordinary and natural meaning. That is simply the obverse of the sensible proposition that the clearer the ordinary and natural meaning the more difficult it is to justify departing from it; – the description or label given by parties to something in a contract is not inflexibly determinative of its true nature; – the mere fact that a contractual arrangement, if interpreted according to its ordinary and natural language as described above, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from that language; and – in general, it is not the function of an arbitrator when interpreting an agreement to relieve a party from the consequences of his or her imprudence or poor advice. Accordingly, when interpreting a contract, ex aequo et bono, an arbitrator avoids re-writing it in an attempt to assist an unwise party or to penalise an astute party. Also, parties should not seize on a literal translation of the phrase ex aequo et bono and consider that “justice” and “equity” provide them with a route to unprincipled and unmoored indulgence for poor contractual choices. 60. As regards the second aspect of the question, namely, when ruling ex aequo et bono, under what circumstances might the effect of contractual terms (once properly interpreted) be attenuated or moderated. Again, as already noted, under ex aequo et bono, in principle, an arbitrator gives effect to all contractual terms used by parties once properly interpreted. 61. The starting point is that parties enter into contracts with the presumed intent that they will abide by their terms, and see them out to a conclusion. Alteration or moderation of a contract’s terms would not usually arise in such circumstances, save by the parties’ own subsequent agreement. 62. One comes to a point of departure from the usual contractual performance (i.e. in full according to agreed terms) when there has been a breach and an arbitrator is looking at the remedies sought by the

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innocent party seeking compensation. There are a number of particular factors which inform such an exercise: – a claimant may often look for compensation for the loss of the benefit of the contract which they have lost, or, putting it another way, what would they have earned had the contract been performed in the usual and agreed manner to the end of its life; – in the professional basketball context, there are specific circumstances which colour the foregoing factor in an important manner, namely, a player, or a coach, can only be at one club at a time during a season, and they cannot have multiple parallel contracts (as might be the case for a commercial company undertaking multiple deals and lines of business). Thus, for example, if a player agrees to a two year contract at a particular salary, it is known from the outset exactly the extent (save for items like bonuses, which are tied to sporting success) of the monetary compensation for that agreement’s lifetime, and also for those two years of that player’s professional playing time; – in the context of a breach of contract, or termination for cause, the innocent party should not be put into a better position than they would have been had all gone according to plan with full and complete performance of the obligations; – contractual clauses which apply in the context of a breach, or termination for cause, such as penalties, or liquidated damages (this is not a closed list), are subject to careful scrutiny when ruling ex aequo et bono. In particular, such a clause which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party, may be refused enforcement, or moderated in its application; – the innocent party is normally expected to mitigate their position by, for example, seeking alternative employment if possible; and – there is a time-value to money payable now, rather than at a point in the future, and such time-value normally attracts a discount factor. It is submitted, for the reader who has made it to this point (and thank you for doing so), that the foregoing contours of interpretation, attenuation, and compulsion of performance of contractual obligations, are what will be encountered when dealing with an arbitration ex aequo et bono.

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Conclusions Is ex aequo et bono any less effective, or less predictable than the widespread sort of governing law clause which puts together an amalgam of local law of the host state and international law? Rather than answer that question, it is left for the consideration of the reader. For a state’s lawyers, particularly those within its own service, the presence of overlapping laws thrown together in a governing law clause, does increase the likelihood of bringing in colleagues from multiple legal systems. Perhaps the reader might see the point that ex aequo et bono liberates state’s lawyers from having to make a decision to retain external counsel from multiple jurisdictions. For an investor’s lawyers, ex aequo et bono, liberates their client from potentially unknown consequences to be found in a host state’s law (if that is chosen), or indeed obviates the endless debate about where the boundary is to be drawn between the local law and international law in the event that the hotchpotch-style governing law clause is used. The conclusion for both a state and an investor is that by choosing ex aequo et bono they are creating their own, tailor-made, legal system based on their contract. Could anything else be more predictable? One hopes the answer now in the mind of the reader is “no”.

chapter 7

The Role of Damages Calculations in the Legitimacy of International Investment Arbitration Catherine Amirfar1 Introduction Issues surrounding the calculation of damages in the investor-state arbitration context are among the most significant and underappreciated challenges facing the system of international investment arbitration. If the premise that “valuation is not what lawyers do”2 were true once—which I dispute—it cannot be true today. Billion-dollar claims, often of significant public policy importance, now routinely are brought in investment arbitration. The import of arbitrators applying the nuances of the law of treaty interpretation in a reasoned and transparent manner goes without saying. Less well-settled, but equally crucial for the legitimacy of the international dispute settlement system, is that practitioners understand the nuances of damages valuation disputes, and that arbitrators interpret and decide those nuances in a reasoned and transparent manner. To be clear, I am not suggesting that legal practitioners themselves should become full-fledged experts in financial economics, but I do believe that they must understand better the complexities of valuation. From a practical standpoint, parties to international investment arbitrations routinely engage in years of drafting pleadings, hearings, collecting of evidence, retaining experts, and paying sizeable legal fees to prepare their cases on damages. To have a tribunal in its final award provide little or no reasoning for the adoption of one methodology or input variable over another, risks creating the perception that tribunals are effectively awarding damages based on ambiguous and amorphous conceptions of equity, with lip-service being paid 1 Partner & Co-Chair of the Public International Law Group, Debevoise & Plimpton LLP. From 2014 to 2016, I served as Counselor on International Law, Office of the Legal Adviser, u.s. Department of State. The views expressed in this article are made in my personal capacity and are not necessarily the views of the u.s. Department of State or of the u.s. Government. 2 Markham Ball, “Assessing Damages in Claims By Investors Against States”, 32 icsid Review— Foreign Investment Law Journal 408 (2001) (noting “valuation is not what lawyers do. The law establishes a standard. It is up to another discipline to assess the facts in light of that standard and produce a number.”).

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004334557_009

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to a valuation methodology to add a veneer of credibility. In egregious cases, damages awards with no supporting analysis are subject to attack. But even outside that admittedly rare circumstance, legal practitioners are often hardpressed to explain to, for example, a senior government official, a general counsel of a Fortune 500 company, or even a student of Economics 101 an award citing to no reasoned basis to justify a quantum of damages that happens to fall just in between the parties’ two competing valuations. If States, parties, and observers perceive that the international investment arbitration system lacks rigor and certainty, that perception materially affects the enterprise of international investment arbitration as a whole. In short, valuation needs to be something that lawyers “do.” A tribunal’s decision on damages not only impacts the ultimate quantum of compensation, but it often raises legal equities of particular importance to investment arbitration. Yet the economic and legal consequences of such decisions are often little discussed in tribunal awards. Critical economic issues drive many awards. For example, how should the valuation for an alleged expropriation claim treat the prospect of future expropriations by the respondent state? Should a respondent state with a higher risk of expropriation pay lower compensation to a winning claimant than for an identical asset in a state with lower risk of illegal sovereign acts? What incentives does the ability to benefit from their illegal conduct create?3 For another example, when and how should compound or simple pre- and post-award interest be available and on what basis? Should pre-award interest hinge only upon whether damages should properly account for the time-value of money, or should tribunals also consider whether interest awards are proper tools to disincentivize possible future illegal conduct by losing respondent states? What incentives for both expropriation and payment are created when post-award interest provides financing to state at rates lower than its sovereign borrowing cost?4 One critical area where transparent reasoning often is lacking is in the determination of the applicable discount rate (“dr”) in the context of the commonly used discounted cash flow (“dcf”) method. For these purposes, I focus 3 See generally Florin A. Dorobantu, Natasha Dupont, and M. Alexis Maniatis, Country Risk and Damages in Investment Arbitration, icsid Review (Winter 2016) 31 (1): 219–31 first published online November 27, 2015 doi:10.1093/icsidreview/siv039. 4 See, e.g., Sergey Ripinsky and Kevin Williams, Damages in International Investment Law 364–74 (2008); Kantor, Mark Valuation for Arbitration: Compensation Standards, Valuation Method,s and Expert Evidence, Kluwer Law International 9 at 265–77 (2008); Kardassopoloulos/Fuchs v. Georgia, icsid Case No. ARB/05/18 and ARB/07/15, Award ¶¶ 658–78 (March 3, 2010) (discussing equitable considerations involved in awarding simple versus compound interest).

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on the calculation of the dr with respect to the specific factor of sovereign risk related to illegal conduct to (a) illustrate the importance of understanding the detail of valuation methodologies, and (b) illustrate the types of issues within the determination of the dr that implicate core legal equities and with which tribunals should grapple in a reasoned and transparent manner. I comment also on a second commonly used method, “market comparables.”

Damages & the Discounted Cash Flow Methodology

When it comes to unlawful expropriation and other common breaches of International Investment Agreements (“iias”) such as the fair and equitable treatment standard, the Chorzόw Factory principle of reparation for violations of international law as set forth by the Permanent Court of International Justice tends to be the point of origin. That principle is as follows: “Reparation must, as far as possible, [1] wipe out all consequences of the illegal act and [2] reestablish the situation which would, in all probability, have existed if that act had not been committed.”5 While the precise contours of the customary international law standard for reparation remain subject to debate, many States acknowledge the role that fair market value (“fmv”) plays in the calculation damages for international investment claims.6 The Commentary of the International Law Commission Articles on Compensation Standards provides, “compensation reflecting capital value of property taken/destroyed as a result of an internationally wrongful act is generally assessed on the basis of fmv of the property lost. Method

5 Factory at Chorzow (Germany v Poland), 1928 pcij Rep Series A No. 13, at 47 (Sept. 13). For more on how the Chorzow Factory principle can differ in the calculation of damages for unlawful versus lawful expropriation, see Reisman, W. Michael & Sloane, Robert D. Indirect Expropriation and its Valuation in the bit Generation, British Yearbook of International Law, Vol. 75, pp. 136–37 (2004). 6 See, e.g., U.S.-Arg. bit, art. IV(i) “[P]rompt, adequate, and effective compensation...shall be equivalent to the fair market value of the expropriated investment immediately before the expropriatory action was taken or became known[.]” U.K.-Pan. bit, art. 5(1) (“Such compensation shall amount to the fair value which the investment expropriated had immediately before the expropriation became known, shall include interest until the date of payment, shall be—made without delay, be effectively realisable and be freely transferable.”). See also Markham Ball, supra note 2, at 414 (“Despite the diversity of terms, however, I believe one can see a growing consensus, expressed in treaties and in arbitral awards under treaties or customary international law, on a standard of ‘fair market value’ or its equivalent.”).

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used to assess fmv depends on the asset concerned.”7 The 1992 World Bank Guidelines likewise state, “[w]ithout implying the exclusive validity of a single standard for the fairness by which compensation is determined,” that stated, “(i) for a going concern with a proven record of profitability, on the basis of the discounted cash flow value; (ii) for an enterprise which, not being a proven going concern, demonstrates lack of profitability, on the basis of the liquidation value; (iii) for other assets, on the basis of (a) the replacement value or (b) the book value in case such value has been recently assessed or has been determined as of the date of the taking…[.]”8 fmv is a term of art referring to the price that a hypothetical willing buyer would pay a hypothetical willing seller.9 Estimating the fmv of expropriated assets indirectly is frequently necessary because the market price of the asset is not observable. Indeed, as I explain below, it may be inappropriate in investor-state arbitration to equate fmv with the traded value of the asset even where can be observed, because actual transactions may not reflect the legal assumptions for compensation. Two of the most common valuation approaches are the dcf method and the market comparables method.10 The dcf method attempts to come to a reasonable forecast of the future cash flows from an asset or company, often with reference to the entity’s historical performance. The comparables approach looks for prices paid in sales of like assets in like circumstances, or contemporaneous sales of stock in an enterprise holding such assets as guides to determining the expropriated asset’s value. Experts often use both methods when each is imprecise, in the name of “triangulation.”11 I should note that these methods may (and often do) result in different valuations, as each method reflects different 7

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9 10

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Crawford, The International Law Commission Draft Articles on Responsibility of States for Internationally Wrongful Acts: Introduction, Text and Commentaries, at 255 ¶ 22 (2002). World Bank: Report to the Development Committee and Guidelines on the Treatment of Foreign Direct Investment, adopted Sept. 21, 1992, (1992) 31 ilm 1363, 1382 (“World Bank Guidelines”). See, e.g., Restatement (Third) of Foreign Relations Law Section 712 (1989). See generally Kantor, supra note 4 (discussing three approaches to valuation: incomebased approach (including dcf), market-based approach (including comparables), and the asset-based approach). For shortcomings on the market based approach, where there may be no comparable businesses or opportunities, see Paul D. Friedland & Eleanor Wong, Measuring Damages for the Deprivation of Income-Producing Assets: icsid Case Studies, 6 icsid REV. FOREIGN INVESTMENT L.J. 400, 405–06 (1991). In the social sciences, “triangulation” referred to using more than one source (ideally of a strategically different type) to check the validity of an interpretation. For a general

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assumptions, data, or circumstances. Experts often enlist multiple methods to buttress the reliability of the bottom line number, and widely divergent results can suggest they have inconsistent assumptions and that one or more are not reliable. For this reason, an expert’s ability to reconcile for the tribunal the differing results is critical. For these purposes, I focus on the dcf methodology. A dcf model forecasts the future expected cash flows from the investment and reduces these to a present value using a discount rate. Briefly stated, the dcf method comprises several steps: (i) estimating the future cash flows from the investment being valued during a specific projection period; (ii) calculating the present value of those future cash flows using a discount rate; (iii) where appropriate, estimating the terminal value of the asset after the end of the specific projection period; (iv) aggregating the present values of the projection period and terminal value cash flows; and (v) (where appropriate) deducting the fmv of the investment debt to determine the value available to equity investors.12 Inputs to a dcf include, among other elements, future revenue and expenses forecasts, incremental capital requirements, interest and inflation rates, currency fluctuations, and starting and ending dates for the dcf forecast period. In theory, the method is well-suited to estimating full compensation to the claimant by determining the amount that reflects a company’s expected ability to generate positive returns in the future.13 There now is widespread acceptance of dcf in the world of corporate finance and increasingly by courts and some international investment tribunals, at least for expropriation claims involving “a going concern with a proven record of profitability.”14 Particularly

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discussion of the advantage of utilizing several valuation methods as complementary tools to reliably determine valuation, see Kantor, supra note 4, at 26–30. Id. at 132. Notably, dcf forecasts are highly sensitive to the terminal value projecting the residual value to the end of the investment’s life, especially if the period for the detailed projections is short. Spiller, Pablo, Damage Valuation of Indirect Expropriation, in The American Review of International Arbitration, 457 (2003). World Bank Guidelines at 1382; see also Ball, supra note 2 at 419 (“It is well settled in the world of finance that the accepted way of valuing prospective earnings is the discounted cash flow method…. The dcf method is a real-world method that businessmen and ­financiers apply every day in deciding how much to invest in a business. It has been accepted and applied in the awards of numerous international arbitral tribunals, as well as in cases in national courts.”); Propositions and Conclusions on Compensation for Business Losses: Types of Damages and Their Valuation, u.n. Comp. Comm’n Governing Council, 4th Sess., 23d mtg. para. 18, u.n. Doc. S/AC.26/SER.A/1 (1992) (arguing that, where market value cannot be directly observed, dcf is proper); Pratt, The Lawyer’s B ­ usiness

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in light of these developments, lawyers need to be conversant, and tribunals need to engage, in the detail of the methodology.

Issues in the Calculation of the dcf Discount Rate

The classic approach to determining the dr is to estimate the Weighted Average Cost of Capital (wacc) of the asset. The waac is directed at determining the proper balance between risks and benefits to investors in competitive capital markets. The wacc often is calculated by reference to the company holding the asset (or similar ones) and is comprised of the cost of debt and the cost of equity, proportionately weighted to determine the overall cost of capital to the company.15 Some practitioners add a factor for non-market (i.e., subjective or investment-specific) risks, though this is controversial among experts. The numerical inputs to determining the dr often are the subject of substantial disagreement by competing party experts and result in wide divergences in damages conclusions. Further, many of these inputs inevitably often have far-reaching legal and policy implications. But very often, tribunals often provide no discussion or decision with respect to the underlying inputs, or even when they do, awards reflect mechanical adoptions of a party’s position, with little to no acknowledgment of the legal or policy underpinnings. Of specific import in the field of investment arbitration is the inclusion and magnitude of a country or sovereign risk discount in a dcf. This element seeks to account for risks associated with country-specific conditions of the host State.16 In the words of the edfi Tribunal, the “country risk premium represents the premium required by an investor to place money in a

15 16

Valuation Handbook (American Bar Association 2000), at 105 (“Not only is discounted cash flow the most theoretically correct valuation method, it is also the most widely practiced valuation method in the world of corporate finance. Furthermore, the method is increasingly used by valuation experts and increasingly accepted by courts[.]”). For two excellent discussions of the dcf method, see cms Transmission Company v. Republic of Argentina, icsid Case No. ARB/01/08, Award ¶ 416 (May 12, 2005) (“dcf techniques have been universally adopted…”) and Enron Corporation and Ponderosa Assets, L.P. v. Republic of Argentina, icsid Case No. ARB/01/3, Award ¶ 385 (May 22, 2007) (“[dcf] has also been constantly used by tribunals in establishing the fair market value of assets to determine compensation of breaches of international law.”). The cost of equity in a wacc is often in turn determined by the Capital Asset Pricing Model (the “capm”). See Maniatis, supra note 3, at 3.

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foreign investment.”17 As sovereign risk increases, the damages figure decreases. One common procedure for determining sovereign risk is based upon the premium of the country’s usd sovereign debt over the corresponding usd risk-free rate.18 Mathematically, but not without controversy, such a risk can be incorporated into the estimation of future cash flows feeding into a dcf analysis (usually based on contemporaneous business projections19) or in the dr itself, although it appears that the latter is more frequent.20 One common issue with respect to country risk that requires vigilance by counsel and arbitrators is the possibility of double-counting: to the degree that country risk is already incorporated into estimated cash flows, it should not be incorporated into the dr as well. Indeed, incorporating such a risk directly into the dr can sometimes invite improper hindsight and results that are not intended, which can be at odds with the relevant Chorzόw Factory legal exercise of determining the proper quantum of expected future profits based on the situation that would have existed but for the unlawful conduct. Thus where inclusion of a sovereign risk factor is deemed appropriate, and unless confronted with a unique set of facts, there is considerable appeal in an assessment limited to contemporaneous risk information that would have been fairly known by claimants (assuming a reasonable, informed investor) at the time of investment and not a post-hoc determination made in the context of a contentious legal proceeding. The tribunal in Kardassopoloulos/Fuchs v. Georgia—one example of a particularly well-reasoned and detailed analysis of the dcf methodology—was faced with this very question. That tribunal was considering the proper sovereign risk to attribute to an oil pipeline investment in Georgia in 1995, which would take account of the specific macroeconomic and political conditions

17 18 19

20

edfi v. Republic of Argentina, icsid Case No. ARB/03/23, Award ¶ 1262 (June 11, 2012). See generally Maniatis, supra note 3, at 13. See, e.g., see cms Transmission Company v. Republic of Argentina, icsid Case No. ARB/01/ 08, Award ¶ 422 (May 12, 2005) (“The use of a company’s internal forecast prepared in the normal course of business is quite acceptable as a starting point in the valuation of a company. The Tribunal sees no reason to reject it.”). See, e.g., edfi v. Republic of Argentina, icsid Case No. ARB/03/23, Award ¶¶ 1261–265 (June 11, 2012) (accounting for country risk in the dr); Lemire v. Ukraine, icsid Case No. ARB/06/18, Award, ¶ 274, 282 (March 28, 2011) (same); Sempra v. Argentina, icsid Case No Arb/02/16, Award, ¶ 433 (September 28, 2007) (same); Siemens v. Argentina, icsid Case No. ARB/02/8, Award ¶ 382 (February 6, 2007) (same); cms v Argentina, icsid Case No. ARB/01/8, Award, ¶ 454–55 (May 12, 2005) (same); adc v. Hungary, icsid Case No. ARB/03/16, Award ¶ 511 (October 2, 2006) (same).

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surrounding the oil transportation industry at the time.21 The respondents’ expert argued for a substantial upwards adjustment on the dr to 36% to reflect the addition of a country risk premium for Georgia of 23%.22 Notably, the expert justified that figure by comparing it to economic and political information subsequent to the time of investment: “The political risks have generally trended down, and before coming here, I went to get to my colleagues to say, what are the risk numbers looking now? What’s the country risk percentage that you have calculated now? Nothing to do with this arbitration. … But the country risk premium, you use country risk premiums now, if you say an average for 2008, 6 or 6.5 per cent, that’s substantially lower than what it was back in 1995, and I think that reflects the fact that Georgia, subject to Russia, is a much more stable developed place than it was back in the days in 1995, because things were—the evidence around there was that things were really very, very uncertain.”23 In short, the respondent’s expert came to a 1995 estimate of 23% by casual inquiry about the country risk premium two decades later and, finding it was about 7%, adjusted that figure substantially higher in an ad hoc manner on the observation that things were much worse earlier when the investment was made. The claimants’ expert opposed the addition of any country risk premium to the dr, arguing in response that as a conceptual matter, “these are just spreads between lending to governments and the risk is really embedded in how the government runs its fiscal affairs. One needs to take exceptional caution as to how that particular type of risk would affect commercial activity, and especially in the energy industry, people like to take into account risks such as this, country risk, political risk, into the cashflows.”24 The claimant’s expert argued that respondent’s proposed discount was so high as to be unrealistic, since it would “deter any international oil companies from ever[] doing business in Georgia,” a premise that was not borne out by the underlying facts showing investment in Georgia.25 The Kardassopoloulo/Fuchs v. Georgia tribunal ultimately rejected the respondent expert’s proposed addition of a 23% country risk premium to the dr, concluding that claimant “was not exposed to significant country risk so as to justify application,” and that claimant expert’s “methodology takes adequate account of the risks involved in each valuation scenario as of the 21 22 23 24 25

Kardassopoloulos/Fuchs v. Georgia, icsid Case No. ARB/05/18 and ARB/07/15, Award ¶ 624 (March 3, 2010). Id. Id. at ¶ 629. Id. at ¶ 630. Id. at ¶ 626.

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valuation date.”26 While not made explicit in the decision, it stands to reason that the tribunal was unpersuaded by the attempt by respondent’s expert to justify a risk premium for 1995 by apparently working backwards from a post1995 ­premium. More importantly, while the tribunal noted that “both experts appear to agree that risk may be accounted for either in the cash flows of a dcf analysis or in the discount rate,”27 it appeared to credit the assertion of claimants’ counsel that the country risk had been sufficiently accounted for in the underlying cashflows estimates, particularly where the nature of the pipeline investment appears to insulate it from the Georgian domestic p ­ olitical landscape.28 The tribunal’s decision in this regard gave appropriately fulsome attention to the question of sovereign risk in a way that is sensitive to the significant legal equities underlying it: what is the nature of the investment and how was that investment actually subject to the host State’s economic and ­political policies for the time period in question? In particular, was the investment of the type of business operation that would have been affected by the specific political turmoil in question? Was the investment dependent on the domestic or foreign market? Was the investment insulated from domestic currency fluctuations? What role does hindsight play in an expert’s assessment and is that appropriate? While not an issue that to my knowledge has been subject of analysis in decisions, inclusion of a sovereign risk premium in the overall dr (rather than as a component of the underlying cash flow estimates) may lead to unintended assumptions. For example, normally a dcf valuation will apply a single dr to all future cash flows, even ones covering a prolonged period of time, rather than through different drs applied to different time periods. So incorporation of the sovereign risk into the overall dr assumes that the risk compounds over time, that is, to “cause the country risk discount to be small in the first

26 27 28

Id. at ¶ 631. Id. at ¶ 628. Id. at 630 (“And so I think you have to think about how the quantity of what you’re applying and adding to the discount rate really affects the business’s operations and what you would expect. Would you expect oil that is really mostly travelling underground, not being sold to any Georgian citizens, not dependent upon the currency value in Georgia of the Lari, you know, literally being transited underground, being sold out into Western markets, how much does the political turmoil really affect that type of business operation? 36 per cent really just eviscerates value and puts the project on a basis as if, you know, oil is hardly going to reliably flow through that pipeline, and I just don’t think that’s realistic. So in my view, you have to bring it down to a commercial context all the time before you just carte blanche apply that spread.”).

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year and growing over time.”29 Tribunal should offer a reasoned basis for their assumptions with respect to an investment’s exposure to sovereign risk, based on specific evidence of the nature of that risk over the course of the relevant time period.

Concluding Thoughts

In sum, a reasoned award with respect to damages requires actual reasons, akin to a reasoned award on liability. Awards that fail to detail the tribunal’s decision-making and evaluation of methodologies on damages can pose legitimacy risks to the investor state dispute settlement system. Users increasingly demand more sophistication with respect to financial modeling in international dispute settlement and express frustration when it is lacking.30 In this respect, initiatives and writing aimed at increasing the rigor and transparency of damages awards are very welcome developments. In 2010, the International Institute for Conflict Prevention and Resolution (cpr) issued a Protocol on Determination of Damages in International Arbitration (“cpr Damages Protocol”) that prescribes addressing damages early in the course of arbitration and recommends “various steps that arbitrators may take to make their and the parties’ task of dealing with damages less complex, time-­ consuming and expensive.”31 These recommendations include asking arbitrators to address damages early in the life of the case (at the initial conference), set up an expert witness conference, consider appointing a tribunal damages expert,32 and provide “a careful analysis of how the quantum of damages 29 Maniatis, supra note 3, at n. 31. 30 Cf. Rumeli & Telsim v. Kazakhstan, icsid Case No. arb [], Annulment Committee Decision (date), in which the Committee declined to annul award because it concluded that the tribunal “did undertake the task of producing a reasoned Award as to damages as Mandated by the icsid Convention,” but only after the committee itself obtained from the parties the complete record of evidence relating to quantum to be able to replicate the tribunal’s analysis. Notably, the Committee stated, “it is highly desirable that tribunals should minimize to the greatest extent possible the element of estimation in their quantification of damages and maximize the specifics of the ratiocination explaining how the ultimate figure was arrived at.” See also Ball, supra note 2, at 428 (“An arbitral award of damages without supporting analysis is not necessarily immune from attack.”). 31 The protocol is available online at http://www.cpradr.org/RulesCaseServices/CPRRules/ ProtocolonDeterminationofDamagesinArbitration.aspx. 32 See, e.g., see cms Transmission Company v. Republic of Argentina, icsid Case No. ARB/01/08, Award ¶ 418 (May 12, 2005).

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awarded was determined” in the decision. The cpr Damages Protocol also sets out prescriptions for the presentation by experts of their damage calculations, in an effort to make them understandable and transparent in terms of the methodology used. Equally welcome is Mark Kantor’s checklist in his excellent damages treatise, related to various issues such as calculation of interest, legal principles limiting compensation, selection of comparable companies for the valuation, and so on. One notable suggestion of both is for experts to take advantage of the sensitivity analysis that is common in the business world to play out what are known as “base case,” “best case,” and “worst case” scenarios.33 This would assist tribunals to appreciate which variables and embedded assumptions are driving the damages calculations. These initiatives, while significant moves in the right direction, are only a start. The international arbitration community as a whole would benefit from the further development of guidelines and other criteria specific to valuation methods. Such measures should be designed to improve the consistency of expert presentation and arbitrator decision-making with respect to damages calculations in international investment arbitration. .

33

See, e.g., cpr Damages Protocol 2(b); Kantor, supra note 4, at 134.

chapter 8

Should icsid have or not have a New Appellate Process, Including a Standing Body to Hear Annulment Applications? Nicholas Fletcher qc1 These are topics with an extremely long pedigree. I am conscious that a great deal of scholarly work has addressed them over a period of many years. Indeed, as long ago as 1991 Elihu Lauterpacht was raising the prospect of an appeal mechanism within icsid.2 In light of that I did for a brief moment wonder what fresh perspective I could bring to this topic.

A Developing Hostility to Investment Arbitration

However it is clear that fresh life has been breathed into the subject by the debate within Europe about the negotiation of the transatlantic trade and ­investment partnership, or ttip. This has generated a great deal of ­ill-informed, almost hysterical comment—much of it focused on the dispute resolution processes. An article in the online edition of the u.k.’s Independent newspaper, with the headline “What is ttip—and six reasons why the answer should scare you” neatly illustrates the current state of the debate.3 Listed at number six was the fact that disputes are heard by arbitration tribunals which are “little more than kangaroo courts”, which are “an assault on democracy” and which are said to help multi-national corporations to undermine the regulatory powers of governments. Even “Counsel”– the monthly journal of the English and Welsh bar, criticizes the current arbitration process within bits as providing “Scope for corporations to wield enormous power against governments and their citizens” and the arbitrators appointed to hear investment disputes as 1 Nicholas Fletcher qc is an arbitrator in independent practice at 4 New Square, Lincoln’s Inn, London WC2A 3RJ. 2 Elihu Lauterpacht, The Development of the Law of International Organizations by the Decisions of International Tribunals, 152 (iv) Recueil des Cours de l’Academie de Droit International de la Haye 377. 3 www.independent.co.uk/voices/what-is-ttip-and-six-reasons-why-the-answer-should-scare -you-9779688.html.

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“potentially possessing an inherent bias towards the commercial interests of the companies appointing them”. The absence of an appeals process was singled out as an example of the democratic deficit and the author concluded that “for starters, there should be a right of appeal to an independent domestic, or even international, court”.4 Since presenting the early draft of this paper last November, it has become apparent that hostility to ttip formed part of the arguments adopted by a portion of the British public in favour of “Brexit”—the departure of the United Kingdom from the European Union. The President of the icc Court recently remarked, in a speech in New York, that the arbitration community has “lost the battle” of communication in Europe and his concern was to ensure that the criticism of arbitration did not bleed over so as to affect mainstream commercial arbitration. Ten percent of the icc’s caseload involves state or state-entities as parties and in those circumstances, he felt that the icc should, if requested, produce a reasoned decision on challenges, proceedings for the replacement of an arbitrator and joinder and consolidation applications. Part of that initiative, at least, has now borne fruit.

The Importance of the European Perspective

The position of the eu (and of the us) is clearly critical to any move that icsid might make towards an appeal mechanism. The eu estimates that ttip will affect almost 40% of world gdp. As the eu noted in November 2013, the eu and its member states are party to almost half of all bits. Investors from eu member states accounted for 53% of all isds cases between 2008 and 2012 and 60% of the cases filed in 2012 alone. By way of comparison, us investors accounted for 7.7%. Looking back over the last 50 years, eu investors have accounted for 55% of icsid claimants. The eu’s position in late 2013 was that it was “aiming to create” an appellate mechanism to ensure consistency and increase legitimacy. By May 2015, however, the eu’s trade commissioner, Cecilia Malmstrom, was reporting that she wished to see a “thorough modernization of the traditional form of isds”, with guaranteed access to an appeal system and a “medium-term goal” of a permanent multilateral investment court. Even at that stage, however, there was an acceptance that arbitration still had a role to play, with the Commissioner emphasizing that she wished to impose a code of conduct for arbitrators

4 Steven Powles, Counsel Magazine, September 2015.

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and to improve the functioning of the arbitral process in order to “increase legitimacy”.5

Towards an Investment Court and a Standing Appellate Body

The text of the proposed draft chapter on investor-state dispute resolution released by the Commission in September 2015 now envisages, in broad terms, that disputes will be submitted to a tribunal of first instance, named the “investment tribunal”, comprised of three judges, selected on a random basis from a roster comprising five nationals from member states of the eu, five nationals from the us and five nationals from third-party countries. In other words, the eu, driven in large part by Germany, now envisages an “Investment Court System” as an immediate goal.6 An appeal tribunal is also to be established. The eu commission feels that there is persistent criticism that tribunals get decisions wrong and that a corrective mechanism is now required to address issues of “correctness, predictability and legitimacy”. This is to be a standing body of six members, two of which will be nationals of the eu, two of which will be nationals of the us and two of which shall be from third-party countries. An individual appeal tribunal will comprise three members, and be chaired by a national of the third-party country. It does not otherwise appear to be envisaged that there must be diversity on the tribunal between the us and eu members. Again, the composition is to be “random and unpredictable”– although how random and unpredictable it will be if the cohort of judges stays at six remains to be seen. The current draft envisages that one of icsid or the pca will act as the Secretariat of the Appeal Tribunal and fundholder for the parties. Interestingly, the draft text envisages at article 12 that a multilateral, rather than bilateral, agreement might subsequently come into force which would equally apply to disputes under ttip. In that circumstance, the mechanisms already identified will cease to apply and give way to the new multilateral arrangements. Indeed, the Commission is on record as saying that it intends to include an appellate mechanism in all eu trade and investment agreements. Any appeal is to be launched within 90 days of the issuance of an award. The grounds upon which an appeal may be launched are: 5 Investment if ttip and beyond—the path for reform (trade.ec.europa.eu/doclib/docs/2015/ may/tradoc-153408.PDF). 6 European Commission draft text on Transatlantic Trade and Investment Partnership, Chapter 2—Investment (trade.ec.europa.eu/doclib/docs/2015/September/tradoc-153807. pdf).

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(a) that the first instance tribunal has erred in the interpretation or application of the applicable law; (b) that the tribunal has “manifestly erred” in the appreciation of the facts (including the appreciation of the relevant domestic law); or (c) any of the grounds provided for in article 52 of the icsid Convention— that is the traditional grounds for annulment. One of the arguments advanced against the traditional form of isds is that it is a throwback to a sort of colonial past when legal systems in developing ­countries were less advanced and home-town justice was a greater risk. The argument now is that domestic legal systems throughout the world can be trusted to handle investment disputes and the neutral option which arbitration has so long represented is no longer required. While great strides are being made, it is simply not true in my opinion to say that investors can invariably be certain of fair and equal treatment in domestic court systems. It is worth examining in a little detail the furore over isds in general, because it suggests to me that a lack of understanding and a vocal minority have driven the agenda in a wholly unbalanced way. In a recent speech, Lord Peter Goldsmith made some very acute observations about the feedback obtained by the European Commission through its consultation exercise on ttip.7 Published in January 2015 this elicited 150,000 responses (approximately 35% of which came from the uk and 22% each from Austria and Germany). Of this 150,000, 70,000—or almost half—came in seven batches from eight ngos and contained identical or similar answers in each batch. 50,000 replies came through one ngo and in response to the question on isds replied: “No comment. I don’t think isds should be part of ttip”.8 A further 25,000 replies completely ignored questions 1 to 12 of the questionnaire and simply answered question 13 which was about investment protection and isds in ttip in general. Those collective submissions emphasise the threat to democracy and public finances, a concern over the chilling effect on the right to regulate, the view that the us and eu legal systems are robust enough to provide an answer at a domestic level and the mistrust of arbitration. Amongst business respondents 7 Lord Goldsmith qc—A Brave New World—Can the bvi International Arbitration Centre Knock New York, London and Paris Off Their Perch—Dr J S Archibald qc Memorial Lecture 20 May 2015. 8 Report on the outline public consultation on investment protection and investor-to-state dispute settlement in the Transatlantic Trade and Investment Partnership Agreement, 13 January 2015 (trade.ec.europa.eu/doclib/press/index/cfm?id=1234).

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there was a more nuanced view. Business associations and large companies were more supportive of the status quo. Small and medium enterprises were less so. Their concerns were that the process was too complex and too costly. Amongst the business community and professional services firms generally, however, the view was that there was no crisis in isds. The Commission’s analysis of the results of its consultation exercise concluded that the proposal for an appeal mechanism was neither fully opposed nor fully supported. Many ngos and governmental organisations saw it is indispensable. Even some business associations saw it as providing consistency and legal certainty—but there were concerns over delays and costs. Others, including the icc, felt that it would cause fragmentation, compromise finality and undermine the essential basis of international arbitration.9 There was widespread recognition of the risk of fragmentation and a desire to see an appellate mechanism developed at a multilateral level—and a feeling among some quarters that any appeal function should be exercised by a standing body with permanent members to protect against issues with the independence of arbitrators.

Faltering Steps

It would be easy to be cynical about this debate. It has, after all, been gestating for over 20 years. The us Trade Promotion Authority Act in 2002, which affirmed the goal of establishing an appellate mechanism, was prompted in part by the Loewen case in which the us was sued under NAFTA—ultimately unsuccessfully.10 The Vattenfall dispute has awoken German legislative and public opinion.11 Spain, which had never been the target of an investment treaty claim, is now the respondent to over 20 sets of proceedings. A number of investment treaties (including cafta) have made provision for member states to discuss and develop an appeal process and yet little progress has been made. icsid itself produced a paper in 2004 ventilating the pros and cons of an appellate process and proposing a standing appeals panel of 9

Report on the outline public consultation on investment protection and investor-to-state dispute settlement in the Transatlantic Trade and Investment Partnership Agreement, 13 January 2015 (trade.ec.europa.eu/doclib/press/index/cfm?id=1234). 10 The Loewen Group, Incorporated and Raymond L Loewen v United States of America, Case No arb (AF)/98/3, Award (26 June 2003). 11 Vattenfall ab and others v Federal Republic of Germany, icsid Case No. ARB/12/12, Decision on Preliminary Objections (2 July 2013).

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15 individuals, before deciding that the required level of support was not there. cafta (Central America Free Trade Agreement) envisaged a working group on an appellate body. Nothing resulted from its efforts.

Arriving at a Tipping Point

There is no doubt, however, that the climate has changed and some commentators and institutions believe that a tipping point has been reached. David Caron has argued that, far from channelling support for an appellate mechanism, the momentum has shifted towards a wholesale rejection of isds. Parts of the international arbitration community are asking whether the hostility being directed towards isds might spread to conventional International commercial arbitration.12

Would the eu Model Work for icsid?

If we have reached a tipping point, is the proposed eu model one that might work on a broader scale for icsid? The replacement of the arbitration tribunal at first instance with an “Investment Court” may be a logistical step too far, but the introduction of an appeal mechanism is at least a viable option. As many other commentators have observed, it is not realistic to expect the wholesale amendment and ratification of a new icsid convention, but the exercise could be achieved by means of a resolution of the Administrative Council of icsid. This would allow states to opt-in on a bilateral basis.13 The question, of course, is why is it necessary to contemplate this? The more reasoned arguments in favour of an appellate body essentially distill into one of two camps: that an appellate body would bring more consistency to the international law on investment disputes and arguments that such a body would enhance the legitimacy of the process. I entirely recognize that there have been well-documented concerns about the consistency of first-instance awards in a number of areas—particularly in relation to umbrella clauses and the state of necessity defence—but my own view is that the concerns are overstated: 12 13

D. Caron on procedural issues in investment arbitration, 18th Annual iba International Arbitration Day, Washington dc, 27 February 2015. See e.g. Christian Tams—An Appealing Option—Essays in Transanational Economic Law No. 57 (2006).

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Treaties are different and provisions that are worded in different ways may well be interpreted differently, even by national courts. Treaties are also not always well-drafted. Often the wording is the result of a compromise or is the product of very deliberate “constructive ambiguity”. The European Commission’s paper of November 2013 specifically recognized that arbitrators’ decisions can only be as good as the rules they are asked to apply and that many key provisions of investment treaties are unclear.14 Nor have states given enough guidance to tribunals as to what was their joint intention. There is a drive by the European Commission towards greater clarity in key areas, such as better articulating the fet standard to provide clearer guidance to arbitrators. The us model bit of 2012 takes similar steps in this direction. Any form of dispute resolution is a messy process. The way in which arguments are advanced and evidence presented will always have an impact on how a case is seen, whether by an arbitral tribunal or investment court. The two tribunals in the Lauder cases came to different views on the facts (a result which could have been avoided had the Czech Republic agreed to consolidation).15 No judicial or quasi-judicial body is always entirely consistent. Views may vary amongst appellate courts in the United States. The Supreme Court in the United Kingdom is not obliged to follow its own precedents. Not all international courts respect precedent—save as between the same parties. Absolute consistency is a chimera. It is not achievable. Although there is no principle of stare decisis in international investment law, the evidence of the last 10 years suggests to me that, with some exceptions, we are developing a “jurisprudence constante” and that tribunals are taking account of relevant prior awards as persuasive authorities. As Susan Franck predicted in 2005, a young area of law has matured and has developed a broad degree of consistency.16 The knowledge that their awards will be dissected and analysed by academics and practitioners keeps arbitrators on their toes.

Legitimacy and Transparency

The main driver now seems to me to be about the legitimacy and transparency of the process. Susan Franck noted 10 years ago that arbitration was being rejected because of perceptions of bias, lack of accountability and insufficient 14 15 16

http://trade.ec.europa.eu/doclib/docs/2013/november/tradoc-151916.pdf. cme Czech Republic v The Czech Republic, uncitral Partial Award (13 September 2001); Ronald S. Lauder v The Czech Republic, uncitral Final Award (3 September 2001). S. Franck, Legitimacy Crisis—Fordham L. Review 2005.

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public participation.17 A system which has in my personal view, worked well enough, is being subjected to an unprecedented degree of scrutiny and to a significant degree of ill-informed comment. Much is said of the risk of bias on the part of arbitrators and certainly there are from time to time indefensible incidents such as the well-reported collusion between the Government of Slovenia and its arbitrator in the dispute between Slovenia and Croatia over their maritime boundary.18 Such examples are mercifully rare and those who sit as arbitrators know that the most valuable asset that they have is their reputation. An arbitrator who betrayed any hint of partisanship would have a very short shelf-life. Whilst there have been a number of instances of arbitrator partisanship from arbitrators who were appointed on behalf of the state, their efforts have been almost entirely counterproductive. There has been an ongoing debate between Judge Brower and Professor Van Den Berg concerning the number of dissents in investment treaty awards, with Professor Van Den Berg deploring the fact that such dissents are invariably in favour of the party appointing the dissenting arbitrator. What this shows, however, is that the system works. A majority decision is rendered that may or may not be as credible as a unanimous decision but is effective in the individual case.19 The reality, which many uninformed observers ignore, is that states win most cases. An icsid report on EU-related investment cases over the last 50 years revealed that the investors prevailed in only 25% of cases and analysis shows that no single actor is exercising a disproportionate influence over the development of the law in this area. There simply is not the investor bias which many people perceive.20 Fragmentation One of the arguments that has frequently been marshaled against an appellate body is the argument that it will lead to fragmentation.21 If it is not feasible to 17 Ibid. 18 See Alison Ross, The Fallout of the Scandal, Global Arbitration Review, Volume 10, Issue 4. 19 See, e.g., Judge Charles N Brower, Are Fear, Disinformation, Politics and the European Commission Becoming the Four Horsemen of the Apocalypse for International Investment Dispute Arbitration? Hugo Grotius Lecture, Madrid, 14 October 2015. 20 The icsid Caseload—Statistics, Special Focus—European Union (April 2015). 21 See, e.g., Roberto Castro de Figueiredo, Fragmentation and Harmonization in the icsid Decision-Making Process, in Reshaping the Investor-State Dispute Settlement System (Brill/Nijhoff 2015).

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amend the icsid Convention to incorporate a standing body for all disputes, it would therefore be necessary to provide an opt-in process that could form part of new bilateral and multilateral agreements going forward or which could be adopted on an ad hoc basis. You will then have cases heard under the original icsid model, cases run under the Additional Facility, cases run under the uncitral Rules and now cases capable of being referred, by those who have opted in, to an appellate body. Whilst the appellate body might strive to deliver consistency, the argument is that that body might develop the law in a way that is in fact inconsistent, or at least not at one, with decisions that are reached by other tribunals. The risks of this are overstated. Fragmentation already exists and yet we do see a developing consistency. Arbitrators are respectful of precedent. The decisions of an appellate body would no doubt be considered persuasive even by tribunals which did not live in fear of having their awards overturned. In any event, if the eu is successful in having the mechanism incorporated into ttip, the matter will be a fait accompli. In those circumstances, by seeking to offer an appeal facility itself, icsid could be seen to be trying to reduce the fragmentation by broadening access to an appellate body. This, in turn, would be consistent with the e.u.’s apparent intention to seek to incorporate the mechanism into other multilateral agreements. Further, if the main concern is in fact legitimacy, the fragmentation argument is less of a concern.

Will the eu Model Work?

Are there therefore any dangers in the proposed eu model, in so far as the proposed appellate body is concerned? In terms of legitimacy, is a standing panel of appeal judges going to be seen to be substantially more independent than a tribunal composed of internationally-renowned arbitrators? The eu proposal envisages that appointees must have the qualifications necessary for the highest judicial office in their respective countries (qualifications which themselves will vary widely amongst the eu member states) or be “jurists of recognized competence” (whatever that means). They must have demonstrated expertise in public international law and it is “desirable” that they have expertise in international investment law, international trade law and the resolution of disputes arising under international investment or international trade agreements. Does this provide any greater guarantee of impartiality and suitability than is already provided for, in relation to icsid’s Panel of Arbitrators, by articles 13 and 14 of

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the Convention? Will such individuals be sufficiently free from government ties, political influence and institutional bias to form truly independent judgments or will they be seen by investors to be pro-state? Will they be seen to have the expertise required? This risk is compounded by the fact that the members of the panel will be nominated, in the case of the ttip proposal, by the states involved. Unlike the composition of an arbitral tribunal, the investor will have no say. The fact is, however, that at the present time the parties have no say in the composition of an ad hoc committee. The riposte to this may well be that the e.u.’s proposal does not mandate that the eu and the us must nominate their own citizens to the appellant body, but can anyone seriously suggest that they will not do so? The eu proposal pays homage to the wto’s appellate body, widely seen to have been very successful. That is, however, a very different institution and one designed to address state-to-state disputes and not investor-state disputes. Will the members of the new appellate body be full- or part-time? The eu’s proposal is that they will start as part-timers, on a monthly retainer of €7,000, together with a daily stipend for each day worked.22 They are to be available “at all times and on short notice”, but what restrictions are to be placed upon their other fee earning activities? And in what respect does this place them in a different category from arbitrators? For the system to confer greater legitimacy, the appointees to any appellate body will need to be full-time. It is unclear how individual appellate panels will be composed. The chair is to be one of the two third-country nationals, but if the membership is to be “random and unpredictable”, how are the other two places to be allotted? One representative of each of the us and eu hardly qualifies as “random and unpredictable”, And yet it would seem odd to have the remaining two places filled by representatives of the same country—whether they represent the respondent or the home-state of the investor.

The Risk of Overly-Broad Grounds of Appeal

Perhaps the greatest flaw in the eu’s proposal is the potential scope of appeal. If there is to be an appeal body, it is entirely appropriate that it should be permitted to hear an appeal based upon an error in the interpretation or application of the applicable law (although the latter was rejected by the drafters of 22

European Commission draft text for TTIP=Section 3, Resolution of Investment Disputes and Investment Court System, Article 12.

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the icsid Convention). Nor can issue be taken with an appeal on the grounds set out in article 52 of the icsid convention. It would however be a great mistake to allow an appeal on the grounds that tribunal has “manifestly erred” in its appreciation of the facts. The facts are best left to the first-instance tribunal which will have the benefit of witness and, if necessary, expert testimony. It is in the best position to judge the credibility of the witnesses and to assess the evidence as a whole. Permitting an appeal on such generous grounds will be to ensure that there is an endless stream of applications to the appellate body. In 2012 19 awards were issued by icsid tribunals. Of these, 13 were referred to annulment committees on the narrow grounds permitted by article 52.23 One is tempted to conclude that had it been open to the parties to appeal on the basis of a manifest error in the facts, all 19 awards would have been subject to some form of challenge. Without such restrictions, the appellate body will be saddled with spurious appeals and an unmanageable caseload. Advocates for the eu scheme may say that they have drafted mechanisms to discourage unmeritorious appeals, such as the mandatory provision of security for costs and indeed for security to be provided in the amount of any award. Whilst this may discourage unsuccessful investors, it is unlikely to discourage unsuccessful and well-resourced host states. A better mechanism might have been the approach adopted by the English Arbitration Act in certain instances of requiring leave to appeal. Indeed, one of the ironies of the eu’s proposal for an appellate body is that the group most likely to benefit is the investor community. Investors lose at first instance more than they win. They also tend not to seek an annulment due to the time and cost involved (compounded by the fact that, if the award is annulled, it is submitted to a new tribunal). A fast and efficient appellate body would fix this—so although the recent proponents of an appellate mechanism have tended to be pro-state, it may be investors who have the last laugh.

Next Steps

The sensible thing for icsid to do at the present time is to watch and wait. Firstly, to see if the eu’s proposals on dispute resolution in ttip are adopted. If they are not, it will be important to understand why. Hostility to them on the part of the us may foreshadow a broader lack of enthusiasm, which would render any independent icsid initiative still-born. The eu’s reaction to such an 23

List of icsid Cases. https://icsid.worldbank.org/ICSID/FrontServlet?requestType=Cases RH&actionVal=ShowHome&pageName=-Cases_Home.

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eventuality will also be crucial. eu member states or investors are involved in a very significant number of investment treaty cases. The eu is therefore a very important player in this drama. If the eu were to press ahead with attempts to negotiate other multilateral agreements with an appellate mechanism, icsid may be well-placed to play a part in that. If the eu’s proposal, or some modification of it, is adopted, icsid is likely to have a front-row seat in seeing how it works–because of the likely involvement of the icsid Secretariat. It should observe for a period. If a ttip appellate body proves to be a success, icsid could then adopt a similar mechanism, by means of resolution of its Administrative Council. It could do so confident that there is a level of support sufficient to ensure the success of an ICSID-sponsored appellate body. The eu’s own enthusiasm will only assist, particularly if it seeks to negotiate further multilateral agreements with a similar dispute resolution framework. Changes will almost certainly be needed to the grounds for appeal—with a more restrictive approach—and to the constitution of the appellate body. The icsid model will have to ensure that these are implemented.

Time for a Standing Body for icsid

Turning to the related question of whether icsid should have a standing body to hear annulment applications, the time for that has surely come. Despite the general trend towards consistency, the decisions of ad hoc annulment committees over the last 30 years have come in for particular criticism. The first generation of annulment decisions was represented by the Klockner and Amco decisions.24 These were criticised for adopting an overly expansive view of the scope and standard of review and transforming what should be a “limited control function” into something much broader. MINE, Klockner ii and Amco ii were seen to have corrected this, (by reversing the “hair trigger” approach adopted in Klockner and the requirement of “sufficiently relevant reasons”).25 24

25

Klockner Industrie-Anlagen GmbH and others v Cameroon and Societe Camerounaise des Engrais, icsid Case No. ARB/81/2, Decision for Annulment (3 May 1985); Amco Asia Corporation and others v Republic of Indonesia, icsid Case No. ARB/81/1, Decision for Annulment (16 May 1986). Maritime International Nominees Establishment v Republic of Guinea, icsid Case No. ARB/84/4, Decision Partially Annulling Award (22 December 1989); Klockner IndustrieAnlagen GmbH and others v Cameroon and Societe Camerounaise des Engrais, icsid Case No. ARB/81/2, Decision Rejecting Application for Annulment (17 May 1990); Amco

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More recently, cms, Sempra and Enron have been attacked for reintroducing inconsistency into the annulment process—in part because of their varying treatments of Argentina’s “necessity” defence and differing views on whether a misinterpretation of the relationship between the bit and customary international law constitutes grounds for annulment.26 The decision in Helnan has been attacked for conducting what has been characterized as a “substantive review of reason” in annulling certain paragraphs of the award for a manifest excess of powers, whilst refraining from annulling the dispositive award.27 In 2012, the icsid Secretariat attempted to clarify the general standards but has confirmed that, in its view, different committees had adopted different approaches to the scope and standard of review. Some committees have concluded that gross or egregious misapplication of the law may lead to annulment, whilst others have considered such an approach to come too close to an appeal. Some have found an error of law in the application of the governing law to amount to a failure to apply the governing law. There is a continued failure to distinguish what may be reviewed from the standard of review to be applied and continued inconsistency in relation to the standard of review itself. Some annulment committees have perhaps viewed their role as being that of an appellate body, rather than being confined to the limited grounds set out in article 52, with the result that annulment has moved away from being the limited remedy envisaged by the drafters of the Convention. In the Malaysian Historical Salvors’ case, for example, we saw the annulment committee set aside an award on the basis that the Salini-style approach adopted by the tribunal in assessing whether there was an “investment” amounted to a “gross error giving rise to a manifest failure to exercise jurisdiction”.28

26

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Asia Corporation and others v Republic of Indonesia, icsid Case No. ARB/81/1, Decision on Second Annulment Request (17 December 1992). cms Gas Transmission Company v Argentine Republic, icsid Case No. ARB/01/8, ­Decision for Annulment (25 September 2007); Sempra Energy International v ­Argentine Republic, icsid Case No. ARB/02/16, Decision for Annulment (29 June 2010); Enron ­Creditors Recovery Corporation and Ponderosa Assets L.P. v Argentine Republic, icsid Case No. ARB/01/3, Decision for Annulment (30 July 2010). Helnan International Hotels A/S v Arab Republic of Egypt, icsid Case No. ARB/05/19, Decision for Annulment (14 June 2010). See also C. Lamm, Internationalization of the Practice of Law and Important Emerging Issues For Investor-State Arbitration, at p. 34 (2011) and N. Tsolakidis, icsid Annulment Standards—Who Has Finally Won the Reisman v Broches Debate of Two Decades Ago? In Reshaping the Investor-State Dispute Settlement System (Brill/Nijhoff 2014). Malaysian Historical Salvors, sdn, bhd v Malaysia, icsid Case No. ARB/05/10, Decision on Annulment (16 April 2009).

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The annulment decisions in the Argentina cases have thrown up contradictory results on the question of whether a misinterpretation of the relationship between the bit and customary international law constitutes grounds for annulment. This is, therefore, an area where inconsistency remains a problem and is harmful to the reputation of investment arbitration. In terms of legitimacy, the appointment of annulment committees on an ad hoc basis is also unsatisfactory and simply fuels suspicion and criticism. The wto appellate jurisprudence is praised for its consistency. That body has the advantage, of course, of addressing issues arising under a multilateral agreement with a settled and identical text. Whilst first-instance tribunals dealing with the investor-states disputes are not in that privileged position, annulment committees are much closer to it. True, they may have to apply the jurisprudence on annulments to decisions arising under a multitude of treaties but the scope and standard of their review is, or should be, limited by the icsid Convention itself. A standing body to handle annulment decisions should therefore be set up—both to bring consistency to this particular area and to improve the legitimacy of the annulment process. icsid should appoint a limited number of highly experienced practitioners who would serve, on a random basis, on such a body. It is not necessary that the individuals appointed have the qualifications necessary to hold the highest judicial office in their own jurisdiction, provided that they are highly experienced in international law and in investment treaty work. Regard should also be had to the special nature of the role of an annulment committee and to the fact that different skills may be required to deal with an annulment application compare to those necessary to determine the original dispute. Those appointed to that roster should not, I suggest, be active as counsel in investment cases, to avoid the frequent criticism that arbitrators from such backgrounds always have one eye on the implications of any decision for their current caseload. The standing body would need enough members to enable the SecretaryGeneral to empanel a committee that did not contain any nationals of a state with an interest in the dispute. They should have set terms of office which should be staggered to enable consistency to be preserved as the membership of the panel changes. No one who has had an award annulled should be entitled to sit on an annulment committee. An added advantage of moving to such a standing body would be that it would provide a ready-made appellate body should the US—EU experience justify it. Although the scope of the appeal would be somewhat wider, there

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would be considerable overlap and the members would be well equipped to handle the additional scope. Nicholas Fletcher qc 4 New Square Lincoln’s Inn London WC2A 3RJ

chapter 9

Crafting Appropriate Dispute Settlement: The Politics of International Investment Disputes Susan D. Franck* i Introduction Despite experiencing a period of fiscal adjustment, world-wide investment remains a lynchpin of the global economic activity and involves trillions of dollars.1 Governments across the world are now focusing upon how to best use bi-lateral and multilateral investment treaties as strategic tools to increase their economic prosperity. Given their potential value in promoting economic competitiveness in the global economy,2 countries have been negotiating both bilateral and multilateral trading agreements. For the United States, this means the Obama Administration’s commitment to the Transpacific Partnership (tpp),3 the European Union-United States Transatlantic Trade and Investment

* Susan Franck is currently a Professor of Law at American University’s Washington College of Law. 1 In 2012, for example, total worldwide foreign-direct-investment stock was approximately US$23 trillion See u.n. Conference on Trade & Dev. [unctad], World Investment Report 2013: Global Value Chains: Investment and Trade for Development, at xv, 217 Annex tbl. 2, u.n. Sales No. E.13.II.D.5 (2013) [hereinafter unctad, wir 2013]; unctad, World Investment Report 2012: Towards a New Generation of Investment Policies, 84–86, u.n. Doc. UNCTAD/ WIR/2012 (May 7, 2012) [hereinafter unctad, wir 2012]; unctad, World Investment Report 2011: Non-Equity Modes of International Production and Development, xii, 191, u.n. Doc. UNCTAD/WIR2011 (July 26, 2011). 2 Charles N. Brower & Sadie Blanchard, What’s In A Meme? The Truth About Investor-State Arbitration: Why It Need Not, and Must Not, Be Repossessed By States, 52 Colum. J. Transnat’l L. 689, 707–08; but see Jason Webb Yackee, Do Bilateral Investment Treaties Promote Foreign Direct Investment? Some Hints from Alternative Evidence, 51 Va. J. Int’l L. 397, 399 (2011). 3 Michael Fromman, Remarks by Ambassador Michael Fromman at the Council on Foreign Relations the Strategic Logic of Trade, 20 L. & Bus. Rev. Am. 373, 375 (2014); David P. Vincent, The Trans-Pacific Partnership: Environmental Savior or Regulatory Carte Blanche?, 23 Minn. J. Int’l L. 1, 4 (2014).

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004334557_011

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Partnership (ttip),4 and bilateral investment treaties with key trading partners, like India5 and China.6 The existing web of signed international investment agreements (iias) exceeds 3,000 bilateral and multilateral investment treaties.7 Those iias use the treaty itself to expressly grant various substantive rights—including the right to compensation using treaty-defined standards in the event of government expropriation and freedom from discrimination—to people or entities investing abroad.8 In derogation of traditional international law principles were only states can pursue international law remedies,9 iias contain ex ante promises where states guarantee investors a forum to seek direct redress for violations of substantive rights. In combination, the scope of existing investment flows and treaties means a meaningful proportion of international investment is currently protected by at least one iia and theoretically subject to treaty-based arbitration.10 As investors have exercised their new international law rights to redress alleged grievances, the theoretical risk has become a reality. The first investment treaty arbitration (ita) that derived from the substantive and procedural rights in iias resulted in a final award in 1990.11 In the modern era, the United Nations Conference on Trade and Development (unctad) has estimated there have been over 500 disputes.12 4

Mark Weaver, The Proposed Transatlantic Trade and Investment Partnership (ttip): isds Provisions, Reconciliation, and Future Trade Implications, 29 Emory Int’l L. Rev. 225, 226 (2014); Brower & Blanchard, supra note 2, at 696–97. 5 House, Office of the Press Secretary, Remarks by President Obama at U.S.-India Business Council Summit, Jan. 26, 2015, http://1.usa.gov/1CYztVq; Kavaljit Singh, India / us bilateral investment treaty will be no easy ride, Financial Times, Jan. 2, 2015, http://on.ft.com/ 1zU449H. 6 John R. Crook, China Agrees to Resume Expanded Bilateral Investment Treaty Negotiations with United States, 107 Am. J. Int’l L. 947, 947–48 (2013). 7 See, e.g., Howard Mann, Reconceptualizing International Investment Law: Its Role In Sustainable Development, 17 Lewis & Clark L. Rev. 521, 523 (2013). 8 See infra notes 25–26 (discussing substantive rights in iias). 9 Note, Mediation of Investor-State Conflicts, 127 Harv. L. Rev. 2543, 2547 (2014). 10 unctad, wir 2013, supra note 1, at 217. 11 Asian Agric. Prods. Ltd. (aapl) v. Republic of Sri Lanka, icsid Case No. ARB/87/3, Final Award (June 27, 1990), available at http://bit.ly/1zRvGuH. 12 unctad, iia Issues Note, No. 1, 9–10, unctad Doc. UNCTAD/WEB/DIAE/PCB/2014/3 (2014), available at http://bit.ly/1jnWbxW; see also Susan D. Franck, Conflating Politics and Development? Explaining Investment Treaty Arbitration Outcomes, 55 Va. J. Int’l L. 13, 15 (2014).

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With increased political, economic, and legal scrutiny on international investment, ita has become the center of debate in treaty negotiation, particularly for the tpp and ttip, and spawned articles in the New York Times and the Economist.13 Some stakeholders express concerns that ita is unpredictable, illegitimate, or exhibits a pro-investor bias;14 yet others disagree and contend that these “objections that began as ideologically driven polemics have come to be widely, but inaccurately, presumed as truths.”15 These competing perspectives demand re-examination of how investment treaty disputes should be resolved,16 and the European Union has rejected ita in favor of an investment court.17 Others have proposed alternative or supplementary methods of managing investment treaty conflict,18 whereas others advocate wholesale elimination of ita. In response, some states have exited the international investment law regime, while other states rely on pre-existing paradigms for dispute settlement.19 13 14

15 16

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Susan D. Franck & Lindsey E. Wylie, Predicting Outcomes in Investment Treaty Arbitration, 65 Duke L.J. 459, 463–65 (2015). See, e.g., Asha Kaushal, Revising History: How the Past Matters for the Present Backlash Against the Foreign Investment Regime, 50 Harv. Int’l L.J. 491, 510 (2009); compare Pia Eberhardt & Cecilia Olivet, Profiting from Injustice: How Law Firms, Arbitrators and Financiers are Fuelling an Investment Arbitration Boom (Nov. 2012), http://bit.ly/1kaMMx4 [hereinafter Profiting] with Charles N. Brower & Sadie Blanchard, From “Dealing in Virtue” to “Profiting from Injustice”: The Case Against “Re-Statification” of Investment Dispute Settlement, 55 Harv. Int’l L.J. Online (2014), http://bit.ly/1pHlj4f. Brower & Blanchard, supra note 2, at 699. See generally Michael Waibel, et al., The Backlash Against Investment Arbitration: ­Perceptions and Reality (2010); Stavros Brekoulakis, Systemic Bias and the Institution of I­nternational Arbitration: a New Approach to Arbitral Decision-Making, 5 J. Int’l Disp. ­Settle. 1 (2013); Kaushal, supra note 14. Veronica Mazzoleni, ttip Treaty Negotiations Loom as Investor-State Dispute Settlement is Debated, 34 Alt. High Cost of Lit. 51, 53–54 (2016). At the time of drafting this chapter, however, the ultimate state of the investment treaty court proposed by the eu is uncertain. Even within the Canada-European Union investment treaties, states have begun to express a degree of opposition. See, e.g., Anna Joubin-Bret & Barton Legum, A Set of Rules Dedicated to Investor-State Mediation: The iba Investor-State Mediation Rules, 29 icsid Rev. 17 (2014); Susan D. Franck, Integrating Investment Treaty Conflict and Dispute Systems Design, 92 Minn. L. Rev. 161 (2007) [hereinafter Franck, dsd]; Susan D. Franck, Using Investor-State Mediation Rules to Promote Conflict Management: An Introductory Guide, 29 icsid Rev. 66 (2014) [hereinafter Franck, Mediation]; Nancy Welsh & Andrea K. Schneider, The Thoughtful Integration of Mediation into Bilateral Investment Treaty Arbitration, 18 Harv. Neg. L. Rev. 71 (2013). Anna T. Katselas, Exit, Voice, and Loyalty in Investment Treaty Arbitration, 93 Neb. L. Rev. 313 (2014).

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The net effect is that politics has begun to permeate practically every aspect of international investment dispute settlement. It has expanded beyond the basic negotiation of treaties and international law instruments, the conflict that generates the disputes, the consideration of appropriate dispute settlement in the face of conflict, the ultimate selection of alternative dispute resolution, the appointment of arbitrators, the parties’ arguments, and the challenges to ultimate awards. The question remains, however, about how to manage the political elements deriving from the politicization of international investment law. ii

Doctrine and Debate about Investment Treaty Arbitration

ita is a sui generis hybrid that permits investors to vindicate substantive rights—provided by a treaty—and then directly adjudicate claims with states through procedural rights also provided by treaty.20 The substantive rights in investment treaties evolved from decades-long political debates about the meaning of customary international law, the international law right to expropriate or nationalize property, and the value of compensation that must be provided for international law violations. Rather than worrying about international relations issues or contentious United Nations debates about sovereign rights and state responsibility,21 states could agree— whether on a bi-lateral or multi-lateral basis—among themselves about the international law obligations that they might wish to undertake. Rather than having to make difficult political calculations about whether a private economic harm should rise to the level of international relations, states punted dispute settlement to investors.22 By permitting investors to advocate for their own international law claims using treaty-based standards, states were able to deflect core political tension and avoid increased political pressures.23 20

21 22 23

Jose E. Alvarez, The Public International Law Regime Governing International Investment (2011); Krista Nadakavukaren Schefer, International Investment Law: Text, Cases and Materials (2013); Anthea Roberts, Clash of Paradigms: Actors and Analogies Shaping the Investment Treaty System, 107 Am. J. Int’l L. 45 (2013). Andreas F. Lowenfeld, The icsid Convention: Origins and Transformation, 38 Ga. J. Int’l & Comp. L. 47 (2009). Andreas F. Lowenfeld, Investment Agreements and International, 42 Columbia J. Transt’l L. 123 (2009). Andreas F. Lowenfeld, Investment Arbitration: Scapegoat or Solution, 13 Am. Rev. Int’l Arb. 1, 1–3 (2002); Sergio Puig, Recasting icsid’s Legitimacy Debate: Towards a Goal-Based

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Against this backdrop, consenting states struck a “grand bargain”.24 In return for the possibility of increased or continued strong levels of inbound foreign investment—with an eye towards the hope of facilitating development objectives—states waived their sovereign immunity. States promised to grant a series of reciprocal investment rights (both substantive and procedural) to the foreign investors of signatory countries.25 Substantively, iias involve state promises that foreign investors will receive certain basic treatment. This treatment includes state promises that, while property rights and investment can still be expropriated, when such state action occurs, proper compensation will be awarded. States also promise that investors shall be free from discrimination and, in some cases, investors are guaranteed “fair and equitable treatment” and “full protection and security”. In an increasingly small number of treaties, might also promise to protect its “commitments” or “obligations” in contracts and licenses. These rights are similar to some, but not all, u.s. constitutional rights.26 The objective was to be more clear about the substantive nature of investment rights and identifying ex ante standards creating state liability. Procedurally, iias typically offer dispute resolution rights, including the right to arbitrate treaty-based disputes directly. Rather than the “ghostly” rights critiqued by u.s. Supreme Court Justice Holmes,27 treaties provide a real forum to resolve disputes. Initially, most treaties require investors to comply with certain pre-requisites, including submitting dispute notices or attempting amicable settlement—possibly even structured mediation. Thereafter,

24 25

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Empirical Agenda, 36 Ford. Int’l L.J. 465, 484–88 (2013); Anthea Roberts, Triangular Treaties: The Extent and Limits of Investment Treaty Rights, 56 Harv. Int’l L.J. 353, 389–92 (2015). Jeswald W. Salacuse & Nicholas P. Sullivan, Do bits Really Work?: An Evaluation of Bilateral Investment Treaties and Their Grand Bargain, 46 Harv. Int’l L.J. 67 (2005). In some, but not all instances, investment treaties secure increased foreign investment levels. See Jennifer L. Tobin & Susan Rose-Ackerman, When bits Have Some Bite: The Political-Economic Environment for Bilateral Investment Treaties, 6 Int’l Org. 1 (2011); Todd Allee & Clint Peinhardt, Contingent Credibility: The Reputational Effects of Investment Treaty Disputes on Foreign Direct Investment, 65 Int’l Org. 401 (2011). Franck & Wylie, supra note 13, at 470–73. See The Western Maid v. Thompson, 257 u.s. 419, 433 (1922) (Holmes, J.) (“Legal obligations that exist but cannot be enforced are ghosts that are seen in the law but that are elusive to the grasp”); see also Karl N. Llewellyn, Some Realism About Realism—Responding to Dean Pound, 44 Harv. L. Rev. 1222, 1244 (1931) (describing the fundamental quality of the law is not just rights but “what can be done: not only ‘no remedy, no right’ but ‘precisely as much right as remedy’”).

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investment treaties permit investors to initiate arbitration against a state to resolve their claims.28 The availability of a direct “hard law” remedy was a fundamental shift for international law. The creation of a meaningful forum was a sharp historical contrast to commercial options, which included: (1) doing nothing, simply absorbing the risk, and then passing on the ultimate cost to later consumers and states interested in doing business, or (2) pursuing a claim under political risk insurance, presuming such coverage was even available, and then likely having insufficient coverage to address the loss.29 It was also a departure from “soft” options related to international relations. Those options might involve more traditional diplomatic methods, which would require government negotiations and injecting politics and foreign relations into private economic activity. It may also involve more dramatic forms of diplomacy, including gun bloat diplomacy where “negotiations” literally involved government officials arriving on warships.30 Even more legalized forms of dispute settlement, namely espousal before the International Court of Justice,31 were tenuous given the need to politically lobby their home state to bring a claim and still end up with no fiscal remedy for the damage. Perhaps for this reason, it has been highly infrequent for states to bring claims. In a discussion with Fordham students, Judge Schwebel estimated that states espoused fewer than ten cases a year. The net result is that, even with a rule of law mechanism available, disputes were often silenced and there was a massive scope of latent investment conflict lurking beneath the surface and ready to erupt.32 28 29

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Franck & Wylie, supra note 13, at 470–74. Jeswald Salacuse: The Three Laws of Foreign Investment: National, Contractual and International Frameworks for Foreign Capitalme 244–48 (2013); Detlev F. Vagts, et al., Transnational Business Problems 422–23 (4th ed. 2014). See, e.g., Tinoco Case (Gr. Brit. v. Costa Rica), 1 R. Int’l Arb. Awards 369, 377–78 (1923), available at 18 Am. J. Int’l L. 147, 150–51 (1924); see also Odette Lienau, Who is the “Sovereign” in Sovereign Debt?: Reinterpreting a Rule-of-Law Framework From the Early Twentieth Century, 33 Yale J. Int’l L. 63, 70–81 (2008). See Rudolf Dolzer & Cristoph Schreuer, Principles of International Investment Law (2012) (discussing the history of international investment law); Anthea Roberts, State-to-State Investment Treaty Arbitration: A Hybrid Theory of Interdependent Rights and Shared Interpretive Authority, 55 Harv. Int’l. L.J. 1, 15–17 (2014) (discussing gunboat diplomacy and the history of ita). In the 1970s, the United Nations identified 875 acts of government takings in sixty-two countries over a period of fourteen years prior to the promulgation of bits. Similarly, the u.s. Department of State was aware of 102 existing investment disputes between u.s. nationals and foreign governments. Jeswald W. Salacuse, bit by bit: The Growth of Bilateral Investment Treaties and Their Impact on Foreign Investment in Developing Countries, 24

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Investment treaty conflict covers a wide range of human, business and governmental activity. Whether these disputes are commercial flavored, policyflavored, or simply deemed “sensitive”, they typically involved elements of both public and private law. In the private law sense, it may be that an investor has a contract—such as a Concession agreement—and the investor believes that the contracting party (who is a state) has breached their contractual obligations.33 Similarly, it may be that an investor had a license to engage in activity and, for whatever reason, the license was revoked. Investment conflict can also involve more sensitive aspects of state regulation, public policy and national priorities. It may, for example, involve the expropriation of the land of white farmers—in an effort to address historic imbalance and oppression as part of a larger land reform program.34 It may also involve efforts to promote a state’s international economic stability by enhancing currency35 and exchange controls or regulating public health through plain-packaging legislation for cigarettes.36 In many respects, one can imagine that investment treaty conflict is the ultimate hybrid, as aspects of the ultimate disputes are “A Little Bit [Public] and a Little Bit [Private].”37 Although states arguably signed treaties to de-politicize these hybrid disputes, completely extracting the variance of “politics” has proved difficult. On one hand, investment treaty arbitration offered a non-politicized form of dispute resolution as the state was not sued within the states’ own courts. It also prevented states from having to make the difficult international relations calculus about whether to escalate economic disputes to the level of international

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Int’l Law. 655, 659 (1990); see also Susan D. Franck, Foreign Direct Investment, Investment Treaty Arbitration, and the Rule of Law, 19 Pac. McGeorge Global Bus. & Dev. L.J. 337, 343 (2007). See, e.g., Ross P. Buckley & Paul Blyshak, Guarding the Open Door: Non-Party Participation before the International Centre for Settlement of Investment Disputes, 22 Bank. & Fin. L. Rev. 353, 366 (2007); Michael Waibel, Opening Pandora’s Box: Sovereign Bonds in International Arbitration, 101 Am. J. Int’l L. 711, 712–13 (2007). Franck & Wylie, supra note 13, at 470–71. See generally Jose E. Alvarez, The Public International Law Regime Governing International Investment (2011) (compiling cases). Philip Morris Brand Sàrl et al. v. Uruguay, Decision on Jurisdiction, icsid ARB/10/7 (July 2, 1013); Philip Morris Asia Ltd v. Australia, uncitral, pca Case No. 2012–12, Notice of Arbitration (Nov. 21, 2011), http://bit.ly/1pbqIBX. Donny & Marie Osmond, A Little Bit Country, A Little Bit Rock and Roll, July 4, 1976, available at https://www.youtube.com/watch?v=QMZCWGyk388.

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relations.38 Yet, there has been a backlash that has re-politicized dispute settlement and even debates about the appropriate form of dispute settlement. Rather than decreasing conflict, these debates have fanned the flame and are part of the growing backlash against globalization and integrated transnational economic activity. There have been recent debates in the mainstream media—and public fights between prominent Democrats including President Barak Obama and Senator Elizabeth Warren.39 Other commentators use inflammatory or emotive language, suggesting ita is a “legal monster”40 that involves “Profiting from Injustice” since “agreeing to arbitration [means] states have accepted to be sued by the devil in hell.”41 There has even been a public “exorcism” of lawyers practicing ita.42 Canadians and Europeans have been protesting trans-Atlantic trade deals; taxi drivers in Brussels are sufficiently knowledgeable about ita to debate its merits. Parliamentarians in countries like South Korea have been involved over physical altercations over arbitration.43 The physical violence and verbal attacks derive from the 38 39

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Franck & Wylie, supra note 13, at 472; see also Andreas F. Lowenfeld, The icsid Convention: Origins and Transformation, 38 Ga. J. Int’l & Comp. L. 47, 51–512 (2009). See, e.g., Greg Sargent, Elizabeth Warren fires back at Obama: Here’s what they’re really fighting about, Wash. Post, May 11, 2015, available at http://wapo.st/1F8Ktn1; see also Jonathan Weisman, Trans-Pacific Partnership Seen as Door for Foreign Suits Against u.s., n.y. Times, Mar. 25, 2015, at http://www.nytimes.com/2015/03/26/business/trans-pacific-partnershipseen-as-door-for-foreign-suits-against-us.html?_r=0 William Mauldin, Dispute Resolution System Fuels Criticism of Pacific Trade Pact, Wall Street Journal, Mar. 2, 2015, http://www.wsj .com/articles/dispute-resolution-system-fuels-criticism-of-pacific-trade-pact-1425330853. See Mahnaz Malik, The Legal Monster that lets Companies Sue Countries, The Guardian, (Nov. 4, 2011) http://bit.ly/1pczddd; Pia Eberhardt & Cecilia Olivet, Profiting from Injustice: How Law Firms, Arbitrators and Financiers are Fuelling an Investment Arbitration Boom (Nov. 2012), available at http://bit.ly/1kaMMx4; Transnational Law Institute, Discover the Dark Side of Investment (June 27, 2012), http://bit.ly/1mBGYYs; Global Europe, A Response to the Critic of “Profiting From Injustice” (Jan. 4, 2013), http://bit.ly/1p8mhVT; see also George Monbiot, This transatlantic trade deal is a full-frontal assault on democracy, The Guardian, Nov. 4., 2013 (suggesting ita is a “monstrous assault”). Eberhardt & Olivet, Profiting, supra note 14. Meredith Hobbs, Activists Perform “Exorcism” on King & Spalding in London, Daily Report, May 4, 2015, at http://www.dailyreportonline.com/id=1202725385488/ActivistsPerform-Exorcism-on-King-amp-Spalding-in-London?slreturn=20150615112520; see also Demotix News, Global Justice Now “exorcising” against isds law firm in London, May 1, 2015, at https://www.youtube.com/watch?v=B5AYYzpD-Pk (providing video footage of the “exorcism”). Associated Press, South Korea Passes u.s. Free-Trade Agreement, Lawmaker Sets Off Tear Gas Canister in Protest, Fox News (Nov. 22, 2011), http://fxn.ws/1nCFXpb; Alison Ross,

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possibility that state responsibility might have teeth—and individuals or corporate entities have the capacity to secure direct arbitration with states to vindicate arguable legal wrongs. In my professional experience—and as a lawyer who has been licensed to practice law in the United States and admitted to the Roll of Solicitors in England and Wales—it was always a strange concept that dispute resolution could end a potential transaction. During my career in practice, including years in Washington and London, there was only one case I worked on when I thought there was a realistic possibility disagreement about crafting a dispute resolution system would undermine the entire deal. Yet in international investment law, debates about dispute system design are undermining the possibility of creating a coherent network of international investment law. The intellectual exposition of the substantive area of law—where we should be attempting to rationally maximize mutual benefits and minimize risk from error—has instead become emotive. Legal and social discourse, in my view, has become flattened.44 The politicization of international investment disputes generates emotive rhetoric and the possibility of emotive decision-making that runs the risk of generating long-term sub-optimal results. iii

Delving into Data to Depoliticize

Within this context, the question then becomes how best to deal with the politics. Many options may be possible, and each person must answer the question in light of their own skills and passion. My solution, having fallen in love with the subject of psychology as a 16-year old college freshman, is to offer data. Bore people with data—or educate them with data and use an evidence-based approach to policy design. Psychology teaches us that assertions and beliefs that we have are not necessarily wrong. Rather, our beliefs are better viewed as hypotheses about the world in which we find ourselves. Hypotheses can—and should—be tested and evaluated against data. If one’s intuition is correct, then creating normative dispute resolution systems reflecting that intuition is a reasonable choice. Yet, if your intuition is wrong, then there is a fundamental risk that derivative

44

Arbitration clause sparks protests in Korea, 6 Global Arb. Rev., Nov. 29, 2011, http://bit.ly/ WDCpIg. See, e.g., Herbert Marcuse, One-Dimensional Man 1964.

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normative policy choices are also wrong.45 Perhaps lawyers, like physicians, should have a creed for designing dispute resolution systems. In my view, that credo should be: first, do no harm. Part of doing no harm first involves doing diagnostic testing to understand reality. Data helps test legends, myths, concerns and our own personal hypotheses about the functionality of the investor-state dispute settlement systems so that we can create systems for the future. The critiques are important to both understand and assess. Likewise, “conventional wisdom”, which ultimately may not be that wise, should also be tested rigorously. Thanks to the substantial number of awards that are fully available (or even available in redacted form), transparency permits us to reality test common myths about investment treaty arbitration. The data that I am about to discuss is fundamental to a book that I will shortly be publishing with Oxford University Press46 and also an article in the Duke Law Journal.47 I will focus on testing a few tropes about ita and using data to identify variables that are critical predictors of outcomes. A Testing Claims—Hypothesis 1: Investors Win More than States One recurring claim is that investors primarily win. Some complain that ita reflects a reliable pro-investor investor bias.48 The concern is, even if ita outcomes are predictable, they are influenced by spurious adjudication variables or arbitrators are biased in favor of investors.49 We heard from earlier speakers that the International Centre for the Settlement for Investment Disputes (icsid) has analyzed their disputes. This, too, is a step forward in terms of focusing on data rather than emotion. We need 45

46 47 48 49

Even under Bayesian logic and probabilistic reasoning, there is a small possibility that it could be correct. Nevertheless, the odds do not favor this outcome, and one would hope that on fundamental international economic choices, states would avoid making policy choices upon the basis of incorrect, inaccurate, or unrepresentative assessments. Susan D. Franck, Investment Treaty Arbitration: Myths, Realities and Costs (forthcoming Oxford University Press). Franck & Wylie, supra note 13. See supra note 14 and accompanying text; but see Brower & Blanchard, supra note 2, at 710–11 (identifying but rejecting arguments related to pro-investor bias). See, e.g., Gus Van Harten, Perceived Bias in Investment Treaty Arbitration, in Michael Waibel, Asha Kaushal, Kyo-Haw Chung & Claire Balchin, The Backlash Against Investment Arbitration: Perceptions and Reality (2010); see also Eberhardt & Olivet, Profiting, supra at 9, at 8 (arguing there is a pro-corporate bias in ita as “prominent arbitrators… [n]early all share businesses’ belief in the paramount importance of protecting private profits”).

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more of this transparent, clear assessment to test claims. Yet, we must also appreciate that icsid’s jurisdiction is broad. icsid resolves a variety of claims: (1) claims where the applicable law of the cause of action derives from an international treaty, (2) claims where the applicable law derives from contract law, which is likely the domestic law of the state being sued, and (3) claims where the applicable law derives from the national investment law of the state sued. Given this breadth and icsid’s failure to demarcate the jurisdictional bases of its data, we must not draw overly broad inferences about the universe of investment treaty arbitration using data from one institution with mixed jurisdictional authority. As the Duke Law Journal article50 and my forthcoming Oxford University Press51 book demonstrate, I analyzed all publicly available awards from cases starting from the 1990s and going until 2012. I used the awards to identify the ultimate final outcome of a dispute. Rather than cherry-picking and focusing only on jurisdictional awards (which may or may not generate a final resolution of a dispute),52 I focused on the ultimate outcome of cases rather than disputes at an intermediate stage. Those data demonstrated that—overall—states actually won more than investors. Recent research from unctad reflects a similar pattern, namely that states won proportionately more cases than investors.53 While the facial dominance of the state wins existed in my earlier research,54 it was not possible to say then that the pro-state bias was statistically reliable, due to factors such as a small sample size and the small population of disputes. With the growth in the caseload, using the updated data, the tests supported the inference that

50 51 52

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Franck & Wylie, supra note 13. Supra note 46. See, e.g., Gus Van Harten, Arbitrator Behaviour in Asymmetrical Adjudication: An Empirical Study of Investment Treaty Arbitration, 40 Osgoode Hall L.J. 211 (2012) (analyzing only jurisdictional issues to evaluate the potential presence of a “pro-investor bias” without addressing the ultimate outcomes of claims that survive a jurisdictional challenge but nevertheless fail at the merits). unctad, World Investment Report 2014: Investing in the sdgs: An Action PlanTowards a New Generation of Investment Policies, 126, u.n. Doc. UNCTAD/WIR/2014 (June 23, 2014), http://bit.ly/1nC3ouQ (observing that of 274 known completed cases “­approximately 43 per cent were decided in favour of the State and 31 per cent in favour of the investor. ­Approximately 26 per cent of cases were settled.”). Susan D. Franck, Empirically Evaluating Claims about Investment Treaty Arbitration, 86 N.C. L. Rev. 1 (2007).

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states won reliably more cases.55 The ratio was roughly, for every two cases won by investors, states won three cases.56 Under the Priest-Klein model of litigation, plaintiffs generally win 50% of the cases irrespective of the applicable legal standards.57 In the absence of reliable baselines to predict outcomes ex ante, the Priest-Klein model—normed on u.s. court litigation—provides possible insights for ita.58 Yet, it is noteworthy that the state win-rates exceeded what one might have otherwise thought. One might actually hypothesize that—in contrast to narratives about a proinvestor bias—that the data actually reveals a pro-state bias. Yet, even this assertion must be held viewed in the context of data. Scholars, such as the dearly departed Professor Theodore Eisenberg, might remind us that when states create dispute resolution mechanisms and hold the pen, one would expect that states should win more often. The Duke article describes a variety of empirical research involving u.s. court litigation that demonstrates respondents are likely to have the relative advantage.59 The data provide evidence disrupting claims of a “pro-investor” bias or suggest the claims are either overstated or inaccurate in the context of final outcomes. Testing Claims—Hypothesis 2: Investors Win Massive Sums and are Extremely Successful A binary measure of analyzing success masks a degree of nuance. Perhaps more importantly, it does not offer a sense of the risk of exposure. While it is one thing to win a dollar, it is another thing to win a million dollars or a billion

B

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In this context, the “ultimate win” variable was coded as a binary variable. The variable analyzed whether a state was subject to liability for any amount (i.e. an amount awarded over US$0) for breaching an investment treaty or not. 56 Franck, supra note 46; Franck & Wylie, supra note 13, at 489–91; Franck, Conflating, supra note 12; see also Scott Miller & Gregory N. Hicks, Investor-State Dispute Settlement: A Reality Check, Center for Strategic and International Studies Report (Feb. 2015) (discussing existing rearch on ita). 57 George L. Priest & Benjamin Klein, The Selection of Disputes for Litigation, 13 J. Legal Stud. 1 (1984). 58 The Preeist-Klein model is based on various assumptions including: the application of u.s. law, clear and available precedent, and the concept that only “close” cases go to trial. Daniel Kessler, et al., Explaining Deviations from the Fifty-Percent Rule: A Multimodal Approach to the Selection of Cases for Litigation, 25 J. Legal Stud. 233 (1996); Keith N. Hylton, Information, Litigation and Common Law Evolution, 9 Am. L. & Econ. Rev. 33 (2006). In ita, the first assumption does not apply and the second two are not necessarily applicable. See Franck, Empirically Evaluating, supra note 55. 59 Franck & Wylie, supra note 13, at 493–94, 520–21.

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dollars. It is also a very different experience to be the party having to be on the receiving end to pay an award with varying orders of magnitude. The discourse of what is a “normal” amount in dispute in ITA—and the “normal” amounts of awards has varied. My previous scholarship has addressed this point.60 Suffice to say, it is easy to gain press when one might wish to discuss what might appear to be an extreme amount or a particularly large damage award. That, however, does not mean that such large amounts are either representative or lasting. One need only look at the press reports related to the US$50 billion Yukos award against the Russian Federation,61 which has nevertheless recently resulted in a Dutch court annulling the decision.62 The question then becomes—to ensure that dispute systems designers understand what is really a typical case rather than what we might intuit as a normal case—it becomes necessary to study the average or the median dispute using hard data. Part of the solution to crafting appropriate dispute settlement is to ensure outliers do not drive systems design. The ultimate objective is to focus on standard and typical disputes so that the tail does not “wag the dog”. Based upon my data—which like any empirically based assessments has inevitable limits and why I discuss research limitations in a variety of contexts63—it is possible to get a sense of a typical claim and award. I strongly encourage readers of this chapter to rely primarily upon the Duke and Oxford publications as they have the core methodology, data, and limitations so that one can understand the context of this research. It is fundamental in terms of understanding concepts such as case selection bias, statistical power, standard deviations, sample size, and the like. Nevertheless, in an effort to reflect core preliminary findings, this chapter offers some synthesis of those results by focusing on different core variable. The average claim in all cases for which there was data was roughly US$622–623 million. This is contrasted with the average award made in final

60 Franck, Empirically Evaluating, supra note 55. 61 Stanley Reed, $50 Billion Awarded in Breakup of Yukos, n.y. Times, July 28, 2014, http:// nyti.ms/1pwgABi; Reuters, Yukos shareholders $50 Billion Win is Largest Award Evereil Buckley, Russia Wins Legal Victory over Yukos Damages, Reuters, July 28, 2014, http://reut .rs/1TLjaCl. 62 Neil Buckley, Russia Wins Legal Victory over Yukos Damages, Financial Times, Apr. 20, 2016, http://on.ft.com/1Ts0KcH; Maarten Van Tarwijk, Dutch Court Quashes $50 Billion Award to Former Yokos Owners, Wall St. J., Apr. 20, 2016, http://on.wsj.com/1QmJ515. 63 See, e.g., Franck & Wylie, supra note 13, at 581–20; Franck, Conflating, supra note 12, at 60–70.

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cases, which was roughly US$16–17 million.64 In terms of relative success, when directly comparing amounts claimed and awarded within an individual case,65 this means that the average investors was awarded less than twenty cents on the dollar; and the median amount awarded was less than ten cents on the dollar. One wonders, with this degree of uncertainty in concluded cases and low relative success, why an investor might pursue ita when faced with the daunting knowledge that other cases have historically lost two-thirds of the time. Yet, there is another important perspective to have on the data beyond this “big picture” lens of outcome. When investors lose, they are awarded nothing. Zero amounts, including zero amounts awarded, bring down means. So, having focused on all cases (where there were winners and losers), we have not yet focused exclusively on the small subset (i.e. the one-third of the winning investors) that were successful in receiving a damage allocation in connection with their treaty-based claim. Within the narrower frame, there were still lower levels of relative investor success. The amounts claimed were also facially lower, suggesting a link between more reasonable claims and ultimate success. Specifically, the mean amounts claimed were about US$171 million. The average damages awarded for the small subset was still in the order of US$45–46 million. This suggests that, even for the “winning” investors, they are still taking a haircut on the ultimate award. This is borne out by more granular data. When looking at each of these individual claims—and looking at the discount between what these “successful” investors obtained—investors as a category still received awards that were roughly one-third of their requested damages. Thankfully, the measures of central tendency were more tightly linked, with a mean investor success rate of 35% and a median of 29-29%. Overall, ita outcomes reflected wide variation but a general pattern. The pattern exhibited less investor success than some commentators suggest and minimal evidence of “pro-investor” bias. Instead, the data provided initial evidence of a pro-state bias that was similar to cases in u.s. litigation involving claims against state entities. 64

65

Unlike raw “win” or “lose” outcomes which involve a binary variable, amounts awarded includes greater variation. It means, for example, that it was possible to include amounts awarded (as articulated in settlements); this variable was therefore able to include both the amounts awarded by a tribunal and amounts awarded, as agreed by the parties in settlements. As earlier noted, the methodology matters. If, for example, a tribunal failed to publicly report the amount claims in the award, it was then not possible to calculate the relative success within an individual case. While the ultimate amount awarded may be ascertainable from the final dispositif, the starting point to calculate relative success was missing.

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C Testing Claims—Identifying Core Variables Linked with Outcome Given variation in results, it is constructive to explore variables affecting case disposition. Unfortunately, this is one of the most difficult yet most important aspects of the research. Given the limited time, my presentation is only able to address these variables at the most cursory levels. I therefore strongly encourage readers to read the Duke article and my Oxford book in greater detail. The Oxford book will have specific chapters looking at the variables so that those interested can take a more nuanced approach understanding how and why certain variables matter (and why other variables that might feel more important are perhaps less important).66 The variables most tightly linked to predicting outcomes were arguably case selection effects, including investor identity and the presence of experienced counsel. Yet, for both variables, the reliable statistical links can operate in different ways. Investor identity was significant in predicting different types of outcomes, perhaps in unexpected ways. When focusing exclusively on investor identity as classifying cases brought by human beings (rather than corporations), investor identity was a significant variable. Put simply, ita provided a critical service to human beings in providing access to justice and permitting them to have a forum for their meritorious. Yet, when investor identify was classified as large multinational enterprises, namely Financial Times 500 entities, investor identity was also predictive of an ultimate win for investors—but it was not linked to differences in investors’ relative success rates. One way of conceiving of these effects is that perhaps some investors appreciated the value of their claims, had a firm appreciation for the merits of their claims, or had nothing to lose by initiating ita. For individuals, ita perhaps involved “bet the company” disputes where they were aware of the value of their investment and had no desire to pursue further investments within a host state; and, in those circumstances, ita perhaps provided the only viable method for obtaining meaningful relief. Large corporations, meanwhile, may have appreciated that, by suing a state, they risked their other commercial interests within the state and potentially jeopardized their worldwide reputation. As such, they may have been cautious in initiating ita; and they may have only pursued the most meritorious claims or those claims affecting the company’s ongoing fiscal viability. As these are not the only explanatory narratives, investor identity will remain a critical but complex variable. From a normative design perspective, if stakeholders wish to eliminate access to ita because of 66

Readers may also wish to explore another article that looks at how to extract aspects of domestic democracy levels from arbitration outcomes. Franck, Conflating, supra note 12.

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their dislike of large, multi-national enterprises, they should also be aware of the negative downstream consequences of that choice in using arbitration to provide access to justice. For attorneys, like earlier research by Mark Galanter on domestic dispute resolution,67 the results revealed that attorney experience was reliably linked demonstrated to dispute outcomes. Once again, the effect was different when focusing on investors’ counsel rather than states’ counsel. For investors, having experienced counsel was only linked to two types of outcomes, namely whether the state was ever liable or the amount of awarded. This may suggest that sophisticated investors’ counsel was adept at distinguishing among cases that were “winners” or might generate large awards, and therefore experienced counsel provided a critical screening function for investors. But the results may also reflect that insider experience in selecting the forum, selecting arbitrators, generating claims, and advocacy were critical to outcomes. For states, having experienced counsel was linked only with investors’ relative success, whereby states represented by more experienced legal teams were associated with outcomes where investors did relatively worse. This may suggest that state counsel were adept in decreasing investors’ claimed damages by virtue of their skill in appointing quality experts, cross-examining the damage experts of the investor, or otherwise making an effective case. It could also mean, however, that arbitrators were persuadable by experienced counsel, that arbitrators were sympathetic to the arguments of states, or that tribunals were skilled at identifying non-meritorious damages and reducing liability accordingly. iv Conclusion These data flesh out our understanding of ita and provide us with an opportunity to think critically about the optimal methods of dispute resolution in an area of dispute resolution that has become highly politicized and involves an assessment of state responsibility. If we wish to build a dispute settlement system that properly incentivizes entities to bring legitimate and reasonable claims, we must target normative reform to those entities that create the most problems. Likewise, we must take care to ensure that those who are properly using the system are not disadvantaged and made to suffer during a time period that involves a growing backlash against globalization. These are two sides

67

Marc Galanter, Why the “Haves” Come Out Ahead: Speculations on the Limits of Legal Change, 9 Law & Soc’y Rev. 95 (1974).

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of the same coin and require stakeholders to avoid undue politicization by focusing on data rather than intuitive ideological preferences. Claims about ita, and derivative normative solutions, should be assessed in light of properly gathered and analyzed data. Offering base rate information about ita outcomes aids stakeholders in minimizing the risk of cognitive illusions influencing information gathering and decision-making.68 For states considering excluding ita from treaties on the premise that ita disfavors them, they may wish to reevaluate that proposition as a basis for eliminating ita. They may also view ita as a way to vindicate appropriate state policy choices. For investors hoping to secure relief from ita, they should appreciate the risks of pursuing ita and the low degree of relative investor success. Stakeholders may wish to consider the analyses carefully and respect the limitations when engaging in policy debates. By considering evidence in context, stakeholders are better positioned to create evidence-based normative solutions that redress real, rather than imagined, problems and constructive durable and fair dispute settlement for the future. 68

See, e.g., Amos Tversky & Daniel Kahneman, Judgment under Uncertainty: Heuristics and Biases, 185 Sci. 1124 (1974); Jennifer K. Robbennolt & Jean R. Sternlight, Psychology for Lawyers 73–75 (2012).

part 3 The Confluence of eu Law and International Arbitration—Both Commercial and Investor-State

⸪

chapter 10

Overview of Recent EU-Related Developments in Commercial and Investor-State Arbitration John Gaffney i Introduction I will touch briefly on all of these issues in attempting to provide you with an overview of recent EU-related developments in commercial and investor-state arbitration. I will adopt a “year in review” format, commencing around this time last year. My overview thus will shuttle back and forth between commercial arbitration and investor-state arbitration in relation to which there have been a number of significant EU-related developments. ii

eu Opposition to isds

The year in review started with something of a bang when the then presidentelect of the European Commission, Jean Claude Juncker, declared in October 2014 that his Commission “[would not] accept that the jurisdiction of courts in eu member states [will] be limited by special regimes for investor-to-state disputes.”1 Mr Juncker’s remarks led many to wonder whether the then newly elected Commission would try to procure wholesale changes to, or indeed the removal of investor-state arbitration provisions from, pending comprehensive trade agreements with Canada, namely the Comprehensive Economic and Trade Agreement (ceta), and the United States of America, namely the Transatlantic Trade and Investment Partnership (ttip). Less than two weeks later, however, Cecilia Malmstrom, the European Trade Commissioner clarified that only “minor clarifications and adjustments”2 could be made to the ceta. These remarks were made against the backdrop of

1 Alison Ross, “Will Juncker junk isds?”, Global Arbitration Review, Oct. 30, 2014, (http://globala rbitrationreview.com/news/article/33120/). 2 “Malmström: Only minor adjustments to isds in trade deal with Canada”, EurActiv.de with Reuters. Nov. 14, 2014, (http://www.euractiv.com/sections/trade-society/malmstrom-only-mi nor-adjustments-isds-trade-deal-canada-309906).

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increasingly vocal European opposition to investor-state arbitration provisions in the ceta and ttip. There was something of a rich irony about this European-led opposition to investor-state arbitration considering the leading role played by European states, notably Germany, in the development of bilateral investment treaties and the novel investor-state arbitration mechanisms they introduced 50 years ago.3 Commissioner Malmstrom also presaged the possibility of a permanent international court being established to hear investor-state disputes under eu investment agreements.4 iii

eu State Aid Rules and isds Collide

Meanwhile, the eu’s Directorate-General for Competition initiated proceedings under eu State aid rules in relation to an icsid award rendered against Romania in favour of two Swedish investors,5 the Micula brothers, in relation to the withdrawal of economic incentives for investment in disadvantaged regions of the country. The Commission had regarded the incentives as violating eu State aid rules, and thus required Romania to repeal them in preparation for its accession to the European Union in 2007.6 The icsid Tribunal found that Romania had violated the Miculas’ legitimate expectations that the measures would remain in place for longer and also by failing to inform the investors in a transparent manner that the incentives would be withdrawn early, prior to its stated date of expiry.7 The Commission’s actions underline the tension that exists between compliance by eu member States with eu State aid law, on the one hand, and, and on the other hand, with their international obligations arising under bilateral

3 See e.g., J. Gaffney and Z. Akcay, “European Bilateral Approaches” in International Investment Law: A Handbook (ed. Bungenberg, Griebel et al.) (2015). 4 Ibid. 5 Commission Decision (eu) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania—Arbitral award Micula v Romania of 11 December 2013. 6 Douglas Thomas, “eu investigates icsid award for illegal state aid”. Global Arbitration Review, Nov. 10, 2014, (http://globalarbitrationreview.com/news/article/33153/%20eu-investigates -icsid-award-illegal-state-aid/). 7 Ioan Micula, Viorel Micula and others v. Romania (icsid Case No. ARB/05/20)(http://www .italaw.com/sites/default/files/case-documents/italaw3036.pdf).

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investment treaties.8 I don’t propose to comment any further, as this issue will be addressed by Fidelma Macken in her presentation. The Micula case was to feature again in the challenge of an Award against Hungary rendered on 4 December 2014 in investor-state proceedings brought by the French electricity company, edf, for breaches of the Energy Charter Treaty (ect), after the state prematurely terminated three long-term power purchase agreements. The termination of the agreements had been requested by the European Commission on the basis that they constituted incompatible state aid under eu law. In an example of an investment treaty tribunal applying eu law, a subject that Kaj Hober will address later on, the arbitral tribunal found that, although the termination of the power purchase agreements did not constitute a breach of the ect, Hungary’s failure to adequately reimburse the investor’s “stranded costs” within the limits allowed by eu law violated the ect’s fet standard. In the tribunal’s view, eu law did not prevent Hungary from adequately compensating the stranded costs in circumstances where it was required under the ect to provide adequate compensation. Hungary would later challenge the award before the Swiss courts, contending, inter alia, that the damages award was incompatible with eu law on the basis of the Commission’s actions vis-à-vis the Micula award, a challenge that was recently dismissed by the Federal Tribunal, which noted that Hungary had not demonstrated with sufficient certainty that the award would violate eu law. iv

European Opposition to isds Increases

Meanwhile, as 2014 drew to a close, debate continued at the European level, most notably in Germany, on the desirability of retaining the investor-state arbitration provisions in the ceta, with internal clashes occurring within the German ruling party on this contentious issue. At least some of the opposition appeared to be prompted in part by the Vattenfall9 and Philip Morris10 claims against Germany and Australia, respectively.

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Christer Söderlund, “Does compensation for a treaty breach qualify as state aid?”, Global Arbitration Review, May 13, 2015, (http://globalarbitrationreview.com/journal/ article/33796/does-compensation-treaty-breach-qualify-state-aid/). Vattenfall AB and others v. Federal Republic of Germany (icsid Case No. ARB/12/12). Philip Morris Asia Limited v. The Commonwealth of Australia, uncitral, pca (Case No. 2012–12).

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Opinion 2/2013 of the eu Court of Justice

2014 ended with a “Christmas bombshell”, namely, Opinion 2/2013 of the eu Court of Justice.11 The question of the eu’s accession to icsid, which is the Union’s expressly preferred forum for the resolution of investor-state disputes, was set in sharp relief by the Opinion, which concerned the eu’s accession to the echr.12 The Court concluded that the draft agreement on the accession of the European Union to the echr was not compatible with eu law,13 since, inter alia, it violated Article 344 tfeu.14 Pieter Jan Kuijper will be discussing this later in his presentation. vi

Regulation (eu) No 1215/2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters

January 2015 saw the entry into force of the Brussels Regulation (Recast)15 in respect of all court proceedings in all eu member states from that date. The Recast Brussels Regulation was intended to more clearly define the arbitration exclusion contained in its predecessor, the Brussels i Regulation.16 One notable feature of the new Regulation was inclusion of Recital 12, which confirms that all arbitration-related actions are intended to be excluded from the scope of the Regulation, and by Article 73 (2) of the same Regulation,17 which provides that the Regulation shall not affect the application of the New York Convention. Recital 12 complements this provision by providing that the Regulation should not prejudice the competence of eu member state courts to decide on the enforcement of arbitral awards under the New York Convention, 11

Opinion 2/2013, Court of Justice of the European Union, Press Release No 180/14, Luxembourg, 18 December 2014. 12 Ibid. 13 Ibid. 14 Article 344 of the Treaty on the Functioning of the European Union states that “The Council and the Commission shall ensure the consistency of activities undertaken in the context of enhanced cooperation and the consistency of such activities with the policies of the Union, and shall cooperate to that end.” 15 Regulation (eu) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. 16 Council Regulation (ec) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. 17 Ibid.

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thereby affirming the supremacy of the Convention over the Regulation in ­relation to such matters.18 vii

eu Online Consultation on Investment Protection and isds in the ttip

Around this time, the European Commission published its analysis of the almost 150,000 replies to its online consultation on investment protection and investor-state dispute settlement in the ttip.19 In late 2014, it had been reported that the consultation process had been “hijacked” by a small group of organisations hostile to the ttip.20 Nonetheless, the Commission presented the consultation findings as demonstrating “huge scepticism” towards isds.21 The Commission also took the opportunity to highlight its concerns regarding the 1400 bilateral investment agreements entered into by eu member states, and the question of investment protection in eu agreements, as failure to replace them by more advanced provisions will mean they remain in force—with all the legitimate concerns they have been raising over the last months.22 viii

European Commission Pushes for Full Transparency for isds

Later in January, the European Commission proposed the adoption of rules that would enable the eu and its member states to adhere to the un Convention on transparency with respect to existing bilateral investment treaties, as part of the Commissions desired reform of the isds system worldwide, including

18 Ibid. 19 See “Report presented today: Consultation on investment protection in EU-US trade talks”, European Commission—Press release, Strasbourg, 13 January 2015 (http://europa .eu/rapid/press-release_IP-15-3201_en.htm). 20 TTIP: Deal Delayed by Campaigners Hijacking isds Consultation, International Business Times, 26 November 2016 (http://www.ibtimes.co.uk/ttip-deal-delayed-by-campaigners -hijacking-isds-consultation-1476771). 21 “Report presented today: Consultation on investment protection in EU-US trade talks”, European Commission—Press release, Strasbourg, 13 January 2015 (http://europa.eu/rapid/ press-release_IP-15-3201_en.htm). 22 Ibid.

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the 1400 bilateral investment treaties included by eu Member States.23 As far as I am aware, the proposal awaits the approval of Council. ix

European Parliament of Its Study on Legal Instruments and Practice of Arbitration

February 2015 saw the publication by the European Parliament of its study on legal instruments and practice of arbitration across the eu and Switzerland.24 This study was undertaken by Brunel University with the assistance of a number of national and international reporters, including myself.25 As regards confluence of eu law and international commercial arbitration, the study proposed three recommendations. First, additional reforms to tackle the risk of parallel proceedings and conflicting judgments, which were not addressed in the recast Brussels i Regulation.26 Secondly, making it possible for arbitral tribunals to make preliminary references to the eu Court of Justice.27 Thirdly, clarification by the Court of Justice concerning norms of eu Law in jurisprudence relevant to arbitration, so as to ensure more certainty in an arbitral context. In particular, the ep’s study recommended that the Court should specify which provisions of eu law constitute part of eu public policy and therefore constitute grounds on which to set aside or deny the recognition of enforcement of arbitral awards under Article V(2)(b) of the New York Convention.28 With reference to investor-state arbitration, the study noted the existing problems concerning the compatibility of arbitration with eu law and the risk of unpredictable and unequal treatment of investors within the eu.29 23

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26 27 28 29

“European Commission pushes for full transparency for isds in current investment treaties”, European Commission—Press release, Brussels, 29 January 2015 (http://europa.eu/ rapid/press-release_IP-15-3881_en.htm). Legal Instruments and Practice of Arbitration in the eu (Study, Annex, Questionnary, Answers to Questionnary), 15 January 2015 (http://www.europarl.europa.eu/RegData/ etudes/STUD/2015/509988/IPOL_STU(2015)509988_EN.pdf; http://www.europarl.europa .eu/RegData/etudes/STUD/2015/509988/IPOL_STU(2015)509988(ANN01)_EN.pdf). See “Legal Instruments and Practice of Arbitration in the eu (Study, Annex, Questionnary, Answers to Questionnary)”, 15 January 2015 (http://www.europarl.europa.eu/thinktank/ en/document.html?reference=IPOL_STU(2015)509988). Legal Instruments and Practice of Arbitration in the eu, p. 201 (http://www.europarl .europa.eu/RegData/etudes/STUD/2015/509988/IPOL_STU(2015)509988_EN.pdf). Ibid., p. 245. Ibid., p. 201. Ibid., p. 241.

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The study recommended in this regard more precise articulation of the substantive standards of investor protection in order to limit the discretionary power of arbitral tribunals and to maintain the eu’s policy space or, in the alternative, introducing an appellate mechanism, which would permit a second instant body to review arbitral rulings. x

Idea of a Permanent International Investment Court Gains Momentum

March saw the idea of a permanent international investment court gaining momentum, with a former European Commissioner, Viviane Reding, describing it as “the only way forward” to guarantee the legitimacy of investor-state proceedings.30 xi

ecj Decision on Anti-suit Injunctions in Support of Arbitration

May saw the publication of the eagerly anticipated ruling of the eu Court of Justice in the Gazprom case.31 The Court clarified that the ruling in the West Tankers case,32 which prohibited eu member state courts from issuing anti-suit injunctions in support of arbitration on the basis of the Brussels i Regulation,33 was confined to member state courts and did not extend to similar injunctions granted by arbitral tribunals. The Court of Justice did not go so far, however, to respond to the call of its Advocate General to interpret the Recast Regulation as rejecting its previous ruling in the West Tankers case.34

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V. Reding, “isds must be replaced by a public court”, EurActiv, 13 March 2015 (http://www .euractiv.com/section/trade-society/opinion/isds-must-be-replaced-by-a-public-court/). C-536/13 Judgment of the Court (Grand Chamber) of 13 May 2015 (http://curia.europa.eu/ juris/liste.jsf?language=en&num=C-536/13). Case C-185/07 Judgement of the Court (Grand Chamber) 10 February 2009 (*) (http:// curia.europa.eu/juris/document/document.jsf?text=&docid=72841&pageIndex=0&docl ang=en&mode=lst&dir=&occ=first&part=1&cid=131063). Council Regulation (ec) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (http://eur-lex .europa.eu/legal-content/EN/TXT/?uri=URISERV%3Al33054). Opinion of Advocate General Wathelet delivered on 4 December 2014 (1) Case C-536/13 (http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A62013CC0536).

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Commission Asks Member States to Terminate their Intra-EU bits

June saw the initiation by the European Commission of infringement proceedings against Austria, the Netherlands, Romania, Slovakia and Sweden, in which the Commission requested the respondent States to terminate intra-EU bilateral investment treaties between them (“intra-EU bits”), which the Commission described as “outdated” and “no longer necessary” in the single market.35 The Commissioner’s proceedings were taken in parallel with Commission initiatives with other member states who have maintained intra-EU bits. Initiation of proceedings by the Commission brings into focus the adequacy of eu law and the Charter of Fundamental Freedom to protect investor rights.36 The press release that announced the initiation of actions by the Commission claimed that eu investors benefit from the same protections under eu law or as intra-EU bits conferred protection on eu investors according to nationality, which was discriminatory.37 It is somewhat surprising that rather than trying to raise the level of investor protections by spreading the benefit of intra-EU bits to all eu investors through, for example, the introduction of a new eu instrument, the Commission appears to have reduced the level of investor protection to that afforded under eu law and the Charter of Fundamental Freedom. This may appear to be a somewhat regressive step. xiii

Adoption by European Parliament of Resolutions Supporting the ttip

July saw the adoption by the European Parliament of resolutions supporting the ttip.38 The majority decision in favour of adopting a common position 35

“Commission asks Member States to terminate their intra-EU bilateral investment treaties”, European Commission—Press release, Brussels, 18 June 2015 (http://europa.eu/ rapid/press-release_IP-15-5198_en.htm). 36 Charter of Fundamental Rights of the European Union (2000/C 364/01) (http://www .europarl.europa.eu/charter/pdf/text_en.pdf). 37 Commission Decision (eu) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania—Arbitral award Micula v Romania of 11 December 2013 (notified under document C(2015) 2112) (Only the Romanian text is authentic) (Text with eea relevance) OJ L 232, 4.9.2015, pp. 43–70 (http://eur-lex.europa.eu/legal-content/ EN/TXT/?uri=CELEX%3A32015D1470). 38 “eu Parliament Adopts ttip Resolution, isds Compromise Language”, ictsd, 9 July 2015 (http://www.ictsd.org/bridges-news/bridges/news/eu-parliament-adopts-ttip-resolution -isds-compromise-language).

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of the ttip came on the condition that investor-state arbitration mechanism would be replaced by another system. Gianni Pittella, leader of the Social & Democrat group in the European Parliament was reported to have said that “isds is dead. It must be replaced by a new public and transparent system of investment protection, in which private interests cannot undermine public policy and which is subject to public law.”39 Around this time, France’s Secretary of State for Foreign Trade speculated that the ceta was unlikely to be ratified in France unless significant changes were made to the investor-state dispute resolution mechanism (isds), involving the establishment of an international and multilateral settlement court, and also conferring the right on states to interpret any ambiguities in the treaty as they saw fit.40 xiv

Public Investment Court Features in the Draft ttip Negotiating Text

It was not altogether surprising, therefore, once the summer break had ended, to find that a public investment court featured in the draft negotiating text of the investment chapter of the ttip produced by the Commission in mid-­ September.41 The draft negotiating text provides that investor-state claims shall be determined by panels drawn from a standing pool of 15 publicly appointed judges, appointed for six-year terms, with a staggered replacement process. The court would also include a prominent appeal court made up of six judges, which would operate on principles similar to the wto Appellate Body.42

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D.Vincenti, “Pittella: isds is dead, EU-Canada trade deal must be reopened”, EurActiv, 3 July 2015 (http://www.euractiv.com/section/trade-society/interview/pittella-isds-is-dead -eu-canada-trade-deal-must-be-reopened/). S. White, “France may block EU-Canada trade deal over isds”, Euractiv, 2 July 2015 (https://www.euractiv.com/section/trade-society/news/france-may-block-eu-canada -trade-deal-over-isds/). “eu finalises proposal for investment protection and Court System for ttip,”—Press, Release, Brussels, 12 November 2015(http://trade.ec.europa.eu/doclib/press/index.cfm?id =1396). For further details of the wto Dispute Settlement: Appellate Body: see https://www.wto .org/english/tratop_e/dispu_e/appellate_body_e.htm.

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xv Conclusion And so, just as European states were to the forefront of the development of new investor-state dispute resolution provisions in the 1950s and 60s, 2015 saw the eu take the initiative in potentially revising the architecture of the investor-state dispute resolution mechanisms they had helped create over 50 years ago.43 43

See e.g., J. Gaffney and Z. Akcay, “European Bilateral Approaches” in International Investment Law: A Handbook (ed. Bungenberg, Griebel et al.) (2015).

chapter 11

Investor-State Arbitration—The European Union as Amicus Curiae? Fidelma Macken sc* In this short paper (arising from a shorter contribution made at Fordham University in New York in late 2015), I consider a relatively recent phenomenon which is giving rise to considerable debate. The paper speaks not only to parties interested in the topic, but also to students—several of whom attended the Fordham conference—who are also interested in European Law at this point in their studies. In the case of certain arbitrations in the context of disputes falling within the terms of some Bi-lateral Investment Treaties, the European Union has sought to intervene in these by way of purported amicus curiae. In the course of the past few years, several investor-state treaties have thrown up issues not previously considered seriously at European Union level, or at the very least not appearing in the past to have caused serious eu law concerns. In the case of Bilateral Investment Treaties (bits), however, disputes which have more recently been remitted to arbitration, have, in turn, uncovered this amicus curiae approach on the part of the Union. Arbitration of such disputes is not itself a surprising issue, as bit treaties (and others) contain within them clauses providing for that very form of dispute resolution. And many of these disputes are determined (in accordance with the bits provisions) by arbitration. It is in relation to such disputes that— it seems—particular problem issues of European Union law allegedly arise. The dispute resolution clauses in bits are usually called into play when, under their terms, citizens or corporations of an investor-state party complain about their treatment by the beneficiary state party, and in respect of which the citizen or corporation seeks redress. In the recent past, problems have included those arising in the context of the admission as Member States of the European Union of a number of countries from Eastern Europe, arising from the significant enlargement of the

* Fidelma Macken is a former judge of the European Court of Justice, and a retired judge of the Irish Supreme Court, chair of the Irish Centre for European Law, Trinity College, Dublin, reland and a door tenant at Brick Court Chambers, London.

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004334557_013

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Union between 2004 and 2007.1 Some of those newly arrived Member State were, prior to their Accession to the Union, the beneficiaries of substantial ­inward investment. In turn, that inward investment was subject to certain treaty terms as to how any problems surrounding investments should be resolved. Of prime relevance in such bits are the provisions for arbitration under the rules of internationally recognised entities. These include in particular, the International Centre for Investment Disputes (icsid),2 existing under the auspices of The International Bank for Reconstruction and Development (commonly known as “The World Bank”). Many bi-lateral treaties, including those entered into by current Member State of the European Union—at a time prior to their accession—refer to icsid as the dispute resolution forum of choice, although the same choice also appears in several more recent treaties. The legal issues arising are not ones, therefore, which are confined to bi-lateral treaties entered into between an established Member State and a former non-member state. It is simply that such treaties currently appear to be those in which, most frequently, difficulties have arisen, and are the most well known. There are other entitles offering similar or equivalent rules of arbitration to those of icsid, including the International Chamber of Commerce, Paris; the London Court of International Arbitration’ Singapore International Arbitration Centre; American Arbitration Association; wipo arbitration centre, and others. All offer a framework of rules and practices which the parties to arbitration, as well as the panel of arbitrators, must comply with. Many parties around the world, including state parties, are confident of the value and reliability of such fora for dispute resolution. There are in addition, many ad hoc arbitrations where the parties operate in accordance with one or other of the above, or with the Uncitral provisions. It will be seen therefore that the potential for disputes which may engage eu law to some or other extent, and in which one or other of the above entity’s rules will have been adopted for the resolution of disputes under treaties is likely to be quite broad. Apart from disputes arising under bits, my understanding is that similar provisions are currently inserted into other treaties, including under the Energy Charter Treaty, more recently coming into existence, and which provides for arbitration pursuant to icsid.

1 Treaty of Accession 2005 between the Members of the eu and Romania and Bulgaria (in force 1 Jan 2007). 2 Convention on the Settlement of Investment Disputes between States and nationals of other states (14 October 1966).

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Investor-State Arbitration: The Relevant eu Legal Context of Damages Claims

It is necessary to say something brief about the particular context in which the current crop of legal issues—and those likely to continue to appear into the future—have arisen. Running parallel with the above comments on such investment disputes, but not necessarily or inevitably applicable to candidate countries for membership of the European union until they were admitted into the Union as Member States, has been the competition policy of the Union which, upon such full membership, became wholly applicable in those countries joining the eu in the more recent past, in particular in so far as concerns this note, since 2004. Of course the same policy continues to apply to all further countries aspiring to become Member States, and all of whom, prior to becoming full Members of the Union had engaged with the Union pursuant to Accession Treaties and prior thereto under Association Agreements.3 These arrangements between the candidate countries and the Union ­commence with the usual liberalisation of trading relationships between the former and the European Union, and progress through several years of cooperation and negotiation, through the Accession arrangements, and finally to full membership of the Union. In between, the Commission Directorates guide and advise the candidate country, and oversee the position, monitoring the candidate’s progress, inter alia, in adopting Union legislation, and in meeting its other commitments, including any benchmark requirements. During the review period, the Commission will have warned candidate countries that their legislation and/or rules or practices were non-compliant with their obligations. What is less clear, however, is whether candidate countries were ever cautioned that, in the absence of moving to full compliance prior to their accession dates, sanctions (such as a delay in being admitted as a Member State of the Union), were ever threatened or imposed. Full compliance in that context would include terminating offending practices so that there are fully disposed of at the date of accession of the new Member State. What seems clear, however, is that in some or other candidate countries, practices which would not, or allegedly did not, comply with European Union law continued after accession, notwithstanding review and likely warnings, and that this position was, upon accession, known to the Union. The continuing review is undertaken so as to ensure that, upon accession, the new Member State will—or ought to have—brought its legislation, rules, 3 Energy Charter Treaty.

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and practices, into strict compliance with the acquis communautaire.4 It is also intended to reassure the existing Member States that the candidate country is meeting the conditions for joining. It should follow that—for the purpose of this note—at the point of accession to the Union, a candidate country ought to have had its legislation fully in place in compliance with the obligations resting on it, and ought to have already made arrangements for the annulment or ending of practices which would not comply with its obligations upon accession— the same applying to each and every other candidate country upon becoming a Member State of the Union (or of its several prior manifestations).

State Aid

Competition—including also certain anti-competitive behaviour—is one of the most “hot spot” areas among all aspects of the European Union law. Over the long period of time during which the Union has existed in one form or another, the integrity/unity of the internal market, as well as measures which might affect it adversely or threaten to destabilise it, have been to forefront of the Union’s concerns, and any such measures have been condemned, in almost all circumstances. State aid is but one, very important, aspect of competition law and policy, and an area in which the Union holds strong views. This is particularly so in the case of illegal state aid, because this almost invariably involves monies or benefits being given by governments to one or more segments of industry, to the detriment of other segments of the same industry or of competitors of the beneficiaries of the state aid. Such aid is, therefore, likely adversely to affect the unity and integrity of the internal market. Illegal state aid is considered to be an example of an anti-competitive measure which is particularly offensive. It is not, however, the case that all aid given by a Member State is, ipso facto, illegal. Instead intended state aid must be notified, in advance, to the Commission so that the Union can decide whether it is, in law, illegal or not.5 If it is, and the aid has not yet been given, then giving such aid is prohibited. If it has already been given, there is a clear legal obligation on the Member State to recover it from the beneficiaries. Only in exceptional, and rare, circumstances 4 This comprises all treaties, eu legislation, international agreements, standards, court rulings and judgments, fundamental rights provisions and principles in the treaties such as equality and non-discrimination—in other words the entire of the bundle of legal principles of Union law. 5 Article 107 tfeu and Article 108(3) tfeu.

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is that legal obligation forgiven.6 In this paper I do not propose to deal with illegal state aid in any detail. Given the above very brief expose of state aid rules, it is not surprising that the Union, through the Commission, is alert to the grant of illegal state aid, to the recovery of that aid if already granted, and to the frequently enormous amount of monies involved where aid has been granted and is declared illegal. It is also not surprising that, in the event investing parties falling within the protection of bits they have adopted the dispute resolution process provided for in those treaties, often by independent arbitration. In such event, the dispute is, in effect, resolved outside the scope of the European Union litigation system. It is not at all surprising that the Union may be interested in that exercise and in its outcome.

The Role of an Amicus Curiae

In light of the above, the Union has recently sought to be heard in some or other or several of these arbitrations. Such applications to be heard or represented have been made, until now, by the mechanism of the long established amicus curiae role. It is necessary to say something about this role, and its particular status in legal proceedings. Traditionally, the amicus curiae was intended to be, and, generally speaking, continues to be considered to be, a party who offers independent assistance to the court. Literally translated from its Latin origins, it means “friend of the court” and refers to someone who has no direct relevance to any particular party in a case. The origins of the amicus curiae goes back to Roman law, and is first known to have been adopted into English law prior to the 10th century, and later into civil law systems. It is most frequently used in the area of human rights, and is now used, inter alia, by the European Court of Human Rights, the Inter-American Commission for Human Rights, as well as the Inter-American Court on Human Rights. Commissioners for Human Rights in those countries or regions where those respective courts operate may have an automatic right to be admitted to a case via the amicus curiae mechanism or procedure. Admission to other parties interested in human rights issues has also been permitted before the echr.7 6 See for example, Case C-404/00, Commission v Spain, [2003] ecr I-6695; and Case C-280/95, Commission v Italy, [1998] ecr I-259. 7 See for example: Bouyid v. Belgium (App. no. 23380/09); E. S v Sweden (App no. 5786/08); and others.

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The amicus curiae is not a party in the proceedings. Instead it volunteers, as a friend of the court, information or argument—usually of a nature broader than that of the perspective of either party—which may be of assistance to the court on a point of law or on some other aspect of the litigation, that the amicus curiae considers will be of assistance to the court. In many countries of the Union, such an application may be made only with the express permission of the Court hearing the application. Typically the cases in which the amicus curiae appears are those whose judgments or rulings are likely to have a significantly broader impact on relevant groups or parties beyond that which would likely emerge from the particular arguments arising on the direct dispute between the parties to the litigation. In such event, the argument of the amicus curiae, will extend beyond the particular interests represented by either of them individually, or even jointly. That is why, again typically, the amicus curiae appears most frequently in litigation concerning human rights claims, given the likely broad impact of judgments or rulings in that field. It must always be borne in mind that the amicus curiae is, or ought to be, wholly impartial. In common law jurisdictions this status is well established. The role of an amicus is, as described by Salmon LJ (as Lord Salmon then was) in Allen v Sir Alfred McAlpine & Sons Ltd:8 I had always understood that the role of an amicus curiae was to help the court by expounding the law impartially, or if one of the parties were (sic) unrepresented, by advancing the legal arguments on his behalf. There are rules regulating when a person/group may be admitted as an amicus curiae in proceedings. It is usually considered inappropriate to admit an amicus curiae in courts of first instance, especially in adversarial proceedings. It is not helpful to the court to have an additional person, or several, making similar submissions at that level as one or other of the parties, as this will tend to allow the so-called amicus curiae, inadvertently, to become unfairly involved on one side or another, and therefore lose the important characteristic of impartiality. Such an approach may also be against the concept of the “equality of arms” at first instance level. At appellate level, however, it is well recognised that an amicus curiae can be of especial assistance, since the factual disputes have been clarified, in order to assist the appellate court—sometimes even a Supreme Court—to reach decisions which will not have inadvertent, unintended or undesirable consequences due to the court’s absence of relevant knowledge or argument. On the other hand, if it is felt that an amicus curiae is not likely bring 8 [1968] 2 qb 229 at p. 266 (f–g).

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new and helpful relevant information, different to that presented by the parties, this constitutes a burden on the court, and it will not usually be admitted. The Supreme Court of the United States sometimes permits parties to file short amicus curiae briefs (limiting the extent of these), where its judgment on the issues in contention may have very broad consequences, beyond the scope of the particular dispute. The entitlement is covered by the Rules of that Court, and absent mutual consent of the parties, or the particular status of the party, an application on motion must be made to the Court. While written submissions may be permitted, it is highly exceptional that the amicus curiae would be granted permission to present oral argument, according to my sources. Unlike some other courts, the United States Supreme Court does permit the amicus curiae to indicate whether it supports one or other party before the Court, and whether it wishes to have decisions affirmed or reversed.9 It is equally important to understand the difference between an amicus curiae and a party which is either entitled to, or wishes, to intervene in legal proceedings. Sometimes there is confusion between the role of the amicus curiae and that of an intervenor. An intervenor is a person who is not already a party to a dispute, but wishes to be involved in the litigation concerning the dispute. Such a person may be entitled to intervene pursuant to statute, or to court rules or practice, or may seek to intervene by application made to the relevant court under its inherent jurisdiction to become an intervening party. A typical example at European Union level is the ability of a person affected by a decision which is the subject of challenge under its public procurement legal scheme, to intervene in the challenge as a person who may be affected adversely by the outcome of the proceedings. As a party to the proceedings, an intervenor carries all the advantages and disadvantages of an original party, including the right to be heard without having to remain impartial, and the burden of being fixed with costs in the case of an unsuccessful intervention. There are myriad such examples at European Union level.

The European Union’s Standing in Legal Proceedings

With the foregoing general background on the role of the amicus curiae in certain specialised courts in mind, the European Union has, in the past few years, sought to be heard in the case of arbitrations undertaken under the auspices of the icsid rules and procedures. In general, in those cases where dispute resolution fora provide for the possibility of non-party intervention of one type 9 Rule 37 of the Rules.

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of another (and not all fora so provide or permit), their rules appear to follow established rules for the admission of parties in different capacities, along the same line as those applicable in the case of court litigation. Apart from the several dispute resolution fora mentioned earlier,10 there are others in which European Union issues may also be canvassed. The most important of these currently is the European Court of Human Rights (“the echr”). This Court has jurisdiction to hear disputes arising from or concerning the provisions of the European Convention on Human Rights and Fundamental Freedoms (“The Convention”). This Court, long established, is based in Strasbourg in France, and comprises judges from the 47 signatory states to the Convention. Those signatories include all members of the European Union, but not the Union itself, qua Union. Indeed it is a condition of membership of the European Union—and has been for some time—that all candidate countries must first become signatories of the Convention. In the case of the echr, a point of European Union law may be canvassed on behalf of the Union, in limited circumstances. Under its Rules of Procedure11 the echr has competence to (a) invite a party, such as the European Union, to intervene, or (b) hear an application on behalf of a non-party, such as the European Union, to intervene. This is done, in either case, by the amicus curiae route, and although circumstances are not common, they are not rare either. The rationale for seeking to be heard, in the case of the European Union, is to ensure that a point of eu law is correctly understood in a particular context, whether the application is generated by the echr inviting the eu to participate, or where the Union itself seeks to do so. In the case of the echr itself, the rationale is equally to ensure that it has all the information and submissions which it considers it will need to resolve the eu issues before it. In the case of Member State national courts or tribunals the position is slightly different. The Union does not have an automatic right to appear in every Member State court, or even to become an amicus curiae in such courts. National courts are considered to be Union courts, and national judges are expected and obliged to apply Union law. If, in a particular case, there is a doubt about Union law, or about its correct interpretation, national judges are entitled, and in some circumstances obliged, to make a reference from the national court to the Court of Justice of the European Union (cjeu), seeking clarification of the point of European Law in issue.12

10 11 12

Ibid. p. 6. Rules—in particular Rule 44 of the Rules of Court of the echr. Article 267 tfeu; and see also Case C-283/1981 cilfit, and cases following this.

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Nevertheless, in certain areas of law there is an automatic right in the Union to be heard or represented, for example in certain competition matters before national competition courts, where the competition authority of the Member State, as the Union authority, has such a right to appear. A similar position arises in the case of the United Nations Human Rights Commission when certain courts in signatory states of the United Nations (as already mentioned), or even the cjeu, are dealing with human rights issues.13 And in some Member States of the European Union, a right to become a party to proceedings, or to apply to be permitted to do so, on an application to the forum, may also arise. For example, in the environmental or planning field, certain parties, expressly designated by law, must be notified of the commencement of proceedings, and/or may be designated as interested parties with a right to be heard. There are a variety of circumstances in which such a right may arise, in some or other Member States. In all such situations, however, the party becomes a notice party or perhaps an intervenor, but not an amicus curiae.

Amicus Curiae Applications on Behalf of the European Union

Whether a particular issue arises in arbitrations in the Investor State field, or in other areas covered by treaties, including those specifying icsid as the governing forum, applications on behalf of the Union seeking to be heard are generally, if not invariably, made on the basis of the amicus curiae procedure, as opposed to applications to intervene as an interested party. Whether this is an appropriate approach or not is a vexed question, when—in the case of bi-lateral treaties in the investment arena—the claims in issue are for compensation by an investor against a country (a party to the treaty) which the investor claims has breached the terms of the treaty, and seeks damages for those breaches. Among the several icsid arbitrations in which such an amicus curiae application was made is the by now well-known Micula matter.14 In this case, while permitted to file a submission, it is evident from the decision that the arguments presented on behalf of the European Union were not successful. In other arbitrations, also involving icsid, some applications to be heard, made on behalf of the European Union, were unsuccessful.

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Coincidentally by the cjeu in certain refugee and asylum matters; See Case C-69/10 Samba Diouf. Micula and ors v Romania, icsid, Cast No Arb 05/20 (final award Dec 11,2013).

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Quite why in the Micula arbitration, as well as in others, the application was made to be heard as amicus curiae is not obvious (but it may have been influenced by the procedure before the echr), and appears to me to be a less than ideal position for the Union to adopt. In the first place, by making such an application, it appears to set up a conflict of competence with the tribunal. Secondly, it is not evident on what precise legal basis the Union considers that its application would, or should, be accepted by the arbitral panel. Implicitly, the Union presents itself in such arbitrations as amicus curiae, and thus it proposes to act as a true “friend of the court,” that is to say, as an impartial party seeking to be of assistance to the arbitral panel. A consideration of the Commission’s Decision makes it abundantly clear that this was not so in the Micula arbitration, and in the case of other applications, the position is similar. Thirdly, although the icsid Rules make it clear that a person not already a party may seek to be heard in arbitration proceedings, the conditions to be met are relatively strict. In particular the Rules15 provide that: Tribunals may accept submissions by non–disputing parties after consulting both parties A non-disputing party is an individual or entity that is not a party to the dispute, but asks the Tribunal’s permission to file a written submission in the case. The non-disputing party’s role is to assist the Tribunal in deciding the dispute by providing a perspective different from that of the parties, via the submission of a written brief. When considering whether to grant the request, the Tribunal takes into account factors such as • whether the submission would assist the Tribunal by providing a perspective different from the disputing parties; • whether the submission would address a matter within the scope of the dispute, and • whether the non–disputing party has a significant interest in the proceeding. (emphasis added) It is not evident that the Union—at least in the cases in which it appears to have sought to make a submission—meets the first condition,, and the overriding condition of “ a perspective different from the disputing parties.” The Union’s approach has been to argue that the grant of damages for breach of 15

Rule 37 (2) of the icsid Rules.

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the terms of the treaty invoked in Micula, is dependent on the pre-existing state aid granted by the Romanian government to Micula. It contended that that aid could not lawfully have continued beyond 2007 when Romania was admitted as a Member State of the Union. The claim to damages was related expressly to the loss sustained by Micula by virtue of the early termination of the state aid. Since the basis for the amount of damages claimed represented the loss of the benefit of the aid from 2006 when the aid was terminated, to the original intended termination date in 2009, any award of damages constituted new state aid which had not been notified to the Union. In that circumstance, the Union argued that an award of damages ought not to be made, as it was not authorised, and was prima facie, illegal. Moreover the Union argued that an award of damages in such circumstances, constituting new and illegal state aid, could not validly be enforced in the European Union. The Romanian government had argued in its defence of the claim that it was obliged, under the terms of its Accession Treaty, to terminate all state aid upon accession and that it had no discretion in the matter, as the prior aid constituted illegal state aid—or at the very least unapproved state aid as of the date of Accession. There was, in reality, no difference in substance between the argument of the Romanian government and that of the European Union on this issue, which was the relevant issue in the application for its admission as an amicus curiae in the arbitration. It is not possible to see how, on its argument, the Union fell within the first of the conditions required to be met, since there was, in reality, “no perspective different to that of the disputing parties”. I say this while at the same time recognising that the application to be admitted as amicus curiae in the arbitration was acceded to by the Arbitration Tribunal. It is also not at all clear whether seeking to be heard in such types of proceedings, even if permitted upon an application being made, is of any assistance to the Union, since at least in the Micula case, it also appears that the arguments presented were not in any way persuasive, in any event. Whether its position as amicus curiae was within the second of the conditions, namely “within the scope of the dispute” is also not clear. On its face the claim for damages was based on the long standing and well recognised allegation that there was a breach of a primary clause of the bi-lateral investment treaty, concerning the fair treatment of the investor. That clause does not expressly refer to a defence of alleged illegal state-aid, or indeed other form of alleged illegality. It seems clear therefore that the Union could only have argued in the course of the arbitration, that any future award of damages by the arbitral tribunal would constitute, prima facie, illegal state aid. As is evident from the

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Commission’s own later investigation and Decision, and as is evident from the legislation and the case law, not all state aid is, ipso facto, illegal. State aid without prior notification to the Commission, will be deemed to be, prima facie, illegal. A determination as to whether that unnotified state aid is, in law, illegal, is a decision which is made only after an enquiry. As is clear from what occurred, and from the Decision of the Union following the investigation, the award in favour of the claimants in the Micula case was not actually declared to be “illegal state aid”, until after the subsequent investigation was carried out by the Commission, and that decision was notified to the Romanian government. It is, therefore, not at all obvious why such an application was made, and why these continue to be made, qua amicus curiae, since in the Micula arbitration, the main point of the exercise appears to have been to support the Romanian State—on a wholly partial basis—so as to ensure that no award would be made (a) as this would constitute illegal state aid, or (b) as such an award the could not be executed or enforced, at least in the European Union member states. However, the competence of an arbitral tribunal appointed pursuant to icsid rules and procedures does not, according to the terms of the bit, depend upon, and is not affected by, whether the eventual award is capable of being executed or enforced within the Union. There are quite a number of other jurisdictions outside the Union where the losing party will or may have assets against which the award may be executed or enforced, including by means of summary proceedings. The third criterion to be met is that the non-party must have a “significant interest” in the proceeding. These words are not defined in the Rules. It nevertheless seems clear that what is being referred to is whether the non-party has a “material interest” in the actual proceedings for the award of damages. While the overall concern of the Union is not to permit illegal State Aid to be granted in circumstances in which it has a legitimate interest in warning against such an event, it does not appear to me that this is what the term is intended to cover. Rather a “significant interest” would ordinarily relate directly to the claim which is made, namely for damages for breach of the terms of a bi-lateral investment treaty. This could ordinarily constitute any of the following: (a) an allegation by the non party that it is the true claimant, not the party actually making the claim (for example where the original party had assigned or sold its interests and rights to the non party); (b) a claim by an insurer on the basis that it had granted cover against the risk of a wrongful termination of the state aid, and the terms of the cover were that it, not the claimant, would have both carriage and control of

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any dispute arising in relation to the aid; and would be entitled to be substituted as claimed in any arbitration or other material interests. Interestingly, the Union, even when it knew that an arbitral decision was imminent, and must have considered the possibility that the claimants might secure an award in their favour, did not have in place any step to ensure it would not be executed or enforced. Instead, after the award was made, the Union wrote to Romania, waiting for that Member State to reply, considered the reply, and then wrote again indicating an intention to adopt a suspensive injunction, at which stage—and indeed much earlier—it became clear that the award had been executed by set off or counterclaim in respect of taxes owed by the claimant to Romania.16 There is one final issue in relation to the role of the European Union in such dispute resolution forum, regardless of the mechanism by which it sought to enter the Micula arbitration. It is not at all clear from the terms of the decisions in Micula, or of those other case in which similar applications have been made, the exact scope of what the Union was asking the arbitral panel to undertake, other than refuse to grant any award. It is true that the issue in question concerned a claim for damages for the unfair treatment of Micula and related parties, by the wrongful withdrawal of certain benefits granted by the Romanian government—before it became a member of the Union (and assumed to be legal under Romanian law at the time they were granted). It is true that the contention of the Union was that such an award of damages constituted unauthorised state aid (unnotified and therefore, prima facie, illegal under state rules of the Union). The claim for damages representing the unawarded outstanding aid, was, in turn, new state aid which was illegal. It is wholly unclear whether the Union was suggesting that the arbitral panel should simply refuse to grant any award of damages, upon the simple assertion made on behalf of the European that such an award was prima facie, illegal, and therefore could not be enforced in the Union, or was instead inviting the arbitral panel to consider European Union law on State aid, and apply it upon the panel’s understanding or interpretation of that law. This latter approach would be totally at odds with the case law of the Court of Justice of the European Union (“the cjeu”), in situations where any attempt has been made by parties, other than the cjeu itself, to embark on an interpretation of European Union law, unless that outside party were, in turn, willing and capable of making a reference to the cjeu as final arbiter—a matter not within the power of an arbitral panel appointed by icsid. The cjeu has been 16

Commission Decision (eu) 2015/1470.

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very careful in the past to ensure that extra-European Union courts or judicial tribunals (and presumably even more so arbitral panels) making enforceable awards, are not granted such power. There is the Court’s Advisory Opinion on the European Economic Area (eea) Agreement.17 Under this it was intended to establish a parallel system of judicial protection covering both the European Community and the European Free Trade Agreement (efta). The cjeu found that while the then Community’s treaty-making power comprised also the power to agree on binding dispute settlement (such as an efta Court), it limited the finding by determining that such an institution could not rule on issue concerning the allocation of competences between the Community and Member States.18 The same approach appears in the cjeu’s Opinion on the establishment of a European Common Aviation Area, emphasising the requirement for an autonomous Union legal order that would prevent an international dispute settlement mechanism from rendering binding interpretations of Union law. Another, more recent, Opinion on the European and Community Patents19 Court also failed to pass muster with the Court. The cjeu found that the proposed patent courts would have had exclusive jurisdiction to decide patent cases. The cjeu cautioned that such a system would deprive it of the possibility to make preliminary rulings on references from Member State courts. This would or could threaten the uniform interpretation and application of Union law guaranteed by the Court. It seems totally at odds with the above approach to invite an arbitral panel of icsid (or any other non-EU dispute resolution entity), to embark on an interpretation and/or application of Union law, and a determination of this, at least in circumstances where there is no mechanism for making a reference to the cjeu, and indeed no compulsion to do so in circumstances where a national court of final instance would be obliged to refer. Such a compulsory mechanism, even if it could exist, would, in turn, also seem to challenge the competence of the arbitral panels appointed pursuant to the icsid provisions and subject to its rules. In the circumstances set out above, it might have been just as effective, and certainly would have been less intrusive of the competence of the arbitral tribunal, if the Union had awaited its decision in the arbitration, and, having warned Romania, put in place in a timely manner the suspensive injunction

17 18 19

Opinion 1/91, [1991] ecr I-6079, [1992]. Opinion 1/00, European Common Aviation Area, 2002 ecr 1-3493. Opinion 1/13 European and Community Patents Court.

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it finally did invoke—but only long after the compensation awarded to the claimant(s) had been paid by Romania, or allocated to the claimants, and the claimants, in turn, had used it to discharge certain tax payments to the Romanian tax authorities. Conclusion On balance, I am of the view that the approach of the Union to arbitrations of the type under consideration in the Micula dispute and others of a similar nature (in the absence of significance changes to the rules under which they operate), the use of the amicus curiae mechanism in arbitration proceedings: – – – – –

Does not assist the Union Does not assist in the development of a proper and mutually respectful relationship between the Union and an arbitral tribunal, whether under icsid auspices or otherwise; Fails to appreciate the respective competences of the arbitral tribunal under the terms of the respective convention or agreement or accord Does not, in fact, generate an award which is likely to be acceptable to the Union In consequence, requires the Union to engage in lengthy convoluted subsequent investigations, and in complex temporary suspensive, or longer term applications or proceedings, with no guarantee of a successful outcome for the Union

As a final comment, I note from some of the applications to be heard pursuant to the amicus curiae procedure, that the Union has, when offered, declined by become an “intervening party”. It is not stated why this was so, but one possible reason is the risks involved in agreeing to do so, may include the possibility that the Union would, or might, if unsuccessful, have to pay costs to one or other party to the arbitration, depending on its outcome, and it may wish to avoid such an outcome. A better mechanism for resolving the issues, must exist, or be capable of being created. Without considering the matter further, it is unlikely that this will be provided under the current Union proposals to create an investment dispute resolution facility/tribunal or court, staffed by permanent decision makers with some appropriate qualifications. However, from what I have seen and heard so far on this proposal, it does not appear to envisage a panel or select group of highly qualified and highly experienced decision makers or judges

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with the type of expertise which exists in those parties named from expert panels of long establish dispute resolution fora. Decisions in these areas are frequently complex, difficult, sensitive and involve significant sums of money. They merit the best decisions makers available. I await further developments of the Commission’s proposal in that regard.

chapter 12

Application of eu Law in Investment Treaty Arbitration Kaj Hobér Prof. Dr. 1 Introduction 1.1 Applicable Law—General Remarks Investment protection treaties, bilateral as well as multilateral, constitute treaties under public international law. They are therefore, as a matter of principle, governed by public international law, unless the parties have agreed otherwise. In practice it is unusual, but not unheard of, that parties to investment protection treaties agree on the application of municipal law, or other rules and principles than those found in public international law. Many investment protection treaties stipulate that disputes are to be resolved based on the provisions of the treaty in question, and on the “applicable rules and principles of international law”. Also when no such explicit reference is made, it is usually assumed that such rules and principles will be applied by an arbitral tribunal, together with the provisions of the treaty in question. This means, inter alia, that the provisions of the treaty in question must be interpreted under international law. The rules and principles of treaty interpretation under international law are generally viewed to have been codified in Articles 31 and 32 of the Vienna Convention, which thus apply as a matter of customary international law. The Vienna Convention as a whole—thus not only its rules on treaty interpretation—is generally accepted as a codification of customary law in the field of treaty law.1 When reference is made to applicable rules and principles of international law, a number of issues arise, which will be addressed in the following. At the outset it is worthy of note that the language referred to above— “applicable rules and principles of international law” is similar to that found in Article 31(3) (c) of the Vienna Convention. Article 31(1) sets forth the general rule of interpretation, which, inter alia, refers to the context of the terms of a treaty. Subsection 3, then goes on to say: 1 See Gardiner, Treaty Interpretation (2008) 12, et seq., and references made therein.

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There shall be taken into account, together with the context: …… (c) any relevant rules of international law applicable in the relations between the parties. Whilst the referenced language and Article 31(3) (c) of the Vienna Convention is similar, it is important to note a fundamental difference between the two, viz., that Article 31(3)(c) of the Vienna Convention deals with the interpretation of treaties under international law, whereas the referenced language deals with the application of international law. At the conceptual level this distinction is clear. In practice, however, it is not always an easy task to keep them apart, particularly perhaps when a treaty is the focus, or indeed the basis, of a dispute. This difficulty is illustrated by some aspects of the Oil Platforms case decided by the icj in 2003.2 In that case, which concerned the destruction of Iranian oil platforms by the usa, the Court had concluded at the jurisdictional phase that the only dispute within its jurisdiction was the interpretation and application of Article X(1)—dealing with freedom of commerce—of the Treaty of Amity, Economic Relations etc. of 1955 between Iran and the usa.3 The reasoning of the majority, however, took as its starting point the general international law of self-defense, while making reference to Article 31(3)(c) in support of its approach. Rather than starting with the treaty terms and using the Vienna rules of interpretation from beginning to end, the Court applied general international law to arrive at the conclusion that the usa could not justify its destruction of the oil platforms by referring to Article XX(1)(d) of the treaty. The reasoning of the majority on this point was criticized, inter alia, by Judge Higgins. In a separate opinion she wrote: The court has, however, not interpreted Article xx, paragraph 1(d), by reference to the rules on treaty interpretation. It has rather invoked the concept of treaty interpretation to displace the applicable law. It has replaced the terms of Article xx, paragraph 1(d), with those of international law on the use of force and all sight of the text of Article xx, paragraph 1(d) is lost.4

2 Oil Platforms (Islamic Republic of Iran v. United States of America) (Merits) (2003), icj Reports 161. 3 Oil Platforms (Islamic Republic of Iran v. United States of America) (Preliminary Objection) (1966-II), icj Reports 820, at para. 53. 4 See note 3, supra, Separate Opinion at para. 49.

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While it is thus clear that the wording “applicable rules and principles of international law” deals with the application of international law, it is not clear how “international law” is to be defined. It would seem that a natural starting point is to seek guidance from Article 38(1) of the Statute of the icj and from the sources of law enumerated therein. Article 38(1) reads: 1. The Court, whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply: a. international conventions, whether general or particular, establishing rules expressly recognized by the contesting states; b. international custom, as evidence of a general practice accepted as law; c. the general principles of law recognized by civilized nations; d. subject to the provisions of Article 59, judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law. 2. This provision shall not prejudice the power of the Court to decide a case ex aequo et bono, if the parties agree thereto. The reference to international law must, however, be understood to reach further than Article 38(1) of the icj Statute. It is also clear that the reference is not limited to customary international law. The reference does, however, include several rules and principles of customary international law which are relevant in the context of investment treaty arbitrations. Examples include the law on treaties as codified in the Vienna Convention, rules on State responsibility as set forth in the ilc Articles on State Responsibility, and rules with respect to determining the nationality of claimants. Given the fact that Article 38(1)(c) refers to “the general principles of law recognised by civilised nations”, it is clear that the scope of application of “international law” in an investment protection treaty is wide. It is generally accepted5 that such principles include the principle of good faith, pacta sunt servanda, fraus omnia corrumpit, compétence de la compétence, the right to be heard, and the principle of res judicata, and several other principles. In practice, it is impossible to identify and refer to every international law rule which might be applicable in a given situation. As far as international

5 See e.g. Cheng, General Principles of Law as applied by International Courts and Tribunals (1953).

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investment law is concerned it is possible that the understanding of “international law” should be further expanded. The legal relationship created by an investment treaty arbitration is of a hybrid nature in that we are dealing with a tripartite arrangement involving not only the two States, parties to the investment protection treaty, but also the claimant who derives his rights from the treaty. The special character of investment treaty arbitration could, in certain circumstances, perhaps warrant that an arbitral tribunal could apply, or take into account, generally accepted principles of international commercial law, such as the unidroit Principles of International Commercial Contracts,6 as well as rules and principles relating to international arbitration, in general, e.g. the doctrine of separability of the arbitration clause.7 As far as “rules and principles” are concerned, it should be noted that there does not seem to exist any generally accepted definition of “rules” or of “principles” as those words are used in the present context. It is helpful to read these words together with “international law”, as discussed in the foregoing. Even so, however, it is not completely clear how to understand “rules” and “principles”. For example, do “rules and principles of international law” include non-­ binding international instruments? Stated in general terms, “rules and principles” could perhaps be understood as any pronouncement having a legal and normative character and content. Such a definition would undoubtedly make for a broad category. The potentially wide ranging reach is, however, limited by the preceding word “applicable”. Again it should be emphasized that the language used here “applicable (rules and principles of international law)” serves a different purpose than the similar language in Art. 31(3)(c) of the Vienna Convention. That provision deals with the interpretation of treaties, whereas the language referred to here is concerned with rules and principles to be used to decide, to resolve, the dispute in question. The determination of which rules and principles are applicable will ultimately depend on the facts and circumstances of the individual case, as well as the legal arguments presented by the parties. Parties to international disputes enjoy party autonomy with respect to the rules and principles to be applied,8 the only limitation being jus cogens…In the final analysis, this is determined by the arbitral tribunal hearing the dispute in question.

6 Wälde, Interpreting Investment Treaties, in Binder et al. (eds), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (2009), 775. 7 Schwebel, International Arbitration: Three Salient Problems (1987) 1–60. 8 See, in general, Hobér Extinctive Prescription and Applicable Law in Interstate Arbitration (2001).

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Since the reference to “international law” is very wide and general, thus including customary law as well as treaty law, it is clear that the reference includes the Vienna Convention. Depending on the facts and circumstances of the individual case, several rules and principles of customary international law would also be covered by the language used. When reference is made to “applicable”, this indicates that the rules and principles must be capable of serving as the legal basis for resolving, deciding, the dispute between the parties in question. It is thus not sufficient for the rules and principles to be “applicable” in a general sense, or “relevant” in a general sense. This means, as far as treaties are concerned, that other treaties in force between the disputing parties may be “applicable” in a given dispute. The exact effect of the application of any such other treaty will obviously depend on what that other treaty actually prescribes. While arbitral tribunals do not seem to hesitate to refer to provisions in other treaties than the one under dispute, for purposes of Interpretation, the scope for actual application of other treaties is much narrower. The application of other treaties raises the potential risk of the treaties imposing conflicting obligations. In such a situation, it would seem necessary first to interpret the relevant treaty provisions, i.e. determine what they mean, before it is possible to apply any of the provisions. Another potential conflict is that between the investment protection treaty in question and “rules and principles of international law”. Can the latter replace the text of the trety and thus be applied rather than the provisions of the treaty. Generally speaking, this is not possible, save if the treaty provision in question violates jus cogens. This follows from the generally accepted principle of party autonomy which the parties have exercised by signing the treaty in question. Indeed, arbitrators have a duty to give effect to the parties’ choice of rules to govern their relationship. As far as decisions and awards rendered by other arbitral tribunals are concerned, international law knows no doctrine of binding precedent. This does not mean, however, that tribunals are prevented from referring to, and from discussing previous awards. This is frequently done in the reasoning of arbitral tribunals, not because tribunals are applying the reasons and conclusions of previous awards, but because they find such awards persuasive. Reference to previous awards is also made for purposes of interpreting identical or similar treaty provisions. 1.2 Relation to Municipal Law It is a well-established rule of public international law that a State cannot rely on provisions of its own law as a justification for not fulfilling its international

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obligations.9 This does not mean however, that national law is irrelevant in the context of public international law, including international investment law. The starting point for an analysis of the relationship between public international law and municipal law is the generally accepted view that international courts and tribunals do not apply municipal law, but merely take ­account of municipal law as facts.10 There are, however, several situations where international arbitral tribunals interpret as well as apply municipal law. Although unusual, the parties to a dispute based on a treaty may agree to apply municipal law, in which case the tribunal is, as a matter of principle, under an obligation to apply the law chosen by the parties. In the context of investment treaty arbitration, it is often necessary for the tribunal to interpret municipal law to determine whether the respondent State has breached its obligations under the investment protection treaty. It may be necessary for a tribunal to interpret municipal legislation and regulations to determine if an expropriation—direct, or indirect—has occurred, or if the respondent State has violated the fair and equitable treatment standard, or to determine the nationality of claimants. Interpreting and understanding municipal law is usually necessary in order for a tribunal to be able to take municipal law into account as a fact. 1.3 Article 42 of the icsid Convention Article 42(1) of the icsid Convention reads: The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.11 The icsid Convention does not provide rules on the substantive protection of foreign investors and investments. The Convention provides a procedural 9

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Article 27 of the Vienna Convention reads: “A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty”, and Article 32 of the ilc Articles On Responsibility of States for Internationally Wrongful acts reads: “The responsible State may not rely on the provisions of its internal law as justification for failure to comply with its obligations under this Part”. For a general discussion of this issue, see e.g. Hobér, Extinctive Prescription and Applicable Law in Interstate Arbitration (2001) 377 et seq. For a commentary on Article 42 of the icsid Convention, see Schreuer, The icsid Convention, A Commentary. (2nd ed. 2009), at p. 545 et seq.

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framework for disputes between investors and host States. It is important to note that the Convention does not primarily focus on investment treaty arbitrations, but rather on disputes based on investment agreements, i.e. where the State itself is a party to the agreement. This fact explains the approach taken in Art. 42. The first sentence of Art. 42(1) confirms the universally accepted principle of party autonomy in contractual relationships. In investment treaty arbitration the situation is by definition different. The claims are based on investment protection treaties which are instruments of public international law and thus governed by it, unless the parties agree otherwise. Therefore, when treaty claims are brought, based on the icsid convention, this is usually regarded as an implicit choice of public international law to resolve the dispute. Using the terminology of Art. 42(1) the parties have thus chosen international law as the law to be applied. 2

Application of eu Law

2.1 Introduction Prior to the Lisbon Treaty, foreign investment fell within the competences of the member States of the eu. The Lisbon Treaty brought about a change of this, at least with respect to foreign direct investment. There is a large number of bits entered into between eu member States, so-called intra-EU bits. With respect to such bits, questions have arisen with respect to the role of eu law concerning foreign direct investments. Such issues have also arisen concerning the Energy Charter Treaty (the “ect”), a multilateral investment protection treaty in the energy sector to which most eu States have acceded, as well as the eu itself. The fact that the ect is a treaty to which both the eu itself and its member States are parties sets it apart from traditional bits entered into by member States. This has given rise to a number of potentially complex issues. The question of applicable law to ect arbitrations is one of them. At the outset, it is worth recalling that since the eu itself is a signatory to the ect, participation in it, and fulfilling obligations under it, cannot be incompatible with member States’ obligations. With respect to intra-eu bits, the eu Commission has argued that such bits automatically terminate when both parties become members of the eu.12

12

Eastern Sugar bv v. Czech Republic, Partial Award, dated 27 March 2007. See discussion at p.15 et seg., infra.

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The eu Commission has also taken action with respect to extra-EU bits—i.e. bits entered into between a member State and a non-member State—which in its view contained provisions violating eu law.13 The member States in question were required to remove provisions which were deemed to be incompatible with eu law. It is worthy of note, however, that the bits themselves are not invalid because of this inconsistency. Based on the arguments presented in several published investment treaty awards, there seems to be a tension between eu law and public international law in general, as traditionally applied to investment protection treaties. When analyzing and discussing this issue it is helpful to maintain the distinction made above between intra eu and extra eu bits, or rather investment protection treaties. The less complicated category is extra eu bits. 2.2 Extra-EU Investment Protection Treaties With respect to disputes between a member of the eu and a non-member, eu law is treated in the same manner as municipal law in relation to public international law, i.e. as a question of fact. Article 31(3)(c) of the Vienna Convention does not apply, because eu law does not constitute “relevant rules of international law applicable to the parties”, since one of the parties is not a member of the eu. The foregoing is subject to the general assumption that an investment protection treaty lacks provisions on the choice of law—which is usually the case—and other provisions which affect the determination of breaches of the treaty in question. In the ect there are at least two provisions which would seem to mean that eu law may be relevant with respect to alleged breaches of Part iii of the ect also in an extra-EU dispute, viz., Articles 24 and 25. Article 25 reads:

Economic Integration Agreements (1) The provisions of this Treaty shall not be so construed as to oblige a Contracting Party which is party to an Economic Integration Agreement (hereinafter referred to as “eia”) to extend, by means of most favoured nation treatment, to another Contracting Party which is not a party to that eia, any preferential treatment ­applicable

13

Cf. Case C-205/06 Commission of the European v. Austria (2009) 2 cmlr 50; Case C-249/06 Commission of the European Communities v. Sweden (2009) 2 cmlr 49; Case C-118/07 Commission of the European Communities v. Finland (2010) All er (ec) 558.

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between the parties to that eia as a result of their being parties thereto. (2) For the purposes of paragraph (1), “eia” means an agreement substantially liberalizing, inter alia, trade and investment, by providing for the absence or elimination of substantially all discrimination between or among parties thereto through the elimination of existing discriminatory measures and/or the prohibition of new or more discriminatory measures, either at the entry into force of that agreement or on the basis of a reasonable time frame. (3) This Article shall not affect the application of the gatt and Related Instruments according to Article 29. The importance of Article 25—in particular subparagraph (1)—is explained by the preceding Article 24, and the exception in subparagraph (4)(a) of that article which allows derogation from the mfn obligations in Article 10(3), assuming that the preferential treatment in question is granted nationals of other eu member States based on the fact that those States are members of the eu. Article 24(4) reads: (4) The provisions of this Treaty which accord most favoured nation treatment shall not oblige any Contracting Party to extend to the Investors of any other Contracting Party any preferential treatment: (a) resulting from its membership of a free-trade area or customs union, or (b) which is accorded by a bilateral or multilateral agreement concerning economic co-operation between states that were constituent parts of the former Union of Soviet Socialist Republics pending the establishment of their mutual economic relations of their mutual economic relations on a definitive basis. Whilst eu law may thus play a role also in extra-EU disputes, it should be recalled that what might be denied based on Articles 24 and 25 may still be ­required under Articles 10(3) and 10(7) of the ect based on the obligation of national treatment. Article 10(3) reads: For the purposes of this Article, “Treatment” means treatment accorded by a Contracting Party which is no less favourable than that which it accords to its own Investors or to Investors of any other Contracting Party or any third state, whichever is the most favourable.

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Article 10(7) reads: Each Contracting Party shall accord to Investments in its Area of Investors of other Contracting Parties, and their related activities including management, maintenance, use, enjoyment or disposal, treatment no less favourable than that which it accords to Investments of its own Investors or of the Investors of any other Contracting Party or any third state and their related activities including management, maintenance, use, enjoyment or disposal, whichever is the most favourable. 2.3 Intra-EU Investment Protection Treaties 2.3.1 General Considerations At the outset it should be noted that there seems to be very few bits entered into prior to the Lisbon Treaty which address the question of the application of eu law. Nor are there eu normative acts from that time which deal with the relationship between investment protection treaties and eu law. As far as the ect is concerned, there are no provisions addressing the application of eu law. There is nothing in the ect itself which indicates that the ect should not apply to intra-EU disputes. Clauses addressing the relationship between eu law and treaty provisions have been included in other treaties to which the eu and member States are parties. Provisions excluding the application of the ect are included in the ect with respect to other treaties than the eu treaties. For example, with respect to the 1920 Svalbard Treaty, the Energy Charter Conference adopted a decision providing that in the case of a conflict between the ect and the Svalbard Treaty, the latter would prevail. The decision reads: With respect to the Treaty as a whole In the event of a conflict between the treaty concerning Spitsbergen of 9 February 1920 (the Svalbard Treaty) and the Energy Charter Treaty, the treaty concerning Spitsbergen shall prevail to the extent of the conflict, without prejudice to the positions of the Contracting Parties in respect of the Svalbard Treaty. In the event of such conflict or a dispute as to whether there is such conflict or as to its extent, Article 16 and Part v of the Energy Charter Treaty shall not apply.14 14

Annex 2 to the Final Act of the European Charter Conference.

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A similar statement was made in a joint memorandum between the Russian Federation and the European Communities concerning Russian exports of nuclear materials.15 No such clause is included with respect to the application of eu law and the eu treaties as far as the ect is concerned. In this context, reference must also be made to Article 16 of the ect. The provision reads:

Relation to Other Agreements Where two or more Contracting Parties have entered into a prior international agreement, or enter into a subsequent international agreement, whose terms in either case concern the subject matter of Part iii or v of this Treaty, (1) nothing in Part iii or v of this Treaty shall be construed to derogate from any provisions of such terms of the other agreement or from any right to dispute resolution with respect thereto under that agreement; and (2) nothing in such terms of the other agreement shall be construed to derogate from any provision of Part iii or v of this Treaty or from any right to dispute resolution with respect thereto under this Treaty, where any such provision is more favourable to the Investor or Investmnt.

Article 16 is designed to avoid disputes as to whether one agreement has displaced another. Rather, the consequence of the provision is that each treaty continues to apply and that an investor can rely on the provisions of either. Given the fact that both treaties apply in parallel, an investor could indeed bring claims based on both agreements. For present purposes, it is important to note that Article 16 does not indicate any priority for eu treaties, or eu law, in relation to the ect. Several arbitral tribunals have had to address the application of eu law in relation to investment protection treaties. Generally speaking, the awards rendered so far essentially fall into two categories. In the first category we find disputes where the respondent State—often supported by the eu Commission, either by submitting an amicus curiae chief, or acting behind the scenes—­ disputes the jurisdiction of the tribunal and/or the admissibility of the claims. The underlying argument is that as between eu member States, the issues in question are exclusively for the eu to deal with. In the other category we find 15 Annex ii to document CONF 115 of 6 January 1995 (not published).

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disputes where the focus has been on the effect of eu law with respect to the merits of the dispute. 2.3.2 Jurisdiction and Admissibility Issues have arisen as to whether an arbitral tribunal sitting under an investment protection treaty has jurisdiction to try claims of an investor of one eu member State against another member State and whether such claims are admissible. In Eastern Sugar bv v. the Czech Republic16 the Respondent argued, referring to Article 59 of the Vienna Convention,17 that the eu accession of the Czech Republic brought about the termination of the bit between the Netherlands and the Czech and Slovak Federal Republics and that therefore the arbitral tribunal lacked jurisdiction and the claims were inadmissible. The Czech Republic also argued that it was the “subjective intention that Dutch investments be governed by eu law”.18 The arguments relied on by the Respondent were rejected by the tribunal which concluded that it did have jurisdiction and that the claims were admissible. With respect to termination of the bit, the tribunal noted that no notice of termination of the bit had been given by either party to the bit.19 It also noted that neither the Europe Agreement of 31 December 1994—as per which the Czech Republic became a candidate for membership of the European Union—nor the Accession Treaty, leading to the Czech Republic becoming a member as of 1 May 2004, provides that the bit is to be, or is, terminated.20 Also, the tribunal did not accept the Respondents arguments based on Article 59 of the Vienna Convention. The tribunal did not accept that the eu treaty covered the same subject matter as the bit; nor did it accept that the 16 17

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Partial Award, dated 27 March 2007. Article 59 reads: Termination or suspension of the operation of a treaty implied by conclusion of a later treaty 1. A treaty shall be considered as terminated if all the parties to it conclude a later treaty relating to the same subject-matter and (a) it appears from the later treaty or is otherwise established that the parties intended that the matter should be governed by that treaty; or (b) the provisions of the later treaty are so far incompatible with those of the earlier one that the two treaties are not capable of being applied at the same time. 2. The earlier treaty shall be considered as only suspended in operation if it appears from the later treaty or is otherwise established that such was the intention of the parties. Id., at para. 102. Id., at para. 153. Id., at para. 143.

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eu Treaty and the bit were incompatible.21 The tribunal also concluded that the Czech Republic had not been able to establish that it had been the intention of the parties to the bit, that the eu Treaty was to supersede the bit.22 In a subsequent dispute between Eureko and the Slovak Republic,23 the arbitral tribunal issued a separate award on jurisdiction on 26 October 2010. The dispute was heard by an arbitral tribunal sitting under the uncitral Arbitration Rules trying claims based on the 1991 bit between Netherlands and the Czech and Slovak Republics. The Slovak Republic became a member of the eu on 1 May 2004. During the arbitration, observations were made by the Netherlands Government and by the European Commission. In essence, the Respondent made four jurisdictional objections: (i) (ii) (iii) (iv)

Termination of the bit under Article 59 of the Vienna Convention; Inapplicability of the bit under Article 30 of the Vienna Convention; Inapplicability of the bit under eu law; Non-arbitrability of the dispute under German law.

The tribunal rejected all the objections and thus accepted jurisdiction. With respect to Article 59 of the Vienna Convention,24 the tribunal concluded that the Vienna Convention does not provide for automatic termination of treaties by operation of law.25 In arriving at this conclusion, the tribunal referred to Article 65 of the Vienna Convention which lays down the procedure to be followed with respect to the termination of treaties, noting that this procedure had not been followed. The tribunal also explained in detail why in its view the bit and eu law, including eu treaties, do not relate “to the same subject matter” as required by para. 1 of Article 59 of the Vienna Convention.26 As regards Article 30 of the Vienna Convention,27 the tribunal noted that his provision is concerned with situations of incompatibility of particular 21 22 23 24 25 26 27

Id., at paras 159–168. Id., at para. 167. Eureko B.V. v. The Slovak Republic, Award On Jurisdiction, Arbitrability and Suspension, dated 26 October 2010. See note (17), supra for the wording of Article 59. Eureko v. Slovak Republic, at para 235. Id., at paras. 239–267. Art. 30 of the Vienna Convention reads: Application of successive treaties relating to the same subject-matter 1. Subject to Article 103 of the Charter of the United Nations, the rights and obligations of States parties to successive treaties relating to the same subject-matter shall be determined in accordance with the following paragraphs.

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provisions of successive treaties, and that no such incompatibility was at hand.28 In any case, any such incompatibility would be a matter for the merits of the dispute, and not a question of jurisdiction.29 The third jurisdictional objection of the Slovak Republic was essentially that the tribunal lacked jurisdiction because, as a matter of eu law, eu law has direct effect and prevails over both national law and international treaties, and because only the European Court of Justice can interpret eu law. The tribunal did not accept this argument. It concluded that eu law may well have a bearing under the rights and obligations under the bit and that therefore eu law may have to be applied, or taken into account, by the tribunal, but that this was a question for the merits of the dispute and not an issue concerning jurisdiction.30 The tribunal also rejected the argument that the European Court of Justice had a monopoly to interpret eu law. The tribunal said: The ecj has no such monopoly. Courts and arbitration tribunals throughout the eu interpret and apply eu law daily. What the ecj has is a monopoly on the final and authoritative interpretation of eu law; but that is quite different.31 The fourth jurisdictional objection was based on the idea that the dispute was outside the jurisdiction of the tribunal by virtue of eu law. Since the tribunal







28 29 30 31

2. When a treaty specifies that it is subject to, or that it is not to be considered as incompatible with, an earlier or later treaty, the provisions of that other treaty prevail. 3. When all the parties to the earlier treaty are parties also to the later treaty but the earlier treaty is not terminated or suspended in operation under article 59, the earlier treaty applies only to the extent that its provisions are compatible with those of the latter treaty. 4. When the parties to the later treaty do not include all the parties to the earlier one: (a) as between States parties to both treaties the same rule applies as in paragraph 3; (b) as between a State party to both treaties and a State party to only one of the treaties, the treaty to which both States are parties governs their mutual rights and obligations. 5. Paragraph 4 is without prejudice to article 41, or to any question of the termination or suspension of the operation of a treaty under article 60 or to any question of responsibility which may arise for a State from the conclusion or application of a treaty, the provisions of which are incompatible with its obligations towards another State under another treaty. Eureko v. Slovak Republic, at paras. 268–270. Id., at para. 272. Id., at paras. 278–280. Id., at para. 282.

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had found that eu law did not deprive it of jurisdiction, it did not have to deal with this objection. Subsequent to the tribunal’s decision on jurisdiction, the Slovak Republic took the jurisdictional question to the Oberlandesgericht Frankfurt am Main (the tribunal had determined Frankfurt to be the seat of the arbitration), which in a decision rendered on 10 May 2012 essentially confirmed the analysis by the arbitral tribunal.32 The final award in the matter was rendered on 7 December 2012. The Slovak Republic again raised the jurisdictional objection that the tribunal lacked jurisdiction since some of the relevant provisions were inapplicable due to the supremacy of eu law. The tribunal rejected this jurisdictional objection by referring to its separate award which “is final and binding upon the Parties”.33 In another ect arbitration brought against Hungary—edf v. Hungary—the issue of the application of eu law seems to have been raised again.34 Hungary sought to have the award set aside, inter alia, on the ground that it violated Swiss public policy. As far as one can tell from the case report, Hungary argued that the award violated the generally accepted principle of pacta sunt servanda in that it would force Hungary to violate obligations it had under other treaties, to wit the Treaty on the Functioning of the European Union. Hungary also argued that the tribunal had failed to apply certain rules and regulations of the European Union relating to State aid and that by doing so, the tribunal had violated Hungary’s procedural rights.35 The Swiss Supreme Court seems to have treated Hungary’s arguments essentially as relating to the right to be heard. It rejected the challenge.36 In Charanne B.V and Construction Investments S.A.R.L. v. Kingdom of Spain, decided on 21 January 2016, an ect tribunal for the first time ruled on solar energy legislation which some European countries, including Spain, have 32

33 34

35 36

This decision was appealed to the Bundesgerichtshof. In a decision dated 19 September 2013, it decided not to rule on the matter since by that time, the arbitral tribunal had already rendered its final award. ACHMEA B.V. (formerly known as Eureko B.V.) v. The Slovak Republic, Final Award, dated 7 December 2012, at para. 154. The award was rendered on 3 December 2014 by a tribunal sitting under the uncitral Arbitration Rules. The award has not been published, nor has it otherwise reached the public domain. The seat of the arbitration was in Switzerland. The award was challenged before the Swiss Supreme Court which rejected the challenge in a decision dated 6 October 2015. The facts referred to here are based on the case report from the Swiss Supreme Court, cited here as 4A-34/2015. edf v. Hungary, at paras. 5.2, 5.31 and 5.3.2.1. Id., at para.5.3.2.2.

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­adopted.37 Spain raised eu law as a jurisdictional objection. It argued that the dispute was an “intra-eu matter” subject to eu law and therefore beyond the reach of the arbitral tribunal. In support of its arguments Spain relied on an amicus curiae brief submitted by the European Commission. The Respondent argued, inter alia, that there was an implicit disconnection clause for intra-EU relations, the consequence of which was that the ect was not applicable as between eu member States. In support of this argument reference was made to Article 267 tfeu and to the Mox Plant decision of the European Court of Justice the consequence of which was said to be that no dispute between eu member States can be resolved by an ad hoc arbitral tribunal. The arbitral tribunal was not convinced by these arguments. It concluded that no implicit disconnection clause for intra-EU disputes could be read into the ect.38 The Respondent also argued that Article 344 tfeu does not allow eu member States to resolve disputes relating to eu law through international arbitration. Article 344 tfeu reads: Member States undertake not to submit a dispute concerning the i­ nterpretation or application of the Treaties to any method of settlement other than those provided for therein. The wording of the provision indicates clear that it applies to disputes between member States and not between a private party and a member State. The Respondent argued, however, that had it been the intention of the member States to limit the provision to state-to-state disputes, this would have been expressed in the provision. Since this has not been done, a member State cannot be a party to a dispute involving State responsibility. If such a dispute arises, it would inherently effect the interpretation of European legislation and should therefore remain within the jurisdiction of the European institutions.39 The arbitral tribunal was not convinced by the arguments presented by the Respondent. It explained, inter alia, that if the Respondent´s interpretation of Article 344 tfeu were true, no state tribunal could ever hear a case involving the interpretation of the European treaties whenever the responsibility of a member State would be at stake. By contrast, the tribunal continued, in practice member States are respondents in many such proceedings in national

37 38 39

scc Arbitration No. 062/2012. Charanne B.V; Construction Investments S.A.R.L. v. The Kingdom of Spain, Final award, 21 January 2016, at paras. 433–439. Ibid, at paras. 441–442.

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courts. Also, member States are free to submit disputes involving eu law issues to arbitration.40 The arbitral tribunal thus concluded that it had jurisdiction to try the claims raised by the claimant. 2.3.3 Application of eu Law to the Merits of the Dispute The first ect arbitration where the question of the application of eu law came up was aes v. Hungary rendered on 23 September 2010.41 As far as the question of applicable law is concerned, the parties agreed during the hearing that ect was the applicable law, by virtue of Article 26:6 of the ect, and that eu law was relevant as a fact.42 Against this background the tribunal said that the eu competition law requirements “will be considered by this Tribunal as a fact, always taking into account that a State may not invoke its domestic law as an excuse for alleged breaches of its international obligations”.43 The parties took different positions with respect to the applicability of ­Article 16 of the ect. Claimant argued that it was applicable, whereas Hungary took the opposite position. The tribunal came to the conclusion that Article 16 would be applicable only in case of a conflict between eu law and the ect. In the view of the tribunal there was no such conflict involved in the dispute. Rather, the dispute concerned the issue whether Hungary’s conduct constituted a breach of its obligations under the ect. The tribunal continued: The question of whether Hungary was, may have been, or may have felt obliged under ec law to act as it did, is only an element to be considered by this Tribunal when determining the ‘rationality’, ‘reasonableness’, ‘arbitrariness’ and ‘transparency’ of the reintroduction of administrative pricing and the Price Decrees.44 It is noteworthy that the European Commission filed a written submission in this arbitration, based on a procedural decision by the tribunal. Later in 2012, the tribunal in Electrabel S.A. v. Hungary rendered its decision on jurisdiction and applicable law in another ect arbitration.45 The question 40 41 42 43 44 45

Ibid, at para 443. aes Summit Generation Limited and AES-Tisza Erömü Kft. v. Republic of Hungary, icsid Case No. ARB/07/22. aes v. Hungary, at para. 7.5.2. Id., at para. 7.6.6. aes v. Hungary, at para. 7.6.9. Electrabel S.A. v. The Republic of Hungary, Decision On Jurisdiction, Applicable Law and Liability, 30 November 2012 (icsid Case No. ARB/07/19).

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of the applicability of eu law featured prominently in the decision. In the Electrabel case, just as in the aes case, the dispute concerned long term power purchase agreements, entered into with the sole state-owned power purchaser at the time, and terminated subsequent to Hungary becoming a member of the eu in 2004. The purchasing obligations under the agreements were viewed by the eu Commission as constituting violations of eu law on State aid. The Claimant argued that the termination violated Article 10(1) and Article 13 of the ect. The question of applicable law came up against the background of Respondents argument that eu law, in particular eu competition law, is part of the international public order and that since the termination of the agreements was in conformity with such public order, it could not be treated as a breach of the ect.46 The Claimant, on the other hand, characterized eu law as municipal law of the Respondent, which was excluded by virtue of Article 26(6) ect since this provision prescribes the application of international law.47 The tribunal found that eu law was both international law and national law of any given eu member State; and that in its view: ……there is no fundamental difference in nature between international law and eu law that could justify treating eu law, unlike other international rules, differently, in an international arbitration requiring the application of relevant rules and principles of international law.48 The approach indicated by the tribunal lead to the further question of the interplay between eu law and the ect, and of possible conflicts between the two sets of legal rules. Both parties, as well as the eu Commission in its amicus brief, took the view that it was not necessary to resolve any such conflict as long as the two sets of rules could be interpreted and applied in harmony.49 As a consequence, it was said, the tribunal: …… in these circumstances need not decide difficult questions about whether the ect trumps the ect Treaty, or the ec Treaty trumps the ect, in disputes between eu investors and eu Member States.50

46 47 48 49 50

Electrabel v. Hungary, at para. 4.102. Id., at para. 4.45. Id., at para. 4.126. Id., at paras. 4.43; 4.59–61; 4.107. Id., at para. 4.75.

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In its analysis, the tribunal came to the conclusion that there was no contradiction between eu law and the ect51 and that there was no need to find a harmonious interpretation of the two sets of rules.52 This conclusion notwithstanding, the tribunal went on to discuss the hypothetical situation that there was indeed a contradiction. In a much debated obiter dictum the tribunal stated: In summary, from whatever perspective the relationship between the ect and eu law is examined, the Tribunal concludes that eu law would prevail over the ect in case of any material inconsistency.53 This obiter dictum is the first, and so far the only, pronouncement by an arbitral tribunal with respect to any purported hierarchy between eu law and the ect. The application of eu law came up also in Micula v. Romania rendered on 11 December 2013.54 The claimants invested in Romania based on government incentives to invest in disfavored regions in the country. In 2005 the incentives were revoked in connection with the Accession Treaty being signed. It entered into force on 1 January 2007. The relevant bit—between Sweden and Romania—had entered into force on 1 April 2003. Romania argued that it was necessary to repeal the incentives to comply with eu law and to accede to the eu. It also argued that the Europe Agreement and the Accession Treaty constituted rules of international law that the tribunal had to take into account when interpreting the bit. The position of Romania was supported by the European Commission in an amicus curiae brief submitted to the tribunal. The European Commission took the view that the tribunal should take into account the State aid rules of the eu when interpreting the bit. The Commission also argued that Article 31(1)(c) of the Vienna Convention55 directed the tribunal to apply eu’s State aid law rather than provisions of the bit which would prove incompatible with the ec Treaty. The tribunal started out by noting that there was no real conflict of treaties since the bit entered into force in 2003 and the Accession Treaty in 2007. As a consequence eu law was not directly applicable to Romania at the time when

51 52 53 54 55

Id., at para. 4.134. Id., at para. 4.166. Id., at para. 4.191. Ioan Micula, Viorel Micula, S.C. European Food S.A., S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. the Republic of Romania, icsid Case No. ARB/05/20, dated 11 December 2013. See page 3, supra.

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the incentives were repealed.56 The relevant question therefore was whether eu law played a role in the interpretation of the bit. In that context it noted that the bit did not refer to the eu nor to eu accession. Also the Accession Treaty did not refer to the bit. Against this background, the tribunal concluded that by entering into the Accession Treaty, and by becoming a member of the eu, neither Romania nor Sweden intended to amend or notify the bit.57 The tribunal then refereed to the rules of interpretation in the Vienna Convention and quoted the preamble of the bit saying that it must interpret the bit in light of the overarching goals identified in the preamble.58 Continuing its analysis, the tribunal explained that it would “interpret each of the various applicable treaties having due regard to the other applicable treaties, assuming that the parties entered into each of those treaties in full awareness of their legal obligations under all of them”.59 Noting that the parties seemed to agree that eu law formed part of “factual matrix” of the case, the tribunal concluded its analysis of this issue in the following way: The overall context of eu accession in general and the pertinent provisions of eu law in particular may be relevant to the determination of whether, inter alia, Romania’s actions were reasonable in light of all the circumstances, or whether Claimants’ expectations were legitimate. A further issue relating to the application of eu law was raised by the Respondent and the eu Commission in that they argued that any payment of compensation arising out of an award would constitute illegal State aid under eu law and render the award unenforceable with the eu. To this argument, the tribunal responded: The Tribunal finds that it is not desirable to embark on predictions as to the possible conduct of various persons and authorities after the Award has been rendered, especially but not exclusively when it comes to enforcement matters. It is thus inappropriate for the Tribunal to base its decisions in this case on matters of eu law that may come to apply after

56 57 58 59

Micula et al. v. Romania, at para. 319. Id., at para. 321. Id., at paras. 322–323. Id., at para. 326.

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the Award has been rendered. It will thus not address the Parties’ and the Commission’s arguments on the enforceability of the Award.60 The award in Micula v. Romania was subsequently challenged by Romania. One of the main arguments relied on by Romania in the annulment proceedings was that the tribunal had failed to apply eu law. The claims regarding the annulment of the award were rejected by the Annulment Committee in a decision dated 26 February 2016.61 The Committee noted, inter alia, that the tribunal had identified the Europe Agreement, the Accession Treaty and the ec Treaty as sources of law that would apply, and that the tribunal found that the Europe Agreement was applicable.62 The Committee concluded that the tribunal did apply the law that it had identified as applicable, i.e. the Europe Agreement. Another annulment ground relied on by Romania was the tribunals failure—in the view of Romania—to decide the issue of unenforceability of an award in favor of the claimants. The Committee found that the tribunal had dealt with the issue posed by Romania by deciding that this was not an issue before the tribunal and by concluding that it was not its duty to address the enforceability, or the lack thereof, of the award once it had been rendered.63 3

Concluding Remarks

The application of eu law has become an issue primarily with respect to ­intra—eu bits and with respect to the ect. At the time of this writing no arbitral tribunal has declined jurisdiction, nor found claims inadmissible, based on eu law. In one case—Electrabel v Hungary—the arbitral tribunal suggested obiter dicta that eu law trumps the ect. In other cases the arbitral tribunals have analysed and discussed eu law, and taken it into account, without ruling on any hierarchy between eu law and investment protection treaties. It is still early days, however. A number of disputes involving eu member States are pending, particularly under the ect. The final analysis of the relationship between eu law and investment protection treaties must therefore await the outcome of a significant number of the pending arbitrations.

60 61 62 63

Id., at para. 340. Ioan Micula, Viorel Micula and others v. Romania, icsid Case No. ARB/05/20. Ibid, at paras. 182–183. Ibid, at para 230.

part 4 Corporate Issues

∵

chapter 13

Material Adverse Change Clauses: Some Practical Thoughts Wolfgang Peter*

Introductory Remarks

This article intends to provide some thoughts for practitioners in arbitration who come across mac provisions. In 2014, “the value of worldwide M&A totaled US$3.5 trillion during full year 2014, a 47% increase from comparable 2013 levels and the strongest annual period for worldwide deal making since 2007”.1 Consequently, there is a very large number of M&A agreements and many M&A agreements include a mac provision. Thus, it is highly possible that one will face such a clause during one’s legal career. Section i provides an introduction to material adverse change provisions. Section ii briefly addresses some main risks associated with mac clauses. Section iii will then look at the “Carve-out” concept. The following Section iv will analyze whether a mac clause is an effective protection for a buyer, and will introduce the “four parts test”, which will also be further discussed in Section v on case law. Section vi goes on with pointing out the practical reasons for establishing a mac clause. Section vii proposes some thoughts for drafting mac clauses. Finally, Section VIII contains a general conclusion. i

Introduction to Material Adverse Change Clauses

A “Material Adverse Change” (“mac”) or “Material Adverse Effect” (“mae”) is “an event or occurrence that significantly and negatively impacts a company, a business or a relevant set of assets”. mac risks are addressed in M&A agreements by specific mac provisions, frequently used in merger and acquisition (“M&A”) and financing contracts. In general, such a clause deals with the risk allocation between the buyer and the seller of the contract. Usually, this provision gives the buyer in an M&A transaction the right to withdraw from a signed deal if a contractually defined mac occurred in the period between signing (i.e., the execution) and closing of the acquisition agreement. There can indeed be * Dr. Wolfgang Peter is a founding Partner of Peter & Partners International sa. 1 Thomson Reuters, Mergers & Acquisition Review—Financial Advisors, Full Year 2014. © koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004334557_015

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important changes in the value of a target between the signing of the agreement and the closing of the transaction. While in some jurisdictions risk passes from the seller to the buyer at signing of the agreement, it will be contractually dealt with in other jurisdictions. Thus the purpose of a mac clause is to shift risks from the buyer to the seller. A mac provision intends to protect the buyer by allocating to the seller the defined interim risk of adverse changes affecting the target. As it has been put “… an underlying purpose of mac/mae terms is to ensure that the financial terms of the deal do not materially change from the time of signing the agreement to the time of closing.”2 ii

What are the Risks?

mac provisions define the nature of any adverse change amounting to a mac. The risks addressed by a mac provision include all market and systemic risks affecting or likely to affect a target’s business and assets. These mac provisions contain fairly standard language, which seeks to excuse a buyer from his obligations to close the deal. For instance, macs affecting the target could be: • • • •

materially adverse to the financial condition; materially adverse to the business, operation or prospects; materially adverse to the assets and/or properties; and materially impair the ability to consummate the transaction.

However, the stronger the buyer will press for protection under MAC clauses, the more the seller will seek to resist and seek carve-outs from these risks. iii Carve-outs mac provisions are subject to lengthy negotiations. Obviously, changes in risk allocation will be intensely negotiated and it is not surprising that a number of exceptions will be included in a mac provision. These exceptions are called “carve-outs”, and they highlight the events that will not qualify as a material adverse change. In other words, if carved-out events happen, they will be disregarded when assessing whether a mac occurred. The extent of these carve-outs depends heavily on the parties’ negotiation power. They operate as a risk allocation and shift back certain events from the seller to the buyer. 2 Paxton Law Group Material Adverse Clauses in Public Company Merger Agreements, March 4, 2004, p. 2.

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Examples of carve-outs:3 • • • • •

changes in economic or market conditions; changes in industry conditions; changes in law, legislation, regulations, including gaap; failure of targets to meet published or internal financial projections; and decline in target’s stock price.

It is worth noting that the majority of carve-outs in agreements pertain to events external to either of the contracting parties.4 iv

Is There Effective Buyer Protection?

Is a mac clause an effective provision, a “mac The Knife”, or an ineffective boilerplate clause? So far, mac provisions were considered to be solely boilerplate provisions.5 If one looks at case law in general and particularly at the Delaware Chancery Court cases,6 there is apparently very little effective protection for the buyer under a mac provision. Indeed, the courts have taken an extremely seller-friendly approach. In this respect, the aspects of (i) the burden of proof, and (ii) the high threshold are important to look at: i Burden of Proof In fact, it falls to the party asserting the existence of a mac (even under a declaratory judgment action where the roles are reversed) to prove the occurrence of a mac.7 In Capital Justice ll v. Wachovia Bank n.a.,8 the lender Wachovia Bank had asserted a mac under a clause providing that “lender may, at its option, terminate its agreement to make the loan … in the event of any material adverse change in the financial, banking or capital market conditions that could impair the sale of the Loan by Lender as contemplated in the Term Sheet.” The borrower Capital Justice had sought declaratory judgment that despite deterioration of financial market conditions in 2007, the lender had to fulfill its obligations under the loan agreement. In this situation, the burden of proof could have been 3 For an extensive listing of typical carve-outs see “Material Adverse Effect Clauses in Public Company Merger Agreements”, Paxton Law Group llp, March 4, 2014, p. 3. 4 Paxton Law Group, op. cit., p. 3. 5 Adam B. Chertock, Rethinking the u.s. Approach to Material Adverse Change Clauses in Merger Agreements, 19 U. Miami Int’l & Comp. L. Rev. 99, 120 (2011). 6 See Section v. Court cases. 7 See Adam B. Chertok, op. cit. p. 120. 8 See Capital Justice llc v. Wachovia Bank, n.a., 706 F. Supp. 2d 23 (d.d.c. 2009).

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either placed on the party asserting the mac or on the plaintiff in the declaratory judgment action. The Court decided to place the burden of proof on Respondent Wachovia Bank, the party asserting the existence of a mac. Further, the Court made clear that because mac clauses are sui generis, the burden of proof is not determined by the form in which the mac clause is drafted.9 ii Extremely High Threshold The Court in ibp v. Tyson applied a “four parts test”10 in order to confirm the occurrence of a mac. The event must: (1) “substantially threaten”; (2) “the overall potential earnings” of the acquired company; (3) “in a durationally-significant manner” (measured in years, not in months); and (4) be proven to have been a change, not an event known when the acquisition agreement was signed. Both the burden of proof approach and the four parts test taken by the courts lead to the conclusion that mac clauses are not the effective protection a buyer might expect when negotiating a mac provision. This will be illustrated by the following Section v on court cases. v

Court Cases

Although the use of mac clauses is common in mergers & acquisitions, contracts and loan agreements, there is little case law concerning the interpretation of mac clauses. In the following, a few most significant decisions will be regarded in more detail. a ibp, Inc. v. Tyson Foods, Inc.11 This case is widely considered to be the leading us authority on interpretation of mac clauses. ibp v. Tyson Foods involved an agreed merger between beef and pork distributors in the United States. After the agreement was signed, both companies’ performance suffered as a result of a severe winter that adversely affected 9 10

11

Adam B. Chertock, op. cit. p. 121. See Daniel Gottschalk, Comment, Weaseling Out of the Deal: Why Buyers Should Be Able to Invoke Material Adverse Change Clauses in the Wake of a Credit Crunch, 47 Hous. L. REV., 1051, 1062 (2010), referring to ibp, Inc. v. Tyson Foods, Inc., 789 A.2d 14, 68 (Del. Ch. 2001), at 65–67. ibp, Inc. V. Tyson Foods, Inc., 789 A.2d 14.

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livestock supplies. Tyson attempted to walk away from the transaction and argued, inter alia, that it was entitled to terminate the contract because ibp had suffered a mac due to “the decline in ibp’s performance in the last quarter of 2000 and the first quarter of 2001”. According to the contract, Tyson had an option to terminate the agreement if: “the representations and warranties of the company … that are qualified by materiality or Material Adverse Effect shall not be true at and as of the scheduled expiration of the Offer as if made and as of such time ….”. The representation at issue provided that: “there has not been : (a) any event, occurrence or development of a state of circumstances or facts which has had or reasonably could be expected to have a Material Adverse Effect” … “on the condition ( financial or otherwise), business, assets, liabilities or results of operations of [ibp] and [its] Subsidiaries taken as a whole”. In interpreting the contract, the Delaware Chancery Court stated, that “to a short-term speculator, the failure of a company to meet analysts’ projected earnings for a quarter could be highly material. Such a failure is less important to an acquirer who seeks to purchase the company as part of a long-term strategy”. The court also pointed out “… that provision is best read as a backstop protecting the acquirer from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally significant manner. It is odd to think that a strategic buyer would view a short-term blip in earnings as material, so long as the target’s earnings-generating potential is not materially affected by that blip or the blip’s cause”, and that “A short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror.” Here the principle was born to which several future decisions involving mac clauses referred to. The Court rejected Tyson’s mac claim on the basis that 4½ months of poor performance was not enough and found that: “The analyst views support the conclusion that ibp remains what the baseline suggests it was—a consistently but erratically profitable company struggling to implement a strategy that will reduce the cyclicality of its earnings.” It is particularly interesting that the Court first made a determination of the test to be applied, taking into consideration two crucial elements, common to all these cases, i.e. that a mac provision is an “exception” to the buyer’s obligation to close and that merger contracts are heavily negotiated and cover a large number of specific risks. Only after having set the standard, the Court qualified it as “seller-friendly”: “In large measure, the resolution of the parties’ arguments turns on a difficult policy question. In what direction does the burden of this sort of uncertainty fall: on an acquiror or on the seller? What little New York authority exists is not particularly helpful, and cuts in both directions”.

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b Hexion Speciality Chemicals, Inc. v. Huntsman Corp.12 The dispute between Hexion and Huntsman arose out of a merger agreement, in which Hexion agreed to acquire Huntsman for usd 28 per share for 100% of stock of Huntsman for a total value of usd 10.6 billion. The agreement included a “compact” definition of mac including a number of carve-outs. Hexion claimed that the deal could not be closed because of the possible future insolvency of the combined company and therefore the target had suffered a mac. The court found that a mac had not occurred and pointed out that “A buyer of a corporation faces a heavy burden when it attempts to invoke a material adverse effect clause of a merger agreement in order to avoid its obligation to close.” Additionally it noted that, “Delaware courts have never found a material adverse effect to have occurred in the context of a merger agreement … is not a coincidence.” The relevant contractual provision contained numerous carve-outs. How­ ever, the Court expressly stated that it did not need to consider these carveouts, unless it determined that there was a mae. This case confirms and f­ urther develops ibp v. Tyson Foods. “The ubiquitous material adverse effect clause should be seen as providing a backstop protecting the acquirer from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-­significant manner. A short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquirer.” Again, the test was applied and the Court found that a mae was not reasonably expected. Conclusively, the principles for an occurrence of a mac have been set out in ibp v. Tyson Foods and confirmed in Hexion v. Huntsman. As a consequence, in order to meet the requirement of materiality, an event must have reasonably been expected after the company’s long-term earnings power over a commercially reasonable period, which should be measured in years rather than months. The event must have been reasonably expected to substantially threaten the overall earnings potential of the target in a durationally-­ significant manner. In conclusion, there is a breach of representation or warranty requiring the qualification of a mac only if the considered event would reasonably have been expected to have a Material Adverse Effect at Closing. The anticipated adverse effect must be measured in financial terms and with regard to the Company and its subsidiaries taken as a whole. In order to be considered material, the anticipated adverse effect must be serious enough to entitle the Party availing itself of the breach of representation or warranty to walk away from the deal. This must be assessed taking into account the circumstances in which the deal 12

Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008).

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was concluded. In order to meet the requirement of materiality, an event must have reasonably been expected to be consequential to the company’s longterm earnings power over a commercially reasonable period, which should be measured in years rather than months. The event must have been reasonably expected to substantially threaten the overall earnings potential of the target in a durationally-significant manner. C Frontier Oil Corp. v. Holly Corp.13 In that case, the Court found that a mere possibility of a negative outcome in a pending lawsuit did not constitute a mac. Holly Corp. claimed that in light of pending mass tort litigation Frontier had breached its representation that there was not and was not expected to be a material adverse effect. The contractual representation stated that there were no actions pending or threatened against the target company and/or its subsidiaries. However, a wholly owned subsidiary of the target company became respondent in lawsuits initiated by environmental activist Erin Brockovich for alleged severe pollution. The case even made it to Hollywood with Julia Roberts in the role of Erin Brockovich. In rejecting Holly Corp.’s claim, the Court adopted the test developed in ibp v Tyson Foods and further observed that the test for “would reasonably be expected to have” is an objective one. The Court also observed that Holly had not offered proof of the expected effect of the litigation and stressed that the burden of demonstrating a mac is on the party alleging a breach of representation or warranty. D Grupo Hotelero Urvasco sa v Carey Value Added sl and Another In light of the decision in ibp, we will go on to look at a judgment rendered more recently by the English High Court14 were it examined how to interpret a mac clause while dealing with a case that involved a loan agreement between the borrower (Urvasco) and the lender (Carey) regarding the financing of a hotel and apartment development in London. The borrower claimed damages against the lender for failing to advance funding under the Loan Agreement. In fact, the lender suspended funding based on his concerns as to whether there had been a mac but never exercised his rights under the mac. The court pointed out that “the few trial court opinions that exist have failed to establish a consistent interpretation” and referred also to the Delaware Chancery Court which “views mac clauses as sui generis, and has never found a mac to have occurred”. 13 14

Frontier Oil Corp. v. Holly Corp., 2005 wl 1039027 (Del. Ch. 2005). Grupo Hotelero Urvasco sa v Carey Value Added sl and another [2013] ewhc 1039 (Comm) (26 April 2013). See also “mac Clauses in the uk and u.s.: Much Ado about Nothing?” Debevoise & Plimpton, Fall 2013, Vol. 13, Number 4, pp 3–6.

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The English High Court, in this case, specifically dealt with the meaning of the term (i) “financial condition”, the meaning of the term (ii) “material”, and (iii) the “pre-existing circumstances”. First, the court held that “the assessment of the financial condition of the borrower should normally begin with its financial information at the relevant times, and a lender seeking to demonstrate a mac should show an adverse change over the period in question by reference to that information.” But it “is not necessarily limited to the financial information if there is other compelling evidence.” Second, the court stressed that the mac “is material if it significantly affects the borrower’s ability to repay the loan in question.” Third, it stipulated that “a lender cannot trigger such a clause on the basis of circumstances of which it was aware at the time of the agreement.” The Court therefore agreed with the Delaware Tyson Foods case, where it was stated that the mac clause in the specific case was “best read as a backstop protecting the acquiror from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally significant manner”. Finally, “it is up to the lender to prove the breach”. In this case the court rejected the view that there had been an occurrence of a mac in connection with the financial condition of the borrower. vi

Practical Reasons for Establishing a mac

mac provisions should provide a time lag protection for unknown or unpredictable events causing material losses of a substantive nature or against potential loss of growth or of strategic opportunities. These practical reasons for seeking inclusion of MAC clauses into agreements will continue to motivate buyers to negotiate such clause. And despite the most restrictive case law, frequently denying that the defined MAC occurred, in other words that harmful events were not qualified as a MAC by the courts, there are exceptions. For instance, in Osram Sylvania v. Townsend Ventures, the Delaware Chancery Court dealt with claims for breaches of the share purchase agreement for financial manipulation and concealment and concluded that it could be expected that the events produce a “Material Adverse Change” or to have a “Material Adverse Effect”.15 It has been shown however that mac provisions fall short of the effective protection that buyers expect, i.e. that a mac clause will eventually give the buyer the right to withdraw from the deal. But even if it is unclear 15

Osram Sylvania Inc v. Townsend Ventures llc et al., C.A. No 8123-VCP, November 19, 2013, p. 16/17; see also “Revisiting mae/mac Clauses in M&A after Cooper Tire, Hunstman, and Osram”, Lisa R. Stark in Business Law Today, February 2014, pp. 4–6.

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whether a court or arbitral tribunal will see the event as an occurrence of a mac, there is still some likelihood that it will indeed be considered as one. In short, the mac provision constitutes a threat to the seller, as the seller can never be sure how the court will decide his particular case. Simply put, the buyer will threaten the seller to withdraw from the deal. This puts the seller in a very delicate position as usually these deals are publicly known. The fact that the buyer is asserting, whether rightly or wrongly an event constituting a mac, will harm the target company which may be considered as “damaged goods”. Often this leads to a significant reduction of the price in order for the deal to be closed. Thus, asserting a mac clause opens up the possibility of renegotiation between the parties providing the purchaser with a leverage to improve the bargain. Therefore and despite of the very restrictive case law, there is still a very good reason to provide for mac clauses as an instrument for renegotiation using the leverage of a threatened withdrawal.16 vii

Some Drafting Issues from Buyer’s and Seller’s Perspective

How can the parties draft an effective mac provision? It is a question of proper negotiation and drafting skills. Often a standard mac provision is used, such as: “Material Adverse Effect means (a) a material adverse effect on (i) the value, (ii) business, assets or properties, or (iii) results of operations or condition ( financial or otherwise) of the Company and its Subsidiaries, taken as a whole and as currently operated (in each case, after taking into account any insurance, indemnities, contributions and other rights of recovery from third parties payable in respect thereof ), ...” However, such standard language is not suitable for all situations or cases. Obviously, a mac should be tailor-made, as one size does not fit all. Moreover, there are pitfalls to be avoided. And decisions to be made, such as whether using a stand-alone provision or using a mac as part of representations and warranties, or the mac clause being used as a qualifier to specific representations. The contractual mac definition must be put in the context of the agreement as a whole.17 In order to draft an effective mac clause from the buyer’s point of view one might consider the following points:

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See Adam B. Chertok, op. cit. p. 125. See Lord Walker of Gestinghorpe in Chartbrook Limited v Persimmon Homes Limited [2009] ukhl 38, pages 688–689, and 703.

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1.

Forward looking language • Taking a close look at the type of the business and its environment. Assessment of the prospect of the business: Is it cyclical or volatile? • Consideration of all possible triggers that might have an impact on value and performance. 2. Careful definition of carve-outs: Qualifying carve-outs by “disproportionally impact target”. In this respect, considering: • Would it be expected that a market event impacts one’s business in a different way? • Are other industry players identical to one’s business? • To be as specific as possible about one’s industry. 3. What is “material” in Material Adverse Change? • Is there a common sense standard of materiality? • Considering that “materiality” is a very elusive factor which will trigger subjective views and most likely lead to the “four part test” (see here above Section iv). 4. Quantifying mac provisions. Should the impact of a mac be contractually quantified? In other words, should the buyer incorporate an objective measure of a particular risk or metric?18 If that approach is taken, the valuation method (for instance ebitda decrease to assess whether a mac occurred) has to be chosen carefully in order to avoid disputes over the method chosen and its application. This provides the advantage of more effective protection for the buyer in terms of threshold and quantum. However, there are also downsides, such as the disadvantage for the Buyer that non quantifiable changes may lose their force and the loss of renegotiation leverage if the quantum definition is inflexible. From the Seller’s negotiation point of view, a mac clause is undesirable but if it is nevertheless imposed in the negotiation process, its likely occurrence and impact should be minimal. In order to avoid a mac occurrence, the definition of a mac should be as narrow as possible. In particular, a seller would seek: • Maximizing carve-outs that exclude specific events such as general economic events and industry developments. It should be noted though that buyers frequently resist by seeking carve outs from carve outs.19 Thus, the process is impacted by the respective bargaining powers.

18 19

See A. Herman, B. Piereck « Revisiting the mac Clause in Transaction Agreements : what can counsel learn from the credit crisis ? » Business Law Today, August 2010, p. 5. Id. p. 6.

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• Limiting macs to financial results and avoiding other developments such as changes to customer or supplier developments. • Resisting forward looking elements such as “change of prospects” to result in a mac. • Insisting on the notion that the effect of a mac must threaten the overall potential earnings of the target in a durational significant manner. • Shifting, as a matter of consequence all short term events such as decline in business, financial conditions, results of operations to separate representation and warranties provisions. • Extending the mac effect to all sold entities by using language such as “taken as a whole”, which raises the quantitative threshold for considering an event as effective occurrence of a mac. • Defining narrowly “material” by using a threshold of a defined amount or an ebitda percentage (but accepting the down-side of the introduction of such objective criteria, i.e. loss of negotiation or litigation potential over the mac occurrence). • Excluding knowledge of facts that may lead to mac (key role of due diligence). • Allocating clearly the onus of proving a mac on the buyer. • Limiting the impact of a mac by seeking a purchase price reduction instead of buyer’s withdrawal from the transaction. viii Conclusion As the analysis has shown, buyers have rarely been successful in the judicial determination of the occurrence of a mac. Since the high threshold approach by courts and arbitral tribunals is not likely to change, the key is drafting and bargaining power. The best approach would seem to move away from the subjective mac clause and to negotiate an objective measure of the material adverse change. This would in turn weaken non quantifiable changes and cause to a large extent the loss of the renegotiation leverage provided by a subjective mac. There are choices to be made. Finally, disputes over the occurrence of a mac should be solved promptly as a situation will quickly deteriorate for both seller and buyer. Arbitration may be preferable to litigation and fast track arbitration to regular arbitration. These are issues that should be considered when negotiating a mac clause.

chapter 14

International Arbitration of Patent Claims Thomas H. Lee* A single invention or innovation today is often protected by patents in many different countries. This is especially true of valuable new products developed by multinational corporations. A company that has invested a lot of time and resources in an innovation will seek maximal legal protection for it in every country where it has been, or might be, brought to market. The largest of innovation-­dependent companies often have hundreds or thousands of their own patents and additionally license many more patents from other companies. This cross-cutting web of patents complicates even further the confusion of multiple, divergent national laws regarding what may be patented, how patents are to be obtained, what constitutes infringement, what may or must be licensed, and so forth. Indeed, one company is often suing for infringement of some of its own patents and simultaneously defending against claims that it is infringing others’ patents. Global efforts at harmonizing national patent laws through international treaties, most notably the 1995 Agreement on Trade-Related Aspects of International Property Rights (trips) of the World Trade Organization (wto), have set some standards for patentability and patent term lengths.1 But agreement on substantive standards beyond lowest common denominators has remained elusive. And, the absence of a centralized dispute resolution system to adjudicate transnational patent-related controversies has exacerbated divergences among national patent laws, despite the trips common standards. The result has been a proliferation of patent-related litigation in national courts, often several simultaneous lawsuits or proceedings involving the same invention patented in multiple jurisdictions. The costs of multi-patent, multi-forum transnational litigation have been enormous, as exemplified by the hundreds of millions of u.s. dollars in legal fees incurred in the Apple-Samsung smartphone patent wars fought in the early twenty-first century on four continents.2 * Leitner Family Professor of International Law, Fordham Law School. Thanks to Jessica Carnevale for research assistance. 1 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 1869 u.n.t.s. 299, 33 i.l.m. 1197 (1994) [hereinafter trips Agreement]. 2 See Apple Inc. v. Samsung Electronics Co., Ltd., 735 F.3d 1352 (Fed. Cir. 2013), cert. granted March 21, 2016, 577 u.s. ___; See also, Adam Satariano & Joel Rosenblatt, Apple, Samsung © koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004334557_016

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The purpose of this Essay is to describe and elaborate how international commercial arbitration supplies a potential solution to the multi-patent, multi-forum litigation problem. One attempt to address the same problem in the context of the European Union is the Unified Patent Court, which is scheduled to become operational in January 2017.3 That is a solution that will apply—if successfully implemented—only in the twenty-odd states of the European Union. My particular solution focuses attention, instead, on the United States for two reasons. First, the United States is by far the most common and costliest forum for transnational patent litigation. Consequently, any solution to the global problem must encompass and preempt litigation in u.s. courts. Second, the United States has a patent arbitration statute that is more ambitious and sweeping than analogous laws in other countries.4 The u.s. statute, which was originally enacted in 1982, goes so far as to allow private, binding arbitration of disputes about the validity of patents, something that most other national laws do not permit.5 I will elaborate below how the statute—and the patent ­arbitration it enables—might be deployed to help solve or ameliorate the multi-patent, multi-forum litigation problem. i

The Puzzle: Multi-patent, Multi-forum Disputes

From the perspective of the most developed countries, which generate the lion’s share of global innovation, the ideal would be a uniform global standard entitling an invention to recognition by patent and property rights everywhere. And there would be a single global court system to adjudicate patent-related disputes, including questions about validity and infringement. Of course, less developed countries seeking liberal access to innovation developed outside of their borders share a contrasting view.

Agree to End Patent Suits Outside u.s., Bloomberg Technology (Aug. 6, 2014, 12:29 am), http://www.bloomberg.com/news/articles/2014-08-05/apple-samsung-agree-to-end-pat ent-suits-outside-u-s- (reporting that Samsung and Apple agreed to a ceasefire of all patent litigation outside of the United States relating to smartphones). 3 See Agreement on a Unified Patent Court and Statute 16351/12, https://www.epo.org/law -practice/unitary/patent-court.html; see also Regulation 1257/2012, 2012 o.j. (L 361) 1 (eu) (implementing enhanced cooperation in the area of the creation of unitary patent protection), Council Regulation 1260/2012, 2012 o.j. (L 361) 89 (eu) (implementing enhanced cooperation in the area of the creation of unitary patent protection with regard to the applicable translation arrangements). 4 United States Patent Act, 35 u.s.c §294 (2012). 5 35 u.s.c. §294(a) (2012) (allowing arbitration of patent infringement and validity).

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Although trips and recent initiatives like the u.s. “First Inventor to File” amendments to the America Invents Act6 are steps to harmonization, we are still far from uniform patent standards, and enforcement is left primarily to Balkanized national courts. In this real world, big multinational companies like Apple and Samsung with massive patent portfolios typically file duplicative patent applications for the same invention in multiple national jurisdictions. And when those patents are believed to have been infringed, the companies often bring multiple lawsuits in the respective national courts. Such redundant litigation multiplies litigation costs and generates coordination nightmares for the disputants regarding negotiations, fact development, and legal arguments across multiple jurisdictions. One possible solution is a winner-take-all arbitration in a country that allows arbitration of all patent-related issues. As a threshold matter, the parties must consent to the arbitration, whether by a preexisting contract or after the dispute arises, and it may seem unlikely that adverse parties in a patent dispute  would mutually consent to arbitrate. However, many large companies that cross-license large numbers of patents like Apple and Samsung now incorporate arbitration clauses into their licensing agreements. Thus, there is a fair chance that when these multinational corporations are involved in a patent dispute, they have, or could have, an arbitration agreement already in place. Alternatively, adversaries in a patent dispute might agree to arbitrate on an ad hoc basis anyway in order to avoid the uncertain and potentially limitless costs of litigation in multiple national courts, particularly the u.s. courts where discovery of fact evidence can be extremely expensive. As a general matter, there are four types of patent-related claims that might arise in a dispute: (1) Interpretation and application of licensing agreements: What royalties are due on a licensed patent? What are the terms of the license?; (2) Adjudication of ownership: Which company owns a patent? Determining ownership may be complicated for older patents, as companies merge and are acquired; (3) Infringement: Did another make something that violates the patented invention; (4) Validity: Was the patent granted in error because the invention in question did not satisfy the standards of utility, novelty, and whatever other standard applies for patentability in the relevant jurisdiction?7 Patent ownership and licensing claims are frequently settled through international commercial arbitrations, sometimes under the auspices of the World 6 Leahy-Smith America Invents Act, Pub. L. No. 112–29, 125 Stat. 284 (2011) (amending 35 u.s.c §102). 7 See generally, M.A. Smith et al., Arbitration of Patent Infringement and Validity Issues Worldwide, 19 Harv. J.L. & Tech. 299, 305 (2006) [hereinafter Patent Arbitration Worldwide].

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Intellectual Property Organization, which was started in 1994.8 Almost all countries allow the arbitration of such claims, which usually revolve around issues of contract interpretation, whether of licensing or M&A agreements. Some countries allow arbitration of patent infringement claims as well. In some civil law countries, like Germany, infringement adjudications are relatively streamlined affairs where the patent alleged to be infringed is presumed to be valid and the court simply determines whether the alleged infringer’s product violates its four corners.9 Most countries, however, do not allow the arbitration of patent validity claims.10 China, Germany, France, and the Netherlands are in that camp.11 The validity of a patent is not considered arbitrable subject matter in those jurisdictions because it is seen to implicate a public function, not something parties can settle amongst themselves by private contract. It is the government’s job, so the argument goes, to decide whether a particular invention is sufficiently novel or creative to warrant recognition as personal property with the right to exclude others.12 Is it necessarily true that determining the validity of a patent under relevant law is a matter for direct state regulation? The basic aim of national patent law is to incentivize domestic home-grown creativity.13 But if the patent holder, as is often the case in today’s multi-patent, multi-forum cases, is a foreign inventor or company that seeks patent protection in one country for an invention that is being sold in many countries, why, exactly, must the government retain the exclusive power to determine whether a patent is valid or not as against competitors, some of whom might be locals? Under these circumstances, the policy objective of fostering home-grown innovation disappears. Indeed, although the view in most countries is to consider patent validity non-arbitrable,

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Intellectual Property: Principles Governing Jurisdiction, Choice of Law and Judgments in Transnational Disputes (Am. Law Inst. 2008), http://www.wipo.int/edocs/lexdocs/laws/ en/us/us218en-part1.pdf. See Smith et al., supra note 7, at 333–38. In Germany, district courts hear infringement cases, but patent validity proceedings must be brought before the Federal Patent Court in Munich. See Smith, et al., supra note 7, at 333–39. See generally Smith et al., supra note 7 (surveying the current legal landscape with regard to patent arbitration in China, France, Germany, and the Netherlands). See William Granthan, Comment, The Arbitrability of International Intellectual Property Disputes, 1996 Berkeley J. Int’l L. 173, 187 (1996). See, e.g., Rebecca S. Eisenberg, Patents and the Progress of Science: Exclusive Rights and Experimental Use, 56 U. Chi. L. Rev. 1017, 1017–19 (1989).

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at least two countries that are major fora for international arbitrations, the United States and Switzerland, permit private arbitration of patent validity. The non-arbitrability of patent validity in the majority of jurisdictions is a major obstacle to the viability of arbitration as a solution to the multi-patent, multi-forum problem. Many of the biggest and most valuable patent cases involve at least plausible claims of patent invalidity. The incentives to arbitrate are dramatically diminished when arbitration cannot offer a one-stop solution for all potential claims related to a dispute. If validity must be resolved in court regardless, why bother to go to arbitration to resolve only some of the issues in a case, without the prospect of addressing the question of whether a patent even exists? In this Essay, I will suggest how we might work around this constraint, but first, it is necessary to review the u.s. patent arbitration statute in greater detail. ii The u.s. Patent Arbitration Statute The principal statute providing for arbitration of patent disputes in u.s. courts is 35 u.s.c. §294, which was enacted in 1982.14 In passing the law, Congress intended to overrule federal judicial decisions that had held it was against the “public interest” to arbitrate patent validity issues. The statute, which is provided in its entirety in the Appendix, has three key features: (1) Questions of patent validity and infringement may be arbitrated by contract or submission, overruling case law to the contrary. (2) An arbitral award is final and binding as between the parties (including claim and issue preclusive effect in subsequent proceedings), but may have “no force of effect on any other person.” The parties may agree, nonetheless, to be bound by a later decision of a court with final jurisdiction finding the patent at issue to be “invalid” or “unenforceable.”15 (3) Notice of the arbitral award, along with the award itself, must be filed with the Director of the u.s. Patent and Trademark Office to be enforceable. Because any such filings are public, some arbitration winners do not file their successful awards for fear of compromising confidentiality.

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Pub. L. No. 97–247. 35 u.s.c. § 291 governs arbitration of interference litigation, and 35 u.s.c. §135, enacted as part of the Patent Law Amendments Act of 1984, governs interference proceedings, which were time-limited after passage of the America Invents Act. Indeed, such a provision might be viewed as necessary to comply with Article 41 of trips.

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To summarize how the u.s. statute works, consider a hypothetical dispute where Party A believes Party B is infringing its patent and brings an arbitration against Party B. B, in its defense, claims that A’s patent is invalid and, alternatively, that it did not infringe upon the patent if it were valid. If Party A wins an arbitral award against Party B declaring its patent valid and files it with the Director of the pto, then Party B would not be able to challenge the validity of A’s patents on the same invention in the United States, and, more controversially, in all other jurisdictions. At the same time, Party A could not use the award to block a third party—Party C, from suing to contest the validity of its patent in the United States or elsewhere. Nor would Party A’s arbitral award block a government agency from contesting patent validity. What are the main obstacles to exporting u.s. arbitral awards on patent validity to constrain duplicative litigation on the same invention or innovation in foreign jurisdictions? First, the award might not be enforced in a foreign jurisdiction governed by different national law standards for granting patents and where patent validity is considered non-arbitrable such as Germany. Second, the u.s. patent arbitration statute by its own terms provides that it may have “no force of effect” on non-parties to the arbitration, which significantly lessens the value of an arbitral award that adjudicated the validity of the u.s. version of the patent. The rest of the Essay is addressed to these two particular obstacles and how they might be overcome. iii

Obstacles to Global Patent Arbitrations

How might a u.s. patent validity/invalidity arbitral award be exported to a foreign state where validity is considered non-arbitrable and where patentability is determined by its own national laws, which, notwithstanding trips, differ in significant respects from u.s. patent law? In other words, supposing two parties explicitly agree to arbitrate any and all patent-related disputes, including validity. Each party has multiple patents on the same innovation in the United States, Germany, and China. Even if the two parties agree to an arbitral tribunal of intellectual property experts that is eminently qualified to decide all relevant issues of u.s., German, and Chinese patent law, any resultant award of the tribunal would be devalued if it were impossible to enforce in Germany and China because courts in both jurisdictions would consider the subject matter non-arbitrable. How to get around this looming constraint? For starters, picking a u.s. location as the seat of arbitration would at least minimize the possibility of a foreign court setting aside the award under Article V(1)(a) of the New York ­Convention, which governs the recognition and enforcement of foreign

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arbitral agreements and awards.16 Article V(1)(a) provides that national government organs may deny recognition and enforcement if the agreement to arbitrate was “not valid…under the law of the country under which the award was made.” Since patent validity is arbitrable in the United States, seating an international patent validity arbitration proceeding in the u.s. would eliminate the risk of a non-arbitrability holding by a national court under this prong of Article V(1)(a). Article V(1)(a) also provides that recognition and enforcement may be denied if the agreement to arbitrate was “not valid under the law to which the parties have subjected it.” To close off the possibility of a national court availing itself of this ground, the parties could specify in their arbitration agreement (or at the time of arbitration if an ad hoc proceeding) that any and all questions relating to the arbitration agreement including arbitrability in the sense of the arbitral tribunal’s power to decide disputes (or jurisdiction) would be decided under u.s. law. That is not to say, of course, that the tribunal would decide the validity of a German patent under u.s. law rather than German law. On the contrary, the idea is an arbitration agreement provision that would say something like: “All national patent law questions, including validity, may be decided by the arbitral tribunal as permitted under u.s. law; when deciding a specific patent law question, whether validity or otherwise, the tribunal shall apply the specific national law under which the patent was issued.” To the extent that arbitration is the creature of contract, there doesn’t seem to be anything in theory against this sort of provision seeking to apply u.s. law permitting the arbitration of patent validity questions (regardless of which national law), despite the contrary view regarding arbitrability of the relevant foreign jurisdictions. Consider, by analogy, the foundational 1985 u.s. Supreme Court decision in Mitsubishi Motors v. Soler Chrysler-Plymouth.17 A Japanese carmaker sued its franchise dealer in Puerto Rico to compel arbitration pursuant to an agreement. The Puerto Rican car dealer counterclaimed against Mitsubishi (and a Swiss holding company), alleging that restrictions on the dealer’s sales to Latin America and the continental United States violated antitrust laws. The relevant agreements provided for arbitration in Japan, and the dealer argued, among other things, that it was contrary to public policy to allow private arbitration 16

Convention on the Recognition and Enforcement of Foreign Arbitral Agreements and Awards, art. 5, June 7, 1958, p.l. 91–368, 84 Stat. 692, 330 u.n.t.s. 38 [hereinafter New York Convention], http://www.uncitral.org/pdf/english/texts/arbitration/NY-conv/New-York -Convention-E.pdf. 17 473 u.s. 614, 617 (1985).

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of antitrust claims. Whose antitrust laws? The franchise contract in question actually contained a Swiss choice-of-law provision.18 The u.s. Supreme Court strongly hinted that u.s. antitrust law should apply regardless, and warned that u.s. courts would have a “second look” after an arbitral award was rendered to check if the result was consistent with u.s. antitrust law. What this suggests, is that parties might, in theory, pick one body of law to govern an arbitral panel’s authority to decide questions of patent validity in another country, just as parties may have picked Swiss law to govern questions of antitrust law in a Puerto Rico-based car dealership contract. But even if such a choice-of-law provision were enforceable, what if patent validity were considered non-arbitrable in the other countries where an arbitral award would need to be enforced? That is, as we have seen, true of most countries today. The New York Convention explicitly provides in Article V(2) that “[r]ecognition and enforcement of an arbitral award may also be refused if… [t]he recognition or enforcement of the award would be contrary to the public policy of that country.”19 And, however much courts and commentators have tried to narrow the “public policy” exception, it seems too inviting to ignore as a legal peg for courts in countries that are adamant in the belief that patent validity is a matter of public interest and not subject to arbitration. So it seems that there must be a change of heart in the major countries (e.g., Germany) where questions of patent validity and non-validity are considered non-arbitrable public matters in order for the solution of international arbitration to gain traction. That argument takes the form, as I have suggested above, of questioning whether it makes sense that patent validity is something that the state only should determine with respect to inventions by foreign companies who are patenting in multiple jurisdictions. There could be an explicit exception for home-grown inventors. It is not unrealistic, I think, to imagine that once the policy analysis gets framed in the right way, more countries might follow the lead of the United States and Switzerland and accept the prospect of full-scale patent arbitrations, including validity issues. Mitsubishi v. Soler, again, provides a useful analogy. Since the case was decided in 1985, three years after the passage of the u.s. patent arbitration statute, there has been a sea change not just in the United States but around the world

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An expert for the icc suggested that u.s. antitrust law would apply nonetheless, but this seems a dubious statement. See Brief for International Chamber of Commerce as Amicus Curiae, at 25, Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 u.s. 614 (1985) (Nos. 83–1569, 83–1733). New York Convention, supra note 16, at 10.

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in terms of perceptions of the suitability of antitrust claims for arbitration.20 In 1985, the majority of world opinion was behind the view that antitrust claims were so imbued with the public interest as to be improper for arbitration. Today, forty years later, most courts and commentators accept and even embrace the idea that private arbitral tribunals may arbitrate antitrust disputes. There is, I think, no reason to believe that the same acceptance might not happen with respect to common perceptions of the arbitrability of patent validity disputes, once the policy justifications for state monopolies on adjudication thereof are examined. The United States and Switzerland may yet again prove to be the vanguard of change in arbitrability doctrine. What about the problem with regard to the non-binding effect of an arbitral award on other parties? To some extent, the fact that an arbitral award does not bind the rest of the world could be viewed as a good thing. But, let’s assume, for argument’s sake, it is desirable to ensure some consistency across results, particularly in cases where the arbitration held a patent to be invalid. In such a case, not to publicize the award risks stifling innovation by third parties who might be deterred from developing or capitalizing on their own inventions for fear of infringing on the invalid patent. Let’s begin our analysis here with a refresher on u.s. rules of preclusion, commonly referred to as res judicata. We need to start by going back to the actual language of the patent statute, which prescribes that an award is “final and bind­ ing as between the parties” but has “no force or effect on any other person.”21 Under u.s. law of preclusion—most relevantly here, the law of issue ­preclusion—a prior adjudication at issue such as patent validity that is adjudicated in a prior proceeding (and arbitral proceedings count) cannot burden a third party. Everyone is entitled to their day in court unless the third party is an alter-ego of one of the original parties.22 So, to recall our hypothetical, Party A sues Party B for patent infringement and wins an arbitral award declaring the patent valid when B counterclaims. If Party C later sues A to contest the validity of the patent upheld in the arbitration, it can. C gets its day in court: a prior proceeding cannot burden a non-party to the proceeding. But in the United States, prior adjudications (and arbitrations) can sometimes benefit non-parties. Recall that the words of the patent statute are no “force or effect on any other person.” Is a benefit “force” or “effect”? A burden 20

See Vera Korzun, Arbitrating Antitrust Claims: From Suspicion to Trust, 48 N.Y.U. J. Int’l L. & Pol. 867 (2016). 21 35 u.s.c. § 294(c). 22 See Taylor v. Sturgell, 553 u.s. 880, 885 (2008) (holding that preclusion by “virtual representation” is disapproved).

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surely is, but it’s doubtful whether a benefit is. The intent behind the statute is clearly not to disadvantage non-parties, but that doesn’t necessarily mean that non-parties might not be advantaged, does it? What does a benefit mean? There are two types of benefit. One is a benefit for a third party that is defensive. Presume that party A sues B for patent infringement. But let’s assume that this time, A loses the arbitral award, and the patent is declared invalid. A then sues C, even though it lost its arbitration against B. C could plead non-mutual defensive issue preclusion: the non-party wants to defend itself by holding up A’s loss in the first proceeding as a shield. This is generally permitted under the u.s. law of preclusion. Another type of benefit for third parties is called offensive non-mutual ­issue preclusion. In the past, u.s. courts were hostile to offensive issue preclusion, but that has changed in recent years.23 Again, consider our second hypothetical: A sues B for patent infringement and loses the award—A’s patent is declared invalid. C sues A, and doesn’t want to relitigate the issue of patent validity; instead, C seeks to have the invalidity of A’s patent presumed in the subsequent litigation. In the United States, non-parties like C can gain this kind of issue preclusion so long as there are no indications that C opportunistically refrained from joining the prior proceeding of A against B. This is less of a problem in arbitration than it is in litigation because arbitration arises from a contractual relationship. Since C, as a non-party, was not a party to the first proceeding, there is less possibility of opportunistic behavior by C in adopting a “wait and see” attitude. This is another way in which a benefit could be ­extracted by a non-party from a prior arbitration holding a patent invalid. Obviously, a holding of validity could not be used to block subsequent suits by non-parties challenging it, since the non-parties would be entitled to a day in court. To be sure, both defensive and offensive non-mutual issue preclusion are aspects of u.s. preclusion law, not global principles of international law. But if arbitration is the creature of contract, why can’t parties pick the preclusion rules that they want to be applied to an arbitration? Under the condition of uncertainty where neither party thinks it will be an infringer, why wouldn’t both parties seek maximal preclusive effect, including over non-parties? The bottom line is that if the parties want to commit to arbitration as a way to solve the multi-patent, multi-jurisdiction problem, and they choose the u.s. law of 23

See Richard L. Marcus, et al., Civil Procedure: A Modern Approach, 1308 (West, 6th ed. 2013) (outlining changes in u.s. courts’ opinion of offensive issue preclusion). But see Parklane Hosiery Co. v. Shore, 439 u.s. 322, 323 (1979) (considering offensive collateral estoppel potentially unfair to defendant).

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patent validity and seat the arbitration in the United States, it seems a small step to provide that the u.s. law of preclusion shall apply. And, given the web of cross-licensing agreements among big multinational corporations, such choices could spread and become the norm. iv Conclusions Multi-patent, multi-forum litigation is an extremely costly way to resolve patent disputes of global scope. One solution—harmonizing divergent patent standard ex ante—has proven politically difficult, as witness the angst over trips. Why not achieve harmonization through the figurative back door, by promulgating a winner-take-all one-shot method of dispute resolution? What would be the costs of doing this? For one, it dramatically increases the stakes in the first arbitration. Second, to the extent that the solution is premised on the u.s. patent arbitration statute, the United States becomes more important as a center of gravity of worldwide patent wars. Obviously, if you are an American lawyer that is a good thing; if you are not an American lawyer it is not such a good thing. But given the prominence of the United States as a forum for patent issues, it may be an inevitable development. I don’t mean to suggest that arbitration is the answer for every single species of trans-national patent disputes. Some types appear tailor-made for arbitration, such as patent ownership or licensing disputes arising from joint venture arrangements, cross-licensing agreements, or mergers and acquisitions. Another type of dispute that might be fruitfully resolved by arbitration are controversies regarding fair, reasonable and non-discriminatory royalties (frand) for standard essential patents (sep). Differing regulatory standards across jurisdictions commonly result in multiple lawsuits in national courts, but, at bottom, these disputes involve questions of the amount of payments, not arguments about law or threshold liability. As such, they seem extremely well-suited for arbitration. But litigation in national courts may still be the best option in certain contexts such as requests for preliminary injunctions or pretrial asset seizures. And government administrative proceedings figure prominently in other contexts, such as Section 337 proceedings before the u.s. International Trade Commission (itc) to stop imports into the United States which infringe a patent granted by the u.s. Patent and Trademarks Office.24 In sum, arbitration is not, and should not, be the only solution to the multi-patent, multi-forum litigation problem. But it can be an important part of the solution. 24

Codified as amended by the Trade Act of 1974 and the Omnibus Trade and Competitiveness Act of 1988 at 19 u.s.c. § 1337 (1988).

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Appendix: 35 u.s.c. Section 294 Voluntary Arbitration

(a) A contract involving a patent or any right under a patent may contain a provision requiring arbitration of any dispute relating to patent validity or infringement arising under the contract. In the absence of such a provision, the parties to an existing patent validity or infringement dispute may agree in writing to settle such dispute by arbitration. Any such provision or agreement shall be valid, irrevocable, and enforceable, except for any grounds that exist at law or in equity for revocation of a contract. (b) Arbitration of such disputes, awards by arbitrators and confirmation of awards shall be governed by title 9 [Federal Arbitration Act], to the extent such title is not inconsistent with this section. In any such arbitration proceeding, the defenses provided for under section 282 [of this title] shall be considered by the arbitrator if raised by any party to the proceeding. (c) An award by an arbitrator shall be final and binding between the parties to the arbitration but shall have no force or effect on any other person. The parties to an arbitration may agree that in the event a patent which is the subject matter of an award is subsequently determined to be invalid or unenforceable in a judgment rendered by a court of competent jurisdiction from which no appeal can or has been taken, such award may be modified by any court of competent jurisdiction upon application by any party to the arbitration. Any such modification shall govern the rights and obligations between such parties from the date of such modification. (d) When an award is made by an arbitrator, the patentee, his assignee or licensee shall give notice thereof in writing to the Director. There shall be a separate notice prepared for each patent involved in such proceeding. Such notice shall set forth the names and addresses of the parties, the name of the inventor, and the name of the patent owner, shall designate the number of the patent, and shall contain a copy of the award. If an award is modified by a court, the party requesting such modification shall give notice of such modification to the Director. The Director shall, upon receipt of either notice, enter the same in the record of the prosecution of such patent. If the required notice is not filed with the Director, any party to the proceeding may provide such notice to the Director. (e) The award shall be unenforceable until the notice required by subsection (d) is received by the Director.

chapter 15

Corporate Interest and the Right to Regulate in Investor-State Arbitration Vera Korzun* Introduction In the wake of the Transatlantic Trade and Investment Partnership (ttip) negotiations, investor-state arbitration has led to a heated debate on both sides of the Atlantic. Ever since Philip Morris’ feud with Australia over the country’s tobacco plain packaging legislation,1 trust in the investor-state dispute settlement (isds) mechanism has been broken worldwide. The opponents of isds point to the lack of transparency, legitimacy and public accountability in the isds process where private arbitrators are called upon to decide multi-million dollar claims against sovereign states. The critics further allege that through the isds regime foreign investors—most commonly, multinational corporations— interfere with the government’s ability to regulate in the public interest, such as public health and environmental protection. The crusade against isds is now supported by evidence from recent investor-state claims challenging government regulation (e.g., investor-state arbitrations against Spain, the Czech ­Republic, Italy, Greece, Romania, and Bulgaria as a result of changes in the regulatory framework in the renewable energy sector in these countries,2 * sjd Candidate and Adjunct Professor of Law, Fordham University School of Law. 1 See, e.g., Philip Morris Asia Limited v. The Commonwealth of Australia, uncitral, pca Case No. 2012–12, Award on Jurisdiction and Admissibility (Dec. 17, 2015). Although in December 2015—four years since the notice of arbitration was served—Australia won the resultant investor-state arbitration with the Hong Kong subsidiary of the u.s. global tobacco group Philip Morris, the reputation of investor-state arbitration has since been irreparably damaged. In large part, this is because the dispute has showed how investor-state arbitration can be used to challenge legitimate government measures. For a similar claim against Uruguay, see Philip Morris Brands Sàrl, Philip Morris Products s.a. and Abal Hermanos s.a. v. Oriental Republic of Uruguay, icsid Case No. ARB/10/7. 2 See, e.g., Watkins Holdings S.à r.l. and others v. Kingdom of Spain, icsid Case No. ARB/15/44 (the latest of the 22 investor-state icsid arbitrations commenced against Spain as a result of its renewable energy regulatory change); Belenergia s.a. v. Italian Republic, icsid Case No. ARB/15/40 (one of the three icsid arbitration cases pending against Italy); ENERGO-PRO a.s. v. Republic of Bulgaria, icsid Case No. ARB/15/19, and evn ag v. Republic of Bulgaria, icsid Case No. ARB/13/17. © koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004334557_017

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claims against Germany in response to its government’s nuclear power phaseout actions3). The proponents of isds are left to defend the system by pointing out that, should an investment dispute arise, the ability to submit a claim directly to investor-state arbitration—instead of litigation in domestic courts of the host state—remains an important factor for private investors seeking to invest abroad. And so, while the debate on the future of investor-state arbitration continues, it becomes clear that for isds to survive, it has to change by responding to the most vocally raised concerns of the lack of transparency, legitimacy, public accountability, and consistency in investment arbitration. Regulatory disputes bring additional, more complicated, layer to the discussion of the long-overdue reform of isds. Disputes of this type involve challenges by foreign investors of government measures of general application, such as laws, regulations, or executive acts. They are particularly controversial because they may limit the state’s ability to regulate by allowing foreign investors to challenge perfectly legitimate government measures before international arbitral tribunals. And so, by contrast to the transparency and legitimacy problems, which largely have to do with procedural aspects of isds, concerns over regulatory disputes motivate sovereign states to limit substantive promises made to foreign investors. Responding to the outcry over legitimacy crisis of isds, governments and other actors have proposed and brought to life various changes to the current regime of investment dispute resolution. As a result, the isds system has become more transparent and led to more consistent and predictable awards. There is also greater accountability of arbitrators guided in their work by expanded codes of ethics and rules on conflicts of interest. Other changes to isds are under way, including a new two-tier investment tribunal system introduced by the European Union in its free trade agreements (ftas) with Vietnam4 and 3 Vattenfall ab and others v. Federal Republic of Germany, icsid Case No. ARB/12/12 (currently pending investor-state arbitration under the Energy Charter Treaty (ect) and the icsid Convention and Arbitration Rules, where Vattenfall, state-owned Swedish energy company, is reportedly seeking compensation for investments lost due to the shutdown by Germany of two reactors in Krümmel and Brunsbüttel, in line with the country’s energy phase-out plan). See also Nathalie Bernasconi-Osterwalder & Martin Dietrich Brauch, The State of Play in Vattenfall v. Germany ii: Leaving the German Public in the Dark, Briefing Note, International Institute for Sustainable Development (iisd) (December 2014), http://www.iisd.org/sites/ default/files/publications/state-of-play-vattenfall-vs-germany-II-leaving-german-public -dark-en.pdf (providing background information on the case). 4 EU-Vietnam Free Trade Agreement (Agreed text as of January 2016), Chapter 8 (Trade in Services, Investment and E-Commerce), Chapter 2 (Investment) [hereinafter EU-Vietnam fta], http://trade.ec.europa.eu/doclib/html/154210.htm.

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Canada5 to replace traditional isds. Even more extreme proposals call for abolishing isds either in favor of regular domestic courts or a system of permanent international investment courts.6 Sovereign states are also increasingly more careful in their investment treaty making. Instead of concise treaties with broad investor protection obligations common for the first generation of bilateral investment treaties (bits), they now incorporate elaborate treaty provisions. Such provisions tend to limit the types and scope of substantive promises given to foreign investors7 and, as a result, the scope of claims which can be brought in arbitration.8 Further, there is a growing tendency to introduce carve-outs for various policy areas (such as taxation) or industries (most recently, tobacco). They are brought into investment treaties as protection against regulatory disputes to allow governments to freely regulate in respective areas for the public benefit. Yet, as I argue here, in a rush to improve and save isds, we may have forgotten to ensure consistency of changes we aspire to introduce. The tobacco carve-out in the Trans-Pacific Partnership (tpp)9 provides a troublesome example. On the one hand, through various isds improvements in recent years we seek to create the most qualified, experienced, independent and accountable body of investment arbitrators. On the other hand, we deprive them of the subject-matter jurisdiction over categories of regulatory disputes. If other 5 Comprehensive Economic and Trade Agreement (ceta) between Canada and the European Union [and its Member States] (Final text, Feb. 2016), http://trade.ec.europa.eu/doclib/ docs/2016/february/tradoc_154329.pdf. 6 See European Commission, Press Release. Commission Proposes New Investment Court System for ttip and Other eu Trade and Investment Negotiations (Brussels, Sept. 16, 2015), available at http://europa.eu/rapid/press-release_IP-15-5651_en.htm. 7 Compare, for instance, provisions of the u.s. Model bit of 1994 and u.s. Model bit of 2012. The mere size of the model treaty, which grew from 16 articles and an annex (the 1994 version) to 37 articles and 3 annexes (the 2012 version), is a reflection of more careful and elaborate treaty-drafting. For text of these documents, see unctad’s Investment Policy Hub, in particular, Investment Related Instruments (iris) for the United States of America, http:// investmentpolicyhub.unctad.org/IIA/CountryIris/223#iiaInnerMenu. Famously, the United States linked its fair and equitable treatment (fet) and full protection and security (fps) obligations in the Model bit to international law minimum standard of protection. 8 See, e.g., China-Australia Free Trade Agreement (ChAFTA), Dec. 20, 2015, Ch. 9 (Investments), http://dfat.gov.au/trade/agreements/chafta/official-documents/Documents/chafta-chapter -9-investment.pdf (providing foreign investors with national treatment (Article 9.3) and most-favored-nation treatment (Article 9.4), but not other common guarantees—such as minimum standard of treatment and guarantee against expropriation—thereby limiting potential exposure to isds under the treaty (Section B. Investor-State Dispute Settlement)). 9 Trans-Pacific Partnership (tpp) (signed Feb. 4, 2016), https://ustr.gov/trade-agreements/ free-trade-agreements/trans-pacific-partnership/tpp-full-text.

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industries follow—such as solar, nuclear power, or biotechnology industry— we may lead isds into disarray. If anything, having created the most competent institutions, we should be expanding their jurisdiction instead of taking it away. At least with respect to regulatory disputes, we should perhaps reconsider our actions to ensure that any changes we introduce remain consistent and system-wide coherent. The rest of the paper proceeds as follows. Part i provides an overview of the modern system of isds explaining the gist of criticism over its procedural and structural features and concerns over regulatory disputes. Part ii explores various changes introduced into the isds regime to increase its transparency and legitimacy and reduce the risk of regulatory disputes. Using example of subjectmatter carve-outs which seek to address concerns over regulatory disputes, it then suggests that we should rethink the isds reform to ensure consistency and coherence of investor-state dispute resolution. A short conclusion follows. i

Modern System of Investor-State Dispute Settlement: The Gist of Criticism

International investment agreements (iias), such as bits and ftas with investment chapters, have become the target of criticism in recent years. The role of these treaties in promoting investments, trade and development among participating countries has always been unclear. Yet, trade liberalization can put local businesses in competitive disadvantage as they become unable to compete with foreign multinational corporations. Failed foreign investment projects have led to disastrous environmental effects or showed disregard to local customs, traditions, and development needs.10 Understandably, international investment treaty making today requires persuasion of governments and other stakeholders that the benefits of trade liberalization outweigh its costs. The debate is particularly heated now as we witness a new trend in treaty making—conclusion of unprecedentedly large trade liberalization ­treaties— the Mega-Regional Trade agreements, or the so-called “mega-regionals.” The tpp Agreement11 was signed by twelve Pacific Rim countries with a total gdp of about US$28 trillion (over 27% of the world gdp, 2014) and population 10

11

See, e.g., Chevron Corporation and Texaco Petroleum Corporation v. The Republic of Ecuador, uncitral, pca Case No. 2009–23 (involving allegations of severe environmental pollution and health damage resulting from Texaco/Chevron operations in the Amazon region of Ecuador). tpp, supra note 9.

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of  805.4  mln (2014).12 Once in force, it will be the largest fta ever concluded in terms of the world trade (25.5%, 2014) it aspires to cover.13 The historic EU-Canada Comprehensive Economic and Trade Agreement (ceta)14 would cover economies with a total gdp of over US$20 trillion (2014) and population of 543.7 mln (2014).15 The Transatlantic Trade and Investment Partnership (ttip)16 being negotiated between the United States and the European Union would affect countries with a total gdp of about US$36 trillion and population of 827 mln (about 33% of the world gdp and 11% of the world population, 2014).17 The importance of these trade liberalization treaties are hard to underestimate. It also explains the most contentious debates surrounding drafting and negotiations of modern iias, including their investment protection and isds provisions. A Procedural and Structural Features of isds Criticism against iias in recent years has led to calls for changing or abolishing the isds regime. isds allows a foreign investor to bring its claims against a host state before a private arbitral tribunal. Sovereign states agree to arbitral jurisdiction by providing consent to investor-state arbitration in iias, domestic legislation, or investment contracts. The system thus grants to foreign investors directly enforceable rights against sovereign states, typically without the need to first exhaust local remedies—such as to resort to domestic courts or to seek other remedies available under the host state’s law. As designed, the isds system is notoriously one-sided. With the exception of counter-claims, it gives the right to bring a claim to foreign investors, but not the host state. The choice of arbitration rules and procedure is also left to foreign investors, who can choose an arbitration mechanism from the list of arbitration options available under a treaty. Further, since the host state promises to arbitrate with any of its foreign investors protected under a treaty, it does 12 13 14 15 16 17

See tpp Outcomes and Background Documents, Oct. 6, 2015, http://dfat.gov.au/trade/ agreements/tpp/outcomes-documents/Pages/outcomes-documents.aspx. Id. ceta, supra note 5. For details of the treaty see In Focus, EU-Canada Comprehensive Economic and Trade Agreement (ceta), http://ec.europa.eu/trade/policy/in-focus/ceta/. The World Bank Data, Population, total, http://data.worldbank.org/indicator/SP.POP .TOTL. See, e.g., Transatlantic Trade and Investment Partnership (ttip), eu Negotiating Texts, available at http://trade.ec.europa.eu/doclib/press/index.cfm?id=1230. The World Bank Data, gdp at Market Prices (current US$), http://data.worldbank.org/ indicator/NY.GDP.MKTP.CD; The World Bank Data, Population, Total, http://data.world bank.org/indicator/SP.POP.TOTL.

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not know in advance if and when it will be hit with an investment arbitration, or which of its investors will choose to invoke isds. Such misbalance would seem to be mitigated by the fact that governments win in over 50% of investor-state arbitrations, at the jurisdictional or merits phase.18 Yet, to do so, host states are still required to defend themselves in arbitration, which is a costly endeavor for many state budgets, requiring at least $4.5–5 mln for a defending state.19 isds has also been criticized for other deficiencies, such as (1) the lack of transparency, (2) reliance on private arbitrators instead of professional judges with training and experience in international law, and (3) absence of an appeal mechanism that would ensure review and consistency of arbitral awards.20 Further, arbitrators are suspected in self-interest where they establish jurisdiction in borderline cases or invariably vote for the state or foreign investor, allegedly to secure future appointments by them. The overarching “legitimacy” concern has become a common argument in the isds debate.21 Dissatisfaction with isds is fueled by the fact that it is still unclear whether iias contribute to attracting foreign investments in the country.22 Their benefits remaining uncertain, the costs of investment protection and isds promises are becoming too 18

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Susan D. Franck, Empirically Evaluating Claims About Investment Treaty Arbitration, 86 n.c.l. Rev. 1, 49 (2007) (analyzing publicly available awards resulting from investment treaty arbitrations and finding that out of fifty-two final awards available before June 1, 2006 “there were twenty awards (38.5%) where investors won and tribunals awarded damages. By contrast, there were thirty awards (57.7%) where governments paid ­investors nothing.” (footnote omitted)). Counting the Costs of Investment Treaty Arbitration, Global Arbitration Review (March 24, 2014), http://globalarbitrationreview.com/news/article/32513/ (describing the study of 176 cases with data showing that “the average party costs were quite similar, at US$4,437,000 for claimants and US$4,559,000 for respondents”). See, for example, unctad, Reform of Investor-State Dispute Settlement: In Search of a Roadmap 3–4 (2013), http://unctad.org/en/pages/publications/Intl-Investment-Agree ments---Issues-Note.aspx, listing the lack of sufficient legitimacy, transparency, and consistency in arbitral decisions among the main concerns in the current isds regime. Susan D. Franck, The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions, 78 Fordham L. Rev. 1521 (2005). See Arjan Lejour & Maria Salfi, The Regional Impact of Bilateral Investment Treaties on Foreign Direct Investment, cpb Netherlands Bureau for Economic Policy Analysis, cpb Discussion Paper 298, cpb Discussion Paper 298 (Jan. 16, 2015), http://www.cpb.nl/en/ publication/the-regional-impact-of-bilateral-investment-treaties-on-foreign-direct-in vestment (showing that there might be benefits of bits for lower and middle income countries, but not to developed countries, although there are observable differences among world regions).

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high for many countries. Some of them have therefore chosen to revoke their isds consent or reconsider investment protection treaties.23 B Regulatory Disputes and the Fear of a Chilling Effect Another recurring theme in the isds criticism is regulatory disputes and their ability to produce a chilling effect24 on the state’s power to regulate. The term “regulatory” is increasingly common for modern iias, which seek to reserve for the state the right to regulate for the public benefit, such as protection of public health, safety, human rights, social values and the environment.25 Yet, the word “regulatory” is never defined in treaties and is used loosely in academic debate and public policy discussions on the desirability of isds. As such, the concept of “regulatory” becomes akin to the notorious “public p ­ olicy” exception26—­ always present, never defined, but broadly understood—the ­proverbial chameleon word.27 23

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To limit their procedural exposure to isds, Venezuela, Ecuador, and Bolivia withdrew from the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (icsid Convention, March 18, 1965, 17 u.s.t. 1270, 575 u.n.t.s. 159). A number of sovereign states have cancelled their investment protection treaties. Examples include South Africa (which has terminated its bits with Austria, Belgium and Luxembourg, Denmark, France, Germany, the Netherlands, Spain, Switzerland, and the United Kingdom), Indonesia (which to date has terminated 14 of its bits), Italy (which announced its withdrawal from the Energy Charter Treaty (ect) with a notice to the ect Secretariat in January 2015). See generally Kyla Tienhaara, Regulatory Chill and the Threat of Arbitration: A View from Political Science, in Evolution in Investment Treaty Law and Arbitration 606, 606 (Chester Brown & Kate Miles eds., 2011). See, e.g., Trans-Pacific Partnership agreement, which in Article 9.16 titled “Investment and Environmental, Health and other Regulatory Objectives” provides that: “Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives.” (emphases added). tpp, supra note 9, art. 9.16. See also EU-Vietnam fta, supra note 4, Chapter 8 (Trade in Services, Investment and E-Commerce), Chapter 2 (Investment), art. 13bis. In international arbitration, the term “public policy” is most famously associated with the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), which allows refusing recognition and enforcement of an award where “[t]he recognition or enforcement of the award would be contrary to the public policy of that country.” See United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 330 u.n.t.s. 38, art. V(2)(b). Compare this with Megan Donaldson & Benedict Kingsbury, Ersatz Normativity or Public Law in Global Governance: The Hard Case of International Prescriptions for National

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The term “regulatory disputes” is used by scholars and commentators to describe investor-state disputes arising out of government regulation that has detrimental effects on foreign investors or investments in the country. Government regulation is usually understood broadly and may include any act of the legislature, public administration, or courts which they do in the exercise of regulatory, or police, power. Both actions (such as introduction of a new law or regulation or reduction in tax breaks28) and inactions (such as a failure to commence an investigation into the allegedly fraudulent investment scheme) may lead to regulatory disputes. As a phenomenon, regulatory disputes are not new for investor-state arbitration. Claims alleging discriminative or expropriatory effect of government regulation over foreign investments or investors have long been raised in investment arbitration.29 Earlier known regulatory disputes—Maffezini30 and Methanex31—involved environmental regulations.32 The newer wave of

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I­ nfrastructure Regulation, 14(1) Chicago J. Int’l L. 1, 27 (2013) (“However, the [formally nonbinding but influential instruments issued in the 2000s by the World Bank, the oecd, and uncitral regulating national infrastructure] repeatedly either omit any reference to a public interest in favor of seemingly narrower categories such as ‘government’ or ‘consumer’ interests, or juxtapose the public interest and private sector interests, mingling the first order objective with the second-order trade-offs required to attain it.”). See, e.g., Philip Morris Asia Limited v. The Commonwealth of Australia, uncitral, pca Case No. 2012–12 (where Philip Morris challenged in investment arbitration the Australian tobacco plain packaging legislation). State regulatory power has often been discussed in the context of expropriation claims, where the challenge for a tribunal is to distinguish expropriatory government measures directed at or (disproportionary) affecting foreign investors versus mere exercise by the government its power to regulate, or “police power,” for the benefit of the public. See Christopher F. Dugan et al., Investor-State Arbitration 452 (2008) (“The signal problem is defining with precision when an exercise of regulatory or police power crosses the line and becomes compensable, and a vast literature makes clear that the line is neither bright not clear.” (footnote omitted)). See also oecd, “Indirect Expropriation” and the “Right to Regulate” in International Investment Law, 4 oecd Work. Papers on Int’l Inv. 1 (2004), http://dx.doi.org/10.1787/780155872321 (noting already in 2004 that “there is increasing concern that concepts such as indirect expropriation may be applicable to regulatory measures aimed at protecting the environment, health and other welfare interests of society”). Maffezini v. Spain, icsid Case No. ARB/97/7, Award (Nov. 13, 2000). Methanex Corp. v. United States of America, nafta (uncitral Rules), Final Award of the Tribunal on the Jurisdiction and Merits (Aug. 3, 2005). See Julie A. Maupin, Differentiating Among International Investment Disputes, in The Foundations of International Investment Law: Bridging Theory into Practice 467, 492 n.108 (Zachary Douglas et al., eds., 2014).

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­regulatory disputes expands beyond allegations of discrimination and expropriation to claims of alleged fair and equitable treatment (fet) violations.33 They involve an array of government measures ranging from legislative acts seeking to reduce tobacco exposure and health risk associated with smoking34 to measures providing for nuclear power phase-out in order to reduce health and environmental risks of nuclear power use.35 The public benefits aspect and regulatory scope of the challenged government measures distinguish such claims from a prior generation of regulatory disputes. While earlier cases involved regulation of a limited scope, addressing a particular industry, territory, or directed at a foreign investor, the latest regulatory investor-state arbitrations challenge measures that have a very remote or no connection to foreign investors at all.36 Most of foreign investors seek damages for the alleged decrease in value of the investment made or expected, but may also seek to abolish a government measure.37 The ability of private companies—most commonly, multinational ­corporations—to bring investor-state arbitration claims to challenge government regulation has contributed to a scholarly discussion of corporations as 33

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See, e.g., Electrabel s.a. v. Republic of Hungary, icsid Case No. ARB/07/19, Award, ¶¶ 165–66 (Nov. 25, 2015) (“the application of the ect’s fet standard allows for a balancing exercise by the host State in appropriate circumstances. The host State is not required to elevate unconditionally the interests of the foreign investor above all other considerations in every circumstance.”); id. at ¶ 166 (“even assuming that Electrabel had an ­expectation that it would be awarded the maximum compensation for stranded costs permitted under eu law, once weighed against Hungary’s legitimate right to regulate in the public interest, such an expectation does not appear reasonable or legitimate” (emphasis added)). Philip Morris Asia Limited v. The Commonwealth of Australia, uncitral, pca Case No. 2012–12; Philip Morris Brands Sàrl, Philip Morris Products s.a. and Abal Hermanos s.a. v. Oriental Republic of Uruguay, icsid Case No. ARB/10/7. Vattenfall AB and others v. Federal Republic of Germany, icsid Case No. ARB/12/12. See, e.g., Reshaping the Investor-State Dispute Settlement System: Journeys for the 21st Century 500 (Jean E. Kalicki & Anna Joubin-Bret eds., 2015) (observing that “contemporary investment arbitrations frequently implicate the scope of the regulatory powers of the respondent States and reach well beyond the traditional concerns of simple expropriations and nationalizations. Instead, a much broader variety of regulatory and public goods disputes has come to be addressed through investment arbitrations, ranging from the provision of basic public services, such as water and sanitation, to the maintenance of public order.” (citation omitted)). See, for instance, Philip Morris Asia Limited v. The Commonwealth of Australia, uncitral, pca Case No. 2012–12, Notice of Arbitration, ¶ 8.2 (Nov. 21, 2011), seeking “an order for the suspension of enforcement of plain packaging legislation.”

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s­ ubjects of international law38 and attracted substantial media attention.39 The debate touches upon broad policy issues with important societal implications and therefore often occurs in the highly charged political context. Commentators are particularly concerned that the growing number of investor-state arbitrations challenging government measures may lead to the “regulatory chill,” broadly defined as less-than-optimal regulation that would be introduced by governments in fear of investor-state claims by foreign investors.40 One may, of course, question whether challenges of this type are good faith actions by foreign investors finding that government regulation harms them in violation of the fet or non-expropriation promises, or, instead, whether they are claims by foreign investors seeking to exploit isds where profits projected in a host country do not materialize as expected. For instance, it is hard to see for many how the introduction of the Tobacco Plain Packaging Act41 by the Australian government in 2011 could amount to regulatory expropriation of the Philip Morris’ investments in the country.42 And yet, in the eyes of Philip Morris the Australian government’s actions were discriminatory, amounted to regulatory expropriation, failed to provide fair and equitable treatment, as well as full protection and security.43 To mitigate the consequences of regulation, the tobacco company went as far as restructuring its affiliates abroad to invoke the Australia-Hong Kong bit44 and begin investor-state arbitration against Australia.45 38 39

40

41 42 43 44

45

See José E. Alvarez, Are Corporations “Subjects” of International Law? 9 Santa Clara J. Int’l L. 1 (2011). See also Julian Arato, Corporations as Lawmakers, 56 Harv. Int’l L.J. 229 (2015). Claire Provost & Matt Kennard, The Obscure Legal System That Lets Corporations Sue Countries, The Guardian, June 10, 2015, https://www.theguardian.com/business/2015/ jun/10/obscure-legal-system-lets-corportations-sue-states-ttip-icsid. See, e.g., Tienhaara, supra note 24. See also Christine Côté, A Chilling Effect? The Impact of International Investment Agreements on National Regulatory Autonomy in the Areas of Health, Safety and the Environment (Ph.D. thesis, London School of Economics, 2014), etheses.lse.ac.uk/897/8/Cote_A_Chilling_%20Effect.pdf. Tobacco Plain Packaging Act, Act No. 148 of 2011, An Act to Discourage the Use of Tobacco Products, and for Related Purposes, C2011A00148 (Australia). Philip Morris Asia Limited v. The Commonwealth of Australia, uncitral, pca Case No. 2012–12, Notice of Arbitration, ¶ 7.2 (Nov. 21, 2011). Id. Agreement between the Government of Hong Kong and The Government of Australia for the Promotion and Protection of Investments, signed 15 Sept. 1993, 1748 unts 385 (entered into force 15 Oct. 1993). For further details of this case, see Philip Morris Asia Limited v. The Commonwealth of Australia, uncitral, pca Case No. 2012–12, Award on Jurisdiction and Admissibility (Dec. 17, 2015).

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Finally, from the state sovereignty perspective, the issue of regulatory disputes appears especially problematic as isds allows foreign corporations interfere with the host government’s ability to regulate, constraining the state’s capacity to function for the benefit of the public. ii

Responding to isds Challenges

A Increasing Transparency and Legitimacy Responding to the most pressing challenges of isds, the international community has undertaken or proposed various measures seeking to improve the current regime. The lack of transparency in investment arbitration was addressed by developing and making available for use by the parties the uncitral Rules on Transparency46 and the Mauritius Convention on Transparency.47 The provisions of these legal instruments seek to make the isds regime more open and accessible to the public through various disclosure obligations on disputing parties.48 Yet, they preserve exceptions to protect confidential information and ensure the integrity of the arbitral process.49 The legitimacy concerns are more difficult to resolve as they require structural changes in the isds system. This may include new rules on nominating arbitrators and ensuring their accountability, eliminating direct financial ­interest of arbitrators in the outcome of the case, removing factors that may suggest bias of arbitrators or that they are motivated by a desire to secure repeat appointments. 46

47

48

49

uncitral Rules on Transparency in Treaty-based Investor-State Arbitration (effective Apr. 1, 2014) (unless otherwise agreed by the treaty or disputing parties, the rules apply to investor-state arbitrations initiated under the uncitral Arbitration Rules to resolve disputes arising out of iias concluded on or after April 1, 2014). United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (New York, 2014) (the “Mauritius Convention on Transparency”) (this Convention, which is yet to enter into force, allows sovereign states to express their willingness to obey by the uncitral Rules on Transparency for investor-state arbitrations arising out of iias concluded prior to April 1, 2014). See uncitral Rules on Transparency, supra note 46 (prescribing a number of transparency-­related obligations, such as an obligation to provide information on the investor-state arbitration to the designated repository to publish such information at the commencement of arbitral proceedings (art. 2), to publish and make available to the public documents on investor-state arbitration (art. 3), and to make hearings accessible to the public (art. 6), as well as providing for submissions by third party (art. 4) and nondisputing party to the treaty (art. 5)). Id. art. 7.

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The most far-reaching suggestion in this respect has been made by the European Commission, which in the context of the ttip negotiations put forward a proposal to replace isds with a permanent international investment court system that would function similarly to the wto dispute resolution.50 The European Union has also agreed on a new approach to investment dispute resolution in its recent ftas with Vietnam51 and Canada52 replacing traditional isds with a permanent investment tribunal system. Both treaties provide for a permanent tribunal and an appeal court to resolve investment disputes in divisions of professional members appointed for a limited term, renewable once.53 They also set the qualifications and experience requirements for such members, establishing that they “shall possess the qualifications required in their respective countries for appointment to judicial office, or be jurists of recognised competence,” “have demonstrated expertise in public international law,” and preferably “have expertise in particular, in international investment law, in ­international trade law and the resolution of disputes arising under international investment or international trade agreements.”54 Yet, under both ftas the new investment disputes resolution system will continue to rely on traditional isds procedural rules—the icsid Convention, the icsid Additional Facility Rules, or the uncitral Arbitration Rules.55 If legitimacy shortcomings of isds are in fact best addressed with the replacement of private arbitrators with professional judges, we may witness similar provisions in other iias concluded by the European Union and its followers. However, it may require some time and a strong political will as many of today’s 3,000 iias provide for traditional isds. Increased transparency and legitimacy deal with procedural and structural challenges of isds. Procedurally, they seek to put the public on notice about an investor-state arbitration, to grant access to arbitration materials and the award, to allow submissions by third parties and non-disputing party to the treaty. They also lead to structural changes in isds, including replacement of private arbitrators with professional judges who are democratically elected or appointed, posses sufficient level of expertise, financially independent, 50

See European Commission, Press Release. Commission Proposes New Investment Court System for ttip and Other eu Trade and Investment Negotiations (Brussels, Sept. 16, 2015), available at http://europa.eu/rapid/press-release_IP-15-5651_en.htm. 51 EU-Vietnam fta, supra note 4. 52 ceta, supra note 5. 53 ceta, supra note 5, art. 8.27–8.28; EU-Vietnam fta, supra note 4, arts. 12–13. 54 ceta, supra note 5, art. 8.27(4); EU-Vietnam fta, supra note 4, art. 12(4). 55 ceta, supra note 5, art. 8.23(2); EU-Vietnam fta, supra note 4, art. 7.

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but also accountable for the timeliness, consistency and quality of legal decisions they make. At the end, as the European Commission suggested, we may indeed replace the isds regime with a permanent international investment court system. B Limiting Tribunal’s Jurisdiction The above initiatives do not directly address another major concern over isds—the issue of regulatory disputes. Instead, to tackle their threat, the states have turned to more careful treaty-drafting. They seek to limit tribunal’s jurisdiction over public policy matters by limiting the scope of substantive promises made to foreign investors, providing for the general public policy exception or industry-specific carve-outs in investment treaties. This is especially noticeable in the newest generation of iias, which increasingly aim to reserve for the state the power to regulate. In line with this practice, one can observe in today’s treaties not only general provisions on the right to regulate,56 but also specific references to such right in articles covering substantive investor protection promises, such as non-discrimination, fair and equitable treatment (fet) and non-expropriation provisions.57 More troublesome, in my view, is the increased number of subject-matter carve-outs, which seek to eliminate the tribunal’s right to resolve disputes in a particular industry or subject matter. A much celebrated example of this 56

57

One of the most recent examples of such practice is found in the EU-Vietnam fta which in relevant part provides that: 1. The Parties reaffirm the right to regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, safety, environment or public morals, social or consumer protection or promotion and protection of cultural diversity. 2. For greater certainty, the provisions of this section shall not be interpreted as a commitment from a Party that it will not change the legal and regulatory framework, including in a manner that may negatively affect the operation of covered investments or the investor’s expectations of profits. EU-Vietnam fta, supra note 4, art. 13bis (Investment and regulatory measures/objectives). See, for example, the EU-Vietnam fta, which in its Annex on expropriation to Chapter 8 (Trade in Services, Investment and E-Commerce), Chapter 2 (Investment), provides that: 3. For greater certainty, except in the rare circumstances where the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures or series of measures by a Party that are designed to protect legitimate public policy objectives do not constitute indirect expropriation. Id., Annex [] Expropriation.

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practice is the tobacco carve-out from the tpp agreement.58 And this is what I think we should reconsider. Without making value judgments about the tobacco industry’s practices or state regulatory measures seeking to limit tobacco use, just by looking at structural, procedural and substantive changes to isds all together, one immediately realizes that taking the most contentious public policy issues away from arbitral tribunals is not a solution to the problem. First, industry-specific carve-outs do not go well together with other improvements of isds introduced to date. Take, for instance, transparency and legitimacy initiatives. Implemented successfully, they will allow converting isds into the most competent investment dispute resolution mechanism. And so, no other court in the world will be better placed to resolve regulatory disputes than isds or its improved version. Second, by carving out the whole industry or sector, we deprive their investors of the benefits of isds with respect to all investor protection violations. These foreign investors will have no other option but to revert to domestic courts or diplomatic protection—the same institutions isds was created to replace. Due to court bias and state immunity concerns, litigating investment disputes in domestic courts of the host state or a third country is not an ideal, or even feasible, solution. And it is particularly so for regulatory disputes because of their public policy implications. Yet, foreign investors will have no other forum unless they are allowed to bring an investor-state arbitration claim. Third, international arbitral tribunals have long proved able to resolve public policy concerns in the context of private dispute resolution.59 isds then, 58

59

See, e.g., Sergio Puig & Gregory Shaffer, A Breakthrough with the tpp: The Tobacco CarveOut, Yale J. Health Pol’y L. & Ethics (2016 Forthcoming), http://ssrn.com/abstract=2772277. See also Article 29.5 of the tpp, supra note 9, providing that: “A Party may elect to deny the benefits of Section B of Chapter 9 (Investment) with respect to claims challenging a tobacco control measure of the Party. Such a claim shall not be submitted to arbitration under Section B of Chapter 9 (Investment) if a Party has made such an election. If a Party has not elected to deny benefits with respect to such claims by the time of the submission of such a claim to arbitration under Section B of Chapter 9 (Investment), a Party may elect to deny benefits during the proceedings. For greater certainty, if a Party elects to deny benefits with respect to such claims, any such claim shall be dismissed.” Vera Korzun, Arbitrating Antitrust Claims: From Suspicion to Trust, 48 n.y.u. j. Int’l L. & Pol. 867, 930 (2016) (arguing that international arbitration “has repeatedly proved capable of settling private disputes involving public policy concerns, such as international arbitration of domestic antitrust claims….[and] has gained trust not only from private parties choosing arbitration for the resolution of their international disputes, but also from national courts and public antitrust authorities”).

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with its public law nature, is even more fitting to take into a­ ccount public policy considerations as part of the investor-state dispute ­settlement process. Therefore, there is no reason to doubt the ability of arbitrators to address regulatory disputes in investor-state arbitrations. With these considerations in mind, we should avoid isds carve-outs, unless there is an alternative treaty regime in place for the subject matter we seek to exclude. In fact, tax carve-outs in bits have arguably worked because tax matters generally fall under the extensive tax treaties regime. In case of tobacco industry and other industries that may follow, there is no comparable regime in place. Conclusion Investor-state arbitration has been hit with a wave of criticism in recent years. The opponents of isds often name the lack of transparency, legitimacy, ­accountability, and consistency of arbitral awards as the major drawbacks of the existing system of investment dispute resolution. They therefore demand changes or abolishment of isds—a unique dispute resolution method whereby foreign investors are able to bring sovereign states before private arbitral tribunals in search of compensation for breach of investment protection obligations. By some accounts, regulatory disputes may be the most serious of such ­concerns as they involve challenges by foreign investors in arbitrations of ­government measures adopted for the benefit of the public at large. Unsurprisingly, the issue of regulatory disputes has become the primary weapon of isds opponents in the vigorous debate as to the future of the isds regime. Various initiatives have already enhanced transparency and legitimacy of isds. The attempts have also been made through more careful treaty drafting to limit challenges of legitimate government regulation by foreign corporations before arbitral tribunals. The tpp’s tobacco carve-out exposed a new trend in investment treaty making—industry-specific carve-outs that allow a state party to deny the benefits of isds with respect to claims challenging regulatory measures in a particular industry. Yet, as I have argued here, in light of the systemic changes being introduced to the isds regime, we should reconsider this approach and bring regulatory disputes back to isds to ensure consistency and system-wide coherence of investment dispute resolution.

Index aaa/icdr Appeal Rules 9, 19–24, 27 Abu Dhabi Investment Authority 65–66 abuse of process 69 abuse of rights 69 action, cause of 64, 65 adc v. Hungary 78 aes v. Argentina 77–78 aes v. Hungary 195 Agreement on Trade-Related Aspects of International Property Rights (trips, 1995) 214 Alere San Diego 46–47 Allen v Sir Alfred McAlpine & Sons Ltd. 168 All Writs Act, “extraordinary remedies” authorized by 65n47 Amco Asia Corporation and others v Republic of Indonesia 77, 130 America Invents Act (2011) 216 American Arbitration Association/International Centre for Dispute Resolution (aaa/icdr) 9, 19–24, 27, 31nn1,2, 32,  34–35, 40 amiable composition/amiable compositeur 96, 103 amicus curiae applications on behalf of European Union 171–77 role of 167–69 amicus curiae, European Union as 163–64, 177–78 and context of claims in investor-state arbitrations for icsid resolution 165–66 and eu’s standing in legal proceedings 169–71 state aid and 166–67 annulment committees 117n30, 130, 131–32, 199 anti-trust law and claims 220–21. See also patent arbitration Apotex 69–71 appeal tribunal. See also icsid appellate process in icsid appellate process 121–23 makeup of 26 remedies available to 26

selection of 25 size of 25 appellate body, standing, in icsid appellate process 121–23, 130–33 applicable law 179–83 Arbitration Act, 1991 (Canada) 17 Arbitration Act, 1996 (England) 13, 59n23 Arbitration Act, 1996 (New Zealand) 13n5, 16 Arbitration Appeal and Review Rules of Arbitration Place 20, 22, 23, 24, 26 Arbitration in Switzerland—The Practitioner’s Guide (Arroyo, ed.) 102–3 Arbitration Place, Arbitration Appeal and Review Rules 20, 22, 23, 24, 26 arbitration rules, res judicata and contract construction 61–62 Arbitration Rules of the European Court of Arbitration (“eca Rules”) 20, 21, 22, 23,  25, 27 arbitrators, partisanship of 126 Argentina aes v. Argentina 77–78 cms Transmission Company v. Republic of Argentina 114n19, 131 El Paso v. Argentina 77 Enron Creditors Recovery Corporation and Ponderosa Assets L.P. v Argentine Republic 131 Sempra Energy International v Argentine Republic 131 Arrowhead Glob. Sols, Inc. v. Datapath, Inc 41 attorney-client privilege 58 attorney experience, and arbitration outcome 149 Australia China-Australia Free Trade Agreement (ChAFTA) 228n8 Philip Morris Asia Limited v. The Commonwealth of Australia 155, 226n1, 235 autonomy, and merit appeals 10 award(s). See also damages calculations in commercial arbitration 76 contradictory 81, 82 in edf v. Hungary 193

242 award(s). See also damages (cont.) finality of 37–39, 48, 49, 51 in intra-EU disputes 189 in investment treaty arbitration 145–47 in merit appeals 26–27 on patent validity 218–19, 222 and precedent in international investment arbitration 78, 79 prior 80–83 publication of 84–85 real value of arbitral 72–73 reasoned 102, 103, 104, 117 Ball, Markham 108n2, 110n6, 112n14 Banco de Seguros del Estado v. Mutual 41 Bangladesh 78 barristers’ chambers 57–58 “base case” scenarios 118 Basketball Arbitral Tribunal 104–6 “benefit,” and res judicata 222–23 “best case” scenarios 118 Bilateral Investment Treaty/Treaties (bit) and eu as amicus curiae 163–64 extra-EU 186–88 between Germany and Pakistan 2n3 and hostility to investment arbitration 119–20 intra-EU 160, 185, 188–99 and precedent in international investment arbitration 78–79 us Model 89, 90, 228n7 binding precedent 74, 77, 78, 83, 86, 183 Brent v Brent (2004, Canada) 18 Brokovich, Erin 209 Brower, Charles N 126 Brussels Regulation 156–57 Bulgaria 199 burden of proof, and buyer protection under mac provision 205–6 Business Combination Agreement (bca) 67 buyer protection, under mac provisions 205–6 Cameroon 130 Canada. See also Royal Bank of Canada Arbitration Act, 1991 17 Comprehensive Economic and Trade Agreement (ceta) 153–54, 230

Index free trade agreement with eu 5, 153, 227–28, 237 provincial and territorial superior courts in 18 Capital Justice ll v. Wachovia Bank N.A. 205 Capitan Constante 39 Carbonneau, Thomas E. 48 Car Carriers, Inc. v. Ford Motor Co. 64–65n43 Carey Value Added sl 209–10 Caron, David 124 Carr v Gallaway Cook Allan (New Zealand) 16 carve-outs 204–5, 208, 212, 228, 238–40 cause of action 64, 65 Central America Free Trade Agreement (cafta) 124 Central Costa Rica Petroleum Company 97 Cesareo v. Cesareo 64n41 chambers, of barristers 57–58 Charanne B.V. and Construction Investments S.A.R.L. v. Kingdom of Spain 193–95 Charter of Individual Freedom 160 chilling effect 232–36 China-Australia Free Trade Agreement (ChAFTA) 228n8 China International Economic and Trade Arbitration Commission Arbitration Rules (cietac) 31n1 Chinmax Medical Systems v. Alere San Diego 46–47 choice-of-law provision 61, 62 Chorzów Factory principle 110, 114 Citigroup, Inc. v. Abu Dhabi Investment Authority 65–66 civil law jurisdictions judicial estoppel in 69 precedent in 74–75 civil law traditions versus common law traditions 63n35, 74 and issue preclusion 67 res judicata in 64 claim 62, 63–64 claim preclusion 63–66 cms Transmission Company v. Republic of Argentina 114n19, 131 Code of Civil Procedure (France) 11n2 collateral estoppel 60, 61, 71n69, 223n23 colones 97, 99

243

Index Commentary of the International Law Commission Articles on Compensation Standards 110–11 commercial arbitration ex aequo et bono in 102–3 precedent in international 75–76 recent EU-related developments in 153–62 common law jurisdictions 75 common law traditions versus civil law traditions 63n35, 74 and issue preclusion 66 precedent in 74 res judicata in 64 Comprehensive Economic and Trade Agreement (ceta) 153–54, 230 consistency of law, and doctrine of binding precedent 83, 84 Construction Investments S.A.R.L. v. Kingdom of Spain 193–95 contract, freedom of 48 Convention on the Settlement of Investment Disputes between States and Nationals of other States (icsid Convention) 77–79,  95–96, 184–85 Cornell-Pepperdine/Straus Institute—cpr Survey (2011) 27–28 corporations, as subjects of international law 234–35 Costa Rica 97–101 cost consequences, and merit appeals 24 “Counsel” 119–20 country risk premium 113–17 Court of Justice of the European Union (cjeu) 156, 158, 159, 175–76, 192 Covenant of the League of Nations 1 cpr Damages Protocol 117–18 Czech Republic 125, 190–91 damages calculations 108–10, 117–18 calculation of discount rate 113–17 and discounted cash flow methodology 109–13 Datapath, Inc 41 defensive non-mutual issue preclusion 223 discounted cash flow (dcf) method 109–13 discount rate, calculation of 109–10, 113–17

Donaldson, Megan 232–33n27 Dugan, Christopher F. 233n29 Eastern Sugar bv v. the Czech Republic 190–91 Economic Integration Agreements (eia) 186–87 Ecopetrol, S. A. v. Offshore Exploration and Production 42–43 Edcare Management v. Delisi 60n27 Eder, Sir Bernard 14n6 edf 155 edfi Tribunal 113–14 edf v. Hungary 193 Egypt 131 Electrabel S.A. v. Hungary 195–97, 234n33 El Paso v. Argentina 77 emergency arbitrator 49–51 emergency awards/emergency relief defined 33–36 enforceability of, in United States 31–33 and enforceability of interim awards 36–44 as enforceable interim awards 45–49 and institutionalization of emergency arbiter 49–51 Energy Charter Treaty (ect) 155, 164, 185, 186–89, 195–99 England. See also Great Britain Arbitration Act of 1996 13, 59n23 claim preclusion in 65 English legal tradition versus French civil code 55n8 fee shifting in 59 Enron Creditors Recovery Corporation and Ponderosa Assets L.P. v Argentine Republic 131 eu law, application in investment treaty arbitration 185–86, 199 and Article 42 of icsid Convention 184–85 extra-eu investment protection treaties 186–88 general remarks on applicable law 179–83 intra-EU investment protection treaties 188–99 and relation between international and municipal laws 183–84 Eureko B.V. v. The Slovak Republic 191–93

244 European Commission calls for termination of intra-EU bits 160 and icsid appellate process 122–23, 125 investment court system proposed by 3–5 Juncker on 153 online consultation regarding isds in ttip 157 and transparency and legitimacy of isds 157–58, 237 European Common Aviation Area 176 European Convention on Human Rights and Fundamental Freedoms 170 European Court of Arbitration, Arbitration Rules of 20, 21, 23, 25, 27 European Court of Human Rights (echr) 156, 170 European Court of Justice (ecj) 156, 159, 192 European Economic Area (eea) Agreement 176 European Parliament adoption of resolutions supporting ttip 160–61 study on legal instruments and practice of arbitration 158–59 European Union. See also amicus curiae, European Union as; eu law, application in investment treaty arbitration amicus curiae applications on behalf of 171–77 approach to investor-state arbitration 5 Comprehensive Economic and Trade Agreement (ceta) 153–54, 230 declines becoming intervening party 177 free trade agreement with Canada 5, 153, 227–28, 237 free trade agreement with Vietnam  227–28, 237, 238nn56,57 and icsid appellate process 120–21, 124–25, 127–30 international investment tribunal in 3–4, 227–28, 237 opposition to isds 153–54, 155 and recent developments in commercial and investor-state arbitration 153–62 soft law and res judicata in 60 standing in legal proceedings 169–71 State aid rules 154–55

Index evidence, new, in merit appeals 24 ex aequo et bono 95, 107 legal sources authorizing 95–97 meaning of 101–6 and treaty between Great Britain and Costa Rica 97–101 ex parte communications 57 extra-EU bits 186–88 fair and equitable treatment (fet) violations 234 fair market value (fmv), in damages calculations 110–11 Federal Arbitration Act (United States) 11n2, 15–16, 33, 38 Federal Rules of Civil Procedure 92 fee shifting 59 Ford Motor Co. 64–65n43 four parts test, and buyer protection under mac provision 207 fragmentation, caused by icsid appellate process 126–27 France and abuse of rights 69 and civil law approach to res judicata 67n53 ex aequo et bono in 102–3 French civil code versus English legal tradition 55n8 Franck, Susan 125–26, 231n18 freedom of contract 48 Frontier Oil Corp. v. Holly Corp. 209 Gainsville 39–40 Galanter, Mark 149 Gallaway Cook Allan 16 Georgia 114–16 Germany Bilateral Investment Treaty with Pakistan 2n3 claim preclusion in 63–64 opposition to isds 155 Vattenfall ab and others v. Federal Republic of Germany 2, 123, 227n3 views on investor-state arbitration in 2 Goldsmith, Lord Peter 122 Great Britain 97–101. See also England Grupo Hotelero Urvasco sa v Carey Value Added sl and Another 209–10

Index Guatemala 93–94 Guinea 130 Hall Street Associates, llc v Mattel, Inc. (2008, us) 15–16 hard law 55–56, 139 Helnan International Hotels A/S v Arab Republic of Egypt 131 Hexion Speciality Chemicals, Inc. v. Huntsman Corp. 208–9 Hobér, Kaj 63n33 Hodges, Paula 56n13 Holloway v. Pagan River Dockside Seafood, Inc. 92 Holly Corp. 209 Holmes, J. 138n27 Hong Kong International Arbitration Centre Administered Arbitration Rules of 19n26, 50–51 and emergency relief 31n1, 32n2, 34 Hungary adc v. Hungary 78 aes v. Hungary 195 edf v. Hungary 193 Electrabel S.A. v. Hungary 195–97, 234n33 and Micula v Romania 155 Huntsman Corp. 208–9 iba Guidelines on Conflict of Interest 57–58 ibp, Inc. v. Tyson Foods, Inc. 206–7, 210 icc Arbitration Rules 96 icdr International Dispute Resolution Procedures 96 icsid appellate process debate regarding 123–24 eu model for 124–25, 127–29 European perspective on 120–21 fragmentation caused by 126–27 and hostility to investment arbitration 119–20 legitimacy and transparency of 125–26 next steps for 129–30 standing appellate body in 121–23, 130–33 icsid Convention—A Commentary, The (2nd ed.) 101, 103 ilc Articles on Responsibility of States for Internationally Wrongful Acts 184n9

245 illegal state aid 166–67, 173–74 “Improvements and Innovations in International Arbitration” 28, 29 Indonesia 77, 130 institutional rules, and merit appeals 18–19 interim awards emergency awards as enforceable 45–49 enforceability of 36–44 international arbitration, evolution of 9 International Arbitration Act (Singapore) 50 International Centre for Dispute Resolution (icdr). See American Arbitration Association/International Centre for Dispute Resolution (aaa/icdr) International Centre for the Settlement for Investment Disputes (icsid). See also Convention on the Settlement of Investment Disputes between States and Nationals of other States (icsid Convention); icsid appellate process dispute analysis of 143–44 and eu as amicus curiae 164 Rules of 172, 173 International Chamber of Commerce (icc) Arbitration Rules of 19 and civil law approach to res judicata 67 and emergency relief 32, 33–34, 35, 45 on ex parte communications 57 and hostility to investment arbitration 120 and precedent in international commercial arbitration 75 International Commercial Arbitration Act (Canada) 17 International Institution for Conflict Prevention & Resolution (cpr) Appeal Procedures 27 Arbitration Appeal Rules of 19, 21–22, 23, 24, 25, 26 and emergency relief 31n1, 35 Protocol on Determination of Damages in International Arbitration (cpr Damages Protocol) 117–18 international investment agreements (iias) 135, 138–39, 229–30

246 international law versus national law 54–55 relation between municipal law and 183–84 international treaty arbitrations, motions to dismiss 89–94 intervening party, European Union declines becoming 177 intervenor, versus amicus curiae 169 intra-EU bits 185 application of eu law to merits of dispute 195–99 general considerations 188–90 jurisdiction and admissibility 190–95 investment arbitration 119–20, 134–37. See also damages calculations investment court/tribunal in eu free trade agreements 227–28, 237 in icsid appellate process 121–23, 124 versus investor-state arbitration in eu 3–5 jurisdiction of 238–40 investment treaties 91, 179, 228 investment treaty arbitration (ita) 135–36, 149–50. See also eu law, application in investment treaty arbitration depoliticization of 142–49 doctrine and debate regarding 137–42 investor bias 126, 143–45, 147 investor identity, and arbitration outcome 148–49 investor-state arbitration/investor-state dispute settlement (isds). See also amicus curiae, European Union as context of claims in, for icsid resolution 165–66 corporate interest and right to regulate 226–29, 240 opposition to 120, 122, 124, 153–54, 155, 229–36 outlook for continued vitality of 1–6 recent EU-related developments in 153–62 responding to challenges of 236–40 Islamic Republic of Iran v. United States of America 180 Island Creek Coal Sales Company v. City of Gainsville 39–40 Israel 40–41 issue estoppel 66–67 issue preclusion 60, 66–67, 223

Index jams Comprehensive Arbitration Rules and Procedures (jams Rules) 20–24, 27, 31n1,  32n2, 35, 96–97 Jeffery Commission 79 Jennings, Sir Robert Y. 73 judicial estoppel 68 judicial review expansion of 14–18 statute based, and institutional restrictions on merit appeals 10–19 Juncker, Jean Claude 153 jurisdictional objection 89–90, 91–93 jurisprudence constante 74–75, 83, 86, 125 Kantor, Mark 118 Kardassopoloulos/Fuchs v. Georgia 114–16 Kaufmann-Kohler, Gabrielle 54n7, 72, 76, 79 Kazakhstan 117n30 Kingsbury, Benedict 232–33n27 Klockner Industrie-Anlagen GmbH and others v Cameroon and Societe Camerounaise des Engrais 130 Korzun, Vera 239n59 Kuhner, Detlev 56n14 Lauterpacht, Elihu 119 League of Nations 1 Leahy-Smith America Invents Act (2011) 216 legitimacy of icsid appellate process 125–26, 127, 128, 132 of investor-state arbitration 227, 231, 236–38 letco v. Liberia 77 Liberia 77 licensing agreements 216–17 Lisbon Treaty 185, 188 Llewellyn, Karl N. 138n27 Loewen v. United States of America 123 London Court of International Arbitration (lcia) Arbitration Rules of 19 Article 18.3 58 and emergency relief 31n1, 32n2, 34 and iba Guidelines on Conflict of Interest 57 “loser pays” principle 59

Index Maimonedes 33 Malaysian Historical Salvors, sdn, bhd v Malaysia 131 Malmstrom, Cecilia 120, 153, 154 Mariform Shipping 39, 46 Maritime International Nominees Establishment v Republic of Guinea 130 market comparables method 111–12 material adverse change clauses 203–4 carve-outs in 204–5 court cases involving 206–10 drafting 211–13 effective buyer protection in 205–6 practical reasons for establishing 210–11 risks addressed by 204 materiality 212 Mattel, Inc. 15–16 Mauritius Convention on Transparency 236 Mega-Regional Trade agreements 229–30 merit appeals 9–10, 29–30 institutional responses to interest in 19–27 as live issue in international arbitration 27–29 statute based judicial review and institutional restrictions on 10–19 Metallgesellschaft A. G. v. Capitan Constante 39 Methanex v. us  90 Michaels v. Mariform Shipping 39, 46 Microsoft 45–46, 50 Micula v Romania 154–55, 171–75, 176–77, 197–99 Mitsubishi Motors v. Soler Chrysler-Plymouth 220–22 Model Law on International Commercial Arbitration of the United Nations Commission on International Trade Law   11–12, 17–18 motion to dismiss 89–94 Mourre, Alexis 76 multilateral trading agreements 134–35 multi-patent, multi-forum disputes 215–18, 224 municipal law, relation between international law and 183–84 national law versus international law 54–55

247 and res judicata 62–69 Netherlands Arbitration Institute (nai) 31n1 New Regency Prods., Inc. v. Nippon Herald Films, Inc. 55n11 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and emergency relief 32–33 enforceability of awards under 37, 38, 42, 43n73, 44 and obstacles to global patent arbitrations 219–20, 221 and public policy 232n26 and statute based judicial review 12 New York Court of Appeals 39 Noble China v Lei (Canada) 17–18 non-mutual issue preclusion, defensive and offensive 223 normativity, soft 54n7 North American Free Trade Agreement (nafta) 2, 69–71 offensive non-mutual issue preclusion 223 Offshore Exploration and Production 42–43 Ohio Reinsurance Corp. 41, 47 Oil Platforms case 180 Ontario Court of Appeal 18 Ontario Superior Court of Justice 17–18 Opinion 2/2013 of eu Court of Justice 156 Opinion on the European and Community Patents Court 176 oral appeal hearings 23 oral evidence, transcript of, for merit appeals 23 ownership, adjudication of patent 216–17 Oxford Handbook of International Law 91 Pacific Reinsurance Management Corp v. Ohio Reinsurance Corp. 41, 47 pacta sunt servanda 103–6, 193 Pagan River Dockside Seafood, Inc. 92 Pakistan 2n3 partisanship, of arbitrators 126 party autonomy, and merit appeals 10 patent arbitration 214–15, 224–25 multi-patent, multi-forum disputes  215–18, 224 obstacles to global 219–24 U.S. patent arbitration statute 35 U.S.C. § 294, 218–19, 225

248 patent validity 216, 217–18, 219–22 Paulsson, Jan 92 permanent international investment court 159 Peru 90, 93–94 petita 62, 63–64 Petroleos Mexicanos of Mexico 48–49 Philip Morris Asia Limited v. The Commonwealth of Australia 155, 226n1, 235 Philippines 78 Pittella, Gianni 161 Plama v. Bulgaria 199 precedent 72–74, 86 and applicable law 183 and icsid appellate process 125 in international commercial arbitration 75–76 in international investment arbitration 77–79 interviews regarding 79–83 role of 74–75 support for theory of, in international arbitration 83–86 preclusive doctrines 68–71. See also claim preclusion; issue preclusion predictability of law, and doctrine of binding precedent 83, 84, 85 Priest-Klein model 145 professional secrecy 58 pro-state bias 144–45, 147 Protocol on Determination of Damages in International Arbitration (cpr Damages Protocol) 117–18 publication of arbitral awards 84–85 Publicis Communication v. True North Communications, Inc. 43–44, 45n84, 47 public policy exception 232 Puig, Sergio 239n58 Radicati di Brozolo, Luca G. 62n33 rdc v. Guatemala 93–94 reasoned awards 102, 103, 104, 117 Reding, Viviane 159 Regulation (eu) No 1215/2012 156–57 regulatory disputes 227, 232–36, 240 regulatory standards, and patent disputes 224 Reinisch, August 79 Renco v. Peru 93–94

Index res judicata 52, 59–71, 222–24 Restatement (Second) of Judgments 65n45 Restatement of the Law Third/The U.S. Law of International Commercial Arbitration 44 Romania 154–55, 171–75, 176–77, 197–99 Ronald S. Lauder v The Czech Republic 125 Royal Bank of Canada 97, 99, 100 rules, res judicata and contract construction 61–62 “rules and principles,” and applicable law 182, 183 Rumeli & Telsim v. Kazakhstan 117n30 Russian Federation 146 Saipem v. Bangladesh 78 Salmon, Lord 168 “same claim” 62 Saville, Lord 14n6 Schwebel, Stephen M. 73–74 secrecy, professional 58 Sempra Energy International v Argentine Republic 131 severability, and enforceability of interim awards 40 sgs v. Philippines 78 Shaffer, Gregory 239n58 Sheppard, Audley 62n32 Sheppard, Ben H. 57n16 Singapore International Arbitration Centre Arbitration Rules of 19n26 and emergency relief 31n1, 32 Sir Alfred McAlpine & Sons Ltd. 168 Slovak Republic 191–93 Societe Camerounaise des Engrais 130 soft law 52–53, 71 content of 56–59 in international arbitration 53–56 and investment treaty arbitration 139 and res judicata 59–71 soft normativity 54n7 Soler Chrysler-Plymouth 220–22 Southern Seas Navigation v Petroleos Mexicanos of Mexico 48–49 sovereign risk 113–17 S. Pac. R. Co. v. United States 66n51 Spain 193–95 Sperry International Trade v. Government of Israel 40–41

Index sports arbitration, ex aequo et bono in 104–6 stability of law, and doctrine of binding precedent 83 standing appellate body, in icsid appellate process 121–23, 130–33 stare decisis 74, 125 state aid 166–67, 173–74 state bias 144–45, 147 statute based judicial review, and institutional restrictions on merit appeals 10–19 Statute of the Permanent Court of International Justice 1, 181 Stockholm Chamber of Commerce (scc) 31nn1,2, 32, 34, 96 substantive rights, in investment treaties 137 Supreme Court of United States 169 Svalbard Treaty (1920) 188 Sweden 197–98 Swiss Chambers Arbitration 31n1 Switzerland and civil law approach to res judicata 67 claim preclusion in 64 ex aequo et bono in 102–3 lawyers and professional secrecy in 58n20 soft law and res judicata in 60 Taft, William H. 98–100 tfeu 194 35 U.S.C. §294 (1982) 218–19, 225 Thomas, Lord 13–14n6 Tinoco, Frederico 97, 99–100 Tinoco, Jose Joaquin 99, 100 Tinoco Government 97, 98, 99 Tobacco Plain Packaging Act (Australia, 2011) 235. See also Philip Morris Asia Limited v. The Commonwealth of Australia Toys “R” Us, Inc. 42 tpp Agreement 229–30, 238–39 trade liberalization treaties 229–30 Trade Promotion Authority Act (2002, usa) 123 transaction, defining, for purposes of claim preclusion 65n45 transatlantic trade and investment partnership (ttip) 119–20, 121, 122, 153–54, 157,  160–61, 230 Trans-Pacific Partnership agreement 232n25

249 Trans-Pacific Trade Agreement 5 transparency of icsid appellate process 125–26 of investor-state arbitration 157–58, 227, 236–38 and precedent in international investment arbitration 84 and testing myths about investment treaty arbitration 143 treaty arbitrations, motions to dismiss international 89–94 Treaty of Amity 180 triangulation 111n11 True North Communications, Inc. 43–44, 45n84, 47 Tyson Foods, Inc. 206–7, 210 uncitral Arbitration Rules 71n69, 96 uncitral Rules on Transparency in Treatybased Investor-State Arbitration 236 Unified Patent Court 215 uniformity of law, and doctrine of binding precedent 83 United Nations Commission on International Trade Law (uncitral) 11–12, 17–18, 43. See also uncitral Arbitration Rules; uncitral Rules on Transparency in Treaty-based Investor-State Arbitration United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. See New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards United Nations Convention on Transparency in Treaty-based InvestorState Arbitration 236 United Nations Human Rights Commission 171 United States. See also emergency awards/ emergency relief amicus curiae briefs in Supreme Court 169 claim preclusion in 65–66 Islamic Republic of Iran v. United States of America 180 judicial estoppel in 68 Loewen v. United States of America 123 Methanex v. us  90 Model bits 89, 90, 228n7

250 United States (cont.) motion to dismiss in investment arbitration introduced in 89 soft law and res judicata in 60 S. Pac. R. Co. v. United States 66n51 Trade Promotion Agreement with Peru 90 validity, of patents 216, 217–18, 219–22 valuation 108–9. See also damages calculations Van Den Berg, Albert Jan 126 variables, and testing myths about investment treaty arbitration 148–49 Vattenfall ab and others v. Federal Republic of Germany 2, 123, 227n3 Vienna Convention Article 27 184n9 Article 30 191–92 Article 31(1)(c) 197 Article 31(3)(c) 179–80, 182, 186 Article 59 190, 191 Article 65 191

Index Vietnam, free trade agreement with eu 227–28, 237, 238nn56,57 Villaggi, M. Florencia 72 Wachovia Bank 205 Weidemaier, W. Mark C. 79 Weighted Average Cost of Capital (wacc) 113 The Western Maid v. Thompson 138n27 White & Case / Queen Mary University of London International Arbitration Survey, “Improvements and Innovations in International Arbitration” 28, 29 winner-take-all patent arbitration 216, 224 World Bank Guidelines (1992) 111 “worst case” scenarios 118 wto appellate jurisprudence 132 Yahoo! Inc. v. Microsoft Corporation 45–46, 50 Yonir Techs, Inc. v. Duration Sys. 41n61 Yukos 146 Yusuf Ahmed Alghanim & Sons v. Toys “R” Us, Inc. 42