The article was first published at European Federation for Investment Law and Arbitration Blog here.
Singapore International Arbitration Centre (SIAC) has published its first edition of the rules applicable to Investment Arbitrations (IA Rules) conducted under its aegis. These IA Rules were published on 1st January 2017 and have been drafted with specific requirements of investment arbitration in mind. While many institutions such as LCIA and ICC administer investment arbitration, there is no specialized procedure or a separate set of rules for investment arbitration. The rules are an indication of the growing importance being given to investment claims in South Asia. In recent times, many South Asian countries such as India, Indonesia, and Malaysia have received several investment claims and are contemplating a new regime of Investor-State Dispute Settlement (ISDS) mechanism. These IA Rules have to be seen in the context of the recent aversion of developing countries to established regimes such as ICSID. Another important point is that India, the largest contributor to SIAC in 2015, is not a party to ICSID.
Unlike commercial arbitration, investment arbitration has its basis and origin in public international law. There are more than 2000 Bilateral Investment Treaties and more than 15 multilateral instruments under international law that govern the Investment arbitration. The entire premise of crystallization of a dispute and the threshold of breach of legal principles under international law are fundamentally different from commercial transactions and disputes thereof. When the entire premise of a dispute and its resolution are different, there is no reason that there cannot be a separate set of procedures for the two types of arbitration. Many issues such as jurisdiction, sovereign immunity, and even the pleadings require a completely different level of procedural sensitivity in investment arbitrations. The IA Rules precisely attempt to bring that level of efficiency and sensitivity. Traditionally it has been seen that the investment arbitrations require a longer time to end than commercial arbitrations due to the complexities of the issues involved and a higher threshold of evidence submission. In order to streamline the process and address the efficiency issues, it is always better to have a separate set of rules dealing with investment arbitration.
SIAC has attempted, quite successfully, to make the rules as customized to investment arbitrations as possible. The important aspects of the IA rules are:
- The rules are applicable to disputes involving a State, State-controlled entity or intergovernmental organization, whether arising out of a contract, treaty statute or any other instrument.
- The IA rules, however, provide for a broad scope of application which is not subject to objective thresholds of whether the claiming party is an “investor” or the subject matter of the dispute qualifies as “investment” though such scope is subject to the underlying treaty or instrument in which the IA rules are incorporated by reference. Therefore, regarding the issues of preliminary qualification to bring claims, if there is a conflict between the IA Rules and the underlying treaty or instrument, the later will prevail.
- Rule 1.3 provides for waiver of any right of immunity from jurisdiction in respect of the proceedings related to the arbitration which parties may otherwise possess if the parties have entered into an agreement to refer the disputes to SIAC. The rule can be directly linked to issues of sovereign immunity i.e. once the parties have agreed to incorporate the arbitration agreement referring the disputes to SIAC administered arbitration, they cannot claim sovereign immunity in respect of the proceedings related to those disputes as envisaged under the agreement contained in underlying treaty or instruments.
- Under Rule 16.5, the presiding arbitrator has been authorized to make procedural orders alone though the same may be revised by the Tribunal if required. Such a step is likely to address the issues of efficiency and time management.
- One of the most important points under these IA Rules is the procedure related to the pleadings. They provide for a memorial based submissions rather than the pleadings based submissions which are generally the preferred practice in commercial arbitrations. Under the Rules 17.2 and 17.3, the parties are required to file their memorial comprising of factual statements of claim/defense along with their legal submissions, fact and expert evidence and all other documents supporting the memorial. All legal authorities and documents supporting the parties’ respective cases shall be filed along with these memorials.
- The Tribunal has also been authorized to appoint its own experts and require the parties to assist the expert so appointed. The Tribunal may also allow the parties to examine such an expert.
- Under Rule 24, the Tribunal has been given a wide range of powers. However, it remains to be seen whether such powers, if exercised by the Tribunal, can go along with the notions of sovereign acts and freedom that form the premise of international law and public policy. The IA Rules are silent on whether the Tribunal will have the jurisdiction to direct a party to not proceed with the civil or criminal investigation and/or prosecution against an investor pending the arbitration before it. Another important point is that the Tribunal has been empowered to impose sanctions on a party for its refusal to comply with the rules, agreed procedure, directions of the Tribunal or any partial award rendered thereof. It remains to be seen if the sovereign states will be willing to concede to SIAC on this point and how the Tribunals will interpret the scope of this unusual power.
- Similar to the ICSID Rule 41 (5), the IA Rules also allow for summary dismissal of a claim or defence in order to save time and cost provided an application is made by the party and after hearing the parties, the Tribunal is of the opinion that a claim/defence is without legal merit or is outside the jurisdiction of the Tribunal or is inadmissible.
- The IA Rules also provide for interim and emergency relief to the parties. They also provide that a relief of such nature obtained from a judicial authority prior to the constitution of the Tribunal under these rules will not be incompatible with the IA Rules. This is a clear indication that merely approaching a national court and obtaining a relief from a national court will not disentitle a party from bringing a claim for interim or emergency relief and neither a failure to obtain a relief from a judicial authority prejudice the right of the party to request the Tribunal for interim/emergency relief.
- The Tribunal will be governed by international treaties, customs and general principles of law along with relevant national laws in case the parties have failed to provide for a designated law governing the substance of the dispute.
- The IA Rules also provide for written submissions (and it Tribunal deems fit, oral arguments) by the non-disputing contracting party as well as the non-disputing party. While a non-disputing contracting party can make submissions with respect to the treaty interpretation as well as on matters within the scope of the arbitration, the non-disputing party can only make submissions on matters within the scope of the arbitration. The IA Rules define a non-disputing party as a party which is neither a party to the arbitration nor a party to the underlying treaty or instrument. Such a submission by non-disputing parties and non-disputing contracting parties must comply with the criteria given under Rule 29.3 before their submissions can be taken on record by the Tribunal i.e. the submissions must assist the tribunal, must address a matter that is within the scope of arbitration and the party making the submission must have sufficient interest in the matter. The Tribunals may have to use their discretion judiciously while allowing third party submissions, especially on the issues of sufficient interest.
- The draft award has to be sent to the registrar within 90 days of the closing of the proceedings. Interestingly, the IA Rules allow the presiding arbitrator to make the award in case the Tribunal is unable to render a majority award.
The IA rules are promising and more than welcome. Their publication could not have been at a better time when many Asian, African, Latin American and few European countries (Poland) are eager to renegotiate their BITs or are reconsidering the ICSID regime. These IA Rules can be an attractive proposition to countries like India and Indonesia who have a successful record of enforcing SIAC awards. There can be no doubt that SIAC has taken the lead in the field and we can only expect others to follow. Especially, one can expect LCIA to publish rules on investment arbitration in coming months as it readies to overcome the post-Brexit challenges and tries to maintain its position as the preferred choice of arbitration in Europe.
However, in our eagerness to welcome these rules, we may tend to overlook the crucial issues that have forced many developing nations to move away from the traditional ISDS mechanisms. The IA Rules provide for waiver of sovereign immunity, the power of Tribunal to impose sanctions and involvement of non-disputing parties in the arbitration process which may not go down well with the States. However, it can be argued and quite successfully so, that these IA rules will be subject to the underlying treaty or instrument that may clearly provide for such exclusions. It remains to be seen whether SIAC will accept reservations to its rules within the arbitration agreements that are present in these underlying instruments or treaties. Whatever the case maybe, these rules are an indication of times to come in the field of investment arbitration (which are bound to be interesting).
Apr 23, 2017
The article was first published at TaxSutra here.
Naresh Thacker & Abhishek Dwivedi
Recently, India announced that its Union Cabinet had approved signing of a new Bilateral Investment Treaty [BIT] with Cambodia, another South-Asian country. The IA Reporter also reported that India and Brazil have also concluded (referring to finalization of draft) the much-anticipated BIT. These are important events as the new BIT with Cambodia as well Brazil is supposedly based on the controversial Model Bilateral Investment Treaty 2015 (Model BIT). However, while the both the BITs are yet to be signed (no press release by Indian Government yet confirming that they have been signed), many developed or capital-exporting nations have shown reluctance in agreeing to the clauses as contained in the Model BIT citing the low level of protection offered to investments and high threshold of compliance before bringing a dispute before an international tribunal. While such reluctance on the part of developed countries is not surprising, it is important to acknowledge the merit in some of these concerns.
India has been revaluating its BIT’s since 2012 when India started receiving large number of arbitration notices due to retrospective taxation and cancellation of 2G licenses by the apex court. Last year, after much discussion and debate, India released the new Model BIT replacing the 2003 Model Bilateral Investment Promotion Agreement (Model BIPA). Subsequently, India gave a notice of termination of the existing BIPAs to 57 Countries and also requested 25 others for joint interpretational statements. India started its renegotiation for new BITs with a number of countries including US, Canada, Australia, Brazil & Cambodia and also with EU based on its Model BIT.
What has changed in the 2015 Model BIT?
The new Model BIT, as per the government, balances the protection given to the foreign investments with the sovereign right of the country to take fiscal and regulatory measures. However, while the revision of the Model BIPA was necessary, the contents of the BIT have been a subject of unending controversy.
The first major change is the complete exclusion of taxation measures from the BIT. The blanket and absolute exclusion of taxation measures from the scope of the BIT has not gone down well with many countries. While most of the treaties exclude tax measures from the scope of treaty but make an exception for expropriation and national treatment clauses. However, there is no such exception in this model BIT. It has also been noted that India is not agreeable to any deviation from this position, probably, due to the large number of claims it had to face due to the retrospective tax amendments.
Further, the threshold of protections has also been substantially altered. Instead of the vague (and avoidable) standard of Fair & Equitable Treatment (F&ET), the Model BIT provides for protection of investments against denial of justice, fundamental breach of due process and manifestly abusive treatment. The latter two protections are merely corollary of the protection against denial of justice.
While the omission of F&ET is acceptable, its replacement with protection against denial of justice is not. The protection against denial of justice has a very high threshold of breach which is evident from the White Industries award where a delay of 9 years in enforcement of an award was considered not to be a denial of justice. Therefore, the developed countries argue that it would be very difficult for an investment to remain reasonably protected when the standard of breach by the host state is exceptionally high.
Also, the clause of Full Protection & Security (FPS) has been explained to be limited to physical security of the investments and investors in relation to those investments. There have been cases in past where such a clause has been expansively interpreted to include all kind of vague and unintended protections.
On the issue of expropriation, there has been conflict of views between the countries regarding the clause which requires the investor to approach domestic courts before moving to an international tribunal. It also keeps the judgements of courts having expropriating effect excluded from the scope of the BIT.
The dispute resolution clause has also been a bone of contention. The requirement that investors must pursue the domestic remedy for at least five years before bringing a claim has not gone down well with other countries. This is a very high threshold of compliance that nearly defeats the purpose of the treaty.
The Model BIT also excludes Compulsory licensing & revocation of Intellectual Property Rights (IPR) from the scope of BIT i.e. a foreign investor against whom such an action is taken by the government will not have a recourse to international arbitration under the BIT. This is one of the biggest concerns raised by foreign investors and nations.
The Most Favoured Nation (MFN) clause has also been omitted. This provision provides protection to investments against discrimination by the host state. However, in past, this provision has been used extensively and successfully by investors to engage in treaty shopping. There has been a movement away from this provision as more and more developing countries oppose the clause for its rampant misuse.
Before we highlight the concerns or suggest any way forward, it is important to acknowledge that India is not alone in its quest to limit the protections offered to foreign investors or move towards a BIT mechanism that considerably asserts the nation’s sovereign right to regulate. Many nations in Latin America, Africa and Asia-pacific have made their intentions to go the same path. It has been argued, quite successfully, that developing countries require a higher degree of regulatory discretion to govern their resources equitably and therefore, a higher threshold of protection to foreign investors may not be the best option.
What are the concerns?
Coming back to the Model BIT, there is no doubt that it has been a subject of worry for both- domestic and foreign investors. The foremost concern among domestic investors is that the Model BIT fails to contemplate India’s position as a capital exporting nation. Indian companies are expanding and investing significantly in markets such as Africa, Iran, middle-east and other smaller countries. These countries are plagued with recurrence of political instability, civil uprisings and in some cases, even armed rebellions. With a BIT that substantially reduces the protection available to investments, they will find themselves in a relatively inferior position to enforce their claims against such countries in case their investment is harmed. For instance, recently, an Indian company- Flemingo, won an investment claim of €20 Million against Poland for breach of the requirement to treat its investment fairly & equitably and for unlawful expropriation. If the claim was under a new BIT on the lines of Model BIT, it would have been difficult for Flemingo to receive compensation for denial of justice because of the high threshold of breach it requires. Even compensation under the Expropriation clause may have been limited. Therefore, smaller countries like Cambodia and struggling economies such as Brazil which are capital importing in nature will be more than willing to sign such a treaty that gives them more regulatory freedom while putting less burden on them.
Similarly, the developed countries and investors thereof are apprehensive about the Model BIT and the lower threshold of protection it offers. For instance, there have been strong reactions to the five year period required to exhaust domestic remedies. Similarly, as per these countries, the blanket exclusion of the taxation measures is unwarranted, in all reasonableness. They are not pleased with most of the alterations in the standard of protections- omission of MFN & F&ET and the limitation placed on FPS clause. They are also unhappy with the exclusion of compulsory licensing and revocation of IPR from the scope of the BIT (something India says is non-negotiable).
The way Ahead
It must be clarified at the outset that there is no need for a total reconsideration by India of its position based on Model BIT. The reluctance of these developed nations to accept the omission of MFN and limiting of FPS to physical security of investors and investments is unwarranted. There is no need for India to reconsider its position on the MFN clause as the omission was required as it had become a means of treaty shopping whereby the notion of bilateralism in a bilateral treaty was rendered useless. The limiting of FPS clause to physical security is in line with the awards of various tribunals. While there is some conflicting jurisprudence, but India is well within its right to put a limitation on it. That said, India needs to recalibrate its position with its intention to provide a stable and secure environment to foreign investments. One suggestion which has been consistently offered to government is to link and limit the protections to international law or customary international law to be precise instead of incorporating extreme thresholds like denial of justice This should be acceptable to US and other developed countries as such a clause is present in North American Free Trade Agreement (NAFTA) to which US is a party. Secondly, it would be justified and reasonable for India to assure foreign nations that their investments will not be subject to expropriation by taxation measures and therefore, a clause to that effect can be incorporated. Further, the dispute resolution clause needs to be made less onerous and more pragmatic. It is futile to seek avoidance of claims by creating onerous or difficult pre-requisite to claims. Instead, Indian government should seek to avoid claims by providing a stable and robust legal and business environment through domestic reforms which are implemented at a steady pace. While there have been steps to that effect, one is yet to see the promised results.
With India and Iran contemplating signing of a BIT by the year end, it is expected that India will amend its stance to protect its own investments flowing into Iran- a relatively volatile jurisdiction. If that happens, the developed countries may expect India to alter its position. However, the onus is also on developed countries to accept and recognize the relatively higher bandwidth of regulatory discretion needed by developing countries, especially India. Being a developing country, it needs the right to regulate investments in its territory in accordance with its evolving commercial environment. And with India’s share in international trade growing steadily, it is time for these countries to sit down with India and find a mutual ground.
However, before we conclude, it needs to be reasserted here that the Model BIT and the strong position of India on it merely highlights the growing opposition among developing countries to the present regime of BITs or the higher threshold of protections that these BITs offer to foreign investments. The authors believe that this signals a possible movement towards the revival of Calvo Doctrine- foreign investors shall get the same protection that is available to the domestic entities. Clearly, while we see the world turning into a global village, the geo-political and the socio-economic realities differ in every state. Such geo-political and socio-economic realities play a significant role in the conduct of the state and level of protections it wishes to offer. While the present BIT regime, on the face of it, may sound an attractive proposition, considering the need of each individual state, going forward, the authors see marked resistance to such treaties, if not in their entirety, then at least to the level of protection they offer to foreign investments.
Oct 01, 2016
The Tribunal constituted under the Canada-Barbados BIT (BIT) to decide on the claims brought by Peter A Allard (Investor) against Barbados (State) regarding the disputes arising out of the investments made by him in a Sanctuary in Barbados has refused to hold the state liable for any breach of the standards under the BIT. The investor had claimed breach of Fair & Equitable Treatment standard, Full Protection & Security Standard and had argued that Barbados had expropriated the investment.
- Fair and Equitable Treatment (F&ET)
The Tribunal refused to accept that Barbados was in breach of its obligation to treat the investment in a fair and equitable manner. The entire F&ET claim was based on the notion of legitimate expectation i.e. that the state, through its actions, had defeated the legitimate expectation of the investor. After a fact-intensive approach to the claim, the Tribunal held that the investor had failed to prove that any specific representation was made by the host state to the investor prior to the investment. It also held that there was no evidence that the investor had relied on any representations, if any.
Interestingly, the Tribunal refused to go into the question whether F&ET corresponds to the minimum standard treatment or creates an autonomous treaty standard.
- Full Protection & Security (FPS)
The debate on FPS was limited to whether the state had taken all the reasonable steps to protect the investment against injury by third (private) parties. In short, the investor argued that FPS standard obligates the host State to act with due diligence to protect investments against injury by private parties which include against environmental damage by third parties. On the other hand, the State argued that the FPS only contains protection against direct physical harm to an investor or its property by a State, its agents or as the result of the State’s gross negligence in protecting the investment against physical harm. It further argued that, in any case, it had taken all reasonable steps to address the environmental damage.
The Tribunal, firstly, held that the state had to take only reasonable steps to address the environmental damage. It was not required to take all the specific steps as the investor desired or requested the state for. Secondly, the tribunal held that even if it is agreed that the notion of FPS contains the obligation to protect the investment against environmental damage by third parties, the State had met the reasonable steps requirement under the BIT and nothing more can be expected of it on account of other international treaties such as Convention on Biological Diversity and Ramsar Convention.
The Claimant, in this frivolously contested claim, argued that Barbados had indirectly expropriated its investments. However, the Tribunal refused to accept the argument and held that the claimant had failed decisively to show that there had been any substantial deprivation. The investor was still the owner of the Sanctuary, operated a café and had conceded that there was still “some business” left at the Sanctuary.
The award appears to be highly fact intensive, limited and balanced. It also shows that the tribunals have learnt to rein themselves while dealing with frivolous claims regarding breach of F&ET and FPS standards. One can only hope that the Tribunals will prefer to restrict their mandate to issues at hand and will refrain from adding new elements to such expansive standards of protections.
The full award is available at the ITA website here.
Sep 23, 2016
The article first appeared at Swarajya Magazine Online Edition here.
Recently, at the conference on ‘International Arbitration in BRICS’, Indian Finance Minister Arun Jaitley was unequivocal in pitching for a separate arbitration framework for the BRICS countries or the emerging economies. He was clear that India, like other developing economies, has been a victim of the inherent structural bias that prevails in the traditional frameworks of international arbitration.
Contrary to the perception, this stand of Jaitley’s is neither new nor isolated. In fact, it is even consistent with India’s stand since 2012, when the then Finance Minister of India indicated that India will renegotiate all its Bilateral Investment Treaties (BIT) from scratch. A new model BIT was approved by the Cabinet last year (2015) and it was indicated that it will be used to renegotiate all future BITs.
Subsequently, early this year, India terminated its BITs with 57 countries and requested 25 other countries for a joint interpretation. All these BITs contain the Investor-State Dispute Settlement (ISDS) framework, which allows a private investor to bring a claim directly against the State in which the investment is made for any action the investor believes to be in breach of international standards.
This is not the first time a country has terminated BITs or withdrawn from ISDS frameworks. There has been a global movement to this effect.
The Growing Opposition To The ISDS
There is a perception among the emerging economies that traditional ISDS frameworks are biased procedurally, as well as substantively, as they fail to respect their needs of regulatory and economic freedom. Many Latin American countries such as Bolivia, Ecuador, Argentina and Venezuela have received a large number of negative investment awards, some of them grossly unfair and biased against the State and in favour of investors from developed countries.
In 2007, faced with a number of claims, Bolivia denounced the Convention for Settlement of Investment Disputes (ICSID)— becoming the first country in the world to do so. Many other Latin American countries followed Bolivia and denounced ICSID, i.e., by withdrawing their consent. Further, these countries, along with others like Brazil, have taken steps to terminate their existing BITs with most of the developed countries. In Asia, along with India, Indonesia has terminated (did not renew) its BIT with more than 20 countries and is taking steps to terminate the rest in the near future. Australia has also been debating opting out of the BITs since 2010. South Africa and a few other countries in Africa have also decided to terminate the BITs.
Why Such An Opposition?
The trigger points for the termination of BITs may be different but the underlining anguish remains the same. The protection given under BITs, which allow a private investor to bring a claim against the State where the investment has been made, have been interpreted to affect the regulatory freedom of the countries. This regulatory freedom is an integral part of the economic sovereignty of the country.
Further, there has been some evidence that the Tribunals constituted under the BITs have travelled beyond their mandates and sit in review of almost all the decisions taken by the country or its judicial organs. Like David Suzuki once remarked about the BITs giving a little too much away, in most of the BITs, the foreign investors directly invoke the ISDS clause of the BIT without approaching the domestic courts or tribunals. In a few cases, especially in the case of Latin American countries, these proceedings have been used successfully to force a regulatory chill in the country.
India started reconsidering its stand on the BITs after the famous White Industries award, which ordered India to pay damages for failing to provide the foreign investor effective means to seek remedy under the domestic framework. There, the courts had delayed enforcement of an award for the last nine years. The recent Devas award (The Antrix-Devas Case), which also went against India, has only fast-tracked the process of exiting the traditional framework of ISDS.
It is important to note that India is not yet a party to the ICSID. It is also important to note that India is not against BITs but against the ISDS frameworks contained in earlier BITs. In fact, the Indian Cabinet has approved a new BIT with Cambodia based on the new model BIT in July.
What Does The Future Hold?
There is a growing demand among developing countries to enter into separate agreements and/or frameworks which understand their basic needs and requirements. The Latin American countries were always reluctant to the concept of ICSID; at the 1964 Annual Meeting of the World Bank, these countries had even unanimously voted against such a proposal (the famous ‘Tokyo No’). In 2009, Ecuador proposed that the Union of South American Nations (UNASUR) manage the arbitration centre, which was readily accepted by all the other attendees. The centre, provisionally called as UNASUR International Centre for Conciliation, Mediation and Arbitration (UNASUR Centre) has been in the news for the last five years. There have been meetings and conferences to finalise the details and principles that will serve as a governance framework for this centre. Finally, after six years, there are indications that the centre will finally be notified. While the UNASUR Centre will initially cater to only Latin American countries, its facilities will eventually be available to all countries.
Similarly, the BRICS Arbitration Centre (BRICS Centre) has been created to address and reinforce this idea. While limited to BRICS countries in its initial phase, it will be available to all the developing countries in the future. While the idea may seem new to some, India has been toying with this idea since the last two years. The views of three member states, namely India, Brazil and South Africa as developing nations, is clear—they will prefer an arbitration framework that is receptive and which respects the regulatory freedom that developing and emerging nations need.
However, while Russia has been facing a lot of heat in investment arbitration, where the fallout of the Yukos Expropriation has been too huge to control, it has still not commented on any possible deviation from the existing BIT and ICSID-based arbitration system. China, as the history shows, will reserve its comments till the proposal is debated through the formal channels.
What Changes Can You Expect?
The primary goal of such an arbitration tool, in UNASUR as well as BRICS, will be to protect the regulatory freedom of the government. For instance, the UNASUR Centre negotiations have said that the centre will be a body full of respect for state sovereignty, both jurisdictional and legislative. The principle, it is expected, will be applied in the context of fiscal, tax and national security measures in the absolute sense. The levy of tax is a completely sovereign and revenue-oriented function and the belief among these countries is that no ad hoc tribunal should have the power to decide on such matters. We can also expect that such an arbitration centre will also provide complete autonomy to states to decide whether any action taken is for “public purpose” or for “national security”, i.e., once the state has taken an action in regard to these two purposes, the tribunal will not review the same.
There have also been indications that such arbitration centres will require the foreign investor to approach the domestic courts in the host country in a serious manner before invoking its jurisdiction. Such an arbitration framework may also have country-based Investment Courts for speedy and quick resolution of disputes.
Going Back To The Calvo Doctrine
The future, thus, may only be a return to the past. The ultimate goal, as it appears, is to go back to the tested Calvo Doctrine, i.e., foreign investors will only get the protection that is available to domestic businesses and nothing more. The foreign investors may get incentives to invest, but not the additional protection that has become a norm in the last four decades. It would be interesting to see how developed countries react to the widespread denunciation of the ICSID and the emergence of alternate forums like BRICS and UNASUR Centres.
Another issue will be the possible confrontation between the Transatlantic Trade and Investment Partnership (TTIP) and these frameworks (though it’s a very remote possibility due to a lack of overlap in membership). One can only wait for the UNASUR and BRICS Centres to take shape to see how these two institutions will change the face of investment arbitration as we know it.
Sep 13, 2016
Whether F&ET is offers higher protection than Minimum Standard of Treatment under International Law
The debate whether the standard of Fair and Equitable Treatment [F&ET] is something more than the Minimum Standard of Treatment to Aliens under international law [MST] has been one of the most polarizing debates in the field investment arbitration. While the sovereign entities i.e. states argue that F&ET is a lower threshold, the investors strongly argue it to be offering higher protection than MST. The basic premise of this differentiation lies in the assertion that while F&ET is a treaty standard or creation, MST is a fluid norm deriving its existence and legitimacy from customary international law. The debate has been an issue in many ICSID and BIT disputes.
Recently, the Tribunal in the matter of Murphy Exploration & Production Company International v. Republic of Ecuador[i] was faced with this question. The dispute pertained to certain decrees promulgated by Ecuador which had a significant detrimental affect on the financial performance of the investments by the investors. The claim was brought by Murphy under the Treaty between the United States of America and the Republic of Ecuador concerning the Encouragement and Reciprocal Protection of Investment (US-Ecuador BIT). It argued that such decrees have in fact statutorily modified the Participation Contracts related to Hydrocarbon exploration and exploitation forcing Murphy to forgo its investments.
Arguments by Claimant
Murphy argued, citing various case laws, that the F&ET standard requires a host State to: a. protect and observe an investor’s legitimate expectations; b. ensure the stability and predictability of the legal and business framework c. act consistently and transparently towards the investor and its investment; and d. act in good faith and treat the investor and its investment free from coercion and harassment. Murphy also argued that the F&ET standard is an independent treaty standard that goes beyond the customary international law minimum standard.
Arguments by Respondent
Ecuador, on the other hand, argued that F&ET is nothing else but the international minimum standard of Aliens and cannot be allowed to correspond to an ever expanding standard of protection that continues to absorb each and every element which the investor wants. Murphy, to be precise, argued that F&ET does not refer to an autonomous fixed standard or an ever expanding catalog of constituent elements. Ecuador argued that in any case, any or all of the elements which are to be part of F&ET, as argued by the Claimant, must derive their existence and sustenance from customary international law. The onus to show that these elements form part of the customary international law lies with the Murphy, the Claimant.
Decision by the Tribunal
The Tribunal agreed that the debate if F&ET is something more that MST is more theoretical than substantial. The Tribunal, in brief, discussed and held that F&ET as a treaty standard has transparency, consistency, stability, predictability, conduct in good faith and the fulfilment of an investor’s legitimate expectations as its’ components. It further explained that F&ET is to ensure the stability and predictability of the legal and business framework in the host state but the same will be subject to any qualifications otherwise established by the treaty or by international law. The Tribunal further observed that the international minimum standard and the treaty standard continue to influence each other and both standards are increasingly aligned. They recognised that tribunals have held in past that F&ET standards are essentially the same as MST. Finally, the Tribunal concluded that there is no material or substantial difference between F&ET and MST and in any case, F7ET is not a lower threshold than the international minimum standard.
There are two important aspects of the Tribunals decision. Firstly, the Tribunal has interestingly noted that the requirement to provide stable and predictable legal and/or business environment is subject to qualifications as established or practiced under international law. Secondly, the tribunal has observed that F&ET standard cannot be lower than the protection offered by international law. The Tribunal in essence, has ruled that F&ET cannot operate in its own vacuum and will have to derive its legitimacy from customary international law. Even if it is a creation of treaty, it cannot create a standard unbound or unaffected by the established norm of international law.
However, the tribunal in the end concluded that the question whether F&ET can be something more than the international law standard was not relevant to the present dispute and thus, declined to rule on that. It has effectively left the debate wide open for the academicians and future tribunals to debate and settle the position (if it ever will be).
The Partial Final Award dated 6 May 2016 (published in August 2016) is available here. The Tribunal’s analysis is available in Paragraphs 206-208.
[i] Murphy Exploration & Production Company International v. Republic of Ecuador, PCA Case No. 2012-16 (formerly AA 434)