ISDS: controversy and cases

Professor Jane Kelsey, School of Law, The University of Auckland, New Zealand

Investor state dispute settlement

Investor can submit claim against state for loss through breach of

investor protections in the BIT or investment contract

BIT means state has given prior consent

6 months after events giving rise to claim, and no more than 3 years after it became known, to• International Centre for Settlement of Investment Disputes (ICSID)• UNCITRAL rules, or• any other agreed arbitration institution or rules.

Applicable law is the Treaty and international law

Interpretation of a provision by the parties is binding on tribunal

State can seek interpretation of Annexes that will bind the tribunal

ISDS process and awards

3 arbitrators, no conflict of interest rulesTribunal can accept amicus briefDocuments to be publicly available with protected info redactedInvestor can seek injunction in domestic courts to preserve position, tribunal can order interim relief Final award can be damages plus ‘applicable interest’ (compound)Restitution of propertyCosts and feesNo punitive damages No appeal, but annulment process for INCSIDCan seek enforcement after 90 days (UNCITRAL) or 120 days or revision/annulment complete (ICSID)

Backlash against investor disputes

US insists on ISDS in negotiations with Europe, Asia Pacific, China,

EU mandate to include investor protections and ISDS since 2009

Before then, many EU member state BITS

Investment arbitration faces a serious backlash, eg cases on

South Africa – black empowerment laws

India – judicial cancellation of corrupt telecom licenses

Indonesia – corrupt forestry contract

Australia – plain packaging of tobacco

Germany – nuclear power plant closure

OECD, UNCTAD, senior judges express concern

Arbitrators themselves are criticalSpeech by senior arbitrator George Kahale named top 10 failings:

1. governments often don’t understand treaties they sign

2. Arbitrators questionable legal reasoning reflects conflicts of interest

3. Rules are given meanings that were never intended

4. No effective appeals so manifest errors can’t be overturned

5. Mega-claims exceed many nations’ GDP

6. It’s almost impossible to disqualify an arbitrator

7. You can predict the outcome from the arbitrators

8. Claimants grossly exaggerate their claims

9. 3rd party funders have made arbitration an industry

10. investment disputes are biased against states

Investor-State Dispute Settlement

Cases are heard in secretive offshore tribunals

Pro-investor bias with conflicts of interest

Lack proper judicial process and no appeal

Very expensive: OECD says average cost is US$8 million

Threat of a case has a powerful ‘chilling effect’ to deter governments from acting

It ‘has become normal for investment arbitrators to constantly switch hats: one minute acting as counsel, the next framing the issue as an academic, or influencing policy as a government representative or expert witness’.

UNCTAD World Investment Forum Oct 2014

Croatia summed up the problems with ISDS:

Even if we disregard the huge costs of arbitration for the respondent state (especially in case of frivolous claims to which some states are exposed together with lately popular third party funding claims) and reduced policy space, both of which represent a big concern for most states, we cannot disregard the fact that the system we have created is far from legal certainty and stability - what we have today is a number of contradicting awards, problems with enforcing such awards, un-transparent proceedings and insufficient appellate mechanism.

TNC lobby rejects any criticism

Business & Industry Committee at the OECDBIAC is very worried about the negative tone, and the lack of equilibrium, in the actual debate on investor protection and especially ISDS. And also about the picture of proliferation of legislative initiatives in the field of investment protection that emerged from our discussions this morning. … The public movement against ISDS is totally out of proportion.

US Council for International BusinessWe reject the premise that the international investment regime is in crisis, is fundamentally flawed, or in need of radical revisions.

Massive surge in ISDS cases

Winners & losers

US & EU investors have brought 75% of cases

274 cases concluded: investor won 57% (total or settled); state 43%

Investors won 7 of 8 cases in 2013

Most known cases are against:

Argentina, 40 times since 2001 crisis; then Venezuela, Czech Republic

Egypt, 4th highest overall, 3rd highest since 2011

3 boutique firms were involved in 130 arbitrations in 2011

Private equity firms ‘lease’ disputes for share of profits

Argentina is the biggest target

Argentina has faced 53 (almost 1/10th) of known disputes.

Most arise from social protection & debt restructuring in its financial crisis

ICSID is ‘a tribunal of butchers’ that rules only in favour of multinational companies and said quitting the centre would be a key move to recover Argentina’s legislative and jurisdictional sovereignty.

(Chief legal advisor to Argentina’s Treasury, 13 January 2013)

Awards just settled:

gas transport tariffs ($133.2 million),

two water privatisation concessions ($270 million+ interest)

national electricity grid ($53 million)

nationalization of shares in state oil firm ($5 billion)

Vulture fund bought bonds for $48.7m, claiming face value $220m

Australia’s Plain Packaging law

Plain packaging law, signalled well in advance

1. Domestic constitutional case (failed)

2. WTO dispute (TBT and TRIPS) funded by big tobacco

3. Philip Morris ISDS claim (Hong Kong-Australia BIT) over $1 billion

NZ backed of similar law until sees the outcome

New opportunities for industry and states to harass policymakers Attempt regulatory chill collect data to litigate Launch ISDS dispute.

Health insurance privatisation 2004 government introduced private health insurance

2007 new government cut back role

Companies can only use profits to reinvest in health insurance, ie non-profits

Penta group was private equity fund with investments in many sectors

3 legal disputes, inc 2008 UNCITRAL arbitration under Czechoslovakia BIT

Complex corporate structure to use BIT

2010 tribunal rejected jurisdiction arguments

2012 German court upheld tribunal decision as consistent with EU law

Dec 2012 Achmea BV was awarded 22 million euro

Public health and pension system

Eureko v Poland

Partial privatisation in 1999,

full float planned for 2001,

government cancelled float

Eureko won 2 arbitrations

2009 Poland settled E1.85b special dividend and

committed to full float by 2012

Failed water privatisations

Biwater v Tanzania (ICSID) 2008

Exclusive operation of designated water services

Underestimated problems & inadequate investment

Government rejected water fee increase after independent review

Mediation failed, government resumed lease in 2003

Biwater claimed $19-20m for breaches of FET, full protection & security, repatriation of investment funds

Tribunal split decision found

(a) Tanzania in breach but

(b) government actions leading to loss pre-dated the breach.

Tanzania won but bore costs

Transport PPP: Fraport v Philippines

BOOT for international air terminal construction & operation Corrupt government entered contractNew government restructured PAL airline,sought to renegotiate contract under domestic law on FDIFraport refused, government declared concession void2003 Fraport claimed expropriation under BITICSID majority dismissed claim 2007, investment did not comply with Philippine law; annulled 2010; interpretation 2012Fraport made new request for arbitration Fraport also initiated commercial arbitration at ICCLegal costs to Philippines reported to be over $50m

Eli Lilly v Canada

Canada courts invalidated US pharma company patent

Applied ‘utility doctrine’ and found drug failed to deliver benefits promised when patent was claimed

Medicine must be shown to be ‘useful’

Eli Lilly sued under NAFTA

‘Investment’ includes intellectual property rights

Claimed breach of minimum standard of treatment

Seeks $481m for loss of expected future profits

Al-Karafi v Libya (2013)

$935m to Kuwaiti investor, 2nd highest known award ever

Tourism project in Libya approved 2006,

90 year land lease

Not begin by 2010, approval annulled, lease cancelled

Claim $55m in 2011 under Libya Kuwait agreement

Tribunal awarded against actions of Gaddafi regime•$5m actual loss & expenses for project never built•$30m moral damages, harm to investor’s reputation•$900m lost future opportunities (profit)

Costs fall on post-Gaddafi Libya

Winners & losers

Investors privatise profits, socialise losses

Usurps domestic rule of law and local courts

Local elite can use backdoor change of nationality

Vultures cash in, speculate, destabilise without conscience

Investment arbitration industry cashes in too

Public finance is diverted from social expenditure

Governments are forced to privilege foreign investors over local people

Debate over reform optionsCapital exporters minor reforms to agreementsUNCITRAL review of its rulesUNCTAD proposals: • promote ADR; • limit investor access to ISDS; • individualised IIAs; • appeals facility; • standing invest arbitration court Draft new model BITsNot enter new agreementsExit from BITS where possibleWithdraw from ICSIDRely on domestic courts