Webinar Report – "Investor State Dispute Settlement: Thesis, Anti-Thesis and Possible Synthesis"

The second in the series of webinars organised by the UNCITRAL National Coordination Committee, India (UNCCI) and the Faculty of Law, Manav Rachna University on contemporary issues in international law was held on 16 May 2020. The discussion was on "Investor State Dispute Settlement: Thesis, Anti-Thesis and Possible Synthesis".

A panel of eminent speakers comprising Dr. Gabrielle Kaufmann-Kohler (President, International Council for Commercial Arbitration; Founding Partner, Levy Kauffman-Kohler), Ms. Marike Paulsson (Senior Advisor, Allbright Stonebridge Group) and Mr. Promod Nair (Advocate & Arbitrator, Arista Chambers; India's National Correspondent to UNCITRAL CLOUT and Member of UNCCI) participated in the discussion. Mr. Gourab Banerji (Senior Advocate, Supreme Court of India and Vice Chairman of UNCCI) and Mr. George Pothan (Advocate, Supreme Court of India; Legal Consultant, Ministry of External Affairs, Government of India and Coordinator of UNCCI) moderated the session. Mr. Ajay Thomas (Director of the Faculty of Law at Manav Rachna University) delivered the introductory remarks where he emphasised, that whilst the basic idea of investment treaties and international dispute resolution was on solid ground, the recent experience with investor state dispute settlement showed that the system had its flaws which needed urgent resolution.

I. The Thesis: The need for an ISDS system

Mr. Gourab Banerji introduced the topic, "thesis of ISDS", and handed over to Dr. Gabrielle Kaufmann-Kohler who detailed the need for and role of an Investor State Dispute Settlement ("ISDS") system. She explained that the best way to understand the need for ISDS would be to imagine a world without it. The avenues available to investors would then be to:

(a) Rely on diplomatic protections at the State-level, and raise claims through their home State against the host State. This could put investors at a disadvantage in that their claims would depend on the home State's political compulsions and preferences on whether to bring a dispute against the host State. In particular, small and medium size enterprises would likely not have the necessary leverage to convince their home State to espouse their claims.

(b) Resort to national courts in the host State. However, national courts in at least some jurisdictions have limited resources and expertise in international law to be able to deal with complicated issues of treaty protections.

(c) Through contractual arbitration. This is an option that exists alongside ISDS also. However, this would be available only for those foreign investors who have the bargaining power to impose on the host State an arbitration clause that suits their need.

Dr. Gabrielle Kaufmann-Kohler discussed another economic argument in favour of ISDS – whilst not conclusive, certain empirical studies have suggested that investment treaties providing for substantive protections for investors and recourse to international arbitration between an investor and the State to enforce such rights have a positive effect on foreign investment flow. Another beneficial impact of ISDS is the influence that it exerts on the rule of law. A State's policies are likely to become more balanced and predictable on account of the accountability created by ISDS.

On balance, Dr. Gabrielle Kauffman-Kohler was in favour of having an ISDS system, although she cautioned that the system in its current form requires reform.

II. The Antithesis: Problems with the current system

The discussion then progressed to the "antithesis" or aspects of the current ISDS regime that are unsatisfactory.

Process issues

Ms. Marike Paulsson spoke about process issues in the current ISDS system. She prefaced the discussion by explaining that the current system itself has been created by States, under the regime of treaties. It is difficult to understand what each State's objective was in creating the system in the form that it exists. Further, a large number of players are involved in the ISDS process. These include the institution which administers the arbitral proceedings, arbitrators, lawyers, investors and the State. It is therefore difficult to precisely identify the source of the process problems that exist in the ISDS system.

By way of the ongoing Tethyan Copper Company Pty Limited v. Islamic Republic of Pakistan (ICSID Case No. ARB/12/1) case as an example, Ms. Marike Paulsson highlighted that ISDS proceedings are often drawn out for several years. The treaty arbitration against Pakistan in this case was initiated in 2012, and the tribunal rendered an award seven years later, in 2019, mainly because of multiple challenges filed by the State. Even after the award was finally rendered, Pakistan requested its annulment and the award has still not been enforced.

Arbitrators in investor-State arbitrations are generally sophisticated, and are keen to ensure that due process rights of parties are protected and that the award that they ultimately render can withstand challenges at the enforcement stage. That said, it is important to formulate systems to address these serious problems of inefficiencies.

Dr. Kauffman-Kohler then discussed the issue of abuse of process through multiple / parallel proceedings under the current ISDS regime. Multiple proceedings are often initiated on the same cause of action or on the basis of the same facts because there are multiple sources of the claim. Investors bring claims under the relevant contract, the investment treaty and sometimes also tax claims or administrative claims before national courts. Multiple claims can also be brought under more than one treaty by different actors involved in a dispute – for instance, through different types of shareholders or majority and minority shareholders of different nationalities (like in the CME Czech Republic B.V. v. The Czech Republic and Ronald S. Lauder v. The Czech Republic cases, which were discussed later in the session by Mr. Promod Nair).

As a result of multiple proceedings, there could be (i) conflicting decisions and (ii) instances of double / multiple recoveries being made by investors, which are complicated to reconcile and adjust across multiple awards. Multiple proceedings also waste resources of both the State and the investor(s).

Inconsistent / incoherent decision-making

Mr. Promod Nair spoke about a number of concerns regarding the consistency and correctness of decisions made by arbitral tribunals in ISDS cases. These are another set of pressing issues which the UNCITRAL through its Working Group-III is looking to address in its proposed reforms to the ISDS mechanism.

At the outset, Mr. Promod Nair explained that the investment treaty regime itself is not uniform, and it would be impossible to achieve a uniform interpretation of provisions without recognising important differences in the language of different treaties. The criticisms in respect of consistency, however, are different and can be summarised as follows:

(a) Different tribunals have reached different conclusions about the same standard in the same investment treaty. For example, in the context of the Argentina's financial crisis, the State took a number of measures to deal with the economic emergency it was faced with and these were sought to be justified on the grounds that they were "necessary" for the protection of Argentina's essential security interests. While the same measures were considered to be a legitimate "necessity" defence by some tribunals, other tribunals were emphatic in their rejection of the "necessity" defence.

(b) Different tribunals have sometimes arrived at diametrically opposite conclusions on similar sets of facts or causes of action. The most prominent illustration of such inconsistency in the BIT context are the often-cited CME v. Czech Republic and Lauder v. Czech Republic cases. In these cases, effectively the same person brought two claims - one by Ronald Lauder in his own name and the second by CME, a company controlled by him. In one case, the claims of the investor were dismissed and in the second case, the investor was successful and was awarded a significant amount of damages.

(c) Tribunals often differ in their interpretation of substantive provisions in investment treaties. A pertinent example is in respect of the interpretation of the fair and equitable treatment (FET) standard, which is the protection most commonly invoked by investors under investment treaties. While some tribunals have held that legitimate expectations (which is a sub-set of the FET protection) can only arise from a specific promise made to a particular investor, other tribunals have found that legitimate expectations can also arise from generally applicable law enacted by the State.

(d) Another example of different approaches to the content of the FET protection are the contradictory decisions in SD Myers, Inc. v. Government of Canada, where the tribunal considered that the FET standard only guaranteed the minimum standard of treatment under international law, whereas 6 months later, in Pope & Talbot Inc. v. The Government of Canada, a case involving the same State (Canada), the tribunal construed the FET standard as going far beyond the minimum standard.

(e) Inconsistencies in the rulings of tribunals on jurisdictional issues. For example, tribunals have issued widely divergent decisions on aspects like (i) who are "investors" (for example, whether portfolio investors are "investors" entitled to treaty protections, which was decided in the affirmative in FEDAX N.V. v. The Republic of Venezuela and Abaclat and Others v. The Argentine Republic, but on which a contrary view was taken in Poštová banka, a.s. and Istrokapital SE v. The Hellenic Republic) and (ii) the meaning of the term of "investment" itself (for example, whether "economic development" is a necessary ingredient for an investment under the ICSID Convention; see the decisions on the one hand in the Salini Costruttori S.p.A. and Italstrade S.p.A. v The Kingdom of Morocco and Malaysian Historical Salvors, SDN, BHD v. The Government of Malaysia cases, and on the other hand in the Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka and SGS Société Générale De Surveillance S.A. v. The Republic of Paraguay cases).

Other areas where inconsistent decisions have rendered by tribunals include decisions on whether (i) multiple claims are permissible and at what stage an investor would be required to elect the remedy that it wishes to pursue, (ii) the cooling off period is a jurisdictional pre-condition for commencing a BIT action, (iii) "most favoured nation" clauses apply to dispute resolution clauses or only to the substantive protections of an investment treaty and (iv) costs should be awarded to the successful party (for example, the decisions on costs rendered in EDF (Services) Ltd. v. Romania (ICSID Case No. ARB/05/13) and ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary (ICSID Case No. ARB/03/16)).

Mr. Promod Nair flagged up the issue that inconsistencies and incoherence in ISDS decisions could lead to confusion among States on how to organise their policies. Since the basis of investment treaty arbitrations (like all arbitrations) is the consent of the party, and in particular the State, it would be important to ask what the respondent State consented to in the relevant treaty. Also, the only remedy available to parties in the current framework of ISDS is to ask for annulment (in the case of disputes under the ICSID Convention) and review for non-ICSID decisions. However, annulment and review are designed to deal with mainly procedural deficiencies in the actual conduct of an arbitration – which would not aid in ensuring consistency, coherence or correctness of the outcomes.

Concerns of legitimacy

Dr. Gabrielle Kaufmann-Kohler added that there are also legitimacy concerns regarding the decision makers in the current ISDS regime. Democracies trust institutions and distrust powerful individuals who are not selected through a transparent process and this has negatively impacted perceptions as to the legitimacy of ISDS.

Another common criticism is that there is a lack of diversity in the pool of arbitrators appointed in ISDS cases– only about 26% appointments are from the non-Western world while ISDS involving non-Western countries constitute a much larger percentage of disputes. A small pool of very busy arbitrators are often (i) also counsel for parties in other ISDS disputes (the problem of "double-hatting") and (ii) repeatedly appointed by the same parties / law firm. This also raises concerns regarding the independence and impartiality of arbitrators.

III. Possible synthesis: Suggested reforms

Mr. George Pothan briefly discussed some of the reforms that are being discussed on the world stage to address the concerns in the current ISDS regime. The UNCITRAL Commission has allotted the topic of work on ISDS reforms to UNCITRAL Working Group III, with a mandate to engage with a wide range of stakeholders involved in ISDS and to progress work step by step process (i) firstly, to identify concerns regarding ISDS, (ii) then to analyse whether reform is desirable for identified concerns and (iii) thirdly, develop suitable solutions that could be recommended to the UNCITRAL Commission. The principal concerns identified by Working Group III in the ISDS regime (some of which were also discussed in the "Antithesis" portion of the session) are (i) regarding consistency and coherence in arbitral awards, (ii) the legitimacy and diversity of decision makers (tribunals) which includes the issues pertaining to diversity and people wearing multiple hats, (iii) costs involved and time taken for ISDS proceedings and (iv) third party funding.

The approaches suggested by stakeholders participating in Working Group III fall into two broad buckets– (i) one advocating "structural reforms", i.e. revamping the current ISDS system in its entirety and devising another model for decision-making on investor-State disputes, which includes discussion on creation of a multilateral investment court with an appellate mechanism (or a standalone appeals mechanism) and (ii) through "incremental reforms", i.e. augmenting the current ISDS structure of decision making through arbitral tribunals constituted under investment treaties.

Ms. Marike Paulsson summarized some of the incremental reforms that have been suggested in Working Group III so far. These include (i) the adoption of a joint code of conduct for arbitrators, a draft of which has been prepared by UNCITRAL and ICSID (available at https://uncitral.un.org/en/codeofconduct); (ii) the setting up of a multi-level advisory centre, which would disseminate information to various stakeholders and provide assistance to States; (iii) pre-publication review of arbitral awards, which could help in achieving greater consistency across ISDS awards; (iv) processes for screening arbitrators and increasing transparency through information dissemination about arbitrators; (v) proposals to increase the diversity of arbitral tribunals; (vi) developing alternative dispute resolution mechanisms such as pre-arbitration mediation, conciliation and commercial diplomacy, to encourage cost-effective amicable settlements; (vii) expedited procedures for resolution and (viii) the introduction of additional case management tools.

Dr. Gabrielle Kaufmann-Kohler spoke about the "structural reforms" that have been suggested by some States in Working Group III. The principal proposed reform is to do away with the current ISDS regime and replace it with a permanent multilateral investment court which would decide investment disputes across treaties. Establishing a permanent court would, in her view, address to a large extent some of the major concerns in the current ISDS regime by providing for legitimacy to decision-makers, greater consistency across decisions and the ability to deal with multiple proceedings.

There would, of course, be challenges to introducing a world court as well. Important questions that would require consensus amongst States would be "who should sit on the court?" and "who should decide who would sit on the court?" Ensuring impartial and de-politicized appointments of judges would be critical. Learnings to deal with these challenges could be drawn from the design and practice of other international courts. For example, there could be ways of mitigating risks regarding appointments of judges by way of screening committees, who would identify and evaluate minimum qualifying criteria for candidates. Non-renewable terms of appointment for judges could also neutralize the pressure that States could exert on judges. Neutrality, diversity and independence of judges could also be achieved by having a roster that determines at random which judge(s) are to hear a certain dispute.

Another important aspect Dr. Gabrielle Kaufmann-Kohler discussed is the jurisdiction that such an investment court would be vested with. To ensure that the court has a wide reach, the court should have jurisdiction not just over future treaties but also past treaties. A possible way to achieve this could be for the treaty establishing a multi-lateral court to have an "opt-in" model for States, akin to that in the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (New York, 10 December 2014, also known as the Mauritius Convention on Transparency). Dr. Gabrielle Kaufmann-Kohler concluded the discussion by cautioning that these would only be some of the issues requiring consideration if a structural reform through a world investment court were to be introduced.

The panel then addressed some of the current issues including contemporary issues in India. Particularly useful in the Indian context was a discussion on the enforceability of ISDS awards in India, under the (Indian) Arbitration and Conciliation Act, 1996 ("Arbitration Act"), especially considering the "commercial reservation" India had made under the New York Convention 1958. Mr. Promod Nair discussed the recent decision of the Delhi High Court pertinent to the issue (Union of India v. Vodafone Group PLC United Kingdom & Anr.). The Delhi High Court made passing observations in this decision that investment arbitrations are different from commercial arbitrations because they are grounded in guarantees and assurances provided by the State. In view of India's commercial reservation under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention, 10 June 1958) ("New York Convention"), an award not arising out of a commercial relationship would not be enforceable under the Arbitration Act as per the Delhi High Court. As such, if ISDS awards are found not to arise out of a "commercial" relationship, there would be no viable mechanism for the enforcement of such awards in India. In Mr. Promod Nair's view, this was probably not the intent of the Delhi High Court, and generally speaking, an "investment" would be within the plain meaning of a "commercial" dispute in the Indian context. Mr. Gourab Banerji added that the (Indian) Commercial Courts Act, 2015 contains a broad definition for disputes that qualify as commercial before national courts. Mr. George Pothan also drew attention to India's Model BIT of 2015, which contains a clause clarifying that awards arising out the treaty arbitration would be considered as an award under the New York Convention. He also pointed out that this could possibly provide a solution in respect of awards under treaties finalized on the basis of 2015 Model BIT but enforceability of ISDS awards arising out of the older treaties or awards related to a third State (which has assets in India against which an ISDS award could be enforced) is still an open question to be addressed. While these factors could aid in the debate on the enforceability of ISDS awards under the Arbitration Act in India, Mr. Promod Nair emphasised that a conclusive ruling by the Supreme Court of India on whether investment treaty awards are enforceable under Part II of the Arbitration Act (i.e. as New York Convention awards) would be critical to put the issue to rest.

Mr. Ajay Thomas concluded the webinar by thanking the panel and moderators for an engaging discussion, and sought the support of the panelists to participating in a sequel to this webinar, to discuss and deliberate related ISDS issues.