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 ID: 605712
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Slide1
ISDS: controversy and cases
Professor Jane Kelsey, School of Law, The University of Auckland, New ZealandSlide2
Investor state dispute settlement
Investor can submit claim against state for loss through breach of
investor protections
in the BIT or
investment contractBIT means state has given prior consent 6 months after events giving rise to claim, and no more than 3 years after it became known, toInternational Centre for Settlement of Investment Disputes (ICSID)UNCITRAL rules, orany other agreed arbitration institution or rules.Applicable law is the Treaty and international lawInterpretation of a provision by the parties is binding on tribunalState can seek interpretation of Annexes that will bind the tribunalSlide3
ISDS process and awards
3 arbitrators
, no conflict of interest rules
Tribunal 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 property
Costs
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)Slide4
Backlash against investor disputes
US
insists on ISDS in negotiations with Europe, Asia Pacific, China,
EU
mandate to include investor protections and ISDS since 2009Before then, many EU member state BITSInvestment arbitration faces a serious backlash, eg cases onSouth Africa – black empowerment lawsIndia – judicial cancellation of corrupt telecom licensesIndonesia – corrupt forestry contractAustralia – plain packaging of tobaccoGermany – nuclear power plant closureOECD, UNCTAD, senior judges express concernSlide5
Arbitrators themselves are critical
Speech by senior arbitrator George Kahale named top 10 failings:
1. governments often
don
’t understand treaties they sign2. Arbitrators questionable legal reasoning reflects conflicts of interest3. Rules are given meanings that were never intended 4. No effective appeals so manifest errors can’t be overturned5.
Mega-claims
exceed many nations
’ GDP6. It’s almost impossible to disqualify an arbitrator 7. You can predict the outcome from the arbitrators 8. Claimants grossly exaggerate their claims
9.
3
rd party funders have made arbitration an industry 10. investment disputes are biased against statesSlide6
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 actingIt ‘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’. Slide7
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. Slide8
TNC lobby rejects any criticism
Business & Industry Committee at the OECD
BIAC 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. Slide9
Massive surge in ISDS casesSlide10
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 2011Private equity firms ‘lease’ disputes for share of profitsSlide11
Argentina is the biggest target
Argentina has faced 53 (almost 1/10
th
) of known disputes.
Most arise from social protection & debt restructuring in its financial crisisICSID 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 Slide12
Australia
’s Plain Packaging law
Plain packaging law,
signalled
well in advance1. Domestic constitutional case (failed)2. WTO dispute (TBT and TRIPS) funded by big tobacco3. Philip Morris ISDS claim (Hong Kong-Australia BIT) over $1 billionNZ backed of similar law until sees the outcomeNew opportunities for industry and states to harass policymakers Attempt regulatory chill
collect data
to litigate
Launch ISDS dispute.Slide13
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 sectors3 legal disputes, inc 2008 UNCITRAL arbitration under Czechoslovakia BITComplex corporate structure to use BIT2010 tribunal rejected jurisdiction arguments2012 German court upheld tribunal decision as consistent with EU lawDec 2012 Achmea BV was awarded 22 million euroSlide14
Public health and pension system
Eureko v Poland
Partial privatisation
in 1999,
full float planned for 2001, government cancelled floatEureko won 2 arbitrations2009 Poland settled E1.85b special dividend and committed to full float by 2012Slide15
Failed water privatisations
Biwater
v Tanzania
(ICSID) 2008
Exclusive operation of designated water servicesUnderestimated problems & inadequate investmentGovernment rejected water fee increase after independent reviewMediation failed, government resumed lease in 2003Biwater claimed $19-20m for breaches of FET, full protection & security, repatriation of investment fundsTribunal split decision found
Tanzania
in breach but
government actions leading to loss pre-dated the breach.Tanzania won but bore costsSlide16
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 $50mSlide17
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 claimedMedicine 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 profitsSlide18
Al-Karafi v Libya
(2013)
$
935m to Kuwaiti investor,
2nd highest known award everTourism project in Libya approved 2006, 90 year land leaseNot begin by 2010, approval annulled, lease cancelledClaim $55m in 2011 under Libya Kuwait agreementTribunal 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 LibyaSlide19
Winners & losers
Investors privatise profits,
socialise losses
Usurps domestic
rule of law and local courtsLocal elite can use backdoor change of nationalityVultures cash in, speculate, destabilise without conscienceInvestment arbitration industry cashes in tooPublic finance is diverted from social expenditureGovernments are forced to privilege foreign investors over local peopleSlide20
Debate over reform options
Capital exporters
minor reforms
to agreements
UNCITRAL 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 possible
Withdraw from ICSID
Rely on
domestic courts