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One of the seminal characteristics of most modern–day international investment agreements (IIAs) is the provision for access to investor–State dispute settlement (ISDS), through which an investor alleging a violation of the agreement may directly claim against its host State in international arbitration. Protection standards offered to investors through these international law instruments, such as fair and equitable treatment, full protection and security, and a guarantee of ‘prompt, adequate and effective’Footnote 1 compensation in case of expropriation, have been tested when their provisions came to be interpreted by arbitral tribunals. And it is so that investor–State arbitration evolved into the centrepiece and guarantor of this system of investment protection and was placed in a unique position from which to formulate international investment law.Footnote 2 This privileged position of investment arbitration, evident in the proliferation and growing importance of arbitral tribunals and exponential recourse to dispute settlement,Footnote 3 has acted as a catalyst bringing to the fore the uncomfortable tension between investment protections and host State regulatory interests, and, by the same token, it has revealed arbitration as part of a problem.Footnote 4 It should then not be astonishing that the much–publicised discussion on the need for reform of international investment law started with and focused on the reform of the investor–State dispute settlement mechanism. The debate has recently intensified, and reform is currently underway. Institutional developments that will lead in the long run to systemic changes are reflected in both novel investment treaty provisions and collective efforts made at various international fora.

It is worth recalling that investor–State dispute settlement is closely affiliated with the function of the International Centre for Settlement of Investment Disputes (ICSID). Attracting the vast majority of known investment arbitrations, this World Bank institution provides an important backbone to substantive protection offered to foreign investors through international investment agreements, and it is the most influential investment arbitration forum. Advantages and shortcomings of ISDS conducted under ICSID Rules are quasi–synonymous with advantages and shortcomings of ISDS more generally, although, as will be discussed, one of the leading efforts for reform has been conducted outside the World Bank system by the United Nations Commission on International Trade Law (UNCITRAL).

The present contribution purports to examine recent institutional developments affecting either the investor–State dispute settlement mechanism in general or the ICSID system. The chapter is organised in the following manner. First, it explores investment arbitration in numbers. Second, it considers institutional developments specific to the ICSID context, in the post–Latin American ICSID Convention–denunciations era. Third, it focuses on recent developments in the context of EU negotiations and, particularly, on the division of financial responsibility and ISDS provisions in the treaties under negotiation. Fourth, it reviews two issues that have recently come to the spotlight, namely arbitration of sovereign debt restructurings and mass claims, and transparency. A final section concludes.

Dispute Settlement in Numbers (Or the Popularity of ISDS)

Dispute Settlement in General

The popularity of investor–State dispute settlement is manifest in the multiplication of claims that are being filed each year. In 2013, at least 57 new investor–State claims were registered, bringing the total of known investment treaty claims to 568 by the end of that year.Footnote 5 A relatively high percentage of these claims were filed against developed countries, and remarkably against Member States of the European Union.Footnote 6 This in itself is a noteworthy development, given that industrialised countries, especially EU Member States, have generally been shielded from investment claims. Treaties concluded by EU Member States have been strongly protective of investor interests, essentially offering European investors protection in their ventures in the developing world as well as the possibility to resort to arbitration against their host State without the expectation of (“reciprocal”) claims initiated against the EU Member States.Footnote 7 Interestingly, some older bilateral investment treaties (BITs) were concluded on an expressly non-reciprocal basis.Footnote 8 One such example is the 1972 BIT concluded between France and Tunisia, which explicitly encouraged only the ‘development of French investments in Tunisia’.Footnote 9 Although the above description belongs now to the history of investment treaties, it testifies to the one–sided interest of EU Member States in the protection of their own investors. In line with this long–standing tradition of concluding treaties with countries with minimal investment in EU Member States, investment claims have generally been initiated by EU investors against third countries. For instance, in 2012 EU investors were at the basis of 60 % of new disputes.Footnote 10

But the new claims reveal that this comfortable position of EU Member States may be slowly changing. Focusing on 2013, six cases were filed against Spain.Footnote 11 Disputes involving the country, also claims against the Czech Republic, were born out of measures relating to renewable energy.Footnote 12 In September 2013, France faced its first known investor–State claim.Footnote 13 More significantly, recent cases registered against EU Member States resulted from the economic and financial crisis in Europe—notably, the Ping An (2012)Footnote 14 and the Marfin Footnote 15 cases against Belgium and Cyprus respectively arising out of nationalisations in the banking sector and the Poštová banka Footnote 16 claim against Greece in relation to that State’s 2012 debt restructuring.

Thirty–seven known arbitral decisions were rendered in 2013.Footnote 17 Out of an overall number of 274 known concluded cases, approximately 43 % have been decided in favour of the host State and 31 in favour of the investor.Footnote 18 The apparent partiality in favour of the State is belied by the fact that investor–State arbitration in the quasi–totality of cases is initiated by the investor with the host State constantly finding itself in the position of respondent.Footnote 19 At least 72 of the 2013 cases were initiated on the basis of intra–EU BITs.Footnote 20

ICSID

General

ICSID remains the most popular venue for ISDS. In 2013, 40 new cases—i.e. 70 % of known claims—were registered under the ICSID Convention and the ICSID Additional Facility Rules,Footnote 21 bringing the total of registered ICSID disputes at the end of the year to 459.Footnote 22 Of these, 407 have been investment arbitration cases under the ICSID Convention, 43 ICSID Additional Facility arbitration cases, and nine conciliation cases under the ICSID Convention or the Additional Facility Rules.Footnote 23 A comparison between the topography of all-time claims and new claims is revealing. Most of the former have been brought under bilateral investment treaties,Footnote 24 and they have involved a South American party.Footnote 25 In 25 % of all decided cases, the tribunal has denied jurisdiction, in 28 % arbitrators have dismissed all claims, in 46 % the tribunal has at least partially upheld the claims, and in 1 % the tribunal has rejected the claim for manifest lack of merits, according to ICSID Arbitration Rule 41(5) and Article 45(6) of the Additional Facility Rules, as amended in 2006.Footnote 26 At the same time, while in the decade 2001–2010, 96 annulment decisions were rendered, in the 3 years that followed (2011–2013), tribunals delivered already 53 such decisions.Footnote 27 In 2013, although the majority of cases were still brought on the basis of a bilateral investment treaty, the percentage of such claims (57 %) was lower than the average of all history. 17 % of cases were brought under the investment law of the host State, 12 % of cases were brought under the Energy Charter Treaty, and 14 % of cases were brought under an investor–State contract.Footnote 28 Latin America stopped being the most popular ICSID respondent in 2013,Footnote 29 with most cases brought under the ICSID Convention involving, firstly, Eastern Europe and Central Asia and, secondly, Middle East and North Africa.Footnote 30 In the same year, in 40 % of cases the tribunal declined jurisdiction, in 30 % the tribunal dismissed all claims, and in the remaining 30 % the tribunal upheld at least one claim.Footnote 31

ICSID Convention

The ICSID Convention counts currently 159 signatory States, of which 150 have also deposited their instruments of ratification, acceptance, or approval of the Convention with the World Bank.Footnote 32 Three new members were added in 2013. In April 2013, Montenegro deposited with the World Bank its instrument of ratification of the ICSID Convention, which consequently entered into force for the country in May 2013, in accordance with Article 68(2) of the ICSID Convention.Footnote 33 The Democratic Republic of São Tomé and Príncipe deposited its ratification instrument in May 2013, and the Convention entered into force in its respect in June 2013.Footnote 34 But probably the most seminal new membership is that of Canada’s. Already a signatory to the Convention since 2006, Canada deposited its instrument of ratification of the ICSID Convention on 1 November 2013.Footnote 35 Pursuant to Article 68(2) of the ICSID Convention, the latter entered into force for Canada on 1 December 2013. Canada’s adhesion to the ICSID Convention opens the door for North American Free Trade Agreement (NAFTA) disputes to be adjudicated under the ICSID Convention. In accordance with Article 1120 of the NAFTA, an investor may submit a claim to arbitration under ‘the ICSID Convention, provided that both the disputing Party and the Party of the investor are parties to the Convention’. Given that among NAFTA’s signatories only the United States had been party to the Convention prior to Canada’s membership, the conditions for the submission of a NAFTA dispute to arbitration under the ICSID Convention may be fulfilled for the first time. It is noteworthy that both the 2004 Canadian Model BIT and the current version of the same modelFootnote 36 adopted before Canada’s ratification of the ICSID Convention provide for the possibility of submitting a claim to the ICSID Convention if both the disputing party and the home economy of the disputing investor are party to the ICSID Convention.Footnote 37

Investor–State Dispute Settlement Challenges and the Division of Financial Responsibility in Arbitration on the Basis of EU Investment Agreements

If the preceding paragraphs have demonstrated the popularity of investment arbitration, the ISDS mechanism has become target for a growing number of critiques.Footnote 38 These have not always left government actors indifferent, and some of them have questioned the necessity of including access to investor–State dispute settlement in their investment agreements. The previous Australian government, for example, sought to adopt a policy that would discontinue access to investor–State arbitration in its international investment treaties.Footnote 39 However, after the conclusion of a recent Australian FTA that provides for investor–State dispute settlement,Footnote 40 it is less than certain that the new Australian Government will go down the same path.Footnote 41 Beyond the Australian context, scepticism has been expressed in Latin America, with obvious disapproval of investor–State arbitration in recent denunciations of the ICSID Convention.Footnote 42 As noted elsewhere, these denunciations constitute a political statement vis-à-vis investor–State dispute settlement, but they target the ICSID system in particular.Footnote 43 And more recently, concerns have reportedly been raised in Europe by Germany.Footnote 44 The following paragraphs will briefly examine some particular issues and challenges posed by investment arbitration in the framework of the ongoing EU investment negotiations, with a focus on the apportioning of financial liability between the EU and its Member States.Footnote 45

The EU institutions involved in the negotiations have made clear that EU investment agreements need to provide an effective investor–State dispute settlement mechanism.Footnote 46 For example, the European Commission has indicated that ISDS is ‘such an established feature of investment agreements that its absence would in fact discourage investors and make a host economy less attractive than others’,Footnote 47 and the Council has stressed ‘the need for an effective investor-to-state dispute settlement mechanism’.Footnote 48 The European Parliament has dedicated five paragraphs to investment arbitration in its Resolution of 6 April 2011,Footnote 49 although it is remarkable that in the text accompanying a proposed amendment to the Commission’s Proposal for a Regulation ‘establishing a framework for managing financial responsibility linked to investor–state dispute settlement tribunals established by international agreements to which the European Union is party’, the European Parliament has observed that including ISDS in EU investment agreements ‘is not a necessity’.Footnote 50 It has further added that inclusion of investor–State dispute settlement ‘should be a conscious and informed policy choice that requires political and economic justification’.Footnote 51 In a more recent document, the European Parliament’s Position ‘with a view to the adoption of Regulation (EU) No…/2014 of the European Parliament and of the Council establishing a framework for managing financial responsibility linked to investor-to-state dispute settlement tribunals established by international agreements to which the European Union is party’ (hereinafter Position of the European Parliament),Footnote 52 and which was adopted with the legislative resolution of 16 April 2014,Footnote 53 the Parliament expressly states that EU investment agreements ‘may’ provide for ISDS.Footnote 54

It does not appear, as of the time of writing, that this statement has an impact on the design of the EU investment policy, although it may reflect a certain amount of sympathy for some policy decisions, such as those of the previous Australian government.Footnote 55

One of the crucial questions that have confronted the EU concerns the highly debated issue of how to apportion responsibility and financial liability between the EU and its Member States as a consequence of investment disputes, and the concomitant topic of identifying the appropriate respondent.Footnote 56 The issue was already touched in the 2010 Communication of the European Commission ‘Towards a comprehensive European international investment policy’, whereby the Commission suggested that the European Union, represented by the European Commission, would be responsible for defending all actions of EU institutions.Footnote 57 According to this same argument put forward by the Commission, the EU would be the only defendant where a Member State has taken measures impacting foreign investment and falling within the scope of the agreement in question.Footnote 58 In another document issued by the European Commission, its 2010 Proposal for a Regulation establishing transitional arrangements for bilateral investment agreements between Member States and third countries, there was provision for participation of both the EU and the Member States in investment arbitrations initiated on the basis of EU investment treaties,Footnote 59 and the topic was also evoked in the Council’s Conclusions of the same year, with the Council inviting the Commission to carry out a study on the question of responsibility.Footnote 60 In 2011, the European Parliament called on the Commission to propose a regulation on the division of responsibilities between the Union and its Member States, particularly relating to financial liability where the defendant has lost a dispute to an investor of another party.Footnote 61

Things have evolved since these early discussions. In 2012, the European Commission submitted a Proposal for a Regulation establishing a framework for managing financial responsibility linked to investor–State dispute settlement tribunals established by international agreements to which the European Union is party,Footnote 62 which in its own express terms sought to establish the framework for managing the financial consequences of investment disputes on the basis of EU investment agreements.Footnote 63 The Proposal’s main argument was that financial liability born out of an investment dispute needs to be attributed to the actor affording the disputed treatment; in other words, where the EU or an EU institution is responsible for the treatment in question, financial liability should lie with the EU, and where a Member State is responsible for the treatment, liability should be with the Member State.Footnote 64 Where treatment afforded by a Member State is required by EU law, then the EU should bear the financial liability.Footnote 65 The central organising ideas of the Commission’s Proposal have been integrated into the aforecited Position of the European Parliament.Footnote 66

One particular question that needs to be examined in relation to the issue at hand is that the conclusion of an agreement as purely a mixed agreement or as a pure EU agreement may have an impact on the allocation of financial responsibility and on identifying the appropriate respondent.Footnote 67 Indeed, this position was upheld by the European Parliament, which notes that in principle the EU will ‘be responsible for defending any claims alleging a violation of rules included in an agreement which falls within the Union’s exclusive competence, irrespective of whether the treatment at issue is afforded by the Union itself or by a Member State’.Footnote 68

The question of whether EU investment agreements are to be concluded as pure EU agreements or as mixed agreements is one that has been subject to a heated debate since the very beginning of the extension of the EU’s competence over the conclusion of treaties that cover foreign direct investment by virtue of Article 207 of the Treaty on the Functioning of the European Union, and it is beyond the scope of the present contribution to explore.Footnote 69 But in order to better understand the Commission’s arguments, and the European Parliament’s response, regarding the apportioning of responsibility and financial liability, suffice it to note at this stage that with its Proposal for a Regulation, the Commission stresses its opinion that the EU ‘has exclusive competence to conclude agreements covering all matters relating to foreign investment, that is both foreign direct investment and portfolio investment’.Footnote 70

If a treaty were to be concluded as a mixed agreement, the Commission considered that the responsible actor should be determined ‘on the basis of the competence for the subject matter of the international rules in question, as set down in the Treaty’ rather than on who were the authors of the act.Footnote 71 In the same vein, the Commission recognised that, while international responsibility for the breach of a provision of an agreement falling within the EU’s competence rests with the EU itself, it is possible to allocate financial liability between the Union and the Member States. Therefore, while in principle it is the EU that should act as respondent in disputes concerning alleged violations of such provisions, it is possible to empower a Member State to act as respondent under given circumstances. The Commission considered that this approach offers ‘pragmatic solutions’.Footnote 72

In the same Proposal, the Commission expressed the opinion that an investor having initiated arbitration on the basis of an EU investment agreement should not suffer the consequences of a potential disagreement between the EU and the Member State concerned as regards the apportioning of responsibility between the two and provision should be made that compensation allocated in a final award or settlement award shall be promptly paid to the investor.Footnote 73 While this approach seems reasonable in the case of a final arbitral award, its suitability to a settlement award could be questioned where a Member State has freely negotiated the settlement and its disagreement with the EU leads the latter to undertake the payment.Footnote 74 For this reason, the Commission’s Proposal and the Proposal of the European Parliament explain that a Member State may settle a dispute so long as ‘it accepts full financial responsibility’.Footnote 75 Likewise, where a dispute also concerns treatment afforded by a Member State, the EU should only be able to negotiate a settlement if this has no ‘financial or budgetary implications for the Member State concerned’.Footnote 76 A further interesting element in the Commission’s proposal has been the establishment of a mechanism for regular payments to be made into the EU budget to be allocated to investor–State dispute settlement costs and for the reimbursement of the Union where it has paid for an award.Footnote 77

These are some of the issues and challenges facing investment arbitration, notably in the context of the European Union, and it will be interesting to watch out in the months to come how some of these dilemmas will be resolved.

Further Topical Issues: Adjudication of Sovereign Debt Restructurings and Transparency

The remaining part of the chapter will consider two particular issues that have arisen in relation to investor–State dispute settlement: the adjudication of sovereign debt restructurings and the concomitant question of multiparty treaty claims and transparency.

Investor–State Dispute Settlement and Sovereign Debt Restructurings

Recent disputes concerning Argentina’s sovereign debt restructuring have given rise to new issues in investment arbitration. More concretely, two questions have been asked: whether sovereign debt instruments qualify as protected investment under the relevant IIA and, when arbitration is conducted under the ICSID Convention, under Article 25 of the ICSID Convention; and whether multiparty, or mass, claims are allowed. Although the issues discussed here are born in the context of Argentina’s sovereign debt restructuring, and especially in the Abaclat,Footnote 78 Ambiente Ufficio,Footnote 79 and Alemanni Footnote 80 cases, they may become relevant to other disputes, such as those relating to Greece’s sovereign debt restructuring. As mentioned above, an ICSID case has already been registered against the country, and other recent sovereign debt restructurings, including those of Belize, Ecuador, and Jamaica,Footnote 81 may open the way for further claims. The paragraphs that follow will give a brief consideration to some of these issues.

While a number of investment treaties expressly include bonds in their definition of investment,Footnote 82 it is generally essential to look at the particular way the relevant treaty provision has been drafted. Regarding the question of whether sovereign bonds constitute investment under the ICSID Convention, the majority in the Abaclat Tribunal, having rejected the Salini test,Footnote 83 found that the purchase of security entitlements in government bonds did constitute investment for the purposes of the ICSID Convention.Footnote 84 The dissenting arbitrator noted his disagreement with the majority view remarking that ‘a good faith international law interpretation […] derived from the inherent ordinary meaning of term “investment” of Article 25(1) in its context and in the light of the object and purpose of the 1965 ICSID Convention’ cannot lead to the conclusion that portfolio investment and ‘other financial negotiable products (traded with high velocity of circulation in capital markets and at places far remote from the State in whose territory the investment is supposed to take place) between persons alien to any economic activity in the host State and which, generally speaking, cover a wide spectrum of financial products ranging from standardized instruments (i.e. shares, bonds, loans) to structured and derivatives products (i.e. hedges of currencies, oil, etc., credit default swaps)’.Footnote 85

The second important question has been whether multiparty claims are covered by a State’s consent to arbitrate in the investment treaty and under the ICSID Convention. Two relevant decisions have been rendered so far. First, the Abaclat Tribunal, and then the Ambiente Tribunal, following in the latter’s steps, found that nothing in the ICSID Convention ‘would militate in favour of interpreting the “silence” of the ICSID Convention as standing in the way of instituting multi–party proceedings’.Footnote 86 It is worth noting the dissenting arbitrator’s ‘total disagreement’ with the majority view in the Ambiente dispute.Footnote 87

Some treaties, especially newer ones, have started to preclude sovereign debt restructuring from coming into the scope of an investment dispute. They do so by altogether excluding portfolio investments from their coverage,Footnote 88 by specifying that ‘public debt operations’ do not constitute an investmentFootnote 89 or that such operations are not subject to the treaty’s investment protection provisions,Footnote 90 or by excluding the possibility of raising claims related to sovereign debt restructurings.Footnote 91 Other ways in which States could ensure that agreements prevent the arbitration of this type of claims would be to specify that sovereign crises come within the scope of an essential security interest exceptionFootnote 92 or provide explicit waivers in contracts associated with sovereign debt.Footnote 93

Transparency in Investor–State Dispute Settlement

A catchword in today’s international investment law, transparency kindled a particularly vivid discussion in the context of (the reform of) investor–State dispute settlement.Footnote 94 Envisioning the future EU investment policy, already in 2010, the European Commission emphasised that ‘the EU should ensure that investor–state dispute settlement is conducted in a transparent manner’Footnote 95 and transparency in ISDS is a prominent feature of current investment policy discussions at the EU level.Footnote 96 Transparency in ISDS is essentially related to publication of and access to arbitral awards and open hearings, and third–party participation.Footnote 97 These topics will be briefly examined below.

While according to the ICSID Convention, publication of awards is subject to the parties’ consentFootnote 98 and comparable provisions are found in most arbitration rules,Footnote 99 UNCITRAL has pioneered in the transparency debate by adopting, on 11 July 2013, the UNCITRAL Rules on Transparency in Treaty–based Investor–State Arbitration (hereinafter UNCITRAL Transparency Rules), which provide for transparency in investment dispute resolution conducted under the UNCITRAL Rules.Footnote 100 The Transparency Rules are an unprecedented set of norms providing, inter alia, for the publication of documents relating to the proceedings, such as the notice of arbitration and the awards,Footnote 101 and, subject to the exceptions in Article 7 of the Transparency Rules, for hearings open to the public.Footnote 102 The Transparency Rules are applicable to investor–State dispute settlement pursuant to an agreement concluded on or after 1 April 2014, unless the parties to the treaty agree otherwise.Footnote 103 In some cases, the Transparency Rules may equally apply to investment disputes born on the basis of earlier investment agreements.Footnote 104 In all probability, the UNCITRAL Transparency Rules will apply to future EU investment agreements.Footnote 105 In December 2014, UNCITRAL adopted the Convention on Transparency in Treaty–based Investor–State Arbitration (Mauritius Convention on Transparency) to extend application of the Transparency Rules to earlier IIAs. Signed by ten States as of the end of March 2015, the Convention has not yet come into force.

Where participation of third parties is concerned, ICSID Rule 37(2), introduced in 2006, provides that, after consultations with the parties, the tribunal may allow non-disputing parties to file submissions in relation to matters that fall within the purview of the dispute. Comparable provisions exist in the ICSID Additional Facility RulesFootnote 106 and the UNCITRAL Transparency Rules.Footnote 107 One step ahead in the transparency debate, the latter further establish that the tribunal shall allow or, after consultation with the parties, invite ‘submissions on issues of treaty interpretation from a non-disputing Party to the treaty’.Footnote 108

Beyond these institutional transparency rules, provisions on transparency may be found in a number of investment agreements, especially those concluded by North American countries. The NAFTA itself provides in Annex 1137.4 that, where Canada or the United States is a disputing party, either the State or an investor party to the arbitration may make the award public. The 2001 Notes of Interpretation of Certain Chapter 11 Provisions of the NAFTA Free Trade Commission (FTC) underlined the absence of a general duty of confidentiality.Footnote 109 Three years later, the FTC welcomed the fact that Mexico has ‘joined Canada and the United States in supporting open hearings for investor–state disputes’.Footnote 110 All NAFTA awards have been made public.Footnote 111 It is further worth noting that, although the NAFTA does not contain express provisions on amicus curiae submissions, the Methanex Tribunal allowed third–party participation.Footnote 112 Its approach was formally endorsed in 2003, with the FTC’s Statement on third–party participation.Footnote 113 Provisions on transparency figure more prominently in new North American treaties,Footnote 114 and they also appear in the draft CETA text of March 2014.Footnote 115

Conclusion

Reform of investor–State dispute settlement is part of an attempt to both improve the system and to increase its legitimacy. Reform is currently afoot with important amendments, such as the provision for more transparency, having taken place in the last couple of years. The present contribution has examined some of these recent institutional developments concerning investment arbitration in general and, especially, the ICSID system. Particular attention has been paid to issues that have arisen in the ongoing EU negotiations, with a focus on one of the seminal ‘internal’ decisions that need to be taken in that context, namely the division of financial responsibility between the EU and its Member States. Lastly, two questions were considered, the arbitration of mass claims and claims relating to sovereign bonds in light of recent sovereign debt restructurings and transparency in institutional and conventional provisions. Of course, several other investor–State dispute settlement issues that may have unfurled in parallel have remained unexplored in the present contribution, and this is an interesting area to watch, given the importance of the essential investment protection mechanism that is access to international arbitration.