By Evan Drake
The CPR Institute’s 2019 Annual Meeting was held at the Fairmont Hotel in Washington, D.C., Feb. 28-March 2. The event featured more than 50 speakers on 16 panels addressing the most pressing issues in commercial conflict resolution.
One of the many CPR AM19 highlights was a lively panel discussion of international investment arbitration, Navigating Risky Business: NAFTA, BITs, ITAs and Global Trade. The panel included international investment arbitration experts Arif H. Ali, a partner who co-chairs Dechert LLP’s international arbitration practice in Washington and London; Mélida Hodgson, a partner in the New York office of Foley Hoag; Mark Luz, senior counsel and deputy director of the Trade Law Bureau of Global Affairs Canada in Ottawa, a Canada government agency; and moderator Ank Santens, a partner in the New York office of White & Case and a CPR Institute board member.
The panel discussed the potential impact of the recent United States–Mexico–Canada free trade agreement, best known as the USMCA. The agreement, which is awaiting ratification by each of the nations, regulates both trade and investment. Once ratified, it will replace the NAFTA.
The panel focused on international investment arbitration.
Moderator Santens began by introducing the panel members and providing an outline of modern investor-state dispute settlement, or ISDS. Santens, who has served as both counsel and arbitrator in investment disputes under all major international arbitration rules, highlighted that bilateral and multilateral investment treaties, or BITs, play an important role in the global economy by increasing investment-system stability.
The typical ISDS claim is brought by an investor against a state, typically for breach of a substantive standard of protection contained in a BIT. These standards vary treaty by treaty, but usually include at minimum protections against expropriation and guarantees of fair and equitable treatment. NAFTA, a multilateral trade and investment treaty, grants similar protections to U.S., Canadian and Mexican investors.
The reciprocal protections created by these treaties, Santens continued, allow investors to bring claims against states that would otherwise lack privity, and the number of these claims has increased substantially over the past 10 years. The bulk of these claims have been arbitrated through ICSID–the International Centre for Settlement of Investment Disputes, which is part of the World Bank and based in Washington, D.C.
But other forums, including the Permanent Court of Arbitration in The Hague, Netherlands, the International Chamber of Commerce and the Stockholm Chamber of Commerce may be available to claimants. The United Nations Commission for International Trade Law, or UNCITRAL, among others, provides frequently-used ISDS rules. (Private and nonprofit providers, including the CPR Institute, which publishes this blog, also have adaptable rules.)
The panel then shifted its focus to ISDS history and development. Panelist Mark Luz, who works in the Canadian Department of Foreign Affairs and International Trade, began the discussion with the tongue-in-cheek goal of “explaining 120 years of investment law history in ten minutes.”
Luz, who has represented the Canadian government in NAFTA and other investment arbitration proceedings, described how the “gunboat diplomacy” of the early 20th century was gradually displaced by a system of treaties providing for protection of foreign investments, and how this system has developed rapidly in the past 20 years.
Prior to the advent of inter-state investment treaties, he explained, states defended the interests of their investors abroad in the same way they defended their nationals–through diplomatic protection. For capital-exporting European powers, this might even entail dispatching warships to pressure foreign governments into honoring their commitments to investors.
Evidence of this practice can be seen in the Hague Convention of 1907, on the law of war, in which states undertook not to use armed force for the recovery of debts owed to themselves or their nationals—provided, however, that the debtor states agreed to submit to arbitration.
Diplomatic protection, said Luz, was a poor system for resolving investment disputes. Under this system, investors would generally need to exhaust local legal remedies before applying to their home states for diplomatic protection—a time-consuming and potentially expensive endeavor.
Furthermore, states were under no obligation to grant protection to their nationals, even in the event of a meritorious claim. If political considerations weighed against damaging a sensitive relationship, a state might simply decline to exercise this protection, and an investor would have no way of seeking redress individually.
During the early-to-mid 20th century, certain customary protections began to gain expression through treaties; interstate bodies such as the U.S,-Mexico Claims Commission (1924) were created to adjudicate investment-related disputes. But it was not until the NAFTA’s 1994 passage that investment arbitration “exploded” into the broad-reaching network of substantive protections for individual investors that characterizes modern ISDS.
Luz also noted that ISDS is not without its critics, and that many consider the system to be in the midst of a “legitimacy crisis.” He recalled that during one NAFTA negotiation over an oil and gas project, protesters floated a blimp with the slogan “Frack Off NAFTA Chapter 11” outside the window of the conference room. Chapter 11 is the NAFTA’s investment section.
Although many states have become increasingly critical of investment arbitration, Mark Luz believes that ISDS is more likely to adapt than to perish. Pointing out the varied approaches that different actors have taken toward reforming the system—including NAFTA’s renegotiation, and the development of an international investment court at the United Nations—he emphasized that most states will seek to preserve the stability created by ISDS, even as they act to transform it.
Panelist Mélida Hodgson, of Foley Hoag, who has been both arbitrator and counsel representing the United States in NAFTA and World Trade Organization disputes, cited the USMCA’s transformative potential, but cautioned that the system isn’t changing just yet.
Until the new rules are ratified, Ms. Hodgson said, NAFTA is still the law. Although the so-called “legitimacy crisis” facing ISDS may result in significant future changes, the USMCA represents a discreet set of reforms in both trade and investment law, which should be considered in the context of specific political factors.
Canada and Mexico, for example, have fared far worse in NAFTA disputes than the United States, and yet current U.S. Trade Representative Robert E. Lighthizer and his office has sought to reduce the scope of protections for North American investors. While Mexico may want to re-assert government prerogatives in the energy sector, Canada appears more concerned with the USMCA’s trade provisions than its investment protections.
The result of these negotiations seems to be a two-tiered system, where investments in certain “special sectors”—e.g., oil and gas—will receive greater protection than other investments.
In any event, as members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), both Canada and Mexico have already committed to a limited set of obligations toward foreign investors. The CPTPP, like much of the USMCA, includes a higher bar than NAFTA for demonstrating discriminatory treatment against an investor, as well as reduced protections against expropriations. President Trump withdrew the United States from the agreement 2017.
Shifting the discussion to Europe, Dechert’s Arif Ali agreed with Mélida Hodgson that any USMCA impact will come only after the agreement is ratified. Ali stressed that modern ISDS development represented a historical shift from a “power-based system to a rules-based system,” and that European and other states are unlikely to abandon this useful framework for depoliticizing investment disputes.
Ali first took issue with the oft-repeated criticism that arbitrators in investment cases are, in effect, deciding public policy. Issues of public policy often arise in cases of expropriation, in which states seek to regulate foreign investments for the public good, creating situations where arbitrators may determine that a state’s regulations are impermissible under an investment treaty. Far from rejecting the system, however, he highlighted that states are more likely to use public policy as a litigation tool within ISDS, developing new procedural and substantive rights in the process.
Drawing a parallel with the USMCA, Ali cited the controversial Achmea decision of the Court of Justice of the European Union as an exaggerated threat to investment arbitration. In its landmark 2018 opinion in Achmea, the CJEU declared that a Netherlands-Slovakia BIT–and by extension all inter-EU BITs–were incompatible with EU law. The EC has supported this position by submitting amicus briefs in EU investment disputes. (For information on the case, see CPR Speaks here.)
Nevertheless, European states continue to refer their investment disputes to arbitration, and it is unclear to what extent the Achmea decision will actually affect the practice of arbitral tribunals. As Arif Ali pointed out at the CPR AM19 panel discussion, the applicability of the Achmea decision to intra-EU treaties such as the Energy Charter Treaty, to which the EU itself is a part, is unclear, and already has sparked conflicting interpretations. In Vattenfall v. Germany, for example, an ICSID tribunal determined that the ECT was unaffected by Achmea, despite the issuance of a “guidance note” by the European Commission to the opposite effect.
Ali looked at the proposed EU multilateral investment court as another possible evolution of European ISDS, rather than a departure from the system. Considering the greater focus in more recent BITs on public policy, he said he felt that the development of such an institution would be “in principle, not a bad thing.”
Collectively, the panelists seemed to agree that NAFTA’s renegotiation should be seen as part of a systemic evolution in international investment arbitration. In Europe, North America, and around the world, the panel members indicated that they believed that states are acting to reform ISDS to suit their changing interests. The USMCA, like the Trans-Pacific Partnership and Achmea, represents one piece of a continuing process.
The author is a CPR Institute Spring 2019 intern from Brooklyn Law School.