Update on investment treaty case law

A number of recent international arbitration decisions raise issues relevant to the investment chapters of New Zealand’s FTAs with China, ASEAN and Malaysia.

First, an interesting debate is brewing in NAFTA jurisprudence as to the proper interpretation of NAFTA Chapter 11, Article 1105, which guarantees covered foreign investors within Canada, the US and Mexico “fair and equitable treatment” in accordance with international law.  The fair and equitable treatment standard is arguably the most controversial and wide-ranging of the investment rights.  Since an official interpretation in 2001, it has been clear that the meaning of Article 1105 is, unlike ‘autonomous’ standards in other investment agreements, to be construed as providing only the minimum standard of treatment protection conferred by customary international law. 

The on-going debate is whether that customary international law minimum standard has evolved significantly since the 1920s – and in particular since a 1926 arbitration, Neer v Mexico.  On 8 June 2009, the tribunal in Glamis Gold Ltd v USA held that the claimant had failed to establish any such evolution with the effect that “the fundamentals of the Neer standard thus still apply today”: a state act must be “egregious and shocking – a gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons – so as to fall below accepted minimum standards and constitute a breach of Article 1105(1)” (paras 22 and 614).  This approach incorporates a high degree of deference to state regulators.  On 31 March 2010, a different tribunal in Merrill & Ring Forestry LP v Canada held that “except for cases of safety and due process, today’s minimum standard is broader than that defined in the Neer case and its progeny.  Specifically this standard provides for the fair and equitable treatment of alien investors within the confines of reasonableness” (para 213).

There is no NAFTA hierarchy of tribunals nor any standing appellate review body.  Thus, the existence of two conflicting interpretations shows that, even if customary international law is not evolving, the case law certainly is.  It should be noted that in neither case did the investor succeed.  Both claims for damages against the host states were thrown out.

Another area in which conflicting decisions can be found is in the dubious procedural tactic of seeking an order preventing the other party’s counsel from participating in the proceedings due to an undisclosed relationship with a member of the arbitral tribunal.  We say dubious because, whilst it is clear that tribunal members – as with domestic court judges – have obligations to avoid perceptions of bias, the ordinary course to address such situations is to challenge the tribunal member, not the opposing counsel. 

  • In Hrvatska Elektoprivdea dd v Slovakia (ruling of 8 May 2008), the tribunal ruled that in all the circumstances the challenged counsel, who was a member of the same set of barristers chambers as one of the tribunal members, “may not participate as counsel in this case”

  • In Rompetrol Group v Romania (ruling of 14 January 2010), a different tribunal indicated that the Hrvatska ruling – which it was careful not to criticise – might be better seen as limited to its own facts “than as a holding of more general scope” (para 25).  The reasoning of the Rompetrol ruling is that “there should be no room for any idea to gain ground that challenging counsel is a handy alternative to raising a challenge against the tribunal itself, with the consequences the latter implies” (para 21).  In our view this must be right.

Thirdly, an Ad Hoc Annulment Committee constituted under the ICSID Convention declined to annul an arbitral award in a telecoms dispute involving Kazakhstan (Kazakhstan v Rumeli Telekom and Telsim Mobil, 25 March 2010), despite having doubts about the clarity of reasoning supporting the arbitral tribunal’s damages award of US$125 million.  In that case the respondent companies were the 60% shareholders of KaR-Tel, a Kazakh company which in 1998 won the licence for Kazakhstan’s second mobile phone network, for which it paid US$65 million.  There were numerous allegations made during the arbitration, including that the respondents’ investment in KaR-Tel amounted to fraud or collusion.  The Ad Hoc Committee did not indicate any interest in revisiting these factual issues.  It was concerned, however, at the paucity of reasoning supporting the tribunal’s discounted cash flow (DCF) damages calculation.  This concern is of wider application.  Although the facts of that case were specific, the tribunal’s DCF calculation is not atypical of many other investment treaty or commercial arbitration claims.  The case is a reminder that rigour, attention to detail, and a logical chain of reasoning are important in justifying a damages award.  Although the committee stated that it “well understands the grounds for” Kazakhstan’s annulment application in this regard, the tribunal had in fact given reasons for its award.  That award could therefore not be annulled under the high standard provided in Article 52 of the ICSID Convention.

Finally, an arbitral tribunal in Romak SA v Uzbekistan held on 26 November 2009 that mere performance under a grain supply contract did not amount to an “investment” creating jurisdiction under the Swiss/Uzbekistan bilateral investment treaty.  Rather, “Romak’s rights were embodied in and arise out of a sales contract, a one-off commercial transaction pursuant to which Romak undertook to deliver wheat against a price to be paid by the Uzbek parties” (para 242).  This is an important clarification of the distinction between the rights which attach to sales of goods and the rights which attach to investments.  Contractual rights can, under almost all bilateral investment treaties and FTA investment chapters, qualify as investments – and therefore for increased protection.  But the context and drafting must support this inference, which they did not in the Romak case.  New Zealand exporters contributing goods to foreign parties, especially in an environment of consistent and recurring risk, should seek legal advice on how most effectively to structure their relationship so as to attract investment protection.

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Related topics: International trade & investment; International trade agreements; Arbitration; Connected Asia Pacific

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Connected Asia Pacific - April issue; NZ-Australia Apples dispute – urgency for a negotiated outcome?; New Zealand-Hong Kong CEP signed 29 March 2010; New Singapore arbitration decisions; Revised IBA Rules of Evidence for international arbitrations; Negotiations held in Wellington on Anti-Counterfeiting Trade Agreement (ACTA), text released on 22 April 2010  

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