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UNCITRAL and ISDS Reforms: Moving to Reform Options … the Politics

Published on November 8, 2018        Author: 
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In the last blog, I provided an update on the UNCITRAL process, including the consensus decision from Vienna last week to move forward to consider possible reforms of investor-state arbitration. This decision is very significant. But to get a sense of how this decision was reached and where the process might be heading, I thought it would be helpful to provide my sense of the politics of the process as well as some projections about how it might move forward.

As stated previously, I am a member of the Australian delegation but I am included in that delegation in my independent academic capacity, so nothing in my writings or talks should be taken to reflect Australia’s views. My academic views are exactly that: mine and academic. Nevertheless, I hope that these views are informed. These blogs are based on official interventions during the UNCITRAL plenary sessions as well as discussions with a diverse range of actors from the process.

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UNCITRAL and ISDS Reforms: Moving to Reform Options … the Process

Published on November 7, 2018        Author: 
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Last week has been described as a watershed moment for ISDS reform. During a meeting in Vienna, states decided by consensus on the desirability of developing reforms in UNCITRAL with respect to investor-state arbitration. States now have an opportunity to make proposals for a work plan about what reforms to consider and how to go about considering them. To the extent that the tide has turned on traditional investor-state arbitration, it is now up to states to tell us where they want to sail.

As you might imagine, reaching a decision like this involved quite a process, along with a lot of politics. In this blog, I set out the process in terms of what was decided in Vienna, what was not decided, and what the next steps will be for moving forward in 2019. In the next blog, I will provide some context to this development, giving some insights into the politics of the process as well as some projections about how this process might develop.

This reform process will be long and its ultimate outcome remains unknowable. But the momentum for and direction of reforms are becoming increasingly clear. The calls for systemic reform are rising, though different states may mean different things by “systemic.”

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Can’t Fight the Moonlight? Actually, You Can: ICJ Judges to Stop Acting as Arbitrators in Investor-State Disputes

Published on November 5, 2018        Author: 
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The earthquake started in earnest in November 2017. At its epicentre was a report, published in November 2017 by two researchers at the International Institute for Sustainable Development (“IISD“).

In the report, titled “Is ‘Moonlighting’ a Problem? The role of ICJ Judges in ISDS”, researchers Nathalie Bernasconi-Osterwalder and Martin Dietrich Brauch analysed the contents of several public databases of ISDS cases, and found that at least seven judges at the International Court of Justice (“ICJ” or the “Court“) at the time of publishing (and 13 former judges) had worked (or were working at the time of the report) as arbitrators in treaty-based investor state dispute settlement cases during their terms at the ICJ.

Crunching the numbers further, the two IISD researchers looked at the amount of treaty-based cases in which ICJ judges had served as arbitrators. They compared the number against the 817 treaty-based ISDS cases known as of July 2017. The results were surprising: ICJ judges had sat as arbitrators in roughly 10% of all known investment treaty cases during their tenure.

This raises three types of concerns.

First, it seems to contravene the prohibition for ICJ judges to “engage in any other occupation of a professional nature” contained in the Statute of the International Court of Justice (the “ICJ Statute“).

Second, arbitrators are usually paid according to the time (calculated in days or hours) spent working on a case. This means that any ICJ judge who is also appointed as an arbitrator would have an economic incentive to spend more time on the investment treaty case, to the potential detriment of the judge’s Court-related work.

Third, cumulating the roles of ICJ judge and arbitrator (or, as the report called it, “moonlighting”) could potentially impact, or be perceived to impact, the judge’s independence and impartiality. Read the rest of this entry…

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New Restrictions on Arbitral Appointments for Sitting ICJ Judges

Published on November 5, 2018        Author: 
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Editor’s Note: This week, in a trio of posts by Callum Musto, Marie Davoise, and Frederic Sourgens, we facilitate discussion on the nature of the International Court of Justice’s judicial function, and the occasional international arbitration appointments accepted by individual judges of the World Court. In view of H.E. President Yusuf’s October 2018 report to the U.N. General Assembly, what can be expected of the Court with respect to managing future arbitral appointments that could be issued by appointing authorities or party nominations for the Court’s individual jurists – whether in inter-State or mixed arbitral disputes?

On 25 October, in the annual address of the President of the International Court of Justice to the General Assembly, President Yusuf announced that the Court had decided to adopt new restrictions on its sitting Members acting as arbitrators in inter-State and mixed arbitration. He said:

The Court is cognizant of the fact that, while the judicial settlement of disputes offered by the Court is enshrined in the Charter, States may, for several reasons, be interested in settling their disputes by arbitration. In such instances, Members of the Court have sometimes been called upon by States to sit on the arbitral tribunals in question dealing in some cases with inter-State disputes while in others with investor-State disputes – a testament, of course, to the high esteem in which the Court’s Judges are held by the international community. Over the years, the Court has taken the view that, in certain circumstances, its Members may participate in arbitration proceedings. However, in light of its ever-increasing workload, the Court decided a few months ago to review this practice and to set out clearly defined rules regulating such activities. As a result, Members of the Court have come to the decision, last month, that they will not normally accept to participate in international arbitration. In particular, they will not participate in investor-State arbitration or in commercial arbitration. [pp. 11-12, my emphasis]

President Yusuf elaborated that while sitting judges would no longer be allowed to arbitrate in mixed proceedings, they would be permitted to do so in ‘exceptional’ circumstances in inter-State disputes, provided that their judicial activities are given ‘absolute precedence’:

… in the event that they are called upon, exceptionally, by one or more States that would prefer to resort to arbitration, instead of judicial settlement, the Court has decided that, in order to render service to those States, it will, if the circumstances so warrant, authorize its Members to participate in inter-State arbitration cases. Even in such exceptional cases, a Member of the Court will only participate, if authorized, in one arbitration procedure at a time. Prior authorization must have been granted, for that purpose, in accordance with the mechanism put in place by the Court. Members of the Court, will, however, decline to be appointed as arbitrators by a State that is a party in a case pending before the Court, even if there is no substantial interference between that case and the case submitted to arbitration. [pp. 11-12, my emphasis]

It does not appear that the Court has elected to make formal amendments to its Rules or to include a Practice Direction reflecting the new appointment policy, but rather for individual judges and the President to manage appointment requests on an individual basis. The difference in approaches taken between inter-State and mixed arbitration presumably reflects the significant jurisdictional and substantive overlaps between the Court’s activities and many inter-State arbitrations — especially under Annex VII UNCLOS — and the comparatively smaller pool of eligible arbitrators to fill these roles.

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Insights from the Bifurcation Order in the Ukraine vs. Russia Arbitration under Annex VII of UNCLOS

Published on September 6, 2018        Author:  and
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By Procedural Order of 20 August 2018 (“Bifurcation Order”), the arbitral tribunal established under Part XV and Annex VII of the 1982 United Nations Convention on the Law of the Sea (UNCLOS) in the “Dispute Concerning Coastal State Rights in the Black Sea, Sea of Azov, and Kerch Strait (Ukraine v. the Russian Federation)” ordered a bifurcation of the proceedings so that Russia’s preliminary objections concerning the arbitral tribunal’s jurisdiction ratione materiae will be examined in a preliminary phase  prior to the merits (see also this statement by Ukraine’s Ministry of Foreign Affairs). This development brought with it some much needed transparency in the arbitration instituted by Ukraine against Russia on 16 September 2016, since the written submissions of both parties remain confidential. What appears from the public statements of Ukraine’s government (here and here), is that Ukraine is claiming that Russia violated Ukraine’s rights under UNCLOS with respect to Russian activities in the Black Sea, the Sea of Azov and Kerch Strait, in particular, involving issues such as the seizure and exploitation of oil fields on Ukraine’s continental shelf, usurpation of fisheries jurisdiction off the coast of Crimea, issues of navigation through Kerch Strait, the construction of Kerch Bridge and related structures, and the conduct of studies of archeological and historical sites in the Black Sea.

The Bifurcation Order discusses (and cites from) a variety of the parties’ arguments concerning jurisdiction ratione materiae, several of which inevitably disclose some of the parties’ substantive positions. With respect to Russia’s request that the arbitral tribunal “adjudge and declare that it is without jurisdiction in respect of the dispute submitted to this Tribunal by Ukraine”, it should be recalled that, under Article 288(1) UNCLOS, the arbitral tribunal’s jurisdiction is limited to “any dispute concerning the interpretation or application of [UNCLOS]”. As Russia’s request to decline jurisdiction is not confined to specific issues or narrow questions of fact or law, it appears that Russia is challenging the arbitral tribunal’s jurisdiction in its entirety. The Bifurcation Order lists six separate preliminary objections. Read the rest of this entry…

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Crimea Investment Disputes: are jurisdictional hurdles being overcome too easily?

Published on May 9, 2018        Author: 
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In February-March 2014, Crimea experienced what is here neutrally referred to as a ‘change of effective sovereign’ (as conceded by Ukraine itself). Subsequent events have given rise to at least nine investment claims by Ukrainian nationals against Russia in connection with their investments in Crimea made prior to the ‘change of effective sovereign’. Substantively, all cases pivot on alleged violations of the expropriation and FET (fair & equitable treatment) clauses of the 1998 Russia-Ukraine BIT. Before getting there, however, a series of jurisdictional hurdles need to be overcome. Firstly, whether the scope of the BIT covers also de facto (as opposed to de jure) territory. Thus, whether under the BIT, Crimea may be understood as Russian territory. Secondly, the BIT’s temporal and personal ambit of application. That is to say, whether Ukrainian nationals and their businesses existing in Crimea prior to the ‘change of effective sovereign’ may qualify, respectively, as foreign Ukrainian investors and investments in Russia. It is doubtful that these questions which, are inevitably intertwined with the public international issue of the legality of the ‘change of sovereign’, can be satisfactorily answered through ‘effective interpretations’ and/or drawing analogies from human rights law. The scope and rationale of investment law differs from that of the latter; the promotion and protection of bilateral business is pursued for the benefit of economic growth, while the protection of fundamental rights and freedoms of persons is undertaken for the good of human kind.  In fact, it is reflected in the standard dispute settlement mechanism envisaged i.e. private ad hoc arbitration v standing international court.

Jurisdictional decisions in five proceedings have recently been rendered. To date, none of these have been made public. Nevertheless, important passages of their reasoning have been uncovered by trusted sources. These allow for a preliminary review of the tribunals’ assessment of the key legal issues involved. Read the rest of this entry…

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China leans in on international adjudication: Why Beijing’s answer to defeat will be more forceful engagement

Published on May 2, 2018        Author: 
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This year China might suffer the third in a string of stinging defeats at international tribunals that would then cover trade, investment, and law of the sea matters. Contrary to persistent expectations in some policy circles, China’s leaders will not opt for withdrawal. They have resolved to make existing mechanisms work for China, and shape global governance by doubling down on engagement. In line with different degrees of Chinese integration into these systems, Beijing will respond by ratcheting up litigation (trade), upgrading bilateral treaties (investment), and pushing for favourable state practice through diplomacy (law of the sea). The international community will have to deal with a newly powerful legal actor who is very much on the offense.

Failure and Frustration

In two ways, trade law could this year deliver the third bombshell setback in China’s recent engagement with international adjudication. Firstly, there is China’s soon to be decided WTO complaint against the EU’s retention of a distinct (although modified) antidumping methodology for (states like) China. A similar case against the United States is in the consultation stage. Beijing had expected that its Accession Protocol would deliver automatic ‘market economy status’ including more favourable antidumping treatment 15 years after it joined the WTO.

Secondly, a major trade law standoff is unfolding between China and the US, involving the mutual adoption of tariffs and filing of WTO complaints, which could come to a head this year. The US filed a complaint on China’s protection of intellectual property (IP) rights alleging TRIPS Agreement violations. At the same time, the US Trade Representative (USTR) proposed tariffs following a Section 301 US Trade Act of 1974 investigation into Chinese IP practices. Beijing already responded with a WTO complaintalleging that such tariffs would violate the GATT, and its own list of proposed tariffs. Less crucially, China initiated another case alleging GATT and Safeguards Agreement violations through US tariffs on steel and aluminium products.

Previously, giant life insurer Ping An became the first Chinese company to lose an investment arbitration, when its $1 billion claim against Belgium over the Fortisbank nationalization was rejected in 2015. A year later, China suffered an almost total defeat against the Philippinesin an Annex VII UNCLOS law of the sea arbitration on South China Sea issues in July 2016.

Such setbacks trigger angry reactions in China against allegedly biased international institutions that might never give China a fair shake. Many commentators decried China’s supposed second-class membership in the WTO, when the EU decided against granting market economy status, while recent US trade actions are termed severe violations and ‘typical of unilateralism and trade protectionism’ by the Chinese government. Chinese officials were stunned when the investor in Ping Anlost over the ‘technicality’ of whether to rely on the older or the more recent bilateral investment treaty (BIT) between China and Belgium. Following the South China Sea case, it was mooted that Beijing could ‘denounce’ the UN Convention on the Law of the Sea (UNCLOS) to be safe from other states’ attempts to ‘exploit’ the system ‘for political reasons’.

Doubling Down

Yet China is not going to withdraw, and Western governments, as guardians of the current system, will be surprised by how forcefully it will instead lean in to shape existing legal regimes. Tools will differ, but trade litigation, investment treaty making and law of the sea diplomacy to influence state practice serve the same purpose: align the rules further with China’s interests.

This effort is part of the more assertive foreign policy outlined by China’s president Xi Jinping, who just consolidated his power at the First Session of the 13th National People’s Congress. In a major shift, Xi has declared that China will no longer just participate in the international system, but provide ‘guidance’ towards a ‘new international order’. A recent treatise in the People’s Daily confirmed the ambition to seize the ‘historic opportunity’ to shape a new order while US policies under President Trump leave a leadership vacuum.

An underestimated driver of such strategic decisions is a policy elite of Chinese international lawyers who overwhelmingly favour playing offense. Prominent academics and legal counsels to the Chinese leadership have argued that with WTO dispute resolution, just showing up is half the battle. They have called for China to develop the litigious ‘mind set’ and investment treaty framework to go with its new status as major global investor. Lastly, they want China to go around the South China Sea award and influence the law of the sea by shaping state practice through diplomacy.

Bespoke Strategies

After China was refused ‘market economy status’, its Ministry of Commerce immediately struck back at the EU with a complaint at the WTO. Should it now lose the case, its appeal will already be prepared, as will be fresh complaints tackling the broader issue from different angles. At the same time, Beijing encourages Chinese companies to more proactively ‘prove’ to regulatory agencies abroad that they operate under market conditions, and contest adverse decisions at local courts.

Similarly, the Chinese government very quickly responded to recent (partly only proposed) US tariffs, with two fresh complaints. The current overall dispute with Washington will see a Chinese leadership that is more open to negotiated solutions than on antidumping methodology. Should there be any adverse decisions, though, China would again immediately appeal and file further complaints.

Flanking its litigation strategy, China continues massive diplomatic lobbying. Firstly, this serves to gain recognition as a market economy. More than 80 countries have already complied by explicitly providing such recognition, and FTA negotiations in line with theBelt and Road Initiative are to increase that number. President Xi has called for hastened implementation of China’s free trade strategy to strengthen its position in writing global trade rules, after failed Western efforts with TPP and TTIP left the field open.

Secondly, Beijing is actively portraying itself as defender of the WTO trade regime against a protectionist Trump administration onslaught. While many governments share US concerns about IP rights in China, Beijing uses (potential) US tariff implementation without WTO decisions, especially where broadly targeted such as on steel and aluminium, to position itself as the better trade citizen. China’s aim is not only to offset pressure concerning domestic legal changes, but also to shape future coalitions of states in international trade law reform (or rather in blocking reform where existing frameworks suit China).

On investment law, the investor’s defeat in Ping An spurred the Chinese government to quickly improve its investment treaties and seek influence on global investment rules harmonization. Beijing wants to get new investor-friendly treaties in place that include improved transitional clauses, and grant broad access to international arbitration, as well as, quite unusually, appellate bodies. Chinese lawyers argue that such mechanisms may improve legal predictability, but perhaps more importantly they would give the Chinese side another chance in case of defeat.

Wanting to make use of the full arsenal of available measures, the Chinese leadership also acts on the multilateral level. On the path towards a common worldwide investment law system that looks more like the WTO in the trade area, Beijing seeks to set the agenda and touts the ‘Guiding Principles for Global Investment Policymaking’, adopted at the 2016 G20 Summit in Hangzhou, as a first step. The non-binding principles are infused with Chinese wording and interpretations of principles such as legal predictability, transparency, and effective dispute resolution.

Finally, in the third issue area of the law of the sea, after the stunning loss on South China Sea claims, Beijing decided to undermine the award’s authority with a diplomatic push to underline contradictory state practice. Chinese officials aim to prevent the arbitrators’ restrictive interpretations of ‘historic rights’ and ‘island’ status from becoming international customary law. They point out, for example, that the United States and Japan use tiny rocks to make extensive maritime claims, and lobby states worldwide to support China’s interpretation of its islands’ entitlements. Some scholars point out the potential for further UNCLOS implementation agreements(as on deep seabed mining), which could clear up ambiguity in terms favourable to China and override the tribunal’s decisions.

While China may strictly reject compliance with the South China Sea award, it needs UNCLOS to protect its interests and gain influence on maritime governance. Beijing aims to secure a large UNCLOS-sanctioned continental shelf in the East China Sea, based on favourable geography vis-à-vis Japan. It wants Chinese companies to be in a prime position for the coming International Seabed Authority-sanctioned mining bonanza under the high seas worldwide, and it intends to have a seat on the table regarding Arctic governance issues. Indicative of its strategic choice to shape the system from within, China now adopts more UNCLOS-like language for its South China Sea claims and backs away from the ‘Nine-dash Line’.

The Future of China and International Law

So, in a nutshell, what should we expect China to do? Its approach has already evolved considerably. The focus shifted from the international legal order’s ‘hardware’ – joining institutions and equipping them with Chinese judges and staff – to its ‘software’. Now the Chinese leadership wants more influence on the treaties and customary law behind the system. In a parallel process, once it feels confident enough in a particular field, China gradually but inevitably boots up participation at court.

Prominent voices in China, including Prof. Yi Xianhe, member of the Foreign Ministry Consultative Committee on International Law, have argued that China must be a ‘leader country’ on international law, if it is to consolidate economic and political gains. That includes actively engaging with international tribunals. Such statements represent an emerging consensus among Chinese international lawyers that forward-leaning engagement will on balance be a positive for China, and the best protection of its national interests.

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Arbitration Agreement is no Waiver of State Immunity from Jurisdiction for the Purposes of Recognition and Enforcement – Comment on Commercial Court of Moscow’s decision in Tatneft v Ukraine

Published on July 17, 2017        Author: 
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In April 2017, the Russia-based PJSC Tatneft initiated against Ukraine the process of recognition and enforcement in Russia of an arbitral award issued in the PCA investment arbitration OAO Tatneft v Ukraine under the UNCITRAL Rules and the Russia-Ukraine BIT. This June, the Commercial Court for the City of Moscow (the court of first instance, hereinafter – “the Court” or “the Russian Court”) dismissed Tatneft’s recognition and enforcement application, inter alia, sustaining Ukraine’s plea of immunity from jurisdiction [see А40-67511/2017 (in Russian)]. This post comments on the part of the Court’s judgment concerning Ukraine’s immunity from jurisdiction.

The Positions of the Parties and the Judgment

Insofar as it is possible to ascertain the crux of the parties’ submissions from the text of the judgment, Ukraine raised two objections to jurisdiction. The first objection was based on Ukraine’s immunity from jurisdiction in the recognition and enforcement proceedings, and the second on the Russian courts’ lack of effective jurisdiction to try the claim due to the absence of Ukraine’s commercial assets in the territory of Russia. This note will concern itself only with the first of the two objections. Read the rest of this entry…

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The Shifting Landscape of Investor-State Arbitration: Loyalists, Reformists, Revolutionaries and Undecideds

Published on June 15, 2017        Author: 
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The investor-state arbitration landscape is shifting under our feet. The utility and legitimacy of traditional investor-state arbitration have come under fire, but states have not converged on a viable alternative. In simplified terms, three main camps are developing, which I call the “loyalist,” “reformist,” and “revolutionary” camps. The vast majority of states, however, are yet to take a public position on whether and, if so, how to reform investor-state dispute settlement. These “undecided” states are not a homogenous group, nor are they necessarily passive. Many states within this group are actively watching these developments and debating the various reform proposals.

One of the big strategic questions for the investment treaty system in the next few years will be whether the loyalists, reformists or revolutionaries will be able to attract a critical number of the undecideds to their cause in order to create a reasonable measure of convergence on a particular approach. The alternative is that the undecideds will split among the existing camps and/or develop their own distinct or hybrid positions. Another question is whether any members of the existing camps will shift their alliances. It is unclear how this will ultimately play out. What is clear, however, is that the tide appears to be turning against the traditional model of investor-state arbitration as it has few – if any – real supporters among states.

Loyalists, Reformists and Revolutionaries Read the rest of this entry…

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Self-Appointment in International Arbitration

Published on June 7, 2017        Author: 
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At first glance, paragraph 14 of the UNCLOS Annex VII tribunal’s Order on Provisional Measures in Enrica Lexie (Italy v. India) appears quite mundane. It states in relevant part that “on 30 September 2015, the President of ITLOS appointed … H.E. Judge Vladimir Golitsyn as arbitrator and President of the Arbitral Tribunal” (para. 14). It becomes much more interesting, however, when one realizes that on 30 September 2015, the President of ITLOS was none other than Judge Golitsyn himself.

A similar phenomenon appears to have occurred in another high-profile UNCLOS Annex VII arbitration: Ukraine v. Russia. On 23 December 2016, the Ministry of Foreign Affairs of Ukraine revealed that Judge Boualem Bouguetaia would be a member of the tribunal, “express[ing] its gratitude to the Vice-President of [ITLOS] for rapid formation of the tribunal”. The Ministry failed to note, however, that on 23 December 2016 the Vice-President of ITLOS was none other than Judge Bouguetaia himself.

If it is true that Judges Golitsyn and Bouguetaia appointed themselves to the tribunals, they should not necessarily be reprimanded. After all, these self-appointments would be in accordance with Annex VII of UNCLOS. Article 3 of Annex VII provides that the parties shall appoint three of the five members of the tribunal by agreement, but if they are unable to agree, the appointments shall be made by the President of ITLOS or, if he or she is a national of one of the parties to the dispute, the next most senior member of ITLOS. In Enrica Lexie, this power fell on President Golitsyn. And in Ukraine v. Russia, since President Golitsyn is a national of Russia, this power fell on Vice-President Bouguetaia. Nothing in Article 3 prohibits the appointing authority from appointing him or herself to the arbitral tribunal.

Three Concerns

Nevertheless, an appointing authority’s self-appointment as an arbitrator, as a general matter in international arbitration, is subject to three potential concerns. Read the rest of this entry…

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