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Home International Economic Law Bilateral Investment Treaties Lack of Consistency and Coherence in the Interpretation of Legal Issues

Lack of Consistency and Coherence in the Interpretation of Legal Issues

Published on April 5, 2019        Author: , and
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Editors’ Note:  This is the last post in our ongoing series of posts (see introduction here, first post on costs here, second post on duration of proceedings here, third post on the diversity deficit in investment arbitration here, fourth post on the impartiality and independence of arbitrators here, fifth post on an empirical assessment of ISDS here) , sixth post on incorrectness of ISDS decisions here) authored by individual members of the Academic Forum of the UNCITRAL Working Group III (UN WG III) on Investor-State Dispute Settlement Reform, in parallel with the ongoing UN WG III sessions taking place this week in New York.  The series features summaries of more detailed concept papers prepared by various working groups of the Academic Forum.  This post summarizes a more detailed concept paper prepared by members of Academic Forum Working Group 3.

This post is the product of the work of the UNCITRAL Academic Forum’s (own) “Working Group 3” whose focus is on the lack of consistency and coherence in the interpretation of legal issues. Lack of consistency has been identified in UNCITRAL Working Group III (WGIII)as one of the concerns with regard to the current system of investor State dispute resolution.

In the view of WGIII, the most glaring cases of unjustifiable inconsistency are cases “where the same investment treaty standard or same rule of customary international law was interpreted differently in the absence of justifiable ground for the distinction” (UN Doc No A/CN.9/935 (14 May 2018), para. 21). Other apparent inconsistencies may be wholly justifiable, where tribunals are interpreting similar, but materially different treaty texts – or interpreting the same treaty in relation to materially different facts. Usually, however, inconsistencies in the case-law fall somewhere between these poles. Indeed, there may be problematic inconsistencies where tribunals make too much of formal differences in treaty texts, where different interpretations may nevertheless prove materially unjustifiable. Not every difference in drafting across thousands of investment treaties necessarily signals a divergent meaning.

Rather than focus on only the glaring cases, we have sought to push further into analyzing the incidents, causes, and varied harms produced by discrete inconsistencies in the ISDS case law. In approaching our task, we have focused on three discrete issues:(1) the obligation to provide full protectionand security (“FPS”); (2) the treaty / contract relationship; and (3) the scope of the most-favoured-nation (“MFN”) clause.  In determining whether there are unjustifiable inconsistencies with respect to these issues, we have explored the following questions: (a) what is the inconsistency?; (b) what is the cause of that inconsistency?; (c) what is the harm being caused by this inconsistency?; and (d) what is the solution for this inconsistency (if one can be identified)?

We have found that a fruitful distinction can be drawn between two kinds of unjustifiable inconsistencies: inconsistent interpretations of basic substantive obligations (e.g. FPS) and inconsistent interpretations of more structural “rules of the game” (e.g. MFN and the treaty / contract issue). The former phenomenon can be problematic, but such inconsistencies are to some extent endemic to any legal system. The life of the law is, everywhere, one of change and development. Moreover, such inconsistencies are relatively manageable. For example, should States worry about inconsistent interpretations of FPS, they can clarify the meaning of such treaty terms through treaty drafting, amendment, and/or joint interpretations. Governments and investors can also, in theory, manage such inconsistencies through private agreement, by contracting for what they consider important.

Unjustifiably inconsistent interpretations of the rules of the game are more problematic, insofar as they create severe uncertainty and unpredictability inthe making of investments and for national regulatory choice. Where there is uncertainty as to whether States and investors can contract around investment treaty rules, efficient private ordering is off the table, leaving price as the best lever to reduce uncertainty. Similarly with MFN, uncertainty about whether such clauses allow importation of substantive treaty rules from treaties with third-parties, procedural rules, or neither, creates severe ex ante uncertainty for all parties about the nature and extent of the regime applicable to the investment. In both cases, uncertainty as to the rules of the game creates harms ex ante and ex post. To the extent that States and investors are aware of these problems, they can lead to bargaining and price inefficiencies in the making of investments. To the extent they are unaware, such inconsistencies can lead to unfair and unjustifiable surprise ex post.

For the purposes of this short blog post, we draw out this distinction by sketching our analyses of inconsistencies in the case law on FPS, treaty / contract, and MFN.  

Full Protection and Security

The FPS standard provides examples of glaring inconsistencies in basic substantive treaty rules.  The first, and most obvious case of “inconsistent” interpretation is the case where two distinct investment tribunals interpret the same provision in the same treaty in two different ways (compare, e.g., BG Group v Argentine Republic, limiting FPS in the UK-Argentina BIT to physical security, and National Grid v Argentine Republic, which found no reason to limit FPS to physical assets). The second glaring kind of inconsistency arises where two distinct tribunals apply the same or similar FPS provisions differently with respect to the same factual matrix (as was the case in Lauder v Czech Republicand CME v Czech Republic).

In none of the above cases was FPS decisive, so these inconsistencies did not necessarily produce immediate harms. But they do point to troubling unpredictability in the meaning of substantive investment treaty rules. Such inconsistencies can, however, be managed with relative ease – either through careful treaty drafting, through joint interpretations, or, potentially, through private ordering (e.g. through arranging by contract for heightened protection and security obligations).

Treaties and Contracts

Inconsistencies in the relationship between treaty and contract are different, insofar as they introduce serious uncertainty into the rules of the game. As Arato has noted,in cases where the investment is, or includes, a contract between the State and the investor, tribunals have proven highly inconsistent on the relationship between investment treaty norms and contractual terms expressly chosen by the parties. Tribunals have taken widely different positions on whether treaty provisions should take precedence over express contract terms, or whether states and investors are free to contract out of treaty norms (i.e., should treaty norms be understood as mandatoryrules, or mere defaultrules?) Further, to the extent that some tribunals have considered that contract terms can prevail over contrary treaty norms, they have varied on the question of what is required to make such opt-out effective (i.e. are treaty provisions better understood as highly flexible defaults or stickydefaults?).

These inconsistencies cause several significant harms for host states and investors alike. Ex ante, States and investors cannot know the effect of their contractual choices if and when they find themselves in ISDS down the line – whether and under what circumstances their directly bargained-for terms will prevail over the overarching treaty, or vice versa. Such uncertainty, if fully appreciated by all parties to a prospective contract, would lead to inefficient and costly drafting, with inefficient effects on price – and even, potentially, the parties’ willingness to contract. If unappreciated, such uncertainty is likely to lead to unfair surprise at the back end, most likely for States

Most Favoured Nation

As for the MFN clause, the principal inconsistency concerns whether the obligation to provide MFN treatment enables the investor to import a more favourable provisions from another investment treaty – procedural and/or substantive.  Some of the differences in the decisions and awards of arbitral tribunals on this issue are well known. As Douglas has noted, some decisions and awards favour permitting the MFN clause to modify or override conditions on access to ISDS, and to expand the tribunal’s jurisdiction (such as Maffezini v Spain, Siemens v Argentine Republic, and RosInvestCo UK v Russian Federation), while others do not permit the MFN clause to be used in this way (such as Salini v Jordan, Plama v Bulgaria, and ICS v Argentine Republic). Meanwhile, most cases have interpreted MFN clauses as permitting the investor to import favourable substantive standards from treaties with third states (such as White Industries v India). Yet, as Batifort and Heath have recently noted,some have closed off this possibility as well, . (such as Içkale v. Turkmenistan) prompting questions about whether importation of any third party treaty terms is appropriate.

Similarly to the treaty / contract problem, inconsistent interpretations of MFN introduce marked uncertainty into the rules of the game. Uncertainty as to whether MFN clauses permit importation of procedural provisions, substantive provisions, or neither, make it difficult for States and investors to predict the legal framework applicable to an investment – potentially leading to price inefficiencies ex ante and/or unfair surprise ex post. All this also introduces substantial uncertainty into the State’s regulatory process.

What can be done?

Solutions are available on both the front and back end.  One solution is for States to clarify the investment protection standards in the underlying investment treaty. This could be achieved by providing guidance on the interpretation of the FPS and MFN clauses, as well as whether States and investors are free to contract around all or some of its terms, and even what language would be necessary to make opt-out effective. On the back end, systemic reforms to ISDS could also remove such inconsistencies, as well as much of the uncertainty produced thereby. Even if left unaddressed by States in the underlying treaties, the pronouncements of a single authoritative judicial voice (such as a standing Appellate mechanism) would, presumably, lead to a more stable jurisprudence on these issues, allowing States and investors to plan more efficiently.  It also seems to the Working Group that these two types of reform would be mutually reinforcing. But at the same time, it must be understood that these institutional choices have trade-offs, and consistency is not the only value at stake – nor, indeed, necessarily even an end-in-itself.

As for what type of reform would most beneficial from the standpoint of consistency and coherence in legal interpretation, the Working Group has not formed a final view. However, it seems likely that consistency would be improved if either (i) the current ISDS system were supplemented by an appellate mechanism, or (ii) if the system were replaced by a unified Multilateral Investment Court (at least within the Court’s jurisdictional ambit). Yet, as the previous discussion shows, problems of inconsistency are myriad and complex, and discrete problems may call for discrete solutions.

 

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2 Responses

  1. Joey Zhou

    Fantastic post! Agreed with all observations and analysis on ways moving forward, especially the nature of the relationship between treaty and contracts.

  2. Julian Arato

    Thank you, Joey!

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