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Report on the YICCA and YIMA Conference on Investment Treaty Arbitration: Select Issues Around the 2018 FDI Moot Case

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By Alexey Drobyshev, Lawyer, international practice group, at BIOCAD

On November 2nd, the Faculty of Law of St. Petersburg State University in Russia held a conference on select investment treaty arbitration issues, based on the issues raised in the 2018 FDI Moot case. The conference was an accompanying event to the St. Petersburg 2018 FDI Pre-moot, which took place the next day, on November 3rd.

The conference started off with a welcoming speech and some introductory remarks by Elena Burova, Russian Arbitration Center, Sergey Morozov, Beiten Burkhardt, and Elena Kilinkarova, St. Petersburg State University. Mr. Morozov had given a brief description of Young Institute of Modern Arbitration (YIMA) and its structure, including 6 committees on moot courts, cooperation with state courts, mediation, regional development, corporate disputes, and on investment disputes. 

After final words of welcome by Mrs. Kilinkarova, the first panel took the floor to discuss counterclaims in ISDS. The panel consisted of Uliana Cooke of Withers, Stefan Dudas, Derains & Gharavi, and Sebastian Wuschka, Luther. Sebastiano Nessi of Schellenberg Wittmer was the moderator of this panel. 

First, Mr. Dudas made a presentation on consent to arbitrate with respect to counterclaims in investment arbitrations. 

He noted that generally, to determine whether there has been a consent to arbitrate counterclaims, one must look at the arbitration clause of the investment treaty at issue, which is not the arbitration agreement per se, but it a good reflection of its content. Although investment treaties are generally seen as asymmetric, their arbitration clauses are sometimes broad enough to incorporate consent to arbitrate, for instance, contractual claims, and these arbitration clauses incorporate consent to counterclaims based on domestic law of the host state. 

At the same time, in some situations, even though the claims were covered by their respective arbitration clauses, the host state had no standing, because standing to file a claim was granted to investor alone. 

The final issue that was raised is that of investor’s acceptance. Can the investor amend the host state’s offer to arbitrate? Views on this issue diverge.

Ms. Cooke, the second speaker, spoke on the latest trends in drafting of investment treaties with respect to counterclaims.

According to UNCTAD statistics, this year was the first year when more investment treaties were terminated than there were concluded. The backlash against ISDS, Ms. Cooke reflected, led the states to try and balance out the asymmetry inherent to investment treaty regimes. Today we see that developing states are the ones leading the way and producing texts of new treaties.

The speaker then referred to some examples of the techniques used in newer investment treaties. For example, a novel feature in Colombia – UAE BIT provides for an obligation of the investor to accept claims against itself alongside the notice of intent to arbitrate. The new Slovakia – Iran BIT has a similar provision, alongside a restriction that claims cannot be submitted where the investor has itself violated the host state law. The new Morocco – Nigeria BIT contains a very broad dispute resolution clause, which is not difficult to interpret as allowing counterclaims. 

The conclusion was that there is an emerging trend by the developing countries to create new investment treaties that allow for counterclaims. The trend is not the only one, however: for instance, the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) has suspended the possibility of counterclaims under the TPP.

Finally, Mr. Wuschka spoke on counterclaims in connection with environmental law and human rights law.

First, with respect to environmental law, it was noted that they no longer develop entirely in parallel, and environmental law issues are dealt with by investment tribunals, as well as other courts. Three issues arise with respect to environmental law-based counterclaims: consent to arbitrate, connectedness of the counterclaim with the dispute, and the applicable law (since environmental claims are typically founded in domestic environmental law, meaning that an arbitral tribunal must interpret the treaty at issue to find out whether this treaty empowers the tribunal to apply domestic environmental law.

The speaker then addressed the problem of assessing the damages. There is no rule on how to quantify damage to environment. The Perenco v. Ecuador tribunal hired an independent expert, while the Burlington Resources v. Ecuador tribunal conducted a site visit. 

The human rights law claims differ in one element: the human rights law claims are based on international law, not domestic law. As such, the question here is whether the investor can be bound by human rights law standards. A reference was made to Urbaser v. Argentina, where the tribunal found that there are negative obligations to be observed by the investor. 

The presentations were followed by a discussion of the issues. The speakers and the audience first discuss the question of why states file counterclaims at all. This is done for procedural efficiency, to rebalance the power in the eyes of the tribunal, to enhance the legitimacy of investment arbitration, and to appeal to the general public in the host states.

Afterwards, the panel and the audience discussed the reasons not to make domestic law applicable in ISDS, and the issues raised by Urbaser regarding treaties that do not impose any obligations upon the investor. 

After the coffee break and a brief presentation on YICCA by Matthew Morantz of Curtis, Mallet-Prevost, Colt & Moslethe, the second panel convened to debate on the host states’ right to regulate balanced and investors’ legitimate expectations. 

The panel was moderated by Diego Brian Gosis, GST LLP, and the speakers were Krystina Khripkova of Integrites, Leonid Shmatenko, Lalive, and Alexander Shchavelev, Pinsent Masons. For this panel, rather then representing their own views, the panelists were asked to take artificial stands constructed specifically for the purposes of the discussion.

Mr. Shchavelev first spoke on why legitimate expectations matter, specifically, because this is a reflection of the general rule of law that is good faith. The things that can create legitimate expectations are specific state conduct, formalized or not, or the legal framework of the country. Where a state wants to change its regulatory environment, it needs to have a legitimate reason to do so. In addition, in terms of procedure, the investor can expect that due process will be applied and the state will act fairly in terms of legal procedure.

Mr. Shmatenko then took a stance of the respondent states. For instance, to what degree could the tobacco producers expect the tobacco industry regulations to not change, when it was not until the 1980s that it was recognized that smoking is unhealthy? When the ground for regulatory change is public health, then the state has a certain degree of discretion, whose exercise on its own does not amount to breaking legitimate expectations. Still, states need to be careful in drafting new regulations and restrictions, and, ultimately, investor can sometimes anticipate what can happen.

Finally, Ms. Khripkova addressed the issue from the point of view of an arbitral tribunal. Generally, there are two approaches. The pro-investor approach, where legitimate expectations are those which were created at the specific moment when the investment was made, and the regulatory framework cannot be changed during the lifetime of the investment. The more flexible approach is that the state can modify the legal framework without dishonoring legitimate expectations, as long as care is taken.

While the first approach limits the analysis by the tribunal to whether the changes in regulations were harmful to the investor, the second approach requires the tribunal to find out what exactly the investor could legitimately expect. That, itself, leads to two more questions: if there was a legitimate expectation, and if the change in regulatory framework was reasonable.

The speaker then presented different answers to these questions presented by different tribunals, including Enron and Metalclad. Ultimately, the approaches differ, meaning that, for counsel it is often good to know the opinions of the specific arbitrators who compose the tribunal. 

After the presentations, the discussion within the panel and the audience took place on how different variables in regulatory changes, such as notice and its period, specific provisions of domestic law, proportionality of the regulations, the content of the promises and representations. 

After the lively discussion, Elena Burova closed the conference by congratulating and thanking the participants and the audience for the presentations and the thought-provoking discussions. The conference was followed by the networking cocktail at the Erarta Museum of Contemporary Art, allowing the participants to relax and think over the recently contemplated issues with a view to the next day’s 2018 FDI St. Petersburg Pre-moot.


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Young IMA
yima@centerarbitr.ru
20 Ноября 2018

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