UNCTAD Released 2011 Review on Investor-State Dispute Settlement

UNCTAD, the United Nations Conference on Trade and Development, published its annual review of investor-State dispute settlement (ISDS) cases last week.

UNCTAD was established in 1964 to "maximize the trade, investment and development opportunities of developing countries and assist them in their efforts to integrate into the world economy on an equitable basis".

This was done in response to concerns on the part of the developing world over the disparity between itself and the developed nations, especially as regards the international market and the multinational corporations that operate in it. The annual review of investor-State dispute settlement cases forms part of UNCTAD’s Programme on International Investment Agreements. The 2010 review (“the Review”), part of the IIA Issue Notes series, contains numerical trends in ISDS as well as country- and issue-specific information on ISDS for 2010.

According to the Review, last year saw 25 new investor-State dispute settlement cases filed under international investment agreements – the lowest number since 2001; although this comes with the caveat that most arbitration forums do not maintain a public registry of claims so, in all likelihood, these numbers should all be much higher. Of these 25, eighteen were filed with ICSID, which remains the single most popular institution for the resolution of such disputes, followed by ad hoc resolution under the UNCITRAL arbitration rules. Together, these two systems account for over 90% of all ISDS cases – the remainder being filed with organizations such as the Stockholm Chamber of Commerce, the International Chamber of Commerce and the Cairo Regional Center for International Commercial Arbitration, or simply ad hoc. Since the first such case was filed in 1987, 390 cases involving 83 countries have been filed with the majority of the awards being in favor of the State (78 to 59 with another 60 being settled between the parties) – Uruguay and Grenada saw their first claims in 2010. 164 cases remained pending at the end of 2010 while the outcome of the remaining 29 is unknown.

In addition to the actual disputes, 2010 saw eleven decisions on jurisdiction and the same number on interim measures, discontinuance of proceedings, and costs, plus another five on liability. The report’s statistics show that, in 2010, of the 20 awards issued, 14 were in favor of the state while only five favored the investor (the remaining one was the embodiment of a settlement agreement). The liability decisions were all in favor of the investor and eight of the nine public jurisdiction decisions found jurisdiction for the tribunal. 2010 also saw a significant number of ICSID annulment decisions, indicating a growing use of this award review mechanism.

The Review’s overview of the issues, substantive and procedural, addressed in the 2010 decisions includes, inter alia, an interpretation of the fair and equitable treatment standard (“FET”), prohibition of unreasonable or discriminatory measures, and treaty-based emergency exceptions. Here is a brief overview of some of the topics touched on:

On the fair and equitable treatment standard, tribunals tied the FET standard to the parties’ legitimate expectations, holding, generally, that an act or omission is contrary to the FET standard if, when viewed objectively, it frustrates “legitimate and reasonable expectations” on which the investor relied, although protection of the investor must be balanced against the State’s right to adopt measures to protect its public interest.

Relating the FET standard to customary law, a tribunal held that it was “satisfied that fair and equitable treatment has become a part of customary law”. The tribunal distinguished two tracks of minimum standard treatment which had each developed their own standard – the first track focused on personal safety, denial of justice and due process and required an “outrageous” conduct of some kind. The second track concerns business, trade, and investment and protected against “all such acts or behaviors that might infringe a sense of fairness, equity and reasonableness“.

Also relating to customary law, the defense of necessity (and the treaty-based emergency exception) was at issue in several arbitrations stemming from the Argentine economic crisis. Argentina was found to have unjustifiably violated its BITs because the measures it took in violation of its BITs were not the only means to satisfy its essential interests and because Argentina had contributed to its own emergency situation.

On the procedural side, one tribunal found that, apart from the three criteria of ICSID Convention Art 25, no other criteria can be looked to in order to give a tribunal jurisdiction. The same tribunal also found that sale-and-purchase contracts are commercial transactions and not investments. On the legality of the investment for purposes of establishing jurisdiction, another tribunal ruled that a state’s objection of illegality was invalid because “principles of fairness should prevent the government from raising ‘violations of its own law’ as a jurisdictional defense when [it] knowingly overlooked them and [effectively] endorsed an investment which was not in compliance with its law”. However, in another case, the tribunal did, again, emphasize that “an investment will not be protected if it has been created in violation of national or international principles of good faith, by way of corruption, fraud, or deceitful conduct; or if its creation itself constitutes a misuse of the system of international investment protection under the ICSID Convention. It will also not be protected if it is made in violation of the host State’s law.”.

Further, collateral estoppel was found to apply to ICSID arbitrations as a general principle of law applicable to international courts and tribunals and, as such, tribunals may not re-litigate a finding concerning a right, question or fact which has already been decided if, in a prior proceeding: “(a) it was distinctly put in issue; (b) the court or tribunal actually decided it; and (c) the resolution of the question was necessary to resolving the claims before that court or tribunal”. Furthermore, the tribunal held, in response to a challenge to a State organ’s decision, that “arbitrators are not superior regulators…they do not substitute their judgment for that of national bodies applying national laws”. Thus, in order to overturn a regulatory decision, it must be shown that “the State organ acted in an arbitrary or capricious way” not merely that the organ’s decision is (even materially) wrong.

The Review concludes that “States appear to be increasingly proactive in the ISDS process. They now aim at managing and controlling cases from the beginning, and/or actively question the tribunal's reasoning once a case has been concluded.”.