Is Arbitral Justice Blind? The Conflict of Law and International Commercial Arbitration

 

By Benjamin Hayward, Lecturer in the Deakin Law School at Deakin University, Australia, and is the author of Conflict of Laws and Arbitral Discretion – The Closest Connection Test (Oxford University Press, 2017). Dr. Hayward’s teaching and research span a range of commercial law and international commercial law topics, with a particular focus on private international law, international commercial arbitration, and the international sale of goods.

A version of this article was originally published on the OUPblog on 16 February 2017.

 

It’s a fundamental principle of developed legal systems that justice is blind. This is often represented by the blindfolded Lady Justice. Objectivity is key to the determination of legal disputes, and parties’ rights and obligations.

International commercial arbitration plays an important role in the resolution of cross-border commercial disputes. Rather than submitting their disputes to foreign courts (which may carry significant business risks), commercial parties will often include an arbitration clause in their contracts.

Through these clauses, they agree to resolve future disputes by arbitration rather than through State courts, before an arbitral tribunal rather than a judge. The arbitration is likely to be held in a neutral country. Empirical studies carried out at the School of International Arbitration confirm arbitration’s preferred status as a dispute resolution mechanism.

What, then, of blind justice in arbitration? Does international commercial arbitration hold fast to this same objectivity ideal?

It’s well-established in international commercial arbitration that all arbitrators — even party-appointed arbitrators — must be impartial and independent. However, objectivity can be compromised by means other than bias. An analysis of the current legal framework for resolving the conflict of laws in international commercial arbitration raises serious objectivity concerns, given the wide discretions enjoyed by arbitrators in identifying the governing law for disputed contracts.

In most commercial contracts, parties choose their governing law, and these choice of law clauses are generally respected. However, statistics published by the International Chamber of Commerce demonstrate that parties don’t choose the governing law in around 16% of cases, based on the ICC’s 1990-2015 case load.

Though it’s a distinctly commercial form of justice, international commercial arbitration remains a dispute resolution process grounded in the application of law. Where parties do not themselves choose a governing law, and where a dispute arises under their contract, its identification falls to the arbitrators.

Different legal systems provide different solutions to different legal problems. The following are just a few examples where the law may differ from State to State: whether or not commercial parties owe good faith obligations; the availability of specific performance as a contractual remedy; the enforceability of agreed sums for breach; and the length of time permitted to bring proceedings under relevant statutes of limitations.

When making choices between (different) potentially applicable laws, arbitrators exercise a conflict of laws function, which stands to substantially affect the outcomes of cases. Take, for example, arbitral proceedings that are instituted after three years; where the Respondent’s State has a two year statute of limitations; and where the Claimant’s State has a four year limitation period. If the Claimant’s home law is applied, it will at least be afforded the opportunity to argue its case, but if the Respondent’s law is applied, the claim will not be allowed to proceed at all.

Given that arbitrators’ conflict of laws determinations can substantially affect the outcomes of cases, it might be surprising to know that there is often no specific test or rule for arbitrators to apply in choosing between different potentially applicable laws. Rather, arbitrators are generally empowered to apply the law deemed “appropriate” or “applicable.” The matter is otherwise left entirely within their broad discretion, to select whatever law is felt (by them) best suited to the dispute.

To take just a small number of examples: the UNCITRAL Arbitration Rules 2010 indicate in their Art. 35(1) that a tribunal “shall apply the law which it determines to be appropriate”; Art. 21(1) of the ICC Arbitration Rules 2017 instructs a tribunal to “apply the rules of law which it determines to be appropriate”; and Art. 39(1) of the ACICA Arbitration Rules 2016 requires a tribunal to “apply the rules of law which it considers applicable.”

None of these rules — or the world’s many others like them — provide sufficiently certain tests or criteria for arbitrators to apply in making conflict of laws decisions. The discretions enjoyed under these kinds of provision are so wide, that arbitrators may ground their conflict of laws decisions in any reasoning — even their subjective assessments of the merits of competing laws.

How does this comport with the ideals of objective justice? Arguably, this kind of discretionary procedure does not sit comfortably with objective dispute resolution, and thus the needs of arbitration’s users. User needs are an important consideration in the design of arbitral procedure — arbitration’s very existence, as a legal institution, is premised on serving international merchant needs.

From the parties’ perspective, arbitrators’ wide conflict of laws discretions lead to legal uncertainty, and generate transaction costs. Not only do the parties’ rights and obligations in an arbitration itself stand to be affected, but also their contractual performance before any dispute even arises, and their settlement negotiations. Uncertainty over the governing law can also impact upon the parties’ due process rights in formal arbitral proceedings.

Arbitral procedure is in a constant state of reform. States and arbitral institutions strive to innovate, and to improve their arbitral laws and rules, based on their assessment of user needs. Recent reforms have included provisions addressing complex arbitration issues such as consolidation, as in Art. 22(1)(ix)-(x) of the LCIA Arbitration Rules 2014, and also provisions regulating the early dismissal of claims and defences where “manifestly without legal merit”, as in Art. 29 of the SIAC Arbitration Rules 2016.

Is arbitral justice blind? On the current state of the law, not quite. Curtailing these wide conflict of laws discretions currently prevailing in arbitration — and replacing them with a more certain rule that would be more useful to arbitrating parties and their advisers — would be a worthy item for future attention in discussions about the ongoing reform of arbitral procedure.

The Third-Party Funding Framework: The Ever-Evolving Singapore

Christopher Bloch, Associate Counsel, SIAC; Akanksha Bhagat, Associate Counsel, SIAC

With 2016 being significant for arbitration in Singapore, 2017 is already shaping up to be another important year following the passing of the Civil Law (Amendment) Bill 2016 by the Singapore Parliament on 10 January 2017. Having come into force from 1 March 2017, the new legislation liberalizes the city-state’s legal regime by creating a framework to allow for third-party funding in certain areas of dispute resolution, including international arbitration and mediation.

The Rise of Third-Party Funding Across the Asia-Pacific Region

It is not news that jurisdictions in the Asia-Pacific region have begun supporting the use of third-party funding arrangements. In fact, the development of a third-party funding market in Australia has been ongoing for the last 25 years, and the discussions in Singapore and Hong Kong have been taking place for several years now. However, such arrangements have remained historically unenforceable due to the common law torts of champerty and maintenance, which make a person sharing in the proceeds of a lawsuit or supporting/promoting another’s suit for their personal gain punishable, respectively.

The benefits that third-party funding brings to businesses across the globe are fairly uniform, ranging from allowing impecunious parties and small-to-medium-sized businesses with limited funds and/or legal “war chests” better access to justice to permitting larger businesses to free up their balance sheets and shift the sometimes burdensome costs and risks associated with dispute resolution. Despite these benefits, however, third-party funding arrangements have been unavailable across much of Asia.

Consequently, with third-party funding only just being introduced in these jurisdictions, there is a need to determine the manner in and degree to which it will be regulated, which is as yet unclear. The issues commonly associated with and debated in relation to third-party funding will be issues in Asia as well (for example, conflict of interest, disclosure and confidentiality), and it remains to be seen how local legislation and regulation will attempt to deal with them.

Additionally, third-party funding in Singapore is only being extended to international mediation and arbitration, with funding remaining unavailable in the domestic litigation context (although as noted by the Singapore High Court in 2015 in Re Vanguard Energy Pte Ltd [2015] SGHC 156, litigation funding may be available in certain insolvency cases, under the appropriate circumstances) and a clear prohibition on legal advisors having any economic interest in the third-party funding. It is therefore narrower than the offering in certain other jurisdictions, such as Australia, where third party funders are even being permitted to invest in law firms.

The Ever-Evolving Singapore

It has become trite commentary that Singapore has emerged as a preeminent global seat for international arbitration. With high trade flows both into and out of Asia leading to an increase in the number and complexity of cross-border commercial disputes, Singapore’s excellent infrastructure and geographical connectivity have made it a global “hub of trade” and center for arbitration.

Combined with a judiciary that provides maximum support and minimal intervention in arbitral proceedings and world-renowned hearing facilities at Maxwell Chambers, Singapore has committed to staying at the leading edge of international arbitration. To carry on this commitment, and recognizing that third-party funding arrangements have become more prevalent in the international arbitration arena, the Singapore Ministry of Law submitted the Civil Law (Amendment) Bill 2016 to the Parliament, following a period of public consultation, for its first reading in November 2016.

The proposed bill sought to:

  1. abolish the common law torts of champerty and maintenance in Singapore;
  2. provide that third-party funding arrangements are no longer against public policy in certain prescribed categories of proceedings (to be defined in subsidiary legislation following enactment);
  3. specify that third-party funding may only be provided by entities that meet certain criteria set out in subsidiary legislation; and
  4. make a related amendment to Singapore’s Legal Profession Act to clarify that lawyers may introduce or refer funders to their clients, so long as they do not receive any direct financial benefit from such introduction or referral, and can act for their clients in relation to third-party funding contracts.

On 10 January 2017, the Singapore Parliament conducted a second reading of the bill and passed the Civil Law (Amendment) Bill 38/2016 which becomes enforceable upon publication in Singapore’s Government Gazette. While this is a major step in the advance of Singapore as a leading hub of international dispute resolution, the community will continue to watch for the Ministry of Law to release the regulations necessary to fully flesh out the third-party funding framework. As specified in the law:

The Minister [of Law] may make regulations necessary or convenient to be prescribed for carrying out or giving effect to this section, including –

  • prescribing the qualifications and other requirements that a Third-Party Funder must satisfy or comply with to be a qualifying Third-Party Funder;
  • prescribing the class or classes or description of dispute resolution proceedings to which this section applies; and
  • governing the provision and manner of third-party funding including the requirements that the Third-Party Funder and the funded party must comply with.

 

Moving forward, readers should watch as Singapore begins to release the subsidiary legislation and regulations envisaged by the initial law, to give a shape to the developing framework. As Singapore’s Senior Minister of State for Law, Indranee Rajah SC, stated during her speech before the Singapore Parliament on 10 January 2017: “[t]he Ministry of Law is working with arbitration institutions and practitioners to initiate the production of such ‘soft laws’”. Once crafted, these regulations and “soft laws will help to shape how funding works in practice in the jurisdiction.

What It Could Mean for Arbitration in the Region

As Singapore moves forward in shaping its framework to deal with third-party funding, Hong Kong is also on the path to amending its laws to allow for third-party funding arrangements. With these two centers of arbitration taking this step, the region is set to further benefit from the opening of the industry as the volume of work is expected to increase.

Since the appetite for third-party funding has grown in Southeast Asia, it would not be surprising if more jurisdictions were to follow suit by liberalizing their legal regimes to allow for third-party funding arrangements. This is especially true for those jurisdictions keen to develop themselves as centers of dispute resolution. As this trend continues, it would seem inevitable that there will be a visibly wider appetite for funding throughout the Asian region.

Further, as investment arbitration has continued its steady rise around the globe and with the advent of third-party funding in the jurisdiction, Singapore has now become well-positioned to attract investor-state disputes. Without the availability of third-party funding, the reality is that some investors (and even certain States) would be unable to bring (or defend, as the case may be) treaty claims.

The quantum of arbitration work that the region will see is likely to increase both as a result of the increased access to justice that permitting third-party funding will allow for, and the fact that the competitiveness of Singapore and Hong Kong as arbitral seats will continue its upward trajectory as a result of these amendments. Drawing on Australia’s experience introducing third-party funding (where related regulation and legislation were varied and amended for almost three years between 2009 and 2012), it is likely that the legal regime in both Singapore and Hong Kong will similarly undergo a period of fine-tuning in their respective regulatory frameworks based on actual use and experience of third-party funding in each jurisdiction. Practitioners should aim to keep abreast of the developments to ensure they are up-to-date on how their clients can best utilize the tools available in the region.

 

(Post updated on 10 March 2017)

The Language of Arbitration in Indonesia

By Prof. Dr. Huala Adolf, S.H., LL.M., Ph.D., FCBArb., Vice President, BANI Arbitration Centre

 

The language used in an arbitration does not normally pose any problems when parties to an arbitration speak the same language. However, difficulties may arise where the parties speak different languages, are of different nationalities or if the arbitrators are of different nationalities. Reasonable practical solutions can normally be found between the parties and arbitrators in these types of situations, but an additional layer of complexity arises where national laws require the national language of the state to be used in commercial transactions.

This issue has recently raised concern in Indonesia after a domestic court in Jakarta delivered a judgment regarding the use of language in contracts. Following the decision, some have questioned if the decision of the court also affects which language can be used in arbitrations conducted in Indonesia. In the author’s view, any concerns surrounding the use of language in a contract should not affect what language can be used in an arbitration.

Law No. 24 of 2009 (Language Law)

The issue of language came to the fore in 2009 when the Government promulgated Law No. 24 of 2009 on the Flag, Language, State’s Coat of Arms and National Anthem (the “Language Law”).

The Language Law consists of 74 articles divided into five main regulations concerning: (i) the national flag (articles 4 – 24); (ii) the national language (articles 25 – 45); (iii) the State’s coat of arms (articles 46 – 57); (iv) the national anthem; and (v) the criminal provisions for the violations of the provisions regarding the national flag, the nation’s coat of arms and the national anthem. The criminal provisions are silent on what penalties can be incurred for violations of the provisions regarding Indonesia’s national language.

Article 27 of the Language Law clearly states that the Indonesian language, Bahasa Indonesia, shall be used in any official state documents. The explanatory provisions of Article 27 stipulates that official state documents include, among others, state decision letters, bonds, (official) certificates, the (official) notes, identity cards (ID), agreements and court decisions.

Furthermore, Article 31 of the Language Law states that Bahasa Indonesia shall be used in a memorandum of understanding or an agreement (including agreements in international public law) which involve a state institutions, a government institution, private Indonesian entity or Indonesian citizens (paragraph 1).

Paragraph 2 article 31 of the Language Law states that if a memorandum of understanding or an agreement as stipulated in paragraph 1 above involves foreign parties, it should also be drafted in the national language of the respective party and/or in English.

This seemingly gives the assurance that English may be used in drafting an agreement (or contract) where one of the parties is not Indonesian.

PT Bangun Karya Pratama Lestari (“BKPL”) v. Nine AM Ltd (“NAM”)

However, as stated above, concerns were raised when the District Court of Jakarta Barat (west Jakarta) ruled on the legality of a contract written in English in a case between PT Bangun Karya Pratama Lestari and Nine AM Ltd.

The claimant, BKPL, is an Indonesian limited liability company. The respondent, NAM, is a US limited liability company based in Texas. BKPL issued its claim against NAM in the District Court of West Jakarta on 30 August 2012.

BKPL had entered into a loan agreement with NAM on 23 April 2013. for NAM to provide a loan of USD 4,422,000 to BKPL. BKPL was to pay the loan back in 48 instalments. After making several loan payments, BKPL filed a claim in the West Jakarta Court alleging that the loan agreement signed between BKPL and NAM was in violation of article 31 of the Language Law. BKPL also claimed that because the loan agreement violated the Language Law, the loan agreement was null and void.

NAM denied that the agreement violated the Language Law and put forward a number of arguments. Firstly, the parties had already entered into a similar agreement and the use of English had never been disputed. Secondly, the parties were subject to the pacta sunt servanda obligation when they entered and agreed to be bound by the loan agreement.

The District Court held that the loan agreement was null and void and did not have any binding force upon the parties because it did not meet the formal requirements of a valid contract, i.e. it was not drafted in the Indonesian language. The District Court was of the opinion that every contract involving an Indonesian institution, company or private individual made after the enactment of the Language Law must be made in the Indonesian language.

The decision was affirmed by the High Court of Jakarta in 2014 and reaffirmed by the Supreme Court in 2015.

The Arbitration Language

The concern surrounding the use of language in a contract should not affect what language can be used in an arbitration. Generally, the parties to an arbitration agreement have autonomy to decide which language to use. This principle is enshrined in the UNCITRAL Model Law on International Commercial Arbitration (UNCITRAL Model Law).

Article 22 paragraph 1 of the UNCITRAL Model Law provides that: “1. The parties are free to agree on the language or languages to be used in the arbitral proceedings. Failing such agreement, the arbitral tribunal shall determine the language or languages to be used in the proceedings. This agreement or determination, unless otherwise specified therein, shall apply to any written statement by a party, any hearing and any award, decision or other communication by the arbitral tribunal.”

Article 28 of Indonesian Law No. 30 of 1999, concerning arbitration and alternative dispute resolution in Indonesia (the “Indonesian Arbitration Law”), stipulates that the Indonesian language must be used in all arbitration proceedings, although parties may choose to use another language with the consent of the arbitrator or arbitration tribunal.

In contrast to the brief article 28 of the Indonesian Arbitration Law, there are extensive provisions regarding language under the arbitration rules of the Indonesian National Board of Arbitration (the “BANI Rules”). Article 14 of the BANI Rules addresses four elements related to the language of arbitral proceedings, namely:

(1) the language of the proceedings (para. 1);

(2) the document language (para. 2);

(3) the interpreter (para. 3); and

(4) the award language (para. 4).

 

BANI Rules on the language of arbitral proceedings mirror Article 28 of the Indonesian Arbitration Law (as set out above). Paragraph 1 article 14 of the BANI Rules provide that the case examination must be conducted in the Indonesian language. However, the parties may agree to use another language subject to the approval of the arbitration tribunal. The arbitral tribunal will consider several conditions when determining whether to grant approval, including:

(1)     the existence of foreign parties in the dispute;

(2)     if the arbitrators are foreign nationals who cannot speak the Indonesian language; or

(3)     if the dispute arises from a transaction that was conducted in another language.

Paragraph 2 article 14 of the BANI Rules addresses the situation where two languages may be used. If the original documentation submitted or relied upon by the parties in the submission of the case is in a language other than the Indonesian language, then the Tribunal may determine whether or not the original documents must be accompanied by a translation into the Indonesian language. Similarly when the original document is in the Indonesian language, the Tribunal may request for it to be translated into another language.

Under paragraph 3 article 14 of the BANI Rules, if the Tribunal and/or any party requires the assistance of an interpreter during the proceedings, such an interpreter shall be provided by BANI at the request of the Tribunal. The fee incurred for the interpreter shall be borne by the parties.

It is important to note that under Article 27 of the Language Law, arbitration awards are considered to be court decisions which are subject to the Language Law. Furthermore, Indonesian Arbitration Law requires arbitration awards to be registered with the Registrar of the District Court where the respondent is domiciled. As the officer of the Court, the Registrar will only register the arbitration awards written in Indonesian language.

Hence, arbitration awards in Indonesia must be written in the Indonesian language. If the parties are foreign nationals, the award may be translated into another language as requested by the foreign party. If the language used in the arbitration is not the Indonesian language, the translation of the award into the Indonesian language is required.

 

Does ISDS Promote FDI? Asia-Pacific Insights from and for Australia and India

 

By Prof Luke Nottage (University of Sydney Law School) & A/Prof Jaivir Singh (Jawaharlal Nehru University, Delhi)

 

Treaty-based Investor-State Dispute Settlement (ISDS) keeps attracting media attention. An example is a social media campaign by the ‘GetUp!’ group, which aims generally ‘to build a progressive Australia and bring participation back into our democracy’,[1] objecting to ratification of the Trans-Pacific Partnership (TPP). This free trade agreement (FTA), signed in February 2016, encompasses Australia and 11 other Asia-Pacific economies generating around 40% of world GDP. Whether and how the TPP will be ratified and come into force has become very uncertain anyway, after the unexpected victory of Donald Trump in US presidential elections. Although Trump seems already to be backtracking on some of his pre-election positions, he had been opposed to the US ratifying the TPP and indeed favoured renegotiation of the longstanding North American FTA with Canada and Mexico.[2] Both FTAs include the option of ISDS, allowing foreign investors to bring direct claims against host states for violating substantive commitments such as non-discrimination or adequate compensation for expropriation.

 

Nonetheless, taking advantage of the extra uncertainty now surrounding the TPP, China is already trying to get Australia’s support to progress negotiations for a broader FTA, establishing a “Free Trade Area of the Asia-Pacific” (FTAAP).[3] China had been pressing for a FTAAP as it had not been included in TPP negotiations.[4] After the TPP was signed, China had also tried to accelerate negotiations for the Regional Comprehensive Economic Partnership (RCEP or “ASEAN+6”) FTA, underway since late 2012 and involving ten Southeast Asian states along with China, Japan, Korea, India, Australia and New Zealand. Ministerial statements and a leaked draft Investment Chapter indicate that ISDS provisions remain on the negotiating agenda for RCEP.[5]

 

Public opposition to ISDs therefore remains an important issue, particularly in the Asia-Pacific region. Legal professionals need to engage with this debate and understand the pros and cons of this dispute resolution procedure, especially the investor-state arbitration mechanism. On the one hand, the GetUp! Campaign against the TPP had focused on the risk of Australia being subject to ISDS claims especially from US investors, in light of their claims against Canada under the North American FTA. Yet damages awarded by arbitrators or through settlements amount to only 0.05% of US FDI in Canada,[6] and the latter’s investors bring more ISDS claims per capita than US investors.[7]

 

On the other hand, the GetUp! campaign did not adequately explain or consider why and how ISDS commitments are made. Host states have increasingly offered such protection to foreign investors in investment treaties since the 1970s. Bilateral investment treaties (BITs) proliferated especially as communist states began to open up their economies from the 1990s. Bilateral and regional FTAs, usually with investment chapters also containing with ISDS protections, were concluded after the collapse of efforts to develop a multilateral investment agreement through the World Trade Organization (WTO) and Organisation for Economic Co-operation and Development (OECD).

 

The extra option of treaty-based ISDS was seen as a more direct and less politicized procedure compared to inter-state dispute settlement. The latter is still typically provided in investment treaties (but hardly ever used), as well as for trade disputes under the WTO (where, for example, Australia has only been complainant in seven cases – last in 2003).[8] Credible commitments through ISDS-backed treaties were seen as particularly important for developing countries where domestic courts and legal protections did not meet international standards.

 

Yet ISDS has recently become a lightning rod for public opposition to FTAs (and economic globalization more generally), often after host states are subjected to their investment treaty claims.[9] For example, major debate emerged in India after Australia’s White Industries won a claim in 2011 under UNCITRAL Arbitration Rules as provided by the BIT with India (signed with Australia in 1999). The tribunal found that India had not satisfied the promised “effective means” for the investor to enforce a commercial arbitration award (against an Indian SOE). This and subsequent claims prompted the Indian government to finalise a revised (less pro-investor) Model BIT in December 2015.[10] It is now being used in negotiating new BITs (eg that signed with Cambodia in 2016) and indeed when proposing to terminate older-generation treaties (including with Australia).[11]

 

Similarly, Philip Morris Asia’s much larger claim initiated in 2011 under a BIT signed in 1993 with Hong Kong, for alleged expropriation of trademarks from Australia’s tobacco plain packaging legislation, led to escalating local media coverage – until the arbitral tribunal rejected jurisdiction in 2015.[12] This cause celebre also became a factor behind the Gillard Government Trade Policy Statement announcing in 2011 a major shift for Australia: eschewing ISDS in new treaties, even with developing countries.[13] This resulted in no significant FTAs being concluded, until a new Coalition Government gained power in late 2014 and reverted to including ISDS on a case-by-case assessment.[14] The current Labor Opposition maintains its objections to ISDS, creating difficulties for Australia to ratify the Trans-Pacific Partnership FTA.[15]

 

Australia’s temporary shift was partly due to politics: in 2011 the (centre-left) Gillard Labor Government was in coalition with the Greens, who are even more opposed to free trade and investment. But the stance also relied on arguments from some economists, even though they instead favour more free trade and foreign investment,[16] albeit through unilateral[17] or perhaps multilateral initiatives rather than bilateral or even regional FTAs. Developing the latter perspective,[18] a majority report of the Productivity Commission in 2010 into Australia’s FTAs had argued against the common world-wide practice of offering foreign investors extra procedural rights such as ISDS. It did concede that such extra rights might be justified, for example if they led to greater cross-border flows in foreign direct investment (FDI). Yet the Commission pointed to a few studies suggesting that, on an aggregate (world-wide) basis, ISDS-backed treaty provisions had not significantly increased flows.

 

A recent econometric study by Luke Nottage (a co-author of this posting) with Shiro Armstrong casts doubt on that observation.[19] After an extensive review of existing empirical research and associated methodological issues, their study instead found instead positive and significant impacts from ISDS provisions on FDI outflows from OECD countries over 1985-2014, using a Knowledge-Capital Model with a dynamic panel indicator (effectively addressing the problem of endogeneity in variables). This impact on FDI could be found from ISDS provisions on their own, especially when ISDS was included in treaties signed or promptly ratified with non-OECD or less developed countries. The econometric study by Armstrong and Nottage also found a positive and significant impact from ISDS provisions when combined with the Most-Favoured-Nation provision, which is a key and indicative substantive treaty commitment for foreign investors. (This aspect was tested because the “strength” of treaties can vary in terms of substantive commitments by host states: we might not expect much impact on FDI even from ISDS provisions if the substantive protections and liberalisation commitments are few.)

 

Counter-intuitively, however, the study found that in general FDI impact was even larger for weaker-form ISDS provisions. This could be due to investors historically having been impressed by a broader ‘signalling’ effect from states concluding investment treaties. Yet the impact from ISDS provisions also seems to be diminishing since 2001, when ISDS claims started to pick up world-wide and therefore investors (or at least legal advisors) could have begun to pay more attention to the details of ISDS and other treaty provisions. Reduced impact since 2001 may be related to more efforts from host states to unilaterally liberalise and encourage FDI. However, it could also be due to a saturation effect (as treaties began to be concluded with less economically important partner states), or indeed due to less pro-investor provisions being incorporated into investment treaties (influenced by more recent US practice, partly in response to ISDS claims[20]).

 

Further variables impacting on FDI (such as double-tax treaties) could be investigated, as can regional differences. Data limitations also remain, as there is now considerable FDI outflow from non-OECD countries. Nonetheless, this baseline study suggests that it has been and still may be risky to eschew ISDS provisions altogether. In particular, results indicate a strong positive effect on FDI flows from ratified investment treaties overall even from 2001. So states would have missed out on that if they had insisted on omitting ISDS, and this then became a deal-breaker for counterparty states.

 

Further econometric research underway at a Delhi-based thinktank[21] suggests that India was correct not to abandon ISDS provisions altogether in its revised Model BIT (and to retreat from an even less pro-investor earlier draft of the Model BIT[22]). While this study by Jaivir Singh (one of the co-authors of this posting) and his colleagues is still ongoing, preliminary results (using instead a gravity-type model) find that although the signing of individual BITs had an insignificant impact on FDI inflows into India, the cumulative effect of signing BITs is significant and so is the coefficient associated with the signing of FTAs. Since almost all of India’s investment treaties provide for full ISDS protections, these preliminary results suggest that ISDS can have a positive influence on foreign investment, albeit in a non-obvious compound manner.

 

Overall, these studies suggest that ISDS-backed treaty provisions liberalising and protecting FDI have had a significant impact, but in complex and evolving ways. Agreeing to dialed-back ISDS provisions and even substantive commitments (perhaps following recent EU preferences[23]) may be an acceptable way forward. This is true especially for Australia and India, as they continue negotiations bilaterally as well as through RCEP, and perhaps eventually for the FTAAP FTA.

 

[This posting draws on Nottage’s joint project researching international investment dispute management, funded by the Australian Research Council (DP140102526, 2014-7); and Singh’s ongoing project assessing the impact of investment treaties on FDI in India, for the Indian Council for Research on International Economic Relations. Singh was a visitor at the University of Sydney in October 2016.]

 

[1] https://www.getup.org.au/

[2] http://www.economist.com/news/united-states/21709921-americas-next-president-wants-pull-out-existing-trade-deals-and-put-future-ones

[3] http://www.afr.com/news/economy/trade/china-names-australia-as-key-partner-in-push-for-new-trade-bloc-20161114-gsozj5

[4] http://thediplomat.com/2015/11/as-tpp-leaders-celebrate-china-urges-creation-of-asia-pacific-free-trade-area/

[5] Kawharu, Amokura and Nottage, Luke R., Models for Investment Treaties in the Asian Region: An Underview (September 28, 2016). Sydney Law School Research Paper No. 16/87. Available at SSRN: http://ssrn.com/abstract=2845088

[6] https://www.cigionline.org/publications/experienced-developed-democracy-canada-and-investor-state-arbitration

[7] http://kluwerarbitrationblog.com/2016/11/14/are-us-investors-exceptionally-litigious-with-isds-claims/

[8] https://www.wto.org/english/tratop_e/dispu_e/dispu_by_country_e.htm

[9] Nottage, Luke R., Rebalancing Investment Treaties and Investor-State Arbitration: Two Approaches (June 14, 2016). Journal of World Investment and Trade, Forthcoming, 2016; Sydney Law School Research Paper No. 16/54. Available at SSRN: https://ssrn.com/abstract=2795396

[10] http://kluwerarbitrationblog.com/2016/01/18/unveiled-indian-model-bit/

[11] http://economictimes.indiatimes.com/news/economy/foreign-trade/india-seeks-fresh-treaties-with-47-nations/articleshow/52458524.cms

[12] Hepburn, Jarrod and Nottage, Luke R., Case Note: Philip Morris Asia v Australia (September 29, 2016). Journal of World Investment and Trade, Forthcoming; Sydney Law School Research Paper No. 16/86. Available at SSRN: http://ssrn.com/abstract=2842065

[13] Nottage, Luke R., The Rise and Possible Fall of Investor-State Arbitration in Asia: A Skeptic’s View of Australia’s ‘Gillard Government Trade Policy Statement’ (June 10, 2011). Transnational Dispute Management, Forthcoming; Sydney Law School Research Paper No. 11/32. Available at SSRN: http://ssrn.com/abstract=1860505

[14] Nottage, Luke R., Investor-State Arbitration Policy and Practice in Australia (June 29, 2016). CIGI Investor-State Arbitration Series, Paper No. 6, 2016; Sydney Law School Research Paper No. 16/57. Available at SSRN: http://ssrn.com/abstract=2802450

[15] http://blogs.usyd.edu.au/japaneselaw/2016/09/tpp_and_foreign_investment.html

[16] http://www.eaber.org/node/24527

[17]http://www.smh.com.au/comment/is-turnbull–dr-jekyll-or-mr-hyde-on-trade-20160923-grmxx2.html

[18] http://www.pc.gov.au/inquiries/completed/trade-agreements/report/trade-agreements-report.pdf

[19] Armstrong, Shiro Patrick and Nottage, Luke R., The Impact of Investment Treaties and ISDS Provisions on Foreign Direct Investment: A Baseline Econometric Analysis (August 15, 2016). Sydney Law School Research Paper No. 16/74. Available at SSRN: http://ssrn.com/abstract=2824090

[20] Alschner, Wolfgang and Skougarevskiy, Dmitriy, Mapping the Universe of International Investment Agreements (June 28, 2016). Journal of International Economic Law, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2801608

[21] http://icrier.org/

[22] http://www.iareporter.com/articles/analysis-in-final-version-of-its-new-model-investment-treaty-india-dials-back-ambition-of-earlier-proposals-but-still-favors-some-big-changes/

[23] http://afia.asia/2016/08/towards-a-european-model-for-investor-state-disputes/

Towards a European model for investor–state disputes?

By Luke Nottage

International investment treaties and investor-state dispute settlement (ISDS) are in the news again, notably in Australia and India, which are negotiating a bilateral Free Trade Agreement (FTA) as well as the Regional Comprehensive Economic Partnership (RCEP or “ASEAN+6” FTA).  A new compromise between the interests of foreign investors and host states may emerge in the broader Asian region, including a shift in the drafting of the standards of protection in treaties from broad protections akin to those previously found in US treaties towards more specific contemporary EU-style standards. However, the inconclusive outcome from Australia’s general election held on 2 July 2016 may hinder the occurrence of this possible shift.

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During the June run-up to the election, one reporter for The Guardian has recently described ISDS as allowing “foreign corporations to sue the Australian government in an international tribunal if they think the government has introduced or changed laws that significantly hurt their interests”. In fact, this is inaccurate. Investment treaties never contain such a broad substantive commitment on the part of the host state. Instead, investors need to establish violations of specific measures of protection, such as the prohibitions against discrimination, denial of justice or other egregious lack of fair and equitable treatment, or expropriation without adequate compensation.

Further, only a small proportion of ISDS claims challenge legislation – the vast majority of claims instead contest executive (in)action, such as not issuing or renewing a licence – and investors usually don’t succeed. For example, last year the arbitral tribunal ruled against Philip Morris Asia on jurisdictional grounds, its challenge to Australia’s tobacco plain packaging laws under an old Bilateral Investment Treaty (BIT) with Hong Kong. In the recently released award, the Tribunal found an ‘abuse of rights’ in obtaining trade mark rights in Australia when it was reasonably foreseeable (and even in fact foreseen) by the company that the legislation would be enacted and therefore a dispute would arise.

Investment treaties almost invariably commit to inter-state arbitration. It’s just that host states have wanted to more credibly commit to living up to their substantive commitments by allowing the option also of a direct claim by foreign investors through ISDS if their home state didn’t feel like pursuing the inter-state arbitration claim. State-to-state arbitration has proven much less popular in practice due to cost or diplomatic reasons, which is probably why Australia has declined to join New Zealand in its World Trade Organization claim against Indonesia for discriminatory treatment of imported beef and other agricultural products.

Yet why was the Australian reporter concerned about ISDS? First, because the government had confirmed that it had commenced with Japan a review of their Free Trade Agreement (FTA) concluded in 2014. That had omitted ISDS, for reasons I’ve suggested elsewhere, but added a provision for such consultations “with a view to establishing an equivalent mechanism”, within 3 months of another treaty containing ISDS being concluded by Australia and coming into force. The process has been triggered by the China-Australia FTA coming in force from 20 December 2015, although its ISDS-backed protections in fact were very narrow (and superimposed on an early BIT, with an agreement for a 3-year Work Program to consider consolidating the two treaties). But I’d pointed that out on my commentary last year on the China FTA, so this is old news.

More interesting is what might now happen, as Japan and Australia should try to complete their FTA review “with the aim of concluding it within six months”. They will probably just agree to wait and see whether the Trans-Pacific Partnership (TPP) Agreement signed on 4 February 2016, with ten other economies and containing ISDS, is ratified and comes into effect over the ensuing two years. Both countries may also obtain ISDS through RCEP, although those negotiations have been delayed.

That leads to the second and more significant reason for the renewed interest in ISDS. Australia’s main Labor Party opposition’s trade spokesperson announced on 7 June that, if elected, a Shorten Government “would not accept … ISDS provisions in new trade agreements”, like the Gillard Government over 2011-2013. It is unclear whether this includes the TPP, as it may not be considered “new”.

In addition, a Shorten Labor Government would “develop a negotiating plan to remove ISDS provisions” in all of Australia’s existing FTAs and BITs. If impossible (as seems very likely with the recent FTAs), it would “seek to update the provisions with modern safeguards”. The rationale is that: “Some of these provisions were drafted many years ago and do not contain the safeguards, carve-outs and tighter definitions of more contemporary ISDS provisions”.

Although the spokesperson’s statement focuses on the ISDS procedure, the policy shift might extend to attempting to dial back the substantive commitments made to investors in earlier treaties. This should be the government’s primary focus in my view, as it should surely remain necessary to preserve an inter-state arbitration enforcement mechanism. Indeed, I recommended such a review of old treaties in by the Greens, which ended up being opposed also by Labor parliamentarians for unduly constraining the executive’s prerogative to negotiate treaties. But I also envisaged improving (without abandoning) the ISDS provisions. This is especially important for BITs signed between 1988 and 2005 by Australia, which followed the more pro-investor template common worldwide from that era.

The question is then what new types of provisions should be proposed in any potential renegotiations. One obvious candidate is the language in the FTAs signed by Australia’s Coalition Government since 2014  (with Korea, as well as Japan, China, and the TPP member states). Perhaps the substantive provisions as drafted in these FTAs will be palatable even to the Labor Party, as they are broadly similar to those in FTAs signed since 2003 – including several by the first Rudd Labor Government. Yet it cannot include the safeguards built into those FTAs also around ISDS itself (such as enhanced transparency for the procedure), because Labor will not countenance any ISDS in future treaties. This is unfortunate because Australia’s FTA investment chapters are heavily influenced by US treaty drafting, which itself was already significantly rebalanced in favour of host states from the early 2000s.

An alternative candidate is the model now proposed by the European Union, after extensive public consultations, especially for its ongoing Transatlantic Trade and Investment Partnership negotiation with the US, but already reflected in FTAs with Canada and Vietnam. Substantive commitments by host states are even more constrained (except perhaps for the National Treatment obligation, where the TPP drafting clearly limits liability to intentional discrimination).

Most interestingly, the EU model substitutes a permanent investment court (including appellate review for serious errors of law) for the usual ISDS mechanism involving the appointment of ad hoc arbitrators. This aims to address concerns about lack of transparency or consistency, while allowing investors to pursue direct claims against host states. Perhaps even the Labor Party might consider this model not to include “ISDS” in its pathological form, and therefore propose such a court in Australia’s future treaties as well as older treaties subject to review.

Many in Australia familiar with the trajectory and details of international investment law, including myself, would probably be comfortable with the latter alternative. More importantly, it seems to be the more plausible way forward in Australia’s ongoing FTA negotiations with India, bilaterally as well as via RCEP. After all, the other breaking news is that India has already written to counterparties to 47 BITs (perhaps including Australia) notifying them that treaties will be allowed to lapse so that a new text can be negotiated. The starting point will be India’s Model BIT revised this year, which will also be proposed in pending FTA negotiations.

India’s model has even more restrictive substantive commitments than the recent EU drafts, let alone those based on the US template as reflected in the TPP. It also includes ISDS, but subject to extremely strict conditions including “exhaustion of local remedies” – where the investor must first seek relief through local courts. India’s new Model is toned back from back last year’s draft, but still represents a reaction to a successful ISDS claim brought by an Australian investor. Tellingly, that was for interminable delays in enforcing a commercial arbitration award against an Indian State-owned enterprise, and it has been followed by several more ISDS claims by investors under other BITs.

Treaty counterparties being approached by India are unlikely to accept such an extreme model, but the EU model may well be an acceptable way forward. This may also be the case for Indonesia, which is negotiating FTAs with Australia (and indeed the EU) bilaterally, as well as through RCEP. After facing few treaty-based ISDS claims (including one claim brought by an Australian investor), Indonesia has also been letting old BITs lapse to negotiate new treaties based on its own revised Model BIT, although that remains undecided or at least undisclosed. But other Asian economies like Korea and Thailand are comfortable with ISDS-backed investment treaties, despite having been subject to their first claims, so may be attracted to an EU-style compromise for RCEP and other future negotiations. Australia now has an opportunity to help lead the way, and perhaps even restore a more bipartisan approach to foreign investment policy generally, at least after the dust settles from the (closely contested) general election on 2 July.

However, the implications of that election remain unclear. The Turnbull Coalition Government retained a razor-thin majority in the lower House of Representatives, but its minority in the upper-house Senate diminished further (30 out of 76 Senators). The Labor Party may be emboldened by such a result, and therefore refuse to vote with the government on FTAs such as TPP or eventually RCEP containing ISDS or even an EU-style investment court procedure. The Greens (with 9 Senators) will certainly refuse. The Turnbull Government would then need to find 9 more votes from among the (11) cross-bench Senators, but Pauline Hanson’s ‘One Nation’ (4) Senators are notoriously xenophobic and the Nick Xenophon Team (3) Senators favour more support for local manufacturing. This difficult political landscape will make it even more likely that the Turnbull Government will now wait to see if and when the US ratifies the TPP.

In addition, “Brexit” will impede the pace of existing and future negotiations of the EU’s negotiations with Asian countries and Australia, as they must consider parallel negotiations with the UK. The models for investment chapters advanced by the EU and the UK may even now diverge. The potential for a shift from US-style to EU-style investment treaty drafting in the Asian region is therefore now even more uncertain.

[A shorter version of this posting was published on 1 July 2016 on the East Asia Forum blog.]

Highlights of the Draft SIAC Arbitration Rules 2016

By Preeti Bhagnani (White & Case) and I-Ching Tseng (Minter Ellison)
The Singapore International Arbitration Centre (SIAC), one of the world’s leading arbitral centres, released draft revised arbitration rules (“Draft Rules”) for public comment in January 2016. The Draft Rules include new provisions on multi-contract disputes, consolidation and joinder and enhancements to the existing emergency arbitrator and expedited procedures.

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Launch of Young Japan Association of Arbitrators (YJAA) and Young Arbitral Women Practitioners (YAWP)

By Bree Farrugia (Herbert Smith Freehills)

In September 2015 the Japan Association of Arbitrators announced the establishment of the “Young Japan Association of Arbitrators” (“YJAA”). The aim of the association is to promote the practice of arbitration and mediation among practitioners of or under the age of 40 who are interested in practicing in Japan.

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HKIAC pioneers accreditation of tribunal secretaries

By Benson Lim (Berwin Leighton Paisner LLP)

On 4 and 5 December 2015, the Hong Kong International Arbitration Centre (HKIAC) held its inaugural and the world’s first tribunal secretary accreditation programme. Once a participant has been accredited and appointed to HKIAC’s panel of tribunal secretaries, he or she will be eligible for appointment in any ad-hoc or institutional arbitration.

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India Fires Two Ordinances To Level The Dispute Resolution Landscape!  

By Madhur Baya and Ms. Shalvi Mehta*

On 23 October 2015, the President of India promulgated two Ordinances that have the potential of changing the Dispute Resolution landscape in India, and if things go well, for Asia as well. It is an acknowledged fact that India-centric disputes have in the past moved to London, Singapore, Hong Kong, Paris and Dubai, by the droves. The exodus was precipitated by a lack of a robust commercial dispute resolution system – statutes and Courts were not spoken of as being the most efficient or effective. These Ordinances are meant to cure just that!

 

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The Trans-Pacific Partnership FTA’s investment chapter: What’s next?

by Luke Nottage (University of Sydney) and Leon Trakman (University of New South Wales)

Alongside this week’s APEC leaders’ summit in Manila, US President Obama met with counterparts and trade ministers from 11 other Asia-Pacific states that agreed in October to the expanded Trans-Pacific Partnership (TPP) free trade agreement. These states, covering around 40 percent of world GDP, cannot sign it before 3 February, when the US Congress finishes its 90-day review. But Obama and others in Manila reiterated the importance of the TPP for regional and indeed global economic integration.

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