ISDS: controversy and cases Professor Jane Kelsey, School of Law, The University of Auckland, New Zealand

Investor state dispute settlement Investor can submit claim against state for loss through breach of investor protections in the BIT or investment contract BIT means state has given prior consent 6 months after events giving rise to claim, and no more than 3 years after it became known, to International Centre for Settlement of Investment Disputes (ICSID) UNCITRAL rules, or any other agreed arbitration institution or rules. Applicable law is the Treaty and international law Interpretation of a provision by the parties is binding on tribunal State can seek interpretation of Annexes that will bind the tribunal

ISDS process and awards 3 arbitrators, no conflict of interest rules Tribunal can accept amicus brief Documents to be publicly available with protected info redacted Investor can seek injunction in domestic courts to preserve position, tribunal can order interim relief Final award can be damages plus ‘applicable interest’ (compound) Restitution of property Costs and fees No punitive damages No appeal, but annulment process for INCSID Can seek enforcement after 90 days (UNCITRAL) or 120 days or revision/annulment complete (ICSID)

Backlash against investor disputes US insists on ISDS in negotiations with Europe, Asia Pacific, China, EU mandate to include investor protections and ISDS since 2009 Before then, many EU member state BITS Investment arbitration faces a serious backlash, eg cases on South Africa – black empowerment laws India – judicial cancellation of corrupt telecom licenses Indonesia – corrupt forestry contract Australia – plain packaging of tobacco Germany – nuclear power plant closure OECD, UNCTAD, senior judges express concern

Arbitrators themselves are critical Speech by senior arbitrator George Kahale named top 10 failings: 1. governments often don’t understand treaties they sign 2. Arbitrators questionable legal reasoning reflects conflicts of interest 3. Rules are given meanings that were never intended 4. No effective appeals so manifest errors can’t be overturned 5. Mega-claims exceed many nations’ GDP 6. It’s almost impossible to disqualify an arbitrator 7. You can predict the outcome from the arbitrators 8. Claimants grossly exaggerate their claims 9. 3rd party funders have made arbitration an industry 10. investment disputes are biased against states

Investor-State Dispute Settlement Cases are heard in secretive offshore tribunals Pro-investor bias with conflicts of interest Lack proper judicial process and no appeal Very expensive: OECD says average cost is US$8 million Threat of a case has a powerful ‘chilling effect’ to deter governments from acting It ‘has become normal for investment arbitrators to constantly switch hats: one minute acting as counsel, the next framing the issue as an academic, or influencing policy as a government representative or expert witness’.

UNCTAD World Investment Forum Oct 2014 Croatia summed up the problems with ISDS: Even if we disregard the huge costs of arbitration for the respondent state (especially in case of frivolous claims to which some states are exposed together with lately popular third party funding claims) and reduced policy space, both of which represent a big concern for most states, we cannot disregard the fact that the system we have created is far from legal certainty and stability - what we have today is a number of contradicting awards, problems with enforcing such awards, un-transparent proceedings and insufficient appellate mechanism.

TNC lobby rejects any criticism Business & Industry Committee at the OECD BIAC is very worried about the negative tone, and the lack of equilibrium, in the actual debate on investor protection and especially ISDS. And also about the picture of proliferation of legislative initiatives in the field of investment protection that emerged from our discussions this morning. … The public movement against ISDS is totally out of proportion. US Council for International Business We reject the premise that the international investment regime is in crisis, is fundamentally flawed, or in need of radical revisions.

Massive surge in ISDS cases

Winners & losers US & EU investors have brought 75% of cases 274 cases concluded: investor won 57% (total or settled); state 43% Investors won 7 of 8 cases in 2013 Most known cases are against: Argentina, 40 times since 2001 crisis; then Venezuela, Czech Republic Egypt, 4th highest overall, 3rd highest since 2011 3 boutique firms were involved in 130 arbitrations in 2011 Private equity firms ‘lease’ disputes for share of profits

Argentina is the biggest target Argentina has faced 53 (almost 1/10th) of known disputes. Most arise from social protection & debt restructuring in its financial crisis ICSID is ‘a tribunal of butchers’ that rules only in favour of multinational companies and said quitting the centre would be a key move to recover Argentina’s legislative and jurisdictional sovereignty. (Chief legal advisor to Argentina’s Treasury, 13 January 2013) Awards just settled: gas transport tariffs ($133.2 million), two water privatisation concessions ($270 million+ interest) national electricity grid ($53 million) nationalization of shares in state oil firm ($5 billion) Vulture fund bought bonds for $48.7m, claiming face value $220m

Australia’s Plain Packaging law Plain packaging law, signalled well in advance 1. Domestic constitutional case (failed) 2. WTO dispute (TBT and TRIPS) funded by big tobacco 3. Philip Morris ISDS claim (Hong Kong-Australia BIT) over $1 billion NZ backed of similar law until sees the outcome New opportunities for industry and states to harass policymakers Attempt regulatory chill collect data to litigate Launch ISDS dispute.

Health insurance privatisation 2004 government introduced private health insurance 2007 new government cut back role Companies can only use profits to reinvest in health insurance, ie non-profits Penta group was private equity fund with investments in many sectors 3 legal disputes, inc 2008 UNCITRAL arbitration under Czechoslovakia BIT Complex corporate structure to use BIT 2010 tribunal rejected jurisdiction arguments 2012 German court upheld tribunal decision as consistent with EU law Dec 2012 Achmea BV was awarded 22 million euro

Public health and pension system Eureko v Poland Partial privatisation in 1999, full float planned for 2001, government cancelled float Eureko won 2 arbitrations 2009 Poland settled E1.85b special dividend and committed to full float by 2012

Failed water privatisations Biwater v Tanzania (ICSID) 2008 Exclusive operation of designated water services Underestimated problems & inadequate investment Government rejected water fee increase after independent review Mediation failed, government resumed lease in 2003 Biwater claimed $19-20m for breaches of FET, full protection & security, repatriation of investment funds Tribunal split decision found Tanzania in breach but government actions leading to loss pre-dated the breach. Tanzania won but bore costs

Transport PPP: Fraport v Philippines BOOT for international air terminal construction & operation Corrupt government entered contract New government restructured PAL airline, sought to renegotiate contract under domestic law on FDI Fraport refused, government declared concession void 2003 Fraport claimed expropriation under BIT ICSID majority dismissed claim 2007, investment did not comply with Philippine law; annulled 2010; interpretation 2012 Fraport made new request for arbitration Fraport also initiated commercial arbitration at ICC Legal costs to Philippines reported to be over $50m

Eli Lilly v Canada Canada courts invalidated US pharma company patent Applied ‘utility doctrine’ and found drug failed to deliver benefits promised when patent was claimed Medicine must be shown to be ‘useful’ Eli Lilly sued under NAFTA ‘Investment’ includes intellectual property rights Claimed breach of minimum standard of treatment Seeks $481m for loss of expected future profits

Al-Karafi v Libya (2013) Tourism project in Libya approved 2006, $935m to Kuwaiti investor, 2nd highest known award ever Tourism project in Libya approved 2006, 90 year land lease Not begin by 2010, approval annulled, lease cancelled Claim $55m in 2011 under Libya Kuwait agreement Tribunal awarded against actions of Gaddafi regime $5m actual loss & expenses for project never built $30m moral damages, harm to investor’s reputation $900m lost future opportunities (profit) Costs fall on post-Gaddafi Libya

Winners & losers Investors privatise profits, socialise losses Usurps domestic rule of law and local courts Local elite can use backdoor change of nationality Vultures cash in, speculate, destabilise without conscience Investment arbitration industry cashes in too Public finance is diverted from social expenditure Governments are forced to privilege foreign investors over local people

Debate over reform options Capital exporters minor reforms to agreements UNCITRAL review of its rules UNCTAD proposals: promote ADR; limit investor access to ISDS; individualised IIAs; appeals facility; standing invest arbitration court Draft new model BITs Not enter new agreements Exit from BITS where possible Withdraw from ICSID Rely on domestic courts