2019 proved another busy year for arbitration lawyers, with the biggest story (again) being the European Commission’s drive to reshape the international system for the settlement of investment disputes (ISDS). We summarise the major stories of 2019 and set out what we can look forward to in 2020.
ISDS can be compatible with European law, says the ECJ
Back in 2016, the Belgian region of Wallonia nearly caused the Canada-Europe free trade agreement (CETA) to fail, despite CETA having secured the approval of the rest of the EU. Disaster was averted by a deal which included the compatibility of CETA’s ISDS provisions with the European treaties being referred to the ECJ. On 30 April 2019, the ECJ ruled that the CETA’s investment courts would not breach the autonomy of EU law. Given the prominence of these courts in the so-called “next generation” free trade agreements recently concluded between the EU and Mexico, Vietnam and Singapore, the European Commission no doubt breathed a sigh of relief.
The EU’s campaign against intra-EU BITs reaches its end game
2019 started off with a bang when, on 15 January 2019, the member states of the EU issued a political declaration stating an intention to terminate all intra-EU bilateral investment treaties (BITs) by 6 December 2019. The main declaration, signed by 22 of 28 member states, also proposed to extend the effect of the ECJ’s judgment in Slovak Republic v Achmea B.V. to intra-EU claims under the Energy Charter Treaty (ECT).
On 24 October 2019, the European Commission announced that an agreement had been reached on a plurilateral treaty to terminate the nearly 200 intra-EU BITs. A leaked draft of the treaty shows that arbitrations currently in progress will be wound down through a “settlement process”. However, awards that pre-date the March 2018 Achmea judgment will not be affected. Also of note is that the treaty is not stated to apply to intra-EU ECT disputes. Rather, the preamble states that this issue has been left to be addressed at a later stage.
UNCITRAL reform of global ISDS gains pace
Representatives of nearly 100 states have been working to agree reforms to ISDS through Working Group III of the United Nations Commission on International Trade Law (UNCITRAL). The working group met twice in 2019, tackling thorny issues including third party funding (conclusion: disclosure is key) and the need for a code of conduct.
These efforts are set to keep pace in 2020, with meetings scheduled for January 2020 in Vienna and April 2020 in New York. The Vienna meeting will consider big structural reforms, including the need for a multilateral investment court and standalone appellate mechanism, and how arbitrators should be appointed. The New York meeting is slated to consider further reforms including:
- Mediation and alternative dispute resolution.
- State control over treaty interpretation.
- Security for costs.
- Frivolous claims.
- Multiple proceedings.
- Shareholder claims for reflective loss.
ECT gets with the times (or starts to, at least)
Following a list of potential areas for reform being circulated among the Energy Charter Conference in late 2018, the “modernisation” process of the ECT kicked off in earnest in early 2019. Whilst comprehensive with respect to investment protections, the manner through which disputes are to be resolved (that is, ISDS) was a striking omission from the list of topics, given the verbiage on the subject to date.
Over the course of 2019, members of the Energy Charter Conference provided their views on reform, which have been reflected in a paper on the policy options for modernisation that was adopted without objection in October 2019. The EU’s comments on ISDS are of particular interest (not least because they make up 50% of the contracting states). The EU highlighted that various initiatives aimed at reforming ISDS are already underway, including the UNCITRAL working group. It also emphasised that amendments to the ECT should be in line with these changes and the EU’s approach to its own bilateral agreement, of course including a multilateral investment court system.
Turmoil and unrest continues to feed arbitration pipeline
Difficult political situations tend to give rise to big claims, a trend that has not abated this year, particularly in South America, which has had its fair share of difficulties this year.
Venezuela has featured prominently, with a tribunal awarding the largest ever ICSID award of US $8.7 billion against Venezuela, in favour of ConocoPhillips. This follows a US $2 billion award against Venezuela’s state-owned oil and gas company, PdVSA, rendered in ConocoPhillips’s favour rendered by an ICC tribunal in 2018. ConocoPhillips has spent 2019 trying to enforce the 2018 award against Venezuela’s most valuable asset, Citgo Petroleum’s US refinery, only to be stymied by the US Treasury Department’s assertion in November 2019 that Venezuelan assets are subject to sanctions and that a judgment creditor needs to obtain approval from the US government before seeking to realise the judgment. ConocoPhillips’ difficulties are only surpassed by the October 2019 decision of the Court of Appeal in The Hague setting aside an ICC award against a subsidiary of PdVSA, on the ground that the underlying contract was procured through corruption.
Other major stories include the third and largest award against Ecuador stemming from its Law 42, by which the government took 99% of revenues above a specified cap, and a Peruvian court jailing 14 arbitrators while they are investigated for allegedly taking bribes from scandal-ridden construction company Odebrecht in a series of disputes that have cost Peru more than US $250 million to date.
Finally, looking further afield, more claims have been brought in relation to Russia’s annexation of Crimea in 2014, and an LCIA tribunal has issued a US $1.25 billion award in favour of Brazil’s Vale against Israeli Mining magnet Beny Steinmetz’s (now insolvent) BSGR in relation to its bribery of the Guinean government to obtain an iron ore concession.
Arbitration claims loom large in the UK courts
Finally, 2019 has seen a bumper crop of arbitration-related claims in the English courts, including two cases in the UK Supreme Court.
The most watched case of the year was Halliburton’s appeal to the Supreme Court, in which it argued that an arbitrator should have disclosed his involvement in overlapping insurance cases arising from the 2010 Deepwater Horizon disaster. Also on the Supreme Court’s list was the question of whether the English courts have the power to stay enforcement of an ICSID award, arising from the long-running Micula saga.
2019 saw not one, but two successful challenges to awards on the basis of serious irregularity (generally a rare ground to succeed on). The court found that one tribunal had failed to address an issue put to it and denied the claimants the opportunity fully to present their case (K v P), whilst the other had based its decision on an issue that had not been properly argued by the parties or put to a witness in cross-examination (P v D). Judges also allowed challenges on the basis that an arbitrator had erred in law by considering without prejudice communications in a costs award (Sternberg Reed Solicitors v Harrison), and that a tribunal had lacked substantive jurisdiction on the basis that the respondent company had been dissolved prior to the notice of arbitration being filed (GA-Hyun Chung v Silver Dry Bulk Co Ltd).
Not all those that sought to challenge awards were so lucky. A challenge for serious irregularity of a decision denying the claimant leave to pursue a derivative claim was rejected on the basis that the decision was not an “award” for the purposes of the Arbitration Act 1996 (ZCCM Investments Holdings PLC v Kansanshi Holdings PLC and another). A challenge to an LCIA award for a lack of jurisdiction and serious irregularity was dismissed on the basis that the tribunal did not exceed its powers by granting relief that would not have been available to an English court (a buyout order against a foreign company). Similarly out of luck was an applicant who sought permission to extend the time for bringing a jurisdictional challenge… 959 days late. As the court pointed out, where the delay is lengthy, the fresh evidence must be “transformational”; it was not (State A v Party B).
End of a decade, beginning of an era?
With meetings planned, judgments expected and disputes ongoing, the major themes from 2019 look set to shift comfortably into 2020. What may be missed is the sea change that has taken place since Achmea. With major steps to reform ISDS being taken in Europe and globally, we may look back on 2019 as the beginning of the end for investment treaty arbitration as we know it. Finally, we are left with little choice but to, again, highlight Brexit as a source of uncertainty and continued hand-wringing in 2020. We dare not say anything more at this juncture. All told, arbitration lawyers can look forward to another busy year.