The cost-benefit analysis of pursuing investor-state arbitration in a post-pandemic world | K&L Gates LLP
The COVID-19 pandemic has prompted many state actions in pursuit of the public interest, but although all states have faced this unprecedented global challenge with some degree of similarity, state responses have varied. from one jurisdiction to another in terms of timing and severity. government measures imposed. As the pandemic swept the world last year, the United Nations Conference on Trade and Development (UNCTAD) observed the following:
State measures to limit the negative economic impact of the pandemic are manifold and vary from country to country. Although these measures are taken to protect the public interest and to mitigate the negative impact of the pandemic on the economy, some of them could, depending on how they are implemented, expose governments to arbitration proceedings initiated by foreign investors within the framework of IIAs [International Investment Agreements] and / or investor-state contracts.1
While the sovereign right to take measures to protect public health is unquestionable, it does not necessarily follow that a State has acted in a non-discriminatory manner or has generally complied with its public international law obligations to promote and protect human health. foreign investment simply because action is taken at a time of pandemic. Foreign investors may feel they have been wronged by such measures, especially when the outcome has been devastating for the investor. Even so, the public health context and related imperatives for state response in the midst of a pandemic are unmistakable, and any analysis of the potential for a foreign investor to pursue action under investor dispute resolution. -State (ISDS) must be conducted in a thoughtful manner and in light of all available evidence. This article briefly examines some important considerations that should be taken into account in any cost-benefit analysis to determine whether and how foreign investors affected by government actions related to the pandemic should pursue all available claims.
Merits of the complaint
One of the first steps in the assessment of any ISDS claim is to conduct a preliminary assessment of the merits of the case, including the elements of the claim and any applicable limitations that may exist under the IIA. relevant or other legal instrument under which the dispute arises. Relevant treaty instruments may include bilateral investment treaties (BITs) or other treaties with investment provisions (TIP), such as free trade agreements (FTAs), which often contain chapters devoted to the investment. Such applicable treaty instruments will generally outline key details regarding available ISDS claims, but certain circumstances precluding wrongfulness also exist as defenses for host states under customary international law. Of the six defenses described in the International Law Commission draft articles on the responsibility of States for internationally wrongful acts (2001), the most probable grounds on which host States can rely in respect of concerns pandemic-related claims are force majeure, distress and necessity. Of course, states may also seek to invoke the “police powers doctrine,” which recognizes the inherent right of the state to regulate in the public interest, including public health. Generally speaking, these defenses have historically been intended to apply only in a narrow range of circumstances and have only rarely been successfully deployed. Given the current pandemic, however, renewed interest in such defenses is likely, and investors should carefully consider all of these factors in any preliminary assessment of the merits.
Availability of compensation
Another factor that can be decisive in whether an investor should bring a claim against a host state is whether compensation may be available and, if so, the likely recovery from any successful arbitration. Unless the relevant treaty instrument contemplates a given standard of compensation, courts generally have significant discretion in determining compensation on the basis of the facts and circumstances of the case. When claimants receive compensation, it is relatively common for courts to award at least the historical costs of the investment (i.e. the relevant expenses already incurred by the investor).
A key question for investors to consider may be whether they will also be able to claim damages for lost profits, i.e. the profits they would have made if the breach of the treaty in question. question had not taken place. Since many investments can have a lifespan of decades, this is often the most important part of an investor’s claim. The courts will only allow this head of claim, however, if such future profits are sufficiently certain and non-speculative, perhaps as demonstrated by a proven track record of profitability or on the basis of fixed contracts in place with customers (as is the case in new power plant projects with contractual arrangements for future production).
Time and costs
The types of costs incurred in ISDS proceedings include administrative costs, court costs, and party costs (for example, costs incurred for legal advice or expert witnesses, travel costs, and other logistical expenses). The amounts involved in ISDS proceedings are often substantial, and the nature of legal, factual and quantum issues can be complex. Therefore, the associated costs and length of proceedings are important considerations in any cost benefit analysis to determine whether and how to pursue ISDS claims.
The main institutional rules used in investor-state arbitration (i.e. ICSID and UNCITRAL) also give courts wide discretion as to the amount and allocation of costs. In apportionment, courts often order that each party pay their own party costs as well as their share of court costs. However, there is a growing trend in court practice to order costs on a “loser pays” basis (ie the losing party pays the costs of its winning opponent). In assessing the amount of such costs, courts are not required to consider whether the costs were “reasonable” or “proportionate” (as is sometimes required in domestic court proceedings in some jurisdictions such as England. and Wales). In view of the above, investors are increasingly turning to Third Party Funding (TPF) as an effective way to manage the risks associated with ISDS procedures. In determining its recovery, a funder will take into account a variety of factors unique to each claim (including the relationship between recoverable damage and the costs of pursuing the claim until final recovery and, of course, the good. -based claim). The precise modalities of the return of the financial backer will be specified in the financing agreement. For investors, these are important considerations that can, of course, go both ways.
Many states (but not all) typically voluntarily comply with investor-state arbitration awards due to reputational risks (and potentially diplomatic and political pressure). If enforcement is necessary, however, the ICSID Convention (with respect to ICSID awards) and the New York Convention (with respect to other awards) operate by requiring that each signatory state (numbering 156 and 168 respectively) issue before its own domestic courts. Even so, the enforcement of an investor-state arbitration award under these Conventions is not entirely isolated from the national laws and judicial procedures of the signatory states, especially with regard to sovereign immunity. The execution stage can be time consuming and investors should carefully consider the possible jurisdictions in which enforcement may be required as well as the laws regarding enforcement against sovereign assets in those jurisdictions.
Relationship with the host state
Another essential consideration in any cost-benefit analysis in determining whether to pursue potential claims in ISDS is the potential impact that the initiation of an ISDS proceeding may have on an investor’s relationship with the state. host. Of course, the circumstances of each investment are unique and the impact on the investor-state relationship will also be specific to the situation. In some cases involving the illegal expropriation of an entire investment, an investor may have little or no relationship with the host state. In other cases, however, such as where future investments are planned in the territory concerned, a more delicate approach to asserting the legal rights of an investor while maintaining a reasonable working relationship with the host state may be preferable. .
Investor-state arbitration proceedings are generally less confidential than international commercial arbitration proceedings, and awards and pleadings are often accessible to the public. Given the inherent political dimension of ISDS, such disputes may also attract media attention and investors may need to be prepared to handle public communications. Additionally, claimants that are public companies often have disclosure obligations with respect to contingent liabilities and sensitive share price information, so arbitration proceedings may need to be disclosed to comply with the requirements. legal or regulatory, and the investor’s share price could be affected. Again, such considerations should be included, where appropriate, in any cost-benefit analysis to determine whether and how an investor should pursue pandemic-related claims in ISDS.
While a number of factors such as those mentioned above should be carefully considered by foreign investors, it is also essential that competent and insightful legal advice is sought throughout the life of any potential litigation. , from pre-arbitration negotiations to the execution of any arbitration award. . Such advice can very well help to mitigate the costs associated with ISDS procedures as well as to maximize an investor’s potential results.
1 UNCTAD, IInvestment policy monitor, Special issue n ° 4, May 2020