UNMCA Innovations in the Investment Protection Regime

Keywords – USMCA, investment arbitration, UNCITRAL, regulatory chill, local remedies, Working Group III, ICSID, ISDS. 

Introduction

Investment arbitration is in a compromising situation. States have expressed concerns which have generated diverse proposed solutions. The ICSID Convention that was once considered to be the most efficient  mechanism to solve investment disputes is now under severe scrutiny by the UNCITRAL Working Group III. 

Some scholars and practitioners have argued against the current ISDS system, opining that investment arbitration has gone “from being a protective shield for defending corporations against unfair treatment, to a sword used by those corporations to attack government regulation in the public interest…”[1] Some of the main concerns are regarding: (1) the regulatory chill; (2) the arbitrators; (3) the consistency, coherence, predictability and correctness of the decisions; and (4) the cost and duration of the proceedings. 

Despite the States’ concerns, Canada, Mexico and the U.S. negotiated the USMCA to substitute NAFTA.[2] The USMCA presents an innovative investment chapter where States limit their risk exposure and investment protection to “some” of the most sensitive sectors where investors and states encounter conflict. It presents new solutions to States’ concern with the exercise of regulatory powers. USMCA Chapter Fourteen is considerably different than NAFTA in several respects and brings a new benchmark of investment protection as it solves many concerns. 

Dealing with Regulatory Chill: Two Schemes of Protection

Some states have expressed concerns about the so called “regulatory chill,” i.e. government reservations to regulate public interest or exercise regulatory powers for fear of costly investment arbitration.[3] The USMCA advances a thought-provoking offer for investment protection, reducing State risk and solving concerns about regulatory chill. 

The USMCA provides two forms to claim treaty breaches: 

1. General Investments: Investors may only invoke the protection of: National Treatment (“NT“), Most-Favored Nation (“MFN“) and Direct Expropriation. NT and MFN only protect in the investment’s post-establishment or post-acquisition phase.[4] 

2. Covered Government Contracts in the oil & gas, power generation, telecommunications, transportation, and certain infrastructure or activities in these sectors,[5] investors may claim breaches to any protection standard of the chapter, including Minimum Standard of Treatment and indirect expropriation.[6] 

With this approach, the USMCA addresses concerns about regulatory chill. The USMCA’s General Investments form reduces States’ risk exposure to ISDS by excluding the standards of indirect expropriation and fair and equitable treatment, which contains the broadest notions of good governance and rule of law in terms of stability, transparency and predictability. 

Dealing with Arbitrators

The UNCITRAL Working Group III identified the arbitrators as a main concern in the current ISDS regime. Many States have expressed worry that the current ISDS mechanisms do not offer acceptable levels of certainty, and that the arbitrators will be truly independent and impartial.[7] The Working Group identified some specific concerns, namely, repeat appointments, double-hatting, and pre-judgment of issues.[8] These issues have been addressed in the USMCA. 

Under USMCA, arbitrators must comply with the IBA Guidelines on Conflicts of Interest in International Arbitration.[9] Several studies have found the IBA Guidelines to be among the highest-rated, most effective soft law instruments,[10] as they provide criteria for assessing the impartiality and independence of arbitrators.[11] 

The IBA Guidelines could help to solve various State concerns about the standards of independence and impartiality. The Guidelines cover a series of specific situations and provide guidance on which of these situations constitute conflicts of interest, or whether information in these situations should or should not be disclosed.[12] For example, the IBA Guidelines specifically address the issues of repeat appointments,[13] and previous opinions of arbitrators.[14] 

While several investment tribunals have dealt with the issue of previous opinions,[15] the USMCA provides uniformity by including the IBA Guidelines. To date, the author has not identified any other treaty that mandates the application of the IBA Guidelines. 

Further, under the ICSID Convention, proposed disqualification of one tribunal member is decided by the remaining members.[16] The ICSID method to disqualify an arbitrator is subject to debate, but the USMCA solves this problem by providing that “[c]hallenges to arbitrators shall be governed by the … UNCITRAL Arbitration Rules.”[17] Under these Rules, the party making the challenge may elect to pursue it.[18] In that case, the party shall seek a decision by the appointing authority. This decision avoids some concerns regarding the challenge.

Finally, “double-hatting” is controversial within the Working Group III discussions and the ISDS community in general.[19] The IBA Guidelines do not address the issue. The USMCA uniquely dealt with this issue by including Article 14.D.6(5)(c) which states that arbitrators appointed to a tribunal shall not “for the duration of the proceedings, act as counsel or as party-appointed expert or witness in any pending arbitration under the annexes of this Chapter.” While the apparent prohibition of double-hatting is relevant, the provision is not broad enough to allay the States’ concerns entirely, because it only applies to other arbitrations under the same agreement. 

Dealing with Consistency

Consistency, coherence, and correctness of the decisions relate directly to certainty, predictability, and equal treatment.[20] These characteristics are necessary to preserve the legitimacy of the ISDS regime.[21] This concern has been subject to numerous suggestions.[22] 

The USMCA deals with this concern in many ways. First, the USMCA requires a waiver “of any right to initiate or continue before any court or administrative tribunal … any proceeding with respect to any measure alleged to constitute a breach.”[23] Also, USMCA contains a consolidation provision.[24] These two mechanisms serve to decrease the risk of parallel proceedings and inconsistent or contradictory decisions.

Second, the USMCA provides for the possibility of “drafts of the award.” Under the USMCA, at the request of a party, the tribunal shall transmit its proposed decision to the parties, and the tribunal shall consider any comments and issue its final decision.[25] Understanding the tribunal’s reasoning and case’s outcome in advance combined with the fact that the tribunal must consider comments made by the parties could increase the correctness and coherence of awards. 

Third, the USMCA solved the debate about whether “dispute resolution provisions invariably fall [or not] within the scope of an MFN provision.”[26] The USMCA restricted arbitral discretion by stating that MFN treatment “excludes provisions in other international trade or investment agreements that establish dispute resolution procedures or impose substantive obligations.”[27] Thus, the treaty provides guidance to interpret the MFN treatment.

Fourth, the USMCA clarifies the meaning of investment by expressly adopting some features of the Salini test.[28] The USMCA sets forth that “investment means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment including such characteristics as the commitment of capital or other resources, the expectation of gain or profit or the assumption of risk.”[29] Although the four elements of the Salini test are not present, there is at least two: (i) a contribution of money; and (ii) the element of risk. 

Finally, the treaty is innovative, at least compared to NAFTA, regarding public debt disputes. In several cases,[30] the ability to litigate claims arising out of public debt was subject to debate.[31] The USMCA seems to allow investment claims that arise out of default or non-payment of public debt; however, the relevant party must meet its burden and prove that such default constitutes a breach of a relevant obligation under the substantive standards of protection.[32]

Dealing with Cost and Duration

The USMCA also contains certain provisions that seem to address the concerns about cost and duration.[33] 

First, USMCA provides that the tribunal and the disputing parties shall endeavor to conduct the arbitration in an expeditious and cost-effective manner.[34] USMCA imposes a duty on both the tribunal and parties. The USMCA also establishes times for discontinuance.

Second, the USMCA also modified the provisions of its predecessor and re-introduced the requirement to exhaust local remedies.[35] Exhausting local remedies has been, to a large extent, abandoned in investment arbitration, only consistently seen in treaties signed by Argentina.[36] The USMCA seems to be part of the current trend to “revive” the local remedies rule.[37]

One of the reasons the local remedies rule was reintroduced may have been to prevent certain claims from reaching arbitration, thus avoiding wasted time and money on a claim that could be resolved without arbitration. The USMCA requires investors—under the General Investments form—to exhaust local remedies for 30 months. This period is much longer than periods in other BITs that also require claimants to exhaust local remedies.[38] The USMCA also includes a futility exception in footnote 25 that states “[t]he provisions in subparagraphs (a) and (b) do not apply to the extent recourse to domestic remedies was obviously futile.”

Conclusion

States have expressed serious concerns about the current ISDS system. These concerns frequently result in divergent proposed solutions. The USMCA solves many of the States’ concerns. While several concerns remain, and there is always room for improvement, the innovation of the USMCA negotiators is a step towards the modernization of ISDS. Some of these innovations will need to be tested in future disputes to determine if such approach is the most efficient, and where the following reforms should concentrate. 

ENDNOTES

[1] Aaron Cosbey, The Road to Hell? Investor Protections in NAFTA’s Chapter 11 in International Investment for Sustainable Development (Taylor & Francis 2004), pp. 150-151. 

[2] Under the USMCA, Canada will not be a party to Chapter Fourteen, the investment chapter containing ISDS mechanisms. 

[3] Ö. Süsler and T Wilson, The Phoenix Rises: Is the CPTPP a New Breed of Trade Partnership or More of the Same? TDM (March 2019) p. 2.

[4] See USMCA, Chapter 14, Annex 14-D, Arts.14.D.3.1.(a)(i)(A) & 14.D.3.1.(a)(i)(B); USMCA, Chapter 17, Annex 17-C, Arts. 2.(a)(i)(A); 2.(a)(i)(B). 

[5] USMCA, Annex 14-E, Art. 2.(a)(i)(A), and 6(a).

[6] USMCA, Chapter 14, annex 14-E, art. 2.a.i.

[7] CIArb at UNCITRAL Working Group III on ISDS Reform: Efficiency, Decisions, and Decision Makers, p. 19.

[8] U.N. Commission on International Trade Law. Report of Working Group III on the work of its thirty-sixth session. U.N. Doc A/CN.9/W.G.III/WP.151 (30 August 2018), pp. 2-3.

[9] USMCA, Art. 14.D.6 (5) (a).

[10] Elina Mereminskaya. Results of the Survey on the Use of Soft Law Instruments in International Arbitration (2014), ¶4; Paul Friedland and Loukas Mistelis. Improvements and Innovations in International Arbitration (White & Case 2015), p.3.

[11] Margaret Moses, The Role of the IBA Guidelines on Conflicts of Interest in Arbitrator Challenges (2017) ¶1.

[12] IBA Guidelines, p. 17, ¶1.

[13] The Orange List of the IBA Guidelines includes situations where the arbitrator “has, within the past three years, been appointed as arbitrator on two or more occasions by one of the parties, or an affiliate of one of the parties,” and “has, within the past three years, been appointed on more than three occasions by the same counsel, or the same law firm.” (IBA Guidelines, Orange List, p. 22, ¶3.1.3).

[14] The Orange List, addresses a situation where an arbitrator “has publicly advocated a position on the case, whether in a published paper, or speech, or otherwise.” (IBA Guidelines, Orange List, p. 25, ¶3.5.1); The Green List addresses a scenario where an arbitrator has previously expressed an opinion in a law review or public lecture concerning an issue that also arises in the arbitration but this opinion is not focused on the case (IBA Guidelines, Green List, p. 25, ¶4.1.1). 

[15] For example, Repsol, S.A. and Repsol Butano, S.A. v. Argentine Republic, ICSID Case No. ARB/12/38, Decision on the Proposal for Disqualification of Francisco Orrego Vicuña and Claus von Wobeser (December 13, 2013) and Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, Decision on Claimants’ Proposal to Disqualify Professor Campbell McLachlan, Arbitrator (August 12, 2010). 

[16] ICSID Convention, Art. 58; ICSID Arbitration Rule 9(4).

[17] USMCA, Art. 14.D.6.6

[18] UNCITRAL Arbitration Rules, Art. 13.4.

[19] Addy Paola Velázquez, Arbitrators an Issue Conflict: Treading a Tightrope of Legitimacy? A Civil Law Perspective in Ian A. Laird and Todd J. Weiler, Investment Treaty Arbitration and International Law – Volume 2, (Juris Publishing, 2009) and Arbitrators and Issue Conflict: Treading a Tightrope of Legitimacy? in Ian A Laird and Todd J. Weiler, Id. 

[20] U.N. Commission on International Trade Law (UNITRAL). Report of Working Group III on the work of its thirty-sixth session. U.N. Doc A/CN.9/W.G.III/WP.150, (28 August 2018), p.13, ¶28.

[21] Idem.

[22] Among commentators and practitioners, the most popular suggestions to address these concerns are (a) introducing a system of binding precedent, (b) providing guidance to arbitral tribunals, (c) introducing a system of prior scrutiny of awards, (d) creating an appellate mechanism, (e) creating a system of preliminary rulings, and (f) creating an international court system. Now, we proceed to comment on each of these aspects.

[23] USMCA, Art. 14.D.5.e.

[24] USMCA, Art. 14.D.12. 

[25] USMCA, Art. 14.D.7(12). 

[26] Impreglio S.p.A. v. Argentine Republic, ICSID Case No. ARB/0717, Concurring and Dissenting Opinion of Brigitte Stern. As pointed out by Stern in her dissenting opinion in Impreglio, there are two distinct lines of cases regarding MFN clauses: Mafezzini v Spain, which supports the notion that dispute resolution provisions fall within the scope of MFN provisions, and Plama v. Bulgaria supporting the opposite view. 

[27] USMCA, Chapter 14, Footnotes 22 & 30. 

[28] Phoenix Action, LTD v. The Czech Republic, ICSID Case No. ARB/06/5 Award (April 15, 2009) ¶83; Salini Construttori SpA & Italstrade SpA v Kingdom of Morocco, ICSID Case No ARB/00/4 Decision on Jurisdiction (23 July 2011). 

[29] USMCA, Art. 14.1.

[30] Abaclat and Others v. the Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility (August 4, 2011); Postová Banka, A.S. and Istrokapital SE v. the Hellenic Republic, ICSID Case No. ARB/13/8.

[31] Abaclat and Others v the Argentine Republic, ICSID Case No ARB/07/5, Decision on Jurisdiction and Admissibility, Dissenting Opinion (October 28, 2011).

[32] Appendix 2, Annex 14-D of USMCA. 

[33] USMCA, Arts. 14-D.7(10 and 14-D.7(11).

[34] USMCA, Art. 14-D.7 (10).

[35] USMCA, Annex 14-D, Art. 5. 

[36] See Abaclat and Others v. the Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility (August 4, 2011) ¶493 et seq.

[37] See Aditi Shah: India’s proposed investment treaty terms leave foreign partners cold, Reuters (Jan. 19, 2018). India is also trying to set exhaustion of local remedies as a requirement.

[38] For example, see Article 8.3 of the Agreement between Italy and Argentine Republic for the Promotion and Protection of Investment (1990)

Eduardo Lobatón, an associate in Litigation and International Arbitration in Hogan Lovells, focuses extensively on diverse aspects of international and domestic arbitration proceedings, civil and commercial litigation proceedings and antitrust matters. Eduardo graduated summa cum laude from Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). He also studied diverse aspects of international and transnational law in London, obtaining a certificate in transnational legal studies from the Georgetown Center for Transnational Legal Studies and holds a postgraduate degree in Amparo Law from Universidad Panamericana. He is currently a professor of civil and commercial law at his alma mater. He previously served as head coach for the Georgetown Center of Transnational Legal Studies’ team in the most prestigious international arbitration competition, and he currently serves as head coach for ITESM’s teams for international and domestic arbitration competitions. 

The views and opinions expressed in the article are those of the author(s) solely and do not reflect the of official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.are those of the author(s) solely and do not reflect the of official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.