THE AUTHOR: Puloma Mukherjee, Associate at LALIVE
As global events over the last two and a half years have created an unprecedented amount of upheaval, international disputes, including investor-State dispute settlement (“ISDS”), have been on the rise. According to ICSID’s Case Load Statistics issued on 4 August 2022 (“ICSID August 2022 Report”), as of June 30, 2022, ICSID had registered a total of 888 cases under the ICSID Convention and Additional Facility Rules; with 66 cases being registered in 2021, and 19 cases in the first half of 2022. As in previous years, a majority of cases were brought against developing nations, with North America and Western Europe accounting for less than 20% of cases. The cases have covered a broad range of sectors, although the ICSID August 2022 Report shows that nearly 50% of these were concentrated in the energy sector.
Drawing on recent ICSID and UNCTAD reports, this note will briefly reflect on some of the global trends that have emerged in ISDS in the last few years, namely intra-EU ISDS disputes, disputes that have arisen out of climate change policies, taxation measures, and war and armed conflict, and will consider their impact on the future of ISDS.
Intra-EU ISDS Disputes
In the wake of the Court of the European Justice’s (“CJEU”) landmark decision in Slovak Republik v Achmea BV (“Achmea”), a trend of ISDS tribunals consistently holding that they had jurisdiction over intra-EU disputes emerged (e.g., Adamakopoulos and others v Cyprus, Addiko Bank v Croatia, Micula v Romania (II), STEAG v Spain and Mathias Kruck and others v Spain).
However, this trend was broken in June 2022 when the tribunal in Green Power and SCE v Spain, unanimously upheld Spain’s intra-EU objection stating that their jurisdiction was not only governed by the dispute resolution clause in the Energy Charter Treaty (“ECT”) but also by international law and the law of the seat (i.e., Stockholm) which recognized the primacy of EU law.
It remains to be seen how tribunals will continue to approach the intra-EU jurisdiction issue. The CJEU’s decision in Republic of Moldova v Komstroy LLC will likely make it more difficult, if not to exercise jurisdiction, then to enforce intra-EU awards within EU member States. In particular, its impact will be felt with respect to disputes arising as a result of policy changes by European governments looking to meet their climate goals. As far as the ECT is concerned, the draft amended treaty announced earlier this year clarifies that ISDS provisions would not apply “among Contracting Parties that are members of the same Regional Economic Integration Organisation in their mutual relations”, which effectively means that the ECT would no longer cover intra-EU disputes.
ISDS and Climate Change
Climate change has been at the forefront of global policy decisions and there has been an increasing trend of climate change litigation over the past few years. The September 2022 UNCTAD Note on Treaty-based Investor-State Dispute Settlement Cases and Climate Action (“UNCTAD September 2022 Note”) estimates that investor claimants have brought at least 175 ISDS cases in relation to measures taken for the protection of the environment, with additional cases in the fossil fuel and renewable energy sectors. Environmental ISDS cases have shown almost a complete reversal of the general trend of developing nations being the most frequent respondents in ISDS cases, with renewable energy cases being almost exclusively brought against developed nations. The UNCTAD September 2022 Note observes that more than 90% of the recent renewable energy cases have been initiated under the ECT.
Climate-related disputes can involve claims of compensation due to climate-friendly policies of a government, as is the case in RWE v Netherlands where the Netherlands faced its first ISDS case in January 2021 as a result of the Government’s decision to ban the burning of coal for electricity generation by 2030 in compliance with its Paris Agreement commitments. Such disputes can also arise due to amendments or rollback of government policies or legislations to meet climate-change targets, as seen in the renewable energy cases that swept across Europe.
As noted in UNCTAD’s Review of 2020 Investor-State Arbitration Decisions: IIA Reform Issues at a Glance (issued in August 2022), these disputes have raised several questions of treaty interpretation, including what constitutes legitimate expectations of the investor, the level of regulatory stability an investor is entitled to, the application of the umbrella clause, and the scope of environmental or policy exceptions in investment treaties.
Climate-related ISDS disputes are likely to increase as the need to curb greenhouse gas emissions becomes more urgent and countries look to align their government policies with their climate goals. As mentioned above, the ECT itself is in the process of being modernized in an effort to make it greener and an amended treaty is due to be signed in November 2022 (although experts fear that the proposed amendments may fall short of this goal). Other international investment agreements (“IIAs”) may also follow a similar direction to try and balance the investor’s treaty obligations with the necessary policy space for countries to take urgent action against climate change.
ISDS and Tax
The July 2022 UNCTAD Note on Facts on Investor-State Arbitrations in 2021: with a Special Focus on Tax-Related ISDS Cases (“UNCTAD July 2022 Note”) observes that tax-related claims accounted for about 15% of the publicly known ISDS cases filed overall as of the end of 2021 (a total of 165 cases).
Over the years, there have been several high-profile disputes such as Cairn v India and Vodafone v India (I) and (II), which dealt with the imposition of capital gains tax; Hulley Enterprises v Russia, Veteran Petroleum v Russia and Yukos Universal v Russia which arose out of tax investigations and assessments; and the various disputes based on the series of legislative reforms in Europe related to feed-in tariffs and incentives for solar energy, such as PV Investors v Spain and ESPF and others v Italy.
ISDS disputes challenging tax-related measures have been growing in number over the last few years, not the least due to a global shift towards greener policies. In fact, due to the large number of renewal energy cases, the ECT has been the most frequently invoked IIA in tax-related cases (68 cases), followed by the North American Free Trade Agreement (12 cases).
ISDS and Armed Conflict
The invasion of Ukraine by Russia earlier this year has also thrown into sharp relief ISDS disputes arising out of war and armed conflict. The UNCTAD July 2022 Note observed that, in total, there have been around 30 ISDS cases brought against States arising out of the harm caused to investments in the context of war, armed conflict, military operations, and civil unrest. This includes the first ISDS case of AAPL v Sri Lanka in 1987. Russia and Libya have been identified as the most frequent respondents in such cases.
The cases against Libya relate mostly to allegations of failure to protect foreign investments in times of war and civil unrest (e.g., Trasta Energy v Libya, Simplex v Libya and Cengiz v Libya). In the case of Russia, following the events in Crimea in 2014, there has been a number of cases that arose out of the Russian Federation – Ukraine BITs, including Ukrenergo v Russia, Naftogaz and others v Russia and DTEK v Russia. As Russia is taken to the International Court of Justice and the European Court of Human Rights over its current war in Ukraine, the war itself, the new wave of economic sanctions against Russia, and the withdrawal of foreign investors from Russia will most likely give rise to ISDS and commercial arbitration claims in the months to come. Some of this has already begun with Ukraine invoking the ECT’s denial of benefits clause to refuse protection to Russian-owned investments. Finland owned Gasum is also bringing an arbitration against Gazprom’s export arm and Russian and Ukrainian parties threatening to pursue ISDS as a result of actions arising out of this war.
ISDS Legitimacy Crisis?
In the past decade, the ISDS regime has come under increasing criticism such as an inconsistency of decisions by tribunals, a potential lack of independence and impartiality of arbitrators, and a lack of transparency. On the back of this “legitimacy crisis”, countries like Bolivia and Venezuela denounced the ICSID Convention in 2007 and 2012 respectively, as did Ecuador in 2009, only to sign the ICSID Convention again in a major twist of events in 2021. In 2017, India terminated its existing IIAs and started renegotiations. The 2020 Brazil-India IIA does not include any ISDS provision at all.
However, in the last few years, stakeholders of the ISDS regime have been engaged in consistent efforts to review and reform the system. In September 2022, the UNCITRAL’s Working Group III met for its 43rd session in Vienna on ISDS reform, and earlier this year, the ICSID Rules and Regulations underwent another amendment.
The recent trends set out in this note indicate that global events over the last few years, including climate change, war, and armed conflict, have influenced the direction that ISDS has taken. As stakeholders sit across the table to evaluate options to reform the ISDS regime, these factors will undoubtedly play an important role in their considerations.
ABOUT THE AUTHOR
Puloma Mukherjee is an Associate in the Arbitration Practice Group at the London office of LALIVE. Her main area of practice is international arbitration, including commercial and investment treaty arbitration. Her experience includes acting in international arbitrations under ICSID, ICC, and UNCITRAL Rules.