By Daniel Xu (Dubai), Wilson Antoon (London) and Edmund Northcott (London)
The last ten years have been a tumultuous time for the world at large, let alone arbitration. The shockwaves emanating from the Global Financial Crisis (the “GFC”) fuelled a rise in nationalist politics and the resulting reactions against globalisation led to some key milestones in modern history: the election of President Trump of the United States and the United Kingdom’s decision to exit the European Union have been coupled with the rise of China as a superpower, a new low in Western relations with Russia and North Korea’s nuclear brinkmanship. Could we have predicted these? Unlikely! Yet what is interesting is that this decade has mirrored a similar discontent surrounding arbitration and especially investor-state dispute settlement (“ISDS”). On the commercial side of arbitration, the previous decade has seen a continued growth in caseload (despite challenges from new international commercial courts), improvements in diversity, a wider variety of nationalities involved as parties and a continuing debate between confidentiality and transparency. This article will look at what has happened over the past ten years; the good, the bad and the ugly, and try to set the scene for the future-looking articles elsewhere in this special 10th edition of Crossing Borders.
The rise (and fall?) of ISDS
ISDS saw a huge rise in the number of cases filed in the period 1993-2012, with a cumulative total of 514 cases and a record 58 cases (at least) filed in 2012. This sudden rise can be largely attributed to the number of claims arising out of Argentina’s debt crises in 2001 and the GFC. Nevertheless, with the rise in the number of ISDS claims, came the ensuing rise in awards issued against defending host states. Such states were typically developing nations, rich in natural resources, fraught with economic and political turmoil, which had concluded a batch of bilateral investment treaties (“BIT”) in the early 1990s (before this rise of ISDS, which would herald a more cautious approach by host states). For example, Argentina, Ecuador and Venezuela were all on the receiving end of substantial damages awards in the mid-2000s which they struggled to afford, and this became a running theme. Host states began to wise up to the fact that whilst ISDS provided a predictable and stable arrangement for investors, it offered fewer benefits for the states themselves. A paradox developed whereby the foreign direct investment flowing into these developing nations was negated by the outflow of damages awards. By the end of 2012 the average damages award was USD 81. 4 million, and the defendant countries were all developing nations. Developing nations could neither afford to pay the damages award nor put in place measures to prevent investors bringing claims. States began terminating their BITs and withdrawing from the International Centre for Settlement of Investment Disputes (“ICSID”). Venezuela, Ecuador and Bolivia withdrew from the ICSID Convention between 2007 to 2012, Venezuela terminated its BIT with the Netherlands in 2008 and in 2013 Ecuador signalled its intention to terminate all of its BITs (and had withdrawn from 13 by 2014).
The host-states’ concerns and criticisms of ISDS also led to an ever-increasing number of refusals to pay damages awards. By 2012, Argentina had refused to pay USD 300 million to US investors alone, as a result of claims arising from its debt crisis. This resulted in a Presidential Proclamation by the US in the same year, suspending Argentina’s benefits under the US Generalized System of Preferences. However, even more developed countries, such as South Korea, have also refused to enforce damages awards, showing this behaviour is not isolated to South American nations with less stable economies. This attitude towards ISDS is likely to nurture a shift towards host states preferring disputes to be settled in their national courts. This trend would discourage foreign direct investment into these developing nations. An investor cannot guarantee the safeguarding of its investment, resulting in a vicious cycle whereby the countries in need of investment cannot attract investors who want the protection ISDS offers.
Furthermore, there has been a steady increase in the number of annulment applications against ICSID-rendered awards. Between 2001 and 2010 there were twenty-six annulment applications in total, compared to 2017 alone, where there were 82 annulment cases, 30% of which ended in a full or partial annulment.
How ISDS could survive the next ten years
It appears that host-states’ main gripes with ISDS boil down to its lack of accountability and the inability to appeal arbitral awards. A return by some nations to the Calvo Doctrine, whereby states exclude arbitration clauses in favour of having disputes settled in the national courts, is looking likely. The rise of nationalistic politics has also led to President Trump’s desire to re-negotiate the North America Free Trade Agreement (the investment treaty with the second highest total number of claims filed under it to date), and is likely to result in isolationist, anti-ISDS policies. All is not lost. To appease the host states and mitigate these negative trends, there are a number of methods ISDS can employ:
An investment arbitration court: A centralised arbitration court is likely to be popular amongst host states seeking to revert to judicial review in their national courts. Permanent arbitrators, a codified appeals system and possibly a binding system of precedent would offer states the accountability, transparency and enablement they are craving. One current example has already been included in the latest draft of the Canada-EU treaty (“CETA”) and it includes a permanent roster of arbitrators and an appellate tribunal.
There has also been a recent rise in jurisdictions attempting to capture market share of the cross-border disputes or regain ground on arbitral centres. The Singapore International Commercial Court (the “SICC”) is one such example. Established in 2015, it aims to offer international parties the best parts of arbitration and litigation. The SICC has experienced a steady growth in its caseload since its inception, with 17 cases on its books in 2017. Such international courts might appeal to those host-states disillusioned with ISDS, but not capable of offering reliable judicial review in their own national courts, when they come to negotiating a dispute resolution clause in their next BIT. It would not be surprising for more courts to start positioning themselves in a similar way following the SICC’s initial success.
Compulsory conciliation: At present, attempts to settle arbitrations in the pre-action phase are often fruitless. An alternative is to include a compulsory conciliation or direct negotiation provision in arbitration agreements, forcing the parties to attempt an amicable settlement. Japan has used negotiations, mediation and conciliation to profound effect, Japanese investors only ever initiating three known ISDS claims. A pioneering initiative is the establishment of the Singapore Mediation Convention (“SMC”), which aims at facilitating the enforcement of settlement agreements by allowing the enforcing party to go directly to a court in a country where enforcement is sought. The SMC has been approved by UNCITRAL and is expected to be signed in August 2019. These endeavours directly address an issue that continues to pervade ISDS, namely cost. Arbitrations are becoming more expensive and drawn out, therefore nipping the claim in the proverbial bud at the conciliation stage, would benefit everyone.
Update the arbitration rulebook: ICSID is undergoing a review of its rules in order to update them (a first draft of which were published on 2 August 2018). Similarly, the latest UNCTAD report shows that new BITs and international investment agreements include more progressive clauses, which again, should assuage some of the criticism levelled at ISDS. For example, Canada and Chile updated their Free Trade Agreement most recently in 2017 to include a provision on corporate social responsibility and enjoining the parties to adopt a permanent multilateral tribunal. Similarly, in October 2017, Bangladesh and India signed the Joint Interpretative Notes for their BIT. The Notes clarifiy BIT provisions, such as the definitions of ‘investor’ and ‘investment’ – critical in determining any ISDS claim. The problem is that it takes time and ISDS needs to be nimble enough to react in this fast-changing geo-political environment.
Staying commercial: variety, diversity, transparency.
Despite this article’s focus on ISDS, it must not be forgotten that most arbitrations are commercial rather than investment-based. In terms of which sectors dominate commercial arbitration, commodity disputes made up the bulk of the claims decided by the London Court of International Arbitration (“LCIA”) in 2008 (around 30%), whereas energy and resources and banking and financial services disputes each made up a quarter of LCIA claims in 2017. It appears that the financial sector is gradually putting arbitration to use in the manner many predicted following the GFC.
Another relatively untapped market for arbitration is also showing signs of growth: sub-Saharan Africa. According to the ICC’s statistics, 2017 saw a 40% increase in cases involving parties from sub-Saharan Africa, 153 in total of which 64 involved claimants from the region. We believe this trend will continue with China’s BRI Initiative, which has already had a significant impact on Africa’s infrastructure. Commercial arbitration has experienced similar challenges to ISDS from the likes of new international courts, but where commercial artbitration has been blazing a trail is in diversity. A good example is the Arbitration Pledge. Started in 2015, this is an award-winning movement aimed at improving female representation on arbitral tribunals. To show how significant this movement has been, in 2008 the LCIA did not even publish their gender diversity statistics for tribunals, whereas in 2017 34% of LCIA arbitrators were female and parties proposed a female arbitrator 17% of the time (a four-fold increase on 2016 figures).15 Even more impressive, and a long time coming, is the ICC’s achievement in securing gender equality on the ICC Court during its 2018-2021 term, with female court members rising from 23% to 50%.16 Finally, transparency. In-house counsel contributing to the 2015 and 2018 Queen Mary Surveys noted that confidentiality and privacy was one of the top three characteristics of why they chose arbitration, yet in order to modernise and stay relevant arbitration needed to increase its transparency. There have been some examples of improved transparency which do not encroach on the parties’ confidentiality: (i) the amended Article 11(4) of the ICC Rules allows the ICC Court to provide reasons for its decisions in certain matters (e.g. appointment, removal, challenge or replacement of an arbitrator) as the strict wording, “and the reasons for such decisions shall not be communicated” was removed from the 2012 ICC Rules; and (ii) the new opt-out provision of Article 41 of the 2018 Rules of Arbitration and Conciliation of the Vienna International Arbitral Centre (“VIAC”) which permits the VIAC to publish anonymised summaries or extracts of awards (a practice the ICC also conducts). Since the introduction of the provision this year, VIAC has published a selection of 60 awards.
Arbitration on the move, or not
Despite the rise in the number of new arbitration centres, the ‘elite seats’ of London, Paris, Singapore, Hong Kong, Geneva, New York and Stockholm remain dominant, with London continuing its supremacy at the top of the league table in terms of popularity. The rise in popularity of Hong Kong and particularly Singapore reflects the increased case load coming out of Asia. The Singapore International Arbitration Centre (“SIAC”) had 86 cases filed with it in 2007, compared with 343 filings in 2016 (which was a 27% rise on 2015’s total). This growth even outstripped the LCIA, which experienced a small downturn in growth during the same period. From the latest Queen Mary Survey, it appears that Brexit will not have as detrimental effect on London’s position as the preferred arbitral seat. There is a chance, albeit a small one, that it may even bolster London’s attractiveness by increasing its independence from Europe and could revive the anti-suit injunction, but it is likely that if there is any impact it will likely be negative and could result in the other elite seats receiving a few extra ‘referrals’.
China’s rise in the past 10 years has been almost unprecedented in terms of economic growth and global expansion. In particular, China’s
Belt and Road policy has the potential to reform the economic and geopolitical landscape, but it will also be a great source of investment disputes. With the policy still in its infancy, disputes are yet to take off, but many expect Shanghai, Hong Kong and Singapore’s respective arbitration institutions to be the go-to centres to settle any disputes and not forgetting the SICC, which could be a strong contender given its position in the region. China has recently established the China International Commercial Courts (“CICC”) specifically to deal with Belt and Road disputes, with courts to be based in Shenzhen and Xian. Whether parties will agree to have their disputes settled in the CICC is another question, of course.
The idea that arbitration is cheaper than litigation is now a myth which cannot be spun to prospective parties to a claim. An ISDS claim on average typically takes four years and will cost a claimant USD 6.019 million (a rise of about USD 1.5 million since 2012) and a respondent USD 4.855 million. The tribunal’s costs usually come in at around the USD 1 million mark, but the pressing issue is the lack of certainty (and consistency) regarding the recoverability of costs for the winning party. Figures show that the successful party only recovers some portion of their costs in 51% of cases, and successful investors are more likely to recover than successful states (58% vs. 47%). Considering the significant costs involved these days, there have been calls that arbitrators should employ a ‘costs follow the event’ approach as an express, but rebuttable, presumption. ICSID is listening and is considering including this measure in its new set of rules, the committee’s reports on which are set to be published shortly, which will offer guidance as to the direction the new ICSID rules are heading. With rising costs we have seen a paralleled rise in third-party funding (“TPF”) in the arbitration space, which has been recognised and subsequently enabled by institutions and courts: Hong Kong
enacted the Arbitration and Mediation Legislation (TPF) (Amendment) Ordinance on 23 June 2017, Singapore made several amendments to its Civil Law Act in March 2017 and the English Commercial Court confirmed in Essar Oilfields Services Ltd V Norscot Rig Management Pvt Ltd  EWHC 2361 (Comm) that an arbitrator may award costs incurred by a successful party to an arbitration for engaging a third-party funder. Early disclosure of TPF is strongly advisable to
take advantage of these radical new rules. Commercial arbitrations tend to be more expensive than a comparable commercial court claim (at least in England and
Wales). Again, controlling costs is a “hot” topic (has been since 2008 and will be in 2028).
ISDS has suffered a rough ride in the past 10 years, but in its defence so has the rest of the world, and ISDS is still standing. To look on the bright side, these tumultuous years have highlighted ISDS’s deficiencies in the eyes of the host-states and the claimant-investors and thereby acted as a catalyst for change. Whilst the theme for ISDS for the last 10 years has been somewhat gloomy, life on the commercial side of the fence has seen some positive developments in terms of growth, diversity and transparency, which we foresee feeding into, and strengthening, ISDS. Reform within investment arbitration is moving at a faster pace than ever before and, as our other articles show, although Trump might be trying to make the future orange, the future is bright for arbitration.
United Nations Conference on Trade and Development (UNCTAD), “Recent Developments in Investor-State Dispute Settlement (ISDS),” IIA Issue Notes No.
1, May 2013, http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d3_en.pdf.
International Institute for Sustainable Development, ‘The Stakes Are High: A review of the financial costs of investment treaty arbitration’, July 2014, https://
This is a preferential tariff system which provides for a formal system of exemptions from the more general rules of the World Trade Organization. Press Release, U.S. House of Representatives, Ways and Means Committee, Camp, Brady Statements on Suspension of Argentina’s GSP Benefits (Mar. 26. 2012), http://waysandmeans.house.gov/news/documentsingle.aspx?DocumentID=287172.
The ICSID Caseload Statistics (Issue 2018-1), available at https://icsid.worldbank.org/en/Documents/resources/ICSID%20Web%20Stats%202018-1(English).
pdf ; United Nations Conference on Trade and Development, “Special Update on Investor-State Dispute Settlement: Facts and Figures”, 2017, IIA Issues Note, http://unctad.org/en/PublicationsLibrary/diaepcb2017d7_en.pdf.
UNCTAD, Investment Policy Hub, BIT Statistics, http://investmentpolicyhub.unctad.org/ISDS/FilterByApplicableIia.
SICC News, The 2017 in Review, https://www.sicc.gov.sg/docs/defaultsource/modules-document/media-resources/sicc-newsletter-issue-no-1---annex_6353b24e-5a2f-40c5-96e5-54a25b7e3562.pdf.
UNCTAD, Investment Policy Hub, Cases as Home State of Claimant, http://investmentpolicyhub.unctad.org/ISDS/FilterByCountry.
ICSID’s proposed amended rules are addressed in our article ’10 Things you need to know about the New ICSID Rules’ and can be viewed at https://icsid.worldbank.org/en/Documents/Amendments_Vol_One.pdf
UNCTAD, World Investment Report 2018, http://unctad.org/en/PublicationsLibrary/wir2018_en.pdf.
Queen Mary International Arbitration Surveys 2015 and 2018, http://www.arbitration.qmul.ac.uk/research/2018/
ICC, 2017 Rules https://cdn.iccwbo.org/content/uploads/sites/3/2017/01/ICC-2017-Arbitration-and-2014-Mediation-Rules-english-version.pdf.pdf