Increased Transparency in Investor-State Dispute Settlement

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  © Cambridge University Press

© Cambridge University Press

What are the impacts of transparency rules for treaty-based investor-State arbitration? Dimitrij Euler, a PhD student in public international law, co-edited a commentary on the new UNCITRAL Rules of Transparency. (Image: University of Basel, Roland Schmid)

Disputes between investors and states are usually handled within the confidential framework of international arbitration tribunals. To make this process more transparent, the United Nations Commission on International Trade Law (UNCITRAL) amended its international procedural rules in 2013. A commentary co-edited by Dimitrij Euler, a PhD student in public international law at the University of Basel, examines the effects of the new Rules on Transparency.

In 2014, Yukos shareholders from Russia won a 50 billion dollar investor-State arbitration settlement concerning the nationalization of their company. In 2012, the energy corporation, Vattenfall, brought a suit against the German State for more than four billion euros over the planned phase-out of nuclear energy. Switzerland is currently facing the threat of legal action before an international arbitration tribunal in Washington: a Turkish company is alleging that around 300 million euros in investments in Switzerland have been frozen and illegally transferred to Turkey.

What all three cases have in common is that they involve the protection of investments and arrive before an international arbitration tribunal. The applicable procedural rules of the chambers of commerce and ad hoc clauses guarantee far-reaching confidentiality, yet the legal literature and civil society are increasingly voicing criticism of this, particularly because public interests are also usually involved.

The United Nations Commission on International Trade Law (UNCITRAL) adopted new Rules on Transparency in 2013 for treaty-based investor-State arbitration. A recently published commentary analyses and explains the application of the new Rules on Transparency. The commentary was co-edited by Dimitrij Euler, a PhD student in public international law at the University of Basel together with SNSF professor Krista Nadakavukaren Schefer.

Mr Euler, investors can file suits directly with international arbitration tribunals if they believe their rights have been violated under investment treaties. What is the advantage of these arbitration tribunals over national courts?

Dimitrij Euler: Investors can call upon an international arbitration tribunal when they allege that a host state breached their rights protected under an investment treaty. One advantage of this relates to reducing the risk that a foreign investor experiences discrimination before a host state’s domestic courts; they are subject to a form of law that is foreign to them – this, at least, was the original idea when these arbitration tribunals were initially established during the second half of the 19th century. Another issue is that investment treaties establish an investor’s right to sue the host state without recourse to the home state’s diplomatic service, as generally is the case in international law.

You examine the Rules of Transparency in the procedural rules of UNCITRAL. How did these rules come into being?

The signatory states of the North American Free Trade Agreement (NAFTA) originally issued a binding interpretation which clarified their arbitration as being transparent in the early 2000s. Since then, several states have begun demanding better transparency. It was also in response to cases like that of Bolivia versus the international consortium Aguas del Tunari. The consortium had received a concession for the water supply in the city of Cochabamba. An increase in water fees triggered social unrest against the consortium which ultimately pulled out of the country and sued Bolivia, in a non-public process, for damages in the amount of 50 million dollars. In turn, this triggered protests by the international community and the call for more transparent processes. When UNCITRAL revised its arbitration rules in 2008, the USA and Canada were particularly strong advocates of increasing the level of transparency in arbitration proceedings. After the revision of the arbitration rules in 2010, UNCITRAL started negotiations of the Rules of Transparency until adoption in 2013.

How do the new rules promote transparency in proceedings?

In short, the Rules of Transparency state that names of the disputing party, the treaty and the sector shall be published at the commencement of the proceedings so that the public is able to respond. The rules guarantee access to information, without them it is impossible to know what is at stake. The rules acknowledge a public’s right to participate in the proceedings. They also address public hearings and the protection of confidential business information and essential security interests. Finally, the rules require the appointment of a public repository that manages the information. Even though this is a small article, it is actually an innovation, as in the past, the arbitration tribunals themselves were responsible for this, from raising the claim all the way to the award. Now, for the first time, there is a duty to retain information, which allows access to the information even after proceedings have ended.

The recently published commentary analyses the application of the Rules of Transparency. Do they meet the expectations that were tied to their introduction?

States often want to mask cases of corruption - and, in such cases, transparent arbitration may help to protect public interests in the long run.

There is great interest in these rules, and than before is, generally, being made public. Originally, disputes were thought to involve two equal disputing parties. Today, however, we recognize clear differences between states and investors. For example, states often want to mask cases of corruption – and, in such cases, transparent arbitration may help to protect public interests that go beyond national borders, such as the environment, in the long run. To this extent, arbitration proceedings are creating a type of transparency under the new rules that far exceeds what national courts are capable of.

Where do you think the new Rules of Transparency have been most effective?

The rules have created a new type of arbitration that is transparent not only in granting access to information but also, for example, in acknowledging that civil society has officially attained the right to be part of these processes, regardless of whether they are located in a host state or home state or somewhere in a third country. If states now also ratify the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration, we will have access to a great deal of information. This will also be exciting for research because it will be possible to examine the procedural law. We have always been allowed to see parts of the awards, but now we see, for example, how the location of the process is decided as well as who is a good arbitrator and who is not.

Still, arbitration tribunals are often accused of neglecting public interests.

I am of the opinion that public interests can better be accommodated within the international context of investment arbitration tribunals than by national courts. International arbitration tribunals rule on matters raised by the arbitration parties under the law selected by the parties to the agreement. The new Rules of Transparency now expand the dialogue beyond borders to include the concerned and non-concerned third parties. Anyone in the world can now, potentially, file a petition to participate on behalf of a given interest. In contrast, national courts officially apply national law, and whoever is not actually affected is excluded. Thus, the application of national law does not automatically promote more transparency and access to information, but rather is counterproductive and especially hinders dialogue in an international context, and can even be discriminatory. While there are very transparent states such as the USA, Canada and the EU, there are also opaque states such as Switzerland and Singapore.

Is it possible to say whether states or investors benefit more from the Rules of Transparency?

That depends on how well equipped a state is in terms of good governance. If one looks at how rarely non-corrupt countries like the USA or Canada are punished, then this is indication of how states like these rarely lose in the frequently-criticized arbitration processes. States that are lacking in good governance, on the other hand, are clearly penalized – something that should also be part of the current discussion concerning the planned Transatlantic Trade and Investment Partnership (TTIP). It is not the USA that has a problem with corruption.

The commentary analyses the UNCITRAL rules on treaty-based investor-state arbitration proceedings. Focusing on the application of these rules, the report examines the question of transparency in investment arbitration and offers suggestions on how the UNCITRAL Rules of Transparency should be applied.

Authoring of the commentary was sponsored by the Freiwillige Akademische Gesellschaft of Basel, the Portland Foundation and the Max Geldner Foundation.

Transparency in International Investment Arbitration. A Guide to the UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration. Edited by Dimitrij Euler, Markus Gehring and Maxi Scherer, Cambridge University Press, 2015.