Transnational Notes

Professor Ferrari will give several talks on matters related to the United Nations Convention on Contracts for the International Sale of Goods (CISG) and arbitration at a conference organized by the Center, to be held in Santo Domingo on 10 October 2016. Professor Marco Torsello, two-time Global Professor of Law at NYU, will also give a talk on CISG related topics. For the full program, please click here.

On January 28, 2015, the High Court of Justice of Madrid (“HCJ of Madrid”) rendered a decision[1] setting aside an award dated January 14, 2014 that dealt with an interest rate swap agreement signed between a retail company and a bank. The HCJ of Madrid concluded, after reviewing the law applicable to the merits of the dispute, that the award was contrary to economic public policy and, therefore, according to article 41(1)(f) of the Spanish Arbitration Act, it should be annulled.

Remarkably, the decision has not been an exception. In the past months, more judgments with a similar factual background (the purchase of an interest rate swap by a retail company) and analogous reasoning and outcome have been lodged by the HCJ of Madrid—Judgments of April 6, 2015, April 14, de 2015, and June 1, 2015—, pleasing those who blame the financial entities for the country’s economic crisis, but alarming Spain’s arbitral community.

Until recently, Spanish courts had respected that arbitral awards cannot be reviewed on their merits, and had interpreted the concept of public policy restrictively, applying it only when there had been a clear violation of a fundamental constitutional right. Do these decisions represent a change in trend?

 

1. The Award of January 14, 2014

In 2008, the sole administrator of a retail company negotiated and agreed with BBVA (Spain’s second largest bank) the novation of a mortgage loan. During the negotiations, the company expressed its concern regarding the possible increase of interest rates and asked the bank if there was any product that covered such risk. The bank then offered the company to subscribe an interest rate swap.

Before contracting the financial product, the bank applied the convenience test[2] to the sole administrator, from which it resulted that he had passed 4 out of 5 years of the degree in business administration. Moreover, a BBVA worker explained to him the terms of the interest rate swap[3]. After the explanation, the sole administrator subscribed the mortgage novation as well as the interest rate swap agreement.

Six years later, the company initiated arbitration proceedings (under the administration of the Court of Arbitration of the Official Chamber of Commerce and Industry of Madrid) against BBVA requesting the arbitral tribunal to annul the interest rate swap agreement due to an error in consent. In this regard, the company alleged that, at the time of the agreement, the sole administrator thought he was contracting an insurance agreement that could be cancelled at any time; that BBVA had not applied the suitability test[4], as it should have due to the complex nature of swaps, and that the bank had advised him to contract the product before having him take the convenience test.

The arbitral tribunal rejected all of these arguments. In summary, the tribunal concluded that the product had characteristics that clearly distinguished it from an insurance (the company had never paid a premium); that a swap could not be qualified as a specially complex product for a person with a minimum formation and experience in commercial and financial activities; that the information provided by the bank was clear, true, impartial and non-fraudulent, allowing the client to be conscious of the essential terms of the agreement; and that the anticipated cancelation of the product had a cost that had to be paid. Hence, the award determined that the company had to comply with the terms of the interest rate swap in order to cancel it.

Disappointed with the award, the company sought its annulment under two grounds: (1) the partiality of the Court of Arbitration[5] and the absence of independence and impartiality in the co-arbitrator; and (2) the infringement of public policy due to the misinterpretation and misapplication of the standard of conduct rules imposed by the Spanish Securities Act and the national and European Union case law that applies those rules[6].

 

1. The decision of the HCJ of Madrid of January 28, 2015

In the application to set aside the award, the company alleged that the award infringed public policy for four reasons: (1) it disregarded article 79(8) of the Spanish Securities Market Act when considering the swap a non-complex product; (2) it did not apply the statute of protection of retailers; (3) in view of the evidence, it could not be concluded that BBVA informed the company of the high risks and costs associated to the swap nor its probability of occurrence and possible range; and (4) it did not sanction the fact that the suitability test was not applied to the sole administrator.

BBVA rejected both grounds for the annulment of the award and, in relation to the second one, it held that the action to set aside awards does not open a second instance and could not allow the courts to review the merits of the case.

Although the decision seemed to agree with BBVA when quoting the Preamble of the Spanish Arbitration Act —“the grounds for setting aside an award must be appraised and must not allow, as a general rule, a review of the arbitrators’ decision on the merits”—, the fact that it underlined the words “as a general rule” gave a hint of what it would later dispose. The HCJ of Madrid stated that article 41(1)(f) of the Spanish Arbitration Act comprised not only the protection of fundamental rights (contained in the Spanish Constitution) but also, due to the imperative mandate of European Union Law, the protection of economic public policy.

In view of the court, “the distinguished paradigm of economic public policy is the principle of contracting in good faith (…), the observance of which is specially unavoidable when, in a particular transaction, a situation of unbalance, disproportion or asymmetry takes place between the parties due to the complexity of the product that is being bought and the disparate knowledge that parties have of such product”.

In order to determine if the award had breached economic public policy, the HCJ of Madrid reviewed the circumstances of the case in the light of the Judgment of the Supreme Court of January 20, 2014[7] —which contained essential doctrine that delimited the scope of the principle of contracting in good faith in relation to financial products—, and then concluded that the award erred in the following three aspects:

1. The award disregarded the facts of the case that proved that the tasks carried out by the bank “implied advice and not only commercialization”, which should have led BBVA to apply both the test of convenience and the test of suitability to the sole administrator.
2. The award ignored article 79 bis (8) of the Spanish Securities Market Act, which forbids to consider swaps as non-complex financial products.
3. The award failed to analyze whether the bank informed the company of the possibility of early terminating the interest rate swap agreement and its related costs.

In view of the aforementioned errors, the court concluded that the award’s motivation, based on legal grounds that are contrary to imperative applicable law, was arbitrary and that it, therefore, contravened public policy.

 

III. The decision of the HCJ of Madrid violates article 41(1)(f) of the Spanish Arbitration Act

While an appeal allows a court to re-examine the decision rendered in first instance, the action of annulment of an award is limited to the numerus clausus grounds listed on article 41 of the Spanish Arbitration Act. This grounds allow a three level control: (1) the existence and validity of the arbitral agreement; (2) the regularity of the proceedings; and (3) respect of public policy.

But, what is public policy and in what particular cases does it allow tribunals to review the merits?

Spanish courts have always interpreted and applied the concept of public policy in a very restrictive manner, respecting the fact that an arbitral award cannot be, as a general rule, reviewed on its merits. This limitation implies that the proven facts, the assessment of the evidence and the interpretation given to the applicable law should, in general, remain out of the scope of the action of annulment.

In other words, courts cannot replace the criterion of the award by their own. The court may disagree with the final decision of the award but that does not allow it to dispense justice when the parties have attributed jurisdiction to an arbitral tribunal. The courts role is reduced to verify if the award is reasoned and if it is not flagrantly incompatible with the practiced evidence, and not to verify if another conclusion could have been reached out of the evidence.

As the Provincial Court of Pontevedra clearly stated in its decision of January 21, 2010[8], through the action of annulment the courts may only challenge awards that absolutely ignore the rights and principles that form public policy (i.e. fundamental constitutional rights), but not the particular interpretation and application that of those rights and principles the arbitrator does.

In view of the above, it is not a surprise that the decision of the HCJ of Madrid, which bypassed the arbitral tribunal’s reasoning, has been harshly criticized in every arbitral forum. This decision has unlawfully taken advantage of a broad concept of public policy to expand the scope of the action of annulment and reverse an award that is perfectly reasoned, just because the court disagrees with the outcome.

This new tendency has led to subsequent judgments like the decision of 14 April, 2015 of the HCJ of Madrid[9] in which the court even affirms that law grants judges an “extraordinary control” that has the goal of “revoking any excess of the arbitral award”. Indeed, this view is mistaken. As it is alleged in the dissent of Judge Francisco Javier Vieira Morante, the powers of the annulment tribunal are not the ones of an appellate one; thus, the annulment tribunal may not replace the conclusions of the award for others it considers to be more just[10].

In order to respect the principle of party autonomy and avoid any abuse of discretion in the future, it would be advisable to determine and narrow a definition of economic public policy, bearing in mind that public policy should only be considered where there is a clear and serious violation of a fundamental right. Otherwise, the ability to set aside an award would be boundless.

The absence of certainty and precision of such an important concept menaces the exceptional scope of the action of annulment, which could become a forbidden second instance. However, even if a definition is not found, courts cannot ignore that an award cannot be set aside when it is reasoned and the assessment of the evidence does not result irrational.

 

1. Conclusion

Some authors[11] believe that the commented decision (as well as the ones that have followed it) “undermine the basis of arbitration and put in danger arbitrations with a seat in Madrid, which from now on are subject to appeal before the HCJ.” Others[12] believe “these judgments to be exceptional decisions on a very specific matter based on the specific circumstances of these cases [that] cannot be extrapolated to other types of controversies or disputes of a different nature.”

In this author’s opinion, the nature of the case should not justify the fact that courts go beyond their authority and, unless we want to detriment arbitration proceedings with a seat in Madrid, the concept of public policy should remain interpreted in a restrictive manner.

A broad interpretation of public policy, even if tied to arbitrations related to swap agreements, may (rectius, will) influence negatively in investors who will become reluctant to include arbitration clauses with a seat in Madrid in their agreements, because when deciding upon a dispute settlement clause, parties want to ensure an absolute legal certainty.

If the HCJ of Madrid misinterpreting article 41(1) of the Spanish Arbitration Act puts an end to the main virtues of arbitration —finality of the decisions, lower cost, enforceability of the award and speed—, by creating the possibility of reviewing awards on the merits, arbitrations with a seat in Madrid may be in danger. For now, these decisions have only affected a certain type of cases (arbitrations related to financial products acquired by retails companies), but what counsel can guarantee its clients that this reasoning will not be applied to other type of cases in the future?

As it was stated by a well-known dissertation, “the binding nature of the award, or indeed any legal instrument, cannot exist in isolation, but must stem from a legal system which recognizes that binding quality.”[13] In this regard, efficiency of arbitration proceedings does not only rely on the arbitrators but also on the support given to it by the courts. Only an intervention that shows a true support of the arbitral proceedings will allow arbitration to be a successful method of dispute resolution.

 

Lara Rodríguez Mulet

Class of 2016 graduate in the International Business Regulation, Litigation, and Arbitration (IBRLA) LL.M. program at New York University School of Law. Foreign Associate of the International Arbitration Practice Area at Freshfields Bruckhaus Deringer in New York.

[1] Civil and Criminal Chamber of the High Court of Justice of Madrid, decision number 13/2015, dated January 28, 2015 (Westlaw JUR\2015\79489).

[2] Test used to evaluate the knowledge and experience of the client in relation to the product being offered or requested.

[3] In summary: the bank would pay the company a 12 month EURIBOR rate and the company would pay the bank a fixed rate of 4.64% during a period of 13 years, being the amount equal to the one of the loan. Or, in other words, that he would have a fixed rate for the loan equal to 5.29%.

[4] Test used to evaluate the knowledge of the client in relation to the concrete product, his experience with such product, his financial situation and the objectives of his investment.

[5] The company alleged that the Court’s neutrality was jeopardized by the fact that at least one third of the arbitrators listed by the Court had had a direct relationship with BBVA or other banks who offer swaps.

[6] The HCJ of Madrid rejected the former ground, so we shall focus on the analysis of the latter.

[7] Note that this judgment was passed 6 days after the award was rendered.

[8] Provincial Court of Pontevedra, decision number 41/2010, dated January 21, 2010 (La Ley 8466/2010).

[9] Civil and Criminal Chamber of the High Court of Justice of Madrid, decision number 30/2015, dated April 14, 2015 (Westlaw JUR\2015\136198).

[10] In words of Judge Vieria, “it is true that when legal issues have been debated we may not agree with the judgment of the award, especially when it contradicts the Supreme Court’s decisions. But that does not allow us to impart justice in the particular case, since it is impeded by the decision of the parties to exclude tribunals of the dispute settlement.”

[11] Conthe, M., Swaps de intereses: la sentencia del Tribunal Superior de Justicia de Madrid de 28 de enero de 2015, Diario La Ley, n. 8515 (April 9, 2015).

[12] Ardila, G. and Fernandez-Miranda, B., No rain forecast for arbitration in Spain, LexisNexis (July 14, 2015).

[13] Fouchard, P., Gaillard, M., and Savage, J., Fouchard Gaillard Goldman on International Commercial Arbitration, Savage and Gaillard (1999).

Prof. Silberman, the Co-Director of the Center, will give a talk on the implications US court decisions can and do have abroad, both in the international litigation and arbitration contexts. The starting point of  Prof. Silberman’s remarks will be the US Supreme Court’s decision in Daimler AG v Bauman, on the occasion of which the US Supreme Court stated that as a constitutional matter, general jurisdiction over a corporation is limited to the state in the US where the defendant can be regarded “at home”. For more info, please click here.

Professor Franco Ferrari, the Director of the Center, and Dr. Friedrich Rosenfeld, a Global Adjunct Professor at NYU Law in Paris, Visiting Professor at the International Hellenic University in Thessaloniki and Lecturer at Bucerius, have just published a comment on the decision rendered on 20 April 2016 by the District Court of The Hague (the Netherlands), which set aside six arbitral awards that had been rendered in the proceedings Yukos Universal Limited (Isle of Man) et. al. against Russia. The arbitral tribunal had ordered Russia to pay compensation for its breach of the Energy Charta Treaty. According to the District Court of The Hague, the arbitral tribunal had erroneously found that the Energy Charta Treaty was provisionally applicable. For this reason, the arbitral tribunal could not base its jurisdiction on the arbitration clause set forth in Art. 26 Energy Charta Treaty. The case comment note examines the set-aside decision of the District Court of The Hague as well as its implications for ongoing enforcement proceedings.

On June 7, 2016, Professor Ferrari, the Director of the Center, was appointed President of the Thailand Arbitrator Committee established at the Thailand Arbitration Center (THAC). The tasks of the President of the Arbitrators Committee are outlined in the Arbitrator Committee Rules. In light of these Rules, Professor Ferrari will preside of the meetings in which the Thailand Arbitrator Committee will take decisions of the challenges to the arbitrators. As President of the Arbitrator Committee, Professor Ferrari will, however, be the sole responsible for appointments and removals of arbitrators.

The Center is pleased to announce this September’s session of the Forum of the Center for Transnational Litigation, Arbitration and Commercial Law, entitled “The EU Proposal for an Investment Court System”. The event will take place on Monday, 12 September 2016, from 6.00 – 8.00 pm, in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

It is a great pleasure to be able to announce that on the occasion of this session Dr. Inka Hanefeld will give a talk on the aforementioned topic and that Professor Robert Howse and Barry Appleton agreed to act as commentators.

Dr. Inka Hanefeld LL.M. (New York University), Attorney-at-law (New York), is a German and New York qualified lawyer specialized in dispute resolution and, in particular, in arbitration. Inka is the founding partner of the German dispute resolution law firm Hanefeld Rechtsanwälte, Hamburg, Germany. In 2013, Inka was appointed as arbitrator to the panel of arbitrators at the Centre for Settlement of Investment Disputes (ICSID) by the German Government. In 2015, Inka became Vice-President of the ICC International Court of Arbitration. Since 2015, she is also court member of the London Court of International Arbitration (LCIA) and designated member of the ICDR International Panel of Arbitrators. Inka primarily acts as arbitrator and counsel in domestic and international arbitration proceedings in the fields of international trade, industrial plant and machine building, energy, banking & finance, as well as in post-M&A and investor-State disputes. Her expertise has been recognized in various international rankings.

Robert Howse is the Lloyd C. Nelson Professor of International Law at NYU School of Law. Professor Howse received his B.A. in philosophy and political science with high distinction, as well as an LL.B., with honours, from the University of Toronto, where he was co-editor in chief of the Faculty of Law Review. He also holds an LL.M. from the Harvard Law School. He has been a visiting fellow at the London School of Economics and visiting professor at Harvard Law School, Tel Aviv University, Hebrew University of Jerusalem, the University of Paris 1 (Pantheon-Sorbonne), Tsinghua University, and Osgoode Hall Law School in Canada and taught in the Academy of European Law, European University Institute, Florence. He is a frequent consultant or adviser to government agencies and international organizations such as the OECD, the World Bank, UNCTAD, the Inter-American Development Bank, the Law Commission of Canada and the UN Office of the High Commissioner for Human Rights. He was a contributor to the American Law Institute WTO project. He is a co-founder and co-convener of the New York City Area Working Group on International Economic Law and serves on the American Bar Association Working Group on Investment Treaties. Professor Howse serves on the editorial boards of the London Review of International Law, Transnational Legal Theory, The Journal of World Trade and Investment, among others. Professor Howse’s article with Ruti Teitel “Beyond Compliance: Rethinking Why International Law Really Matters” was awarded the Global Policy Best Article Prize 2010 (shared with Joseph Stiglitz et al). Prior to pursuing legal studies, Howse held a variety of posts with the Canadian foreign ministry, including as a member of the Policy Planning Secretariat and a diplomat at the Canadian Embassy in Belgrade.

Barry Appleton is the Managing Partner of Appleton & Associates International Lawyers in Toronto. He is a member of the bars of Ontario, New York, the District of Columbia and the US Court of International Trade.  For more than twenty years, he has practiced international investment treaty arbitration under the NAFTA. bilateral investment treaties, appearing as lead counsel in many international arbitrations He also has represented client submissions at the World Trade Organization. Mr. Appleton is the author of the three volumes of NAFTA: Legal Text and Interpretative Materials, (Thomson West, 2007), the treatise Navigating NAFTA (Carswell,1994) and many articles involving the adjudication of international investment treaty law issues. He is the global editor of Westlaw’s Investor-State Reports and Investor- State Digest. He also acts as the Vice Chair of the International Arbitration Committee of the American Bar Association Section on International Law and co-chairs the International Arbitration Committee’s Investment Treaty Working Group which is currently drafting a Report on the EU Investment Court Proposal.

Please note that the Chatham House rule applies.

The Center co-sponsors an event organized under the auspices of ARBITRALWOMEN. The International Network of Women in Dispute Resolution to be held at the office of Bryan Cave on 15 September 2016, from 6.00 pm to 9.00 pm. The speakers will be Gabrielle Nater-Bass, Homburger (Switzerland), Claudia T. Salomon, Latham & Watkins (New York), Emma Lindsay, Bryan Cave (New York), Anna Tevini, Shearman & Sterling (New York), Rocío Digón, International Chamber of Commerce (New York), Yasmine Lahlou, Chaffetz Lindsey (New York), amd Katie Hyman, Akin Gump Strauss Hauer & Feld (Washington, D.C.). For the program brochure, please click here.

Professor Franco Ferrari, the Director of the Center, and Dr. Friedrich Rosenfeld, a former scholar-in-residence at the Center and currently a Global Adjunct Professor at NYU Law in Paris, a Visiting Professor at the International Hellenic University in Thessaloniki and Lecturer at Bucerius Law School in Hamburg, have just published a paper in the NYU Journal of Law & Business (vol. 12: 295) analyzing the interaction of between the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958(New York Convention) and international investment law. The starting point of their analysis are the cases in which the domestic authorities in the country where enforcement of an arbitral award is sought unduly interfere with the enforcement instead of taking the arbitration-friendly stance required by imposed by the New York Convention. In these instances, a success in arbitration proceedings may turn out to be a mere pyrrhic victory. This holds true, in particular, where all of the debtor’s assets are located in one jurisdiction. Here, a contracting state’s compliance deficit with the New York Convention cannot be mitigated by seeking enforcement in a different contracting state. In response to these shortcomings, investors have begun to exploit the linkages between the New York Convention and the regime of international investment law. And it is on these linkages that the authors have focused.

On July 5, 2016, the Republic of Argentina appointed Professor Diego P. Fernandez Arroyo, a professor of law at Sciences Po Law School in Paris, and formerly a scholar-in-residence of the Center as well as a Global Professor at the NYU Paris Campus, to the ICSID Panels of Arbitrators and Conciliators. The ICSID is a forum for international investment dispute settlement that was established by a 1966 convention.

Professor Arroyo teaches subjects related to international dispute resolution, arbitration, conflict of laws, and comparative law and his books and articles have been published in more than twenty countries. He is actively involved in the practice of international arbitration as an independent arbitrator and an expert. He represents Argentina at the UNCITRAL Working Group on Arbitration. Professor Fernández Arroyo is also a member of the Curatorium of the Hague Academy of International Law, a former President of the American Association of Private International Law, and the current Secretary-General of the International Academy of Comparative Law. Professor Fernández Arroyo is actively involved in the practice of international arbitration as an independent arbitrator and an expert. He has developed several projects in the field of arbitration and international business law for the European Union, the Andean Community, the MERCOSUR, and the Latin-American Integration Association. He has published several books and a number of articles and notes in publications of more than 20 countries.

This appointment brings to four the number of NYU Law community members who have been appointed as arbitrators/conciliators to the ICSID by various governments:

Professor Diego Arroyo, professor of law at Sciences Po Law School in Paris, appointed by the Republic of Argentina

Adjunct Professor Pedro Martinez-Fraga, partner at Bryan Cave, appointed by the United States

Adjunct Professor Brian King, partner at Freshfields Bruckhaus Deringer, appointed by Saint Lucia

Professor Franco Ferrari, Director of the Center for Transnational Litigation, Arbitration and   Commercial Law,  appointed by Saint Lucia

 

Upon the invitation of the head of the UN Office of Legal Affairs, International Trade Law Branch, who also acts as Secretary to the UN Commission on International Trade Law (UNCITRAL), Professor Ferrari, the Center’s Director, will give a talk on specific aspects of the rule of law at this year’s Commission session. More specifically, Professor Ferrari will address what efforts are being made to avoid that the uniform rules elaborated by UNCITRAL be applied in a way that undermines the very purpose behind the unification efforts leading to those very same rules.

For this year’s Commission session’s program, please click here.

The Center co-hosts, with the Hong Kong International Arbitration Centre (HKIAC), the world’s first tribunal accreditation programme. As an extension of HKIAC’s award-winning tribunal secretary service, the programme aims to train and accredit a new generation of qualified tribunal secretaries. The programme is organized as a two day workshop featuring practical training by experienced tribunal secretaries, followed by a written exam and oral interview. Those who pass the exam may apply for admission to a list of accredited tribunal secretaries maintained by HKIAC. The programme is taught by an experienced faculty and overseen by an advisory board which includes eminent arbitrators from around the world. For access to the brochure, please click here.

The Center hosts, together with Sciences-Po, a seminar on “how do arbitrators decide” that is to take place on 30 May 2016, from 4.30-6.30 pm. The event’s main speaker will be Eduardo Silva Romero (Dechert Paris), while Prof. Fabien Gélinas (McGill University), Prof. Pierre Mayer (University Paris 1), Ms. Isabelle Michou (Herbert Smith Freehills Paris) and Prof. Franco Ferrari (the Center’s Director)  will act as commentators. The event will be moderated by Prof. Diego Arroyo (Sciences-Po). For more info, click here

This is to announce a conference organized by the Center, together with the Brazilian Arbitration Committee, entitled “How International Should International Commercial Arbitration Be?” The conference will  bring together speakers from the United States and Brazil and will take place on 19 April 2016, from 2.30 -7.30 pm, , in the Lester Pollack Colloquium Room, Furman Hall 900, 245 Sullivan Street, New York, NY 10012. For the full program, please click here.

 

The Center will host the November 2014 session of the Arbitration Forum,  When U.S. Treaty Powers and State Law Collide – The Controversy over Implementing the 2005 Hague Convention on Monday, November 24, 2014 from 6:00-8:00 p.m. in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

The event will be moderated by the Center’s Executive Director, Franco Ferrari. Our distinguished speakers include Peter D. Trooboff, Senior Counsel in the Washington office of Covington & Burling LLP , Ronald A. Brand, Chancellor Mark A. Nordenberg Professor of Law and Director of the Center for International Legal Education at the University of Pittsburgh School of Law,  Harold Hongju Koh,  Sterling Professor of International Law at Yale Law School and Joseph Lookofsky, Professor of Law at Copenhagen University.

Please note that all discussions taking place during the Forum are subject to the Chatham House Rule.

Since space is limited, those interested are kindly asked to RSVP at cassy.rodriguez@nyu.edu

 I. Introduction

On October 16^th, 2014 the United Nations Convention on Contracts for the International Sales of Goods (“CISG”) was finally promulgated in Brazil by the Presidential Decree No 8.327/2014[1], exactly two years after the National Congress has approved the text of the Convention (which occurred on October 16, 2012).

The fulfillment of this requirement by President Dilma Rousseff puts an end to the existing discussion of whether the Convention was actually in force in Brazil after the deposit of the instrument of ratification by the Brazilian Government at the United Nations (which occurred on March 4^th, 2013) and the expiration of the twelve-month period set forth in article 99(2) of the CISG (which occurred on April 1^st, 2014).

Although no doubts existed as to the coming into force of the Convention with respect to Brazil’s international relations (that is, for other signatory countries, Brazil is a Contracting State as of a April 1^st, 2014), discussions emerged as to whether the Convention was also in force in Brazil internally, that is, whether it should also be applied by a Brazilian judge.

The purpose of these notes is to briefly explain the Brazilian ratification process of the CISG. Such purpose will be carried out by confronting the Convention’s rules with the Brazilian Constitution and Brazilian law requirements in light of relevant case law of the Brazilian Supreme Court.

II. Ratification and approval process

In order to enter into force in the Brazilian territory, an international treaty or convention is submitted to the following process: first, it is signed by the Brazilian President and then its text is approved by the Brazilian National Congress[2] with the issuance of a Legislative Decree; as the next step, the Federal Government (i) deposits the instrument at the competent country or international organization responsible for receiving the ratifications, accessions or approvals from Contracting States; and (ii) promulgates the legal instrument by a Presidential Decree[3].

However, the exact order and necessity that all those requirements be fulfilled before a convention or treaty comes into force in Brazil is subject to controversy among scholars and decision makers. One of the main reasons for such controversy is the absence of an express provision that requires the issuance of the Presidential Decree for an international treaty to come into force in Brazil.

According to the Brazilian Federal Constitution, the National Congress is competent to decide on the approval of international treaties and conventions (art. 49, I). On the other hand, article 84, VIII determines that the President is competent for the signature of international treaties. Consequently, a practice has been developed to consider the Presidential Decree as the final step towards the entering into force of an international treaty or convention in the Brazilian territory.[4]

As regards the CISG, its text was approved by the Brazilian Senate on October 16, 2012 and enacted by the National Congress on the same date by Decree no. 583/2012[5]. The deposit of the instrument of ratification by the Brazilian government occurred on March 4^th, 2013 and thus, according to art. 99(2) of the CISG, Brazil became a Contracting State as of April 1, 2014.

Some scholars celebrated the date of April 1^st, 2014, understanding it as the date in which the CISG entered into force in Brazil. However, other scholars raised doubts as to whether the CISG could already be applied by a Brazilian judge in light of the absence of promulgation by the President. This debate recalled the classic discussion of whether Brazil adopts a monist or dualist international law system.[6]

III. Monism or Dualism?

In a monist system, the international treaty or convention, once approved by the competent authorities, integrates the domestic law of the country and is considered hierarchically equal to an ordinary law. Both national and international systems form a unity.

On the other hand, in dualist systems, the international and national laws have different effects and hierarchy within the country’s jurisdiction. In such systems, international treaties have to be “internalized” in order to produce effects within the country’s territory.

Scholars debate as to whether Brazil should be considered a monist, a dualist or even a “moderate” monist system, in light of the specific procedure for the internalization of international treaties. Once treaties are internalized in Brazil, they become part of the Brazilian law and should be applied by the judges as any other ordinary law. Therefore, an international treaty may conflict or even derogate former ordinary laws.[7] Such internalization process would somehow resemble the process to promulgate an ordinary law in Brazil, that is, necessarily involving both the Legislative and the Executive branches, and the latter with the final act.[8]

The debate between monism and dualism has been fueled by recent case law of the Brazilian Supreme Court (STF) – which is the court with the final word in the interpretation of the Federal Constitution – for it has decided that this last act by the Brazilian President is necessary for a convention to come into force in the Brazilian territory.

IV. The Brazilian Supreme Court Position

Even though the Brazilian Federal Constitution grants power to the National Congress to approve and enact international treaties, the STF considered in more than one opportunity that the President formal act of promulgation should occur in order for the treaty to have effects within the Brazilian territory.

This position embraced by the Supreme Court strengthens the dualist argument which states that, although the treaty has entered into force in the international setting, the validity and effectiveness under Brazilian domestic perspective will only occur with its promulgation by the President, that is, when its text is finally and officially published.[9] This position follows article 1 of the Lei de Introdução às Normas do Direito Brasileiro (LINDB)[10] and was reflected in two remarkable cases.

The first case was the judgment of the Letter Rogatory No. 8.279[11] issued by Argentina invoking the application of the one provision of the Mercosur Protocol for Urgent Measures. At the time of the judgment by the STF, the Brazilian National Congress had already promulgated the Protocol by Decree No. 192/95, the instrument of ratification had been already deposited by the Brazilian Government and the 30-day period of “vacatio legis” had already expired. However, the promulgation by the President was still pending (only occurred approximately one year later). Based on the lack of this requirement, the STF denied the Letter Rogatory stating that the referred Protocol was not officially published and, therefore, was not yet in force in Brazil for the purposes of granting the requested urgent measure. This case illustrates the dualist position of the STF by recognizing that Brazil was internationally bound by the Protocol to the other Member States, but could not apply its provisions since it was not fully in force within the Brazilian jurisdiction. However, the STF did not state any legal provision that expressed the need for promulgation by the Brazilian President[12].

Another case is the Ação Direta de Inconstitucionalidade (ADI) nº 1,480[13] regarding the Convention No. 158 of the International Labor Organization, when the STF also decided that an international treaty should follow a complex procedure in order to enter into force in Brazil. Such procedure encompasses acts from both the National Congress (through the promulgation of the Legislative Decree under article 49, I of the Federal Constitution) and the President (through the issuance of the Presidential Decree under the article 84, IV and VIII of the Federal Constitution) and therefore the international treaty needs to be promulgated by the President in order to become effective in Brazil.

V.  Conclusion

In light of STF’s current case law, it can be concluded that the CISG entered into force in Brazil for the purpose of other Contracting States on April 1^st, 2014, but only became applicable in the domestic setting on October 17^th, 2014 by Presidential Decree n. 8.327/2014.

 

Rafael F. Alves

LL.M. New York University, Arthur T. Vanderbilt Scholar – Class of ’10.

Master of Laws, University of São Paulo. Senior Associate of the Arbitration Practice at L.O. Baptista Schmidt Valois Miranda Ferreira Agel Advogados. Director of the Brazilian Arbitration Committee.

Ligia Espolaor Veronese

Master of Laws Candidate, University of São Paulo. Visiting researcher at the Max Planck Institute for Comparative and International Private Law. Associate of the Arbitration Practice at L.O. Baptista Schmidt Valois Miranda Ferreira Agel Advogados.

Professor Campbell McLachlan QC (Victoria University of Wellington) was scholar in residence at the Center for the month of September 2014. While visiting, he presented a seminar under the chairmanship of Professor Ferrari on “The Foreign State in International Civil Litigation before National Courts” with Professor Linda Silberman (NYU) and Professor Harold Koh (Yale). In the video-clip, Professor McLachlan talks about his new book Foreign Relations Law, published this month with Cambridge University Press. It is the first modern study of the law regulating the external exercise of the public power of states in the United Kingdom and the Commonwealth.

Professor Franco Ferrari, the Director of the Center, will give talks both in Berlin and Rome. In Berlin,  Professor Ferrari will join two former scholars-in-residence of the Center, Ms. Inka Hanefeld and Professor Luca Radicati di Brozolo, who will also give talks on the occasion of this year’s annual meeting of the German Arbitration Institution (DIS). On that occasion, Professor Ferrari will examine how international international arbitration should be (for the program, click here). In Rome, at a conference hosted by Universita’ Roma Tre and the International Institute for the Unification of  Private Law (UNIDROIT), Professor Ferrari will discuss the process of how arbitrators get to the arbitral award, focusing specifically on the deliberation process (for the program, click here). 

The New York International Arbitration Center (NYIAC), a nonprofit organization formed to advance, strengthen and promote the conduct of international arbitration in New York, has one open internship position for a NYU Law student, preferably an IBRLA LL.M. students, for the Fall 2014 semester.  In addition to legal research and writing, the intern will have the opportunity to interact with the NYIAC community, including leading practitioners and arbitrators.

The internship position can be tailored to the student’s interests and skills, but core duties will include: writing a 25 pages paper on a subject concerning international arbitration in New York. The paper will be orally presented to the NYIAC Program Committee at the end of the internship; assisting the Executive Director and the NYIAC staff in conducting legal research and drafting articles for publication; writing articles or notes for the NYIAC Newsletter and website; attend NYIAC Program Committee’s meetings; preparing case summaries for NYIAC’s contribution to www.newyorkconvention1958.org; participation in NYIAC’s events, conferences and seminars.

The time commitment is approximately 5 hours per week, not all of which needs to be on-site.  NYIAC intern will work under the direct supervision of Alexandra Dosman, NYIAC Executive Director, and Olivia Pelli, NYIAC McLaughlin Fellow.  As for the aforementioned 25 pages paper, the student will also be supervised by Professor Franco Ferrari and receive 1 credit from NYU for Directed Research, if all applicable criteria and standards are met.

Eligibility

The legal intern must be enrolled at the NYU School of Law for the Fall 2014 semester. IBRLA LL.M. students are preferred: 3Ls are also considered.

Application

To apply, please send before August 31, 2014, 5 pm a C.V. and a letter of motivation to franco.ferrari@nyu.edu, ljs3@nyu.edu, adosman@nyiac.org and opelli@nyiac.org. Interview candidates will be contacted by email on September 3, 2014. 15 minutes interviews will be held between [September 4 and September 5, 2014, at NYU. The decision will be communicated by email by September 8, 2014.

The successful candidate will have to start the internship on September 15, 2014. The 25 pages paper, which is an integral part of the internship, is to be submitted by December 7, 2014.

 

I.         Introduction: the new EU competence over foreign direct investment

On 16 April 2014, the European Parliament adopted a legislative resolution[1] on the proposal for a regulation establishing a framework for managing financial responsibility linked to investor-state dispute settlement (ISDS) tribunals established by international agreements to which the European Union is a party (COM(2012)335)[2].

This is a further step in defining European international investment policy, clearing the way for the gradual replacement of the bilateral investment treaties (BITs) of the EU Member States by EU agreements with non-EU countries on the protection of foreign investment.

This proposed regulation will clarify the division of financial responsibility between the Union and Member States when the Union or a Member State is sued by a non-EU investor in the context of ISDS proceedings. With the entry into force of the Lisbon Treaty, foreign direct investment (FDI) was added to Common Commercial Policy (CCP). Article 3 of the Treaty on the Functioning of the European Union (TFEU) stipulates that the EU will have exclusive competence in matters concerning the customs union, to which the CCP belongs, and article 206 TFEU further clarifies that by “establishing a customs union […] the Union shall contribute, in the common interest, to the harmonious development of world trade, the progressive abolition of restrictions on international trade and on foreign direct investment, and the lowering of customs and other barriers”. Article 207(1) TFEU is the central provision regarding the EU’s competence in the field of CCP. It expressly extends the scope of CCP and requires that it be based on uniform principles, adding FDI matters to treaty-making power. As regards FDI matters to be negotiated and concluded under the new CCP, the first subparagraph of article 207(4) TFEU requires the Council to “act unanimously where such agreements include provisions for which unanimity is required for the adoption of internal rules.”

These provisions correspond largely to the proposals already discussed during the drafting of an EU Constitution Treaty. Before Lisbon, investment treaties were signed by Member States and therefore any potential ISDS cases were handled nationally. But now that these treaties are being handled by the EU, a case can also be filed on the basis of European law or treaties. So new rules are needed to deal with these cases and, most importantly, to deal with any possible financial implications.

Since the Lisbon Treaty came into force, there has been growing debate between the Commission and the Member States on the appropriate division of their powers in the field of foreign investment. The EU now has the power not only to adopt secondary legislation on FDI but also to negotiate and conclude international agreements affecting FDI, in the form of Free Trade Agreements (FTAs), International Investment Agreements (IIAs) or BITs.

When EU Member States realised that the EU had gained a broad new investment competence as a result of the express inclusion of FDI in treaty-making powers relating to CCP, many of them tried to defend the remaining powers which they enjoyed as part of their national investment protection policies. This also led to lively academic debate about the scope of the new EU investment powers. On the one hand, it was argued that the EU’s investment powers would be limited to aspects concerning the admission of investments and not extend to traditional investment protection once an investment was made. On the other hand, the express choice of the term FDI was interpreted as limiting the EU’s powers to FDI, excluding portfolio investments traditionally covered by modern investment treaties. Both limitations would lead to a situation of de facto shared control between the EU and its Member States, as they would require so-called mixed agreements to be negotiated and concluded by both the EU and its Member States. Thus, the question was anything but ‘academic’.

According to the European Commission, the EU’s investment power is not limited to access/admission questions. It also covers the pre-establishment and post-establishment phase and the EU can therefore conclude treaties containing the traditional substantive treatment obligations of IIAs and procedural guarantees in the form of state-to-state dispute settlement and ISDS, although ISDS is adapted so that the EU can (partly) replace the Member as respondent. The European Commission also rejects a narrow interpretation of its investment powers, arguing that these powers are not restricted to FDI but include an implied power in relation to the discipline of portfolio investments.

Much time and effort were spent on both sides in claiming and defending treaty-making power as regards BITs with third states, lessening the Commission’s exercise of its new competence in the field of foreign investment.

In actual fact, the question of competence is still open and the inclusion of an ISDS mechanism in IIAs is surrounded by questions and controversy, also given the difficulty of access to the International Centre for Settlement of Investment Disputes (ICSID) and ICSID additional-facility rules[3].

In July 2010, two Commission documents were made public. One was a draft regulation of the European Parliament and the Council establishing transition arrangements for BITs between Member States and third countries; the other was a communication outlining the EU’s future investment policy. These were followed by a Commission proposal in the summer of 2012 for a regulation addressing the issue of allocating financial responsibility between the EU and its Member States in case of investment arbitration.

On December 12 2012, the European Union issued Regulation (EU) No. 1219/2012[4] (the “1219/2012 Regulation”) establishing transitional arrangements for BITs between Member States and third countries. The Regulation, which entered into force on 9 January 2013, provides investors with clarifications on the status of BITs entered into by EU Member States and non-EU States (“extra–EU BITs”) following the Lisbon Treaty.

With regard to the European Parliament proposal for a regulation establishing a framework for managing financial responsibility linked to investor-state dispute settlement, this provides the legal financial framework for the allocation of responsibilities between the EU and its Member States.

II.       A new framework for financial responsibility linked to ISDS tribunals established by international agreements to which the EU is a party

Given that the EU now has competence to conclude FDI international agreements, the EU has to bear the international responsibility for the violation of investor rights included in international agreements to which the EU is a party. Accordingly, as mentioned above, on 16 April 2014 the European Parliament approved at first reading the proposal for a regulation establishing a framework for managing financial responsibility linked to ISDS tribunals established by international agreements to which the EU is a party, although it has made some amendments to the version of the proposal presented by the European Commission in 2012. The aim of this proposal is to establish the proper allocation between the EU and its Member States of liability for damage caused to a foreign investor (i.e. a non-EU investor) on the territory of the EU. Indeed, in the complex situation created by the distribution of competences, it is not easy to identify who is responsible for injury caused to a foreign investor. In short, the purpose of the proposed regulation is to protect inbound FDI on the territory of the EU, given that this new legal framework will identify who is financially responsible for damage caused to a foreign investor.

The scope of this proposal is limited to the international agreements to which the EU is a party. Therefore the new regulation will apply to all IIAs that include a provision on ISDS negotiated and concluded by the EU in the future, given its new exclusive competence on FDI. Although the EU has had exclusive competence to sign international agreements affecting FDI since 1 December 2009 – when the Lisbon Treaty came into force – EU institutions had already concluded international agreements containing provisions on investments. This was possible because of the doctrine of implied powers, whereby the EU is competent to act internationally also in fields where such a competence is not provided by the Treaties, insofar as this external competence is essential to exercise internal competences efficiently and to pursue the objectives of the Treaties. This doctrine was developed by the case law of the CJEU (31 March 1970, Case 22/70, AETS) and is now incorporated into the TFEU at article 3(2).

In the recent past five EU international agreements also covering investment treatment have been concluded: the Energy Charter Treaty (ECT) (1991), the Trade, Development and Cooperation Agreement with South-Africa (1999), the Economic Partnership Agreement with Mexico (2000), the Association Agreement with Chile (2002), and the FTA with South Korea (2011). All these agreements can be considered as FTAs and, as they regulate a wide range of subjects, some of which fall within the scope of the competences of the Member States, they have been concluded in the form of mixed agreements signed by the EU and its Member States. Besides these FTAs, the EU is about to conclude the negotiation of an international trade agreement with Canada: the CETA (Comprehensive Economic and Trade Agreement). EU and USA are currently negotiating a Transatlantic Trade and Investment Partnership (TTIP). As a part of its ongoing efforts to make the negotiations as open and transparent as possible, on 27 March 2014 the European Commission has launched a public consultation on ISDS in the TTIP[5].

Although all these FTAs include some provisions on investments, not all of them have ISDS mechanisms. For instance, the FTAs with Mexico and Chile do not have ISDS clauses, whereas the ECT, the FTAs with South Africa and South Korea, and the CETA include a chapter on ISDS. Therefore, the proposed regulation on financial responsibility linked to ISDS will apply not only to future IIAs, FTAs or BITs − incorporating ISDS provisions − that the EU will conclude, but also to these existing FTAs with ISDS clauses. However, the proposed regulation will apply only “in respect of disputes where the submission of a claim to arbitration has been lodged after the entry into force of the regulation which concern treatment afforded after the entry into force of the regulation” (article 24).

III.      An overview of the proposed regulation on financial responsibility linked to ISDS

With regard to the exact scope of the exclusive external competence of the EU in investment matters, it is expressly stated in article 1 (Scope) of the proposed regulation on financial responsibility that the regulation does not prejudice the division of competences established by the TFEU. This ‘neutral’ approach to the question is confirmed by the Joint Declaration by the European Parliament, the Council and the Commission annexed to the legislative resolution. All that, despite the Commission’s firm statement that the Union has exclusive competence to conclude agreements covering all matters relating to foreign investment (COM(2012)335).

In the proposed regulation the general criterion for apportioning financial responsibility between the EU and the Member States is the origin of the treatment that has allegedly injured a foreign investor on the territory of the EU (article 3). If the treatment originates in an act of the institutions, bodies or agencies of the EU, the EU itself is financially responsible for the damage caused to the investor. If the treatment originates in an act of the institutions, bodies or agencies of a Member State, that Member State has to bear financial responsibility for its act.

Nevertheless, the proposed regulation includes an exception to this general rule: if the treatment by a Member State is required by EU law, the financial responsibility for that treatment is attributable only to the EU. The reason for this exception lies in the principle of the conferral of powers; in other words, if the EU has a competence in the field to which the treatment by a Member State belongs and that Member State acts in conformity with EU law, the EU is the sole party responsible for the action of that Member State. As the European Commission stated in the Explanatory Memorandum, “where the treatment of which an investor complained originates in the institutions of the Union (including where the measure in question was adopted by a Member State as required by Union law), financial responsibility should be borne by the Union” (COM(2012)335).

This exception is in line with the work of the International Law Commission (ILC). The draft articles on the responsibility of international organisations proposed by the ILC have been included in a resolution of the General Assembly of the United Nations (UN) adopted on 9 December 2011[6]. Although, under international law, the general rule governing the attribution of international responsibility to an international organisation is the attribution of conduct, article 64 of the articles on the responsibility of international organisations provides that “[t]hese articles do not apply where and to the extent that the conditions for the existence of an internationally wrongful act or the content or attribution of the international responsibility of an international organisation, or of a State in connection with the conduct of an international organization, are governed by special rules of international law. Such special rules of international law may be contained in the rules of the organisation applicable to the relations between an international organisation and its members”. In short, international law recognises the existence of special rules for the attribution of international responsibility to certain international organisations which are “providing for integration”[7], such as the EU, which is mentioned in the last ILC commentary to the articles[8] as an organisation to which special rules should apply. As we can see, the development of international law does not preclude that the international responsibility and consequent financial responsibility of the EU can be based on the principle of the conferral of powers between the EU and its Member States, instead of the criterion of attribution of conduct.

The proposed regulation introduces rules for the conduct of disputes concerning treatment afforded by the Union (article 4) or by a Member State (articles 6 to 10). With reference to the conduct of an ISDS arbitration proceeding, the general rule laid down by the proposal is that the Member State concerned must act as respondent (article 9), except in two cases: (a) if the European Commission decides to act as respondent, because at least part of the financial responsibility has to be borne by the EU; (b) if the Member State concerned notifies the European Commission that it does not intend to act as respondent. In any event, the European Commission and the Member States concerned have to act in accordance with the principle of sincere co-operation (article 6) referred to in article 4(3) of the Treaty on the European Union  in order to defend and protect the interests of both the Union and the Member State itself. Articles 11 and 12 govern the conduct of arbitration proceedings by the Union. Moreover, the proposal includes rules for the settlement of disputes and for the payment of the final award (articles 13 to 16 and 17 to 21 respectively). However, regardless of who is the respondent, the EU and the Member State involved in the dispute have to reach an agreement with regard to financial responsibility. It is likely that this liability will be shared between the EU and its Member States in most cases. In the view of EU institutions this agreement between the EU and the Member State concerned is important because, as the European Commission stated in the Explanatory Memorandum (COM(2012)335), it is “appropriate to put forward pragmatic solutions which ensure legal certainty for the investor and provide all the necessary mechanisms to allow for the smooth conduct of arbitration and, eventually, the appropriate allocation of financial responsibility”. Should the EU be held liable, the claimant who has obtained a final award may present a request to the Commission for payment of the award (article 18). As stated in the Explanatory Memorandum, the EU “would honour such obligation”. There are no recorded cases of the Union or its Member States refusing to respect an award; however, if an investor were to consider it necessary to seek recognition or enforcement of an award, it would need to seek such recognition or enforcement via the courts of the Member States. Article 1 of the Protocol (No 7) on the Privileges and Immunities of the European Union would apply and the investor might have to go to the CJEU, which, in turn, would apply the standard approach on sovereign immunity.

IV.      Extra-EU BITs concluded by EU Member States and EU international responsibility

Before the Lisbon Treaty came into force in 2009, the Member States of the EU had concluded more than 1,400 BITs with third countries (more properly, non-EU States). These BITs will be replaced by BITs, IIAs or FTAs with investment clauses negotiated and concluded by the EU, given its exclusive competence over FDI. In this respect, the European Parliament and the Council have already passed the 1219/2012 Regulation establishing transitional arrangements for BITs between Member States and third countries. This Regulation provides the European Commission with the power to check the compatibility of these BITs with EU law and establishes a legal framework for substituting the old BITs of Member States with new IIAs concluded by the EU.

Apparently, the proposed regulation on financial responsibility linked to ISDS will not apply to extra-EU BITs concluded by Member States, which are not international agreements to which the EU is a party. Nevertheless, considering the afore-mentioned article 64 of the ILC’s articles on the international responsibility of international organisations, it cannot be ruled out that in certain circumstances the EU may be considered internationally responsible for the conduct of a Member State which causes an injury to a foreign investor of a country with which that Member State (but not the EU) has concluded a BIT. Indeed, if that Member State does not observe a right granted to the foreign investor by the BIT because it has to comply with EU law, it is not unlikely that the international responsibility and consequent financial responsibility may be attributable to the EU. The special rules of article 64 seem to have an extremely wide scope[9] encompassing all the situations in which a Member State of an international organisation acts in accordance with a binding act of that organisation[10]. This position is the same adopted by the European Commission, according to whom “the Union bears, in principle, international responsibility for the breach of any provision within the Union’s competence” (COM(2012)335). In its resolution of 16 April 2014 the European Parliament expressed the same opinion, stating that “[i]nternational responsibility for treatment subject to dispute settlement follows the division of competence between the European Union and Member States. As a consequence, the Union will in principle be responsible for defending any claims alleging a violation of rules included in an agreement which fall within the Union’s exclusive competence, irrespective of whether the treatment at issue is afforded by the Union itself or by a Member State” (Recital (3). Moreover, as the Special Rapporteur (Gaja, Second Report on responsibility of international organizations) stated in 2004, “[a]lthough generally the organization’s responsibility depends on attribution of conduct […] this does not necessarily occur in all circumstances”. Should this interpretation of the international responsibility of the EU be right, both the EU and Member States could be brought before an ISDS tribunal to respond to an investor’s claim.

V.        What kind of ISDS tribunals for EU international agreements?

It is known that the EU cannot be part of arbitration before the ICSID which is the main ISDS mechanism now operating and which is incorporated into the World Bank Group (WB). The ICSID Convention (1966) can only be signed by States that are members of the WB or party to the Statute of the International Court of Justice (ICJ). The EU is neither of these (COM(2010)343[11]) and statehood is a clear requirement for adherence to the ICSID Convention[12]. On May 23, 2014 the European Commission sought to intervene as a third-party (article 37 of Arbitration Rules) in an ongoing ICSID proceeding under the BIT between Spain and Guatemala, citing its new competence for extra-EU investment obligations, and claiming its “systemic interest” in the interpretation of investment agreements concluded by EU Member States. On June 9, 2014 the European Commission’s application was rejected. In fact, the EU intervention did not meet the criteria set out in the ICSID rules for such interventions; in particular,  application was not presented in the format contemplated under the ICSID rules and came too late, after the final hearings[13].

To be part of an ICSID ISDS procedure the State of the investor and the State to the dispute both have to be members of the WB or party to the ICJ Statute. Nevertheless ICSID has another tool for the resolution of disputes: the ICSID additional-facility rules. Since 1978 these have allowed ICSID to manage disputes even if the State of the investor or the State to the dispute is not a member State of the WB. In such cases the ICSID Convention is not applicable but, like the Convention, the additional-facility rules only apply to States and not to international organisations such as the EU. Apart from ICSID, the EU can be part of an international investment arbitration before the Stockholm Chamber of Commerce (SCC), before an ad hoc tribunal conducted under the rules of the United Nations Commission on International Trade Law (UNCITRAL) and also before ad hoc tribunals conducted in accordance with both the international agreements that establish them and international law. According to the United Nations Conference on Trade and Development (UNCTAD), in 2013 ICSID managed 55% of the world’s investor-state disputes, while ad hoc tribunals applying UNCITRAL rules managed 35%. The SCC managed only 5% of these disputes and the remaining 5% were managed by other ad hoc tribunals[14].

With regard to the three FTAs concluded by the EU and its Member States and including ISDS clauses, we can divide these provisions into two categories: narrow ISDS clauses and broad ISDS clauses. While the FTAs with South Africa and South Korea provide for very limited ad hoc arbitration tribunals with jurisdiction over certain issues only (procurement contracts and telecommunications investment), the ECT countenances a wide range of institutionalised arbitration tribunals with extended jurisdiction, such as ICSID tribunals, ICSID additional-facility tribunals, ad hoc arbitrations conducted under UNCITRAL rules and the arbitration tribunals of the SCC. Of course, recourse to ICSID means that the ICSID Convention should be modified so that it also applies to the EU. The (preparatory) political agreement of CETA has already been signed by the EU and Canada and leaked documents allow us to include CETA in the same category as the ECT. The CETA allows claimants to bring their case before ICSID tribunals, ICSID additional-facility tribunals, ad hoc arbitration tribunals which follow UNCITRAL rules, and other ad hoc arbitration tribunals[15]. ECT and CETA include ICSID and ICSID additional-facility rules because they are mixed agreements signed by the EU and its Member States; therefore a foreign investor can obviously sue an EU Member State (but not the EU) before ICSID, following the process established by the ICSID Convention or the process established by the additional-facility rules. All the cited FTAs include an ISDS mechanism alternative to arbitration, such as consultation and mediation, before the ICSID Secretariat and before ad hoc consultation or mediation bodies.

After some initial reluctance, the European Commission eventually weighed in favour of including ISDS in future IIAs entered into under its new competence (COM(2010)343). The European Parliament, though expressing “its deep concern regarding the level of discretion of international arbitrators to make a broad interpretation of investor protection clauses, thereby leading to the ruling out of legitimate public regulations”, also took “the view that, in addition to state-to-state dispute settlement procedures, investor-state procedures must also be applicable in order to secure comprehensive investment protection” (European Parliament Resolution of 6 April 2011 on the Future European Investment Policy (2010/2203(INI)[16]). Its criticisms are based on a lack of both transparency, which commercial arbitration emphasis on confidentiality entails, and consistency in decisions, as a direct result of the decentralised nature of arbitration and the relative lack of review. One solution might be to establish an appellate process for a review of arbitral awards. The Commission has stated that “appellate mechanisms” should be considered together with or as an alternative to “quasi-permanent arbitrators” (COM(2010)343). The European Parliament, deeply concerned about the degree of discretion left to arbitrators, has expressly called for the inclusion of “the opportunity of parties to appeal” (2010/2203(INI)). In other words, ISDS should be included in future EU IIAs only where it is justifiable, that is when it is an agreement with a third country that does not have a properly-functioning judicial system, where the rule of law is doubtful. The identity of the EU counter-party would probably become the determining element in deciding whether or not to include ISDS mechanism in future investment agreements. That would mean a significant change in direction from the pattern established by previous Member State BIT procedure and the question is still open.

In conclusion, on its own the EU can only conduct ad hoc arbitrations proceedings and disputes before the SCC, while EU Member States have the opportunity to conduct any kind of investor-state arbitration proceeding, including ICSID proceedings. Last year the European Commission declared that in any case its ISDS policy will be carried out in the light of the new UNCITRAL rules[17]. Concerning the CETA and the TTIP between the EU and the USA, it is noteworthy that the European Commission has declared that it intends to create an appellate body for investor-state disputes[18] [19], a quasi-permanent tribunal which can review arbitral awards at first instance[20]. However, it is still unclear what kind of relation would exist between this possible appellate body and the other investor-state arbitrators mentioned above, especially ICSID tribunals, given that article 53(1) of the ICSID Convention provides that “[t]he award shall be binding on the parties and shall not be subject to any appeal or to any other remedy except those provided for in this Convention”.

VI.      Controversial issues

As illustrated above, the European Commission is currently and gradually making use of its new investment treaty-making power within the boundaries of EU investment policy. However, there are still many open issues which deserve to be studied in more detail.

To touch on just some of these, the precise scope of exclusive IIA powers remains unclear, especially with regard to the inclusion of provisions on post-establishment measures and on ISDS. From a practical perspective, investment agreements can be expected to be mixed agreements, signed by both the EU and Member States concerned. In terms of external relations with third countries, mixed agreements would avoid the need to specify spheres of competence; in terms of internal relations between the EU and its Member States, responsibility for breaches of the agreements would be organised according to the criterion of attribution of conduct and the principle of the conferral of powers. Another set of open issues includes the problems raised by the Commission’s Communication of July 2010, “Towards a Comprehensive European Investment Policy” (COM(2010)343) and the European Parliament’s resolution on this (2010/2203(INI)). In particular, there is a need for a higher level of definition of substantive treaty standards, greater transparency when initiating proceedings, access to documents, open hearings, publication of awards, greater consistency of outcomes through clearer rules of interpretation, and the introduction of an appeal mechanism. Another highly contentious issue concerns the compatibility of ISDS itself with the system of legal protection afforded by the CJEU. According to current rules, a European investor is under an obligation first to attempt to obtain the annulment of the illegal act of the Member State or Union that affects its investment before being able to recover the losses suffered; in contrast, most existing BITs do not require foreign investors to exhaust local remedies and allow them directly to bring a claim for all damages before an international tribunal, thus entailing the reverse discrimination of EU investors in Europe. On the other hand, investor-state tribunals are not entitled to make preliminary reference to the CJEU. In such a situation investment tribunals may have to rule on EU law which could be regarded as an infringement of the exclusive power of the CJEU to interpret EU law. Finally, the inclusion of ISDS itself in future IIAs is under scrutiny because of the degree of latitude enjoyed by arbitrators under the ISDS system.

VII.     Conclusions

Many questions still remain to be addressed in order to shape future European IIAs and, in general, European investment policy. Certainly, after initial reluctance to take a clear position on a wide range of crucial issues, the Commission, with the support of the European Parliament, seems to be moving in the right direction. The proposed regulation on financial responsibility is a logical step forward in defining the emerging European international investment policy, the contours of which are beginning to emerge.

Ruggiero Cafari Panico

Ruggiero Cafari Panico is Professor of European Union Law at the University of Milan, where he also teaches Competition Law. His practice focuses on European Union Law as well as Transnational Commercial Law, with particular emphasis on Competition Law and Discipline of foreign investments. He is a member of supervisory boards of international companies. He is the author of several publications on different topics on private international, competition and arbitration law.

Email: ruggiero.cafari@unimi.it

[1] European Parliament legislative resolution of 16 April 2014 on the proposal for a regulation of the European Parliament and of the Council establishing a framework for managing financial responsibility linked to investor-state dispute settlement tribunals established by international agreements to which the European Union is party (P7_TA-PROV(2014)0419).

[2] European Commission, Proposal for a regulation of the European Parliament and of the Council establishing a framework for managing financial responsibility linked to investor-state dispute settlement tribunals established by international agreements to which the European Union is party (COM(2012)335).

[3] ICSID additional-facility rules, April 2006.

[4] Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries, OJ L 351, 20.12.2012, p. 40-46.

[5] European Commission Consultation notice, 2014.

[6] Resolution adopted by the General Assembly on 9 December 2011, Responsibility of international organizations (A/RES/66/100).

[7] Giorgio Gaja, Special Rapporteur’s Second report on responsibility of international organizations, 2004, page 6 (A/CN.4/541).

[8] Report of the International Law Commission, 2011, pages 168-170 (A/66/10).

[9] Giorgio Gaja, Special Rapporteur’s Eight report on responsibility of international organizations, 2011, page 36 (A/CN.4/640).

[10] Frank Hoffmeister, Litigating against the European Union and Its Member States – Who Responds under the ILC’s Draft Articles on International Responsibility of International organizations?, The European Journal of International Law Vol. 21 no. 3 (2010).

[11] European Commission, Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions, Towards a comprehensive European international investment policy (COM(2010)343).

[12] August Reinisch, The Future Shape of EU Investment Agreements, ICSID Review, Vol. 28 no. 1 (2013), page 193.

[13] Investment Arbitration Reporter (IAreporter.com), European Commission’s DG Trade tries to intervene for first time in an extra-EU BIT case to offer “systemic” views, but ill-timed application is rejected, July 9, 2014.

[14] UNCTAD, IIA Issue Note. Recent development in Investor-State Dispute Settlement (ISDS), no. 1 (2014), page 4.

[15] Eu-secretdeals.info/ceta.

[16] European Parliament resolution of 6 April 2011 on the future European international investment policy (2010/2203(INI) (P7_TA(2011)0141).

[17] European Commission, Fact sheet. Investment Protection and Investor-to-State Dispute Settlement in EU agreements, November 2013, pages 8-9.

[18] European Commission, Investment Provisions in the EU-Canada free trade agreement (CETA), December 2013, page 3.

[19] European Commission, Investment Protection and Investor-to-State Dispute Settlement (ISDS) in EU agreements, March 2014, page 2.

[20] Mark A. Clodfelter, The Future Direction of Investment Agreements in the European Union, 12 Santa Clara Journal of International Law 159 (2014), pages 174-175.

Professor Silberman will be delivering a paper on international child abduction to the Journal of Comparative Law conference on the Hague Abduction Convention, to be held in London in July 2014. Over the past academic year, Professor Silberman, Co-Director of the Center, has participated in a number of conferences and activities related to transnational litigation and arbitration.  In September, 2013, she participated in a conference at Pepperdine University and gave a talk on the need for a federal statute on judgment recognition, and in October, 2013 she spoke on comparative judgment recognition at the International Law Section meeting of the ABA in London.  On leave in the Spring, Professor Silberman spent two weeks in January at Pepperdine University as Distinguished Professor at the Strauss Dispute Resolution Center and then in March was Distinguished Research Scholar at Queen Mary School of International Arbitration in London.