News in Brief

Australia to reject investor-state dispute resolution in TPPA

The Australian government will not sign on to investor-state dispute resolution provisions in the Trans-Pacific Partnership Agreement (TPPA), according to an Australian government official.

“We have made it clear that we will no longer be seeking investor-state dispute settlement provisions in trade agreements,” said the Australian Minister for Broadband, Communications and the Digital Economy to the Australian Senate on March 13^th.

The Australian government first committed to rejecting investor-state dispute resolution in April 2011 in a document titled “Gillard Government Trade Policy Statement: Trading our way to more jobs and prosperity.”

The government justifies the policy on the basis of not allowing “greater rights” to foreign investors and maintaining its “ability to impose laws that do not discriminate between domestic and foreign businesses” to protect the public interest.

Australia’s position on investor-state dispute resolution hardened last year when the country was developing legislation that strictly limits branding on tobacco products. That legislation spurred the tobacco company Phillip Morris to file for arbitration claiming a breach of Hong Kong-Australia BIT. Philip Morris argues that the legislation amounts to an expropriation of its investment in Australia.

Australia’s refusal to include investor-state dispute resolution in the Trans-Pacific Partnership Agreement (TPPA) – an ambitious free trade agreement negotiated by Brunei, Chile, New Zealand, Singapore, Australia, Malaysia, Peru, Japan, United States, and Vietnam – will likely complicate the negotiations.

“Differential treatment in ISDS could also open the door to demands for exceptionalism in other parts of the TPPA, undermining the ‘gold standard’ ambitions,” wrote Professor Kelsey, University of Auckland, in the January 2012 edition of ITN.[1]

Australia’s position has drawn criticism from the U.S. corporate lobby for exactly that reason. Thirty-one U.S. corporate groups, representing different economic sectors, wrote to President Obama in February this year, warning that “Australia’s rejection of investor-state dispute settlement is not only thwarting the ability of the TPP negotiations to produce strong enforcement outcomes, it is also having a corrosive effect on the level of ambition and other key aspects of the TPP negotiations. If Australia were able to extract such a major exemption, other countries would press forward to seek their own major exemptions from core commitments.”

Governments call for limited interpretation of Fair and Equitable Treatment under DR-CAFTA

The governments of Honduras, El Salvador and the United States say that tribunals should take a restricted view of the Fair and Equitable Treatment (FET) standard in the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA).

The three governments made written submissions in the context of the Railroad Development Corporation (RDC) v. Republic of Guatemala arbitration, which is the first arbitration under DR-CAFTA to reach the merits stage.

DR-CAFTA Article 10.5 states that investments should be treated “in accordance with customary international law, including fair and equitable treatment and full protection and security.” Guatemala has argued that this standard is equivalent to the minimum standard of treatment under customary international law. The Governments of the Honduras, El Salvador and the United States support this view.

In its submission, the United States explains it was the intent of the CAFTA-DR Parties “to incorporate the minimum standard of treatment required by customary international law as the standard for treatment in CAFTA-DR Article 10.5.”

El Salvador states that the FET standard in DR-CAFTA is a “‘floor’ or ‘bottom’ to acceptable treatment of investors.” It goes on to clarify that “international arbitral awards that refer to ‘Fair and Equitable Treatment’ as an autonomous standard, as well as international investment treaties that refer to ‘Fair and Equitable Treatment’ without reference to customary international law, are not relevant for the purposes of the interpretation of the standard under CAFTA Article 10.5.”

Railroad Development Corporation’s dispute with Guatemala relates to an agreement between its Guatemalan subsidiary Compañia Desarrolladora Ferroviaria (FVG) and a state owned-company responsible for managing Guatemala’s railway services. In 2005, FVG initiated arbitration proceedings in Guatemala for alleged breaches of contract. Guatemala subsequently terminated its agreement with FVG, declaring it injurious to the state. The American company is seeking some US$65 million in lost profits and damages in its DR-CAFTA claim.

Canadian pharmaceutical company launches new NAFTA case against the United States

A Canadian pharmaceutical company has initiated a new NAFTA case against the United States.

Apotex sells generic drugs through an indirectly held company in the United States. In 2009, the US Food and Drug Administration prevented Apotex from selling drugs to its American subsidiary (under a so-called import alert), which was eventually lifted in 2011.

The import alert followed an FDA inspection of Apotex’s Canadian facilities, in which the agency noted some deviations from its manufacturing standards. While Apotex claims these issues were promptly addressed, the FDA moved to bar imports from Apotex’s facilities into the US.

In its February 2012 Request for Arbitration under the ICSID Additional Facility Rules, Apotex claims it lost “hundreds of millions of dollars of sales and was prevented from bringing any new drug to the US market.” The request also states that “during the relevant time period, FDA accorded more favorable treatment to US investors and US-owned investments in like circumstances …”

Apotex claims breaches of NAFTA Chapter Eleven’s provisions on National Treatment, Most-Favoured Nation Treatyment, and Minimum Standard of Treatment.

Apotex is already locked in arbitration with the United States in a separate NAFTA claim.  This dispute relates Apotex’s efforts to sell the generic version of the antidepressant medication commonly known as Zoloft. Apotex argues that the U.S. courts “misapplied” statutory and constitutional law in multiple decisions, in what amounts to a violation of NAFTA commitments on National Treatment, Minimum Standard of Treatment, and Expropriation and Compensation.

The Request for Arbitration in Apotex Holdings Inc. and Apotex Inc. v. the Government of the United States is available at: http://italaw.com/documents/Apotex-Requestforarbitration.pdf

German law firm eyes case over sovereign debt restructuring

In the wake of the biggest sovereign debt restructuring recorded in history, a German law firm is seeking to challenge the Greek state for breaching the German-Greece BIT.

According to a report in the Financial Times, the law firm Gröpper Köpke intends to file a class action suit on behalf of small investors who have been forced to take part in the recent €206 billion debt swap, arguing that the bond swap amounts to expropriation of investors who did not volunteer. [2]

A collective action clause forces all bondholders to undertake the swap, in which investors are required to exchange the old bonds with new ones worth less in face value.

The German law firm states that the case will be dropped if the Greek government exempts small investors.

If pursued, however, the claim faces a considerable hurdle, in that the German-Greece BIT, signed in 1961, does not contain a provision on investor-state dispute settlement. Thus the claimants would need to argue that they can use the Most-Favoured Nation provision to access dispute settlement provisions in more recent Greek BITs.

This would not be the first time that holders of sovereign debt have turned to investment treaties in response to sovereign debt restructuring. When Argentina restructured its debt in 2005, thousands of Italian bondholders filed a claim under the Italy-Argentina BIT for approximately $4.3bn (Abaclat v. Argentina).

In a controversial September 2011 ruling, a majority of the Abaclat v. Argentina tribunal granted jurisdiction to the claim. That decision drew a strong rebuke by the third arbitrator in the case, Professor Georges Abi-Saab. Professor Abi-Saab challenged the decision to accept Argentine government bonds as a protected investment under the Argentina-Italy BIT and the ICSID Convention. He also countered that an ICSID tribunal cannot accept jurisdiction over mass claims, in the absence of consent by the state party.

2011 saw spike in ICSID cases

ICSID registered a record 38 new cases in 2011, according to the latest issue ICSID Caseload – Statistics. That’s compared to 26 cases in 2010, 25 in 2009, and 21 in 2008.

As with previous years, jurisdiction was granted mainly through bilateral investment treaties (63%), followed by investor-state contracts (20%).

Also following the pattern of most previous years, South America saw the largest number of cases (30%), followed by Eastern Europe and Central Asia (23%), and Sub-Saharan Africa (16%).

Similar to past years, the greatest number of cases arose in the oil, gas, and mining sector (25%), followed by electric power and energy sector (13%), and the transportation sector (11%).

Arbitrators, conciliators, and ad hoc committee members appointed in ICSID cases in 2011 were dominated by nationals of Western Europe and North America (Canada, Mexico, US), as is the case in the previous years.

ICSID Caseload Statistics are available at:

http://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=CaseLoadStatistics