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2010/IEG/WKSP1/003

Trends in Treaty-Based Investment Disputes

Submitted by: Vanderbilt University

Workshop on Dispute Prevention and Preparedness

Washington, DC, United States26-30 July 2010

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T d i TTrends in Treaty-Based Investment

Disputes

Professor Susan D. Franck

VISITING ASSOCIATE PROFESSOR OF LAWVVANDERBILTANDERBILT UUNIVERSITYNIVERSITY, , SCHOOL OFSCHOOL OF LLAWAW

26 July 2010

My Summer Vacation and What it Taught Me about Dispute Preventiong p

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Methodology: Data BasisIdentify Sources of Datad y ou o a a

UNCTAD and ICSID Research by Franck (2007; 2008; 2009; forthcoming 2010; forthcoming 2011)

Analysis and conclusions are as good as d l i d tunderlying data sourceFranck analyses based upon data from publicly available awards (pre-2007) Dataset in process of updating further to inter-coder reliability testing

Scope of Claims – UNCTAD Data:fCumulative number of known treaty-

based cases = 35763 % filed with ICSID25% filed with UNCITRAL6% filed with SCC6% filed with SCC6% filed in other foras (ICC, Cairo, ad hoc)

In 2009, there were at least 32 new investment treaty arbitration disputes

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Scope of Claims filed during 2009 – UNCTAD Data:

Canacar v. United States (UNCITRAL)Apotex v. United States (II) (UNCITRAL)Abengoa, S.A. y COFIDES, S.A. v. United Mexican States (ICSID Additional Facility)( y)Dow AgroSciences LLC v. Canada (UNCITRAL)Howard and Centurion Health Corporation v. Canada (UNCITRAL)

Scope of Claims: Historical Data from UNCTAD

20

25

30

35

40

45

50

l num

ber

of c

ases

150

200

250

300

350

400

ve n

umbe

r of c

ases

0

5

10

15

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Annu

a

0

50

100

Cum

ulat

i

ICSID Non-ICSID All cases cumulative

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Scope of Claims: Historical Data

Decisions from 2009 – UNCTAD DatafForty-four decisions rendered in 2009:

7 Jurisdiction Awards20 Merits Awards 4 Arbitrator Challenges3 Annulment Decisions3 Annulment Decisions

Other decisions concerned admissibility of ancillary claims, provisional measures and settlement agreements

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Awards in 2010 – UNCTAD DataBetween January and July 2010, ICSID registered at least 14 new requests

Existence of other alternative arbitral forums means number of new awards could be higher [NB: awards may not be final resolution of a case]

One case involving an APEC economy: Convial Callao S.A. and CCI - Compañía de Concesiones de Infraestructura S.A.v. Peru

Party Demographics: RespondentsArgentina

Venezuela

Canada

Ukraine

United States

Ecuador

Czech Republic

Mexico

g

0 10 20 30 40 50 60

Kazakhstan

India

Egypt

Poland

Number of cases

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Party Demographics: APEC Respondents

Peru

The Philippines

Chile

Russia

Canada

The United States

Mexico

0 2 4 6 8 10 12 14 16 18 20

Indonesia

Thailand

Viet Nam

Number of cases

Party Demographics: Respondents

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Party Demographics: Investors United States

F

Italy

Canada

Germany

United Kingdom

Netherlands

United States

0 20 40 60 80 100 120

Greece

Belgium

Spain

France

Number of cases

Demographics: Industries

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Demographics: Industries – UNCTAD Data

Pétrole, gaz & mines25%

Services & commerce3%

Finance8%

Information & communication6%

Agriculture, pêche & forêts4%

Electricité & autres sources d'énergie

13%

Eau, assainissement & protection contre les inondations

8%

Construction7%

Tourisme5%

Autres industries10%

Transports11%

Demographics: Treaties –UNCTAD Data

ASEAN 2%

NAFTA5% Energy Charter Treaty

7%

CAFTA2%

Bilateral investment treaties 84%

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Demographics: Treaties

Actual Risk: Winning DisputesClaim: Investors win more than StatesClaim: Investors win more than States

Data: Investors won 39% of the time and states won 52% of the time

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Actual Risk: Winning DisputesCl i I t l tClaim: Investors recover large amounts

Data: On average, investors won US$10m but requested US$343m

Actual Risk: Amounts Awarded

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Scope of Risk – Data from UNCTAD (amount claimed v. amount awarded)

Case Name Amount Claimed Amount AwardedSiemens

v. Republic of ArgentinaUS$ 462,477,071 US$237,838,439

Enron Corp. & Ponderosa Assetsv. Republic of Argentina

US$582,000,000 US$106,200,000

Sempra Energy Internationalv. Republic of Argentina

US$210,000,000 US$128,250,462v. Republic of ArgentinaIberdrola Energía, S.A.

v. Republic of GuatemalaUS$672,000,000 Pending

KT Asia Investment Group B.V.v. Republic of Kazakhstan

US$1,500,000,000 Pending

Abengoa, S.A. y COFIDES, S.A.v. United Mexican States

US$96,000,000 Pending

Variables Linked with Outcome: Development Statusp

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Variables Linked with Outcome: Development Status

Damages: Mark KantorExpropriation – Market Value

“the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper

k i h i h i h d h dmarketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.” International Valuation Standards Council

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Damages: Mark KantorNet Invested Capital and Net Book Value Are Not Market Values Unlawful Conduct – Chorzow Factory -“…reparation must, as far as possible, wipe out

all the consequences of the illegal act and re-all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed.”

Damages: Mark KantorfUnlawful Conduct – ILC Art. 36

(Compensation)1. The State responsible for an internationally wrongful act is under an obligation to compensate for the damage caused thereby, insofar as such damage is not made good by restitution. 2. The compensation shall cover any financially assessable damage including loss of profits insofar as it is established.

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Practical Implications of Damage Calculations: Mark Kantor

“ h l i f i d h i“…the valuation of expropriated shares in a company necessarily involves a consideration of the future profitability of the business, a matter which is inherently uncertain. As Whiteman observed: However, the absolute certainty of prospective profits can scarcely ever be established in as much as in all cases they are to be realized in futuro. It is the worth of the expectation of future profits, appropriately discounted, that is to be considered in cases where an award for the loss of prospective profits is proper.” Kazakhstan v. Rumeli Annulment Decision, at 40

Dispute Resolution Risk Calculusf fRisk is a function of:

Amount claimedAmount likely to be awardedAmount of interest on any awardCost of arbitral tribunal (TCE)Cost of arbitral tribunal (TCE)Cost of parties’ lawyers (PLC)Which party bears TCE and/or PLC

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Cost Issues – UNCTAD’s ApproachCosts involved in ITA have skyrocketedLegal fees may amount to an average of 60% of case’s total costsExample – Plama v. Bulgaria (2008):

Investor’s PLC was around US$4.7 millionR d t’ PLC US$13 2 illiRespondent’s PLC was US$13.2 millionTCE nearly US$1 millionLosing investor required to pay: (1) own PLC + (2) respondent’s PLC of US$7 million + (3) TCE = US$12.7 million

Cost Issues – UNCTAD Examples Victor Pey Casado v Chile (2008):Victor Pey Casado v. Chile (2008):

Investor’s PLC around US$14.5 millionRespondent’s PLC around US$4.4 millionTCE was around US$4 millionLosing State required to pay: (1) own PLC

( ) ’ f $ ll ( )+ (2) investor’s PLC of US$2 million + (3) 75% (US$3 million) of TCE = US$9 million

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Cost Issues – UNCTAD Examples ADC Affiliate v Hungary (2006):ADC Affiliate v. Hungary (2006):

Investor’s PLC around US$7 millionRespondent’s PLC around US$3 millionTCE around US$700,000Losing State required to pay: (1) own PLC, ( ) ’ d ( ) $(2) Investor’s PLC, and (3) TCE = US$7.7 million

Cost Issues – UNCTAD Examples Waguih Elie George Siag and ClorindaWaguih Elie George Siag and ClorindaVecchi v. Egypt (2009):

Investors’ PLC around US$8 millionRespondent’s PLC around US$3.5 millionTCE around US$1 millionLosing State required to pay: (1) own PLC + (2) investors’ PLC of US$6 million + (3) 50% of TCE = US$14 million

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Cost Issues – APEC Counter ExamplesThunderbird Gaming v. Mexico (2006): u d b d a g o ( 006)

Investor’s PLC around US$1 millionRespondent’s PLC around US$1.5 millionTCE around US$500,000Losing Investor required to pay: (1) own PLC + (2) investors’ PLC of US$1 million +PLC + (2) investors’ PLC of US$1 million + (3) 75% of TCE = US$2.5 million

Merrill & Ring Forestry v. Canada (2010)TCE around US$1 millionParties bare own PLC + 50% of TCE

Cost Issues – Recent APEC ExamplesWalter Bau AG v Thailand (2009):Walter Bau AG v. Thailand (2009):

Investor’s PLC around EUR3.4 millionRespondent’s PLC around EUR1.1 millionTCE around EUR3.1 millionLosing State required to pay net PLC/TCE f illiof EUR1.8 million

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A Need for Rationalization?Eureko v. Poland = arguable outlieru o o a d a guab ouUS$1.34 billion claimed + prominent tribunal86-page awardCost justification was two sentences:j

“Claimant has prevailed. Consequently, its costs and those of the Tribunal shall be borne by the Respondent.”

IIA flatly prohibited this approach

Franck’s Normative RecommendationAddress ITA costs at an early stageEncourage tribunals to be transparent cost decisions Implement clear and predictable legal guidelines for making cost decisionsguidelines for making cost decisionsImplement a pleading system with enhanced clarity for claimed damagesConsider use of ADR

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Alternative Means of Settling Investment Treaty Disputes

What are alternative methods?Negotiation, Mediation, Early Neutral Evaluation, Hybrids, etc.

Consider how alternative methods being d i t i di ti

y p

used now in systemic diagnosticConsider Dispute Systems Design (DSD) to create systems to implement strategic recommendations using proper norms

Other forms of Dispute Resolution

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Other forms of Dispute Resolution – Data from ICSID

Responding to ChallengesConduct research to monitor trends and emerging issues in IIAs and ISDSOffer technical assistance activities to develop understanding and capacity related to understanding investment framework, negotiate IIAs train government officialsnegotiate IIAs, train government officials, and train courses on managing investment disputesEncourage innovation to address real issues and learn from success stories

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Implications for the FutureExpand scope of empirical research

More data, variables and models

Encourage stakeholders to take the data into account

Informed policy debatesp yEnhanced efficacy for designing ISDS systemsImplement DPP and ADRProvide training, capacity building and communication networks