Energy disputes and investment protection in international arbitration

November 2017 | LEGAL & REGULATORY | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

November 2017 Issue

Arbitration has fast become the primary form of dispute resolution in international transactions. The number of disputes submitted to arbitration has risen in conjunction with the growth of the world’s economy. Energy projects are one of the major driving factors of this development.

As a result, one can see increasing numbers of energy-related disputes in both commercial and investment arbitration. Between 2014 and 2015, the Stockholm Chamber of Commerce Arbitration Institute (SCC) has seen a more than 100 percent increase in the number of energy-related cases, from 19 filed in 2014 to 43 filed in 2015. The bulk of these cases related to oil and gas disputes, while electricity related disputes took a proportion of approximately 40 percent. A further 10 cases were specifically brought under the Energy Charter Treaty (ECT). By contrast, in 2016, 48 cases were administered under the International Centre for Settlement of Investment Disputes (ICISD) rules, with 17 percent of these cases relating to electric power and other energy. Furthermore, ICISD’s ECT caseload amounted to 9.5 percent of its total cases.

Among the commercial disputes, certain claims, such as price-reviews, are specific to trade in energy supplies and are less common in other industries. Price-review arbitrations are limited in comparison to claims for damages and specific performance. The most important trend of the past 15 years is the development of jurisprudence based on the ECT, a major international instrument securing legal framework for international cooperation in the energy sector.

This article provides an overview of the protections available to investors and discusses most common dispute resolution forums, such as the ICSID and the SCC.

Energy disputes and investor-state dispute settlement (ISDS)

Investor arbitration remains the most popular choice for global investors to protect their international investments. The ability to initiate arbitral proceedings are normally included in international investment agreements. These instruments come in a variety of different forms, including bilateral investment treaties (BITs) and multilateral investment treaties (MITs).

What separates investment arbitration from commercial arbitration (and other forums of dispute resolution) is that only the investor can initiate arbitration against the state. The investor can do so when they consider that the state has failed to honour the commitments agreed between the state and the investor’s home country. According to the Organisation for Economic Development’s (OECD’s) public consultation on investment arbitration, dispute mechanisms such as investment arbitration represents a way for governments to provide credibility to the commitments made in various international investment agreements. Equally, the stronger the protections provided to the investor under the treaty increases the possibility of foreign investment, as strong protections indicate low long-term risk for investors.

Generally, such investment instruments include multiple protections for foreign investments. When these protections are breached by the home state, an investor may initiate arbitration. International investment agreements include four primary forms of protection for investors in foreign states. First, most international investment agreements provide for fair and equitable treatment, which is a non-contingent form of protection. Although the substantive content of fair and equitable treatment has been fleshed out by arbitral tribunals on a case by case basis, it can be generally defined as prohibiting arbitrary decision making, discrimination and abusive treatment of foreign investors. The principle of fair and equitable treatment is considered the cornerstone of most investment treaty obligations. For example, the principle can be found in the North American Free Trade Agreement (NAFTA), as well as the ECT.

Most treaties also protect against discriminatory practices. It is only natural that each state entering into an agreement wishes to be treated equally with any or all other states. These non-discriminatory protections may include non-discriminatory treatment or ‘most favoured nation’ clauses. These protections, essentially, prohibit a state from treating a foreign investor differently to any other: if one trading partner is provided a tax subsidy, then all trading partners must be offered the same privilege.

International investment agreements also provide investors with protection against the expropriation of an investor’s assets by the state. Such expropriation can occur through the nationalisation of property or enterprises, or by such actions that may affect the sustainability of an investment. Though expropriation may be legal, given the satisfaction of certain requirements (such as compensation), where the expropriation does not satisfy the general requirements, it can be considered a breach under which an investor may bring a claim under investment arbitration.

The final protection normally provided under international investment agreements is the protection of transfer of funds, which can include the payment, conversion or repatriation of investments from a host country to the investor.

Unlike bilateral investment agreements, the ECT includes broad definitions for investment and investor, which is perhaps a reason for its uptick in use by investors. Between 2001 and 2016 there has been a total of 101 ECT related disputes, with sharp growth between 2013 and 2016 (having registered 64 cases alone). The ECT provides investor protections which seek to reduce the commercial risks associated with energy investments by, among other things, granting investors non-discriminatory treatment and compensation for expropriation, as well as improving energy efficiency and providing for investor-state dispute resolution mechanisms. This is seen in the recent claims in relation to changes to renewable energy schemes, particularly the removal of feed-in-tariffs (FITs) for energy investments.

Institutional investor-state dispute resolution forums

There is an apparent preference for institution arbitration in relation to ECT arbitrations. According to the Energy Charter, the SCC administers 20 percent of all ECT disputes, most of which are seated in Stockholm, while ICSID administers 53 percent and ad hoc arbitrations under the UNCITRAL Rules amount to 27 percent of the total caseload. This is perhaps due to the overall complexity of these energy-related disputes, as well as the experience of institutions in dealing with large, complex energy-related disputes.

This is also due in part to the fact that these three forums are often designated as the resolution options within investment treaties.

According to the SCC, the last four years have seen a steady increase in investment treaty disputes, including seven new claims in 2016 alone. This is compounded by the continued growth of such disputes in ICSID, as well as ad hoc arbitrations under UNCITRAL rules. This continued growth in the use of ISDS is in stark contrast with the criticisms and threats levelled at ISDS.

Natalia Petrik is legal counsel and Samuel Carey an intern at the Stockholm Chamber of Commerce Arbitration Institute. Ms Petrik can be contacted on +46 8 555 100 58 or by email: natalia.petrik@chamber.se.

Natalia Petrik and Samuel Carey

Stockholm Chamber of Commerce Arbitration Institute