The Investment Treaty Arbitration Review: Investment Treaty Arbitration: Construction and Infrastructure Projects
I The nature of major construction and engineering disputes
Before looking at the specific issues that arise in the context of investment treaty disputes, it us worth reflecting on the specific challenges and dimensions of large-scale construction and engineering projects and their associated disputes:
- International construction and infrastructure projects are typically long-term transactions of significant technical and commercial complexity.
- In relation to the risks and responsibilities of long-term contracting arrangements, each country has its own cultural, legal and regulatory nuances that require to be fully understood; in theory, at the outset, but more usually as the project unfolds and challenges arise.
- Issues will frequently arise when inbound foreign investors are unfamiliar with the host country's legal landscape, where there is a need for engagement with state entities, and that degree of engagement occurs either too late, or not at all.
- Typically, major infrastructure and construction and engineering projects will proceed over many months, more often years and during that time the project is exposed to decisions of governments or authorities in the jurisdiction the project. The asset being constructed, or constructed and then perhaps operated or transferred, will very often come to be a major 'asset' within the host country, whether that is a power plant, a system of roads, or an airport with associated infrastructure. The 'asset' may, in certain circumstances, attract the attention of the media, the population at large or the ruling executive. This can make investors and contractors anxious that the state may prioritise its own interests and those of its nationals over foreign parties.
II Investment treaties
Treaties can afford protection for investors (and, in an appropriate case, this may include entities that might otherwise be described as contractors and operators in relation to specific assets). Foreign investors can seek redress, if they qualify, by bringing claims to an independent international arbitration tribunal. The tribunal can award compensation or other remedies for investors who have been harmed. Thus, bilateral investment treaties (BITs) and multilateral investment treaties (MITs) typically provide for any disputes to be resolved through investor–state dispute settlement mechanisms (ISDS), which includes international arbitration.
Most treaties provide either for arbitration under the International Centre for Settlement of Investment Disputes (ICSID) or arbitration in accordance with UNCITRAL Rules. Not all states have embraced MITs and BITs. Investor–state arbitration between a Member State and an investor from another Member State is incompatible with EU law, including through 'intra-EU BITs', as the European Court of Justice (ECJ) recently held in the recent judgment in Slovak Republic v. Achmea BV. In that case, the court considered that investor–state arbitration clauses in EU bilateral investment treaties are not compatible with EU law and that they do not have legal effect. The Achmea judgment is also relevant for the application of the Energy Charter Treaty between EU Member States. In the Commission's view, that treaty cannot be used as a basis for dispute settlement between EU investors and EU Member States. EU law already offers a comprehensive and effective legal framework, including remedies, to intra-EU investors when they invest in another Member State; the Achmea decision handed down from the CJEU rules that references to arbitration in such intra-EU BITs to be incompatible with EU law.
III ICSID arbitrations and 'construction' – the statistics
According to ICSID, there were 58 new cases registered with it in 2020, up from the previous record high of 56 in 2018 and the 39 recorded in 2019. The number of cases registered with ICSID has typically been rising since the late 1990s.
The latest 2020 ICSID caseload statistics show that the construction sector makes up 12 per cent of all ISCID cases.2 Moreover, the distribution of new cases shows that construction-related disputes form 17 per cent of ISCID cases.3
IV Investment disputes in the 'construction space' through the lens of recent ICSID decisions (and some non-construction decisions)
i CMC v. Mozambique
In large part, the dispute was in relation to the validity of the alleged settlement agreement. Although it was regarded as settled that a contract for construction works is an investment for the purposes of the ICSID Convention, Mozambique argued that the tribunal did not have jurisdiction because the alleged settlement agreement was nothing more than a 'legal act' and, of itself, involved no contribution to, or relevant economic activity within, Mozambique (as required by the ICISD Convention). Thus, the argument raised by Mozambique raised the question of how remote from the underlying contract for construction works was permissible for there to be a qualifying investment. The opposing party, CMC, argued that the settlement agreement was either itself an investment in Mozambique, or that it was at the least a 'credit for sums of money or any performance having economic value connected with an investment' part of the definition of 'investment' set out in the applicable BIT. CMC additionally contended that the settlement agreement qualified as an investment by virtue of the fact that it was connected to and arose from the principal construction contract. On this analysis, the settlement agreement fell within the definition of an 'associated activity' and 'performance having economic value connected with an investment' under the definition of 'investment'.
The tribunal ruled in favour of CMC and concluded that:
the definition of “investment” in the [investment treaty] does not exceed what is permissible under the ICSID Convention. The Claimants' claims “for sums of money or any performance having an economic value” within the meaning of Article 1(c) of the [investment treaty] arise directly out of their investment in the Lot 3 Project. In the view of the Tribunal, that is sufficient to bring the Claimants' claims within the jurisdiction of the Tribunal under both the [investment treaty] and the ICSID Convention.
In some respects, this is an unsurprising conclusion. The nexus between the underlying construction contract and any settlement agreement relating to that construction contract is so close that both contracts should be regarded as being founded on the original 'investment' by the contractor. The position argued on behalf of Mozambique – that the settlement agreement must generate or be associated with its own, discrete generation of economic value – would seem artificial and unrealistic.
ii Micula v. Romania
On 19 February 2020, the Supreme Court delivered its judgment in Micula v. Romania, which is the latest instalment in the long-running saga of Micula's multi-jurisdictional attempts to enforce a 2013 arbitral award, which was blocked by the European Commission on state aid grounds. In a unanimous ruling, the Supreme Court held that, while the English courts have the power to stay execution of ICSID awards, the stay in this case exceeded the proper limits of that power as the EU treaties did not displace the UK's obligation to enforce awards under the ICSID Convention (which pre-dated the UK's entry into the EU, as it now is).
iii Theodoros Adamakopoulos and others v. Republic of Cyprus
One of the most interesting individual decisions of 2020 came from the ICSID tribunal hearing Theodoros Adamakopoulos and others v. Republic of Cyprus, which granted permission for nearly 1,000 mostly unrelated claimants to bring a single arbitration against the Republic of Cyprus under the Cyprus–Greece and Cyprus–Belgium/Luxembourg BITs. The tribunal's decision is likely to encourage further large-scale claims. It held that, despite involving a very large number of claimants and falling under two separate treaties, the claims were still a single 'dispute', which was capable of fair administration under the ICSID framework. This decision marks the first step forward for mass investment treaty claims in several years, since the Abaclat, Ambiente and Alemann cases against Argentina were settled in 2015/16 and may well lead to more such claims coming forward. It remains to be seen whether this sort of development could have an impact in the construction and engineering and infrastructure sectors: it seems likely that this broader approach to large-scale claims could well have implications in these areas.
iv Staur Eiendom AS, EBO Invest AS & Rox Holdings AS v. Latvia4
In this case, the ICSID tribunal denied an investor's claim concerning the development of an airport project in Latvia. The essentials facts involved allegations that the investor was unable to proceed with the construction of its project because of numerous amendments to the relevant development plan, culminating in a decision to significantly restrict the size of the airport. The tribunal determined that the actions of the airport authority were not attributable to the state and that the changes to the development plans did not give rise to a treaty breach, despite having an impact on the investor's ability to proceed with the works. There are of course many events that can occur within a long-term contract that will have, or may have, a very substantial impact on the value of the project to the investor. However, it is a separate, but fundamentally important, question, whether the events having implications for the position of the investor fall within conduct that is justiciable and that can properly be attributed to the state. This decision may have wider implications for developers and contractors on global infrastructure projects that may now be under feasibility reviews (and may subsequently face suspension, or cancellation) as a result of the covid-19 pandemic.
V Areas of reform and development – things to keep an eye on
i Energy Charter Treaty
In 2019, the negotiations on the modernisation of the Energy Charter Treaty (ECT) commenced. The latest round of negotiations (fourth round) took place in March 2021. The group continued to discuss topics debated at the last session, including definitions of investment, investor, fair and equitable treatment, and indirect expropriation. The group also discussed: (1) most constant protection and security; (2) compensation for losses; (3) denial of benefits; (4) the most favoured nation clause; (5) the right to regulate; and (6) the umbrella clause. The next negotiation round is in June 2021. In December 2020, Belgium requested an opinion from the ECJ on whether the ISDS provision in the draft modernised ECT will apply to intra-EU disputes under the ECT.
ii EU reform and the creation of an investment court system
The creation of an investment court system (ICS) continues, especially in the context of ISDS provisions in the free trade agreements being negotiated between the EU and several countries.
In 2015, the EU put forward a proposal for reformed ISDS provisions, including the creation of an ICS to replace the existing ISDS mechanism in all ongoing and future trade and investment negotiations between the EU and other states. The European Commission (EC) consulted on options for reform, the responses to which showed an 'overall broad support' for a multilateral investment court (MIC). In 2017, the EC gave the go-ahead for negotiations on a convention to establish a MIC. On 21 March 2018, the European Council adopted and published its negotiating directives for the establishment of the MIC.
iii The covid-19 pandemic and its ramifications
The covid-19 pandemic has wrought changes to almost every area of human activity, and the long-term ramifications can only be the subject of broad speculation at this stage. However, in the construction and engineering and infrastructure sectors, there can be few major international projects that will emerge unaffected by the events of the past 12 months or more.
During the covid-19 pandemic, almost all states in the world took unprecedented measures to safeguard public health such as instituting lockdowns, tracking and tracing, requisitioning hotels for use as hospitals, and ordering car manufacturers or other manufacturers to start producing ventilators or personal protective equipment for hospital personnel. Equally, major energy and infrastructure projects have been paused, disrupted and often reconfigured and reconsidered. In this context, it comes as no surprise that some have predicted that there will be an explosion of investment treaty claims. It will be necessary to wait and see. Some initial observations are offered below.
As a matter of general approach, claims by investors based on measures taken by states during the pandemic will present challenges. The crisis wrought by covid-19 is global, with every country in the world implementing measures to deal with the pandemic in circumstances where little is known about the disease. It will only be clear with hindsight whether measures taken were proportionate: one would expect states to be accorded reasonably sympathetic treatment in the hindsight assessment of proportionality.
States that have cases brought against them may rely on various defences (subject to certain conditions) such as:
- The doctrine of 'police powers' under customary international law, which refers to the state's right to regulate (often without paying compensation) (see, for example, Philip Morris Brands SARL and others v. Oriental Republic of Uruguay (ICSID Case No. ARB/10/7)).5
- The defences of force majeure or necessity (see Articles 23 and 25 of the International Law Commission's Articles on Responsibility of States for Internationally Wrongful Acts (2001) (ILC Articles)).6
- Express carve-outs contained in the relevant BIT or MIT such as the essential security exception, commonly found in US treaties, or an express right to regulate found in more modern BITs.
For further discussion of the various defences available to states in investment arbitration, the following provide useful broad guidance:
- Practice note, Defending states in investment treaty arbitration.7
- Guidance for respondent states, which provides useful tips to states regardless of the rules of arbitration that apply (see ICSID: Practice notes for Respondents in ICSID Arbitration (2015)).8
Where a state invokes the doctrine of police powers or relies on an express right to regulate that may be contained in a BIT or MIT, it must show that the measures taken were proportionate. The issue of proportionality is a controversial one. This is because governments can only be judged on the information available to them at the time that they implemented the measures, which are the subject of the investor's challenge; government action cannot be judged in hindsight. The assessment of what is proportionate is further complicated by the fact that different countries have taken different approaches to dealing with the pandemic.
The defence of necessity requires the state to show that it implemented the challenged measures only for the duration necessary to safeguard the public interest in question. That is, the defence will only be successful if the measures adopted were temporary. However, it is difficult to know how long any covid-19-related measures should remain in place, particularly given the possibility of second and third waves of the pandemic. Again, the state cannot be judged in hindsight.
States will not be able to rely on the defence of necessity where they have contributed to the situation of necessity. Arguably, some states may have contributed to the situation of necessity by downplaying the risks and not acting in time. With the limited information currently available, it will be difficult to assess and for investor claimants to prove the extent to which measures taken later ultimately created more damage than they would have had they been taken sooner.
VI Treaty suspension or termination because of fundamental change of circumstance?
State parties to BITs and MITs may consider suspending or terminating treaties by invoking Article 62 of the Vienna Convention on the Law of Treaties,9 which provides that a state may suspend or terminate a treaty where a fundamental change of circumstances has occurred with regard to those existing at the time of the conclusion of the treaty. To invoke Article 62, among other things, the following circumstances must exist:
- the change must not have been foreseen by the parties;
- the existence of those circumstances must have constituted an essential basis of the consent of the parties to be bound by the treaty; and
- the effect of the change must have been to radically transform the extent of obligations still to be performed under the treaty.
VII Exceptional cases?
Despite the difficulties highlighted above, certain cases may well be worthwhile running. These will likely be outliers; for example, where a state has taken advantage of covid-19 to act in breach of its international obligations. This would include, for example, those states that have implemented laws stipulating that people may be imprisoned for criticising a government's response to covid-19. Another example might be where a state takes advantage of the pandemic to implement measures to boost domestic monopolies, such as in the reported potential cases against Mexico by foreign renewable energy producers. The potential claimants are considering challenging regulations that were recently implemented severely restricting the production of renewable energy, ostensibly because of reduced demand following the pandemic.
It is unlikely that covid-19-related investment claims will be halted by the call on 6 May 2020 by the Columbia Center on Sustainable Investment for an immediate moratorium on all ISDS in relation to all covid-19 investment claims.10 This is because, as some commentators have opined, while covid-19-related claims are likely to be unjustified in most cases, there will be instances where investors should be able to avail themselves of the protections offered in BITs. In addition, while the moratorium would in theory terminate at the end of the pandemic, because we do not know when the pandemic will end, any moratorium risks curtailing worthwhile claims indefinitely. Equally, however, the call for this moratorium evidences the fact that state action during this unprecedented time is likely to be accorded due deference by investment treaty tribunals.
Investors and states should carefully review any BITs or MITs that may be applicable to them to see whether there are any carve-outs that may be relied on as a defence or other specific provisions that will likely have a bearing on complaints and claims in the covid-19 era.
1 Simon Hughes is QC at Keating Chambers, London.
3 id., page 25, Chart 6.
4 ICSID Case No. ARB/16/38.