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There are concerned calls for more transparency in standards for investment treaty arbitration, write João Ribeiro, Tony Andriotis, Lee Soo-Hyun and Jean-Isamu Taguchi

Much ink has been spilt on discussing whether or not the investment treaty arbitration regime has played a role in encouraging the growth of developing economies by creating a more secure system for foreign direct investment (FDI). As of late, the viability of the treaty arbitration system has been called into question.

Some developing countries are threatening to retract themselves from the system completely, while sovereignty-related alarms can now be heard loudly in the halls of cities such as Washington, London and Brussels. The authors do not wish to reiterate or re-litigate any of the arguments advanced by such states. They do see, however, mutually shared advantages to international trade and investment, and in harmonizing legal codes.

These advantages include bolstered investor confidence in the certainty of due diligence by recipient states, and improved trade and investment flows that can provide the necessary capital to help economies pursue inclusive and sustainable economic development. There are also advantages to embracing a model of transparency in dispute resolution as put forth in the United Nations Commission on International Trade Law (UNCITRAL) Rules on Transparency in Treaty-based Investor-State Arbitration, and in the UN Convention on Transparency in Treaty-based Investor-State Arbitration (New York, 2014 – the Mauritius Convention), referred to from here on as the UNCITRAL transparency standards, in situations where disputes are directly related to the interests of citizens and taxpayers, namely on what concerns public-private partnerships (PPPs).

The Mauritius Convention was adopted by the UN General Assembly in December 2014, by which parties to investment treaties concluded before 1 April 2014 express their consent to apply the UNCITRAL rules on transparency, and is significant with regard to the suggested reforms to the arbitral processes for resolving investor-state disputes to ensure greater transparency and accessibility to the public.

The authors see advantages in heightening transparency in the current investment treaty arbitration system, specifically through the UNCITRAL transparency standards. Such transparency in dispute settlement results in strengthening the rule of law while continuing to emphasize the importance of encouraging FDI flows to the growth of developing economies.

Defining PPPs

In a recent published reference guide on PPPs, the World Bank describes them as entailing “long-term contract[s] between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risks and management responsibility, and remuneration is linked to performance”. Apart from these features (long-term contract, risk management and responsibility), PPP projects are considered to be complex in designing and managing/governing contracts and, as noted above, concern the interests of current and future citizens, both as taxpayers and service users.

However, even where such funds are not primarily rooted in the tax base of the contracting sovereign, such as where development funds are utilized, the need for transparency is of particular importance. Regardless of the extent to which the state becomes involved in a PPP, its involvement imposes marginal social costs, in either the form of an explicit cost or an opportunity cost.

The contractual structure of a PPP is particularly prone to disputes due to the existence of multiple contractual relationships, as well as the risks transferred between stakeholders. The UNCITRAL Legislative Guide on Privately Financed Infrastructure Projects distinguishes three types of disputes that can arise between the stakeholders: (1) disputes between the contracting authority and the special purpose vehicle [SPV]; (2) disputes between the SPV and sub-contractors; and (3) disputes between the SPV and other parties, such as end users.

It is necessary to mention that within a PPP, specific disputes can arise at various stages of the project that are related to the awarding of contracts. The authors are focusing primarily on the first type of dispute – those between a sovereign state and a private party.

Dispute resolution in PPPs

When PPPs involve long-term arrangements between two or more parties, the risk of conflicts over issues such as service quality, customer satisfaction, and tariff reviews are especially high. The World Bank mentions that “PPP arrangements are long-term and complex, contracts [that] tend to be incomplete”, so that “this creates room for differences in interpretation”. Therefore, “defining a dispute resolution process helps ensure disputes are resolved quickly and efficiently, without interruption of service − reducing the risk of disruption due to disputes to both the public and private parties”. In giving its recommendation related to the governance of PPP projects, the Organization for Economic Co-Operation and Development (OECD) provided that “clear, predictable and transparent rules for dispute resolution should be in place to resolve disagreement … between the public and private parties”. Practitioners have also argued that careful attention must be given to managing potential disputes in PPP projects. Finally, in the context of developing countries, the lack of trust in the treatment that will be given to sovereign states (or, more likely, parties opposed to a sovereign) under domestic judicial systems is also a factor in favour of alternative dispute resolution systems.

Joao Ribeiro
João Ribeiro
is head of the UNCITRAL Regional Centre for Asia and the Pacific, based in Incheon, South Korea. His views do not necessarily reflect the views of the UN

As to treaty arbitration, the International Centre for Settlement of Investment Disputes (ICSID) has been criticised for disproportionately emphasizing commercial and private interests. New practices of local dispute resolution have also emerged. During the UNCITRAL colloquium on PPPs in 2014, for example, participants questioned the suitability of utilizing international arbitration for PPP-related disputes, mainly because of the “multiple investment treaties, multiple international arbitration forums, cases and rulings, and the poor enforcement of international arbitral awards”. Participants added that the tendency of using local dispute resolution involving governments should be taken into account and that “a more practical approach would be helpful”.

The considerable variation in the type of arrangements made in PPPs, combined with the unique characteristics of PPPs themselves, enable the use of a wide range of dispute resolution mechanisms. Jeffrey Delmon, who has written extensively on the classification of PPP projects, described a comprehensive concession agreement as employing a mixture of dispute resolution mechanisms that best minimizes the “detriment to [the contracting parties’] working relationship”.

This echoes the recommendations given in the UNCITRAL Legislative Guide on Privately Funded Infrastructure Projects, which calls for the use of dispute settlement mechanisms “that avoid as much as possible the escalation of disagreements between the parties and preserve their business relationship; that prevent the disruption of the construction works or the provision of the services; and that are tailored to the particular characteristics of the disputes that may arise”. Given the necessity to maintain the continuity of public services in PPP projects, intergovernmental bodies, sucn as the World Bank, the United Nations Development Programme (UNDP), UNCITRAL and the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), have cautioned against the use of litigation as a primary means of resolving PPP-related disputes.

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Furthermore, the “normative pull” of the UNCITRAL transparency standards and its opt-in nature are significant in the endeavour to address questions that are of public interest and possible appellate body functions.

Jean-Isamu Taguchi
Jean-Isamu Taguchi
is a PhD candidate in comparative law and politics at the Graduate School of Law in Nagoya, Japan, and worked as a consultant at the PPP group of the World Bank in 2016

Improving the current system

When contemplating how to best create a viable system that both sovereign and private parties will be encouraged to utilize, all the discussions about the future of the current investment treaty framework must be kept in mind. As is also set out above, we should strive to improve the current system(s) by encouraging transparency and consistency. To that end the authors proposed the following:

  • The creation of a “repository”-like organization, or the assignment of such a role to an existing organization, whose sole directive will be to act as a collector of PPP arbitration filings, and to make information related to these filings available to the public. In this way, it will be relatively easy to find out how many PPP-related disputes have been filed in a particular year and, if the parties were to agree to transparency in relation to their awards, they could turn to previous awards as a means of seeking out the wisdom of previous tribunals. Though such previous awards will not technically act as precedents, they may act as creating an increased sense of certainty and conformity amongst possible parties to a PPP agreement. The Transparency Registry, currently run by UNCITRAL, would seem to be a reasonable repository that could be utilized instantly.
  • As opposed to setting up an additional treaty-basis of empowerment, the use of standard PPP ADR clauses should be encouraged. Efforts to enact a model clause through a recognized legislative international body, such as UNCITRAL, could lend the necessary legitimacy for its widespread adoption, particularly by developing states. Such clauses will require direct disputes involving a sovereign state to utilize the above-mentioned repository, while also requiring that transparency, as envisioned by the UNCITRAL transparency standards, be utilized.
  • Consider the creation of regional arbitration organizations, such as what is being attempted in Latin America in relation to investment state arbitration, or as is envisioned in the CETA (EU-Canada Comprehensive Economic and Trade Agreement), which calls for the creation of some form of a permanent adjudicating body.
  • Consider the creation of an appellate body that can quickly hear appeals made from ADR (or even possibly court litigation) related to PPPs. Again, this can be contracted for, and the enforcement mechanism can be the New York Convention, if applicable.

The authors stress that it is not their desire to re-litigate the state of investment treaty arbitration and its future. They are simply turning to the lessons that the system has to offer for guidance when addressing the issues of settlement of international PPP-related disputes.

The authors are seeking to continue the momentum towards a system that will encourage investment in infrastructure projects, while also encouraging transparency. As has been made clear above, the authors believe that the public nature of PPP projects makes transparency imperative, regardless of the selected vehicle of dispute resolution. A system in which both sovereigns and investors can take solace and comfort is a system that is likely to pass the test of time.