ISDS policy trend round up for 2023

What are the trends in investor state dispute resolution at a macro level that have developed over 2023? We have put together a round-up below.

• Declining use of ISDS? In 2022, 56 new cases were publicly filed, although the number is likely higher as some treaty arbitrations (outside ICSID or the PCA) will be confidential. This was a reduction in the number of overall cases from 2021 and the lowest annual number of known cases since 2010, significantly below the 10-year average of 75 cases per year (2012-2021). While the numbers are yet to be finalised, UNCTAD's public records for 2023 suggest 35 new cases were publicly filed last year. If correct, this would show a continued decrease in treaty claims.
• Modernisation of the Energy Charter Treaty (ECT): The modernisation of the ECT has been under discussion since 2017. In June 2022, the Contracting Parties of the ECT reached an "Agreement in Principle", concluding negotiations on the modernisation of the ECT. However, the process has faced several challenges. The decision to adopt the modernised ECT was paused in November 2022 due to several EU Member States, including France, Germany, Spain, and the Netherlands announcing plans to withdraw. In July 2023 it was announced that the EU would consider a coordinated withdrawal of the EU and all EU Member States. The UK also recently announced (in September 2023) that it is considering withdrawal. This has led to an impasse in negotiations to modernise the treaty.
• New BITs – signs of a reversing trend? There had been a significant trend towards the termination and denunciation of BITs and the ICSID convention over the past decade. However, 2023 witnessed the signature of a number of new FTAs with investment provisions or BITs, albeit that some of these are not yet in force. These new treaties show the continued adoption of investment protection and dispute settlement by newer exporters of FDI, such as China, Latin American countries and African states. Interestingly, we are seeing countries who have historically criticised the ISDS process (such as Venezuela) returning to BITs, but negotiating much more restrictive investor-state provisions, reflecting a modernisation of BIT standards.
• Release of European Commission "Non-paper" with model clauses for BITs: The European Commission released a "non-paper" containing model clauses with notes that aim to guide EU Member States entering into bilateral investment treaties with other, non-EU, states. The clauses are intended to demonstrate best practice and the EU's approach to investment protection to ensure a harmonised approach across the EU. They include provisions such as: the requirement for investors to have substantial business operations to qualify for protection; a definition of fair and equitable provision with only limited protection for legitimate expectations, denial of benefits provisions; and a limited umbrella clause. The drafts also include provisions related to the EU, to human rights, sustainable development and corporate social responsibility and provision for a future multilateral investment court.
• Reform of ISDS being proposed by UNCITRAL Working Group III: UNCITRAL Working Group III was tasked in 2017 with working on the reform of ISDS and, in particular, whether a multilateral investment court (MIC) should be established. This latter point arose out of the European Commission's ISDS reform proposals which proposed the MIC to replace the arbitration system. In July 2023 UNCITRAL adopted the Codes of Conduct for Arbitrators and for Judges in International Investment Disputes as well as Guidelines on Mediation, with the UN General Assembly formally adopting them later in the year. The Working Group is also considering proposals for the establishment of an advisory centre, guidelines on dispute prevention and mitigation, draft provisions on procedural and other issues, and the establishment of a standing and appellate court mechanism.
• Continuing tension between EU, international and domestic law: In the cases of the Republic of Slovakia v Achmea BV (Achmea) and Republic of Moldova v Komstroy LLC the Court of Justice of the EU (CJEU) has found that investment treaty arbitrations between EU investors and EU member States are incompatible with EU law (under both BITs and multilateral treaties). These decisions have prompted a member state declaration regarding the consequences of the decision and the termination of many intra-EU treaties. Investment treaty tribunals are reaching differing positions on the legal effect of the EU's position and termination of intra-EU BITs, with the most recent case, Adria v Croatia, dismissing Croatia's preliminary jurisdiction objection on these grounds. National courts have also been embroiled in this debate. The Amsterdam Court of Appeal has allowed a Dutch investor, LC Corp, to continue with an arbitration against Poland under an intra-EU BIT. In contrast, the German Federal Court of Justice ruled that member state courts can declare intra-EU arbitrations inadmissible in order to give EU law primacy (in the cases of Mainstream Renewable v Germany and RWE v the Netherlands). Similarly, the Svea Court of Appeal set aside a costs award in Poland's favour in the case of Festorino Investment Limited et al. v Poland on the grounds that the award was contrary to Swedish public policy because four out of the five claimants were from EU Member States. Investors have also sought to enforce awards arising out of intra-EU BITs outside the EU, notably in the US.
• Investor-state climate change-related claims: There is a growing body of investment treaty case law concerning state measures related to climate change and decarbonisation. Regulatory incentive schemes linked to solar power have led to a significant number of claims against Spain, Italy and the Czech Republic. New categories of claims have also arisen regarding the decision to phase out certain energy sources (such as Uniper v Netherlands, RWE v Netherlands and Westmoreland v Canada) and about state decisions to deny approvals for projects on climate change grounds (such as TransCanada v USA or Rockhopper v Italy). During the latter half of 2023 two arbitrations were commenced by Zeph Investments against Australia, with the prospect of a third. The first arbitration is based on the rejection of coal mining licences on climate change grounds.

For further information, please contact Andrew Cannon, Partner, Christian Leathley, Partner, Hannah Ambrose, Partner, Vanessa Naish, Professional Support Consultant,  Liz Kantor, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.