Arbitral decisions and domestic courts - what if?

 The Vodafone arbitration decision brings back to focus the debate on ISDS and its impact on policy space. Is it a case where sovereign tax policy was impeded? It was yet again a case where the Fair and Equitable (FET) clause was invoked successfully by the investor. It is pertinent to note that the FET clauses are missing in new age treaties partly because of the fear of its expansive interpretative scope. Another issue is the applicability of investment and trade treaties to taxation issues. Obviously, the treaty under question did not have an exception clause taking taxation outside its purview. However, new age treaties do have exceptions excluding the applicability of the provisions of the treaty to taxation matters. However, is that sufficient to deter a claim is another debate altogether.

Another interesting aspect of the Vodafone dispute was the legal battle that took place domestically with the Supreme Court also involved. The intersection of domestic judicial decisions with international arbitration raises interesting questions. What if, hypothetically, the Supreme Court had upheld the constitutional validity of the retrospective tax amendment? What if the claims made by the State were found to be as per domestic law? Then the arbitral decision would have been in direct contrast to domestic judicial dicta, that too of the highest court of the land. The Supreme Court having decided in favour of the assessee avoids the question of what if there was a divergence.

I think the decision is not in the public domain yet. But did find this preview on the barandbench website. 

The conclusion of the decision states:

XIV. DECISION 

363. After deliberation, and for the reasons of fact and law set out above, the Tribunal decides as follows: 

(1) The Tribunal has jurisdiction, under the terms of the Agreement between the Kingdom of the Netherlands and the Republic of India for the Promotion and Protection of Investments, done at The Hague on 6 November 1995, to consider the Claimant’s claims for breach of the Agreement. 

(2) The Claimant is entitled, in respect of its investments in mobile telecommunications in India, to the protection of the guarantee of fair and equitable treatment laid down in Article 4(1) of the Agreement. 

(3) The Respondent’s conduct in respect of the imposition of the Claimant of an asserted liability to tax notwithstanding the Supreme Court Judgement is in breach of the guarantee of fair and equitable treatment laid down in Article 4 (1) of the Agreement, as is the imposition of interest on the sums in question and the imposition of penalties for non-payment of the sums in question. 

(4) The finding of breach in paragraph (2) entails the obligation on the Respondent to cease the conduct in question, any failure to comply with which will engage its international responsibility. 

(5) In the light of the above findings, it is not necessary for the Tribunal to proceed to a determination of the Claimant’s other claims. 

(6) The costs of the arbitration will be borne equally between the Parties. 

(7) The Respondent will reimburse to the Claimant the sum of £ 4,327,294.50 or its equivalent is US Dollars, being 60% of the Claimant’s costs for legal representation and assistance, and € 3,000 or its equivalent in US dollars, being 50% of the fees paid by the Claimant to the appointing authority

It is interesting to note the reference to the Supreme Court decision in the arbitral tribunal decision. What if the Supreme Court had decided in favour of the State. Would the Respondent's conduct in respect of imposition of the Claimant of an asserted liability to tax NOT amount to a breach of the fair and equitable treatment if the Supreme Court and other domestic courts have endorsed the State's views? How would that have played out? Would it have become relevant to the arbitral proceedings? Would the present arbitral decision then have tantamounted to over-ruling the decision of the highest constitutional court of the land?

Another ISDS decision - policy space, tax matters and sovereignty

Breaking news - Vodafone arbitration dispute goes in favour of the investor. 

Reported here, here and here.

Looking forward to reading the arbitral tribunal's decision - tax matters, retrospectivity, sovereignty and policy space. Lot of questions.

Africa and investment law norm setting

An interesting series of posts on Africa and investment norm setting in Kluwer Arbitration blog here and here. The normal churning that States are facing in terms of what should the scope of investment arbitration obligations be, what kind of protections to be included and what dispute settlement mechanism to be adopted face the negotiators of the Investment Protocol of the African Continental Free Trade Area.

Statistics of the skewed nature of arbitrator selection caught my eye:

The limited involvement of African arbitrators and African institutions in the ISDS ecosystem is a matter of great concern to many in Africa. According to The ICSID Caseload – Statistics (Issue 2019 – 2), although Sub-Saharan Africa contributes 15 percent of all ICSID cases by State Party involved, the region only accounts for 2 percent of arbitrators, conciliators and ad hoc Committee members appointed in ICSID cases. By contrast, Western Europe contributes 8 percent of all ICSID cases by State Party involved but account for a staggering 48 percent of arbitrators, conciliators and ad hoc committee members appointed in ICISID cases. North America (Canada, Mexico and U.S.) contributes 4 percent of all ICSID cases by State Party involved but account for 20 percent of arbitrators, conciliators and ad hoc committee members appointed in ICISID cases.

Will the negotiators reject ISDS altogether? Will State to State arbitration or the Brazilian model of co-operation and mediation hold sway? Or will the substantive obligations be more balanced with an ISDS mechanism?

Can Africa be the next place for investment norm setting standards for the world?

What kind of reforms at the WTO - this time for Africa?

 The selection of the next Director General is on everyone's agenda. atleast in trade circles. While the debate on whether a political leader or a technocrat should head the organisation gains pace, talks of the inevitability of "reforms" is rasied by many members. What exactly is the shape and form of these reforms? There are different perceptions of how the WTO should transform itself for the 21st century.

Project Syndicate carried a piece on what Africa needs from a reformed WTO. Hippolyte Fofack and Pat Utomi argue that the multilateral trading organisation ahs not served the interests of Africa thus far and needs to have an agenda that is more fair. In "Making the WTO work for Africa", the three pillars of their reform agenda are:

1. Tariff escalations and stringent technical standards hinder export of goods from Africa

2. Policy space - Developing countries are not allowed to design industrial policies that encourage their domestic sectors, a strategy that the developed world used effectively in the past

3. Agricultural subsidies maintained by large developed countries which depress world prices that impact farmers in Africa.

Arguing that Africa wants to be a player in the multilateral setting, a robust private sector in Africa seeks access and opportunity.

Africa is now a mature global player, with a private sector ready to drive development and take its rightful place alongside firms in more advanced economies. All we ask is that the WTO remove the artificial barriers and prejudicial hindrances that prevent Africans from unleashing their creative and productive energies.

A fairer, more equal, and more accessible global trade system must be at the top of the next director-general’s reform agenda. A WTO that is fit for purpose will also allow governments of smaller developing countries to act on behalf of their private sectors without fear or favor. Africa will support Azevêdo’s successor, provided that the WTO serves Africa in the same way it serves the rest of the world.

Will this reform agenda be the driving force of the new WTO? Well, not everyone in the WTO has this notion when speaking about reforms. One will have to see a real convergence of ideas for reform to make a thriving fora for future negotiations.

The importance of treaty language and doing it right!

Legally binding treaties that impose enforceable obligations must be negotiated and concluded with great care. Many a times what is intended is not reflected in the language of the treaty text while in many cases the ambiguity in the provisions of the treaty give wide scope for arbitral tribunals/dispute settlement panels to interpret obligations in ways that were not conceived by the treaty negotiators. Now a days a lot of importance is given to State parties being vigilant about treaty provisions they are entering into.

The debate on how many developing countries entered into international investment agreements without comprehending the full extent of obligations is well documented. This led to steps by States to rescind or rethink on their investment treaty negotiation strategy. Old age treaties have given way to new age treaties where State parties have been more circumspect in assuming obligations.

A classic account of how important treaty text is while negotiating is emphasized by this CCSI paper by George A. Bermann, N. Jansen Calamita, Manjiao Chi, and Karl P. Sauvant on the overlap between the interplay of the WTO Investment Facilitation Framework (Framework) and bilateral investment treaties of WTO members. Can the obligations assumed under the Framework be used by investors or State parties to butress their cases in ISDS cases under international treaties. Since both are separate legal regimes under different institutional set ups one would come to a conclusion that obligations under wither of the settings cannot be used in the other.

However, the paper outlines the importance of having clear, explicit treaty text in the Framework to exclude that possibility. A series of legal language is proposed to ensure that the Framework obligations are not imported as an interpretative tool to expand the rights and obligations under investment agreements. 

Some examples of such language suggested are as follows:

A future Framework can be expected—and needs to state expressly—that it does not cover “market access, the treatment and protection of investment or investors, and ISDS.

A determination that there has been a breach of this Framework shall not establish the breach of any rules on investment protection or investor-state dispute settlement.

For greater certainty, obligations arising from other treaties do not in themselves constitute ‘treatment’ and thus are excluded for the purpose of assessing a breach of this Article. Conversely, only measures adopted by a Member pursuant to those obligations shall be considered ‘treatment’. Furthermore, the obligations in this Framework shall not constitute ‘treatment’ under any other treaty.

This Framework cannot and shall not serve as a means to interpret any rules on investment protection or investor-state dispute settlement

So what seemed to be a non-issue is not exactly that straight-forward. Creative interpretations can upset carefully crafted balance in treaties. It can also lead to unintended consequences. 

Unintended and unwanted interaction between a Framework and IIAs is possible. WTO negotiators should therefore seriously consider including provisions.

The above piece only illustrates, once again, the importance of treaty negotiators to be aware of such consequences, create capacity to deal with the challenge of interpretation and exercise utmost caution. Quite often States leave this to their lawyers. However, this problem is much more than a legal one. It is one of State capacity that policy makers must have. It is a necessary toolkit in such challenging environs!

  

Digital trade rules - where are we headed?

Digital trade has captured the imagination of policy makers, both domestic and international.While some argue that the present legal architecture is insufficient to address the internet of things, others argue that national priorities must prevail when pursuing the ecommerce agenda. For some global trade rules is a must. For others it is anathema.

Touching on this theme, Dani Rodrik, in his inimitable way, highlights the tensions that digital trade and data bring to the fore in international economic policy making. Writing in the Project Syndicate, he highlights the three core challenges of new digital developments - issue of national security wherein digital technologies are perceived as being able to impact internal domestic security, the issue of data privacy where some countries value the principle more than others and the issue of economics where large technology players benefit from first mover advantage.

The WTO is definitely not well placed to address these issues - but should it be the multilateral fora where digital trade rules should be negotiated? Do developing economies that are still at the base of the ladder agree to multilateral trade rules that enable technology companies of the developed world to dominate. What about consumers? Should they not benefit irrespective from where the service is provided?

So are global rules the answer? Should we harmonise rules on data localisation, cross border data flows and standards? Who would benefit. Dani Rodrik states:

The benefits of common rules are clear. In their absence, practices such as data localization, local cloud requirements, and discrimination in favor of national champions create economic inefficiencies insofar as they segment national markets. They reduce the gains from trade and prevent companies from reaping the benefits of scale. And governments face the constant threat that their regulations will be undermined by companies operating from jurisdictions with laxer rules.

But in a world where countries have different preferences, global rules – even when they are feasible – are inefficient in a broader sense. Any global order must balance the gains from trade (maximized when regulations are harmonized) against the gains from regulatory diversity (maximized when each national government is entirely free to do what it wants). If hyper-globalization has already proved brittle, it is in part because policymakers prioritized the gains from trade over the benefits of regulatory diversity. This mistake should not be repeated with new technologies.

So the answer lies in a minimalist global rule framework where core national interests are protected:

Global governance and multilateralism will often fail, for both good and bad reasons. The best we can expect is a regulatory patchwork, based on clear ground rules that help empower countries to pursue their core national interests without exporting their problems to others. Either we design this patchwork ourselves, or we will end up, willy-nilly, with a messy, less efficient, and more dangerous version.

But do exporters of such technologies agree that there needs to be minimal global trade rules. There is a belief that harmonisation is beneficial to the world at large. The debate in the coming years would be how economies view global trade rules in ecommerce - as factors enabling their integration and development or one that hinders there digital and industrial road map.

Digital competitiveness, digital trade and indicators

Digital trade and digital competitiveness are the new kids (no longer new) as far as multilateral trade rules are concerned. There are growing demands for new rules on ecommerce that can spur digital trade and growth across the globe.

I found this interesting report on digital competitiveness called the Digital Riser Report 2020 done by the European Center for Digital Competitiveness which ranks countries of the globe based on how digitally competitive or ready they are. I wasn't interested in the ranking - was more interested in the methodology and the indicators used to decide who is up and who is down.

The Report lists out two sets of parameters to determine digital competitiveness - ecosystem related and mindset related. The effort was to examine whether the right conditions exist where digital growth and entrepreneurship could flourish.

The Ecosystem related indicators asked the following set of questions:

1. Venture capital availability -  “In your country, how easy is it for start-up entrepreneurs with innovative but risky projects to obtain equity funding?”

2. Cost to start a business -  Expressed as a percentage of the economy’s income per Capita

3. Time to start a business - Number of calendar days needed to complete the procedures to legally operate a business

4. Ease of hiring foreign labour - "In your country, how restrictive are regulations related to the hiring of foreign labour?” 

5. Skillset of graduates -  “In your country, to what extent do graduating students from secondary education possess the skills needed by businesses?” and “In your country, to what extent do graduating students from university possess the skills needed by businesses?” 

The Mindset indicators asked the following questions:

1. Digital skills among active population - “In your country, to what extent does the active population possess sufficient digital skills (e.g. computer skills, basic coding, digital reading)?” 

2. Attitudes towards entrepreneurial risk - “In your country, to what extent do people have an appetite for entrepreneurial risk?”

3. Diversity of workforce - “In your country, to what extent do companies have a diverse workforce (e.g. in terms of ethnicity, religion, sexual orientation, gender)?” 

4. Mobile-broadband subscriptions - Number of active mobile-broadband subscriptions per 100 Population. 

5. Companies embracing disruptive ideas - “In your country, to what extent do companies embrace risky or disruptive business ideas?” 

Broadly, the indicators thrust is to understand what is the ease of doing business, what is the skill set involved,  how good is the availability of venture capital to start innovative companies, what is the cost to start a business, how easy is it to employ qualified foreign labour, what is the internet penetration and what is the attitude of the population towards digitalisation.

Very relevant set of indicators. What I found interesting is that the country's regulatory framework for digital tarde - bth internal or external in terms of rules on data privacy, localisation requirements, cross border trade flows, intellectual property law enforcement, performance requirements, do not form part of the indicators. How relevant are they to digital competitiveness? Do they matter at all? Or are they relevant to increase global competitiveness when one is a digital powerhouse themselves? Of course some of the indicators related to ease of doing business do have a co-relation to investment rules but that is a broader question. In fact, the indicator on foreign labour, calls for a more freer flow of high skilled labour across countries. Do countries have the appetite for that now?