On July 18, 2014, an arbitral tribunal sitting in The Hague ordered the Russian Federation to pay shareholders of the defunct oil company Yukos an unprecedented sum of damages — $50 billion, plus $60 million in legal fees and costs.
One year later, after Russia had made no move to pay the award, courts in France and Belgium responded to a request by the claimants and froze dozens of Russian state-owned assets, including bank accounts and buildings, in anticipation that they might be seized as payment on the arbitral award. Meanwhile, the Yukos shareholders have told reporters that they’re seeking similar actions in the U.S., the U.K., Germany and the Netherlands.
The Yukos case has created headlines all over the world. It’s also drawn attention to a field of law many people have never even heard of, but that I’ve been practicing for about 10 years — namely, investor state dispute settlement, or ISDS.
ISDS is a neutral, international arbitration procedure, designed to provide investors with a way to settle claims against sovereign states, without having to try those claims in the same states’ local courts.
ISDS arbitrators are appointed by the parties in each case, or by an appointing authority if the parties fail to or choose not to appoint them. These arbitrators do not have to be tied to any particular geographic region or national bar. Many, if not most, of them are from North America and Western Europe, but an increasing number are from other regions and legal backgrounds. While they almost universally have experience in international law, very few arbitrators have served as judges in traditional courtrooms.
Given this system that has no traditional judges, no direct ties to traditional courts, and, most importantly, no right to appeal, why do investors bring ISDS claims? In some cases, it’s because they cannot reasonably expect to get a fair hearing in a local court. The tribunal for the Yukos case, for instance, noted the Russian authorities’ “intimidation and harassment of Yukos’s senior executives, mid-level employees, in-house counsel and external lawyers.”
Even more disturbing, the tribunal found that Russia had conducted a “ruthless campaign to destroy Yukos, appropriate its assets, and eliminate [its primary owner] Mr. Khodorkovsky as a political opponent” by putting him in prison. By the time the company’s former majority owners brought their arbitration in The Hague, they were living abroad, and didn’t dare return to Russia.
But not all ISDS cases involve concerns about judicial bias or the claimants’ safety. Small businesses and individuals may choose to bring an ISDS case simply because it’s a more efficient and straightforward means of prosecuting their claims, and one that offers a near-certain path to payment of any resulting award. According to the Office of the U.S. Trade Representative, about half of all ISDS cases are brought by individuals and small or medium businesses.
ISDS cases have recently produced some stunning outcomes. In 2012, two of these cases — brought by Dow Chemical against Kuwait and by Occidental Petroleum against Ecuador — resulted in awards of $2.19 billion and $1 billion.
Arbitration awards in the tens and hundreds of millions have become routine. Just this month, a case brought against Panama by a consortium of international construction companies resulted in a $233 million award.
But it was the Yukos case — which generated 6,500 pages of court filings, 11,000 exhibits, 3,300 pages of hearing transcripts and 37 days of hearings, then ended in a $50 billion award — that has prompted the most discussion in the legal profession.
“This … story not only confounds those who say that international law does not matter,” said Harvard Law School Assistant Professor Mark Wu, in a panel discussion about the case last month, “it also shows the extraordinary tenacity of the people involved in shaping international law.”
Provisions allowing for ISDS appear in more than 3,000 bilateral and multilateral investment treaties worldwide. For instance, both NAFTA and the Energy Charter Treaty, which came into play in the Yukos case, include ISDS provisions.
But the foundational document for the ISDS system is the 1965 Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States. This Convention, which has been ratified by 152 countries, created the International Centre for Settlement of Investment Disputes, commonly referred to as ICSID. Together, the Washington Convention and the procedural rules of ICSID create an arbitration system that is tailored to disputes between investors and states. If states lose an ICSID arbitration and fail to pay the award, they face international sanctions.
If the ICSID Convention does not apply to a country or dispute, claimants may have other pathways to pursue arbitration.
The Yukos claimants, for instance, brought their case under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention. This treaty, which primarily applies to commercial disputes, has been ratified by 156 countries, including nearly all the countries in Europe, the former Soviet Union and North America.
The New York Convention requires that ratifying states recognize arbitration as a means to settle disputes between governments and investors, if both the investor and government have consented to arbitrate their disputes. This consent is usually found in an investment treaty or agreement, or in a contract between the investor and a state-owned entity.
The Convention also requires all 156 of its ratifying states to enforce arbitration awards made in other contracting states. In other words, if an investor can identify assets owned by the state in any one of the ratifying states, then the investor has an automatic right to attach those assets — provided they are used for commercial, and not diplomatic, purposes.
The investor can then repeat this enforcement process as many times and in as many countries as it takes, until the compensation due under the award is fully paid. Which is why the Yukos claimants can ask courts in five different countries to freeze Russian assets.
Notably, arbitral awards do not expire, and interest on the award accrues until it is paid in full.
In my practice, I am regularly contacted by investors who have lost everything because of failed contracts with states and state entities. Under international law, these people are due compensation. ISDS is often the best way — and sometimes, it is the only way — for them to get it.
Author: Jennifer Morrison Ersin
Primary source materials about international arbitration:
