Tom Baker reports on a busy period despite case volume falling in 2016
Despite growing investor-state arbitration caseloads over the last five years, City international arbitration partners are uneasy about the impact of Brexit and anti-globalisation sentiment on their business.
According to data from the International Centre for Settlement of Investment Disputes (ICSID), 2015 saw the most investor-state arbitration cases ever, with 52 cases registered worldwide. Despite the caseload falling to 48 in 2016, compared to the 23 cases in 2006, it is clear that the volume of cases is increasing.
The rise in frequency of investor-state cases is linked to the growing implementation of investment treaties, of which there are more than 3,000 currently active. In 2016, bilateral investment treaties (BITs) were the basis of 57% of new investor-state arbitrations registered with ICSID. While these treaties allow for more investor-state arbitration, Herbert Smith Freehills (HSF) arbitrator Christian Leathley sees a separate factor having an impact: ‘The number of companies and lawyers who are aware of these claims has increased. Companies are also less shy about suing a sovereign government.’
Leathley sees the market as having matured to the point where ‘every single state decision that has an impact on a foreign investor is now being scrutinised. Before, if a certain government changed its tax code, people would normally throw their hands up and say: “We’ve got to pay more tax!”, but now they may think: “Can the government really do that?”‘
And despite growing caseloads, arbitrators are wary about the implications of Brexit. Roland Ziadé (pictured), international arbitration partner at Linklaters, believes London’s position as an arbitral seat is unlikely to be affected by Brexit, but adds: ‘Some may think that if Brexit is implemented in the way it’s likely to be, for certain types
of disputes and for certain types of clients, London may become slightly less attractive or may be perceived as slightly less neutral.’
Wilmer Cutler Pickering Hale and Dorr international arbitration chair Gary Born concurs: ‘There’s not necessarily any logical disadvantages for London post-Brexit, but businesses may be more attracted to seats that aren’t as defined by uncertainty.’
‘The centre of gravity is certainly moving to the emerging markets.’
Roland Ziadé, Linklaters
However, Andrew Cannon, another arbitration partner at HSF, is unfazed: ‘There’s no reason and certainly no legal reason why Brexit should affect the choice of London as an arbitral seat.’
Meanwhile, others have foreseen positive repercussions from Brexit, with Ziadé seeing room for even more investment treaties: ‘On the more positive side, there may be new opportunities from the trade deals to be signed post-Brexit, with the EU, the US and the Commonwealth nations.’
Anti-globalisation
Across the Atlantic, fears of a decelerated investment arbitration market are more real. President Trump has been vocally anti-globalisation, already repealing the Transatlantic Trade and Investment Partnership (TTIP), a deal that Simmons & Simmons partner Stuart Dutson argues ‘would have been the source for a lot of work’. Therefore, Trump’s proposals to update the North American Free Trade Agreement (NAFTA) have caused some arbitrators concern. While a draft proposal for updating NAFTA showed a willingness to improve investor-state dispute resolution mechanisms, the administration is characterised by unpredictability.
Born cites scepticism of Trump’s ‘anti-globalisation mantra’ and how that ideology has been propagated by others, such as failed French presidential candidate Marine Le Pen. ‘However, when you look at what’s happened in practice, in particular with Trump’s proposals for revisions to NAFTA, which are extremely limited, it’s hard to see those concerns being any greater than what’s transpired over the last five years. Investor-state arbitration has been said to be on its deathbed for the last five to ten years.’
Despite wider geopolitical forces potentially coming into play, the state of the market is looking healthy. Emerging markets have come to the fore as investment arbitration becomes a more popular route for companies to follow. ‘The market is very active,’ says Ziadé. ‘Especially disputes in emerging markets like the Middle East, Africa and Latin America. Of course many cases also involve European projects or clients, but the centre of gravity is certainly moving to the emerging markets.’
Statistics by ICSID back this up, with the number of new cases registered in South America jumping up from 4% of total cases in 2015 to 17% in 2016 when eight cases were registered.
Aside from the increase in BITs, Cannon attributes the growth in caseload to an increased awareness of the investment arbitration route. ‘The more of these cases there are, the more investors realise this is a potential avenue for redress. As awareness increases, so does the number of claims.’
However, he is quick to establish that the investor-state arbitration path is not always the answer: ‘It’s seen as a bit of a last resort in many cases. You’re risking breaking relations with the state and that is usually not in your interests if you want to continue doing business there.’
The investment arbitration route may have become more desirable for companies, but what about for law firms? Dutson believes the market is easy to access: ‘Anyone with a good arbitration shop can do BIT work these days. It’s not rocket science.’
tom.baker@legalease.co.uk