Toxic Lawsuit Showcases State Solidarity in ISDS

Like the Philip Morris cases I discussed earlier this week, the Renco Group v. Republic of Peru case had become a poster child for critics of so-called investor-state dispute settlement, or ISDS. The company was owned by Ira Rennert, a controversial billionaire accused of bleeding distressed companies into bankruptcy and building one of the largest homes in the United States. And he was suing Peru for – among other things – not granting him a third extension of his clean-up obligations for a pollution-emitting smelter he owned there. The facility was faulted for turning the village of La Oroya into one of the 10 most polluted places on the planet, leading to cancer and other ailments in the local population.

The case has taken many twists and turns since being filed in late 2010. For instance, Rennert argued that his claim – brought under the U.S.-Peru trade agreement – shielded him from a tort claim brought by La Oroyans in Missouri state courts. For a timeline of the messy treaty and domestic proceedings, see here.*

Although two of the arbitrators sided with Peru in the decision this week, the matter is far from settled. Renco immediately announced their intention to re-file the case with the corrected paperwork. Thus, a case where the preliminary phases had already dragged on for years could drag on for years more.

Here are a few takeaways from the case.

Getting the rules right matters

The momentary win for Peru highlights a key role that policymakers can play in carefully limiting investors’ access to the jurisdiction of ISDS tribunals.

The tribunal reluctantly sided with Peru after they determined that Renco had failed to abide by the requirements of U.S.-Peru trade deal. Article 10.18 reads in part:

Article 10.18:  Conditions and Limitations on Consent of Each Party

No claim may be submitted to arbitration … unless:  (a) the claimant consents in writing to arbitration in accordance  with the procedures  set out in this Agreement; and  (b) the notice of arbitration is accompanied  … by the claimant’s written waiver… of any right to initiate or continue before any administrative tribunal or court  under the law of any Party [e.g. Peru or the U.S.], or other dispute settlement procedures, any proceeding  with respect to any measure alleged to constitute a breach…

In other words, the treaty states that investors can sue under the treaty or under domestic law – but not both.

Seems pretty straightforward. But here’s what Renco filed:

as required by Article 10.18(2) of the Treaty, Renco waives its right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach…, except for proceedings for interim injunctive relief, not involving payment of monetary damages, before a judicial or administrative tribunal of Peru.  To the extent that the Tribunal may decline to hear any claims asserted herein on jurisdictional or admissibility grounds, Claimant reserves the right to bring such claims in another forum for resolution on the merits. [emphasis added by tribunal]

So, from the outset, Renco had not waived its rights to later bring a case in Peruvian courts.

Peru focused on the point only three years after Renco had filed the paperwork, and the tribunal award expressed reluctance to take the country’s side. (One of the three arbitrators thought that the tribunal should simply allow Renco to re-file its paperwork with the correct waiver.)

But the tribunal ultimately noted that the requirement to require a waiver with the notice of arbitration was an explicit design reform of the George W. Bush administration relative to a more investor-friendly approach contained in the North American Free Trade Agreement, or NAFTA, negotiated by his two predecessors.

For them, this was not a mere technical matter, but a fundamental one:

an arbitration agreement will be formed under the Treaty only if the investor satisfies the formal and material waiver requirements of Article 10.18(2) (b). This is so because compliance with Article 10.18(2) is a condition and limitation upon Peru’s consent to arbitrate. Article 10.18(2) contains the terms upon which Peru’s non- negotiable offer to arbitrate is capable of being accepted by an investor. Compliance with Article 10.18(2) is therefore an essential prerequisite to the existence of an arbitration agreement and hence the Tribunal’s jurisdiction…

The Tribunal’s interpretation of Article 10.18(2)( b) is consistent with the object and purpose of the waiver provision. Renco, Peru and the United States all agree that the object and purpose of Article 10.18(2)(b) is to protect a respondent State from having to litigate multiple proceedings in different fora relating to the same measure , and to minimise the risk of double recovery and inconsistent determinations of fact and law by different tribunals…

The Tribunal also observes that States are entitled, by virtue of their sovereignty, to apply such reservations to treaties… Investors have no equivalent power to insert reservations into their acceptances of a State’s standing offer to arbitrate under an investment treaty. In a system of arbitration without privity, a State is entitled to “shape its consent as it sees fit by providing the conditions under which it is given —in other words, the conditions subject to which an ‘offer to arbitrate’ is made to the foreign investors”…

In short, getting the rules right increases the chance of more favorable judicial outcomes.

Jurisdiction matters

One might think that courts are greedy for cases. Especially in ISDS, where arbitrators are paid by the case, it’s easy to imagine a story where adjudicators never turn down cases so as to maximize income and power over countries.

This is not always the case. As legal scholar Yuval Shany writes in his 2014 book“Assessing the Effectiveness of International Courts,”

At a first glance, it would appear that from an effectiveness point of view, international courts should construe their jurisdictional powers in ways that maximize their goal-attainment potential. Such an approach may pull in the direction of a broad construction of the jurisdictional authorizations bestowed upon the court and a narrow construction of the conditions precedent to the exercise of jurisdiction, so as to ensure a steady flow of cases to the court for adjudication. Through ongoing adjudication, courts can generate desired outcomes (ie, attain their goals)…

Still, no inevitable correlation exists between a broad jurisdictional basis and increased judicial effectiveness. On the contrary, under certain circumstances, overly broad jurisdictional power may prove to be counterproductive…

Another strategic concern that may affect the design of an international court’s scope of jurisdictional mandate is the possibility of a backlash. The more contested is the court’s exercise of jurisdiction, the greater is the expected resistance by states and other relevant actors (including other international courts trying to protect their own jurisdiction against encroachment by different courts), and the fiercer the challenge to the court’s consent-based legitimacy. One example of a political backlash to an expansive jurisdictional holding can be found in the aftermath of the decision of the Southern African Development Community (SADC) Tribunal in Campbell v Zimbabwe, which, in effect, added to an economic integration court a strong human rights component. By reading specific normative contents into Article 4 of the SADC Treaty, which lists the general principles of the SADC Community, the Tribunal considerably expanded the categories of cases falling under its subject-matter jurisdiction (illustrating, thereby, the relationship between the breadth of subject-matter jurisdiction and the scope of the applicable law). The backlash felt against this decision—which resulted in the suspension of SADC Tribunal’s operations—raises questions regarding the wisdom of the Tribunal’s pursuit of an expansive interpretation of its legal authority and confirms the insight that under certain political conditions, more (jurisdiction) may mean less (fewer cases).

The fact that about one-third of litigated ISDS cases end in a dismissal on jurisdictional grounds suggests that at least some arbitrators rate more pay as less desirable than following the law or risking backlash. But – and this is the problem with untenured ad hoc tribunals – how this balance manifests itself can change in each case.

More to come

Peru’s win is the latest in a string of state victories in controversial ISDS cases.

However, unlike in some of the other cases, this may be simply delaying an eventual investor win. The tribunal warned the government to not object if Renco filed a new case, even though it would be doing so past the trade deal’s three-year statute of limitations.** This – coupled with the disagreement of one of the three arbitrators with the tribunal’s decision – is just another indication of how close the case was. And it seems that Renco left several legal arguments on the table that might have allowed the current tribunal to proceed.***

In any event, the case shows the value of between-state solidarity. I don’t think it’s any small matter than the Obama administration weighed in and took Peru’s side on many key legal arguments. See here, here, and here. Under Hillary Clinton and John Kerry, it seems the State Department (which defends the U.S. in ISDS cases and liaises with tribunals more broadly) has been increasingly willing to argue for deferential-to-sovereign interpretations – even in cases where it might hurt U.S. investors’ suits against other countries. As a candidate, Clinton has expressed skepticism of ISDS, so I imagine this trend will continue. (To my knowledge, Trump has not specifically addressed the issue of foreign investor lawsuits, although he complained in last night’s RNC speech about the sovereignty impact of trade agreements more generally.)

For the full reasoning by the tribunal of Michael Moser (president, U.S.), L. Yves Fortier (Renco appointee, Canada) and Toby Landau (Peru appointee, U.K.), read the award here.

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Footnotes

* Another aspect of the tangled proceedings is that Renco’s companies were dealing with bankruptcy proceedings in Peruvian courts. While these proceedings were initially a bigger part of the investment treaty case, the arbitral tribunal exercised judicial economy on needing to resolve them – given their stance on the waiver issue explored in this post.

** I’m sure this will endear the current tribunal to the next one. This majority wanted to follow the letter of the treaty, but seems to suggest a later tribunal should be flexible on overlooking the statute of limitations.

*** Why – for example – did they not look to Peru’s other investment agreements for less onerous filing requirements? The Peru-Australia agreement, for one, does not include the Article 10.18 waiver rules. Some arbitral tribunals have been willing to allow investors to invoke most-favored nation rules to access more favorable jurisdictional requirements from other pacts in a country’s treaty portfolio. From a quick review of Renco’s filings, I don’t see the company raising MFN-related issues at any point during the proceedings – not even in their 200-page memorial on the merits of the case. But maybe I missed it.