Negotiations behind closed doors?

Transparency in investor-state arbitration: it’s on the rise

By Dr. Hanns Christoph Siebold and Mark C. Hilgard

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US President-Elect Donald Trump has his own views on the Transatlantic Trade and Investment Partnership (TTIP). AmCham Germany’s Corporate and Business Law Committee has been involved in the discussions about TTIP for a number of years now. One of the hot-button topics consistently cited by TTIP critics is the alleged lack of transparency in the investor-state arbitration proceedings where negotiations take place behind closed doors.

AmCham Germany’s Corporate and Business Law Committee would like to shed light on this issue and highlight some recent developments – including arbitration hearings that are streamed on the internet. The authors have discussed the issue of transparency with Steffen Lindemann, arbitration expert at Mayer Brown. Here are some observations and remarks: In the fierce discussion concerning free trade agreements such as TTIP and the Comprehensive Economic and Trade Agreement (CETA), one major point of contention has been the settlement of investor-state disputes by arbitration.

In Germany, the high-profile case of Vattenfall AB versus Germany has called attention to this mechanism, as Vattenfall is demanding more than €4 billion in damages for the phase-out of nuclear energy.

Among other aspects, critics find fault with arbitration proceedings for their perceived confidentiality, calling them “opaque,” “not transparent” and “secret.” Leaving aside all other aspects of the discussion, a closer look at developments in investor-state proceedings reveals a general trend toward transparency.

Conflicting interests concerning confidentiality

Any rules on transparency must strike a careful balance between the conflicting interests in an investor-state arbitration proceeding.

There are good reasons for the parties’ to demand confidentiality. Both parties, states and investors alike, are usually interested in safeguarding vital information, be it business or government secrets. While these secrets can also be maintained by providing selective confidentiality, the parties’ interests extend beyond that. Investors are keen to protect their public image, which might suffer because of the dispute, because public opinion will generally favor the state. Similarly, tribunals might fear a public outcry should the decision come down in favor of the investor. And states may welcome the opportunity to negotiate a case without having to withstand public pressure.

On the other hand, there have always been good arguments that support a transparent approach. Only the publication of awards makes it possible to develop a fairly consistent case law.

While tribunals are by no means bound by each others’ rulings, it is still common to take them into account. Other tribunals cannot, however, rely on previous decisions if they are not made public. Consistent rulings are desirable to make decisions more predictable, which helps both parties. The need for some level of orientation is even greater considering that the agreements governing investor-state rights are often written using rather vague terms. Moreover, transparency can improve the quality of the decision-­making process by serving as a quality-control mechanism.

Most importantly in the recent debate, the states involved have to consider their accountability to the public. Granting transparency can help the state justify its course of action in an arbitration proceeding while at the same time improving the reputation of the arbitration process.

Already limited confidentiality

It is important to note that there is no general expectation of total confidentiality in investor-state arbitration. In the absence of rules and specific confidentiality agreements, parties involved in arbitration will, at a minimum, usually be allowed to take such steps at their own discretion as making the existence of the proceedings public, announcing their own positions and publishing the final award. Tribunals may want to decide on a case-by-case basis if other materials should be published or not.

In this regard, a strict line has to be drawn regarding commercial arbitration – that is, arbitration that does not usually involve state actors, where extensive confidentiality has been and will remain one of the cornerstones of success. As commercial arbitration usually does not entail elements of public accountability, there are significantly fewer reasons for transparency, notwithstanding the parties’ right to agree otherwise.

Video-streamed arbitration – modern trends towards transparency

Recently, the case of Vattenfall versus Germany showcased new developments by providing an internet stream covering the oral proceedings. The public criticism of the confidentiality of the proceedings led the parties to agree on expanded transparency. Looking ahead, such publicity may become the norm, rather than the exception.

The important ICSID Rules of Procedure for Arbitration Proceedings still allow for public hearings (Article 32 [2]) and publishing of the full award (Article 48 [4]) only if the parties do not object.

In recent years, however, a major trend has emerged that promotes transparency as a standard on an institutional level.

The UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration (in effect since April 1, 2014: see information here) allow for broad transparency where either the parties to the arbitration or the states signing investment protection treaties have agreed on their application.

The major elements of transparency in arbitrations under the UNCITRAL Rules on Transparency are:

• Publication of commencement of arbitral proceedings.
• Access to proceedings – for example, through video streams or maybe even archives to watch already concluded proceedings such as Vattenfall versus Germany (see information here).
• Full publication of written submissions and evidence by means of an official registry.
• Publication of awards and decisions.

While the rules do contain some limitations, the level of transparency achievable under them is unprecedented, even in terms of German court proceedings.

These rules are also supposed to apply under the current proposals for TTIP and under CETA. While older investor-protection treaties do not contain references to the new transparency rules, several major states, including France, Germany, Italy, the UK and the US, have also signed the United Nations Convention on Transparency in Treaty-Based Investor-State Arbitration (see information here), making it easier for the UNCITRAL Rules on Transparency to apply to such disputes.

This means that while the majority of current investor-state disputes are still being arbitrated with less transparency, the developments outlined above will work to change that in the fore-seeable future and mark a continuing trend toward more transparency.

hanns.christoph.siebold@morganstanley.com

mhilgard@mayerbrown.com