Cam Mowatt has participated in over 30 investment treaty disputes, including as outside counsel to the Government of Mexico and the Canadian government. He is also a founder and editor of Investor-State Law Guide, a leading research database for investment treaty law. Mr. Mowatt visited robert wray and engaged in a refreshing discussion with Mariano Gomezperalta on practical issues relating to investment arbitration. The comments and views expressed are those of Mr. Mowatt and do not necessarily reflect the views of his clients or professional colleagues. His observations are the result of his cumulative experience and should not be attributed to the circumstances of any particular case.
Mariano Gomezperalta (MGC): What are some of the principal reasons that investment disputes arise and what should sovereigns try to do to avoid them?
Cam Mowatt (CM): I was thinking about this the other day because, ironically, at the moment, the only NAFTA cases that are out there—there’s one against Mexico and I think eight pending or existing cases against Canada and if there’s one, maybe, against the US, what’s the reason? So the Canadian ones, many of them are about environmental regulation and other acts of government regulation which, for one reason or another, investors have decided to try to invoke the investor-state mechanism. You look at Venezuela and Ecuador and Bolivia, it’s a different set of measures; it’s a real taking: either they’re expropriations or they’re expropriatory taxes, that kind of stuff. So it really just depends on the state, and there’s the socialism set on one side and then there’s the environmentally conscious regulators on the other, whereas the United States seems to be—and I’m not going to say immune to claims, but the fact that there is protection against takings in the US Constitution may mean that US law is imposed a little differently than, say, Canadian or Mexican law is.
MGC: Do you think it’s odd that Canada, a fully developed country, has had so many investment arbitration claims?
CM: Yes, Canada has had the most. I haven’t got a current tally, but it is a surprise, I think. If you were looking at it prospectively from January of 1994 when the NAFTA entered into force, you would think that Mexico would have most of the claims, a few in Canada. The US has faced quite a large number, but they’ve successfully defended them.
MGC: Why do you think the US has never lost an arbitration case?
CM: I would say firstly, that they’ve been ably defended by the State Department. Secondly—I think that the Loewen case is a good example. The Loewen case is one which easily could have gone against the United States and didn’t for—what I would call legal reasons, but technical, legal reasons, right? I know that the view has been expressed that if the Loewen case had resulted in an award against the US, there would have been a great uproar and problems with the investment treaty regime going forward. Now, whether that figures into an arbitrator’s thinking or not is hard to say; it’s purely speculative. But I think that arbitrators may find it hard to make a finding against the United States government, or, harder than it is to do so, say, against Mexico or Canada. That’s just my view.
MGC: What do you think is happening in the damages area? If you look at ICSID figures from the ‘90s, the awards were in the $10-20 million neighborhood. We have now seen amounts of hundreds of millions of dollars or Ecuador’s case of $1.77 billion—are arbitrators now more willing to issue larger awards because awards over $100 million are not uncommon? What do you think is happening? What is the reason for the increase in the size of the awards?
CM: I know what you’re saying. I haven’t looked at it empirically and said, well, you know the average award is now so many tens of millions or anything. Certainly, all of our early cases were either single-digit millions or $10, $15 million, and when Metalclad came out for $15 million, that was a lot of money! Everybody thought that was a huge amount, even though the claimant wanted $90 million. And if you look at it like a line-item budget for education or healthcare, that is a lot of money. Where does the state come up with a billion, $1.5 billion, to pay? Those are staggering amounts of money. And I’m not saying they’re not warranted. If there’s been the taking of an oil field or something, maybe that’s the case. Although, look what has happened in the last few months to the value of oil. It’s fallen to half or less than half of what it was. So, I think that arbitrators need to be mindful, and this is where the game gets played, you know, with the experts and the forecasting and so on. And I think in the earlier days, like in Metalclad, they were expressly concerned about being overly speculative and basically awarded the claimant its money back, the amount that they’d invested after certain deductions. We’re not seeing that as much anymore. We’re seeing, you know, “Oh, the cash flow projection is ‘x’,” and what’s happened to the price of oil is a classic example of why that can be terribly wrong. You could be terribly wrong, by being double, by basing it off the price of oil being double what it is today. And how long will that last? Maybe it will come back, maybe it will level off. So it’s not a very precise exercise.
MGC: When an award is issued, BITs require the state to pay the entire amount, a lump sum amount, on the day the award is issued, when the claim is often for the lost profits for the economic life of the investment. Wouldn’t payment over time make more sense?
CM: The damages figure that the arbitrators arrive at, whether based on the discounted cash flow value or the net present value of a certain stream of earnings, is the value today. So in theory if you were to have sold the asset that’s been expropriated or taken out of business, if you sold it the day before the expropriation, that would be the price payable in today’s dollars now. I can see why you ask if it would make sense to make payments over time…although I look at it a little bit differently, and that is: when do you get to the point in terms of the amount the claimant is seeking, it would rather have the claim instead of the business? Because then you know that people aren’t taking into account all appropriate negative contingencies. I think if something is missed, that’s what it is—it’s the negative contingencies. We’ve used a couple of different investment banking firms that buy and sell businesses and they say, “No, the discount rate is much higher than that in this industry,” because there’s many things that can go wrong in a particular industry or particular market. But, los expertos! [laughter] the ones who know, the all-knowing, they all want to drive that discount rate down to 10-12%, when maybe it should be 24-25% in reality, in truth. So this is where I find that the figures get bumped up. And the other thing is the “but for” scenario, damages for something other than expropriation claims, like breach of the minimum standard of treatment: “But for the egregious behavior of the state, here’s what our business would have done. Never mind our track record, because here’s what would have happened.” It’s the “hockey stick curve”—flat prior to the alleged treaty breach, then with a sharp increase in projected earnings after the breach. So there’s a lot of artifice in the whole damages area. Some tribunals are very good at figuring out damages. I still think that the best damages award is S.D. Myers v. Canada, where the tribunal took the domain of possible contracts that could have been performed by the claimant and discounted a certain percentage because competitors would have gotten them and for certain other factors, which took a claim that was pitched at $20-30 million down to $6 or $7 million, which seemed realistic at the end. I think at times we’re missing this sort of realism.
MGC: Do you see these types of discussions taking place at the settlement level? Are governments evaluating the different scenarios of how much they would need to pay if they lose, or what is the likelihood of losing? Is there a serious, analytical, methodical evaluation of the settlement scenario versus litigation, or do states tend to litigate all the time because there are legal or political constraints to negotiating?
CM: Well, I’ll say this based on just what I think about the world at-large and not any particular state: I think in the cases of some states, it’s so hard to face the fact that the claimant will succeed—or there’s the high probability of succeeding, so we have to address how much to pay—that it’s a difficult exercise to reach that conclusion and then agree on a number. Certainly, though, when a claim is received the lawyers take a close look at it and try to reach some early appraisal—and, let’s be honest, all claims are presented for far more money than they’re visibly worth or than the claimant expects to get, or even hopes to get. And so there is often a question of trying to determine just how inflated it is. I think that the best likelihood for settlements in many cases is to try to do something about the measure, to see if during that six month or three month cooling off period, whichever it is under the treaty involved, there’s something that can be done to put the investor back in business. I think that that’s probably the more fruitful area for settlement. It’s not very common to see cash settlements, although the most recent ICSID statistics are quite interesting, because they indicate that just over a third of all cases are either settled or discontinued. Of these, about 15% resulted in a settlement agreement that was embodied in an agreed arbitral award, and about 45% involved discontinuance at the request of both parties, but no revelation of the terms of the agreement to discontinue. So I think it can be fairly assumed that about 10 to 15% of all ICSID cases result in a settlement that is of some benefit to the claimant. It is also interesting to note that only 46% of all cases decided by tribunals in 2014 resulted in an award in favor of the claimant.
MGC: Do you see structured mediation efforts between the parties, or is it something that just happens informally?
CM: Usually, my experience has been—and this is in cases I’ve been involved in—by the time the case gets to a notice of arbitration being issued or at least a notice of intent to start an arbitration, whatever efforts to resolve internally have already been undertaken. Could a mediation in the formal sense, where the parties say, “OK, never mind what’s happened. Let’s sit down and see if we can resolve this,” work? I’ve never had one formally, so it’s hard to say. There are some statistics in the ICSID about the outcome of conciliation proceedings. About 2% of all cases have been submitted under the conciliation rules. Of these, about 30% have been withdrawn—indicating that they might have resulted in a settlement—and only 20% of the remainder resulted in a conciliation report recording a settlement. So it can be assumed that the process assisted in the settlement of something more than 10% of all cases submitted for conciliation, but this represents a very small percentage of all cases submitted for resolution by the ICSID.
MGC: Can you think of anything that would make these kinds of mediation efforts during the “cooling off period” enhance the possibilities of reaching settlement?
CM: Yes, I think that if the system was that if you register a claim…actually, they tried this in Metalclad. Sir Elihu Lauterpacht presided; he was very experienced and very senior. He invited the parties to tell the tribunal a little bit about the case beforehand, and then said the tribunal would be available if at any time there was any prospect of resolving it. He sort of held out the olive branch early on. It didn’t resolve, as history tells us. There are examples in domestic court systems where, if you’re going to go to court, there’s a case management judge who will call for admissions and certain things and bring the parties together in the same room. This may reduce the cost of proceedings just by simplifying it and may get the parties talking about what can be done to resolve it.
MGC: What if the arbitration attorneys were kept out of these settlement negotiations?
CM: Hmmmm…no lawyers? [laughter] You know, I’ve seen that in certain other contexts. I suppose the answer is that it depends on just how sophisticated the claimants and the respondents are. The respondents, if they’re being asked to pay money, will need to be advised by people who know how much they’re going to wind up paying, so they really need to be involved in the process, if not directly, then very closely. It’s an interesting question. You see, the other thing, too, is that in many governments, somebody has to take a decision. This is a problem that I think exists in many countries, where the person who has to take the decision then bears responsibility for it. So they want to see solid opinions on what is going to happen. And often, as counsel, it’s difficult at any given stage to give a solid opinion; it’s always based on what we know at the moment.
MGC: We have seen cases that have been settled right before the hearing without outside counsel being involved in the negotiations.
CM: And, you know, when that can happen, it’s a good thing, I think. If the parties can call each other up and say “The lawyers aren’t getting this resolved…” And sometimes there are cases where there’s a continued relationship between the parties, where that’s important—to say, “Let’s bury the hatchet and move on.”
MGC: When a claimant elects to sue a government in arbitration, what is the typical respondent state’s position? Would the respondent state expect the claimant to pack up its things and leave the country? Or do you think it’s still possible for a claimant to operate in the country after having sued the government?
CM: Oh, we’ve certainly seen claimants who’ve continued to carry on business as usual. A good example is the “fructosa trilogy,” as I call it, where the companies that brought claims continued to carry on business, and I don’t think there’ve been any ill effects. And it might depend whether you’re a business where your public profile mattered.
In the case of Mexico, for example, there’ve been numerous notices of claims that were small, where somebody’s got the idea that, you know, “I’m ticked about this so I’m going to put in a notice of arbitration or a notice of intent.” They rarely—in fact, they never go ahead. I think those people decided to withdraw when they didn’t get the reaction they wanted. The notices get assessed and some effort is made to assess the validity of the claim and what its value might be, but the would-be claimants usually find that it’s way too expensive to pursue modest or small claims, so they don’t.
MGC: Will there ever be, you think, a…
CM: Small claims court?
MGC: Yeah, or arbitration being less expensive and available for small investors? They may have legitimate claims.
CM: Well, part of the problem is that in court, there’s one judge, not three, on a salary that the government pays. In the arbitration process, you have three well-qualified people who are all being paid a very high per diem—worth it, I’m sure [laughter]—by the parties. And then you pay for the facility. And then you’ve got a very labor-intensive process: the ICSID and UNCITRAL rules try to merge civil and common law practice, so it has the best of both worlds and the worst of both worlds in the sense that there’s a heavy reliance on written documentation as well as a full oral hearing. There are many hours of work put into investor-state cases that wouldn’t necessarily occur under either the common law system, where the trial or the hearing is everything, or the civil law system, where the written work is everything. Instead, you’ve got a kind of doubling-up. I’ve looked at the possibility of getting a sole arbitrator on a case to try to move it along faster, and maybe limiting the pleadings. I’ve looked at that on behalf of a claimant, but it only happens when a respondent will agree and if the respondent says no thanks, then it has to be a tribunal and you’re going through the whole process and it’s going to cost. I know of several cases where the claimant received an estimate and says, “I can’t afford that,” or “I don’t want to throw good money after bad,” and decided not to proceed.
MGC: Respondent states tend to take a pretty restrictive view towards arbitral tribunals having jurisdiction over investment claims. Their view is that investment arbitration is available for very defined, limited types of issues—but then when you talk to claimants or work with claimants, that is not how they are reading the treaty. They tend to take a more expansive view.
CM: That’s not how some arbitrators are reading the treaty either…
MGC: Right. That is, I think, my point: do you see tribunals accepting this more “expansive” approach of arbitration? Cases such as Abaclat with multiple claimants, cases where the investors are making claims for issues that relate to trade measures: do you think that tribunals are being more flexible about jurisdiction?
CM: I think it depends entirely on who is on the tribunal. In some cases, you can predict very accurately who the claimant will appoint because you know there are people out there who take a particular view, for example, on the minimum standard of treatment or fair and equitable treatment. I think that part of it is getting the state’s message across: “Look, it’s not just us as respondent—not just this state, but states generally—that use this treaty language. That does not mean that it’s expansive and it grows. It means that it’s a minimum threshold that requires a very serious form of breach.” But that’s a continuing struggle. It is one particular area where the jurisprudence is all over the map. What would make a difference would be if there was some sort of appellate mechanism, where an appeal court says, “Sorry, that’s not how you read that language.” Under a system like the WTO’s appellate body, the arbitrators’ expectation would be that overly expansive treaty interpretations will be slapped down and the worries and concerns of state parties will be significantly reduced.
MGC: What do you think of third-party funding for arbitration claims? Is it good? Is it bad? Is it working? Is it common?
CM: It seems to be more common. I suppose it’s good in the sense that it accords a party that can’t afford to pursue a claim an opportunity to at least see some of their money. I think one always has to be careful when there are third parties involved, you know, so that it’s the “truth and justice prevail” kind of thing as opposed to economic interest. I don’t, in principal, have a problem with it.
MGC: If tribunals learn that the claim is being funded by a third party, would it make a difference in their evaluation of the merits of the claim or the damages to be awarded?
CM: If anything, I suppose, it might make an arbitrator feel less sympathetic to the claimant. But in theory, it should be irrelevant. I mean, lawyers who do contingency fee cases for people who are injured in accidents are third-party funders because they cover the disbursements and carry the fees. That’s a fact of life that we’re all used to. It’s a more sophisticated approach here. I don’t necessarily have a problem with it. I think it’s more of a question of just, OK, who’s calling the shots? Are lawyers acting independently and providing the correct advice and doing what they should do and not embarking on actions in the case that are inappropriate? There’s nothing that waves a red flag at me, but it’s an area where you kind of want to wave a caution flag, take a look around.
MGC: Talking about general trends in the arbitration world, do you see countries renegotiating BITs taking into account their experiences in arbitration proceedings?
CM: They clearly should. As BITs come up for renewal, there should be a new standard. The thing is, too, that we’re on the verge of a whole new set of BITs. The TPP (the Trans-Pacific Partnership)—all the NAFTA parties will be agreeing to something quite a bit more detailed than currently exists under NAFTA Chapter Eleven. Plus it will also include Australia, New Zealand, Japan, Malaysia, Indonesia, Vietnam and the other participants. I think it would be worthwhile for the world to take a stab at a common investment treaty that has common principles. Certainly, what’s going on now in the European community…it was fine when they were imposing these treaties on capital-importing states, but now that it’s them and potentially the United States…and you know, a Swedish state entity giving notice to sue Germany over what would be the phase-out of its nuclear power plants—massive potential damages. So, everybody there is taking stock of this. It’s going to be really interesting to see what happens in the next couple of years. If I was advising a state client, I’d say, “Now is the time to look at all of your treaties and see exactly what you’ve agreed to and what does your MFN [most favored nation] language say? What is it intended to do? Is it time now to create a new model? Do you want to harmonize it with the TPP?” Because the array of different treaties makes it very confusing. I think there could be a common treaty with individual contracting states making reservations and exceptions, just like the WTO agreements, where a state reserves a particular industry or a particular measure or whatever, and then that becomes the subject of further negotiation, but everybody knows what the language means and what it applies to. And my hopes would include the establishment of some sort of an appellate mechanism where wise men and women would say yes or no to the way arbitrators have interpreted and applied the treaty language.