Investment Arbitration in the EU-Vietnam Free Trade Agreement – The Times They Are a Changin’

by Ruth Marie Mosch at Mosch Legal

I.    Introduction
The EU-Vietnam Free Trade Agreement (“FTA”) is meant to ensure sustainable growth by liberalising trade and securing stable jobs. Negotiations on the FTA have been concluded and the text of the Treaty has recently been published.
The FTA implements a new approach to investment protection by ensuring the EU’s and Vietnam’s right to regulate and to pursue legitimate public policy objectives such as the protection of health, safety or the environment.
Since the Treaty of Lisbon entered into force on 1 December 2009, foreign direct investments have been included in the competence of the EU’s commercial policy. Since then, foreign investment has become part of free trade agreements negotiated by the EU. Accordingly, existing bilateral investment treaties (BITs) between Vietnam and EU member states will be replaced by the FTA once it enters into force.

II.    Investment Dispute Resolution in the EU-Vietnam FTA
The new FTA between Vietnam and the EU creates a completely new system for investment arbitration.
The provisions on investment arbitration in the FTA are extensive. Included are about twenty articles on the investment tribunal system and the conduct of proceedings.

i.    System of Investment Arbitration
A major change to the current investment arbitration system is the creation of a standing body for the resolution of investment disputes. The role model for this permanent arbitration tribunal is the dispute resolution system of the WTO and the Iran-US Claims Tribunal.
The relevant provisions are found in Chapter 8 “Trade in Services, Investment and E-Commerce”, Chapter II “Investment”, Section 3 “Resolution of Investment Disputes”, of the FTA. Article 12 establishes the tribunal for investment claims, which are themselves defined according to Article 7.
The FTA’s permanent tribunal will consist of two bodies: The “Tribunal” hearing first instance cases and the “Appeal Tribunal” hearing appeals. The Tribunal will initially have 9 members and the Appeal Tribunal 6 members, with a third of these members being from Vietnam, the EU and other countries, respectively. All members will be jointly appointed by the EU and Vietnam. To hear cases both bodies sit in divisions of 3, one from the EU, one from Vietnam and a neutral third country chairperson.
The tribunal members shall possess the qualifications required in their respective countries for appointment of judicial offices and they shall have demonstrated expertise in public international law. It is merely “desirable that they have expertise in …international investment law, international trade law and the resolution of disputes”.
The essence maintaining a standing tribunal such as the one in the FTA is that the investor is deprived of its right to choose and nominate its own arbitrator. It definitely marks a setback in so far as neutrality of the forum and equal initial position of the parties is concerned. The thought that arbitrators appointed by states are naturally more inclined towards the perspective of the states in investment arbitration is not totally far-fetched. This impression is reinforced by the fact that the members of the FTA’s tribunals must only have knowledge of international public law whereas the knowledge of international trade law is merely “desirable”.1
This impression – whether justified or not – will have an impact on the investor’s decision to initiate arbitration before such a tribunal. The interests and perspectives of the investors’ side may not be represented on the FTA’s tribunals. The new system may therefore marks a disadvantage for investors compared to the old system, in which investors can freely choose a member of the arbitration panel, for instance an arbitrator known to be generally closer to the investor’s perspective than to the state’s perspective.
If standing investment tribunals are the future, stakeholders should be enabled to choose an equal number of tribunal members as the states in order to represent investors. In order to reach this goal, investors could find an international organisation to safeguard their interests and exercise the right to appoint investment tribunal members.

ii.    Provisional Award and Appeal Procedure
A fundamental difference to investment arbitration as we know it, is that the award is not final and binding but only “provisional”. The award becomes final 90 days after it has been issued and only if neither party has brought an appeal before the Appeals Tribunal.
This appeals mechanism is meant to ensure the correct application of the law and the homogeneous interpretation of the FTA’s provisions. Grounds for appeal are that the Tribunal erred in the interpretation of the applicable law, that the Tribunal manifestly erred in the appreciation of the facts and all grounds provided for in Article 53 ICSID Convention. If the Appeal Tribunal finds for the appeal, it modifies or reverses the provisional award in whole or in part.
The appeal mechanism attempts to address the problem of inconsistency of some arbitral awards rendered in investment arbitrations in the past, where arbitral tribunals in different cases came to different conclusions on the same issues of public international law.2  Prominent examples for inconsistency of decisions in investment arbitration are the Lauder3  cases, where a tribunal seated in Stockholm and a tribunal seated in London arrived at different decisions over the question whether the Czech Republic breached its obligations to a US investor and its Dutch subsidiary.
It is clear that different decisions on the same or similar facts undermine the trust of the public opinion in a legal system, render it less reliable and predictable and thus run counter to the very idea of the law. Against this background, and considering the history of conflicting decisions in investment arbitration, a standing body producing consistent case law appears to be a good solution. However, to be effective in harmonizing investment arbitration decisions, such a body would have to be competent to rule on all investment disputes worldwide or at least on the majority of cases.
So far Vietnam has been the respondent state in four investment arbitrations. From the investors who initiated the proceedings three were from Europe and one from the US. According to UNCTAD, until the end of 2014, there were 608 investment arbitration cases worldwide. The EU-Vietnam FTA thus created an appeal mechanism for a marginal part of cases.

iii.    Applicable Law
Arbitral tribunals are, like any other tribunal, bound to the applicable laws. In investment treaties, public international law concepts usually apply. According to Article 16, the Tribunal shall apply the investment protection provisions of the FTA, apply other rules or principles of international law applicable between the parties, and take into consideration any relevant domestic law of the disputing state.
In their application of domestic law, the Tribunal and Appeal Tribunal are bound by the interpretation given to domestic law by the competent courts and authorities. This supplement clarifies that the Tribunal and Appeal Tribunal are not only bound to the mere wording of the domestic law but to the interpretation given to it by domestic courts and authorities. It thus limits the competences of the Tribunal to interpret the wording of domestic law.
Moreover, where serious concerns regarding the FTA’s interpretation arise, the Trade Committee established under the FTA may adopt interpretations, which are then binding upon the Tribunal and the Appeal Tribunal.  This possibility of binding interpretation by the Trade Committee is a concept taken from NAFTA – the North American Free Trade Agreement between Canada, the US and Mexico. It certainly is useful for the avoidance of conflicting treaty interpretation by tribunals. The institution of interpretative powers appears beneficial to the rule of law as it increases predictability of treaties’ application by  investment arbitration tribunals4.

III.    Conclusion
The FTA’s investment tribunal system as discussed above marks a new era in the history of investment dispute resolution. The most important change is the fact that investors will no longer have the possibility to choose their arbitrator and thus may lose their influence on the composition of the tribunal hearing their case. Investors will probably perceive this as a major disadvantage, as the possibility to select an arbitrator is constantly named as one of arbitrations’ biggest advantages. In consequence, investors’ acceptance of decisions and identification with the system will decline.
The chapter on investment protection of the FTA shows that states reinforce their grip on investment arbitration. The provisions further address the criticism of investment arbitration in recent time. The treaty therefore also represents a model for the continued existence and evolution of investment arbitration as an important mechanism of international dispute resolution.

1 EU-Vietnam FTA, Trade in Services, Investment and E-Commerce, Chapter II, sub-section 4, Article 12 fourth paragraph.
2 Read for instance: Frank, Susan, The Legitimacy Crisis in Investment Treaty Arbitration, Fordham Law Review, Vol. 73, 2005, p.1558.
3 Lauder v. Czeck Republic, Final Award issued by the Tribunal seated in London: http://www.italaw.com/sites/default/files/case-documents/ita0451.pdf.
4 Read for instance: Kaufmann-Kohler, Interpretive Powers of the Free Trade Commission, Fifteen Years of NAFTA Chapter 11 Arbitration, pp. 175-194.