CPEC Investment Court-An Investment Protection and Dispute Resolution Mechanism for the China Pakistan Economic Corridor

CPEC INVESTMENT COURT-AN INVESTMENT CPEC INVESTMENT COURT-AN INVESTMENT PROTECTION AND DISPUTE RESOLUTION MECHANISM FOR THE CHINA PAKISTAN ECONOMIC CORRIDOR By Rao Qasim Ali Khan Advocate High Court, Lahore INTRODUCTION Encompassing both land and maritime routes, the One Belt One Road Initiative ("OBOR") led by China casts its net over the vast geographical expanse of East, Central, and South Asia, seeking to substantially enhance economic connectivity, cooperation and activity in the region and beyond. Within the broad framework of OBOR, the China Pakistan Economic Corridor ("CPEC"), a regional trade and connectivity undertaking, was announced with "a vision to improve the lives of people of Pakistan and China by building an economic corridor promoting bilateral connectivity, construction, explore potential bilateral investment, economic and trade, logistics and people to people contact for regional connectivity." With growing levels of investments in Pakistan and increased cooperation between Chinese and Pakistani businessmen, the prevalent Free Trade Agreement ("FTA") between China and Pakistan, entered into in 2007, much prior to the origination of CPEC, has been rendered obsolescent. The governments of China and Pakistan are negotiating a new FTA and it is imperative that an Investor State Dispute Settlement ("ISDS") mechanism be put in place, which balances the need to protect investors with the rights and duties of the state in order to avoid economic exploitation and arbitrary acts. In this article, I shall be discussing the merits for establishment of a permanent investment court for CPEC as a replacement for existing ISDS mechanism in Pakistan China FTA in lieu of recent developments in ISDS mechanisms in International Investment Agreements ('IIAs"). A BRIEF OUTLINE OF ISDS The Investor State Dispute Settlement was introduced in mid-twentieth century as an alternate to the gunboat diplomacy of yore where trade disputes were settled by military escalations between states. A tool of international law, ISDS's emergence coincided with the formation of the United Nations, which sought an economic system "based on equity, sovereign equality, interdependence, common interest and cooperation among all States". ISDS was one of the means by which certain types of international legal disputes arising out of investments could be arbitrated without any influence from the state. It originated from the Washington Convention of 1965, the signatories of which established the World Bank's "International Centre for the Settlement of Investment Disputes ("ICSID"). ISDS claims flow from international investment agreements where countries agree to ensure that investments made by entities or persons of one country are insulated against indiscriminate actions by the executive, judicial or legislative branch of a state. Almost all IIAs, such as, free trade agreements, bilateral investment treaties, and multilateral investment treaties, contain clauses referring to international arbitration in the event of a dispute arising from a breach of treaty obligation with regard to protection of investment by a person or entity in the state. In effect this international law regime allows for foreign nationals and entities to lodge a claim against a state directly before an international forum thereby ensuring the "de-politicization" of investment disputes. When it comes to ISDS, there is a freedom of choice to the parties particularly to the investor to choose the institution that shall act as the default arbitral forum. The respective IIAs let parties to pursue claims under the International Centre for Settlement of Investment Disputes (ICSID Convention), the Rules on the Additional Facility for the Administration of Proceedings by the Secretariat of the ICSID (ICSID Additional Facility) or the United Nations' UNCITRAL Arbitration Rules apart from certain other dispute settlement bodies. To invoke arbitration under any of these stated rules requires consent of the parties to the dispute, which consent, on behalf of the state, is customarily imbedded in the IIA. There is no internationally acceptable uniform legal basis for ISDS and reference is made to the respective investment treaties entered into by states. As a form of international arbitration, ISDS mechanisms depends on the choice of proceedings consented by parties however International Centre for Settlement of Investment Disputes ('ICSID Centre') created under the ICSID Convention 1966, is the dominant choice of most parties in ISDS dispute and in this article we shall focus on ISDS proceedings conducted in terms thereof. Article 25 of the ICSID Convention states that 'the jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent sub-division or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre.' Once an investor has exhausted reconciliation remedy provided in Articles 33 and 34 of the ICSID Convention, it may file a request for arbitration before the Secretary General of the ICSID Centre under Article 36 for registration of the request that may accept or reject such an application. In the event that the request is registered, an arbitral tribunal shall be formed in terms of Article 37 of the ICSID Convention consisting of arbitrators appointed by each party. The arbitrators may be appointed from the panel of arbitrators of ICSID Centre or any person can be appointed as an arbitrator subject to the requirements of Article 14. The parties commonly agree upon the president of the Tribunal however in the event of disagreement, the Chairman of the ICSID Centre may appoint the arbitrator and/or the president of the tribunal per Article 38 of the ICSID Convention. Investors ordinarily seek pecuniary compensation claimed due to the acts or omissions of the state deemed to be in violation of a fundamental safeguard to investment provided in the IIA under question. Apart from pecuniary restitution, investors have also sought on occasional instances subject to the terms of the IIA, restitution by way of repeal of a state's impugned act or by handing back the property so acquired. In most cases, investors also seek interim relief against any measures that may cause irreparable harm to the investor. After the arbitral tribunal has conducted the arbitral process, it passes an award that is binding on the parties to the proceedings. A limited review option is available with restrictive scope and currently no appellate mechanism is available with regard to ICSID Convention although various proposals are in the offing in this regard. The enforcement of such an award, although made a feature of the ICSID Convention vide Article 54 thereof, is commonly sought through the domestic court process of the litigated state under the New York Convention subject to the state's immunity from execution. As of June 30, 2017, ICSID had registered 619 cases under the ICSID Convention and Additional Facility Rules with an increased trend recent years depicting investors resorting to ISDS proceedings under ICSID. Both Pakistan and China are signatories to the ICSID Convention and the New York Convention and provide for safeguards to investors in the IIAs entered into respectively by them. ISDS has been hailed as a benchmark for ensuring that states comply with the provisions of the IIAs with regard to investor protection however in recent years, ISDS has come under increased scrutiny by public, courts and scholars alike. CRITIQUE OF ISDS The proponents of ISDS often hail it as an effective safeguard for investors who might otherwise face 'allegedly' biased domestic judicial system, political instability, and arbitrary state policy. The increased flows of foreign direct investment and the rule of law in the international legal arena are often attributed to the ISDS mechanisms put in place in IIAs and their adjudication by international forums such as the ICSID Centre. However despite its apparent benefits to the cross-border investments, ISDS has come under scathing criticism from governments, politicians, academics, and citizens. The detractors of ISDS point out that the arbitral tribunals do not uniformly apply standards for protection of investment and an entire gamut of awards have been rendered which are prima facie inconsistent with previous awards . This dichotomy is said to exist because the award rendering bodies which are ad hoc in nature and do not form any stare decisis or jurisprudence constante from which guidance could be sought. Furthermore, since most arbitrators are career lawyers who are reliant upon the investors, normally large multinational companies, for work and referrals, it is argued that they can neither exercise independence, nor divest themselves from the web of conflict of interests when it comes to adjudicating on such matters. In recent times, another cogent arguments given against ISDS is that it transgress a state's right to regulate its important domestic sectors such as environment, public health, labour standards or actions taken in response to extraordinary economic or political crises. The matter of Philip Morris v. Australia demonstrates an investor's ability to challenge a state's right to regulate health industry standards with regard to tobacco usage and labeling. Whereas ISDS provides an investor with the right to bring a complaint against a state no reciprocal right is given to neither the state nor its citizens to bring complaints against an investor with respect to its investment in pursuance of an IIA. Moreover, the legal costs of ISDS proceedings before ICSID Centre are prohibitively high. The ICSID Annual Report 2016 estimates the average cost of proceedings before ICSID as USD 12 Million. Such excessive costs of the ISDS process, excluding award implementation proceedings before the domestic court, makes it particularly arduous for most small and medium size companies to utilize ISDS mechanisms for dispute settlement. It is prevalently argued that ISDS mechanisms are a tool for large corporations to coerce states to either take actions so desired by such corporations or face the prospect of paying substantial damages for their defiance. They are described as "Pseudo Courts" working under a cloak of secrecy with limited public access to proceedings and documentation filed therein. ISDS mechanism was devised with the basic premise that domestic legal systems in states would be biased towards investors. It has been argued that varying state policy results in many projects being either made scapegoat for corruption charges or scrapped altogether. This argument has the basic flaw of negatively by implying shortcomings in the host country's judicial and executive branches. ISDS mechanisms sidestep remedies available before domestic jurisdictions and reduce incentives for improvements in the domestic ISDS mechanisms. While seeking to bypass domestic judicial systems, ISDS mechanisms are dependent on this very system for enforcement of the award. Since Article 54 of the ICSID Convention does not provide any execution mechanism for award rendered, investors have to approach the domestic courts, invoking relevant domestic legislation for execution of the awards. Various cases have shown the difficulty in execution of such awards as a domestic judgment since sufficient levy is given to domestic courts to interpret "public policy'. Grey areas remain in the procedural impediments in enforcing such awards and substantial time is consumed in award implementation in the domestic system. Another criticism of ISDS mechanism is that there is no appellate forum where an affected party may file an appeal. In present circumstances, the decisions of the ad hoc tribunal is final and save for any legal defect apparent on the face of the record, there is no right to appeal the decision passed by the ad hoc tribunal. Although in recent times studies have been conducted on the establishment of an appellate body however no concrete measures have been adopted in this regard and ISDS mechanism remain a single stage process without the right to appeal of the decision reached. Therefore ISDS has been faced with the question of legitimacy of its proceedings as ad hoc bodies and oft critiqued as non-judicial bodies in nature that seek to circumvent a state's right to regulate in important policy matters without providing any appeal. ISDS is painted as a capitalist tool only available to large corporations who have the financial depth to pursue this remedy and is not open to local investors and citizens who are increasingly put at a disadvantageous position, as they cannot intervene in a matter that directly affects their interests. RECENT INNOVATIONS IN ISDS MECHANISMS IN TRADE TREATIES The critique of ISDS mechanism led policy makers to adopt innovations to ISDS mechanisms that address some of the key issues in need of reform. The Comprehensive Economic and Trade Agreement Between Canada and the European Union ("CETA" ), has set the modern benchmark by seeking to redefine ISDS mechanisms while purporting to remain compatible with the ICSID Convention and the Vienna Convention on the Law of Treaties. It is still in transitory phase and there are no decided cases with which to gauge the efficacy of the new ISDS system however it provides a way forward to countries seeking similar mechanisms for Investor state dispute resolutions and aims for the establishment of a permanent investment court. Since CETA aims to remain within the framework of existing international conventions and arbitral rules, it has been agreed that a claim may be submitted under either the ICSID Convention or Rules of Procedure for Arbitration Proceedings, the ICSID Additional Facility Rules, the UNCITRAL Arbitration Rules or any other rules agreed to by the disputing parties. CETA seeks to address a major criticism of ISDS by providing for appointment of a panel arbitrators on fixed five-year tenures once renewable who are retained through a monthly retainer fee. The arbitrators are appointment by the respective governments (Canada and E.U member states in this case) and their eligibility criteria are set as the same for judicial appointments in the appointing state apart from the requirements that the candidates must hold expertise in public international law, international trade law and international investment laws. With regard to conflict of interests and transparency guidelines, CETA relies on the International Bar Association's Guidelines on Conflict of Interests in International Arbitration and the UNCITRAL Arbitration Transparency Convention. Cases are distributed on random basis to roster of tribunals drawn from the list of arbitrators appointed by the respective states. The tribunals consist of three members with one member of the tribunal to be a national of a third country. The hybrid system integrating traditional ISDS approaches with novelty has been hailed as a benchmark of CETA by its signatories which allows for the state the right to regular economic activity in public interest without fear of ISDS claims. For instance, CETA includes "clearly defined investment protection standards, including on fair and equitable treatment and expropriation and provides clear guidance to dispute resolution Tribunals on how these standards should be applied". Furthermore CETA conforms to traditional ISDS approach and primarily provides for pecuniary compensation as remedy for violation of substantive investment protection condition contained in the IIA with limited other remedies such as restitution available only to locally established entities. As for the enforcement of the awards given by the tribunal, CETA again relies on the ICSID Convention, ICSID Additional Facility Rules, and the UNCITRAL Arbitration Rules, and provides that the final arbitral award shall relate to claims arising out of a commercial relationship or transaction for the purpose of Article I of the New York Convention. Another key innovation of CETA is the formation of the appellate tribunals to review awards rendered by the tribunal of first instance. In this regard Article 8.28 provides that the Appellate Tribunal "may uphold, modify or reverse the Tribunal's award based on errors in the application or interpretation of applicable law, manifest errors in the appreciation of facts and relevant domestic laws, and the grounds set out in Article 52(1)(a) through (e) of the ICSID Convention." Although CETA has at a minimum sought to address some apparent flaws in traditional ISDS mechanism however the drafters of CETA took a cautious approach while mechanism so as to adhere to traditional ISDS mechanisms such as ICSID Convention. Major criticisms of ISDS remain such as unfairness of proceedings and the right of affected parties beyond investors and states to be allowed as parties to proceedings and the apportionment of obligations to investors that may be actionable in the same way as their rights. Since CETA aims to pursue the establishment of a multilateral investment tribunal and appellate mechanism for the resolution of investment disputes and therefore currently presents the most viable route to an alternative dispute resolution mechanism while arguably seeking to remain within the benchmarks set forth by traditional ISDS mechanisms. CHINA AND PAKISTAN'S EXPERIENCES WITH ISDS It is interesting to note that the first ever post Second World War Bilateral Investment Treaty ("BIT") was signed between Germany and Pakistan in 1959. Article 11 of this BIT contained a dispute resolution mechanism of arbitration under the auspices of the International Court of Justice. Pakistan has adopted the mainstream international arbitral conventions and is signatory to both the ICSID Convention and the New York Convention, which conventions it entered into without any significant caveat. China on the other hand, was a latecomer to international trade, signing its first BIT with Sweden in 1982 and has gone on to enter into a substantial number of BITs. However, China was reluctant to provide for international arbitration that may arise under BITs and mainly resorted to provisions relating to 'mutual protection and promotion of investors'. In recent times, China pivoted towards providing more comprehensive dispute settlement mechanisms in its BITs with the BIT between China and Germany entered into in 2003 as testament to this fact. Pakistani Courts however do not have a stellar record in implementing foreign arbitral awards with the process often long and tedious. Most recently, Pakistan has faced significant cases under ISDS before the ICSID and there have been frequent adverse decisions passed against it. Similarly, various companies through the years have successfully challenged actions undertaken by the Pakistani government before international arbitral forums. On the other hand, no Pakistani company has ever invoked the provisions of a Bilateral Investment Treaty to pursue ISDS proceedings against a state. It could be argued that Pakistani companies do not usually venture in foreign markets however the prohibitive costs of ISDS proceedings could be a factor in hesitation in pursuing such proceedings. China, on the other hand, has recently been taken to ICSID proceedings by certain companies for breach of substantive investment protection clauses in BITs. The approach taken by China has been to resist the jurisdiction of ICSID however a majority of cases are pending adjudication and limited information is publicly available regarding the same. In recent times there has been a growing tendency of both Pakistani and Chinese Courts in recognizing and implementing international arbitral awards. Pakistan has enacted legislation to recognize international arbitral awards and a growing number of international awards are being enforced in Pakistani Courts. Similarly, China has sought the recognition and enforcement of international arbitral awards within its judicial system and the China International Economic and Trade Arbitration Commission ("CIETAC") has developed a strong reputation as a provider of high-quality arbitration services in Mainland China and has rendered billion of dollars in pecuniary compensation over the years. It is pertinent to note that no Chinese or Pakistani investors have brought claims against the each other under their BIT or FTA. Furthermore with specific regard to CPEC there has not been substantial litigation in domestic courts to reach any definite conclusion as to the possible implications on investment protection under BIT or FTA. The most substantial litigation to arise out of the CPEC remains the Lahore Orange Line Metro Project. A designated "early harvest" project under CPEC; the mass transit project was challenged on environmental and antiquity protection grounds before the Lahore High Court. The Punjab Government, one of the respondents in the case, argued, inter alia, that since the project is a Chinese loan under CPEC, any adverse judgment may affect the rights and obligations under the said loan. While deciding the matter, the Lahore High Court did not divulge into the intricacies and implications of Chinese financing and, but rather permanently restrained the Punjab Government from constructing the project on the basis of procedural anomalies in the approval process concerning the construction of the transit system in close proximity to landmark heritage sites of Lahore. The Punjab Government challenged the judgment before the Supreme Court of Pakistan, which while allowing the appeal for different reasons also did not consider the arguments regarding obligations with respect to the Chinese loan on the project. Since China and Pakistan have initiated dialogue over a possible new BIT and in light of substantial investments being made in Pakistan, and the significant trade imbalance eschewed in favour of Chinese companies, it is imperative that a permanent dispute resolution mechanism be established where investors and stakeholders may bring claims and disputes arising out of CPEC. FRAMEWORK FOR CPEC INVESTMENT COURT (CIC) Taking the tribunals formed under CETA as the initial benchmark, the framework of the CIC will be similar to the tribunals formed under CETA. Both China and Pakistan will have to agree on the investment provisions to be safeguarded by the CPEC Investment Court and the details of such a process in their BIT since all claims flow from the scope of such investment provisions. This Permanent Investment Court will primarily be seized with matters in relation to the Bilateral Investment Treaty signed between China and Pakistan in addition to projects being executed in pursuance of CPEC. Investment provisions form the backbone of any investment treaty and it is imperative that detailed studies be undertaken on the various forms of investment provisions adopted in modern BITs and to find a balanced approach where investment protection and welfare of state and citizens should both be taken into regard. It is imperative for investments to thrive and reach their optimal level that investors be given fair and equitable treatment by the host state and their investments given protection against transgresses of the state and its allied institutions. Both the countries would have to detail the scope of investment protection and market access given to investors while protecting the state's right to regulate legitimate policy objectives such as, amongst others, the protection of public health, safety, and environment as the BIT and FTA between China and Pakistan have different definitions of investors, investment, claims to be adjudicated upon by the adhoc tribunal amongst other provisions. It is therefore imperative that the existing BIT and FTA between Pakistan and China are expressly terminated in accordance with the Vienna Convention and a singular agreement be agreed upon detailing the meaning and scope of investments, investors, the state's right to regulate and other provisions apart from the establishment of a permanent investment court. The CIC will differ from the tribunals formed under CETA with respect to the arbitrators. Where CETA essentially forms a panel of arbitrators on monthly retainer fee, CIC will consist of permanent tenured judges appointed in equal numbers by both China and Pakistan. To ensure transparency, a minimum of two benches should be formed with three members in each bench. The consenting states i.e. China and Pakistan appoint one judge each to such a bench however the third member of the bench must be of a third country. As for the qualification of the Judges to the CIC, the suitable candidates will have to satisfy the prerequisites required to be a Judge of the High Court in Pakistan and the Higher Peoples Court in China with the added requirement that such persons must have sufficient knowledge with regard to International Investment Laws. The Judges may be appointed for one term of six years that may be renewed for one more term subject to detailed review by the appointing country in consultation with the consenting state. With respect to the judges of the third country to be appointed to the CIC, a joint working committee of the governmental representatives of China and Pakistan may devise the qualifications for appointment however it is imperative that such persons hold a qualifying degree in law, have good standing in their respective practice jurisdiction, and hold sufficient knowledge in International Investment laws, Public International laws, and International arbitral laws. The jurisdiction of CIC will be perhaps its jurisprudential obstacle. Traditional ISDS mechanisms only provide investors with the right to initiate proceedings against the state. This has led to severe criticism that individuals and local companies being adversely affected by the IIA's implementation in its home country. It is necessary that affected persons and companies of the home state be given the right to bring ISDS claims against investors before such a forum. A legal test of maintainability and actionable cause should be developed for individuals and companies of the host state who desire to approach such an investment court with pecuniary penalties be imposed for frivolous claims. The prevalent ISDS mechanisms including those envisaged under CETA are essentially arbitrations based on consent of the parties. To evolve from the present ISDS model from arbitration to adjudication system would present difficulties regarding consent by investors to the Investment Court. There would be various instances where the jurisdiction of investment courts and local courts will overlap and jurisprudential issues will be raised which would require comprehensive studies. The Appellate tribunal under CETA has the power to modify or reverse a Tribunal's award if there are (i) errors in the application or interpretation of applicable law, (ii) manifest errors in the appreciation of the facts, including the appreciation of relevant domestic law, and based on (iii) grounds set out in Article 52(1)(a) through (e) of ICSID Convention. In this regard the Appellate forum such as the one established under CETA should be part of such an investment court so that parties have at a minimum one forum to approach for any grievances with the primary award or judgment. The CIC should have its own secretariat with benches in both Beijing and Islamabad where adequate staffing arrangements are made. Both countries would have to jointly fund the investment court's budget. The procedure for case initiation and adjudication can be developed which are efficacious and ensure swift hearing of cases. All cases filed and pending before such an investment court should be public record and an information cell should be formed which can inform the general public about pending and decided cases apart from maintaining an online database of the same. CONCLUSION Although traditional ISDS mechanisms remain the predominant dispute resolution mechanisms however with tectonic shifts slowly taking place in international trade, it has become imperative to move towards a permanent dispute resolution body for investor state disputes. However presently ISDS, whether under CETA or other trade pacts such as the TTIP, remains a form of arbitration and not adjudication. The establishment of a permanent investment court shall present its own set of problems with the paramount being its jurisdictional reach. As Stephan Schill argues, "the introduction of centralized dispute resolution institutions, whether appellate mechanism or court, could raise its own legitimacy concerns that need to be addressed. Apart from the question of who sits as decision-makers, and who appoints or elects them, permanent institutions may display stronger dynamics in enlarging their jurisprudential powers than a system of one-off arbitral tribunals." It would be imperative that codes and guidelines be developed for such a permanent investment court which, as far as possible, attempts to draw clear jurisdictional lines between the permanent investment court and the local court of law. With the appointment of tenured judges, ancillary staff, and provision of facilities, critics can argue that such an investment court "might create overheads for a dispute settlement mechanism whose utilization by claimants is unforeseeable at the moment". The establishment of a parallel adjudication institution can also lead to critique about the 'lack of respect' shown for domestic court system and it would invariably become difficult for the state's judicial system to become more efficient. While dispute resolution under CETA continue to mirror arbitration after adoption of best practices from Canada and Europe and addressing some concerns regarding ad hoc ISDS arbitration, the drafters of CETA deliberately fell short of establishment of a permanent investment court. However each country is besieged with it own set of problems, and the executive branch of the Pakistani state tend to have shifting policies towards foreign investments. Therefore it will become ever more imperative that the organs of the Pakistani state implement clearly defined policies over a period of time regardless of political change. With the large-scale Chinese state backed and private investment expected in Pakistan in the coming years, it is imperative for sustained investment and growth that a permanent dispute resolution system is developed which gives impartiality and certainty to investors with regard to adjudication of their claims, a right to companies and individuals from the state to approach this forum for redress of any grievance with respect to investments made under the BIT and CPEC and ensure that the state is insulated from adjudication by ad hoc international tribunals