Mechanisms for International Investment Dispute Settlement: a lesson learned for Vietnam
Chau Huy Quang/ Logan Leung
Economic growth on a regional scale; scale of investment disputes arises
In recent years, Vietnam has been bracing itself towards a surge of foreign direct investment activity, prefaced by steadily growing interest in the country’s rich resources, attractive labour force and relaxation of foreign investment restrictions. A catalyst for such anticipated surge has been the Vietnamese Government’s active efforts to ensure Vietnam’s economic presence on the world map is marked through the conclusion of various bilateral and multilateral trade agreements.
However, with the anticipated rise of such activity comes the need for discussion regarding introducing foreign investment dispute resolution mechanisms – namely, through Investor-State Dispute Resolution (ISDS) clauses. It is undisputed that a strong mechanism for dispute resolution available for foreign investors, especially against the state or state bodies, bolsters investor confidence prior to their decision to inject capital into the country. It is also a factor considered prior to making an investment in a new jurisdiction.
The above particularly rings true for a rapidly emerging market such as Vietnam where, while the opportunities are plentiful, there is an aura of uncertainty among investors as to the country’s legal framework and government/administrative processes.
However, such mechanisms tend to act as a double-edged sword, exposing the country to actions brought by foreign investors, and this is the balance that should be considered prior to embarking on subscribing to such mechanisms.
Current state of affairs in Vietnam
In the field of domestic and international commercial disputes, arbitration is not a new concept in Vietnam, with the Vietnam International Arbitration Centre (VIAC) having been established since 1993 as the country’s premier arbitral institution. Since inauguration, the Vietnamese Government has actively promulgated regulations to bring the country’s legal framework for commercial arbitration in line with other jurisdictions (namely, through substantial adoption of the UNCITRAL Model Law through the Law on Commercial Arbitration (2010)).
Nowadays, through statistics of VIAC, the number of disputes with an international element being resolved via arbitration has seen almost exponential growth in Vietnam. This is arguably contributed, for a significant part, through the Vietnamese court’s increasing receptiveness towards recognising and enforcing foreign arbitral awards and the efficiency and cost-effectiveness of Vietnamese arbitral institutions.
While the situation is improving, there is still much work to do, as Vietnamese courts still have a tendency to liberally interpret the law in deciding to recognise and enforce (or ultimately set aside) an award, as opposed to traditional “arbitration-friendly” jurisdictions such as Malaysia, Singapore or Hong Kong. For foreign arbitral awards, approximately less 50% see recognition and enforcement in Vietnam courts as the interpretation of the law regarding this is not necessarily uniformly applied among judges, despite Vietnam being a member of the New York Convention 1958 since 1995.
It is positive to note, however, that among emerging and frontier markets in Southeast Asia, Vietnam ranks quite highly against the crowd in terms of arbitration friendliness.
For investor-state disputes, the treatment is hazier. To date, there have been a limited number of claims made by foreign investors against Vietnam’s state organs, state bodies or quasi-governmental entities. In fact, there have been no known investor-state arbitration awards put before a Vietnamese court for recognition and enforcement so therefore, there is still uncertainty as to how such awards will be treated in practice. Foreign investors that wish to enforce such awards will be grasping in the dark and such uncertainty creates difficulties for new and existing investors.
As awards have been enforced against state-owned entities in the past, it is possible that the Vietnamese courts will enforce it in line with the regime under the Law on Commercial Arbitration and the Civil Procedure Code (though we note that the former applies to commercial arbitrations, not investor-state).
As Vietnam is not yet a party to the ICSID Convention (see below), investor-state disputes have generally been adjudicated through ad-hoc arbitration under the UNCITRAL Arbitration Rules. Disputes of a commercial nature against state bodies or entities have generally been conducted through institutions of international repute (e.g., the ICC International Court of Arbitration).
For the former, few known commercial matters exist and due to arbitration privacy, information regarding these cases is generally limited to what has been disclosed to and reported by the press in Vietnam:
1. Michael Mackenzie v Vietnam (2010), initiated under the US-Vietnam Bilateral Investment Treaty (decided in favour of Vietnam);
2. Dialasie SAS v Vietnam (2011), initiated under the France-Vietnam Bilateral Investment Treaty (unknown); and
3. RECOFI v Vietnam (2013), initiated under the France-Vietnam Bilateral Investment Treaty (unknown);
All cases above were or are adjudicated under the UNCITRAL Rules of Arbitration in accordance with the ISDS clauses in the relevant bilateral trade agreements.
For the latter, figures are uncertain. However, our experience is that the government is not unfamiliar with the processes of these international arbitral institutions, as the subjects of such disputes are generally not of the state, but of state bodies or entities. While the track record for foreign recognition and enforcement is not yet at a level of uniformity in Vietnam, we have observed instances where foreign awards have been enforced against state bodies or entities, which is a positive precursor to treatment of investor-state awards in the future.
Preparation by the judiciary
The path to investor-state disputes currently remains open under many of Vietnam’s international commitments, including bilateral trade agreements. However, the lack of experience by the judiciary in such matters creates uncertainty in their treatment in the country, and it is important for Vietnam to ready itself for such claims.
For example, what may on the surface appear to be a commercial dispute between an investor and a state-owned entity may erupt into an investor-state claim in the event the State fails to safeguard the investor’s interests through the entity as a vehicle. Where the state holds a significant stake in the entity and such entity “appropriates” assets of an investor (e.g., a state-owned bank that appropriates monies from a foreign investor’s bank account), there is a potential exposure to dispute brought in accordance with the bilateral treaty between the investor’s home jurisdiction and Vietnam.
As another example, where a Vietnamese court freezes the monies of an offshore foreign investor in breach of international customs or practice (e.g., for letters of credits), the state is also exposed to potential suits against the affected investor.
Therefore, the roots of investor-state disputes are not always obvious. Without the existence of a dedicated legal framework for handling such matters, it will arguably be too late when such disputes do occur and eventually reach a Vietnamese court for recognition and enforcement. However, the remedying of this issue may be prompted by Vietnam’s potential ratification of the ICSID Convention (as below).
Being part of the ICSID Convention: bolstering investor confidence
The International Centre for Settlement of Investment Disputes (ICSID) is an international arbitral institution which facilitates the settlement of dispute among international investors. Only signatories to the ICSID Convention are subject to such mechanism and as Vietnam is not a signatory, investor-state disputes against it are not subject to its scope of resolution.
The pressure against Vietnam to participate in the Convention has been growing, going hand-in-hand with its efforts to bolster inbound investment from overseas.
Under the various trade agreements that Vietnam has ratified (e.g., the ASEAN Free Trade Agreement and existing FTAs) and is potentially anticipated to ratify (e.g., Trans-Pacific Partnership (TPP)), the resolution of disputes arising from matters therein between parties, particularly investor against state, is to be conducted through the arbitration rules of ICSID. Disputes may be resolved via other mechanisms (commonly ad-hoc arbitration through the UNCITRAL Arbitration Rules) in the event a party is not a signatory to the ICSID Convention.
The stipulation of ICSID as the first choice for investor-state dispute settlement in international trade treaties is unsurprising, as there are now 159 signatories to the ICSID Convention. For the states that have ratified the ICSID Convention, they are required to have in place mechanisms to allow for the recognition and enforcement of ICSID awards.
The argument for Vietnam to ratify this Convention draws in two schools of thought: on the one hand, it paves the way for encouraging foreign investment as Vietnam no longer rests as an outlier on this matter. On the other hand, Vietnam is exposed to the risk of a rise in suits against it. For the latter, the risk is a real consideration, and Vietnam is not alone: for example, Australia has rejected the inclusion of ISDS clauses in the TPP, spurred by the ICSID case of Philip Morris Asia Limited v The Commonwealth of Australia, and Indonesia has taken an even more drastic measure (see below)
Of course, as seen, the absence of Vietnam’s ratification to the ICSID Convention does not prevent investor-state disputes being brought against Vietnam. Investors may do so through other mechanisms, such as the UNCITRAL Rules of Arbitration, where the international instruments allow for it. However, the issue of recognition and enforcement is another matter which will be subject to the Vietnamese courts (and as above, it remains to be seen how judges will apply Vietnamese legislation for recognising and enforcing such awards).
Upon Vietnam’s ratification of the ICSID Convention, it will be required to have in place mechanisms that enable recognition and enforcement of ICSID awards (as part of its obligations under Articles 53 and 54 of the ICSID Convention). This may entail a suite of new legislation to implement such obligation to create a platform for investors to arbitrate and subsequently enforce awards against the State. This mitigates the overall investor concerns on judicial uncertainty regarding recognition and enforcement of awards against the State, and remedies the issue of lack of judicial preparation as addressed above.
Lessons from Indonesia
Indonesia has been a member of the ICSID Convention since 1958, and many investor-state disputes brought against the state had been arbitrated under such mechanism. It is worth considering the perspective of Indonesia, as it is often compared with Vietnam by investors as an emerging market of sizeable growth potential.
In March 2014, the business community was hit with the sudden announcement that Indonesia intended to terminate all 67 of its bilateral investment treaties (BITs).
The drastic announcement followed the State’s notice to the Embassy of the Netherlands in Jakarta that it would terminate its BIT with the Netherlands, after it had lost a jurisdictional challenge in an ICSID arbitration brought against it (Churchhill Mining plc v Indonesia. The quantum of that dispute exceeded US$1.3 billion.
The rationale for the aggressive slashing of the BITs was Indonesia’s claim that multinational companies were “bullying” the developing country through abuse of the ISDS mechanisms and initiating investor-state disputes brought under these treaties. Claims to a tune of billions of dollars have been made against Indonesia.
There was significant backlash by the business community against the drastic announcement, who cited the adverse repercussions to foreign investment, particularly for an emerging market like Indonesia. What happens next is not cemented, but it is highly possible that Indonesia may re-execute the BITs without ISDS clauses, thereby removing the alleged foundation for “bullying”.
For Vietnam, the maintenance of close economic partnerships and ties with investing countries (via, for example, bilateral trade agreements) are critical to its growth. Vietnam harbours significant export potential, with the US, the EU and ASEAN accounting for its key markets. Therefore, there is general consensus among the business community that the slashing of BITs by Vietnam would be a step backwards, as was echoed when Indonesia made such announcement.
Therefore, the case study of Indonesia provides a foundation to Vietnam on what arguably should be avoided in order to continue fostering its aims of bolstering foreign investment.
The general argument for ISDS Clauses in Vietnam
The emergence of discussions over repercussions of Vietnam participating in ISDS clauses seriously came into light following the nationwide press coverage of Vietnam’s arbitration success in Mackenzie v Vietnam – particularly given the reported quantum of US$3.7 billion for the dispute.
The effect of Mackenzie v Vietnam was two-fold. First, there was the victory that was widely lauded by the public and relevant government stakeholders, which conveyed to investors that Vietnam will not be a light recipient of such shoehorned claims. Second, on the other end, it had the implicit effect of placing Vietnam in the spotlight as a country vulnerable to such disputes and leads to the rationale of why this is the case (e.g., creating the incorrect or negative impression of Vietnam’s tendency to interfere in foreign investments).
The case further highlighted the dangers of ISDS clauses for Vietnam. If such claim was able to be made against the state, what is there to stop another claim of similar or greater quantum from being brought in the future by other investors?
While we are of the view that such risk is not one that should be ignored, the state of play of Vietnam’s economic growth should be closely considered. Unlike, for example, Australia which has an already strongly developed economy, Vietnam has widely been regarded as a destination of considerable growth potential. To complement the Government’s active efforts to fuel such development, investor confidence plays a vital role.
In fact, through our experience, queries on potential recourse by investors have been made regarding their affected investments (for example, effects due to the 2014 anti-China riots, impacts of enacted by-laws to existing or potential infrastructure projects, or appropriated assets by state-owned entities), and it is a factor that comes into play for investors to enter or stay in Vietnam.
While issues such as administrative red-tape, corruption and a developing legal framework have often been cited by foreign investors as an existing challenge, Vietnam’s receptiveness of ISDS clauses informs investors that in the event their investments are adversely affected by the state, there is a neutral mechanism for final recourse via arbitration.
The Government has been actively trying to stamp down on the above challenges, as prevention should come before rectification. However, until such issues are no longer concerns on the investors’ radar, it arguably pays to have ISDS clauses as (at least) a temporary measure to bolster investor confidence at such a critical time of growth – both for investors coming in and existing investors in the country.
And indeed, as shown, Vietnam has within its grasp a host of resources to ensure it is more than sufficiently protected against arguably “shoehorned” claims such as from Michael Mackenzie. All in all, if Vietnam continues its active approach to bolster investment activity, and show receptiveness and favourability towards overseas investors, such disputes should not be commonplace.
After all, if Vietnam follows such approach, what is there to truly fear?