Published: 24 November 2020 Author: Sebastián Mantilla Blanco
In Germany, no discussion about international investment protection escapes the case of Vattenfall v. Federal Republic of Germany. On 14 May 2012, Swedish investor Vattenfall AB and four other companies filed a request for arbitration against Germany with the International Centre for Settlement of Investment Disputes (ICSID) under Article 26 of the Energy Charter Treaty (ECT). The claimants contended that Germany’s Thirteenth Act Amending the Atomic Energy Act of 31 July 2011 was in breach of investment protection standards set forth by the ECT. The Act accelerated the phase-out of the peaceful use of nuclear energy on German soil in response to the tsunami of March 2011 and the resulting collapse of several reactors at a nuclear power plant in Fukushima, Japan. In particular, the Act set out fixed dates for the closing of German nuclear power plants, which meant that the electricity output allowances previously allocated to individual plants could not be spent prior to the established shut down deadlines. Vattenfall also challenged the Act before the German Federal Constitutional Court, but it was the arbitration under the auspices of ICSID that attracted widespread media attention because of the more than 6 billion euros of damages, including interest, claimed in these proceedings.
In 2019 and 2020, Germany made two unsuccessful attempts to disqualify the three arbitrators in the Vattenfall case: Albert Jan van den Berg, Charles N. Brower, and Vaughan Lowe. Article 57 of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 1965 (ICSID Convention) allows for the disqualification of arbitrators who manifestly lack the ability “to exercise independent judgment” or the “high moral character and recognized competence” required under Article 14(1) of the Convention. As a rule, disqualification proposals against an arbitrator are to be decided by the other members of the Tribunal. As Germany challenged all three members of the Tribunal, the decision fell to the Chairman of the ICSID Administrative Council.
The First Disqualification Proposal
The first challenge was filed on 12 November 2018. A few days later, the claimants submitted comments on the disqualification proposal. The arbitrators also provided explanations about the challenge, pursuant to ICSID Arbitration Rule 9(3). On 11 December 2018, the parties filed additional communications addressing the challenge. The disqualification proposal soon caught the attention of the media. In an interview with German weekly magazine WirtschaftsWoche in December 2018, ICSID Secretary-General Meg Kinnear briefly referred to the challenge, explaining that petitions to disqualify all members of an investment tribunal were rather uncommon. Kinnear pointed out that one of the challenged arbitrators had actually been appointed by Germany, saying:
“It is also interesting that Germany chose an arbitrator, Vattenfall too, and the presiding arbitrator was designated by both. The Federal Government is now questioning the arbitrators it has itself appointed. Besides, it is very unusual for one party to question the impartiality of all three arbitrators.
We have very strict standards for the independence of our arbitrators, who must make a very extensive declaration upon appointment. And we have incorporated a safety mechanism. The impartiality can be questioned – as has happened now. For me, it is difficult to grasp the idea that ICSID arbitrators are supposedly biased.”
Germany complained that the Secretary-General’s comments evidenced prejudgment of the disqualification proposal on the part of ICSID. On 24 January 2019, ICSID commented as follows:
“The Secretary-General did not comment whatsoever on the merits of Germany’s proposal for disqualification; nor did she make any statement which could imply that the proposal had been prejudged. ICSID does not comment on ongoing cases.”
Nevertheless, due to Germany’s concerns, ICSID requested a non-binding recommendation from the Secretary-General of the Permanent Court of Arbitration (PCA) on the application for disqualification of the Vattenfall Tribunal. On 4 March 2019, PCA Secretary-General Hugo Hans Siblesz recommended rejection of Germany’s disqualification proposal.
This first challenge was a reaction to a questionnaire sent by the Tribunal to the parties on 26 October 2018. Germany requested disqualification on four grounds. First, Germany argued that the questionnaire constituted an “illicit attempt” to help Vattenfall’s case, providing the investors with an opportunity to submit new evidence and reshape their arguments. Significantly, the Tribunal had allowed new submissions about the valuation date to be used in the assessment of damages. Germany stressed that the deadline set for submitting additional expert reports on this key issue was excessively short. For their part, the claimants considered that the questionnaire contained “no suggestion, let alone any request, for any of the Parties to amend its case”. The investors underscored that the Tribunal requested comments on a valuation scenario different from both parties’ preferred scenarios. In his recommendation, the PCA Secretary-General concluded that the questionnaire of October 2018 provided “no evidence of bias.” In this vein, he explained:
“I do not consider that the Tribunal’s request for the parties to address the implication of an alternative valuation date can reasonably be considered to support an inference that the Tribunal manifestly cannot be ‘relied upon to exercise independent judgment’.”
Second, Germany argued that the questionnaire entailed an “unequal treatment of the Parties.” This contention was based on the fact that the Tribunal had denied previous requests from Germany to allow the submission of additional documents. The investors maintained that a challenge on such grounds was untimely and further observed that the Tribunal had actually accepted some of Germany’s requests. The PCA Secretary-General found that the challenge was not untimely, as it did not address the decisions rejecting new evidence as such. Rather, the disqualification proposal referred to an alleged inconsistency between those previous decisions and the recent invitation to produce new evidence made in the questionnaire. The Secretary-General considered, however, that the questionnaire provided no indication of unequal treatment to the detriment of Germany. For the PCA Secretary-General, “the Tribunal has sought additional documents and materials that it considered to be essential to its decision and provided reasoned decisions for not admitting other materials.”
Third, Germany questioned the participation of a partner in the Tribunal President’s law firm as co-arbitrator in a case under the rules of the International Chamber of Commerce (ICC), which involved the German Nuclear Fuel Tax. The PCA Secretary-General dismissed the argument as untimely, noting that almost a year had passed since Germany had learned about this issue.
Finally, Germany submitted that one of the arbitrators “took the position of advocate in Claimant’s interest” during the hearing, as he held “hostile additional cross-examinations of Respondent’s experts.” It was claimed that this was in sharp contrast with said arbitrator’s attitude towards the claimants’ experts. For their part, the investors submitted that these allegations were neither timely nor credible. The PCA Secretary-General considered that such an objection could have been raised earlier and concluded that, in any case, the facts provided no convincing basis for a challenge.
The PCA Secretary-General recommended the dismissal of Germany’s disqualification proposal, stating:
“It follows from the legal principles set out above that a party proposing the disqualification of an arbitrator must prove the existence of objective facts from which a reasonable third person may infer a manifest lack of the arbitrator’s impartiality or independence. Subjective inferences or beliefs are insufficient.
[…] I do not consider that the record before me can reasonably be considered to support an inference that the Tribunal manifestly cannot be ‘relied upon to exercise independent judgment’.”
This cannot be read other than as a thinly veiled reprimand to Germany, saying that the respondent did not provide evidence in support of its serious allegations, but rather sought to build a case on “subjective inferences” and “beliefs”.
In light of the recommendation from the PCA Secretary-General, the Acting Chairman of the ICSID Administrative Council dismissed Germany’s proposal to disqualify the members of the Tribunal on 6 March 2019 in a brief decision, underlining that “the Proposal does not meet the standard set forth in Article 57 of the ICSID Convention for the disqualification of an arbitrator.”
The Second Disqualification Proposal
Undeterred by this rebuke, Germany filed a second disqualification proposal against the full Tribunal on 16 April 2020. As with the first challenge, ICSID requested a recommendation from the PCA Secretary-General. The second proposal was based on the allegation that the arbitrators lacked the ability “to exercise independent judgment”. Germany invoked five grounds for challenge.
First, Germany argued that Arbitrator Charles Brower had omitted disclosure of an issue conflict for nearly six years, hiding from the parties that, in the case of PV Investors v. Spain, he had expressed his views on whether local subsidiaries could bring their full losses – a question that was “at the heart” of the Vattenfall proceedings. The investors, on the other hand, argued that Judge Brower’s opinion was irrelevant for the arbitration, as the case of “PV Investors v. Spain concerned the rights of locally incorporated companies in proceedings under the UNCITRAL Rules, not pursuant to the ICSID Convention.” They also contended that, in any case, the opinion “would not amount to a manifest lack of impartiality.” They further emphasized that the arbitrator “was under no obligation to disclose” that opinion, citing the IBA Guidelines on Conflicts of Interest in International Arbitration, a soft law document of the International Bar Association that has repeatedly been used in international arbitrations. The Guidelines include “previously expressed legal opinions” in the so-called “green list”, which refers to circumstances that do not require disclosure. Arbitrator Brower noted that his 2014 opinion did not concern the subject-matter of the Vattenfall case. With reference to the IBA Guidelines, he also emphasized that no disclosure obligation was applicable. The PCA Secretary-General explained that “an ‘issue conflict’ denotes a situation in which an arbitrator is inappropriately predisposed to favour a particular outcome with respect to the issues at stake in the proceedings.” He underscored that this “cannot mean that an arbitrator that has previously ruled on an issue or applied a treaty in another matter is thereby automatically conflicted with respect to that issue or that treaty.” Rather, two conditions had to be met: “a) an appearance of pre-judgment of an issue likely to be relevant to the dispute; and b) on which the parties have a reasonable expectation of an open mind.” Comparing the issues at hand in the case of The PV Investors v. Spain and in the Vattenfall arbitration, the Secretary-General concluded:
“I do not consider that any issue conflict arises. The question of jurisdiction at issue in The PV Investors v. Spain is fundamentally different from that at issue in these proceedings […] Given that Judge Brower’s Opinion did not take a position on issues in dispute in the present proceedings, I do not consider that it would reasonably give rise to justifiable doubt as to his impartiality, such as to require disclosure […]. In any event, I do not see that his non-disclosure of the Opinion can support an inference that Judge Brower manifestly cannot be ‘relied upon to exercise independent judgment’.”
Second, Germany contended that the Tribunal had “been deliberating for years about The PV Investors without disclosing this matter to the Parties.” This had become apparent in the questionnaire of 26 October 2018 and Judge Brower’s reluctance to explain whether his 2014 opinion had been part of the Tribunal’s deliberations. Germany argued that the internal discussion of the PV Investors case infringed its “right to be heard”. In response, the investors stated that “the notion of ‘illicit deliberations’ is a novelty to international arbitration, made up by Germany.” They further noted that Germany’s depiction of the arbitrators’ alleged deliberations was speculative and contradictory as the “extensive set of questions” put to the parties, resulting from the deliberations, provided both parties with an opportunity to address the PV Investors case. The PCA Secretary-General was little impressed by Germany’s second ground for challenge, stating that its allegations were “entirely speculative”. In this vein, he stated:
“I do not consider that the record identified by the Respondent reasonably supports inferences regarding the content of the Tribunal’s deliberations or an inference that the members of the Tribunal manifestly cannot be ‘relied upon to exercise independent judgment’.”
Third, Germany challenged the Tribunal’s decision to conduct a virtual hearing on quantum, notwithstanding its objections. For Germany, this showed that the Tribunal “views the hearing as a mere formality, and hence creates an appearance of bias.” In their comments on this ground, the investors underscored that there was “no right whatsoever to an in-person hearing.” In any case, such a procedural decision, even if erroneous, could not reasonably provide a basis for a challenge for lack of impartiality. The PCA Secretary-General considered that this ground for challenge was unfounded. He noted that, as per the ICSID Rules, the decision to hold a videoconference in lieu of an in-person hearing fell within the competence of the Tribunal. He continued:
“I do not see that even an erroneous interpretation of the Rules would – without more – support an inference that the ruling was the product of a lack of independence or impartiality.”
Fourth, Germany took issue with the Tribunal’s decision not to grant counsel additional time for the preparation of a hearing in view of the coronavirus pandemic. This decision revealed that the Tribunal had “already made up its mind and prejudged the matter, unwilling to reconsider even in the face of unprecedented circumstances.” For their part, the investors pointed out that the procedural calendar had been adjusted several times at Germany’s request. In addition, they argued that there was no basis for reading such a procedural decision as an indication of “manifest lack of independence or impartiality.” The PCA Secretary-General held that the issue was “a procedural matter that falls to the Tribunal to decide”, stating:
“An adverse procedural decision does not by itself give rise to an inference of bias, and I do not see anything in the Tribunal’s decision to maintain its procedural calendar that could reasonably be considered to support an inference that the Tribunal manifestly cannot be ‘relied upon to exercise independent judgment’.”
Lastly, Germany claimed that the comments submitted by Judge Brower on 1 May 2020 on its disqualification proposal delivered “an independent ground for disqualification”. For Germany, said comments revealed that Judge Brower’s failure to disclose the PV Investors opinion was far from “an honest exercise of discretion”. The investors made no submission regarding this ground for challenge. The PCA Secretary-General concurred with the premise that “an arbitrator’s response to a disqualification proposal may itself evidence a lack of impartiality, even where the initial grounds for disqualification would not.” However, he concluded that, in this case, Judge Brower’s remarks could not “reasonably be considered to support an inference that the he [sic] manifestly cannot be ‘relied upon to exercise independent judgment’.”
Based on this analysis, the PCA Secretary-General recommended dismissal of Germany’s disqualification proposal. The Chairman of the ICSID Administrative Council followed this recommendation and rejected the challenge on 8 July 2020.
Germany’s challenges in the Vattenfall arbitration were largely based on speculative and subjective inferences that fell short of the standard of proof required under the ICSID Convention. From a broader perspective, the dismissal of the disqualification proposals filed by Germany provide important lessons on hotly debated subjects, such as issue conflicts and the standard of proof required for a successful challenge. These two decisions seem all the more relevant in light of the ongoing discussions on the Draft Code of Conduct for Arbitrators jointly launched by ICSID and UNCITRAL in May 2020.
Any proposal for the disqualification of one or more arbitrators causes a suspension of the proceedings pending a decision on the challenge. The fairly prompt decisions on these challenges prevented excessive delays in this investor-State arbitration. By challenging the whole Tribunal twice, Germany still managed to delay the final decision in the Vattenfall arbitration by more than six months. This came at an additional cost of ca. 314,000 euros in counsel fees. This sum does not yet include the costs for the proceedings as such and those associated to personnel at the government departments involved in the case. These additional expenditures for two unsupported disqualification proposals seem hardly consistent with the Federal Government’s confident statement that “the arbitration claim is inadmissible and unfounded and will therefore be rejected.”
Category: International economic law