"The Asymmetry of International Investment Law Is a Major Challange" - conversation with Tomoko Ishikawa

2021. július 14. 19:55
Investment arbitration is a one-way street in which the host state is a perpetual respondent. Likewise, the vast majority of existing IIAs provides host state obligation alone without any references to investors’ responsibilities. I think that the international investment regime should be reformed and the reform process should allow certain flexibility to incorporate different needs and demands, using, for example, opt-in and opt-out methods – Tomoko Ishikawa professor of international law at Nagoya University pointed out in a conversation with Lénárd Sándor.

You have been researching and teaching international investment law along with its related fields for quite a long time in Japan. But before we turn to that area of the law, could you shed light on some of the unique character of the Japanese legal tradition and culture and how they are reflected in Japan’s approach to dispute settlement, including investment arbitration? In the Western legal tradition including the investment arbitration, to initiate dispute settlement is fundamental right and thus the litigation has its own culture. Is there any different in the approach of Japan and Japanese legal culture?

I have some experience as an associate judge at the Tokyo district court where I started my career in law, but before speaking about my own experience, please allow me to first rely on a renowned professor of Japanese civil law. It is widely understood that the modern law of Japan that has existed since the late 19th century has its roots and basis in German law and French law. However, this does not mean that European civil law was simply transplanted onto the Japanese soil. In 2018, Professor Takashi Uchida, a leading scholar of Japanese civil law, published a book entitled ‘The Birth of Jurisprudence – What “law” meant for modern Japan’. In this book, he analyzed how ‘Western jurisprudence’ was received in Japanese society during and after the Meiji Restoration, drawing upon vast historical sources. He concluded that: ‘[after the Meiji Restoration] Japan had incorporated European civil law in its legal system not only as a means to modernize the country, but also as an armour not to deny its own tradition.

The reception process reflected the pressing desire among the leading scholars of the time to assert Japan’s identity in the seemingly established European theoretical framework’.

The Japanese legal system fully reflects its history, culture, tradition and the perception of society.

What was your own experience as a judge?

I think one of the defining characteristics of the Japanese legal culture, with which I broadly agree, is that

it reflects a harmony seeking society and harmony seeking social culture.

The Japanese litigation practice that seeks in-court settlements accurately illustrates this feature. My experience in the Japanese judiciary taught me that judges play an active role in reaching settlements before courts, by often encouraging the disputing parties to reach an amicable settlement. From this perspective,

the role of judges is quite similar to the role of conciliators or mediators.

This function makes the Japanese judiciary distinct from many jurisdictions around world.

Does this general cultural attitude you described apply to Japanese companies operating outside of Japan?

No, it does not necessarily apply to Japanese investors operating in foreign jurisdictions. Historically speaking, Japanese multinational companies have no significant resistance to international arbitration. Even though Tokyo has not become a major center for arbitration as other Asian cities such as Singapore, Hong Kong or Soul, it does not mean that Japanese companies do not have recourse to international arbitration. They do arbitrate, but they arbitrate overseas.

How many and what kind of cases were initiated by Japanese companies?

Japanese companies directly initiated six known investment arbitration cases between 2015 and 2020. Considering that Japan is one of the major FDI providers, this number might look small. However, Japan concluded its first bilateral investment treaty in 1977 with Egypt and Japanese investors had been largely silent for 38 years up until 2015. Therefore, I think the past five years is a sign of change. At the same time,

the Japanese government now faces its first arbitration case initiated by a Hong Kong based investor against Japan.

So on the one hand, Japanese investors increasingly exercise their rights to initiate dispute settlement in international forums. On the other hand, you can see foreign investors in Japan began to use these forums as well.

How does the Japanese government see the threat of ISDS?

When Japan negotiated the Trans-Pacific Partnership (TPP), which would have included the United States as well, there were certain concerns raised against ISDS under this treaty that American investors file multiple claims against Japan. In spite of these voices, the Japanese government has been quite confident about its ability to comply with investment protection obligations. Rather, the Japanese government has been focusing on protecting the interests of Japanese companies operating abroad. However, as I said, the Japanese government is facing with its very first investment case, and the impact of this case on Japan’s future attitude towards ISDS remains to be seen. Still, the backlash against investment arbitration is much weaker here than in, for example, Europe at this moment.

In your upcoming monograph, “Corporate Environmental Responsibility in Investor-State Dispute Settlement: The unexhausted potential of current mechanisms”, you are examining one of the contemporary challenges of international investment law, that is, the protection of environment, focusing on the investor’s environmental responsibility. What are the major challenges for investment disputes in this respect?

In my view,

one major challenge is the asymmetry of the regime of international investment law.

Investment arbitration based on an International Investment Agreement (IIA) is a one-way street in which the host state is a perpetual respondent. Likewise, the vast majority of existing IIAs provides host state obligation alone without any references to investors’ responsibilities. This asymmetry along with the growing dissatisfaction with the regime is one of the major reasons why I am writing this monograph. At the same time, there has been important development recently towards establishing international legal obligations of business operators. Yet, it remains to be seen whether this new development will gain widespread support from the international community. Even though an obvious option to address this issue would be to introduce structural reforms of the IIA regime, this is a quite challenging and difficult path. So, instead

my work seeks to explore the means that already exist in the current IIA regime to pursue and reflect investors’ responsibilities.

Another motivation for my monograph is to recognize that the current asymmetry debate does not sufficiently consider the interests of third persons in the investment disputes, that is, those who have actually suffered loss and injury by the conduct of the investors. In many cases, the operations of the foreign investors have resulted in serious environmental degradation and human rights’ violations. The victims generally do not have an effective way to seek redress against the investor. Therefore, the ‘materialization’ of investor responsibility in the IIA-based dispute settlement mechanisms should also reflect the interests of these victims.

What are your major arguments?

I think one effective way to address this issue is to encourage the active use of counterclaims by the host states. In addition, claiming the investors’ responsibility at the merits phase as a defense could be possible ways to materialize the investors’ responsibility in ISDS. I believe that

ways to materialize investor responsibility in the current regime are not fully utilized.

My study seeks to reveal the unexhausted potential of the regime.

If we look outside of the IIAs regime, there is an ongoing treaty-making procedure on business and human rights. Even though it is a difficult and painstaking process, but how in your view such a treaty could contribute to the business’ responsibilities in such scenarios?

If this treaty-making is successful and if it provides binding obligations on business operators, that can form the basis of the host states counterclaims in the IIA-based dispute settlement mechanisms. A possible obstacle is a lack of secondary rules that determine the consequences of a breach of external international law by private juridical persons. However, my theory is that domestic laws of the host state such as tort law can serve as a gap filling law between the primary and secondary rules.

After the Fukushima Daiichi nuclear disaster, the German Chancellor Angela Merkel decided to phase out nuclear energy by 2022. Some investors such as the Swedish Vattenfall decided to turn to investment arbitration to question this decision. What is your view on this litigation? And in a broader context how international investment arbitration should react to state policies on the protection of environment?

At the center of this case there is a recurring question of how much deference should be given to the host states’ regulatory power in light of the property interests of the investor.

The German Constitutional Court confirmed in 2016 that the state enjoys broad regulatory powers to protect public health and the environment.

Also, it is widely accepted that state may determine the level of protection as it considers appropriate in a given context.

However, what makes the given case difficult is

the fact that the state decision was triggered by a totally external incident as the Fukushima disaster rather than the actual misconduct of the investor.

In addition, this decision was taken only a few months after the government decided to extent the existing permit of the nuclear power plant. This imposes a hard question about the extent to which changes in circumstances brought about by external elements should or could influence the balance between the investors’ interests and the host states’ regulatory power to protect the public interests.

How do you assess the investment treaty proposal along with the ICS of the European Union? What are their benefits as well as their shortcomings?

It should be recalled that in the ongoing process of modernization of the ECT, the EU has proposed various textual changes with a view to constraining tribunals’ interpretative discretion. Japan has taken a cautious position to assess the effects of introducing such structural changes on the balancing between the host state’s regulatory power and investors’ proprietary interests. However, Japan also concluded new generation investment treaties that have more nuanced approach in terms of the interests at stake. Overall,

there is a clear trend towards greater recognition and deference to the host states’ regulatory power in IIA-making,

and investment arbitration should reflect the new context.

Current international investment law even has a chilling effect on environmental protection. An example for this is a gold mine proposed in Romania in the Roșia Montană area, or Verespatak in Hungarian. This mine has been controversial for many years because it would do huge damage to the local landscape and to Roman archeological features that are very noteworthy culturally. Because it has not been approved to this point by the government, the foreign investor proposing the mine has sued Romania under an investment treaty. In the face of that lawsuit, the Romanian government decided to withdraw a bid for the United Nations (UNESCO) recognition of the Roșia Montană site. How, in your view, should the investment treaty regime be reformed to adequately take into account the environmental interests?

I agree with your observation that this is a case of regulatory chill.

The regulatory chill refers to situations where concerns about ISDS prevent the government from regulating for the public interest in a timely and effective manner.

Even though some experts remain skeptical of the existence of a ‘chilling effect’ of investment arbitration, this case along with others such as Ethyl Corporation v. Canada well illustrate that the threat of regulatory chill is real rather than theoretical.

I think that the international investment regime should be reformed. In this context, it should be noted that

some modern IIAs do not only broaden the scope of legitimate regulatory power of the state but also require the investors’ responsible conduct.

I call them the third generation IIAs. They include, for example, the Nigeria – Morocco and Iran – Slovakia BITs, the Netherland and the Indian model BITs, and the Pan-African Investment Code. These treaties require international standards for business conducts and thus advance responsible investments, which incorporates Environmental, Social and Governance (ESG) factors. I believe that this is the direction that future IIAs making should take. In discussion on ISDS reform at UNCITRAL Working Group III, countries like South Africa call for a paradigm shift saying that promoting and attracting investments should not be an end in itself but realizing the broader objectives of sustainable development (SDGs). The third generation IIAs may signal this paradigm shift. A softer approach would be to provide references to corporate social responsibilities in IIAs. A sizable number of IIAs already embrace this idea.

How could such substantive reforms be introduced?

Introducing reforms into substantive obligations of the old-school, first generation IIAs is an obvious way to reform the regime, but given that there are more than 3,000 IIAs around the world, it would be simply an impossible task. An alternative option would be a multilateral or regional approach that takes the collective initiatives for reforms to address the asymmetry and responsible investment issues. The draft Pan-African Investment Code from 2017 includes various provisions that impose obligations on investors. Although it was a non-binding guiding instrument, the Code is considered as a manifestation of the shared understanding of the future of African IIAs. It remains to be seen that such a paradigm shift is followed by other reforms in Asia or in Europe. However, along with the necessary capacity building, it is a far more feasible option than renegotiating the several thousand investment treaties individually.

Since you mentioned the necessity of multilateral and regional approach, I am wondering whether we can have one-size-fits-all approach or the reform should take into account the regional differences in cultural, economic and other thinking the way it does in the case of human rights regimes.

Creating a one-size-fits-all mechanism would be simply impossible. Let’s look at the rule of the exhaustion of local remedies as an example. There are huge differences among regions in the level of attainment of the rule of law in the judiciary. Requiring the exhaustion of local remedies universally can simply result in the deprivation of the rights of investors to dispute settlement.

Regional approach may seem more feasible,

but one should recall that even within one region, such as the ASEAN countries and the Latin-American countries, there are differences that are hard to bridge. Therefore,

the reform process should allow certain flexibility to incorporate different needs and demands,

using, for example, opt-in and opt-out methods.

Tomoko ISHIKAWA, professor of international law at Nagoya University. She is a member of the ICSID Panel of Conciliators, appointed by the Chairman of the ICSID Administrative Council and a member of the Legal Advisory Committee of the Energy Charter Treaty. Her professional experiences include serving as a Judge at Tokyo District Court and holding the position of Deputy Director at the International Legal Affairs Bureau of the Ministry of Foreign Affairs of Japan, where she worked on investment treaties, Free Trade Agreements and WTO dispute settlement.
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