Apart from diplomacy and elections, courts also play an increasingly important role in driving policy. Some of the most important are private arbitration courts, where governments also take part in the proceedings. International arbitration is a key instrument to resolve cross-border disputes and promote foreign investment. Historically, arbitration provided foreign investors with a neutral platform to settle disputes, particularly with governments, without relying on potentially biassed local courts. However, relying on private arbitration can be of benefit for governments as well. Europe is a key location for hosting arbitration panels which resolve judicial disputes from across the world.
One notable example involves a dispute between the Malaysian government and the descendants of the Sultan of Sulu. The case revolves around a colonial-era agreement from 1878, in which the British agreed to pay the Sultan of Sulu compensation in exchange for control over what is now the Malaysian province of Sabah. After Malaysia gained independence, it continued making these payments; but it stopped doing so in 2013, following an armed invasion by a militant group from the Philippines that left at least 60 people dead.
In 2022, a Spanish arbitration court awarded the alleged heirs of the Sultan of Sulu $15 billion in compensation. The arbitration is financially backed by Therium, a UK-based litigation funder that reportedly invested over $20 million in the case. This kind of third-party funding is increasingly raising eyebrows both in the U.S. and the EU, where legislation to restrict it is being prepared.
The outcome of the lawsuit was important, and it threatened to unleash a diplomatic crisis between the EU and Malaysia, because the assets of Malaysia’s state energy company, Petronas, were frozen in Luxembourg as part of the enforcement process. The case was further mired in controversy when the Spanish arbitration judge, Gonzalo Stampa, was criminally sentenced to six months in prison for moving the case from Madrid to Paris, in violation of a Spanish court order.
In response, Petronas has launched legal action against Therium in the U.S., accusing the litigation funder of misconduct. Recently, in a significant development, the Dutch Supreme Court rejected the appeal of the descendants of the Sultan of Sulu, refusing to recognize the arbitral award in their jurisdiction. The court’s decision was based on several matters, including the absence of a valid arbitration agreement and the improper composition of the arbitral tribunal. This ruling represents a major setback for the descendants and casts doubt on the validity of the entire arbitration process.
More fundamentally, it should make European governments and the EU consider whether their increasingly hostile stance towards international arbitration is wise.
Clouds on the horizon?
Unfortunately, opinions about private arbitration have become more negative in Europe over the years, with the political Left, in particular, railing against it. That perception comes despite statistics showing that only about 29% of all concluded cases were decided in favour of the investor, and that approximately 37% of all concluded cases were decided in favour of the state. About 20% of the cases were settled by agreement.
In many trade agreements secured by the EU, “investor-state dispute settlement” (ISDS) arbitration clauses have been and are included. This was one of the reasons why, in 2016, the Belgian region of Wallonia refused to ratify the Canada-EU Comprehensive Economic and Trade Agreement (CETA). Ultimately, a compromise entailed that a new “Investment Court System” would be created to settle disputes. With this system, the judges are not selected by the parties or arbitral institutions on an ad hoc basis for each dispute; instead, they are permanent civil servants.
The EU’s changing approach to arbitration also became evident with the 2018 Achmea ruling of the European Court of Justice (ECJ). In that case, the court ruled that arbitration agreements under intra-EU bilateral investment treaties (BITs) were incompatible with EU law. The court thereby argued that private arbitration risked undermining the EU legal system by circumventing the jurisdiction of EU courts.
This growing opposition to arbitration can also be seen in the EU’s treatment of international treaties, most notably the Energy Charter Treaty (ECT). The ECT, which was signed in the 1990s, was designed to protect foreign investments in the energy sector, and it also includes investor-state dispute settlement (ISDS) mechanisms. These provisions allow investors to sue governments in private arbitration courts if their investments are harmed by regulatory changes or other government actions. However, as more EU member states (such as Spain) face arbitration claims from foreign investors, the EU has become more resistant to the use of arbitration under the ECT.
The case of Spain refusing to comply with arbitration court orders, thereby condemning it to billions of damages for defaulting on promised financial support for renewable energy projects, is indicative. Spain’s compliance is almost as bad as the likes of Venezuela, an international comparison has found. Worryingly, the European Commission has been supporting Spain. The Spanish Minister responsible for the case, Teresa Ribera, is even becoming a European Commissioner.
In June, 26 EU member states agreed that the European Union would sign a declaration to the effect that the arbitration provisions of the Energy Charter Treaty are non-applicable within the EU.
The big picture
In response to Malaysia’s win before the Dutch Supreme Court, the Malaysian Minister for Law and Institutional Reform, Azalina Othman, announced: “Malaysia welcomes this landmark ruling as a momentous victory for the rule of law, representing a further step towards the end of the Sulu case and the preservation of the sanctity of international arbitration as an alternative form of dispute resolution.”
Her statement shows that the high-profile case has strengthened the perception of private arbitration as a neutral judicial dispute resolution instrument. It is therefore bizarre to see European governments questioning arbitration, given Europe’s importance as a hub for this area of judicial activity.
Europe: A Hub for Global Arbitration
Photo by Tingey Injury Law Firm on Unsplash
Apart from diplomacy and elections, courts also play an increasingly important role in driving policy. Some of the most important are private arbitration courts, where governments also take part in the proceedings. International arbitration is a key instrument to resolve cross-border disputes and promote foreign investment. Historically, arbitration provided foreign investors with a neutral platform to settle disputes, particularly with governments, without relying on potentially biassed local courts. However, relying on private arbitration can be of benefit for governments as well. Europe is a key location for hosting arbitration panels which resolve judicial disputes from across the world.
One notable example involves a dispute between the Malaysian government and the descendants of the Sultan of Sulu. The case revolves around a colonial-era agreement from 1878, in which the British agreed to pay the Sultan of Sulu compensation in exchange for control over what is now the Malaysian province of Sabah. After Malaysia gained independence, it continued making these payments; but it stopped doing so in 2013, following an armed invasion by a militant group from the Philippines that left at least 60 people dead.
In 2022, a Spanish arbitration court awarded the alleged heirs of the Sultan of Sulu $15 billion in compensation. The arbitration is financially backed by Therium, a UK-based litigation funder that reportedly invested over $20 million in the case. This kind of third-party funding is increasingly raising eyebrows both in the U.S. and the EU, where legislation to restrict it is being prepared.
The outcome of the lawsuit was important, and it threatened to unleash a diplomatic crisis between the EU and Malaysia, because the assets of Malaysia’s state energy company, Petronas, were frozen in Luxembourg as part of the enforcement process. The case was further mired in controversy when the Spanish arbitration judge, Gonzalo Stampa, was criminally sentenced to six months in prison for moving the case from Madrid to Paris, in violation of a Spanish court order.
In response, Petronas has launched legal action against Therium in the U.S., accusing the litigation funder of misconduct. Recently, in a significant development, the Dutch Supreme Court rejected the appeal of the descendants of the Sultan of Sulu, refusing to recognize the arbitral award in their jurisdiction. The court’s decision was based on several matters, including the absence of a valid arbitration agreement and the improper composition of the arbitral tribunal. This ruling represents a major setback for the descendants and casts doubt on the validity of the entire arbitration process.
More fundamentally, it should make European governments and the EU consider whether their increasingly hostile stance towards international arbitration is wise.
Clouds on the horizon?
Unfortunately, opinions about private arbitration have become more negative in Europe over the years, with the political Left, in particular, railing against it. That perception comes despite statistics showing that only about 29% of all concluded cases were decided in favour of the investor, and that approximately 37% of all concluded cases were decided in favour of the state. About 20% of the cases were settled by agreement.
In many trade agreements secured by the EU, “investor-state dispute settlement” (ISDS) arbitration clauses have been and are included. This was one of the reasons why, in 2016, the Belgian region of Wallonia refused to ratify the Canada-EU Comprehensive Economic and Trade Agreement (CETA). Ultimately, a compromise entailed that a new “Investment Court System” would be created to settle disputes. With this system, the judges are not selected by the parties or arbitral institutions on an ad hoc basis for each dispute; instead, they are permanent civil servants.
The EU’s changing approach to arbitration also became evident with the 2018 Achmea ruling of the European Court of Justice (ECJ). In that case, the court ruled that arbitration agreements under intra-EU bilateral investment treaties (BITs) were incompatible with EU law. The court thereby argued that private arbitration risked undermining the EU legal system by circumventing the jurisdiction of EU courts.
This growing opposition to arbitration can also be seen in the EU’s treatment of international treaties, most notably the Energy Charter Treaty (ECT). The ECT, which was signed in the 1990s, was designed to protect foreign investments in the energy sector, and it also includes investor-state dispute settlement (ISDS) mechanisms. These provisions allow investors to sue governments in private arbitration courts if their investments are harmed by regulatory changes or other government actions. However, as more EU member states (such as Spain) face arbitration claims from foreign investors, the EU has become more resistant to the use of arbitration under the ECT.
The case of Spain refusing to comply with arbitration court orders, thereby condemning it to billions of damages for defaulting on promised financial support for renewable energy projects, is indicative. Spain’s compliance is almost as bad as the likes of Venezuela, an international comparison has found. Worryingly, the European Commission has been supporting Spain. The Spanish Minister responsible for the case, Teresa Ribera, is even becoming a European Commissioner.
In June, 26 EU member states agreed that the European Union would sign a declaration to the effect that the arbitration provisions of the Energy Charter Treaty are non-applicable within the EU.
The big picture
In response to Malaysia’s win before the Dutch Supreme Court, the Malaysian Minister for Law and Institutional Reform, Azalina Othman, announced: “Malaysia welcomes this landmark ruling as a momentous victory for the rule of law, representing a further step towards the end of the Sulu case and the preservation of the sanctity of international arbitration as an alternative form of dispute resolution.”
Her statement shows that the high-profile case has strengthened the perception of private arbitration as a neutral judicial dispute resolution instrument. It is therefore bizarre to see European governments questioning arbitration, given Europe’s importance as a hub for this area of judicial activity.
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