A right decision with wrong consequences? - some comments on the Eiser annullment

A summary of the decision of the annulment committee in ICSID Case No. ARB/13/36 Eiser v. Spain would probably be that it is a right decision with unfairly stark consequences for the investor. It is bound to change the landscape of investor-state disputes in several areas.

At the core of the matter was a bona fide investment in the Spanish renewable energy sector. According to the award rendered in 2017, “the limited partners involved in Eiser’s business model are retirement funds and other investors seeking long-term stable returns. Accordingly, Eiser seeks to invest in assets in public sector or regulated sectors characterized by stability of long-term returns, including multiple investments in regulated energy producers in numerous countries. Eiser’s business model involves finding and developing such low risk investments involving public infrastructure with stable cash flows, often in regulated areas” (Eiser award, para. 116).

Eiser invested over EUR 126 million (Eiser award, para. 121) in a developed economy of one of the principal Member States of the EU after a thorough due diligence process. It claimed that its investment lost value due to a change in the regulatory regime. Eiser issued arbitral proceedings against Spain in late 2013. In 2017, an arbitral tribunal rendered an award in which it declared Spain liable of breaches of international law and ordered it to pay to Eiser EUR 128 million in damages, plus interest. The awarded damages were thus just a little bit higher than the amounts Eiser had invested in Spain. They represented some 50 - 60 % of the claim value pursued by Eiser in the arbitration.

Three years later, on 11 June 2020, the ad hoc committee annulled the Eiser award in its entirety on the ground that the arbitrator appointed by Eiser and a damages expert instructed by the same party failed to disclose their previous and contemporaneous professional relations with each other in unrelated matters. In some of these other matters the arbitrator appointed by Eiser acted as an arbitrator; in the remaining ones, as counsel.

The ad hoc committee not only sent Eiser back to square one, after four years of arbitration and another three years of annulment proceedings. Eiser was also ordered to pay over USD 3 million of Spain’s fees related to the annulment procedure, in addition to its own costs. In total, Eiser’s own cost plus the costs of the annulment procedure that Eiser has been ordered to bear, exceed USD 10 million. Eiser has not seen and will not see, any damages, unless it initiates a fresh arbitration and incur its high costs once again. The dissuasive and chilling effect of this annulment decision on any potential investor claimant is palpable. If a good faith investor which made a significant investment receives such treatment, which sorts of claims is the system made for?

From a purely legal perspective the decision of the annulment committee is correct and explicable. It is plain that neither the arbitrator nor the expert made proper disclosures of their long-standing and repeated collaboration on various matters, including cases that were pending simultaneously with the Eiser arbitration. The annulment committee was absolutely right that such relationship between the arbitrator and the expert may have created positive bias, and since the other arbitrators in the Eiser case were not aware of the risk of such bias, the could not have reacted to it. In other words, the hypothesis of the ad hoc committee was that the decision-making process of the Eiser tribunal, and perhaps even the award, could have likely been different, if the disclosure had been made. The Committee was also right in that independence and impartiality of an arbitrator is a fundamental rule of procedure, and therefore, the Committee was entitled (although not strictly required) to annul the award on the basis that the lack of disclosure resulted in a serious departure from such rule.

The reason why the Committee chose not to use its discretionary powers to spare the award is laid out in para. 255 of its decision. It reads: “Annulment committees are guardians of the ICSID system and must set the bar high, with regard to disclosure obligations, in particular, and, in general, with respect to addressing conflict of interest of arbitrators who also choose to act as counsel in investment disputes. The Committee, thus, declares the Award annulled for improper constitution of the Tribunal and for a serious departure from a fundamental rule of procedure.”

The Committee thus resolved to make an exemplary case against the practice of double-hatting of arbitrators, who act also as counsel in investment treaty matters. It is worth noting that the annulment decision in the Eiser case was rendered just six weeks after announcement of the Draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement, prepared by the Secretariats of ICSID and UNCITRAL (https://icsid.worldbank.org/en/Documents/Draft_Code_Conduct_Adjudicators_

ISDS.pdf). The Draft Code makes a very strong case for disclosure and against double-hatting (Articles 5 and 6).

The question remains, however, whether it is either necessary or appropriate that investors should bear the consequences of policy statement from ad hoc committees and their desire to set a high moral bar for the community of arbitrators. The awkwardness of Eiser consists in that in the annulment procedure Eiser had to, perhaps unwillingly, to become an advocate of a member of an arbitral tribunal for whose acts and omissions it was not and could not be responsible.  

Both the arbitrator and the expert took roles that required their impartiality and independence from the investor who appointed them. It was not argued, let alone shown in the annulment procedure, that the investor either knew about the ties between the expert and the arbitrator, or that Eiser made any of these appointments because of these ties. It could only be suggested that from a practical perspective, Eiser could have pressed for more detailed disclosure before the appointment of either of them. But so could Spain in the course of the arbitration, at least after the information about the links between the expert and the arbitrator began to surface. In the annulment procedure, Eiser argued that Spain should have known about the ties between the expert and the arbitrator because the information emerged in the public domain. Eiser argued in the annulment proceedings that the record of the case even included documents which showed that the expert and the arbitrator had worked together.

The ad hoc committee dismissed the argument noting that “The existence of the information in the public domain does not discharge the burden of the Eiser Parties to prove that Spain was aware of the relevant facts. A clear and unequivocal waiver of a right so fundamental as to challenge the impartiality and independence of an arbitrator, goes to the very root of the proper constitution of a tribunal. Such a waiver cannot be [inferred]” (Eiser annulment decision, para. 190). The requirement of actual, as opposed to construed, knowledge of facts is again a very high bar that would typically be impossible to meet. Such approach both puts extensive disclosure obligations on the shoulders of adjudicators in investment treaty cases, and stimulates more challenges to arbitrators, some of which may be tactically left for the annulment stage.

There is then the issue of proportionality. A common sense commercial approach to the Eiser case also begs the question whether it was necessary to annul the entire award if the problematic link existed only between the arbitrator and the expert on damages. An argument could be made that before the Eiser tribunal came to rule on damages, it had to resolve questions of jurisdiction and liability, and that these parts of the rulings were not affected by the lack of disclosure. Accordingly, instead of annulling the entire award, a more proportionate solution could perhaps be considered, such as to repeat the damages assessment stage, including by changing the experts or through tribunal-appointed experts according to an accelerated schedule. It might be an approach acceptable and comprehensible to the world outside the arbitration community, since it resonates with conventional wisdom that were only a part is broken it would be wasteful to dispose of the entire process.

In this respect, Eiser pointed that Article 51 of the ICSID Convention refers to the revision procedure which may have been applied. The ad hoc committee, however, dismissed that argument and focused instead on its own powers and grounds to annul the award, and by referring to the importance of the integrity of the proceedings. It is possible that the ad hoc Committee took the right approach here because of the two peculiar aspects of the Eiser case. First, it is understood that in Eiser, the expert team submitted both a regulatory and a damages report, and second, that in cases concerning renewable energy, the understanding of the financial impact of contested measures can be highly relevant to the tribunal’s decision on liability. The broader issue arising from Eiser therefore is whether an undisclosed relation between an arbitrator and an expert should always warrant annulment of the entire award, and if not, when it should and when it should not.

The Eiser decision also sends a number of other important signals in various directions. It dissuades the practice of double-hatting and mandates legal practitioners to choose careers between counsel and arbitrator. It incentivizes states to challenge arbitrators and to use such challenges as a strategic tool in the event of an unfavorable award. It dissuades investors from bringing claims even when they have strong and legitimate claims. It also incentivizes spin-offs of expert teams from larger firms to smaller boutiques which are less exposed to challenges based on the lack of impartiality. Finally, it must lead to questions about the scope and grounds of liability of arbitrators in the event of negligent non-disclosure. Once again, it confirms that the ISDS has become a part of the VUCA world.