Iran signs off on a radical investment treaty: barring arbitrators from wearing two hats, narrowing protections, and limiting damages awards

IA Reporter | 27 July 2016

Iran signs off on a radical investment treaty: barring arbitrators from wearing two hats, narrowing protections, and limiting damages awards

By Luke Eric Peterson

Reprinted with permission from Investment Arbitration Reporter -

The Islamic Republic of Iran and the Slovak Republic have signed off on a deeply iconoclastic investment treaty – one that bars arbitrators from moonlighting as counsel, protects as “investments” the activities of non-profit development and research organizations, and modifies in myriad ways the boilerplate protections seen in prior treaties.

The two countries signed the BIT on January 19th of this year [click to view]. Given that Iran has contemporaneously concluded far more conventional BITs, such as the recent Japan-Iran BIT, we suspect that the reform ambitions of the Iran-Slovakia BIT may stem more from the Slovak side of the negotiating table.

Indeed, tiny Slovakia has faced a string of BIT claims in recent years, and some experiences with those claims has filtered into the new BIT with Iran.

For instance, “public health insurance” is completely excluded from the BIT, an apparent reaction to the succession of claims by investors in the country’s health insurance market, including Eureko/Achmea, HICEE, and EURAM.

Similarly, the new BIT squarely contemplates orders for security for costs, something that Slovakia has sought (unsuccessfully) in at least one recent ICSID arbitration.

As we discuss below, the treaty’s innovations rival, and sometimes exceed, those of an ambitious model investment treaty recently finalized by the Government of India (but whose provisions do not appear to have been adopted as yet by India in any final treaties.)

Although the Slovak Republic is a member of the European Union, and the European Commission now takes the lead for EU states in negotiating external investment treaties, individual member-states retain some leeway to negotiate treaties with third-parties with whom the EU is not negotiating. However, as we’ve explained, the EC will supervise such negotiations and need to sign off on their results.

No double-hatting

For what appears to be the first time, the Iran-Slovakia BIT bars conduct that has been much-criticized, but rarely prohibited in express terms: the ubiquitous practice of arbitrators moonlighting in other investment law cases as counsel or expert.

Article 18(5) of the Iran-Slovakia BIT lays down several ethical strictures for arbitrators*, including the following:

“In addition, (arbitrators) shall refrain from acting as counsel or party-appointed expert or witness in any pending or new investment protection dispute under this or any other agreement or domestic law.”

UNCITRAL is default arbitration option; Slovakia embraces transparency

The new BIT permits investors to seek arbitration using the UNCITRAL rules or any other set of rules agreed by the disputing parties. (Iran is not a party to the ICSID Convention.)

With respect to transparency, Slovakia, but not Iran, offered an advance commitment to apply the UNCITRAL transparency rules to any investor-state claims arising under the treaty.

In case investor or investment breaches host state law, dismissal or counterclaims/set-offs are contemplated

The agreement bars investors from submitting claims if they or the investment have violated host state law. If such violations are sufficiently serious or material – including cases of fraud, tax evasion, corruption, bribery, or other forms misrepresentation – then arbitrators “shall dismiss such a claim”.

Otherwise, these breaches of host state law – as well as separate arguments that investors have failed to take all reasonable steps to mitigate possible damage – can be raised as defences, counterclaims, or rights of set off, and should be taken into account by arbitrators.

FET provision is inspired by CETA, but does not reach as far

Rather than yoke the fair and equitable treatment standard to customary international law, as is sometimes done by negotiators, the Iran-Slovakia BIT instead follows the approach of the Canada-Europe free trade agreement (CETA) in defining the concept in precise terms.

A breach of the Slovak-Iran treaty will arise only where one of four failings have occurred:

  • denial of justice in criminal, civil or administrative proceedings;
  • fundamental breach of due process, including a fundamental breach of transparency, in judicial and administrative proceedings;
  • manifest arbitrariness
  • targeted discrimination on the grounds of nationality.

Compared with CETA, this definition does not reach – perhaps at Iran’s urging – to discrimination on any “manifestly wrongful grounds such as gender, race or religious belief”. Nor does it extend to “abusive treatment of investors, such as coercion, duress and harassment”.

[UPDATE: Due to an editing error, the initially-published version of this report omitted to mention that the BIT also fails to include a “legitimate expectations” reference like the one in Article 8.4 of the CETA.** We’ve now corrected that omission within an hour of publication.]

Finally, unlike in the CETA context, the treaty-parties did not pledge to review the content of the fair and equitable treatment obligation regularly, and consider additional behaviours that might be added to the fair and equitable treatment obligation

National Treatment and Most Favoured Nation (MFN) Treatment must weigh community impact and cumulative environmental impacts; and contains broad public purpose exception

The Iran-Slovakia treaty is also noteworthy for introducing explicit and detailed guidance in the national treatment and MFN provisions, so as to clarify that a comparison between investments or investors should assess the totality of circumstances, including the effect of an investment on the local community where it is sited, and on the environment, including the cumulative impact of allinvestments within a jurisdiction.

At a glance, these considerations appear to draw inspiration from treaty templates such as the IISD Model Agreement on Investment for Sustainable Development, and their attention to the cumulative environmental impact of successive or parallel investments in a given region.***

The Iran-Slovakia BIT’s NT/MFN clause also contains a broad exception clause that allows states to treat investors or investments less favourably for legitimate public purposes (a number of which are then enumerated in the clause).****

Treaty also dictates how damages should be calculated, circumstances allowing for security for costs and denial of benefits, and narrowed definitions of investor and investment

The treaty also contains a series of other reforms and innovations. Click here to read the rest of the article.

* Article 18(5), quoted in full below, bars double-hatting and introduces other ethical requirements:

“Arbitrators and their staff and assistants shall be independent of, and not be affiliated with or take instructions from the claimant or the respondent or the government of a Contacting Party with regard to investment matters. Arbitrators shall not take instructions from any organization, government or Disputing Party with regard to matters related to the dispute. They shall not participate in the consideration of any disputes that would create a direct or indirect conflict of interest. In addition, they shall refrain from acting as counsel or as party-appointed expert or witness in any pending or new investment protection dispute under this or any other agreement or domestic law.”

** Article 8.4 of the CETA reads as follows: “When applying the above fair and equitable treatment obligation, a Tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated.”

*** Compare the wording of Article 4.3 (a) (ii) of the Iran-Slovakia BIT and Article 5 of the IISD Agreement. The former appears to use the precise language contained in Footnote 7 of the latter text. (The Editor of IAReporter was one of the authors of the IISD text).

**** A measure will benefit from this exception “… if it is adopted and applied by the Contracting Party in pursuit of a legitimate public purpose that is not based on the nationality of the investor or of nationality of the owner of an investment, either explicitly or factually, including the protection of health, safety, the environment, and internationally and domestically recognized labor rights, or the elimination of bribery and corruption, and it bears a reasonable connection to the stated purpose.“

source: IA Reporter