On 8 June 2020, the National Assembly of Vietnam formally ratified the Europe-Vietnam Free Trade Agreement (EVFTA). As part of this treaty, Vietnam and the EU have also agreed on an Investment Protection Agreement (IPA).1 The two agreements are expected to enter into force later this summer, once the ratification procedure is completed by all EU member states.
On the one hand, the EVFTA will lead to the elimination of 99% of import duties between Vietnam and the EU. On the other hand, the IPA is not only meant to protect investors and investments in the EU and Vietnam but also addresses some of the critics raised in recent years as part of the backlash against investor-state dispute settlement (ISDS).
This update provides a brief overview of some of the key developments under the IPA with regards to the ISDS mechanisms and the substantive protections afforded to investors. With regards to dispute resolution, the following matters are addressed: amicable negotiations and consultations, the creation of a permanent Tribunal and Appeals Tribunal, third party funding, and the application of the 2014 UNCITRAL Transparency Rules.
This is followed by a brief overview of the following issues related to investors and their investments: the definition of an investor, the right of the host state to issue regulatory measures, and the national treatment of investors.
- Dispute Settlement under the IPA
a. Amicable settlement and consultations
The IPA and EVFTA place the focus on the amicable resolution of disputes between investors and host States. Indeed, the IPA provides that, as far as possible, disputes should be settled amicably through negotiations or mediation.
Although non-mandatory, the IPA contains a mechanism for mediation that offers detailed rules of procedure that may be adopted by disputing parties.
Otherwise, before initiating arbitration proceedings, an investor must submit a request for consultation to the State party with which it has a dispute.2 The request must be filed within a strict time limit:3
- 3 years from the date on which the investor acquired, or should have acquired, knowledge of the measure alleged to be in breach of the IPA; or
- 2 years from the date on which the investor ceases to pursue internal litigation but, in any event, no longer than 7 years from the date on which the investor acquired, or should have acquired, knowledge of the measure alleged to be in breach of the IPA.
Consultation must be held within 60 days of the filing of the request. Unless agreed otherwise, the location for the consultation will be Hanoi for measures adopted by Vietnam, Brussels for measures adopted by the EU, or the capital of the EU Member State which adopted a measure. Consultations may be held by videoconference.4
When a dispute cannot be settled within 90 days of the request for consultation, an investor may proceed to file a notice of intent to submit a claim.5
If a dispute cannot be settled within 6 months of the date of the request for consultation and at least 3 months from the date of the notice of intent to submit a claim, then an investor may proceed and formal arbitration claim as discussed below.6
The EVFTA and IPA establish one of the most innovative investor-state arbitration mechanisms adopted in recent years. Indeed, a permanent arbitral tribunal will be established to hear investment disputes related to breaches of the IPA by a State party.
The tribunal will have two levels: the Tribunal of the first instance and the Appeal Tribunal. Accordingly, a decision rendered by the Tribunal may be challenged before the Appeal Tribunal for errors of law or facts, procedural unfairness, etc. The establishment of an appellate jurisdiction aims to ensure that the decisions rendered under the IPA are consistent and create legal precedents, thereby addressing one of the salient critiques raised against the current ISDS framework regarding inconsistent and conflicting decisions.
When filing a claim, an investor will have the right to choose which of the following set of rules will be applied by the Tribunal to resolve the dispute: the ICSID Convention, the ICSID Additional Facility, the UNCITRAL Arbitration Rules, or any other rules agreed upon by the disputing parties.7
For the time being, Vietnam is still not a member of the ICSID Convention meaning that, in practice, only the three other options will be available for the time being.
Both the Tribunal and Appeal Tribunal will be composed (in equal proportion) of nationals from EU Member States, Vietnam, and third countries appointed for a four-year term.8 Each claim will be heard by a division of the Tribunal or Appeal Tribunal composed of one national of an EU member state, one national of Vietnam, and one national of a third country.9
The Presidents of the Tribunal and Appeals Tribunal will appoint members to hear cases on a rotation basis, ensuring that the composition of the division is random and giving equal opportunities to all members to serve.10 Therefore, investors will no longer enjoy the right to appoint the arbitrator of their choice, as is currently the case under the vast majority of bilateral or multilateral investment protection treaties.
c. UNCITRAL Transparency Rules
To answer growing calls for increased transparency in investor-state arbitration proceedings, as well as better public accessibility, the IPA provides that the UNCITRAL Transparency Rules will apply to arbitrations initiated under the treaty.
Accordingly, a number of documents related to arbitrations conducted under the IPA shall be made available to the public: the request for consultation, the notice of intention to submit a claim, written pleadings (statements of claim, statement of defense, etc.), lists of exhibits (but not the exhibits themselves), non-disputing party submissions, hearing transcript and orders, decisions or awards of the Tribunal and Appeal Tribunal.
Other documents not listed above may also be made available by the Tribunal, on its own initiative or at the request of any person (i.e. including non-disputing parties), after consultation with the disputing parties. The disclosure of any document will be subject to a confidentiality exception, where some measures can be taken to prevent protected or sensitive information from being disclosed to the public.
d. Third-Party Funding
The growth of third-party funding in international arbitration in recent years has also reached the ISDS sphere, with growing calls for further transparency with regards to the identity of the funders and the terms of the funding agreements. The IPA addresses such concern by requiring any party to a dispute to disclose the existence and nature of a funding arrangement and the identity of the funder.11 Such disclosure must be made when the claim is filed or if the agreement is signed thereafter, as soon as the agreement is concluded or the funding granted.12
The existence of a third-party funding arrangement will be taken into account by the Tribunal when determining whether a claimant investor should provide security for the costs of the arbitration.13 Compliance with the above requirements will also be taken into account by the Tribunal in any interim awards on costs.14
- Key substantive protections has given to investors
a. Definition of an investor
The IPA sets out a number of conditions to qualify as an ‘investor’ and benefit from the protections it affords. In the case of juridical persons (i.e. companies), the IPA provides that such entities must be engaged in ‘substantive business operations in the country where they are incorporated (i.e. either Vietnam or one of the EU member states) in order to be recognized as an ‘investor’ of that country.15
These terms have been interpreted by investment tribunals as requiring the companies to have ‘substance, and not merely form’ in their home country in order to pursue an investment claim. Such a provision aims to prevent shell or mailbox companies from claiming benefits under the treaty. In other words, entities created for the sole purpose of gaining the benefits of the treaty, but without any real economic activities in the home country, will have no rights under the IPA.
b. Host state rights
The IPA safeguards the right of Vietnam and EU member states to adopt laws and regulations to achieve legitimate policy objectives. These include matters related to public health, safety, environment, public morals, social or consumer protection, and the promotion or protection of cultural diversity.16 It also provides for states to change their legal and regulatory framework, even if it may affect the operation of an investment or the profit expectations of an investor.
Such provisions are meant to protect the host State’s right to enact measures for the public interest. They reflect the police power doctrine of international customary law pursuant to which a state may exercise its legislative and regulatory powers in the pursuit of public interest matters (health, safety, security, etc.) without incurring international liability.
Therefore, in principle, Vietnam and EU member states may still adopt pursue measures so long as they are adopted in good faith, for a public interest, non-discriminatory, and proportionate to their underlying objectives.
c. National Treatment
Under the IPA, Vietnam and the EU Member states agree to afford national treatment to investors of the other. In other words, each party to the treaty guarantees that the investors of the other party, their investments and their operations will be treated in a manner that is no less favorable than that accorded to its own national investors and investments.17
However, it was negotiated that Vietnam may adopt or maintain measures that are not in conformity with the national treatment standards of the IPA for the following 17 industries:18
- Newspapers, printing, publishing, radio, television, broadcasting;
- Production and distribution of cultural products, including video records;
- Production, distribution, and projection of television programs and cinematographic works;
- Investigation and security;
- Geodesy and cartography;
- Secondary and primary education services;
- Oil and gas, mineral and natural resources exploration, prospecting, and exploitation;
- Hydroelectricity and nuclear power; power transmission and/or distribution;
- Cabotage transport services;
- Fishery and aquaculture;
- Forestry and hunting;
- Lottery, betting, and gambling;
- Judicial administration services, including but not limited to services relating to nationality;
- Civil enforcement;
- Production of military materials or equipment;
- Operation and management of river ports, seaports, and airports; and
- Restrictions adopted in the above industries will, however, be subject to Vietnam’s Schedule of Specific Commitments under the EVFTA (Annex 8-B) pursuant to which Vietnam has agreed to gradually liberalize the provision of services and goods in upcoming years.
1 The full text of the IPA is available here: https://eur-lex.europa.eu/resource.html?uri=cellar:2d9b97ac-d2e7-11e8-9424-01aa75ed71a1.0001.02/DOC_2&format=PDF
2 Article 3.30(1) of the IPA
3 Article 3.30(2) of the IPA
4 Art. 3.30(3) of the IPA
5 Art. 3.32 of the IPA
6 Art. 3.33 of the IPA
7 Arts. 3.33(2) and 3.35(1) of the IPA
8 Arts. 3.38 (2) & (5) and 3.39 (2) & (5) of the IPA
9 Arts. 3.38(6) and 3.39(8) of the IPA
10 Art. 3.38(7) and 3.39(9) of the IPA
11 Art. 3.37 (1) of the IPA
12 Art. 3.37 (2) of the IPA
13 Arts. 3.37 (3) and 3.48 of the IPA
14 Arts. 3.37 (3) and 3.53(4) of the IPA Art. 3.38(7) and 3.39(9) of the IPA
15 Art. 3.37 (1) of the IPA
16 Art. 3.37 (2) of the IPA
17 Arts. 3.37 (3) and 3.48 of the IPA
18 Arts. 3.37 (3) and 3.53(4) of the IPA