Apart from diplomacy and elections, also courts play an increasingly important role in driving policy. Important are in particular private arbitration courts, where also governments 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 biased local courts. However, also for governments, relying on private arbitration can be of benefit. And Europe is a key location hosting arbitration panels which resolve judicial disputes from across the world.
Despite that, opposition against private arbitration has been on the rise in Europe. A notable example of that involves a dispute between the Malaysian government and the descendants of the Sultan of Sulu. This 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 stopped in 2013 following an armed invasion 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. This echoes the concerns emerging from the Sulu case.
The outcome of the lawsuit was important and 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 further mired in controversy, when the Spanish arbitration judge, Gonzalo Stampa, being criminally sentenced to six months in prison for moving the case from Madrid to Paris, violating 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 grounds, 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 reflect 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 in particular the political left railing against it. That’s 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 per cent of the cases were settled by agreement.
In many trade agreements secured by the EU “investor-state dispute settlement” (ISDS) arbitration clauses were included. This was one of the reasons why the Belgian region of Wallonia refused to ratify the Canada-EU Comprehensive Economic and Trade Agreement (CETA), back in 2016. 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, but 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 this case, it 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 furthermore 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 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 condemning it to billions of damages for defaulting on promised financial support for renewable energy projects is indicative. Spain is thereby doing 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 now even becoming a European Commissioner.
In June, 26 EU member states agreed that the European Union would sign declaration considering the arbitration provisions of the Energy Charter Treaty to be non-applicable within the EU.
The big picture
Despite the concerns expressed by an increasing number of European policy makers, arbitration remains a safe, and cost-efficient, form of alternative dispute resolution that should be perfected rather than ditched. Preserving arbitration, rather than dropping it altogether should be the preferred way forward.
This is also what the Malaysian Minister for Law and Institutional Reform, Azalina Othman, stated, in response to the country’s win before the Dutch Supreme Court: “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.”
This shows that the high profile case has strengthened the perception of private arbitration as a neutral judicial dispute resolution instrument. It is downright bizarre to see European governments questioning arbitration, given Europe’s importance as a hub for this area of judicial activity.
A version of this article was originally published by The European Conservative
