Investor-State Dispute Resolution – New Liability Thanks to Vietnam’s Free Trade Matrix – International Law


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1. Overview: Investor-State Dispute Resolution Mechanisms in Vietnam

Vietnam is consistently in the headlines as a new rising star in foreign direct investment (IDE) in Southeast Asia. Strategically linked to most of the world’s major economies through multilateral free trade agreements (ALE), a growing number of multinational companies (multinationals) and Small and Medium Enterprises (SME) discover Vietnam as their gateway to Asia. Indeed, the country has managed to position itself well in the shadow of its powerful northern neighbor, China, still embroiled in an unpredictable trade war and diplomatic disagreements with the United States and other Western economies.

The sudden disruption of international supply chains due to the COVID-19 pandemic has resulted in a further shift in global trade and investment flows in favor of Vietnam. Growing uncertainty about the future of international trade has made Vietnam even more attractive, especially to those who previously viewed Vietnam as a country
‘high risk’ investment. Therefore, it is no coincidence that Vietnam was one of the few economies in the world that managed to grow by 2.9%, according to World Bank statistics.1

Much of this success can be attributed to the efforts of the Vietnamese government to conclude a series of highly beneficial FTAs ​​with regional and global partners. These treaties generally contain investment protection agreements (IPAs), which increase the liability of member states by introducing new dispute settlement rules in the event of a unilateral violation of agreed bilateral investment conditions.

Extrapolating these developments, most forecasts agree that Vietnam is heading towards a bright economic future, supported by dizzying growth and massive investments in its logistics and energy infrastructure. Large-scale projects such as the refurbishment of the power grid, the installation of large capacities for the production and storage of household renewable energy and the improvement of ports, roads and bridges for a new decade of industrialization requires significant capital and know-how. Vietnam is poised to attract these funds and other resources in the form of FDI, continuing its successful strategy of the past decade.

IPAs play a crucial role in tilting the balance of investment decisions in favor of developing countries, where the effectiveness and transparency of local laws and practices can be a significant problem. Being familiar with and able to understand the complex structures of international treaties, FTAs ​​and APIs has therefore become a basic element for doing business in emerging markets.

This legal update covers Vietnam’s most important APIs and summarizes the benefits of investor-state dispute resolution (ISDS) mechanisms for foreign investors. We have chosen the EU-Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as indicative examples to describe the available ISDS mechanisms. These FTAs ​​are the most sophisticated and relevant treaties that include the bulk of Vietnam’s global investment partners.

2. Summary: What is ISDS?

Many developing countries are concluding an increasing number of bilateral investment treaties (Parts), FTAs ​​and regional trade agreements (RTAs). Significant differences distinguish them in terms of scope and membership, while most of them include provisions for the protection of foreign investors through ISDS. The value of these treaties lies in the mutual commitment of ratifying countries to offer favorable conditions for investment on the basis of most favored nation, national treatment, and fair and equitable treatmentprinciples.

Within the scope and scope of FTAs, ISDS mechanisms form a complementary dispute settlement regime. Like the foreign investor procedural toolkit, ISDS makes it possible to prosecute signatories of international treaties for alleged discriminatory practices in their capacity as host of foreign investments. The substance of these procedures is usually an alleged violation of favorable treatment clauses by a host country to the detriment of a specific foreign direct investment. Member States usually meet on an ISDS system in addition to an FTA. However, there are also several FTAs ​​that do not contain ISDS mechanisms or that explicitly exclude them. When available, ISDS rules ensure mutual respect for agreed trade and investment terms and provide foreign investors with a legal instrument to enforce their claims abroad.

Under global free trade policies, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions. FTAs and other treaties set out these preferential trade and investment conditions. They offer trading partners trade and regulatory advantages over their competition in countries not subject to such preferential treatment. However, these advantages only have the value of the implementing legal instruments that support them.

Typical regulations incorporated into ISDS mechanisms are:

  • Scope ISDS (who and what?);
  • Preconditions: Alternative dispute resolution or reflection period;
  • Composition of the Tribunal (Ad hoc arbitration or permanent tribunal);
  • Reference to Rules of procedure international institutions or the United Nations Commission on International Trade Law (UNCITRAL);
  • Execution rules arbitral awards under ISDS; and
  • Limitation periods for ISDS claims.

The ISDS agreement forms the basis of any subsequent legal proceedings. The conditions and regulations under these agreements may vary. Typically, in IPAs, investors will find a notification provision requiring a potential claimant to notify the host state in writing of a dispute that arises. In some variations, an ISDS clause may impose a “cooling-off period”, during which the counterparties must attempt to resolve the dispute amicably. In other cases, applicants may also have to exhaust all local remedies (legal or otherwise) available during this period. Once this time limit has expired – assuming that no other preconditions apply (eg mediation) – the claimant can begin arbitration.

Typically, ISDS agreements stipulate the rules that will apply to their procedures. Less frequently, the agreement may allow the claimant to select a set of rules that the host state has previously approved (for example, the ICSID Arbitration Rules, the ICSID Additional Facility Rules, the ICSID Arbitration Rules. UNCITRAL and ICC or PCA Arbitration Rules).

The ISDS agreement may include a reference to a particular seat of arbitration. Failing this, the Arbitral Tribunal has discretion over its seat in accordance with the applicable rules. This choice may be meaningful because it establishes the legal framework to support the arbitration, including how and when the headquarters courts can intervene and the legal grounds and procedure for challenging an award that results.

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The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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