The Khersones ship was loaded and ready to start its passage from Kerch in Crimea, Ukraine, to western Europe on an April morning in 2006. Then a telegram arrived from the Ukrainian ministry of agriculture, forbidding the ship to set sail.
For Uwe Koch, who had renovated the three-mast Khersones with the help of investor money to transport tourists from east to west, it marked the end of his business. It also marked the end of his career: “Since then I have basically been retired,” said Mr. Koch.
A couple of weeks after the seizure of his ship, he filed for insolvency for his company Inmaris Perestroika, and put aside any leftover capital to cover potential legal costs.
Then, in a last attempt to fight the Ukrainian government’s decision to seize his ship, Mr. Koch appealed to an international arbitration court. That final move added him to the ranks of investors currently being heavily demonized by activists.
The widespread fear is that these courts will become a way for investors to push through their economic interests at all costs.
With the ninth round of negotiations on a free-trade deal between the United States and Europe set to begin in April, few points have received as much vehement opposition as the international arbitration courts that could be charged with enforcing the deal.
Such courts have been part of the business world since the 1950s, included in thousands of free-trade deals between countries. The TTIP deal would also provide for such institutions to mediate between international companies and countries’ governments in cases of disputes in the United States or the European Union.
Many activists, especially in Germany, heavily reject these tribunals. In a recent public consultation, the European Commission received 150,000 statements on the TTIP agreement, and 88 percent of them concerned the planned arbitration courts. All of them rejected the tribunals.
The widespread fear is that these courts will become a way for investors to push through their economic interests at all costs, even against the democratic decisions taken by governments.
The horror scenario for many Germans is an agreement that allows slick American lawyers to run ragged over judges taking opaque decisions behind closed doors, and at the expense of democratic states.
But what exactly are these mysterious arbitration courts that everyone is afraid of, and yet knows so little about?
Take Siegfried Elsing, one of the most renowned arbitrators worldwide. He is not American, but hails from Germany’s Rhine region and works out of a corner office on the edge of Düsseldorf. He is currently mediating a dispute between the Caribbean state of Saint Lucia and the American oil tycoon Jack Grynberg.
The case revolves around drilling rights, and whether the island nation’s territorial disputes with its neighbor states are the reason why Mr. Grynberg’s company RSM has not been able to start drilling for oil there yet.
“I don’t think that my assessment of legal disputes is fundamentally different from that of an experienced district court judge,” said Mr. Elsing.
His resumé is hardly that of a district court judge though. He studied law in Germany and the United States, is licensed in both countries and sits on the boards of both the German Institution of Arbitration and the American Arbitration Association. “To assess international disputes for arbitration, you need to understand different legal cultures,” the lawyer said.
Arbitration courts have long been the commonly accepted practice to settle disputes between companies. When two partners quarrel, they look for someone to mediate between them and in the end both accept the verdict.
Arbitration courts also have a long tradition in trade deals between countries. The first such deal was struck between Germany and Pakistan in 1959. The design of these courts is normally based on standards set by the International Centre for Settlement of Investment Disputes, an organization within the World Bank.
Such tribunals have a decisive advantage over national courts, because they set binding standards for everyone and basically create a form of international law for investors.
Uwe Koch’s arbitration court was located in The Hague. For two weeks, the tribunal tried the case of his ship and Ukraine’s seizure of it. A handful of lawyers pleaded the case for each side, with secretaries of state and ministers testifying as witnesses.
“Earlier, I didn’t even know that there was such a thing as an arbitration court for our case,” said Mr. Koch. It was only by concidence that just after the seizure of the vessel, he met one of the stars of the arbitration scene, a man named Richard Happ.
Mr. Happ, a lawyer in Hamburg, recently won Swedish utility Vattenfall as a client. The electricity producer is suing Germany for several billion euro in compensation for having to shut down its nuclear power plants, in accordance with Germany’s major shift to renewable energies.
A classic case of expropriation, say the Swedes. This is what will happen to all of us if we sign TTIP, say the Germans.
“I don’t think that my assessment of legal disputes is fundamentally different from that of an experienced district court judge.”
In fact, Vattenfall is the first company ever to sue the German government, while German companies have filed dozens of cases based on the many investment agreements reached between Germany and other countries. While German politicians are busy complaining about Vattenfall’s lawsuit, German utilities are suing Spain because of its reform of feed-in remuneration.
That such international arbitration courts are often opaque is not a valid criticism in Mr. Happ’s eyes.
“If arbitration proceedings are not public, that’s only because states don’t want them to be,” he said.
The case of German construction company Hochtief, which has been litigating against the state of Argentina for seven years, is a pretty transparent one. In 1998, Hochtief built a turnpike with Argentinian partners. Then the 2001 economic crisis hit and the government abandoned its fixed exchange rate with the dollar – a rate that had also been set for the toll road. Ever since, the parties have been fighting at the International Centre for Settlement of Investment Disputes.
The case has been examined in excuciating detail. Recently, the panel released a “decision on liability,” a 95-page document detailing every questionable move of the Argentinian government.
The arbitrators’ verdict is clear. Because Argentina has not compensated Hochtief appropriately, the government has to bear the lion’s share of the legal costs, about 75 percent or $6.9 million. Hochtief has been found guilty of some misconduct as well, which is why the company will have to pay $2.3 million in legal fees too.
The tribunal has not ruled yet on the compensation. As none of the arguments by the two sides convinced the arbitrators, the parties are supposed to settle on an amount between themselves within three months.
Such a “judgment of Solomon” is typical. As their name suggests, arbitration courts are looking to forge a settlement between the parties. Exorbitant compensation payments, therefore, are a rare exception. That’s why not all investors are fans of arbitration procedures.
Just because scores can be settled at an international tribunal doesn’t necessarily mean that compensation will be paid, as Werner Schneider knows. The lawyer and liquidator had taken on the task of winding down the company Walter Bau 10 years ago. Since then, he has been fighting the kingdom of Thailand in court rooms across the world.
The firm had built a road in Thailand and never been paid by the government – a classic case for arbitration courts.
In the end, Mr. Schneider was awarded €29 million in compensation for his client. But Thailand has not paid up yet. Ever since, Mr. Schneider has tried to get his money through other means. “I might not have had any experience with arbitration courts, but I do have a lot of experience with enforcement,” said the seasoned insolvency practitioner.
Mr. Schneider’s biggest coup so far was grounding the plane of Thai crown prince Maha Vajiralongkorn four years ago. When the royal visited Bavaria, Mr. Schneider obtained a decision from the Berlin court of appeal to ground the aircraft in Munich. This was hard to stomach for the kingdom – and ensured that Mr. Schneider immediately received a security so he would let the plane leave again.
Critics of the courts point at litigation funders as the reason for the proliferation of arbitration cases.
To Mr. Schneider’s surprise, however, the German Federal Court has since sided with the prince, claiming that the arbitration ruling was not enforceable in Germany as the Berlin court had not checked the validity of the underlying investment agreement.
This decision by the German federal court rebuffs another common criticism of the arbitration courts, namely that their rulings cannot be challenged and supersede national democratic states.
Uwe Koch, the former owner of the Khersones, did at least receive some money. After four years of court proceedings, his firm was awarded €3.2 million for the lost revenue, which Ukraine’s government in Kiev paid him immediately. Compared to the €15 million that Mr. Koch had sued for, that was rather little.
“I immediately handed down the money to the partners,” said Mr. Koch. The other half went to “litigation funder,” the Dutch firm Omni Bridgeway, whom he had hired to finance the court case in the first place. “Otherwise we would have never been able to afford the legal costs.”
Critics of the courts point at precisely such litigation funders as the reason for the proliferation of arbitration cases. They claim that the financers have found a sure-fire way to make money that guarantees high returns, so long as they manage to initiate procedures somehow.
Mr. Koch doesn’t buy into this argument.
“In our case, the litigation funder surely made a loss,” he said. The Dutch agreed to pay for any legal costs, and got half of the compensation in return. With the total legal fees amounting to €5 million but only €3.2 million awarded in compensation, that doesn’t sound like a winning deal.
The discussion demonstrates perhaps the greatest strength of the arbitration courts: Because they have to prove themselves with every single case, standards keep developing as well, to the advantage of everyone involved.