*Panagiotis Athanasiadis
When two states sign a trade agreement, the question of dispute settlement is a major focal point. What should happen in the case of a violation of the rights of an investor; what recourse should be available; how can fairness in that proceeding be assured. Historically states resulted to diplomatic means or even the occasional military intervention in order to protect the assets of their nationals in the host-state. These practices have nowadays largely eclipsed. Nevertheless, investors are still unlikely to place the fate of their disputes at the hands of a domestic court, which could be biased towards its own government. Hence most investment treaties now contain ISDS chapters. ISDS stands for “investor-state dispute settlement” and describes an arbitration system through which foreign investors can sue host-states. This legal instrument can be used to seek monetary redress against host-states for discrimination, uncompensated expropriations, unequitable and unfair treatment or any other kind of violation of the investor-rights established in the underlying treaty.[i]
Since its rise to prevalence, the ISDS has been widely criticized. States have to pay obscene compensations when they regulate sectors that might adversely affect investors’ profits.[ii] Questions of consistency, impartiality and transparency are also a recurring issue with ISDS.
1. Investor super-rights – The Trojan Horse complaint
The rights an investor enjoys under a modern-day investment treaty go far beyond protection against expropriations and nationalizations.[iii] Investment arbitration has seen a thematic shift. Most disputes nowadays deal with issues of public concern such as energy, health, technology etc.[iv] Experts in the field have voiced concern over how handing foreign investors a tool that can award them exorbitant sums in damages can hamper a host-state’s ability to regulate those sectors.[v] This so-called Trojan horse critique to the ISDS describes how multinational enterprises can challenge, in a private setting, legitimate public regulation that threatens their profit margins. The ISDS platform circumvents domestic remedies for challenging legitimate public policies and allows investors to derail legislative programs with impunity.[vi]
This chilling-effect on democratic, regulatory processes becomes especially apparent in economically developing states. The majority of ISDS cases see a claimant from an economically developed country against an economically developing government.[vii] Some retort that the high standard of care and diligence that must be shown by the states so as not to be held liable might “spill over into domestic law.”[viii] Host-states are thus incentivized to apply good governance. A more likely scenario however is that investment arbitration creates an insulated foreign investor enclave with preferential treatment, all the while national legislation and judiciaries lag behind.[ix] As a result, many countries have stopped signing international investment agreements with ISDS clauses and in the case of Indonesia and South Africa have gone as far as terminating already existing ones.[x] Bolivia, Ecuador and Venezuela all withdrew from the ICSID.[xi]
2. Procedural and structural issues
The current ISDS model has further been criticized for its lack of consistency in cases bearing a high degree of similarity. This failure can be attributed to the fragmented nature of the ISDS system.
The lack of binding precedent contributes to the legal uncertainty surrounding investment arbitration, but it is not its sole cause. Inconsistency seems to be inescapable on account of how investment arbitration is set up. Different ad hoc tribunals with different arbitral institutions and arbitrators with different legal backgrounds all laying judgement independently and with little reference to one another.[xii] Achieving a unified interpretative front concerning the legal questions of each respective treaty seems almost unattainable.
A side effect of this incoherence is that it allows claimants to look for Tribunals, whose interpretations best suit their needs. This so-called phenomenon of “forum shopping” describes the practice of choosing a court in which to bring an action based on a determination of which court is most likely to yield a favourite outcome. Enabled by the decentralized nature of investment arbitration, “forum shopping” in investment arbitration has drawn large scale criticism.[xiii] Some argue that a dedicated appeal mechanism could bottleneck diverging interpretations and provide a steadier and more predictable flow of arbitral decisions.[xiv] This would help combat “forum shopping” and also generally increase the correctness of awards.[xv]
3. Transparency
Investment arbitration is based on commercial arbitration. It is thus not surprising that one of the most attractive qualities of commercial arbitration, its confidentiality, was carried over to investment arbitration. Given, however, the public relevance of the issues at hand questions of legitimacy are raised.[xvi]
Behind-closed-doors decisions on topics of public interest by private arbitrators with no public accountability highlight what many describe as the democratic deficit of the ISDS.[xvii] The criticism focuses on the unreliably sporadic publication of awards and documents relating to arbitral proceedings and the scarcity of open hearings.
Seeing how both states and investors have an interest in keeping certain aspects of the dispute confidential a balance has to be struck between confidentiality and transparency on matters of public interest.[xviii] The application of the UNCITRAL Transparency Rules has helped in that regard. Nevertheless, many treaties still condition the openness of hearings to party consent thus impeding comprehensive transparency.[xix]
4. Independence and impartiality
Agency in investment arbitration works in a unique fashion. Only those who meet the very high qualification standards get to be part of the industry. This means that the pool of potential arbitrators and counsellors is necessarily a shallow one. Some end up undertaking both the role of an arbitrator and that of a counsellor, even in cases very similar to one another.[xx] The constant back-and-forth between roles has been dubbed as the “double-hat”[xxi] dilemma. This alteration can have an adverse effect on impartiality (e.g. conflicts of interest)[xxii] while it also reinforces the “clique” perception many have of investment arbitration. The problem is exacerbated by the lack of stricter ethical codes and rules preventing the same candidates from occupying different roles.[xxiii]
Arbitrators might also have monetary and career interests in seeing more and more cases move forward. Firstly, since most arbitrators are paid per day of work, they might be inclined to interpret their competence widely, which would result in a lengthy procedure.[xxiv] Secondly, since only investors can bring claims, it is only natural that a certain pro-investor affinity arises.[xxv] A study examining the existence of bias in investment treaty arbitration showed that rulings on admissibility tended to favour the claimants and expansive, investor-friendly interpretations of the treaties were more usual.[xxvi] This signals to prospective claimants not to shun from filing a claim.
5. Conclusion
The merit of this criticism can definitely be questioned – and even if founded, one could still argue that the benefits of the ISDS still outweigh its drawbacks – nevertheless public mistrust towards the current system continues to mount. Admittedly, some of the elements that make arbitration so attractive: finality, speed, low costs, confidentiality work best in the commercial setting. The involvement of a sovereign state brings with it a heightened need for accountability and transparency. Flexibility often has to yield to glacial due process on the side of the state. The challenge for reforming the ISDS system will be to maintain as many of its current attractive qualities, while making room for classic democratic pursuits such as legal certainty and sovereign legislation.
*Law student, Humboldt University, Berlin, Germany.
[i] Alex Mills, ‘The public-private dualities of international investment law and arbitration’ in Chester Brown and Kate Miles (eds), Evolution in Investment Treaty Law and Arbitration (CUP 2011) 97-116.
[ii] Cf Yannick Radi, ‘The Application of the Most-Favoured-Nation Clause to the Dispute Settlement Provisions of Bilateral Investment Treaties: Domesticating the Trojan Horse’ (2007) 18 (4) European Journal of International Law 757.
[iii] William W Burke-White, Andreas von Staden, ‘Private Litigation in a Public Law Sphere: The Standard of Review in Investor-State Arbitrations’ (2010) 35 (2) Yale Journal of International Law, 2010 283, 284.
[iv] Markus Krajewski, ‘Modalities for Investment Protection and Investor-State Dispute Settlement (ISDS) in TTIP from a trade union perspective’ (Friedrich-Ebert-Stiftung, 1 July 2014) 7.
[v] Kate Miles, ‘International Investment Law and Climate Change: Issues in the Transition to a Law Carbon World’ (2008) Society of International Economic Law Working Paper No 27/08, 22; Kyla Tienhaara, ‘Regulatory Chill and the Threat of Arbitration: A View from Political Science’ in Chester Brown and Kate Miles (eds) Evolution in Investment Treaty Law and Arbitration (CUP 2011) 607.
[vi] Robert W Schwieder, ‘TTIP and the Investment Court System: A New and (Improved?) Paradigm for Investor State Adjudication’ (2016) 55 Columbia Journal of Transnational Law 178, 187-188.
[vii] Roderick Abbott, Fredrik Erixon and Martina Francesca Ferracane, ‘Demystifying investor- state-dispute-settlement (ISDS)’ (ECIPE Occasional Paper No 5/2014) 2.
[viii] Peter Muchlinski, Federico Ortino, Christoph H Schreuer, The Oxford Handbook of international investment law (OUP 2008) vi.
[ix] Joachim Pohl, ‘Societal benefits and costs of international investment agreements: A critical review of aspects and available empirical evidence’ (2018) OECD Working Papers on International Investment, 60-61; Tom Ginsburg, ‘International substitutes for domestic institutions: Bilateral investment treaties and governance’ (2005) 25 International Review of Law and Economics 107, 119– 121.
[x] Axel Berger, ‘Developing countries and the future of the international investment regime’ (giz, 2015) 8.
[xi] Sergey Ripinsky, ‘Venezuela’s Withdrawal From ICSID: What it Does and Does Not Achieve’ (IISD, 13 April 2012).
[xii] Irene M Ten Cate, ‘The Costs of Consistency: Precedent in Investment Treaty Arbitration’ (2013) 51 Columbia Journal of Transnational Law 418, 424-426.
[xiii] Joost Pauwelyn, Luiz E Salles, ‘Forum Shopping Before International Tribunals: (Real) Concerns, (Im)Possible Solutions’ (2009) 42 Cornell International Law Journal 77, 80-83; Richard H Kreindler, ‘Arbitral forum shopping’ in Bernardo M Cremades and Julian D M Lew (eds), Parallel State and Arbitral Procedures in International Arbitration (ICC, 2005) 153-154.
[xiv] Susan D Franck, ‘The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions’ (2005) 73 Fordham Law Review 1521, 1524, 1617.
[xv] Nicolette Butler, ‘Possible Improvements to the Framework of International Invest-ment Arbitration’ (2013) 14 (4) Journal of World Investment & Trade 613, 634; Asif H Qurshi, Shandana Gulzar Khan, ‘Implications of an Appellate Body for Invest-ment Disputes from a Developing Country Point of View’ in Karl P Sauvant (eds), Appeals Mechanism in International Investment Disputes (OUP 2008) 270; Hongling Ning, Tong Qi, ‘A Chinese Perspective on the Investment Court System in the Context of Negotiating EU-China BIT’ (2018) 11 (1) Tsinghua China Law Review 91, 121.
[xvi] Freya Baetens, ‘The EU’s proposed Investment Court System (ICS): addressing criticisms of investor-State arbitration while raising new challenges’ (2016) 43 (4) Legal Issues of Economic Integration 367, 374-375; Jonathan Ketcheson, ‘Invesment Arbitration: Learning from Experience’ in Steffen Hindelang and Markus Krajewski (eds), Shifting Paradigms in International Investment Law (Oxford Scholarship Online, 2016), 101.
[xvii] William W Burke-White, Andreas von Staden, ‘Private Litigation in a Public Law Sphere: The Standard of Review in Investor-State Arbitrations’ (2010) 35 (2) Yale Journal of International Law, 2010 283, 336; Barnali Choudhury, ‘Recapturing Public Power: Is Investment Arbitration’s Engagement of the Public Interest Contributing to the Democratic Deficit?’ (2008) 41 Vanderbilt Journal of Transnational Law, 775.
[xviii] Bárbara M Bravo, Cláudia Figueiras, ‘The Problem of Reconciling the Principle of Confidentiality in Foreign Investment Arbitration with the Public Interest’ (2018) 12 (3) International Journal of Law and Political Sciences 480.
[xix] Klint Alexander, ‘Hearings’ in Dimitrij Euler, Markus Gehring and Maxi Scherer (eds), Transparency in International Investment Arbitration: A Guide to the UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration (CUP 2015) 229.
[xx] Juan P Benedetti, ‘The proposed Investment Court System: does it really solve the problem?’ (2018) 42 Revista Derecho del Estado 83, 95.
[xxi] Ibid; see also: UNCITRAL, ‘Draft Report of Working Group III on the work of its thirty-sixth session’ (6 November 2018) A/CN.9/964, paras 70-72.
[xxii] Blue Bank International & Trust (Barbados) Ltd v Bolivarian Republic of Venezuela (2013), ICSID Case No. Arb/ 12/ 20, Decision on the Parties’ Proposal to Disqualify the Majority of the Tribunal, para 69.
[xxiii] European Commission, ‘Online public consultation on investment protection and investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP)’ (13 July 2014) 102; UNCTAD, ‘Trade and Development Report, 2014’ (10 September 2014) 139.
[xxiv] European Commission, ‘Online public consultation on investment protection and investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP)’ (13 July 2014) 95, 112.
[xxv] David Gaukrodger, Kathryn Gordon, ‘Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community’ (2012/03) OECD Working Papers on International Investment, 48.
[xxvi] Gus van Harten, ‘Arbitrator Behaviour in Asymmetrical Adjudication (Part Two): An Examination of Hypotheses of Bias in Investment Treaty Arbitration’ (2016) 53 (2) Osgoode Hall Law Journal 540.