REPORT ON
Desirability of the investment arbitration in the context of TTIP negotiations Albert Henke
Università degli Studi - Milan Introduction
Almost all of the international investment agreements currently in force worldwide, which EU Member States are parties to almost half of total number of (roughly to 1400 out of 3000), include investor-to-State dispute settlement mechanisms (“ISDS”). Arbitration (both institutional and ad hoc) represents the most used mechanism within the ISDS.
However, over the years the current ISDS system has attracted several criticisms, which have triggered a deep rethinking of the entire phenomenon from its foundations (1).
Following the conferral of an exclusive competence in the field of Foreign Direct Investment (hereinafter FDI) to the EU, the EU Commission has tried to cope with some of those criticisms by formulating a number of proposals made open to discussion with different stakeholders (EU Institutions, Member States, NGOs, state courts…). Among those proposals, worth mentioning are, in particular: the creation of a permanent international investment court; new criteria in selecting the arbitrators and the elaboration of a code of conduct for the latter; the intention to promote full, mandatory transparency of the arbitration process; the conferral to governments, not to arbitrators, of ultimate control over the interpretation of the rules; the provision of an appeal mechanisms, in order to reduce the inconsistency of arbitral decisions.
Some of those ideas have already been incorporated in the first generation of EU Free Trade Agreements (those stipulated in 2014 with Canada – CETA, and Singapore – FTA), that include investment protection and ISDS.
In the context of TTIP negotiations, the idea to create a permanent international court replacing the current de-centralized adjudicatory system have been expressed for the first time in the EU Concept Paper on Investment in TTIP and beyond – the path for reform (May 2015). The negotiating proposal for the Transatlantic Trade and Investment Partnership (TTIP) (September 2015) again includes the provisions for a permanent two-tiered international investment court (2).
Such idea has been further developed in the Commission’s Proposal, officially endorsed by the Union, for Investment Protection and Resolution of Investment Disputes (3), which was tabled for discussions in the 12th TTIP negotiating round between the European Union and the United States (November 2015) (4).
At present, TTIP is still under negotiation, the United States’ official reaction to the EU proposal is not yet known and the text of the EU-Vietnam FTA has not been released.
(1) See FRANCK, The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law through Inconsistent Decision, in Ford. L. Rev. 2005, 1545 ff.; BROWER, Structure, Legitimacy, and NAFTA’s Investment Chapter, in Vanderb. J. Transn. L. 2003, 52 ff.; BROWER,SCHILL, Is Arbitration a Threat or a Boon to the Legitimacy of International Investment Law?, in Chic. J. Int’l Law 2009, 1.
(2) For an overview of the proposal, see TITI, The European Commission’s Approach to the Transatlantic Trade and Investment Partnership (TTIP): Investment Standards and International Investment Court, in Trans. Disp.
Manag., 2016, 6.
(3) The actual text in the final agreement will be a result of negotiations between the EU and US.: see http://trade.ec.europa.eu/doclib/docs/2015/november/tradoc_153955.pd.
(4) In December 2015 the Commission announced the conclusion of negotiations on a comprehensive free trade agreement (FTA) between the European Union and Vietnam, in which Vietnam agreed to the Union’s proposal for an international investment court.
The idea to create a permanent two-tiered international investment court, with a particularly broad scope of review of the first instance decision, is probably the most significant and innovative among all the reform proposals put forward by the EU Commission. It is not the first one in its type (5). Such a radical modification, which will substantially impact on the traditional ISDS’
features and characteristics, intends to respond to the abovementioned widespread criticisms against the current system (6).
However, both the criticisms and the reform proposals appear, at a deeper analysis, respectively ill-founded and counterproductive.
Criticisms to the current system of investment arbitration
In the following pages the main criticisms to the current ISDS system will be highlighted, along with a brief assessment of their rationality.
1. Investment arbitration as a threat to democracy
Most criticisms, especially put forward by NGOs and other lobbying groups, maintain that ISDS is a “threat to democracy” (7).
Among the most recurrent challenges to the current system, it has been said that: it undermines the rule of law, makes citizens pay for corporate risk, and creates a ‘fright to regulate’ – governments not daring to legislate out of “fear for litigation” (8); it has become a tool of multinational corporations that use arbitration panels to circumvent, or even alter, national laws at their whim; it provides exclusive advantages for large corporations to sue States before a special adjudicative forum, such as the prohibitive costs of investment arbitration, the role of appointing bodies accountable directly to investors or major capital exporting States, and the bargaining power that ISDS provides investors when investing in host States; it would allow unknown panel of corporate lawyers to overrule the will of parliament and destroy the legal protection (9); it is only for the benefit of foreign firms and highly paid corporate lawyers, under the supervision of
(5) It has been previously put forward by the German Federal Ministry for Economic Affairs and Energy through the Model bilateral investment treaty with investor-state dispute settlement for industrial countries, giving consideration to the U.S. It has also been included as a reform option in the 2015 World Investment Report of the United Nation’s Conference on Trade and Development (UNCTAD) and in the 2015 update of the UNCTAD’s Investment Policy Framework for Sustainable Development (IPFSD).
(6) For a thorough overview of the criticism raised against the ISDS system, as well of all the technical objections to them, see the detailed papers published by E.F.I.L.A. (and available at http://efila.org/publications/), among which:
EFILA final response to the EU Commission’s consultation on investment protection and investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP), 12 July 2014; EFILA submission to the UK Parliament’s Business, Innovation and Skills Committee inquiry into the impact of the Transatlantic Trade and Investment Partnership (TTIP) on the UK economy, 05 February 2015; EFILA response paper to the criticism against ISDS, 15 May 2015; EFILA Task Force Paper regarding the European Commission’s proposal for the International Court System (ICS). See also LAVRANOS, Critics towards the desiderability of the current investment arbitration system. Countering Anti-ISDS Propaganda with Facts: An Uphill Battle, in www.kluwerarbitrationblog.com.
(7) See the papers elaborated by CORPORATE EUROPE OBSERVATORY, TTIP Investor Rights: the Main Voices Ignored by the Commission, available at www.corporateeurope.org, 3 February 2015, 1 ff.; EBERHARDT,REDLIN, TOUBEAU, Trading Away Democracy- How CETA’s Investor Protection Rules Threaten the Public Good in Canada and the EU, available at: http://corporateeurope.org/sites/default/files/trading-away-democracy.pdf., November 2014, 1 ff.; THE SEATTLE TO BRUSSELS NETWORK, ISDS: Courting Foreign Investors, available at: www.s2bnetwork.org, 29 September 2015, 1 ff.
(8) EUROPEAN ENVIRONMENTAL BUREAU, TTIP Group Members Urge Commission to Drop Business vs State Dispute Resolution, available at: www.eeb.org, 14 July 2014, 1 ff. See also EC Preliminary Statistical report (statistical overview), available at: http://trade.ec.europa.eu/doclib/docs/2014/july/tradoc_152693.pdf, 18 July 2014.
(9) MONBIOT, This Transatlantic Trade Deal is a Full-Frontal Assault on Democracy, in The Guardian, available at: www.theguardian.com, 4 November 2013, 1 ff.
secretive tribunals (10); it constitutes a practice threatens domestic sovereignty and weakens the rule of law by giving corporations special legal rights, allowing them to ignore domestic courts.
(11).
However, as wisely pointed out in a published letter by a group of prominent law professors experts in investment arbitration (12), the mere signing of an investment treaty does not constitutes, per se, a loss of sovereignty or undermining of the rule of law. “Corporations cannot and will not gain victory simply by arguing reduced investment value.” Instead, before being awarded compensation, an investor must establish that: “(…) a host state has discriminated on the basis of nationality, has failed to accord a foreign investor due process, or has expropriated the property of a foreign investor without payment of prompt, adequate, and effective compensation.”
(13)
In other words, the obligations to which any State party to an investment agreement is subject, i.e. not to discriminate on the basis of nationality, to comply with principles of due process, to expropriate property only for a public purpose and on payment of prompt, adequate and effective compensation, are themselves a clear expression pillars of the rule of law.
2. Inconsistency and unpredictability of arbitral decisions This is a real concern.
However, on one hand, this phenomenon appears almost inevitable also in respect of judicial decisions, as any provision (being it a treaty or a contractual one) is a matter of interpretation by the court and the stare decisis rule does not apply in investment arbitration; on the other hand, by its very nature investment arbitration (as well as commercial arbitration) is fact- and case specific, and so is its resolution; finally, even the principle of res judicata does not receive uniform recognition at an international level (14). Therefore, the divergent interpretation of similar provisions appears an inherent phenomenon to investment arbitration.
In order to cope with the problem of inconsistency and unpredictability, a better option would be to focus more on improving the clarity and preciseness of investment treaty provisions (which do not typically provide substantial determinacy, setting forth instead only brief and basic rules, drafted in general terms, which often enumerate vague standards in an effort to use discretion to promote fairness or facilitate agreement (15)), rather than on radically upsetting the adjudicatory framework which bears only part of responsibility for the defects of the system as a whole.
(10) See ALFORD, Scholars Debate Investment Arbitration Chapter in TPP and TTIP, available at:
www.kluwerarbitrationblog.com, 7 April 2015.
(11) http://www.afj.org/wp-content/uploads/2015/03/ISDS-Letter-3.11.pdf.
(12) https://www.mcgill.ca/fortier-chair/isds-open-letter.
(13) Ibidem.
(14) Even though consistency is widely demanded as an important factor in dispute settlement, international investment arbitration does not enshrine any concept of binding precedent, or stare decisis. Awards are binding between parties, but have no third-party effect (this is implicit in Article 53(1) ICSID Convention and Article 54(4) of the Additional Facility Rules. Decisions of tribunals neither bind other litigants, nor subsequent panels of arbitrators in a different set of proceedings. On this matter the SGS-Philippines arbitral tribunal clearly underlined: “(…) it must be for each tribunal to exercise its competence in accordance with the applicable law […] Moreover there is no doctrine of precedent in international investment law, if by precedent is meant a rule of the binding effect of a single decision” (SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6 (2004), Jurisdiction para. 97).
(15) As an example, the standards of compensation for expropriation often lack detail in most investment treaties.
A common provision for lawful compensation is the payment of “prompt, adequate, and effective” compensation of
“fair market value” (see United States Model Bilateral Investment Treaty 2012, arts. 6(1)(c), 6(2)(b).). This provision is followed by no instructions on numerous calculation issues, including the appropriate methodology for determining fair market value or whether to compound interest. Moreover, some legal standards, such as the obligation to provide fair and equitable treatment (FET), are at a relatively high level of abstraction and can give rise to different and conflicting interpretations. Inconsistent interpretations have led to uncertainty about the meaning of key treaty obligations and lack of predictability on how they will be applied in future cases (UNCTAD, Investor-State Dispute
3. Arbitrators’ role and conflicts of interest
It is said that the current system, which allows the same person to act both as counsel of the parties and as arbitrator, creates situations of conflicts of interest.
That is also a real concern.
However, the current system already incorporates rules to cope with this issue. Independence and impartiality can be challenged on different level of investment arbitration system, pursuant to national laws, institutional rules and soft law.
Under ICSID Convention, for example, an arbitrator can be dismissed if he or she manifests a lack of the qualities required to sit as an arbitrator. For example, a proposal to disqualify an arbitrator was upheld in Blue Bank International & Trust (Barbados) Ltd. v. Bolivarian Republic of Venezuela, [ICSID Case No. ARB 12/20], on the ground that the arbitrator appointed by claimant worked in a law firm that represented other claimants in unrelated ICSID cases against Venezuela. In addition, under the same Convention, an award may be annulled if the tribunal was not properly constituted. This may include situations where an arbitrator failed to disclose potential conflicts of interest before or during the arbitration (16).
As to non-ICSID proceedings, most arbitration rules (such as UNCITRAL, ICC, SCC) require that every arbitrator must be impartial and independent (17). This requirement extends from the outset and throughout the proceeding. Prior to appointment, an arbitrator must disclose any circumstances which may give rise to justifiable doubts as to his or her impartiality or independence. Further, a party to a dispute may challenge an arbitrator during the course of the proceedings, if new circumstances arise or facts come to light that lead the party to doubt the arbitrator’s independence or impartiality.
Also national arbitration laws contain similar provisions (18).
Under Article 4 of the IBA Guidelines on Conflicts on Interest in International Arbitration (19), arbitrators have a duty to disclose all facts or circumstances that may give rise to justifiable doubts as to his impartiality or independence. The failure to such disclosure can be a ground for the disqualification of the arbitrator.
In the end, those who criticize the role of arbitrators in ISDS disregards the fact that investment- treaty arbitration is heavily regulated with several formal and informal mechanisms that ensure their impartiality and independence. In light of this, arbitrators have been described as impartial and independent dispute resolvers: “(…) who interpret and apply the governing law and are subject to a number of mechanism that can prevent private interests from taking precedent over the public interests”. (20)
BROWER and SCHILL, for example, argue that appointments, in international investment arbitration, are essentially merit-based and that: “(…) the crucial factor for appointment is not the possible or real bias of an arbitrator in favour of a party’s position. It is rather his or her reputation for impartial and independent judgment that earns appointment”. (21)
Settlement, Series on Issues in International Investment Agreements II, Geneva 2014, 26). Another example of provisions the interpretation of which gives raise to inconsistency is that of “umbrella clause”.
(16) See artt. 14 and 56-58 ICSID Convention.
(17) See artt. 11-14 UNCITRAL Arbitration Rules Articles,.
(18) See, for example, Art. 24(1) UK Arbitration Act 1996.
(19) IBA Guidelines on Conflicts of Interest in International Arbitration, adopted by the IBA Council Resolution, 23 October 2014.
(20) BROWER,SCHILL, Is Arbitration a Threat or a Boon to the Legitimacy of International Investment Law?, in Chic. J. Int. L. 2009, 489.
(21) BROWER,SCHILL, Is Arbitration a Threat, cit., 492.
In light of this, the relevant issue should be whether these mechanisms provide an effective control over the impartiality and independence of arbitrators, rather than whether all arbitrators are biased (22).
As to arbitrators, another criticism points to the fact that only a small elite group handles most arbitrations, that international arbitrators form part of a close homogenous group comprised of
“grand old men” (23), that there are between 100 and 200 practitioners worldwide with significant repeat experience, or even an arbitration “mafia”. (24).
This concern might be true. However, the mechanism is such that arbitrators are party- appointed, thus States are entirely free to appoint other individuals thereby widening the pool of arbitrators.
4. Pro-investors bias
It is often said that the traditional ISDS system tends to favor the investors.
However, statistical evidence shows that respondent States in arbitral proceedings consistently win more cases than the investors who bring claims against States.
In the 2014 UNCTAD World Investment Report, it is stated that: “(…) arbitral developments (…) brought the overall of concluded cases to 274”. Out of these cases, approximately 43% were decided in favour of the State, 31% in favour of the investor and 27% were settled. (25)
UNCTAD figures confirm that States continue to win more cases than investors.
This is also confirmed by latest ICSID statistics, which show that only 46% of all ICSID awards upheld claims in part or in full, while 53% of the claims were dismissed either for lack of jurisdiction or on the merits. (26)
5. Lack of transparency
The assumption is that the current system is an obscure and non-transparent mechanism where disputes are resolved “in the back rooms of democracy” and apart from public control, being decided by professionals, who are not public officers. Indeed, in international investment arbitration, as in commercial arbitration, there is an inevitable inherent tension between confidentiality and transparency.
However, as incisively said by some commentators: ‘What is overlooked in the current heated discussion is the fact that investment arbitration is surprisingly transparent’ (27).
It is undisputable that over the last years remarkable efforts have been made to achieve greater transparency in ISDS, which has gradually outbalanced the value of confidentiality.
Among the arbitral institutions and arbitral rules currently in force, ICSID has the highest level of transparency. It publishes information on the registration of requests for arbitration, conciliation and post-award remedies and maintain registers on the procedural developments of all proceedings (28). The registers, continuously updated, include details concerning the economic sector to which
(22) EUROPEAN FEDERATION FOR INVESTMENT LAW AND ARBITRATION (EFILA), A Response to the criticism against ISDS, 17 May 2015.
(23) ROGERS, The Vocation of the International Arbitrator, in Am. Univ. Int. L. Rev. 2005, 963 (noting that “the forefathers of the modern international arbitrator were a small, intimate group of European ‘grand notables’ or ‘Grand Old Men’, as they were sometimes called”).
(24) On the use of this term see DEZALAY,GARTH, Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order, 1996, 10; PARK, National Legal Systems and Private Dispute Resolution, in Am. J. Int. L. 1988, 623-24.
(25) UNCTAD, World Investment Report 2014.
(26) ICSID statistic 2015-1, available at: www.icsid.worldbank.org.
(27) RISSE,GREMMINGER, The Truth About Investment Arbitration (not only) under TTIP – Four Case Studies, ASA Bull. 2015, Vol. 33 Issue 3, 465 ff.
(28) Artt. 22(1) and 23 ICSID Administrative and Financial Regulations.
the disputes relate, the names of the counsel representing the disputing parties, the method of constitution and composition of each tribunal, conciliation commission and ad hoc committee and the procedural steps in the proceedings. This gives the possibility to any third party to be informed about the disputes administered by the Center (29).
In Spring 2006, ICSID member States modified the Rules in order to officially allow the possibility for NGO to file amicus curiae briefs (30); to consent the public hearings, even if subject to parties’ consent (31); to strengthen the provisions on the publication of awards that, however, remain confidential in the absence of the agreement by the parties. (32) In this case, the parties’
authorization is required before awards can be published but, even without express permission, ICSID may include excerpts of legal reasoning in its publications (33). The recent trend is that the parties are more favourable to permit publication of awards. (34) In addition, the Centre might publish other material with the parties’ consent (for example, decisions of the Tribunal, procedural orders, parties’ submissions, transcripts and minutes of hearings, etc.) (35).
The reforms involving the implementation of transparency have also dealt with the innovation in the use of technology: for example, hearings have been broadcast in order to make them available to the public. (36)
As to non-ICSID proceedings, a remarkable effort to achieve greater transparency in ISDS has been put in place by UNCIRAL, which in 2013 has released the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, come into effect on the 1 April 2014 (37).
These new rules provide for a significant degree of openness throughout the arbitral proceedings.
They provide for open oral hearings in ISDS cases, establishing that the arbitral tribunal: “(…) shall make logistical arrangements to facilitate the public access to hearings”. (38) They establish the publication of key documents, including notices of arbitration, leadings, transcript, and all decisions and awards issued by the tribunal. (39) However, Article 7 provides exceptions to transparency when the information is qualified as confidential or protected pursuant to Article 7 paragraph 2. (40)
The UN General Assembly adopted the Convention on Transparency in Treaty-based Investor- State Arbitration on 10 December 2014, recognizing the need for provisions on transparency in order to take into account the public interest involved in international investment arbitration (41).
The aim of the Convention is to provide a tool for those States that wish to make the UNCITRAL Transparency Rules applicable to their existing investment agreements. In the absence of
(29) Chapter V, Regulation 23, ICSID Administrative and Financial Regulations.
(30) Rule 37(2) ICSID Arbitration Rules.
(31) Rule 32(2) ICSID Arbitration Rules.
(32) Art. 22 ICSID Administrative and Financial Regulations, Regulation.
(33) Art. 48(4) ICSID Convention; art. 48(4) ICSID Arbitration Rule 48.
(34) ICSID website contains an increasing number of digitally available awards. See at https://icsid.worldbank.org/apps/ICSIDWEB/Pages/default.aspx.
(35) See Art. 22 (2) ICSID Administrative and Financial Regulation.
(36) UNCTAD, Transparency Series on Issues in International Investment Agreements II, 2012, 53.
(37) For a comment on the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration see JOHNSON,BERNASCONI,OSTERWALDER, New UNCITRAL Arbitration Rules on Transparency: Application, Content and Next Steps, in Int. Inst. Sust. Dev. August 2013, 1 ff.
(38) Art. 6 UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration.
(39) Art. 3 UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration.
(40) Art. 7(2) UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration: “Confidential or protected information consists of: (a) Confidential business information; (b) Information that is protected against being made available to the public under the treaty; (c) Information that is protected against being made available to the public, in the case of the information of the respondent State, under the law of the respondent State, and in the case of other information, under any law or rules determined by the arbitral tribunal to be applicable to the disclosure of such information; (d) Information the disclosure of which would impede law enforcement.
(41) United Nations Convention on Transparency in Treaty-based Investor-State Arbitration, New York 10 December 2014, Preamble.
reservations by the signatory States, the Transparency Rules will apply to disputes where both the respondent State and the home State of the investor are parties to the Convention, or where only the respondent State is party to the Convention, but the claimant investor agrees to the application of the Rules.
A positive side-effect of such a level of transparency is the contribution to: “the development of a common legal opinion of jurisprudence constant” (42). In other words, making awards available also serves the important goal of promoting a harmonized development of the case law.
(43)
6. ‘Regulatory chill’
Criticisms also denounce that ISDS leads to so-called “regulatory chill”, the situation whereby governments are prevented by ISDS from exercising their sovereignty by restraint policy space associated with the environment, health, natural resources, and human rights, among other policy areas. The chilling effect has been defined as a situation in which: “(…) a State actor will fail to enact or enforce bona fide regulatory measures because of a perceived or actual threat of investment arbitration” (44).
However, there is no evidence which supports such a claim. (45) Past chilling effects are difficult to identify because they require counterfactual evidence about the regulations that would have been adopted in the absence of the purported chilling (46) Even if one can identify a drastic change in the adoption of public interest regulations, pinpointing the reason for the change is nearly impossible. Indeed, political choices can hardly be adequately explained by one independent variable. Investigating the existence of the regulatory chill would require a more extensive research than that carried out by the ISDS system’s critics.
In addition, the fact that most regulatory expropriation claims are unsuccessful shows that investment treaties do not impede efforts to raise regulatory standards.(47) In this respect, there are several examples in which the respondent states have maintained the contested measures throughout arbitration proceedings and ultimately avoided liability (48).
It is interesting, in this respect, to quote a passage from the decision in S.S. "Wimbledon", Britain et al. v. Germany, (1923) (49), where the Permanent Court of International Justice declined to see in the conclusion of any Treaty by which a State undertakes to perform or refrain from performing a particular act an abandonment of its sovereignty. It stated: “No doubt any convention creating an obligation of this kind places a restriction on the exercise of the sovereign rights of
(42) SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6, 2004, 97.
(43) FRANCK S., The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions, in Ford. L. Rev. 2005, 1558-82.
(44) TIETJE, BAETENS AND ROTTERDAM, The Impact of Investor-State-Dispute Settlement (ISDS) in the Transatlantic Trade and Investment Partnership, Study prepared for the Minister of Foreign Trade and Development Cooperation, Ministry of Foreign affairs, 2014, 68. See also CORPORATE EUROPE OBSERVATORY AND THE TRANSNATIONAL INSTITUTE, Profiting from injustice 2012, citing PROFESSOR VAN HARTEN, Osgoode Hall Law School, Toronto
(45) BROWN, International Investment Agreement: Regulatory Chill in the Face of Litigious Heat?, in West. J.
Legal St. 2013.
(46) NEUMAYER, Greening Trade and Investment: Environmental Protection Without Protectionism, 2001, 78.
(47) VANDEVELDE, Bilateral Investment Treaties: History, Policy, and Interpretation, New York 2010, 107.
(48) See Methanex Corporation v. United States of America, Final Award, 2005; Glamis Gold Ltd v. United States of America, ICSID Case 2009; Chemtura Corporation v. Government of Canada, 2010; Empresas Lucchetti, S.A. and Lucchetti Perù, S.A. v The Republic of Peru, ICSID Case 2005; Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, Decision on Jurisdiction, ICSID Case 2013.
(49) PCIJ Series A01.
the State, in the sense that it requires them to be exercised in a certain way. But the right of entering into international engagements is an attribute of State sovereignty”. (50)
The same rationale can be found in international investment law, which prevents a state from treating foreign investors unfairly. It is self-evident that investment treaties place limits on host states’ sovereignty, in the sense that they require states to compensate investors for otherwise permissible exercise of governmental power. Hence, the essential thrust of international investment protection is to achieve some level of “chill”, that is, to chill governments from treating foreign investors unfavourably.
Another significant element emerges from a research study published in 2014, which revealed that out of all concluded ICSID cases up to 2014, most of them (47%) relate to executive or administrative acts, arising from a pre-existing contract permit, license or promise from government, whereas only a marginal part (9%) relate to legislative acts. (51) The low rate of disputes involving legislative branch activity, means that: “(…) arguments that investor-state arbitration may encroach on the legitimate prerogatives of domestic governments appear to be overstated. Instead, democratic legislatures should embrace investor-state arbitration as an additional check on executive branch misbehaviour”. (52)
Similar data emerges in respect to NAFTA case law (53).
7. Excessive costs of investment arbitration for Respondent States
Another criticism regarding investment arbitration as a method for resolving investor-states disputes points to the costs and expenses of the procedure. Arbitration, is said, is “neither speedy nor cost effective”. (54)
However, the largest cost component is represented by the fees and expenses incurred by each party for its legal counsel and experts. They are estimated to average about 82% out of the total costs of a proceedings. Arbitrator fees average about 16% of costs. Institutional costs payable to organisations that administer the arbitration and provide secretariat services - such as ICSID, the PCA, the SCC - are low in relative terms, amounting to about 2% of costs. (55)
On the costs of arbitration, UNCTAD reported that: “(…) recent awards suggests that the average legal costs incurred by governments are $1 to $2 million, including lawyers’ fees; the costs for the tribunal, about $400,000 or more; and the costs for the claimant about the same as for the defendant”. (56)
These data are quite unambiguous. They show that the high costs in investment arbitration do not depend so much on the arbitral remedy, but rather on the inherent complexity of (and significant amount involved in) investment disputes. In other words, there is no indication that the legal costs would be much less for the parties if they had to refer the same dispute to state courts (apart from what concerns the arbitrators and institution’s costs, which, as said, represent a minor portion of the total amount).
(50)Permanent Court of International Justice, S.S. Wimbledon (United Kingdom v. Japan), 1923, 25.
(51) CADDEL J. AND JENSEN N., Which Host Country Government Actors are Most Involved in Disputes with Foreign Investors?, in Col. Univ. Acad. Commons 2014, available at: www.academiccommons.columbia.edu.
(52) Ibid.
(53) TIETJE,BAETENS AND ROTTERDAM, The Impact of Investor-State-Dispute Settlement (ISDS), cit., par. 83, where it is stated: “(…) the NAFTA cases further demonstrate that most claims do not challenge the executive’s ability to adopt the new measure, but rather concern specific guarantees owed to the investor. What is more, the cases also demonstrate that NAFTA claims that do directly challenge legislative and regulatory acts have all failed”.
(54) WICK, The Counter-Productivity of ICSID Denunciation and Proposals for Change, in J. Int. Bus. & L. 2012, 271.
(55) OECD, Investor-State Dispute Settlement, Public Consultation: 16 May-9 July 2012.
(56) U.N. Conference on Trade and Development, Occasional Note: International Investment Dispute on the Rise, 4, U.N. Doc. UNCTAD/WEB/ITE/IIT/2004/2, 29 November 2004.
8. Diversion of public money
Another line of criticism underlines the fact that investment disputes lead to a diversion of public money from public goods and services. Indeed, the amount of damages granted by arbitrators to investors and against the States is often substantial.
However, this does not depend on the particular characteristics of the dispute resolution mechanism chosen, but rather on the complexity of the disputes, the huge amount of money at stake and the applicable substantive provisions. In other words, being almost undisputed that investor arbitrators cannot grant punitive or even treble damages, there is no indication that proceedings brought before an independent domestic court will not bring to a similar outcome in respect of the same type of dispute.
9. The uselessness of an ad hoc ISDS system in the context of TTIP
Another criticism, specifically tailored to disputes arising out of TTIP, maintain that an ad hoc ISDS system within the latter would be unnecessary, since both the US and EU can avail of modern and developed judicial systems, characterized by both high quality and high level of independence.
A proof would be the fact that transatlantic investments have been enormous so far, without any need to create a special regime for disputes resolution other than the national court system.
This view is based on the assumption that ISDS is only needed in order to protect investors from the discriminatory measures taken by the host state where the institutional and legal framework of the latter does not sufficiently guarantees such protection. If the protection of the foreign investor is already granted by the legal system of the host state, it is said, there would be no need for a special ISDS regime.
However, that picture only partially reflect reality. Also international commercial arbitration involve parties who mostly come from jurisdictions with high developed judicial systems (Europe in general, US, Australia). Nevertheless, nobody doubts that in cross border disputes, the option for arbitration is still the preferred one, as it provides parties with key advantages which cannot be found within a domestic systems, such as the neutrality of the forum, the expertise of the arbitrators, their linguistic skills and multicultural background, the adaptability of the procedure to adjust to the peculiarity of each dispute, the easy circulation of the award worldwide.
In other words, it is the cross border character of investment disputes, along with the special nature of Respondents, which, for the reasons stated above, make international arbitration the preferred mechanism to solve investor-states disputes, as neutrality, expertise, flexibility and enforceability of the decision cannot be provided by domestic courts to the same extent they are provided in international arbitration (57).
The assessment of the two key EU reform proposals in the context of TTIP negotiations
(57) It is worth quoting, in this respect, the passage of an article by PAULSSON, International Arbitration Is Not Arbitration, in Stockh. Int. Arb. Rev. 2008, 2, 1 ff., where he states: “You don’t think that international arbitration is arbitration because it has “arbitration” in its name, do you? Do you think a sea elephant is an elephant? International arbitration is no more a “type” of arbitration than a sea elephant is a type of elephant. (…). Yet the essential difference of their nature is so great that their similarities are largely illusory. (…). Here is the difference: arbitration is an alternative to courts, but international arbitration is a monopoly – and that makes it a different creature. (…) each party hearing ‘arbitration or courts?’ thinks “this arbitration as opposed to what – my court or their court?” We can be certain that lawyers’ cupboards across the globe are filled to bursting with myriad contracts referring to international arbitration even though each side actually preferred courts. You all see why international arbitration finishes first even though it was perhaps never better than second best in anyone’s mind. The problem was that the most preferred alternative of each side was the least acceptable to the other”.
1. The creation of a permanent international investment arbitration with the exclusion of experienced professionals
The envisaged two-tier investment court system, inspired in large part by the WTO Dispute Settlement System, presents a number of disadvantages.
In the first place, it eliminates one of the key perceived advantages of arbitration, the possibility for both parties to choose their own arbitrator, even from an approved roster, as it is customary in domestic or international arbitrations.
In the second place, by giving only the Respondent States, albeit in advance of a particular case, the exclusive power to appoint arbitrators, it carries the inherent risk of selecting “pro-State”
individuals, in particular since the latter are paid by the States (or rather their tax payers) alone (58); in addition, the stronger role of the Contracting Parties raises some concerns in light of the principles of due process. The shift from party autonomy to political considerations in the process of appointing arbitrators will reduce the legitimacy of the process in the eyes of the investors (59).
In the third place, the exclusion from the potential candidates of most professionals currently working in the field of investment arbitration, being deemed to be biased, and their replacement with academics, former judges and governmental officers (in respect of whom the independence on a practical level is not sufficiently assured by the proposed text), risks to re-politicize the entire selection process and does not seem to guarantee the requested level of expertise and experience (which are of the utmost importance in arbitration, where it is usually said that ‘arbitration is as good as arbitrators’). Indeed, rarely issues of public international law and international investment law are brought before national court judges.
In addition, the system of challenging TFI judges and AT members can be further criticized for envisaging that the presiding judge will decide the challenge against one of his own colleagues on the bench, rather a decision being made by an independent outside authority.
It has been said that the beauty of investment arbitration is the variety of competences and expertise of people involved in it. The reform proposal, by reducing the plurality of views brought by arbitrators chosen by parties with different backgrounds, eliminates one perceived benefit of the whole system.
Finally, while the proposed appeal mechanism provides for a deadline for the conclusion of the proceeding, such provision is lacking with respect to the first instance proceedings before the investment court. This might result in a lengthy procedure, thus affecting another key advantage of arbitration, i.e. rapidity.
2. The establishment of an appeal mechanism with a broad scope of review
The proposal to establish an appeal mechanism with an extended scope of review, appears to outbalance the pursued goals. (60)
(58) SCHEUER, The Future of Investment Arbitration, in ARSANJANI, COGANETAL., Looking at the Future, Essays on International Law in Honor of W. Michael Reisman, 2011, 787 ff.
(59) ZULETA, The Challenges of Creating a Standing International Investment Court, in KALICKIAND JOUBIN- BRET, Reshaping the Investor-State Dispute Settlement: Journeys for the 21st Century, 2015, 403 ff.
(60) So far, discussions on the possibility of appeal for investment disputes took place and started among scholars back in the early 90s. See SCHWEBEL, The Creation and Operation of an International Court of Arbitral Awards, in HUNTER,MARRIOTT,VEEDER, Internationalisation of International Arbitration: the LCIA Centenary Conference, 1993, 115 ff.; LAUTERPACHT, Aspects of the Administration of International Justice, 1991, 112 ss., where he stated:
“(…) arbitration is an important component of the international system and cannot be done away with. We should contemplate the possibility that its value may be enhanced if it is linked to a system of appeal”. Also ICSID has turned its attention to the need for an appeals mechanism. In 2004 the ICSID Secretariat mooted the idea of an appeals facility, but at that time the idea failed to gain sufficient States’ support. ICSID Secretariat noted that by mid-2005: “(…) as many as 20 countries [most of them ICSID parties] may have signed treaties with provisions on an appeal mechanism for awards rendered in investor-to-State arbitrations under the treaties” (see 22nd ICSID Secretariat Discussion Paper, Possible Improvements of the Framework for ICSID Arbitration, 14 October 2004. 14). More importantly, the
First, in contrast to public perception, the current ISDS system is not entirely deprived of a mechanism for (albeit more limited) review.
As to ICSID proceedings, the annulment procedure aims at remedying the most relevant violations of fundamental principles of procedure (61).
As to non-ICSID proceedings, the scope for review is even wider, as both national laws and the New York Convention provide for the annulment of the award for, among other grounds, lack of arbitrability or violation of public policy (62).
In addition, if one of the goals for introducing an appeal mechanism is to overcome the perceived inconsistency of the case law in investment arbitration, it has been noted that the effort is misplaced, as it cannot address the issue beyond TTIP (at least, as long as TTIP is not multi- lateralized). Since many of hermeneutic contradictions still arise from the interpretation of the more than 3.000 existing BITs, to overcome which TTIP have been designed with radically different features, an appellate system applicable only to TTIP regimes might be ineffective (63).
The mere provision of an appeal mechanism is per se a denial of the principle of finality, considered a key feature of arbitration. Its compression will inevitably bring an increase of costs and length of the procedure. And considering the costs involved in investment disputes and the fact that the latter concern important undertakings binding a relevant portion of a company’s budget, the sacrifice of a speedy resolution will reduce the attractiveness and acceptability of the overall mechanism (64).
In addition, the kind of appeal emerging from the proposal, with an extensive review of the merits of the first instance decision, also in respect of errors of facts, will go even further than the mere compression of finality, to the extent it will radically change the nature of the remedy, blurring the traditional distinction between arbitration and state court litigation (65).
Moreover, it is questionable that such an innovation will have the expected impact on the issue of inconsistency of decisions and incoherence in the application of investment law. As stated above, inconsistency seems more the consequence of the ambiguous drafting of the substantive applicable law rather than the effect of the malfunctioning of the particular dispute resolution mechanism chosen. In addition, a degree of inconsistency is inherent in investment arbitration, which has a higher level of fact- and case specificity.
Instead of introducing an appeal mechanism with a broad scope of review of the first instance decision, which seems to bring more disadvantages (in terms of length and costs of the proceedings) than advantages, a wiser solution would be to preserve the current system which guarantees finality, another traditional advantage of arbitration, with the creation of a mechanism similar to the ad hoc committee within the ICSID system, with possible minor adjustments (such
Secretariat took an active role in guiding the discussion, showing itself prepared to “(…) pursue the creation of […]
an ICSID Appeals Facility”, and putting forward rather concrete proposals for that option in an Annex. However, in late 2005 and early 2006, ICSID officials seem to have discarded any immediate plans for the creation of an appeals facility noting that its earlier proposal had been considered by many as premature.
(61) See art. 52, ICSID Convention.
(62) See art. V, New York Convention.
(63) See EFILA final response to the EU Commission’s consultation on investment protection and investor-to- state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP), available at http://efila.org/publications/, 12 July 2014, where it is also stated that: ‘Whereas an appellate system may represent a safeguard against future cases of controversial interpretation of treaty norms, it is fair to say that virtually all treaty clauses that have caused incompatible constructions so far have been modified in CETA, with the specific goal of preventing unpredictable interpretation. In other words, the largest part of the confusion that is invoked as a reason to set up an appellate review was in fact already removed’. See also FONTANELLI,BIANCO, Converging Towards NAFTA:
An Analysis of FTA Investment Chapters in the European Union and the United States, in Stan. J. Int’l L. 2014, 50, 211 ff.; LAVRANOS, The New EU Investment Treaties: Convergence towards the NAFTA Model as the New Plurilateral Model BIT Text?, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2241455, 29 March 2013.
(64) YANNACA-SMALL, Improving the System of Investor-State Dispute Settlement, in OECD Working Papers on International Investment, 2006, 13 ff.
(65) LEGUM, Option to Establish an Appellate Mechanism, 2008, 231 ff.
as the introduction of additional grounds for annulment of the awards, contemplating, for example, the violation of international public policy).
In alternative, worth considering is a proposal supported by eminent scholars (such as SCHREUER (66)) to introduce a mechanism patterned after the preliminary ruling currently in force within the EU (67). Whenever a tribunal is faced with an issue of validity, interpretation or inconsistency of treaty provisions, it should be able to refer the matter to a permanent body authorised to give preliminary rulings. While awaiting for the outcome, the tribunal might be requested to suspend the proceedings. This solution would allow to combine the achievement of a greater level of consistency, the saving of time and costs compared to the appeal mechanism, and to preserve the principle of finality.
In addition, the mechanism of the preliminary ruling would better serve the purpose of controlling the interpretation of all the relevant rules than the mechanism put forward by the EU proposal, consisting in conferring this ultimate control to governments in lieu of arbitrators.
Indeed, on one hand, a specialized legal body is more fit for the role of interpretation of legal provisions than governmental entities or institutions; on the other hand, the option for the preliminary ruling would preserve the equal treatment of the parties, instead of favoring one of them (in the case of the EU proposal, the Respondent States, which will be at the same time parties to the dispute and possible interpreter with binding effect of the rules applied in that dispute).
(66) SCHREUER, Preliminary Rulings in Investment Arbitration, in SAUVANT, Appeals Mechanism in Internatioanl Investment Disputes, 2008, 207 ff.
(67) As suggested by SCHREUER, Preliminary Rulings in Investment Arbitration, cit., 207 ff.
Concluding remarks
In light of the foregoing, when analyzed from a technical and non-political or non-emotional perspective, most of the criticisms appear myths which have dominated the public debate, both within the EU Institutions and the media, creating a negative climate on the investment protection within the EU. They do not reflect the reality of the current system of investment arbitration, being neither supported by facts nor experience from law and practice.
In addition, the unresolved problem of intra-EU Bits, which have clearly emerged in the Micula case - with the EU Commission prohibiting Romania to enforce an ICSID award - has the potential to demolish investors’ trust in the system and to create unwelcome tensions with binding instruments at international level.
In turn, the reform proposals represent too a radical change with respect to the current ISDS system, with the potential of bringing more drawbacks than advantages.
In particular, the idea to create a permanent investment court goes against the current party- appointed, ad-hoc ISDS as provided for in practically all BITs and FTAs, depriving claimant of any role in the appointment of the judges, while giving the Respondent States the exclusive authority to do so, albeit in advance of a particular case. It negatively affects one of the main feature of arbitration, the autonomy of the parties in choosing their own judge, and raises serious concerns as to its compatibility with the principles and rules of due process.
As to the appeal mechanism, it goes against the principle of finality, it upsets the nature of arbitration by providing for an extended review of errors of law and facts, thus blurring the distinction between arbitration and litigation, it will certainly increase the length and costs of the proceedings, without any guarantee to achieve the expected goal, i.e. a greater level of consistency and coherence in the decisions.
In order to achieve the result of a more balanced, fair and transparent system of investment dispute resolution, the following option might instead be worth considering:
to keep the current ISDS system (which guarantees neutrality of the forum, expertise of the arbitrators, flexibility of the procedure, easy enforcement of the decisions), with a possible adjustment of the revision of the award, by introducing a mechanism patterned after the ICSID ad hoc committee, with an extended review (for example, by introducing additional grounds for annulment, i.e. violation of international public policy);
to introduce a preliminary ruling to a permanent body, in order to preliminarily resolve issues of validity and interpretation of international treaties provisions;
in order to achieve even greater transparency, to enlarge the scope for amicus curiae interventions, by admitting participation of public interest non-governmental organizations (68);
(68) The reforms implemented in 2006 by ICSID included a series of new rules relating to non-disputing party.
Art. 37 (2) ICSID Rules creates the condition for considering public interest issues within investment arbitration, as it expressly allows the tribunal to receive amicus briefs. The tribunal, while still required to consult with parties, can however can override their wishes. Three are the requirements to which the admission of amicus curiae is subject: 1) the submission must be of assistance for the tribunal; 2) the matter addressed should be within the scope of the dispute;
3) the interest of the non-disputing party in the proceedings must be significant. There is a potential conflict with art.
27 ICSID Rules on non-party access to hearings, which is subject on party consent: if one party objects, the non- disputing party will be excluded from the oral hearings. These provisions try to strike a balance between the public interest in transparent proceedings and the private interests of the parties in a fair and efficient resolution of the dispute.
At present, it is still not clear whether and how arbitrators, acting independently or in consultation with the ICSID Secretariat, should rule on the nature of public participation in particular cases (see on this issue GOMEZ, Rethinking the Role of Amicus Curiae in International Investment Arbitration: How to Draw the Line Favourably for the Public Interest, in Ford. Int. L. J. 2012, 183). This innovation has been done in order to respond to the perceived legitimacy
enhancing the role of the investor’s home state (69), which would make the ISDS system more balanced.
deficit of the arbitration institution and to provide the public with more understanding of arbitral processes: see UNCTAD, Transparency Series on Issues in International Investment Agreements II, New York and Geneva 2012, 55.
(69) As suggested by TREVES, The Irresponsible National State of the Investor: An Idea for Reform of the Investment Arbitration Treaties, in ZIADÉ (ed), Festschrift Ahmed Sadek El-Kosheri, 2015, 359 ff.
