Investor-State Arbitration: As Docket Grows, Questions Continue

Vol. 20 No. 2

By

In 1997, the Ethyl Corporation launched an investment claim against Canada, saying that a Canadian ban on importation of a gasoline additive violated the company’s rights as an investor under Chapter 11 of the North American Free Trade Agreement (NAFTA).[1] A battle on jurisdiction followed, which Canada lost.[2] The claim settled, with Canada reportedly paying Ethyl $13 million.[3] That settlement ended what may have been the earliest investor-state arbitral proceeding launched under a modern investment protection treaty. 

Since those early NAFTA days, hundreds of claims have been initiated under other treaties.[4] As in Ethyl, they have been brought directly against the host state, relying on guarantees advanced in a treaty (usually a bilateral investment treaty, or BIT). Like NAFTA Chapter 11, such treaties aim to stimulate foreign direct investment by reciprocally promising minimum levels of treatment for qualifying investors. These pledges include, for example, that the host state will treat the other state’s investor in a fair, nondiscriminatory manner and will pay full compensation in the event of an expropriation. The arbitral claim mechanism is available should the investor believe it has suffered damages resulting from the host state’s failure to abide by one or more of its treaty undertakings.[5] Such a claim may proceed without the investor seeking permission from its home state.[6]

The prerogative of an aggrieved investor to bring a direct claim without the involvement of its state of nationality is distinctive. In the traditional espousal method practiced in international relations, the investor’s state of nationality presses the grievance, but only as a matter of discretion[7] after weighing (in addition to the merits) the likely effects espousal will have on its relations with others states. Because states do not take up an investor’s claim as a matter of course, the espousal remedy is unpredictable and largely illusory. The direct claim mechanism associated with modern investment treaties, therefore, eliminates a remedial gap that would otherwise undercut the persuasiveness of the treatment promises now found in thousands of investment treaties.

The Docket

Despite NAFTA’s role as a catalyst for investor-state disputes, at present NAFTA accounts for only a modest percentage of the more than 400 investor-state arbitration proceedings that have arisen under an investment treaty.[8] Several factors have contributed to the ever-enlarging docket.[9] First, the number of BITs and other investment treaties granting access to arbitration has grown rapidly over the last 20 years,[10] and states in every region of the world are now parties to such instruments. Second, in recent decades, adherence to the convention establishing the International Centre for the Settlement of Investment Disputes (ICSID) and to the New York Convention has widened dramatically. These treaties promote global enforcement of investment awards and signal to investors that the awards they receive can be given effect where assets might be found (subject to questions of sovereign immunity).

Encouragement to prospective claimants also came from the recoveries received in the early NAFTA cases, which showed that investor-state tribunals were willing, in appropriate circumstances, to assess liability against states. The arbitral mechanism used was also comforting in its familiarity, being in essence that in use for international commercial disputes. These precursors led to particularly noticeable jumps in claim numbers when states dealt with emergent circumstances on a sector-wide basis, giving rise to multiple claims against a single state, often under multiple BITs. Argentina’s program to address its perilous economic situation in the late 1990s, which resulted in dozens of claims, is one well-known example.   

The Investor-State Arbitration Architecture

Once under way, an investor-state proceeding follows the general pattern prevalent in international commercial arbitration.[11] A tribunal, usually made up of three arbitrators, is appointed, with each party appointing one arbitrator and typically having some influence upon the selection of the chair, who is the presiding arbitrator. Each arbitrator is to be independent and impartial. The tribunal directs the process, using organizational meetings with the disputants to inform subsequent procedural orders that establish the arbitration’s ground rules and procedural roadmap. Customarily, the parties provide written submissions and the arbitrators hold one or more hearings at which they examine facts and question expert witnesses. Party counsel often make oral submissions. The proceedings may be bifurcated, so that jurisdiction and liability are addressed as separate phases. As a rule, awards are elaborately reasoned. 

Despite broad similarities between the two types of arbitration, investor-state arbitration can differ markedly from international commercial arbitration. Unlike contract-based arbitration, investment treaty arbitration is founded upon a host state’s continuing offer (advanced in the BIT or similar treaty) to join in arbitration. Conceptually, the investor accepts the offer by processing the claim in accordance with designated formalities, outlined in the BIT and the governing arbitration rules.[12] The BIT often gives the investor a choice of two arbitral avenues. Usually these two options are ad hoc arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) or one of the two regimes operated by the International Centre for the Settlement of Investment Disputes (influenced by whether the two states involved have ratified the ICSID Convention.) Given the forgoing, respondent state attacks on tribunal jurisdiction or claim admissibility do not center upon a contract’s arbitration clause, but rather the relevant questions are, for example, whether the activity pursued by the claimant was an “investment,” whether the claimant has the requisite affiliation with the counterpart state to invoke the BIT, and whether the claimant has observed the required formalities in launching its claim.

There are other differences between international commercial arbitration and investor-state arbitration. Among these is that compared to international commercial arbitration, investor-state arbitration operates with relative transparency.[13] NAFTA states, for example, regularly make available a wide range of materials derived from Chapter 11 arbitrations, including pleadings and awards. Commonly, BIT arbitrations involve participation by amici and, on occasion, public access to hearings. The wide availability of many dozens of reasoned investor-state awards is also noteworthy. It has led to a body of accessible investment jurisprudence. Given confidentiality restraints, the same is not generally true of international commercial arbitration. Finally, with respect to governing law, in investment arbitration the arbitration panel will apply international law to some extent – if only in consulting rules of treaty interpretation. That is unlikely to be true in international commercial arbitration not involving a state, in which tribunals typically use choice of law analysis to select the governing contract law, which will ordinarily be that law chosen by the parties or one otherwise connected to the contract.

Jurisprudential Disarray, Challenges to Arbitrators, and Other Problems

The lack of BIT jurisprudence that characterized the seminal NAFTA experience has, over time, given way to a profuse body of awards. There is, however, no rule of precedent and no appeals mechanism to unify international investment law. Each tribunal is a court unto itself, composed of arbitrators who can vary widely in background from tribunal to tribunal. Perhaps because of this, tribunals have differed on the scope and meaning of most of the provisions prevalent in BITs.

States and investors alike decry the prevailing lack of jurisprudential predictability, a concern intensified by the vast sums often involved in investment treaty cases. States have responded in part by adding detail to their BITs in an attempt to clarify the governing law and procedure and to limit arbitrator discretion and inventiveness in assessing the disputants’ rights and duties. States and other stakeholders continue to discuss the possibility of instituting an appeals body of some type, but the realization of such a proposal remains a distant prospect. As an interim solution, some arbitrators have openly pursued a policy of following trends established in earlier awards, as distinct from proceeding with no particular fidelity to established patterns.

A relatively small number of arbitrators and lawyers specialize in investor-state matters, and putative conflicts of interest threaten the legitimacy of the system. The concerns are not merely that when people work together repeatedly they tend to develop predispositions toward each other; what worries many is that the lawyers and arbitrators repeat (and sometimes switch) roles. Disputants, understandably risk averse, appoint experienced investor-state lawyers as counsel and experienced investor-state arbitrators as tribunal members. Thus, a given arbitrator may be called upon to assess more than once – in separate arbitrations – one state’s enactment of a particular regulation or the meaning of a particular treaty provision, raising what some have called “issue” conflicts. 

Given the lack of stare decisis, an arbitrator may, of course, reach a different decision in subsequent arbitrations on the same issue, but the human disinclination to do so naturally causes state participants in particular to question her independence and impartiality. Though perhaps on the wane, the practice of the same lawyer serving as arbitrator in one case and lawyer in the next has also been criticized for similar reasons; the fear is that the arbitrator will be tempted to add to the corpus of awards a precedent potentially of use to an existing or (hoped-for) client. Under certain circumstances, these elements give rise to plausible arbitrator challenges in the form of petitions that an arbitrator step down.[14] Challenges for these and other reasons have become commonplace, predictably adding delay to an already delay-prone process.

One proposed reform is to eliminate unilateral party appointments and have institutions appoint the arbitrators, which proponents argue would reduce the number of troubling conflicts. Many variations of this reform have been proposed,[15] but they have not garnered wide support among participants accustomed to the current system.

The same lament heard with respect to commercial arbitration generally – that it has lost the agility needed to produce rapid, cost-effective results – is particularly apt in relation to investor-state disputes. Respondent states defend claims robustly, leaving no jurisdictional defect unexplored and few colorable arbitrator challenges unmade. Perhaps that is to be expected, but the result is a very deliberate process. 

And what of post-award maneuvering? Arguably this happens too often: in a common scenario, an investor-state arbitration that required several years and many millions of dollars to complete takes an additional step toward the absurd when a court or institutional control mechanism annuls the award. For ICSID Convention arbitration, that mechanism is a regime (the ad hoc committee system) that relies on a panel of three members empowered to annul the award based on grounds set forth in the Convention. Each annulment proceeding involves a new committee of three. Such attacks on ICSID awards have been frequent, and annulment has occurred more often than one might have expected.[16]

Mediation – On the Horizon?

In recent years, the cost, lack of predictability, and other weaknesses in the present investor-state arbitration system have prompted a search for alternatives and a genuine interest in mediation as a process to supplement, if not replace, arbitration. The International Bar Association (IBA) has, for instance, promulgated Rules for Investor-State Mediation, and the United Nations Conference on Trade and Development (UNCTAD) has endeavored to introduce the advantages of mediation to relevant stakeholders.[17]

Conclusion

The literature addressing investor-state arbitration is copious and generally high in quality. It attests to the allure of a field that blends private and public international law and an architecture that, by being borrowed from international commercial arbitration, has inherited features that perpetuate recurrent debates and generate fresh puzzles. It might have been better to constitute an international court for investment disputes, staffed by term-appointed jurists governed by what would become in theory coherent jurisprudence (promoted by appellate-level review). Whatever the merits of such a proposal, the current investor-state arbitration system remains an improvement on espousal. To eliminate it from the treaty promises that states freely make – as some states would prefer to do – will in most cases render the remaining promises unconvincing.

Jack J. Coe Jr. is a Professor of Law and Faculty Director of the LL.M Concentration in International Commercial Arbitration at Pepperdine University (http://law.pepperdine.edu/straus/academics/international-commercial-arbitration/). He is an Associate Reporter of the ALI’s Restatement (Third) on International Commercial Arbitration and a Senior Advisor to the ABA Section of International Law. He can be reached at jack.coe@pepperdine.edu.


 

[1] See Ethyl Corp. v. Canada, Award on Jurisdiction, 38 I.L.M.708 (1999).

[2] Id. at 724-30.

[3] See Charles H. Brower II, Investor–State Disputes Under NAFTA: A Tale of Fear and Equilibrium, 29 Pepp. L. Rev. 43, 47-48 n.32, 57-59 (2001).

[4] See, e.g., Investment Treaty Arbitration, http://italaw.com/ (last visited Dec. 11, 2013); see also UNCTAD, Best Practices in Investment for Development: How to Prevent and Manage Investor-State Dispute–Lessons from Peru 5 (2011), available at http://unctad.org/en/Docs/webdiaepcb2011d9_en.pdf.

[5] See Lucy Reed, Jan Paulsson, & Nigel Blackaby, Guide to ICSID Arbitration 58-106 (2d ed. 2011). [hereinafter Guide].

[6] Id. (passim).

[7] Concerning espousal, see Restatement (Third) Foreign Relations, § 713 (2013).

[8] See, e.g., Investment Treaty Arbitration, http://italaw.com/ (last visited Dec. 11, 2013).

[9] See UNCTAD, International Investment Policymaking in Transition: Challenges and Opportunities of Treaty Renewal, IIA Issues Note, No. 4 (June 2013), available at http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d9_en.pdf.

[10] There are approximately 3,000 investment treaties in effect. Id.

[11] See generally Clyde C. Pearce & Jack J. Coe Jr., Arbitration under NAFTA Chapter Eleven: Some Pragmatic Reflections Upon the First Case Filed Against Mexico, 23 Hastings Int’l & Comp. L. Rev. 311(2000).   

[12] Jan Paulsson, Arbitration Without Privity, 10 ICSID Rev. 232, 233 (1995); Andrea Bjorklund, Contract Without Privity: Sovereign Offer and Investor Acceptance, 2 Chi. J. Int'l L. 183, 183 (2001).

[13] See generally Jack J. Coe Jr., Transparency in the Resolution of Investor-State Disputes—Adoption, Adaptation, and NAFTA Leadership, 54 Kansas L. Rev. 1139 (2006).

[14] For digests of reasoned challenge decisions reached by the London Court of International Arbitration (LCIA), see Challenge Digests, 27 Arb. Int’l 315-473 (2011).

[15] See Jan Paulsson, Moral Hazard In International Dispute Resolution, Inaugural Lecture as Holder of the Michael R. Klein Distinguished Scholar Chair, University of Miami School of Law (Apr. 29 2010).

[16] Guide, supra note 5 at 159-177.

[17] See generally UNCTAD, Reform of Investor-State Dispute Settlement: In Search of a Roadmap Special issue for the Multilateral Dialogue on Investment, IIA Issues Note, No. 2 (June 2013), available at http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d4_en.pdf; see also Anna Joubin-Bret, International Dispatch: Investor-State Disputes, Disp. Resol. Mag., Fall 2013, at 37.

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