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NYU Investment Law Forum, 6 December 2010
How bad is investor-state
arbitration for the development of
host countries?"
August Reinisch
University of Vienna, Austria
august.reinisch@univie.ac.at
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IN INTERNATIONAL LEGAL STUDIES
A backlash against investor-State
arbitration?
• The problem of inconsistent or even
contradictory awards – Lack of
predictability
• Lack of transparency – Voice of public
interests
• High costs – Damages and proceedings
• Loss of sovereignty – Chilling effect on
regulatory autonomy
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Inconsistent or contradictory awards
• Lauder v. The Czech Republic (UNCITRAL), Final Award
(Sept. 3, 2001), and CME Czech Republic B.V. v. The Czech
Republic (UNCITRAL), Partial Award (Sept. 13, 2001),
• SGS Société Générale de Surveillance S.A. v. Islamic
Republic of Pakistan, Decision on Jurisdiction (Aug. 6, 2003),
and SGS Société Générale de Surveillance S.A. v. Republic
of the Philippines, ICSID Case No. ARB/02/6, Decision on
Jurisdiction (Jan. 29, 2004),
• CMS Gas Transmission Co. v. The Argentine Republic, ICSID
Case No. ARB/01/8, Award, paras. 320–321 (May 12, 2005),
and LG&E Energy Corp., LG&E Capital Corp. and LG&E Int’l
Inc. v. Argentine Republic, ICSID Case No. ARB/02/1,
Decision on Liability, para. 257 (Oct. 3, 2006).
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The problem of inconsistent or even
contradictory awards
• Principled response:
– Appellate mechanism for investment
arbitration
• Pragmatic response:
– Consolidation of proceedings
– Development of a jurisprudence constante or
de facto case law
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Inconsistent awards and lack of
transparency
• Problem is exacerbated by confidentiality
• NGO criticism: lack of transparency of investor-
State proceedings
• Commercial arbitration heritage, but important
reforms: ICSID, current UNCITRAL debate
• Response: Trend towards publication of awards
plus partly pleadings
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Public criticism
• “Their meetings are secret. Their members are
generally unknown. The decisions they reach need
not be fully disclosed. Yet the way a small group of
international tribunals handles disputes between
investors and foreign governments has led to
national laws being revoked, justice systems
questioned and environmental regulations
challenged. And it is all in the name of protecting the
rights of foreign investors under the North American
Free Trade Agreement.”
• “NAFTA‟s Powerful Little Secret; Obscure Tribunals Settle Disputes, but Go
Too Far, Critics Say,” N.Y. Times (Mar. 11, 2001).
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Transparency
• “Nothing in the NAFTA imposes a general
duty of confidentiality on the disputing parties
to a Chapter Eleven arbitration, and, …
precludes the Parties from providing public
access to documents submitted to, or issued
by, a Chapter Eleven tribunal.”
• NAFTA Free Trade Comm‟n, Notes of Interpretation of
Certain Chapter 11 Provisions, para. A(1) (July 31, 2001).
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Transparency
• Amicus curiae
– e.g., Suez, Sociedad General de Aguas de Barcelona,
S.A. and Vivendi Universal, S.A. v. Argentine Republic,
ICSID Case No. ARB/03/19, Order in Response to a
Petition for Transparency and Participation as Amicus
Curiae (May 19, 2005)
• Amendments to the ICSID Rules and Regulations
and the Additional Facility Rules (effective Apr. 10,
2006):
– public availability of its awards unless objected to, but also
with regard to public or semi-public hearings, the
permission of amicus curiae briefs, etc.
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Financial Risks
• Extremely large awards
– CME v. Czech Republic Final Award, (UNCITRAL),
Partial Award (Sept. 13, 2001), Final Award (Mar. 14,
2003)
– Československa obchodní Banka, a.s. v. The Slovak
Republic, ICSID Case No. ARB/97/4, Final Award
(Dec. 29, 2004).
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Financial Risks
• High costs of proceedings
“Contrary to the expectations, it turns out that costs
involved in investor–State arbitration have
skyrocketed in recent years. This refers not only to
the damages States must pay to foreign investors in
the case of a violation of a treaty provision, but the
costs for conducting arbitration procedures are
extremely high, with legal fees amounting to an
average of 60 per cent of the total costs of the case.”
UNCTAD, Investor–State Disputes: Prevention and Alternatives
to Arbitration (2010), 16/17
• Advisory/Assistance Center for Developing
Countries
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Financial Risks
• The Financial Times recently referred to a
series of awards involving: (1) “hundreds
of millions of dollars in compensation,” (2)
a claim by Mobil for “billions of dollars,”
and (3) Bolivia‟s “loss” in a case against
Bechtel.
• Alan Beattie, Concern Grows over Global Trade Regulation,
Financial Times, Mar. 12, 2008, at 9.
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Financial Risks
• “Empirical information aids the assessment of such
claims. It aids their contextualization to know: (1) the
average value of awards is in the order of US$10 million,
which suggests a US$140 million award is a statistical
outlier, (2) the difference between amounts claimed and
awarded has been in the order of US$333 million, and
(3) Bolivia‟s “loss” at the jurisdictional phase, where most
governments lose as the case proceeds to the merits
phase, actually resulted in a settlement where the
investors dropped their claims and were paid nothing.”
• Susan D. Franck, Empiricism and International Law: Insights for Investment
Treaty Dispute Resolution,48 VaJIL 767, 799 (2008)
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Loss of control over dispute settlement
• Private investors decide over the initiation
of proceedings
• In treaty arbitration no obvious reciprocity;
states can usually only raise counterclaims
• States may wish to regain control
– See e.g. Australia-U.S. FTA (2004), most EC
FTAs contain no investor-State DS
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Loss of control over dispute settlement
• A new preference for inter-state dispute
settlement?
• Rise of FTAs and PTAs with investment
chapters without investor-State arbitration
• Investment pre-negotiations in the WTO
(Singapore issues) focused on inter-state
dispute settlement
• Uncertain views of the EU Commission on
investor-State arbitration after gaining control
over investment treaty-making powers through
the Lisbon Treaty
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The EU and investor-State arbitration
• “Investor-state dispute settlement, which forms a key
part of the inheritance that the Union receives from
Member State BITs, is important as an investment
involves the establishment of a long-term relationship
with the host state which cannot be easily diverted to
another market in the event of a problem with the
investment. Investor-state is such an established feature
of investment agreements that its absence would in fact
discourage investors and make a host economy less
attractive than others. For these reasons, future EU
agreements including investment protection should
include investor-state dispute settlement.”
• Commission Communication, Towards a comprehensive European
international investment policy, COM(2010)343 final, 9/10
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Loss of control over dispute settlement
• De-politicization of investment disputes
– Inter-State level creates political costs,
modern gun-boat politics
• Investor-State arbitration avoids
diplomatic protection
– rids host States of harassment value of
diplomatic protection
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Avoidance of diplomatic protection
• “No Contracting State shall give diplomatic
protection, or bring an international claim, in
respect of a dispute which one of its nationals and
another Contracting State shall have consented to
submit or shall have submitted to arbitration under
this Convention, unless such other Contracting
State shall have failed to abide by and comply with
the award rendered in such dispute.”
• Article 27 ICSID Convention
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Effective investment protection
• “From the point of view of the promotion
and protection of investments, the
arbitration clause is in practice the most
essential provision of Bilateral Investment
Treaties.”
• Eastern Sugar BV v. Czech Republic (UNCITRAL), SCC Case No.
088/2004, Partial Award and Partial Dissenting Opinion, para. 165
(Mar. 27, 2007)
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Loss of sovereignty/chilling effect on
regulation
• “Concerns have been raised, particularly in the wake of
several controversial investor-state disputes, that in some
instances the protection offered to investors may limit the
ability of governments to regulate investment for the
protection of the environment, natural resources and other
social goods, and to ensure that foreign investment
contributes to overall national development goals. Some
authors have also suggested that the threat of an investor-
state dispute could have a chilling effect on government
policy, though they note that there is little evidence to
substantiate such a claim.”
• Tienhaara, What You Don‟t Know Can Hurt You: Investor-State Disputes and the
Protection of the Environment in Developing Countries, Global Environmental Politics
6:4, November 2006, 73-100, 75.
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Loss of sovereignty/chilling effect
• “The increase in North American Free Trade
Agreement (NAFTA) cases against the
United States, Mexico and Canada have also
triggered fears about frivolous and vexatious
claims that could inhibit legitimate regulatory
action by governments.”
• UNCTAD, Investor–State Disputes: Prevention and
Alternatives to Arbitration (2010), 19.
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Loss of sovereignty/chilling effect
• “[T]his concern about regulatory chill does not
appear to have been justified. To date the
majority of cases related to regulatory policy
have either been dismissed or decided in
favour of the host Government and where
decisions have been in favour of the investor,
awards have been relatively small.”
• EP, The EU Approach to International Investment Policy
After the Lisbon Treaty (2010), p. 46.
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“Good governance” effect
• The potential financial liability under
investor-State arbitration may effectively
lead to compliance with investment
standards;
• Rule of law-inspired limits on the
regulatory powers of host States;
• May complement “good governance” aims
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“Good governance” at the international
level
• “Good governance promotes equity,
participation, pluralism, transparency,
accountability and the rule of law, in a
manner that is effective, efficient and
enduring.”
• http://www.un.org/en/globalissues/governance/.
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The rule of law
• “The “rule of law” is a concept at the very heart of the
Organization‟s mission. It refers to a principle of
governance in which all persons, institutions and entities,
public and private, including the State itself, are
accountable to laws that are publicly promulgated, equally
enforced and independently adjudicated, and which are
consistent with international human rights norms and
standards. It requires, as well, measures to ensure
adherence to the principles of supremacy of law, equality
before the law, accountability to the law, fairness in the
application of the law, separation of powers, participation in
decision-making, legal certainty, avoidance of arbitrariness
and procedural and legal transparency.”
• „The rule of law and transitional justice in conflict and post-conflict societies‟, Report
of the Secretary-General, S/2004/616, 23 August 2004, para. 6.
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The rule of law
• “(a) there is a set of rules known in advance, (b)
the rules are actually in force, (c) there are
mechanisms ensuring application of the rules,
(d) conflicts are resolved through binding
decisions of an independent judicial body, and
(e) there are procedures for amending the rules
when they no longer serve their purpose.”
• World Bank, Governance and Development, 30 (1992).
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The link between the rule of law and
economic development
• “[The] connection of the rule of law with
efficient use of resources and productive
investment, which must be understood and
dealt with in highly specific and differentiated
cultural and political settings, is the aspect
most important to economic development,
and hence to World Bank assistance.”
• World Bank, Governance and Development, 30 (1992).
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The rule of law and fair and equitable
treatment
• “„[F]air and equitable treatment‟ includes
the obligation not to deny justice in
criminal, civil, or administrative
adjudicatory proceedings in accordance
with the principle of due process embodied
in the principal legal systems of the world;”
• Article 5(2)(a) US Model BIT 2004.
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Fair and equitable treatment
• “The [host state], without undermining its legitimate right to
take measures for the protection of the public interest, has
therefore assumed an obligation to treat a foreign investor‟s
investment in a way that does not frustrate the investor‟s
underlying legitimate and reasonable expectations. A
foreign investor […] is entitled to expect that the [host state]
will not act in a way that is manifestly inconsistent, non-
transparent, unreasonable (i.e. unrelated to some rational
policy), or discriminatory (i.e. based on unjustifiable
distinctions). In applying this standard, the Tribunal will
have due regard to all relevant circumstances.”
• Saluka Investments BV (The Netherlands) v The Czech Republic,
Partial Award, 17 March 2006, para. 309.
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External rule of law and its relation to
domestic dispute settlement
• Unclear relationship between investor-
State arbitration and domestic courts:
– Spill-over effect or
– Circumvention of national procedures
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Circumvention of national procedures
• “The decision to bypass domestic courts may
reduce courts‟ incentives to improve
performance by depriving key actors from a
need to invest in institutional improvement. It
allows the government to segment its reputation
among domestic and foreign actors.”
• T. Ginsburg, International Substitutes for Domestic Institutions:
Bilateral Investment Treaties and Governance, 25 International
Review of Law and Economics (2005) 107, 119.
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Spill-over effect
• “[…] one might imagine that there is a form of
regulatory competition among institutions.
International arbitration, for example, can spur
domestic courts to compete for the business of
resolving commercial disputes and thus improve
their quality. BITs can also serve as a signal to
domestic audiences that the government does
not plan to expropriate, will adopt relatively
stable policies, and will not treat local actors with
special favor.”
• Ginsburg, International Substitutes, 25 International Review of Law
and Economics (2005) 107, 119.
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