Articles

The views expressed in this article are the personal views of the author and do not necessarily reflect those of the ICJ.

Introductory remarks

It is a pleasure for me to speak to you today at this third ICC European Conference. I thank Mr Alexis Mourre for the kind words of introduction. I am from Somalia, and it is not part of my culture to observe April Fools’ Day. This should serve as guarantee that I will not play any practical jokes or pranks on you today. You should, however, be on your guard as to what other speakers may tell you.

I was asked to discuss the topic of ‘Public Interest and the Future of Arbitration: Lessons from Europe’. In this context, I would like to share my thoughts on the future of investor-State arbitration. Unfortunately, the prospects are not entirely positive, particularly in Europe. ISDS is the area of arbitration facing the most controversy with regard to its legitimacy and functioning, casting existential threats on its future. This very week, the thirty-seventh meeting of the UNCITRAL Working Group III on Possible reforms of Investor-State Dispute Settlement is taking place in New York. Ahead of that meeting, the European Union and its Member States proposed the establishment of a Multilateral Investment Court,¹ which, if accepted, would change completely the face of investment arbitration as we know it. In this respect, I would like to address four questions. Is there a ‘backlash’ against investor-State arbitration? Where do the criticisms or threats against the system come from? What are the causes of disenchantment with the system? And finally, what can be done to salvage it or to ensure a smooth transition to another method of dispute settlement?

1. ISDS: the background of the backlash

Let us start with the first point: Is there a backlash against ISDS? Would it be fair to say that such a backlash may be due to an original misconception or misapprehension about ISDS? To a certain extent, the answer is yes. During its foundational moments in the late 1960s, ISDS was perceived as a mechanism for rendering final and enforceable decisions through a swift, cheap and flexible procedure over which disputing parties would have considerable control. ISDS was also viewed as an important guarantee that foreign investors’ claims would be adjudicated in an independent and impartial manner.²

At the same time, bilateral investment treaties (BITs) containing investor-State dispute settlement clauses were considered necessary to attract foreign investment in developing countries. This belief prompted the conclusion of many BITs, leading up to a total of more than 3,300 international investment agreements in 2019.³ If the very first BIT was the 1959 Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments,⁴ it is only in 1969 that Italy and Chad concluded the first BIT with an ICSID dispute settlement clause.⁵

It may be said that ISDS delivered on its promises. ISDS removed the settlement of investment disputes from domestic judicial authorities, as most BITs did not include an obligation to exhaust local remedies before international arbitration. The system also freed foreign investors from the vagaries of diplomatic protection, which does not always guarantee that compensation will actually be paid to the foreign investor who suffered the injury.⁶ Moreover, Article 54 of the ICSID Convention made awards rendered under the Convention binding and imposed on States Parties an obligation to enforce such awards as if they were final judgements of their domestic courts.⁷

According to UNCTAD, as of 31 December 2018, 942 known treaty-based ISDS cases have been submitted, of which 332 are pending and 602 are concluded. Looking at the results, 35.7% of the cases have been decided in favour of States, 28.7% in favour of investors; whereas 22.8% have been settled and 10% of cases were discontinued.⁸

However, these accomplishments and undeniable virtues have not shielded ISDS from criticisms regarding its legitimacy and functioning. A 2015 online survey of the European Commission noted a ‘wide-spread opposition to the investor-State dispute settlement (ISDS) in [the Transatlantic Trade and Investment Partnership] or in general’.⁹ The survey reported that ISDS was perceived as a ‘threat to democracy and public finance or to public policies’.¹⁰ Concerns were also expressed regarding ‘governments being sued by corporations for high amounts of money’, a situation creating ‘a chilling effect’ on the right to regulate.¹¹ The online survey revealed a ‘generic mistrust with regard to the independence and impartiality of … arbitrators’ and concerns that ‘ISDS may create a possibility for investors to circumvent domestic courts, laws or regulations’.¹² The survey also listed as deficiencies of the system ‘the accessibility to the ISDS mechanism’ which was characterized as a ‘prerogative mainly of large-scale firms, as its costs and complexity make it difficult for small private investors to resort to it’.¹³

Many States expressed similar views on the ISDS system in a survey conducted by the UNCITRAL Secretariat in preparation of the discussions on ‘Possible reforms of investor-State dispute settlement (ISDS)’. They listed as concerns: the methods of appointing arbitrators and their consequences on their independence and impartiality; the lack of coherence of a system based on ad hoc tribunals; the lack of appropriate control or review mechanisms for mistakes and errors; the length and costs of the proceedings; as well as the lack of transparency.¹⁴

2. A system abandoned by its main designers

I now turn to my second point: where does the disenchantment with the ISDS system come from? Most of the harshest criticisms against investment arbitration are voiced today by the traditional capital-exporting countries of the North, while, of course, a few of them are expressed by countries of the Global South.

The Global South has consistently been very supportive of ISDS since its inception, with a few exceptions. Of the twenty ratifications needed for the entry into force of the ICSID Convention, 17 came from the Global South, especially African countries. After enabling ISDS to become operational, Global South countries did not raise any significant challenge against it for a long time, despite the large number of investment awards rendered against them. Their attempts to reform the system were limited in scope and aimed at changing substantive guarantees in BITs. Even the recent Pan-African Investment Code¹⁵ and the Southern African Development Community (SADC) Model BIT¹⁶ follow this incremental approach.

Certainly, some countries in the Global South showed distrust against investment arbitration. For instance, in Latin America, Ecuador, Bolivia and Venezuela withdrew from the ICSID Convention, whereas Argentina, El Salvador and Nicaragua threatened to do so. Brazil has never been a party to the ICSID Convention. In Asia, Indonesia terminated its BITs containing arbitration clauses, whereas the new Indian Model BIT expresses preference for domestic dispute settlement.¹⁷ In Africa, South Africa has terminated its BITs with arbitration clauses, and Tanzania seems to be following suit. Last year, Tanzania notified the termination of its BIT with the Netherlands, the latest move in a series of measures aimed at shielding Tanzania from investment arbitration claims.¹⁸

Nonetheless, the ‘backlash’ against investment arbitration has in reality come from the North, especially Europe and the United States. Germany resisted the inclusion of investment arbitration clauses in the TTIP and the CETA, in the aftermath of the Vattenfall cases.¹⁹ On 11 July 2014, the Second Chamber (Bundesrat) of the German Parliament adopted a resolution, which advocated recourse to domestic courts for the settlement of investment disputes.²⁰ The resolution considered ISDS as unnecessary and as creating ‘great risks’.²¹ This is the same country that concluded the first BIT with a developing country, Pakistan, in 1959.

In 2015, the German Magistrates Association challenged the assumption that domestic courts and tribunals could not provide effective judicial remedies to foreign investors. For them, any shortcomings of domestic judicial systems should rather be fixed, instead of creating what they characterized as ‘special courts for certain groups of litigants’.²²

As mentioned, the European Commission 2015 online survey noted a wide-spread opposition to ISDS among Europeans,²³ and as recently as 11 January 2019, over 80 non-governmental organizations urged Members of the European Parliament not to ratify the EU-Singapore Investment Protection Agreement. Characterizing ISDS as a ‘failed and dying system’, they criticised the fact that ‘[a]rbitrators remain remunerated on the basis of fees, not fixed salaries and therefore have a vested interest in encouraging more cases by ruling in favour of investors’. They also maintained that ISDS undermines the rule of law.²⁴

Across the Atlantic, ISDS has also faced severe criticisms. On 25 October 2017, 230 law and economics professors wrote a letter urging the US President to remove investment arbitration clauses from NAFTA and other US treaties. They explained that through investment arbitration clauses, the US government ‘grants foreign investors – and foreign investors alone – the ability to bypass the robust, nuanced, and democratically-responsive US legal framework’. In their views, ‘ISDS thus undermines the important roles of [the US] domestic and democratic institutions, threatens domestic sovereignty, and weakens the rule of law’.²⁵ No such criticisms emanated from these corners when the US was concluding BITs containing ISDS clauses with more than 30 countries from the Global South. Other scholars, predominantly from US-based universities, have dismissed these criticisms as not representative.²⁶

Nonetheless, it is difficult to ignore sceptical views expressed by the US Trade Representative, on 21 March 2018, before the US Congress. Characterizing ISDS as a ‘political risk insurance’ offered by the United States to its investors, the Trade Representative explained that the protection of US interests overseas could be handled through ‘state-to-state dispute settlement’ or relevant contractual clauses. Without referring expressly to the Calvo doctrine, he stated that he fails to understand ‘[w]hy should a foreign national be able to come in and not have the rights of Americans in the American court system but have more rights than Americans have in the American court system’.²⁷ The Calvo doctrine seems to have re-emerged in the United States, which had always opposed it in the past.

Implementing this view, the 2018 United States-Mexico-Canada agreement phases out ISDS in the relations between the United States and Canada, while in the relations between Mexico and the United States, the initiation of ISDS is subject to the exhaustion of local remedies rule or, at least, 30 months of domestic litigation.²⁸

I conclude this overview with Europe. As you are all aware, the Achmea decision, which was delivered on 6 March 2018,²⁹ interpreted Articles 267 and 344 of the TFEU as prohibiting ISDS in intra-EU bilateral investment treaties. The decision of the Member States of the European Union on 15 January 2019 to act upon the decision of the CJEU in Achmea will take away approximately a fifth of all ISDS cases.³⁰ Indeed, as of 31 July 2018, the overall number of known intra-EU investment arbitration cases totalled 174, which amounts approximately to 20% of all known investment cases globally.³¹

3. A system based on misconceptions

What are the causes of this widespread disenchantment with ISDS, especially in traditional capital-exporting countries? I believe that it results from certain misconceptions that shaped the ISDS system from its inception. One of these original misconceptions is that investor-State disputes would only arise in emerging markets or in capital-importing States, and would never involve capital-exporting countries as respondents. Despite the wording of the BITs themselves, which applied equally to both categories of States, ISDS was supposed to target mainly countries of the Global South and economies in transition in Eastern Europe.

However, the distinction between capital-importing and capital-exporting countries is no longer as neat as it was in the 1960s or 1970s. The UNCTAD 2018 list of the top ten foreign direct investment recipient countries includes: (1) the United States, (2) China, (3) Brazil, (4) Singapore, (5) Netherlands, (6) France, (7) Australia, (8) Switzerland, (9) India, and (10) Germany.³²

Disputes involving traditional capital-exporting countries as respondents have now become an established feature of the ISDS system. A perusal of the top-ten most frequent respondents in all known ISDS cases between 1987 and 2016 reveals that numbers are evenly shared between the South and the North. Among Global South countries, one would count Argentina (59 cases); Venezuela (41 cases); Egypt (28 cases); Mexico (25 cases); and Ecuador (23 cases). As far as Northern respondent States are concerned, they were the Czech Republic (34 cases); Spain (34 cases); Canada (26 cases); the Russian Federation (24 cases) and Poland (23 cases).³³

ICSID’s caseload Report on ISDS, dated 30 April 2017, recorded that 17% of cases registered (i.e. some 105 cases) involved an EU Member State as respondent party.³⁴ According to UNCTAD’s 2018 World Investment Report, intra-EU disputes accounted for a fifth of all investment arbitration cases initiated in 2017.³⁵

Another original misconception was that, instead of domestic tribunals, international arbitral tribunals, by their very nature, would deliver adequate remedies in disputes involving foreign investors. This assumption explains the striking absence of provisions governing the independence and impartiality of arbitrators, including issues of ethics and conflict of interests in investment arbitration. Moreover, as ISDS was modelled according to the private commercial arbitration system, provisions on States’ regulatory powers, transparency and accountability towards the public at large were perceived as being of little practical importance. The 1969 Chad-Italy BIT, to which I referred above, as many of the old BITs, did not contain any provisions on these issues.

The Achmea decision challenges this assumption head on. For the CJEU, through arbitration clauses, EU Member States removed disputes from the jurisdiction of their domestic courts and hence from the system of judicial remedies offered by EU law. The CJEU is not so much concerned with a direct conflict between EU law and international investment law. It appears to be more concerned that a dispute that may particularly involve questions of EU law is removed from EU courts’ jurisdiction, which it finds problematic.³⁶ One may wonder what would be the consequences if the African Union, African sub-regional integration organizations, or several African States also adopt a similar approach. ISDS would have to cede its place to the domestic or regional judicial institutions in African States.

4. Looking at the future: a few fundamental principles applicable to any reform

Now that the very designers and initiators of the ISDS system have turned their back on it, what can be done to salvage or reform it? Three options might be envisaged.

1. The establishment of appellate tribunals to hear appeals against decisions rendered by ad hoc investment tribunals. This option would have the merit of addressing to a certain extent the issue of the inconsistency between arbitral awards. The introduction of effective review of awards would prevent the frequent survival of legal errors and factual mistakes in awards, which is currently inherent to the limited mandate of annulment committees and the limited grounds for refusing recognition and enforcement of arbitral awards.
2. Establishment of multilateral investment court(s). After pushing for bilateral investment courts in its free trade agreements with Canada, Singapore, Vietnam, and Mexico, the European Union and its Member States proposed, on 18 January 2019, to the UNCITRAL Working Group III the establishment of a Multilateral Investment Court, with an appeals mechanism.³⁷
3. A third option would combine domestic dispute prevention mechanisms with the possibility of ISDS. It could also condition recourse to ISDS to the use of local remedies. Articles 26 and 27 of the Morocco-Nigeria BIT exemplify this approach. These provisions require the exhaustion of local remedies and a six-month consultation and negotiation procedure before an inter-State Joint Committee as a precondition to the initiation of arbitration proceedings.³⁸

Of course, nothing precludes the combination of these different options. Regardless of the options ultimately chosen, I believe that three fundamental principles should guide any successful reform of the investor-state arbitration system:

• equal application to all States;

• multilateralization; and

• institutionalization.

The first principle requires the equal application of the future system to all of its participants. To the extent that such a future system would make ISDS applicable in fact and in law to all States, negotiators will have to strive for a just, fair and equitable system. I, therefore, do not consider as viable those proposals which would exclude investment arbitration in the relations among developed countries, and maintain it in the relations with other countries. Such a difference of legal regimes, reminiscent of colonial periods, would be manifestly unfair and contrary to the fundamental principle of sovereign equality of States under Article 2, paragraph 1, of the Charter of the United Nations.³⁹

As for the second principle, the future of ISDS should be based on multilateralism, including regionalism, and trans-regionalism. The current system of BITs prospered because of the disagreement between developed and developing countries on some of the main tenets of the New International Economic Order. I am referring here to the principle of the permanent sovereignty over natural resources and its corollaries, the right to nationalize and the standard applicable to compensation, the jurisdiction of domestic courts and the application of domestic law to foreign investment disputes.

Bilateral treaties allowed States to overcome some of the divide, perhaps, thanks to the fact that they allowed the imbalance of power to bear more heavily on the negotiations. However, I believe that now that the misconceptions shaping ISDS are widely understood, a consensus may be reached both on the substantive and the procedural rules applicable to the protection of foreign investments in international law. The multilateral initiative on transparency in treaty-based investor-State arbitration, which led to the adoption of the Mauritius Convention in 2014, proves that it is possible.⁴⁰ The UNCITRAL initiative on ISDS reform may, therefore, provide an opportunity to multilateralize, at least in part, ISDS through the creation of permanent adjudicatory bodies.

Third and finally, the future of ISDS should be based on institutionalization. Some of the main criticisms that are levelled against ISDS relate to its ad hoc nature, including the contradictions and inconsistencies between arbitral awards, double-hatting, vested interests of arbitrators in the decision-making process, repeat and cross-appointments, and challenge mechanisms.

Institutionalization, through the establishment of appellate investment tribunals, would greatly serve to address many of these issues. In return, institutionalization would structure the stakeholders of the regime, providing both accountability mechanisms and safeguards for the integrity of the system.

Conclusion

Every crisis carries with it new opportunities. As an optimist - and I can assure you that I am a certified optimist as far as international relations are concerned  I believe that the strong challenges facing ISDS are also an excellent opportunity to revisit the misconceptions that shaped the system at its origins. In this respect, the criticisms from Europe, including the Achmea decision, are not misplaced. They are perhaps long overdue.

But even more, they offer an opportunity to shape a more inclusive and fair system, based on principles of public international law and far removed from the initial modelling on commercial arbitration; a system which, on the basis of the law of cooperation and not on that of coexistence, will account for the interests of all its participants by reinforcing multilateralism, institutionalization, and preventive dispute settlement.

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