The traditional method by which the interests of foreign investors were safeguarded was that of diplomatic protection. The State to which the investors belonged would, if it considered it appropriate to do so, bring a claim on behalf of its nationals against the host State. Indeed, the investors' State might even send a gun-boat or two to back up its request, if the situation appeared to warrant it. This is what happened in 1902 when Venezuela defaulted on its sovereign debt. Germany, Italy and Great Britain sent warships to the Venezuelan coast to seek reparation for the losses suffered by their nationals.

The Convention on the Peaceful Resolution of International Disputes, signed at The Hague in 1907, envisaged a more friendly method of resolving disputes by providing for recourse to arbitration. However, this would not be an arbitration between the investor and the host State directly, but arbitral proceedings between the States themselves. The Permanent Court of International Justice made this plain in the Mavrommatis Palestine Concessions case:

By taking up the case of one of its own subjects and by resorting to diplomatic action or international judicial proceedings on his behalf, a State is in reality asserting its own rights-its right to ensure, in the person of its subjects, respect for the rules of international law. 1

For the claimant, whether an individual or a corporation, this was far from being satisfactory. Professor Brierley described the claimant's problem, and its possible solution, as follows:

He has no remedy of his own, and the state to which he belongs may be unwilling to take up his case for reasons which have nothing to do with its merits; and even if it is willing to do so, there may be interminable delays before, if ever, the defendant state can be induced to let the matter go to[Page665:] arbitration. Delay, besides being unjust to the claimant, creates difficulties in securing satisfactory evidence, and also often leads to the original claim being exaggerated beyond all recognition. It has been suggested that a solution might be found by allowing individuals access in their own right to some form of international tribunal for the purpose and, if proper safeguards against merely frivolous or vexatious claims could be devised, that is a possible reform that deserves to be considered. For the time being, however, the prospect of states accepting such a change is not very great. 2

This was written some forty years ago. What Professor Brierley thought unlikely then has become almost routine now. As global trade developed, the need for developing countries to encourage foreign investment led to foreign investors being given the right to bring proceedings directly against host States in a neutral forum. A structure for such proceedings was put in place by the Washington Convention of 1965. 3This Convention was formulated under the aegis of the International Bank for Reconstruction and Development (the World Bank) and came into force in October 1996. It established the International Centre for Settlement of Investment Disputes (ICSID) and provided for the settlement of investment disputes by conciliation or arbitration. There are four conditions: the parties must have agreed to submit their dispute to ICSID; the dispute must be between a contracting State (or one of its subdivisions or agencies) and a national of another contracting State; it must be a legal dispute; and it must arise out of an 'investment'(which is not defined in the Convention, but which in practice has been widely construed).

The importance of the Convention was perhaps not immediately recognized; and in the early days, ICSID arbitrations were few and far between. Nevertheless, as Sir Elihu Lauterpacht has pointed out:

At the time the Convention was concluded, some of its most important features represented significant new developments, though in the light of subsequent advances in international law they now appear almost commonplace. For the first time, a system was instituted under which non-state entities-corporations or individuals-could sue states directly; in which state immunity was much restricted; under which international law could[Page666:]

be applied directly to the relationship between the investor and the host state; in which the operation of local remedies was excluded; and in which the tribunal's award would be directly enforceable within the territories of the state parties. 4

The scope of the Washington Convention was widened in 1978 by the creation of the 'Additional Facility'. This extended the availability of ICSID arbitrations to proceedings in which the State party, or the home state of the investor, is not a party to the Washington Convention.

But the most significant change has come with what has been described as the 'explosion' of Bilateral Investment Treaties-or BITS, as they are more commonly known. Such treaties, which are said to have numbered more than 2,000 by the year 2003, 5generally give qualifying investors a guaranteed minimum protection in respect of their investments in the State with which the investor's State has concluded a treaty. For example, the explanatory letter of 23 May 2000 from President Clinton to the US Senate, concerning the BIT between the US and Bahrain, said:

The Treaty is fully consistent with U.S. policy towards international and domestic investment. A specific tenet of U.S. policy, reflected in this Treaty, is that U.S. investment abroad and foreign investment in the United States should receive national treatment. Under this Treaty, the parties also agree to customary international law standards for expropriation. The Treaty includes detailed provisions regarding the computation and payment of prompt, adequate and effective compensation for expropriation; free transfer of funds relating to investments; freedom of investments from specified performance requirements; fair, equitable and most-favored nation treatment; and the investor's freedom to choose to resolve disputes with the host government through international arbitration. 6

The reference to the resolution of disputes through international arbitration is significant. BITS have been joined by MITS (Multilateral Investment Treaties) such as the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico and the 1994 Energy Charter Treaty (ECT). [Page667:]

Depending upon the terms of the treaty, or the choice of the parties, the reference to international arbitration may be to ICSID, ICC, another institution such as the Stockholm Chamber of Commerce, or to an ad hoc arbitration under the UNCITRAL Rules.

At the time, this looked like a major step forward for international arbitration. As Antonio Parra wrote:

In view of the huge and still rapidly growing number of such treaty consents in particular, it is increasingly likely that any given investor will, in accordance with the terms of such a consent, be able to resort to arbitration in respect of a dispute with the host State despite the absence of an earlier arbitration agreement with the State-or, in many instances, despite the existence of an earlier agreement prescribing a different method for settling the dispute. 7

Or again, as Jan Paulsson said in relation to NAFTA and ECT:

By allowing direct recourse by private complainants with respect to such a wide range of issues, these treaties create a dramatic extension of arbitral jurisdiction in the international realm. 8

Those of us who practise international arbitration, and regard it as a neutral and effective way of resolving international commercial disputes, should no doubt rejoice that it should have come to occupy such a pivotal role in world trade and investment. As one writer has put it:

Such bilateral, regional and multilateral trade and investment treaties allow enforcement of trade, investment, finance and environmental policies through the grant of treaty-based arbitral rights directly upon non-state actors (rather than through traditional inter-governmental diplomatic negotiations). Such [treaties] . . . have an evolutionary impact on the international arbitral regime in that private justice in the form of international commercial arbitration (without a contractual relationship but rather treaty-based) is extended to private investors against host states. 9[Page668:]

Nevertheless, there is cause for concern:

This new involvement of states within the realm of private international arbitration raises concerns. A central issue is how state governments will view the increasing role and authority of arbitrators and arbitral institutions in the regulation of international trade and investment disputes? The private arbitrator's decision may ultimately result in the policies of the host state and its elected government being overruled without any recourse or appeal by the state. What review, if any, should there be of arbitrator's decisions and what protections should there be against arbitrators abusing their powers? 10

Many commentators are now asking questions of this kind; and highly critical comments on investor-State arbitrations are to be found in the media and elsewhere. In a sense, this is surprising. Arbitrations between States or State entities on the one hand and individuals or corporations on the other are not new. They took place, either ad hoc11or under institutional rules, well before the emergence of BITs and other trade and investment treaties. Indeed, they formed-and still form-an important part of the work of ICC and other arbitral institutions. Frequently, the issues involved were-and are-of major importance to the State party as well as to the private claimant; and yet, with some notable exceptions, they do not appear to have attracted the critical comment, and the demand for change, which treaty-based arbitration has attracted. This may be because they arise out of commercial contracts-including construction contracts-which the parties have freely entered into. In such circumstances, whilst the award of an arbitral tribunal will generally be disappointing to one party or the other (and sometimes to both), it is perhaps more readily accepted by the parties as part of the commercial risk of their original bargain.

There is less readiness to accept the decisions of international arbitrators in treaty-based arbitration. An article in The New York Times, for example, began as follows:

Their meetings are secret. Their members are generally unknown. The decisions they reach need not be fully disclosed. Yet the way a group of international tribunals handles disputes between investors and foreign[Page669:]

governments can lead to national laws being revoked and environmental regulations changed. And it is all in the name of protecting foreign investors under NAFTA. 12

In similar vein, a hostile advertisement in The Washington Post referred to the threat posed by 'private courts'-meaning arbitral tribunals-being used by foreign corporations 'demanding our tax dollars as payment for complying with U.S. health, safety and pollution laws'. Nor is it only in the USA that criticism of investor-State arbitrations has emerged. In Canada, for example, it has been said that the confidentiality of arbitration constitutes a 'cone of silence' and that NAFTA arbitrations serve to limit the legitimate rights of governments to regulate. 13

Not surprisingly, disputes involving environmental issues are particularly likely to arouse public interest, from environmental groups and others. In Metalclad, for instance-which was the first case in which an application to set aside a NAFTA award was made to a domestic court-Metalclad had entered into an agreement for the construction and operation of a landfill and waste treatment facility in Mexico. But the company did not have permission from the local municipality, which declared the area on which the facility was to be built and operated to be a permanent ecological reserve, thus ruling out any prospect of Metalclad going ahead with the project; and so the company commenced arbitral proceedings against the Mexican government, in which it claimed substantial compensation. 14

Again, in Methanex, the State of California banned gasoline containing a methanol-based additive because it was concerned about the risk to drinking water if there was leakage from underground fuel storage tanks. Methanex, a[Page670:]

Canadian corporation which produced the additive, brought arbitral proceedings for compensation against the US government. This, in turn, provoked an outcry from environmentalists and the US Environmental Protection Agency. 15

Criticism of treaty-based arbitration tends to focus on three salient features of the arbitral process: first, that the tribunal consists of private individuals and not of judges appointed by the State; secondly that the proceedings are private in nature; and thirdly, that the arbitral award is not generally subject to appeal or review, except (broadly) on grounds of lack of a fair hearing.

There is little to be said of the criticism of the composition of the arbitral tribunal, except perhaps that the individuals chosen are generally chosen because of their skill and expertise and will usually have more knowledge and experience of international investment than the judge of a domestic court.

As to the other issues, there is much to be said. Privacy or confidentiality has long been a characteristic of arbitral proceedings and for many it is an important advantage of arbitration as opposed to litigation. A former Secretary-General of the ICC International Court of Arbitration, for instance, has commented that:

It became apparent to me very soon after taking up my responsibilities at the ICC that the users of international commercial arbitration, i.e. the companies, governments and individuals who are parties in such cases, place the highest value upon confidentiality as a fundamental characteristic of international commercial arbitration. When enquiring as to the features of international commercial arbitration which attracted parties to it as opposed to litigation, confidentiality of the proceedings and the fact that these proceedings and the resulting award would not enter into the public domain was almost invariably mentioned. 16

It is understandable that the parties may attach considerable importance to confidentiality in arbitrations of the traditional kind, which arise under ordinary commercial contracts and in which neither party has any interest in seeing potential disputes making the headlines in the newspapers. The position is different, however, when the public interest is involved. Even if the parties wish for confidentiality, they-and the arbitral tribunal-may be unable to[Page671:]

resist the pressure for disclosure. The public's 'right to know', which may extend from the legitimate to the merely prurient, is taken to be paramount and it is said to be 'unacceptable' to conduct arbitrations implicating the public interest in conditions of secrecy. 17

In fact, and in contrast to the practice of other arbitral institutions (which generally maintain confidentiality in respect of the cases they administer), the existence of ICSID cases is posted on the organization's web site, with details of the parties, the tribunal and the status of the arbitration; and the parties are usually encouraged to allow the award to be published on the ICSID web site or in its journal. NAFTA cases, including briefs and interim decisions, are publicly available; and the possibility of allowing third parties to play some part in arbitrations as amici curiae has been canvassed and favourably received in such cases as Methanex v. United States and UPS v. Canada. 18Indeed, the dispute resolution provisions in the investment chapter of the USA-Singapore Free Trade Agreement go further: in a section entitled 'Transparency of Arbitral Proceedings' there is a provision that hearings will be open to the public, although special arrangements may be made to protect sensitive information from disclosure-much, one imagines, as a court of law may exceptionally agree to hold proceedings in camera. According to an authoritative source:

the pressure from public interest groups and other third parties to make ICSID and other investor-State arbitrations more open and transparent will not abate. 19

On the question of the finality of arbitral awards, several commentators have suggested that, again because of the issues of public importance likely to be affected by the tribunal's award in treaty arbitrations, there should be some system of review; perhaps by a standing panel or court, established for the purpose of reviewing such awards.

Where an arbitration is conducted within the ICSID system, there is already provision for review of the decision of the original arbitral tribunal, chosen by or on behalf of the parties, by an ad hoc committee which has the power to annul the original award in whole or in part. If an award is annulled, the parties are free to litigate the matter again before another arbitral tribunal. [Page672:]

There is no remand back to the original tribunal. This is a flawed system which led to anything but finality in the early annulment cases. In Klockner, 20 for example, the award of the original tribunal of three arbitrators was annulled by an ad hoc committee, also of three arbitrators. The dispute then went to another arbitral tribunal of three arbitrators, which in due course made a further award. This time, both parties requested annulment of the award; but the second ad hoc committee put an end to the merry-go-round by rejecting this request.

It is suggested that 'after a difficult start the system of annulment has now found its proper balance'; 21but if there is to be a system of review within ICSID, it would surely help to constitute a standing tribunal for this purpose, so as to help establish a coherent and recognizable body of authority.

Where an investment arbitration does not fall completely within the ICSID system-which is the case with the NAFTA arbitrations, since neither Canada nor Mexico are parties to the Washington Convention-any review of the arbitral award is likely to take place either before the courts of the place of arbitration or before the courts of the place of enforcement. The risk is that with cases coming before different tribunals, and then perhaps being subject to review by different national courts, there may be conflicting decisions on basically the same issues of principle-for instance, on what is meant by 'fair and equitable treatment' or by 'adequate compensation'.

As Professor Lowenfeld has said:

is it reasonable to expect ad hoc panels, no matter how experienced and competent its members are, to take a long view, to build up a consistent and roughly predictable jurisprudence? If not, does that not suggest that designs for dispute resolution under NAFTA Chapter 11 and similar arrangements are flawed in an important sense? 22

It may be objected that the same could be said of any international arbitration award. Each arbitral award stands on its own. There is no doctrine of precedence or stare decisis. Arbitrators are free to decide as they wish within the limits of [Page673:]

the governing law and the relevant procedural rules. Thus, in SGS Société Générale de Surveillance S.A. v. Republic of the Philippines23the arbitrators said:

In the Tribunal's view, although different tribunals constituted under the ICSID system should in general seek to act consistently with each other, in the end it must be for each tribunal to exercise its competence in accordance with the applicable law, which will by definition be different for each party and each respondent state. Moreover, there is no doctrine of precedent in international law, if by precedent is meant the binding effect of a single decision.

In the absence of any doctrine of precedence, taken together with no system of appeal on the law, conflicting decisions may-and do-occur. However, the pressures for a system of appeal are much more powerful where investor-State disputes are concerned. The present writer suggested, years ago, that it would have been preferable for ICSID to have a permanent review body, rather than a series of ad hoc committees. David Williams has referred to this suggestion in a recent article and has commented that to the extent that ICSID is often likely to be the selected dispute resolution method, it 'is perhaps unfortunate that the [Washington] Convention did not create such a body', since its absence 'makes the system less predictable'. 24

In summary-and admittedly with the benefit of hindsight-it would have been preferable to establish a specialized foreign investment tribunal of competent (and pragmatic) arbitrators, on the lines of the later Iran-United States Claims Tribunal, but without the partisan element that complicated the latter's work. Instead, the conventional model of party-appointed arbitrators and a neutrally-appointed chair was adopted with a new and different tribunal being appointed for each particular dispute. This attempt to resolve investor-State disputes by ad hoc arbitration in the conventional manner appears to have failed. For the traditional process of international commercial arbitration, it has proved to be a bridge too far. 25In consequence, the traditional arbitral process is being adapted-some may say distorted-to cope with the challenge. [Page674:]

Investor-State arbitrations are moving away from the usual model of international commercial arbitration to a model which resembles that of the State courts. The challenge to the traditional privacy of arbitral proceedings and awards is succeeding, in the name of the public interest; and that same public interest may lead to the parties having to arrange, no doubt at their own expense, for the public to be admitted to hearings, with the necessary arrangements being made for security, seating and other facilities, including perhaps a designated area for the press. The decisions of arbitral tribunals too are under attack; and it may prove necessary to establish an appeal court to help ensure consistency of decisions, in place of what Professor Lowenfeld has described as 'the unhappy compromise of the annulment procedure built into the World Bank Convention'. 26

Some years ago, in a collection of essays, Charles Brower wrote of the increasing 'judicialization' of international commercial arbitration, 'meaning both that arbitrations tend to be conducted more frequently with the procedural intricacy and formality more native to litigation in national courts and that they are more often subjected to judicial intervention and control'. 27In the same collection of essays, Professor Carbonneau suggested that arbitration had become 'an engine of adjudication indistinguishable from its judicial counterpart'. 28

It would be regrettable if international commercial arbitration as we know it were to go the way in which investor-State arbitrations seem destined to go, as a pale replica of the State court system, with arbitrations being conducted in public and awards being subject to review on the merits, to say nothing of the formalism and procedural niceties which are a feature of proceedings in court. If this is the way in which investor-State arbitration is to develop, there is much to be said for cutting it adrift from the mainstream of international commercial arbitration and treating it as an analogous but different system of dispute resolution. [Page675:]

1
Mavrommatis Palestine Concessions (Greece v. Great Britain) (1924), PCIJ, Ser. A, No.2 at 12. See also E. de Vattel: 'Whoever ill-treats a citizen indirectly injures the state which must protect that citizen.' (The Law of Nations or the Principles of Natural Law Applied to the Conduct and to the Affairs of Nations and of Sovereigns, trans. C.G. Fenwick (Washington: Carnegie Institution, 1916) at 136.)

2
J.L. Brierley The Law of Nations, 6th ed. (Oxford University Press) at 277.

3
Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Washington, 1965, 575 (1966) U.N.T.S. No. 8359, p. 160. The Convention is also known as the ICSID Convention and as the 4orld Bank Convention.

4
In his foreword to C.H. Schreuer, The ICSID Convention: A Commentary (Cambridge University Press, 200) at xi-xii

5
L. Reed, J. Paulsson & N. Blackaby, Guide to ICSID Arbitration (Kluwer Law International, 2004) at 38.

6
Ibid. at 175.

7
A.R. Parra, 'Provisions on the Settlement of Investment Disputes in Modern Investment Laws, Bilateral Investment Treaties and Multilateral Instruments on Investment' (1997) 12 ICSID Rev. 287 at 360.

8
J. Paulsson, 'Arbitration without Privity' (1995) 10 ICSID Rev. 232 at 233

9
K. Lynch, The Forces of Economic Globalization: Challenges to the Regime of International Commercial Arbitration (Kluwer Law International, 2003) at 161-62

10
Ibid. at 162.

11
Amongst notable ad hoc arbitrations between investors and States were the Libyan oil nationalizations and the well-known arbitration between Kuwait and Aminoil.

12
Examples of such media criticism were given in presentations to the Swiss Arbitration Association by Nigel Blackaby and by Professor William Park, who suggested (for instance) that: 'As Americans and Canadians began to understand the host state perspective, praise for arbitration's neutrality turned into a chorus of complaint about infringement of national sovereignty and democracy. The level playing field no longer appeared as an unalloyed benefit. NAFTA was said to undermine legitimate governmental regulations, challenge legislative prerogatives and open decision-making to ill-informed foreign tribunals.' See Investment Treaties and Arbitration, ASA Special Series No. 19, August 2002 at 10.

13
See supra note 12.

14
For a clear and concise note on this case see D. Williams, 'International Commercial Arbitration and Globalization-Review and Recourse against Awards Rendered under Investment Treaties' (2003) 4:2 The Journal of World Investment & Trade 251 at 259.

15
Methanex Corp. v. USA, noted by Professor Park, supra note 12 at 22.

16
'Expert Report of Stephen Bond Esq (in Esso/BHP v. Plowman)' (1995) 11 Arbitration International at 273-74.

17
Noted by Nigel Blackaby, supra note 12 at 149, quoting a legal adviser with the US State Department.

18
See L. Reed, J. Paulsson & N. Blackaby, supra note 5 at 71.

19
Ibid.

20
For a detailed review of Klockner and other cases see (amongst others) A. Broches, 'Observations on the Finality of ICSID Awards' (1991) 6 ICSID Rev. 320; D. Williams, supra note 14 at 268ff.; and C.H. Schreuer, supra note 4.

21
C.H. Schreuer, supra note 4 at 903.

22
A.F. Lowenfeld, 'International Arbitration: Scapegoat or Solution?'(2002) 13 The American Review of International Arbitration 1 at 5.

23
Case No. ARB/02/6, Decision on Objections to Jurisdiction, 29 January 2004

24
D. Williams, supra note 14 at 273.

25
In September 1944, allied forces under General Montgomery launched an armoured drive for theRhine, which depended upon the seizure of a series of river and canal crossings by airborne forces. The most northerly was the bridge over the Lower Rhine at Arnhem in the Netherlands. Before the attack began, General Browning told Montgomery that airborne troops could hold the bridge for four days, before armoured reinforcements arrived. Then he added: 'But Sir, I think we might be going a bridge too far.' And so it proved.

26
A. Lowenfeld, supra note 22 at 7.

27
R.B. Lillich and C.N. Brower, eds., International Arbitration in the 21st Century: Toward "Judicialization" and Conformity? (New York: Transnational, 1994) at ix.

28
Ibid. at 130.