Arbitrating the Conduct of International Investors

By Jose Daniel Amado, Jackson Shaw Kern, Martin Doe Rodriguez

Cambridge University Press (2018); 198 pages; ISBN: 978-1-108-41572-9

Summary and context

In a world where foreign investment is playing an increasingly important role alongside traditional governmental and multilateral institutions in the development of emerging markets, the legal framework governing commercial interactions is under increasing scrutiny. Arbitrating the Conduct of International Investors strives to provide a foundational discourse shift and potential framework from which to open a much needed dialogue and explore the increasingly important question of whether host States and their nationals should have greater access to international arbitration vis-à-vis foreign investors.

Despite the original reciprocal vision promulgated by its founders to ‘[permit] the institution of proceedings by host States as well as by investors’ and that ‘the provisions of the Convention should be equally adapted to the requirements of both cases’ (p. 1, quoting Report of the Executive Directors of the International Bank for Reconstruction and Development on the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965), para. 13), the book explores the concept that investment arbitration has ultimately evolved and developed into a manifestly one-sided process. While international arbitration provides a mechanism by which aggrieved foreign investors can bring claims against host States, neither the host State itself (beyond the limited realm of counterclaims) nor its nationals are afforded equivalent rights and such mutuality of access. Accordingly, where a foreign investor has inflicted some form of harm or damage on the host State and/or its nationals as a result of its investment, they have limited means of redress. Amado, Kern and Rodriguez (hereafter the ‘Authors’) emphasise that such a lack of redress is giving rise not only to increased opposition to investment projects but stagnation and delays in the implementation of these projects. In turn, this is preventing investment and the advantages of the resulting capital flow afforded by such projects. When making an investment, foreign investors seek to repatriate profits under rule of law, while host State nationals strive to realise the benefits from the influx of capital, while avoiding any harm. The Authors believe that as in any commercial transaction, the success of such an investment in part requires ‘access by parties concerned to a dispute settlement mechanism that is empowered to render a binding result’ (p. 2). In the realms of international foreign investment, this is currently lacking, thereby preventing many host States from achieving their desired result.

Although host State national courts are capable of adjudicating foreign investment disputes, any subsequent award is often subject to enforceability issues, especially where the foreign investor owns no assets within the host State’s jurisdiction. Therefore within the current legal landscape, aggrieved host States and host State nationals have limited options.

Against this contextual backdrop, the Authors creatively explore ways in which broader jurisdictional access could be obtained by host States and their nationals. The Authors set out a number of different but equally thought-provoking mechanisms through which claims could be brought against foreign investors. The Authors further address issues surrounding jurisdiction, mass-scale events, the incorporation of a broader body of rights into a tribunal’s competence (including human rights and labour rights), and enforcement. The work culminates in the compilation of a toolset in the form of model texts applicable to investors, home States, host States and their nationals alike providing a potential legal framework to approach and address this imbalance and reframe the legal landscape. It should be noted that the Authors do not suggest a new regime, but rather nuanced mechanisms within the existing legal framework, as detailed in greater depth below.

The Authors posit that the development of a procedural and substantive mechanism by which host States can instigate or intervene in investment arbitrations has two advantages: first, as influencing the prospective conduct of the key actors, and second, by providing host States and their nationals with a mechanism of receiving compensation for any harm resulting from foreign investment. Both of these advantages will ultimately facilitate and encourage foreign investment in developing countries.

How can mutuality of access be achieved?

The Authors begin by exploring the existing legal landscape within which international investment currently operates, more specifically the roles and limitations of the host State national courts, home State national courts and international arbitration. Needless to say, this section is illustrative of the limited means of redress for host States and its nationals, and goes to explain some of the frustration currently felt by States and their nationals about the system as it stands.

The Authors proceed to present four potential mechanisms or models which would enable host States or their nationals to either initiate or intervene in investment arbitration.

Direct Claims Model

The first of these models is the Direct Claims Model, of which there are three proposed variants. Under the first variant, the host State national acts as claimant in a direct claim against the foreign investor. This variant removes the role of the State entirely, and as such precludes ICSID jurisdiction, although not that of the Permanent Court of Arbitration. Under the second variant, the investor’s home State would act as guarantor of the investor’s obligations. As a State actor is party to the dispute, if both the home and host States are parties to the ICSID Convention, the Centre would have jurisdiction. The final variant of this Model involves the host State itself acting as claimant in relation to an infringement of rights by the foreign investor resulting in damage to the host State, separate from and independent of any individual claims by host State nationals.

Espousal Model

The second Model applies where there has been a dispute in relation to rights held by host State nationals. In this scenario, conformity with the ICSID Convention can only be achieved through the espousal of such a claim. This is achieved by the host State national assigning his claim to the host State, which would in turn prosecute the claim against the foreign investor. The Authors conceptualise this Model as a form of reverse diplomatic protection, although they emphasise that rather than entering the realms of diplomatic protection (despite potential parallels), such an approach is instead resorting to the lex specialis of international investment law.

Qui Tam Model

The Qui Tam Model, which derives its name from a Latin phrase referring to ‘one who sues in a matter for the king as well as for himself’ (p. 55) would apply where a host State’s rights have allegedly been infringed, but private individuals may also have incurred injury as a result of the aforementioned conduct. This Model allows the host State nationals to participate in any arbitral proceedings and share any potential award, even though the host State is the ultimate right-holder. This Model would provide redress for individuals who have potentially suffered injury as a result of a breach of an obligation owed by the foreign investor to the State.

Hybrid Model

As the name suggests, this Model is a compilation of the Espousal and Qui Tam Models. The host State national assigns the claim to the host State, as under the Espousal Model, but rather than prosecute the claim itself, the State then appoints a representative to prosecute the claim, namely the national who initially assigned the claim to the State. Such a Model allows the national to retain greater control over the arbitral proceedings than they would have done under the Espousal Model, while at the same time retaining the host State as a party to the dispute facilitating access to ICSID.

Conclusion

Unlike most other books in this area which either teach black letter international arbitration or seek to describe or criticize the system as it is, this book seeks to be much bolder: to redefine the status quo. It raises a number of timely, pertinent, and applicable questions not simply in relation to the mutuality of access to international dispute resolution fora but also broader questions pertaining to international investment and sustainable development. It suggests a host of potential mechanisms applicable within the existing legal framework and provides model texts within which to address and ultimately achieve mutuality of access for host States. These model texts, and the work of these distinguished Authors, will no doubt facilitate the opening of a dialogue to explore and address not only whether such changes should be implemented, but also how to achieve such an aim for the benefit of all. And for that, both States and investors will ultimately be thankful.

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