JUNE 2015
  • Improving Investor-State Dispute Resolution in
    International Investment Agreements —
    The US Supreme Court Adds Fuel to Fire

    Austin I Pullé

In BG Group v Argentina, the US Supreme Court upheld an arbitral award rendered by arbitrators who allowed investor-state arbitration despite the investor disregarding the mandatory recourse to court provision contained in the applicable bilateral investment treaty (BIT). Instead of interpreting the BIT by applying the Vienna Convention on the Law of Treaties, to which both countries to the BIT were parties, the court used US canons of interpretation applicable to arbitration clauses in private commercial contracts. The decision refocuses attention on the defects of investor-state dispute resolution system and the pro-investor bias of arbitrators. To restore a desirable equilibrium between the interests of the host state and foreign investors, urgent reforms of the present dispute resolution system are required.

ISDS; investment treaties; Argentina; Vienna Convention Law of Treaties; local remedies; arbitrator bias; consent to arbitration; Arbitrator Jurisdiction; UNCITRAL Arbitration; Convention Award.
Click here to read extracts of the article

The rights and privileges that foreign investors currently enjoy under bilateral investment treaties (BITs) and investment protection chapters in free trade agreements, collectively called “International Investment Agreements” (IIAs), as well as arbitral awards in favour of such investors against host states rendered pursuant to dispute settlement provisions under such IIAs, have resulted in “growing dissatisfaction with the regime in general and investor-state arbitration in particular”. The recent US Supreme Court decision in BG Group v Republic of Argentina (BG Group) would contribute to such dissatisfaction. The case dealt with what has been described as “really the ultimate question in our law of arbitration”. As another writer observes, the case “goes to the heart of whether it is the arbitral tribunal that has the exclusive say on its own competence or whether national courts have a limited role in ensuring that arbitral tribunals cannot egregiously depart from the consent of the parties”. The diffident approach of the Supreme Court to this larger question and its indifference to the sui generis issues arising from investor-state dispute settlement (ISDS) vividly illustrate some of the fault lines in international commercial arbitration as well as the weaknesses of the several decades-long foreign investment law regime that have been highlighted by scholars and practitioners for many years. The decision in BG Groupwould confirm the perception of many that the current ISDS regime is obsolete and unresponsive to concerns about the misplacement of, if not reversal of, priorities regarding the role of foreign investment in the economic development of host countries, and the legitimacy of arbitral tribunals, composed of unelected arbitrators drawn from Western countries, making blockbuster awards against developing countries thereby unduly privileging foreign investor concerns over far more pressing concerns relating to the welfare of host country populations.

Most often the preamble of the text of IIAs identifies the development of the host country as a key objective of the IIA. That the main purpose of IIAs is to promote the well-being of host country populations by encouraging foreign investment is generally overlooked in arbitral awards. Often, arbitrators in investor-state disputes approach and interpret IIAs as if the principal purpose of these instruments is to function as insurance policies against political risk, and sometimes even against commercial risk, in favour of investors. Some of these investors, had they evaluated the political risk they would face by investing in some countries, would have stayed away from a risky investment in the first place. In other words, but for the IIA, a potential investor would have stayed away from a particular country because the proposed investment would have been too risky, if not reckless.

When the first IIAs were signed, globalisation was a term that was not in the vocabulary of trade specialists. In the 21st century, many barriers to market entry by foreign companies have been dismantled, and technology and the surplus of information have made markets more efficient. It is therefore arguable that in this age of globalisation, free market considerations and not IIAs should influence investment decisions. When countries and businesses assume unnecessary risk, the markets usually deliver outcomes based on a risk–reward ratio formula. If a host country molests foreign investment, it should be punished by market forces or by application of specific provisions in a state contract that an investor has signed with the host government as a precondition for investing. But foreign investors engaging in risky ventures in high-to-medium risk host countries under the protective umbrella of IIAs get the best of both worlds. They reap the benefits of access to resources and markets but at the same time are treated better than their counterparts who are citizens in these host countries because of the protections given to them in IIAs. If IIAs are to avoid just becoming blueprints for predation of limited resources from vulnerable host country populations, the asymmetric nature of such instruments would have to be remedied by coherence in their interpretation as well as clarification through clearer drafting of key provisions in new IIAs.

The majority of justices of the Supreme Court in BG Groupheld that an arbitral award in favour of an investor against Argentina could be enforced, although the investor had not followed the sequence of steps prescribed in the applicable investment protection treaty, which had to be followed before an investor could institute arbitration proceedings against Argentina. This was because, according to the majority opinion, the arbitrators were empowered under the BIT to determine whether the investor could bring an action against Argentina despite the investor not having satisfied a “recourse to court before arbitration” requirement in the treaty. Roberts CJ delivered a strongly worded dissent in which he questioned he reasoning of the majority, which reasoning was heavily reliant on precedents dealing with domestic arbitration clauses in commercial agreements that the majority had used to interpret the BIT.11

The decision of the US Supreme Court, the highest court of the country that has entered into many significant regional trade agreements and is in the process of negotiating other free trade agreements that contain investment protection chapters and BITs, would provoke more debate about the desirability of retaining ISDS provisions in their current boilerplate form in IIAs.

The decision in BG Group illustrates why so many scholars and civil society groups have concerns about ISDS, or at least the way arbitrators purport to act under ISDS provisions. The Supreme Court decision as well as the decision of the arbitral panel show why there is an urgent need to define with precision in future IIAs the conditions under which the host state would permit investor-state arbitration and curb the power of arbitrators who have arrogated to themselves the power to create precedents with no basis in customary international law or in the text of the treaty that they purport to interpret. With the entry of the Lisbon Treaty, the European Union (EU) is expected to replace the approximately 1500 IIAs that individual EU member states have concluded so far with uniform EU agreements with third countries. During this exercise, both capital importing countries in the Global South and developed economies currently negotiating the Transatlantic Trade and Investment Partnership (TTIP) would have the opportunity of critically assessing some of the policies that currently underpin ISDS, curb arbitrator overreach and otherwise enhance the legitimacy of ISDS mechanism. In particular, the precise reach of the Fair and Equitable Treatment provision in IIAs would have to be clarified so that this provision is not leveraged to impose an obligation that normally could be imposed only under a stabilisation clause as it appeared to have been done by the arbitral panel in the BG arbitration.

Countries with strong democratic traditions ensure that the judicial power of the state be exercised in a transparent and accountable manner. Indeed, some states in the US arguably take this concept too far by requiring that judges submit themselves periodically for election. ISDS is an exception to this principle but can be taken too far. Alarms over the democracy deficit posed by ISDS have been recently echoed by the distinguished scholar, Professor Martti Koskenniemi, who has spoken about “a transfer of power from public authorities to an arbitration body, where a handful of people would be able to rule whether a country can enact a law or not and how the law must be interpreted”. These observations become poignant in the context of the widening economic gap and the resulting inequality that remains an urgent issue to be addressed by states.