Overview of Research on Investment Treaty Arbitration

Overview of research on investment treaty arbitration

Gus Van Harten

Osgoode Hall Law School of York University

March 2014

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BACKGROUND TO INVESTMENT TREATY ARBITRATION

•  many trade or investment treaties allow foreign investors (usually North American or Western European companies) to sue countries directly

•  unlike other international courts or tribunals, investors do not have to go first to domestic courts

•  foreign investors cannot themselves be sued; thus, investor-state arbitration disciplines governments not foreign investors

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BACKGROUND TO INVESTMENT TREATY ARBITRATION

•  foreign investors may receive public compensation for regulations that are:

•  “unfair” or “inequitable” •  “discriminatory” •  “expropriation” •  “performance requirements”

•  cases are decided by arbitrators whose decisions are not closely reviewed in national or international courts

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OVERVIEW OF ARBITRATOR POWER

•  power to review any legislative, executive, and judicial decisions of the state in its sovereign capacity

•  power to issue unlimited monetary compensation orders against states

•  power to issue non-monetary orders against states

•  power to decide own jurisdiction and to interpret vaguely-worded standards of foreign investor protection, following an international claim by a private party (i.e. foreign asset owner)

•  no (ICSID Rules) or limited (UNCITRAL Rules) judicial review, even on the narrow grounds of the New York Convention

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OVERVIEW OF ARBITRATOR POWER

•  power to issue awards that are enforceable in numerous countries against commercial assets of the losing state

•  power to issue awards that are more enforceable than any domestic or international court decision involving the state in its sovereign capacity

•  free from any binding code of conduct; arbitrators typically work on the side as lawyers, lobbyists, paid experts, or academics

•  free under the ICSID Rules from judicial review of conflict-of-interest claims against arbitrators

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CONCERNS

•  Concerns due to the unique use of arbitration to decide (finally) selective asymmetrical claims against the state, as sovereign, and re-direct public funds:

•  Independence and impartiality: absence of conventional safeguards of judicial independence founds perceptions of bias on institutional grounds in favour of some claimants/ respondents and against others

•  Procedural fairness: limitation of standing rights to claimant investor and respondent national government precludes others whose rights or interests are affected from full participation

•  Open court principle: most arbitrations have not delivered the level of openness of a court proceeding because the claim, documents filed, and/ or awards are not public

•  “Balance”: the system provides highly-actionable rights for foreign investors but without any correspondingly actionable responsibilities

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HIGHEST NUMBER OF KNOWN INVESTOR-STATE CASES (58) FILED IN 2012

0 5

10 15 20 25 30 35 40 45 50 55 60 65

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Ann

ual n

umbe

r of

cas

es

ICSID Non-ICSID

Known treaty-based cases (source: UNCTAD)

TOTAL INVESTOR-STATE CASES REACHED 514 IN 2012

0

100

200

300

400

500

600

Cumulative treaty-based cases (source: UNCTAD)

Cum

ulative number of cases

VARIOUS TYPES OF POLICY MEASURES WERE REVIEWED

Study of the measures reviewed by arbitrators and evidence of restraint (all figures are approximate)

•  review of a legislative measure: 37% of cases •  review of an executive measure: 98% of cases •  review involving a judicial decision: 44% of cases

•  cases involving a contract likely with its own dispute settlement clause: 62% of cases

•  cases involving a general (not specific) policy decision by the state: 50% of cases

source: G Van Harten, Sovereign Choices and Sovereign Constraints (Oxford University Press, 2013).

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NOVEL CLAIMS ARE BEING FILED

•  claims arising from crisis-related financial measures Ping An v Belgium

•  claims arising from environmental measures

Vattenfall v Germany; Lone Pine Resource v Canada •  claims arising from domestic court decisions

Infinito Gold v Costa Rica; Eli Lilly v Canada

•  apparent tendency toward third-party speculative financing of investor claims

THEORY UNDERLYING EXPECTATIONS OF ARBITRATOR BIAS

•  investment treaty arbitration does not incorporate the usual institutional safeguards of judicial independence

•  no judicial security of tenure •  no prohibitions on outside remuneration by the judge •  no objective method of appointment to specific cases •  no open court principle

•  investment treaty arbitration is uniquely asymmetrical and insulated from judicial review

•  founds perceptions of arbitrator dependence on prospective claimants, default appointing authorities, gatekeepers in the arbitration industry, and treaty rule-makers

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RESEARCH PROJECT ON POTENTIAL ARBITRATOR BIAS

Is there quantifiable evidence at a systemic level of actual bias in investment treaty arbitration based on institutional rationales to suspect bias? Conceptual distinctions: perceived v. actual bias; individual v. institutional factors Analysis of outcomes v. analysis of legal content source: G Van Harten, “Arbitrator Behaviour in Asymmetrical Adjudication” Osgoode Hall Law Journal (2012)

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HYPOTHESES OF ARBITRATOR BIAS

1. Arbitrators will be more likely to favour expansive (pro-claimant) than restrictive (pro-respondent) legal interpretations 2. Expected tendency in 1. will be accentuated where claimant is a national of U.S., U.K., Germany, or France

3. Expected tendency in 1. will be reduced where respondent state is U.S., U.K., Germany, or France

4. Expected tendency in 1. will be accentuated for the most active arbitrators/ repeat players

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PROJECT DESIGN AND IMPLEMENTATION

•  development of issues template

•  training of coders

•  review of awards by two coders

•  resolution of coding disagreements by third coder

•  statistical analysis of results

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SOME LIMITATIONS OF THE PROJECT

•  relevance to perceived bias at institutional level not actual bias at individual level

•  degree of discretion in selection of issues, outline of interpretive approaches, identification of issues in awards, and coding of issue resolutions

•  possible selection bias arising from the fact of known and unknown secret awards

•  crudeness of quantitative indicators for complex behaviour

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ARBITRATORS TEND TOWARD EXPANSIVE (PRO-INVESTOR) INTERPRETATIONS, ESP. FOR MAJOR WESTERN INVESTORS

Study of how arbitrators resolved contested issues of jurisdiction or substantive protection

•  tended to resolve ambiguity in investment treaties expansively in favour of investors

•  this tendency was accentuated where the claimant investor was a national of a major Western capital-exporter

source: G Van Harten, “Arbitrator Behaviour in Asymmetrical Adjudication” Osgoode Hall Law Journal (2012)

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TENDENCY TOWARD EXPANSIVE RESOLUTIONS 17

Issue Resolution of Issue

Total resolutions Restrictive Expansive 1 – corporate investor 15% 85% 72 2 – natural investor 100% 0% 6 3 – “investment” 30% 70% 119 4 – minority claims 08% 92% 75 5 – permissibility 33% 67% 27 6 – parallel claims 16% 84% 162 7 – MFN treatment 50% 50% 60 8 – national treatment 65% 35% 60 9 – FET and custom 27% 73% 56 10 – FET content 17% 83% 137 11 – full protection 43% 57% 51 12 – indirect expropriation 28% 73% 120 13 – umbrella clause 09% 91% 32 14 – essential security 25% 75% 24 Total 26% 74% 1001

TENDENCY TOWARD EXPANSIVE RESOLUTIONS JURISDICTIONAL ISSUES

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0

20

40

60

80

100

120

140

160

1 -‐ Corporate Person Investor

2 -‐ Natural Person Investor

3 -‐ Concept of Investment

4 -‐ Minority Shareholder Interest

5 -‐ Permissibility of Investment

6 -‐ Parallel Claims 7 -‐ Scope of MFN Treatment

Issue that arose

Issue by resoluGon (N)

0 -‐ RestricGve 1 -‐ Expansive

ACCENTUATED TENDENCY (JURISDICTIONAL ISSUES) FOR INVESTORS FROM MAJOR WESTERN CAPITAL-EXPORTERS

•  U.S. investors: 91% more likely to benefit from an expansive resolution than other investors

•  French, German, U.K., and U.S. investors: 84% more likely to benefit from an expansive resolution

than other investors

•  Western European former colonial powers’ investors: 75% more likely to benefit from an expansive resolution

than other investors (except U.S.). source: G Van Harten, “Arbitrator Behaviour in Asymmetrical Adjudication”

Osgoode Hall Law Journal (2012)

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CONCENTRATION OF ARBITRATOR POWER

Study of frequently-appointed individuals who dominate decision-making

•  12 arbitrators were present on 60% of 263 ICSID tribunals

•  15 arbitrators were present on 55% of 247 investment treaty tribunals

•  24 arbitrators resolved nearly 50% of the issues and tended to be more expansive (pro-claimant)

•  virtually all core arbitrators were from Western states

source: dataset for G Van Harten, Sovereign Choices and Sovereign Constraints (Oxford University Press, 2013).

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No. of arbitrators

% of arbitrators No. of issue resolutions

% of issue resolutions

144 67% 170 26%

47 22% 172 27%

13 6% 99 15%

11 5% 208 32%

Totals: 215 100% 649 100%


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No. of issues resolved

No. of arbitrators

Total appointments to cases

% of total appointments to cases

Median appointments per arbitrator

Mean appointments per arbitrator

0 to 2 144 195 41.0% 1 1.4

3 to 5 47 110 23.1% 2 2.3

6 to 11 13 62 13.0% 5 4.8

12 to 30 11 109 22.9% 11 9.9

Totals: 215 476 100% 1 2.21


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No. of issues resolved

No. of arbitrators

Expansive resolutions

Restrictive resolutions

Non-classifiable resolutions

ETR ratio

0 to 2 144 84 50 36 0.61

3 to 5 47 92 45 35 0.67

6 to 11 13 67 13 19 0.75

12 to 30 11 158 18 32 0.90

Totals: 215 401 126 122 0.76


SOME IMPLICATIONS OF ARBITRATORS’ ROLE

•  in cases where the tribunal allowed a treaty claim to proceed despite a contractual forum, $1.2 billion was awarded in total

•  in Oxy v Ecuador No 2, where the tribunal allowed the claim to proceed despite a wait period, $2.3 billion was awarded

•  treaties are often ambiguous; arbitrators may find ambiguity where others would not

•  arbitrators tended resolve ambiguity in favour of claimants, especially for claimants from U.S. and major Western European states

•  Query: arbitrator incentives + legal uncertainty + third party financing+ potentially massive fiscal liability = new sovereign debt crises?

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SCANT EVIDENCE OF JUDICIAL RESTRAINT

•  arbitrators rarely showed restraint in ways used by courts, e.g. to respect legislative accountability

•  arbitrators infrequently showed restraint, especially in NAFTA investor-state arbitration, due to the role of domestic courts

•  arbitrators rarely showed restraint due to a contractually-agreed forum

•  arbitrators rarely showed restraint due to a wait period or fork-in-the-road

•  source: G Van Harten, Sovereign Choices and Sovereign Constraints (Oxford University Press, 2013).

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ADVANTAGES FOR FOREIGN INVESTORS

RELATIVE TO DOMESTIC INVESTORS/ OTHER ACTORS

DUE PRIMARILY TO TREATIES:

•  special access to parallel adjudicative forum •  ability to present facts and arguments in absence of other affected parties

•  absence of institutional safeguards of judicial independence that otherwise insulate adjudicators from dependence on prospective claimants

•  direct role in make-up of tribunal •  role of appointing authorities with direct accountability to investors (e.g.

International Chamber of Commerce)

•  exceptional ability to enforce awards against sovereigns

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ADVANTAGES FOR FOREIGN INVESTORS

RELATIVE TO DOMESTIC INVESTORS/ OTHER ACTORS

DUE PRIMARILY TO ARBITRATORS:

• allowance of broad-based challenges to general measures including legislation

• avoidance of general deference doctrines often applied by judges when reviewing legislative or executive decisions

• avoidance of explicit balancing of investor rights and interests against those of other actors or the collective interest

• side-stepping of contractual obligations on dispute settlement

• Competitive advantages that presumably follow in marketplace/ bargaining advantages in relations with legislatures, governments, or courts

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OPTIONS FOR REFORM?

COMPONENTS OF A JUDICIAL PROCESS

Independent • institutional safeguards of judicial independence

•  secure tenure/ set remuneration

•  objective case assignment •  judicial conflict-of-interest review

Procedurally Fair • right of direct standing where one’s rights or interests are affected

Open

• general principle of transparency subject to specific exceptions

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OPTIONS FOR A JUDICIAL PROCESS

•  Domestic investor-state courts •  decline, or withdraw from, investor-state arbitration •  incorporate customary duty to exhaust reasonably-available local

remedies

•  International investor-state court •  existing international or courts •  new international investment court •  new appellate body

•  State-state processes

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•  other forms of arbitration have judicial safeguards

•  random appointment of state-state arbitrators from set roster

•  limits on apparent financial conflicts in U.S. financial services arbitration

•  code of conduct, screening of claims, and limits on compensation in Canada’s Agreement on Internal Trade investor-state arbitration

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•  components of judicialized investor-state arbitration

•  an effective roster (unlike the ICSID roster)

•  appointment of all arbitrators from the roster, by rotation or random assignment

•  publicly-accountable/ merit-based appointment to the roster

•  pre-set criteria for appointment; e.g. geographical/ gender representation; expertise in relevant area of decision-making

•  prohibition on double-dipping as arbitrator and lawyer

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•  components of judicialized investor-state arbitration

•  provide for guaranteed (modest) remuneration for roster members

•  binding code of conduct for roster members

•  judicial model for rules of procedure

•  judicial process for conflict-of-interest challenges

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•  potential complementary reforms

•  exhaustion of local remedies where reasonably-available •  exhaustion of contractually-agreed remedies •  screening mechanism by independent officer •  objections based on standards of corporate behaviour •  actionable responsibilities as well as rights for investors

•  suggest that simplest option is to withdraw from existing treaties until major states commit to fundamental reform of the adjudicative process including actionable investor responsibilities

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Overview of Research on Investment Treaty Arbitration

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