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The Reign of Law in International Investment Decision-making

Lady Margaret Hall, Oxford

Diane Desierto, Ian Laird, & Frederic Sourgens
Co-Chairs, Oxford University Press Investment Claims Summer Academy, Lady Margaret Hall, Oxford

The Second Oxford University Press Investment Claims Summer Academy at Lady Margaret Hall took place on July 6-7, 2017, and focused on the role of international law in international investment decision-making. The Summer Academy opened with a quote from Sir Hersch Lauterpacht’s 1933 Function of Law in International the International Community: “The reign of law, represented by the incorporation of obligatory arbitration as a rule of positive international law, is not the only means for securing and preserving peace among nations. Nevertheless it is an essential condition of peace”. Campbell McLachlan, Laurence Shore, and Matthew Weiniger relied upon the quote to open their second edition of International Investment Arbitration: Substantive Principles. In the first session of the Summer Academy, Ian Laird reviewed and discussed the Second Edition of International Investment Arbitration with Matthew Weiniger, QC as a way to set the stage for remaining proceedings.

It became apparent quickly that Sir Hersch Lauterpacht’s quote was a good place to start the Summer Academy – recent events have made abundantly clear that international law as a whole finds itself under increased strain to preserve the peace, never mind secure it. Yet, as the book discussion and the Summer Academy as a whole made clear, the task of securing the reign of international law by means of pacific dispute settlement is the more daunting when disputes do not involve classic state-to-state foreign policy entanglements. Seemingly more is at stake when such legal disputes pit states against non-state actors.

Investment arbitration is at the heart of this most contentious form of international legal disputes; it by definition involves claims that the impairment of property rights of foreign investors by state conduct is internationally wrongful – or requires the payment of compensation at international law. A state’s invocation of regulatory sovereignty does not provide a defense to such claims. The submission of such disputes to obligatory arbitration thus involves a visible renunciation of host state sovereignty and a willingness to yield claims of sovereign might to international legal right.

This dynamic led to a flashpoint in public discourse, particularly in Europe. Public opinion forced an abandonment by the European Union of investor-state arbitration in favor of a court system. As the Summer Academy met, the European Union pushed its agenda to abolish investor-state arbitration and replace it with a court mechanism at UNCITRAL meetings lending further urgency to the underlying issues created by investor-state arbitration.

Ian Laird and Matthew Weiniger, QC

As the proceedings of the Summer Academy highlighted throughout, the delegates were highly skeptical of the introduction of a court as a sufficient or prudent means to address the current political resistance to investment arbitration. As a matter of political dynamics, it appears that much of the fire against investor-state dispute resolution is caused by the conclusion of instruments codifying rules for trade and investment law jointly. Investment chapters provide an easy target for a broader opposition to globalization and legal instruments facilitating it. The introduction of an investment court does not address this underlying opposition to globalization.

The question thus arose why negotiators continued to combine investment instruments with trade instruments in multilateral and bilateral negotiations. The reason appears to be the policy interest in securing stronger investment protections for outgoing investments. These protections can more easily be secured when they are exchanged for market access to significant economies such as the European Union or the United States. Protests against the loss of regulatory sovereignty within the EU or the US thus do not reflect the real dangers of a loss of such sovereignty domestically. Rather, the suggestion was raised that such protests used investment arbitration as a stalking horse in order to block the far more domestically significant trade-related effects of entering into free trade agreements.

The book discussion ended with a focus on the process of decision-making in investor-state arbitration. The discussion highlighted the gradual development of the law through factual comparison of disputes to prior disputes. Premised upon such comparison tribunals determine whether to extend rationales from earlier decisions to the case at bar – and thus extend the protections as developed in earlier case law to new circumstances.

This common law method would be reasonably immune to the institution of a court system unless such a court system would be given different rules to apply than BITs. One might further wonder to what extent the existence of jurisprudence would continue to guide even the interpretation of new standards. The reign of law – in other words – is not threatened by current policy proposals. Nor, however, would it be much aided by them.

The Summer Academy next addressed the question of counterclaims. The discussion of counterclaims focused on two separate issues. First, the discussion addressed the jurisdictional basis for counterclaims. It noted that counterclaims were frequently dismissed on jurisdictional grounds due to the narrow nature of consents to arbitration in investment treaties. Delegates noted, however, that such a problem would not arise in the context of an arbitration premised upon a contractual consent to arbitration or a combination of a contractual consent to arbitration and treaty consent as was the case in the Perenco v. Ecuador and Burlington v. Ecuador decisions on the state’s counterclaim.

Delegates then discussed whether broadly worded treaty consents on their own might be able to achieve a similar result. The delegates noted the decisions in Saluka v. Czech Republic and Paushok v. Mongolia, as well as the dissent by Professor Reisman in Roussalis v. Romania in that regard. They noted however that there were significant structural problems for a broad reading of consents as permitting counterclaims: such counterclaims raise the question whether the prosecution of the claim in arbitration would constitute an election of forum by the state – and thus preclude future domestic actions by the host state with regard to the same claims. The delegates noted that most investment treaties did not address the issue for any claims that could be raised by the state (as opposed to the provisions dealing with claims by the investor). This could lead to interpretive problems in construing the consent to arbitration broadly, or, vice versa, the fork in the road provision narrowly if the tribunal deemed itself seized of jurisdiction.

The delegates next discussed the question of applicable law. They noted the link between defenses and counterclaims raised by the parties. This link suggested that the counterclaims ultimately would need to rely upon an internationally cognizable claim (or defense) as opposed to a simple infraction of a rule of domestic law, as set out in the Amco v. Indonesia arbitration: legal disputes concerning rights and obligations that are applicable to legal or natural persons who are within the reach of a host State’s jurisdiction “in principle fall to be decided by the appropriate procedures in the relevant jurisdiction unless the general laws generate an investment dispute under the Convention.”

The discussion in this session suggested useful areas for further engagement by treaty drafters. First and foremost, treaty drafters should carefully consider the availability of counterclaims in drafting arbitration consents. As they do so, they should anticipate the challenges arising out of the submission of counterclaims by states – such as the question whether the fork in the road provision in dispute resolution mechanisms applies to states and investors alike. Finally, they should consider whether the submission of disputes by an investor should require the consent of its ultimate parent company to submit to arbitral jurisdiction to provide additional security to the state seeking to prosecute a counterclaim.

The next session of the Summer Academy addressed the question of the appropriate role of tribunal secretaries and tribunal assistants. The discussion began with a comparison of the role of clerks in domestic judicial systems to the role of tribunal secretaries in investor-state arbitration. The delegates noted that tribunal secretaries, unlike clerks, are not authorized to assist the tribunal with a substantive resolution of the dispute. Instead, as born out by the History of ICSID, tribunal secretaries assist with the procedural aspects of an award as well as the procedural organization of the arbitration only.

The delegates next addressed that recent practice has been to appoint both traditional tribunal secretaries and tribunal assistants. Frequently these assistants serve as the same firm as the president of the tribunal as was the case for instance in Churchill Mining v. Indonesia. Some delegates viewed the use of such tribunal assistants with a good bit more skepticism as the use of such assistants might very well detract from the arbitrator’s own engagement of the record. In fact, several delegates noted that tribunal assistants worked in much the same way as clerks in providing substantive reasoning to the tribunal on both factual and legal questions. Some delegates noted that the arbitrator could risk becoming a quality control professional for the assistant rather than the true decision-maker in a traditional sense. The delegates agreed that the use of tribunal assistants was a reality of arbitration, and that good regulation was already in place to prevent the assistant from becoming a “fourth arbitrator” in any nefarious way.

The next session concerned the potential relevance of the Paris Agreement for investment arbitration. The delegates noted that climate change action by states might well impair existing energy and oil and gas projects. The delegates then considered how climate change regulation would be addressed in the absence of the Paris Agreement. They noted that depending upon the BIT, the issue might be dealt with differently – either by requiring a European proportionality analysis or a U.S. style takings analysis. The delegates agreed that neither of these analyses as a matter of law would provide a complete defense to states against investment claims for the good faith enactment of climate change regulations.

The delegates were reasonably agreed, however, that the reality of investment arbitration decision-making would make it next to impossible to hold a state liable for the good faith enactment of climate change regulations. Environmental concerns, the delegates noted, in practice had become akin to a complete defense as a matter of fact even if they had not yet matured into a legal defense. The delegates were quick to note that this did not preclude liability in the context of discrimination claims. Thus, proof that the state discriminated against foreign investors could give rise to state responsibility. The delegates therefore concluded that the Paris Agreement would further cement existing trends in investment arbitration rather than represent a turning point for the practice.

The fourth session asked the policy question whether ISDS was fast becoming a thing of the global south. The delegates noted that there was a significant backlash in developed economies against ISDS now that there was a real prospect that strong investment protections could create liability for developed states. The delegates suspected that this led some policymakers to express displeasure as, in their minds, investment treaties were intended to support the rule of law in developing economies rather than doing so in developed mature jurisdictions. The response therefore was to seek to recalibrate the ISDS system in such a way as to minimize the potential for such liability – all the while protecting outgoing developed state capital.

The delegates took the view that economic self-interest, as opposed to high-minded principle, caused the current political backlash against ISDS. They noted that this economic self-interest was not confined to “America First” nationalists but also pervaded the policy decisions of European officials. This dynamic creates a threat for the reign of law through dispute resolution – it provides the kindling for sustained political opposition. As the delegates noted, however, this dynamic was not unique to investment arbitration or international economic law but formed part and parcel of international law developments in general.

The delegates drew a stoic conclusion: the system of ISDS did not achieve its goals well if those goals were cast in terms of attracting foreign investment or protecting property. But the point of ISDS was not to be seen in the abstract or ideal. Rather, the virtue of ISDS was a matter of comparison. What would be the case if ISDS were abolished tomorrow? Economically strong investors would gain arguments to insist upon stronger contractual political risk protections enforceable in commercial arbitration proceedings. Economically weaker investors would be required to litigate disputes with the host state in the state’s own court system. Both alternatives to ISDS look reasonably unattractive, particularly in the context of transitional economies. The delegates therefore expressed their view that the current system of ISDS might well be modified but that its broad outlines would remain reasonably constant.

The final session focused on remedies. It noted that remedies actually awarded in investor-state arbitration were significantly below the valuations of claims undertaken by arbitration claimants. It then looked to the significant annulment challenges drawn by the remedies portions of investor-state proceedings, particularly Mobil v. Venezuela, Tidewater v. Venezuela, and Occidental v. Ecuador.

The delegates discussed that the problem in the first instance was one of law. The delegates discussed first that damages calculations crucially depended upon an understanding of the rights protected by the treaty. These rights are frequently circumscribed by host state law – meaning that damages calculations need to be cognizant of the host state law rights in supporting their damage calculations. Further, the law of state responsibility can pose a puzzle for international arbitrators. The law of state responsibility, one delegate noted, was sufficiently robust to guide investor-state dispute settlement. However, the law of state responsibility develops incrementally, meaning that the law will become clearer – and more sophisticated – with time as more cases are decided. The delegate noted that the development of jurisprudence on the contribution to injury was a good example of such a gradual development in the law of state responsibility prompted by ISDS jurisprudence.

The delegates next addressed the question whether tribunals were sufficiently diligent in supporting their damages calculations. Here again, comparative fault – or contribution to injury – loomed large. The delegates were in agreement that the damages calculations undertaken by the tribunals to establish comparative fault were reasonably crude. One delegate noted that the crude nature of the calculations was not necessitated by most arbitral records. These records typically permit a more granular engagement of contribution to injury and comparative fault than tribunals perform. This area therefore provides fertile ground for further development by practitioners and academics alike to provide more transparent – and thus better – damages awards.

The delegates finally discussed whether the use of tribunal experts might aid tribunal decision-making. The delegates were skeptical of the utility of tribunal quantum experts to the extent that quantum experts would fall into specific schools. They noted that the use of tribunal experts on questions of quantum in the past was occasioned by the absence of expert evidence from one party on the issue and thus assisted the tribunal in testing record evidence. Beyond this scenario, the delegates noted that it would be incumbent upon counsel to plead cases in a more transparent fashion to engage points raised by the opposing party. Should counsel succeed in doing so, counsel and parties might obviate the need for the tribunal to appoint yet an additional quantum expert.

The Summer Academy closed with a discussion of Antonio Parra’s second edition of the History of ICSID. The discussion highlighted the political climate in which the World Bank considered the need to introduce a facility for the resolution of investor-state disputes. Antonio Parra relayed the extraordinary vision and tenacity of ICSID’s “founding father,” Aron Broches, in the creation of ICSID. The discussion next turned to parts of the early vision of ICSID that remains as of yet unfulfilled: the creation of a renegotiation facility at ICSID to prevent legal disputes – as opposed to resolving legal disputes after they have already matured. Antonio Parra next addressed the vision of the second transformative figure of ICSID, Dr. Ibrahim Shihata. In particular, the discussion focused upon Dr. Shihata’s post-cold war vision for the bank and ICSID’s role in fulfilling it.

Freddy Sourgens and Antonio Parra

As the discussion finally brought to the fore, the history of ICSID remains as relevant as ever for its present and future – if traveled carefully. The history of ICSID provided meaningful assistance in understanding the jurisdiction ratione personae of the Center. This historical view meaningfully informed the proper placement of the Tokios Tokeles jurisdictional decision in the jurisprudence. The history further provided corroboration of the meaning of investment as set out by the MHS v. Malaysia annulment.

The discussion of the History of ICSID highlighted that ICSID through the half century of its existence has provided a valuable process for the reign of law. The creation was occasioned by an investment dispute gone wrong – the invasion of Egypt by French and British forces following the nationalization of the Suez canal. Such investment disputes gone wild became less pronounced as proxy wars associated with the Soviet-U.S. confrontation raged throughout South East Asia, Latin America, and Africa. With the demise of the Soviet-U.S. conflict, however, it would not have been implausible to expect a politicization of investment disputes akin to the days of Suez canal nationalization or the heydays of gunboat diplomacy. Instead, the disputes in question were resolved by international arbitral tribunals. These tribunals heard claims arising out of a self-proclaimed Venezuelan socialist nationalization of U.S. oil assets emulating Cuban nationalizations of foreign property. They resolved claims resulting from an Argentine financial crisis not unlike the one immediately prior to the Dirty War saw U.S. support for a military junta. They currently hear claims directly following from the occupation of Crimea by the Russian Federation. And in all these scenarios, the use of arbitration has shown that might has not always made right, the capital importer has not always succeeded, and the international community has learned that law can be a powerful conflict resolution tool. As we are debating the future of ISDS, the Summer Academy brought back to mind that these are lessons we would do well to remember.

Participants in the Summer Academy: Ian Laird (co-chair; Chairman of the Advisory Board, Investment Claims); Freddy Sourgens (co-chair, Editor in Chief, Investment Claims); Teddy Baldwin (discussion group leader); Kabir Duggal (discussion group leader); Ben Preziosi (discussion group leader); José Antonio Rivas (discussion group leader); Chiann Bao; Marinn Carlson; Filippo Fontanelli; Lise Johnson; Mark Kantor, Cameron Miles, Michael Nolan; Martins Paparinskis; Antonio Parra; Markus Wagner, Todd Weiler; Matthew Weiniger, QC; Romesh Weeramantry; Sebastian Wuschka.