Arbitrators’ Role in the Recent Investment Arbitration Boom

27 March 2013
Article

In the 2012 report Profiting from Injustice, jointly published by Corporate Europe Observatory and the Transnational Institute, we boldly asserted that law firms, arbitrators and third-party funders have, over the past two decades, helped maintain an investor-biased arbitration system and have fuelled the rise in investor-state disputes.[1]

Some critics have responded to the report arguing that if the arbitration system is investor-biased, the problem lay solely in the way substantive norms of protection contained in bilateral investment treaties (BITs) are formulated. Arbitrators, so the argument goes, merely apply the rules as presented to them and should not be blamed.

This line of argumentation is only partly accurate.

Certainly investment rules are too broad in scope, vaguely phrased, and contain provisions that allow corporations the right to sue governments even when their actions are meant to protect people’s basic rights or the environment. No doubt capital-exporting states, international institutions and business lobbies help shape the architecture of international investment law. Also, governments surely bear ultimate responsibility for signing biased treaties. However, we found evidence that arbitrators, particularly an elite group of them, bear considerable responsibility for promoting and perpetuating an ever-expanding investment regime that grants investors favourable treatment while generating lucrative business for the arbitrators themselves.

A small group of investment lawyers, undertaking various roles such as arbitrator-counsel, academics, policy advisers, lobbyists or media commentators, have taken positions of influence that allow them a direct role in shaping a global narrative that promotes the signing of investment treaties. These arbitrators influence the direction of the investment arbitration system in a way that expands its scope, allowing a greater pool of players to qualify as investors and place demands against states.

Arbitrators negotiate investor-biased treaties

Some of the elite arbitrators serving as government advisors have in fact negotiated investment treaties with very broad investor protection clauses. French arbitrator Jan Paulsson, for example, served as adviser to the Mexican government in the 1990s, during negotiations for investment protection rules (Chapter XI) in the North American Free Trade Agreement (NAFTA)[2]. Another prominent US arbitrator, Daniel Price, led the same negotiations on behalf of the United States. Price was later reported to have helped persuade the Mexican government to accept investor-state arbitration[3], in effect making the Mexican government abandon a provision in the Mexican constitution that only national courts have the jurisdiction to hear cases brought up by foreign investors (known as the Calvo doctrine).

These two lawyers later received lucrative appointments after companies sued Mexico for breach of NAFTA rules.

Arbitrators lobby to prevent reform in the wording of investment protection clauses

Investment clauses that lack precision give companies a chance to sue in a variety of situations that would otherwise not have been possible. The United Nations Conference on Trade and Development has warned: “[A]n expansive interpretation of minimalist treaty language can give rise to a lack of predictability in the application of the standard. This, in turn, may lead to the undermining of legitimate State intervention for economic, social, environmental and other developmental ends.”[4]

Despite this, arbitrators have consistently opposed attempts by governments to reform or reword certain clauses in existing BITs. Elite US arbitrator Charles Brower made his position clear: “My proposition is that any proposal that alters any of the fundamental elements of international arbitration constitutes an unacceptable assault on the very institution [...] Conversely, any proposal that does not attack these fundamental elements, but instead is designed to enhance them, should be considered carefully and may be found to represent an improvement to the process.”[5] Interestingly, Brower’s speech against reform was nominated by the Global Arbitration Review, an information service that caters to the legal industry, as “Best lecture or speech of 2012.”[6]

The United States, having been sued several times by Canadian companies based on investment protection rules embedded in NAFTA, moved in 2004 to review the 1994 US Model BIT. The revised text included new language that gave the US state some policy space for regulation, particularly in the areas of health and environment. But international arbitrators reacted very strongly to the US move, although the proposed changes were found inadequate by environmental and labour organisations. Prominent US arbitrator (formerly a judge at the International Court of Justice) Stephen Schwebel condemned the proposed changes[7]. Daniel Price argued against weakening the provisions in the US Model BIT[8]. Another US arbitrator, William W Park, declared the policy shift as “highly problematic,” adding that the shift will ultimately “cause significant harm to American interests abroad.”[9]

Barack Obama himself, campaigning for president in 2009, vowed to review the 2004 model BIT to increase labour and environmental obligations. When the final revisions came out in 2012, no substantive changes were in fact included[10]. Judge Schwebel was part of the government’s advisory committee and, together with the business lobbies, advocated against weakening investment protections measures.[11] He seems to have got his way.

Arbitrators’ influence was also made quite patent after the Lisbon Treaty took effect in 2009, opening the door for possible reforms to investment treaties in the European Union (EU). The European Parliament (EP) released a resolution expressing “its deep concern regarding the level of discretion [given to] international arbitrators [in making] broad interpretation of investor protection clauses,” which, the EP said, led to “the ruling out of legitimate public regulations.” The EP then called on the European Commission “to produce clear definitions of investor protection standards in order to avoid such problems in new investment agreements.”[12]

Some arbitrators put forward their views about the matter.

Canadian arbitrator Marc Lalonde expressed concern that the EU’s proposed new investment policy would weaken investor protection. He noted that it would be to Canada’s advantage to negotiate a single European BIT rather than 27 BITs, but he warned: “A proviso would be that, we don’t end up with a second rate product or a weaker product than what is available at the present time when we negotiate on a bilateral basis with individual countries.”[13]

The negotiating mandates finally approved by the European Council for investment protection chapters in free trade agreements with Canada, India and Singapore ignored the EP’s recommendations.[14]

French arbitrator Emmanuel Gaillard raised concerns about the European Commission’s proposal to phase out BITs between EU Member States (Intra-EU BITs).[15] Gaillard warned, despite inconclusive evidence, that the “effort to create a level playing field for investment in Europe will have the unintended consequence of driving companies that wish to invest in Europe away from the European Union.”[16]

Arbitrators opt for expansive interpretations of investment treaty law

A study by Professor Gus van Harten shows that arbitral tribunals tend to adopt an expansive (claimant-friendly) interpretation of investment treaty clauses.[17] These enhance “the compensatory promise of the system for claimants and, in turn, the risk of liability for respondent states,” van Harten writes. A similar observation was made recently by Singapore Chief Justice Sundaresh Menon, who noted that it was “in the interest of the entrepreneurial arbitrator to rule expansively on his own jurisdiction and then in favour of the investor on the merits because this increases the prospect of future claims and is thereby business-generating.”[18]

Arbitrators promote the ‘benefits’ of investment treaties

Arbitrators often use rousing rhetoric to encourage countries to sign investment treaties, advance laissez-faire economic policy, and promote investor and arbitration-friendly positions.

Elite arbitrator Stephen M. Schwebel has voiced the opinion that “BITs are an immense advance in the field and should be nurtured and cherished rather than denounced and undermined.” He also warned “the demise of BITs would be regressive for investors, states and the international community.”[19]

William W. Park defends transnational corporations’ economic rights. “In today’s heterogeneous world,” he writes, “cross-border investment will be chilled without a willingness of all countries to accept arbitration.” Arbitrators (like him), Park says, are politically neutral. Arbitration responds to the apprehension that host-country judges might be biased, he says. It provides “a forum that is more neutral than host country courts, both politically and procedurally.”[20]

The claim that investment agreements attract Foreign Direct Investment (FDI) is not supported by facts. A senior economist in the World Bank’s Research Department, Mary Hallward-Driemeier, warned back in 2003 that an analysis of 20-years of data on bilateral FDI flows from the OECD to developing countries showed “little evidence that BITs have stimulated additional investment.”[21] More recent studies have also shown that investment treaties are not a decisive factor in investor decision to go abroad.[22]

Other arbitrators opted to use scare tactics.

“If international arbitration goes, international economic exchanges will suffer immensely. Nothing will take its place,”[23] warned Jan Paulsson. “[I]f countries don’t sign up to BITs they will have nothing to offer and will lose the investment, as has been seen many times,”[24] warned Chilean arbitrator (and former ambassador during the Pinochet dictatorship) Orrego-Vicuña.

These apocalyptic warnings have no basis in reality. For example, Brazil never signed any BIT but enjoys the largest amount of foreign direct investment of all Latin American countries.

Arbitrators protecting their own vested interests

Arbitrators have a financial and professional stake in strengthening investor protection.[25] The most influential among them handle the heaviest caseloads in investment-treaty disputes and most of the biggest cases in terms of amounts demanded by investor claimants. A very small group of arbitrators, numbering 15 across the world, have sat in the panels of 55 per cent out of 450 investment-treaty disputes known today. And they earn handsome rewards. Unlike judges, there is no flat annual salary. Their fees range from approximately US$375 to US$700 per hour depending on the amount claimed, and subject to where and under which rules the arbitration takes place.[26] How much an arbitrator ultimately earns per case will depend in large part on the case’s duration and complexity, with fees that can easily amount to several hundreds of thousands of US dollars per case.

In addition to the arbitrator fees, which are small in comparison to what counsel may earn, the role as an arbitrator can help law firms and law chambers, to which the arbitrator is affiliated, acquire clients. This leads to significant additional income streams for the arbitrator directly or his or her firm.

The concentration of cases in so few hands suggests that these arbitrators have a significant career interest in the system. If governments started restricting the language in investment treaties, or worse, terminating these treaties, the arbitrators’ caseloads would shrink to an alarming degree. This suggests that while lax and vague rules are the key problem in investment treaties, arbitrators out to defend private profit over people’s rights and the environment are themselves a part of the problem.

There are, even within the existing system, some steps that can be taken to help to roll back the power of the arbitration industry. The report calls for a switch to independent, transparent adjudicative bodies, where arbitrators’ independence and impartiality is secured; the introduction of tough regulations to guard against conflicts of interest; a cap on legal costs; and greater transparency regarding government lobbying by the industry.

These steps, however, will not by themselves transform an investor-state arbitration system. Without governments turning away from investment arbitration, the system will remain skewed in favour of big business and the highly lucrative arbitration industry.

Authors:  Cecilia Olivet is project coordinator with the Economic Justice Programme at the Transnational Institute. Pia Eberhardt is a researcher and campaigner with the Brussels-based campaign group Corporate Europe Observatory.

 

[1] This article is based on Chapter 4 of the Report Profiting from Injustice by Corporate Europe Observatory and the TransnationalInstitute http://www.tni.org/briefing/profiting-injustice

[2] Paulsson, Jan (1995) Arbitration Without Privity, 10(2) ICSID Review – Foreign Investment Law Journal, p. 248

[3] Patel, Bimal (2006/2007) Multiple Roles for a Unified Continent: Negotiating NAFTA, p3, http://www.thepresidency.org/storage/documents/Vater/Patel.pdf  and Wilkinson, Suzanne M. (2002) NAFTA, Mexico &Metalclad, Master thesis, p.76-79, https://circle.ubc.ca/handle/2429/13062 [17-02-2013].

[4] United Nations Conference on Trade and Development (UNCTAD) (2012) Fair and equitable treatment: a sequel, UNCTAD Series on Issues in International Investment Agreements II.New York and Geneva, p21.

[5] Ross, Alison (2012) London: Build on the classic model, urges Brower, Global Arbitration Review, Volume 7 – Issue 3, 21 May, http://www.globalarbitrationreview.com/journal/article/30558/london-build-classic-model-urges-brower  [17-02-2013]

[7] Schwebel, Stephen M. (2009) A critical assessment of the US model BIT, Keynote Address at Twelfth ITF Public Conference, London, 15 May, http://www.biicl.org/files/4253_schwebel-biicl15may2009speech_cor2.pdf [17-02-2013].

[8] Alvarez, J.E. (2011) The Return of the State, Minnesota Journal of Int’l Law, 20:2, p.241, http://www.minnjil.org/wp-content/uploads/2011/07/Alvarez-Final-Version.pdf  [17-02-2013].

[9] Park, W. and Alvarez, G (2003) The New Face of Investment Arbitration: NAFTA Chapter 11, The Yale Journal of International Law, vol. 28, p. 395.

[10] Global Arbitration Review (2012) The new US model BIT: not so very different from the old version, 21 April, http://www.globalarbitrationreview.com/news/article/30488/the-new-usmodel-bit-not-so-different-old-version [17-02-2013]

[11] U.S. Department of State (2009) Report of the Subcommittee on Investment of the Advisory Committee on International Economic Policy Regarding the Model Bilateral Investment Treaty: Annexes, http://www.state.gov/e/eb/rls/othr/2009/131118.htm  [17-02-2013].

[12] European Parliament (2011) Resolution on the future European international investment policy (2010/2203(INI)), http://www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P7-TA-2011-0141&language=EN [17-02-2013].

[13] Global Arbitration Review (2010) BITs after Lisbon: what mark will the new EU treaty leave? 15 April, http://www.globalarbitrationreview.com/news/article/28287/bits-lisbonmark-will-new-eu-treaty-leave [17-02-2013].

[14] European Member States refuse necessary reform, ignore the will of the European Parliament and insist that future EU investment agreements copy their bad practices, http://www.s2bnetwork.org/fileadmin/dateien/downloads/S2B_Statement_approval_investment_mandates_110915.pdf [18-02-2013].

[15] von Krause, Christophe (2010) The European Commission’s Opposition To Intra-EU BITs And Its Impact On Investment Arbitration, Kluwer Arbitration Blog, 28 September, http://kluwerarbitrationblog.com/blog/2010/09/28/the-europeancommissions-opposition-to-intra-eu-bits-and-its-impact-oninvestment-arbitration [17-02-2013].

[16] Ross, Alison (2011) Killing off intra-EU BITs: how the European Commission plans to level the playing field for investors, Global Arbitration Review, Volume 6 – Issue 5, 17 October, http://www.globalarbitrationreview.com/news/article/29884/killingoff-intraeu-bits-european-commission-plans-level-playing-field-investors [17-02-2013].

[17] Van Harten, Gus, Arbitrator Behaviour in Asymmetrical Adjudication: An Empirical Study of Investment Treaty Arbitration (April 19, 2012). Osgoode Hall Law Journal, Forthcoming; Osgoode CLPE Research Paper No. 41/2012. http://ssrn.com/abstract=2149207[17-02-2013].

[18] Menon, Sundaresh (2012) Speech International Arbitration: The Coming of a New Age for Asia (and Elsewhere), ICCA Congress 2012. http://www.arbitration-icca.org/media/0/13398435632250/ags_opening_speech_icca_congress_2012.pdf [18-02-2013]

[19] Global Arbitration Review (2010) Judge Schwebel at 81, Volume 5 – Issue 2, 12 May, http://www.globalarbitrationreview.com/news/article/28402/judge-schwebel-81 [17-02-2013].

[20] Park, W. and Alvarez, G (2003) see endnote 9, p. 369, 396.

[21] Hallward-Driemeier, Mary (2003) Do Bilateral Investment Treaties Attract Foreign Direct Investment? Only a Bit … and They Could Bite, World Bank Policy Research Working Paper, p22, http://elibrary.worldbank.org/content/workingpaper/10.1596/1813-9450-3121 [17-02-2013].

[22] Poulsen, Lauge Skovgaard ‘The Importance of BITs for Foreign Direct Investment and Political Risk Insurance: Revisiting the Evidence,’ in: K. Sauvant, ed., Yearbook on International Investment Law & Policy 2009/2010 (New York: Oxford University Press, 2010). http://works.bepress.com/lauge_poulsen/4/[17-02-2013].

[23] Paulsson, Jan (2008) International Arbitration is Not Arbitration, Stockholm International Arbitration Review, p3.

[24] Ross, Alison (2010) From ICCA to the icecaps: an interview with Francisco Orrego Vicuña, Global Arbitration Review, Volume 5 – Issue 4, 1 September, http://www.globalarbitrationreview.com/journal/article/28666/from-icca-icecaps-interview-franciscoorrego-vicuna [17-02-2013].

[25] Van Harten, Gus (2010) Investment Treaty Arbitration, Procedural Fairness, and the Rule of Law, Chapter 20, in Ed. Stephan W. Schill, International Investment Law and Comparative Public Law. Oxford University Press, http://www.oxfordscholarship.com/view/10.1093/acprof:oso/9780199589104.001.0001/acprof-9780199589104-chapter-20 [17-02-2013].

[26] International Centre for Settlement of Investment Disputes -ICSID) fees are set at US$3000 a day, https://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=ShowDocument&ScheduledFees=True&year=2012&language=English The London Court of International Arbitration (LCIA) set the hourly rate at US$700 an hour (£450), http://www.lcia.org/Dispute_Resolution_Services/LCIA_Arbitration_Costs.aspx. [17-02-2013]. Other arbitral institutions will calculate arbitrator’s fee as a proportion of the amount in dispute (ICC).