By Meric Sar
Investor-state dispute resolution (ISDR)—an international procedure that allows an investor to enter into arbitration with a foreign government for violations of their property rights—is at a difficult crossroads. Enacted through international treaties, ISDR is facing a legitimacy crisis and skepticism from all ends of the political spectrum, from developing and developed countries alike. Many critics argue that ISDR undermines human rights and states’ regulatory powers.
While ISDR is far from being flawless as a dispute resolution mechanism, many such critiques only undermine the legitimacy of a very important judicial forum that is—and has been—essential for the development of modern international law. The real risk that we are facing today is not the occasional unjust decision by an ISDR tribunal, but the systemic persistence of states in restricting the capacity of international tribunals to develop and fine-tune the substance of international law. ISDR and international investment treaties are vehicles that, if used effectively, can bridge enormous gaps between theory and advocacy at the intersection of human rights and sovereign responsibility.
HISTORY AND CONTEXT
Throughout its history, international investment law faced constant political resistance from developing countries. The legal norms developed in this field rely on a delicate political equilibrium achieved after a centuries-long, painful—and often bloody—struggle between western states and developing nations seeking to find a way to de-politicize investment disputes (see Gunboat politics). At the same time, they wanted to ensure the rule of law in nascent political systems. Especially, the notion of holding a sovereign state liable for its treatment of a foreign merchant based on an “international” law standard stood at the core of academic disputes, especially in the legal traditions of the post-colonial countries.
As the current negotiations for the Trans Pacific Partnership treaty (TPP) and Transatlantic Trade and Investment Partnership (TTIP) continue—both of which include an investor-state dispute resolution clause—the western world has strongly criticized treaty arbitration for the first time. Today, investor-state arbitration’s opponents include Joseph Stiglitz, a renowned Nobel laureate and development economist. He says, “[ISDR] is about rewriting the rules of how our economy works, tipping the balance of power in favor of big businesses at the expense of workers and the public here and in partner countries.” Yet, these concerns often tend to reflect a very narrow understanding of ISDR, which fails to grasp its essential function in the realm of international law.
Most critics argue that ISDR is inherently biased in favor of wealthy investors. However, in reality, small and mid-sized businesses and individuals have accounted for about half of all cases brought to investment treaty arbitration. Another popular argument argues ISDR as an adjudicative process constitutes an undemocratic and “arbitrary” interference with the powers of sovereign states. But, this argument represents a simplistic fallacy as well, and it ignores the foundational tenets of state responsibility under international law. An essential attribute of state sovereignty is the ability to enter into international treaties and thereby restrict a state’s own sovereign powers. On the flip side, within the same treaty, a state can empower a neutral tribunal to adjudicate any claims to be brought against itself by third parties for alleged breaches of any such treaty. The vast majority of bilateral investment treaties (BITs) executed by states (even the treaties executed between two developing countries) are almost identical in terms of their substantive provisions, often merely reflecting the minimum standards of treatment recognized under customary international law. Likewise, the “arbitrariness” claim blatantly overlooks the complexity of ISDR as a legal field. In reality, ISDR is a sophisticated system with a variety of procedural and substantive checks and balances to answer most of the concerns raised by the general public.
THE TABLES TURNING
The skepticism of ISDR in the western world particularly intensified after two controversial cases, which are currently pending before arbitral tribunals. Brought against the governments of Australia and Germany, the cases have a common theme. In both lawsuits, investors seek just compensation for the monetary effects of certain regulations on their investments. These recent regulations were adopted by both governments in the public interest to address legitimate health and environmental concerns. More interestingly, in both cases, countries that are traditionally perceived to have developed democratic institutions and judicial systems find themselves as defendants.
The fact that the plaintiffs in the cases were tobacco and nuclear power companies only amplified the public’s outrage. Why was a commercial company allowed to circumvent domestic legal systems and undermine the “democratic process” of regulatory rulemaking? How could a three-person tribunal consisting of non-judicial legal experts with no political liability be granted so much power over the policies of a democratically-elected government?
NO COUNTRY FOR ARBITRATORS
Following these cases, the Australian government became the first developed country declaring that it will stop including ISDR clauses in its future BITs. Germany and France voiced strong opposition against the inclusion of an ISDR clause in the U.S.-European trade agreement that is currently being negotiated. Likewise, the U.S. revised its model BIT by delineating greater exceptions for labor, health and environment related regulations.
The current events come after a steady trend of withdrawals, beginning in the mid-2000s, from the International Centre for Settlement of Investment Disputes (ICSID) Convention by countries such as Venezuela, Bolivia, Ecuador, and Venezuela, all of which have questionable democratic accountability records. Likewise, in 2009, Russia withdrew from Energy Charter Treaty, which envisaged an ISDR mechanism to handle the disputes arising from the treaty’s application. The future of ISDR looks even bleaker, when the recent wave of skepticism in western society about ISDR is read together with this greater picture.
This concerted effort of western states in restricting the adjudicative powers of ISDR tribunals intends to protect states’ regulatory “police powers against potential legal challenges that can be brought via ISDR. However, although the legal theory of regulatory taking argued in the aforementioned cases may sound over-the-top for the laymen, regulatory taking is a well-established doctrine under the fifth amendment of U.S. Constitution and various other national legal systems. Thus, if the regulatory taking concept—providing compensation to an investor for being unfairly singled out in bearing the burdens resulting from the adoption of a regulation—is not an alien concept to the Western legal system, then should we not expect western states to advocate for the development of similar standards under international law so that it can serve to hold undemocratic regimes responsible? More importantly, what message about the health of international law is conveyed to the rest of the world when a developed state chooses to question the legitimacy of an international dispute-resolution mechanism to which it has given binding power, rather than first honoring the remedies and raising the legal defenses made available by such a venue?
AMBIGUITY AND ARBITRARINESS IN INTERNATIONAL LAW: A STATUS-QUO PLAYING TO THE HANDS OF STATES?
In his controversial article on the current predicament of the human rights and international law, titled “The case against human rights”), Eric Posner, a professor at the University of Chicago Law School, argues that ambiguity and lack of proper interpretation mechanisms are the greatest problems facing human rights and international law.
The first problem is the ambiguity in defining human rights and international norms, which allows governments to rationalize almost anything they do. The vast quantity and diversity of rights often fall short of providing clear guidance to governments. Quite often, protection of a certain right conflicts with securing another. For example, governments often legitimize torture by claiming that torture is a necessary to ensure their citizens’ right to security. Likewise, governments use the right to self‑determination often as a defense for alleged violations of international law. The same dichotomy is valid for freedom of expression and the right to not to be discriminated. Benefiting from institutional reputation and constitutional legitimacy, domestic courts provide a permanent seat to reconcile such normative conflicts in domestic legal systems. However, the jurisdiction of international courts are often established in an ad hoc fashion, and there is not an all-encompassing international court which can serve a function in developing such norms under international law in a way similar to the one of domestic courts.
Posner points out that the lack of institutionalization as the second core problem. The lack of a consensus among states about the scope of certain rights and international norms makes it difficult to establish a hierarchical system for interpreting and enforcing norms of international law. This leaves governments with almost complete discretion on how to interpret international law and enforce their policies as they see fit. In some ways, it is a race to the bottom. In order to avoid being held liable by an international institution, states inherently hesitate to give any binding authority to any international institution at all. This causes international law to function only to the extent when there is a clear and short term benefit for a government to do so.
FINE-TUNING INTERNATIONAL LAW
Given these issues, ISDR may actually have a role to play in strengthening international law and human rights. The general skepticism of states towards international law and adjudication renders those few institutions that we have at our hands ever more valuable. And interestingly, investor-state dispute resolution turned out to be one of the few judicial venues of international law that witnessed a steady rise in the last decades in adjudicating certain claims against sovereign states. Despite the popular skepticism towards ISDR, it may prove to address the ambiguity and institutionalization problems of international law as pointed out by Posner. The problem is: how can we expect the proper development of international law without providing authority to an international tribunal to adjudicate claims addressing such problems?
Indeed, the ISDR system is not perfect. An ordinary case may take years to reach a conclusion. The legal costs associated with filing and advocating a claim may easily amount to millions of dollars. Some claims brought via ISDR amount to billions of dollars may create a heavy burden on any country’s budget, let alone for one at an especially fragile situation economically. Likewise, the dual activities of some practitioners, acting both as a lawyer and an arbitrator in different cases, pose professional and ethical problems.
But despite its inadequacies and shortcomings, ISDR represents an important evolutionary step in the development of international law. It is revolutionary in the way that it provides individuals (at least those who qualify as an “investor”) a direct standing in the interpretation and shaping of international law. By offering a venue to private advocacy, ISDR enriches the landscape of international law. Generating valuable case-law, jurisprudence of ISDR offers guidance to states and fine-tunes various norms of international law. Often acting as a venue of transnational administrative law, ISDR tribunals deal with disputes involving competing interests of individuals and governments. At the very intersection of states’ prerogative powers and their obligations under international law, the tribunals consistently try to figure out ways to reconcile the tension between international law and domestic legal systems, between democratic governance and corporate risk-taking, and between human rights and sustainable development.
Contrary to popular belief, ISDR tribunals do not adjudicate in a vacuum. An ordinary ISDR tribunal consists of reputable experts of international law, often with distinguished academic backgrounds. Different than judges who often benefit from special immunities affording them life-long job protection, arbitrators have strong incentives to preserve their reputations as fair and competent adjudicators. Theoretical predispositions of prominent arbitrators on issues of state responsibility tend to differ from each other quite often, which naturally balances out overly liberal interpretations of international law. ICSID tribunals especially work to maintain transparency and often accept amicus curiae from stakeholders in the community. Furthermore, ISDR has sophisticated procedural rules, which allow for a quasi-appellate review to ensure the fairness of awards under well-established principles.
Current criticism of ISDR fails to take into account the very important function of ISDR in fine-tuning the interpretation of international law when it meets real life conflicts. As a venue, ISDR provides us a tremendous opportunity to give meaning to what we care the most.
Meric Sar is a Staff Writer for Rights Wire.
The views expressed in this post remain those of the individual author and are not reflective of the official position of the Leitner Center for International Law and Justice, Fordham Law School, Fordham University or any other organization.
Photo credit: Marc Treble/Creative Commons