Limits of Commercial Investor-State Arbitration: The Need for Appellate Review
Limits of Commercial Investor-State Arbitration: The Need for Appellate Review
Abstract and Keywords
This chapter explains why investor-state arbitration is often wrongfully likened to international commercial arbitration among private parties. Investor-state arbitrations involve not only private business interests but also public policies of the host state and citizen rights. Arbitral awards on investor-state disputes risk lacking credibility and democratic acceptability if they overrule, in non-transparent proceedings, democratically legitimate government decisions on grounds of investor-state contracts. Similar to the introduction of appellate review in the GATT/WTO dispute settlement system, the transparency, legitimacy, and legal coherence of investor-state arbitration could be enhanced by introduction of an appellate instance.
Keywords: investor-state arbitration, international commercial arbitration, private business interests, public policies, citizen rights, democratic acceptability, non-transparent proceedings, GATT, WHO, dispute settlement system
The concept of human rights is a wide-ranging one – its various aspects and their interactions with investors-state arbitration are ably discussed by the contributors of this book. I would like to concentrate my contribution on what I consider a ‘neglected’ human right when dealing with investors-state arbitration, namely the rights of the state hosting foreign investment and the rights of the citizens of this host state, to have their political process duly respected by arbitral tribunals acting in investment cases.
As we know it, investment arbitration has been created out of the states' decision to get out of the constraints of diplomatic protection. Many arbitrations at the turn of the 20th century, like the famous Mavrommatis 1 case, involved claims of individuals based on diplomatic protection, which means that these disputes were not really between the two states named as parties. As a consequence of two world wars, governments became increasingly reluctant to intervene on behalf of their nationals in investment or trade disputes, considering that investors' or traders' private interests were quite often not worth an international political crisis or, worse, a casus belli. Another reason for their reluctance was the increased difficulty in determining the nationality of an investor in a globalizing world where large investors frequently had a diversified capital base, a diversified management, and possibly several centres of control for their operations. Drawing investment disputes outside the ambit of inter-state dealings and transferring them to a credible depoliticized dispute settlement mechanism became a definite policy goal of a number of states, to be achieved through the new generation of investment conventions.
If the expansion of investment arbitration over the last decades corresponded in the first place to the political imperatives of preventing investment disputes (p.116) from turning into political disputes, it corresponded as well to an economic imperative: to facilitate the meteoric rise of the flow of world trade and investment by settling the disputes which unavoidably would arise along the way. In shaping investment arbitration mechanisms, the state drew heavily on the international commercial arbitration system, which had proved highly successful.
However, the analogy is fallacious. Commercial arbitration rests on firm ground. Its function is to oil the wheels of international commerce by removing the little stones – the disputes between contracting parties – which might cause the system to malfunction and which the national state courts are ill-positioned to deal with. Through a network of arbitral institutions, it administers several thousands of arbitral cases each year by a process which is basically a ‘one-stop shop’ – no recourse, except in some very limited circumstances. This is what the parties want: they know that arbitrators can err – they are just human after all – but find that bad decisions by arbitrators are a lesser evil than having a system of appellate proceedings which can drag on and on over many years, preventing the parties from putting the dispute behind them.
In disputes of investors against their host states, the frailty of the arbitral process takes on another dimension. There are not only private business interests at stake, but the actions – for instance, imposition of new taxes – taken by the legitimate and quite often democratically elected governments of host countries. These actions may be declared unlawful by an arbitral tribunal composed of three arbitrators without any elective mandate, or even the public mandate conferred on the judiciary. Any decision rendered by an arbitral tribunal disciplining a government should be convincing enough to overcome the suspicion that investment arbitration is nothing but a ploy to derail the political will of a legitimate government or, conversely, is too timid to redress the wrongs suffered by an investor for fear of confronting a powerful host country. However, there is no magic here – arbitrators in investment disputes, like arbitrators in commercial disputes, can and will err. And the consequences of their actions are different from commercial arbitration: it is not just money as in commercial arbitration which is at stake, but the public policy of the host states.
And here comes the fallacy: while it makes eminent sense for commercial arbitration to be a ‘one-stop shop’, it is a highly dangerous proposition for investment arbitration to follow that pattern. The absence of a meaningful appellate level is increasingly considered by host states and their political constituencies as an unjustifiable risk on their political process.
Optimists will say that the countries wishing to attract foreign investments have no choice, as evidenced by the over 2,500 bilateral investment treaties (BITs) in existence concluded by over 180 countries, and that the encroachment on national sovereignty by the arbitral tribunal is the price to pay for ensuring foreign investors' confidence in the host government's commitments. Investment arbitration is not perfect, they will say, but a better system is yet to be designed.
(p.117) One of the great fallacies of international relationships is a determinist belief that economic and political circumstances in fact dictate countries' policies, leaving them with no real choice. The contrary is true: countries, like people, always have choices, even if some are more difficult and painful than others, and countries dissatisfied with the way in which investment arbitration functions can opt out of it. And they prove it: Argentina flatly refuses to pay the CMS award2 as long as the award has not been upheld by the local Argentine courts – in obvious violation of the ICSID Convention. Bolivia and Ecuador have withdrawn from ICSID Convention. And Venezuela has denounced its BIT with the Netherlands, which was used by scores of investors as a route for their investment in Venezuela.
Human rights of the citizens of the states concerned require that the decisions taken by their government be not annulled by an arbitral tribunal without a possible recourse to an appellate instance which could decide de novo both on the facts and the law of the case. The investment arbitration system as a whole would gain much in credibility and acceptability. To be convinced of this, it suffices to look at the WTO. Under the former GATT system, panel decisions without recourse were often the targets of political attacks. The fact that three panelists could condemn a state's action was hard to swallow. Since the WTO has instituted an Appellate Body, the decisions have greatly gained in respectability and hence acceptability. This is certainly the way to go.
(1) Case of the Readaptation of the Mavrommatis Jerusalem Concessions (Jurisdiction), 10 October 1927, PCIJ, Series A, No 11 (1927).
(2) CMS Gas Transmission Co v Argentina, Award, 12 May 2005, ICSID Case No ARB/01/08, (2005) 44 ILM 1205; Decision of the Ad-Hoc Committee on the Application for Annulment of the Argentine Republic, 25 September 2007, ICSID Case No ARB/01/8, 44.