Overview of Research on Investment Treaty Arbitration

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Overview of research on investment treaty arbitration Gus Van Harten Osgoode Hall Law School of York University March 2014

BACKGROUND TO INVESTMENT TREATY ARBITRATION •

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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

BACKGROUND TO INVESTMENT TREATY ARBITRATION •

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

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“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 •

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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 •

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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-ofinterest claims against arbitrators

CONCERNS •

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

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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

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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

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

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

Annual number of cases

Known treaty-based cases (source: UNCTAD)

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

65 60 55 50 45 40 35 30 25 20 15 10 5 0

ICSID

Non-ICSID

TOTAL INVESTOR-STATE CASES REACHED 514 IN 2012 Cumulative treaty-based cases (source: UNCTAD)

600 Cumulative number of cases

500 400 300 200 100 0

VARIOUS TYPES OF POLICY MEASURES WERE REVIEWED

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

review of a legislative measure: review of an executive measure: review involving a judicial decision:

37% of cases 98% of cases 44% of cases

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

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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).

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 • • • •

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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

RESEARCH PROJECT ON POTENTIAL ARBITRATOR BIAS

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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)

HYPOTHESES OF ARBITRATOR BIAS

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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

PROJECT DESIGN AND IMPLEMENTATION

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development of issues template

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training of coders

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review of awards by two coders

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resolution of coding disagreements by third coder

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statistical analysis of results

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SOME LIMITATIONS OF THE PROJECT

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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

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

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

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

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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)

TENDENCY TOWARD EXPANSIVE RESOLUTIONS Issue 1 – corporate investor 2 – natural investor 3 – “investment” 4 – minority claims 5 – permissibility 6 – parallel claims 7 – MFN treatment 8 – national treatment 9 – FET and custom 10 – FET content 11 – full protection 12 – indirect expropriation 13 – umbrella clause 14 – essential security Total

Resolution of Issue Restrictive

Expansive

15% 100% 30% 08% 33% 16% 50% 65% 27% 17% 43% 28% 09% 25% 26%

85% 0% 70% 92% 67% 84% 50% 35% 73% 83% 57% 73% 91% 75% 74%

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Total resolutions 72 6 119 75 27 162 60 60 56 137 51 120 32 24 1001

TENDENCY TOWARD EXPANSIVE RESOLUTIONS JURISDICTIONAL ISSUES

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160

140

0 -­‐ RestricGve

1 -­‐ Expansive

120

Issue by resoluGon (N) 100

80

60

40

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0 1 -­‐ Corporate Person 2 -­‐ Natural Person Investor Investor

3 -­‐ Concept of Investment

4 -­‐ Minority 5 -­‐ Permissibility of 6 -­‐ Parallel Claims Shareholder Interest Investment Issue that arose

7 -­‐ Scope of MFN Treatment

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

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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

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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

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

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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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CONCENTRATION OF ARBITRATOR POWER No. of arbitrators

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% 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%

100%

649

100%

Totals: 215

CONCENTRATION OF ARBITRATOR POWER

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No. of issues resolved

No. of arbitrators

Total appointments to cases

% of total Median Mean appointments appointments appointments to cases per arbitrator per arbitrator

0 to 2

144

195

41.0%

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1.4

3 to 5

47

110

23.1%

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2.3

6 to 11

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62

13.0%

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4.8

12 to 30

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109

22.9%

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9.9

Totals:

215

476

100%

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2.21

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CONCENTRATION OF ARBITRATOR POWER

No. of No. of Expansive issues arbitrators resolutions resolved

Restrictive resolutions

Nonclassifiable 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:

401

126

122

0.76

215

SOME IMPLICATIONS OF ARBITRATORS’ ROLE •

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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?

SCANT EVIDENCE OF JUDICIAL RESTRAINT •

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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

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arbitrators rarely showed restraint due to a contractually-agreed forum

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

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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

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DUE PRIMARILY TO TREATIES: • •

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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

ADVANTAGES FOR FOREIGN INVESTORS RELATIVE TO DOMESTIC INVESTORS/ OTHER ACTORS

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DUE PRIMARILY TO ARBITRATORS:

allowance of broad-based challenges to general measures including legislation

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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

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

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 •

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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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OPTIONS FOR A JUDICIAL PROCESS

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other forms of arbitration have judicial safeguards •

random appointment of state-state arbitrators from set roster

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

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

OPTIONS FOR A JUDICIAL PROCESS •

components of judicialized investor-state arbitration •

an effective roster (unlike the ICSID roster)

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

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publicly-accountable/ merit-based appointment to the roster

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

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prohibition on double-dipping as arbitrator and lawyer

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OPTIONS FOR A JUDICIAL PROCESS •

components of judicialized investor-state arbitration •

provide for guaranteed (modest) remuneration for roster members

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binding code of conduct for roster members

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judicial model for rules of procedure

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judicial process for conflict-of-interest challenges

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OPTIONS FOR A JUDICIAL PROCESS •

potential complementary reforms • • • • •

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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