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A Permanent Investment Court: The Future of the International Investment Regime?

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About The Author

İnayet Aydeniz Baytaş (Regular Writer)

İnayet is currently working as a Legal Assistant at Money Global finance company. She has recently completed her LLM programme at Durham University. She is originally from Turkey, and was registered with the Istanbul Bar Association in 2016. Her main areas of interest are competition law, investment law and arbitration. Outside the law, İnayet enjoys playing tennis, wind surfing,  travelling and cycling.

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©Petr Kratochvil

Such a court system will enable us to get the right balance between the interests of states and investors and the necessary democratic legitimacy by ensuring independence, accountability and transparency.

Frans Timmermans

Several flaws in the provision of investor-state dispute settlement (ISDS) for disputes over international investment agreements (IIAs) has triggered a backlash against the international investment regime. As Rebecca Von Blumenthal has explained for Keep Calm Talk Law, the ISDS allows foreign investors to bypass domestic courts and sue governments under the investment arbitration regime if their substantive rights under an IIA have been infringed. It aims to depoliticise investment disputes by providing an independent tribunal that determines whether the governments’ discriminative actions have infringed foreign investors’ rights.

However, since the 1990s, the current regime has faced criticism for restraining the fundamental right of governments to regulate in the public interest. In light of this, there have been numerous calls for reform: for example, the EU has proposed the establishment of a permanent international investment court (PIIC) to tackle the problems within the regime.

This article analyses the case for reform and the various proposals that have been advanced, concluding that the EU’s proposal for a PIIC should be preferred as it would ensure consistent awards, transparent proceedings, and independent and impartial judgements.

Main Concerns about the Current Regime

The major problems with the current regime can be divided into two categories: substantive problems and procedural shortcomings.

Substantive problems

On the substantive front, concerns have been raised that investment arbitration has enabled foreign investors to challenge public health, labour, tax and environmental policies of states when they threaten their profits with too much ease. In line with this, trends suggest that arbitrators have increasingly adopted a pro-investor interpretation to treaties that has granted protection to foreign investors at the expense of the countries’ public interest.

For instance, in Metalclad Corporation v Mexico [2000] the International Centre for Settlement of Investment Disputes (ICSID) stressed the importance of investment protection over the need to protect the environment; awarding $16.7 million damages in the investor’s favour. Meanwhile, in CMS Gas Transmission Company v Argentina [2005] and Enron Corporation v Argentina [2007], the ICSID upheld the rights of investors over Argentina’s attempt to protect public welfare. In light of these decisions, it may be argued that the current investment regime leaves the governments’ regulatory activity under threat.

Procedural shortcomings

On a procedural ground, the World Investment Report 2013 raised several issues: a lack of independence and impartiality amongst arbitrators, inconsistent awards and a transparency problem. Several features of the current system leaves these problems somewhat inevitable: for one thing, the autonomy of parties to appoint arbitrators – who lack security of tenure – can impact impartiality. Furthermore, the phenomenon of ‘changing hats’ – whereby an individual can serve as an arbitrator on one dispute, and counsel in another similar case – is likely to have an effect; reappointed persons may be influenced by their self-interest instead of complying with the rule of law.

Inconsistency has proved a major problem, with diverging interpretations of similar treaties on the same facts noticeable. Furthermore, there is no formal appeals process that can be used to challenge such potentially erroneous decisions. With respect to the lack of transparency, if disputing parties agree, the arbitration can be kept confidential even if the issue is about public interest – this seems unacceptable to the rule of law and democracy.

Consensus and Disagreement: How to Approach Reform

There is widespread consensus that these flaws necessitate reform to ISDS. According to the World Investment Report 2013, ‘at least 110 countries have reviewed their national and/or international investment policies since 2012’ and ‘at least 60 countries have developed or are developing new model IIAs’. However, different countries have either taken, or proposed, their own solutions for resolving these concerns based on their divergent economical, historical and political developments.

The Global South

For example, some countries from the Global South – for whom preserving policy space has historically been a crucial aim – are disgruntled with the current system, which they consider a threat to states’ regulatory discretion, and have begun to explore and implement alternatives. Brazil, for example, has sought to replace ISDS with state-to-state arbitration or local courts, as well as making mediation mandatory before commencing proceedings.

Similar concerns about the challenges by foreign investors against the government’s measures – which came to a head in White Industries Australia Limited v India [2011] – has resulted in changes in India, which now requires the exhaustion of local remedies before initiating the ISDS process. This has noticeable similarities with the new South African system.

However, these systems featuring state-to-state arbitrations and local remedy requirements may not be suited to the IIAs world: it may struggle to prevent such disputes from being influenced by political intervention, while demanding parties going through local courts could extend the process unduly and add considerable cost. Mediation, meanwhile, is not legally binding and may not be an efficient way of resolving the dispute entirely.

China

In recent years, China has been seeking to bolster its rapidly growing economy through entering into new deals with its trade partners. This strategy of using investment agreements to improve economic development relies heavily on the existence of investor-state arbitration and the provision of extensive protection for investors to act as an inducement. In this respect, it considers the retention of its current regime a necessity.

It is arguable that China’s belief that the retention of ISDS is necessary for its economic plans is incorrect; it no longer attracts investment flow in the way it once did. After all, Brazil – which is increasingly operating outside the international investment regime – is one of the largest recipients of foreign direct investment in South America.

However, there are reasons which may explain China’s desire to retain the status quo. On the positive side, it might be argued that – having joined the system in 2000 after opening up its economy – it has been aware of the system’s flaws and regime and taken steps to mitigate them. However, it may well be that China’s lack of experience with ISDS has not given it enough time to fully understand the extent of its deficiencies.

USA

The USA has recognised the deficiencies within its current approach – as demonstrated by its agreement with the EU to create a new investment court system for disputes that would have arisen under the now-shelved Transatlantic Trade and Investment Partnership (TTIP) – but is reluctant to engage in a complete overhaul. Instead, it favours more limited revisions that, it believes, will tackle the majority of the problems.

Whether such revisions would be sufficient to effectively tackle the flaws is questionable: the extent of the deficiencies, and the way they feature in almost every aspect of it, suggests that something more drastic is needed. 

The EU

The EU has been the major advocate for the creation of a PIIC, drawing from the positive experience it has had with similar multilateral investment courts contained within its Free Trade Agreements with, for example, Canada and Vietnam. The EU’s argument that a new approach is needed is likely to be taken seriously; the bloc is – after all – a major player on the world stage, being party to some 1400s IAAs.

Furthermore, there appears to be a clear consensus that such an approach could work. Indeed, it would follow the establishment of the Arab Investment Court, the ongoing negotiations to create a regional permanent investment tribunal under the Union of South American Nations (UNASUR), and the proposal advanced by the United Nations Conference on Trade and Development (UNCTAD).

Analysis of the Proposals for an Investment Court

The creation and operation of a PIIC would preclude investors from bringing claims via arbitration tribunals, and provide public judicial proceedings, which is suitable for public law disputes. There are several reasons which suggest that the use of a PIIC is a welcome proposal and should be adopted.

The Public Law Feature of Relevant Disputes

Arbitration on disputes arising under IIAs is different from commercial arbitration: while the former engages the regulatory relationship between state and individual, the latter involves a reciprocal relationship between juridical equals. Indeed, investment disputes arise from the exercise of the sovereign authority by the state. Hence, it can be argued that IIA arbitration is a form of public law adjudication, for which private arbitration is not an appropriate method.

Moreover, the subject of disputes might not merely be a purely commercial breach of contract. Instead, public policy concerns – such as the environment, labour rights, health and the economy – may be affected by tribunal awards. For example, the ICSID’s decision in Occidental Petroleum v Ecuador [2012] required Ecuador to pay billions of compensation, which had a huge impact on public welfare. Whereas, the ICSID’s award in Santa Elena v Costa Rica [2000] heavily reduced Costa Rica’s investment resources  for implementing environmental measures.

Furthermore, one of the major defences in international investment law is that of corruption. Clearly, corruption is an issue of public concern that falls within the realm of criminal law, rendering it unsuitable to scrutiny from private arbitrators in the confidential arbitral process. A PIIC seems to be a more appropriate instrument in dealing with such claims, as it would consist of independent judges (qualified in public international law) who would be better placed to examine the governments’ public policies.

Transparent Public Proceedings

Under the current system, the protection of corporate secrets involves rules that leave the disclosure of documents, the access to the files and the minutes of hearings dependent on parties’ consent to waive confidentiality. However, such confidentiality is at odds with the fact that many of the issues involved in arbitration on disputes arising under IIAs relate to public policy, and can have a major impact on citizens’ lives.

For example, the case of Vattenfall AB v Germany [2016] involved a high level of confidentiality, to the extent that the public could not fully access the information about the amount of compensation that was to fall upon them to pay as taxpayers. This seemed contrary to fundamental human rights, whereby individuals affected by a legal decision should have a right to know about proceedings and the decision that has impacted them.

Such confidentiality is typical of commercial disputes, but the public policy dimension of the investment regime outweighs the private law principles. Under the proposed PIIC, all information, documents and hearings would be published and subjected to public scrutiny. This would be a major increase in transparency, enhancing compliance with rule of law principles.

Consistency

At present, there are flaws in the system that are heavily damaging to legal certainty. For example, the fact that parties can appoint arbitrators – who need not be qualified in public international law – that they believe will aid their interests can lead to differing interpretations of treaty provisions. Furthermore, the absence of an accessible appellate body (the IDSD annulment committee has highly limited powers) blocks the chance for much-needed review of decisions of extreme public importance.

In contrast, the creation of a PIIC would tackle these problems. For one thing, judges appointed to the PIIC would be independent and likely be required to possess expertise in public international law that would likely enhance certainty. Furthermore, it opens the door for the creation of an appellate body with the power to uphold, modify or reverse an arbitral award.

Impartiality and Independence

One of the most significant features of the PIIC would be to ensure independent and impartial judgements by the procedure of the appointment of judges with a prescribed tenure and subject to a rigorous code of ethics. That stands in contrast to arbitrators, who are appointed by disputing parties on a case-by-case basis.

Inspiration could be drawn from the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada: here, fifteen members of the Tribunal are appointed by the CETA joint committee, which comprises of representatives from the EU and Canada. Five members must be nationals of EU Member States, five members must be Canadian nationals, and the final five members must be third-country nationals.

The absence of the security of tenure in the current regime is another major reason for the lack of judicial independence. At present, investment arbitration tribunals are constituted on an ad hoc basis that requires an arbitrator be appointed. This creates something akin to a career, whereby arbitrators have a personal interest to gain favour with parties. In contrast, after the creation of a PIIC, judges could be appointed for a term of a specified number of  years, preventing them from being influenced by the prospect of future career advancements when making decisions.

Opponents of the PIIC have claimed that governments could have control over who the judges are, such that the aim of depoliticisation of investment disputes may be failed by the political influence of certain states in appointment committees. Such claims are weak, however, as they ignore the fact that such influence has not appeared to have affected the judges on the International Court of Justice and the European Court of Human Rights, which also make crucial decisions on important disputes over international law.

Conclusion

Although there are claims that a PIIC would not be an efficient and a reliable mechanism for investor-state dispute, such claims ignore the fact that it would be a remedy for lack of transparency, consistency, independence and impartiality.

It also appears to be the most appropriate mechanism to deal with such disputes, due to the fact that as investment disputes arise from public policy matters, using the sovereignty of the states and issues of government regulations, private investor-state arbitration as an ad hoc basis may ill-suited to deal with these issues.

While there are some countries who would protest, it is clear that there is a significant group of countries – including the EU, Canada, and some in the Middle East and Latin America – who would favour the creation of a PIIC. This suggests there is an appetite for reform, if the international community is willing and ready to seize it.

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Tagged: Banking & Finance, Commercial Law, European Union, International Law, Trade

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