Excerpt
Content
List of Figures
List of Abbreviations
1 Introduction
2 Development of International Investment Agreements
2.1 The Bilateral Investment Treaty as an Instrument of Investment Protection
2.2 International Investment after the Cold War
2.3 Rules and Institutions of International Arbitration
3 Current Arbitration Practice
3.1 Critique of the Arbitration system
3.2 Outcomes of ISDS Arbitration
4 Reforming the International ISDS Regime
4.1 Improving the Existing ISDS System
4.2 Establishing an International Investment Court
5 Conclusion
6 List of References
List of Figures
Figure 1 Trend of IIAs 1980-2014
Figure 2 Number of ISDS cases 1987-2014
List of Abbreviations
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1 Introduction
In the era of Globalisation international investment flows are large. Even small and medium sized companies are active in foreign countries and economies are increasingly interdependent. Despite this globalisation process there is no unified legal framework concerning international investments and the disputes which may arise from them. In this perspective global governance is lacking behind globalisation. International investment is one of the key drivers of economic development. Investors demand legal security, also in countries where domestic governance is weak in order to minimise the non-commercial risks. International Investment Agreements (IIA) between two or more countries serve as primary legal basis to govern and protect international investments and to settle disputes between investors and states. The framework of thousands of IIAs and within it the system of Investor State Dispute Settlement (ISDS) is fragmented and increasingly subject to harsh critique of providing inconsistent arbitration awards and lacking legitimacy in general.
This paper addresses the development of ISDS provisions in investment agreements and how the current system could be reformed.
Chapter two provides a historical overview of investment treaty practice, the roots of the current system and the development of private courts of arbitration. Main ISDS institutions and their rules will be introduced.
The following section will point out the arguments in favour and opposing ISDS. Critique will be made visible on examples of prominent cases as well as on overall findings from treaty analysis.
The final chapter deals with possibilities to reform, amend or even replace today’s ISDS regime. It will address most recent concluded megaregional agreements such like the Trans-Pacific Partnership (TPP) and the upcoming Trans-Atlantic Trade and Investment Partnership (TTIP) and their roles in shaping future rules which will govern international investment flows.
2 Development of International Investment Agreements
The process of Globalisation is reflected by the increasing number of Bilateral Investment Treaties since the end of the Second World War. In the first half of the 20th century the rules that governed foreign investment was customary international law. Cases of investment disputes after 1945 revealed the weaknesses of customary law between nations and induced a step forward to the making of international investment treaties. In 1947 the first attempt to create a multilateral trade organisation which rules international investment failed due to conflicts between market economies and communist countries concerning the recognition of private property (UNCTAD 2015a, pp. 121f.). Even though the so called Havana Charter failed, the part of it concerning tariff policy went into force as the General Agreement on Tariffs and Trade (GATT). The GATT formed an organisation which had competence over trade but not over investment, thus investment had to be treated separately from trade. (Vandevelde 2005, pp. 162).
The first failure of a multilateral system of investment regulations was followed by the success of a regional one. The treaty of the European Economic Community in 1957 dealt with the treatment of foreign investment and declared free capital movement to a core of the European integration (see UNCTAD 2015a, pp. 122).
On the global level trade was now under the framework of the GATT. To overcome the flaws of customary international law in terms of investment protection, bilateral treaties were recognised as necessary. Due to customary international law states had to tread foreign investment according to an international minimum standard. Problems of this method were that some countries denied that there was any minimum standard and even where the parties agreed on the existence of a standard, the definition of it was vague. In case of a dispute, the investor could not assert its claims directly against the state but depended on its home state, that it espouses a claim of the investor against the other country as its own. Because espousal is a diplomatic process, the home states were often reluctant of that measure to not trouble the political relations with the other country (Vandevelde 2005, pp. 159f.).
The United States started to increasingly introduce issues of investment protection in their treaties of Friendship, Commerce and Navigation (FCN). The US were concluding those FCN treaties since the eighteens century. Their original purpose was to establish trade relations but this was now done through the GATT, which is why the FCN appeared to be a less appropriate measure for the notion of investment protection (Vandevelde 2005, pp. 158-166).
The international investment environment after the Second World War was shaped by former colonies reaching independence, creating new economic undeveloped countries and the confrontation of the Western World with the Socialist Bloc. Former colonies were highly protective and viewed foreign investment as neo-colonialism. Thus many developing countries refused new foreign investment and expropriated existing investment. The socialist states expropriated the domestic private sector as well as assets hold by foreigners (Vandevelde 2005, pp. 166f.).
2.1 The Bilateral Investment Treaty as an Instrument of Investment Protection
The thread of uncompensated expropriation was countered by the developed countries with the creation of the Bilateral Investment Treaty (BIT). West Germany was the first country to negotiate BITs. In 1959 it signed the first bilateral investment treaties, one with Pakistan and the other with the Dominican Republic. In the early 1960s other West European countries followed those German examples (Vandevelde 2005, p. 169). In 1965 the International Centre for Settlement of Investment Disputes (ICSID) was founded as one organisation of the World Bank Group. The ICSID provides specialised facilities for conciliation and arbitration of international investment disputes between investors and host states (UNCTAD 2015a, p. 122).
From the 1960s until the end of the 80s BITs increased in number and substance. Parties to international investment agreements were mainly Western European countries with developing countries that saw the attraction of Foreign Direct Investment (FDI) as part of their development policy. The socialist countries of Eastern Europe and China but also India and Brazil first did not join any investment agreement (UNCTAD 2015a, p. 122). China first signed a BIT in 1982 with Sweden; the East European states started to conclude BITs from 1989 Brazil, India and many other developing countries followed in the 1990s (UNCTAD 2013).
The content of the BITs changed in so far, that after the Netherlands and Indonesia for the first time included Investor State Dispute Settlement provisions into a BIT in 1968, more countries adopted this approach (UNCTAD 2015a, p. 122). Contrary to this strengthening of the position of the investors, socialist and developing countries initiated resolutions in the United Nations General Assembly, one in 1962 to reinforce national sovereignty over natural resources and economic activities, the other, the so called New International Economic Order in 1974, which included the right to nationalise or transfer the ownership of foreign property to its nationals. Whereas paying compensation to investors for possible expropriation was not a specified obligation (Vandevelde 2005, p. 167f.; UNCTAD 2015a, p. 122).
BITs were a defensive reaction of developed countries to prevent its foreign investment from expropriation without compensation of the fair market value as it happened in the past and what was in line with the above mentioned United Nations (UN) resolutions. Typically, BITs were formulated by developed countries and offered to developing countries, which made the agreements broadly similar. The United States only concluded BITs which included the notion of prompt, adequate and effective compensation for expropriation, hoping that this would set a standard which would made it to a norm of customary international law even for countries that had not agreed to such a provision. Under a BIT and the included ISDS provisions investors were provided with a remedy independent of espousal of their home state and thus helped to depoliticise international investment conflicts (Vandevelde 2005, pp. 171-175).
2.2 International Investment after the Cold War
Until 1989 there were a total of 404 international investment agreements in force. The fall of the Berlin Wall and the following collapse of the Soviet Union had a massive impact on international investment policies. The transition economies of Eastern Europe and other developing countries opened their markets for foreign investment. Developing countries competing for FDI and investors from developed countries searching for production opportunities in lower cost regions and access to the local markets triggered the process of economic globalisation. In the 1990s the number of BITs increased fivefold to 2067 and nearly every country had at least a few BITs. Remarkably is the case of Brazil, which as a big, promising country concluded several agreements but never ratified any. The structure of the BITs changed in so far that more developing countries between themselves negotiated investment treaties (UNCTAD 2015a, p. 123).
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Figure 1 Trend of IIAs 1980-2014
Source: UNCTAD 2015b, p. 2.
The Uruguay Round of the GATT created the World Trade Organization (WTO) in 1995 and also provided a multilateral agreement on Trade-Related Investment Measures (TRIMs). This agreement helped to liberalise FDI flows, for instance it prohibits local content requirements if a foreign company wants to invest somewhere (WTO 2016). Another multinational agreement that was concluded during that time is the Energy Charter. Originally the Energy Charter aimed to integrate the East European energy sectors into European and world market. It liberalised cross-border trade and obliged the signatories to provide stable and transparent legal framework to promote and protect foreign investment. The Charter also contains a chapter on dispute settlement, which states that the investor may submit the dispute for resolution to the ICSID, the Stockholm Chamber of Commerce or to an arbitration tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL). The awards of arbitration are final and binding (International Energy Charter 2016, p. 32f., p. 78-81). While negotiations within the Organisation for Economic Co-operation and Development (OECD) to create a Multilateral Agreement on Investment (MAI) failed in the mid-nineties, regional approaches on setting investment rules were quite successful. For instance the Asia-Pacific Economic Cooperation introduced investment principals and the North American Free Trade Agreement (NAFTA) between Canada, USA and Mexico ensures foreign investors national treatment and the possibility of arbitration (UNCTAD 2015a, p. 123).
2.3 Rules and Institutions of International Arbitration
There are several arbitration organisations which can be used for investors and states to settle their disputes. A large sample survey of 1660 BITs finds that 93.5 % of them provide ISDS through international arbitration. Mostly this arbitration is offered in addition to the possibility of domestic proceeding (Pohl et al. 2012, p. 11). Most frequently mentioned organisations by IIA that contain ISDS clauses are the ICSID and ad hoc tribunals established under UNCITRAL rules. The International Chamber of Commerce (ICC) follows as third. While Sweden never includes the Stockholm Chamber of Commerce as an arbitration institution in its treaties, it is the most often mentioned regional arbitration organisation, other local arbitration institutions only play an insignificant role in IIA. In 2011 90 % of the BITs which mention ISDS, mention ICSID and around 60 % ad hoc tribunals under UNCITRAL rules. Around 8 % of bilateral treaties call for the establishment of individually arbitration tribunals specified by the IIA.
44 % of the BITs offer one arbitration forum to the investor, in the majority of newer treaties the investor can choose from a list of up to five different arbitration organisations (Pohl et al. 2012, pp. 20-22).
Only a small minority of BITs specify the rules of arbitration procedures, thus the majority of BITs are subject to the default set rules of the arbitration organisation, mainly the ICSID convention and UNCITRAL rules (Pohl et al. 2012, p. 24).
UNCITRAL was established by the UN in 1966 to promote harmonisation and modernisation of the law of international trade to facilitate trade among countries with different legal traditions and at different stages of economic development (UNCITRAL 2013, p. 1). The UNCITRAL arbitration rules were initially adopted in 1976, revised in 2010 and extended in 2013 by rules on transparency to make arbitrations available to the public. The rules have been used to settle investor-State, State-State and private commercial disputes. All aspects of the arbitration process, like procedural rules of appointing the arbitrators, conduct of arbitral proceedings and creating rules in relation to the form, effect and interpretation of the arbitration awards, are covered (UNCITRAL 2016).
Under UNCITRAL rules the arbitral panel consists of one arbitrator appointed by each party and a third arbitrator acting as chairman who is consensually chosen by the arbitrators. Tribunals under the ICSID framework also consist of one arbitrator designated by each party, but here the parties nominate a chairman by mutual agreement. Only very few treaties specify the qualifications of arbitrators, ICSID convention requires high competence especially in law but also commerce, industry and finance. Many treaties require that the chairman cannot be of the same nationality as one of the parties. UNCITRAL rules require arbitrators to be transparent on circumstances concerning their impartiality and independence. Under ICSID framework arbitrators who were earlier involved as conciliator or arbitrator in the dispute are incompatibility (Pohl et al. 2012, pp. 26-28). Besides that, the majority of arbitrators must be nationals of states that are not involved in the dispute. Contrary to the UNCITRAL, the ICSID provides a list of possible arbitrators (ICSID 2015). The third-often mentioned arbitration institution, the ICC in Paris, has slightly different rules. The case and the parties are kept completely confidential. To prove arbitrators impartiality they have to sign a respective statement similar to the UNCITRAL rules, but there are no provisions concerning their nationality (ICC n.d.).
As of 2011, 90 % of the BITs as well as the arbitration rules of UNCITRAL and the ICSID contain no restrictions or provisions on remedies which tribunals may award. Nevertheless, most Treaties and arbitration rules state that awards are final and binding (Pohl et al. 2012, pp. 32-36). Because many BITs don’t provide any rules for basic issues of processing the choice of the ISDS framework can be of special relevance for the disputing parties. Recently concluded treaties show a trend towards more comprehensive ISDS sections elaborated with a higher degree of detail. The ISDS issues which are covered in BITs are spread very uneven, even within one country’s set of treaties and the issues are not consistently addressed. This varying coverage of ISDS categories in one country’s treaty drafting is reflected by the high heterogeneity across countries. Multilateral treaties like NAFTA instead are influencing the treaty practice of its member states to more detailed ISDS provisions. In general, most free trade agreements contain more comprehensive ISDS sections than BITs (Pohl et al. 2012, pp. 39-42).
In case the losing party of an arbitration tribunal refuses to pay voluntarily and the court of the country in which the losing party holds its assets does not recognise the judgement, then the winning party cannot collect damages. In order to enforce the award of an arbitration court the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention, was drafted. Parties to this convention are obliged to recognise and enforce foreign awards. Under the New York Convention, an arbitral award rendered in one member state shall be enforced by the courts of all other member states (Argen 2014, pp. 221-224).
3 Current Arbitration Practice
The amount of international investment agreements increased sharply in the 1990s. After the first award in a case under an arbitration tribunal was issued in 1990, a growing number of investors somehow discovered the mechanism of ISDS and the number of new cases increased rapidly in the 2000s.
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Figure 2 Number of ISDS cases 1987-2014
Source: UNCTAD 2015b, p. 5.
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