Retaining and Improving Investor-State Arbitration Amidst Calls for Reform

(uniquement en anglais)

par Melissa Morrow

Introduction

Once predominantly revered, investor-state arbitration has become controversial creating calls for reform from states and non-state actors with UNCITRAL hosting intensive multi-year reform discussions. In addition, we have seen en masse treaty terminations by states eliminating arbitration as an international dispute resolution method. Some states seek to replace the entire arbitration regime with an investment court-type system, while others want an appellate mechanism for arbitral awards. I argue that the well-established structure currently existing for investor-state arbitration should not be abandoned, but necessarily improved.

My analysis consists of two parts. In Part I, I look at the nature of investor-state dispute settlement (ISDS) with a specific focus on arbitration. Treaties are discussed as the source of protections for foreign investors and the authority for investors to bring their claims against the host state directly. In addition, I provide a brief overview of the institutions, structures, and widely ratified agreements currently in place which support arbitration, and I evaluate the benefits and criticisms of arbitration. In Part II, I discuss suggested reforms including an investment court-type system with appeal capabilities, a separate appellate body to the existing arbitral regime, and improvements to the current investor-state arbitration system. I favour the latter concluding that state concerns with arbitration can be addressed within the current structure of arbitration. A more constrained approach to ISDS reform is simply to allow updated treaties to dictate the goals and address the concerns of states, alongside amendments to the institutionalized rules to include heightened transparency requirements and enhancement of the pool of arbitrators. Enhancement of arbitrators can occur through updated codes of conduct which may include encouragement to decide like cases alike. Additionally, diversity amongst arbitrators themselves will subsequently result in awards that better reflect current diverse issues.

With enhancements to existing arbitration, criticisms can be overcome and the benefits that arbitration has always provided can continue to assist. Drastic reforms to ISDS will require a consensus that may be difficult, if not impossible, to achieve and at great costs. In short, I argue that there is no need to reinvent the arbitration wheel with a judicial-style system.

I. The Value of Investor-State Dispute Settlement

Investing in a foreign country poses risks to investors especially when the host country may not offer the same protections that investors are accustomed to in their home state. To encourage foreign investment and provide some reassurance to investors, many countries enter into investment treaties which provide certain protections for foreign investors. Investment treaties may take the form of bilateral investment treaties (BITs), multilateral investment treaties (MITs) or free trade agreements with an investment chapter. Most of these treaties contain dispute resolution clauses.

Arbitration is not the only form of international dispute settlement available to investors and states. Negotiation, consultation, mediation, and conciliation are also available and often investment treaties will require that parties attempt one of these non-binding procedures prior to commencing arbitration;¹ however, only arbitration is binding. Further, all methods of ISDS require the consent of the investor and the state prior to commencing any resolution method. Most traditional investment treaties proactively provide consent giving private investors standing to bring a host state to arbitration without the involvement of the investor’s state.² Investors can also bring claims in domestic courts against the state. Despite various methods of dispute settlement, investors continue to choose arbitration as their primary source of recourse³ but with waning consent by states.⁴

The International Centre for Settlement of Investment Disputes (ICSID) is the self-proclaimed “world’s leading institution devoted to international dispute settlement” and administers the majority of international investment disputes between states and investors.⁵ There are over 160 signatory and contracting states to the ICSID Convention⁶ and the Centre currently administers about 50 cases per year compared to the 1-2 cases per year following its establishment in 1965.⁷ State members can submit to arbitral awards under ICSID and these awards are enforced in the host state under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention).⁸

Non-members of ICSID may also participate in international arbitration administered through either the Permanent Court of Arbitration (PCA)⁹ or independently using established rules such as the UNCITRAL Arbitration Rules¹⁰ or the Additional Facility Rules of ICSID.¹¹ Disputing states and investors are not bound to abide by ICSID or UNCITRAL rules; however, these established rules do provide efficiencies not found in ad hoc arbitrations. Also, outside of the ICSID Convention, enforcement of an arbitral award may occur through the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).¹² Currently, there are over 150 contracting states to the New York Convention.¹³

Whether parties opt for arbitration administered through ICSID or otherwise, the common reliance on arbitration for ISDS is undeniable. However, the continued popularity of this form of ISDS requires the confidence of both investor and state.

A. Benefits of Investor-State Arbitration

Historically, foreign investors had to seek recourse within a host state’s domestic court or through diplomatic intervention from their home state. Often investors were unable to obtain any recovery in domestic courts or gain attention from their home state which dampened desire for foreign investment.¹⁴ With the establishment of ICSID, and the increasing use of arbitration to resolve disputes, it is clear that arbitration does provide benefits to disputing parties. Some of the benefits of arbitration include neutrality, flexibility, and enforcement.

A treaty may establish the framework for arbitration or the treaty may leave it up to the disputing parties to define the rules of their arbitration.¹⁵ The most common form of tribunal is an uneven number of arbitrators where each disputing party choses one to two arbitrators and then both either agree on a neutral arbitrator or agree to have the neutral member selected for them.¹⁶ The resulting effect is that the particular interests of each disputing party are represented at the table and a deciding vote in a deadlock is made by a disinterested, neutral party. In addition, arbitrations administered through ICSID or the PCA provide a neutral forum for arbitration. Whether through neutral decision-makers or a neutral location, arbitration supports neutrality.

Selection of the tribunal also highlights the flexibility of arbitration. J.G. Merrills describes arbitration as providing parties “with the opportunity to obtain a decision from a judge or judges of their own choice.”¹⁷. Investor-state disputes involve complex and specific issues and a need for the careful balancing of often conflicting interests. Given that each investor-state dispute is governed by varying treaties, the necessity for flexibility is also important. By selecting arbitrators that have substantive knowledge about the specific issues of each case, both investor and state benefit from focussed expertise.¹⁸

In addition to the selection of arbitrators, investors and host states also have the flexibility to determine procedural arrangements regarding how the arbitration will function, what issues the arbitrators must analyze, the jurisdiction of the tribunal, and what types of provisional measures arbitrators can apply.¹⁹ Many investment treaties contain a choice of law clause but if no clause exists or no specific law to apply is stipulated, the parties may agree on the law to be applied (see for instance Article 42 of ICSID.²⁰ Choices about procedure and jurisdiction are made by the parties instead of a court which demonstrates flexibility in the dispute resolution process.

Likely one of the most beneficial aspects of arbitration is the binding nature of the award. Apart from judicial settlement, most other forms of international dispute settlement are non-binding.²¹ An arbitral award is binding, only subject to annulment in limited circumstances, and arbitral awards can be enforced in the host state. Article 54 of the ICSID Convention states that domestic courts of the host state “shall treat the award as if it were a final judgment of the courts of a constituent state”.²² If a disputing party is not a member of ICSID, then arbitral awards are still enforceable under the New York Convention if the host state is a party to the Convention.²³ Given the wide ratification of states to either or both ICSID and the New York Convention, investors can rely on a guarantee of enforcement of their arbitral award in the host state of a member. A guarantee of enforcement necessarily promotes foreign investment because it boosts investor confidence.²⁴

B. Criticisms of Investor-State Arbitration

Despite the benefits of arbitration, there has been increasing criticisms and calls for reform by states among others. Common criticisms are that it constrains states from legislating legitimate domestic concerns, the process lacks transparency and consistency, there is no award verification process, and arbitrator bias favours investors.²⁵

O Thomas Johnson concludes that developed countries enter into BITs to provide increased protection for their investors while developing countries seek to encourage foreign investing in their home states.²⁶ Investment has increased because of BITs, but investor claims which create substantive restrictions on host states has also increased to create, as Johnson calls it: a “regulatory chill”.²⁷ In effect, state regulation that protects the environment, for example, subsequently may indirectly expropriate a foreign investor’s investment resulting in a large award against the state because of an important social concern. However, the new regime of investment treaties are directly addressing domestic state concerns about critical issues such as environmental protection or human rights by inserting terms that allow states to regulate in the interests of their citizens.²⁸ Within the confines of the newer model treaties, tribunals must assess investor claims considering legitimate state concerns.

Article 53 of the ICSID Convention²⁹ confirms that there is no rule of precedent in general international law and as such, there is no doctrine of precedent (stare decisis) in international law or in arbitration.³⁰ Therefore, arbitrators are not required to decide like cases alike and some argue that this leads to inconsistent awards. Additionally, while confidentiality is seen as a benefit of arbitration because arbitral awards are not required to be published without the consent of the parties, lack of publication is seen to decrease transparency.³¹

There is no appeal process within arbitration, but an annulment may be requested on certain procedural grounds such as lack of jurisdiction.³² Critics argue that without an appeal process, arbitral decisions are not subject to oversight and errors in law may result with arbitral tribunals left unrestrained.³³

There are also accusations of arbitrator bias. States claim that arbitrators favour private investors despite safeguards such as article 14 of the ICSID Convention requiring arbitrators to act impartially and independently.³⁴ Bias or lack of independence, some argue, occurs because arbitrators may have various other career roles which influence their opinions and make them sympathetic to certain arguments. States particularly argue that these biases create more awards to their detriment. ³⁵ However, Meg Kinnear, Secretary General of ICSID, stated in 2017 that “empirical evidence consistently shows that states win slightly more than half of the cases”.³⁶

II. An Evaluation of Proposed Reforms

As international arbitration continues to trend around 50 reported cases per year, there is greater importance for confidence of both investors and states in the process and decisions rendered. States terminating treaties and either not replacing them or replacing them with more confined protections and settlement dispute clauses,³⁷ indicates that some reform is desired. Possible reforms include an investment court with a built-in appellate body, a separate appellate body to the already existing arbitration system, or improvements to the existing structure of investor-state arbitration. Each option is discussed below.

A. An Investment Court

Some states are attempting to establish an investment court-type system to replace arbitration. On September 21, 2017, a trade agreement between Canada and the European Union was provisionally entered into force: The Canada-European Union Comprehensive Economic and Trade Agreement (CETA).³⁸ CETA provides for the replacement of ad hoc arbitral tribunals with a fixed tribunal of 15 members and an appointed appellant body.³⁹ Parties do not select their own three-member tribunal,⁴⁰ with the result more closely resembling a judicial body.

The European Commission is also proposing a single permanent body to decide investment disputes and gradually eliminate traditional arbitration.⁴¹ Recent decisions from the Court of Justice of the European Union regarding the inapplicability and unenforceability of the Energy Charter Treaty’s⁴² dispute resolution clause among intra-EU disputes, has fueled the European Commission’s push for an investment court system. However, discussions about an EU investment court have been ongoing since the early 2000s without ratification to date.⁴³

CETA and the European Commission’s proposition are examples of multilateral investment courts. Each multilateral treaty would have to establish a different investment “court” system or states would have to consent to using an established court’s jurisdiction.⁴⁴ The system is argued to create greater consistency in ISDS but only within each group and there are questions about enforcement. The decisions of these courts may not fit the description of “arbitral awards” under the New York Convention which allows the enforcement of arbitral awards.⁴⁵ Without the enforcement power of the New York Convention, these court awards may not be enforceable outside the parties to the agreement.

Giovanni Zarra has researched the plausibility of international investment courts and has found that there are too many complications to make them efficient.⁴⁶ Zarra argues that investment court-type systems are not desirable because of loss of party autonomy, greater politicization of the dispute and less representation for investors.⁴⁷ Having predetermined tribunal members selected by states and not investors, removes autonomy from the investor and allows states to politicize their own views through one of their appointed members.⁴⁸ Similarly, a single international investment court system will face some of the same issues as multilateral investment court systems but on a grander scale. The most difficult challenge is the concurrence of enough state members to make it effective in both functionality and enforcement whether on a multilateral or global level.

B. An Appellate Body

Currently there is no appellate function in investor-state arbitration. In addition, the ICSID Convention specifically does not allow appeals.⁴⁹ An amendment to do so would require agreement by all 150+ members of ICSID.⁵⁰ The difficulty in accomplishing this may be why the ICSID Secretariat previously withdrew from considering an appeal facility in 2004 citing lack of interest by states.⁵¹

One of the main arguments for an appellate body is to improve the reasoning of tribunals by promoting consistency or stare decisis. Critiques argue that with stare decisis parties are better able to predict the outcome of their case; however, many tribunals in arbitration already cite prior decisions as a type of de facto stare decisis. In Burlington Resources v Ecuador, the majority noted that they were not required to follow previous decisions, but stated that “subject to compelling contrary grounds, [the tribunal] has a duty to adopt solutions established in a series of consistent cases” and “has a duty to seek to contribute to the harmonious development of investment law”.⁵² Conversely, a dissenting arbitrator in the same case considered it her duty to “decide each case on its own merits, independently of any apparent jurisprudential trend”.⁵³ While the conflicting views in Burlington might point to the necessity for an appellate body to correct inconsistent views, I argue that required congruence among arbitrators can also enforce consistency.

Recourse for errors in law is another argument in favour of an appellate body. Traditionally, under BITs or MITs, annulment could only be sought from an arbitral award for administrative or functional errors. Alleged errors in law could not be appealed or annulled.⁵⁴ Despite the seeming legitimacy that an appellate body might bring, consensus to enact one is still required. If one member of the group finds fault with the appeal function, they may be able to unilaterally dispel it. The World Trade Organization’s (WTO) Appellate Body is an example where an international appeal function has essentially been eliminated. The United States has refused to appoint new members to the appellate body thereby rendering the body defunct.⁵⁵ The unilateral action by the United States shows that despite the ability to create an appellate body, if consensus is not maintained, the body is useless. Conversely, CETA is attempting to bring an appellate body into arbitration. It contains a clause that allows the appellate body to modify or reverse an award based on errors of law and fact.⁵⁶ However, it has yet to be determined if the appeal process under CETA will be effective.

One has to ask whether arbitration is so flawed that it is no longer a useful settlement dispute mechanism in foreign investment? An investment court would effectively remove party autonomy and flexibility that arbitration provides. In addition, an appeal body outside an investment court appears to be self-seeking given that most arbitration allows each party to select a tribunal member, and the ability to appeal would eliminate a basic premise of arbitration: a single and final resolution.

C. Enhancing Investor-State Arbitration

The primary concerns of states can readily be corrected by amending the treaties that provide jurisdiction for ISDS. Since states determine treaty terms among themselves and without investor approval, they can write in considerations that arbitrators must apply. New model treaties, and the termination of older treaties, exemplify that treaties are an available starting point to correcting the major concerns with arbitration. In addition, investors will better understand the confines of their investment initially through a well-defined treaty.

One of the most significant critiques from states is that arbitration limits their ability to regulate in their domestic jurisdiction over legitimate concerns such as environmental protections and human rights. However, as suggested, we have already seen countries amending their model treaties to require these types of considerations. For example, Canada’s 2021 model treaty at article 3 reaffirms that parties to the treaty can regulate to achieve legitimate policy objectives and article 4 confirms domestic regulation respecting health, safety and the environment should not be relaxed in favour of investment.⁵⁷ In addition, many states are terminating treaties that they no longer see as beneficial to their domestic goals.⁵⁸ Given that an arbitration tribunal must render their decision within the confines of the treaty that governs, the current amendments to the treaties themselves will eliminate concerns that legitimate domestic interests will be overruled.

Lack of consistency in awards has also been cited as a negative of arbitration. Stare decisis is not required in arbitration.⁵⁹ Often arbitrators are repeatedly appointed and although repeat appointments have been expressed as a critique to arbitration, consistency can result from arbitrators applying their same legal reasoning to cases with similar circumstances.⁶⁰ In addition, ICSID maintains a comprehensive database of reported arbitral decisions. More often parties to an arbitration are allowing their decisions to be published and ICSID has been compiling these decisions since 1972.⁶¹ Therefore, the ability to follow past cases is already in place. Additionally, CETA contains a requirement for tribunals to consider previous decisions that are similar to a case being arbitrated and where those cases impact each other.⁶²Encouraging the use of past decisions in modern treaties and among arbitrators through codes of conduct will provide for more consistency in awards.

In addition to amending treaties, a more appropriate solution for reform focuses on the arbitrators. Arbitrators are the main actors in arbitrations. They have great power to influence the outcome of a dispute. It would be more efficient and plausible to insert reform into the pool of arbitrators rather than revamping an entire system and then duplicating it in multiple states or trying to seek worldwide consensus for a single regime.

ICSID and UNCITRAL are working on a draft “Code of Conduct for Adjudicators in International Investment Disputes” (Code of Conduct).⁶³ The Code of Conduct is expected to increase efficiency and transparency in arbitration by addressing repeat appointments and double-hatting. Repeat appointment is not prohibited under the Code of Conduct but arbitrators must satisfy independence and impartiality requirements while disclosing appointments.⁶⁴ Double-hatting, where arbitrators act in multiple concurrent roles (such as counsel in one case and an arbitrator in another), will be permitted but only with the consent of the parties.⁶⁵ The Code of Conduct is a step towards improving transparency in arbitration.

Most recently, and also increasing transparency, the ICSID Administrative Council approved an amendment to the ICSID Rules, which comes into effect on July 1, 2022.⁶⁶ The updated ICSID rules address concerns with access, speed, transparency, and disclosure. There are now mandatory deadlines for rendering awards, expedited arbitration rules, and requirements for parties to disclose third-party funding.⁶⁷ Investors and states which use the ICSID rules will benefit from the efficiencies created in the amendments.

Diversity among arbitrators with respect to their ethnicity, gender and accustomed legal systems, is a progressive and necessary goal for any enhancement of arbitration. Diversity enhances the legitimacy of arbitration generally and specifically can eliminate some of the biases created by over-representation of one type of arbitrator.⁶⁸ A non-diverse tribunal of arbitrators is not representative of the diverse states and investors that will come before a tribunal. Investor, state and the public’s confidence is enhanced when they see varied representation among their decision makers.⁶⁹ Professor Sarah Rudolph Cole has written that in addition to arbitration diversity enhancing arbitration’s legitimacy and the perception of fairness and impartiality, arbitrator diversity enhances “equal protection, equal opportunity, and complete participation norms”.⁷⁰ Despite progress in diversity among arbitrators, in 2017 ICSID reported that 61% of appointees were from Western Europe or North America and only 3% of appointees were women.⁷¹ Often investment treaties will name a body to select the neutral member should the state and investment parties be unable to agree on the neutral member.⁷² The selecting body can encourage diversity by appointing a diverse individual as the neutral member to a tribunal. There is still a lot of work to do to increase the diversity of the arbitration pool; however, diversity is necessary to enhance arbitration.

Conclusion

The mass termination of BITs in recent years, the signing of CETA, and the European Commission’s continued push for an investment court with an appellate body evidence that reform in arbitration is desired by states. Notwithstanding these activities, the benefits that arbitration provides still exist. The arbitration process is almost entirely decided by the parties themselves. Where the arbitration will take place, who will make the decision, and which issues the decision-makers must determine are just some of the selections that the parties choose for their arbitration. These choices support neutrality, flexibility and enforcement as settled benefits of arbitration.

Discussed reforms such an investment court or an appellate body attempt to correct the criticisms of arbitration including a state’s inability to legislate domestically, lack of transparency and consistency in arbitral awards, errors in law, and alleged favouring of foreign investors. Expansive reforms to arbitration towards a judicial-type function or creation of an appellate body would require consensus of many parties and the development of new structures. Such drastic reforms would be a momentous task with conflicting state interests involved. Instead, issues with arbitration can be more efficiently addressed within the current system.

Termination and the non-renewal of treaties, and the creation of new model treaties that better represent a state’s goals are straightforward ways to address state concerns. Further, since arbitrators are the guardians of fair awards, by enhancing arbitrators and the constitution that guides arbitrators, many concerns about arbitration can be eliminated. Codes of conduct and governing rules can and have been updated, as shown by ICSID’s recent amendment to the ICSID Rules and by ICSID’s and UNCITRAL’s draft Code of Conduct. Finally, diversity among arbitrators will better reflect the diversity among states and investors leading to more representative awards. Without diversity, over-representation among arbitrators reinforces stagnant decisions that neglect current and critical issues.

Definitely arbitration needs some tuning, but to change the shape of ISDS to a court-type vessel with appeal abilities completely removes the existing benefits that arbitration provides and at great cost and effort. Instead, investor-state arbitration can be adjusted to meet concerns without drastically reforming arbitration.

Bibliography

Treaties

Comprehensive Economic and Trade Agreement, 30 October 2016 (provisionally entered into force 21 September 2017)

Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958, 330 UNTS 3 (entered into force 7 June 1959)

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Endnotes