Reforming investment tribunals

 One of the advantages of living in Washington, D.C., is the chance to go to presentations and roundtables organized by the capital’s myriad think tanks. Cato is one of the best. I’m sure that statement surprises some of our readers, but it’s true. They get a lot of good people to talk about interesting issues.

In this case, the interesting issue is the horribly-named ISDS. That’s the acronym for investor-state arbitration, a subject this blog has written a lot about. Basically, the system allows foreign investors to sue governments when those governments are alleged to have expropriated (or at least damaged) their investments. The arbitral rulings are then enforced in national courts, meaning that a British investor “wronged” by the Ecuadorean government can sue for damages in an American court and have that court attach Ecuadorean assets or income streams … including, potentially, PetroEcuador’s oil sales or the proceeds from any foreign bond sales organized by the Ecuadorean government. It’s a powerful tool. And I would argue that it’s much better than a world where investors go back to their home government and ask it to bitch-slap the government that “wronged” them until it pays up.

(Of course, that still happens with some regularity, but that’s a different subject.)

The thing is, the system is profoundly undemocratic and exceedingly odd. First, the tribunals are essentially ad hoc. The parties to the dispute choose at least two of the typical three arbiters, often they choose all three. The arbiters are generally selected from a small rotating group of people … who also often act as counsel in other arbitration proceedings. (It’s like your judge in a civil was also a similar plaintiff’s lawyer.) There’s no appeal process. Decisions are (usually but not always) published but proceedings are confidential. And the system is molasses slow. It’s a goddamned mess.

(Which is why state-to-state bitch-slapping persists, but again, that’s a different subject.)

Few people care in the United States, but in Europe ISDS is a big deal. In part, that’s because Europeans are more concerned with the way the system appears to be biased towards large imperial corporate power. (In practice, the bias is less clear: governments win more than they lose. But I would argue that it nonetheless exists.) But it’s also because European governments are getting hit with seats suits; thirty at last count for poor beleaguered Spain. And Germany has been smacked with a €3.8 to €4.7 billion claim over its nuclear policies.

While I was writing The Empire Trap, I had a long conversation with Steve Haber about the arbitral system. I suggested that the system would be a lot better if it more resembled an actual judicial system, with standing courts, open proceedings, real appeals and reliance of precedent. He agreed … but added that the idea was a Nirvana thesis. Wasn’t gonna happen. He was right four years ago.

And if European governments hadn’t started getting hit with suits, he would still be right! But they did, and the European public noticed, and the European Commission was seized with the issue. Which is why I got to hear Rupert Schlegelmich, the Director General of Trade, present the European reform proposals at Cato. 

The Commission’s proposals would basically turn ISDS into the Investment Court System (ICS): a real genuine court system like the one I proposed to Steve in 2012. The Europeans would write this new system into all new bilateral investment treaties (BIT). Any BITs signed by the European Union would then supersede any old BITs signed by European national governments.

First, the European proposal would enshrine a “right to regulate” in order to insure that the system could not be used to overturn legitimate public concerns, the way the Phillip-Morris, for example, has tried to use ISDS to force Australia to pay it for losses incurred by that country’s cigarette-labeling laws.

Second, it would define “fair and equitable treatment” of investors as the following:

1. No outright denials of justice;
2. No manifest arbitrariness in state actions;
3. No discrimination on manifestly wrongful grounds;
4. No abuse, meaning coercion, duress or harassment.

Third, it would define expropriation as the following:

1. Causing substantial deprivation for the investors;
2. Causing more than an economic impact on their interests;
3. Not including “normal regulatory activities” concerning “health, safety and the environment” unless they were “manifestly excessive.”

Finally, it would create a permanent court with judges appointed by E.U. governments. Said judges (like all real judges) could not serve as lawyers in other investment disputes. Cases would be allocated randomly among the judges. And there would be full transparency in all proceedings, including video.

Wow! Sounds great. But then came Miriam Shapiro to point out with a smile that there was still a lot of daylight between the U.S. and E.U.

The United States, she pointed out, agrees with Europe that it would be a great idea to improve the selection of arbiters so as to put them “above reproach” and let tribunals rapidly dismiss frivolous cases. She also allowed that Washington would smile upon greater transparency.

She then pointed out some wrinkles where it might be hard to find common ground. Frex, how early on can the new court dismiss frivolous claims? Can states provide binding guidance on treaty interpretation before cases are brought? Who pays attorneys fee? Current tribunals can award that to one side or another; the European proposal will award those to the winner. What will the special mechanisms to make it easier for small companies to sue look like? And will there be a binding review clause to evaluate the new system after five years?

But … you can forget an American administration signing on to an appeals mechanism, even if Congress likes it. Simply put, governments win at arbitration and the U.S. wins a lot. Like, always. An appeals process could change that. From Washington’s position, what ain’t broke don’t need fixing.

Anyway, interesting stuff. If the European reform happens, it will be yuuuge, another move from global governance to something more like actual global government. Which may be why, like D.C. statehood, I’m skeptical that the European proposal will fly.

Comments

[J.H.]

Even if the European proposal doesn't fly in full perhaps Washington might be okay with:

- a permanent pool of arbiters (as opposed to judges) who would be assigned cases at random and be unable to serve as lawyers in other investment disputes

- full transparency in proceedings, including video (unless both parties to the dispute agreed otherwise)

- allowing states to provide binding guidance on treaty interpretation before cases are brought

- continuing to allow arbitral tribunals to award the attorney fees to one side or another and not necessarily the winner

I can't see them signing on to an appeals mechanism as you said, but if the four bits above were to form the basis of acceptable reform it would probably be better than the current system and at some point down the road (perhaps 50 years hence) form the basis of a true Investment Court System....

[shah8]

Heh, I found this post fascinating because I've been reading about Colombian frustration with frivolous suits...