Carta Academica: It is urgent to disarm private arbitration courts

Carta Academica: It is urgent to disarm private arbitration courts
Carta Academica: It is urgent to disarm private arbitration courts

Since the remuneration of arbitrators is correlated with the number of complaints filed by investors, they have an interest in increasing the number of cases of disputes and taking advantage of the vague definition of investment protection in bilateral agreements to adopt a broad interpretation of the rules. While there were only 50 arbitration cases between 1965 and 2000, there were 1,257 listed at the end of 2022, including 890 concluded (3). Between 1987 and 2022, 37% of disputes were concluded in favor of States, but even in this case, they still have to spend on average 8 million dollars per dispute to ensure their defense against foreign investors (4). Since arbitrators may also be lawyers for the multinationals involved in the disputes, they are also subject to conflicts of interest.

Private interests versus general interest

The fundamental problem with arbitration tribunals is that they feature a pro-investor bias to the detriment of public interest standards. They operate under a model designed to resolve disputes between private commercial actors. Consequently, it is the interpretation of the terms of the contract which takes precedence, without consideration for the general interest. The vague concept of indirect expropriation allows investors to consider as such an increase in the minimum wage or the protection of a natural reserve having the effect of reducing the profits they expected at the time the agreement came into force. investment concerned. In other words, the arbitration courts have established “the logic of risk-free investment” (5). The legal advisors of multinationals do not hesitate to overestimate the losses caused by the contested policy to obtain greater compensation, or even to use false documents (6). In recent years, there has been a rapid increase in compensation awarded by arbitration courts to injured investors (7).

An expert used to participating in arbitration tribunal panels, Juan Fernández-Armesto, summed up the anti-democratic excesses of the ISDS: “I sometimes wake up at night thinking about it, and I still don’t understand how the Sovereign states were able to accept the very principle of arbitration in matters of investment. (…) Three private individuals are vested with the power to review, without the slightest restriction or appeal process, all actions of the government, all decisions of the courts, and all laws and regulations that emanate from Parliament. » (8)

The worst is that the economic and social benefits attributed to these investment protection agreements are in reality not demonstrated. This is the conclusion of the empirical study published by the OECD (9), which not only finds no solid empirical evidence that investment agreements lead to an increase in foreign investment, but also identifies a number of negative effects such as environmental and social damage, crowding out of local businesses and tax evasion.

If it is legitimate to protect investors against discriminatory measures and authoritarian expropriations, nothing justifies rules favoring private interests to the detriment of democratic choices in favor of policies of general interest. Arbitration tribunals should limit themselves to protecting investors against direct expropriations and not under any circumstances allow an investor to invoke indirect expropriation to challenge legislation of public interest.

From ISDS to ICS

To respond to growing criticism, the European Commission decided in 2016 to replace ISDS with a new mechanism, the ICS or International Court System, which it integrated for the first time in CETA and then in the agreements with Singapore and Vietnam – and which it hopes to eventually transform into a Multilateral Investment Court. Unlike the ISDS, the ICS offers the possibility of appeal and is a public tribunal with members selected from a pool of permanent members. In addition, it limits the possibility for a foreign investor to attack a State for indirect expropriation by opposing the “right to regulate” of States. CETA thus stipulates that it is necessary to carry out a case-by-case examination to determine whether or not a measure constitutes an indirect expropriation (10). It specifies that “except in rare circumstances” where the impact of a measure appears manifestly excessive, policies adopted by a State to “protect legitimate objectives of public well-being, in particular with regard to health, safety and environment, do not constitute an indirect expropriation. The ICS therefore makes it possible to reduce to “rare circumstances” the possibilities for investors to invoke indirect expropriation, but it nevertheless leaves a power of interpretation to the arbitrators.

Investors further continue to use the ISDS mechanism included in hundreds of existing investment agreements, the most concerning of which is the Energy Charter Treaty (ECT), as it is the agreement of investment generating the most arbitration between investors and States and it allows energy multinationals to demand compensation from States which decide to abandon fossil fuels. Negotiations took place between 2019 and 2021 to modernize this anachronistic treaty, but its Article 26 on the ISDS arbitration mechanism has not been open for revision. This is why the European Union, ten of its member states and the United Kingdom announced their exit from the treaty – but not Belgium because the Flemish Region wants Belgium to remain a member (11).

More generally, the ISDS clause remains applicable in hundreds of investment agreements, including nearly 1,400 signed by Member States of the European Union. It is urgent to disarm these arbitration tribunals which are incompatible with the climate objectives of the Paris Agreement, with the sustainable development objectives of the United Nations and, more broadly, with the public interest objectives that States must pursue. democratic.

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(1) UNCTAD, World Investment Report 2023: Investing in Sustainable Energy for All, United Nations, p. 71.

(2) SH Nikièma, Indirect expropriation in international investment law, Graduate Institute Publications, 2012, pp. 1-12.

(3) UNCTAD, World Investment Report 2023: Investing in Sustainable Energy for All, United Nations, pp. 78-79.

(4) D. Gaukrodger and K. Gordon, “Investor-State Dispute Settlement: a scoping paper for the investment policy community”, OECD Working Paper n°2012/3, December 15, 2012.

(5) R. Beauchard, The subjugation of nations. Controversy surrounding the settlement of disputes between States and investors, Editions Charles Léopold Mayer, 2017, p. 35.

(6) G. Kahale III, “ISDS: The wild, wild west of international law and arbitration”, Brooklyn Law School, April 3, 2018.

(7) T. Marzal, “Quantum (In)Justice: Rethinking the Calculation of Compensation and Damages in ISDS”, The Journal of World Investment & Trade, flight. 22, n°2, April 22, 2021.

(8) Friends of the Earth Europe, “The TTIP of the Anti-Democratic Iceberg”, October 2013, p. 1.

(9) J. Pohl, “Societal benefits and costs of International Investment Agreements: A critical review of aspects and available empirical evidence”, OECD Working Papers on International Investment, 2018.



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