QLLM397 – Investment Treaty Arbitration- Session 3 – BIT I – Models and Key Provisions | Study Guides, Projects, Research Law

Week 3 – BIT I – Models and Key Provisions

Investor-state dispute settlement: a scoping paper for the investment policy community –

David Gaukrodger & Kathryn Gordon

Part I – ISDS in context-comparison with other international dispute settlement mechanisms

and with domestic investor-state dispute settlement mechanisms

ISDS has helped to resudece sources of intenaitonal tension and recourse to military force as

previously, disputes relating to investments would be resolved by the use of gun shot

diplomacy.

ISDS and other international dispute settlement mechanisms

BITS allow for private enforcement of international investment commitments. Where a state

is found to be in breach of its treaty obligation, the harmed investor can receive monetary

compensation or a different form of redress. ISDS is an enforcement mechanism that

promotes compliance and compensation.

ISDS’ legal basis is spread across thousands of investment treaties, conventions and

arbitration rules. The overwhelming number of BITS provide for ISDS. ISDS allows private

parties to bring claims against states and can generate large monetary rewards. The

institutional framework of ISDS draws from commercial arbitration. The WTO, international

investment law and the ECtHR provides a diversity of arrangements for three dispute

resolution systems. The differences in these three systems include:

-access to dispute settlement - investors have direct access to proceedings. Private parties can

access the ECtHR but in the WTO only WTO member states can bring cases.

-remedies – investors generally seek monetary compensation. WTO does not provide for

monetary damages. For the ECtHR, the primary remedy is declaratory but can include awards

for just compensation e.g. in expropriation.

-appeals/annulments/review and the duration of proceedings – this depends on the forum that

the dispute is brought before e.g. ICSID has annulment mechanisms. WTO parties have a

right to appeal on legal issues. Appeals at the ECtHR involve a full second hearing of the

case.

-choice of decision makers – different depending on applicable investment treaty but general

reliance on ad-hoc panels. Frequently appointed wholly or in part by the parties and

appointing authorities are also often involved. ICSID reviews awards through ad hoc

committees, ECtHR relies on a permanent body of 47 judges, WTO panels are legal

professionals with other careers.

-compensation of decision makers – parties to dispute compensate the arbitrators. WTO

arbitrators receive compensation directly from WTO, ECtHR paid out of Council of Europe

budget.

-regulation of and ethics rules for decision makers – no universal code exists but ICSID

requires independence and impartiality and sets standards for challenges to panel members.

WTO & ECtHR have specific ethics rules.

Systems of international adjudication need to be evaluated according to how well they meet

the needs of the societies they were created for.

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Week 3 – BIT I – Models and Key Provisions Investor-state dispute settlement: a scoping paper for the investment policy community – David Gaukrodger & Kathryn Gordon Part I – ISDS in context-comparison with other international dispute settlement mechanisms and with domestic investor-state dispute settlement mechanisms ISDS has helped to resudece sources of intenaitonal tension and recourse to military force as previously, disputes relating to investments would be resolved by the use of gun shot diplomacy. ISDS and other international dispute settlement mechanisms BITS allow for private enforcement of international investment commitments. Where a state is found to be in breach of its treaty obligation, the harmed investor can receive monetary compensation or a different form of redress. ISDS is an enforcement mechanism that promotes compliance and compensation. ISDS’ legal basis is spread across thousands of investment treaties, conventions and arbitration rules. The overwhelming number of BITS provide for ISDS. ISDS allows private parties to bring claims against states and can generate large monetary rewards. The institutional framework of ISDS draws from commercial arbitration. The WTO, international investment law and the ECtHR provides a diversity of arrangements for three dispute resolution systems. The differences in these three systems include: -access to dispute settlement - investors have direct access to proceedings. Private parties can access the ECtHR but in the WTO only WTO member states can bring cases. -remedies – investors generally seek monetary compensation. WTO does not provide for monetary damages. For the ECtHR, the primary remedy is declaratory but can include awards for just compensation e.g. in expropriation. -appeals/annulments/review and the duration of proceedings – this depends on the forum that the dispute is brought before e.g. ICSID has annulment mechanisms. WTO parties have a right to appeal on legal issues. Appeals at the ECtHR involve a full second hearing of the case. -choice of decision makers – different depending on applicable investment treaty but general reliance on ad-hoc panels. Frequently appointed wholly or in part by the parties and appointing authorities are also often involved. ICSID reviews awards through ad hoc committees, ECtHR relies on a permanent body of 47 judges, WTO panels are legal professionals with other careers. -compensation of decision makers – parties to dispute compensate the arbitrators. WTO arbitrators receive compensation directly from WTO, ECtHR paid out of Council of Europe budget. -regulation of and ethics rules for decision makers – no universal code exists but ICSID requires independence and impartiality and sets standards for challenges to panel members. WTO & ECtHR have specific ethics rules. Systems of international adjudication need to be evaluated according to how well they meet the needs of the societies they were created for.

Bodies of international law without compulsory IDS Various processes for promoting compliance with state commitments have been created under international environmental law, labour law and anti-corruption. Enforcement mechanisms under these bodies of international law focus on efforts to enhance domestic court and regulatory systems’ ability to uphold a country’s international commitments. Influence of ISDS on domestic dispute resolution and policy making processes ISDS often benefits investors who are faced with poorly functioning domestic dispute resolution and policy making processes. ISDS allows host states to attract investments even though domestic governance standards may be weak. An investor who is trying to resolve a dispute with a host state will keep in mind the prospects offered through international arbitration when choosing a strategy for settlement procedures. The international ISDS structure could lower incentives on the host state and international investors to improve domestic dispute resolution mechanisms. On the other hand, it could also provide strong incentives to improve domestic institutions by giving monetary compensation to investors for violating treaty standards for ‘denial of justice’ for example. Part II – Key issues in ISDS These issues involve; costs, remedies and enforcement, selection and regulation of arbitrators and consistency and predictability. Investor access to justice in ISDS – who are investor-claimants Investor-claimants range from individuals with limited international experience to multi- nationals. Costs of ISDS High cost is one of the greatest disadvantages of international arbitration. They require reform and the flexibility of rules for allocating costs are a source of uncertainty for both claimants and respondents. The largest component for costs is payment of legal counsel and experts. Due to problems with high costs, there has been a growing interest in ADR including mediation, conciliation. ADR is flexible, faster and cheaper than arbitration. UNCITRAL rules provide that costs for the arbitration shall be covered by the unsuccessful party although arbitrators have discretion to decide otherwise. However, lack on reasoning for cost allocation can raise issues of legitimacy and efficiency. Developing countries with small legal teams with little experience in international arbitration may be overwhelmed by the large resources available to investors. Small claims also could not be pursued in such an expensive system. The states party to ISDS cases are accountable to their citizens on how their taxes are used. High costs will generally play to the advantage of the financially stronger party. Remedies for breach of investment treaties

creditors can register an award and seek enforcement in any jurisdiction that is party to the New York Convention. There is an obstacle where parties must obtain execution against assets which are difficult to locate and are not subject to state immunity. These assets may be held by a state-owned corporation (which are considered as a third party). The state can also have the assets in a jurisdiction limited to sovereign assets e.g. diplomatic bank accounts which have diplomatic immunity. States have sometimes sought to obtain security for costs in advance especially where the investor appears to be a special purpose vehicle with few apparent assets. An award against a shell entity leaves a state with no meaningful means of enforcement. Third party financing TPF is composed of institutional investors who invest in litigation by providing financing in return for a stake in a legal claim and a contingency in the recovery. This typically involves a hedge fund which pays legal fees on an interim basis and they get paid a contingency fee out of the damages. The UK allows some TPF subject to the claimant maintaining control over the case, the courts have jurisdiction to require disclosure of funding and to impose liability on funders for adverse course awards, and a code of conduct for funders. TPF promotes access to justice by providing additional means for funding litigation. Conflicts of interest can arise between claimants and funders with regard to settlement over the amount that is being settled for. Sometimes claimants may be willing to accept non- pecuniary remedies whereas funders want pecuniary remedies. Funders therefore prefer ISDS which offers them pecuniary remedies as opposed to recourse to national courts as a condition of access to ISDS. Disclosure of a funder’s identity could be allowed to ensure that arbitrators are not unknowingly having inappropriate relationships with TPF of cases they’re deciding. Disclosure here would be limited to identity and not to the amount of funding. National courts have powers to sanction conduct by TPF that interferes with administration of justice. Arbitration tribunals deriving power from consent on the other hand has no power over third parties unless they have also consented to the jurisdiction of the tribunal. Some courts impose costs awards to funders where the fund cases are unsuccessful. English courts provide that the funder is not liable for the full costs but only up to the amount of funding they gave to the claimant. Arbitrators in ISDS Arbitrators are selected for each case either by the parties or by a third-party institution. Parties try to identify candidates who will be sympathetic to their case and who have integrity and persuasiveness to convince the other two arbitrators.

Characteristics of investment arbitrators as a group may influence general trends of interpretation in investment law. Arbitrators consist of an elite pool of law professionals (lawyers, professors, former judges). 50% of ISDS arbitrators have acted as counsel for investors in other ISDS cases. There could be risks to parties picking their own arbitrators: -mutual back-scratching – cases could be decided on grounds other than merit. -encouragement of unhealthy compromise solutions in order to be seen as more legitimate an arbitrator. -bias – party appointed arbitrators don’t act neutrally as required, over 95% of dissenting opinions are written by the arbitrator chosen by the losing side. -misconduct Many arbitration commentators consider that arbitrators’ strong interest in their reputation for good and impartial decision making trump economic incentives. There are also some advantages in terms of information symmetry in arbitrator selection. Information about potential arbitrators is a highly valuable commodity that is open only to those who can afford it. Coupled with knowledge about an arbitrator’s opinion on a specific matter of procedure/interpretation of treaties, this could be a great advantage to a party. Non-ICSID arbitration is regulated by the applicable arbitration rules and the laws of the state of the seat of arbitration. Only a limited number of investment treaties follow this path. ICSID arbitration is regulated by ICSID Convention and arbitration rules only. All these rules require arbitrators to be independent and disclose facts that concern their independence. This gives parties an opportunity to challenge an arbitrator’s independence to accept him/her. Repeated appointments of an arbitrator by the same side of the divide are not addressed by the arbitration rules or ethical standards. Arbitration is also vulnerable to issue conflicts because of the recurring legal issues under the same legal instruments. The dual arbitrator- counsel role raises questions of ‘due process’ where an arbitrator may be tempted to advance the interests of a client in a case he is handling as counsel. Forum shopping and treaty shopping Forum shopping – involves efforts by disputing parties to have the dispute resolved by what they believe is the most favourable forum for their interests. With the recent increase in international tribunals, international law is confronted with the challenge of managing multiple overlapping courts. If states wish to control forum shopping, they can do so by changing their consent to arbitrate or by changing the rules of the fora. Competition between tribunals may improve the quality of rulings and expediency of proceedings. Investment treaties give investors choice of more than one arbitral fora and/or rules. An investor may be able to file a claim a treaty such as the ECHR rather than an investment treaty. They can also choose to litigate in domestic courts in the host state or international arbitration. Setting precise rules for procedures in treaties limits the consequences of forum shopping. Most investment treaties engage in only limited direct regulation of ISDS. Divergence in

Part III – Investment treaty practice and ISDS Presentation of the OECD statistical survey of BITs The OECD prepared a statistical survey based of ISDS provisions from among a sample of 1660 bilateral international investment agreements concluded by 54 countries. ISDS provisions appear primarily in two places; in clauses or sections on expropriation and in specific articles/sections dealing on ISDS. Key findings -96% of the treaties contain language on ISDS including both domestic and international arbitration. -Many countries only lightly regulate ISDS in their bilateral agreements as there’s heavy reliance on arbitral rules (ICSID/UNCITRAL). -Light regulation can result in some significant differences compared to domestic procedural frameworks. -56% of treaties offer forum shopping for investors, frequently between ICSID/UNCITRAL. -Regulation of ISDS is highly diverse, most treaties deal with limited set of ISDS issues and there are many variations in details of language used to describe specific concepts. -70% of recent treaties explicitly mention domestic judicial review as a dispute settlement mechanism in their ISDS clauses. -Treaties have a long-life expectancy with an average age of 16.5 years

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