Chapter 2: Investment treaty disputes: Big business for the arbitration industry

27.11.2012

Bilateral investment agreements can pose profound and serious risks to government policy.

South African government official1

After the Fukushima nuclear disaster the German government decided to phaseout nuclear energy. To protect public health, the governments of Uruguay and Australia introduced compulsory health warnings on cigarette packets. To redress the inequalities created by the apartheid regime, the South African government grants black people certain economic privileges.

What do these scenarios have in common?

They have all been legally challenged by companies that considered them harmful to their profits. However, they did not challenge the legislation in their respective host countries’ courts but sued the governments before an international tribunal of arbitrators in international investment disputes. In the past 20 years, many of these tribunals have granted big business dizzying sums in compensation – paid out of taxpayers’ pockets often for democratically made laws to protect the environment, public health or social well-being.

Some emblematic investor-state disputes

Corporations versus public health – Philip Morris v. Uruguay and Australia: On the basis of bilateral investment treaties (BITs), tobacco giant Philip Morris is suing both Uruguay and Australia over their anti-smoking laws. The company argues that compulsory large warning labels on cigarette packs prevent it from effectively displaying its trademarks, causing a substantial loss of market share2.

Corporations versus environmental protection – Vattenfall v. Germany I & II: In 2009, Swedish energy multinational Vattenfall sued the German government, seeking €1.4 billion (US$1.9 billion3) plus interest in compensation for environmental restrictions imposed on one of its coal-fired power plants. The case was settled out of court after Germany agreed to water down the environmental standards, exacerbating the effects that Vattenfall’s power plant will have on the Elbe river and its wildlife4. In 2012, Vattenfall launched a second lawsuit seeking €3.7 billion (US$4.6 billion5) for lost profits related to two of its nuclear power plants. The case followed the German government’s decision to phaseout nuclear energy after the Fukushima nuclear disaster6. Both actions were taken under the Energy Charter Treaty, which includes BIT-like investment protection provisions. (see box 5 on page 27)

Corporations versus black empowerment – Piero Foresti and others v. South Africa: In 2007, Italian investors sued South Africa over its Black Economic Empowerment Act which aims to redress some of the injustices of the apartheid regime. It requires, for example, mining companies to transfer a portion of their shares into the hands of black investors. The dispute (under South Africa’s BITs with Italy and Luxembourg) was closed in 2010, after the investors received new licenses, requiring a much lower divestment of shares7.

Corporations versus action against financial crises – CMS and 40 other companies v. Argentina: When Argentina froze utility rates (energy, water, etc.) and devalued its currency in response to its 2001-2002 financial crisis, it was hit by over 40 lawsuits from investors. Big Companies like CMS Energy (US), Suez and Vivendi (France), Anglian Water (UK) and Aguas de Barcelona (Spain) demanded multimillion compensation packages for revenue losses8.

Investment treaty boom creates a lucrative industry

The legal basis for these disputes is in the agreements between countries that determine the rights of investors in each other’s territories. These international investment agreements give sweeping powers to foreign investors, including the peculiar privilege to directly file lawsuits at international tribunals, without necessarily even going through the local courts. Companies can claim compensation for actions by host governments that have damaged their investments, either directly through expropriation, for example, or indirectly through regulations of virtually any kind. ‘Investment’ is understood in such broad terms that corporations can claim not just for the money invested, but for future anticipated earnings as well.

There are currently more than 3,000 such agreements9. The vast majority are bilateral investment treaties (BITs) between two countries. Others include free trade deals with investment chapters such as the North American Free Trade Agreement (NAFTA) between Canada, Mexico and the United States, and multilateral agreements such as the Energy Charter Treaty which regulates investments in the energy sector.

Since the late 1990s, these agreements have triggered a wave of investor claims against states. In 1996, only 38 investor-state disputes had been registered at the then 30-year-old World Bank International Center for Settlement of Investment Disputes (ICSID), the main handler for these arbitrations10. Its staff worried that they “would soon be empty-handed”11. They had no reason to worry. In 2011, there were 450 known investor-state cases, the majority of which were filed by corporations from industrialised countries against countries from the Global South12. With most arbitration forums subject to confidentiality, the actual number is likely to be much greater.

The stakes have also skyrocketed. In 2011, American Lawyer magazine reported on 151 investment arbitration cases that involved costs of at least US$100 million and is confident that, at the time of its next survey, the stakes will have risen even further: “Bringing a billion-dollar claim is no longer enough to stand out in a survey of international arbitration. Nor is it enough to win a measly US$100 million. Attention, arbitration lawyers: What it takes to distinguish yourself these days is a US$350 million award, minimum”13.

Bringing a billion-dollar claim is no longer enough to stand out in a survey of international arbitration. Nor is it enough to win a measly $100 million... What it takes to distinguish yourself these days is a $350 million award, minimum.

American Lawyer Magazine14

The chronology of an international investment dispute

The exact course of an investor-state arbitration case depends on the relevant rules and the institution administering the case. The majority of known cases are handled by the World Bank’s International Center for Settlement of Investment Disputes (ICSID) in Washington. The second most used rules are those of the United Nations Commission on International Trade Law (UNCITRAL). The Permanent Court of Arbitration (PCA) in The Hague, the London Court of International Arbitration (LCIA) as well as the Paris-based International Chamber of Commerce (ICC) and the Stockholm Chamber of Commerce (SCC), both business organisations, also regularly handle disputes.

Despite procedural differences, an investment arbitration case looks roughly like this:

  • Phase 1
    The arbitration process starts when a foreign investor sends a notice of arbitration to a state. Both, the investor and the state will be assisted by lawyers (counsel) during the proceedings.
  • Phase 2
    The investor and the state jointly select the arbitration tribunal. Usually each party picks one arbitrator and both jointly appoint a third to serve as chairman.
  • Phase 3
    Proceedings last years and mostly take place behind closed doors, with scant or no information at all released to the public, sometimes not even the fact that a case is on-going.
  • Phase 4
    The arbitrators ultimately determine if an award is justified and the type and size of the remedy. They also allocate the legal costs of the proceedings (see box 3). Opportunities to challenge tribunal awards are very limited and awards are rarely challenged by governments.
  • Phase 5
    States have to comply with arbitral awards. If they resist, the award can be enforced almost anywhere in the world, for example, by seizing the state’s property elsewhere.

The growth of the investment arbitration industry

As the number of international investment disputes has grown, arbitration has become a money-making machine in its own right. Arbitration lawyer Nicolas Ulmer from Swiss law firm Budin & Partners explained: “Arbitration institutions vie for their market share of disputes, legislatures pass arbitration-friendly measures to attract this business, various conference and workshops are held year round, a class of essentially full-time arbitrators has developed and a highly specialised ‘international arbitration bar’ pursues large cases avidly. A veritable ‘arbitration industry’ has arisen”15.

In fact investment arbitration is considered “possibly the fastest-developing area of international law”16. “It’s become a sexy thing to do”, Yves Derains, counsel and arbitrator with Paris-based law firm Derains & Gharavi, told the media. “It offers the chance to contribute to jurisprudence”. And an opportunity for promoting your brand. “With investment arbitrations, you can boast”17.

Blogs are littered with anecdotes about “young, up-and-coming lawyers who want to break into the international arbitration arena or seasoned veterans seeking to make a transition into this [...] legal field”18. More and more legal boutiques announce the opening of an arbitration practice in hotspots such as Paris, London, Washington and New York. Arbitration events mushroom around the globe, with droves of lawyers “dragging laptops and Blackberries in tow to ensure meeting deadlines on the arbitrations”19. Journals and websites regularly rank the biggest cases, busiest arbitrators and most in demand arbitration firms20.

Expensive consequences

The costs of investment arbitration

Investment arbitration is expensive – long before the final settlement is made. Both the state and the investor have to pay for the administration of a case. They also have to pay arbitrators, witnesses and experts who are often scattered across the globe and require translation services, travel and living allowances. And they have to pay their lawyers.

According to the United Nations Conference on Trade and Development (UNCTAD) “costs involved in investor-state arbitration have skyrocketed in recent years”21. For the known cases with available data, the Organisation for Economic Co-operation and Development (OECD) recently found that legal and arbitration costs averaged over US$8 million, exceeding US$30 million in some cases22. Compare that to the average legal costs of US$194,000 for one side in US domestic antitrust litigation23. The Philippines government spent US$58 million to defend two cases against German airport operator Fraport – the equivalent of the salaries of 12,500 teachers for 1 year, vaccination for 3.8 million children against diseases such as TB, diphtheria, tetanus, polio; or the building of 2 new airports24.

The lion’s share ends up in the pockets of the parties’ lawyers. Industry insiders estimate that more than 80% of all legal costs in arbitration are spent on counsel25. The tabs racked up by elite law firms can be US$1,000 per hour, per lawyer – with whole teams handling cases26. According to figures from ICSID, arbitrators also line their pockets, earning a US$3,000 daily fee plus travel and living allowances27.

Legal costs aren’t always awarded to the winning party. An empirical study of investment arbitration costs found that “tribunals most frequently required parties to share tribunal and administrative costs equally and absorb their own legal fees”28. This means that even when corporations do not win, taxpayers still have to pay millions in legal fees. The real winners? Law firms who collect multimillion-dollar payments, regardless of the result.

In the case of Plama Consortium v Bulgaria, for example, Bulgaria’s legal fees totalled US$13,243,357 for defending a claim that was ultimately found to be fraudulent. Although Bulgaria was awarded US$7,000,000 of these legal fees, it was still forced to pay out the remaining US$6,243,35729. At that time Bulgaria was grappling with a healthcare crisis due to a shortage of nurses – the money could have paid the salaries of more than 1,796 Bulgarian nurses30.

 If you look at ICSID awards, and in particular at the legal costs of the parties, you’ll fall off your chair. 6 million, 8 million, 12 million – just for the law firms.

Lars Markert, Gleiss Lutz31

Investment arbitration in troubled waters

Originally, investor-state arbitration was envisioned for instances of straightforward expropriation – when the government took the factory. But the system has spun out of control, with multinationals using it to chase down lost profits. The last two decades have seen a number of multimillion-dollar claims against the alleged effects of public legislation. Developed and developing countries on every continent have been challenged for tax measures, fiscal policies, bans on harmful chemicals, bans on mining, requirements for environmental impact assessments, regulations relating to hazardous waste etc32. Sometimes, the threat of a dispute has been enough to freeze government action, making policymakers realise they would have to pay to regulate33.

These legal challenges have raised a global storm of critical objection to investment treaties and arbitration. Public interest groups and academics have called on governments to oppose investor-state arbitration, claiming it fails basic standards of transparency, judicial independence and procedural fairness and threatens states’ responsibility to act in the interest of their people, economic and social development and environmental sustainability. Concerns have also been raised about the glaring absence of investor obligations and the imprecise language of many investment treaties, opening the floodgates to expansive, pro-investor interpretations of corporate rights by arbitral tribunals34.

Investor-state dispute settlement... opens the door to narrow commercial interests on matters of vital national interest and... is a direct challenge to constitutional and democratic policy-making.

South African government official35

Some countries have realised the injustices and inconsistencies of international investment arbitration and are trying to abandon the system. In spring 2011, the Australian government announced that it would no longer include investor-state dispute settlement provisions in its trade agreements. Bolivia, Ecuador and Venezuela have terminated several BITs and have withdrawn from ICSID, sending a clear political message that they refuse to co-operate in the future. Argentina, which has been swamped with investor claims related to emergency legislation in the context of its 2001-2002 economic crisis, refuses to pay arbitration awards. South Africa has announced that it will not renew old investment treaties due to expire. And India is reported to have decided not to include investor-state dispute provisions in future free trade agreements36.

The so-called users of investment arbitration, multinational companies, have come out in force to prevent any radical reform of the system37. And they have not been alone. The investment arbitration industry is by their side, propping up an unjust but lucrative system.

Investment treaty arbitration is an important legal and institutional piece of the neoliberal puzzle because it imposes exceptionally powerful legal and economic constraints on governments and, by extension, on democratic choice, in order to protect from regulation the assets of multinational firms.

Professor Gus van Harten, Osgoode Hall Law School, Toronto38

References chapter 2:

  • 1. Xavier Carim, Deputy Director General at South Africa’s Department of Trade and Industry, comment at an event on international investment agreements during the WTO Public Forum in Geneva on 25 September 2012; see: Raman, Meena (2012) BITs ‘not decisive in attracting investment’, says South Africa, SUNS – South-North Development Monitor, Thursday 27 September, http://www.sunsonline.org/contents.php?num=7446 [08-10-2012].
  • 2. Porterfield, Matthew C. and Byrnes, Christopher R. (2011) Philip Morris v. Uruguay. Will investor-State arbitration send restrictions on tobacco marketing up in smoke? Investment Treaty News, http://www.iisd.org/itn/2011/07/12/philip-morris-v-uruguay-will-investor... [27-08-2012]; IISD (2012) News in Brief. Philip Morris files for arbitration over intellectual property dispute with Australia, http://www.iisd.org/itn/2012/01/12/news-in-brief-6/ [01-09-2012].
  • 3. Based on a conversion rate of 1EUR = 1.352USD (17 April 2009).
  • 4. Bernasconi, Nathalie (2009) Background Paper on Vattenfall v. Germany Arbitration, IISD; Rechtsanwälte Günther (2012) Briefing Note. The Coal-fired Power Plant Hamburg-Moorburg, ICSID proceedings by Vattenfall under the Energy Charter Treaty and the result for environmental standards, 11 April.
  • 5. Based on a conversion rate of 1EUR = 1.244USD (31 May 2012).
  • 6. PowerShift (2012) Der deutsche Atomausstieg auf dem Prüfstand eines internationalen Investitionsschiedsgerichts? Hintergründe zum neuen Streitfall Vattenfall gegen Deutschland (II), October.
  • 7. IIAPP (2011) Foresti v South Africa (Italy-South Africa BIT), http://iiapp.org/media/uploads/foresti_v_south_africa.rev.pdf [02-09-2012].
  • 8. Phillips, Tony (2008) Argentina Versus the World Bank: Fair Play or Fixed Fight?, Center for International Policy (CIP). http://www.cipamericas.org/archives/1434 [02-09-2012].
  • 9. UNCTAD (2012) World Investment Report 2012. Towards a New Generation of Investment Policies, p. 84.
  • 10. ICSID (2012) The ICSID Caseload Statistics (Issue 2012-1), p. 7.
  • 11. Arbitration International (2008) Birth of an ICSID Case – Act I, Scene I, Arbitration International 24:1, 5-15, p. 5.
  • 12. UNCTAD (2012) Latest Developments in investor-state dispute settlement. IIA Issues Notes No 1, April, p. 1.
  • 13. Goldhaber, Michael D. (2011) High Stakes, Focus Europe. An American Lawyer supplement, summer, 19-22, p. 22.
  • 14. Ibid.
  • 15. Ulmer, Nicolas (2010) The Cost Conundrum, Arbitration International 26:2, 221-250, p. 224.
  • 16. Lalive/UNITAR (2012) Introduction to Investment Arbitration (2012), http://www.unitar.org/event/laliveunitar-introduction-investment-arbitra... [04-09-2012].
  • 17. Casley Gera, Ravinder (2007) International arbitration. Investment arbitration – The end of the boom?, http://www.chambersmagazine.co.uk/Article/International-arbitration-INVE... [17-05-2012].
  • 18. Bench Nieuwveld, Lisa (2012) How and How? The two most commonly asked questions, 16 March, Kluwer Arbitration blog, http://kluwerarbitrationblog.com/blog/2012/03/16/how-and-how-the-two-mos... [04-04-2012].
  • 19. Ibid.
  • 20. Global Arbitration Review publishes a yearly ranking of the top arbitration firms and Focus Europe, a supplement to the American Lawyer magazine, ranks the top arbitration firms, busiest arbitrators and biggest awards every two years.
  • 21. UNCTAD (2010) Investor-State Disputes: Prevention and Alternatives to Arbitration, New York and Geneva, p. 16.
  • 22. OECD (2012) Investor-State Dispute Settlement. Public Consultation: 16 May – 23 July 2012, p. 19.
  • 23. Franck, Susan (2011) Rationalizing Costs in Investment Treaty Arbitration, Washington University Law Review 88:4, 769-852, p. 812.
  • 24. Olivet, Cecilia (2011) The Dark Side of Investment Agreements, December, p. 4.
  • 25. Confirmed by a conference of practitioners in 2011, summarised here: http://kluwerarbitrationblog.com/blog/2011/10/05/arbitral-institutions-u... [19-03-2012].
  • 26. OECD (2012), see endnote 21, p. 20.
  • 27. International Center for Settlement of Investment Disputes (2008) Schedule of Fees (Effective January 1, 2012), p. 1.
  • 28. Franck, Susan (2011), see endnote 23, p. 777.
  • 29. Plama Consortium Limited v. Republic of Bulgaria (ICSID Case No.ARB/03/24).
  • 30. Based on a conversion rate of 1EUR = 1.32USD and an average monthly salary of 220€ as reported by: European Federation of Nurses Associations (2012) Caring in Crisis. The Impact of the Financial Crisis on Nurses and Nursing, p. 8.
  • 31. Markert, Lars (2012) “Investitionsrecht aus der anwaltlichen Praxis”, presentation at the International Investment Law Centre Cologne, 18 May; non-authorised translation: Pia Eberhardt.
  • 32. International Institute for Sustainable Development (2011) Investment Treaties and Why They Matter to Sustainable Development, Questions and answers, p. 7.
  • 33. Tienhaara, Kyla (2010) Regulatory chill and the threat of arbitration: a view from political science, http://ssrn.com/abstract=2065706 [16-11-2012].
  • 34. For examples of the academic critique of the investment arbitration system, see the following two statements: http://tpplegal.wordpress.com/open-letter/; http://www.osgoode.yorku.ca/public_statement. Many critical works by public interest groups can be found on the website of the Network for Justice in Global Investment: www.justinvestment.org.
  • 35. Raman, Meena (2012), see endnote 1.
  • 36. For an overview of the growing discontent with the investment arbitration system, see: UNCTAD (2012) World Investment Report 2012. Towards a new generation of investment policies, pp. 86ff.
  • 37. For example, the Australian Chamber of Commerce and Industry (ACCI) is lobbying against Australia’s move away from investor-state dispute settlement. See: http://acci.asn.au/Research-and-Publications/Media-Centre/Media-Releases....
  • 38. Van Harten, Gus (2010) Five Justifications for Investment Treaties. A Critical Discussion, Trade, Law & Development 2:1, p. 5.

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