Chapter 7: Conclusion & recommendations: investment arbitration - a lucrative industry built on illusions of neutrality

The existence of international investment arbitration is based to a large extent on the argument that it provides a depoliticised, neutral space to resolve disputes between multinational companies and governments. This premise was always flawed given that investment treaties only enable companies to sue states at international tribunals, yet affected communities and governments cannot make use of the same mechanism.

The lure of corporate investment persuaded governments to sign numerous international investment agreements, which have in turn fuelled a boom of investment treaty cases. As this report shows, this led to a powerful and highly lucrative arbitration industry.

The role of the arbitration industry

The alleged neutrality of arbitration is however a myth. A small group of elite arbitrators emerged promising to be neutral ‘judges’ in whom, as arbitrator William Park said, “people could entrust their wealth and welfare”. But, instead, they have used their power and influence to secure government-hostile rules and a steady flow of multimilliondollar lawsuits. A number of global law firms are also involved, multiplying arbitrations against countries. Investment funds are increasingly consolidating the investment arbitration market, bringing speculative claims.

As a result, states have to defend the rights of their citizens in a system that is shaped by vested interests. Societies in many developing nations have seen their taxes diverted as a result of financial penalties and costs imposed by arbitration. The only beneficiaries seem to have been corporations and investment lawyers.

Investment lawyers have become aggressive promoters of a skewed and unjust system on which their six- or seven-digit salaries depend. As this report shows, investment lawyers have:

  • actively encouraged cases and sometimes even pushed corporations to pursue arbitration, exploiting loopholes in investment treaties to create an explosion in the number and the costs of dispute settlement cases
  • acted behind the scenes to push countries to adopt investment treaties
  • promoted the use of vague language in treaty clauses which increases the scope for investor-friendly interpretation by arbitrators and the chances of disputes
  • tended to approach investment law from an almost exclusively commercial angle rather than public interest, ignoring or even denouncing arguments based on human rights and sustainable development
  • aggressively and successfully fought to maintain and expand the current system of investment treaties and arbitration, both through academic circles and by lobbying against reforms that would serve the public interest
  • worked alongside speculative investment funds to provide the finance for corporations to bring more cases, at the expense of states and taxpayers

These actions have not only confirmed the pro-corporate bias of current investment agreements, they have tilted the regime even further in the favour of large multinational corporations. The result is a system driven by commercial interests rather than the delivery of justice.

Scope for change

If there are investors who stay away because they feel that we don’t have old-style, dated, antiquated bilateral investment treaties in place, I can assure you there are plenty of other investors from other parts of the world who are happy to come and don’t insist on this.

Rob Davies, Trade and Industry, Minister of South Africa1

At a time when the world has seen the enormous social costs of excessive corporate control over the financial system and of short-sighted deregulation of capital, calls for reregulation and corporate accountability are increasing. Not only have investment agreements been one of the root causes of the crisis, they prevent governments from solving it2. We need a root-and-branch review of the investment regime.

Just as governments have agreed to a system that currently benefits corporations at the expense of the public interest, governments have the power to change it. The aim of attracting productive investment to fulfil people’s needs cannot be realised in the context of the current flawed framework of investment treaties.

It is for governments to follow the example of countries such as Brazil, South Africa, Bolivia and Ecuador which have either never concluded international investment treaties or have started to terminate existing agreements and have pledged to not sign new ones. Or governments could follow Australia’s example and exclude the investor-state dispute settlement process from their investment agreements, so preventing companies from suing states in international tribunals.

Even within the current international investment regime, there are a number of options that could help prevent investment lawyers and law firms from exploiting the current investor-state dispute system:

  • Investment disputes could be solved by independent and transparent adjudicative bodies, where sitting ‘judges’ enjoy objective guarantees of independence and impartiality. The roster of ‘judges’ would represent every country in the world3.
  • Tougher conflicts of interest regulations, including a binding code of conduct for investment arbitrators requiring that they can neither work as counsel nor as experts in investment cases during but also for at least 3 years before and after service on the roster (cooling-off period).
  • A cap should be imposed on the costs of lawyers and arbitrators4.
  • Clarification of the broad and vaguely formulated terms used in investment treaties, in order to prevent arbitrators from making investor-friendly (expansive) interpretations of certain obligations and to give countries policy-space to regulate.
  • Inclusion of binding investor obligations in investment treaties on issues such as environmental and human rights impact assessments, compliance with all local and national laws on health, environmental, labour and taxation issues. In this way, arbitrators will be forced to take these issues into account when deciding on cases.
  • Governments should provide pro-active lobby transparency about meetings with and advice received from members of the arbitration industry regarding their investment policies, including from law firms, chambers and individual arbitrators.

These proposals aim at increasing the neutrality and impartiality of investment arbitration and tackling conflicts of interest. They are legally viable. And yet they face resistance from the corporate world and most of the arbitration industry, which opposes any attempts to see their profits curbed. Investment lawyers have profound influence on arbitration panels, governments, academia, policymaking, and the media. They have benefited financially from the current system and are unlikely to argue for changes that challenge the status quo.

But these reform proposals will not suffice to address the most egregious injustice of the international investment regime: the exclusive right of foreign investors to threaten and initiate claims against legislative, executive or judicial decisions outside of national courts and the lack of mechanisms for communities to address corporate impunity when violations of human and environmental rights occur.

Without turning away from investor-state arbitration, the balance will remain skewed in favour of big business and a powerful and highly lucrative arbitration industry.

The states that created the investor-state arbitration system and that signed treaties granting jurisdiction are not getting what they bargained for, so they need to step in to try to tame the monster that the investor-state arbitration system has become.

Investment arbitration lawyer5

 

References chapter 7

  • 1. Marais, Jana (2012) South Africa, European Union lock horns, Business Times, 23 September, http://www.bdlive.co.za/businesstimes/2012/09/23/south-africa-european-u... [17-10-2012].
  • 2. Gallagher, Kevin (2010) Policy Space to Prevent and Mitigate Financial Crises in Trade and Investment Agreements, UNCTAD G-24 Discussion Paper Series, No. 58, May.
  • 3. Concrete proposals for this have already emerged. A working group of the Latin American regional block UNASUR has proposed a Permanent Arbitration Tribunal to solve investment disputes, where the selected arbitrators would not be allowed to hold other positions. Professor Gus Van Harten of Osgoode Hall Law School has advanced the idea of an international investment court that could replace the existing system. See, Fiezzoni, Silvia Karina (2012) UNASUR Arbitration Centre. The Present Situation and the Principal Characteristics of Ecuador’s Proposal, Investment Treaty News, January 12, http://www.iisd.org/itn/2012/01/12/unasur/ [17-10-2012]; Van Harten, Gus (2008) A Case for an International Investment Court, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1153424 [17-10-2012].
  • 4. Within UNASUR, countries have proposed a Centre for Legal Advice that could represent the interests of the states being sued and would follow the model of the Legal Centre for Dispute Settlement in the WTO, whose services are ten times cheaper than the costs of international law firms. Another proposed solution is the creation of an international standard that sets maximums on legal expenses.
  • 5. Quoted in: van Harten, Gus (2010) Academic Experts Call for Reform of Investment Treaties, http://triplecrisis.com/reform-of-investment-treaties/ [15-10-2012].