A Defence of Investor-State Dispute Settlement
Introduction
Investor-State Dispute Settlement (ISDS) has been the object of vocal criticism in recent years. These critiques commonly allege that (I) ISDS tribunals disproportionately issue ‘pro-investor’ awards by biasedly and expansively interpreting Bilateral Investor Treaty (BIT) investor protections; (II) ISDS awards are often inconsistent, thus undermining the establishment of a coherent body of law, and; (III) BIT arbitration clauses grant foreign investors unnecessary procedural rights by enabling them to bypass national courts. It is enormously important to analyse these claims critically, not only because they strike at the very legitimacy of ISDS arbitration but also because they are being used to justify establishing a ‘multilateral investment court’ as an alternative to the International Centre for the Settlement of Investment Disputes (ICSID). This essay shall critically examine the three allegations outlined above, assessing their validity in view of available statistics and established international arbitration law practices, illustrating why they should be dismissed from the current debate on ISDS reform.
Do ISDS Arbitral Tribunals Expansively Interpret BITs to Unfairly Favour Foreign Investors?
Before examining the merits of criticism (I), this essay must first establish what can be classified as a ‘pro-investor’ arbitral award. This prima facie excludes outcomes dismissing the claims brought by the investor or successful counterclaims brought by a state. In contrast, an award where the investor wins on the merits and receives an entitlement to compensation from the opposing state can be considered ‘pro-investor.’ Having defined what a ‘pro-investor’ award is, this essay can now examine whether criticism (I) is justified in view of available evidence. In this context, it logically follows that criticism (I) must rely on quantitative and qualitative data demonstrating that ISDS arbitral tribunals disproportionately issue ‘pro-investor’ awards. So what does the data say?
Notably, the 2014 World Investment Report of the United Nations Conference on Trade and Development (UNCTAD) provided that out of 274 concluded cases, 43 per cent resulted in ‘pro-state’ arbitral awards, while only 31 per cent resulted in awards that can be considered ‘pro-investor.’ The remaining 27 per cent of cases were settled between the parties. Additionally, ICSID caseload statistics from the same period found that 53 per cent of all investor claims were dismissed at the merits stage or for lack of jurisdiction, while only 46 per cent of arbitral awards partially or fully upheld investor claims. Far from indicating a clear pro-investor bias dictating ISDS awards, the UNCTAD and ICSID findings arguably illustrate a careful balance between respecting the sovereign prerogative of governments to amend their FDI laws and protecting investor interests.
What counter-arguments can be provided against the above conclusion? For one, it can be argued that these statistics do not fully undermine criticism (I) as they only show that investors do not win most ISDS arbitrations. Instead, critics of the ISDS system are asking whether investors win more cases than they should win due to a pro-investor bias. Determining whether such biases exist is a difficult task. Indeed, a report by Osgoode Hall Law School reached the unsatisfactory view that no conclusive empirical data exists to prove or disprove the presence of systemic biases in international arbitration. While this noted lack of evidence is itself fatal to criticism (I), this essay shall (for the sake of argument) assume that arbitral tribunals still adopt a broad interpretation of BIT provisions to issue ‘pro-investor’ awards disproportionately. In this context, it is necessary to ask what factors (aside from unsubstantiated biases) may explain the frequency of these interpretations and their outcomes. A potential answer may relate to the intention of the states themselves.
The fact that BITs contain expansive definitions of protected investments and generous legal protections for investors (such as guarantees against the direct expropriation of their assets) reflects a conscious calculation by states to mitigate their internal commercial and political risks to attract as much FDI as possible. In other words, the existence of pro-investor attitudes in the arbitration process may not be the outcome of an arbitral tribunal’s ‘creativity’ but specifically the broad wording of the concerned BIT (as intended by the parties), which acts as a foundational ‘frame’ for the tribunal’s reasoning. This view would be consistent with the principle in Methanex Corporation v. United States of America, which established that arbitral tribunals must conduct their legal interpretation with due regard to the intended objective and purpose of the concerned BIT. Ergo, it would be difficult to one-sidedly portray an expansive interpretive approach as favouring investors when ISDS arbitrators would only be giving effect to the express intention of the concerned state.
Having established that investors continue to lose more arbitrations than states (meaning that tribunals are not disproportionately pro-investor) and that expansive interpretations of BIT provisions can be reasonably explained without assuming the presence of pro-investor biases, it can be concluded that criticism (I) is largely unsupported. This essay can now proceed to address criticism (II).
Is it Reasonable to Expect ISDS Arbitral Awards to Avoid Inconsistencies?
Concerning criticism (II), ISDS arbitration tribunals have undoubtedly rendered inconsistent awards vis-à-vis similar or identical factual circumstances (one only needs to compare CMS v. Argentine Republic and LG&E v. Argentine Republic to illustrate this point). Thus, the appropriate question is whether this fact can be used to fairly criticise the ISDS system for ‘failing’ to establish a coherent body of international investment law. These criticisms are arguably unfair for the following two reasons.
Firstly, inconsistencies in ISDS awards are a foreseeable consequence of the reality that international investment law cannot be conveniently extracted from a consolidated source. There is, frankly, no multilateral treaty governing this entire area of law. Indeed, over 3,000 BITs and other agreements are currently in force to provide legal rights to foreign investors, all of which have been negotiated between different parties and, consequently, accommodate unique needs. Given that arbitrators are bound by the provisions of a specific BIT and the signatories' intention, the fragmented nature of investment agreements is a major obstacle precluding convergence. Hence, when ISDS tribunals produce inconsistent outcomes, this merely reflects the inherently divergent nature of ISDS disputes and is not evidence of an incompetent dispute resolution system. Proponents of criticism (II) overlook this fact.
Secondly, criticism (II) suffers from a similar lack of evidence as criticism (I). Only a minority of the 580 known ISDS awards have been made subject to accusations of inconsistency, and no comprehensive study has yet to indicate the full scope of this issue. This opens uncomfortable questions for proponents of criticism (II). Namely, is the problem they allege so systematic as to justify a negative portrayal of the entire ISDS system? Arguments that ISDS tribunals have created widespread inconsistencies in the law will remain premature until that question can be answered.
In view of the above points, it is arguable that criticism (II) ignores fundemental features of ISDS disputes and lacks evidential grounding. It cannot, therefore, be considered a fair critique of the ISDS system. Having established this, this essay can now examine the merits of criticism (III).
Do BIT Arbitration Clauses Necessarily Enable Foreign Investors to Bypass National Courts, And (if so) Is This Warranted?
Criticism (III) relies on the following two assumptions: (a) BIT arbitration clauses inherently enable investors to bypass national judicial mechanisms, and (b) it is not necessary for investors to have access to international arbitration mechanisms, given the availability of domestic courts. Are these assumptions reasonable? Arguably not. Concerning assumption (a), there is nothing to suggest that BIT arbitration always permit foreign investors to bypass national courts by design. Article 26 of the ICSID Convention permits states to require the exhaustion of “local administrative or judicial remedies” as a precondition for consenting to arbitration, and investment tribunals have generally given force to such provisions. In Dede and Elhüseyni v. Romania, the tribunal declined jurisdiction, reasoning that the investor failed to satisfy the relevant arbitration clause, which required that arbitration proceedings only commence if local remedies had been exhausted or domestic litigation had extended past one year. Hence, whether domestic courts can be bypassed depends on the state's discretion in constructing the arbitration clause and is not a result of an internal deficiency within the ISDS system.
Concerning assumption (b), even if specific BITs enable foreign investors to bypass domestic courts, there are compelling reasons justifying this right, all of which are overlooked by criticism (III). Firstly, certain jurisdictions may outright forbid submitting BIT or international law claims to national courts (observe, for example, how Canadian or U.S. courts could not adjudicate NAFTA-based claims), leaving foreign investors without any remedies whatsoever. Secondly, there is always the risk that domestic courts will act partially or be unduly influenced to produce judgements contravening the rule of law. This was a pertinent issue in the unforgettable Yukos Shareholders v. Russian Federation ruling, which found that it was practically impossible for the Yukos shareholders to have recourse to domestic courts due to their lack of independence from the Russian state. Therefore, granting direct access to arbitration procedures is an important mechanism ensuring international and domestic parties are equally treated according to minimally set global standards. Thirdly, arbitration procedures generally cost the disputing parties less time (and financial resources) than traditional litigation routes. In this context, while ISDS arbitrations have an average lifespan of 3.6 years, this is still more expedient than utilising many domestic legal systems, including those in developed countries.
The potential inadequacies of domestic dispute settlement mechanisms should also be highlighted. Depending on the jurisdiction, a disputing party may unfairly exploit the pervasive inefficiencies of national courts. Take, for example, the so-called ‘Italian torpedo’ tactic. This is essentially an abuse of the Lis Pendens rule, which provides that if a court is actively seized on a particular dispute, a court within a second jurisdiction cannot adjudicate on the same matter. Parties have strategically instrumentalised this rule to postpone (hoping to force the abandonment of) dispute proceedings by filing actions in states with notoriously slow and overstretched legal systems. This further illustrates why bypassing national courts can be instrumental in ensuring dispute proceedings' fairness and integrity.
Given the above arguments, criticism (III) is clearly misplaced. BIT clauses can require the exhaustion of domestic remedies as a precondition to the initiation of arbitration proceedings, and ISDS arbitration mechanisms remain a relevant and necessary alternative for international investors.
Concluding Remarks
The purpose of this essay is not to castigate all criticisms of the ISDS system. There are undoubtedly valid critiques to be made regarding existing investor-state arbitration mechanisms, and the current discussion on ISDS reform is of immense value to investors, states, practitioners and academics alike. However, this discussion ought to exclude exaggerated arguments that lack utter foundation. This essay identified three such arguments and outlined why they are fundamentally unsupported.
