Readers and Friends:
Join our Serious Debate for Real Change! Read the commentaries and join in the forum.
We begin with commentaries by: Sarah Anderson (Institute for Policy Studies); Benjamin A. Gilman (former US Congressman); Christian Leathley (Curtis, Mallet-Prevost, Colt & Mosle LLP, and author); Edgardo Mira (CEICOM, El Salvador); Jeffrey Pryce (Steptoe & Johnson, LLP); Edward B. Scott (Chevron); Jim Shultz (The Democracy Center); and William Waren (Forum on Democracy & Trade).
The NJGI is dedicated to a serious debate about the rules of global investment. We believe that such a debate is essential to remaking those global rules in a way that promotes social justice and protection of a fragile planet.
These commentaries focus on one of the most important aspects of those rules – the means by which governments and foreign investors resolve disputes. Does the current system work? If not, why not? To launch the forum we have invited seven individuals and organizations from diverse perspectives – civil society, corporate, U.S., Latin American – to offer a brief commentary on those questions, which you will find below. This is our first forum, but it will not be the last. Stay tuned for a similar debate on possible reforms.
We encourage you to read these commentaries and to join in this forum with your own views on the subject in the comments section below. These comments will be moderated before being posted, so please keep on subject, be concise and help contribute to a spirited and mature debate.
The Democracy Center and the Institute for Policy Studies
Excessive Rights for Foreign Investors
The current system is designed to serve the narrow, short-term interests of for-profit enterprises. For them, it is working quite well. For the rest of us, it is not.
Correcting this extreme imbalance is all the more important today, in light of a global financial crisis caused by insufficient regulation of corporate behavior.
Now is the time to address the many valid concerns raised by global civil society and an increasing number of elected officials:
Democracy: The current system allows private foreign investors to bypass domestic courts and take claims related to laws and regulations developed through the democratic process directly to international tribunals.
Global Poverty: Current rules tie the hands of government officials in many poorer countries from placing responsible conditions on foreign investment to ensure that it benefits local communities and supports sustainable development.
Jobs: The current system gives sweeping protections to foreign investors, without commensurate investor obligations to respect internationally recognized worker rights or to create good jobs.
Environment: Many governments in rich and poor nations have had to spend millions of dollars defending legitimate environmental and health and safety protections against investor-state claims. The threat of such expensive lawsuits can also discourage elected officials and regulators from taking responsible action to promote sustainable development, environmental protection, and human health and safety.
Financial Deregulation: Current rules in many investment treaties and trade agreements restrict governments from placing even temporary controls on capital flows, despite the fact that many countries have used this policy tool effectively to prevent or mitigate financial crisis.
In the United States, President Obama has made encouraging statements indicating a commitment to make significant changes to the investment rules in U.S. trade agreements. He has said, for example, that “I will ensure that foreign investor rights are strictly limited and will fully exempt any law or regulation written to protect public safety or promote the public interest.”
The most direct way to ensure that foreign investors do not have excessive rights is to replace the investor-state dispute resolution system with a state-to-state mechanism. This would guarantee the crucial role of governments in determining and protecting the public interest. At the very least, foreign investors should be required to exhaust domestic judicial remedies before filing a claim before an international tribunal. This would help eliminate frivolous claims and strengthen judicial systems.
The big lesson from the global crisis is that corporate behavior, unfettered by strong public interest regulation, can cause devastating harm to everyone. The current investor-state dispute system is one of the most extreme examples of excessive power granted to corporations. Fixing this system should be high on the agenda of world leaders who are working to build a new global architecture to support sustainable, stability development.
Sarah Anderson is Global Economy Project Director at the Institute for Policy Studies in Washington, DC, and a member of the Private Sector Advisory Subcommittee on Investment of the U.S. State Department’s Advisory Committee on International Economic Policy.
Legislative Vacuum Exists in the Current System
Benjamin A. Gilman
Pursuant to your invitation to express my comments on the need for reforming the BIT Arbitration Process and its affect on small/medium size enterprises, I submit the following:
As a 30 year Congressman, including my Chairmanship of the House International Relations Committee, I have had many opportunities to work with the BIT procedures, none of which has been more exhaustive than my last 4 years seeking to redress the confiscation of a U.S. businessman’s expropriation by the corrupt Honduras government [Cemar Cement Co. v. Honduras]. In my exhaustive campaign to restore its 30 million dollar investment in the most impoverished area of Southern Honduras, I found that there is a vacuum in our nation’s legislation for providing adequate protection and an expeditious remedy for such a seizure.
Those seeking such a remedy face a difficult choice; they must either petition the Secretary of State’s gateway to our U.S. Justice Department’s Foreign Claims Commission or alternatively must first exhaust their remedies by going to a corrupt government’s courts or to elect a prohibitory, expensive, and time consuming arbitration under the U.S. Bilateral Investment Treaty Program.
In addition to being highly vague and requiring costly counsel, the BIT process itself is extremely costly. Please note that investor-state arbitration is often more expensive than litigation in our domestic courts, including the cost of facilitating an arbitral tribunal, the fees and expenses of the arbitrators and any administrative expenses incurred by the tribunal, including stenography, translations and secretarial assistance, in addition to a base administrative charge of $10,000 per year.
Moreover, to file an International Centre for Settlement of Investment Disputes (“ICSID”) claim, investors seeking arbitration must pay a non-refundable fee of $25,000 including arbitrator’s daily fee of $3,000 per day.
Moreover, former ICSID Secretary General, Robert Danino stated that the exorbitant cost of arbitration had prevented most small companies from being able to afford the high cost of legal counsel required in any arbitration proceeding.
In Mr. Cerna’s Cemar seizure case, he estimated his arbitration cost would exceed several million dollars in addition to an extensive time consuming process of 5 to 10 years prior to any decision. Those facts cement the notion that the BIT process is tailor-made for multinational corporations.
Former Senator Helms, in commenting on the lack of protecting U.S. business investment abroad questioned “Where is the U.S. desk in the State Department?”
It is long overdue for our government to protect and encourage U.S. investment abroad by providing proper, adequate, and cost effective remedies for any confiscation of U.S. business by corrupt governments.
Let us fill this legislative vacuum by helping our U.S. businesses to invest overseas.
Benjamin A. Gilman is a former U.S. Congressman and an attorney. He heads The Gilman Group, an international strategic business consulting firm.
Focus Not Only on the Arbitration Tribunals but the Laws Under Which They Operate
Those who are troubled by the current investment arbitration regime (and what it means for States) sometimes miss the central issue which is that international law frequently sets the standards for tribunals to follow. To this extent, it is misplaced to blame ICSID for all the perceived problems. ICSID is an administrative body. It does not research or draft the awards, and it is not responsible for the content of the laws that the arbitral tribunals apply.
For present purposes, “international law” comprises numerous standards that are critical to establishing State responsibility: indirect/creeping expropriation; fair and equitable treatment; most-favored-nation treatment; full protection and security; arbitrary and discriminatory treatment; and the various standards of compensation included in bilateral investment treaties (BITs), multilateral treaties, and investment agreements, for example.
These standards are terms of art under international law, but are often ill-defined by the treaties that contain reference to them. This leaves tribunals looking to customary international law and other sources of international law (e.g., general principles of international law, and judicial decisions and teachings of the most highly qualified publicists of various nations) to interpret them. In addition, an arbitral tribunal is not obliged to follow previous decisions of other tribunals and, therefore, can essentially choose the previous decisions it wishes to rely on (if any). This can lead to uncertainty, which in turn leads to instability and a loss of confidence in the predictability of this high-stakes dispute resolution system.
In practical terms this uncertainty can encourage investors to launch speculative claims against a State in the hope of either forcing a generous settlement or resulting in a sizeable award that may not really be expected. In either case, the State has to take each claim seriously and invest considerable resources in its defense. While there are recently enacted treaties that include provisions preventing frivolous and vexatious claims, such is the uncertainty in international investment arbitration that these provisions will only likely protect States in extreme cases.
What can be done about changing the law?
If concerned States truly want to redress a perceived imbalance in the way standards of international law affect them in investment disputes, they have to think about changing the applicable law. This would be with a view to ensuring greater predictability of the standard of treatment a host State owes a foreign investor. Even subtle changes effected to restrictively define the standards of treatment can have consequences for State responsibility. However, changing international law is neither a small nor quick undertaking, and cannot be accomplished by only a handful of States (although the United States has historically been regarded by some to be an exception to that rule).
The most immediate means of re-defining the applicable standards may be by treaty (subject to certain fundamental restrictions customary international law and general principles of international law place on treaty law). Some treaties (including BITs) already try to define certain of the above mentioned standards with precision – often an effort to establish a regional system of law. However, international law has the ability to pervade even regional systems.
For new institutions drafting rules with the aim of bringing about real change, the nature of the applicable law should be the central concern. There are means to achieve this change, but a long-term, strategic approach based on common understanding among the institution’s member States is the only option.
Christian Leathley is a lawyer in the firm, Curtis, Mallet-Prevost, Colt & Mosle LLP and author of the book, International Dispute Resolution in Latin America: An Institutional Overview.
CEICOM Addresses Investor-State Disputes
With regard to investment disputes involving large transnational corporations against states, and regarding the mechanisms for resolving these investor-state claims, we offer the following:
Investors claim that the states are interfering in their investments, and, of course, in their ability to make profits associated with such investments.
They (investors) take refuge in the free trade agreements, in the case of El Salvador in CAFTA DR, signed with the United States, also in bilateral investment treaties and investment law, which have generally been adopted in the countries to attract foreign investment.
One instrument to operationalize these demands is ICSID (International Centre for the Settlement of Investment Disputes), affiliated with the World Bank, which incidentally has become an investor in several projects as a partner of major transnational corporations. Since the World Bank has invested in large-scale mining projects, we can expect that the person they nominate to be part of the arbitration court to “resolve” the dispute, in the case of El Salvador, is biased in favor of mining.
Clearly, the instruments mentioned above, including ICSID as a mechanism for dispute resolution are designed to serve the interests of large transnational corporations to the detriment of the interests of the people. Just look at the issues relating to trade and investment and you absolutely will not see them having a good effect on the quality of life of people. These investments generate socio-environmental damage, which in reality does not contribute to the well-being of communities, but rather takes advantage of conditions to expand investor’s profits using permeability of the laws, lack of effective controls, the low costs of labor and exemption from taxes. These are the real motives for making these investments in our countries.
Another extremely serious matter, one which contributes to our rejection of these instruments and the jurisdiction granted to ICSID, regards our countries and the loss of our sovereignty at the hands of these transnational corporations, who, having the option of using these instruments, are given the right to attack states; states whom, for various reasons and circumstances, have decided to protect their interests as a society.
This is the case of El Salvador, where, as a result of several years work, by different social organizations, NGOs, etc.. we have achieved a broad consensus against mining. The government, for its part, has reaffirmed the decision not to issue operating permits. However, in spite of this legitimate decision made by the Salvadoran people in defense of our natural resources, in order to safeguard water resources and especially the lives of individuals, corporations decide to attack us, demanding millions of dollars, without addressing the reasons given. They claim that their investments are threatened or have been expropriated indirectly. Within this framework it is quite probable in most cases that these entrepreneurs will still benefit and that the results of these arbitrations will benefit them, not only in monetary terms, but in that their projects will be implemented in our countries against the popular will.
In that sense, the struggle against the claims these multinational mining companies bring against the Salvadoran state, should become a great national and international movement,
Today, the right decision is to denounce these types of treaties, and withdraw from these mechanisms such as ICSID, to discontinue in the logic of promoting the interests of big business and further loss of sovereignty.
Edgardo Mira is a member of the Board of Directors of CEICOM.CEICOM (Center for the Investigation of Trade and Investment) is one of the key members of La Mesa Nacional frente a la Minería Metálica en El Salvador (The National Roundtable against Mining in El Salvador).
Investment Arbitration Takes Longer than it Should
Mr. Pryce’s commentary is taken from his written testimony submitted to the US government related to the US model bilateral investment treaty in July 2009. Follow this link to his complete written testimony.
A wide range of commentators on investor-state arbitration, who often disagree on substantive issues, have tended to agree that investment arbitration takes longer than it should (and consequently costs more than it might). This should not be seen as any criticism of arbitrators, who are in my experience universally conscientious and dedicated, but it does suggest structural issues in investment treaty arbitration that perhaps should be addressed in a structural way. A procedural framework which fostered quicker resolution of disputes would tend to increase the efficiency of dispute resolution, decrease its expense, and better serve the underlying goals of investment agreements.
There are several ways that the Model BIT might advance the goal of quicker resolution of disputes.
First, the BIT could incorporate an overall timeline for the rendering of an award, presumably taking the constitution of the arbitral tribunal as a starting point. This would provide parties, counsel and arbitrators better structure, predictability, and ability to plan.
Timelines for an award are included in many international arbitration regimes, including the arbitration rules of the International Chamber of Commerce, the Stockholm Chamber of Commerce, and the International Centre for Settlement of Investment Disputes (“ICSID”). It also bears noting that many U.S. BITs contain overall deadlines for the award – often a total of eight or ten months from the formation of the tribunal to award — in their provisions regarding the resolution of state-to-state disputes. And, of course, the 2004 Model BIT itself sets out detailed procedures and specific deadlines for specific procedures within an investor-state arbitration, but currently provides no timetable for concluding the arbitration as a whole.
In addition, some of the detailed sub-procedures within the arbitral process, set out in the Model BIT, may be worth review.
Summary Disposition for Failure to State a Claim.
First, the BIT provides procedures for summary disposition of a claim, upon the objection that, as a matter of law, it is not a claim for which an award in favor of the claimant may be made. See Model BIT, Art. 28.4 and Art. 28.5. These procedures might be streamlined.
Two elements come to mind. First, even in the expedited procedure of Art. 28.5, the timeline for summary action on such an objection could extend for 5 or 6 months. In addition, Article 28.4(b) and Article 28.5 currently provide that the tribunal “shall” suspend proceedings on the merits, upon receipt of an objection that a claim is legally baseless. The benefit of quickly disposing of legally meritless claims is clear, but unless a preliminary objection ends the case entirely, halting proceedings on the merits pending completion of this sub-procedure, which can last 6 months or more, could have the unintended consequence of lengthening, rather than shortening, the overall arbitral process.
It may be worth considering a shorter timeline for resolving preliminary objection, and providing for resolution on an expedited basis in something more like 60 or 90 days. This would be closer to the expedited procedure timeline in ICSID Arbitration Rule 41(5) (as amended in 2006), dealing with an objection that a claim is “manifestly without legal merit.” That objection is to be made within 30 days after the constitution of the tribunal, and the ICSID rules provide for the tribunal to announce its decision at its first session, or promptly thereafter. (ICSID Arbitration Rule 13(1) provides that the tribunal shall hold its first session within 60 days after its constitution, or such other period as the parties may agree.)
Whatever the specific timeline, it would probably be constructive to modify the current BIT provisions which require that the tribunal “shall” suspend proceedings on the merits while it considers a preliminary objection. Providing that the tribunal “may decide to” suspend the proceeding on the merits (similar to the current ICSID Rule 41) would allow the tribunal to exercise its discretion as to how to administer the case most efficiently.
Jeffrey Pryce is Vice-Chair of the International Arbitration Practice at Steptoe & Johnson LLP, where he counsels clients on international legal issues and represents them in proceedings to resolve international disputes.
The Current Arbitration System Plays a Fair and Effective Role Helping Mitigate the Risks Inherent in International Investment
Edward B. Scott
Any discussion of the effectiveness of international dispute resolution must be grounded in two important facts: global economic health is increasingly dependent on foreign direct investment (FDI), and access to fair impartial third party dispute resolution is one crucial component of the international investment climate necessary to encourage and protect that investment. While this discussion cannot fully address the importance of FDI, we should be aware that just the capital requirements for energy and energy infrastructure alone needed to fuel the world’s growth and prosperity over the coming decades is projected in the tens of trillions of dollars and FDI will provide a large share of that investment. The investment climate needed to encourage those expensive and long term investments must include a number of elements, such as transparent open markets, sanctity of contracts, rule of law, and investment protection disciplines including access to fair and impartial third party dispute resolution.
The current arbitration system, where available, plays a fair and effective role helping mitigate the risks inherent in international investment.
Arbitration of disputes is never a first resort – it is far preferable to work out disagreements in direct negotiations between the parties. One of the important, though rarely discussed, benefits of investor-state dispute resolution is the incentive it creates for parties to negotiate good-faith solutions and resolve disputes before they reach the point of arbitration. Chevron has successfully concluded such negotiations in countries which have high quality investment treaties with the U.S. and I believe the desire to avoid arbitration on the part of both parties helped foster equitable good faith settlements.
However, arbitration must remain an option where settlements cannot be achieved and in countries where the basic ingredients of rule of law—strong court systems, due process, a fair and unbiased judiciary—are absent or severely compromised. In those cases, investors have no recourse except international arbitration to receive a fair hearing on their claims. These protections provide important assurances for the investor, of course, but they can also benefit host countries by making them more attractive to potential investors and more likely to be the destination of much needed FDI.
While any system can be continuously improved as experience grows, statistics bear out the effectiveness of international arbitration. A 2007 study by Susan Franck demonstrates that the system is not biased toward either the investors or the host governments; in fact international arbitral decisions to date favor states and investors about equally. The same study asserts that there has not been a high volume of arbitration cases. With thousands of BITs in place there have been only a relative handful of cases which have reached the point of arbitration, and decided damages awarded in those cases have not been exorbitant.
Foreign direct investment is a necessary part of the world economy and crucial to the success of countries and businesses alike. Successful international investment requires risk management across a broad range of factors, ranging from technical and market risks to geopolitical risks. In the final analysis, investor-state arbitration is an important tool to help manage those risks, to increase stability of the investment environment and benefit both investors and the host countries.
Edward B. Scott is Vice President and General Counsel for Chevron Global Upstream and Gas
Bechtel vs. Bolivia: A Case Study in How Global Investment Rules are Designed to Protect Corporations
One does not need a legal degree to understand how global investment rules advantage corporations and undermine social justice and the environment. You need only to look up close at the cases that corporations are bringing against governments and the process by which those cases are handled.
One of the best examples is the Bechtel Corporation’s notorious case against the people of Bolivia following the Cochabamba Water Revolt in 2000.
In 1997 the World Bank made privatization of the city of Cochabamba’s public water system a condition of further aid for water development. In 1999, in a closed-door process with just one bidder, the government of Bolivia awarded a 40-year lease to a subsidiary of Bechtel. Soon afterwards the company increased water rates dramatically, an average of 51% on all water users and 43% on the very poorest. A civic rebellion against the price increases shut down the city with general strikes on three occasions. A 17-year-old boy was shot and killed by army troops dispatched by the government to defend the contract. Finally Bechtel left.
Two years later, in November 2002, Bechtel filed a $50 million case against the people of Bolivia before a World Bank trade court, the International Centre for the Settlement of Investment Disputes (ICSID). It would later be revealed that Bechtel had invested less than $1 million in Cochabamba.
The Bechtel vs. Bolivia case at ICSID illustrates three substantial problems with the ICSID process:
First, the process is utterly secret. The people of Cochabamba, who were being asked to pay Bechtel, were not allowed to know when the tribunal met, where it met, who testified before it, or what they said. There is no legitimate reason that this process should be secret. As with Congressional committees or court hearings in the US, the process should be open and public and closed only based on very specific circumstances.
Second, the process is ridiculously distant from the supposed “scene of the crime”. Lawyers and officials meeting behind closed doors in Washington, many of whom have never been to the countries involved, cannot be expected to understand the realities of the case without going to where it is based and hearing from the people involved.
Third, the process is needlessly expensive. The legal fees paid by Bolivia in this case were more than Bechtel’s investment in the country. Those funds could have been used instead to hire more than 300 schoolteachers for a year. Bolivians should not be expected to defend themselves at U.S. prices, and especially for the hourly billing price of U.S. lawyers.
In the end Bechtel dropped its case in January 2006 for a token payment of 30 cents, a response to the extraordinary pressure that citizens and social movements brought to bear on the company and its officials.
International investment is important, and with it the need for a fair system for resolving investment disputes. But the current system with its intrinsic injustices is in need of serious reform, if not replacement altogether.
Jim Shultz is Founder and Executive Director of The Democracy Center in Cochabamba, Bolivia.
Investor-State Arbitration of International Investment Claims Does Not Work in the Public Interest
International investment agreements (IIAs) provide greater procedural rights to foreign investors.
Ineffective diplomatic screens. Arbitrators make their decisions without the moderating influence of diplomats and without consideration of the domestic and foreign policy implications for the investor’s home country (with three narrow exceptions).
Appearance of conflict of interest. Arbitrators in these cases are typically international commercial lawyers who may alternately serve as arbitrators in one case and plaintiff’s counsel in the next, thus raising questions of conflict of interest.
No exhaustion of domestic remedies. International investment agreements, contrary to the general practice in international law, do not require the exhaustion of domestic remedies prior to initiating an international claim. Domestic administrative and judicial processes are thus circumvented.
2. IIAs grant foreign investors greater substantive rights.
Overbroad definition of investment. The current US IIA model for definition of investment is broader than the constitutional standards used under domestic law, even in the United States. For example, any interests resulting in the commitment of capital also might be considered an investment.
Vague expropriation standard. Arbitrators make their judgments based on a vague expropriation standard that is subject to multiple interpretations. The arbitrators in Methanex v. United States interpreted NAFTA’s expropriation rule narrowly, but the tribunal in the earlier case of Pope & Talbott gave the same language a broad construction. (The Methanex tribunal stated that “as a matter of international law, a nondiscriminatory regulation for a public purpose, which is enacted with due process …is not deemed expropriatory, unless specific commitments to refrain from regulation were made to the investor…” Pope & Talbot said that an economic regulation, even when an exercise of the traditional police power, may be an expropriation if it is “substantial enough.”) Accordingly, the outcome of future cases is unpredictable.
Open-ended minimum standard of treatment. Except with respect to issues of procedural due process, it is difficult to predict when a tribunal may decide that a government action has “denied justice” or failed to provide “substantive due process.” One line of tribunal decisions, for example, has indicated that the minimum standard of treatment imposes a duty on governments not to change regulatory standards that were in effect when a foreign investment was made. (See Occidental Petroleum v. Ecuador.) Under U.S. substantive due process analysis and presumably under due process principles embodied in other legal systems, governments are generally free to change regulatory standards in response to changed circumstances or priorities. It remains to be seen whether future tribunals will follow the narrow reading of MST in Glamis Gold v. USA.
William Waren is the Policy Director of Forum on Democracy & Trade and adjunct professor at the Harrison Institute of Public Law, Georgetown University Law Center. He is also a consultant to the Andean Parliament and the Parliamentary Confederation of the Americas (COPA).