Governments often seek to attract foreign investment as part of their economic development strategy. In doing so, a government will presumably seek to minimize costs of foreign investment while maximizing benefits. Depending on a state's treaty and contractual obligations, one potential cost of foreign investment is the enhanced exposure of the state to lawsuits by foreign investors.
This page offers an overview of responses by governments to international investment arbitration, focusing on responses to:
- actual lawsuits, and the risk of lawsuits, by foreign investors,
- treaties that authorize investment arbitration, and
- processes and forums for investment arbitration.
In the discussion, alternatives to investment arbitration are also highlighted. The content draws on a mix of academic, practitioner, government, and NGO sources. The website does not endorse any particular form of dispute resolution. However, it does present editorial comments based on the assumption that international adjudication of investment disputes -- where it leads to final decisions on important questions of public law and public policy -- should reflect well-established principles of open courts, judicial independence, and public accountability.
The information presented is a non-exhaustive summary and is intended to provide a basis for discussion and further research. Wider topics on foreign investment -- such as anti-corruption, competition regulation, environmental protection, investment screening, technology transfer, and so on -- are not discussed. As for all content on this website, the page does not offer legal or other professional advice of any kind.
Responses to investor lawsuits
States have varying capacities to defend against investor lawsuits. They may deploy in-house lawyers or outside law firms or a combination of the two. For reasons of cost control, in-house representation may be preferred. Where a state opts to use outside lawyers, an option is to issue a competitive tender for legal representation, stipulate a cap on fees, and have bids assessed by an independent expert.
There are cases in which a government has spent vast sums (i.e. over $10 million) on legal and arbitration fees merely to defend against an investor lawsuit. Among other problems, this may create undue pressure on a government to settle cases in situations where there is a sound rationale for the challenged policy measure.
Some states, such as the U.S. and Argentina, appear to have taken the approach of mounting a vigorous defence to any investment treaty lawsuit against them. This may act as a deterrent to future claims by investors, provided that the state has a reasonable legal argument and credible litigation capacity.
Numerous governments have developed in-house capacity in investment law and arbitration, even if only one or a few persons in a small government, to supervise outside counsel and offer well-informed internal advice to political decision-makers about the risks and liabilities associated with investment treaties. States that are known to lack such capacity could become targets for claims, including by lawyers or law firms that may themselves finance aspects of an investor's claim based on contingency fee arrangements. When faced with a lawsuit or the threat of a lawsuit, governments may consider that investors may view investment arbitration as unattractive due to its financial cost and legal uncertainty as well as the negative consequences for the investor's wider relationship with the host government.
In states that are subject to investment treaty arbitration, some governments have developed an internal process to review domestic policy initiatives in light of the relevant obligations. A general objective of such a process is presumably to limit litigation risk without undermining the policy objectives of the measure or otherwise frustrating proactive regulation.
Some states have declined to pay awards against them in investment arbitrations, at least in a timely manner. In international arbitration, it is not uncommon for the unsuccessful party to offer partial payment in settlement of a claim in exchange for relieving the other party from having to pursue further litigation to collect on the award. Partial payment of an award may thus be a viable option even after an arbitration is lost. [IIAPP comment: For various reasons, including institutional inadequacies of international investment arbitration, there may be a credible rationale for a state to decline to pay an award on grounds of procedural unfairness and lack of independence.]
Among other implications, where a state does not pay an award, its assets -- ships, cargo, monies owed to state agencies, sovereign loans -- may be subject to seizure in foreign countries based on the New York Convention, the ICSID Convention, or other award enforcement treaties. [IIAPP comment: To support its position in settlement negotiations or to deter future lawsuits, a government may seek to evaluate and track the vulnerability of its foreign-held assets to seizure in different jurisdictions, and take steps to protect or relocate those assets where feasible.]
Responses to investment treaties
As states have faced claims under investment treaties, the treaties themselves have come under scrutiny. Some states have reviewed their policies on investment arbitration, sometimes as part of a broader review of their trade and investment policy or their development strategy. See, for example, the reviews by Norway, South Africa, and Australia (the latter based in part on a report by the Australian Productivity Commission).
[IIAPP comment: The scope and potency of investment arbitration warrants attention by governments to relative the costs and benefits of investment treaties. For governments that have not in past adopted a conscious strategy in investment treaty negotiations, there is a strong case to review existing treaties in light of recent waves of investor claims. A review of this sort may be beneficial as a means to involve a wider range of policy-makers whose decision-making is subject to investment arbitration.]
In some cases, a state's legislative branch has declined to ratify investment treaties negotiated by the state's executive branch. For example, in the mid-1990s, the Brazilian government negotiated a series of BITs on the model pioneered by the major capital-exporting countries, but the country's national legislature did not ratify them.
Having reviewed their obligations, some states -- such as the Czech Republic and Ecuador -- have taken steps to abrogate existing treaties or to renegotiate them against the backdrop of possible abrogation. Because many investment treaties renew automatically, and are open to withdrawal only for a limited period every 10 to 20 years, a state contemplating this response would need to monitor closely the duration of their treaty obligations and take advantage of periodic opportunities to reconsider particular treaties.
There are well over 3000 investment treaties in place, with significant differences of legal language. In this context, states may find it more efficient to negotiate a new agreement, at the bilateral or regional level, that reforms or replaces existing treaties. For example, Canada, Mexico, and the U.S. used the option of an interpretive statement to clarify the meaning of substantive standards in NAFTA Chapter 11 after a first wave of controversial decisions were issued by tribunals in cases like Metalclad v Mexico and Pope & Talbot v Canada.
[IIAPP comment: These were modest reforms to NAFTA Chapter 11 arbitration that did not involve a renegotiated treaty to replace investment arbitration with an institutional alternative, for example, or to put obligations on investors alongside their extensive rights under investment treaties. For a calibrated but somewhat more ambitious proposal for NAFTA Chapter 11 reform, see this report prepared for the Pardee Center for the Study of the Longer-Range Future.]
Another model, which offers various accommodations of developing country interests relative to model investment treaties of major capital-exporting states, is the Common Investment Area of the Common Market for Eastern and Southern Africa (COMESA). See also the examples of moderating treaty provisions in the negotiator's handbook prepared by the International Institute for Sustainable Development. Although it has produced documents that arguably under-stated or failed to identify risks of investment treaties for respondent states, the UNCTAD Investment Division has more recently produced useful reports of alternative language in investment treaties on different issues.
States may choose to use investment contracts instead of investment treaties as the preferred means for committing to compulsory investment arbitration in the state's relations with foreign investors. Investment contracts, unlike investment treaties, can be tailored to a specific project. Thus, they may allow a state to manage and limit its liabilities in investment arbitration while linking those liabilities to binding commitments on the part of the investor. However, investment contracts also have been criticized for their impact on a state's ability to implement its other international obligations and policy objectives and for their lack of transparency. The inclusion of highly-restrictive stabilization clauses in investment contracts has emerged, in particular, as a topic of concern.
Responses to processes and forums for investment arbitration
The procedural rules and institutional design of investment arbitration are key features of investment treaties. In reviewing a state's policy on investment arbitration, a government may therefore consider alternative forums to investment arbitration. For example, a state could adopt a policy of relying on a preferred set of arbitration rules and a preferred forum in its investment treaties or investment contracts. Alternatively, it could coordinate with other states to develop alternative forums to the major arbitration centres in Paris, London, the Hague, Stockholm, and Washington.
A state may also take part in reviews of the arbitration rules under which the state allows investor claims against it. The ability of a government to participate in such reviews depend on whether the arbitration rules are under the auspices of a public body, such as the International Centre for Settlement of Investment Dispute (ICSID) or the UN Commission on International Trade Law (UNCITRAL), or are in the hands of a private organization like the International Chamber of Commerce (ICC) or the London Court of International Arbitration (LCIA). These latter forums are not publicly-accountable in the manner of a state-based international court or other international organization.
There is an ongoing review by states of the UNCITRAL arbitration rules in which transparency -- and, by extension, public accountability and independence -- of investment treaty arbitration is a central issue. A related issue is whether the usual approach, by which arbitrations commenced after the revision of the applicable arbitration rules are subject to the revised rules, will be displaced by states seeking to limit transparency-oriented reforms by not applying the revised UNCITRAL rules to existing treaties.
[IIAPP comment: Unfortunately, a recent review by the International Chamber of Commerce of its arbitration rules maintained a very high level of confidentiality in ICC arbitrations involving states, such that the existence of a claim against a state, the identity of the arbitrators, the text of orders or awards, and any amounts awarded against a state will continue to be kept confidential. While this level of confidentiality may be appropriate in commercial arbitrations, it precludes public scrutiny of ICC arbitrations involving states and makes it difficult to evaluate the policy implications of a state's decision to authorize investment arbitration under the ICC Rules.]
States may agree to override specific provisions in arbitration rules used in international investment arbitration. For example, after the lack of openness in NAFTA Chapter 11 arbitration became a matter of public debate, the NAFTA states clarified the process expressing their view that nothing in NAFTA precluded them from publishing all awards and materials submitted in Chapter 11 arbitrations.
[IIAPP comment: To date, reforms of the investment arbitration process have tended to focus on issues of openness and amicus curiae participation rather than concerns about independence and procedural fairness (e.g. lack of conventional safeguards of judicial independence in the system; inability of all parties whose rights or interests are affected by a dispute to seek full standing in the process). However, these concerns remain pressing. For example, serious issues of perceived independence and impartiality in international investment arbitration are raised by the additional opinion of arbitrator Jan Hendrik Dalhuisen in the annulment panel decision in Vivendi v Argentina.]
Where states decide to consent to investor-state arbitration, but wish to address concerns about possible bias or other unfairness in the investment arbitration process, they may take various steps such as:
designation of a pre-set roster from which all arbitrators under the treaty must be appointed;
use of an objective method (such as random appointment from the roster) to select tribunal chairs where the parties do not agree;
- imposition at the treaty level of a binding code of conduct for arbitrators (e.g. annex 1719 of Canada's Agreement on Internal Trade);
imposition of rigorous checks on outside remunerative activities by arbitrators;
incorporation of a duty of investors to resort to reasonably-available local remedies; and
incorporation of an independent screening process to block claims that are frivolous, harassing, or otherwise unlikely to succeed.
[IIAPP comment: For a case for an international investment court, see here.]
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