With the incessant, dramatic headlines over the last two years about the “to and fro” investment and trade disputes between the U.S. and China, it is easy to forget that for the rest of the world, international arbitration for the independent settlement of disputes between foreign investors and the host countries in which they operate—Investor-State Dispute Settlement (ISDS)—has been one of the fastest growing areas of international law governing cross-border commerce.
Notwithstanding such activity has been a significant component of what keeps the wheels of international trade and investment in perpetual motion, helping to spur growth of the global economy, it is also the case that international arbitration for ISDS has become one of the most controversial issues in international investment policy. The most visible manifestation of this is the perception of the erosion of sovereignty that has accompanied globalization and questions about the efficacy and sustainability of the WTO and its multilateral trading rules.
For decades, especially prior to World War II, when foreign investors and host states had disagreements—ranging from expropriation, to interference by local tax and regulatory authorities in the day-to-day operations of an investment, to unilateral demands by the government for requiring local content otherwise not enshrined in a duly signed investment agreement—such disputes were generally heard before the sovereign’s local courts.
Among foreign investors, this process was seen as conferring an unfair advantage to the state. Moreover, it resulted in a costly and extraordinarily time-consuming process for both sides, slowing down the generation of the intended economic benefits for all parties concerned.
For host governments, this system of adjudication—regardless of who was at fault—often halted the creation of jobs, less collection of tax revenues, and put a damper on economic growth. Foreign investors experienced both their capital and management teams in the field unduly tied up, which restricted their reallocation to more efficient and higher value uses.
The result? Both sides realized there was an incentive to gravitate towards development of a system for dispute settlement governed by impartial, independent arbitration tribunals. Hence the growth of ISDS.
The legal instruments in which the rules governing international arbitration of investor-state disputes among the parties to a cross-border investment are codified are International Investment Agreements (IIAs). The growth in the number of IIAs has been substantial in recent years, totaling more than 3,000 in 2017.
IIA treaties can take a variety of forms, whether in terms of jurisdictional (geographic) or sectoral coverage or both.
The most common form of IIA treaties are stand-alone vehicles, such as bilateral investment treaties (BITs). At present, there are more than 2900 BITs in force—accounting for almost 90% of all IIAs. (With full disclosure, during my time in the White House, I was the lead U.S. negotiator for all U.S. BITs).
Regional trade agreements, such as NAFTA, often incorporate significant provisions to govern investor-state disputes among the country signatories. The Energy Charter Treaty, launched in 1991, is sector-specific and currently includes 54 countries across Europe, the Former Soviet Union, the Balkans and Turkey. There are many other examples.
The number of ISDS cases initiated over the last 30 years—more than 900 during that period—may seem strikingly large. However, the proper context is critical in interpreting these figures.
First, on an annual basis, these data translate into only about 25 cases, although the average annual amount has been increasing substantially in recent years to more than 65 in 2017 alone.
Second, and far more important, the data reflect the fact that there has been spectacular growth of cross-border foreign investment transactions around the globe—an activity that is, of course, part and parcel of the emergence and maturation of a globalized marketplace. For example, between 2000 and 2017—just 17 years—the stock (or cumulative flow) of the globe’s foreign direct investment rose from about US$7billion to more than US$30billion, which is more than a quadrupling.
And, these foreign investment transactions include advanced countries (“the North”) investing in emerging markets (“the South”); emerging markets investing among themselves (“South-South” commerce); and emerging markets investing in advanced countries (“South-North”).
The choice of the specific set of rules that will govern the arbitration procedures that signatories to an IIA must follow in a dispute can vary from treaty to treaty. Whichever set is followed, they are agreed upon before the treaty is signed and comes into force.
The set of rules most frequently chosen (about 50%) are those of the International Center for Settlement of Investment Disputes (ICSID), which was established in 1966 and is part of, and funded by, the World Bank Group. Owing to its strong institutional resources, more than 150 countries are contracting parties to ICSID.
The United Nations Commission on International Trade Law (UNCITRAL), which is a subsidiary body of the United Nations, currently has more than 60 member states. UNCITRAL accounts for about one-third of the disputes heard.
The other venues most often chosen for dispute settlements include the International Chamber of Commerce’s International Court of Arbitration in Paris; the Arbitration Institute of the Stockholm Chamber of Commerce; the London Court of International Arbitration (LCIA); the Australian Centre for International Commercial Arbitration; and the Hong Kong International Arbitration Centre.
While each of these venues have differences in procedures and capacities, there is little question that the advent of international arbitration under ISDS has significantly enhanced the efficiency and speed of reaching decisions for the settlement of disputes than what was previously the case—that is, coming to a conclusion which party is the liable one. And, most practitioners agree that the achievement of this efficiency has been done with de minimis sacrifice of sovereignty for the host country compared to situations where disputes would be aired in local courts.
Nevertheless, as was the case before, the efficacy and collection of the awards owed for any damages—say compensation owed by a state to a foreign investor for expropriation of the latter’s assets—still is a key problem.
More generally, reform of the overall ISDS process is now center stage. This is reflective of the intensifying controversial state of play surrounding the now maturing system of international arbitration. In particular, concerns have been expressed—both on the part of the states as well as the investors—about the expense and length of time spent on cases; the selection and quality of arbitrators; the degree of consistency and legitimacy of arbitral awards; and (a relatively new development) the use of third-party investors to help finance one side of a case and in return share in the fruits of the awards.