Tuesday, 27 May 2014

Investor-State Dispute Settlement: Slow down and proceed with caution

In a previous blog I referred to the current negotiation of the so-called Trans Pacific Partnership and to the concerns in some of the participating countries about a US proposal to introduce the ISDS system (Investor-State Dispute Settlement). This entitles private foreign investors to seek compensation in international tribunals for any law, regulation or policy which can be construed as an unfair change in the rules of the game and detrimental to their profitability. In fact, those concerns have cropped up in the US itself, prompting the United States Trade Representative to issue a statement(1) arguing against what it calls the myth that “ISDS somehow limits our ability – or our partners’ ability – to regulate in the interest of financial stability, environmental protection, or public health…These assertions are false.”

A recent Issues Note from UNCTAD’s Programme on International Investment Agreements contains data that seem to throw some question marks on that statement. In particular, the Note refers to cases decided at the World Bank’s International Centre for the Settlement of Investment Disputes, ICSID, awarding compensation to the investor on the grounds of a purported violation of the Fair and Equitable Treatment (FET) clause, a nearly universal provision of bilateral investment treaties. The problem here is that there is no authoritative definition of FET; defining its scope is effectively left in the hands of the ISDS tribunals in each case, and it would appear that ICSID and other ISDS tribunals are tending to interpret it broadly, thus impinging on the legitimate regulatory powers of governments.

Two ICSID cases reported in the UNCTAD Note exemplify the perils of this expansive approach. In Micula v. Romania(2) the tribunal found that the repeal by Romania of certain investment incentives was a reasonable action in pursuit of a rational policy; it nevertheless also found that it was a breach of FET vis-à-vis the investors – and entitled them to compensation - because of Romania having created a reasonable expectation of regulatory stability. To establish the reasonable expectation the tribunal declared that it is irrelevant whether the State actually wished to commit itself; it is sufficient that it acted in a manner that would reasonably be understood to create such an appearance. The doubtful logic of this line of reasoning was emphasised by the fact that one of the three arbitrators dissented(3).

In the other case, Inmaris v. Ukraine(4), the tribunal held that the FET clause in the Germany-Ukraine bilateral investment treaty (BIT) was not restricted to, but went beyond, the international minimum standard of treatment required by customary international law, since there was no such limitation in the BIT itself. “[A] government act” the tribunal states, “could be unfair or inequitable if it is in breach of specific commitments, if it is undertaken for political reasons or other improper motives, if the investor is not treated in an objective, even-handed, unbiased, and transparent way, or for other reasons” (my italics).

There are other criticisms of the ISDS system as currently practised. A seasoned and respected US international arbitration lawyer has identified nine other major problems in it(5), leading him to conclude that “it is seriously flawed and … needs a complete overhaul”. Before that happens, developing countries considering adopting it or extending its coverage would do well to heed the advice associated with yellow traffic lights: Slow down and proceed with caution.

(1) USTR, The Facts on Investor-State Dispute Settlement: Safeguarding the Public Interest and Protecting Investors, 27 March 2014.
(2) International Centre for the Settlement of Investment Disputes, Ioan Mikula et al. v. Romania, ICSID Case No. ARB/05/20, Award, 13 December 2013.
(3) ICSID, Micula et al. v. Romania, Separate opinion of Professor Georges Abi Saab.
(4) International Centre for the Settlement of Investment Disputes, Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine, ICSID Case No. ARB/05/20, Award, 1 March 2012.
(5) Kahale, George, Keynote Speech, Eighth Annual Juris Investment Treaty Arbitration Conference, Washington D.C., 28 March 2014.

By Carlos Fortin, Research Associate, Institute of Development Studies