From “Dealing in Virtue” to “Profiting from Injustice”: The Case Against “Re-Statification” of Investment Dispute Settlement

In 1998, the book Dealing in Virtue discussed the growth of international arbitration and a cadre of elite arbitrators who, through intense competition, established themselves as trustworthy to resolve high-stakes global disputes. Over the next decade and a half, opposition to arbitration developed, predominantly from leftist academics, anti-globalization groups, and States that found themselves as respondents in investment treaty arbitrations. Several States have withdrawn from the investment arbitration regime to differing degrees. Venezuela, Bolivia, and Ecuador have withdrawn from ICSID or have reduced the scope of their consent to ICSID arbitration; South Africa is terminating its “first generation” bilateral investment treaties (BITs); Ecuador plans to audit its BITs; and Australia adopted a policy, recently abandoned after only two years of no longer entering into treaties providing for investor-State arbitration. A report published in 2012, entitled Profiting from Injustice, captures the spirit of arbitration opposition. It opens with the epigraph, “There is little use going to law with the devil while the court is held in hell.” Such opponents of investor—State arbitration argue that investment arbitration is biased in favor of multinationals, either harms or fails to benefit poor States, and interferes with the ability of democratic governments to pursue policies in the public interest.

Based on those premises, critics advocate a pivot away from the current neutral juridical process for resolving disputes between States and foreign investors by permitting States to exert greater influence over the arbitral process. For example, some have advocated replacing party-appointed arbitrators with panels selected through essentially political channels controlled by States. Others support recognizing post hoc interpretive statements issued by States as binding on arbitral tribunals. Still others have urged relaxing the rules of treaty interpretation to make it easier for States to derogate from their treaty obligations by citing other fundamental values such as human rights or interpreting necessity or essential security clauses in treaties as self-judging.

All proposals to “re-statify” investment dispute resolution should be rejected because they would undermine the effectiveness of the system of foreign investment protection. States created the International Centre for the Settlement of Investment Disputes (“ICSID”) and committed to other neutral arbitration fora for resolving foreign investment disputes precisely to remove such disputes from earlier politicized means of settlement, such as international diplomacy and potentially volatile domestic processes, because politicization inhibited capital flows essential to economic development. Thus, the Report of the Executive Directors of the World Bank on the ICSID Convention, published in 1965, observes that while disputes between foreign investors and host States were typically settled through domestic processes, they were increasingly resolved through international means which indicated a demand for other methods of dispute settlement. The report explains that the Convention was motivated:

[B]y the desire to strengthen the partnership between countries in the cause of economic development. The creation of an institution designed to facilitate the settlement of disputes between States and foreign investors can be a major step toward promoting an atmosphere of mutual confidence and thus stimulating a larger flow of private international capital into those countries which wish to attract it . . . . [A]dherence to the Convention by a country would provide additional inducement and stimulate a larger flow of private international investment into its territories, which is the primary purpose of the Convention.

To that end,

The present Convention would . . . provide facilities for conciliation and arbitration by specially qualified persons of independent judgment carried out according to rules known and accepted in advance by the parties concerned. In particular, it would ensure that once a government or investor had given consent to conciliation or arbitration under the auspices of the Centre, such consent could not be unilaterally withdrawn.

Thus, States sought to create an independent, neutral forum with clear rules to enhance trust and encourage foreign investment. To further induce international capital flows for economic development, States proceeded to conclude thousands of bilateral and multilateral investment protection and promotion treaties, which guarantee certain standards of treatment to alien investors. Many such treaties grant foreign investors the right to initiate arbitration against a host State before ICSID or another forum for breaches of treaty standards. One of the most sophisticated empirical studies that has been conducted found that investment treaties reflecting a strong commitment to neutral dispute settlement, particularly those with arbitration clauses that omit any requirement for prior domestic dispute resolution, most effectively increase foreign direct investment. Thus, there is evidence that, as envisaged by the ICSID Convention, the availability of a neutral dispute resolution forum enables a State to make a credible commitment to uphold its obligations to foreign investors, which in turn accomplishes the objective of stimulating capital flows.

Recent proposals to reform investment arbitration by increasing States’ political control over the arbitral process would undermine the credibility of investment arbitration as a neutral method of resolving a dispute between an alien investor and a host State. Allowing States to interfere with arbitral decision making after a dispute arises would thus weaken the effectiveness of the system of foreign investor protection for stimulating international capital flows and promoting economic development. Moreover, the criticisms of investment treaties and arbitration that are invoked to justify politicization are based on emotion rather than on facts. Time permits me to share only a few of the many examples of how the claims of opponents of investment arbitration are either directly contradicted by data or are not supported by any evidence.

Read full article (PDF)