Ius Gentium

University of Baltimore School of Law's Center for International and Comparative Law Fellows discuss international and comparative legal issues


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In Defense of Villainy

Esther-Jane Grenness

Mr. International-Lawyer sits down at his desk and boots up his laptop. As is his usual practice, he opens his email and sips his coffee while the morning sun streams pleasantly through his office window. He first peruses a Listserv email from the international arbitration committee of which he is a member. In that email, there are links to a four-part BuzzFeed investigation[1] examining investment treaty arbitration (ITA), sometimes referred to as investor-state dispute settlement (ISDS). Mr. International-Lawyer’s interest is highly piqued, after all, he has served as arbitrator on several investment treaty tribunals.

The opening image of the BuzzFeed investigation’s first installment is enough to get Mr. International-Lawyer’s intellectual-battle-adrenaline pumping. He opens the articles one-by-one and reads on, glued to the pages, his indignation rising with each salacious detail. His fingertips rest on his warm coffee cup. Heat travels from his fingertips along the length of his arm, rushes up his neck, and boils over into his face. He’s almost, though not quite, livid. Having finished reading the exposé, Mr. International-Lawyer fires off a reply-all to the recipient list of the original email. The four-part BuzzFeed article, he argues, is full of wild claims and factual errors. Most graciously, Mr. International-Lawyer directs his colleagues to a factsheet[2] published by the International Bar Association (IBA), which contains point-by-point refutations of assertions made by critics of ITA/ISDS.

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In the four-part BuzzFeed series, there are several examples of the very worst abuses of ISDS mechanisms available to foreign investors in the 3,000+ investment treaties dotting the globe. When discussing the role of the lawyers in these examples, one of Mr. International-Lawyer’s colleagues referred to the behavior as the “gamesmanship” in which less scrupulous counsel sometimes engage. While the stories are despicable, and an in-depth analysis of investment treaty arbitration is beyond the scope of this post, a couple things did stand out to me as I read two of the narratives in particular.

In the case of Sri-Lanka’s[3] bad oil-derivatives investment with a contract that was despicably one-sided, I’m quite struck at how little responsibility the BuzzFeed article placed on the executive who signed the deal. Conventional wisdom would say that one should have to pay the natural consequences of one’s own foolish actions, but the BuzzFeed article placed blame entirely on the bank for not doing the executive’s due-diligence for him. Any person heading a corporation, whether state-owned or not, should be at least marginally business savvy. The man who bound an entire nation was one who merely “dabbled” in the stock market. He admitted he didn’t completely understand what he was signing, yet he didn’t seek counsel from those who would understand the contract—lawyers. Even worse, he didn’t even read all parts of the contract.

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Ashantha de Mel, the man who didn’t read the contract

While there certainly is an expectation of good-faith negotiations and sound policy reasons for protecting against unconscionable contracts, we’re talking about the head of a corporation here, not a sole-proprietor with little to no bargaining power. Advocating against allowing the bank to collect its money is disruptive to the rule of law—certainly in this instance at least. While morally despicable, law and morality don’t always intersect. Sri-Lanka wanted to block a legitimate enforcement of a contract because it deemed the contract “substantially tainted” and heartily disliked the manner in which the bank courted a signature. Sri-Lanka’s refusal to honor its foolishly-entered obligation is the very sort of arbitrary State action against which investment treaties are designed to protect. Unfortunately, sometimes such a reprehensible outcome is the unsavory result. But the burden lies on the signer to do his due diligence—especially one who signs on behalf of a corporation where a nation foots the bill. The burden should not be placed on a foreign investor to sift through another country’s policies on signatory authority to determine whether the person signing actually had the power bind the corporation over which he presides. An ordinary executive, acting in the ordinary course of business, usually has the authority to bind the company he heads. As such, the bank had a legitimate expectation and a legally vested right to realize its profits, ill-gained as they may have been.

The Mississippi funeral home case[4] is a clear illustration of why investment treaties have provisions to protect foreign investors in the first place. It makes no difference here that the nation against whom the case was brought has a well-developed, usually fair justice system. When the law of the country in which a foreigner invests returns an unjust, clearly biased result, investors have recourse to remedy the wrong. Without such recourses for individuals against States, an investor would have to rely on his or her country of citizenship to intervene. Nations have a choice whether they will intervene on their national’s behalf or not. Investment treaty ISDS mechanisms provide individuals with standing against a Nation.

While the Canadian investor may certainly have been at fault and deserved to lose his case, he was entitled to a fair trial. Clearly, xenophobia, and outright hostility to the “other” element in the case prevailed. Had this been a situation in which the tables were turned and it was an American investor who received the same treatment in, say, Mexico, there would have been no sovereignty objection. The possibility of a foreign tribunal having the ability to question and overturn a sovereign nation’s determination would have been applauded. Only recently have developed countries been truly faced with having to answer for their own capricious actions, if any. Why is it that we now hear such loud protestations over threats to America’s sovereignty? Suddenly objecting to ISDS mechanisms we largely wrote, and founding the objection on grounds of sovereignty and the availability of sophisticated judicial systems is plain arrogance.

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Mississippi case jury award

Notwithstanding the above defenses, the BuzzFeed investigation was truly appalling. As one reads the articles, questions churn within one’s mind: How on earth can this happen?!? Who would sanction such egregious abuses? Aren’t the provisions meant to incentivize infusions of much-needed capital into developing countries? Isn’t this a system that protects foreign investors from the vagaries of all-too-often capricious regimes? What went awry? Unfortunately, the answers, and the possible solutions that may reform a legitimacy-challenged system, are complex and difficult to boil down into a high-level, easily digestible summary. There are no easy approaches, but before we advocate for throwing out the kitchen with the sink, we need to consider the costs of dismantling an entire system.

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Esther-Jane Grenness is an evening student in her fourth year of studies at the University of Baltimore School of Law. She graduated from the University of Baltimore in 2013 with a Bachelor of Arts in Jurisprudence and obtained her Associate of Arts from Howard Community College in 2001. Esther is a member of the International Arbitration Committee’s Investment Treaty Working Group of the American Bar Association’s Section of International Law. She also participated in the Mentorship program with the Women in International Law Interest Group of the American Society of International Law. In addition to her studies, Esther coordinates government procurement contracts in the mobility sales operations group for AT&T’s Global Business – Public Sector Solutions segment.

[1] https://www.buzzfeed.com/globalsupercourt

[2] http://www.ibanet.org/Article/Detail.aspx?ArticleUid=1dff6284-e074-40ea-bf0c-f19949340b2f

[3] https://www.buzzfeed.com/chrishamby/not-just-a-court-system-its-a-gold-mine?utm_term=.bjWJaxGwM#.lyzX4wNOq

[4] https://www.buzzfeed.com/chrishamby/homegrown-disaster?utm_term=.jtNOQjN3w#.bcN9yEN0K

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The Trans-Pacific Partnership’s Investor-State Dispute Settlement Provision : A Baby Step toward Legitimacy

Esther Grenness

In Senator Elizabeth Warren’s (D-MA) op-ed published in the Washington Post in February 2015, she excoriated the Investor-State Dispute Settlement (ISDS) provision of the Trans-Pacific Partnership (TPP) free-trade agreement.[1] In her op-ed, she painted the ISDS provision as a nefarious tool by which multinational corporations could “tilt the playing field” in their favor.[2] This would undermine U.S. sovereignty by enabling foreign corporations to take the United States to a corporate-lawyer-infested arbitration panel and slough off regulations designed to protect the public.[3] And the cherry on top? All this would occur without a day in U.S. courts and the legal bill would be dumped on the backs of U.S. taxpayers.[4]

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Even though Warren’s op-ed was in response to the as yet unfinished agreement, opposition has remained steadfast against the TPP.  With such a visceral reaction to a single provision of a free-trade agreement, one would think that ISDS provisions were something new to U.S. involvement in the investment treaty world. This is far from the case. There are currently over “3,000 agreements worldwide [that] utilize some form of ISDS, and the United States is party to 50 such agreements.”[5]

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While ISDS provisions are nothing new, they are still highly controversial. The line between private and public law is blurred. According to Stephen Schill, “investor-State arbitration is better analogized with judicial review of governmental conduct under administrative (or constitutional) law at the domestic level or international judicial review.”[6] Because investor-State arbitral decisions affect entire nations, the reality is that ISDS functions as “an instrument of global governance” where “public law values of equality, predictability, transparency, and democratic control of decision-making” come into play.[7] This is the foundation of the major objections to the practice of ISDS. The processes is notorious for the lack of transparency, the inability for third parties to participate or have a voice in the process, the risk of improperly biased arbitrators, and the lack of appealable decisions. Furthermore, without a consistent body of law from which to draw, a decision under one treaty can violate a provision in another treaty.[8]

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Even with these very real and valid concerns about the whole ISDS system, the ISDS provision in the TPP is not the demon it has been made out to be. It follows on the heels of revisions to the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules and the Mauritius Convention, which expanded third-party participation in disputes and increased transparency in the process.[9] The Mauritius Convention, in particular, has the potential to expand this transparency “to the entire treaty-based international investment regime as it stood on 1 April 2014.”[10] Indeed, the TPP’s ISDS requirements are among the most liberalized and transparent of any trade agreement reached to date. The provision requires publication of the documents, and it allows concerned third parties to participate as amicus curiae.[11] Most significantly, the provision requires not just application of the rules of the treaty itself, but also the application of relevant rules of international law.[12] This takes ISDS jurisprudence beyond the scope of a “treaty-by-treaty approach to investment law reform.”[13] The “normative pull”[14] of the decisions reached under the TPP will have more gravity, which brings the international investment body of law closer to the goal of consistency.

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However, the TPP does not currently have a method by which decisions may be appealed (although this may be changed at a later date).[15] Enter the Trans-Atlantic Trade and Investment Partnership (TTIP). Although not finalized, the European Commission has proposed an almost complete overhaul of the ISDS system, whereby the arbitrators would be permanent appointees with demonstrated neutrality (perhaps already appointed to a judicial function in their home state.)[16] This is all highly controversial and in a complete state of flux, but the general trend in the formation of investment treaties is moving toward a more liberalized, public oriented approach to Investor-State Dispute Settlement.[17] While the procedural process may slow significantly,[18] the legitimacy of the whole system will grow.

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There are a myriad of issues posed by ISDS; however, the TPP is a step in the direction of legitimizing the ISDS process. The TPP’s ISDS provision is not a multinational corporation’s nefarious tool for tilting the judicial balance in its favor. In a world of an increasingly interconnected, globalized economy with exponential growth, there are bound to be growing pains and stumbling blocks along the way. The TPP’s ISDS provision is a step in the right direction, small as that step may be.

 

 

[1] The Trans-Pacific Partnership (TPP) is an enormous free-trade agreement between the United States, Canada, Australia, Mexico, Japan, Malaysia, Peru, Vietnam, Chile, Brunei, Singapore, and New Zealand. The United States signed the agreement on February 4, 2016, but the agreement hasn’t yet been submitted to Congress for a vote. The TPP contains an Investor-State Dispute Settlement (ISDS) provision, where disputes between foreign investors and States are to be settled via arbitration rather than going through the domestic court system. Investors have standing to challenge sovereign actions, such as state-imposed regulatory measures. The TPP member countries represent around 40% of global gross domestic product (GDP) (https://ustr.gov/tpp/overview-of-the-TPP); Warren, Elizabeth. 2015. “The Trans-Pacific Partnership Clause Everyone Should Oppose.” Washington Post, February 25: 3. Accessed February 2, 2016.

[2] (Warren 2015)

[3] (Warren 2015)

[4] (Warren 2015)

[5] Malawer, Stuart. 2015. “Looking at Dispute Resolution In the Trans-Pacific Partnership.” New York Law Journal, December 8: 4. Accessed January 30, 2016.

[6] Schill, Stephan. 2013. “The Public Law Paradigm in International Investment Law.” EJIL: Talk! December 3. Accessed February 1, 2016. http://www.ejiltalk.org/the-public-law-paradigm-in-international-investment-law/.

[7] (Schill, The Public Law Paradigm in International Investment Law, 2013)

[8] Levine, Eugenia. 2011. “Amicus Curiae in International Investment Arbitration: The Implications of an Increase in Third-Party Participation.” Berkeley Journal of International Law 29 (1): 200-224 at 218

[9] Schill, Stephan. 2015. “The Mauritius Convention on Transparency: A Model for Investment Law Reform?” EJIL: Talk! April 8. Accessed January 29, 2016. http://www.ejiltalk.org/the-mauritius-convention-on-transparency-a-model-for-investment-law-reform/.

[10] (Schill, The Mauritius Convention on Transparency: A Model for Investment Law Reform? 2015)

[11] (Malawer 2015)

[12] (Malawer 2015)

[13] (Schill, The Mauritius Convention on Transparency: A Model for Investment Law Reform? 2015)

[14] (Schill, The Mauritius Convention on Transparency: A Model for Investment Law Reform? 2015)

[15] (Malawer 2015)

[16] Lawson, Alex. 2015. EU Floats Overhaul of Investment Arbitration Process. Law360, May 5. Accessed January 30, 2016.

[17] (Schill, The Mauritius Convention on Transparency: A Model for Investment Law Reform? 2015)

[18] (Levine 2011) at 219