My Summer Vacation (Part II): More on the Transparency of the International Investment Regime

The IISD’s paper on transparency I mentioned this morning demonstrates why the investment regime is globalization’s Rorschach test. Recent scholarship (most prominently the work of one of the participants at Barcelona, York University Professor Gus Van Harten (see, e.g., “A Case for an International Investment Court,” available here) contends that investor-state arbitration is nothing like the commercial arbitration between private parties on which its procedures are based but more like public litigation that belongs in national constitutional courts but has been erroneously “privatized.” The IISD paper takes the same approach, arguing that investor-state arbitration raises public interest concerns because (1) these involve states as parties; (2) they often involve disputes in public service sectors (such as the privatized gas utilities involved in several of the most prominent Argentina cases); (3) they often challenge regulatory measures justified on the basis of protecting the public; (4) such arbitrations affect taxpayers’ interests given their potential impact on the public purse; and (5) the resulting arbitral jurisprudence constante is now the principal driver of international investment law. (For my own, more controversial, contention that BITs and FTAs are having an impact on general customary law, see José E. Alvarez, “A BIT on Custom”).  The IISD paper also contends that all of the regime’s stakeholders, from investors to states, should have an interest in greater transparency since all want public, harmonious and stable rules of the road.

The IISD’s articulated reasons for the “public-ness” of the regime are more convincing than its second contention which is either that everyone wants transparency or that they ought to do so because transparency produces the most economically efficient outcome. IISD’s five-fold public rationale is, in capsule form, the backdrop for my NYU colleagues’ contention that the investment regime is part of, and is constructing, “global administrative law.” (See, e.g., Benedict Kingsbury and Stephan Schill, “Investor-State Arbitration as Governance: Fair and Equitable Treatment, Proportionality, and the Emerging Global Administrative Law”). The strongest case for transparency is precisely that a process that imposes principles of “good governance” should itself adhere to them; that is, that the arbitral process – from the briefs to the hearings to the awards and annulment rulings — should itself be fully transparent because this is the only way to assure that the resulting law is coherent, fully reasoned, and harmonious. IISD’s five reasons suggest that, if anything, the IISD’s focus only on investor-state arbitrations under existing BITs and FTAs is too modest. Its concerns should equally apply with respect to any arbitrations that arise under investors’ contracts with states, irrespective of whether a BIT or FTA is in place. Most of IISD’s transparency concerns arise equally with respect to host state’s contracts with investors, including mining and oil concessions, and many of these contracts also rely on arbitral enforcement. Such contracts are increasingly drawing concern, and not only because most remain confidential. (For a recent study of publicly available investor-state contracts, suggesting that surprisingly, many still contain controversial “stabilization” clauses purporting to “freeze” local law, see IFC, Stabilization Clauses and Human Rights, Mar. 11, 2008).

But it is not so clear that all of the regime’s stakeholders desire openness or that they ought to do so because an open airing of investment disputes produces the best outcome. This was amply demonstrated by our sessions in Barcelona where a number of participants, particularly those with experience in ICSID or in private practice, indicated why states and investors may sometimes want to keep their disputes and what happens to them under wraps. Governments as different as Cuba and the United States may want to encourage the quiet settlement of such disputes precisely to avoid the production of precedent-setting law. They may prefer privacy to encourage mediation in lieu of costly litigation, contain the issues at stake (especially if publicity draws the participation of amicus), or even to prevent other disputes from arising. These are perfectly rational needs which may produce, from a variety of perspectives, more efficient outcomes than high profile arbitral decisions (which could ether embarrass the state or, even if the host state wins, scare off investors) – just ask Argentina. (Indeed, the quiet, non-transparent settling of disputes prior to public adjudication is characteristic of a number of international legal regimes, including the WTO.) Investors and their lawyers may desire the same thing for many reasons, including to avoid adversarial contentious litigation with a government with which they hope to have a continuing relationship. The dynamics of the “obsolescing bargain” inherent to foreign investment – where the host state’s leverage vastly increases once an investor has incurred sunk costs – helps to explain why disputing parties in these cases may have economically rational reasons to keep their disputes private. Of course, to the extent a dispute reaches arbitration but the resulting award remains secret, one of the IISD’s concerns becomes less relevant as unknown awards cannot be cited as part of the evolving jurisprudence constante.

The market for investor-state dispute settlement (and, in some cases, for confidentiality) helps to explain why varying degrees of transparency/confidentiality are reflected in the distinct arbitration rules operating within ICSID, UNCITRAL, the Arbitration Institute of the Stockholm Chamber of Commerce, and the International Chamber of Commerce (ICC). Although these rules evolved in the context of commercial arbitration, the same dynamics that favor transparency only when the disputing parties consent (as many of these rules provide) may continue to prevail in some of the forums outside of ICSID. It should not surprise anyone if some of these arbitral rules continue to resist transparency – in order to respond to the needs of those who have constructed these rules.

The IISD paper is correct that there is a clear trend favoring transparency with respect to the NAFTA (see, e.g., 2001 NAFTA Commission Interpretation, and ICSID more generally (see, e.g., this). But it is not yet clear whether the market for these disputes – namely the interests of states and private litigants – will drive a “toothpaste effect” wherein the greater transparency of ICSID will only encourage disputing parties accorded such discretion in the relevant treaties to opt for less open arbitral forums. Perhaps the move towards transparency in ICSID will only prompt a greater number of investor-state disputes to relatively less transparent venues, such as Stockholm, the ICC, or UNCITRAL.

Of course, unscrupulous states – not only undemocratic or corrupt ones – or unscrupulous investors – may want to avoid transparency for all the wrong reasons. IISD and others pressing for transparency may yet succeed in emphasizing these, as well as the pragmatic rationales for “public-ness” nicely articulated in its paper. My own suspicion is that the NGO and scholarly campaign for greater transparency with respect to this regime, if it is to have greater success, will need to rely on the “common language, common challenges” that I enumerated in my speech during IL Weekend (see link above). Changing the views of states and investors, that is, convincing them that despite their short term needs for secrecy, the long-term legitimacy and viability of the regime rests on greater transparency, remains crucial.

If the campaign for greater transparency is to succeed it will also need to make a stronger case that states, as respondents to these claims and as negotiators of BITs and FTAs, cannot be trusted to re-balance the investment regime. There is every sign that the states (and even some arbitrators) are responding to the strong cross-currents now driving international investment law. While most states remain committed to the free flow of capital, their commitment has been buffeted by repeated economic crises and a sense that the spread of BITs and FTAs has not raised all boats or produced the expected rates of sustained economic development. Major architects of the investment regime – including China, the United States and Canada – are now re-calibrating their BITs and FTAs to enable them to exercise, as governments, “greater policy space.” (For my description of these changes in the U.S. Model BIT, and their emulation by others, see “The Evolving BIT” and “US BIT Comparison” both available here). Others, such as South Africa, are reacting to particular investor challenges to their affirmative action laws by doing the same, while yet other states—Venezuela, Ecuador, Bolivia, and even Norway – have stopped negotiating BITs, withdrawn from some they have concluded in the past, or narrowed their acceptance of ICSID arbitration. Argentina, under the onslaught of investor-state claims, appears to be exercising a form of “civil disobedience” and is refusing to pay out arbitral awards rendered against it. At the same time, annulment committees formed to contest some of the original multimillion dollar arbitral awards against Argentina are now showing it greater sympathy. Three of the most visible Argentina awards – in favor of CMS, Sempra, and Enron – have now been severely criticized (see CMS Annulment here) or annulled altogether (see Enron and Sempra Annulments). (In the interests of full disclosure, readers should know that I was an expert witness in several of these cases. See expert opinion in CMS v. Argentina). Evidence of a greater backlash to the “Washington Consensus” model that drove the most strongly investor-protective BITs of the late 1980s and 1990s abounds (see, e.g., here) and has drawn some support from “progressive” economists.  As one comprehensive survey of developments both within investment treaties and within national laws from UNCTAD indicates, the investment regime is now re-emphasizing the need to protect states’ right to regulate (see UNCTAD World Investment Report for 2010). At least some of these developments respond to the latest economic crisis – and to greater receptivity to states’ arguments in favor of “emergency” legislation adopted in response. To the extent arbitrators and annulment committees are changing their views of the law in response to these developments, this casts doubt on the original expectation that resort to investor-state dispute settlement would “depoliticize” such disputes – and the ensuing law. Political concerns that once bedeviled the diplomatic espousal of investor claims are now re-appearing in investor-state arbitrations.

Notwithstanding IISD’s complaints of lack of transparency, the reasons for these developments have everything to do with how public the investment regime has already become. Concerns over the regime have emerged precisely because, as arbitral awards have become more public, their factual findings, inconsistent legal conclusions, or reasoning have been criticized. This has also led to questions about the contents of the treaties that produce such awards. The future of the investment regime rests on how it handles the perception – produced by its own success — that it shows greater solicitude for the protection of property rights over and above any other form of human right. (See, e.g., Public Statement on the International Investment Regime (issued by prominent academics). While I believe that these concerns have been exaggerated, if the regime continues to be perceived as transparently and disproportionately biased in favor of investors, its future may not be bright.