Book Symposium Investment Law: Does the Preservation of the Public Interest Require an Alternative to the Arbitral Model?

by Nicolas Hachez and Jan Wouters

[Nicolas Hachez is a PhD student at the institute for International Law and Leuven Centre for Global Governance Studies and Jan Wouters is Professor of International Law and International Organizations, Jean Monnet Chair Ad Personam EU and Global Governance, and Director of the Leuven Centre for Global Governance Studies and Institute for International Law at the University of Leuven (KU Leuven).]

This chapter, entitled ‘International investment dispute settlement in the twenty-first century: does the preservation of the public interest require an alternative to the arbitral model?’ takes a close look at the arbitral mechanism which is the preferred dispute settlement mode in investment disputes between foreign investors and host states, and reviews the criticism which arbitration is currently facing in this context. The starting point of such criticism is that investor-state disputes concern questions of public law as they allow for the review of domestic legislations. Arguably, the arbitral model would not be suitable to settle disputes which directly engage the public interest. The argument is usually articulated around the following concerns:

  • The arbitral model is designed after commercial arbitration and would fail to live up to the rule of law requirements of administrative review. This is evidenced notably by the fact that arbitral proceedings are one-off procedures not amenable to appeal, thereby allowing for inconsistent decisions, or by the fact that proceedings involving questions of public interest are untransparent as confidentiality is the rule in commercial arbitration.
  • Arbitral tribunals would lack independence, as there are no incompatibilities for arbitrators and remuneration by the claim would be an encouragement for arbitrators to take legal positions that encourage the lodging of future claims and therefore increase the arbitration business. Likewise, it has been noted that a number of arbitrators are also practicing lawyers regularly advising multinational corporations, and would therefore have an interest to adopt pro-investor decisions so as to serve the interest of their clients.
  • Arbitrators would lack impartiality, as the arbitral system would be structurally biased towards investors’ interests and towards the application of investment disciplines even when they potentially conflict with other bodies of international or domestic law.

The result of such deficiencies would be that the arbitral model for settling investor-state disputes disregards issues of public interest which such disputes naturally entail, and would be biased towards preserving the private economic interests of foreign investors. In the face of such criticism, the international investment arbitration regime (notably under the impulsion of ICSID, UNCITRAL, the PCA, and through the amendment of certain investment treaties like NAFTA) underwent reform under several counts aiming at increasing consideration of issues of public interest: 

  • Relaxing confidentiality by opening the possibility of having public hearings and making certain procedural documents (claims, briefs, awards, etc.) publicly available;
  • Generalizing the admissibility, under certain conditions, of amici curiae briefs to allow civil society organizations to voice public interest concerns and legal positions.

For many however, these reforms are too limited and are unlikely to give the public interest its proper place in investor-state disputes since the fundamentals of arbitration – confidentiality, speciality, finality, consent on issues to arbitrate – are left untouched. More ambitious avenues for reform have therefore been put forward:

  • The reinstatement of the customary requirement of exhausting domestic remedies before having recourse to arbitration, so as to ensure a better understanding of the local public interest issues at hand and to buttress the legitimacy of the investor-state dispute settlement process;
  • The possibility to appeal arbitral awards or to have preliminary references to remedy the problem of inconsistency among different awards concerning the same dispute or the same issues;
  • The establishment of a permanent institution for investor-state disputes, with tenured judges and public proceedings, which would be competent to hear disputes either in first instance or as an appeals mechanism for arbitral awards.

After assessing the current reforms, the proposals for bolder moves, and the attitude of major investment actors such as the European Union, who is currently designing its very own investment policy and investment treaties, the paper concludes as follows:

it seems that despite a pressing need for (r)evolution, conservatism firmly holds the international investment legal regime, especially on the part of capital-exporting countries, as their corporations value highly the possibility of resorting to arbitration. One would hope that, in the absence of a sea change, small tides of reform will, in the course of the twenty-first century, progressively shape a fairer and more open dispute settlement system that is more concerned with the general interest.’

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