Chevron and the Rise of Arbitral Power: A Comment by Muthucumaraswamy Sornarajah

[Muthucumaraswamy Sornarajah is the CJ Koh Professor of Law, National University of Singapore and a Visiting Professor, Centre for the Study of Human Rights, London School of Economics.]

Michael Goldhaber’s well-argued piece on the extent of the powers that investment arbitration tribunals are arrogating to themselves is evidence of a general malaise that afflicts investment arbitration. The arbitrators have assumed powers far in excess of what states intended them to have when they made investment treaties and created a unilateral power in the investor to arbitrate disputes. Consistent with prevailing ideas generated by the Washington Consensus and its desire to bring about standards of global governance, arbitrators promoting their own self-interest went on a rampage of expansionist interpretation of treaties. Goldhaber highlights one of the most glaring instances of this neoliberal expansionism, the making of interim orders restraining a respondent state from enforcing judgments of their domestic courts made in cases involving third parties.

This phenomenon is but an aspect of a project to build up a neoliberal regime of inflexible investment protection. In the aspect of this project that Goldhaber describes, there has been an assiduous effort made by leading members of the “college of international lawyers”, entrusted the task of being bulwarks against injustice, promoting sectional interests of investors to the detriment of other values such as the protection of human rights and the environment.

The downsizing of the notion of denial of justice so that it could accommodate lesser standards enabling easy review of domestic judicial orders is a definite project that arbitrators and “highly qualified publicists” embarked upon. Arbitrators, whose legal competence is not tested or uniform, embarked on a course of review of domestic decisions. Golhaber describes these processes with competence. As he points out, while purporting not to act as appellate courts, this is precisely what the tribunals were doing.

Instead of carefully nurturing a system committed to their care, the arbitral tribunals and lawyers in their greedy search for personal profit, are unconsciously ringing the death knell of the system. The scholarly projects that support them are equally tenuous. The multilateralization of investment norms, the promotion of the “rule of law” that is designed to promote property protection and the devising of a global administrative law are ideas that rationalize these trends.

But one panacea that Goldhaber suggests is that the secrecy that surrounds investment arbitration is ended. This should ensure that the dispute is litigated with the participation of all interests such as those concerned with human rights or the environment. Developing country lawyers have always pointed out that the process of foreign investment is a public law process. The essential defeasibility of the foreign investment contract as a public law contract should be recognized. This was rejected in the old days on the ground that it was an idea peculiar to French law. It is now embraced because it is convenient to promote notions of administrative review. One must then go all the way and ensure that dispute resolution is a public process representing the global interests at stake. This will ensure that all interested parties could participate in the process.

The other solution that Goldhaber puts forward will not work. An appellate system is an old suggestion. It is like building a superstructure on a rotten foundation. The same rogues gallery will populate the appellate tribunal and hasten the ways in which the neoliberal agenda could be furthered. An international community, particularly developed states, which balked at a multilateral code on investment, is unlikely to agree to a tribunal that will formulate multilateral rules without state control. There has to be more creative thought than pursuing a project that is now moribund.

The proportionality test is no solution either. It is an effort to keep arbitration relevant in the light of the efforts to create regulatory space. Given the rule that regulatory measures are police powers the exercise of which are non-compensable, arbitrators have introduced the proportionality test, presumably derived from German and European law, to limit the scope of the doctrine. Again, the technique is magical. There is no basis for the test in the treaties themselves. It is a self-vested power to perform the balancing function by persons unfamiliar with the context in which the balancing has to take place.

The malaise arises from the greed of arbitrators and multinational law firms bent on personal profit out of the system. Goldhaber rightly points this out when he refers to the fraternity of “three hats”. The remedy lies in removing them from the scene. There are promising beginnings. Strengthening national systems of dispute resolution (the South African solution), withdrawal from arbitral institutions (by Latin American states which will surely go back to the Calvo Doctrine), emphasizing the local remedies rule and confining dispute resolution to the states (the Australian solution) are possibilities. The better solution is to confine dispute resolution to legal officials belonging to the two states, as is done in taxation, in some new treaties. The personnel are the problem. Changing the personnel may provide immediate solutions.

The law was built up in the heyday of neoliberalism. There will be rapid changes taking place as hegemonic power passes. But, the phase in which a moribund system thrashes about for life is the most dangerous phase as the mutations it throws up will be multifaceted. The phenomenon described is a facet of that phase. The sooner it passes the better.