Scholars Debate Investment Arbitration Chapter in TPP and TTIP

by Roger Alford

Negotiations over the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) have highlighted the growing debate over investment arbitration. Last week the New York Times published an article summarizing objections to the TPP investment chapter. The article notes that politicians, law professors and liberal activists “have expressed fears the provisions would infringe on United States sovereignty and impinge on government regulation involving businesses in banking, tobacco, pharmaceuticals, and other sectors.”

The reference to academic opposition is based on a letter published by the Alliance for Justice with the signatories from numerous law professors. The one-page AFJ letter urges Congress to “protect the rule of law and our nation’s sovereignty by ensuring [investment arbitration] is not included.” Foreign corporations, the letter continues, can use investment arbitration to “challenge government policies, actions, or decisions that they allege reduce the value of their investments…. This practice threatens domestic sovereignty and weakens the rule of law by giving corporations special legal rights, allowing them to ignore domestic courts, and subjecting the United States to extrajudicial private arbitration.”

Today another group of prominent law professors who are experts in investment arbitration have written a lengthy response. The letter (to which I am a signatory) challenges the notion that signing an investment treaty constitutes a loss of sovereignty or undermines the rule of law. “Corporations cannot and will not gain victory simply by arguing reduced investment value.” Instead, a corporation must establish that “a host state has discriminated on the basis of nationality, has failed to accord a foreign investor due process, or has expropriated the property of a foreign investor without payment of prompt, adequate, and effective compensation.” The letter then addresses the contentious issue of regulatory takings, and highlights the limits of corporate claims challenging environmental, health, and safety regulations.

It concludes: “investment treaty arbitration does not undermine the rule of law…. The obligations commonly found in investment agreements—including non-discrimination on the basis of nationality; due process; expropriation of property only for a public purpose and on payment of prompt, adequate and effective compensation; and repatriation of profits—are the hallmarks of a society that is governed by law.”

Frankly, the rebuttal letter is substantive and faithful to the true state of investment arbitration, while the AFJ letter reads more like a piece of political advocacy than a memorandum by scholars offering legal analysis.

Of course, these battle lines are not new. The Multilateral Agreement on Investment was scuttled in the late 1990s because of similar concerns. In the meantime, over 3,000 bilateral and multilateral investment agreements have now been signed, with the United States a signatory to over 50 such agreements. NAFTA and CAFTA-DR are among the most prominent examples of such agreements.

What is new is the potential economic impact of the deals. The sheer size of TTP and TTIP significantly raises the stakes. The TPP countries collectively would represent the largest U.S. trading partner, accounting for 40% of total U.S. goods trade and 25% of total U.S. services trade. As for the TTIP, the combined share of the U.S.-EU GDP is approximately 45% of global GDP and reflects 17% of global foreign direct investment.

Any hope for a TTP or TTIP deal depends on Congress granting the Obama Administration trade promotion authority, which seems increasingly likely. Whether that authority includes investment arbitration remains to be seen. But the fact that the Obama Administration and the vast majority of Republicans in Congress strongly favor investment arbitration in both agreements bodes well for its inclusion.

5 Responses

  1. There is a common belief among lawyers that Arbitration in some way affects Sovereignty. It is simply not true. Even under the 1958 New York Convention on the recognition and Enforcement of Foreign Arbitral Awards there is discretion for State Courts to have regard to Public Policy or Arbitrability.
    See Arbitration and the Sovereign Power, Geoffrey M. Beresford Hartwell, The Journal of International Arbitration, Vol. 17 No. 2, April 2000, published by Kluwer Law International at

  2. While I’m not surprised that the author of one letter thinks his letter is better than his opponents’, I think Mr. Alford goes too far by dismissing what he calls the Alliance for Justice letter as “political advocacy,” while characterizing his own as “a memorandum by scholars offering legal analysis.” I would say both are 80% the former, 20% the latter.

    The “analysis” provided by the Alford letter, as I read it, is that the world of international investment disputes is simple and objective: when a state has acted badly, it will be held liable; when it hasn’t, it won’t. What’s the problem?

    The problem is that litigation is litigation, even when it’s arbitration. While “objective” facts matter, the system is driven by a competitive inter-subjectivity where the parties’ underlying resources and commitment to the dispute are often (some would say always) determinative of the outcome. States can be trusted to continue to claim they act in the global public interest; corporations can be trusted to aggressively and creatively package state regulatory actions as arbitrary, discriminatory, etc. The “truth” can be trusted to continue reside somewhere in between.

    The case Alford et al choose to highlight as an example, S.D. Myers, is an example indeed. Alford et al suggest that this is an easy case of state discrimination, asserting that the objective truth is that “Canada’s goal in imposing the [PCB export] ban was not to protect the environment, but to protect Canada’s PCB waste disposal industry, as acknowledged by Canada’s Minister for the Environment in a speech that she gave to the House of Commons.”

    In fact, the ban was the product of more than a decade of deliberation by numerous Canadian authorities involving numerous complicated factors and considerations, including as just one example whether the ban was required for compliance with the Basel Convention. The gloss in Alford’s letter would throw all this out this window in favor of a “truth” purportedly revealed when a cabinet minister, who was obviously not solely responsible for the ban, responded to a question during a parliamentary session with the off-the-cuff summary that “it is still the position of the government that the handling of PCBs should be done in Canada by Canadians.” I’m not saying this remark was not a legitimate piece of evidence, but playing it for its “ah ha” value, as Alford et al do and as the claimant did in the arbitration, is an example of litigation — and advocacy — that should remind us that we know this process (and its relation to truth) all too well.

    And in fact, even accepting the “in Canada by Canadians” position as the government’s official position doesn’t turn the case into a simplistic story of greedy nationalism. That policy, to the extent it played a role, was substantively justified by the state’s legitimate interest in maintaining capacity and control in an area critical to citizen and environmental health and safety, especially in light of the possibility that the U.S. disposal facilities might become unavailable or were the border to be closed, which had happened in the past.

    The Alford letter tries to take the AFJ letter to task for focusing on what “might” happen. It’s response, apparently, is to tell us with resounding confidence, is a standalone paragraph, what ”will” happen:

    “Corporations cannot and will not gain victory simply by arguing reduced investment value. Rather, legitimate government conduct will be upheld as a proper exercise of sovereignty.”

    Great! We’re done then. Or perhaps not quite, because how do we know this will happen. It actually does tend to happen this way in the United States with respect to takings claims under the U.S. Constitution, but that’s because we have a strict interpretation of the takings clause by the highest court in the land, which interpretation is binding on all other (federal) courts, i.e. Tahoe/Lucas/Penn Central and the requirement that only “permanent obliteration of value” can result in a finding of regulatory taking. Not only is there not a similar doctrine in international investment law, but the disaggregated system as currently established would be incapable of developing and enforcing it. It could be included in the text of any upcoming treaty, but the leaked treaty texts see the them going in the other direction, setting up a system where regulatory acts will be evaluated according to their “legitimacy” – again, in a disaggregated system where each panel decides for itself, expressly not bound by any larger system of jurisprudence or higher authority.

    This is one of the reasons the AFJ letter complains of the lack of an appeals process. The Alford letter respond that at least in the ICSID context there is the annulment process. But it acknowledges that annulment is available only where the arbitrators have “manifestly exceeded their authority or departed from a fundamental rule of procedure.” This is akin to the standard for issuance of the writ of mandamus in the common law. If we were to ditch the availability of appeal in this country and say, let’s just use mandamus to correct the most egregious cases, I doubt people would be satisfied with this as sufficient due process.

    It’s also worth noting the details of the Alford et al assurance that states will have to pay foreign corporations for exercise of state regulatory functions “only if their acts are arbitrary, discriminatory, or otherwise violate the investment guarantees to which states have previously agreed.” Pay attention to that last clause. Countless tribunals have read “umbrella clauses” into investment treaties, meaning that any violation of even a purely domestic contract by the state thus gives rise to international liability under the treaty. So we end up back in the realm on typical commercial contract litigation – except, as the AFJ letter notes but the Alford letter ignores, it’s a one-way street, because system only allows corporations to sue states, not vice versa.

    We cannot blind ourselves to the fact that litigation often has a strategic dimension. Companies file lawsuits to pressure their opponents to settle, or to improve their negotiating position in ongoing and evolving relations. Indeed settlement is probably the dominant feature of commercial litigation, where cases almost never go to trial. Corporate claimants are certainly aware of this, and have particularly powerful leverage in the form of the system’s built-in sky-high costs and fees. Remember, in arbitration you’re not just paying for counsel, you’re paying for the judge – in fact for three of them, and typically around $1,000 an hour. The tribunal wants to hold a motions hearing? That’s probably $20,000 just to get started, not counting travel and other expenses. A two-week trial? Do the math. And while the U.S. has a fantastic in-house lawyers teed up and ready to litigate these cases, most countries don’t, and end up having to go to the club of elite law firms who specialize in this work and charge correspondingly elite-level fees for the privilege.

    The issue of settlement raises particular concerns in the sovereign context because it goes beyond the issue of states using taxpayer money to pay off potentially meritless corporate claims. States will often be tempted to “settle” a claim by revising the challenged regulation to suit the claimant. The Alford letter faux-naively suggests that the regulatory taking concern is limited because “nothing in investment treaties requires states to change their domestic regulations” – instead, they can just pay damages. Come on. The idea that states are free to keep regulations on the books and just happily pay off private parties (at whatever damages figures those parties’ lawyers can sell to private tribunals) for the privilege is ridiculous. The budgetary issue will almost always be determinative – by law, every regulation in the US is rigorously evaluated for its budgetary impact – and corporations know it.

    As to a number of other issues in the AFJ letter, the Alford letter just ignores them. The controversial cases such as Philip Morris’ tobacco labeling challenges or the gold-mining cases in El Salvador? No comment. The rotating lawyer/arbitrator system, in which a tiny club of individuals sit on panels and represent parties before those panels? No comment. The fact that arbitration often allows corporations to bypass domestic court systems? No comment – except that the letter cites (for a different proposition) the BG Group case, where it was eventually decided that arbitrators were within their rights to relieve a claimant of the requirement to exhaust domestic remedies, even though that requirement was expressly stated in the treaty.

    Alford is right that these battle lines are not new. But his suggestion that he and his colleagues are not part of the fray, or are somehow above it – that his letter is “legal analysis” while his opponents only offer “political advocacy” – is unconvincing. Just like litigation is litigation, advocacy is advocacy – it’s the butter on the bread of public discourse and Alford is more than welcome to spread it as thick as he likes. But I for one can’t believe it’s not butter.


  3. Aaron,

    Thanks for your response. It might be useful for readers to know that you are counsel with Steven Donziger in the Chevron v. Ecuador case. In that case, of course, the Southern District of New York found that Steven Donziger and other lawyers on his team procured the Ecuadorian judgment by fraud. 974 F.Supp.2d 362 (2014). The Ecuadorian judgment was also the basis of an investment arbitration award that Chevron won against Ecuador. Chevron v. Ecuador, PCA Case No. 2009-23 (Partial Award of Sept. 23, 2013). Given these judicial findings, any concerns you express for protecting the rule of law and upholding the integrity of domestic judicial processes should be taken with a grain of salt.

    Roger Alford

  4. You’re a class act, Roger.

  5. On the unlikely odds that readers here don’t know the background of Chevron’s fundamentally bogus fraud, extortion, racketeering, and related claims that it has churned out against the Ecuadorians and their representatives for nearly a decade now as a means to try to avoid liability for the contamination it left in Ecuador, here are a few of my recent writings on the topic.

    It’s noteworthy that for a decade Chevron has accused the Ecuadorians of “fraud” just for bringing the case because (a) they claim it has no basis in fact, and (b) even it did, the Ecuadorians’ claims were released by the government of Ecuador in the 1990s.

    No other than the arbitral panel Roger mentions put an end to Chevron’s “release” argument just a few weeks ago. And while the evidence of the good-faith fact basis of the claims (i.e. massive contamination linked to Chevron) is all over the internet, it is worth noting that VICE just published a reel of some pretty shocking videos of Chevron’s own technical experts trying (but failing) to NOT find contamination as they conducted “pre-inspections” ahead of the formal judicial site inspections during the Ecuador trial. Worth a look.

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