Does Investor-State Arbitration “Weaken[] the Rule of Law”? Judith Resnik and Larry Tribe Seem to Think So

by Julian Ku

I have not been surprised by the swelling opposition in the U.S. (mostly from the progressive left) against proposed trade agreements with Pacific and European nations (TPP and TTIP).  But I am mildly surprised by the way in which TPP and TTIP opponents have zeroed in on the inclusion of investor-state arbitration mechanisms as a rallying point for their opposition.  Not only has former Harvard lawprof (and now U.S. Senator) Elizabeth Warren come out against the inclusion of investor-state dispute settlement (or ISDS), but yesterday, Yale law prof Judith Resnik and Harvard lawprof Lawrence Tribe, along with Nobel Laureate Joseph Stiglitz and a few others released a letter outlining their concerns with (really, their opposition to)  ISDS.  This letter is much more sophisticated and persuasive than an earlier lawprof letter Roger criticized here.  Indeed, its critique is far broader and echoes “sovereigntist” critiques that many on the political right have often applied to international tribunals.  Here is one snippet of their argument.

ISDS weakens the rule of law by removing the procedural protections of the legal system and using a system of adjudication with limited accountability and review. It is antithetical to the fair, public, and effective legal system that all Americans expect and deserve.

The letter valorizes U.S. courts and Article III judges, as well as the importance of democracy, and contrasts those institutions and values with the secretive ISDS process.  The main complaint, which is quite true, is that ISDS gives foreign investors a “separate legal system” to which others, including US citizens and corporations, cannot access. ISDS is not subject to any serious review by either courts or other arbitral tribunals.

None of the statements in the letter are inaccurate or incorrect. But they do leave out the basic assumption and rationale behind ISDS provisions. Foreign investors are presumed to be more likely to face disadvantages in a foreign legal system, which is why they are presumed to need “extra” protections from ISDS.  I think the rationale for ISDS is weaker for trade agreements between the US and Europe or the US and other developed industrialized countries.  But it is still probably true that there is a greater risk of discrimination against foreigners from a local legal system than against local companies.

I am not convinced of the necessity of ISDS in these trade agreements, but I don’t think it is necessarily a bad thing to include them either. I do recognize that these systems of dispute settlement do create non-trivial tensions with the domestic legal systems of member countries. In other contexts (law of the sea, ICJ/death penalty, etc), raising concerns about these tensions has been associated with the political right. So it is interesting to see progressives borrow sovereigntist arguments in their campaign against ISDS.

8 Responses

  1. Have any of these people ever actually litigated a single case for a foreign corporate client in any domestic court?

  2. Are the proposed arbitration mechanisms supposed to utilize ICSID? If so, doesn’t the U.S. already do this, so what’s the big deal?

  3. I think you are being charitable Julian.

    ISDS provides a separate legal system available only to certain investors who are authorized to exit the American legal system

    US law (not American!) allows differential access as well. A resident of South Carolina suing a resident of South Carolina does not have access to federal court for a lawsuit when a resident of South Carolina who sues a resident of North Carolina does. ISDS, in principle, merely creates a neutral forum for the resolution of disputes between parties of even greater legal, political, cultural and linguistic difference. They are confusing the dispute resolution mechanism with the substantive law to be applied.

    Only foreign investors may bring claims under ISDS provisions. This option is not offered to nations, domestic investors, or civil society groups alleging violations of treaty obligations.

    Actually most investment treaties allow the parties to the Treaty to settle disputes about the application or interpretation of the treaty by arbitration. Ecuador tried this with the US (and lost). The US goes a pretty long way of preventing their own investors from suing it through ISDS. This is generally not seen as a bad thing.

    ISDS also risks undermining democratic norms because laws and regulations enacted by democratically-elected officials are put at risk in a process insulated from democratic input.

    Kind of like the US Supreme Court!

    But seriously, the President negotiates a treaty/agreement that either the Senate ratifies or the House and Senate vote on. The treaty/agreement can likewise be abrogated by a party to the agreement.

    Moreover, ISDS arbitrators, like other arbitrators, do not make law because their decisions have no precedential value, and ISDS arbitrators in turn are not obliged to follow precedent in reaching their own decisions.

    If stare decisis is the hallmark of a legal system, someone better tell the civilians that they aren’t governed by law. Or at least Louisiana.

    I am with you Julian. The complaints about ISDS are weird to me. If they wanted to write a letter about the scope and breadth of the fair and equitable treatment clause in one of these things, I might listen more closely. But that a foreign arbitrator might rule on whether the US expropriated the property of a different foreign national does not keep me up at night.

  4. Whatever Award may result from any arbitral process, the ultimate protection against non-compliance with the agreement is in Article V of the New York Convention 1958. Challenges are heard in the Court. The Sovereign Authority has the last word.

  5. Hi Julian,

    This paper by the CHief Justice of Australia may be of some interest:

  6. The Article V grounds are extremely narrowly construed in the US. So the sovereigns last word is basically silence. Whether ISDS awards are always NYConvention awards could be an interesting issue.

  7. ICSID Convention Awards are not executed through the NY Convention. As for ISDS and the NY Convention, see BG v Argentina that was decided last year.

  8. Response…The professors’ criticism seems to mirror similar criticism in Europe, coming mostly from the left. The European criticism recently has led to proposals (by the German Minister of Economy and, at bit less forcefully, by the competent European Commissioner) to replace the investor-state arbitration mechanism in the TTIP by a permanent EU-US trade court to be manned by professional judges instead of ad hoc selected lawyers-arbitrators.

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