Symposium on International Investment Law & Contemporary Crises: Crises as Investor-State Dispute Catalysts – The Banking and Finance Sector

[David Attanasio is a Partner at Womble Bond Dickinson LLP based in Washington, DC, and a co-author of the Empirical Study on International Investment Law Protections in Global Banking and Finance. He has over a decade of experience in commercial and investment arbitration disputes, with particular expertise in Latin America–related matters]

A recent study published by the British Institute of International and Comparative Law (BIICL) – co-authored by the present writer – empirically assessed Investor-State dispute settlement (ISDS) in the banking and finance sector based on data from 145 public cases. While the study is wide ranging, it sheds important light on the performance of ISDS in times of economic or financial crisis.

Despite the large volume of debate over ISDS, somewhat less attention is given to the systematic causes of disputes than to other issues, such as the need for reform of the system. However, the conventional wisdom on the causes seems to be that the measures underlying disputes are largely explained by such factors as resource nationalism, domestic politics, and idiosyncratic State policy decisions.  

Whether or not true in general, our data strongly suggests that economic or financial crises are a major driver of disputes in the banking and finance sector. This is not to say that domestic politics and policy have no role to play; they may determine the precise measures that a state takes in response to an economic or financial crisis and may also generate disputes in non-crisis circumstances. Yet, economic and finance crises are highly significant factors for explaining the occurrence of disputes in this sector.

When are Disputes Arising?

I was surprised at how apparent the link between crisis and disputes was in the data we considered, even without undertaking any sophisticated statistical analysis. Among other factors, there was a clear visible correlation between the timing of major economic and financial crises and the timing of the measures that have allegedly breached international investment protections.

Timing of Alleged Breaches

The above curve plots the number of (public) investment disputes in the banking and finance sector against the year that the underlying state measures were adopted. The vertical orange lines indicate the peaks of significant local, regional, or global economic crises: Czech Banking Crisis (1998) (instability in the Czech banking sector); Argentine Financial Crisis (2001) (severe local economic and financial crisis lasting from 1998-2002 that peaked in 2001); Global Financial Crisis (2007–2009); Greek Debt Crisis (2013–2015) (a severe local aftershock of the Global Financial Crisis).

What this figure does not show is that every economic or financial crisis throws off a lot of investor-State disputes. We did not attempt to graph every such crisis. There may well be crises that do not generate significant numbers of investor-State disputes, perhaps because the relevant governments are relatively passive or because the governments do not intervene specifically in the banking and finance sector.

Curiously, the study found no discernible spike of disputes attributable to COVID-19 market turmoil, at least not yet. This absence may or may not be a matter of timing. There is often a lag of several years between the underlying state measure and the filing of a claim—the median time to file in banking and finance disputes was about two years.  (Not to mention that cases may take years to become public once filed.)  Even if there is a COVID-19 spike in cases, it would not have been apparent in our data.

We therefore cannot draw any conclusions about the market and economic turmoil surrounding COVID-19.  It may just not yet have appeared in the data. Alternatively, the absence of a case spike in the data may mean that there simply was no such spike. While COVID-19 caused significant social disruption, financial markets rebounded quickly and states avoided systemic financial measures that would have triggered investment claims. Either way, this is an area to watch as more cases become public.

More generally, the patterns of cases underscore that investor-State arbitration serves not only as a mechanism to resolve isolated grievances but also to address disputes tied to State’s broader responses during extraordinary times. While not every dispute during such moments is directly an outgrowth of crises, the spikes in cases at these times strongly suggest that economic and financial crises themselves often provoke investor-State arbitration.

Who Is Suing Whom?

That crises are dispute catalysts is not just reflected in the timing of disputes, but also in their participants. When we look at the States that are the most frequently respondents in banking and finance investor-State arbitrations, those significantly impacted by economic and financial crises—whether local, regional, or global—stand out in the rankings.  

At first glance, a wide range of states have been respondents in banking and finance investor-State disputes. Some 63 different states have been party to at least one of the 145 banking and finance cases in our dataset. This may seem to suggest that the cases are not concentrated against any particular respondent State.

Yet not all states have been equally impacted, and crisis can make a difference. Argentina, perhaps unsurprisingly, tops the list of the most common respondent States with 12 separate banking and finance claims—a direct legacy of its 2001 crisis and related measures. Other repeat respondents include those states that adopted sweeping or significant measures affecting banking and finance sectors, such as the Czech Republic during its late-1990s banking instability (itself an outgrowth of the Global Financial Crisis).  

This is not to say that all repeat respondent States in banking and finance investor-State arbitrations are the result of economic or financial crises.  Croatia, for example, had seven separate claims against it. These claims were not a response to a crisis.  Croatia instead adopted a broad ranging measure that permitted residential mortgages to be converted from foreign currency to euros. It did so when Switzerland—whose currency had been used to denominate many such mortgages—abandoned exchange rate controls in 2015.

Nor have crises had a major impact on the identity of the claimants in these disputes. Roughly half of all claimants hailed from just six jurisdictions: the Netherlands, the United States, the United Kingdom, Austria, Switzerland, and France. These states are both major financial hubs and treaty-rich jurisdictions, giving investors ample opportunity to invoke BIT protections.  These facts provide a very plausible explanation of why such States are overrepresented.

An Effective Dispute Resolution Mechanism?  

While crises may catalyze investor-State disputes, the success rates of investor claimants depend on the particulars of the claim.  Crisis-related disputes cover a lot of ground: sovereign debt defaults or restructuring, a range of currency and exchange interventions, emergency measures to stabilize financial institutions (bailouts, bail-ins, etc.), and others. Claimants do reasonably well overall, but they are less successful in challenges to emergency measures.

Overall, investor claimants have slightly lower success rates in obtaining a favorable award compared to investor-State arbitration generally, but have higher rates of settlement. If a settlement is a satisfactory outcome for an investor claimant, then they achieved favorable results in more than half of all disputes. If, however, only a positive final award is a successful outcome, State respondents fared significantly better than investor claimants. (This puts aside discontinued arbitrations, since they may be discontinued for any number of reasons, including settlement or a lack of funds to proceed.)

Overall Rates of Success

While the outcomes for banking and finance investor-State arbitrations are broadly comparable to those for investor-State arbitrations generally, it is striking that disputes over emergency intervention measures had lower rates of success for investor claimants. These disputes over purported efforts to stabilize financial institutions by no means constitute all or even most of the crisis-linked disputes. But they are a prominent category of crisis-related measures, at least psychologically.

Success Rates on the Merits for Emergency Interventions

Our data covered a relatively limited number of emergency intervention cases that reached the merits—just 14 cases in total. Not all were the outgrowth of crises. Nevertheless, in those 14 cases, respondent states prevailed entirely on the merits in almost two-thirds of the cases, and prevailed at least in part (defeating claims that decreased damages) in over three-quarters of the cases. This suggests that investor-State arbitration is not an ideal mechanism—at least from the investor’s perspective—in resolving crisis-related emergency interventions to stabilize financial institutions (again, bail-ins, bailouts, and the like).

Indeed, the emergency intervention cases where investors prevailed on the merits tended not to relate to broad economic or financial crises.  For example, one such case where the investor prevailed was Valeri Belokon v. Kyrgyz Republic, PCA Case No. AA518. That case concerned emergency interventions (including management takeover) accompanied by criminal investigations, undertaken outside of a broader crisis.  By contrast, in the context of a bona fide financial crisis, tribunals have often deferred to the State’s judgment about the need for emergency intervention unless carried out in bad faith or discriminatorily.

While psychologically salient, emergency interventions are far from the only type of dispute that arises from crisis. As the overall data on outcomes indicates, investors are more successful with other categories of claims.  Investor-State arbitration, even in a crisis, can provide a tool to resolve disagreements over state measures that negatively impact foreign banking and finance investments.

Conclusion

Based on the data from the BIICL study on investor-State arbitration in the banking and finance sector, it appears that crisis is a significant catalyst for investor-State disputes.  This segment of ISDS is responsive to local, regional, and global political dynamics. Whether it is well-suited to this role is a more complex issue, depending at least in part on the specific nature of the dispute and the contested State measures.