International Investment Arbitration: Poisoned at the Root?

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 Tolga R Yalkin is a graduate student in the Faculty of Law, University of Oxford and President of Oxford Pro Bono Publico, a public interest law program of the Oxford Law Faculty. His Oxford thesis considers the international minimum standard of treatment in international investment law.

 Earlier this month, the British Institute of International and Comparative Law (‘BIICL’) held its annual conference in London and focussed on the theme of “Business and International Law” in London on 5 June 2009. Together with Professor M Sornarajah (National University of Singapore), Professor Peter Muchlinski, (University of London) and Sylvia Noury (Freshfields Bruckhaus Deringer), I spoke on one of the panels. The discussion in our panel revolved around international investment arbitration, with the two senior panellists focusing on broader systemic developments, and the latter two on specific technical areas of international investment law. In this post, I wish to reflect on the proposition by Professor Sonarajah-one of the doyens of international investment law-that the expansion of jurisdiction by international investment tribunals offers evidence that the investment treaty system is intrinsically pro-business.

Sornarajah advanced the proposition-enjoying increasing purchase in the international legal community-that bilateral and multilateral investment agreements and the system of international investment arbitration was conceived, and indeed continues to operate, on a number of false assumptions. Foremost among these is the ‘hunch’ that a system of international investment arbitration would significantly increase the inflow of capital to developing countries, bringing with it wealth and development to some of the world’s poorest citizens. According to Sonarajah,this justification has been promoted by neo-liberal business interests-rather than arising from genuine social concern, Furthermore, he claims that the system has ‘entrenched’ itself by providing arbitrators and international law firms-for whom the system ‘produces golden eggs’-with vested interests. The result, as he sees it, is that the system is intrinsically geared towards the interests of business and capital-exporting States. In support of this contention he provides examples that illustrate the expansion of jurisdiction enjoyed by tribunals.

Sornarajah believes that the examination of the way in which jurisdiction has been expanded will permit us to determine: (1) whether the system can be ‘salvaged‘; and (2) what measures might be adopted it this respect.

Despite painting a compelling picture of what he sees as the true nature of international investment arbitration, Sornarajah’s submission must be seen, at best, as a starting point for further inquiry. The main flaw of his approach is that reaching firm policy conclusions requires more than polemic arguments and anecdotal examples; it requires a solid and rigorous analytical approach to considering both:

(1) the outcome of investment decisions; and

(2) the legal reasoning engaged in by investment tribunals.

In order to ground any policy imperative, the way in which these two elements are considered is critical. First, they should be analysed separately. This means that it is possible that we might decide that although the legal reasoning adopted by tribunals be sound we are unhappy with the substantive outcomes of the decisions they have reached. Second, both considerations must receive sufficiently comprehensive treatment. It is not enough to point to anecdotal examples of an outcome we are dissatisfied with, or some legal reasoning that is flawed or that conflicts with first principles. Such anecdotal reasoning may be sufficient for the purposes of tracing the contours or general trends of international investment arbitration, in a descriptive sense, but cannot form the basis for crafting policy treatments.  Tailored and concrete proposals on how to reform the system cannot be developed without isolating and dealing with the two above considerations in full. Only then can effective policies be proposed-identifying not merely that action is called for, but what form it should take.

To a certain extent, Sornarajah’s argument touches on both these elements, but considers them neither separately nor in full. He takes particular exception to the definition of ‘investor’ expounded in Tokios Tokelés v Ukraine and also the treatment of most-favoured nation clauses (‘MFNs’) in Maffezini v Spain. His analysis fails in a number of respects.

The thrust of his illustrations might be criticised on two counts. First, by his own admission, the decisions chosen constitute ‘high water marks’ vis-à-vis the supremacy of investor’s interests. If this is the case, we ought to look to the average, rather than the most extreme examples, for evidence of system failure. Turning first to the example of MFN clauses. Broadly speaking, a MFN clause is a promise from one state to another that it will not treat the investments of nationals of the other State any worse than those of any other nation. MFN clauses have been the darling of investors, as they constitute an absolute standard that is easily comparable and that avoids variability inherent in other non-discrimination clauses. A number of cases have dealt with their treatment over the years, APPL v Sri Lanka in 1990, Maffezini v Spain in 2000, CMS v Argentina in 2003, Salini v Jordan in 2004, Siemens v Argentina also in 2004, and Plama v Bulgaria in 2005, to name just a few. Out of this handful of cases selected, Maffezini v Spain unquestionably constitutes the high-water mark in the expansion of MFN clauses. Since then, there has been an observable retreat, with expansionist decisions receiving openly hostile criticism in the decisions of some tribunals (see, eg Plama v Bulgaria). The conclusion that might be drawn on reading all of the cases is that MFN clauses can offer procedural advantages, even when the comparison is the relative silence in the other instruments (Maffezini v Spain, Siemens v Argentina) providing to do so falls within the wording of the provision interpreted on principles in the Vienna Convention (Plama v Bulgaria, Salini v Jordan) and the application of the clause does not lead to an artificiality of consent (Plama v Bulgaria), and that they can offer substantive advantages, but not where the benchmark is silence in the other instruments (APPL v Sri Lanka, CMS v Argentina). The outcome is really a mixed, bag, and far less uniform in its treatment of the standard than is suggested by Sornarajah.

Second, Sornarajah does not consider to any extent the legal reasoning found in the decisions. There very well may be cases in which the outcomes are so manifestly egregious that they could not possibly be based on sound legal reasoning. But more often than not, when decisions dictating ostensibly unacceptable outcomes emerge, evidence of their flaws will be found within their passages, rather than solely in the substance of their orders. It is rare to be faced with a manifestly incorrect outcome without some incorrect legal reasoning. He cites the example of Tokios Tokelés v Ukraine, in which ‘local’ Ukrainian investors were able to obtain the benefit of an investment treaty by incorporating a shell company in an overseas jurisdiction, and the explicit endorsement of this proposition by the tribunal in Aguas del Tunari v Bolivia. With reference to Tokios Tokelés v Ukraine, the Tribunal seemed to adopt a rather literal interpretation of the treaty, with Professor Weil’s vigorous dissent preferring a teleological interpretation. Sornarajah does not address the legal analysis-only the outcome. this might be likened to the situation  of the victim of a crime who is outraged at the mistrial. It might be observed that although in this particular situation the decision may appear unjustified, especially from the perspective of particular individuals or stakeholders, when one looks to the broader principles at play the case may not be so straightforward. Careful review and criticism of the legal analysis would likely help us better decide both whether the case is an outlier and what aspects of it we might like to retain in any policy changes we make. For example, it could be that the legal reasoning is sound and that we are just unhappy with the legal rules that direct the arbitrator. In such a case we might simply consider providing different instructions to arbitrators, rather than abandoning the system altogether.

Sornarajah’s position that neo-liberalistic ideology took root in the context of international investment arbitration, perpetuating business interests to the detriment of the developing countries, has merit. However, this merit only extends to suggesting that we carefully consider whether we are happy with the status quo. That is where its indicative value stops. Only with carefully drawn distinctions between law and policy, reasoning and outcome, will we be able to identify the nature and character of measures that should be adopted. The only alternative to such measured analysis is the same ideologically driven solutions that Sornarajah himself advocates against.

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Franz Kundmüller says

June 27, 2009

Very interesting post, but in relation with the interpretation of MFN clauses in the Maffezini case, I am shure that it is not a rule, but the exception to the rule.

In fact, por example, the MFN clause in chapter X of the new FTA USA - Peru, includes a footnote that expressly excludes the interpretation of MFN to procedural (arbitral) issues, concentrating the effects of MFN to substantive issues.

This means that jurisprudence in investment treaty arbitration should be analyzed with more detail.

On the one side, it´s possible to identify contradictions (see the excellent papers of Prof. Susan Franck) among awards concerning similar cases, but on the other side, the same jurisprudence is useful for the incorporation of reforms during the negotiation and approval of "last generation" investment chapters in FTA´s or BITs. In fact this has been the case in the abovementined FTA.

Kind regards

Franz Kundmüller
Prof. of Investment and State Arbitration
Lima - Peru
Pontificia Universidad Católica del Perú
Universidad Peruana de Ciencias Aplicadas
Universidad de Piura
Universidad San Pablo