By Paul Uranga[1]
Introduction
“As [the investment arbitration] awoke one morning from uneasy dreams [it] found itself transformed”. Drawing from the opening line of Franz Kafka’s ‘The Metamorphosis’, this echoes the transformation undergone in investment arbitration. But, unlike Gregor Samsa, the novella’s protagonist, this shift didn’t occur overnight and remains far from complete. After more than thirty years of existence, investment treaty-based arbitration has evolved and, in some respects, metamorphosed in response to the issues at stake. While international investment law is facing a well-known “legitimacy crisis”, its main dispute settlement method, arbitration, is under the spotlight. It alone accounts for the majority of criticisms and attempts at reform, as illustrated by the multilateral discussions undertaken by the United Nations Commission on International Trade Law (UNCITRAL) Working Group III. Arbitration is increasingly seen as an unsuitable means of settling foreign investment disputes, because of the interests inherent in the participation of a sovereign actor in the dispute. Among other concerns, such as the impact of arbitration on state’s right to regulate, the attacks also focus on the foundations of arbitration. Specifically, critics point to its ad hoc and confidential nature, the absence of a rule of precedent, and the option to choose arbitrators. The combination of these features is said to result in a lack of consistent jurisprudence, questionable ‘democratic’ legitimacy, and a risk to arbitrators’ independence and impartiality. These criticisms highlight the need for reformation by means of a radical change in the institutional form of arbitration, or even its abandonment. The overhaul of the Investor State Dispute Settlement (ISDS) is also the spearhead of the European external investment policy both in its own regional agreements and at the multilateral level.
Yet investment arbitration seems to have already moved away from its original form. From the earliest contract-based arbitration to the most recent treaty-based ones, investment arbitration has evolved. Not really in form, but definitively through the evolution of the mindset of arbitrators. Indeed, they are often seen as the key (p 182) to overcoming the legitimacy crisis the system faces, and it has been argued that their practice is increasingly influenced by the position that States take towards them. As a result, the idea of a metamorphosis of arbitration – which would take place without the ‘systemic’ reform sought by the EU and many others – through the evolution of arbitrators’ practice and the conception of their role, is not so far-fetched.
At a time of intense multilateral discussions on the redesign of investment arbitration, this short contribution outlines the reasons why, in the absence of a formal change in its main characteristics, investment arbitration would have nevertheless undergone a substantial change. This idea is justified by the fact that arbitrators take into account considerations that are theoretically foreign to international arbitration practice – at least historically. While the fundamentals remain the same, this contribution shall argue that the philosophy behind arbitration has undergone a metamorphosis. Finally, unlike Gregor Samsa who, at least when he wakes up, remains human in mind and insect in form, investment arbitration remains in form, but departs from it in mind.
The Original Form of Investment Arbitration: An Emanation of Commercial Arbitration Paradigm
Sometimes referred to as “two sides of the same coin” (p 298), it is generally accepted that modern investment arbitration was born from the mould of commercial arbitration, from which it draws its principal characteristics. Like Athena emerging from the skull of Zeus, investment arbitration emerged from the skull of commercial arbitration. Scholars have often identified and analysed the relationship between the two forms of arbitration, reflecting a public/private paradigm shaping contemporary international investment law. The private commercial paradigm that shaped the way in which foreign investment disputes are settled is rooted in several historical instruments. The 1966 Washington Convention, which created the International Centre for Settlement of Investment Disputes (ICSID), adapted the commercial arbitration model to accommodate the presence of a public actor, blending it with elements of inter-state arbitration. As is often highlighted (p 1270), “investment arbitration often involves public international law grafted onto a substructure of private commercial arbitration”. Indeed, some of the arbitral institutions that administer investor-state arbitration proceedings, such as the London Court of International Arbitration (LCIA) and the International Chamber of Commerce (ICC), remain specialised in commercial arbitration between private parties.
In many ways, investment arbitration retains the original characteristics of commercial arbitration, namely flexibility, freedom of the parties and confidentiality. Moreover, it should not be forgotten that the original vehicle for the parties’ consent to arbitration in investment arbitration disputes was state contract (pp 18-22). Consent to submit to arbitration in the event of a dispute was mainly found in the arbitration clauses of various contracts concluded between the State or its entities and private investors. This is undoubtedly one of the reasons why ICSID recorded so few cases during the first decades of its existence. Over and above their common institutional roots, the tribunals were originally composed mainly of practitioners from the commercial arbitration field. While today, specialisation in investment law is commonplace, this was not the case at the time. Practitioners who acted as lawyers and arbitrators in disputes between governments and private investors were essentially specialists in international commercial arbitration. Their past experience in that field induced a dominant mindset. Arbitrators drawn from commercial arbitration appeared less inclined to show deference to States’ regulatory choices, and favoured the equality of the parties. Secondly, one might say that they tended to consider the dispute more in “clinical isolation’, i.e., by focusing solely on resolving the dispute without worrying about the consistency of jurisprudence. In other words, as the arbitrators in Romak v. Uzbekistan stated (¶ 171), their sole purpose would be to resolve the dispute before them, without giving much weight to arbitral precedents, and without any ambition to protect the system as a whole.
The Evolution of Investment Arbitration: A change of arbitrators mindset
An early development in the history of investment arbitration was the famous AAPL v. Sri Lanka award of 1990, which enshrined what came to be known as “arbitration without privity”. The vehicle for state consent is no longer only the contract or national law (¶¶ 77-78), but also an international treaty; in this case investment protection treaties. Through a general offer of arbitration contained in the treaty’s arbitration clause, States automatically consent to arbitration when a dispute is brought by investors from the other contracting state. This (r)evolution, unforeseen by the drafters (pp 55-56) of the ICSID Convention or the Bilateral Investment Treaties (BITs), definitively anchors investment arbitration in public international law and distances it from its commercial origins. This initial transformation is not to be taken lightly, as it has led to an unprecedented boom in arbitration proceedings (p 78) against governments. If this unprecedented growth in treaty-based arbitration has led to criticism, it has surely also motivated arbitrators to take these criticisms into consideration. Indeed, it is long acknowledged that arbitrators are scrutinised by their peers in a competitive market, where all decisions have the same value. This incentivises them to seek to legitimise their interpretations in the eyes of the arbitral community. Moreover, studies show that arbitral tribunals are not completely insensitive to the dissatisfaction of civil society and influential States; on whom the long-term viability of the system depends. This implies promoting, in one way or another, the legitimacy of international investment law in the long term, and thus moving away from the simple role of agent of the parties to the dispute to guardian of the regime or “régulateur”.
Despite lack of official precedent in ISDS, the often-analysed practice of referring to precedent easily highlights the desire – often not explicit – to participate in a goal that transcends their primary role of settling the dispute brought before them. If arbitrators are not obliged to follow a mandatory stare decisis rule, then why do they do it? It is a well-known fact that commercial arbitrators have done little to develop this practice. Borrowing the recent words of one tribunal (¶ 190), we can answer that tribunals have “a duty to seek to contribute to the harmonious development of investment law and thereby to meet the legitimate expectations of the community of States and investors towards certainty of the rule of law”. This type of formula, long used by other arbitral tribunals (¶ 90), highlights the arbitrator’s moral duty to the rule of law and thus safeguarding the legitimacy of the system. However, in a classical view of arbitration, shared by some (pp 588-589), this should not be the case, and arbitrators should only be concerned with resolving the dispute for which the tribunal has been set up. Yet this is one of the most significant developments in investment arbitration. In a different yet equally indicative context of this trend of tribunals behaving as agents of a broader system, Emmanuel Gaillard stated regarding the Orascom v. Algeria (esp ¶¶ 543) case that “such an award is emblematic of the ability of arbitral tribunals to implement investment law as a system, and not to contemplate their referral from the isolated point of view of the instrument on the basis of which they are seized, as if this instrument existed in a total legal vacuum”[2] (p 505). In this way, from a metaphysical point of view, the metamorphosis reveals itself, and is reinforced by other notable developments.
Commentators often discuss the legislator’s role in filling the large normative gaps – or silence – left by investment protection treaties is one that is often discussed. Another factor, albeit still limited, is the growing recognition of considerations external to the treaty in question, such as human rights.
Metamorphosis of Investment Arbitration: An Incomplete One
Other developments, such as the opening up of investment arbitration to greater transparency and a move away, at least in part, from traditional confidentiality, appear to have supported this shift in mindset. Today, most ‘known’ decisions are published and accessible, enabling third parties to comment on them, disputing parties to use them and arbitrators to refer to them. What is more, the intervention of third parties in the proceedings has now been made possible, first through the endorsement of case law (¶ 33) and then through its acceptance in treaties (article 32). The diversification of practitioners, commentators and arbitrators in investment arbitration has also favoured this change of perspective on the subject. Nevertheless, some may argue that nothing has really changed. The original form remains unchanged in its fundamentals, and no revolution has challenged the primacy of arbitration as a means of settling investor-State disputes. Moreover, the change in mindset does not seem to affect all arbitrators. First, some, like Stern (¶ 187), still seem to adopt the more “isolationist” view of the dispute illustrated above, typical of commercial arbitration. Second, it seems that some arbitrators remain “impervious to the storm outside”. Recent cases like Eco Oro v. Colombia and Rockhopper v. Italy cast doubt on whether arbitrators really take environmental imperatives into account. Such controversial decisions, which set aside State environmental objectives in favor of costly compensation even in the presence of a treaty that better protects the State’s regulatory space, do not demonstrate a concern for systemic and contemporary considerations.
In this respect, the metamorphosis of mind seems to be incomplete. But aren’t we witnessing a completion of the metamorphosis in practice? When we talk about the transformation of investment arbitration, one of the first things that comes to mind is the European proposal for an Investment Court System (ICS). The European Union’s stance, initially introduced through the Comprehensive Economic and Trade Agreement (CETA) and subsequently in other agreements, represents an innovative and distinctive approach in a world that remains largely governed by ad hoc arbitration. However, if this European proposal is viable and overcomes the problems of individual member-States’ ratifying the agreements, it nonetheless represents a real evolution of the classic form of arbitration. Furthermore, this proposal is meant to be succeeded by the Multilateral Investment Court (MIC), a concept fervently championed by the European Union within UNCITRAL Working Group III. This completely ‘public’ and multilateral form of investor-State dispute settlement would represent the completion of the metamorphosis of investment arbitration, begun in mindset and completed in form. It remains to be seen whether this reform will really remedy the shortcomings of arbitration, or even whether it will actually materialise.
Conclusion
To conclude, this contribution has outlined that despite the lack of an institutional change, a metamorphosis of sorts has taken place and is still ongoing. While this evolution does not strictly follow a linear path and encounters fluctuations inherent in the arbitral nature of investment disputes, it is indeed in progress. This fits right in with the idea that international investment law can naturally adjust to contemporary challenges, even if slowly. Through arbitrators, international investment law appears to be a reflexive regime that is evolving in light of criticism and social context. Though evident that investment arbitration has evolved significantly from its early stages to its current form, the metamorphosis is not absolute. It hinges on arbitral tribunals’ perceptions of their roles and their varying interpretations over time. In short, the reference to Kafka’s metamorphosis is not insignificant. It emphasises the fact that, rather than a brutal evolution of form, it is above all the gradual transformation of the arbitrators’ mental perception that takes place. So, in the event of a late entry into force of the EU’s ICS in its agreements, and a failure of its MIC proposal, one can take comfort in the hope that the transformation of investment arbitration will continue to progress and materialise.
PhD student in International Investment Law, Université Laval (Canada), Université de Bordeaux (France); Member of the Chaire de recherche sur les nouveaux enjeux de la mondialisation économique (NEME) and the Centre de Recherche et de Documentation Européennes et Internationales (CRDEI). ↑
[Our translation from French] : “ une telle sentence est emblématique de l’aptitude des tribunaux arbitraux à mettre en œuvre le droit des investissements en tant que système et non à contempler leur saisine du point de vue isolé de l’instrument sur le fondement duquel ils sont saisis, comme si cet instrument existait dans un vide juridique total”. ↑