In BG Group v Argentina, the US Supreme Court upheld an arbitral
award rendered by arbitrators who allowed investor-state arbitration despite
the investor disregarding the mandatory recourse to court provision contained
in the applicable bilateral investment treaty (BIT). Instead of interpreting the
BIT by applying the Vienna Convention on the Law of Treaties, to which both
countries to the BIT were parties, the court used US canons of interpretation
applicable to arbitration clauses in private commercial contracts. The decision
refocuses attention on the defects of investor-state dispute resolution system
and the pro-investor bias of arbitrators. To restore a desirable equilibrium
between the interests of the host state and foreign investors, urgent reforms of
the present dispute resolution system are required.
The rights and privileges that foreign investors currently enjoy under bilateral
investment treaties (BITs) and investment protection chapters in free trade
agreements, collectively called “International Investment Agreements” (IIAs), as
well as arbitral awards in favour of such investors against host states rendered
pursuant to dispute settlement provisions under such IIAs, have resulted in
“growing dissatisfaction with the regime in general and investor-state arbitration
The recent US Supreme Court decision in BG Group v Republic of Argentina
(BG Group) would contribute to such dissatisfaction. The case dealt with
what has been described as “really the ultimate question in our law of arbitration”.
As another writer observes, the case “goes to the heart of whether it is the arbitral
tribunal that has the exclusive say on its own competence or whether national courts
have a limited role in ensuring that arbitral tribunals cannot egregiously depart
from the consent of the parties”.
The diffident approach of the Supreme Court
to this larger question and its indifference to the sui generis issues arising from
investor-state dispute settlement (ISDS) vividly illustrate some of the fault lines
in international commercial arbitration as well as the weaknesses of the several
decades-long foreign investment law regime that have been highlighted by scholars
and practitioners for many years.
The decision in BG Groupwould confirm the
perception of many that the current ISDS regime is obsolete and unresponsive
to concerns about the misplacement of, if not reversal of, priorities regarding the
role of foreign investment in the economic development of host countries, and
the legitimacy of arbitral tribunals, composed of unelected arbitrators drawn from
Western countries, making blockbuster awards against developing countries thereby
unduly privileging foreign investor concerns over far more pressing concerns
relating to the welfare of host country populations.
Most often the preamble of the text of IIAs identifies the development of
the host country as a key objective of the IIA. That the main purpose of IIAs is
to promote the well-being of host country populations by encouraging foreign
investment is generally overlooked in arbitral awards.
Often, arbitrators in
investor-state disputes approach and interpret IIAs as if the principal purpose of these instruments is to function as insurance policies against political risk, and
sometimes even against commercial risk, in favour of investors. Some of these
investors, had they evaluated the political risk they would face by investing in
some countries, would have stayed away from a risky investment in the first place.
In other words, but for the IIA, a potential investor would have stayed away from
a particular country because the proposed investment would have been too risky,
if not reckless.
When the first IIAs were signed, globalisation was a term that was not in the
vocabulary of trade specialists. In the 21st century, many barriers to market entry
by foreign companies have been dismantled, and technology and the surplus of
information have made markets more efficient. It is therefore arguable that in this
age of globalisation, free market considerations and not IIAs should influence
investment decisions. When countries and businesses assume unnecessary risk, the
markets usually deliver outcomes based on a risk–reward ratio formula. If a host
country molests foreign investment, it should be punished by market forces or by
application of specific provisions in a state contract that an investor has signed
with the host government as a precondition for investing. But foreign investors
engaging in risky ventures in high-to-medium risk host countries under the
protective umbrella of IIAs get the best of both worlds. They reap the benefits of
access to resources and markets but at the same time are treated better than their
counterparts who are citizens in these host countries because of the protections
given to them in IIAs. If IIAs are to avoid just becoming blueprints for predation of
limited resources from vulnerable host country populations, the asymmetric nature
of such instruments would have to be remedied by coherence in their interpretation
as well as clarification through clearer drafting of key provisions in new IIAs.
The majority of justices of the Supreme Court in BG Groupheld that an arbitral
award in favour of an investor against Argentina could be enforced, although
the investor had not followed the sequence of steps prescribed in the applicable
investment protection treaty,
which had to be followed before an investor could
institute arbitration proceedings against Argentina. This was because, according to
the majority opinion, the arbitrators were empowered under the BIT to determine
whether the investor could bring an action against Argentina despite the investor
not having satisfied a “recourse to court before arbitration” requirement in the
Roberts CJ delivered a strongly worded dissent in which he questioned he reasoning of the majority, which reasoning was heavily reliant on precedents
dealing with domestic arbitration clauses in commercial agreements that the
majority had used to interpret the BIT.11
The decision of the US Supreme Court, the highest court of the country that
has entered into many significant regional trade agreements and is in the process of
negotiating other free trade agreements that contain investment protection chapters
would provoke more debate about the desirability of retaining ISDS
provisions in their current boilerplate form in IIAs.
The decision in BG Group illustrates why so many scholars and civil society
groups have concerns about ISDS, or at least the way arbitrators purport to act
under ISDS provisions. The Supreme Court decision as well as the decision of
the arbitral panel show why there is an urgent need to define with precision in
future IIAs the conditions under which the host state would permit investor-state
arbitration and curb the power of arbitrators who have arrogated to themselves the
power to create precedents with no basis in customary international law or in the
text of the treaty that they purport to interpret.
With the entry of the Lisbon Treaty,
the European Union (EU) is expected to replace the approximately 1500 IIAs that
individual EU member states have concluded so far with uniform EU agreements
with third countries. During this exercise, both capital importing countries in the
Global South and developed economies currently negotiating the Transatlantic
Trade and Investment Partnership (TTIP) would have the opportunity of critically
assessing some of the policies that currently underpin ISDS, curb arbitrator
overreach and otherwise enhance the legitimacy of ISDS mechanism. In particular,
the precise reach of the Fair and Equitable Treatment provision in IIAs would have
to be clarified so that this provision is not leveraged to impose an obligation that
normally could be imposed only under a stabilisation clause as it appeared to have
been done by the arbitral panel in the BG arbitration.
Countries with strong democratic traditions ensure that the judicial power
of the state be exercised in a transparent and accountable manner. Indeed, some
states in the US arguably take this concept too far by requiring that judges submit
themselves periodically for election. ISDS is an exception to this principle but
can be taken too far. Alarms over the democracy deficit posed by ISDS have been
recently echoed by the distinguished scholar, Professor Martti Koskenniemi, who
has spoken about “a transfer of power from public authorities to an arbitration
body, where a handful of people would be able to rule whether a country can enact a law or not and how the law must be interpreted”.
These observations become
poignant in the context of the widening economic gap and the resulting inequality
that remains an urgent issue to be addressed by states.