The Inconsistencies in the Pursuit of Consistency of Investor State Dispute Settlement Awards

Keywords: ISDS, International Investment Agreements, awards, consistency

Introduction

The system of Investor-State Dispute Settlement (ISDS) has been under the microscope of the community of States, investment arbitration practitioners, and scholars over the past several years.[1] As the number of investor claims brought against host states for the alleged violations of International Investment Agreements (IIAs) grew exponentially, revealing the teeth of the broad investment protection policies, the calls for the reform and even abolition of the ISDS system grew louder.[2] Critics of the ISDS system have been active regionally (in South America and the European Union), as well as at the international level (UNCITRAL Working Group III – ISDS Reform).[3]

The most pressing concerns underlying the ongoing international ISDS reform discussions range from the selection of the arbitrators/adjudicators and their independence and impartiality[4], the costs and duration of the proceedings[5] to the consistency, coherence and, correctness of the awards.[6] This article focuses on the latter category of concerns which presents the largest threat to the legitimacy of the ISDS system as a whole in the eyes of its critics in the legal community and civil society.[7]

The background of the backlash against ISDS

At the outset of the discussion about the criticisms of the consistency of ISDS awards, it should be noted that there are legitimate arguments justifying the growing criticism, as well as reasonable explanations for the perceived and actual inconsistencies of the ISDS case law. Therefore, neither side of the argument should be taken for granted without a nuanced and balanced assessment of the underlying issues.

The origins and surge of the criticisms of ISDS

Jan Paulsson prophetically stated over two decades ago that the sustainability of the ISDS system built on the global network of IIAs would depend on the performance of the arbitrators entrusted with resolving investor-state disputes: “A single incident of an adventurist arbitrator going beyond the proper scope of his jurisdiction in a sensitive case may be sufficient to generate a backlash”[8] Since Paulsson’s remarks in 1995, there has been more than one arbitrator whose awards were at least perceived as “adventurous” and the criticism of these awards has opened up the floodgates to the ongoing scrutiny and ISDS reform process. The series of ISDS claims raised against Argentina (Argentina cases) in the aftermath of the devastating financial crisis (from 2001 to 2003) are an oft-cited prime example of the inconsistent and incoherent ISDS award.[9] Namely, arbitral tribunals in the Argentina cases have applied diverging interpretations of the substantive treaty provisions and State defenses, although they arose out of the same set of facts and sometimes even the same applicable Bilateral Investment Treaty.[10] The analysis of these awards shows that the distinctions between most of the awards can be explained by the difference in the basis of the claim, the factual matrix underlying the case, or the arguments and evidence presented by the parties.[11] However, the obvious inconsistencies in the reasoning of the awards made them an easy target and a surrogate for the entirety of the ISDS system from the perspective of its ardent critics.[12]

Although the calls for consistency and coherence in ISDS awards are founded in the legitimate pursuit of legal security at the international level, one should not lose sight of the main characteristics of ISDS (distinguishing this dispute resolution mechanism from national and international litigation).[13] ISDS is primarily built on a consensual relationship between two contracting states granting foreign investors direct recourse against the host States for alleged treaty violations.[14] Just as every contractual relationship is a product of the will of the parties, with obligations that can result in diverse claims, each investment treaty should be interpreted in light of its purpose and underlying will of the parties.[15] This is consistent with the provisions of the Vienna Convention on the Law of Treaties, which provide that the interpretation of international treaties must take into account the context of the treaty, its object, and purpose.[16] In addition, the large and complex investment projects which are protected under these treaties give rise to particular issues and disputes which cannot be placed under a broad umbrella of interpretive norms.[17] Therefore, the pursuit of a unified and predictable precedent system in ISDS may be a futile endeavor. ISDS was born out of the desire to create a dispute resolution mechanism that would be alternative to and distinct from the national judiciary, which did not enjoy the trust of foreign investors.[18] However, the recent calls for ISDS reform seem to aim at the judicialization and reclaiming state control over the process. This is largely inconsistent with the purpose of the ISDS system and the underlying framework of international agreements which provide foreign investors standing against States.[19]

Is there a lack of consistency of ISDS awards?

If the consistency of the ISDS jurisprudence is to be measured in the reliance on established previous decisions as persuasive authority, then the analysis of the existing body of ISDS decisions reflects a consistent reliance on previous investment awards.[20] Although some tribunals explicitly emphasize the lack of any obligation to follow any previous decisions, they go on to extensively cite prominent awards both to rely on and distinguish from their reasoning.[21] The fact that some tribunals come to diverging conclusions in similar cases can often be attributed to the underlying treaty language and factual circumstances.[22] Namely, the tribunals reside within the analytical framework construed by the provisions of the applicable treaty. For example, tribunals analyzing provisions guaranteeing “Fair and equitable treatment”, “fair and equitable treatment in accordance with the norms of international law” and “Fair and equitable treatment not exceeding the minimal standard of protection under customary international law” are likely to rule differently, even if presented with identical underlying facts.

In most cases, the broad interpretations of some treaty provisions are a direct result of their largely unqualified wording.[23] The broad wording of so-called “old-generation IIAs” has allowed the proliferation of ISDS claims. In fact, the vast majority of ISDS claims known to date were brought on the basis of old-generation BITs, whose unqualified provisions allowed foreign investors to seek redress for treaty violations on multiple bases at a time.[24] Any effort to completely harmonize the ISDS practice and to establish a precedent system in ISDS, without a systematic and consistent substantive reform of the applicable IIAs, would be artificial at best and detrimental to the correctness of the ISDS awards. In fact, recent studies have shown that the pressure imposed on the tribunals to pursue consistency of ISDS awards has resulted in a trend of tribunals citing awards that would be considered consistent rather than those that would result in the correct conclusion in the specific case.[25] Thus, drawing arbitrary “lines in the sand” in a field that is dynamic and ever-evolving can result in the deterioration of the quality of the awards.[26]

The loudest critics of the perceived inconsistency of ISDS awards are States which have abandoned ISDS and are actively promoting the establishment of other mechanisms under closer control of the States, rather than the gradual reform of the ISDS system as it stands. Therefore, their criticism of the lack of consistency in ISDS can be traced back to a broader repudiation of ISDS in general and should be viewed in that light.

The European Union and its Member States and several Latin American countries have all taken a firm stance against ISDS, by terminating all their BITs[27] or even withdrawing from the ICSID Convention.[28] There is also a powerful campaign lead by the EU for the total abandonment of ISDS and the establishment of a stand-alone multilateral investment court.[29] The Latin American backlash against ISDS comes as no surprise as several countries of the region issued the famous “Tokyo No” to the first draft of the ICSID Convention in 1963.[30]

Following the decision of the European Court of Justice in the Achmea case,[31] the EU and its Member States have concluded an Agreement on the termination of all intra-EU BITs (including the sunset clauses).[32] Until a permanent replacement for ISDS is established (most likely a standing Multilateral Investment Court), aggrieved investors can engage in “structured dialogue” with the host State or refer to the national courts.[33] India also abandoned ISDS in its recent IIAs, and has since concluded IIAs with reformed substantive provisions and without provisions allowing investors direct recourse against the State. Instead, these IIAs foresee the resolution of investment disputes in state-to-state proceedings, diplomatic channels, or domestic courts. Interestingly, Argentina, as the State which was on the short end of the problematic ISDS awards has not terminated its BITs or their ISDS provisions. In fact, Argentina was slow to adopt any treaty reforms following the financial crisis, only concluding two BITs since.[34] The new and reformed BITs provide exceptions and qualifications to the substantive provisions, in order to avoid broad their interpretation in the future.[35] The effects of the reformed substantive and procedural provisions on the real and perceived consistency of ISDS awards is yet to be seen.

Conclusion

The preceding analysis shows that the criticism of the consistency of ISDS awards is driven by States who are determined to take back control over their investment policy regime. In this sense, ISDS as a dynamic and inherently diverse dispute resolution system will never be able to meet the standards of uniformity and predictability pursued by the States. Therefore, as long as there is tension between the States opposing ISDS and those which remain in favor of the system, the issue of inconsistency and incoherence of ISDS awards will remain the endless point of contention. In this context, it is important to take a realistic stance on the issue of consistency and assess the degree and type of reform which will address the actual issues. The continued pressure to pursue uniformity over the correctness of ISDS awards, without taking into account the intricacies of the case law and actual progress, will certainly not result in the desired improvements of the areas of legitimate concern.

The ISDS system has proven its resiliency and, despite some areas which can and should be improved in the future, it will likely outlive the calls for its abolishment. There is an established practice of arbitral tribunals of relying on previous awards in their reasoning, despite the absence of any obligation to that effect. Under the current system, there is no consensus among States that a system of binding precedent in investment arbitration is either imminent or desirable. The consistency of ISDS awards will come with the adoption of more precise substantive and procedural provisions in new generation IIAs, and no amount of outside pressure can yield the desired result.

States which are legitimately concerned about the possibility of broad interpretations of their IIAs should engage in meaningful negotiations of calibrated provisions that will protect their policy space and manage the expectations of the foreign investors. Successful and robust reform of the substantive treaty provisions may help address several areas of concern related to the ISDS system, including the cost and efficiency of the proceedings, and the correctness and consistency of the outcomes.[36] When it comes to the improvement of the consistency of treaty interpretation, there is no substitute for clear treaty drafting. Chasing the shadows of previous inconsistencies and flawed awards should not distract from the reform priorities and the improvements which can be accomplished through targeted and gradual reform.

ENDNOTES

[1] Inconsistency’s Many Forms in Investor-State Dispute Settlement and Implications for Reform, Lise Johnson and Lisa Sachs, Columbia Center for Sustainable Investment Briefing Note, Inconsistency’s Many Forms in Investor-State Dispute Settlement and Implications for Reform, November 2020. Available at: Microsoft Word – Inconsistencies_ISDS_Briefing Note_11.28.18.docx (columbia.edu).

[2] Backlash to Investment Arbitration: Three Causes, Louis Wells, in The Backlash against Investment Arbitration: Perceptions and Reality, Michael Waibel et al. (eds), (Alphen aan den Rijn: Kluwer Law, 2010), pp. 342–7.

[3] Possible reform of investor-State dispute settlement (ISDS): Consistency and related matters Note by the Secretariat, United Nations Commission on International Trade Law Working Group III (Investor-State Dispute Settlement Reform) Thirty-sixth session Vienna, 29 October–2 November 2018, p. 4.

[4] For an overview of the discussions and working documents of the UNCITRL WG III on the topic of ISDS tribunal members’ selection appointment and challenge, please see: ISDS tribunal members’ selection appointment and challenge | United Nations Commission On International Trade Law.

[5] For an overview of the discussions and working documents of the UNCITRL WG III on the topic of the principles/guidelines on allocation of cost and security for cost, please see: Principles/guidelines on allocation of cost and security for cost | United Nations Commission On International Trade Law.

[6] Possible reform of investor-State dispute settlement (ISDS): Consistency and related matters Note by the Secretariat, United Nations Commission on International Trade Law Working Group III (Investor-State Dispute Settlement Reform) Thirty-sixth session Vienna, 29 October–2 November 2018. Available at: A/CN.9/WG.III/WP.150 – E – A/CN.9/WG.III/WP.150 -Desktop (undocs.org).

[7] Possible reform of investor-State dispute settlement (ISDS) Submission from the European Union and its Member States, United Nations Commission on International Trade Law Working Group III (Investor-State Dispute Settlement Reform) Thirty-seventh session New York, 1–5 April 2019. Available at: A/CN.9/WG.III/WP.159/Add.1 – E – A/CN.9/WG.III/WP.159/Add.1 -Desktop (undocs.org).

[8] Arbitration without Privity, Jan Paulsson, 10 ICSID Rev.-For. Inv. L. J. 232 (1995), p. 257.

[9] Lessons from the Crisis in Argentina, Prepared by the Policy Development and Review Department, In consultation with the other Departments, Approved by Timothy Geithner International Monetary Fund, October 8, 2003.

[10] Wiliam W. Burke-White, The Argentine Financial Crisis: State Liability under BITs and the Legitimacy of the ICSID System, 3 Asian J. WTO & Int’l Health L & Pol’y 199 (2008).

[11] Awards interpreting different provisions differently may not necessarily be inconsistent at all.
General Principles of Law and Investment Arbitration, Andrea Gattini, Attila Tanzi and Filippo Fontanelli (eds), Leiden: Brill Nijhoff, 2018. p. 461.

[12] Crisis, Emergency Measures and the Failure of the ISDS System: The Case of Argentina, South Centre, Investment Policy Brief, No. 2, July 2015, p. 2.

[13] The Proven Benefits of ISDS and BITs –Even for SMEs and Small Claims, Nikos Lavranos (NL-Investmentconsulting)/October 24, 2017. Available at: The Proven Benefits of ISDS and BITs –Even for SMEs and Small Claims – Kluwer Arbitration Blog.

[14] Investor–State Dispute Settlement and Impact on Investment Rulemaking UNCTAD, 2007 p. 3. Available at: iteiia20073_en.pdf (unctad.org).

[15] The Interpretation of Investment Treaties Series: International Litigation in Practice, Trinh Hai Yen, Volume: 7.

[16]Articles 31, 32, and 33 of the Vienna Convention on the Law of Treaties (VCLT) from 1969.

[17] Parsing and Managing Inconsistency in Investor-State Dispute Settlement, Julian Arato, Chester Brown and Federico Ortino, In: The Journal of World Investment & Trade, 22 Jun 2020, Volume 21: Issue 2-3, pp.336–373.

[18] UNCTAD, Investor-State Dispute Settlement and Impact on Investment Rulemaking, New York and Geneva, 2007.

[19] Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community, David Gaukrodger. and Kathryn Gordon, OECD Working Papers on International Investment, 2012/03, OECD Publishing. http://dx.doi.org/10.1787/5k46b1r85j6f-en.

[20] Using citation practices as a mean to measure the extent of precedent-based decision-making, Stone Sweet and Grisel note that since 2005, about 90% of all ISDS awards that include citations tend to cite to prior arbitral awards and more predominantly to awards rendered under ICSID whereas, in the pre-2000 period, arbitral tribunals tended to cite to the ICJ and other international courts. Stone Sweet and Grisel (dataset: 2016 Yale Law School Dataset on Investor-State Arbitration compiled by Alec Stone Sweet as principal investigator, and Sheng Li, Meng- Jia Yang, Michael Chung, Moeun Cha, and Tara Zivkovich as research assistants); See also Alec Stone Sweet, Path Dependence, Precedent, and Judicial Power in Martin Shapiro and Alec Stone Sweet (eds), On Law, Politics and Judicialization, Oxford University Press, 2002.

[21] Saipem SpA v People’s Republic of Bangladesh, ICSID Case No ARB/05/7, Award (30 June 2009) para 90 stating: “The Tribunal considers that it is not bound by previous decisions. At the same time, it is of the opinion that it must pay due consideration to earlier decisions of international tribunals. It believes that, subject to compelling contrary grounds, it has a duty to adopt solutions established in a series of consistent cases. It also believes that, subject to the specifics of a given treaty and of the circumstances of the actual case, it has 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.

[22] There is evidence of a gradual decline in the fragmentation of citations in ISDS awards, with an increase of cross-citations, informal dialogue between courts, and the active role of the International Court of Justice (ICJ). Parsing and Managing Inconsistency in Investor-State Dispute Settlement, In: The Journal of World Investment & Trade, Julian Arato, Chester Brown and Federico Ortino, 22 Jun 2020, Volume 21: Issue 2-3, pp. 336–373.

[23] The treaty protections which are most commonly invoked against the State (Direct and Indirect Expropriation, Fair and Equitable Treatment, Most Favoured Nation, Full Protection and Security) in most applicable IIAs do not provide any substantive or policy carve-outs which would allow the State to regulate in the public interest without risking treaty-violation claims.

[24] Investor-State Dispute Settlement Cases Pass the 1,000 Mark: Cases and Outcomes in 2019, UNCTAD IIA Issues Notes, Issue 2, July 2020. Available at: https://unctad.org/system/files/official-document/diaepcbinf2020d6.pdf.

[25] In his empirical research of the similarity of treaties cited by arbitral tribunals, Alschner found that arbitral tribunals prioritize consistency over correctness as most citations connect highly dissimilar IIAs, which is inconsistent with the policy priorities expressed by states. Wolfgang Alschner and Kun Hui, Missing in Action: General Public Policy Exceptions in Investment Treaties, University of Ottawa Research Paper, 2018.

[26] William W. Park’s contribution to The Backlash against Investment Arbitration: Perceptions and Reality, Michael Waibel et al. (eds), (Alphen aan den Rijn: Kluwer Law, 2010).

[27] Announcement of the EU Commission of the Agreement for the Termination of Intra EU Bilateral Investment Treaties May 2020. Available at: EU Member States sign an agreement for the termination of intra-EU bilateral investment treaties | European Commission (europa.eu).

[28] Bolivia was the first state to withdraw from the ICSID Convention (effective as of November 2007), followed by Ecuador (effective as of January 2010) and Venezuela (effective as of July 2012). In 2015, Ecuador terminated all its BITs after an assessment process which found that they were insufficiently negotiated and too generous in procedural and substantive guarantees for foreign investors.

[29] Submission from the European Union and its Member States to the UNCITRAL Working Group III, January 2019. Available at: A/CN.9/WG.III/WP.159 – E – A/CN.9/WG.III/WP.159 -Desktop (undocs.org).

[30] The countries who voted against the draft of the Convention include Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Republic Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Venezuela. Latin America and ICSID: David versus Goliath Fach Gomez K., p. 2. Available at: http://aragosaurus.academia.edu/katiafachgomez/Papers/858321/Latin_America_and_ICSID_David_versus_Goliath.

[31] Judgment of the Court (Grand Chamber) of 6 March 2018, Case C-284/16, Slowakische Republik v Achmea BV.

[32] The Agreement for the Termination of Intra EU Bilateral Investment Treaties May 2020. Available at: EUR-Lex – 22020A0529(01) – EN – EUR-Lex (europa.eu).

[33] Article 9 of the Agreement on the Termination of Intra-EU BITs. Available at: EUR-Lex – 22020A0529(01) – EN – EUR-Lex (europa.eu).

[34] Argentina-Qatar BIT in 2016 and Argentina – United Arab Emirates in 2018.

[35] Sticky BITs, Cree Jones & Weijia Rao, Harvard Law Journal, Volume 61, Number 2, Summer 2020. p. 377. Available at: untitled (harvardilj.org)

[36] Dispute by Design? Legalization, Backlash, and the Drafting of Investment Agreements, Tarald Laudal Berge, International Studies Quarterly, Volume 64, Issue 4, December 2020, pp. 919–928.

Fahira Brodlija, LL.M is the country coordinator on a regional project for the ISDS reform in the Western Balkans and an adjunct lecturer at the International University of Sarajevo.

The views and opinions expressed in the article are those of the author(s) solely and do not reflect the official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.