INVESTOR-STATE DISPUTE SETTLEMENT CHALLENGES AND REFORMS.

• Author: Kofman, Marina

I INTRODUCTION

1. Hybrid nature of investment arbitration

   Foreign direct investment law is largely based on a network of more than 3,000 known bilateral and multilateral investment treaties (and other agreements with investment chapters) that incorporate a core set of protection standards for foreign investors, coupled with a strong enforcement regime that allows an investor to have direct recourse against a host State in international arbitration. (1)

   Investment arbitration has been called a hybrid system of sui generis character. (2) This characterisation reflects the largely public international law character of the source of obligations, the Bilateral Investment Treaties, (BITs), on the one hand, coupled with a procedural enforcement mechanism with rules based largely on the model of international commercial arbitration, on the other. As Anthea Roberts has poignantly observed, 'Investment treaties... lie at the fault line of many problematic dichotomies, such as public and private law and international and domestic law... . States and private parties simultaneously hav[e] a vertical substantive relationship (between governor and governed) and a horizontal procedural one [in the event of a dispute] (between equal disputing parties).' (3)

2. History of investment treaties

   In their infancy, investment treaties, which grew out of earlier friendship, commerce and navigation treaties, were typically concluded between developed (capital exporting) States and developing (capital importing) States, with most claims being brought by investors from developed States against governments of developing States. (4) A large proportion of the treaties currently in force, and under which most of the jurisprudence has been developed, are those negotiated during the 1990s and early 2000s. (5) These 'first generation' investment treaties in particular 'traditionally coupled short and broadly worded obligations with strong enforcement mechanisms.' (6) Roberts notes this system involves a high level of obligation and delegation of enforcement powers to tribunals, but a low level of precision in the treaty drafting. Combined with the ability of investors to appoint an arbitrator to the tribunal, and the lack of a merits review system, '[t]he net result was a considerable shift of interpretative power away from the treaty parties and toward investment tribunals, leading to much investment treaty law being developed through a body of de facto precedents. (7) These features of the system, among other things, have now given rise to serious legitimacy concerns among civil society groups, States and their constituents prompting calls for reform.

3. Emergence of ICSID and its features

   The conclusion of the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, 1965. (8) ('ICSID Convention), was a watershed development in international investment law, that along with other developments, was a major contributor enabling the growth of the system in place today. The ICSID Convention established the International Centre for Settlement of Investment Disputes as an administrative centre with its purpose being to provide facilities for conciliation and arbitration of investment disputes between Contracting States and nationals of other Contracting States. (9)

   The ICSID Convention was aimed primarily at facilitating the resolution of investment disputes between investors and States, who would include arbitration clauses in their State contracts. However, the travaux preparatoires made clear that the consent of the State to arbitration did not have to be included in the same instrument as the consent of the investor, and may be included for example in the host State's investment protection legislation. (10)

   Once ICSID was established, treaty drafters eventually began to include dispute clauses giving consent for the resolution of investment disputes between the State and investors at ICSID, with the first being the Netherlands-Indonesia BIT of 1968. This removed the limitations and politicisation of diplomatic protection claims and opened the way for direct recourse claims on the international plane. (11)

   According to one author 'The promise of ICSID was superficially simple... . Beneath the surface, however, ICSID introduced what would turn out to be two major developments. First, mixing and combining investment contracts, host State law and international law as sources of what is now commonly referred to as the 'hybrid' of foreign investment law. Second, ICSID confirmed the model of commercial-style arbitration for the settlement of investor-State disputes--with party-appointed arbitrators, confidential proceedings, quick and final decisions without appeal, focus on monetary damages rather than compliance--thereby embedding the system with competing analogies of private commercial arbitration and public international law.' (12)

4. Asian Agricultural Products v Sri Lanka Award

   Despite the burgeoning practice of States in signing BITs with ISDS provisions, it was not until the decision in Asian Agricultural Products v Sri Lanka (13) in 1990 that the ability of a private investor to invoke a treaty breach by a host State government, without the need of there also being a State contract between the parties, was confirmed. (14) Furthermore, it was recognised that the applicable law in such a case was the BIT itself as lex specialis international law. (15)' Until this case, all claims heard at ICSID were based on State contracts and the direct application of a BIT as the applicable law to an investment dispute was unknown. The decision of the Asian Agricultural Products v Sri Lanka tribunal on these issues paved the way for the development of the treaty-based system of foreign direct investment law as we know it today. (16)

5. Second generation and newer BITs

   In more recent treaty practice, BITs and agreements with investment chapters have typically become longer and more detailed. Many States have sought to address known drafting issues, for example, by explicitly clarifying the scope of the Most Favoured Nation clause; and increasing the specificity of treaty standards like Fair and Equitable Treatment. This gives States, rather than Tribunals, more control over the content of treaties. Further, States as contracting parties have been including mechanisms in their agreements that give them greater control over their treaties, such as joint interpretative statements, which are binding on a tribunal.

   II CRITICISMS OF ISDS ANDTHE CHALLENGE OF REFORMING THE SYSTEM

1. 'Regulatory' disputes subject to commercial style arbitration

   One of the overarching criticisms of investor-State arbitration as a dispute resolution mechanism for foreign investment disputes is that its design, which is modelled largely on international commercial arbitration, is incompatible for the characteristics of the disputes that it is used to resolve. Colin Brown, one of the EU delegates to UNCITRAL Working Group III, for example, writing in his personal capacity has stated that 'the form of dispute settlement used for ISDS is inappropriate for resolving disputes involving the regulatory autonomy of states.' (17)

   The large damages figures, paid from the public purse, the potential for regulatory chill, the lack of an appeal mechanism and the inability of States to make counterclaims (18) are all issues that have caused concern in the eyes of the public, of many civil society groups and an increasing number of States. These and other aspects of the system have been publicly scrutinised due to the comparative visibility that investment arbitration enjoys when compared with commercial arbitration, because of the public availability of many awards. In the eyes of many stakeholders, there is at least a perceived structural asymmetry between the position of investors and the position of States within the current system.

   One theme that has emerged in this debate is the notion of 'rebalancing' States rights vis-a-vis investors, and States taking back control of their treaties. Some have noted that the system developed in a way that was not foreseeable to governments when first generation BITs were signed. (19)

2. Characteristics of the system that make it challenging to reform

   While reform is desirable to many, the structural aspects of the current system make reform difficult. The decentralised character of the bilateral investment treaty system, with its over 3000 bilateral and multilateral investment treaties, which include sunset clauses, means a piecemeal approach may take many years and may not be the most effective way to undertake reform. (20) Despite the challenges, many States have increasingly been making incremental reforms to their treaties. As well as treaty reforms, there are now parallel multilateral reform efforts currently underway under the auspices of UNCTAD, ICSID and UNCITRAL, with some coordinated approaches between those organisations.

3. Tracking the trends

   To understand the current treaty-making climate, it is useful to examine some recent empirical studies and surveys on trends in treaty making, with an eye to whether reform-oriented drafting has been making its way into new and renegotiated treaties. Professor Lucy Reed recently surveyed the latest empirical research on treaty practice in this area during her presentation on 'Law-Making by Arbitrators' at the 2018 ICCA Congress. (21) She opined that 'the most objective way to assess legitimacy in ISA [investor-State arbitration] is to examine how states react to the arbitrator lawmaking process.' (22) She concluded that the newest empirical research 'confirms the embedded role of investment treaty tribunals as law-makers and the continuing blessing from most states--so far--of that role.' (23)

   Stone Sweet and Grisel, the authors of one of the recent studies mentioned by Professor Reed in her ICCA presentation, looked at new BITs signed from 2002 to 201 5. (24)...