Chapter 5: Competition and Interaction between States and Tribunals with
5.1 Factors influencing the acceptability of investment arbitration awards by
The concept of acceptability is introduced here to measure the extent of tolerance treaty parties have for the jurisdictional creep of investment tribunals. In general, an arbitral award has binding force on the disputing parties regardless of whether it is acceptable to them. It should be noted from the beginning that the concept of acceptability here does not deny the binding force of arbitral awards in individual cases, but rather evaluates the political effect of awards to treaty parties. Usually, the respondent states would not question the formal binding force of arbitral awards on them, but would question their legitimacy and accuracy. The acceptability of treaty parties for the jurisdictional expansion by tribunals is likely to change with factors such as the vagueness of investment treaty norms, the caseload of investment arbitration, the quality of their legal reasoning, the effect of prior arbitral decisions, the composition of tribunal members and their preferences. In addition, the finality and worldwide enforceability of investment arbitral awards also exerts considerable pressure on the respondent states to comply with them.
Firstly, the less precise investment treaty norms are, the more discretion tribunals would have with respect to the interpretation of these treaty norms. The vagueness of investment treaty provisions is the very pivot upon which the scope of jurisdiction could be expanded and the scrutiny of consistency of state measures with treaty obligations could be strengthened. Such ambiguity is manifested in both investment arbitration provisions and substantive treatment provisions. The ambiguity of investment arbitration provisions leaves the door open for the expansion of tribunals’
jurisdiction, which brings more chances for tribunals to interpret and develop substantive treatment provisions in applicable investment treaties.
As a matter of theory, treaty parties may express their opposition to an award by
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clarifying or modifying the relevant investment treaty norms or threatening to exit investment treaties. As a matter of fact, however, the capability of treaty parties to control and overrule the interpretation of investment tribunals may be limited due to the following reasons. First, the vagueness of several concepts is sometimes intended by treaty parties. For example, the evolvement from the enterprise-based definition of investment to the asset-based definition of investment put forward by treaty parties leads to a broader but more obscure scope of investment. Second, treaty norms tend to become rigid and difficult to amend once concluded. Contrary with the majority rule for the amendment of domestic law, the amendment or interpretation of an international treaty requires collective action, which is consent from all treaty parties.
It is rather difficult for treaty parties to reach an agreement on the modification or interpretation of treaty norms since treaty parties, especially capital-exporting countries and capital-importing countries, may have distinct interest preferences and thus may have different understandings of treaty norms. Third, the more costly it is for states to exit from the regime of investment arbitration and investment treaties, the greater the discretion of investment tribunals. Although exiting from the regime of investment arbitration and investment treaties is an absolute right of treaty parties, treaty parties rarely exercise this right since the cost of exiting remains high. States may be unwilling to withdraw from an investment treaty, even when they object to certain interpretations of investment tribunals, for fear of being excluded from the regime’s benefits, such as possible increases in investment flows and competitive advantages for their investors.451 Lastly, treaty parties may lack the capability to know, assess and respond to the enormous case law of investment arbitration because of the lack of human and financial resources. The fewer financial and human resources available to contracting states, the weaker their legal control over investment tribunals. Although the silence or inaction of treaty parties other than the respondent state cannot be simply equated with approval, it will be an important factor that investment tribunals rely upon to legitimize their expansive interpretation.
Secondly, the impact of investment arbitral awards increases with the number of cases submitted to arbitration. Generally, controlling the number of future cases submitted to an international dispute settlement body is one of the ways to limit its legitimacy and capability. 452 Such control, however, does not function well in
451 Anthea Roberts, Power and Persuasion in Investment Treaty Interpretation: The Dual Role of States, American Journal of International Law, Vol. 104, No. 2, 2010, p. 192.
452 Tom Ginsburg, Bounded Discretion in International Judicial Lawmaking, Virginia Journal of International
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investment arbitration mechanism. It is because foreign investors have direct access to investment arbitration under investment treaties even though they are not one of treaty parties. The broader and less costly the access to an international court or tribunal, the greater the number of cases it will receive. 453 The right to activate the investment arbitration process is allocated to foreign investors, while treaty parties cannot bring claims against foreign investors and cannot politically filter the initiation of claims by foreign investors. Except that all treaty parties consent in unanimity to restrict or abandon the investor-state arbitration provision, a covered foreign investor may submit the covered investment dispute to international arbitration at any time. The expansionary trend in establishing jurisdiction and finding liability of host states encourages other investors to bring more cases before investment tribunals. It thus allows investment tribunals to exercise jurisdiction over a theoretically infinite number of future investment disputes.
In contrast to inter-state arbitration where only states may bring the claims, in investor-state arbitration only foreign investors are entitled to bring the claims against host states. Foreign investors are able to challenge the regulatory measures of host states by starting the arbitration process while host states can only passively participate in the arbitration process. The direct access of foreign investors to international arbitration ensures a steadily expanding caseload. Cases breed cases in a virtuous circle. Foreign investors who are likely to benefit from the expansive interpretation of tribunals will have an incentive to bring more cases to reiterate and enforce it. The more investment claims that are brought by foreign investors to tribunals, the more these tribunals have opportunities to improve their power and persuasion.
Thirdly, the acceptability of arbitral awards heavily depends upon the quality of the tribunal’s legal reasoning. The higher the quality of their legal reasoning, the less political backlash these awards will receive from treaty parties. In the first place, it is of great importance how tribunals reflect distinct interest demand of disputing parties in their arbitral awards. The arbitral awards are more likely to be accepted by treaty parties if the tribunals convincingly balance investors’ interests in the protection of their investments against governmental interference, on the one hand, and governments’ interests in the protection of the public interest, on the other. In practice,
Law, Vol. 45, 2005, p. 660.
453 Robert O. Keohane, Andrew Moravcsik & Anne-Marie Slaughter, Legalized Dispute Resolution: Interstate and Transnational, International Organization, Vol. 54, No. 3, 2000, p. 474.
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tribunals may split the difference by giving each disputing party part of what they requested. Giving each party a partial victory rather than a full victory or failure is the easy way to please each disputing party. To increase both parties’ satisfaction in the arbitration result, tribunals may avoid rendering “all or nothing” decisions and will instead render awards that come closer to the middle ground of the parties’ contention.
For instance, a tribunal may affirm its jurisdiction on one basis but simultaneously deny its jurisdiction on another basis. After affirming its jurisdiction, a tribunal may still dismiss claims of investors in part or even in full. Even if a tribunal refrains from establishing its jurisdiction, it may still express its criticism and make pronouncement on the merits. In Tza Yap Shum v. Peru, the tribunal affirmed its jurisdiction on the basis of the restrictive investor-state arbitration provision, but at the same time refused to broaden its jurisdiction on the basis of the MFN clause. Similarly, in the case of Loewen v. USA, the tribunal found that the claimants were not covered investors under the NAFTA due to the dissatisfaction of nationality requirements and thus the tribunal decided that it lacked jurisdiction to determine the claimant’s claims under the NAFTA. 454 The tribunal, nonetheless, recalled the treaty obligations of the respondent under the NAFTA and offered additional comments and observations showing its critical attitude towards the respondent. In the words of the tribunal, the United States court process involving the claimants “was a disgrace” and “failed to afford Loewen the process that was due”. The relevant US court proceedings, as a state measure, “were clearly improper and discreditable and cannot be squared with minimum standards of international law and fair and equitable treatment.” 455 The tribunal chose to deny its jurisdiction while condemning the United States since it was convinced that “finding against the United States would generate immense heat and opposition and that this could jeopardize the future of NAFTA and the investment rules regime, more generally.” 456
In the second place, tribunals may show their flexibility in the extent to which they expand their jurisdiction on different jurisdictional bases. A comparison between the interpretation of waiting period requirements and that of MFN clauses reflects such flexibility. For the requirements of waiting periods, tribunals generally hold a rather
454 Loewen Group, Inc. & Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3, Award, 26 June 2003, paras. 220-240.
455 Loewen Group, Inc. & Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3, Award, 26 June 2003, paras. 119, 124-137.
456 David Schneiderman, Judicial Politics and International Investment Arbitration: Seeking an Explanation for Conflicting Outcomes, Northwestern Journal of International Law & Business, Vol. 30, 2010, p. 405.
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radical interpretation denying their mandatory and jurisdictional nature. Although such interpretation does not synch with the language of waiting period requirements, it nevertheless does not generate a strong backlash from treaty parties. It is because waiting period requirements only limit the timing of submission of claims and thus could be easily satisfied. Even if tribunals refrain from exercising jurisdiction before the expiration of waiting periods, investors may still submit their claims as soon as waiting periods elapse. On the contrary, concerning the applicability of MFN clauses to dispute settlement matters, tribunals are relatively cautious. Most tribunals support that MFN clauses could be used to override or modify procedural conditions on access to investment arbitration. Only several tribunals rely upon MFN clauses to broaden the coverage of disputes subject to arbitration under the basic treaty and thus to expand their jurisdiction. It seems that a progressive rather than a radical expansion of jurisdiction is more likely to be tolerated by treaty parties. Besides, the bifurcation of jurisdiction and merits may also influence the attitude of treaty parties towards tribunals’ jurisdictional expansion. If tribunals remain prudent in the merits stage, then their expansion of jurisdiction would more likely be tolerated or accepted by treaty parties. As explained above, however, the expansionary trend in investment arbitration happens both in establishing jurisdiction and in finding breaches of substantial treatment.
Fourthly, the effect of prior awards in later cases influences the legal anticipation of investment treaty norms by foreign investors and treaty parties. Although investment arbitration does not recognize a formal doctrine of binding precedent, a de facto system of precedent indeed exists. Disputing parties, including host states and foreign investors, heavily rely upon previous awards in support of their positions. Most tribunals acknowledge the actual precedential value of prior decisions and cite prior decisions to confirm or justify their interpretation of investment treaty norms. Prior awards that correspond with the value of investment protection will be followed and refined by later tribunals and become a strong precedent difficult to overturn. It in turn will become the disputing parties’ legal anticipation of investment treaty norms.
The party seeking a distinct interpretation result from that reached in a series of consistent cases would bear the argumentative burden. The informal system of precedent therefore leads to path dependence and keeps various tribunals consistent with each other in safeguarding the expectation of investment protection. Moreover, treaty parties cannot control the access of foreign investors to investment arbitration
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in individual cases, and thus cannot attack or overturn those precedents unfavorable to them by filtering the cases submitted to arbitration. Therefore, a strong effect of precedent would reinforce the authority of investment tribunals and meanwhile weaken the political backlash from treaty parties.
Fifthly, the composition of tribunal members and their preferences are relevant to the credibility of arbitral awards. The impartiality and independence of arbitrators are fundamental to due process and the legitimacy of investment arbitration. Undeniably, there may be different subjective understandings by disputing parties on whether arbitrators are independent and impartial in adjudicating cases. Thus, establishing an objective standard in appointing arbitrators and developing a reasonable code of conduct for arbitrators is of critical significance in ensuring arbitrators’ impartiality and independence. As regards to the appointment of arbitrators, arbitration rules generally give equal right to foreign investors and host states in appointing arbitrators.
The fact, that most arbitrators come from commercial fields and are nationals of developed countries, does not violate the equal right of disputing parties in appointing arbitrators. What treaty parties can do is to impose more qualifications on arbitrator candidates. Regarding the code of conduct for arbitrators, the issue of conflict of interest is where the focus lies. Under the existing investment arbitration rules, regulations on the multiple roles of investment arbitrators is absent, which leads to a high possibility of arbitrators’ conflict of interest. It in turn becomes a major ground on which the respondent states attack the legitimacy of investment arbitration.
Therefore, the higher standard the code of conduct is for arbitrators, the more likely the respondent states will trust the credibility of arbitration process.
Lastly, the finality and worldwide enforceability of investment arbitral awards also exerts considerable pressure on the respondent states to comply with the awards. The investment arbitral awards are final and binding for the disputing parties even if the treaty parties disagree with the outcome or reasoning of investment tribunals. Treaty parties have no power to overrule the binding force of awards. Moreover, investment arbitral awards are effectively shielded from judicial review by domestic courts in the host state as well as any third state since they are not subject to any appeal. 457 A review of investment awards is possible only under very limited circumstances. For ICSID investment awards, the exclusive remedy is an annulment process under Article 52 of the ICSID Convention on strictly limited procedural grounds. The
457 Stephan Schill, System-Building in Investment Treaty Arbitration and Lawmaking, German Law Journal, Vol.
12, No. 5, 2011, p. 1091.
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request for annulment of the ICSID award is to be decided by an ad hoc Annulment Committee of three persons appointed by the Chairman of the ICSID Administrative Council. For non-ICSID investment awards, the only remedy against awards is an application for setting aside awards in the domestic courts at the place of arbitration on primarily procedural grounds, for example for lack of arbitral jurisdiction or violation of due process.
An investment award, if not annulled by an ad hoc Annulment Committee or not set aside by the domestic court at the place of arbitration, has worldwide enforceability without court review of its merits. For ICSID investment awards, each contracting state of the ICSID Convention shall recognize and enforce them within its territories “as if it were a final judgment of a court in that State” according to Article 54 of the Convention. Therefore, ICSID awards can be recognized and enforced in any contracting state of the ICSID Convention having 151 state parties. For non-ICSID investment awards, the winning party may seek the recognition and enforcement of investment awards in one of the 155 contracting states of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
The widespread enforceability of investment awards certainly will give the losing states a strong incentive to comply with them.