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Judicial economy and moving bars in international investment arbitration

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Abstract

Historically, international investment law has centered on protecting foreign investors from direct expropriation, but much of modern law includes legal standards that allow investors to win compensation for other kinds of investor-state disputes. A prominent criticism among scholars and policy advocates is that modern legal protections allow investors to pursue increasing numbers of frivolous, low-merit cases. We contend that this claim overlooks the impact of judicial economy and changing legal standards: since foreign investors only need to prove a main legal violation to secure compensation, arbitrators can and do rule only on those standards that are most easily proven, in particular, contemporary legal protections. As a result, measures based on legal claims and rulings cannot provide definitive evidence of merit, and fears about trends in frivolous litigation under international investment law may be overstated.

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Notes

  1. “TTIP protestors take to streets across Germany,” The Guardian (UK), 17 September 2016. Available at: https://www.theguardian.com/business/2016/sep/17/ttip-protests-see-crowds-take-to-streets-of-seven-german-cities.

  2. Although see St John (2018) for a nuanced argument that framers of German BITs were particularly responding to Nazi property rights violations, which were often undertaken in ways other than direct expropriation.

  3. On the history of ISDS, see St John (2018).

  4. Ibid.

  5. Other scholarly work that incorporates this finding of a worsening, low-merit trend includes Betz and Pond (forthcoming) and Donaubauer and Nunnenkamp (2018). For an earlier, provocative argument that frivolous cases are prevalent enough that the law should allow respondent states to receive “moral damages,” see Parish et al. (2011).

  6. Many social scientists have successfully used selection bias as a means of testing hypotheses, and scholars in international law and international political economy are no exception (Strezhnev n.d.; Johns and Pelc 2016; Lupu 2013; von Stein 2005).

  7. In promoting the Trans-Pacific Partnership (TPP), the Obama administration highlighted ISDS safeguards in the agreement that included “the ability to dismiss frivolous claims quickly.” Given the US withdrawal from the TPP, more clarity on the issue of frivolous claims could inform whether and how such safeguards are prioritized in future efforts. See Jeffrey Zients. 26 February 2015. “Investor-State Dispute Settlement (ISDS) Questions and Answers. Available at: https://obamawhitehouse.archives.gov/blog/2015/02/26/investor-state-dispute-settlement-isds-questions-and-answers.)

  8. Shany (2006: 919) argues that “since international courts are today busier than ever, considerations of judicial economy exert growing pressures on courts to delegate some decision-making powers to state authorities and to assume less intrusive … standards of review.” Because ISDS tribunals are ad hoc and there is no formal international investment court, docket-driven pressures for judicial economy are less relevant.

  9. For example, the Loewen Group went bankrupt while fighting its high-profile case under NAFTA. See Loewen Group, Inc. and Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3.

  10. For comprehensive data and analysis regarding ISDS arbitration costs, see Franck 2019.

  11. For discussion of competitive dynamics among the set of people qualified to serve as investment arbitrators, see Tucker 2018.

  12. In a 2016 interview, investment arbitrator Gary Born invoked the popular HBO television show Game of Thrones when he said that “winter is coming” for international investment arbitration. He argued that after enjoying “a long golden summer when everything went right,” international lawyers needed to prepare to defend investment law from growing political opposition. Alison Ross “Game of Tribunals–Winter is Coming, Warns Born” Global Arbitration Review 15 July 2016. Available at: https://globalarbitrationreview.com/article/1067197/-game-of-tribunals-–-winter-is-coming-warns-born.

  13. Statute of the International Court of Justice, Article 38, para. 1(d).

  14. Contrast this with international trade law, in which states can be plaintiffs. Pelc (2014) argues that, in the trade setting, a state will often bring relatively small test cases to try to establish favorable precedents that can be used in later cases.

  15. In some expropriation cases, an investor can be awarded interest and/or projected future earnings if it can prove that a host state was not expropriating for a public purpose or did not act in good faith. However, baseline damages cannot exceed the value of the initial investment.

  16. Anatolie Stati, Gabriel Stati, Ascom Group SA and Terra Raf Trans Traiding Ltd v. Kazakhstan, SCC Case No. V 116/2010.

  17. Luigiterzo Bosca v. Lithuania, UNCITRAL, Award 17 May 2013, para. 244.

  18. Note that these two possible positive consequences are not mutually exclusive; both can occur simultaneously. We therefore view these alternative explanations of why investment arbitrators might use judicial economy as complementary, rather than competing, explanations. We remain agnostic about the circumstances under which one or the other consequence provides greater motivation to a given arbitrator.

  19. Less pertinent to our argument are the set of standard relative treatment standards. National treatment specifies that a foreign investor must receive treatment that is at least as favorable as the treatment received by a similar domestic investor (that is usually defined as an investor in “like circumstances”). For an illustration, see for example Cargill, Incorporated v. Republic of Poland, ICSID Case No. ARB(AF)/04/2. Most-favored nation treatment specifies that a foreign investor must receive treatment that is at least as favorable as the treatment received by a foreign national from another state. For an illustration, see for example ATA Construction, Industrial and Trading Company v. Hashemite Kingdom of Jordan, ICSID Case No. ARB/08/2.

  20. See Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000, para. 103.

  21. See for example the PBS documentary, “Bill Moyers Reports: Trading Democracy” (premiered 5 February 2002).

  22. Brunetti (2003: 151) argues that this doctrine descended from the Iran-US Claims Tribunal, noting for example the ruling in the Tippetts case: “The intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact.” Iran-US Claims Tribunal, Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA, 6 IRAN-U.S. C.T.R., at 219 et seq. See also Dolzer 2002, Olynyk 2012.

  23. For more on the implementation of police powers doctrine, see Weiner 2003, Heiskanen 2003, Vicuña 2003, Olynyk 2012.

  24. “Once the jurisprudential fact that ownership itself involves a bundle of intangible rights in relation to property is acknowledged, then it follows that it is not only the outright taking of the whole bundle of rights but also the restriction of the use of any part of the bundle that amounts to a taking under the law” (Sornarajah 2004: 368).

  25. Today, the understanding among lawyers in this space is that tribunals are increasingly unwilling to make a finding of indirect expropriation if a host government’s actions are only temporary or reduce the value of an investment only incrementally (Interview, Los Angeles, May 2018).

  26. Less pertinent to our argument is the “full protection and security” absolute treatment standard that requires that host states refrain from military attacks against foreign firms and their property. It is also often interpreted to require that host states provide basic protection against attacks by third parties, like rebel groups and militias. For an illustration, see for example See Asian Agricultural Products Ltd. v. Republic of Sri Lanka, ICSID Case No. ARB/87/3.

  27. Dolzer (2002) called for “legitimate expectations” to be a concept used in assessing indirect expropriation (78–79). Vicuña (2003) noted early developments of “legitimate expectations” standards around indirect expropriation in UK courts (193). Yet the concept today is squarely associated with FET.

  28. Grand River Enterprises Six Nations, Ltd., et al. v. United States of America, NAFTA, filed in 2004 and award issued in 2011.

  29. Sornarajah (2017) claims that “legitimate expectations” is a concept that was “plucked from the air” (417).

  30. For example, see Romak S.A. v. The Republic of Uzbekistan, PCA Case no. AA280, decision issued 2009.

  31. For example, see Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, decision issued 2012.

  32. It is also possible that one claim be declined and the other not ruled, resulting in a state win. As will be discussed, however, this outcome effectively never occurs in practice.

  33. Expanded from Wellhausen 2016. Some cases excluded from UNCTAD are brought under investor-state contracts rather than treaties. That distinction means little for our ability to accurately judge trends in the quality of cases brought in international tribunals over time.

  34. For example, only 8 of the 76 cases filed in 2015 currently have public documents available (as of November 2018).

  35. The full codebook is available in the Online Appendix, available at the Review of International Organizations’ webpage.

  36. Links to external sources are provided in the replication files.

  37. These include the tribunal noting special agreements between the parties and partial settlements that make a ruling unnecessary.

  38. See Appendix Figure 6a for longitudinal trends in the six core claim types.

  39. See Appendix Figure 3a for more information comparing our data to UNCTAD data.

  40. NATFA parties in 2001 clarified that, under the treaty, FET does not require more than MST, and the US has included language on this point in its subsequent IIAs (Lowenfeld 2007: 556–557).

  41. See Appendix Figures 4a and 5a.

  42. See Appendix Figures 1a and 2a.

  43. A one-tailed t-test provides support for this claim (p = .006). In cases filed before 2004, the opposite trend holds: indirect expropriation claims are significantly more common than FET claims (p = .002).

  44. A one-tailed t-test supports the claim that there were significantly more ruled FET claims than indirect expropriation claims beginning in 2004 (p = .054). In cases filed before 2004, the opposite trend holds: ruled indirect expropriation claims are significantly more common than ruled FET claims (p = .02).

  45. A one-tailed t-test supports the claim that, beginning in 2004, there were significantly more cases with ruled indirect expropriation claims than cases with both ruled FET and indirect expropriation claims (p < .001). Prior to 2004, however, there is no significant difference between the number of cases with ruled FET claims and the number of cases with both ruled FET and indirect expropriation claims (p = .31).

  46. Wellhausen (2019) establishes that in approximately 31% of cases (1990–2016), claimant investors either remain invested in the host state or leave and return to the host state after ISDS arbitration. The implication is that ISDS sometimes enables a return to cooperation consistent with standard goals of the law.

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  1. UCLA, Los Angeles, CA, USA

    Leslie Johns

  2. University of Texas at Austin, Austin, TX, USA

    Calvin Thrall & Rachel L. Wellhausen

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Johns, L., Thrall, C. & Wellhausen, R.L. Judicial economy and moving bars in international investment arbitration. Rev Int Organ 15, 923–945 (2020). https://doi.org/10.1007/s11558-019-09364-y

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