In a new style of session introduced at GAR Live London - the GAR Live Inquisition - David Rivkin QC and Lisa Bingham grilled Audley Sheppard QC, Duncan Matthews QC, Wendy Miles QC and Alejandro Escobar on whether arbitrators ‘make’ international law. Read our edited transcript of the spirited exchange.
The idea of the new format is simple: two inquisitors grill four witnesses, in pursuit of “the truth”. Ben Carroll, Linklaters partner and head of the firm’s energy disputes team, moderated. The inquisitors were David W Rivkin of Debevoise & Plimpton and Lisa Bingham, legal counsel at the Permanent Court of Arbitration, who together probed Wendy Miles QC of Debevoise & Plimpton, Duncan Matthews QC of 20 Essex Street, Audley Sheppard QC of Clifford Chance and Alejandro Escobar of Baker Botts on whether arbitrators make international law.
Some of the best bits of the session were:
- Rivkin and Bingham’s fiery questioning,
- Matthews’ opinion that arbitrators, no matter the type of case, are only ever deciding a specific private dispute,
- Sheppard’s suggestion that investment treaty arbitration should be viewed as “normal commercial arbitration under a different governing law” and his view that “investors are treated better than nationals” thanks to investment treaties “a disparity I’m not comfortable with”,
- Escobar’s contrasting opinion that “it’s a public international law phenomenon which uses a commercial dispute settlement mechanism as a method,”
- Plenty of discussion on whether it can really be said that either states or investors adjust their behaviour in response to arbitration – with mention of the UK’s decision to press ahead on tobacco regulations despite pending cases against Uruguay and Australia that appeared to tread the same ground, and
- A spirited discussion of the EU’s proposed investment court, and why something along the lines of the US-Iran Claims Tribunal may be preferable to a body that resembles the ICJ.
The following transcript has been edited for your ease. Since speakers were asked to “play up” to their assigned role, not all of the views they expressed are necessarily firmly held.
Ben Carroll: We’re trying a new format this afternoon. We’re looking to replicate US Senate Committee hearings or UK House of Commons Select Committee Sessions during which our witnesses will be grilled by a panel of inquisitors on two main topics: firstly, whether international law is being formed through public arbitration decisions; and, second, whether arbitrators are conscious of this public function and performing it in a legitimate manner.
We have an esteemed collection of inquisitors and witnesses.
Ben Carroll introduced the speakers.
Each witness will be questioned in turn and we will have a plenary session at the end. With that, I hand over to David to start the questioning of our first witness.
David Rivkin: Thank you Ben, and thank you Mr Matthews for agreeing to go first. First, could you confirm your typical role in international arbitration?
Duncan Matthews QC: In general terms I am normally 85% counsel in international arbitration and spend 15% of the time as arbitrator.
David Rivkin: And do you only sit as an arbitrator in investor state cases, or do you also act as a counsel in investor state cases?
Duncan Matthews QC: I don’t believe that it’s necessary to be either one or the other, but over time the position of counsel and his credibility may be progressively undermined by decisions he takes as an arbitrator.
David W Rivkin: That’s a nice answer Mr Matthews, but you did not answer my question. Do you act both as counsel and as arbitrator in investment treaty cases?
Duncan Matthews QC: Happily so.
David Rivkin: In investment treaty cases?
Duncan Matthews QC: No.
David Rivkin: OK, only in commercial cases?
Duncan Matthews QC: Yes.
David Rivkin: Let’s think about the cases that involve states one way or another, either commercial cases or investment treaty cases. Is it your view that arbitrators exercise a public or a private function in those cases?
Duncan Matthews QC: In the context of commercial arbitration, it’s clearly a private function resolving a dispute between parties. In the context of investor state arbitration, there are undoubtedly elements of the process which have a public law element. Most notable, of course is that the origin of the jurisdiction is a public law. On the other hand, a lot of disputes that need to be resolved between the parties come down to the same sort of disputes that are resolved in the commercial tribunal forum. There is a great danger of arbitrators in investor state treaty arbitrations arrogating to themselves too major a role as public deciders, rather than private deciders, of disputes. Particularly when one sees suggestions that investor state arbitrations should be resolved after the exhaustion of national remedies. So, in effect, international investor state arbitrators would sit over and above national regimes, although privately appointed.
In other readings or writings, one sees the suggestion that they are, in effect, performing the role of a Supreme Constitutional Court, which is an optimistic description of the role they play. Ultimately their job is to decide the dispute between an investor, whose government or status has obtained a right for them, against another state in relation to a commercial dispute. Therefore, there are hybrid elements of the relationship between the state and the investor that are being decided. The fact that in many cases the decision may be publicised; the fact that you may have issues being addressed in the context of the arbitration which can introduce elements of international law and make them more visibly a public concept. But then we also have international law issues being addressed in a private context.
I had a case recently. The law was the domestic law of the state entity. The question arose as to whether the contract, which provided for “pay now, argue later”, could be enforced. The answer was that it couldn’t because the arbitrators held that the relevant state’s public policy, which was incorporated into the contract, precluded state entities entering into “pay now, argue later” clauses. What is the difference between that sort of dispute, which is being resolved in a wholly private environment, and a public law decision, which is being made in an international investor state treaty arbitration? There is a lot of overlap. There are elements of the investor state process that are more prone to public aspects than international commercial arbitration, but it is a mistake to see this as purely an emanation of public law. It’s hybrid and needs to be kept within those confines.
David Rivkin: In an investor state case, if the state is found to be liable in any way the payment is going to come from the public treasury. Does that impact the arbitrator’s function in an investor state case, as opposed to a commercial case?
Duncan Matthews QC: I don’t see why the fact that it’s an investor state case in which the state is paying, rather than a private commercial case in which the state is paying, should make a difference. In all the cases where you have a state entity, it’s ultimately the state that’s paying. I have another case at the moment against the ministry of defence. If the ministry of defence loses the state will pay, but it’s not an investor state arbitration. Does that make it a public law arbitration? I think not. It keeps it within the confines of a private commercial dispute. It is one in which the ultimate payer is the state but, as I say, that doesn’t differentiate it if you’ve got a contract for a joint venture agreement with a national oil company. In effect, it is the state that is going to pay, but they have a private agreement governing their relations. In each case, effectively what the state has done, whether by contract or by treaty, is say that it will give the counterparty certain rights. In the one case it’s a direct contract with the individual entity; in the other it’s a contract or a treaty with another state saying that the nationals of that state will enjoy those rights. Whether one sets that up as an agency position, or whatever, doesn’t matter. A state has decided that it is going to give somebody certain rights. It gives them those rights and you have the resolution of them either in the private commercial arbitration, if that’s the forum that’s been agreed for that dispute, or in an investor state arbitration, which has slightly different elements to it. But ultimately, it’s the state that’s going to pay.
David Rivkin: If I am hearing you correctly, Mr Matthews, your view is that arbitrators pay too much attention to the fact that one of the parties is a state, and should simply focus on the fact that they have a dispute between two parties, whether it’s a commercial case or an investment case?
Duncan Matthews QC: Certainly. There’s a risk that some arbitrators pay too much attention to the fact that in an investor state arbitration they’re dealing with a system of law that’s derived from international law because it’s treaty-based. That, therefore, alters how they approach the subsequent dispute. There is a great danger because the private process, whereby you have individuals determining in effect matters of policy, is one you have to approach carefully. The case I mentioned earlier is a classic example. These things happen in private contract disputes and arbitrators are called upon to decide issues of public policy, regardless of the forum. I think that enthusiastically endorsing it – trying to do it, in some way, as a virtue – is dangerous.
David Rivkin: Decisions in investment treaty cases are published, right? Is it your view that those decisions create public policy and international law because they tend to be followed by other investment treaty arbitrators?
Duncan Matthews QC: They don’t create precedent, as we know it as Anglo-Saxons. They are simply decisions. Some are very persuasive; others may have decided a case one way or another on particular grounds. The quality of the process may vary from case to case depending on the quality of submissions and evidence before the tribunal. It may depend upon the quality of the tribunal. Ultimately, they decide the dispute on facts and circumstances and, from that point of view, they create a precedent. But what is the effect? It’s not in any sense binding on others. It does, however, fit into the context of international law that you should try to develop degrees of certainty for users. If there’s a line of decisions which goes in one particular direction, you give weight to those decisions because otherwise there’s a high degree of unpredictability. Do they bind anybody else? Certainly not.
David Rivkin: Is it true that states may look at decisions that are public and build their own actions around them so as not to be in violation of their own treaties?
Duncan Matthews QC: Certainly. They also build their behaviour around it in negotiating amended treaties to take into account decisions that have been made – if they like the way particular issues have been addressed – or to achieve the reverse effect if they don’t like the way things are going. Or to resolve disputes that arise if different tribunals come up with different conclusions, and they want a greater degree of certainty. So they have a valuable role to play from the point of view of fashioning international law, but they don’t make international law.
Ben Carroll: Counsel, please move on to the next witness.
Lisa Bingham: Thank you. Mr Sheppard. Can you confirm your typical role in international arbitration? Do you sit as an arbitrator and act as counsel?
Audley Sheppard QC: My typical role is as counsel for one of the parties. I also sit as sole arbitrator or on a tribunal, which is usually between two and five cases at any time. I rarely sit as arbitrator in investment treaty cases.
Lisa Bingham: Is it unwise in your view to act as counsel in investment treaty cases if one sits as arbitrator in investment treaty cases?
Audley Sheppard QC: There are dangers to the confidence that users and governments have in the system when they see arbitrators making decisions which may impact on future cases that the arbitrators may be pursuing as counsel.
Lisa Bingham: Does that imply a view that you have about whether investment treaty tribunals make law?
Audley Sheppard QC: I’d agree with the previous witness in saying that they don’t make law as such. I concur that there is a jurisprudence constante established over time because arbitrators look at what has gone before – they’re generally bombarded by counsel with a lot of previous decisions. Most lawyers prefer consistency to chaos, and many are aware of the prestige of arbitrators that have gone before. At law school I did not really understand when professors made reference to a “strong court”: I understand it very well now. You look at a decision and think: “Well, they were very capable people that made that decision.” Of course, it’s is dependent on the facts but as far as interpretation of aspects of expropriation, fair and equal treatment (FET) or MFN, you’d want to give what well respected arbitrators said very serious consideration before deciding to deviate from those prior decisions.
Lisa Bingham: The legitimacy of that process in the area of investor state arbitration – one can see why arbitrators would take that approach and you talk about a preference for certainty. Is it right that a preference for certainty should trump other considerations?
Audley Sheppard QC: No. Bad certainty is a bad thing and there are times when people, for perfectly good reasons and in totally good faith, take a view different from their predecessors and feel the right interpretation is something different than was said before. That’s perfectly understandable, particularly in common law jurisdictions where lawyers are very familiar with appeal courts splitting. We are used to Higher Courts disagreeing, not only with Lower Courts but the decisions of the same court previously, then deciding to take a different path. That need not shock us, although it may cause consternation for users when they see a different path being taken. When one looks at the years of investment treaty cases and the geometric increase of cases recently, it’s like looking at a newspaper picture or a television image made up of pixels. When you only see a few pixels, it’s hard to see the contours of the image until you get more pixels. That’s the same with decisions. Expropriation is relatively straightforward: you know it when you see it. Indirect expropriation is a little less so, and FET much harder to define. But we’ve had problems like that in the past. What is natural justice? What is negligence? Over time more cases give definition to those concepts. As we get more cases on FET, more pixels, we get a much clearer definition of the concept.
Certainty it’s important because both states and investors need to know before they bring a claim. Initially investors need to know when investing and, if they have enough awareness, to consider the legal framework of the host state. Is there a treaty and is that treaty different from your common or garden treaty? Then if something does happen about which they might want to bring a claim, the lawyers need to be able to tell them: “Well, on these facts, there is likely to have been a breach.” At the same time it’s important for the state to have some predictability and for their legal officers to be able to tell them whether they’ve either breached the treaty or haven’t. Then, as Mr Matthews said, states can amend their treaties if they don’t like the direction the cases are going.
Lisa Bingham: Would you agree with the previous witness that investor state dispute resolution is of a hybrid nature, both public and private?
Audley Sheppard QC: Yes. In some ways it can be described as normal commercial arbitration under a different governing law.
Lisa Bingham: And what about “normal arbitration”, commercial arbitration where a state is involved?
Audley Sheppard QC: I disagree with Mr Matthews on that point. I think that if a state descends from its sovereign position on Mt Olympus and comes down to the market place to buy boots for its army, then submits itself to its own law or chooses a different national governing law and breaches that contract, then it is subject to damages in accordance with however that law prescribes compensation. The difference is when a state takes governmental measures about which someone might complain because they have been affected – which is very likely legislation, but of course it can be death by a thousand cuts of regulatory intervention. There, the damages to which the aggrieved party is entitled under domestic law are really quite different from that in commercial law. That is a difference of disparity I’m not comfortable with. The level of damages awarded against states for measures that they take [against investors] is so different from the compensation a national of that state would get before its local court, it does seem investors are being treated better than nationals. I don’t think that’s satisfactory and sustainable.
Lisa Bingham: Where arbitrators are exercising a public function, what do you see as the legal or procedural basis for an arbitrator to go beyond the letter of the treaty or contract to look at the state’s other obligations: its other international obligations and its domestic obligations?
Audley Sheppard QC: That depends on what issue they are being asked to decide. If it’s expropriation, a relevant question to ask is whether there is perhaps an international law reason, or an obligation they have entered into, which gives a public purpose for that expropriation. For example, among the EU accession states, some were subsequently required to terminate contracts because they offended EU state-aid rules. Was that legitimate? The same with legitimate expectation. Does the state have some justification that it acted not arbitrarily nor capriciously, but because of other obligations that it had? Should the investor have anticipated – particularly in FET where it doesn’t protect against changes in the law? If the change in the way the state acts is because of international obligations, then I think that that is relevant to the tribunal’s consideration and may be reason to reject the inventor’s complaint.
Lisa Bingham: Do you have concrete examples showing whether or not the process of identifying the other obligations is done with sufficient precision? Is it done well by arbitrators and by counsel?
Audley Sheppard QC: No, I don’t. It doesn’t come up that often that there is some other international law norm that is so relevant to the consideration. For example, when a business was shut down because of purported compliance with the state’s environmental obligations, was that expropriation or not? But most defences put up by states are not that they are complying with some international law obligation. Nor to define and understand expropriation or FET is it necessary to look at wider international law. But I think that many counsel and arbitrators in investment treaty cases are not nearly as well versed in wider international law as those that practise international law. Doing investment treaty law does not make you a public international law lawyer by any stretch of the imagination. On the other hand, if there were ever a standing investment treaty court, should it be made up of public international lawyers or former law officers of the state, no. What contribution do those less familiar with public international law make? Undoubtedly yes, the commercial drivers of investment are better understood. Has it made investment treaty arbitration too much like commercial arbitration? Yes, I think so.
Ben Carroll: Thank you Mr Sheppard. Counsel, please move on.
Lisa Bingham: Ms Miles, thank you for joining us today. Would please confirm your typical role in international arbitration?
Wendy Miles QC: My typical role is like the previous two witnesses: about 85 to 90% of my time is spent as counsel in international, commercial and investor state arbitration. I do some broader public international law boundary disputes and I sit as arbitrator in commercial arbitration.
Lisa Bingham: And is that a conscious choice on your part: to sit as arbitrator only in commercial arbitration?
Wendy Miles QC: I have sat previously as arbitrator in investor state arbitration, but I was not actively sitting as counsel in investor state arbitration at the time. Having reflected over time, if one is active as counsel in investor state arbitration, it is better not to be acting also as arbitrator in investor state arbitration for the reasons stated by earlier witnesses. There are four main issues that arise in most cases and, if one is making decisions on those cases, particularly public decisions, that could create difficulties when arguing as counsel in respect of those same issues in a different case.
Lisa Bingham: Do you see that as raising issues for your clients when you are acting as counsel? Or are you more broadly concerned as to the perceived legitimacy of the system overall?
Wendy Miles QC: Legitimacy is my primary concern in that international arbitration is providing a service to users. In investor state arbitration, there are tax payers and other stakeholders who are affected by those decisions. They need to feel that the decision-making process is legitimate.
Lisa Bingham: Can you tell us what you think the impact of international arbitration awards is on the development of law and policy? Do those awards create law as such, or is the situation more nuanced in your view?
Wendy Miles QC: The transparency movement in international arbitration has shaped that question – or the answer to that question – in a material manner because transparency, which is an attempt to further legitimise the process of international arbitration, has become increasingly the norm in the publication of awards and orders. The decisions taken in those orders and awards, whether procedural or substantive in investor state arbitration, are leading to a process whereby subsequent counsel and tribunals are tending to follow those earlier decisions. I’ve heard that described as “fashioning”, not making law, but still a jurisprudence constante is becoming more certain. If we’re not making law, we’re at least interpreting the law in a meaningful way that subsequent tribunals are following. It’s fundamental that we recognise that that’s what we’re doing as counsel and arbitrator when decisions are published. In private disputes, in commercial arbitration or non-published arbitral awards – the rest of the pixel picture – it’s difficult to see how a decision can have any binding effect in subsequent decisions if it’s not published. Although, even there, as we saw with the e-borders case involving the UK and Raytheon, when the decision was published, partly by the government and then in subsequent court proceedings, even there we saw some influence in the subsequent conduct of tribunals and counsel.
Lisa Bingham: How do you in your practice see the impact of international law more broadly, specifically conventions or norms of public policy? Are investor state cases being decided within the four corners of the treaty, or are you seeing broader considerations coming into play?
Wendy Miles QC: It’s a very important question. The treaty is the starting point, just as the contract is the starting point in a commercial arbitration. But the treaty isn’t the beginning and end of the international law governing the relationship, obligations and commitments between the parties. The treaty is just one international instrument that sits against a backdrop of international and domestic law which may be applicable at minimum to the legitimacy of the acts of state that form the subject of the claim. We are increasingly seeing references to international law beyond the bilateral and multilateral investment treaties, and international policy. In a number of decisions relating to environmental issues, tobacco and human rights, arbitrators have referred to these international treaties well beyond the context of investment treaty and trade, and interpreted the legitimate expectations of an investor against that backdrop of international law.
If I may give one example: the majority decision in Uruguay denying Philip Morris jurisdiction in its claim about the World Health Organisation, which put in an amicus brief. In the decision, the majority noted the WHO’s reference to the framework treaty on tobacco control and said that that treaty, albeit entered into subsequent to the bilateral investment treaty between the investor state and the host state, was entered into also by the host state and the investor state. Subsequently, that that informed the public policy that underlay that treaty, and informed the legitimate expectations of the investor investing in that state. I think that is the right approach. I don’t think treaties should be interpreted in a vacuum. They exist in the context of broader international law, but it’s an approach that counsel and arbitrators can only take if they’re properly informed. Perhaps that will happen with more amicus briefs. Somehow those issues that impact the populations affected by the decisions we’re taking in this process, knowing that they have an impact means we carry a responsibility to ensure that those laws are properly applied or fashioned.
Lisa Bingham: Do you think that arbitrators are properly informed, have the proper guidance, to enable them to undertake the role you are describing? Are they the right people to be doing that? Is it legitimate that it’s being done at the dispute resolution stage, rather the treaty-drafting stage: the point at which a state is deciding whether to accept an investment or not?
Wendy Miles QC: I don’t think arbitrators are the wrong people to be fashioning this broader international law fabric when deciding bilateral investment treaty claims. But they need to have the right information to make the right decision. That requires smart arbitrators, but they must not insist on looking only within the four corners of the treaty or underlying contract. They must understand how international treaty law and customary international law work. They need at their disposal the facilities and tools to hear from the parties they need to hear from, as the Uruguay Tribunal did with the WHO. I think that starts with international treaties and domestic laws with transnational powers that relate to bribery and corruption. It also relates to basic framework treaties in relation to environmental and climate change obligations under the Paris Agreement, and human rights obligations as well. Knowing that all of those aspects of international law and international policy affect investors and states’ rights and obligations in their relations between one another and others; knowing and understanding that you may have a role, depending on a particular dispute that takes into account some or all of those aspects, is critical.
Lisa Bingham: Would you call for anyone sitting as an arbitrator in an investor state case to have training in broader public international law? Do you consider that to be an essential part of the toolbox for arbitrators, or do you think they can inform themselves as they go along?
Wendy Miles QC: We need to move away from a popular thinking that existed about 10 years ago where commercial arbitration specialists would think of a treaty as just another contract. The legitimacy of our system and process requires us to move away from that thinking. It’s not what the stakeholders in the process – perhaps the investors – think of it but, in my experience, investors are often the thought leaders anyway when it comes to broader social rights and responsibilities. Their own corporate social responsibility often sits parallel with, or embraces, those broader international laws and policies.
Recognising that these are two different processes – there are similarities and overlaps, but commercial arbitration and investor state arbitration do have fundamental differences – knowing where broader international law has an impact, including bribery and corruption, but environmental and human rights as well, increases the responsibility for getting it right. It comes down to a careful and constant self-evaluation about the legitimacy of our process. I think it is a good process, it has the right people in it, but they need to be constantly vigilant about recognising the changes, the factors, the evolution and the criticisms of the processes, and where we need to improve. One place is in recognising the normative value – binding or not – of what we are doing and the importance of our getting it right.
Ben Carroll: Thank you Ms Miles. Counsel, can you move to another witness.
David Rivkin: Mr Escobar, could you describe your role in arbitration?
Alejandro Escobar: I devote about 90% of my time to acting as counsel. Most of those cases are investor state cases, whether under treaty or contract. The remaining 10% is devoted to work as arbitrator, partly in commercial cases but also in investor state cases.
David Rivkin: How do you turn off the counsel part of your mind, which you said is 90% of your mind, when sitting as an arbitrator?
Alejandro Escobar: I obviously avoid conflicts of interest regarding the parties. I have disclosed the fact that I act as counsel in other cases. Some of those are for claimant, others for respondent. As I am sure is the case of other arbitrators in similar situations, I approach the issues honestly and do the best I can, with the knowledge that all the participants have accepted the rules of the system.
David Rivkin: Have you ever cited one of your own decisions as counsel?
Alejandro Escobar: No. In fact, I have not yet rendered a public award in an investor treaty matter.
David Rivkin: Do you feel that the decisions in investor state cases create public norms or create public international law?
Alejandro Escobar: The witnesses before put it well, particularly Ms Miles. They do have a normative impact. However, we need to be a little bit less optimistic, less lofty, in the way that we approach this. I don’t agree with Mr Sheppard’s description of this as a pattern of pixels. It’s more like a crucible. We can’t really align the body of international case law and say there’s jurisprudence constante at a certain point: that this is now settled law. It’s difficult to get to that point. Remember, most cases are decided on entirely different instruments. They might have similar wording, but they are at the end different treaties between different parties, and sometimes cases decided under the same treaty have different results. Leaving aside the fact that some treaties are bilateral and some are multilateral, and have their own history in terms of how the state parties have interpreted them. We obviously have different generations of bilateral treaties. I would say it’s very difficult to draw neat conclusions and derive ordered results from the fact that we have an increasingly growing body of case law.
David Rivkin: You began by saying it does create certain norms, but then said that these are all different treaties, different parties and so forth. The fact is that, in counsel’s arguments and awards, you see references to prior decisions without necessarily drawing distinctions from one treaty to the next. Isn’t there a broader body of interpretation of what expropriation standards are? What standards are there for FET and the like?
Alejandro Escobar: There is a broad standard of interpretation, particularly on issues such as expropriation. Expropriation is one of those areas where there has been more consensus than in others. I agree that the use of precedent in awards is a fact of life, and counsel certainly rely on it. However, the way to understand that phenomenon is by looking at awards as declaring a particular interpretation of the treaty and of international law, in conjunction with other elements of interpretation. The starting point would be the Vienna Convention: how the text of a treaty is approached in the light of the practice of the parties. The use of arbitral awards is a short cut to underscore and reaffirm the conclusion to which the arbitral tribunal has arrived, based on that more holistic type of interpretation.
On issues such as expropriation, I would agree that investment treaty awards have helped to clarify and develop the law. However, there are other issues on which the case law is divided: FET is an example. There’s a debate o the meaning of FET under investment treaties: some have called it an autonomous standard – whatever that means – and others argue that FET should instead be understood as reflecting customary international law, as the NAFTA state parties have agreed it does. Some states have reflected this in subsequent treaty practice. The debate is a real one, but one has to ask what is the ultimate outcome for the purpose of determining what international law says on FET. I think the debate is inconclusive. It may be that at the end of the day the same practical principles might apply, and the same outcome might result, regardless of how the FET obligation is expressed in one treaty or another, but the method for reaching that conclusion, or other conclusions on FET, is still largely undetermined in the case law. This is not to speak of other issues, such as the umbrella clause or the MFN clause. There’s still a lot to be said about integrating the body of international investment law and investment arbitration precedent in a more coherent manner.
David Rivkin: Do you think that investors adjust their conduct based upon what they have seen in the interpretation of investor state cases?
Alejandro Escobar: They do, but on the basis of very broad strokes. The first thing investors look at is whether there is a jurisdictional basis to bring a claim; whether they qualify as an investor in a particular treaty; and whether that treaty provides a forum for their claim. Then they look at the particular protections of the treaty – not all treaties provide the same type of protection – and the general level of legal framework. Once they start to look at particular issues, they’ll realise that there is an open texture: there’s often no definitive answer on many of those issues of treaty protection, whether substantive or procedural, when an investor is planning to invest in another country. It must look at the broader picture. That holds true as a rule of thumb for understanding international investment law as a whole.
David Rivkin: So, does the system then fail to provide certainty to investors?
Alejandro Escobar: It doesn’t fail to provide it altogether. It provides certainty in the terms I have tried to explain: there are treaties that provide basic protections, that provide jurisdictional basis for going to an international forum. What it doesn’t always provide is the certainty that the particular case, and the particular merits of the case, will lead to a successful result.
David Rivkin: Do you see insurers, energy companies and others with global investments basing their behaviour on what they feel they would be protected by, coming from the decisions that arbitrators have issued?
Alejandro Escobar: That’s probably true. What prudent investors will look at is the common ground and points of reference on which a future claim might be built. That point of reference could take many shapes and forms. One would be the initial contact of the investor with the state. The example of Argentina provides many points of debate, but one that was clear in the cases was that there was a deliberate intention to attract foreign investment. That allowed investors a very clear point of entry, a starting point, on which to base what they would later say were legitimate expectations under a treaty. So the starting point is an important point of reference.
Another point of reference would be what general standards the investment adheres to. Ms Miles referred to environmental standards. Investors have voluntarily accepted common environmental standards developed by multilateral agencies, such as the World Bank, to ensure that if their conduct is questioned, then they have a point of reference. That they can say that their expectations were legitimate and reasonable in the circumstances. Very much in parallel to what Ms Miles referred to is the Philip Morris decision, in which the point of reference benefited the state. Investors have similar resources to point to when they invest and to be able to spell out their legitimate expectations vis-à-vis their host states. Sometimes that is sufficient to either avoid arbitration altogether, to reach an early settlement with the host state or to prevail in arbitration, as we have seen in a number of cases as well.
Ben Carroll: Thank you Mr Escobar. Counsel, you may direct your questions to any of the witnesses for the remainder of the session.
David Rivkin: Let me ask all of you to comment on what we have just heard from Mr Escobar. We’ve heard from each of you that in some way investors adjust their behaviour based on not only what the treaties say, but on what the awards interpreting those treaties say. What does that say about the role that arbitrators play? Should arbitrators be conscious of the impact that their awards are having in rendering decisions? Or does it undermine, as Mr Matthews said, the idea that what they were there to do was simply interpret a dispute between the two parties before them?
Duncan Matthews QC: The starting point is the one on which Mr Sheppard disagreed with me, and I think that was an error on his part. He distinguishes between a state buying boots and a state entering into an agreement with another state under which the person who is going to be providing him with investment is guaranteed certain rights.
In both cases, the state has agreed with a counterparty that it’s going to give certain rights and protection to the other party. The state has a choice. It has the same right of autonomy in entering into a contract as it has in entering into a treaty. It can decide whether it enters into the treaty, and on what terms, and it can choose not to enter into the treaty. It can choose to abrogate it; it can choose to renegotiate. These are all possibilities, and all ultimately are decisions against which background the investor is going to decide whether to invest. The state enters into the treaty not out of goodwill, not out of love, but to attract investors. They are promising certain protections to somebody who is induced to take a risk. So, the question is: when they are induced to take the risk and they lose out, should they be compensated? To me the answer is simple: yes. It should be so whether they enter into it because there’s a treaty there, or whether they enter into it because they agree a contract with somebody, with a state, and the state gives them certain rights under the contract.
Not that I’m not answering your question, but taking it on to the next stage. The question is: does an investor state treaty sit in a different place because parties adapt their behaviour according to the outcome of disputes. Again, if you have an ongoing commercial relationship and arbitrators decide a dispute, it obviously impacts upon how parties are going to conduct themselves because it establishes certain rights that exist. So, in a sense, whether you are in a private context or an investor state treaty context, you are going to have a modicum of impact upon how people conduct themselves. The fact that they may adjust their behaviour is obviously a risk: in two ways. It’s a risk for the investor because the investor may change their conduct and then the state may change the treaty. It’s a risk in the other sense because the investor or the state may change their conduct and then some other arbitration panel comes up with a different result, which they are at liberty to do.
David Rivkin: Mr Sheppard, do you want to respond?
Audley Sheppard QC: Mr Matthews has only strengthened my resolve and reasoning as to why he is wrong. He focused on the risk that the investor takes – and all business is a risk of some sort. Therefore, the question is: are investment treaties an insurance policy against everything; an insurance policy against government interference which is improper by the standards of the treaty? Yes, of course. But they go further and then give the investor compensation. It’s compensated for what is believed to be the future prospects of that business, loss of profit. That’s where domestic administrative law is very unlikely to compensate the national investor and that’s something that seems out of kilter between the two, and should be fixed.
There is, as always, a range of cases. There’s a one-off measure that was wrong and is not going to affect the future conduct of the investor or government in any way. There are the solar panel cases that are similar, but there are differences with the two families of solar panel cases. Perhaps, one can extrapolate from one decision as to how other cases will be decided and how a government should behave. If there is one adverse decision it may prompt settlement of other claims – Egypt is a good example that seems to be more open to trying to resolve claims with investors. Then there are the really macro decisions, like tobacco, that you would expect to affect the behaviour of governments that were thinking of introducing legislation. You would think it would hold the legislation back until Uruguay and Australia decisions had come out, but the UK government pressed ahead and didn’t wait for a final decision. It has been vindicated in what it’s done. So, one can’t paint too broad a brush as to how government action is impacted. I don’t see any empirical evidence that investment treaties and decisions have a chilling effect on introducing sensible, social, environmental and human rights legislation. What it has done is cause certain states to rush headlong into amending treaties, such as the India Model BIT, where the portal to get through to bring a claim is slammed shut, or whatever sliver remains open is very restricted. And, of course, there are those other states that are keen on a standing investment court on the EU Commission model.
Wendy Miles QC: The question was: are investors shaping their behaviour based on what treaties or awards say and do. Every time we speak to an investor, we discuss, where relevant, how they’re structuring their investment through treaty protection. In that respect, yes, they are shaping behaviour. But we don’t just look at the treaty. We look beyond the treaty, particularly in light of the recent CIAC and Montenegro case where the holding company in Cyprus wasn’t sufficient to satisfy the definition of an investor from Cyprus in Montenegro so as to give rise to jurisdiction under the treaty. I think it does shape what counsel advise investors, and investors are often at least as sophisticated in shaping how they invest in the decisions they are taking. It’s important to remember that these treaties are often tiny instruments: 14 or 15 articles; sometimes 5 or 6 pages long. Contrast that to the investment agreement, which can be inches thick with terms. We need to find something that helps us to interpret those broadly stated commitments in the treaty instrument, and where we’re looking more broadly at international policy practice and earlier rewards. To do that we must acknowledge that that has an effect – so far not a chilling effect – on state conduct in respect of human rights, environmental obligations or acts in respect of those obligations. The solar panel cases are a very interesting set of cases to watch.
The first decision, the Charanne decision against Spain, decided that there was no jurisdiction to consider the revocation of certain tariffs or incentives to invest in renewable energy and solar energy. Those incentives within the EU were to promote transition to renewable energy, which is pretty much accepted as international policy under the Paris Agreement. The changing of those tariffs and incentives unilaterally by the Spanish government was the subject of the Charanne claim. It was unsuccessful on the basis that the regulatory decision taken by the government did not satisfy the language of that treaty. There are 31 other cases and Decision Number 2 on 5 May found there was jurisdiction. Decision Number 2 was based on a different regulatory decision by the same government. There are 30 more cases to follow, all taken under that second regulatory decision. This is a test. It’s the same treaty, or very similar treaty wording. The test is whether we end up with this irrational, irregular mishmash of inconsistent decisions relating to identical or very similar treaty obligations involving the same state. We have a legitimacy issue and we have it in a particularly sensitive and fragile subject matter relating to environment and climate change, which is very much top of the global agenda.
Wendy Miles QC: If we’re going to take any role as facilitators in implementing our states’ Paris Agreement obligations, we need to get these decisions right. That’s where I worry about a chilling effect going forward. You asked me earlier: do we have the right people making the right decisions? If they’re not paying attention to one another on this, then possibly not. I hope they are paying attention and recognise there is a normative effect going on, and that it’s fundamentally important to a very big international policy issue.
David Rivkin: Do you resolve that by saying the first tribunal that decides the issue, others should follow it so that there is a standard? Or is it more a market place of ideas where the better-reasoned decisions would be the ones that subsequent tribunals would follow?
Wendy Miles QC: I think both, if that’s not an inconsistent answer. The first decision could be wrong and bad precedent is not a good thing. Bad precedent is a bad thing, but bad consistency is a bad thing as well. Ideas need to evolve, but not just sprout like mushrooms in independent fields. If the thinking is evolving, one thought from another, in an intelligent and thoughtful manner, we’re getting the system right. Even if the second and thirtieth decisions are not exactly the same.
David Rivkin: How do other members of the panel feel about that?
Alejandro Escobar: I couldn’t agree more. We all have a responsibility. The parties have a responsibility in how they appoint their arbitrators. The institutions have a responsibility when the parties’ can’t agree. Arbitrators have a responsibility to decide the case put before them. Their responsibility is not consciously to fashion international law generally, but to resolve the case. Their legitimacy depends on how they solve the case and what methods they apply to determining the facts and the law. I agree with Ms Miles that this is a public international law phenomenon. I don’t agree with Mr Sheppard that this is just a normal international form of arbitration with a different governing law. I would say it’s the inverse; it’s a public international law phenomenon which uses a commercial dispute settlement mechanism as a method. I think, rightly or wrongly, we should approach it in that fashion.
David Rivkin: Mr Sheppard, you seem to be the loner on that. What you have is arbitrators and counsel interpreting treaties which are public international law documents. So, why is that not one form of dealing with public international law?
Audley Sheppard QC: It’s one form. I don’t disagree at all, but a treaty is an international law instrument governed by international law.
Lisa Bingham: I wanted to come back to Ms Miles with this question. Are we relying too much on transparency to increase the public’s sense that the system is legitimate? When you talk about the solar panels cases, for example – you have suggested that the instruments the two cases were considering were different enough to justify different results, but when decisions go out into the public domain, is there a risk that in that type of situation that the public reaction might be: “This is inconsistent; this is crazy.” Is it asking too much of transparency to expect that it will necessarily build perceptions of legitimacy?
Wendy Miles QC: I don’t think so. If it’s a different regulatory decision that gives rise to the claim – as was the difference between the Charanne case and the second case involving ABN AMRO – that is very clearly explained and has been explained in the press. Equally there has been clear explanation of which group the pending claims fall into, which may result in settlement. We can’t be complacent. It sounds trite, I know, but much of what we do in the commercial arbitration sphere is about resolving private disputes between private parties. There is an exception when it involves a state party, state assets or state interest. I think that is more of a hybrid. One of the in-house counsel speaking at an earlier session mentioned that corporates are not interested in making the big law point: they’re interested in resolving their disputes. We need to be mindful of that. Investor state arbitration is a hybrid. Remember, most investors also have a private agreement under which they can resolve their disputes in the first instance, often – not always – against the state. But when they’re looking for relief under the treaty, they need to understand that they’re seeking that relief in a public body. Even if it’s not published, it’s a body undertaking a public law function as opposed to a private dispute. Transparency shines a light on the exercise of that public function. I think that’s a good thing, but we need to be consistent and able to explain why we’re doing it in a reasoned and sensible way.
David Rivkin: Mr Sheppard mentioned the investment treaty court the EU is setting up. Given we are dealing with public policy issues, is that a good thing?
Alejandro Escobar: A proposal for an international court for investment, in theory or in principle, shouldn’t be controversial. Setting up standing bodies is what international law does. The difficulty is setting it against the experience in investor treaty arbitration to date. A future court, which nobody knows what remit it will have, how it will be composed, how it will function; or the wealth of decisions we have today which provide some – but in my view, not a high degree of – predictability. Ultimately it’s a question of how states want to refashion this area of law. There’s a lot to be said for refining the system we have at the moment, for making it more rigorous and for being more methodical in the rule-creating aspect of both treaties and decisions.
Wendy Miles QC: The difficulty with the international court proposed by the EU is the hybrid nature of the system we’re talking about. The ICJ works, insofar as it works, because it resolves disputes between states, and states appoint the judges to the ICJ. The court proposed by the EU will follow that model whereby states appoint the judges. That creates an asymmetrical court weighted against the investors and that, I would speculate, is a somewhat political and, perhaps, cynical attempt to redress a perceived asymmetry the other way. I don’t think there is an asymmetry the other way, but the perceived asymmetry in the system is as much a symptom of our failure to be able to participate in public discourse about what our system is, and how it works. We need to come out from the shadows and not resist transparency in that respect.
There are other problems with the proposed EU court. I wouldn’t throw out the concept of an international court entirely just because that particular proposal isn’t a good one. In the context of environmental and broader climate, for example, an international court of the environment – with the apt acronym of ICE – has been proposed and that might be a necessary place that, short term, can get consistency to decisions and interpretations of obligations under the Paris Agreement, for example. But it doesn’t have to work like the ICJ; it could work like the Iran-US Claims Tribunal. You could have a permanent panel with different constitutions for different disputes. It’s not one or the other; it’s not court or arbitral tribunal. From the spectrum of international dispute resolution bodies you would create a smaller group – if you can get the appointment process sorted out – with the necessary expertise to improve and further legitimacy, for example in relation to environment disputes.
Audley Sheppard QC: I think it’s completely binary. If you are an investor, it’s a bad idea; if you’re a state, it’s a jolly good idea/
David Rivkin: Is that because of the conflict in interests that Ms Miles described? That the states are then appointing the decision makers on their own cases?
Audley Sheppard QC: I think it is weighted in favour of states through the appointment process, which will undoubtedly be a cumbersome one. It’s a shame it’s come to that but, in considering these things, it’s useful to bear in mind that businesses and international companies invest because they think they’re going to make money. They may be right: they may be wrong. But many have the experience to make that judgment for themselves. One aspect must be the legal framework in which they invest. It’s interesting that the studies seem to be inconclusive as to whether any investment treaty or body of investment treaties actually promote investment.
David Rivkin: But the states enter into investment treaties because they believe it will. In order to do that, they must offer some protection to the investor, some rights to promote the investment they want.
Audley Sheppard QC: Well, they obviously provide rights.
David Rivkin: Then there must be an effective mechanism to resolve a dispute as to whether those rights have been violated.
Audley Sheppard QC: There should be, but would the world really change if we didn’t have these investment treaties? Business would carry on making investments. I don’t think we’d see any sort of change in investor behaviour.
David Rivkin: Mr Matthews, you’ve been looking eager to answer this question as well.
Duncan Matthews QC: I’m very eager, not least because, against my better judgment, I’m inclined to agree with Audley. He’s right that the only stimulus for the creation of a court is dissatisfaction with and concerns on the part of the states as to the extent to which they are sufficiently protected by the present system. They are going to want to fashion an international court in a way that strengthens their position. It goes back to an earlier comment about the identity of the people who are going to be making these decisions. Are they going to be former law officers? Are they going to be people with a bent towards supporting states rather than the private investor? In theory, it is possible – to the extent that investment tends to come predominantly from one area and the direction of investment tends to be predominantly in another area – you might get some balanced representation by the states which give rise to foreign investment, providing some sort of protection. But I think that’s more theoretical than real.
Wendy Miles QC: That was a very, very interesting discussion. Perhaps, inevitably, it seemed to focus on the role of arbitration in fashioning – which was an interesting word – international law in terms of state obligations balanced against investor expectations. It’s also interesting to think about the potential role of arbitration in forming international law in terms of obligations on private businesses and companies. If we think about the UN’s guiding principles on business and human rights, for example, they are stated as soft law that bears upon private actors. But if we look at the recent Argentina decision, where the tribunal specifically referred to the UN principles in the context of a potential counterclaim. Now that counterclaim didn’t go anywhere, but the tribunal found itself actively saying that it could no longer be admitted that companies operating internationally are immune from being subjects of international law. So, a question for me is whether we’ll see that soft law bearing upon private actors being hardened – or fashioned – more via the arbitral process. I’ll stop there.
GAR Live London was held on 15 May 2017 at Freshfields Bruckhaus Deringer. It was sponsored by Freshfields Bruckhaus Deringer, Cooley, BDO, Linklaters, Therium, Maitland Chambers and Geotext Translations.