Info Service on Finance and Development (May14/03)
14 May 2014
Third World Network
system needs ‘complete overhaul'
Published in SUNS #7801 dated 12 May 2014
Kuala Lumpur, 9 May (Fauwaz Abdul Aziz) - A prominent international
lawyer has launched a scathing critique of the international arbitration
system that deals with investor-State disputes, calling for its "complete
The investor-State arbitration system features strongly in bilateral
investment treaties and recent bilateral and plurilateral trade agreements
such as the controversial Trans-Pacific Partnership Agreement.
Delivering the keynote address to the Eighth Annual Juris Investment
Treaty Arbitration Conference held in Washington, D.C. in late March,
George Kahale III - who has been lead counsel in several of the world's
largest international arbitration cases, including a pending claim
against Venezuela - also listed the top ten of what he viewed were
the most troubling aspects of investor-State arbitration.
The chairman of the Curtis Mallet-Prevost Colt & Mosle law firm
has also acted as lead counsel in some of the world's largest and
most publicised transactions and infrastructure projects in the international
petroleum industry, representing energy ministries and national oil
corporations in many oil and gas producing countries.
At the conference, themed around the question "New Developments
in Investment Treaty Arbitration: A Return to Fundamentals?",
Kahale said the pace and scope of change in the area of international
trade and investment agreements, in particular, had overtaken the
ability of governments to grasp the seriousness of the challenge,
significance and impacts they posed.
This is in addition to the serious flaws of the current international
arbitration system, such as its biasness and partiality in favour
of foreign investors as against states, the use of private commercial
arbitration law principles and practices to decide on matters traditionally
deliberated on the basis of public international law, and the susceptibility
to abuse of substantial provisions in international investment treaties,
such as the Most-Favoured- Nation and Fair and Equitable Treatment
Kahale also decried the preference in international arbitration for
"speed" and finality" as opposed to due process and
justice, the arbitrary and exorbitant claims and awards against states
that often exceed the GDP of developing countries, the lack of a credible
and uniform standard of conduct for arbitrators, and the recent phenomenon
of third-party funding.
‘WEAPONS OF LEGAL DESTRUCTION'
The first of the "top ten" concerns he has with current
international arbitration is the fact that many governments are jumping
on to the bandwagon of investment treaties - which Kahale described
as "weapons of legal destruction" - often without scrutinising
the serious implications and significance of the obligations contained
Governments also often overlook the changing nature of investment
treaties - which are expanding in breadth and ambiguity - in favour
of investors with the corresponding effect that more and more types
of State acts, gestures or Statements are becoming liable to challenge
and compensation by foreign investors, said Kahale.
Secondly, a "club of international arbitrators" and a new
body of international law were being built up through the international
arbitration system, but arbitrators are seldom trained in international
law and often have "other interests not necessarily consistent
with their functions as arbitrators" nor their independence as
supposedly impartial ‘judges' between parties to international disputes.
In such an environment, said Kahale, "arbitrators are actually
encouraged to trade points as if they are bargaining in a Turkish
bazaar, acting more like party representatives negotiating a settlement
than arbitrators deciding a momentous legal controversy."
Emphasising that the issue lies beyond the mere choice of which arbitrators
are picked by disputing parties to a dispute - and acknowledging that
"quite a few" arbitrators are competent and professional
- Kahale stressed that the system itself of international arbitration
is unsuitable for investor-State disputes.
The third criticism Kahale raised was that the provisions contained
in bilateral investment treaties (BITs) and other international trade
and investment agreements, such as Most-Favoured-Nation (MFN) and
Fair and Equitable Treatment (FET) standards, are themselves "susceptible
"Most of us intuitively sense that the drafters of these 3,000
treaties had little or no idea that FET meant anything other than
the minimum standard of treatment under customary international law,"
for example, whereas MFN is "a dangerous provision to be avoided
by treaty drafters whenever possible" and has been used as if
it was a "magic wand" to impose obligations on governments
to give protections "never imagined for virtually an entire world
of investors," said Kahale.
Fifthly, rather than "the proper administration of justice",
he said the premium placed in the international arbitration process
on "speed and finality" has turned justice and due process
into the main casualties of the system.
He cited the example of the refusal of the International Centre for
Settlement of Investment Dispute's (ICSID) Annulment Committee in
2007 to overturn an earlier ICSID award of US$133 million against
Argentina despite finding "manifest errors" in the original
decision that "could have a decisive impact on the operative
part of the award."
As Kahale noted, the Annulment Committee nevertheless felt that it
could not annul the award because it exercised jurisdiction under
what it thought was a "narrow and limited mandate conferred by
Article 52 of the ICSID Convention."
"How is Argentina supposed to feel when it loses a case that
the Annulment Committee says was a product of manifest errors of law?"
The sixth criticism of international arbitration relates to the increasing
normalisation of US$50-$100 million awards as well as the increasing
frequency of billion-dollar "mega cases" and other claims
exceeding the GDP of many nations. Such claims are being brought against
States in the same "cavalier" manner as if they were the
same as a "small demurrage claim under a charter party,"
The case of Occidental (oil corporation) versus Ecuador has seen not
only a foreign investor being awarded US$1.8 billion plus interest
- which Kahale said is "the largest known award in investment
treaty arbitration's history" - and is currently the subject
of annulment proceedings, but raises questions as to how the tribunal
arrived at the decision to reduce the compensation by 25 percent.
"Did the arbitrators just throw darts? Did they sit around negotiating
percentages? ‘How about 30, or maybe 40? No, that's too high, let's
make it 25'", he quipped.
Kahale also noted that the decision that had given rise to the Occidental
versus Ecuador dispute in the first place - Ecuador's termination
of a contract with Occidental - was itself precipitated by Occidental's
violation of the prohibition against assigning an interest in the
project to a third party without ministerial approval, on which point
Occidental had actually lost.
"I can only assume that Ecuador was and remains puzzled as to
how it is that it can win the underlying issue giving rise to the
case and still lose the largest award in ICSID history. Can you imagine
what the US Congress would have done if a multi-billion-dollar award
had been rendered against the United States for exercising its right
to terminate an oil lease for breach of its terms?" he asked
‘A COMEDY OF ERRORS'
On the controversial decision of ConocoPhillips versus Venezuela,
Kahale cited the dissenting arbitrator's description of the majority's
findings as "a legal comedy of errors on the theatre of the absurd,
not to say travesty of justice, that makes mockery not only of ICSID
arbitration, but of the very idea of adjudication."
Kahale said that many objections registered against the conduct of
arbitrators have been serious, but they did not succeed simply because
the rules of the international arbitration system ensure that arbitrator
conduct is not held to the same standards as those of domestic judicial
"We have to acknowledge," said Kahale, "that conduct
wholly unacceptable for a federal judge in the United States is commonplace
in investor-State arbitration."
"I ask," he added, "Why should that be so if, in fact,
investor-State arbitration often involves issues of international
law having an impact far beyond the individual case, and matters of
the highest public order and national security for the States involved?
Under these circumstances, what possible excuse is there for not holding
arbitrators to the highest, rather than the lowest, conflict standards?"
‘A LACK OF STANDARDS'
The lack of a credible standard of conduct is compounded by the finality
of arbitrators' decisions as well as the related matter of issue conflicts,
Kahale said further. In most judicial systems around the world, he
stressed, even if a judge were to have displayed his/her bias for
or against certain issues, that judge would still be bound to follow
the interpretation of a higher judicial authority, or otherwise risk
reversal of his/her decision.
"But in the world of investor-State arbitration, where arbitrators
feel free to follow their preferred school of thought or even to invent
law without fear of appellate review, issue conflict has to be taken
Related to the above criticism, Kahale contended, is that many cases
can be predicted by experienced practitioners on the basis of the
composition of the tribunal.
While this explains why it can take a long time for parties to agree
on the tribunal of arbitrators for their dispute, the more significant
question is how such a state of affairs can be squared with the notion
of impartiality, which Kahale said is universally agreed to be the
bare minimum qualification for arbitrators.
"The fact is that true impartiality is almost impossible to achieve
on issues, and that's a dangerous thing when combined with other features
of the current system, including the manner of appointing arbitrators
and the sovereignty of each tribunal."
Claimants have also demonstrated the tendency to grossly exaggerate
claims: when ExxonMobil started its litigation against Venezuela's
State oil firm, it had initially sought US$12 billion in a claim against
Venezuela's State oil company PDVSA (the tribunal awarded Exxon 5
percent of that amount); ConocoPhillips began its case against Venezuela
claiming over US$30 billion plus interest.
"Now, we've all heard the stories about multi-million dollar
claims based on coffee spills. Gross exaggeration of a claim is nothing
new, but with investor-State arbitration, it reaches a new level,
first because of the amounts involved and second, because there is
a greater chance that some tribunal will actually take such a claim
seriously than there is in a national court which is subject to more
checks and balances."
The next "disturbing phenomenon" connected to international
arbitration is that of third-party funding, said Kahale, whereby commercial
companies offer to pay some or all of a claimant's legal fees and
expenses in exchange for payment of the claimant's direct costs and
a share of the sum recovered by the claimant in the arbitration (typically
between 15% to 50%).
"One can wax eloquent about the positive role played by funders
in getting justice that would otherwise be denied," said Kahale,
"but I think we should all be frank enough to admit that that
isn't the kind of investment BITs were meant to protect."
‘BIAS AGAINST STATES'
Kahale's final criticism was on "the perceived bias against States"
in the investment arbitration system, which is a result of the features
discussed above as well as many others that have not been mentioned.
While such bias does not mean that States never win cases, that tribunals
are always tilted in favour of investors, or that States never do
wrong, Kahale said that such figures cited by proponents of the current
international arbitration system showing that States win more than
50 percent of cases are "meaningless, if that figure happens
to represent the percentage of cases that never should have seen the
light of day or that would never survive a motion to dismiss in a
"It is also cold comfort if 20 or 30 percent of those cases involve
manifest errors, especially if some of those are mega cases."
In conclusion, Kahale said there are some quarters who believe the
criticisms against the current international arbitration system are
merely isolated, fixable "mistakes" and exceptions to the
general efficacy and efficiency of the system.
"But I can assure you," Kahale pointed out, "there
is a very large segment of the international community, including
States, international law scholars, and even students trying to make
heads or tails out of these decisions, that believe otherwise. And
if that's the case, as it undoubtedly is, it calls into question the
legitimacy of the entire system."
While not purporting to have any one panacea for all the problems
of the system, they do call for immediate recognition and attention,
particularly since they are "serious problems that don't often
get sufficient air time."
"After all, the first step in solving a problem is always becoming
aware of its existence," Kahale stressed.
According to a Curtis report on the 28 March speech, it was not the
first time that Kahale has spoken out against investor-State arbitration.
In New York in 2012, he argued that ICSID suffered from a legitimacy
problem, and that the institution had strayed from its original ambit.
His essay on the same subject, "Is Investor-State Arbitration
Broken?", won the Burton Award last year for distinguished legal