Info Service on UN Sustainable Development (May14/05)
Dear friends and colleagues,
Prominent international lawyer George Kahale III delivered the keynote address at the Eight Annual Juris Investment Treaty Arbitration Conference held in Washington, D.C on 28 March this year. He criticized strongly the investor-State arbitration system that is a prominent feature in bilateral investment treaties (BITs) and the Trans-Pacific Partnership Agreement (TPPA).
Kahale is chairman of the Curtis Mallet-Prevost Colt & Mosle law firm, and has acted as lead counsel in several of the world’s largest international arbitration cases, including a pending claim against Venezuela.
In his address, Kahale listed the top ten most troubling aspects of investor-State arbitration and called for the system’s “complete overhaul”:
1. Many governments are jumping onto 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 therein. 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.
2. A “club of international arbitrators” and a new body of international law is being built up through the international arbitration system, but the arbitrators are seldom trained in international law, and 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, and acknowledging that “quite a few” arbitrators are competent and professional, Kahale stressed that the system of international arbitration itself is unsuitable for investor-State disputes.
3. The provisions contained in BITs and other international trade and investment agreements, such as Most-Favoured Nation (MFN) and Fair and Equitable Treatment (FET) standards, are themselves “susceptible to abuse”: “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”.
4. Rather than “the proper administration of justice”, premium placed in the international arbitration process on “speed and finality” has turned justice and due process into the main casualties of the system. Kahale 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.”
5. Awards of $50–$100 million no longer raise eye-brows, with billion–dollar “mega cases” and other claims exceeding the GDP of many nations 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 versus Ecuador, for example, not only saw a foreign investor being awarded US$1.8 billion plus interest – “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?” asked Kahale. “Did they sit around negotiating percentages? ‘How about 30, or maybe 40? No, that’s too high, let’s make it 25.’”
Kahale also noted that the act that had given rise to the 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 Occidental had lost.
6. Many arbitrator challenges are serious, but many do not succeed because the rules of the international arbitration system ensure that the conduct of arbitrators are not held to the same standards as those of domestic judicial systems. “We have to acknowledge,” said Kahale, “that conduct wholly unacceptable for a federal judge in the United States is commonplace in investor-State arbitration.”
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. In most judicial systems around the world, 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,” said Kahale, “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 more seriously.”
7. Related to the criticism above is that there are far too many cases that 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.
8. 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 (the tribunal awarded Exxon 5 percent of that amount); ConcocoPhilips began its case against Venezuela claiming over US$30 billion plus interest.
“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.”
9. The next “disturbing phenomenon” connected to international arbitration is that of third-party funding offered by commercial companies that agree to pay some or all of a claimant’s legal fees and expenses in exchange for payment of their direct costs and a share of the sum recovered by the claimant in the arbitration (typically between 15% to 50%).
10. Kahale’s final criticism was on “the perceived bias against States” in the investment arbitration system, which are 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 titled in favour of investors, or that States never do wrong, Kahale said that 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 national court. 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.”
Kahale’s full speech is available at:
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