The world’s worst judicial system

More countries are realizing how they are at the losing end of a biased arbitration system that is loaded against them in investment cases that can cost them billions of dollars. 

by Martin Khor

It must be the world’s most problematic and outrageous judicial system. Its decisions can cost a country billions of dollars. It is riddled with conflicts of interest involving the judges, the lawyers and the proponents of the case. Yet its hearings and decisions are shrouded in secrecy and even the very existence of the cases is often not public information.

This is the arbitration system at the heart of international investment agreements. 

Many countries are signatories to these agreements. There are around 3,000 bilateral investment treaties (BITs) signed by pairs of governments. And there are also bilateral free trade agreements (FTAs) which have an investment chapter that is similar in content to the BITs.

Under these treaties, foreign companies can sue governments if the latter introduce policies that these companies deem affect their future incomes. The treaties define “expropriation” to include depriving investors of future profits due to new regulations.

Thus, a tobacco firm has sued Australia and Uruguay for requiring cigarette boxes to have plain packaging. When Ecuador cancelled a contract with an American oil company for violating the terms of the contract, the company brought a case and was awarded $2.4 billion.

Another company sued Germany for two recent policies requiring tighter regulations on coal-fired power plants to reduce carbon emissions and phasing out nuclear power following the Fukushima nuclear disaster. Indonesia is being sued for $2 billion by a British mining company after the government revoked a licence that it found was faulty.

Public interest groups have criticized BITs for preventing or discouraging governments from introducing health, environmental and pro-development policies. 

A small group of lawyers, working either for investors or as arbitrators, and who are based in Europe and North America, have been benefitting from the boom in litigation linked to investment agreements, and they also encourage big companies to sue governments, according to a recent report by two European groups, Transnational Institute and Corporate Europe Observatory.

In disputes relating to most BITs and FTAs, the arbitration is conducted by the International Centre for Settlement of Investment Disputes (ICSID) at the World Bank in Washington.  

Lopsided system

The report, “Profiting from Injustice”, revealed that:

l     Only 15 arbitrators, nearly all from Europe, the US or Canada, have decided 55% of all known investment-treaty disputes. This small group sit on the same panels, act as both arbitrators and counsels, and call on each other as witnesses.

l     Many arbitrators show a clear bias towards investors. Several prominent arbitrators have been members of the board of major multinational companies, including those who filed cases against developing countries. 

l     A few law firms have been encouraging investors to sue governments, as a weapon to weaken or prevent laws on public health or the environment. These investment lawyers are the new “ambulance chasers” and have fuelled an increase in cases from 38 in 1996 to 450 known cases in 2011.

l     Countries have to pay exorbitant legal and arbitration costs averaging over $8 million per dispute and exceeding $30 million in some cases. The Philippines spent $58 million defending two cases against a German firm.

l     Lobbying by arbitration law firms and arbitrators succeeded in stopping reform of investment agreements in the EU and US in the last four years.

l     Fairness and independence of investment arbitration is an illusion.

Frustrated with the BITs and its arbitration, a growing number of governments have retreated from the system. 

Recently, India started a review of its existing BITs and suspended all BIT negotiations to protect itself from frivolous litigation. In 2011, Australia announced it would not include investor-state disputes in its future trade agreements.

In South Africa, the Cabinet decided to stop negotiating new BITs and to renegotiate existing ones. Bolivia, Ecuador and Venezuela terminated several treaties and have withdrawn from ICSID.

Officials of many developing countries admit that they signed the BITs without realizing the full implications. One problem is a “survival clause” in many BITs: even if a country withdraws or if a treaty expires, the provisions will remain in force for 10 or 15 years.

In any case, awareness of the problems in the agreements and the unfairness of their arbitration system is growing, and calls for reform are being made by more countries.                               

Martin Khor is Executive Director of the South Centre, an intergovernmental policy think-tank of developing countries, and former Director of the Third World Network.

Third World Economics, Issue No. 539, 16-28 Feb 2013, p 13