Investor-State Dispute Settlement: Transparency and Beyond

 

On March 17, the United Nations Convention on Transparency was opened for signature in Mauritius.  The Mauritius Convention, as it is known, has the potential to repair a glaring flaw in the process that allows foreign investors to institute binding arbitrations against the country in which they made the investment.  This process of investor-State dispute settlement (ISDS) is made possible by a network of approximately 3200 bilateral investment treaties (BITs), including many to which the United States is a Party.  

 

ISDS has become controversial, including with respect to the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).   Critics argue, for example, that most of the members of the three-person arbitration panels deciding ISDS cases are old, white men (“stale, pale, and male”), that serious ethical problems exist, and that BIT norms such as “fair and equitable treatment” are so vague that they are incapable of predictable application and give arbitrators too much discretion.  Defenders argue that ISDS allows relatively fast and inexpensive dispute settlement, circumvents often-corrupt local court systems, and results in awards that are enforceable via the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).

 

Another critique of ISDS is that it is conducted under rules that tend to be secretive, one set of which is the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL).  Thus, for example, no one knows how many ISDS cases have occurred, and memorials and judgments often are not made public.  This is problematic because these cases are of interest to the public.  For example, each of the cases alleges that a host government violated international law; significant amounts of public money are at stake; investors often challenge rules at the heart of national sovereignty protecting health, safety, and environment; and cases often involve critical natural resources such as water or minerals.  In addition, this secrecy violates the international human rights to access to information and public participation enshrined, for example, in Article 19 of the Universal Declaration of Human Rights.

 

In order to rectify the democracy deficit in its rules regarding ISDS, UNCITRAL negotiated a set of transparency rules culminating in the 2014 UNCITRAL Rules on Transparency.  In spite of strong resistance from several countries, most prominently Singapore, China, and Israel, the Rules on Transparency provide for significant but balanced transparency, including opportunity for public participation; but the compromise necessary to achieve that result is that the rules do not apply to arbitrations brought under BITs existing before April 1, 2014 unless the Parties to the BITs “opt-in” to their application, or the parties to the arbitration in question agree to apply the rules (which experience indicates is not likely once a dispute has been joined).  Because the vast majority of future ISDS cases will arise under pre-2014 BITs, there is a serious risk that the UNCITRAL transparency rules will not apply in most ISDS cases.

 

Putting aside the fact that many governments are reluctant to have their alleged wrongdoing made public, an obvious procedural block exists because the process of reciprocally opting-in to over 3200 BITS would require many time-consuming negotiations and politically difficult ratification efforts.  To make it easier for States to op-in, UNCITRAL thus negotiated the Mauritius Convention.  By becoming a Party to this single treaty, a State can effectively agree to the application of the Transparency Rules to all arbitrations brought under all of its BITs.  The Transparency Rules will then apply automatically if the other State to the BIT under which the arbitration is commenced is also a Party to the Mauritius Convention (or, when that is not the case, if the other party to the dispute agrees to apply them).

 

The Mauritius Convention thus offers States an easy way to take the first step to ensure transparency and opportunity for public participation in ISDS and to fulfill their human rights obligations in this regard.  Only three States must become Party to the convention for it to take effect vis-à-vis ratifying States.  Thus far only 11 States have signed the convention, and none have ratified it.  It is essential that more States, including developing countries, ratify the convention.

 

The Mauritius Convention is important in another sense: its approach offers a model for dealing with other flaws in ISDS.  For example, the experience of the dispute settlement system in the World Trade Organization demonstrates how important it is to have an appellate mechanism.  Yet ISDS contains no appellate mechanism; the awards of the three-person ISDS arbitral panels are essentially non-appealable.  A global convention modeled on the Mauritius Convention could provide an elegant way to provide such a mechanism, just as it offers a way to rectify other flaws in ISDS.

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© 2015 The Foreign Policy Institute

The Paul H. Nitze School of Advanced International Studies (SAIS)
The Johns Hopkins University

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