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CHALLENGING THE INVESTMENT
ARBITRATION INDUSTRY
SOUMIK CHAKRABORTY
THE NATIONAL UNIVERSITY OFADVANCED LEGAL STUDIES
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INTRODUCTION
There is little use in going to law with the devil while
the court is held in hell. These words from an unlikely
sourceHumphrey OSullivan, a 19th
Century Irishschoolmasterbecame a widely used argument by
multinational companies in the last decade as they
justified the construction of an international arbitration
system to decide state-investor disputes
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Governments worldwide signed 3000 internationalinvestment treaties over the last few decades. These
treaties all relied on international tribunals such as the
World Bank-hosted International Centre for Settlementof Investment Disputes.
With these treaties came a boom in cases and the
emergence of a powerful new industry of arbitration
lawyers
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The CELAC-EU Summit, which took place in Chile 26-27 January,
deserves attention for a controversy that erupted around investment issues,
notably the proposed EU wording for the final declaration in support
of providing foreign investors legal certainty.
Several Latin American countries contested this premise. Today, there is agrowing unease among Latin American governments with the international
rules of the game for foreign investment.
They have started to reject the notion that Bilateral Investment Treaties
(BITs) promote development and, instead, have come to see them as tools
that can potentially undermine their development objectives.
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This change of heart has taken place as states
have become the target of multi-million dollar
international lawsuits by corporations for
measures that, at home, were considered part of
the governments duty to protect and improve thelives of its citizens.
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THE ARBITRATION INDUSTRY
Amidst the flurry of treaty-signing, few states paused to consider the
negative implications for public health, the environment, and human rights
that would result from governments putting their regulatory powers in a
legal straitjacket. Almost no-one warned of the small print in the agreements.
This included the granting to corporations of very broad and ill-defined
protection for their investments as well as the exclusive right for
corporations to sue states (states cannot sue corporations) at secretive
international tribunals for actions deemed to unfairly affect investors
profits.
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A new report by Transnational Institute (TNI) andCorporate European Observatory (CEO), Profiting
from Injustice: How law firms, arbitrators and
financers are fuelling an investment arbitration
boom shows that the arbitration industry are far
from neutral guardians, but rather highly active
players, many with strong personal and commercial
ties to multinational companies.
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FINDINGS OF THE REPORT
The legal and arbitration costs average over US$8 million per investor-state
dispute, exceeding US$30 million in some cases.
Three top law firmsFreshfields (UK), White & Case (US) and King & Spalding
(US) are the most active playersacting in 130 investment treaty cases in 2011
alone.
15 arbitrators, nearly all men from Europe, the US or Canada, and referred by some
as an inner mafia, have decided 55% of all known investment-treaty disputes.
Law firms with specialised arbitration departments regularly advise corporations to
sue countries in crisis, most recently Greece and Libya
Investment lawyers have encouraged governments to sign investment treaties using
language that maximises possibilities for litigation. They have then used these
vaguely worded treaty provisions to increase the number of cases.
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Arbitration law firms as well as elite arbitrators actively lobbied against attempts toreform investment agreements in the EU and US in the last four years.
Investment lawyers have a firm grip on academic discourse on investment law and
arbitration, controlling on average 74% of editorial boards of the key journals on
investment law, and frequently failing to disclose the way they personally benefit
from the system.
Speculative financing firms such as Juridica (UK), Burford (US) and Omni
Bridgeway (NL) have already become an established and unregulated part of the
international investment arbitration industry, further fuelling the boom in
arbitrations
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A LITIGATION GOLD RUSH
In 2009, the government of Uruguay, following recommendations from the World
Health Organization, increased the size of health warnings on cigarettes packages.
A year later, it was sued for US$2 billion by tobacco giant Philip Morris which
claimed Uruguay had expropriated its trademark. After an Ecuadorian court ordered Chevron to pay US$18 billion in damages and
clean-up for oil-drilling-related contamination in the Amazonian rainforest,
Chevron counter-sued Ecuador arguing that the government breached its investment
treaty with the US by allowing the legal case to continue.
Law firms alerted investors to the possibility of sueing crisis-affected Greece. The
legal bills were added to the already crushing debt repayments that the Greek
people are shouldering.
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Latin American countries have been taken tointernational courts at least 153 times.
Eastern Europe, Africa, and Asia are the targets in most
of the other cases.
While by 1991, only 24 investor-state disputes had been
recorded, by 2011 there were 450 known cases.
As most arbitration forums take place in secret, the
actual number is likely to be much higher.
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ILL EFFECTS OF SUCH ARBITRATION
In every case, the only judgement considered by arbitrators
is whether a corporate investment was unfairly affected; the
impact on peoples health or environment is usually not
even debated.
A proposal by International Court of Justice Judge Bruno
Simma in 2011 to give greater consideration to international
environmental and human rights law in investment
arbitration was roundly rejected by arbitration lawyers.
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While the boom in investment litigation has created a lucrative
industry for a few lawyers, the report shows that its costs are paid by
taxpayers, including in countries where people do not even have
access to basic services such as Argentina.
The Philippine government spent US$58 million defending two
cases against German airport operator Fraport; money that could
have paid the salaries of 12,500 teachers for one year or vaccinated
3.8 million children against diseases such as TB, diphtheria, tetanusand polio.
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CASE STUDY: LIBYA
On 10 March 2011, a popular uprising against Gaddafi a month before had
turned into a full-scale civil war. On the very same day, a prominent
international law firm, Freshfields Bruckhaus Deringer, also had its eye
on Libya.
They decided to advise multinational corporations on how to defend their
threatened profits in Libya in the midst of a humanitarian crisis. Notably
the briefing suggested corporations could use Bilateral Investment Treaties(BITs) to sue the Libyan state, claiming that investors could claim financial
compensation for Libyas failure to comply with promises to investors
regarding physical security and safety of installations, personnel etc.
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Two months later in May 2011 at the height of NATO bombing, the
international law firm King and Spalding advised multinationals that they
could still sue Libya using BIT rules by arguing that Gaddafi had created
an untenable, unstable and unpredictable investment environment.
The law firm even suggested that it would be possible to make claims
against a possible post-Gaddafi government based on the principle of
continuity of states although it admitted that arbitrators might be
reluctant to impose substantial damages against Libya at a time when it isrecovering from a major political, social, and economic crisis.
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The payouts made by governments in terms of compensation have reached
tens of billions of dollars, with legal fees worth tens of millions of dollars.
They suggest a new breed of international ambulance chasers has
emerged on the global stage.
Ambulance chasers was the term given in the late 19th Century to lawyers
that sought to profit from someones injury or accident.
Today, they are international law firms making money from fuelling
international investment disputeswith devastating social, environmental
and budgetary impacts for sovereign states and ordinary people.
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To maximise their profits, law firms have promoted investment arbitration in
universities, developed funding mechanisms to make it easier to finance cases, and
have lobbied politicians to prevent changes to the investment regime.
By doing so they have maintained and supported an international legal framework
that is structurally biased in favour of corporations and prejudicial against sovereign
states and ordinary people.
International investment arbitration lawyers have largely escaped public attention as
their cases are largely unknown and the vested interests behind and social costs of
their actions are largely hidden from view.
It is time to shine a spotlight on the serious ethical concerns related to the role of
law firms in the international investment regime.
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A RECENT TURNAROUND
Countries have started to realise the injustices and inconsistencies of international
investment arbitration and have initiated a retreat from the system.
In the Spring of 2011, the Australian government announced that it would no longer
include investor-state dispute settlement provisions in its trade agreements.
Bolivia, Ecuador and Venezuela have terminated several investment treaties and
have withdrawn from International Centre for Settlement of Investment Disputes
(ICSID).
South Africa is engaged in a thorough overhaul of its investment policy and has just
announced that it will neither enter into new investment agreements nor renew old
ones due to expire.
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CONCLUSION
Systemic reform, based around principles that consider
human rights and the environment as more important than
corporate profits, can deliver necessary change.
This must start with the termination of existing investment
agreements and a moratorium on signing new ones.
Even within the existing system, there are some steps that
can be taken to help to roll back the power of the arbitration
industry.
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These Steps may be taken:
It is time to call for a switch to independent, transparent adjudicative
bodies, where arbitrators independence and impartiality is secured
The introduction of tough regulations to guard against conflicts of interest
A cap on legal costs
Greater transparency regarding government lobbying by the industry.
These steps will not by themselves transform the investor-state arbitration
system. Without governments turning away from investment arbitration, thesystem will remain skewed in favour of big business and the highly lucrative
arbitration industry.