Czech taxpayers must think poorly of what passes for the world system of investment arbitration. Just a year ago, the Czech Republic was forced to pay $355 million to a foreign investor--CME Czech Republic B.V.--which had won the award through arbitration under an investment treaty. But the American mogul Ronald Lauder, who controls CME, lost an identical claim under a second investment treaty. Faced with two opposing rulings on the same issue, the Czechs effectively had nowhere to complain. They challenged the CME award in the courts of the nation where the arbitrators sat, which was Sweden. But inconsistency by arbitrators is not grounds for judicial review, and Sweden's judges quickly confirmed the award. The Lauder cases dramatize the tenuous legitimacy of investment dispute resolution. In the American judiciary, circuit splits happen daily without tearing asunder the law's fabric. In a system with no true recourse for appeal, however, a split between two panels provides, justifiably, an occasion for existential soul-searching.
"A crisis has undoubtedly fallen upon us," Charles Brower of White & Case wrote in The National Law Journal after the Lauder rulings. "Whether it will destroy the system, however, remains a subject for debate." Nigel Blackaby of Freshfields Bruckhaus Deringer is willing to take that extra step and predict apocalypse. "An appeal mechanism," he says, "is critical for the long-term survival of the investment arbitration system. Any system where diametrically opposed decisions can legally coexist cannot last long. It shocks the sense of rule of law or fairness. Ultimately, there must be a right answer."
Investment has overtaken trade in global economic importance, but, so far, investment has failed to inspire the creation of mature legal institutions. According to United Nations figures for 2001, the value of goods and services provided through foreign direct investment, at $18 trillion, was more than double that provided through cross-border trade. When trade law is murky, parties can turn to the Appellate Body of the World Trade Organization for a right answer. But in investment law, disputes between investors and states end up in a diffuse system of contract and treaty arbitration. The inadequacy of that system is increasingly apparent. What the system lacks is a final arbiter--call it a World Investment Court. Such a body is politically unfashionable, perhaps to the point of being unfeasible. But that is all the more reason to discuss its merits openly.
The past year produced another glaring example of incoherence in the law of international investment. Both Pakistan and the Philippines have signed investment treaties with Switzerland containing an "umbrella clause," in which each nation promises to observe "commitments" it has made with respect to foreign investments. What exactly this clause means remains a great open question. Ordinarily, investment treaties protect investors only against egregious contract breaches. Some lawyers, like Emmanuel Gaillard of Shearman & Sterling in Paris, believe that the umbrella clause transforms every breach of a contract signed by a nation with a Swiss company into a violation of the treaty signed by that nation with Switzerland. Thus, Gaillard visualizes the treaties as umbrellas opened above its contracts, giving investors an extra level of protection.
A Swiss engineering firm, SGS S.A., had signed contracts with Pakistan and the Philippines to service those nations' shipping ports. When the deals went bad, SGS filed two complaints with the World Bank's International Center for the Settlement of Investment Disputes, and two treaty arbitration panels were convened. SGS hired Gaillard to plead its case, and advanced the umbrella theory. In August 2003 the Pakistani panel declined jurisdiction over SGS's contract claim, reasoning that the states' intent to incorporate contract claims into a treaty needed to be clearer. In February 2004 the Filipino panel accepted jurisdiction over SGS's contract claim, but stayed its own hand until that claim was resolved in the Filipino courts. Although neither approach satisfies Gaillard, they differ significantly. The meaning of the umbrella clause remains shrouded in fog.
The Lauder and SGS cases underscore the need for a true arbitration appeals process, which would promote accuracy and uniformity in the law. Such a process would vest the power of review in permanent arbitrators, rather than ad hoc panels or national judges, and it would allow a case to be revisited on broad grounds of fact and law.
The arguments in favor of an appeal apply with special force in state-investor arbitration. When compared to arbitration between private parties, uniformity in state-investor disputes is more important because most awards in this area are published. A correct result is more important in investment arbitration because the stakes tend to be higher, both in terms of money and public interest [see " 'A Completely Appalling' Decision."]. Together, uniformity and accuracy promote justice, and ensure the survival of this system by enhancing its legitimacy. A viable system of dispute resolution sustains high levels of foreign investment and economic growth throughout the world.
The main theoretical objection to an appeal mechanism is that it undermines the goal of speed and finality. But the preeminent goal of international arbitration (as opposed to domestic arbitration) is not finality. For most parties, the preeminent goal is to remove decision making from the hands of untrusted domestic courts. Such a goal would be promoted by permitting an appeal within the arbitration system itself, and thus preempting a judicial challenge.
Finality is certainly desirable. But when the stakes are high, as they almost always are in investment arbitrations, most parties prefer to sacrifice finality for accuracy. Besides, when the stakes are high, the promise of finality is illusory, because the losing party pressures domestic courts to intrude. To the extent that an arbitral appeal would remove opportunity for judicial meddling, it would promote finality.
The current forms of review are meager. Under the rules set by the International Centre for the Settlement of Investment Disputes, a losing party may ask a second ad hoc panel to annul the final award. In non-ICSID cases like Lauder, a losing party may generally file a motion in the courts of the nation where the arbitration was sited asking to set aside the final award. Neither annulment nor court challenge amounts to a true appeal. And because the grounds of review are limited and largely procedural, they don't assure accuracy or uniformity. In addition, review by a nation's judges is usually unacceptable because it defeats arbitration's basic goal of political neutrality. Review by ad hoc (as opposed to permanent) arbitrators is not ideal, either, because such appointees are open to charges of bias.
The United States has officially recognized the virtues of an arbitral appeal. In granting President Bush power to hold fast-track talks on trade and investment treaties, Congress in 2002 stated that an appellate mechanism is a U.S. negotiating objective. The legislation stopped short of specifying how to reach that objective.
The ideal solution would be to establish a World Investment Court, corresponding to the Appellate Body of the World Trade Organization. Such a forum could be called into being by signing a new world treaty, or adding a protocol to existing world treaties. However, prospects for any such agreement are dim. The current round of world trade negotiations is stalled, as are talks over a regional trade and investment treaty for the Americas. International lawyers well remember that antiglobalization groups defeated a proposal for a "Multilateral Agreement on Investment" floated by the Organisation for Economic Co-operation and Development in the 1990s. But if the MAI was a first step toward an investment system corresponding to the WTO, then its defeat was a pity.
Perhaps the word "multilateral" has a sinister ring. But the MAI's defeat simply accelerated the signings of bilateral investment agreements. If, as it seems, globalization is inevitable, then globalization skeptics ought to welcome a centralized system of investment dispute resolution, with a built-in appeal. Cases would be easier for the public to track, and one identifiable institution could be held accountable. Correct, coherent, and unbiased results benefit investors, states, and civil society alike.
Especially in light of the multilateral debate, experts agree that an international arbitration court is not now politically viable. "There's merit in the idea," says Stephen Schwebel, an arbitrator who once served as president of the International Court of Justice. "We may see it one day, but not any time soon."
Nonetheless, there's always the possibility that a shock to the system will spur global reform. Some lawyers hear a loud buzzing noise emanating from Buenos Aires, where cases arising out of Argentina's peso crisis threaten to yield conflicting results on a scale much larger than the Lauder or SGS matters.
Thirty-plus arbitrations, easily worth $10 billion, have been filed against Argentina, most by foreign investors who in the early nineties bought up newly privatized water and power utilities. These claims fit a common pattern. Investors maintain that Argentina promised to assume the risk of currency fluctuation, and then withdrew its promise. In January 2002 Argentina started calculating utility rates in pesos rather than dollars, and devalued the peso. Foreign investors' income plunged to a third of its former levels, while costs remained constant. Investors went belly-up. Legally, the claimants argue that Argentina's actions rose to the level of unfairness or discrimination or expropriation. In defense, Argentina might argue that the fiscal emergency dissolved its treaty obligations.
Brigitte Stern, a professor at Universit"é Paris I, wrote a classic 1980 article on the lack of uniformity in arbitral law, called "Trois arbitrages, un même problème, trois solutions" ("Three Arbitrations, One Problem, Three Solutions"). Now sitting as an arbitrator on several Argentine panels, she fears that Argentina will take this situation to an extreme. "You have the potential," she warns, "for 20 arbitrations, one problem, and 20 solutions."
Is today's arbitral system up to the challenge of Argentina? Some optimists predict that the later panels will informally follow the precedents of the early panels, and that the law will gel over time. Others say that Argentina will await the outcome of the first few rulings, and settle all the claims in their light. But pessimists fear that the later arbitrators will ignore the early arbitrators, and Argentina will use the divergence of the panels as an excuse never to pay on any claim. If that happens, the idea of a World Investment Court may return to fashion sooner rather than later.
