One of the criticisms of the international investment arbitration system is that it is far from being the neutral adjudicatory forum that it was envisaged to be. Critics find that the arbitral awards in investor-state disputes are often skewed in favour of the investors, with the effect that host nations are often directed by the arbitration panels to pay millions in damages to the investors. Typically, investor-state disputes under the Investor State Dispute Settlement (ISDS) clauses in free trade agreements are brought for adjudication before private arbitrators instead of being adjudicated before the national courts like other disputes. This has led to a system of “privatization of justice” wherein sovereign states are made amenable to private arbitrators, with no provision of appeal against the arbitrators’ decisions.
While the investment arbitration system evolved to protect the rights of investors by adjudicating investor-state disputes in a seemingly neutral manner, it is witnessed that the ISDS mechanism is adversely impacting the sovereignty of host nations. This is because investors can initiate arbitration to challenge the domestic laws of host states where the investors feel that their investment is not adequately protected. In most cases, the arbitrators render an award favouring the investors, and host nations are called upon to pay millions in damages to the investors; as most nations cannot afford the exorbitant amount of damages payable by them to the investors, they are often compelled to amend their regulatory laws to suit the investors. ISDS proceedings entail legal expenses in millions of dollars and the financial liability may itself suffice to bring the host nation to the negotiating table.
Critics fear that the ISDS mechanism has evolved as a tool for investors to badger host nations into amending their laws to favour the investors. Foreign investors have been known to use the ISDS mechanism to change the host State’s IP laws.
Investment treaties generally define ‘investment’ to include ‘intellectual property’. If investors feel that their IP is not adequately protected in a host nation, they often initiate arbitration proceedings claiming ‘expropriation’ of their IP.
In 2010, Philip Morris sued Uruguay for $25m dollars over its anti-tobacco laws which require that 80% of the cigarette packaging should bear warning signs about the hazards of cigarette smoking. Philip Morris brought the arbitration case under the Switzerland-Uruguay BIT (Philip Morris being headquartered in Switzerland) and claimed that Uruguay expropriated its IP because the company has effectively no space to advertise its trademark on the cigarette packaging. The case is awaiting a ruling on merits by the arbitral tribunal.
Potential investor-state disputes can also deter countries from enacting public-health legislation. When the Canadian Parliament wanted to introduce plain packaging rules in 1994, tobacco company, R.J. Reynolds, wrote to the Canadian government threatening to bring an investor claim for illegal appropriation of its trademark. Canada eventually succumbed and the plain packaging law never saw the light of the day.
The independence of arbitrators has become a contentious issue in investment arbitrations- since arbitration under the ISDS clause can be initiated only by the investor, arbitrators have an incentive to rule in favour of the investors who later hire those arbitrators as lawyers in other investment arbitrations involving the investors.
A likely model for ISDS can be the replacement of the investment arbitration system with an Investment Court System (ICS), as is currently being proposed by the European Union in the Transatlantic Trade and Investment Partnership (TTIP) Agreement with the United States. The ICS seeks to ensure the impartiality of adjudicators by establishing a permanent tribunal comprising Tribunal members who “shall refrain from acting as counsel or as party-appointed expert or witness in any pending or new investment dispute“. Additionally, the ICS would also include an Appeal Tribunal. If the ICS is adopted into the TTIP, other developed and developing nations are expected to follow suit to preclude the “privatization of justice” under the current investment arbitration regime and to protect their domestic laws.
(Written by Devika Agarwal)