Monthly Archives: October 2014

Large awards and costly treaties

Here is a sampling of large awards by investor-state arbitrators against countries and the treaties that made them possible.

Trade and investment treaties allow only foreign investors to sue countries, not vice versa. This is why there are no damages awards against foreign investors in favour of countries.

Ecuador: concluded a bilateral investment treaty (BIT) with the U.S. in 1997.

  • ordered to pay $75 million and then $2.36 billion to Occidental Petroleum in 2004 and 2012. Oxy is the third-largest U.S. oil and gas company, by market capitalization.
  • ordered to pay $28 million to Duke Energy in 2008. Duke is the largest U.S. electric power holding company.
  • ordered to pay $96 million to Chevron in 2011. Chevron is one of the world’s six “super-major” oil companies.

The Czech Republic concluded a BIT with the Netherlands in 1992.

  • ordered to pay $395 million to CME in 2003. CME was owned by U.S. tycoon Ronald Lauder.
  • ordered to pay $25 million to Eastern Sugar in 2007. Eastern Sugar was owned by large sugar producers Tate & Lyle and St Louis Sugar.

Argentina concluded BITs with France, Germany, the UK, and the US in 1993 and 1994.

  • ordered to pay $186 million to Azurix Corporation in 2006. Azurix is an x-large water company.
  • ordered to pay $169 million to Vivendi Universal in 2007. Vivendi is an x-large media and telecommunications company.
  • ordered to pay $278 million to Siemens in 2007. Siemens is the largest Europe-based electronics and engineering company.
  • ordered to pay $219 million to BG Group in 2007. BG Group is an x-large oil and gas company.
  • ordered to pay $57 million to LG&E in 2007. LG&E is an x-large oil and gas company.
  • ordered to pay $54 million to National Grid in 2008. National Grid is an x-large electricity and gas utility company.
  • ordered to pay $66 million to El Paso in 2011. El Paso is an x-large natural gas pipelines company.
  • ordered to pay $205 million to EDF and SAUR in 2012. EDF is the largest global electric utility company.
  • ordered to pay $60 million to SAUR International in 2014. SAUR is a large water company.

Kazakhstan concluded a BIT with Turkey in 1995.

  • ordered to pay $165 million to Rumeli Telekom and Telsim Mobil in 2008. Rumeli is a large telecommunications company; Telsim is a subsidiary of the telecommunications giant Vodaphone.

Mexico signed NAFTA in 1992.

  • ordered to pay $17 million to Metalclad in 2000. Metalclad is a privately-held waste management and asbestos company.
  • ordered to pay $17 million to Marvin Feldman in 2002. Feldman is a U.S. national.
  • ordered to pay $37 million to Archers Daniel Midland and Tale & Lyle in 2007. ADM is an x-large food processing and commodities trading company; Tate & Lyle is a large agribusiness company.
  • ordered to pay $86 million to Cargill in 2009. Cargill is the largest privately-held U.S. company, by revenue.

Canada signed NAFTA in 1992.

  • reportedly agreed to pay $13 million to Ethyl Corporation in 1998. Ethyl is a large fuel additive company.
  • ordered to pay $8 million to S.D. Myers in 2002. S.D. Myers is a medium electric power maintenance company.
  • reportedly agreed to pay CAD$130 million to AbitibiBowater Inc. in 2010. AbitibiBowater was the third-largest pulp and paper company in North America.
  • apparently agreed (through the province of Ontario) to pay CAD$15 million to St Marys Cement in 2013. St Marys was owned by Votorantim Cimentos, a Brazilian company and one of the largest cement companies in the world.

Romania concluded a BIT with Sweden in 2003.

  • ordered to pay $156 million to Ioan and Violrel Micula in 2013. The Micula brothers’ net wealth was approx. $220 million in 2011.

Hungary concluded a BIT with Cyprus in 1990.

  • ordered to pay $76 million to ADC in 2006. ADC is a company of unknown size in the airports industry.

Sri Lanka concluded a BIT with Germany in 2000.

  • ordered to pay $70 million to Deutsche Bank in 2012. Deutsche Bank is a global bank.

Paraguay concluded a BIT with Switzerland in 1992.

  • ordered to pay $64 million to SGS in 2012. SGS is a large customs inspection company.

The explosion of arbitration lawsuits by foreign investors against countries started around 2000, after many treaties allowing the lawsuits were signed with little public attention. There are now more than 500 known investor lawsuits, many ongoing.

Most compensation has been ordered for companies that are large (over $1 billion in annual revenue) or extra-large ($10 billion) or to tycoons (individuals with over $100 million in net wealth), all of whom qualified as foreign investors. An award to a company’s subsidiary or affiliate has been reported as an award to the parent company.

The list is non-exhaustive but includes most large awards up to May 2014. It does not include the more recent award of $50 billion against Russia under the Energy Charter Treaty. Amounts include pre-award but (not post-award) interest as well as principal amounts. Unless otherwise indicated, amounts have been converted to USD based on exchange rates at the time of award, have been rounded off, and are approximate.

Arbitrators who rule the world?

People are used to countries governed by legislatures, governments, and courts.

In rare circumstances, a country’s decisions can be reviewed by international adjudicators who are backed by serious legal remedies. The most powerful of these adjudicators, by a long shot, are investor-state arbitrators. Yet I doubt most people have heard of these arbitrators.

Investor-state arbitrators can review virtually anything that a country’s decision-makers do in the exercise of their sovereign authority. Vitally, they can order payment of uncapped amounts of public compensation — sometimes billions of dollars — for individuals or companies who, the arbitrators decide, have been wronged by the country.

The awards are more enforceable than any court decision, domestic or international, and — if an award is not paid — commercial assets of the country can be chased and seized in other countries.

Unlike other international tribunals (such as state-state arbitration panels at World Trade Organization), a country cannot avoid paying compensation by changing its conduct to comply with the arbitrators’ interpretation of the country’s obligations. Faced with the threat of a major investor-state lawsuit, a government may face great pressure to bend to a deep-pocketed adversary.

In this way, the arbitrators, and those whose interests they protect, have been given supreme power over the sovereign authority and public finances of countries. Yet, they are not judges, they lack classical safeguards of independence and fair process and in some cases they can make their decisions entirely in secret. Also, their decisions are subject to little or no oversight in courts.

Why have states given the arbitrators so much power? Is it to ensure respect for human rights? To make markets more efficient? To regulate nuclear arms or guard against global epidemics?

No. The role of the most powerful international adjudicators in the world is to protect the wealth of foreign “investors” — meaning basically, foreign owners of assets (broadly defined) — from:

  • “unfair” or “inequitable” changes to national laws and regulations,
  • treatment that favours domestic companies,
  • uncompensated expropriations including “indirect” takings,
  • limits on capital transfers in and out of the economy,
  • requirements to use domestic workers or suppliers, and
  • lots of other things a country’s institutions might think important.

Is this powerful protection of foreign investors good? Investor-state arbitration (or ISDS, for investor-state dispute settlement) is debated intensely in specialist circles and the public but one thing is sure: the structure of investor-state arbitration, based on numerous treaties, favours a narrow class of owners of large-scale assets around the world.

As I put it (more precisely and academically) in my book from 2007:

The advent of investment treaty arbitration stands out, not as the vanguard of a broad movement to protect individuals in international law, but as an anomalous and exceptionally potent system that protects one class of individuals by constraining the governments that continue to represent everyone else. Designed in this way, the system disadvantages those individuals who stand to benefit from business regulation that is now foreclosed by investment treaties or from other public initiatives, the cost of which is made too high or uncertain by the threat of investor claims.

This is an occasional blog about the arbitrators, the treaties that given them their power, and the (overwhelmingly) large companies and law firms that have benefited financially from investor-state arbitration since it began to explode in the late 1990s. The subject is complex, and easily obfuscated or drowned in detail by lawyers with technical expertise, but I’ll try to avoid doing that.

And to stress the unparalleled breadth and intensity of their power as international adjudicators, I’ve called them “the arbitrators who rule the world”.