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”.