Category Archives: Power of the arbitrators

The ISDS legal industry and the European Court of Justice

It is important that states’ decision-making about ISDS not be seen to have been captured by the ISDS legal industry. That is especially so when questions about the legality of ISDS come before courts, whose decision-making is expected to be separated from interested actors in legal and political debates.

Observers of the ISDS debate in Europe should therefore be concerned when the official position of an Advocate General before the European Court of Justice can be tied to the ISDS industry. The ECJ presently faces questions of the legality of ISDS — more precisely, investment treaty arbitration — in a case arising from an investment treaty claim by a Dutch company, Achmea, against Slovakia.

The Achmea case raises an apparent contradiction. On the one hand, EU member states have assumed the obligations of EU membership and the ultimate authority of EU institutions including the ECJ. On the other, they have given investment treaty tribunals the power to decide the legality of member states’ conduct, including conduct required by EU law, and to issue monetary or (through interim measures) non-monetary orders against member states. Compared to other court or tribunal decisions against states, for their sovereign conduct, investment treaty tribunals’ orders are exceptionally enforceable against states’ assets in many countries both in and outside Europe.

In Achmea, one of the ECJ’s Advocate Generals — whose role is to advise the Court on how to decide a case — recently submitted to the ECJ that this apparent contradiction between EU law and ISDS should be resolved by treating investment treaty tribunals as if they are themselves courts of EU member states. While I am not an expert in EU law, based on my knowledge of ISDS I would say that this position seems dubious due to the ad hoc nature of ISDS tribunals and the absence of conventional attributes of courts in investment treaty arbitration.

The troubling aspect of the Advocate General’s opinion is that it essentially tracks a position expressed previously by the relevant Advocate General’s legal assistant, named Paschalis Paschalidis, in his previously published work. (See for example Paschalidis’ article on the subject in Arbitration International, a journal whose editorial board consists mostly of ISDS practitioners.)

This is especially noteworthy because Paschalidis, the assistant, has ties to the ISDS legal industry:

  • During 2009-2012, he was at Shearman & Sterling, a major law firm that has worked on various ISDS cases, and he has a connection with the firm’s leading ISDS lawyer (and sometimes ISDS arbitrator), Emmanuel Gaillard. Paschalidis thanked Gaillard, among others, for encouraging him to publish his doctoral thesis (see P. Paschalidis, Freedom of Establishment and Private International Law for Corporations (2012)).
  • While at Shearman & Sterling, Paschalidis worked with Gaillard on an ISDS case in which Shearman & Sterling represented the claimants and billed over $70 million. The case arose under the Energy Charter Treaty which, like the investment treaty that is under review in Achmea, allows for intra-EU investor-state claims.
  • Gaillard has represented or is representing parties, such as the claimant in Micula v Romania, who may benefit from an ECJ decision in Achmea that is favourable to ISDS. Paschalidis was at Shearman & Sterling while Gaillard worked on Micula.
  • Gaillard has been publicly hostile to the European Commission’s efforts to reform intra-EU bilateral investment treaties (see A. Ross, “Killing off intra-EU BITs: how the European Commission plans to level the playing field for investors” Global Arbitration Review (17 October 2011)). These treaties call for reform on the basis that they were mostly concluded in the aftermath of the fall of the Soviet Bloc, before European and Central European countries acceded to the EU, and before foreign investors started to bring ISDS claims from the mid 1990s on. Paschalidis was at Shearman & Sterling when Gaillard took this position.
  • Gaillard has urged the European Commission to take an approach that insulates ISDS from even the limited court supervision that is available in the designated European seat of an arbitration. He has called on the Commission to increase “the chances that an [arbitration] award be enforced in the maximum number of countries”, even if the courts in the seat have declined to recognize the award. Paschalidis was at Shearman & Sterling when Gaillard lobbied the Commission in this way.

The significance of these facts should not be exaggerated. They do not reveal the Advocate General himself to have a direct association with the ISDS legal industry, for example. Even if they did, the ECJ’s judges are not bound by an Advocate General’s submissions.

Yet the situation is still troubling if one considers the importance of the issues raised in Achmea and heightened public debate about ISDS in Europe. For an outside observer, they provide a credible basis for questions about Paschalidis’ role in preparing the Advocate General’s opinion and his history with Gaillard and the ISDS legal industry.

To avoid perceptions that the ECJ’s decision-making may have been influenced by actors with an interest in the outcome of Achmea, it would have been preferable for another Advocate General to have done the opinion in that case. Unfortunately, the ground has now been laid for criticism that the “revolving door” between the ISDS industry and state decision-makers also leads into the ECJ.


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”.