This is a guest post from Marcin Menkes, Assistant Professor in the Department of Business Law at Warsaw School of Economics:
“So this is how liberty dies ... with thunderous applause.”
A long time ago, in a hemisphere far, far away …
War! The multilateral order and the democratic Rule of Law are crumbling under attacks by the ruthless POTUS Donald Trump, Marine Le Pen, Nigel Farage, Viktor Orbán, Jarosław Kaczyński. There are heroes on both sides.
In a stunning move, populists have swept several political scenes. They claim emergency competences to restore power to ordinary people, thus far restrained in accordance with the principle of the Rule of Law.
As separatist leaders attempt to flee the besieged seats of international institutions with their valuable “emergency prerogatives”, the investment arbitration community could lead a desperate mission to rescue the captive republics …
The once-compromised weapons for the protection of public order may turn against their masters and serve simultaneously the protection of the Rule of Law and enhancement of the legitimacy of investment arbitration.
Decay of International Investment Law and Schism in the ISDS Order
As globalisation has not delivered on all the promises, criticism of it has gradually transformed into an anti-globalisation movement for complex reform of the socioeconomic order. Subsequently, these early challenges to international cooperation served as fertile ground for all sorts of populists, claiming we can backtrack on globalisation by re-empowering the nation-state.
The interference of both waves wreaks havoc in western democracies. In international economic relations, it allowed the (near) derailment of a number of international initiatives, from TTIP and CETA to ACTA. It also translated into a general backlash against investment arbitration (ISDS), with the same arguments echoed in various states, regardless of the differences between the applicable investment regimes.
To be clear, investment arbitration did depart from its original mission to depoliticise disputes that would otherwise be ignored or elevated to an inter-state level (through the espousal of claims). While IIL has its shortcomings—some even trace post-colonialism deep structures in IIL—the explosive growth of investment arbitration attracted the unprecedented attention of legal practitioners, notably with a private law background. This was neither surprising nor unjustified, given that ISDS largely followed commercial arbitration design. This came at a price though. Most important, the latter insist that ISDS is “merely an institutional support structure for the settlement of essentially private investment disputes”, thus arguing in favour of the private nature of the regime. Subsequent problems followed, including alleged pro-investor bias, transparency, the “invisible college of arbitrators”, a “chilling effect” on regulatory powers, and others.
As a result, distrust in IIL strengthened and the very matter evolved from an issue interesting only to a handful of specialist to one polarising both academia and the general public. Whether the reasons for questioning ISDS were right or wrong, they resulted in a very real legitimacy crisis that needs to be addressed. Here, the paradox of the intersection of these waves has been fully revealed. While the backlash against investment arbitration is largely due to the doings of the new “private law order” (as opposed to the original “public law” approach or even conceptualisation of IIL as administrative law), now it empowers yet another group of challengers to the current normative (socioeconomic) framework, notably in their attempts to free from the Rule of Law (RoL) restraints and ISDS control.
The Ancient Public Order (Clause) and Recognition/Enforcement of Arbitral Awards
Although ISDS capture by the “private law order” is a relatively new phenomena, it does not mean that states had been unaware of the risk that arbitration could be abused in fraude legem. Accordingly, there are safeguards, both in investment treaties and in domestic legislation, to shield public interests and state activity in pursuit thereof from arbitral tribunals. And yet, whereas such clauses were originally intended to protect the domestic legal order against the discretionary powers of tribunals, now, as we are now witnessing a systemic assault on the Rule of Law, their function could reverse and protect states against themselves.
As for treaty law, although the normative contents of the public order clause in international investment law is ephemeral, they were commonly included from the very first Friendship, Commerce and Navigation (FCN) treaties, nowadays taking various normative embodiments (BIT exceptions, interpretation declarations). More elements of the RoL can be traced in other substantive clauses (see below); however, at this point, we shall differentiate between them and the adaptive characteristics of the public order clause.
On procedural grounds, in accordance with the New York Convention, a court may refuse to recognise or enforce an arbitral award ex officio if it find out that doing otherwise would be contrary to the public policy of that country [article V(2)(b)]; by contract, an ICSID award can be annulled only due to a serious departure from a fundamental rule of procedure [ICSID Convention, article 52(1)(d), Arbitration Rules 50(1)(c)(iii)]. A judgment shall also not be recognized under the Brussels Convention if such recognition would be contrary to public policy in the state in which it is sought (art. 27(1)). As explained by the EU Court of Justice in Krombach (C-7/98), the latter means recognition or enforcement of judgment shall not be granted when it is “incompatible to an unacceptable degree with the legal order of the State in which enforcement is sought inasmuch as it infringes on a fundamental principle”.
Public order safeguards are more robust in domestic laws. Since Poland provides the most notorious current example of violating the founding principles of the European project and flagrant disregard of the RoL, I focus here on the Polish Code of Civil Procedure (CCP). However, as the ILA Committee on the Rule of Law and International Investment Law showed in its comparative analysis, public policy can prevent recognition and/or enforcement of arbitral awards in numerous jurisdictions, including in Australia, Brazil, Germany, Ghana, Italy, New Zealand, Norway, and South Africa (therefore, I shall occasionally refer to “Poland” as a proxy for a state that has normatively removed the RoL from its legal order).
Under Polish CCP, integrity of the legal order is protected through provisions on setting aside (art. 1206) and non-recognition and/or non-enforcement of an arbitral judgment (art. 1214) which can be sought, inter alia, where: - a party to the dispute has been deprived of the means of effective defence in courts of arbitral proceedings, - violation of fundamental procedural norms stemming not only from the compromise of arbitration but also from statutes (sic!).
A court may also set aside an award ex officio if it is contrary to the fundamental principles of the Polish legal order (CCP, art. 1206(2)). The latter encompasses both substantive and procedural breaches, i.e., fundamental legal principles such as the equality of parties and impartiality of the disputes settlement body, or the Rule of Law. The assessment is performed ad casu, with respect to a particular award given the circumstances. Some even claim that the public order clause is relative; hence, its normative contents evolve in time and space. Fundamental principles of legal order with respect to economic activity include pacta sunt servanda, freedom of contract, compensatory nature of damages (i.e., no punitive damages), and certainty of business transactions. Additionally, with respect to international arbitration, judicial control of international/supranational public order encompasses elements such as protection of good faith, pacta sunt servanda, rebus sic stantibus, protection of acquired rights.
Weapon Turns Against the Master: Poland and the Rule of Law
As the incumbent Polish prime minster explained to Deutsche Welle, “good of nation is above the law and so the law is not sacred”. Accordingly, to break with the “impossibilism”, the governing party decided to change the legal order to “illiberal democracy”. Hence, we’ve witnessed a flagrant disregard of the procedural requirements and democratic principles (including a rejection of opposition motions en bloc, preventing the opposition from issuing statements, recapitulation of the same vote until achieving the desired result has been achieved, evasion of the duty of public consultations, even a change of room and barring the opposition from entrance and disregard of quorum requirements, just to quote some examples). As the government does not enjoy a constitutional majority, the constitutional order is being dismantled through regular statutes and, until regulatory takeover, disregard of rulings by the Constitutional Tribunal. In this way, the Constitutional Tribunal was seized first so the government could inter alia broaden the control of the minister of justice over the common courts and prosecutors and seize the National Council of the Judiciary (thus obtaining political control over the nomination of judges and disciplinary proceedings). Currently, the government has replaced the Supreme Court, using the cover of the politicised Tribunal.
The government insists that the institutional changes do not violate any specific constitutional norms but are merely a review of the statutory embodiment thereof. Yet, such claims ignore the constitutional acquis, notably in terms of the Rule of Law, first developed by the Constitutional Tribunal and subsequently enshrined in the Constitution of 1997. The Constitution stipulates that Poland “shall be a democratic state ruled by law and implementing the principles of social justice” (art. 2) and “the organs of public authority shall function on the basis of, and within the limits of, the law” (art. 7). But the RoL framework is broader, including principles of two instances in court proceedings (art. 176(1)), independence of judges (art. 178(1)) and of courts (art. 174), and the public nature of court hearings and public pronouncement of judgments (art. 45(2), courts’ duty to be competent, impartial and independent (art. 45(1)). Norms regulating the strict functioning of the judiciary reinforce these concerning individual rights and freedoms, e.g., right to a fair and public hearing of a case without undue delay (art. 45(1)), statutes shall not bar recourse to the courts in pursuit of claims alleging infringement of freedoms or rights (art. 77(2)), and participation of civil society in the administration of justice (art. 182). Several provisions regulate court officers status: - judges are appointed by the President, for an indefinite period, on the motion of the National Council of the Judiciary (art. 179), judges are non-removable (art. 180(1)), - recall from office, suspension or transfer to another bench or position against one’s will may occur only by a court judgment and only in an instance prescribed in statute (art. 180(2)), - specific circumstances of compulsory retirement (art. 180(3,4)), - judicial immunity (art. 181), etc. A number of these norms has been clearly disregarded in the last two years.
These RoL safeguards are further strengthened by Constitution art. 9, whereby Poland shall respect international law binding upon it, in conjunction with the right to fair trial stipulated by art. 14 of ICCPR, art. 6 of the ECHR, and art. 47 of the EU Charter of Fundamental Rights. Finally, Poland can delegate to an international organisation or international institution the competence of organs of state authority (Constitution, art. 90(1)).
Accordingly, “fundamental principles of legal order” clauses on their own (as stipulated under the CCP), or as an element of broader “public order” as it relates to the normative framework, can be used to curtail the assault on the RoL and protect investors from possible arbitrary assaults.
First, inherent to IIL, such a sudden lowering of legal standards contradicts the very essence of investment protection. If not the FET itself, then cumulatively the IIL substantive and procedural protections can be understood as an expression of the Rule of Law. The Rule of Law per se is guaranteed under several international instruments (for instance, ICCPR, ECHR, EU Charter of Fundamental Rights, and others). Occasionally, BITs refer to the RoL explicite, such as in the Preamble to the Norway Model BIT or the draft Dutch Model BIT art. 5 (subject to the ongoing legislative procedure). On other occasions, respect of the RoL results from a number of provisions on law-making, the administration, and judiciary, as in the case of the Energy Charter Treaty. Finally, like the Polish constitution, the RoL is a constitutive element of modern liberal democracies. Accordingly, violations against a foreign investor by virtue of an unconstitutionally adopted statute or judgment by an unconstitutionally appointed jury should increase the likelihood of an arbitral tribunal declaring a violation of a substantive right.
Second, both substantive and procedural elements of the “Polish” reforms could exempt the foreign investor from the local remedy rule (ILC Draft Articles on Diplomatic Protection, art. 15, as confirmed in the ELSI judgment).
Third, an arbitral judgment favourable to a foreign investor set aside by a “Polish” court should nevertheless by enforced in a third state in accordance with the latter’s public policy. Here, the practice comes from inter alia the Dutch Supreme Court, the U.S. circuit courts, and the U.S. Court of Appeals. In this same vein, a “Polish” judgment—adopted in the above-described circumstances—is more likely to be set aside abroad.
Finally, although beyond the direct scope of the current article, Polish courts are bound directly by the Constitution. Accordingly, I would argue that they are obliged to uphold the RoL standards even despite, or especially contrary to, regular legislation that would violate investor rights in violation of the constitutional acquis.
Investor Protection following Achmea and LM
To complete the journey of ISDS through its RoL purgatory, one should acknowledge the very particular situation with respect to EU members who have renounced fundamental values of European integration.
The now famous Achmea judgment (C-284/16) created a practical dilemma of whether relying upon intra-EU investment arbitration became too risky for investors. Aside from the uncertainty inherently appertaining to any disputes settlement procedure, one additionally has to incur the legal risks of an investment tribunal refusing to resolve the dispute and, even greater, concerning the enforcement of the award by EU courts. Paradoxically, in light of the LM judgment (C-216/18PPU), the continuous assault against the RoL may have amplified the risk of relying upon the judicial system—where an investor prefers to enforce the judgment outside the host-state—and postponed the twilight of intra-EU arbitration.
In Achmea, the EU Court of Justice ruled that intra-EU BITs (in that case, Slovakia-Germany) are incompatible with the EU legal order. This stems from the fact that arbitral tribunals cannot be considered “courts or tribunals” in the sense of article 267 TFUE and as a result, they are barred from referring preliminary questions to the Court. This is problematic, because art. 19 TEU states justice in the EU should be administered by a network of national courts and the Court.
Interestingly for our purposes, the CJEU made explicit reference to the principle of mutual trust underlying the judicial system of the EU. “The possibility of submitting [an interpretation both of the BIT and of EU law] to a body which is not part of the judicial system of the EU is provided for by an agreement which was concluded not by the EU but by Member States. Article 8 of the BIT is such as to call into question not only the principle of mutual trust between the Member States but also the preservation of the particular nature of the law established by the Treaties, ensured by the preliminary ruling procedure (…), and is not therefore compatible with the principle of sincere cooperation (…)”. At the same time, judicial trust is not an abstract term or principle, for the cooperation relies predominantly upon national courts, which in accordance with previous jurisdiction (including effectiveness of judicial protect as stated in Opinion 2/13 Accession of the EU to the ECHR and judicial independence in C-64/16, Associação Sindical dos Juízes Portugueses) ought to meet certainly normative requirements, including judicial independence.
Now, in the LM judgment, the Court comes back to the notion of mutual trust and judicial independence with respect to the European Arrest Warrant (i.e., an inter-EU fast-track extradition procedure). Answering the Irish court’s concern about the Polish judicial reform, the CJEU confirmed that the trust is neither automatically granted nor inalienable. The Court ruled in favour of a two-step test. First, verify whether “systemic or generalised deficiencies” do not threaten judicial independence. Second, if the former is established, whether the individual concerned runs such a risk in case of surrender. As a result, courts of such a state could lose the right to refer preliminary questions.
A “Polish” domestic court stripped of independence, impartiality, and mutual trust could thus be put by the government in the legal situation of investment tribunals, allegedly contradicting the European judicial network. More important from the ISDS perspective, the reason why “Polish” courts ought to have precedence over ISDS is thus void. In most cases, that would leave an investor with no other option but to refer a dispute with a host government to investment arbitration. Furthermore, if enforcement of the European Arrest Warrant is no longer automatically enforced towards states normatively against the RoL, similar concerns could be raised with respect to the “Polish” court rulings (although, unless the court considers the issues ex officio, the defendant state could have a political preference for enforcement rather than for relying on such a defence, which would undermine its position in the EU RoL procedures).
We are currently going through a turbulent legitimacy crisis of liberal democracy. Although some circumstances are new, the repetitive (or cyclical) nature of the conflict between the yearning for freedom and need of security has characterized Postmodernity and its discontents. Accordingly, the above considerations could be framed with reference to Hegel’s historical dialectics, Nietsche’s eternal returns, cyclical conceptions of history (including Machiavelli's Discourses on Livy), or simply a historical recount of why Western states for centuries developed instruments for the protection of freedom against the omnipotence of the government. However, Poland and Hungary are but the most recent examples that history has taught us nothing. As the former President of Poland’s Central Bank recently argued, idiots come out when stomachs are full.
Given the stake of the game, my contribution to the ongoing debate used the well-known and evocative Star Wars model. Yet, I am far from a simplistic reductionism of the current backlash against the Rule of Law in western democracies, including investment arbitration. I warned against precisely such a narrative with respect to the legal controversies surrounding Argentina’s debt restructuring and the battle against vulture funds. There, I claimed that all stakeholders “showed considerable moral nihilism and no one got out of the encounter stainless.” Also, the Star Wars authors proved they are wary of appearing naïve with their black and white depiction of moral dilemmas. And yet, for good and for bad, Star Wars as a whole is based on the clear opposition of good and evil and on the philosophy of hope. When it comes to the defence of fundamental principles of liberal democracies, such must be our attitude, for relativity in fundamental matters ultimately strengthens those who want to destroy this world.
Investment arbitration did betray its original mission. The activity of the ISDS “schismatic order” did strengthen the discontent of those who do not share the benefits of globalisation. Eventually, the power of investment arbitration has been used by anti-democratic populists to seek revenge on the existing order. However, even as democratic checks and balances are dismantled and the judiciary is subjugated to the executive, there is a ray of hope. ISDS could again be harnessed for the protection of an individual against the arbitrariness of the state. Powerful clauses for the protection of the public legal order could be turned against the new threat, thus protecting the Rule of Law and redeeming investment arbitration.
Public law clauses could operate both in substantive terms—rendering an award favourable to the investor more likely—and procedural (mostly in terms of enforcement of “Polish” court orders). Reversal of the public order clause has been discussed to the extent it suddenly protects an investor from the host-state and not the other way around. But yet another normative phenomena could be observed. One of the public order clause functions is to safeguard a state’s right to regulate, which is a clear contradiction of the analysed scenario.
It is also worth noting that in a case of a continuous assault on the RoL, investment arbitration may eventually provide greater legal certainty than judicial proceedings in the host-state (especially in the case of intra-EU arbitration).
Obviously, from the perspective of the governments concerned, the above situation will appear as yet another manifestation of “obscure powers” attempting to stave off the “reforms”. Yet, from the international community’s perspective, at least its liberal democratic members, as well as investors, a tribunal would thus contribute towards legal certainty and legitimacy of ISDS. From the domestic perspective, it could also foster the Rule of Law and liberal democracy.
Have hope! Rebellions are built on it.