International Economic Law and Policy Blog

A Booby-Trapped Approach to Reforming Investor State Dispute Settlement Part II

In my previous post I took issue with what appears to be the basic premise of super-arbitrator Kaufmann-Kohler's approach to creating a multilateral investment court: because of the overriding importance of maximum enforcement instruments for investors, a multilateral tribunal can't deviate too much from "arbitration"; otherwise, enforcement under the New York Convention (UNCITRAL) and/or Washington Convention (ICSID) is put in question.  

Now I want to address some of the features of the Kaufmann-Kohler approach that flow, directly or implicitly, from that premise. One of these is that a multilateral tribunal should not be an international court governed only by public international law (paragraph 104).  A great advantage of public international law being the sole applicable or governing law is that one can confidently appoint judges whose primary qualifications are in public international law and/or public law more generally, and can dispense with persons from the old arbitrator/counsel elite who have arcane expertise is concepts like that the law of the seat or the governing law of the arbitration.

Another feature of the Kaufmann-Kohler approach is to tempt UNCITRAL to become involved in coordinating states' efforts in pursuing reform of ISDS (paragraph 75). UNCITRAL is a UN institution that is deeply embedded in the commercial law and the arbitration fields rather than in the public international law world.  It took 7 years from the time that an NGO, IISD, proposed that UNCITRAL move to introduce transparency in arbitration to get agreement on what seems like an obvious requirement of a legitimate adjudicative system. Throwing the project of radical reform of ISDS as a whole into UNCITRAL is like throwing it into a bottomless pit. 

Perhaps most worrying, except that EU Commissioner for Trade Malmstrom has made it clear that an appeal mechanism is a logically required part of a legitimate adjudicative system for investment, is the way in which Kaufmann-Kohler tries to wean reform enthusiasts away from the idea of a full appeals instance.  Citing costs and delays, she proposes an alternative idea, "preliminary rulings." This idea is splendidly design to appear to provide consistency and certainty in legal interpretation, while all the while allowing a single instance to control the whole process.  Under the Kaufmann-Kohler proposal, it would be in the hands of the panels of first instance to determine that they need a preliminary ruling on some legal issue, before they proceed to apply the law to the facts.     The parties to the dispute would have no entitlement of any sort to the supposed certainty to be obtained by such a ruling; it would be entirely the prerogative of the panel of first instance themselves to decide whether the law needs to be clarified (paragraph 130).   And who would clarify the law for the panel of first instance?  Why, it just might be not a "separate body" but a special chamber of the pool of  first instance adjudicators themselves! It seems there is nothing that that the investment arbitrator/counsel elite want to avoid more than genuine accountability to an appellate instance where the judges are appointed separately and sit above and quite autonomously from the first instance,therefore are undeterred in scrutiny of prior case law by "collegial" considerations and have the hierarchical authority of a high court.

Now comes the perhaps the most devious suggestion of all by Kaufmann-Kohler (paragraph 263): states could be allowed to declare that the multilateral investment court is merely an additional forum  to which resort may be had alongside traditional investor-state arbitration.  In other words, the multilateral court, instead of providing a solution to forum shopping by investors by creating a unified judicial system, could be operated simply to enhance their forum-shopping opportunities!  One thing not in short supply among the investment arbitrator/counsel clique is chutzpah.  

Gabrielle Kaufman-Kohler:A Booby-Trapped Approach to Reforming Investor-State Dispute Settlement Part I

Currently the European Commission and Canada are at the forefront of an initiative to replace traditional investor-state arbitration with a multilateral investment court.  The latter would likely include a true appellate mechanism, serious rules on arbitrator ethics and against conflict of interest, judges who are qualified in public international law and largely compensated by a fixed salary rather than by the hour (as with arbitrators).  The investment arbitrator/counsel elite has (not surprisingly) reacted negatively to the idea of replacing a system that has allowed them to generate considerable personal wealth with a judicial mechanism.  One member of the innermost circle, however, Gabrielle Kaufman-Kohler has, with a co-author, devised what looks like a detailed blueprint for transitioning from traditional ISDS to a multilateral tribunal.  The central idea is to use the model of the UNCITRAL Mauritius Convention on transparency in ISDS, which allows the possibility of states who have existing investment agreements that offer arbitration opting in to a multilateral instrument that would be a treaty later in time within the meaning of the Vienna Convention on the Law of Treaties (VCLT) rules and therefore prevail to the extent of conflict over the dispute settlement provisions of existing investment agreements.  Through this device, it would be possible to jump start a multilateral court, without the states concerned having to renegotiate or denounce their existing investment agreements.  European Commission officials are understandably attracted to the Mauritius Convention model, as it provides a way of making the multilateral court proposal feasible in a relatively short period of time, simply by virtue of avoiding the need to open up treaties now in force. As far as Kaufman-Kohler's proposal is merely about this kind of opt-in feature of a multilateral tribunal, it is indeed attractive; but beware of what is inside the Trojan horse.

If one reads carefully Kaufman-Kohler's long study, the strategy behind it becomes evident; namely to make the project for a multilateral investment court resemble, or depend on as much as possible, the existing system in which, as the EU's director-general for trade Cecilia Malmstrom has pointed out, there is a fundamental lack of trust.

The basic starting premise of this strategy is that,in order to have awards in favor of investors enforceable against the host state in courts around the world, the adjudicative system in question must be capable of being called "arbitration".  In the case of arbitration, the New York and ICSID Conventions already exist, which bind states signatories to allow enforcement in their domestic court systems. But not comparable approach exists for the enforcement of judicial awards by international bodies.   Once one starts from the premise that the multilateral tribunal has to count as "arbitration" for purposes of the New York (UNCITRAL) and/or the Washington Convention (ICSID) a deep anxiety sets in about departing too much from existing ISDS, which is to a large extent the presupposition of those systems.  

So it's time for a reality check about Kaufman-Kohler's starting premise.  First of all, the collection of most arbitral awards against a host state does not involve enforcement in domestic courts of another country.  States pay awards for reputational reasons, because of a culture of rule of law, because a new government can blame the conduct that led to the award on the bad behavior of the previous one, because host states may receive pressure from other states if they do not pay (threatening to cut off foreign aid, etc), and also because, in the case of non-democracies, the rulers are not accountable to the people for spending public money.  Efforts to enforce awards in domestic courts have yielded a few spectacular successes, but many failures.  States can and do easily organize their activities to avoid holding in other jurisdictions large quantities of state assets of the kind that are unprotected by sovereign immunity from execution. Second, if they wanted to, the parties to a multilateral instrument establishing an investment court could through that very instrument bind themselves to have domestic courts enforce the awards, without any need whatsoever to refer to the New York Convention/UNCITRAL or ICSID (which in her rather arcane, technician's way of writing Kaufman-Kohler at some point seems to concede) .  The parties are "Herren der Vertrage" as it were and don't need to incorporate any other treaty to specify the obligations among themselves.  As for enforcement of awards in the courts of countries not parties to the multilateral instrument, this would depend upon cooperation between the states parties and these non-parties. Yet there is little evidence that such cooperation would not occur, assuming that the multilateral court were seen as legitimate. Even if there were a gap, in that some countries resisted such cooperation, for the reasons described above, it would make scarce little difference to the overall effectiveness of the multilateral judicial system.  

More philosophically, one might ask whether even if there were real limits to the extent investors could fully enforce awards in the courts,the objective of full and enforceable compensation for investors should be a sine quo non of reform of the system, such that other goals, such as the genuine independence and autonomy of the multilateral tribunal from the arbitration regime and its keepers, would need to be sacrificed.  The design of other international dispute settlement systems does not seem to prioritize the ability of private actors to recover multi-million dollar damages awards, the WTO for example.  Investors doubtless want as iron-clad enforcement as possible but why put their concerns over others in determining how to reform investment dispute settlement?

Having challenged Kaufman-Kohler's basic premise, in the next post I'll look at some of its undesirable implications, and other features of her approach that would sabotage the lofty goals of reform, for example her ploy to propose a preliminary rulings mechanism as an alternative to genuine appellate jurisdiction, which would really hold first-instance adjudicators accountable.  

          

The U.S. National Trade Policy Agenda for 2017

The FT has a copy here. It is being portrayed as more evidence of the U.S. planning to move away from the WTO, and perhaps it is, but to be honest the language is not as radical as I expected.  Yes, there are mentions of "sovereignty" and concerns about judicial overreach in WTO dispute settlement, but overall I thought it stuck with generalities that would leave the U.S. with flexibility to make reform proposals rather than abandon WTO dispute settlement.  I think I was worried that there would be more specificity about the U.S. relying on alternatives to the WTO.  When I didn't see those, I felt a little better about where things might be headed.

But read it yourself and see what you think.

UPDATE: The above link was to a draft version of the report. The final version is here.

And this is from White House Press Secretary Sean Spicer today:

Q    Sean, the trade document that's out there, which suggests that the administration may take a position that would potentially ignore or look past WTO rulings.  Is there any truth to this?  

MR. SPICER:  No.

Q    What is the position?

MR. SPICER:  Again, I would just argue, look, we're a member of the WTO, we don't have a USTR in place yet.  So to suggest that we're going to take any kind of trade policies -- I think, obviously, we've got some concerns with the percentage of dispute resolutions that are brought to the WTO versus other nations.  But I would just -- that's sort of a fact in terms of the percentage of cases that get brought to dispute resolution at the USTR -- or, excuse me, at the WTO against the United States.  But we don't have a U.S. Trade Representative, so I would say that that's not -- 

Q    Like a working --

MR. SPICER:  No, no, no.  I mean, it's not even a working. That's not -- full stop -- that is not our policy and that's not where we're going.