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The traditional opacity of the investment arbitration regime, resulting from the importation of the confidentiality principle from commercial arbitration, has in recent decades raised doubts over its legitimacy. Public interest areas traditionally considered as the exclusive domains of sovereign states, the operations of which citizens as its beneficiaries have a right of scrutiny, are now thought to be constrained and usurped by ephemeral investment arbitration processes multifariously inaccessible and unaccountable to the public.
The investment arbitration regime is an extra-judicial recourse mechanism against a state, applying a corpus of law separate from domestic legal principles, which is afforded exclusively to foreign investors. Disputes that typically impinge on the allocation of state resources and key public interests – such as environmental protection, health, and public safety – are determined by individual arbitrators of undisclosed backgrounds. Its processes and outcomes are also generally kept secret from the public. It is, therefore, unsurprising that a long- standing perception of a legitimacy deficit in the system exists and that this has, in turn, generated widespread public resistance towards investment agreements, clear from the recent discussions on the CETA,1 TPP,2 and TTIP.3
Efforts have been made by the investment arbitration community to address the legitimacy deficit, primarily through the disclosure of information linked to investment arbitrations. In camera hearings have been dispensed with in favour of public hearings, which are now increasingly common in modern investment agreements with arbitral tribunals keen on the use of live video streaming facilities to widen the hearing audience. Central repositories of published arbitral awards and cause papers widely accessible to the public have also been created. The possibility of amicus curiae submissions by non-disputing parties have also become a systemic feature.
Such has been the remedial strategy over the past decades with the inclusion of varying combinations and degrees of the above measures in individual investment agreements discretely concluded between states. This has resulted in incoherence in transparency standards globally, which has produced a fragmentary response inadequate to dispel the perceived illegitimacy of the system. Initial responses to this fragmentation, such as the 2006 amendments to the ICSID Arbitral Rules and the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration (UNCITRAL Transparency Rules),4 attempted to streamline transparency standards through amendments to arbitral rules, a common denominator of existing investment agreements. Their impact, however, was muted given the non- participation of various arbitral institutions still endorsive of the confidentiality prized by commercial arbitration and, even amongst participating institutions, the differing transparency standards employed by each set of arbitral rules. Further, investment agreements falling outside the ambit of transparent arbitral rules, either by the absence of an arbitration mechanism or the selection of opaque versions of arbitral rules, remain a significantly large proportion of existing investment agreements.
Equally inhibitive is the temporally demarcated ambit of the UNCITRAL Transparency Rules, which omits investment agreements preceding the Rules. The Mauritius Convention5 was recently drafted to fill this lacuna by mandating the retrospective application of the UNCITRAL Transparency Rules to omitted investment agreements. However, the instrument’s impact has been largely muted due to its limited reception worldwide.
Even if the Mauritius Convention gathered its aspired subscriptions, it should be questioned if the transparency regime therein would have addressed the core legitimacy deficit of the investment arbitration regime. Focusing on the mere improvements of public perception of systemic legitimacy, the current remedial philosophy is centred on perceived legitimacy, whilst leaving the system’s actual legitimacy lagging. These are two complementary aspects of legitimacy between which this paper draws a distinction.6 Perceived legitimacy refers to the perception of credibility of a regime in the eyes of its beneficiaries. Actual legitimacy is a normative value premised on the conformity of a regime with certain objective requirements for legitimate decision-making. The requisite criteria of actual legitimacy in this paper’s focus are accountability and equal protection, the absences of which create systemic imbalances of power and governance deficits.7 Accountability refers to the ability of governance beneficiaries to hold decision- makers answerable for misfeasance. Equal protection is a comparative value which requires all governance beneficiaries to be afforded the same level of legal protection by the decision-maker.
Current disclosure requirements ignore the system’s inability to address conflicts of interest, the systemic concentration of decisional power, and the unequal protection afforded to domestic and foreign investors occasioned by the artificial dualism between domestic and international investment laws, two corpora of law which, though substantially overlapping, are developed in isolation. 8 Further, when transparency becomes more extensive, investors are incentivised to settle disputes with respondent states the outcomes of which are confidential under the current transparency rules despite their public impact being equal to that of investment arbitral awards. The conjunctive result of these deficiencies is an existing investment arbitration regime that lacks actual legitimacy.
It is argued that there is a need for a shift to a remedial philosophy premised on actual legitimacy. The present investment arbitration regime contains a suboptimal architecture of systemic accountability due to the presumption of confidentiality therein. In this respect, this paper notes that accountability operates on multiple levels, and not merely at the state level.
The acts of a state, namely its laws and executive decisions, are held to account by the public – comprising its citizens and non-citizens, including foreign investors – who, by various accountability mechanisms, ensure that state governance pursues public interests. Accountability mechanisms may take the form of administrative reforms and market forces, common to both democratic and non-democratic states. It is this balance of power which legitimates the system of national governance. By contrast, under investment agreements, foreign investors are afforded an exclusive, confidential right of accountability against respondent state on sovereign actions constituting the investment dispute. Confidentiality and exclusivity deprives citizens of the respondent state of their traditional right of holding the disputed sovereign action to account.
It is apposite to note that accountability also operates at a corporate level. The actions of corporations are routinely scrutinised by members of the public who will sanction corporate maladministration, especially those contrary to public interest, through market forces. Again, the confidentiality of investment arbitrations prevents the public from exercising disciplinary forces on corporate maladministration. These collectively form the legitimacy and governance deficits in the system of governance constructed by investment agreements.
Future transparency reforms should remedy the above legitimacy and governance deficits of the investment arbitration regime. The ambit of transparency measures should be enlarged to include the mandatory disclosure of settlement agreements, arbitral awards, and arbitrator appointments in investment arbitration, some of which are features not novel under international law as this paper will show.
It is expected that the expansion of transparency would raise concerns that it denatures investment arbitration by attenuating confidentiality, the oft-assumed incentive for the mechanism’s utilisation. This paper challenges the immanence of confidentiality in the investment arbitration regime. Confidentiality, a derivative philosophy of commercial arbitration, was never an intended characteristic of the investment arbitration regime, which bears greater resemblance to administrative law mechanisms rather than commercial arbitration. Thus, it is doubtful if confidentiality should be maintained in its current form in the investment arbitration system. Transparency should instead be welcomed.
This paper begins by examining, in Section 2, the philosophical core and the system of governance constructed by investment agreements and its distinction from commercial arbitration. This informs the panoramic analysis of Section 3 of the diminution of confidentiality in investment arbitration and the development of transparency measures leading up to the UNCITRAL Transparency Rules and Mauritius Convention. Section 4 discusses the muted impact of existing transparency measures as augments of actual legitimacy before presenting a proposed selection of reforms and its justifications.
The theoretical core of investment treaty arbitration is an econo-legal bargain between foreign investors and States: in return for inflowing foreign invest ment, a host State agrees to waive in its disputes with foreign investors a part of its sovereignty to private arbitration tribunals.9
As companies and citizens of capital exporters amassed wealth, they exported some of that capital abroad, typically into less developed nations where these investments were perceptibly vulnerable to regulatory caprice and expropriation risks in the host state. Such risks were pronounced at the height of national revolutions and decolonisation, evidenced by the uncompensated expropriations during the Russian and Mexican revolutions. 10 The expropriation of foreign affiliates and their assets also intensified shortly after the mid-20th century wave of decolonisation.11
Against these governmental takings, a foreign investor could do little to respond. Prior to the investment agreements, foreign investors’ remedies were limited to: (1) negotiating directly with the sovereign of the host state; (2) suing the foreign sovereign in the host state’s own courts; and (3) requesting their home government to negotiate diplomatically, or take other actions, on their behalf. 12 These remedies were considered wholly unsatisfactory for the resolution of investment disputes. Politically-driven diplomatic recourse and the vagaries of suits in a non-neutral forum offered little assurance of an effective outcome to investors, which deterred foreign investment.13
This incentivised industrialised countries to institutionalise substantive protections for the investments of their nationals through investment agreements.14 It is apposite to note that these efforts were and remain decentralised with states entering into discrete investment agreements of varying levels of investment protection. Early investment agreements took the form of bilateral investment treaties (BITs) signed between two States.15 Over the past two decades, the number of investment treaties has tripled16 with nearly 170 countries having signed onto one or more BITs to date. More extensive treaties such as multilateral investment treaties, economic integration agreements, and preferential trade and investment agreement have also been adopted in recent years.
Investment agreements typically articulate a series of substantive economic rights, aimed at recompensing investors for the risk taken in exporting capital. These rights include guarantees of appropriate compensation for expropriation, freedom from arbitrary or discriminatory government actions, guarantees of national treatment of foreign investments, promises of fair and equitable treatment, assurances that the host state will provide foreign investments with full protection and security, undertakings that the host state will fulfil its obligations under existing private contracts, and assurances that foreign investments will receive treatment no less favourable than that accorded under international law. 17 These substantive rights do not form part of and are developed separately from domestic law.
Most significant is the creation of a regime of direct recourse by the foreign investor against the government of the host state, 18 ie investment arbitration, to enforce the above substantive rights.19 Under this mechanism,20 an investor could elect 21 to commence arbitration proceedings in accordance with the stipulated procedure (typically under the rules of the International Centre for Settlement Investment Disputes (“ICSID”) 22 or the UNCITRAL Arbitration Rules). 23 Typically, the process will be confidential and privy only to the disputants, though this nature has seen a partial reversal in recent years.
Accountability functions to expose and sanction governance abuses.24 It entails the right of the governed to hold decision-makers to a set of operative standards, non-observance of which is sanctioned which, in extreme cases, culminates in the de-recognition of legitimacy and authority. Accountability mechanisms may take on non-exhaustive forms, including hierarchical accountability, legal accountability, and market discipline,25 all common to any system of governance. In this regard, the existing discourse on accountability in investment arbitration has been focused on state accountability. This paper views this as an unsatisfactory focus that omits key related governance systems. Accountability should instead be seen as operating on multiple levels, namely: the claimant foreign investor vis-à-vis the respondent state; the respondent state vis-à-vis other foreign investors; the respondent state vis-à-vis its citizens; and the claimant foreign investor vis-à-vis the respondent state’s citizens.
The actions of a state, encompassing its laws and executive decisions, are held to account by the public comprising its citizens and non-citizens, including foreign investors. This is a mechanism aimed at ensuring that state governance pursues public interests. Maladministration may give rise to judicial review by affected citizens. Public outcry and bad publicity concerning wrongful state actions may lead to changes in administrative membership. Actions disruptive of favourable market conditions, such as interest rate revisions and fiscal tightening, are disciplined by markets participated by domestic and foreign investors. These mechanisms impose corrective forces on state administration to preserve its legitimacy.
Similar accountability mechanisms are also present at non-state levels. Modern corporate governance sees companies being accountable to an expanded range of stakeholders. Proper corporate governance is hitherto equated with holistic corporate social responsibility which entails the alignment of corporate activities with public interests.26 It is common for corporate maladministration impinging on public interests to attract public and market sanctions. Environmental disasters occasioned by corporate activities have attracted public censure and negative trading sufficient to spur corrective actions by misbehaving companies.27
It should be noted that for any accountability mechanism to operate optimally, information on governance abuses is necessary as asymmetrical information enables undisclosed governance abuses to escape scrutiny and sanction. Accordingly, investment arbitration, which exists in a confidential legal enclave, disrupts all of the above accountability mechanisms. The arbitration mechanism and protections therein are privileges exclusive to foreign investors due to the carving out of domestic investors from investment agreements. 28 Domestic investors are not able to regulate state actions on investments through investment arbitration. Thus, investment arbitration is an accountability mechanism exclusive to foreign investors. This disruptive effect is compounded by the secrecy of disputes preventing domestic actors from knowing the impugned maladministration by the state and its scrutiny at a national level. Resultantly, in particular investment disputes, the state is accountable solely to the claimant foreign investor with other governance beneficiaries marginalised.29
A similar information asymmetry exists in investment arbitration at the corporate level. Disputants who are foreign companies would have the propriety of their actions escape the review of the polity. This may result in an unsanctioned marginalisation of various stakeholders whose interests are directly impacted by the disputed corporate actions, which is a recurring complaint in the transparency discourse.
Further, unequal protection features in the legal enclave of investment arbitration. The separation of investment protections from domestic law creates an artificial legal dualism between the investment protections afforded to domestic and foreign investors. A corollary implication is that the operative standards to which the same state action are judged differs according to the nationality of the investor, which results in a potential disparity in governance standards and a depreciation in the actual legitimacy of the investment arbitration regime. This is elaborated further in Section 4.4.
It is apposite to consider the adequacy of the theoretical underpinnings of the above legal enclave. The investment arbitration regime is in effect a form of global administrative law in that the regime primarily aims to realign state actions with public interests rather than contractual bargains. Its traits, bearing resemblance to judicial review, appear distinct to commercial arbitration. This bears heavily on the transparency debate in investment arbitration as the confidentiality principle is a derivative philosophy of commercial arbitration.30 It should therefore be questioned if the links and extrapolations, particularly the confidentiality principle, drawn between investment arbitration and commercial arbitration are tenable.
The historical raisons d’etre of the two regimes are distinct. Commercial arbitration arose from organisational practices of merchant guilds in the twelfth and thirteenth centuries. To enter the merchant trade, one required the membership of merchant guilds that were tasked by the borough government with the out of court resolution of disputes between its members. One’s agreement to submit future trade disputes to the arbitrations by his guild prior to litigating the matter elsewhere was a condition for guild membership. 31 By contrast, investment arbitration was conceived as an introduction of substantive constraints of state actions, not as a complement to an existing recourse mechanism.
Another distinction is the absence of a contractual link between the disputants in investment arbitration. Investment agreements are consensual instruments agreed between states without the input of investors. It can be conceptually argued that investment agreements contain no arbitration agreement between the claimant investor and respondent state from which an implied confidentiality right may arise.32
This paper is cognisant of the view that while the investor may not be a party to the investment agreement, the agreement serves as an open invitation by the state to arbitrate, the requisite contractual base to which the implied right of confidentiality may attach. It is doubtful, however, if such an implied right of confidentiality exists even in commercial arbitration given its inconsistent provision worldwide. Most arbitral rules are silent on confidentiality. Further, confidentiality in commercial arbitration appears to be a regional phenomenon with its rejection in multiple jurisdictions. Thus, it is doubtful that the investment arbitration regime ever had room for confidentiality. This is a crucial consideration for future transparency reforms and discourse.
Equally pertinent is the increasingly blurring distinction between state-owned enterprises and purely private commercial parties as states are becoming increasingly involved in commerce. State-owned enterprises are private legal entities created by the government, through the use of public funds, to participate in commercial activities on the government’s behalf. Disputes involving state- owned enterprises are likely to draw on public funds otherwise multifariously allocable to the polity, such as fiscal improvements and healthcare spending. By contrast, such wide-ranging negative externalities are absent in disputes between purely private commercial parties. Thus, it bears inquiring into the tenability of the continued presumed application of confidentiality in commercial arbitration.33
Investment arbitration has traditionally functioned behind a veil of secrecy. While there was no explicit provision for confidentiality in arbitral rules or investment agreements, disputants have imported the principle from commercial arbitration where it existed as an unchallenged norm. In camera hearings were the norm and information on the proceedings, much less the existence of the dispute, was not disseminated to members of the public. Arbitral awards were also presumed to be confidential.
As the mechanism and its use proliferated, it became apparent that a significant number of investment arbitrations involved matters of key public interests, of which disclosure was wanting. 34 Disputes are often centred on public health, 35 environmental protection, economic crises, 36 and broad human rights considerations. 37 Corrupt practices by state officials also featured as material allegations in investment arbitrations, a matter of direct interest to the local population. 38 Alongside this was a realisation of the negative externalities of investment arbitration. The costs of investment arbitrations, including legal fees and awards unfavourable to the state, are significant and draw heavily on public funds otherwise allocable to national development, which are aggravated where a dispute is decided against the state. Confidentiality prevents scrutiny of the propriety of this reallocation of public funds.
Equally concerning was any potential unconstrained maladministration by arbitrators, the individuals whose decisions create the said negative externalities of investment arbitration. This was not a fear unique to investment arbitration but one shared by all forms of extra-judicial justice, including commercial arbitration. However, the nationwide scope of the potential negative externalities of investment arbitration amplified popular concern.39
Most pertinent was the realisation by the public of its inability to hold to account states on the subject matter of the investment arbitration. Information on disputes was inaccessible and, even if inadvertently disclosed, arrived belatedly after the creation of the negative externality. Also criticised was the unaccountability of ephemeral arbitral tribunals of undisclosed membership whose decisions were unalterable. The conjunctive effect of these realisations was the widespread doubt cast by the public over the legitimacy of investment arbitrations. Poor perceptions of systemic legitimacy have led to public outcry and popular resistance against investment agreements leading to significant withdrawals from the investment arbitration regime by various Latin American countries and Australia.40 The demise of the TPP and TTIP also evinces the perceived legitimacy deficit. This legitimacy deficit prompted a transparency movement within the investment arbitration community, efforts of which are canvassed below.
Nascent transparency inroads were largely driven by NAFTA arbitral tribunals under Chapter Eleven disputes. Though the instrument generally followed the pattern of BITs and, thus, the procedural formats of ICSID and UNCITRAL, certain member states of NAFTA mandated the publication of arbitral awards.41 The disclosure of other information linked to investment arbitrations was left untreated by the investment agreement which led to the discrete deliberations on the confidentiality by various NAFTA arbitral tribunals.
Multiple arbitral tribunals found that confidentiality was not a feature of NAFTA investment arbitrations. In this regard, the first transparency inroads were made by the arbitral tribunal in Ethyl Corporation v Canada which allowed an application for the publication of disputant filings but stopped short of permitting public hearings. 42 The later tribunal in SD Myers v Canada extended this transparency inroad by expressly rejecting the presumption of confidentiality in investment arbitrations citing the absence of a contractual base to which an implied term of confidentiality could attach. Consequently, the parties could disclose arbitral documents, including pleadings and submissions, alongside public access to the hearings. This decision reverberated with the NAFTA Free Trade Commission who in 2001 issued an Interpretive Note affirming the absence of presumed confidentiality in investment arbitration.43 Subsequent arbitral tribunals further expanded the transparency philosophy of the earlier NAFTA tribunals by allowing amici curiae submissions, then unprecedented in investment arbitration.44
More noteworthy was the idea underlying this transparency philosophy – the perceived legitimacy deficit – of which the reasoning of the Methanex v United States of America tribunal is an indicative example:45
There is an undoubtedly public interest in this arbitration. The substantive issues extend far beyond those raised by the usual transnational arbitration between commercial parties…There is also a broader argument, as suggested by the Respondent and Canada: the Chapter 11 arbitral process could benefit from being perceived as more open or transparent or conversely be harmed if seen as unduly secretive.
The transparency inroads of the NAFTA regime gave the necessary impetus for other investment arbitration regimes to review their procedural formats. Of central importance were the 2006 reforms to the arbitral rules of ICSID, which presently accounts for approximately 63% of known investment arbitration proceedings.46
By comparison to NAFTA, ICSID has taken a more reserved position on transparency. The Centre now publishes basic procedural details concerning each dispute registered with it, such as the existence and status of the proceedings. An opt-out regime of award publication was adopted, similar to NAFTA, though one not mandatory in nature as either disputant may withhold the requisite consent. 47 Where the award is not published, arbitrators are required to disclose excerpts of their legal reasoning, which may provide useful factual and legal overviews of the disputes. 48 Third parties may also now apply to file amicus curiae submissions under the amended ICSID arbitral rules.49
However, these measures of ICSID omit critical components of transparency. Public access to hearings is not presumed available.50 The transparency of hearings is within the discretionary purview of the tribunal, whose decision to permit open hearings must yield to an objection by either disputant. 51 The amended ICSID arbitral rules are also silent on the publication of disputant filings, which has led to several ICSID arbitral tribunals to refuse such disclosures.52 Though an inroad was made by the tribunal in Piero Foresti v South Africa, which ordered the disclosure of pleadings to amici curiae, this has not been the normal practice in ICSID arbitrations.53
Similar concerns were seen in the 2010 amendments by UNCITRAL, whose rules collectively account for about 26% of known investment arbitration proceedings,54 to its arbitral rules which saw an absence of transparency measures, possibly to accommodate its originally intended application in commercial arbitration. While the UNCITRAL Arbitration Rules (2010) permitted the publication of arbitral awards, this was an opt-in regime under which awards were not readily published save where all disputants agree.55 Similarly, the rules of other major arbitral institutions, 56 occasionally applied in investment arbitration, were resistant towards the transparency movement in investment arbitration.
The adoption of transparency was not confined to just arbitral rules. Widespread public concern about the secrecy in investment arbitration and the perceived legitimacy deficit spurred governments to rethink the content of modern BITs.
Adopting the NAFTA transparency acqui, Canada and the United States of America were the first to incorporate wide transparency measures into their model BITs. The 2004 revision to the United States of America Model BIT provides for an opt-out regime of transparency with little discretion conferred to arbitrators over deviations from it.57 Disclosure of core components of investment arbitrations were expressly provided for, including disputant filings, hearing minutes, and amicus submissions. 58 Similar pro-transparency revisions were made by Canada, and Norway, a non-NAFTA member, to its model BITs.
However, the impact of these transparency reforms was muted. Most BITs were already concluded prior to these transparency reforms, which left a significant proportion of BITs and disputes arising thereunder confidential. Of its 39 existing BITs, the United States of America only concluded two BITs by using its 2004 Model BIT. The proportion was less stark for Canada for which only 15 of its existing 43 BITs contained the transparency reforms. It should be noted that these transparency reforms were not followed by many other countries.
3.5 UNCITRAL Transparency Rules and the Mauritius Convention
Recognition grew within UNCITRAL that its arbitration rules, originally designed for commercial arbitration, were being increasingly used in investment arbitrations which had a public interest component unconsidered by the original architects of the UNCITRAL Arbitration Rules. The resolution of this lacuna culminated in the UNCITRAL Transparency Rules, which have been incorporated into the 2013 UNCITRAL Arbitration Rules. The UNCITRAL Transparency Rules apply only to investment agreements concluded on or after 1 April 2014. Earlier investment agreements may apply the Rules where the disputants so agree or where the respondent state and the home state of the claimant investor agree to its application after 1 April 2014.59
The Rules are a marked shift towards transparency in UNCITRAL by requiring wide-ranging disclosures more expansive than the NAFTA acqui. Save where it contains categorically protected information, almost all information linked to an investment arbitration is required to be published. The list includes disputant filings, awards, decisions, amicus curiae submissions, expert reports, and witness statements. Publicity of hearings is also presumed under the Rules which require arbitrators to actively facilitate public access.60
However, the Rules are limited in their reach. Their temporally demarcated ambit restricts their application to only a handful of investment agreements as most were concluded prior to 2014. For most states, this temporal demarcation means that none of their BITs fall within the scope of the Rules. 61 Further, many investment agreements do not apply the UNCITRAL Arbitration Rules62 and, even amongst that agree to its use, a large proportion thereof expressly select opaque versions of the UNCITRAL Arbitration Rules.63
The Mauritius Convention was drafted to remedy the above lacuna of the UNCITRAL Transparency Rules by mandating the retrospective application of the UNCITRAL Transparency Rules to earlier investment agreements which apply the UNCITRAL Arbitration Rules. This intended impact, however, remains unrealised given the limited reception of the Mauritius Convention which has hitherto been ratified by only a small number of states.64 Nonetheless, the Mauritius Convention signifies the beginning of a fundamental shift away from the prevailing presumption of confidentiality in investment arbitration. With the below proposed amendments to the instrument, the Mauritius Convention could become a possible foothold for an optimal system of investment arbitration.
Current transparency measures are aimed at improving public perceptions of the legitimacy of the investment arbitration system by dispelling fears of systemic secrecy. It is apparent from the above that the prevailing remedial strategy has been a partial bridging of the information asymmetry present in investment arbitration. However, these efforts have been selective in their coverage and remedial philosophy.
Save instances of categorically protected information, such as business secrets and national security, some existing transparency schemes afford disputants the opportunity to opt out of transparency. Disputants to ICSID investment arbitrations, which form the bulk of investment arbitrations, hold great influence over the publication of awards and public access to hearings. Though pro- transparency positions have been taken by various investment arbitral tribunals under ICSID, NAFTA, and UNCITRAL procedures, public access to multiple categories of information related to the process remains a discrete inquiry which risks inconsistency in transparency. This leaves the availability of systemic accountability as articulated in Section 2.2 unguaranteed and subject to the vagaries of the arbitral tribunal and disputants.
Further, public participation through amicus briefs has been implemented unconvincingly and may be purely symbolic. In AES Summit Generation Limited and AES-Tisza Erömü Kft v Republic of Hungary (AES), the European Commission petitioned to submit an amicus brief on alleged violations of protections guaranteed under the Energy Charter Treaty.65 However, in making its substantive decision, the AES tribunal did little more than note that it took the amicus submissions into consideration. Thus, it is difficult to analyse the extent of any influence the submissions may have had on the outcome of the proceeding and, by corollary, the efficacy of the measure as an accountability mechanism.66
A notable feature is that all transparency regimes omit the disclosure of settlement agreements in investment arbitration despite their public impact being equal to that of arbitral awards. Also omitted is information concerning the process of arbitrator appointments. While the composition of arbitral tribunals is readily disclosed, the selection process of these key decision-makers remains a secret to the public.
It thus appears that the existing transparency strategies are in effect enhancements of the appearance of legitimacy of the investment arbitration system, i.e. perceived legitimacy, which miss the actual legitimacy crisis67 of the system. Some of the latter are canvassed below.
Unreflective of a global institution, there is a noticeable lack of diversity amongst investment treaty arbitration arbitrators, the network of which is dominated by a small, homogenous, and interconnected group.69 Research shows that more than half of all investment treaty disputes were decided by an elite group of fifteen arbitrators.70
While 83% of ICSID cases are filed against a diverse range of developing countries,71 there is little representation of these States amongst investment treaty arbitrators. The arbitrator network is dominated by individuals from Western Europe as well as Anglo-American professionals, with 69% of arbitrators coming from West Europe or North America.72 Similarly, nationals of specific developed countries, namely New Zealand, Australia, Canada, Switzerland, France, the UK, and the US, account for almost half of total arbitrator appointments.73 A proximate concern is the concentration of global investment treaty arbitration work within a handful of large European or American commercial law firms. 74 This reinforces questions about the possibility of cosy relationships both between arbitrators inter se and between arbitrators and the law firms that appoint them.75
It has been suggested that cultural milieu may shape an arbitrator’s doctrinal sympathies, normative inclinations, and pre-conceived notions, thereby affecting his or her analysis of information and decision-making process.76 Resulting from this is a possible systemic mismatch of culture-dependent understanding and norms between Respondent States, which are typically developing countries, and key arbitrators. Of concern is whether this creates an arbitration regime that is systemically less sympathetic to the positions of developing countries. Proponents of investment treaty arbitration point to the presence of prominent Latin-American arbitrators. 77 However, these individuals are often, by training and residence, culturally affiliated with a more Anglo- and Euro-centric perspective.
It has been argued that the cultural homogeneity of arbitrators is innocuous and purely coincidental. A possible explanation of the dominance of particular nationalities is the nationality restrictions in arbitrator appointments under ICSID Rules,78 which provide that arbitrators may not be of the same nationality or be a national of either party to the dispute absent the parties’ agreement. As only a few ICSID cases have been filed against Western European (3%) or North American (5%) countries, this may explain why nationals of these two regions have constituted the majority of ICSID arbitrator appointments. 79 However, it bears noting that these nationality restrictions only apply to appointments by ICSID and not to arbitrator appointments under the UNCITRAL Arbitration Rules. It is important to note that the operative restriction is nationality, rather than regional affiliation.
75% of investor-claimants are of Western European (53%) or USA (22%) nationalities.80 Thus, a French investor-claimant is not barred from appointing a Belgian arbitrator. In fact, 53% of all cases filed by investor-claimants of EU origins involved 47% of ICSID nominations having Western European nationality.81
Another explanation advanced for the cultural composition of arbitrators is the regime of party appointments of arbitrators that leads to a system of preferential attachment, which closes the network of ICSID arbitrators through high reappointment rates of prominent arbitrators. Invariably, parties are determined to prevail in their disputes and are, as such, incentivised to appoint arbitrators with normative inclinations, background, and experience that favour their positions as opposed to an untested novice arbitrator. 82 This entrenches heuristics bias and propels repeat appointments of a few select arbitrators who become increasingly well-versed with investment treaty law with each appointment, and who have their identifiable policy preferences detectable in arbitral awards.83
In investment treaty arbitration proceedings, experience and track record then probably hold greater sway than nationality. The central role of party appointments has been propounded as a possible explanation 84 for why only 50% of ICSID arbitrators and less than 30% of ICSID appointments are nationals of developing countries.85
Further, arbitrator appointment decisions are frequently made by the private lawyers or law firms working for claimants, rather than by the claimants themselves. This is a weighty consideration as 99.6% of ICSID arbitrators are lawyers and 76% of the group have private law backgrounds where they may often serve as counsel in other ICSID arbitrations. 86 As arbitrators are typically selected for their substantial experience in international investment law, there is little prospect for the appointment of lawyers outside this legal circle which entrenches the cultural homogeneity of ICSID arbitrators.87
A related criticism is that arbitrators and corporations may be “too close for comfort”,88 thus affecting their impartiality. Problematically, this criticism has been met by institutional apathy as the ICSID annulment procedure for conflict of interests appears unwilling to cleanse the system. A glaring example of this dysfunction is Vivendi v Argentina.89 Argentina sought to annul an award under Article 52(1) (a) of the ICSID Convention on the ground of non-disclosure by one of the arbitrators. After the delivery of the award, it emerged that the arbitrator had, during the course of the arbitration, accepted appointment to the Board of Directors of, and was partially remunerated with shares in, an international bank which was the single largest shareholder in the claimant investor.
Despite trenchant criticisms of the arbitrator’s conduct and a lengthy cautionary reflection on the numerous due diligence measures which could have been taken by the arbitrator,90 the committee declined to annul the award.91 Despite being referred to the revision of the Pinochet case92 and the IBA Guidelines, 93 the committee accepted, seemingly at face value, the arbitrator’s self-declaration of independence and impartiality. Instead, it held that the arbitrator’s exercise of independent judgement was not actually impaired and that it would be unjust to deny the claimants the benefit of the award owing to the arbitrator’s failures. It should be noted that the arbitrator in question remains prominent in investment treaty arbitrations.
This inability of the system to self-cleanse has been acknowledged by observers, including the United Nations, 94 and certainly merits careful consideration by industry players.
Investment agreements create separate regimes of investment protection for domestic and foreign investors, two corpora of law which, though substantially overlapping, are developed in isolation. The investments of the former are protected by public and administrative law frameworks existing under domestic law. By contrast, the foreign investments are protected by a separate regime under international law set out in investment agreements.
This separation creates an artificial legal dualism in which common law natural justice95 and eminent domain principles are adjudicated in isolation from domestic considerations. In this respect, investment protections under international investment agreements are more than “functionally comparable to the constitutional guarantees and administrative law principles at the domestic level”.96 A useful reference is the fair and equitable treatment (FET) concept of investment treaty law which concerns the protection of legitimate expectations and the prohibition of arbitrary and discriminatory measures. These elements are substantially similar to common law judicial review principles. As a consequence, the operative standards to which the same state action are judged differs according to the nationality of the investor, which culminates in a possible inequality of accountability standards. This inequality of investment protections throws into doubt the actual legitimacy of the investment arbitration system.
Apparent from the above discussion is that the existing transparency regime has left many actual legitimacy deficits unaddressed in its pursuit for perceived legitimacy. It is thus proposed that future transparency reforms pursue the enhancement of systemic actual legitimacy.
In this respect, the mandatory disclosure of settlement agreements should be considered. Settlement agreements bear outcomes with impacts equal to that of arbitral awards. Payments by the state under such agreements would reallocate public resources in the same manner as unfavourable arbitral awards. The secrecy of settlement agreements, however, prevents the public from scrutinising the actions by the disputants to the case and the resultant reallocation of resources which impedes the systemic accountability regime articulated in Section 2.2. A further case for this measure is its pre-emptive effect. As transparency intensifies in the investment arbitration system, disputants are incentivised to settle their disputes. Against this, should settlement agreements remain outside the ambit of transparency, existing measures would be counterproductive and exacerbative of the actual legitimacy crisis of investment arbitration. It should be noted that the mandatory disclosure of settlement agreements is not a novel measure under international law. Under the dispute settlement regime of the World Trade Organisation (WTO), disputants must notify the WTO of any settlement, both its existence and content. 97 Underscoring this notification system is the need for consistency between settlement agreements and the WTO Agreement and benefits afforded to non-disputing member states. Any settlement agreement leading to the impairment or nullification of third party state benefits would be disallowed. This is a supranational system of accountability analogous to the overall system of accountability articulated in Section 2.2 which would be optimised by the adoption of this proposed measure.
The authors recognise that the selection of arbitrators is not necessarily contingent on public opinion but rests on the expertise of the arbitrator candidates. However, public scrutiny does sanitise and legitimate the process. Public sunlight on the appointment process compels investment arbitration figures to ensure that conflicts of interests of arbitrators are fully considered in appointments. The risk of conflicts may arguably disincentivise repeat appointments of select arbitrators which would operate to diversify the community of investment arbitrators. This would concomitantly dispel occasions and perceptions of backscratching and partiality in investment arbitrations, and the consequent perceived illegitimacy of investment arbitral awards.
Future transparency reforms should not be constrained by the need for confidentiality in investment arbitration. While the authors accept that they are categories of information for which secrecy is apropos,98 the investment arbitration regime should not be thought of as general balancing exercise between the competing themes of public interest and confidentiality. Given its historical origin and administrative function, it is inapt to consider confidentiality as a general principle and presumption of investment arbitration.
Further, the pursuit of transparency would operate to remove the artificial legal dualism between domestic and international investment protections. Domestic and international law whilst, separate corpora of law, inherently entail mutual scrutiny of decisions.99An indicative example is denial of justice claims under international law, which encompasses procedural impropriety and, more importantly, misapplications of law by domestic courts. 100 This necessitates an inquiry by investment arbitral tribunal into the impugned decision of a domestic court and its legal reasoning, the analysis of which will bind and inform subsequent domestic judicial decisions. Reciprocally, domestic courts have, in setting aside proceedings, analysed the awards of investment arbitral tribunals in non-ICSID disputes. 101 Exemplifying this is Metalclad v Mexico in which the Supreme Court of British Columbia partially annulled the award of an investment arbitral tribunal having analysed the tribunal’s finding that the breach of fair and equitable treatment standard was caused by a lack of transparency.102 This would be a judicial finding to be observed by arbitrators intending the enforceability of their awards in Canada. 103 Given the necessarily symbiotic development of international and domestic investment law, it is counterproductive to their growth if investment arbitral awards and filings are kept confidential unless and until the enforcement of the award is resisted. The mandatory publication of awards, rather than the prevailing opt-in regime, bridges the development gap between domestic and international law. The result would be congruity and equality of investment protections, a feature augmentative of systemic actual legitimacy.
The remedial philosophy of existing transparency measures in investment arbitration is misplaced. Rather than pursuing the enhancement of the institution’s perceived legitimacy, the pursuit of actual legitimacy should inform future transparency reforms. The democratisation of information traditionally privy only to the investment arbitration community can optimise the traditional structure of accountability and governance, inadvertently disrupted by investment arbitration.
Equal protection, another aspect of actual legitimacy, will also be improved by transparency. The disclosure of arbitral awards eradicates the artificial legal dualism between domestic law and international investment laws created by the investment arbitration regime. Both corpora of law are inherently interlinked and necessarily develop symbiotically. Confidentiality of investment arbitrations, however, wedges a development gap between the two which risks unequal investment protection dependent on the nationality of the investor. Thus, transparency is necessary for the congruity and equality of protections afforded to investors.
In light of these ideas, future transparency reforms should further expand the ambit of transparency whilst being unconstrained by confidentiality. Whilst often thought as a general principle of investment arbitration, the system’s architecture and origins, which bears greater resemblance to administrative law mechanisms rather than commercial arbitration, never intended a presumption of confidentiality.
Source: Comparative Law Journal of the Pacific, Hors Série Volume XXII, 2018, Regional Perspectives on Contemporary and Future Harmonization Agenda in International Trade Law: Faculty of Law, Victoria University of Wellington.
https://www.victoria.ac.nz/__data/assets/pdf_file/0004/1642585/01-nadkarni-wei.pdf
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