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How international investment disputes work

Multinational corporations and other investors are placed on an equal footing with nation-states and are allowed to file claims against national governments seeking money damages in compensation for economic regulation at the federal, state, or local level.

Coverage
Most free trade agreements signed by the United States contain complex definitions of investment that cover a broad range of economic interests.   These international agreements contain definitions of investment that are broader than the constitutional standards used under domestic law in the United States.  The U.S./Chile definition, for example, includes "assets having characteristics of an investment" such as expected profits, assumption of risk, and the commitment of capital.  Forms of investment include not just enterprises, but also stocks, bonds, debts, contracts, resource-extraction concessions, and business licenses.

Key rules

(1)    Expropriation. International investment agreement (IIA) expropriation obligations are, in some respects, analogous to U.S Fifth Amendment takings law. The question is whether international expropriation law provides foreign investors with greater property rights than U.S. investors enjoy under the domestic 'takings' clause.  Tribunals set up to hear these investment cases do not agree on the scope of IIA expropriation--that is, the rulings are all over the map. Arbitrators have room to read the vague language of IIAs broadly or narrowly.

(2)    Minimum Standard of Treatment. 
The “minimum standard of treatment,” which includes the right to “fair and equitable treatment,” is a vague and evolving standard that permits foreign investors to challenge government actions on the grounds that they are either procedurally or substantively unfair.  Again, these vague concepts allow international investment tribunals considerable discretion in their deliberations.  Because there are no specific criteria underpinning the concept of the "minimum standard of treatment," it is very difficult to predict when a tribunal will find that justice has been denied.    

Exceptions.
U.S. international investment agreements are extremely broad in coverage and provide very few general exceptions.  The recent U.S./Peru agreement is typical--it provides exceptions only for essential security interests; for most (but not all) taxation measures; and for disclosure of confidential information.

By contrast, the General Agreement of Trade in Services administered by the WTO provides general exceptions for measures necessary to protect the public morals or to maintain public order; measures necessary to protect human, animal or plant life or health; and five other categories of exceptions.  State environmental laws, or local measures to regulate gambling, might be protected in WTO litigation, because of the broader scope of the exceptions.  But not so in international investment litigation. 

Settling disputes.
Perhaps the most important thing to know about international investment agreements is that they are NOT administered in national courts.  International investment agreements entered into by the United States such as NAFTA chapter 11 do an 'end-run' around the U.S. courts.

The arbitrators are, almost without exception, international commercial lawyers.  There are no formal conflict of interest rules.  A lawyer who sits 'in judgment' on a tribunal can, at exactly the same time, act as 'plaintiff's counsel' in another case.  Most attempts to get a panel member removed from a tribunal because of perceived conflicts of interests have failed.  Although the conflict of interest issue has been raised by members of the international commercial bar as a reason for the eroding legitimacy of the system, the major international institutions dealing with investment disputes have argued only in favor of a system of 'self-regulation.'

IIAs allow investors to submit claims under one of three sets of arbitration rules:

  • the International Centre for Settlement of Investment Disputes (ICSID), which is part of the World Bank;
  • the ICSID Additional Facility, also administered by the World Bank; or
  • the United Nations Commission on International Trade Law (UNCITRAL).

ICSID and ICSID Additional Facility arbitrations are “administered.” UNCITRAL arbitration is “ad hoc.”  This means that ICSID provides administrative support for the conduct of the arbitration--for a fee--while UNCITRAL provides rules but no institutional support.  So UNCITRAL puts more administrative burdens on the tribunal and the parties, but potentially, it can cost less to bring a case through UNCITRAL.  And cost is a serious consideration; some of the more complex cases have had litigation costs running into the millions of dollars.

Forum Analysis
Minimum Standard of Treatment
Ambiguous language in investment chapters of trade agreements allows foreign investors to challenge local government actions.
Expropriation
Explanation of expropriation obligations found in international investment agreements, as compared with takings provisions in US law.

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