Imagine this: a country is in the middle of the worst economic crisis in decades. A quarter of the people are unemployed. Tens of thousands have lost their homes. There have been five presidents in two weeks time. To halt the downward spiral, the government decides to nationalize previously privatized sectors and companies. Dozens, however, respond by suing the government, because they feel disadvantaged by the new policy. The government is forced to pay millions in financial compensation.
Surreal? It happened to Argentina after the economic crisis early this millennium. Argentina had signed dozens of bilateral investment treaties (BITs)A Bilateral Investment Treaty is an agreement between two states to honor and protect each other’s investors. It includes principles of protection – such as an anti-discrimination clause – and offers arbitration to investors that feel disadvantaged, meant to attract foreign direct investments (FDI). The treaties gave investors the right to sue the Argentinian government in case of a conflict, under the ISDS mechanism. Investor State Dispute Settlement, or investment arbitration. A procedure by which a foreign investor can file a claim for financial compensation if it feels it was treated unfairly by a government. A panel of three commercial judges called arbitrators handles the case and issues a binding verdict. Argentina became easy prey. With 56 claims to date it is the most-sued country in the world.
ISDS is a mechanism by which a foreign company can sue a state, without actually going to court. The investor can bring its dispute before a panel of arbitrators, which acts as a kind of privatized court. Both parties appoint one arbitrator, and the two arbitrators appoint a third one, the chairman. They are usually investment lawyers. The trio then decides whether the state treated the investor unfairly. And if so, what it has to pay in damages. There is no possibility to appeal.
It has been set up as an effective way of protecting investors against so-called “banana republics”. But this system is increasingly used by multinational companies to pressure countries to roll back a new tax or a certain policy. However, there is not much transparency in this sector, so it is hard to find out what claims are really made and what the actual awards are.
For our research we compiled a list of all known ISDS cases up to 2014. We found 629 in total. We have also included the names of the arbitrators, the outcomes, economic sectors and if possible the descriptions of claims. Our research is based on different sources, and is available for download.
ISDS has greatly increased in popularity. In 2000 only fifteen claims were filed. In 2014 alone seventy claims were filed. This may turn out to be even more, because not all cases are public. Most of the cases refer to Bilateral Investment Treaties between states, but the North American Free Trade Area (NAFTA) and the European Energy Charter are also important sources for ISDS claims.
Insurance for investors
The question is: why ISDS? Why not go to court in the country where you as an investor were duped? According to investment lawyer Gerard Meijer judges are not independent enough. “A judge has to have the reputation of being unbiased”, he says, “but in reality he often bends to the will of the regime. There are many thug states in the world that cannot be trusted.” Bernard Hanotiau, a famous arbitrator in the ISDS industry, agrees. “It is nonsense that national courts could decide in international public law”, he says. International Public Law is the field of law that governs states. It includes treaties, “You need a lot of expertise.”
By continuously broadening the set of rules, ISDS has become a sort of catch all insurance for investors
Many critics say ISDS is unfair. It might be obvious that an investor needs some redress, when a factory is expropriated, they say, but investment protection has been stretched too far. “By taking investors’ rights too far, some arbitrators have turned the treaties with ISDS into a catch-all-insurance for investors”, says Gus van Harten, professor of investment law at Osgoode Law School in Canada.
Many developing countries have started to walk away from ISDS. It is abused by companies, they say, to get out of rules and laws. That undermines the authority of national governments. “ISDS is unfit for its aim”, says Xavier Carim, permanent representative for South-Africa with the World Trade Organization. “There are very deep problems. We have signed many BITs in the past. Back then there was little knowledge about where that could lead. We really did not know what we signed.”
Interactive map with all ISDS cases
Many disputes are kept confidential, which makes a thorough debate difficult. To create more transparency in this secretive world, we created an interactive map, showing all claims ever made known, based on a 2014 UN list, with some cases that have been uncovered in the specialist press afterwards.
Most targeted countries
What countries have been sued most? The graphic below shows the thirteen countries that received most claims as individual blocks. Together they represent over 50% of all ISDS cases, although they make up just 13% of all countries that ever have been sued. That sounds complicated, but it means this: many countries get sued, but only a few get sued a lot.
Argentina has received most ISDS claims. Three out of four were related to the measures taken to fight the economic crisis. Second in line is Venezuela, followed by the Czech Republic. That country received many claims because they had to roll back subsidies on solar panels due to the economic crisis. The Czech Republic might be slightly overrepresented, because they have made all their claims public. If every country did so, probably dozens of new cases would come to light.
It is interesting to have a list of most-sued countries, but it is more important to see which countries have had to pay up the most. The US are sued quite often because of NAFTA, but they have never lost a case. The graph below shows which countries do not do as well. They lose or settle a large percentage of their cases. We take those two outcomes together, because a state that settles still has to pay: either financially or by rolling back policy measures.
The graph shows that arbitration is mostly used to discipline developing and emerging countries. They win fewer of their cases, compared to for example Canada or the Czech Republic. Notice the ratio between blue and orange above. India for example has lost 100% of their cases, Argentina 75%.
Claims come from Western Europe
An investor has to base his claims on a treaty, signed by its home state. The top-13 of home states below represents 83% of all ISDS cases and consists of western countries exclusively.
Notice the high rank of Western European countries. The US have been surpassed in 2012 and 2014 by the Netherlands. Germany, the UK, Luxembourg, Spain and France are also high contenders. In 2014, more than 50 percent of the new ISDS claims were filed by Western European investors.
What could explain these high rankings? Firstly, most of these countries have many BITs. The Netherlands has 95, Germany has 135. That gives investors from those countries ample opportunity to use the ISDS clauses in those BITs to sue a wide range of countries. Moreover, BITs negotiated by Western European countries often use broad definitions for the principles of investment protection.
In the case of the Netherlands, the government actively attracts foreign investors by allowing a trust sector helping companies set up Dutch entities. These so called mailbox companies get the same protection from Dutch BITs as “real” Dutch investors. The large majority of “Dutch” ISDS cases comes from investors without employees in the Netherlands. This is called the Dutch sandwich: put a Dutch holding between your companies and you can call yourself Dutch.
Read the stories we have written from the perspective of three countries that have actually been sued by Dutch sandwiches.
Awards increase in size
Critics of ISDS often point to the exorbitant financial claims that investors file. That does not say much, because most awards turn out much lower than the amounts that are claimed. To know how much states really have to pay to investors, we have plotted all ISDS awards in one bar graph. We know the award for 101 cases that states have lost. In fourteen cases the awards are still not public.
Just the awards that are more than dozens of millions of dollars are visible. Note that the x-axis has no standardized scale. Each year more awards are issued.
Notice the increase of mega awards. It does not necessarily follow that arbitrators are getting stricter. That could be the case, but mostly the graph shows that much larger claims are brought to arbitration tribunals. In the first case in 1987 (award in 1990) the investor claimed half a million dollars, one of the most recent cases was about the dismantling of the Russian oil empire Yukos. The shareholders – all Russian, but registered in different countries – filed three claims that led to a joint award of 50 billion dollars.
That award has been covered and talked about extensively, mostly because it is 20 times as high as the compensation Russia owed the shareholders according to the European Human Rights Court. It is striking that a large Russian conflict is decided on by a tribunal of three western arbitrators and hardly surprising that Russia refuses to pay the award.
However, we should not obsess solely over the fines. Many cases are filed to roll back policy measures or laws. Those cases are often cancelled or settled, but can still be a costly matter for the state, either financially or politically, which is called “regulatory freeze”.
Small circle of elite arbitrators
A remarkable small group of western top-lawyers has been dominating the world of investment arbitration, according to our own analysis of the arbitrators. The top-15 of arbitrators is involved in 63 percent of the tribunals of which we could determine the members. In 22 percent of the known tribunals there are even two members from this top-15, which means that they can make or break the case. They are all white men – with the exception of two white women. They often work for, or have connections with, law firms which profit from the extension of the market.
This is a very serious problem, says George Kahale III, lawyer for the firm Curtis, Mallet-Provost, Colt & Mosle in New York, which handles more billion-dollar cases than any other law firm. Kahale refuses to mix lawyer work with arbitrator work, and only represents states. He is very critical about the current functioning of ISDS. “The personal views of the arbitrators are too important.” These people know each other, appoint each other and meet each other time and again in other cases, sometimes as a lawyer and sometimes as a judge. According to Kahale, this leads to too many legal mistakes. “Their business background shines through in their decisions. Their background is commercial arbitration. The aim there is not to create correct legal precedents, but to get parties back to business again as soon as possible.”
Is ISDS unfair to developing countries? After interviewing lawyers, arbitrators, third party funders, civil servants and academics we have found a clear divide in the arbitration world. Part of the people we spoke to – including ones that think investors need protection – feel the system is unjust. Countries are severely limited to handle crises, arbitrators have way too much power and the rules favor investors too much.
Professionals in the industry do not see it this way. They think of ISDS as a way to limit the power of states and a clear set of rules. Injustice? “They were there when they signed the BITs?” is the common response of lawyers and arbitrators we spoke to. They cannot believe that governments would not have weighed all the risks and consequences when they signed them.
It is a set of rules that match a neoliberal world view, where governments need to be limited in slowing down trade and investment
This contrast between an apolitical, technical way of thinking about law and an emphasis on justice and ethics is something Bryant Garth recognizes. He is professor of law at the University of California and expert on the arbitration world. “Law is always in favor of the ‘haves’, who want to secure their position by setting rules. That is not a conspiracy theory, it is just how legal systems work. Otherwise they would not be stable.” All the people in power have to do stay there is follow the rules. “Lawyers do not sue countries saying ‘haha, I got you’. They see ISDS as a clear, neutral set of rules.”
“Nevertheless, these rules match with a neoliberal world view, of course, where governments need to be restricted in slowing down trade and investment.”
More and more countries start wondering if they want to be exposed to the consequences of this neoliberal world view. India, South Africa, Argentina, Ecuador, Indonesia, and others, have made a turn and are now renouncing existing investment treaties. They think they might be better off with different models. That doesn’t mean that they don’t believe in arbitration. Arbitration can be a good option to solve disputes. But they think the current model is a danger for their democracy and their autonomy.
Now Europeans and Americans are debating the free trade agreement TTIP with the US, the Western world is finally looking to itself. No one denies that investors should have some recourse, when they are mistreated by a state. But is opening up our society to a neoliberal, privatized justice system the only alternative?
A lot of things are said on investment arbitration, or ISDS, by both proponents and opponents. But a clear overview of all the claims that are filed, and what kind of awards are awarded, is almost impossible to get. That is why we started this research project. Our goal: mapping the world of ISDS, in both numbers and stories. We chose to highlight a few cases in Indonesia, Uganda and Venezuela to find out what ISDS means for developing countries.
The project was supported by the Innovation in Development Reporting Grant program from the European Journalism Centre. The media partners are OneWorld, De Groene Amsterdammer and Inter Press Service. Read more about our research project.
The research was done by journalists Frank Mulder and Eva Schram. Data research by Adriana Homolova. Additional field research by Edward Ronald Sekyewa in Uganda and Mitchell van de Klundert in Geneva.
The list with arbitration cases is based on a list by UNCTAD (end of 2014), supplemented with cases that were revealed by IAReporter after that time (until August 2015). Details on all the cases were acquired from different sources: UNCTAD, Gus van Harten, The American Lawyer, Italaw, IAReporter and media reports. In addition, we have spent four months talking to arbitrators, lawyers, third party funders, academics and civil servants, including from the countries that feel disadvantaged by ISDS, including Venezuela, South-Africa and Indonesia.
Our articles have been published De Groene Amsterdammer, Oneworld, Inter Press Service, and Der Spiegel, among others, in different languages. For a complete list of publications, see here.