Posted on 09 October 2013, at 3:12 PM

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Investment Agreements versus the Rule of Law?

By Todd N. Tucker,  Gates Scholar at the University of Cambridge’s Centre of Development Studies

The field of development economics has taken a significant shift over the last several decades towards institutional explanations for economic growth, with scholars attributing a key explanatory role to independent judiciaries capable of constraining political branch discretion.[1] But the compatibility of this type of “branch autonomy” with international law has been called into question in a series of recent disputes under international investment agreements (IIAs). These lawsuits challenge domestic legal proceedings and show potential conflict between international and domestic law. Even when domestic courts function as “good institutions” from a social science point of view, they may find their decisions reviewed by international tribunals empowered under IIAs signed by other branches of government.

One example comes from Moldova. The country has been criticized for weak governance,[2] but the picture is not all bad. In 2009, Moldovan courts ruled that executive branch agencies illegally granted an exclusive concession to Franck Arif (a French national) to operate duty-free shops at the Chisnau airport. According to Moldovan courts, Moldovan airport officials had failed to follow the required competitive tender processes, which had blocked Arif’s competitors (who brought the case) from having a fair shot at gaining the concession themselves. Arif responded by launching a case against Moldova under the France-Moldova bilateral investment treaty (BIT). In its April 2013 ruling, the investment tribunal noted that the Moldovan courts “applied Moldovan law legitimately and in good faith”, giving Arif a “fair opportunity” to present his case. The courts acted without excessive delays, “gave reasoned decisions,” took the “necessary time,” did not appear to collude with outside plaintiffs or otherwise act impartially or incompetently. Moreover, their decision to require more transparent concession proceedings promoted competition and had “economic sense.”[3] By transition economy standards, this was exemplary court conduct.

However, according to the tribunal, the Moldovan courts ran afoul of Moldova’s IIA obligations in discharging their duty to hold executive branch officials accountable to Moldovan law. The tribunal found that the court rulings discouraged Arif’s investment, while the executive branch encouraged the same.[4] This inconsistent treatment on the part of two branches contributed to a violation of the treaty’s fair and equitable treatment standard. The executive branch committed a further treaty breach when it enforced the national court's orders against the investors, and was slow to provide temporary or alternatives arrangements and facilitate the investor's business in a way to minimize his losses. According to the tribunal, this was the “most reprehensible element of [the] Respondent's conduct.”[5]  To top it all off, the investment tribunal put Moldovan courts on notice that they might commit further treaty violations if they were to find against Arif in a separate set of court proceedings that have still not been finalized (related to other of his Moldovan investments).[6]

An arbitral tribunal in the Chevron v. Ecuador dispute has likewise found national court decisions to be contrary to the obligations contained in an IIA. In this long-standing conflict, Ecuadorian plaintiffs filed class action lawsuits in U.S. courts on behalf of 30,000 residents of Ecuador’s Lago Agrio region in 1993. The plaintiffs maintained that Texaco had been negligent in its local operations for the previous three decades. In 2002, U.S. courts agreed with Texaco’s (by then a subsidiary of Chevron) request to have the case transferred to Ecuadorian courts, calling Ecuadorian courts “adequate for the resolution of civil disputes involving U.S. companies.”[7]

However, Chevron grew impatient with the pace of the Ecuadorian courts, and, in 2009, launched an IIA case against Ecuador, claiming that Ecuadorian courts were causing an “undue delay” in resolving the case. The IIA tribunal found for Chevron in August 2011, issuing a $77.7 million award under the U.S.-Ecuador BIT.[8] The tribunal found that a State can be held responsible for delays in its court system, even when due to congested court dockets and even though Chevron had previously lauded the Ecuadorian courts before U.S. courts.[9]

If Ecuadorian courts were moving too slowly by international standards in 2011, they began moving too fast just months later. In January 2012, they found against Chevron in a $18 billion damages award. This ruling was called into question by a separate IIA tribunal convened at Chevron’s request. The arbitrators in that case ordered Ecuador “to take all measures at its disposal to suspend or cause to be suspended the enforcement or recognition within and without Ecuador of any judgment” against Chevron.[10] This order was reiterated in second and third interim awards in February 2012. Ecuador’s executive branch, however, maintained that it lacked constitutional authority to intervene in the decisions of its judicial branch.[11]

The Lago Agrio plaintiffs proceeded to petition various third country courts for recognition of the decision against Chevron (or attachment of assets of various Chevron subsidiaries and affiliates) – a move that prompted the IIA tribunal to issue a fourth interim award, stating:

“[T]hese orders and awards were directed not only to the Respondent’s executive branch but to all branches and organs that make up the Respondent as a State, including its judiciary and legislature. Neither disagreement with the Tribunal’s orders and awards on interim measures nor constraints under Ecuadorian law can excuse the failure of the Respondent, through any of its branches or organs, to fulfil its obligations under international law.”[12]

The tribunal added that it constituted the “only tribunal with the power to restrain the Respondent.” Depending on how the case unfolds, this comment will either be a testament to a new level of arbitral authority in international affairs, or to tribunals’ ongoing challenges in influencing State behavior.

One need not argue that the Moldovan or Ecuadorian courts necessarily made the correct decisions. The decisions of Ecuadorian courts in the Lago Agrio case have generated a great deal of consternation in and out of the tribunal proceedings,[13] while (as noted above) investment arbitrators looked favorably on many aspects of the Moldovan courts’ actions. Rather, the point worth contemplating is what these cases mean for the future of development and of investment arbitration.

On the one hand, the interplay between domestic and international justice is not a new phenomenon. Domestic courts have long had a role in the enforcement and attachments actions related to IIA cases.[14] Meanwhile, there has been a steady line of IIA “denial of justice” disputes that touch on the quality and availability of domestic judicial remedies.[15] Developed countries themselves have had their proceedings questioned,[16] perhaps demonstrating the evenhandedness of the IIA system. For many international lawyers, these new cases simply extend in a logical direction the notion of State responsibility for the judiciary.

On the other hand, social scientists and policymakers may approach the problem differently. At a minimum, the cases demonstrate international investors’ relatively high “political liquidity” vis-à-vis other interests. (This concept captures the notion that actors that can realize their goals in a greater number of locales have greater power than those that have access to more limited settings.)[17] While social and legal norms instruct national level officials to refrain from opining on ongoing court cases in the domestic context, the investment tribunals in the Arif and Chevron cases indicate that a different order may be at work on the international legal plane. If States cannot simultaneously respect arbitral norms and foster the integrity of institutions that support development, one of the key justifications for IIAs – their contribution to economic development[18] – may be brought into question.

That said, the IIA system appears remarkably stable: new signings of IIAs continue to outpace the number of States exiting or remaining outside the system.[19] An adverse ruling against a developed country on the basis of its own court proceedings might generate calls for change. The United States has yet to lose a case (although it once came close).[20] Currently, investors are challenging the substantive conclusions of U.S. and Canadian courts on issues of intellectual property law[21] and have invoked connections to IIA disputes to influence whether U.S. federal or sub-federal courts may hear civil suits against them.[22] If developed country jurists and trial lawyers perceive that international arbitrators are edging into their turf, they may join the chorus of stakeholders voicing concerns about recent IIA case law.



[1] See Daron Acemoglu and Simon Johnson, “Unbundling Institutions,” 113.5 Journal of Political Economy 949, at 953 (2005). See also contributions to the Journal of Institutional Economics, Volume 7, Issue 04, from December 2011. Other scholars have emphasized the importance of the autonomy of administrative agencies; for example, Peter Evans, Embedded Autonomy: States and Industrial Transformation, Princeton: Princeton University Press (1995); Meredith Woo-Cumings, “The Rule of Law, Legal Traditions, and Economic Growth in East Asia,” (No. 2006/53), Research Paper, UNU-WIDER, United Nations University (UNU) (2006).

[2] “Nations in Transit, 2013,” Freedom House, at 392 (available at http://www.freedomhouse.org/sites/default/files/NIT13_Moldova_2ndProof.pdf).

[3] Mr. Franck Charles Arif v. Republic of Moldova, ICSID Case No. ARB/11/23, Award, 8 April 2013, at paras. 415-416 and 447-453.

[4] Indeed, the executive had favored Arif over his Moldovan competitor. Ibid., at para. 456.

[5] Ibid., at para 547.

[6] Ibid., at para. 555.

[7] Aguinda v. Texaco, Inc., 303 F.3d 470 (2d Cir. 2002), 16 August 2002 (available at http://www.texaco.com/sitelets/ecuador/docs/aquinda_v_texaco_d.pdf).

[8] Chevron Corporation (USA) and Texaco Petroleum Company (USA) v. Republic of Ecuador, PCA Case No. 2007-2, Final Award, 31 August 2011 (available at http://www.italaw.com/sites/default/files/case-documents/ita0154.pdf).

[9] Chevron Corporation (USA) and Texaco Petroleum Company (USA) v. Republic of Ecuador, PCA Case No. 2007-2, Partial Award on the Merits, 30 March 2010, at paras. 263-266 (available at http://www.italaw.com/sites/default/files/case-documents/ita0151.pdf).

[10] Chevron Corporation (USA) and Texaco Petroleum Company (USA) v. Republic of Ecuador, PCA Case No. 2009-23, First Interim Award on Interim Measures, 25 January 2012 (available at http://www.italaw.com/sites/default/files/case-documents/ita0173.pdf).

[11] “Ecuador Pushes Back On Chevron's Drive To Suspend Trade Preferences,” Inside U.S. Trade, 4 October 2012.

[12] Chevron Corporation (USA) and Texaco Petroleum Company (USA) v. Republic of Ecuador, PCA Case No. 2009-23, Fourth Interim Award on Interim Measures, 7 February 2013 (available at http://www.italaw.com/sites/default/files/case-documents/italaw1274.pdf).

[13] Patrick Radden Keefe, “Reversal of Fortune,” New Yorker, 9 January 2012 (available at http://www.newyorker.com/reporting/2012/01/09/120109fa_fact_keefe).

[14] See Blue Ridge Investments, LLC v, Republic of Argentina, No. 10 Civ. 153 (S.D.N.Y. 30 September 2012) (available at http://www.italaw.com/sites/default/files/case-documents/italaw1102.pdf).  See also Belize Social Development Ltd. v. Government of Belize (D.C. Cir. 2012) (available at http://lettersblogatory.com/wp-content/uploads/2012/01/Belize.pdf).

[15] See Jan Paulsson, Denial of Justice in International Law, Cambridge: Cambridge University Press (2005), at 38.

[16] Indeed, the United States was the respondent in an oft-cited case regarding IIA review of domestic court actions. See Loewen v. USA, ICSID Case No. ARB(AF)/98/3 Award, 26 June 2003 (available at http://www.italaw.com/sites/default/files/case-documents/ita0470.pdf).

[17] See for instanceSteven Lukes, Power: A Radical View, 2nd ed., New York: Palgrave Macmillan (2004), at 75. One might note that various non-corporate actors may also pursue their claims in multiple venues. However, whatever space that international class action lawsuits might have had in the United States (to take one example) seem to be coming to a close with the recent U.S. Supreme Court ruling that limited foreign citizens’ recourse to the Alien Tort Claims Act under Kiobel v. Royal Dutch Petroleum, 569 U.S. _____ (17 April 2013).

[18] There are various channels whereby IIAs may boost development. Scholars are divided as to whether and why IIAs attract FDI. For recent findings of positive and negative FDI effects to treaty signing, see (respectively) Todd Allee and Clint Peinhardt, “Contingent Credibility: The Impact of Investment Treaty Violations on Foreign Direct Investment,” 65 International Organization 401–432 (2011); and Robert Blanton and Shannon Blanton, “Rights, Institutions, and Foreign Direct Investment: An Empirical Assessment,” 8 Foreign Policy Analysis 431–452 (2012). See also UNCTAD, The Role of International Investment Agreements in Attracting Foreign Direct Investment to Developing Countries, 161 p. Sales No. E.09.II.D.20, available at http://unctad.org/en/Docs/diaeia20095_en.pdf. For views that IIAs further development by substituting or complementing (respectively) for domestic institutions, see Tom Ginsburg, “International Substitutes for Domestic Institutions: Bilateral Investment Treaties and Governance,” 25 International Review of Law and Economics 107–123 (2005); and Andrew Kerner, “Why Should I Believe You? The Costs and Consequences of Bilateral Investment Treaties,” 53 International Studies Quarterly 73–102 (2009).

[19] According to UNCTAD, 30 IIAs were signed in 2012. While this is the lowest annual number since the 1980s, it is still higher than the total of 12 IIAs denounced by four countries over 2008 to the present. See UNCTAD, World Investment Report 2013, Sales No: E.13.II.D.5, at 101, 108 (available at http://unctad.org/en/PublicationsLibrary/wir2013_en.pdf).

[20] See Loewen v. USA, ICSID Case No. ARB(AF)/98/3 Award, 26 June 2003 (available at http://www.italaw.com/sites/default/files/case-documents/ita0470.pdf).

[21] Eli Lilly and Company v. The Government of Canada, UNCITRAL, (NAFTA), Notice of Intent, 13 June 2013, at paras. 35 et seq. (available at http://www.italaw.com/sites/default/files/case-documents/italaw1530.pdf); Apotex Holdings Inc. and Apotex Inc. v. United States of America, ICSID Case No. ARB(AF)/12/1 (NAFTA), Request for Arbitration, 29 February 2012 (available at http://www.italaw.com/sites/default/files/case-documents/italaw1228.pdf). A separate case by the same company against the United States did not get past the jurisdictional stage. See Apotex, Inc. v. United States of America, UNCITRAL, (NAFTA), Award on Jurisdiction and Admissibility, 2 July 2013, at paras. 281-290 (available at http://www.italaw.com/sites/default/files/case-documents/italaw1550.pdf).

[22] See the contrast between the same U.S. judge blocking federal question jurisdiction in 2008 – and then later upholding it in 2011 – in substantially the same civil dispute brought on behalf of Peruvian children allegedly subjected to health damage from a multinational mining operation. The decisive difference between the two instances was the launch in 2010 by the corporate defendant of an international arbitration claim against the government of Peru. See AAZA v. Doe Run Resources Corp., No. 4:07CV1874 CDP, 2008 WL 748328 (E.D.Mo. 18 March 2008) (order granting plaintiff’s motion to remand to state courts) (available at http://www.uselaws.com/uploaded/articles/OrdergrantingMotiontoRemand.pdf).  See also A.O.A. v. Doe Run Res. Corp., Civil Case No. 4:08CV1416 CDP (9 October 2008); K.G.C. v. Doe Run Res. Corp., Civil Case No. 4:08CV1420 CDP (9 October 2008) (order granting plaintiff’s motion to remand to state courts); The Renco Group, Inc. v. The Republic of Peru, ICSID Case No. UNCT/13/1, Claimant’s Notice of Intent to Commence Arbitration under United States – Peru Trade Promotion Agreement, 29 December 2010, at para 15 (available at http://ita.law.uvic.ca/documents/RencoGroupVPeru_NOI.pdf); A.O.A. v. Doe Run Resources Corp., 2011 WL 2553259 (E.D.Mo. 22 June 2011) (denial of plaintiffs’ motion to remand to state courts) (available at https://ecf.moed.uscourts.gov/documents/opinions/A._et_al_v._Doe_Run_Resources_Corporation_et_al-CDP-45.pdf); Reid v. Doe Run Res. Corp., No. 12-1065 (8th Cir. 13 November 2012) (appeal denied on plaintiffs’ motion to remand to state courts) (available at http://pdfserver.amlaw.com/nlj/8thCirReidvDoeRunResourcesCorp.pdf). 



A COMMENT ON “INVESTMENT AGREEMENTS VERSUS THE RULE OF LAW?”
With his cogent analysis of IIA litigations tick-tocking between traditional courts and arbitral panels, Todd Tucker exemplifies how the negotiation of international trade or investment agreements can produce severe challenges to American principles of self-government and federalism. In the cases involving Franck Arif and his commercial competitors in Moldova and the Chevron dispute with the government of Ecuador an investment agreement between governments caused nullification of judgments rendered by constitutional domestic courts. In these instances, an adjudicatory tribunal created by the executive branches of the signatory governments has trumped the actions of courts created by underlying domestic constitutions.

At the end of his piece, Tucker ruminates on whether, in the face of these cases, developed and developing countries in the future will countenance an outside tribunal preempting judgments of their domestic courts. In response to his open query, I underline some bedrock principles of U.S. governance and formal concerns of leaders of America’s state court systems.

The U.S. Constitution works from the premise that “We the People” are the source of governance. To avoid government becoming more powerful than its people, the Founders divided governmental authority into three co-equal branches. This separation of powers dynamic is so fundamental that it is carried forward in all state constitutions. And, to define a proper balance between federal and state governmental responsibilities, the Constitution enumerates federal powers but reserves to the states or to the People all powers not so specified. We call this endeavoring to reach the proper balance of powers a fundamental “principle of federalism.”

To this, I add the federalism concerns of a long-established and respected American legal institution – the Conference of Chief Justices (“CCJ”). The CCJ was founded in 1949 to provide an opportunity for the highest judicial officers of the states to meet and discuss matters of importance in improving the administration of justice and the organization and operation of state courts and judicial systems. For decades the Conference has made recommendations to bring about improvements in such matters. The CCJ membership consists of the highest judicial officers of the fifty states, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, and the territories of American Samoa, Guam and the Virgin Islands.

With the rising number of negotiations of free trade agreements [1] the CCJ has raised federalism concerns for almost a decade. It adopted a resolution in 2004 urging USTR “to negotiate, and the United States Congress to approve, provisions in trade agreements that recognize and support the sovereignty of state judicial systems and the enforcement and finality of state court judgments.”[2] More recently, after the United States signed the Hague Convention on Choice of Court Agreements (authorizing private commercial contractors to choose courts of signatory countries for resolution of their private contract disputes), the CCJ formally urged “the executive and legislative branches of the United States government, in the course of their drafting and enacting legislation to implement the Hague Convention of Choice of Court Agreements, take all available and reasonable steps to respect and accommodate principles of federalism and the authority of states to establish common law jurisprudence with respect to pertinent substantive law” and for the Congress “to enact Convention-implementing legislation that takes a ‘cooperative federalism’ approach which avoids unilateral, compulsory preemption of relevant state jurisprudence and which encourages states to adopt a uniform international choice of court agreements act which is consistent with federal guidelines.”[3]

Circling back to the case law cited by Todd Tucker, I believe it would be prudent for the negotiators of international investment treaties, no matter which country they represent, to be mindful of the roots of their domestic court systems when contemplating the creation of judicial forums un-tethered to established courts. I hope professional negotiators appreciate that, if the consumers of traditional domestic court services around the globe come to see private parties and their national government executives have garnered an invincible, penthouse-level justice system for themselves, then there can well be a plummeting of public trust and confidence in judicial systems generally. That is a risk not worth taking.

From another perspective -- if sovereign domestic courts in some countries are not up to the task of delivering fair and impartial justice, then governments hosting those courts should first set about improving their judiciaries rather than isolating them. Is that not what smart business managers do when faced with underperforming key components of their enterprises?

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*The views expressed herein are solely those of Judge Mize and not necessarily those of the National Center for State Courts or the Conference of Chief Justices.
[1] In the shadow of stalled negotiations of the General Agreement on Trade in Services (GATS), negotiations on the fastest tracks are the Trans-Pacific Partnership Agreement (with respect to Pacific Rim countries), the Trade in Services Agreement (involving 20 assorted US trading partners who are impatient with the GATS process), and the recently proposed Transatlantic Trade and Investment Partnership Agreement (commonly called the US-EU trade agreement).
[2] CONFERENCE OF CHIEF JUSTICES, RESOLUTION 04-A-26, REGARDING PROVISIONS IN INTERNATIONAL TRADE AGREEMENTS AFFECTING THE SOVEREIGNTY OF STATE JUDICIAL SYSTEMS AND THE ENFORCEMENT OF STATE COURT JUDGMENTS (2004). http://ccj.ncsc.org/~/media/Microsites/Files/CCJ/Resolutions/07292004-Regarding-Provisions-International-Trade-Agreements-Sovereignty-of-State-Judicial-Systems.ashx.
[3] CONFERENCE OF CHIEF JUSTICES RESOLUTION 10-A-02, URGING THE UNITED STATES GOVERNMENT TO RESPECT STATE POLICIES AND PRINCIPLES OF FEDERALISM WITH REGARD TO ENACTING LEGISLATION TO IMPLEMENT THE HAGUE CONVENTION OF CHOICE OF COURT AGREEMENTS (2010). http://ccj.ncsc.org/~/media/Microsites/Files/CCJ/Resolutions/07282010-Urging-the-US-State-Policies-Federalism-Implement-Hague-Convention.ashx.
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An international administrative tribunal?

The awards pointed out highlight a seemingly new pattern in investment arbitration, i.e. issue obiter dictum (E.G. RDC v. Guatemala, inter alia). One wonders if that phenomenon known in common law jurisdictions as “judicial activism” is applicable in arbitration and thus we can start talking of “arbitral activism”.
Of course judicial activism, although highly criticized, is not weak in its legitimacy. But can we say the same of investment arbitration? In investment arbitration the tribunals review of the regulatory conduct of the state, binding determine the legality of the state’s conduct and are empowered to adjudicate a strong remedy therefore. All those are responsibilities that belong to courts in domestic law. But in international investment law it is arbitral tribunals, not courts the ones who undertake that task. That in and itself enhances the momentum against the investor-State dispute settlement system.
One also wonders what is the relevance or to put it in economic terms, the efficiency (cost v. benefit) of giving notice of what would be the result of future deeds of the state vis-à-vis IIAs or bragging the strength of the tribunal in an award solely devoted to determine whether there had been a violation of IIAs and decide consequences accordingly.
Jeopardizing the current system of investor-state dispute settlement is a high cost to pay in exchange for slim benefits, mainly when the alternative to the current system could be a return to risky situations of legal ostracism. Obviously if the attack to the current system of investor-state dispute settlement from within is intended to promote an avant garde transformation towards an international judicial review court the benefits would exceed the costs involved. But, are we there yet?

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Arbitration as blackmail
Ecuador's Constitution expressly recognizes legal certainty as a constitutional principle. In 2011, the people of Ecuador decided, via referendum, to transform the slow and inefficient judicial system, and move on to real legal certainty, to build better institutions. Now, it is not necessary to privatize justice to arbitration panels that are full of conflicts of interest.

Starting in 2008, Ecuador began denouncing bilateral investment treaties (BITs) and the associated arbitration system. As part of this process, the Ecuadorean Constitutional Court declared all BITs unconstitutional. According to Article 96 of our Law for Jurisdictional Guarantees and Constitutional Control, no authority may apply the contents of a norm that has been declared unconstitutional.

After 2008, our country has been the target of dozens of arbitrations, and of the largest award against any state in the history of the world: the Occidental Petroleum Company v. Ecuador case. The arbitral tribunal considers that Occidental did not comply with Ecuadorean law, but astonishingly, the tribunal decided that the penalty included in Ecuadorean law was too harsh. This absolutely weakens the rule of law and breaks the foundations of good institutions. This could have the negative effect of decision makers being not "too harsh" even when companies are found responsible of breaking the law. You could call this "regulatory chill" or "arbitrarion as blackmail"

Besides the infamous case cited by Todd Tucker, Ecuador faces yet another astonishing case. The case is Merck Sharp and Dome against Ecuador. Briefly, this company lost the first instance of a private domestic court case against a local pharmaceutical company over intellectual property issues. The response by the transnational corporation was to file an arbitration against the Republic of Ecuador. It is very questionable that companies can file cases against the State without concluding the entire judicial process. I consider this to be yet another case of "arbitration as blackmail".

Replacing BITs, and investment arbitration and honoring our principle that ‘human beings are above capital’, Ecuador issued a national law of the highest hierarchy, just below the Constitution: the Organic Code of Production, Trade and Investment. This is a groundbreaking model of incentives and guarantees, but also of duties and responsibilities, for national and foreign investors who believe in our country. The investment contract is a much better document than a BIT. Besides including performance requirements, it encourages and protects specific investments according to our development planning, it is not a blank check. We want to avoid cases like the ones cited and others, like those of casinos that, affected by a popular vote decision to shut them down (2011 referendum), have sued the State, under the auspices of a BIT. These types of arbitrations affect good institutions, like democracy itself.

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