Investment arbitration a "self-serving" industry, says study
Online Publication Date: 20 December 2012
Geneva, 6 Dec (Kanaga
Raja) -- Rather than acting as fair and neutral intermediaries, the
international investment arbitration industry has "a vested interest in
perpetuating an investment regime that prioritises the rights of investors at
the expense of democratically elected national governments and sovereign
states", according to a new report by the Transnational Institute (TNI)
and Corporate Europe Observatory (CEO).
"They have built a
multimillion-dollar, self-serving industry, dominated by a narrow exclusive
elite [group] of law firms and lawyers whose interconnectedness and multiple
financial interests raise serious concerns about their commitment to deliver
fair and independent judgements. As a result, the arbitration industry shares
responsibility for an international investment regime that is neither fair, nor
independent, but deeply flawed and business-biased," said TNI and CEO.
These findings are
highlighted in the joint report by the two organisations titled "Profiting
from Injustice: How law firms, arbitrators and financiers are fuelling an
investment arbitration boom."
Says the report:
"The international arbitration industry is dominated by a small and
tight-knit Northern hemisphere-based community of law firms and elite
arbitrators. Just three law firms claim to have been involved in 130 investment
treaty cases in 2011 alone. Just 15 arbitrators, nearly all from US, Europe and
Canada, have decided 55% of all investment-treaty disputes. This small group of
lawyers, referred to by some as ‘inner mafia', sit on the same arbitration
panels, act as both arbitrators and counsels, and even call on each other as
witnesses in arbitration cases. This has led to growing concerns, including
within the broader legal community, over conflicts of interest."
The TNI-CEO report
seeks to "shine a light on law firms, arbitrators and litigation funders
that have profited handsomely from lawsuits against governments," and
shows that the arbitration industry "is far from a passive beneficiary of
international investment law."
"They are rather
highly active players, many with strong personal and commercial ties to
multinational companies and prominent roles in academia who vigorously defend
the international investment regime. They not only seek every opportunity to
sue governments, but also have campaigned forcefully and successfully against
any reforms to the international investment regime."
The report reveals that
investment lawyers amongst others have:
* actively encouraged
cases and sometimes even pushed corporations to pursue arbitration, exploiting
loopholes in investment treaties to create an explosion in the number and the
costs of dispute settlement cases, and acted behind the scenes to push
countries to adopt investment treaties;
* tended to approach investment
law from an almost exclusively commercial angle rather than public interest,
ignoring or even denouncing arguments based on human rights and sustainable
* aggressively and
successfully fought to maintain and expand the current system of investment
treaties and arbitration, both through academic circles and by lobbying against
reforms that would serve the public interest, and worked alongside speculative
investment funds to provide the finance for corporations to bring more cases,
at the expense of states and taxpayers.
have not only confirmed the pro-corporate bias of current investment
agreements, [but that] they have also tilted the regime even further in the
favour of large multinational corporations. The result is a system driven by
commercial interests rather than the delivery of justice."
The report explains
that in international investment disputes, multinational companies can sue
governments if the government has done something that the multinational
considered harmful to its profits. These cases take place before an
international tribunal of arbitrators, three people who decide whether private
profits or the public interest are the most important. The legal bases for
these disputes are investment treaties between states.
The idea of investment
arbitration as a fair and independent space to resolve disputes between
multinationals and governments is one of the key justifications for a system
which has cost taxpayers dearly and undermines the capacity of sovereign governments
to act in the interests of their people.
According to the
report,"the alleged fairness and independence of investment arbitration is
an illusion. The law and the consequential disputes are largely shaped by law
firms, arbitrators and, more recently, a phalanx of speculators who make a lot
of money from the disputes."
Driven by their own
profit interests, this "arbitration industry" actively encourages an
ever-growing number of corporate claims, while creating the necessary legal
loopholes and funding mechanisms for its continued functioning. This industry is
also responsible for growing its own business with pro-investor interpretations
of the treaties.
It further notes that
investment arbitration lawyers, arbitrators and funders have largely escaped
public attention. Many of their cases are unknown and some never become public.
The vested interest behind their actions is well hidden by "a thick layer
of legal rhetoric about judicial independence, fairness and advancing the rule
investment agreements give sweeping powers to foreign investors, including the
peculiar privilege to directly file lawsuits at international tribunals,
without necessarily even going through the local courts. Companies can claim
compensation for actions by host governments that have damaged their
investments, either directly through expropriation, for example, or indirectly
through regulations of virtually any kind.
There are currently
more than 3,000 such agreements. The vast majority are bilateral investment
treaties (BITs) between two countries. Others include free trade deals with
investment chapters such as the North American Free Trade Agreement (NAFTA)
between Canada, Mexico and the United States, and multilateral agreements such
as the Energy Charter Treaty which regulates investments in the energy sector.
Since the late 1990s,
these agreements have triggered a wave of investor claims against states.
In 1996, only 38
investor-state disputes had been registered at the then 30-year-old World Bank
International Center for Settlement of Investment Disputes (ICSID), the main
handler for these arbitrations. In 2011, there were 450 known investor-state
cases, the majority of which were filed by corporations from industrialised
countries against countries from the Global South.
The report highlights
some "emblematic" examples of investor-state disputes:
* On the basis of
bilateral investment treaties (BITs), tobacco giant Philip Morris is suing both
Uruguay and Australia over their anti-smoking laws. The company argues that
compulsory large warning labels on cigarette packs prevent it from effectively
displaying its trademarks, causing a substantial loss of market share.
[In the case of the
dispute against Australia, according to posts at IELP blog, the Philip Morris
subsidiary at Hong Kong appears to have bought shares of Philip Morris
Australia, some months after Australia had already made public its plans to
introduce further regulatory measures for plain packaging to discourage
smoking. The Philip Morris Hong Kong's purchase of the shares of Philip Morris
Australia is aimed at enabling the Hong Kong subsidiary to use the Hong
Kong-Australia BIT to sue Australia. - SUNS]
* In 2009, Swedish
energy multinational Vattenfall sued the German government, seeking 1.4 billion
euros (US$1.9 billion) plus interest in compensation for environmental
restrictions imposed on one of its coal-fired power plants. The case was
settled out of court after Germany agreed to water down the environmental
standards, exacerbating the effects that Vattenfall's power plant will have on
the Elbe river and its wildlife.
In 2012, Vattenfall
launched a second lawsuit seeking 3.7 billion euros (US$4.6 billion) for lost
profits related to two of its nuclear power plants. The case followed the
German government's decision to phase-out nuclear energy after the Fukushima
nuclear disaster. Both actions were taken under the Energy Charter Treaty,
which includes BIT-like investment protection provisions.
* In 2007, Italian
investors sued South Africa over its Black Economic Empowerment Act which aims
to redress some of the injustices of the apartheid regime. It requires, for
example, mining companies to transfer a portion of their shares into the hands
of black investors. The dispute (under South Africa's BITs with Italy and
Luxembourg) was closed in 2010, after the investors received new licenses,
requiring a much lower divestment of shares.
* When Argentina froze
utility rates (energy, water, etc.) and devalued its currency in response to
its 2001-2002 financial crisis, it was hit by over 40 lawsuits from investors.
Big Companies like CMS Energy (US), Suez and Vivendi (France), Anglian Water
(UK) and Aguas de Barcelona (Spain) demanded multimillion compensation packages
for revenue losses.
As the number of
international investment disputes has grown, arbitration has become "a
money-making machine" in its own right, says the TNI-CEO report, citing
arbitration lawyer Nicolas Ulmer from Swiss law firm Budin & Partners as
explaining: "Arbitration institutions vie for their market share of disputes,
legislatures pass arbitration-friendly measures to attract this business,
various conference and workshops are held year round, a class of essentially
full-time arbitrators has developed and a highly specialised ‘international
arbitration bar' pursues large cases avidly. A veritable ‘arbitration industry'
The report stresses
that investment arbitration is expensive - long before the final settlement is
made. Both the state and the investor have to pay for the administration of a
case. They also have to pay arbitrators, witnesses and experts who are often
scattered across the globe and require translation services, travel and living
allowances. And they have to pay their lawyers.
According to the United
Nations Conference on Trade and Development (UNCTAD), "costs involved in
investor-state arbitration have skyrocketed in recent years". For the
known cases with available data, the Organisation for Economic Co-operation and
Development (OECD) recently found that legal and arbitration costs averaged
over US$8 million, exceeding US$30 million in some cases.
government spent US$58 million to defend two cases against German airport
operator Fraport - the equivalent of the salaries of 12,500 teachers for 1
year, vaccination for 3.8 million children against diseases such as TB,
diphtheria, tetanus, polio; or the building of two new airports.
According to the
TNI-CEO report, the lion's share ends up in the pockets of the parties'
lawyers. Industry insiders estimate that more than 80% of all legal costs in
arbitration are spent on counsel. The tabs racked up by elite law firms can be
US$1,000 per hour, per lawyer - with whole teams handling cases. According to
figures from ICSID, arbitrators also line their pockets, earning a US$3,000
daily fee plus travel and living allowances.
An empirical study of
investment arbitration costs found that "tribunals most frequently
required parties to share tribunal and administrative costs equally and absorb
their own legal fees". This means that even when corporations do not win,
taxpayers still have to pay millions in legal fees.
"The real winners?
Law firms who collect multimillion-dollar payments, regardless of the
result," the report underlines, citing, for example, the case of Plama
Consortium v Bulgaria, where Bulgaria's legal fees totalled US$13,243,357 for
defending a claim that was ultimately found to be fraudulent.
Although Bulgaria was
awarded US$7,000,000 of these legal fees, it was still forced to pay out the
remaining US$6,243,357. At that time, Bulgaria was grappling with a healthcare
crisis due to a shortage of nurses - the money could have paid the salaries of
more than 1,796 Bulgarian nurses.
investor-state arbitration was envisioned for instances of straightforward
expropriation - when the government took the factory. But the system has spun
out of control, with multinationals using it to chase down lost profits. The
last two decades have seen a number of multimillion-dollar claims against the
alleged effects of public legislation.
developing countries on every continent have been challenged for tax measures,
fiscal policies, bans on harmful chemicals, bans on mining, requirements for
environmental impact assessments, regulations relating to hazardous waste etc.
Sometimes, the threat of a dispute has been enough to freeze government action,
making policymakers realise they would have to pay to regulate."
According to the
report, these legal challenges have raised a global storm of critical objection
to investment treaties and arbitration. Some countries have realised the
injustices and inconsistencies of international investment arbitration and are
trying to abandon the system.
In spring 2011, the
Australian government announced that it would no longer include investor-state
dispute settlement provisions in its trade agreements.
Bolivia, Ecuador and
Venezuela have terminated several BITs and have withdrawn from ICSID, sending a
clear political message that they refuse to co-operate in the future.
Argentina, which has been swamped with investor claims related to emergency
legislation in the context of its 2001-2002 economic crisis, refuses to pay
South Africa has
announced that it will not renew old investment treaties due to expire. And
India is reported to have decided not to include investor-state dispute
provisions in future free trade agreements (after the government was sued for
carrying out the orders of the country's Supreme Court to cancel some telecom
2G band licences over charges of scam and corruption involved).
[In another case, just
reported in the current issue of the Economic and Political Weekly, a
Singapore-based arbitral tribunal has criticised the Supreme Court of India and
the Indian judiciary for its delays in hearing and disposing off cases, and
asked the Government of India (which under the Indian Constitution has no
control over the judiciary) to compensate an Australian party, having a
contract dispute with an Indian firm, for these delays. - SUNS]
According to the
TNI-CEO report, the UN has recognised that international investment agreements
can severely curb states' abilities to fight financial and economic crises.
Argentina has been sued
more than 40 times as a result of the economic reform programmes implemented
after its economic crisis in 2001. By the end of 2008, awards against the
country had reached a total of US$1.15 billion. That's the equivalent of the average
annual salary for 150,000 Argentinian teachers or 95,800 public hospital
Globally, says the
report, three firms have emerged as market leaders in the investment
arbitration business: Freshfields Bruckhaus Deringer (UK), White & Case
(US) and King & Spalding (US). Freshfields alone claims to have acted in
more than 165 investor-state disputes.
Such dominance creates
a reputation for these firms, which in turn brings new cases and leads to a
concentrated market that is difficult for newcomers to enter. One practitioner
estimates that 25 out of 30 new cases at the ICSID go to the heavyweights in
the field. Non-Western law firms from the countries most sued by investors
scarcely get a look in.
As many as two dozen
senior lawyers in the top firms also act as arbitrators, "opening a
Pandora's box of potential conflicts of interest because of their vested
interest in growing their own business".
An arbitrator might,
for example, be tempted to make a decision that will favour a client whom they
represent as counsel in another case. Some suggest that the dual role of
arbitrator and counsel is "one of the most significant problems of the
investment arbitration regime".
According to the
report, when companies sue governments in international arbitration tribunals,
investment arbitrators have the power to divert taxpayers' money to
corporations. They can decide to penalise governments for ensuring people's
human rights to health, access to water or electricity as well as the right to
a healthy environment.
Advocates claim an
international arbitration system is needed because national courts are not
sufficiently neutral. They say that only international arbitration courts can
provide the neutral ground to deal with investors' concerns. That means that
investment arbitrators become the guardians of investment arbitration, and
confidence in the system is based on their perceived independence.
arbitrators are hardly neutral guardians, who stand above the law. In fact,
they are crucial actors in the arbitration industry, with a financial interest
in the existence of investment arbitration. Arbitrators, to a far greater
degree than judges, have a financial and professional stake in the system. They
earn handsome rewards for their services. Unlike judges, there is no flat
salary, no cap on financial remuneration," the report underscores.
Arbitrators' fees can
range from US$375 to US$700 per hour depending on where the arbitration takes
place. How much an arbitrator earns per case will depend on the case's length
and complexity, but for a US$100 million dispute, arbitrators could earn on
average up to US$350,000.
It can be far more. The
presiding arbitrator in the case between Chevron and Texaco v. Ecuador,
received US$939,000. In another case, the Tribunal president billed for 719
hours at an hourly rate of US$660 plus VAT.
"To put it simply,
if a doctor is sponsored by a pharmaceutical company, we might question whether
the medicine prescribed is the best for our health; if a public servant receives
money from a lobbyist, we might question whether the policies they promote are
in the public interest. In the same vein, if an arbitrator's main source of
income and career opportunities depends on the decision of companies to sue, we
should wonder how impartial their decisions are."
And concerns not only
arise from the financial benefits arbitrators gain. Arbitrators frequently
combine their role with several other hats: working as practitioners,
academics, policy advisers or as media commentators. With these various roles,
this small group of investment lawyers can influence the direction of the
investment arbitration system in a way that they can continue benefiting from
According to the
report, arbitrators may not be well known in the outside world, but members of
the arbitration club certainly know each other. International arbitrators are
the epitome of a close-knit community. Academics, journalists and insiders have
described the circuit of investment arbitration as "small, secret, clubby",
"an inner circle", "a closed homogenous group comprised of
‘grand old men'" ... "or even an arbitration ‘mafia'".
Most of the members of
the arbitrators' club are men from a small group of developed countries:
Proportion of arbitrators from Western Europe and North America: 69% for all
cases held at the ICSID and 83% if taking into account arbitrators who have sat
in more than 10 cases.
Evidence shows that
many of the arbitrators enjoy close links with the corporate world and share
businesses' viewpoint in relation to the importance of protecting investors'
Given the one-sided
nature of the system, where only investors can sue and only states are sued, a
pro-business outlook could be interpreted as a strategic choice for an
ambitious investment lawyer keen to make a lucrative living.
investment arbitration look if it did not operate as a closed-shop? What would
happen if many more lawyers motivated by the public interest sat in panels; if
the interpretation of investment clauses was more heterogeneous, or if
arbitrators tended to allocate people and environmental welfare higher value
than property rights when deciding on the merits of a case?" TNI and CEO
Under such a scenario,
they note, it is likely that many lawsuits brought by investors would be
dismissed. In fact, the system may even collapse as investors would be more
hesitant to pursue cases if the arbitration system became a level playing
The report further
finds that banks, hedge funds and insurance companies also invest in
Brokers and electronic
marketplaces where claimants can shop for potential funders and funders can
shop for claims are emerging. Commercial third-party litigation funding is most
readily described as buying into someone else's lawsuit in the hopes of sharing
in the spoils if a payout is awarded. Typically, a funder will take between 20%
and 50% of the final award.
Little is known about
the industry, but occasional reports suggest that litigation finance shops such
as Juridica (UK), Burford (US) and Omni Bridgeway (NL) are becoming an established
part of international investment arbitration. Top tier financier Burford
commits on average US$8 million to a case, while Juridica averages US$7.5
million. Returns vary between 30% and 50%.
litigation funders' profits have been growing at staggering rates. Burford's
profits grew ninefold on their 2010 levels in 2011. In the same period,
Juridica saw a 578% growth in its profits."
By funding lawsuits
that might otherwise settle quickly or die altogether, third-party funding has
the potential to multiply the number of investment disputes brought before
arbitrators, says the report, adding that lessons from the past support the
claim that financing stirs up litigation.
Australia saw an
estimated 16.5% rise in litigation after liberalising its attitude toward
third-party funding in general.
In its overall
conclusions, the report calls for a "root-and-branch review" of the
It says that even
within the current international investment regime, there are a number of options
that could help prevent investment lawyers and law firms from exploiting the
current investor-state dispute system.
investment disputes could be solved by independent and transparent adjudicative
bodies, where sitting ‘judges' enjoy objective guarantees of independence and
impartiality, and the roster of ‘judges' would represent every country in the
It also recommends
tougher conflicts-of-interest regulations, including a binding code of conduct
for investment arbitrators requiring that they can neither work as counsel nor
as experts in investment cases during, but also for at least three years before
and after service on the roster (cooling-off period), and that a cap be imposed
on the costs of lawyers and arbitrators.
It further recommends
clarification of the broad and vaguely formulated terms (such as ‘fair and
equitable' treatment which can mean anything the arbitrator decides) used in
investment treaties, in order to prevent arbitrators from making
investor-friendly (expansive) interpretations of certain obligations and to
give countries policy space to regulate.
Also, the inclusion of
binding investor obligations in investment treaties on issues such as
environmental and human rights impact assessments, compliance with all local
and national laws on health, environmental, labour and taxation issues.
In this way, it adds,
arbitrators will be forced to take these issues into account when deciding on
- This report first appeared in South-North Development
Monitor (SUNS) #7496 dated 7 December 2012.