Alexis Mourre | Keynote | MIAS 2nd Annual Latam Investor-State Arbitration Conference 2023
We may be strong defenders of investment arbitration, or think that it should reformed, or even believe that it is profoundly evil and needs to be dismantled. But we can all agree that the current ISDS framework, as it has been built in the past 40 years on a net of over 3.000 bilateral and multilateral treaties, is in crisis.
It is in crisis because we - the defenders of the idea that investments should be protected by a rule of law based system allowing access to a fair and just dispute resolution mechanism - have been politically defeated. We have lost the battle of public opinion. We have to a large extent lost the battle of legitimacy, and I would like to reflect with you today on why it is so.
Why have we - the international law specialists, the investment law and arbitration specialists, those who know better, why have we lost the battle of legitimacy on investor-State arbitration?
I will not address today who is right and who is wrong in the arbitration debate: whether Achmea is legally correct and whether the demise of investor-state arbitration will result in less investments, or less advantageous investments, and ultimately less prosperity.
Let us assume for a moment that we, the arbitration specialists, are right - or let’s say technically right - and that the system as we know it today is the best possible one and the only one able to provide meaningful protection to international investments. The question is: why have we failed in having that truth understood and accepted?
In order to answer that question, I submit that we need to understand better who our opponents are, where do they come from, how do they think and how do they operate.
When I refer to our opponents, I do not refer to the UE or to the many States – albeit not all of them - having expressed their desire to exist the system as it is, but rather to the civil society, or more exactly to those who pretend to represent the civil society against the current ISDS framework.
When we look at how the debate on investment arbitration has unfolded, the most striking thing is the complete misunderstanding between both sides. There could not be a better example of two ships passing in the night. Different values, different languages, different cultures. But above all: no desire to bridge the differences. And no desire to reach a compromise.
To us, the existing system, based as it is on a direct right to arbitrate under rules brought from international commercial arbitration, is existential. Like marxists who think that communism is the result of a necessary and inevitable historical evolution, we think that investor-state arbitration is the ultimate evolution of the international protection of the right of aliens, after gunboat diplomacy and diplomatic protection.
And our belief is based on the deep conviction that the free-flow of foreign investments is good, good for societies, good for prosperity. We assume, even if that has perhaps never been demonstrated scientifically across the board, that the availability of investor-state arbitration has the effect of increasing the flow of investments. And the consequence is that the power of sovereigns to regulate their economies should be limited in order to protect private property and to enforce the principle pacta sunt servanda, a principle as old as western civilization itself. That is the very raison d’être of investment arbitration.
Our opponents, however, think the exact contrary: investor-state arbitration is nothing more than a post-colonial instrument of domination by the powerful against the democratic will of peoples as expressed through their legitimate governments. It establishes an unacceptable discrimination between nationals and aliens. It allows multinational to blackmail governments to the detriment of the poor. And it leads to protecting polluting industries in contradiction with environmental public commitments.
For us, the system needs to be maintained, hence our complete and forceful rejection of Achmea. But for them, it needs to be dismantled, hence their rejection not only of direct access to arbitration, but also of any proposal, such as the European Union (EU) multilateral investment court, that would maintain in favor of foreigners rights that are not enjoyed by nationals.
The second striking difference between the two camps is about words, language, and audiences.
They speak the language of emotions and politics. And we speak the cold and rational language of legal technique. They speak to the broader public, and we speak to ourselves, the insiders. We defend ISDS with correct technical arguments on the shortcomings of diplomatic protection, the neutrality of the arbitration process, and the ability of arbitrators to address complex matters requiring time and experience. They instead agitate simple messages, which may well distort the reality, but loudly speak to the public and resonate with the deep concerns and fears of societies torn by a profound aspiration to more State, more protection, less openness, less globalization and less free markets.
This is the root cause of our ideological defeat. It is not the result of a plot by the European Commission to dismantle international law or to arrogate itself exorbitant powers. It is the result of a profound change in our societies and the way in which public opinions perceive the relationship between the State and the economy.
All this might be history now, and the train has unfortunately long left the station. But if understanding this history has any interest, we need to look at the beginning of the history. And the beginning of that history really was 25 years ago: the rise and demise of the Multilateral Agreement on Investment (MAI).
The MAI was an initiative by the Organization for Economic Cooperation and Development (OECD) which aim was to adopt a multilateral framework for investment protection, including fair and equitable treatment and protection against expropriation, with direct access to arbitration in favor of qualified investors.
Negotiations started in 1995. They were not transparent. There was no announcement, and the negotiating papers were not published. Everything was done behind closed doors in Paris at the Chateau de la Muette, the “mute castle” – which for that occasion bore its name quite well.
For two years, no one noticed, until when, in February of 1997, an American NGO founded by consumer advocate Ralph Nader called Public Citizen leaked a draft of the agreement on the internet.
1997 was a particular point in time. With the fall of the wall of Berlin, the old 20th century ideologies were dying. Old ideologies were gone, communism as much as Chicago school inspired liberalism; but the nature and form of political activism, in particular left-wing activism, was also undergoing profound changes. The traditional far-left political organizations, trotzkyist or maoist as they were, were disappearing or becoming irrelevant, and their militants, thousands of experienced, talented, and cultivated activists, were flowing into new forms of action through a new generation of organizations. These were no longer political parties in the traditional sense, but less ideological and more pragmatic organizations each focused on a particular purpose.
This was the time of the rise of humanitarian law as well as of environmental activism in the aftermath of the Kyoto Protocol. The focus of the NGOs’ militants was no longer on a global vision of the world; it was no longer a revolutionary aspiration to a complete change of society. It was rather on achieving immediate and concrete results on practical issues touching on the people’s daily lives such as human rights, environment, consumer protection, or taxation. The scope of each NGO was different, but they all converged on a common foe: globalization and liberalism; and nothing better than investment arbitration can epitomize the evils of globalization and liberalism.
Jan Paulsson, in his excellent article on Barcelona Taction in the last International Council for Commercial Arbitration (ICCA) Congress Series, refers at some point to Franz Fanon’s famous book Les Damnés de la terre to say that:
“Neo-colonialism, Fanon might say today, is not the fruit of foreign investments or the imposition of international norms protecting them, but of modern forms of dependence on what used to be known as the metropolitan powers”.[2]
With all due respect to Jan, I do not think that Fanon - the friend of Jan-Paul Sartre and François Maspero, the anti-capitalist activist and the active militant of the Algerian National Liberation Front - would ever have said that. And to suggest that a radical anti-colonialist and leftist activist such as Fanon could in some ways have supported the idea of investment protection shows how blinded we are by our belief in the righteousness of our technical case in favor of arbitration and investment protection.
The other remarkable change that characterized the end of the last century was of course the spectacular emergence of internet and social networks, not only as simple means of communication, but also as powerful political platforms.
So, the Ralph Nader/Public Citizen leakage of the MAI felt on fertile ground. In a matter of months, 600 NGOs from 70 different countries mobilized and started a violent campaign against the treaty. By the end of 1997, hundreds of NGOs had coordinated, adopting in Ljubjana the Stop-MAI manifesto, which was in turn widely published and disseminated.
US activist Lori Wallach, who would later lead the campaign against the Trans-Pacific Partnership (TTP), then said jokingly that the treaty was like Dracula, because it would die as soon as it would see the light of the day. And, unfortunately, she was right.
I remember well how things then unfolded in France. It started, as it often does in France, with the cinema industry. Employees and actors mobilized and spread the message that the MAI would put an end to the French so-called “cultural exception” by preventing the government from subsidizing the industry. Associations representing the industry then wrote to socialist and green members of the parliament (MPs), and these MPs in turn started questioning the government. An NGO called ATTAC (the Association for the Taxation of Financial Transactions), followed suit, joined by trade unions as well as environmental and civil rights associations. The matter then snowballed to become of national interest.
This marked the first time, 10 years before the Tapie case, that the general public discovered what arbitration is, or at least what it thought it to be. And it was not for the best. Who were these unknown people who were, unbeknownst everybody, plotting to dismantle the most cherished social protections and to grant exorbitant rights to foreign multinationals?
The opponents to the treaty not only attacked the lack of transparency of the negotiation process and the lack of consultation of the civil society, but also the absence in the negotiation agenda of any reference to labor and environmental standards.
The pressure became such that even the OECD Trade Union Advisory Council had to disavow the treaty. In April 1998, the French socialist government led by Lionel Jospin announced the suspension of the negotiations and entrusted minister Catherine Lalumière to provide a report on the matter. Four other States, the USA, the UK, Australia, and Canada, followed suit and instituted parliamentary reviews of the MAI.
By then, the greatest financial panic since 1929 had overwhelmed global markets, unfolding a global economic crisis that led many countries to impose capital controls and tighter regulation of financial flows. With the 1998 crisis came, in the working and middle class, a growing fear of impoverishment and social downgrading. Workers started for the first time to think that their children would not enjoy the same standards of living as they and their fathers had.
Things became even worse with the 2008 financial crisis. Poor people were now paying a very high price for a purportedly law-based economic framework that had proven to be completely unable to protect them. The consequence of the total impunity that the financial sector enjoyed nourished a deep distrust towards the private sector, globalization and free-markets. Years later, the youth would also start to be deeply anguished, this time by global warning and idea that our liberal societies are leading humanity to a catastrophe. This was a society torn by fear, with a fast-growing aspiration to the restauration of state power across the world.
In that context, the MAI initiative had become politically indefensible and, in October 1998, the French government withdrew from the negotiations, which in fact killed the treaty.
The report by Minister Lalumière, which had been delivered to the government a month before, included the following interesting note:
“In spite of the highly technical nature of the topic, the representatives of the civil society that we heard were perfectly informed, and able to perfectly articulate their criticisms” […] “the arguments against the MAI are now consistently formulated across the various OECD countries, and the opposition to the treaty went much beyond sectorial or technical points to express a broader and more fundamental concern”[3].
These observations of Minister Lalumière reflected a reality that remains true today: the high level of coordination between the NGOs opposing ISDS, intensely using internet and social networks to disseminate a simple and easily understandable message. As the well-known leader of one of these groups once said to the press: “if a negotiator says something to someone over a glass of wine, we’ll have it on the internet within an hour, all over the world”[4].
The constellation of these NGOs is extremely diverse. There are labor organizations, such as the AFL-CIO in the US, or international labor federations. There are political parties, essentially from the left part of the political spectrum, but also now from the right, with the growing force of populism and nationalism. But not only them: one of the most striking things that we are today witnessing in Europe is that even center-right parties having a solid governmental tradition have joined the anti-ISDS chorus. In fact, there is virtually no longer anyone, across the European political spectrum, defending ISDS.
There are environmental associations such as Greenpeace or Friends of the Earth, an organization with branches in 65 countries, Extinction Rebellion, Just Stop Oil, Oil Change International or Uplift, and many others. There are human rights associations such as Amnesty International, citizens’ watchdog groups, universities, student associations, and even churches. And there are no-global associations such as ATTAC, which militate for more capital controls, taxation, and regulation.
How did we, the arbitration and business community, confront with this opposition? In the easiest and possibly most wrong manner: by denying these organizations’ representativity and entitlement to have a say on matters of trade policy and investment protection.
That is exactly what the International Chamber of Commerce (ICC) did in the final declaration of its September 1998 Geneva Business Dialogue, which was attended by 450 international corporate leaders:
“ICC recognizes how societies are changing, with citizens speaking up and expressing their deep-felt concerns.
However, in some respects, the emergence of activist pressure groups risks weakening the effectiveness of public rules, legitimate institutions and democratic processes. These organizations should place emphasis on legitimizing themselves, improving their internal democracy, transparency and accountability. They should assume full responsibility for the consequences of their activities. Where this does not take place, rules establishing their rights and responsibilities should be considered. Business is accustomed to working with trade unions, consumer organizations and other representative groups that are responsible, credible, transparent and accountable and consequently command respect. What we question is the proliferation of activist groups that do not accept these self-disciplinary criteria”.[5]
This incredibly patronizing statement, which was drafted by the then Secretary General of the ICC Maria Cattaui, is extremely interesting, because it shows a profound ignorance and misunderstanding of the reality of the social movement, and also because it expresses the old-world vision where multilateral organizations and business organizations were accustomed to have structured discussions with identified accredited organizations, such as trade unions, whose legitimacy was accepted.
Our modern world, however, is very different. We are no longer in a dialogue between accredited institutions representing vested interests, but in a diffused confrontation at the global level involving an amorphous and fast evolving constellation of interconnected organizations.
And this cloud of organizations conveys one single message, which has permeated the thinking in the most institutional settings, as shown by the recently published report of the UN Special Rapporteur on the promotion and protection of human rights.[6]
Events would show how misconceived the ICC 1998 reaction was. In 2014, ATTAC launched a petition against the Transatlantic Trade and Investment Partnership (TTIP) and the EU-Canada Comprehensive Economic and Trade Agreement (CETA) and, in less than one year, it had collected more than 3.3 million signatures across Europe. That initiative, and the surrounding political criticism of ISDS, prompted the European Commission to launch, some months later, an online consultation on the TTIP, in the context of which it received 150.000 responses, 97 % of which rejected ISDS.
Of course, this raises a fundamental question of legitimacy. Why should the voice of an NGO, or even of a single individual deciding to answer a survey, have more weight than that of a company leader who will not care to participate? Is the value of that kind of public consultation not distorted by the activism of NGOs calling their members to participate, while pro-arbitration technicians and the broader public would not?
That may be true. Still, while the individual representativity of certain NGOs may be questioned, what cannot be overlooked is their number, their determination, and their enormous capacity to organize and defend their ideas, as right or wrong as they may be. Collectively, with the power of internet and social networks, these organizations have become a powerful expression of the global public opinion that no State can afford to ignore.
Of course, the TTIP primarily died as a consequence of the Trump election, but the more fundamental root cause was the 1998 and 2008 crisis and the complete change in the public opinion that ensued. The demise of the TTIP was the starting point of a long series of setbacks for ISDS until Achmea in 2018, the end of Europeans’ BITs and the announced withdrawal of the EU from the Energy Charter Treaty (ECT).
So, is the EU right? Is it wrong? Anyone of us can have its views on that. But does it really matter now? What ultimately matters today is a simple reality: it has become politically impossible in Europe to obtain approval in a majority of European national parliaments, let alone all of them, of any treaty having the word arbitration in it. And this is why, right or wrong, the EU has decided that in order to pursue its trade policy, which is a quite ambitious one, it needed to get rid of arbitration.
So, where do we go from there?
According to the United Nations Conference on Trade and Development (UNCTAD), there were 569 terminations of BITs between 1999 and 2022, 70% of which occurred during the last decade. In 2022 alone, UNCTAD recorded 84 terminations, compared with 15 new treaties signed.
Of course, treaties including a direct right to arbitrate will continue to exist. Old generation treaties will coexist for decades with new generation treaties providing for narrower standards and limiting the right to arbitrate, and also with treaties including mechanisms along the lines of the EU investment courts and with treaties with no ISDS clauses at all.
The problem then is not only that of fragmentation. The problem is that the EU proposed investment court is likely to be dysfunctional – for many reasons that are not part of this speech – , and that in many of the new generation treaties that may retain arbitration, there will be much less protection afforded to investors.
Many unavoidable features of treaty-based offers to arbitrate will continue to suscitate strong political opposition no matter what, if anything because by their very nature, BITs only contain obligations on States, which feeds the idea of an unbalanced advantage; and also because of concerns on multiple actions, risks of double recovery, and impairment of the State’s right to regulate.
So, it does not require much wisdom to predict that the more reforms are introduced to the system in order to make treaties acceptable to the public, the less they will be protective of investments.
Can something be done about that, beyond pursuing desirable reforms to the current, treaty-based investment protection framework? Well, perhaps yes: these backdrops can be eliminated in a bilateral, contractual setting.
In this regard, an important initiative has been taken by the ICC and the International Institute for the Unification of Private Law (UNIDROIT), under the leadership of Eduardo Silva Romero and Professora Maria Chiara Malagutti, to prepare a model contract for international investments. This important initiative, which aims at the adoption of a new legal instrument by 2026, has the potential of offering a valid alternative to investors where there is no longer an offer to arbitrate or where the applicable treaties have become too restrictive.
A contract may provide for arbitration under the International Centre for Settlement of Investment Disputes (ICSID), the United Nations Commission on International Trade Law (UNCITRAL) or the ICC rules. More importantly, a contractual investment protection framework based on an individual bilateral negotiation on stabilization and other commitments may eliminate most of the sensitivities concerning the limitations to the State’s regulatory powers that arise from a treaty including an open-ended offer to arbitrate.
The eligible investors are defined on a case-by-case basis, thus eliminating any concern as to jus standi, parallel actions, and double recovery. Contractual protection avoids the difficulties arising from the distinction between contract claims and treaty claims, as well as from umbrella clauses, in particular when applied on the basis of a Most-Favored Nation (MFN) clause. And it is also easy to introduce obligations on the part of the investor as counterparty of the advantages received, allowing to address environmental concerns, but also health and labor commitments.
This project will face a number of interesting challenges. First, how to adapt the old stabilization clauses to today’s reality by balancing the obligation not to apply new legislation with legitimate regulatory objectives, which may in turn imply to balance stabilization with obligations to negotiate compensations in good faith. Another interesting and important challenge will be to assess how to contractualize international law concepts and standards such as legitimate expectations and Fair and Equitable Treatment (FET) in light of the State’s right to issue general regulation in the public interest. And the question of the law applicable to these contracts will also be interesting: should it be international law, as it once used for many investment contracts? Or should it be the UNIDROIT principles, which have useful provisions on matters such as force majeure and hardship, and which are already tested in investment contracts?
Of course, one may object that contractual protection is only available to investors having sufficient bargaining power to secure bespoke arrangements. But a model such as the one proposed by the ICC and UNIDROIT will precisely assist in making it accessible to smaller players. And more generally, if such an instrument can find the right answers to these questions, it will become an interesting alternative to the faltering framework of treaty-based investment protection.
Establishing a framework for the contractual protection of investments will surely assist in making sure that investments will continue flowing with confidence in the rule of law and adjudication by arbitration. But it will perhaps also assist in putting an end to an increasingly bitter debate, which we are losing, and which ultimately risks endangering international commercial arbitration as much as investment arbitration.
[1] This is the author’s keynote address at the 2nd annual Miami International Arbitration Society Investor-State Arbitration Conference at the University of Miami Law of Law on 12 November 2023. The oral form of the presentation has been maintained.
[2] Jan Paulsson, “Chapter 9: Why Investment Treaties Should Not Be Subverted by Barcelona Traction”, in Cavinder Bull, Loretta Malintoppi, et al. (eds), ICCA Congress Series No. 21 (Edinburgh 2022): Arbitration’s Age of Enlightenment?, 2023, p. 151.
[3] Catherine Lalumière and M. Jean-Pierre Landau, Rapport sur l’Accord multilatéral sur l’investissement (AMI) – Rapport intérimaire - Septembre 1998.
[4] By Maude Barlow, Council of Canadians.
[5] Excerpt of the “The Geneva Business Declaration”, statement issued by Helmut O. Maucher, then President of the ICC, on 24 September 1998.
[6] Doc. A/78/168, 13 July 2023.