The new book The Trouble with Foreign Investor Protection1GUS VAN HARTEN, THE TROUBLE WITH FOREIGN INVESTOR PROTECTION (Oxford University Press 2020).1 by Gus Van Harten is a thought-provoking—sometimes even brazen—and insightful monograph, which poses a very sharp criticism to the investor-state dispute settlement ("ISDS") system. The author studies the historical roots of current ISDS and how the sudden discovery by arbitrators of asymmetrical sovereign consent, coupled with expansive interpretations of vague concepts in investment treaties, prompted the fast development of this powerful system that institutes what he considers to be wealth-based inequality under international law. He also explores the links between multinational corporations and certain pro-ISDS advocates—to whom he refers as "leading hawks"—that were instrumental to the reshaping of international law in favor of foreign investors, creating what could be viewed as a “world supreme court” with the power to review decisions made by national institutions that is under the sway of investors. His work also features the reactions of states to the expansive and abusive use of ISDS, as well as surveys the efforts to reform this defective system that is clearly prejudicial to sovereign states.
The book is divided into seven chapters and one annex, covering all these subjects in great detail. Summaries and thoughts on each part of the book are offered below, in sequence.
A. Chapter 1: National Issues
Chapter 1 provides the context in which the ISDS system was built, largely based on global inequality, since countries granted extraordinary foreign investment protections to huge corporations and ultra-wealthy individuals without giving them corresponding responsibilities. The author anticipates his highly critical perception of ISDS by stating that in ISDS “one finds examples of unfairness, conflicts of interest, and public money flowing to private actors on dubious grounds.” This chapter introduces certain themes that are developed throughout the book; for instance, how ISDS “is an extraordinary tool for safeguarding wealth,” and how it “back[s] inequality and augments the power of corporations in relation to government.” It also provides an overview of foreign investor protections and dispels the common arguments made in favor of ISDS, such as that it improves the investment climate or that foreign investors cannot rely on national institutions and require ISDS to protect their investments. This introductory chapter also explains how ISDS would not have exploded without a powerful legal industry behind it, in particular by the power of a group of repeat players who often played multiple roles in ISDS as counsel, expert witnesses, treaty negotiators, and arbitrators.
B. Chapter 2: Origins of ISDS Treaties
Chapter 2 tracks down the origins of the current ISDS system. It begins by providing an explanation about the links between the first wave of ISDS treaties and post-colonial violence, since most of those first treaties emanated from a former colonial power (which wanted to protect their corporations in newly independent countries) or from the World Bank. The author then observes how ISDS treaties grew more rapidly in the 1980s, driven by capital-exporting countries. The chapter also examines the background of the creation of the International Centre for Settlement of Investment Disputes (ICSID) through which western states tried to guard against the grave risks presented by decolonization.
Van Harten critically considers that the ISDS system created by those treaties—ICSID being the leading arbitration house—substitutes arbitrators for judges to boost the position of foreign investors in their relations with sovereign states. He further analyzes the great expansion of investment treaties in the 1990s and the critical role played by the United States government in this expansion. The author highlights how, with the help of specialist lawyers, the treaties of the 1990s laid the basis for an ISDS litigation explosion. The chapter concludes by posing the proposition that if ISDS continues to expand, it will eventually make all countries semi-independent, as it extends privileges to investors and allows corporate lawyers to act as supreme judges by using vague laws to issue rulings that create public debt and discredit the sovereign.
C. Chapter 3: Activation of the Treaties
In Chapter 3, the author explores how ISDS treaties give far-reaching powers to arbitrators, in particular by not requiring a more specific statement of consent by the state for investor claims to be valid and actionable. Van Harten explains that foreign investor claims became possible only after arbitrators decided that investment treaties contained sovereign consents that granted authority to arbitrators to hear such claims. The notion of asymmetrical sovereign consent was first recognized in Asian Agricultural Products, Ltd. (AAPL) v. Sri Lanka,1Asian Agric. Prods., Ltd. V. Sri Lanka, ICSID Case No. ARB/87/3, Award (Jun. 27, 1990).1 in which—according to Van Harten—the majority overcame the impediment of consent "by legal wizardry." ICSID approved the tribunal's innovative approach. The APPL arbitration was followed by other cases in which the same reasoning was applied (such as Saar Papier Vertriebs GmbH v. Poland,2Saar Papier Vertriebs GmbH v. Poland, UNCITRAL, Final Award (Oct. 16, 1995).2 American Manufacturing and Trading, Inc. v. Zaire,3Am. Mfg. & Trading, Inc. v. Zaire, ICSID Case No. ARB/93/1, Award (Feb. 21, 1997).3 Fedax N.V. v. Venezuela,4Fedax N.V. v. Venezuela, ICSID Case. No. ARB/96/3, Award (Mar. 9, 1998).4 and Ethyl, Corp. v. Canada5Ethyl Corp. v. Canada, NAFTA/UNCITRAL, Award on Jurisdiction (Jun. 24, 1998).5), which are analyzed at great length in this chapter. The conclusion of the author is that the arbitrators’ liberal interpretation in these early cases—validating the theory of asymmetrical sovereign consent—paved the way "for an expansionist ISDS movement in which the fortunes of investors and arbitrators are closely aligned."
D. Chapter 4: The Most Powerful Protections
Chapter 4 offers a critical analysis of the main standards of protections offered by investment treaties. It shows how ISDS treaties give foreign investors the most powerful protections of any private actor in international law. Van Harten explains how ambiguous concepts in investment treaties have been interpreted by arbitrators in investor-friendly ways, intensifying the pressure on governments and allowing investors to challenge a wide array of sovereign decisions. He also highlights that treaties do not create investor responsibilities that are actionable in the same manner as their protections.
The expansive interpretation of treaty protections began with Metalclad v. Mexico, in which concepts such as indirect expropriation and fair and equitable treatment were interpreted heavily in favor of investors.6Metalclad Corp/ v. Mexico, ICSID Case No. ARB(AF)/97/1, Award (Aug. 30, 2000). 6 Such trend continued with other cases, such as Von Pezold v. Zimbabwe7Von Pezold v. Zimbabwe, ICSID Case No. ARB/10/15, Award (Jul. 28, 2015).7 (which underscored the procedural unfairness in ISDS), Tokios Tokelés v. Ukraine8Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18, Award (Jul. 26, 2007).8 (where nationality shopping was allowed), and Sedelmayer v. Russia9Sedelmayer v. Russia, Ad Hoc, Award (Jul. 7, 1998).9 (which endorsed indirect ownership of investments). The author also explains how under ISDS treaties, foreign investors can avoid the institutions that govern others in a country by bringing claims against the country, since foreign investors are excused from the duty to exhaust local remedies. The ISDS system—starting with Lanco v. Argentina10Lanco Int’l Inc. v. Argentina, ICSID Case No. ARB/97/6, Decision on Jurisdiction (Dec. 8, 1998).10—also allows investors to avoid contractually agreed forums to resolve their disputes. Finally, ISDS treaties also fix the problem of enforcement for foreign investors—as they can pursue enforcement with relative ease against the losing country’s assets in other countries—that is also coupled with the intense pressure a country may face to pay awards from the investor’s home country, the World Bank or other financial institutions.
E. Chapter 5: Special Access to Public Funds
Chapter 5 deals with the imbalance created by ISDS treaties, which provide generous protections to foreign investors that would be impossibly expensive to provide to all as a result of their special access to public compensation, allowing them to make extraordinary threats against governments. The chapter further analyzes issues such as how ISDS allows investors to challenge a country’s laws and win compensation free from public or judicial scrutiny, the prospect of foreign investors receiving compensation from the state if the country does not accept the investors’ will, and how the risk of arbitrators ordering uncapped compensation could be a concern for governmental officials when contemplating a law or regulation that investors might oppose.
The author also explores some key features of ISDS, such as the right of an investor to pick one arbitrator directly and to jointly choose the presiding arbitrator, who would otherwise be imposed by an appointing authority, most likely by one of the arbitration houses. Another important tool of ISDS is the power of the most-favored-nation clause to expand treaty protection—starting with the Maffezini v. Spain11Maffezini v. Spain, ICSID Case No. ARB/97/7, Award (Nov. 13, 2000).11 ruling—that the author qualifies as “a wand for arbitrators to wave when converting ISDS treaties into a functionally multilateral deal that maximizes special protections for foreign investors in general.” Van Harten also covers the competition between arbitrators, lawyers and arbitration houses within the ISDS industry, which affects “the legitimacy of the whole system,” and allows for limited judicial oversight to the arbitrators’ decisions and different options for secrecy contemplated in the arbitration rules.
F. Chapter 6: Intimidating Sovereigns
Chapter 6 examines the ways in which ISDS jeopardizes sovereign states by undermining regulation, democracy, and security. The main focus of this chapter is the regulatory chill generated by ISDS since certain elements of ISDS treaties "create an exceptionally powerful tool for changing sovereign minds." Some of those most salient elements are: exclusive access by foreign investors to ISDS, which allows them to challenge sovereign decisions; the ability of investors to win uncapped amounts of compensation; the breadth and ambiguity of the protections; the vagueness of treaty safeguards for the state's regulatory role; the international enforceability of ISDS rulings; the use of for-profit arbitration to decide claims, with little or no access to judicial review; and the inability of states to bring claims against investors.
The author provides several examples of regulatory chill in which ISDS contributed to state decisions and had even led governments to reconfigure their institutional processes. Some of the examples analyzed in depth are: the Ethyl v. Canada case, in which a foreign investor used ISDS to stymie the Canadian government's efforts to check pollution by banning trade in a gasoline additive; the use of ISDS by foreign investors in Indonesia to unwind deals that dated from a corrupt era; Colombia privileging a private health insurer due to a threat of an ISDS claim, which led to a change in the government's processes; the dispute between Vatenfall and Germany, in which ISDS was used as pressure for approval of a coal-fired power plant in Hamburg at the expense of increased pollution; the Philip Morris saga, where ISDS was used to delay anti-tobacco regulations; and Romania pulling back from heritage protection threatened by ISDS.
G. Chapter 7: Fault Lines and the Future of ISDS
Chapter 7 addresses some of the current concerns with ISDS, its effect on globalization, and the reactions by many states, which are trying to limit expansive interpretations of treaty obligations and are pursuing reform of ISDS. In particular, this chapter explores the efforts by the European Union to replace ISDS with an investment court system in its new economic agreements and to push for a multilateral investment court to replace ISDS in existing treaties, the reform discussions at UNCITRAL, the renegotiated NAFTA, and the withdrawal of some countries from investment treaties.
H. Appendix: Leading Hawks of ISDS
In this appendix, the author elaborates on the professional background and the decisions rendered by six arbitrators, to whom he refers as the "leading hawks" of ISDS (Yves Fortier, Francisco Orrego Vicuña, Charles Brower, Marc Lalonde, Stephen Schwebel, and Gabrielle Kaufmann-Kohler), including examples of their investor-friendly records. He studies how these individuals interpreted investment treaties in a way that expanded treaty protections, and reviews their rulings on contested legal issues—such as claims by minority shareholders or involving questionable investments; the interpretation and scope of controversial concepts such as most-favored nation treatment, fair and equitable treatment and umbrella clauses; and the availability of the national security exception, among others.in, ICSID Case No. ARB/97/7, Award (Nov. 13, 2000).
Van Harten takes us through an entertaining journey that critically examines all the deeply disturbing problems that the current state of the ISDS system creates. The book analyzes how ISDS was ill-conceived, digging into its historical roots, and reveals how through expansive interpretations of vague concepts in investment treaties, it is reshaping international law to unimaginable levels, benefiting multinationals and tycoons, and creating inequality in favor of foreign investors. It also teaches how ISDS can be used as a weapon of extortion against states —intimidating sovereigns and restricting their ability to regulate in the public interest— and intends to raise awareness about the chilling effect of ISDS claims on state decisions. In short, this well-written study poses a sharp criticism to ISDS, echoing the concerns expressed by many states, which one rarely finds nowadays amid the prolific pro-ISDS literature.