International Arbitration

There's an interesting long-form article in the Guardian about international arbitration and corporate-sovereign disputes. The weight of it is (unsurprisingly) that provisions in trade/foreign investment treaties that provide for Investor-State Dispute Settlement are a Bad Thing, in that they subvert local democratic decision making, and are a way for foreign multi-nationals to exploit under-developed countries.

But on reading the examples cited in the article, it's hard to muster a huge amount of sympathy for this view:

The suit was filed in 2009 by a Canadian company, Pacific Rim – later bought by an Australian mining firm, OceanaGold – which said it had been encouraged by the government of El Salvador to spend “tens of millions of dollars to undertake mineral exploration activities”. But, the company alleged that when valuable deposits of gold and silver were discovered, the government, for political reasons, withheld the permits it needed to begin digging...

In 2008, Vattenfall was granted a water permit for its Moorburg project, but, in response to local pressure, local authorities imposed strict environmental conditions to limit the utility’s water usage and its impact on fish... the environmental conditions placed on its permit were so severe that they made the plant uneconomical and constituted acts of indirect expropriation...

In 2004, South Africa’s new, post-apartheid Mineral and Petroleum Resources Development Act (MPRDA) came into force... The new system terminated all previously held mining rights, and required companies to reapply for licences to continue their operations. It also instituted a mandatory 26% ownership stake in the country’s mining companies for black South Africans...

In 2010, Bolivia’s president, Evo Morales, nationalised the country’s largest energy provider, Empresa Eléctrica Guaracachi. The UK power investor Rurelec, which indirectly held a 50.001% stake in the company, took Bolivia to the permanent court of arbitration in the Hague demanding $100m in compensation. Last year, Bolivia was ordered to pay Rurelec $35m...

There's a common thread in all the above cases: Governments taking political decisions that are in clear breach of the commercial obligations they agreed with the companies. The principle that Governments should not be allowed to break their own laws is a well-established one (it's arguably the main point of Magna Carta). If a Government does break its own laws, then there needs to be the ability to get redress. In the UK, that approach would be by way of Judicial Review, which has the power to overturn actions of the Government on grounds (among others) of illegality. It's worth noting that, of the examples listed above, Vattenfall also won their case in Germany's domestic courts.

But companies that are looking to invest in countries like Bolivia, South Africa or El Salvador are less likely to be comforted by the option of seeking redress in national courts. This is fairly understandable and is why investor and trade treaties routinely contain a provision that an investor company has the option of appealing to a neutral body if its rights are infringed by the sovereign state. Why should this be so controversial? This is the line of argument often used:

“What was concerning for us was that you could have an international arbitration – three individuals, making a decision – on what was in effect a legislative programme in South Africa that had been arrived at democratically, and that somehow this arbitration panel could potentially call this into question,”

But of course the arbitration panel have no right to call the law into question. Their power extends, to the extent that the new law breaches existing commercial obligations, to requiring the Government to compensate their counterparts. Expropriation without compensation is theft, and we generally have a poor opinion of people who steal.

If there is evidence that the international arbitration tribunals are corrupt, or that the decisions they reach are fundamentally legally flawed, then I would agree that there is a big problem. If the complaint is that Governments are finding that their freedom to break commercial contracts and expropriate private property is being corralled, then I would tend to think that is basically a good thing.