Putting a Spotlight on the Arbitration Industry

Nick Buxton and Cecilia Olivet, Guest Bloggers

“There is little use in going to law with the devil while the court is held in hell.” These words from an unlikely source – Humphrey O’Sullivan, a 19th Century Irish schoolmaster  – became a widely used argument by multinational companies in the last decade as they justified the construction of an international arbitration system to decide state-investor disputes.

Agreeing with the questionable premise that national courts could not be expected to make unbiased decisions regarding investments by foreign parties, and believing that it was the only way to attract investment, governments worldwide signed 3000 international investment treaties over the last few decades. These treaties all relied on international tribunals such as the World Bank-hosted International Center for Settlement of Investment Disputes. With these treaties came a boom in cases and the emergence of a powerful new industry of arbitration lawyers that earn up to $1000 dollars an hour.

A new report by Transnational Institute (TNI) and Corporate European Observatory (CEO), Profiting from Injustice: How law firms, arbitrators and financiers are fuelling an investment arbitration boom, has decided to turn the spotlight on this hitherto secretive industry.

In doing so, it adds to the increasing number of challenges to the international investment arbitration’s rationale and justification. For the edifice of the entire international investment regime rests on the premise that the international tribunals are not “held in hell” and are models of fair, independent judgements. It also presupposes that the arbitrators appointed to decide state-investor disputes can be considered fair guardians and indeed guarantors of this system.

The report by TNI and CEO shows that the arbitration industry are far from neutral guardians, but rather highly active players, many with strong personal and commercial ties to multinational companies. Increasingly working with speculative funders, investment lawyers have not only actively encouraged an ever-growing number of corporate claims, but also sought to create the necessary legal loopholes to maximise cases. They have also actively fought against any substantial reforms of investment arbitration in academic circles and through direct political lobbying.

Among other findings, the report reveals that:

  • The legal and arbitration costs average over US$8 million per investor-state dispute, exceeding US$30 million in some cases.
  • Three top law firms – Freshfields (UK), White & Case (US) and King & Spalding (US) are the most active players – acting in 130 investment treaty cases in 2011 alone.
  • 15 arbitrators, nearly all men from Europe, the US or Canada, and referred by some as an “inner mafia”, have decided 55% of all known investment-treaty disputes.
  • Law firms with specialised arbitration departments regularly advise corporations to sue countries in crisis, most recently Greece and Libya
  • Investment lawyers have encouraged governments to sign investment treaties using language that maximises possibilities for litigation. They have then used these vaguely worded treaty provisions to increase the number of cases.
  • Arbitration law firms as well as elite arbitrators actively lobbied against attempts to reform investment agreements in the EU and US in the last four years.
  • Investment lawyers have a firm grip on academic discourse on investment law and arbitration,  controlling on average 74% of editorial boards of the key journals on investment law, and frequently failing to disclose the way they personally benefit from the system.
  • Speculative financing firms such as Juridica (UK), Burford (US) and Omni Bridgeway (NL) have already become an established and unregulated part of the international investment arbitration industry, further fuelling the boom in arbitrations

While the boom in investment litigation has created a lucrative industry for a few lawyers, the report shows that its costs are paid by taxpayers, including in countries where people do not even have access to basic services. The Philippine government spent US$58 million defending two cases against German airport operator Fraport; money that could have paid the salaries of 12,500 teachers for one year or vaccinated 3.8 million children against diseases such as TB, diphtheria, tetanus and polio.

Actions by a pro-corporate arbitration industry has also undermined necessary regulation as governments have been sued by corporations for health and environmental measures that have affected corporate profits. Argentina is the classic case, facing 40 lawsuits for its freeze on utility prices and currency devaluation undertaken at the time of severe economic crisis in 2001.  Meanwhile both Uruguay and Australia are currently fighting lawsuits by Philip Morris against their anti-smoking laws. Many more cases never even come to tribunal, as a threat of the case is usually enough to stop regulatory measures.

In every case, the only judgement considered by arbitrators is whether a corporate investment was
unfairly affected; the impact on peoples’ health or environment is usually not even debated. A
proposal by International Court of Justice Judge Bruno Simma in 2011 to give greater consideration
to international environmental and human rights law in investment arbitration was roundly rejected by
arbitration lawyers.

In every case, the only judgement considered by arbitrators is whether a corporate investment wasunfairly affected; the impact on peoples’ health or environment is usually not even debated. Aproposal by International Court of Justice Judge Bruno Simma in 2011 to give greater considerationto international environmental and human rights law in investment arbitration was roundly rejected byarbitration lawyers.

Yet there are signs that countries have started to realise the injustices and inconsistencies of international investment arbitration and have initiated a retreat from the system. In the Spring of 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 investment treaties and have withdrawn from ICSID. South Africa is engaged in a thorough overhaul of its investment policy and has just announced that it will neither enter into new investment agreements nor renew old ones due to expire.

The TNI report gives more ammunition to those arguing for a fundamental rethinking of state-investor disputes in order to prioritize  human rights over corporate profits. When it comes to decisions that affect human lives, and to our desire for a clean environment, just working conditions and good health, the only hell is a court that considers these irrelevant.

Nick Buxton is Communications Manager for Transnational Institute and is currently based in California. Cecilia Olivet is project coordinator with the Economic Justice Programme at Transnational Institute.

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