Who Benefits? A Deep Dive into the Incestuous World of ISDS Arbitrations

For those who are troubled by several far-reaching mega investments treaties such as the TPP, TTIP and CETA which are in various stages of being ratified by the treaty member countries, their concerns are many and all legitimate. One such concern arises out of the controversies surrounding the Investor-State Dispute Settlement (ISDS) mechanism, an arbitration system for disputes between foreign investors and states.

If, based on what you already know, the stench of fishy smell gives you the feeling that there is something inherently not right about the arbitration regime, your intuition has served you well. However, there is more, much more, than meets the eyes.

What you are about to find out will make your jaw hit the keyboard and cry out loud why the f*** do we let the citizens of a democratic country with a mature legal system get sucked into this.

Cui Bono?

Before diving into the ecosystem of the arbitration system itself, just who benefits from the system, you may ask?

Instead of answering that question directly, let’s see who does not benefit from ISDS claims:

  • Not the governments/taxpayers – it is a one way system. Just like a farmer who got drafted into the king’s army on an imperial conquest in days past, or the 1% who join the modern day volunteer armed forces to pay off their student loans, the best you can hope for from the tour of duty is coming back home to the farm with all four limbs intact and not suffer from too severe a case of PTSD.
  • Not the health, environmental, labor or other civil society organizations, since they have no legal standing in the ISDS courts.
  • Not the provinces/states or municipal governments, since they also have no legal standing. Besides, remember, only corporations can sue governments; not the other way around.
  • Not small and medium enterprises – the legal costs are simply out of their leagues, as we shall explore below.

If, by process of elimination, you come to the conclusion to this seemingly rhetorical question that the international corporations and the law firms are the primary and sole benefactors, then you are pretty close, except for one hidden aspect.

If you’re resigned to the fact that the cost of justice is never cheap and lawyers are always expensive, but take comfort in the assumption that the international trade arbitration system is set up in the same fair manner as the way you expect the court systems are set up in democratic countries with a mature legal system, then you are in for a rude shock.

Like an iceberg, a totally rigged trade arbitration ecosystem which has evolved to supply to – as well as create the demand for – international arbitrations, is submerged out of view below the surface.

Partly due to the fact that Joe Six-pack would immediately glaze over this yawn-inducing subject of international arbitration in favor of triple clicking to the nth degree of details on the Jenner metamorphosis, a more plausible reason for the ISDS regime lurking well below the surface of public awareness is that it is that way by design. For if the dirty laundry of this secret system ever gets fully aired into mainstream awareness, the pitchforks would very quickly put an end to the nonsense.

A recent research paper – recent only because I managed to find it only recently; although the findings are completely applicable if not more so now than when it got published – shines the spotlight on the international arbitration ecosystem composed of international law firms, arbitrators, governmental trade negotiators and investment funds, detailing the chameleon characteristics of the actors and incestuous relationships among them. Profiting from injustice – How law firms, arbitrators and financiers are fuelling an investment arbitration boom (PDF link) by Transnational Institute, a 76-page report which is well worth a read in its entirety for those wishing a deep dive into this subject. For the time constrained, here’s an abbreviated summary.

Before looking at the causes, let’s look at the end results from the dramatic growth in ISDS claims.

ISDS Claim Proliferation

In 1996, a cumulative total of 38 investor-state disputes officially existed arising out of hundreds if not thousands of bilateral or multilateral trade agreements. In 2011, there were 450 known cases. The operative qualifier is ‘known’, as most arbitration forums are subject to confidentiality, so the actual number of cases is likely much, much higher.

Dollar-figure-wise, in 2011, 151 arbitration cases involved costs of at least $100 million each. As the claims continue to escalate, billion dollar claims don’t even stand out in recent years.

Beside the compensations claimed, the cost of arbitration continues to spiral out of control. The OECD found that legal and arbitration costs average over $8 million per case, exceeding $30 million in some cases.

How much money is that for a country of moderate means? In its defense against two ISDS cases against German airport operator Fraport, the government of the Philippines spent US$ 58 million. That’s the equivalent of the salaries of 12,500 teachers for one year, or vaccination for 3.8 million children against diseases such as TB, diphtheria, tetanus and polio.

What’s worse? Tribunals most frequently require parties to share tribunal and administrative costs equally and absorb their own legal fees. This means that taxpayers still end up forking out millions in legal fees even if their government manages to win.

Mutation and Carpet Bombing

From its original stated intent of protecting investors from corrupt governments seizing their assets such as factories, the nature of the ISDS claims have morphed entirely. Multinationals are now using it liberally to go after public legislation threatening their profits, including tax measures, fiscal policies, bans on harmful chemicals, bans on mining, requirements for environmental impact assessments, and regulations relating to hazardous waste, etc.

In a word, it has turned into a free for all.

“Investment treaty arbitration is an important legal and institutional piece of the neoliberal puzzle because it imposes exceptionally powerful legal and economic constraints on governments and, by extension, on democratic choice, in order to protect from regulation the assets of multinational firms.” – Professor Gus van Harten, Osgoode Hall Law School, Toronto

Here’s a sample of the emblematic investor-state disputes:

  • Tobacco giant Philip Morris suing Australia and Uruguay over their anti-smoking laws.
  • Energy firm Vattenfall filing multi-billion claims aginst Germany – twice – over its environment protection laws.
  • Italian investors suing South Africa over laws to redress some of the injustices of the Apartheid regime.
  • Investors filing over 40 lawsuits against Argentina for its emergency measures during its 2001-2002 financial crisis.

Multinationals are no longer using ISDS claims as a last resort against government enacting on legislation affecting their businesses. Increasingly, these claims are used as pre-emptive strikes and a political weapon in a wider war of attrition against states.

Under the threat of huge damage claims, to be decided in a private court genetically wired in favor of the claimants, the so-called ‘regulatory chill’ more often than not leads to proposed or enacted laws being abandoned or severely watered down.

Canada, for example, had put anti-tobacco laws and a proposal to set up a province-run (Ontario) auto insurance plan on the shelf indefinitely in the wake of potential lawsuits from the respective industries.

Five years after NAFTA’s investor-to-state provisions came into force, a former Canadian government official told a journalist:

“I’ve seen the letters from the New York and DC law firms coming up to the Canadian government on virtually every new environmental regulation and proposition in the last five years. They involved dry-cleaning chemicals, pharmaceuticals, pesticides, patent law. Virtually all of the new initiatives were targeted and most of them never saw the light of day” (link)

Now let’s take a look at the shadowy ecosystem of the international investment arbitration industry.

The Inner Circle

The international investment arbitration industry is dominated by a small and tight-knitted Northern hemisphere-based community of law firms and elite arbitrators. Of the 25 listed in the report (p. 20), three standouts include Freshfields (UK), White & Case (US) and King & Spalding (US). Freshfields alone claims to have acted in more than 165 investor-state disputes.

Just 15 arbitrators, nearly all from Europe, the US or Canada, have decided 55% of all known ISDS cases.

Arbitrators: Ambulance Chasers and Arsonists

If someone falls on the sidewalk in front of your property and sues you for negligence and damages, and you find out that the judge presiding over your case also makes his living representing accident liability claimants, what level of confidence would you have in your court system?

Elite trade arbitration law firms charge as much as $1000 per hour per lawyer handling an ISDS case. These cases typically employ an army of lawyers and drag out over years. Little wonder there is zero incentive to open and close cases quickly.

Alarmingly, this small group of lawyers, referred to by some as an ‘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.

Just think of the jaw-dropping conflict of interest this incestuous arrangement creates:

  • The more creative and expansive the interpretation of the rules you make as an arbitrator in one case, the more likely you are to be retained as counsel in future cases.
  • Expansive and investor-friendly interpretations of trade rules pave the way for even more challenges against the state, and more business for the law firms.

Buying influence over decision makers is nothing new. Those who ‘talk to god’ command premium dollars for the privilege of providing you ‘a communication channel’ directly into god’s ears. Imagine the advantage you have if you get to even play god sometimes.

Professor Gus Van Harten, Osgoode Hall Law School, Toronto, offers a more appropriate analogy:

Investment arbitration lawyers are not just ambulance chasing. They are also creating the accidents because, doubling as arbitrators, they often interpret the treaties very broadly. So it’s a bit like ambulance chasing after your friend has put banana peels on the road.

Arguably, few industries on earth enjoy a business model better than the trade arbitration industry, not even the drug cartels. To wit:

  • You have defendants with practically bottomless pockets to pay lawyer fees and compensations.
  • There is no cap on how long the case should take or how much to give out as compensations.
  • You get to be the judge and set rules.
  • You get to be the counsel and exploit the same rules you just set.
  • You get to talk to god; you sometimes actually play god.
  • You are not accountable to the citizens involved in the defending country.
  • You are not accountable for your professional conduct; the cottage industry is not even self regulated.

Pinching himself to make sure he is not living in a dream world, here’s a reflection on a business model made in heaven by Juan Fernandez-Armesto, an insider and arbitrator from Spain:

When I wake up at night and think about arbitration, it never ceases to amaze me that sovereign states have agreed to investment arbitration at all […] Three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.

Revolving Doors and Tentacles: the Full Spectrum Dominance

The revolving door from being public officials to lobbyists and law firm partners resulting in complete regulatory capture is nothing new. Several of the NAFTA ISDS chapter negotiators and advisors, including Daniel Price who negotiated on the US side, Jan Paulsson and King & Spalding’s Guillermo Alvarez Aguilar who both advised the Mexican government, led companies in suing the three signatory states with the ink of the signed treaty barely dry.

As government trade reps and lobbyists, they get to Trojan-horse intentionally vague rules into the treaties, go through the revolving door and get paid handsomely for (1) advising the state on these rules, (2) advising corporations, (3) representing the firms to sue states via the vague rules, and (4) play god on said rules.

The arbitrators and their law firms are also extending their dominance in the academic realm. Much of the writing is done by lawyers and arbitrators who make money when companies sue states under investment treaties. The same report found that of the 51 books and articles on the subject, more than half were written or co-written or edited by investment lawyers and arbitrators. The three existing volumes of the Yearbook on International Investment Law and Policy contains 50 texts, of which nearly half were (co-)written by same.

The same report also found that the editorial direction is set and content of important journals in this field are also written mostly by arbitrators or their assistance. In some cases all of the major journals’ editorial board members are people who earned income as arbitrators, experts, counsel or from institution that administer arbitrations. (full list on p.66)

Imagine that half of all scientific writing on public health was written by pharmaceutical companies. Or imagine that oil companies took over the editorial boards of environmental law journals, directing their tone and position.

The full spectrum domination in the academic field virtually ensures a mono-culture of academic thinking in their favor and an absence of dissenting voices challenging the status quo.

incestuous-world-of-ISDS-arbitratorsThe incestuous relationship of arbitrators in the ISDS arbitration industry (source: subject report)

The 3rd Party Funder Behind Your Spouse’s Divorce Claim

As if the situation is not bad enough, now enters another party which further muddies the water.

Smelling blood and sensing excellent pot odds and potentially staggering returns, investment firms are jumping in on the act, offering to front the astronomical legal fees in exchange for a share of the spoils – typically 20 to 50% of the payouts, if the case is won.

Image you are going through a nasty divorce and found out that someone else is funding your spouse against you in exchange for a portion of the payout in case you lose. Welcome to the innovative financial world of third party funding.

By funding lawsuits that might otherwise settle quickly or die altogether, third party funding allows a corporate fighter jet pilot to ‘fire and forget’, knowing there is no downside to launching a claim. The removal of the only deterrent to a war of attrition is guaranteed to fuel even more arbitrations with these new kids in town.

What Can Be Done

The report offers several measures which would marginally mitigate the out-of-control malignant growth known as ISDS, including:

  • Investment disputes get presided by independent and transparent adjudicative bodies.
  • Tougher conflict of interest regulations including a cooling-off period barring an arbitrator from becoming counsel or an expert witness.
  • A cap on lawyer and arbitrator costs.
  • Greater clarity on current set of vague laws.

The author of this post goes a bit further, and contends that ISDS has no place in any investment or trade treaty in which the member countries have competent and mature legal systems. There should not be a parallel court system reserved for foreign corporations and foreign corporations only, at the expense of citizens of a democratic state.

Alfred de Zayas, the UN’s Independent Expert on the promotion of democratic and equitable international order, sums it up best:

“The ISDS cannot be reformed. It must be abolished because it undermines fundamental principles of the UN, state sovereignty, democracy and the rule of law. “

Investor State Dispute Settlement (ISDS)

This article is part of the Investor State Dispute Settlement (ISDS) in-depth topic. Get a crash course and read the latest developments on this topic.

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