MIC’s Institutional Lessons from the DSM’s Collapse and the Equilibrium Between Investor Protection and State Sovereignty

Introduction

The Multilateral Investment Court (“MIC”) is proposed as a forum to adjudicate disputes between states and investors, consisting of a set of permanent judges elected by states. This adjudicatory system would replace Investor-State Dispute Settlement (“ISDS”), which uses arbitration as a mode of resolving such disputes. Proposals for the MIC have received significant hostility from international investors and scholars on investment law, with both quarters unanimous on its sole purpose as undermining arbitration as an integral component of the ISDS framework. Some have even argued that the move can be characterised as an attempt by losers to cartelise, for “transnational corporations always win investment arbitrations”. They consider MIC proposals to constitute bare exertions of state sovereignty, a collective act by ISDS losers to consolidate and target transnational corporations. Alongside such vociferous critiques of the MIC, states are proactively undermining investor rights by either prohibiting access to international fora altogether for purposes of dispute resolution, or by inserting contractual clauses mandating the absolute exhaustion of local remedies before an aggrieved investor petitions an international forum.

These portray two polarized segments of discourse and action surrounding investment dispute resolution. While some laissez-faire scholars have gone to the end of analogizing state desires for ISDS reform with the expropriation of all independent enterprise, some states have decided to leave the investor remediless when such an expropriation actually occurs. In a discourse characterized by vehement opposition to reform and a simultaneous state unwillingness to have an inch of their sovereign prerogatives undermined, this piece argues that an MIC characterized by the foundational principles of the World Trade Organization’s Dispute Settlement Mechanisms (“DSM”) strikes an ideal and popularly acceptable equilibrium between competing considerations of investor protection and state sovereignty.

In order to make this argument, firstly, I evaluate state responses towards present conditions of ISDS and the proposed MIC along with scholarly critiques thereof; secondly, I discern the principles of the DSM’s functioning that serve as institutional lessons for the proposed MIC; and thirdly, I address the critiques of the MIC that consider it either a bare assertion of state sovereignty or a step too far from ISDS.


State Responses and Scholarly Critiques of the ISDS and MIC

Contemporary defences of ISDS framework are premised either on hyper-focusing on individual case outcomes in order to establish that the system isn’t prejudiced in favour of investors, or circumventing discussion on the structural nature of ISDS by imputing responsibility of unfortunate case outcomes on shoddy drafting. Koeth, for example, argues that the failure of Phillip Morris’ claim against Australia’s decision to standardize cigarette packaging is testament to the non-biased nature of ISDS, while the American government also supports this assertion by alluding to its crystal-clear record of ISDS victories. Further, Saulino and Kallmer hold the view that the circumstantial desperation of states to obtain international investments caused the insertion of unwise modes of international arbitration within ISDS, indicating that the problems with ISDS have circumstantial instead of structural causes.

Both these arguments, however, fail to address the structural problems implicit in the ISDS framework, as perceived by the developing world. The mere possibility of a state winning a dispute via ISDS mechanisms is no longer a concern. Instead, the developing world is threatened by the barriers posed by the ISDS framework towards state capacity and welfarism. Libya, for example, was ordered by an arbitral tribunal to make a payment of $935 million for loss of profits to an international firm that barely suffered a financial dent. Similarly, Egypt faced an ISDS case effectively because it raised its minimum wage.

Given this set of systemic problems that the ISDS is characterized with, the MIC has been proposed as an alternative mechanism for addressing investment disputes. Instead of ad-hoc appointments of arbitral tribunals composed of corporate lawyers with double-hat conflicts of interest, the MIC would consist of a permanent set of judges elected by regional groups of its Plenary Body. This development did not, however, alleviate the developing world’s concerns with the ISDS. India announced that the existence of MIC would mean that it can prima facie be dragged to an international forum, which it considered an affront to its sovereignty. Born has critiqued such responses as constituting bare assertions of state sovereignty, considering it a form of expropriation of independent enterprise.

The present discourse on the MIC, therefore, is as fraught as its corresponding state action. The DSM, however, gives the ISDS a substantially competitive existential crisis. If ISDS is facing huge external unpopularity, Malmström argues that the DSM is being “killed from the inside”. In the following section, I analyse the principles and designs of the DSM that caused its collapse and the institutional lessons it presents for the MIC. 

DSM’s Collapse and Institutional Lessons for the MIC

Zwolankiewicz presents MIC as an institutional analogue of DSM, given UNCITRAL’s emphasis on MIC’s foundational principles of predictability, adjudicatory impartiality and institutional transparency. DSM was also founded with a similar aspiration of creating doctrinal consistency and decisional transparency for state-state trade disputes. The MIC’s underpinnings are similar, given its desire for consistency and transparency in decisions, along with adjudicatory impartiality. In order to resolve disputes, the WTO’s Dispute Settlement Understanding envisioned a two-tiered Dispute Settlement Body (“DSB”) and Appellate Body (“AB”). This mechanism has witnessed an absolute institutional collapse following American browbeating, with the Appellate Body having zero members at present.

DSM’s present moribund state, however, must not serve as any indication of the MIC’s destiny. DSM’s collapse doesn’t have structural roots and is predominantly a by-product of American hegemonic desires left dissatisfied in a well-functioning, transparent ecosystem. This is evident from scholarship preceding the solidification of the American attack on the WTO that identifies the DSM as a distinct “epistemic community”, a system of the rule of law instead of the rule of lawyers, a system of “representativeness, inclusiveness, and trust” and a “show of mutual self-restraint for the sake of the entire cooperative enterprise of the WTO”. American dissatisfaction with the WTO grew following unfavourable decisions and a general disdain for multilateralism. The DSM served as an easy platform for airing such dissatisfaction, given its institutional design of demanding consensus on all critical matters. Article IX.1 of the Marrakesh Agreement and Article 2.4 of the DSU mandate this consensus, which has been held hostage by the US by blocking any appointments to the DSM via withholding its consent. The necessary condition of unanimity for appointments has been admitted to be an inadvertent institutional flaw by drafters of the DSU and the Marrakesh Agreement, and scholars have floated alternatives of a four-fifth majority leading to DSB appointments in the absence of appointments by consensus. 

MIC has learnt its lessons from the DSM’s unanticipated crisis. While striving for unanimity was commended as a desirable principle during the Uruguay Rounds, MIC would be established with institutional safeguards that value multilateralism and preserve it by preventing absolute takeovers by bullies. Article 12.4 of the Draft Statute of the MIC proposes the formation of five regional groups that shall elect a quota of judges, all of whom shall be selected by a seven-member Screening Committee. While the politicization of appointments and states’ desire for representation therein is inevitable in an international forum, institutional frameworks must strive to remove the role that identities and affiliations play in decision-making. While the DSM Rules of Conduct mandate the disclosure of any conflicts of interest, Article 51.1 of the Draft Statute provides for a notice of challenge against a judge refusing recusal that must be addressed within 15 days of a complaint to the President. In order to avoid double-hat conflicts that are perceived to exist in ISDS, Article 13.5 of the MIC holds that judges are prohibited both from deciding matters that they have been priorly involved with, and involving themselves in any investment dispute following their retirement from the MIC. The principles of multilateralism, fairness and transparency, therefore, constitute the edifice of both the DSM and the MIC.

Apart from specific institutional lessons arising from DSM’s collapse, MIC also inherits the ethos of judicialization and commitment to social values that scholars attribute to the DSM. This ethos is formulated in opposition to what is considered the ISDS’s elite bastion of corporate lawyers acting as counsel in one dispute and arbitrator in another. On this basis, Pauwelyn argues that state opinion on ISDS and DSM is shaped by the fundamentally distinct characteristics of its members and the elite nature of the process, concluding that ISDS adjudicators belongs to Mars and its DSM counterparts to Venus. There are, therefore, significant institutional lessons to be learnt by the ISDS from the DSM, with the most important one being an abandonment of idealistic multilateralism in the form of inserting unanimity as a condition for institutional functioning. In the following section, I argue that an MIC that is characterized by the foundational principles of the DSM does not constitute a bare assertion of state sovereignty, and that critiques of this kind subordinate the developing world’s threatening perceptions towards ISDS.

MIC as a Bare Assertion of State Sovereignty?

MIC’s critiques arise from two segments: scholars such as Born and Brower, who consider any intervention in the present mode of ISDS a bare assertion of state sovereignty, and those such as Weiler and McRae, who consider the creation of the MIC with a dual judicialized structure a step too far. I address both these arguments in this section.

Born and Brower consider, inter alia, empirical evidence of the miniscule number of treaties that have ever had to invoke their ISDS clauses, along with similar evidence that concludes no evidence of partiality or conflicts of interest. The problem, as I have discussed above, is no longer solely the evidence. Matveev holds the position that the deterioration of discourse surrounding the ISDS has fundamentally impacted the legitimacy of the process, taking it to a stage where justice is not being seen to be done, even though it may actually have been done. Notions of state sovereignty acquire significance not due to ISDS’s structural opposition thereto, but due to infamous cases such as Al Kharafi or Philip Morris v. Australia. This is why the empirical claims presented by Bower may not dent the ISDS’s forthcoming demise. They simply no longer matter when its institutional legitimacy is being widely questioned. 

The second is the critique levelled by Weiler and McRae, which is essentially that a single appellate judicialized body that functions with a first instance ad-hoc ISDS tribunal shall better balance our competing considerations as opposed to a two-tier judicialized MIC. Disputes, they argue, shall inevitably become concentrated in the appellate body and investors deprived of a choice in the appointment of expert arbitrators even in the first instance. The legitimacy concerns created by ad-hocism at any stage, however, are irreconcilable with the presence of even a first-instance arbitral tribunal. The characterization of ISDS with the double-hat and its progressive dismantling via statutory exclusions is testament to the futility of sticking with an appellate MIC. Rejection of the two-tier MIC by India and Argentina constitutes the opposite end of the spectrum, portraying state sovereignty in a form that significantly undermines investor protection. The balance between these competing considerations requires a commitment against legislative lawlessness, especially against measures such as retrospective taxation or a company’s nationalization. A two-tier MIC creates a platform that inherits an ethos of judicialization and institutional legitimacy from the DSM, and assures the investor of a legitimate forum to address the state’s unjust expropriation. At the same time, it assures the state that the judges serving in the MIC have been duly elected by states themselves, have no prior links with the issue being addressed, and that the state may submit a notice for challenge if it senses something fishy. States having rigid stances towards any international adjudicatory exercise would ultimately be compelled to either have investment slowly withdrawn due to investors’ inability to keep up with the state’s expropriation, to continue throwing hollow warnings towards ISDS, or accept the MIC as a middle-ground. States, therefore, are better-off with the MIC than without it.

Conclusion

The MIC, therefore, is a step in the right direction and a step exactly as far as necessary. It guarantees the investor that they won’t suffer unjust expropriation at the hands of the state, and the state that its sovereign prerogatives and welfare commitments shall not be undermined by wanton orders to pay exorbitant sums, like they were in Al Kharafi or Philip Morris. Its two-tiered nature and institutional legitimacy inherited from the DSM also add epistemic value to its decisions, assuring aggrieved states and investors of the justice in directions to compensate another. The shift towards the MIC is moving progressively towards global consensus, striking equilibrium between the principles of state sovereignty and investor protection.


Kartik Kalra is a second year student in the B.A. LLB (Hons) course at National Law School of India University, Bangalore.


Image: Getty Images

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