Commentary: A case for an international investment court

By Gus Van Harten
Assistant Professor, Osgoode Hall Law School, York University
7 August 2008

I shall lay out an argument for an international investment court, not because I wish to associate myself with grandiose schemes for international reform, but because I see it as the most pragmatic and appropriate way to fix serious problems in the existing system of investment treaty arbitration.

Investment treaty arbitration differs from other forms of international arbitration

There are two initial points to keep in mind. The first is that investment treaty arbitration is unlike other forms of international adjudication in that it is a public law system. This is not to say that investment treaty arbitration is precisely the same as domestic public law. But it does differ from other forms of adjudication that are reciprocal (i.e., in which either of the disputing parties can bring a claim against the other) such as conventional international adjudication between states and international commercial arbitration between private parties.

Investment treaty arbitration is different in that only one class of parties, the investor, brings the claims and only one class of parties, the state (acting as sovereign), is punished for breach of treaty. Moreover, the disputes in question arise from the regulatory relationship between individual investors and the state. The system reviews and disciplines legislators, judges, and other public officials in order to protect business. It does not regulate business in order to protect the public. It is in this sense more akin to domestic systems of constitutional or administrative law than to international adjudication as normally understood.

Moreover, investment treaty arbitration goes beyond other forms of international adjudication that resemble domestic public law – especially in the human rights field – because investment treaties remove the duty of investors to use domestic remedies before bringing a claim, and because they allow for damages to be awarded in favour of investors that are enforceable by domestic courts around the world, while barring the courts from reviewing any legal errors made by the arbitrators.

Investment treaty arbitration lacks basic requirements of openness and independence

This leads to the second item to keep in mind. In establishing such an exceptionally powerful system of regulatory adjudication, investment treaties should have been written to ensure a very high level of openness and independence in the adjudicative process. For whatever reason, they were not so written. Instead, the treaties import the model of private arbitration into the public sphere, creating numerous problems of which two are especially serious.

The first is that in many instances the arbitrations can be kept secret at the option of the disputing parties. This may be appropriate in private law or even in inter-state arbitration. But it simply does not square with principles of democratic accountability in public law adjudication, where fundamental choices are made about the lawfulness of sovereign decisions and the allocation of public funds.

Linked to this is the issue of independence. One does not have a properly independent judicial body where the adjudicative process is closed to public scrutiny. Secrecy is therefore the first nail in the coffin of judicial independence under the current system. Another nail, less widely recognized, relates to security of tenure.

In public law, judges are appointed for a set term – typically for life or until a set retirement age – so as to insulate them from inappropriate influences that may be brought to bear by powerful forces in government or the private sector. Security of tenure does not guarantee judicial independence, but it is long recognized as a vital prerequisite.

Arbitrators do not have tenure, nor are they subject to other objective guarantees of judicial independence (such as prohibitions on outside remunerative activity). Instead, arbitrators are appointed on a case-by-case basis. Again, this may not pose any problem in private law or in inter-state adjudication. But in public law, where only one class of parties brings the claims, a system of case-by-case appointment creates an unfortunate perception that arbitrators may decide cases and interpret the law in ways that favour investors, so as to encourage claims. As an informed observer can readily see, more claims means more business for the arbitration industry. For the outsider, it is troubling to see how, in numerous cases, the arbitrators have interpreted the treaties creatively in favour of investors and to the detriment of the regulatory position of states.

Investment treaty arbitration is thus a unique form of international adjudication that protects a small class of persons, mainly large firms, and that is structurally slanted in favour of those persons. By design, then, the system disadvantages those who stand to benefit from business regulation that is foreclosed by arbitration awards, or from other public initiatives that are made too costly or fiscally uncertain by the threat of investor claims.

I doubt that this type of system would ever fly in a domestic context as a means to resolve regulatory disputes between business and the state. It would be outlandish for a claim of ‘unfair regulation’ brought by a company against a government to be decided by an ad hoc tribunal, the president of which was appointed by the national chamber of commerce. But this is the effective state of affairs under the many investment treaties that assign appointing authority to the International Chamber of Commerce, for example.

An international investment court is the best solution

What can be done? The best option, without falling back on domestic courts and abandoning the use of international adjudication to protect investors, is an international investment court. This need not be a grandiose thing and it need not depend on agreement by all. Rather, groups of like-minded states might agree to establish an international judicial body to replace the role of private arbitrators in the existing system by providing for claims under the states’ existing treaties to be channeled through the new entity. They could then appoint an appropriate roster of judges to the court for a set term and direct the judges to develop rules for the court according to well-known principles of judicial decision-making.

Such a court would enable greater fairness and accountability in this tremendously powerful arm of the international legal system. It is thus desirable for reasons of public interest. But investors would also benefit in an important way. Most investors will never bring a claim under an investment treaty. Claims are costly and best regarded as a last resort. As such, the system’s main benefit for investors is the deterrence of regulatory abuse by states. An international court, properly established, would deliver this benefit on a much more credible and lasting basis than the current system.