Politicians attacking international arbitration are undermining the rule of law
On both sides of the Atlantic, political leaders are attacking the integrity of international arbitration as a mechanism for resolving disputes, especially between private parties and States.
Having represented sovereigns and private parties in international arbitrations globally for over three decades, I find this trend deeply concerning—not because I do not accept international arbitration’s imperfections, but because politicising mechanisms for the peaceful settlement of disputes undermines the rule of law.
President Biden, urged on by lawmakers from his party, has spearheaded a new narrative, claiming that dispute settlement mechanisms for resolving disputes between private parties and States are little more than trojan horses for elite corporate interests. He proposes excluding investor-state dispute settlement (ISDS)—a system conceived and implemented to minimize the influence of inter-State political and power dynamics from the resolution of private claims—from future trade deals, thereby depriving Americans investing abroad from impartial and independent arbitration tribunals to resolve disputes resulting from State action taken against them or their investments. Instead, injured investors would have to sue the government in the investment hosting State’s courts where neutrality could be compromised by notions of national interests.
In Europe, the European Commission has demanded that EU Member States abrogate treaties with other Member States, foreclosing EU investors from accessing international arbitration to resolve disputes against a Member State. Enigmatically, EU Member States will still be able to arbitrate with non-EU investors. The EU is also seeking termination of the Energy Charter Treaty, a multilateral agreement adopted to encourage energy sector investments in ex-Soviet bloc countries after the Cold War. Central to the treaty’s success in encouraging billions in cross-border energy investments is its requirement for treaty signatories to arbitrate disputes with investors from other treaty members. Once the EU and its Member States exit the treaty, energy sector investors will have to seek relief in the domestic courts of the countries in which they have invested, some of which have occasionally echoed the same type of nationalistic tendencies of the countries’ leaders. The chilling effect on much needed energy sector investments hardly calls for elaboration.
The essential political narrative is that international arbitration allows corporations to unjustifiably penalise governments for democratic regulatory action. US Senator Elizabeth Warren claims that ISDS allows “highly paid corporate lawyers” to “go back and forth between representing corporations one day and sitting in judgement the next”, annulling meaningful judicial independence. This skews the system in favour of corporate profiteering, and against the advancement of government policy imperatives.
These claims are largely unfounded. A study in the Journal of International Arbitration concludes that the statistics show that States have consistently won more disputes than private parties. Certainly, the damages States have been ordered to pay are far lower than the amounts claimed.
Similarly, a Columbia Journal of Transnational Law analysis concludes that claims such as Warren’s “have no discernible basis in reality.” Empirical data confirms that “investment treaties and arbitration benefit poor states, are even-handed, enhance transparency, allow states ample regulatory leeway, and promote the rule of law”.
What the public is not being told is that dismantling ISDS will drive-up protectionism and squeeze trade flows exactly when the global economy needs more, not less trade. The Biden administration’s own US International Trade Commission found in 2022 that ISDS boosts foreign investment into host economies by about 22 percent. Attacking ISDS will slash this dividend, and countries needing foreign investment will suffer.
Arbitration run amok
This doesn’t mean that disputes resolved by arbitrators do not go wrong. But when they do, the in-built corrective mechanisms of the international system in which arbitration takes place provide the necessary checks and balances. Albeit not a typical investor-State dispute, a recent arbitration receiving extensive media coverage illustrates the point.
In the so-called “Sulu Arbitration,” a Spanish arbitrator issued a US$15 billion award against Malaysia and in favour of Filipino nationals premised on the Philippines’ historical claim to the North Borneo region of Malaysia, today known as Sabah.
The claim was based on an 1878 treaty signed between two British colonial explorers and the lapsed Sultanate of Sulu, a remote island region in the Philippines. According to the heirs’ lawyers, this treaty functioned as a commercial lease agreement granting the British colonists exclusive rights over North Borneo in return for an annual fee to the Sulu.
Despite the treaty containing no clear clause on arbitration, the Sulu heirs approached the British Foreign Office to appoint an arbitrator, but it refused. Undaunted, the heirs asked the Spanish courts to appoint an arbitrator. Resting their arguments on tenuous Spanish colonial era sovereignty claims, they succeeded.
The Spanish arbitrator Gonzalo Stampa found that “the Sultanate of Sulu met all the criteria for statehood and sovereignty”. But this is completely wrong. Several historians have noted that the Sultanate of Sulu did not exert sovereign control over North Borneo. Indeed, the British colonists signed a different treaty in 1877 with the Sultan of Brunei for control of North Borneo for a higher annual payment. Diplomatic records suggest that neither sultanates fully controlled the region. So both treaties signified not a legitimate transfer of sovereignty, but a British colonial strategy to neutralise local opposition to British colonisation.
A lot can be said about Stampa’s flawed analysis of historical evidence, his bizarre legal analysis of the parties’ rights and obligations, his highly suspect procedural decisions, and ultimately of his exorbitant US$ 15 billion award against Malaysia. But whatever injustice could have resulted from Stampa’s award has been blocked for now thanks to checks and balances within the system of arbitration, which requires national courts to enforce arbitral awards based on a network of international treaties, including the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the 1966 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, both of which are a testament to how international cooperation and coordination can promote the pacific settlement of disputes.
In 2021, the Spanish Supreme Court which had originally appointed Stampa as the sole arbitrator withdrew his authority to arbitrate the case as Malaysia continued refusing to recognise the arbitration. Instead of complying, Stampa moved the arbitration to Paris where he issued his final award. The Prosecutor’s Office of Madrid even filed criminal charges against Stampa for “unqualified professional practice” – for which he could face up to three years in prison. After that, court verdicts in Paris and The Hague have consistently refused to enforce the award, with the Paris Court of Appeal’s landmark decision in June concluding that the 1878 treaty dispute resolution was ineffective.
The system is working
The international legal system, including the mechanisms of international arbitration, has evolved organically and for the most part successfully over decades. The bulk of evidence suggests that it works. Rather than attacking institutions that stand for the rule of law, I would urge politicians to focus on reforms that make the system even more robust. This is all the more important at a time when international law and its institutions and systems need to be given more relevance, instead of becoming the target of populist politics.
Arif Hyder Ali is Partner and Co-Chair of the International Arbitration Law Group at top ten global law firm Dechert LLP. He has been lead trial counsel in international investment and commercial arbitrations under all of the major international arbitral regimes, the governing laws of over 50 civil and common law jurisdictions and international law. Previously he served as Section Chief at the United Nations Compensation Commission, a subsidiary organ of the United Nations Security Council established to process loss and damage from Iraq’s invasion of Kuwait. He was also Senior Counsel at the World Intellectual Property Organization Arbitration and Mediation Center. Arif Ali is the lead author of the widely-used treatises “The International Arbitration Rulebook” (Kluwer 2019), and “International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice” (Kluwer 2021).
Photo by EKATERINA BOLOVTSOVA