Profiting from Injustice: challenging the investment arbitration industry

Corporations have been granted the exclusive right to sue states (states cannot sue corporations) at secretive international tribunals for action deemed to unfairly affect investors' profits.

While worldwide attention was centred recently on the World Economic Forum in Davos, the concurrent biannual Summit of the Heads of State from Latin America, the Caribbean, and the European Union went almost unnoticed. Yet, the CELAC-EU Summit, which took place in Chile 26-27 January, deserves attention for a controversy that erupted around investment issues, notably the proposed EU wording for the final declaration in support of providing foreign investors legal certainty.

What the EU meant by this was the need to protect investors with international investment agreements. Several Latin American countries contested this premise. This would have been unthinkable some years back when the dominant discourse dictated that signing Bilateral Investment Treaties (BITs) was a necessary condition to attracting investment. However, today, there is a growing unease among Latin American governments with the international ‘rules of the game’ for foreign investment. They have started to reject the notion that BITs promote development and, instead, have come to see them as tools that can potentially undermine their development objectives.

This change of heart has taken place as states have become the target of multi-million dollar international lawsuits by corporations for measures that, at home, were considered part of the government’s duty to protect and improve the lives of its citizens.

Litigation gold rush 

In 2009, the government of Uruguay, following recommendations from the World Health Organization, increased the size of health warnings on cigarettes packages. A year later, it was sued for US$2 billion by tobacco giant Philip Morris which claimed Uruguay had expropriated its trademark. Back in 2000, when Argentina was in a deep economic crisis, the government eased people's hardship by freezing electricity and water tariffs. It has since been battling over 40 law suits demanding multi-million dollar compensations. After an Ecuadorian court ordered Chevron to pay US$18 billion in damages and clean up for oil-drilling-related contamination in the Amazonian rainforest, Chevron counter-sued Ecuador arguing that the government breached its investment treaty with the US by allowing the legal case to continue. 

And these are only a few examples. Latin American countries have been taken to international courts at least 153 times, 34% of the total number of known cases. Eastern Europe, Africa, and Asia are the targets in most of the other cases. What we have seen in the last two decades is a litigation gold rush. While by 1991, only 24 investor-state disputes had been recorded, by 2011 there were 450 known cases. As most arbitration forums take place in secret, the actual number is likely to be much higher.

The arbitration industry 

The door was opened for these lawsuits when governments, and not just in Latin America, signed numerous Bilateral Investment Treaties (BITs). Over 3000 investment treaties are in place today. Almost no-one warned of the small print in the agreements. This included the granting to corporations of very broad and ill-defined protection for their investments as well as the exclusive right for corporations to sue states (states cannot sue corporations) at secretive international tribunals for actions deemed to unfairly affect investors’ profits. 

Amidst the flurry of treaty-signing, few states paused to consider the negative implications for public health, the environment, and human rights that would result from governments putting their regulatory powers in a legal straitjacket. Neither, it seems, did they grasp the potential financial burden for cash-strapped states, where legal and arbitration costs average over US$8 million per dispute, and in some cases exceed US$30 million. 

Multinational corporations have not been the only ones to benefit from this uneven playing field. A recent report by research and campaign groups Corporate Europe Observatory and the Transnational Institute, shows that Investment arbitration has also become a lucrative industry for a small club of international law firms and arbitrators that fuel the investment arbitration boom at the expense of taxpayers’ money. The report Profiting from Injustice finds that three law firms from the UK and US, and 15 elite arbitrators mainly from the North, dominate the arbitration industry and reap substantial financial benefits from the international investment regime. 

This small-knit community of elite arbitrators promise to act as neutral judges in investment disputes, despite their close links with multinational corporations and their pro-business outlook of the world. The evidence shows that they use their influence to promote investor-friendly rules, and lobby against reform. In 2011, many arbitrators voiced their opposition to a proposal by International Court of Justice Judge Bruno Simma to give greater consideration to international environmental and human rights law in investment arbitration. 

Greece again

Meanwhile, a small number of law firms, where investment lawyers charge fees of up to US$1000 an hour, encourage companies to sue governments. A recent example is when law firms alerted investors to the possibility of sueing crisis-affected Greece. The legal bills will be added to the already crushing debt repayments that the Greek people are shouldering.

Given the high arbitration costs and the constraints to legislate in the public interest, it is no wonder that countries increasingly question the current investment arbitration regime. The retreat from this system goes beyond Latin America. Since 2011, the Australian government no longer includes investor-state dispute settlement provisions in its trade agreements. In 2012, South Africa terminated its investment treaty with Belgium. These governments are paving the way for a wholesale reform of the investment arbitration system.

 

Cecilia Olivet and Pia Eberhardt are the co-authors of the report Profiting from Injustice. How law firms, arbitrators and financiers are fuelling an investment arbitration boom, Brussels/Amsterdam 2012.



About the authors

Pia Eberhardt is a researcher and campaigner with the Brussels-based campaign group Corporate Europe Observatory. 

Cecilia Olivet is project coordinator with the Economic Justice Programme at the Transnational Institute.