Le Monde Diplomatique | 1 mars 2024

The lucrative world of international arbitration

Vincent Arpoulet & Meriem Laribi

International investment agreements enable corporations to sue foreign governments for loss of profits. The sums they demand can be so huge that even the threat of a claim is enough to make governments cave in.

Rafael Correa, who became Ecuador’s president (2007-17) during a spike in oil prices, tried to impose a windfall tax by increasing the state’s share of oil revenue over a given threshold from 50% to 99%. Parliament forced him to reduce this to 80%, which was still much more than Perenco, the multinational that exploits the country’s reserves, was willing to accept. Perenco called it ’indirect expropriation’ and brought a case before the International Centre for Settlement of Investment Disputes (ICSID), a tribunal which is part of the World Bank and a key body in international arbitration (1).

Perenco’s parent company is registered in the Bahamas but the group asserted that, as its headquarters were nonetheless in Paris, a 1994 bilateral investment treaty (BIT) between Ecuador and France applied. It demanded $1.42bn in compensation, equivalent to 2.27% of Ecuador’s GDP in 2008. Correa denounced the process and withdrew his country from ICSID’s jurisdiction. Article 422 of Ecuador’s constitution, which he introduced in 2008 (an electoral promise), stipulates that it is prohibited for the Ecuadorean state to cede its sovereign jurisdiction to international arbitration bodies.

He also initiated a long process of reviewing BITs, which led to a series of withdrawals, including from the agreement signed between Paris and Quito, which took place in 2017. But a ’survival clause’ embedded in BITs states that the dispute settlement mechanism between investors and states (ISDS, investor-state dispute settlements) remains in force for ten to 20 years after a party withdraws, 15 years in the case of the France-Ecuador BIT. So in 2021 Perenco prevailed. Under conservative president Guillermo Lasso (2021-23) Ecuador rejoined ICSID, which imposed a $400m fine, and Lasso paid up.

Perenco’s legal action against Ecuador is just one example among hundreds in which states see private interests ride rough-shod over their sovereignty. The Swedish electricity supplier Vattenfall demanded $1.4bn from Germany in 2009 because Hamburg had made its activities ’unprofitable’ with a ban on a coal-fired power station that had polluted the Elbe. The US company Próspera demanded $10.8bn from Honduras (two-thirds of its national budget) in 2022 for repealing laws enabling the creation of an autonomous city on the island of Roatán. And Argentina was ordered to pay more than $400m in 2015, following claims from several companies, including SUEZ and Vivendi, for freezing water and electricity tariffs after the financial crisis of 2001-02.

’Arbitrations remain undisclosed’

At ICSID, one of 60 arbitration bodies recognised by the UN, the number of cases instigated by multinationals has doubled in a decade, totalling 998 since the institution’s creation in 1972 (2). To date, 132 countries have faced one or more ISDS claims, according to the UN Conference on Trade and Development (UNCTAD), which specifies, ’As some arbitrations can be kept fully confidential, the actual number of disputes filed is likely to be higher’ (3)..

At the end of the second world war, the newly formed United Nations considered the development of trade relations between states to be critical to lasting peace, as long as rules were established. Lex mercatoria - the merchant law shaped by custom and usage since the middle ages - was replaced by modern international commercial law with the creation of the UN Commission on International Trade Law (UNCITRAL) in 1966. The increasing influence of the private sector in this new legal architecture spawned a multitude of bilateral free trade agreements, and 93% of them included an ISDS mechanism (4), providing for recourse to arbitration to resolve disputes. Proponents of this private justice system beyond any state influence believe it guarantees an impartiality that national courts cannot.

The point of the early bilateral investment treaties signed during the decolonisation process of the 1960s was to protect Western investors. Colonial continuity was ensured: countries of the South remained subject to the predation of multinationals. Thirty years later, these treaties proliferated in the North when hardline conservatives decreed, after the USSR’s collapse, that there was no alternative to neoliberal capitalism. This inaugurated a new form of colonialism: the hold of corporations over most countries of the world. BITs conveniently include a set of rather nebulous clauses left open to multiple interpretations, such as the prohibition of ’direct or indirect expropriation’ and ’fair and equitable treatment’, a stipulation according to which national legislations must not infringe international investment standards. Thus, the goal is not only to restrict the South’s room for manoeuvre to the benefit of the North, but to break the very principle of state sovereignty.

In this system, only foreign investors can bring cases against states; the reverse is not permitted. Everything takes place behind closed doors and can drag on for years. Judgments, which often go against states, are settled with public money. Yet the astronomical sums that multinationals claim often bear no relation to their initial investments, as demonstrated by the case Nasser al-Kharafi pursued against Libya from 2006. In 2013 the arbitration process resulted in Libya being ordered to pay nearly $1bn to the Al-Kharafi group, a nice little earner intended to compensate for a hypothetical loss of profit though the group had only invested $5m in a tourism project that never got off the ground (5).

Lucrative market attracts investors

When Tripoli refused to pay up, the Al-Kharafi group attempted to seize Libyan assets in the form of funds in Société Générale accounts, the FNAC building in Ternes, Paris, and the presidential plane in Perpignan. At this point, the Al-Kharafi bid failed, notably because most of Libya’s assets abroad had been frozen since 2011 and sovereign funds are protected in France (6). But the episode shows that when a state tries to resist, it may face considerable international pressure. The arbitration market is so lucrative that it attracts investors who know how much money the system can pay out.

The market is lucrative for members of arbitral panels, too. At ICSID, decisions can be taken by a single arbitrator if both parties agree, or a three-person panel, one appointed by the state, another by the company, and a third, the president, chosen by the other two members. No formal qualification is required, though ICSID specifies that panel members must be people of ’high moral character and recognised competence in the fields of law, commerce, industry or finance, who may be relied upon to exercise independent judgment’ (7).

Most arbitrators are former judges, commercial lawyers who have built careers in arbitration, or corporate executives. They are not required to be versed in international law or to take account of the constitution and laws of the country which is party to the dispute. This parallel justice system places the fate of states in the hands of financially interested individuals. Arbitrators’ remuneration varies case by case and is impossible to estimate. Internal sources mention fees of several thousand dollars a day. ’They have no sovereign legitimacy and are not accountable to the public. The decisions they make can be inconsistent between one another and cannot be appealed,’ notes one website that scrutinises ISDS (8).

Arbitrators are frequently at the centre of opaque conflicts of interest. This was true of lawyer Gabrielle Kaufmann-Kohler, appointed to arbitrate in disputes between Vivendi and SUEZ and the Argentine state. Kaufmann-Kohler had been appointed as a director of Swiss bank UBS, a major shareholder in both companies, which she omitted to declare to the arbitration tribunal. Argentina tried to challenge her decision, which found in favour of Vivendi and SUEZ, and to bring the conflict of interest to the attention of various bodies, to no avail. Article 58 of the ICSID charter stipulates that any challenge to an arbitrator must be approved not by an impartial third party, but by the two other panel members, who generally come from the same circles.

Approval by panel members needed

This is often the case with political figures who are supposed to represent the interests of states. Ecuador’s foreign minister Édgar Terán (1984-87) ratified the ICSID treaty in 1986; years later, the IBM group hired his legal firm, Terán & Terán, to represent it against Ecuador before the ICSID (9).

In France, Agnès Pannier-Runacher, whose father and minor children have direct interests in Perenco, was the junior minister in charge of industry at the time of the decision against Ecuador. She was later promoted to minister for energy transition, a position she held until January 2024. The only safeguard in place was a decree from November 2022 preventing her from dealing with issues relating to Perenco.

According to UNCTAD data, from 1987 to 2021, 39% of disputes were dismissed on their merits and no penalty against states awarded (though they received no financial compensation), while panels found in favour of companies in 56% of cases (10). Among concluded cases, 28% of decisions were in favour of companies, and 20% were classed as ’settled’, which means an agreement was found. Yet, the threat of arbitration often leads states to make concessions on their legitimate interests or to pay fines in advance to avoid the risk of being stripped of assets following arbitration. In the case Vattenfall brought against Germany, Hamburg’s environmental authority had to drop its demands. A minority of cases are either abandoned or concluded without a decision.

Modern international commercial law, which was supposed to smooth relations in the postwar world, has ended up favouring a form of predatory practice to the advantage of the private sector, which has a poor record on environmental, social and health issues. According to British journalist Matt Kennard (11), this gives corporations the tools to challenge and even oppose public policies. All they have to do is wield the threat of arbitration. It has now become a constant concern for governments that paralyses policymaking for the benefit of the people.

Many states question the value of being part of such a system. Some, such as Brazil, which has one of Latin America’s most developed industrial structures, have proved they don’t need it. It has never ratified a BIT. At the instigation of the Workers’ Party (PT, left), in power from 2002 to 2016, Brasília rejected the ISDS system in order to protect national economic development. States don’t have to consent to their own dispossession.

Note(s):

(1) See Benoît Bréville and Martine Bulard, ’The injustice industry’, Le Monde diplomatique , English edition, June 2014.

(2) International Centre for Settlement of Investment Disputes (ICSID), icsid.worldbank.org/.

(3) ’Total number of known investment treaty cases rises to 1257’, UNCTAD, 19 April 2023, unctad.org/

(4) Elvire Fabry and Giorgio Garbasso, ’L’"ISDS" dans le TTIP: Le diable se cache dans les détails’ (The ’ISDS’ in the TTIP: The devil is in the details), Policy Paper no 122, Jacques Delors Institute, Paris/Berlin, 13 January 2015.

(5) Tarek Badawy, ’The Al-Kharafi v Libya award and the jurisdictional limits of Egyptian courts’, African Arbitration Association, 24 July 2020, afaa.ngo/.

(6) Nessim Aït-Kacimi, ’Le fonds souverain libyen échappe à la saisie de ses actifs en France’ (The Libyan sovereign fund escapes seizure of its assets in France), Les Échos , Paris, 30 December 2022.

(7) ’ICSID: Convention, Regulations and Rules’, ICSID, April 2006.

(8) ’The Basics’, ISDS Platform, isds.bilaterals.org/.

(9) Report of the Ecuadorean Citizens’ Commission for a Comprehensive Audit of Investment Protection Treaties and of the International Arbitration System on Investments (CAITISA), 2015, caitisa.org/.

(10) ’Facts on investor-state arbitrations in 2021: with a special focus on tax-related ISDS cases’, UNCTAD, July 2022.

(11) Co-author, with Claire Provost, of Silent Coup: How Corporations Overthrew Democracy , Bloomsbury Publishing, London, 2023.