In the 1990s, heavily-indebted Argentinia privatised some of the country’s water and sewerage services, under heavy pressure from the World Bank and the International Monetary Fund.
The 30-year concessions by a state trying to recover from an economic crisis that had produced hyperinflation of 5,000 per cent in 1989 would improve services, said supporters.
Within years, there was sellers’ regret, and the Argentine province of Tucuman moved to cap the charges for water and sewerage, levied by French-owned Vivendi, who had secured the local concession.
In all, the Argentinians had signed concessions for 18 contracts with international investors. Up to 2008, nine contracts had been terminated because of complaints by local authorities and locals about higher prices and poor services.
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Several cases were brought by international investors before the World Bank-funded International Centre for Settlement of Investment Disputes (ICSID) — a necessary vehicle to ease the way for global investors, say supporters; but condemned by critics as a tool that benefits the rich at the expense of the poor.
The use of so-called ‘investor courts’ was at the heart of this week’s successful Supreme Court challenge by Green Party TD Patrick Costello
In 2010, a number of French and Spanish companies were awarded $211 million in damages by the ICSID against Argentina.
The use of so-called “investor courts” was at the heart of this week’s successful Supreme Court challenge by Green Party TD Patrick Costello, who objected to plans by the Government to ratify the EU-Canada trade deal, Ceta (Comprehensive Economic and Trade Agreement).
Under the investor-state dispute system (ISDS), which dates back 50 years and is included in hundreds of trade deals over that time, states can be sued by foreign investors if their actions — including laws — are alleged to hurt the interest of foreign investors.
The ISDS has attracted increased criticism since the late 1990s when investor claims began to rise substantially.
The ISDS treaties, according to Prof Gus van Harten, were originally adopted by former European colonial powers to protect their corporations’ wealth in newly independent countries and to limit the freedoms of former colonies.
In his 2020 book, The Trouble with Foreign Investor Protection, van Harten, professor of administrative law at York University’s Osgoode Hall, traced the slow development of such treaties. By the 1990s, they had rapidly grown, he says, with the World Bank’s ICSID, assisted by specialist lawyers, stepping up efforts to attract investor claims.
By 2000, such litigation was booming.
Under treaties with ISDS clauses, corporations have the right to sue states before an international arbitral tribunal, rather than before the states’ domestic courts.
Foreign direct investment is legally protected under international law by more than 2,750 bilateral investment treaties, international trade treaties, or other agreements such as the Energy Charter Treaty 1994 (ECT).
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Only the foreign investors can sue states under such treaties. There is no corresponding right, under the treaties, for states to sue the investors, although a state can sue foreign investors in its domestic courts.
Cases by foreign investors under such treaties usually argue that the state has, by its laws, judicial decisions or executive actions, breached one or more of their rights, such as “fair and equitable treatment”.
Such cases taken before tribunals run by the International Chamber of Commerce, among others, favour the wealthy in ways that an independent judicial process never could, agues the academic.
The logic of foreign investor protection is ultimately to trust no people to govern themselves where it threatens the assets of the ultra-wealthy
— Prof Gus van Harten
If left to expand, investor courts will eventually make all countries “semi-independent”, he argues. “The logic of foreign investor protection is ultimately to trust no people to govern themselves where it threatens the assets of the ultra-wealthy.”
Developing countries hoping to encourage an influx of investors are “heavily constrained” by such trade deals, whereas developed countries have remained relatively free of such constraints, he notes.
Such deals allow “corporate lawyers to act as supreme judges by using vague laws to issue rulings that create public debt and discredit the sovereign state”, he maintains.
Today, the ISDS system is fraying. Many countries now avoid such deals, or, like Australia, are trying to withdraw from the ones they have signed. In response, supporters are trying to expand and solidify the protections offered in new treaties, says van Harten.
The only treaty with an ISDS system that Ireland is signed up to is the Energy Charter Treaty — set up after the cold war to encourage cross-border co-operation on energy supplies.
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Unlike other ISDS treaties, the energy treaty and, separately, the North American Free Trade Agreement (Nafta) have exposed western countries to claims by each others’ investors and between them account for up to a quarter of all known claims.
According to the United Nations, 1,100 ISDS cases have been taken up to the end of 2020, on the back of international investor agreements reached in the 1980s and 1990s against 124 countries and one economic grouping.
In 2012, an ICSID tribunal found in favour of Occidental Petroleum against Ecuador, after the company took an action when Ecuador annulled a contract with the firm
Sixty-eight cases against 43 countries were initiated in 2020 alone. Four countries — Denmark, Norway, Papua New Guinea and Switzerland — faced their first cases in 2020. Seven were taken under the energy treaty.
Substantial damages are possible. In 2012, an ICSID tribunal found in favour of Occidental Petroleum against Ecuador, after the company took an action when Ecuador annulled a contract with the firm.
Though the tribunal accepted Ecuador’s argument that Occidental had violated its contract by selling its rights to another firm without permission, it ruled the annulment did not amount to “fair and equitable treatment” of the company. It awarded Occidental $1.77 billion.
In November 2021, Vattenfall, a Swedish state-owned energy company, secured a €1.4 billion settlement of a claim against Germany before an arbitral tribunal under the Energy Charter Treaty after Germany decided to phase out nuclear energy power plants.
A US waste treatment company, SD Myers, was awarded $20 million under Nafta’s arbitral tribunal against Canada in 2000 over a ban between 1995 and 1997 on the export of PCB toxic waste [Polychlorinated biphenyls are highly carcinogenic chemical compounds].
Investors do not always win, supporters of investor courts argue. In 2013, tobacco giant Philip Morris failed in a bid to sue Uruguay for $25 million in damages over anti-smoking laws. Philip Morris was ordered to pay Uruguay $7 million, plus all court costs.
However, critics argue that even the prospect of damages before investor courts has a chilling effect on states when they start to think about legislation that could negatively affect foreign investors.
The ISDS system has faced other charges that it has an inbuilt investor bias and has delivered inconsistent and incorrect rulings, along with excessive damages and costs awarded against countries.
In the Dáil, Tánaiste Leo Varadkar, during a speech supporting the full ratification of the investor court provisions of Ceta, acknowledged that ISDS systems have “proved controversial” and are regarded as “outdated” by the European Commission.
Varakdar argued that transparency, legitimacy and public interest questions would be addressed by the ICS for reasons including it would have a first instance tribunal
The Government considered that the European Commission was right to address concerns raised by NGOs and others by developing its own Investor Court System (ICS).
Varakdar argued that transparency, legitimacy and public interest questions would be addressed by the ICS for reasons including it would have a first instance tribunal — where matters are first heard — that would sit in public and an appeal tribunal.
In addition, the ICS would have a permanent list of qualified arbitrators and maintain a “clear distinction” between international and domestic law. In turn, it would offer investors a “single consistent mechanism”.
The Ceta deal, said Varadkar, reaffirms the EU and Canada’s right to regulate to achieve legitimate public policy objectives, such as the protection of public health and the environment.
Investment disputes can continue to be litigated before national courts and what the ICS offers is “an alternative approach for an aggrieved investor”, he said.
That “alternative approach” was deemed last week by four of seven Supreme Court judges to breach the Constitution’s judicial sovereignty guarantees since it would operate in parallel to Irish courts and its decisions would effectively have to be automatically enforced by the Irish courts.
Mr Justice Gerard Hogan said the rules regarding membership of Ceta tribunals address many of the traditional concerns about the role of arbitrators in international arbitration law, namely lack of independence from nominating governments and a “certain eagerness to please the international investment community”.
This case was ‘essentially about sovereignty’ and, on any view, a Ceta tribunal would be exercising powers corresponding to the judicial powers of a state
However, as matters stand, members of Ceta tribunals will not be judges and will not have the standard guarantees in terms of fixity of tenure and salary generally deemed to be essential prerequisites to judicial independence, he said. The Ceta tribunals will also not sit in public, he noted.
This case was “essentially about sovereignty” and, on any view, a Ceta tribunal would be exercising powers corresponding to the judicial powers of a state.
Mr Justice Peter Charleton disagreed with his six Supreme Court colleagues that a potential solution to the unconstitutionality of ratification of the ICS aspects of Ceta is to amend the 2010 Arbitration Act to expand the grounds for refusal by the Irish courts to enforce a Ceta tribunal award.
The grounds for such an amendment cannot override the obligation of EU membership, he said. Even if that were legally possible, inserting a protocol to Ceta now, based on the protection of Ireland’s constitutional tradition, would be “so far-reaching as to fundamentally contradict the treaty itself; something impossible under the Vienna Convention on the Law of Treaties”.
If the judge is correct, the only means of constitutionally ratifying Ceta may be by way of a majority decision in a referendum, a route the Government has said is not required.
Against this complex background, some may consider criticism of the Government’s attempt to achieve Dáil ratification of the disputed ICS provisions of Ceta after only a 55-minute debate in the House was well justified. Ireland is not alone in its concerns about the ICS provisions of Ceta, with 10 other EU states failing to ratify the ICS provisions to date. It will come as no surprise that Varadkar indicated this week it may take months for the Government to decide on its next step.
