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Incoherence in International Investment Arbitration: A Brief Analysis of Possible Solutions

Incoherence has been a major issue in investment arbitration. Coherence in any legal system is necessary to ensure its credibility and legitimacy. Generally, disputes subject to investment arbitration require predictability and consistency in the arbitral awards (as ambiguity or uncertainty discourages investors). This article discusses the viability of the various means of reformation of investor-state dispute settlement (ISDS) towards a more coherent regime while reacting to the arguments proposed by trailblazing international law jurists such as Giovanni Zarra, Kaj Hobér and Christoph Schreuer.

Incoherence occurs in two ways. Firstly, there may be an inconsistency in interpretations of similar provisions in investment treaties. Secondly, there may be an inconsistency in the awards where the same investment treaty has been subject to interpretation in a previous dispute. The incoherence in the awards raises serious questions of bias and the larger credibility of the ISDS system. Multiple solutions to counter the lack of coherence have been advanced. They can be bifurcated into two categories: the first includes solutions that have been tried in the past like domestic remedies and diplomatic protection. The second includes the development of new systems like a permanent tribunal, a Multilateral Investment Court or an appellate body.

Christoph Schreuer makes an argument against replacing ISDS with diplomatic protection and remedies in the domestic courts of a state. While claims of diplomatic protection before the International Court of Justice may lead to more coherence in the pronouncements, the issues highlighted by Schreuer make it a less attractive alternative. Diplomatic protection has certain drawbacks, such as its effect on the relations of the states, reluctance by states to initiate proceedings and the lack of control of the investor on claims of diplomatic protection. Domestic remedies, on the other hand, have issues such as independence and impartiality, judicial loyalty, high stakes for the investor, inefficiency, inordinate delays and the fact that in some cases the adverse act may be a result of judicial action. Building further on Schreuer’s argument, the domestic remedy alternative would not be able to result in more coherent pronouncements than what the current ISDS regime produces. The vast disparity in legal systems and domestic jurisprudence would inevitably lead to incoherent results. Rejecting both diplomatic protection and domestic remedies, Schreuer notes that despite the weaknesses of the investment arbitration regime, there is currently no viable alternative.

Relying on domestic remedies or diplomatic protection is not a viable option for coherence. For the development of new systems, there are four alternatives:

  1. a permanent tribunal with a set of members

  2. a Multilateral Investment Court

  3. an appellate body

  4. preliminary rulings

Zarra argues against the development of new systems and makes a case for self-regulation in the ISDS regime. She argues that the legal framework is still evolving and that self-regulation to minimise disparities within the ISDS regime is a better option. Such a view can also be supported by Kaj Hobér’s argument that any change in the current treaty arbitration regime requires significant amendments, all of which would be impractical in the foreseeable future. Schreuer argues for the system of preliminary rulings. However, this again would require the creation of a permanent institution to which the individual arbitral tribunals would refer matters for preliminary rulings.

From a cumulative reading of the arguments made by Schreuer (rejecting domestic remedies and diplomatic protection), Zarra, and Hobérm, it can be concluded that in the foreseeable future self-regulation appears to be the most reasonable approach to ensuring coherence in the ISDS regime. Certain evidence of coherence has been highlighted by Zarra and other scholars. Examples such as EDF Annulment Decision, Adem Dogan v. Turkmenistan, Postova Banka v. Greece and others signify that the arbitrators have begun to act as members of a network rather than in isolation. While the self-adjustments themselves may be at a starting point the suggested reforms would also require considerable time to develop and gain the trust of the stakeholders.

Notwithstanding the inherent merits or demerits of the proposed systems, the biggest hindrance to any new development in the field is consensus amongst the states. For example, for a multilateral investment court to work as it is desired, there will have to be a treaty between the states providing that the multilateral court would be the exclusive forum for investment disputes. Such an agreement would be necessary because in absence of such an agreement the Multilateral Court would become just another avenue that the parties may choose to approach. Similar agreements would be required for the permanent court, appellate body and the system of preliminary rulings to function effectively. The best alternatives to the current system involve a great degree of common political will amongst a significantly high number of states which may not be possible to achieve in the foreseeable future given the considerations of practicality.

Per Contra, in this reference, self-regulation and self-adjustment within the existing system would not require any negotiation, formal treaty, or consensus between the states and hence may be easier to achieve compared to institutional reforms. In light of this, self-regulation becomes a more reasonable idea. However, this would require a semblance of consensus amongst the stakeholders within the system. Since the inception of the ISDS regime, there has been a tilt towards a pro-investor jurisprudentially incoherent model. Langford and Behn highlight the evidence of a shift of mood of the arbitrators to a more "effective and legitimate" form of adjudication. They note that the investor success rate in disputes has fallen significantly reaching around 40 percent. They have also highlighted the reasons for arbitrators to be more sensitive to a change. There are certain concerns that will eventually reflect in the system, such as the personal reputation of the arbitrator, compliance with awards by states and the larger survival of the system. All these would require the system to maintain an amount of legitimacy amongst its stakeholders. However, due to the decentralised nature of the ISDS system, complete consistency in the conduct of the arbitrators cannot be ensured. This is due to the fragmented nature of ISDS often referred to as "patchwork". There are multiple independent treaties and the tribunals constituted to adjudicate disputes are ad hoc in nature. Each arbitrator can apply reasonings as per their own preference and can safely ignore the consequences of their actions on the system as a whole.

Incoherence is deeply rooted in the present system. It is not possible to completely rid the system of incoherence using self-regulation. To achieve a greater amount of coherence in ISDS, a perfect application of other measures such as Multilateral Investment Court could be more appropriate. Consistency in ISDS decisions cannot be ensured merely by a change in the attitude of the arbitrators. Solutions to incoherence will have to be implemented incrementally and with the involvement of all stakeholders. It would require the states to take a more proactive role in reforming the way the treaties are drafted. Certain provisions such as the "fair and equitable protection" have extremely broad implications. Certain states have responded by drafting provisions in a specific manner. India's Model BIT does not reflect the FET provision but rather contains specific protections against denial of justice, certain violations of due process, targeted discrimination and manifestly abusive treatment. Specific drafting in the investment treaties may assist in reducing the discretion that the arbitrators have in interpreting the protections.

Coherence would be better achieved by making the system more inclusive rather than making it a monopoly of a few. It has been observed that ISDS has a significantly high number of “double-hatters”. On analysis of the list of double-hatters presented by Malcolm Langford and others. It can be seen that some arbitrators who have a high number of arbitrator appointments also have a similar number of counsel appointments. There is a general incompatibility between adjudication and advocacy. Beyond concerns of perception of legitimacy, there is an amount of self-interest due to the economic incentive that a "double-hatter" has in each proceeding which may have implications on the general coherence. Ensuring diversity in the pool of arbitrators and counsels will again require an active role by the states.

Any reform in the ISDS regime, be it the establishment of a new system or changes in behavior in the current system, will be extremely slow due to the sheer number of stakeholders. Significant and quick changes would be only possible with a new institution altogether. Self-regulation, on the other hand, is a more abstract change that would be a continual process. The result may be more gradual and would take a significantly longer time to be visible. However, looking at the current scenario with respect to the international consensus on institutional development, it appears to be the most viable option.


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