Proposed Changes to the Investment Dispute-Resolution System: A South American Perspective

The system of international investment arbitration suffers from serious flaws. In South America, more than other regions, these failings are apparent from direct experience. Although South America does not attract the most foreign direct investment, the region has historically encountered the largest number investment-treaty arbitrations. This is in spite of the fact that we are ruled by democratically elected governments, with well-established institutions and laws.

Perhaps because so many countries in the region have faced multiple international investment arbitrations based on multi-million dollar claims for compensations, a number of alternatives to the current system of investment dispute resolution have been proposed by governments, multilateral institutions and academics. While these proposals are not only applicable to South America, the region has been particularly active in identifying solutions or alternatives. This brief article summarizes some of those alternatives.

Mandatory periods of amicable settlement and mediation before arbitration

This proposal, which has been discussed in academic and government forums, involves the development of contractual, treaty or other legal provisions whereby the investor and state, once a dispute has arisen, will be required to enter an initial period of amicable settlement and mediation before being allowed to move to arbitration.[1] This would require demonstrating that communication denoting the existence of a dispute has been exchanged between the investor and host state, which would form the basis for starting the amicable settlement phase of the dispute resolution process. If the period of amicable settlement is unsuccessful, the parties must then begin a formal process of mediation for a specified period of time. Only after this second phase has concluded can the parties submit the dispute for arbitration.

In an effort to try and avoid the present situation, where many arbitration tribunals allow claimants to avoid pre-arbitration requirements in investment treaties that demand amicable settlement or the use of local remedies, with the excuse that it would be “futile” or that it is a matter of admissibility and not of jurisdiction, the implementation of this proposal would expressly indicate—in specific instruments—that the phases prior to arbitration must be properly concluded.

The advantage of this proposal is that it creates conditions for parties to communicate, negotiate and seek mediated solutions with each other, in an effort to resolve the dispute at a low cost.  However, the disadvantage is, if negotiation and mediation are not successful, the disputing parties incur into additional time and costs.

Resolution of disputes by local tribunals

This proposal, which some governments consider viable, has two variants:

a) A special foreign investment jurisdiction. This would entail the establishment of specialised administrative courts, made up of judges specialised in investment law, trade law, administrative law and administrative disputes, business accounting, and political sociology.

b) A system of associated judges. Here, investors would be permitted to appoint a jurist of high prestige to join the sitting judge and therefore be part of the competent national court.[2] This proposal might require legal reforms in some countries. Due to the local nature of the tribunals, it is likely that one of the requirements of the associated judges would be to have a license to practice law in the host country. However, as investment disputes are likely to be solved based on international investment agreements, which have the dual nature of national and international law (i.e. having been ratified by the legislative branches of the states), some adjustment to national law could be made to allow the possibility of appointing foreign lawyers that meet the other requirements of associated judges. [3]

The advantage of this proposal is that the investor might lose its fear of a lack of impartiality on the part of local judges, as the tribunals will be partially constituted with jurists selected and appointed by them. Likewise a decision by a national tribunal will be easier to accept by the state for purposes of voluntary enforcement. For states the advantage is that the disputes will be solved in their territories, in their jurisdiction and through their procedures. However, the disadvantage of this option is that it may be perceived by foreign investors as lacking the neutral and international edge that is apparently valued in the current system.

Creation of a regional investment tribunal

A regional investment tribunal could be formed, for example, under the Union of South American Nations (UNASUR: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Surinam, Uruguay, and Venezuela); the Bolivarian Alliance for the Peoples of Our Americas (ALBA: Antigua and Barbados, Bolivia, Cuba, Dominica, Ecuador, Honduras, Nicaragua, San Vicente and the Grenadines, and Venezuela); or Southern Common Market (MERCOSUR: Argentina, Brazil, Paraguay, Uruguay, and Venezuela).

To be established by a treaty, such a public institutional undertaking could serve the interests of states and investors. Likewise, by establishing new arbitration rules, it could provide improved legitimacy, predictability and transparency, compared to the arbitration rules linked to the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) and United Nation Commission on International Trade Law (UNCITRAL).

It has also been proposed that the treaty establish a roster of judges which would be assigned randomly to cases, thus moving away from the system of party-appointed arbitrators.[4] Judges could be nominated for a specific period and cases be assigned in accordance with internal rules.  Of course, the persons nominated to an investment tribunal will have to meet certain ethical and professional requirements, including sufficient knowledge of international investment law. This structure would help inspire confidence in the level of competence of judges among investors, and satisfy states by providing permanence, transparency and predictability within the framework for resolving disputes.

The parties to a dispute will have the option of accepting or refusing to resolve conflicts using these permanent investment tribunals. Consent could be given via treaties, laws, notifications or the presentation of a dispute, as is currently the case.

States that agree to create permanent investment tribunals can finance them as is done at the World Trade Organization or other permanent regional tribunals. Some of the funds will be used to pay the salaries of judges. In fact, states may favourably compare the costs of financing permanent tribunals with the amounts paid in investment arbitration costs and fees.

These tribunals will probably compete with with existing dispute resolution options, such as ICSID and UNCITRAL, which feature in most investment treaties. But over time, and as the reputation of these new tribunals grows, they will be capable of attracting further cases.  Moreover, with future treaties, states would be able to formally grant consent to submit disputes to tribunals alone or as an alternative.[5]

Currently, there are 21 international investment agreements between the UNASUR countries. Thus, were South America to create a South American Court on Foreign Investments, the court could immediately have jurisdiction to disputes pertaining more than 20 international investment agreements, provided the relevant countries mutually grant consent.

This option has the advantage of creating a neutral and permanent international centre for investment dispute resolution. The disadvantage is that the centre would have to be created, structured, supplied and qualified, and even then it may not attract many cases. However, the experience of the first years of ICSID is a useful example. With few staff, its first years were mainly educational, dedicated to technical qualifications and publications, among other things. A permanent foreign investment court would assume the role of a qualifying, informational, and decision-making body.

Currently this is the proposal that appears to have received the most support in the South American diplomatic arena, and one that possibly would be best suited to provide a neutral, professional and stable forum for investment dispute resolution.[6]

Designation of first instance to national tribunals and second instance to two or three appeal courts in different South American countries

This option, conceived by the author,[7] involves a combination of some of the earlier proposals and therefore carries the same advantages and disadvantages. For example, the disputes could be settled by a local court composed by associated ‘partner’ judges. The appeal could be submitted before a specially created international tribunal or before the highest judicial forum (to be identified in the relevant treaty) in a third country.

The advantage of this proposal is that it could provide legitimacy to the adjudicators, stability to the court, consistency on its decisions, and neutrality of the court, all of which could reduce the cost of the litigation. An intermediate method is to enable the possibility—via the same treaties in which this appeal method is established—that courts that recognise these appeals may be made up of associate judges in conjunction with sitting judges.

The important point is that due to the crisis of the international system of settlement of investment disputes, creativeness is required in order to arrive at alternatives that offer fairness and are supportive of sustainable social and economic development.

Author: Hildegard Rondón de Sansó is Professor Emeritus of Administrative Law at the Central University of Venezuela. She is a former magistrate in the administrative policy court of the Venezuelan Supreme Court of Justice.