Chapter 4: Investment Arbitration and the Rule of Law

In this light, the relationship between FDI and the rule of law has been a topic of interest for scholars, policymakers and stakeholders for years. It has been argued that ‘the development of international investment law can be seen as an important achievement for the international rule of law’. 5

From the 1950s onwards, we have seen the ‘legalization of investment protection’ through bilateral investment treaties (BITs). 6 Furthermore, we have seen a process of ‘judicialization’, consisting of putting in place ‘rules and procedures … where power play and uncertainty reigned before’. 7 The most notable development is the establishment of the International Centre for Settlement of Investment Disputes (ICSID) – an institution under the aegis of the World Bank which was established in 1966 by the Convention on the Settlement of Investment Disputes between States and Nationals of other States (‘ICSID Convention’). 8

It has been observed that ‘conventional wisdom’ dictates that FDI is an ‘important component of economic growth’, and that a ‘crucial factor’ in attracting FDI is a ‘stable, consistent, fair, and transparent legal … system’. 9 However, ICSID seems to have provided international investors with the comfort that they can find a remedy for breaches of their rights even if the country in which they have invested is not governed by the rule of law, as long as there is a relevant treaty they can rely upon. A priori, one may argue that such comfort deters investors from making ethical choices by refusing to invest in countries which disrespect the rule of law and violate human rights. 10

This chapter sheds light on a narrower issue which is nonetheless intrinsically linked to protecting the rule of law on a domestic level. If one examines ICSID’s website, one sees that in many cases which have been concluded, neither the full text of the awards nor excerpts from the awards have been published. Sometimes, even if excerpts have been published, they seem redacted to such an extent that one may be unable to piece together how the dispute unfolded. This allows the state which violated investors’ rights to save face and even to issue misleading press releases or launch misinformation campaigns in the media about how the dispute ended, going as far as to deceive the public that it won the case. Even when such overt misrepresentations take place, ICSID remains silent. Is ICSID complicit with such states or does it merely lack the tools needed to ensure better transparency and to curtail such misrepresentations of its procedures?

This chapter’s main argument is that greater transparency of ICSID proceedings can foster accountability on a domestic level and thus promote the rule of law. As we will see below, there are cases of breaches of investors’ rights which involve alleged abuses of office, corruption or other unlawful behaviour by public officials. These should be clearly distinguished from cases in which states act lawfully, but to the detriment of investors. In the former cases, some governments may be tempted to reach a settlement with the investor in order not to draw too much attention to the wrongdoings committed by state officials by risking an award upholding the investor’s claims.

Investors themselves often choose to settle even if they have solid claims against a host state: they may obtain compensation faster and they do not have to deal with the troubles which are often associated with the enforcement of arbitral awards. From a strategic perspective, it may be more beneficial for an investor to secure partial compensation today rather than full compensation much later and after considerable hassle. One arbitration practitioner has argued: ‘our performance is measured not just by the quality of outcomes but by how quickly and at what cost they are achieved. This can be taken to unhealthy extremes.’ 11

In principle, settlements are considered problematic because they prevent the examination of a dispute on the merits. However, as is argued in more detail below, when their existence is concealed, they become problematic from a rule of law perspective too. Even when the case ends with a settlement rather than with an award ruling on the merits, the investor is compensated with taxpayers’ money for breaches of its rights. Meanwhile, there are loopholes in ICSID’s arbitration rules and procedures which permit states acting in bad faith to mislead the public about the outcome of ICSID proceedings. In turn, this prevents civil society from knowing how taxpayers’ money is spent and from engaging in its role in terms of checks and balances by seeking the accountability of those involved in breaches of investors’ rights and by pushing for legislation which can curtail misuses of power in the future. Hence, there seems to be a mismatch between the expectations of civil society about transparency at ICSID and ICSID’s rules, which should be addressed through further reforms to ensure better reporting of procedural details and accessibility of awards. In this way, a better balance can be struck between protecting international investors and defending the rule of law on a domestic level.

This chapter begins by reflecting on the importance of transparency in investment arbitration in fostering the rule of law and empowering civil society to resist rule of law backsliding (Section 2). Next, it highlights ICSID’s recent efforts to ensure greater transparency in its proceedings, which culminated in the approval of amendments to ICSID’s rules and regulations that came into effect on 1 July 2022 (Section 3). It goes on to analyse three cases which originated from unlawful behaviour by public officials in the host state. In these cases, ICSID’s rules and practices helped the violating state to mask the fact that it had settled the dispute and instead allowed it to claim publicly that it had won the case. Hence, not only was the violating state not encouraged to desist from unlawful behaviour in the future, but local citizens were misled about how public money was spent and were precluded from exercising their role in terms of checks and balances (Section 4). To conclude, the chapter makes recommendations about further reforms to ICSID’s rules and practices that may be necessary to ensure that they are not a façade behind which public officials can hide their wrongdoings (Sections 5 and 6).

Experts in arbitration have put forward multiple reasons why transparency is necessary in commercial arbitration, as well as in investor-state arbitration. It has been deemed that post-award transparency is beneficial for ‘jurisprudential consistency’. 14 In simple terms, this refers to the predictability and legal certainty which are important for international investors, states and lawyers alike. Arbitration awards have persuasive value and may be useful not only for arbitrators, but also for the legal community in general. 15

Moreover, investment arbitration often concerns ‘key public policy issues’ and involves ‘expenditure of public funds’. 16 Hence, citizens have a legitimate interest in knowing how disputes ended and whether any violations of the law by the host state were established. To this end, the need for greater transparency is much more palpable in investment arbitration than in commercial arbitration because the public interest is concerned.

From a rule of law perspective, nonetheless, one can provide further arguments in support of greater transparency in investment arbitration. Breaches of investors’ rights established by arbitral tribunals or settlements made to prevent arbitral awards from upholding investors’ claims often evidence rule of law deficiencies that need urgent attention. While definitions of the rule of law differ, its distinctive features include accountability (nobody should be above the law); stable and predictable laws (individuals or legal entities should not be arbitrarily targeted with lex specialis/laws enacted intuitu personae); fairness and accessibility of the legislative process; and an impartial and accessible justice system. 17

Unlawful expropriation or cases of criminal corporate raiding (state raiding), where state institutions are abused by public officials so that businesses and assets of private individuals or artificial legal persons can be acquired by these officials or their close politico-economic circles, evidence intentional assaults on the rule of law. 18 States may expropriate by invoking the public interest and through official procedures that comply with their constitution and international conventions. However, in some...