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Out from the dark

International investment arbitration is (slowly) becoming more transparent.

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Over the past winter, Yves Fortier — Canada’s éminence grise of international arbitration law — sat down for an interview with this magazine. In it, he lamented the way the small, elite cadre of investor-state arbitration law practitioners is sometimes portrayed by its critics as closed, insular and unaccountable.

“Some people complain that it’s like the Mafia, controlled by just a few of us,” he said at the time.

Which explains why, these days, Fortier — and virtually everyone else working in investor-state arbitration — welcomes what he sees as an accelerating trend toward more openness and transparency in a legal field that was, until recently, known for operating largely in the dark.

“We’re seeing a great deal of movement in the right direction, toward more transparency,” says Fortier who is based in Montreal. “More decisions being published publicly and promptly. More interested parties are being permitted to intervene.

“I’m certainly not going to deny that greater transparency probably builds more public trust in the system.”

Investor-state arbitration is one of the places where law and politics collide at the global level. The use of arbitration tribunals to settle disputes between governments and foreign investors really got started with the 1965 International Centre for Settlement of Investment Disputes (ICSID) treaty, but the ‘Cambrian explosion’ of investment treaties that began in the 1980s triggered a massive increase in the number of arbitration cases — and in the size of the legal network that grew up around them.

The Corporate Europe Observatory notes that the global ICSID caseload was just 38 in 1996; there are now more than 550 active cases worldwide, under the roughly 3,000 investment treaties in effect. And with top law firms charging $3-million to $5-million per case, investor-state arbitration law has grown into a vast, globe-spanning service industry.

Investors like arbitration because it keeps them out of domestic courts — taking away an advantage enjoyed by governments in states where the line between politics and the law is blurry at best. They also enjoy the privacy; most investment treaties base their investor-state arbitration systems on commercial arbitration, which puts a premium on confidentiality.

“One of the reasons businesses like commercial arbitration is that they don’t really like airing their dirty linen in public,” says Tony VanDuzer, professor of international investment law at the University of Ottawa.

This is where law and politics collide. Investor-state arbitration starts with an investor challenging a government decision that affects its bottom line. When Australia passed a law in 2011 forcing cigarette companies to sell their product in plain packaging — a public health measure — tobacco giant Philip Morris accused it of expropriation and launched an arbitration case against it. Also in 2011, Australia announced it would no longer seek investor-state dispute settlement mechanisms in trade agreements with developing countries. Since 2007, Bolivia, Venezuela and Ecuador have exited ICSID.

A turning point

It’s not hard to see why many states are uncomfortable with investor-state arbitration. Arbitration cases can run for years and cost governments tens of millions of dollars. Arbitration conducted under a cloak of confidentiality puts politicians in the awkward position of having to drain the treasury without offering citizens much in the way of explanation. So the trend towards greater transparency in investor-state arbitration started with political pressure — and it started in North America.

“In 2001, the NAFTA states issued an interpretive statement that said nothing in the treaty precludes the member states from making arbitrations public,” says Gus Van Harten, international investment law specialist at Osgoode Hall Law School. “And they’ve been quite consistent about following that rule.”

More daylight crept in with the Methanex v. United States case. Methanex is a Canadian producer of methanol, which is used in a gasoline additive that was banned by the State of California in 1999 because it was alleged to be contaminating groundwater. Methanex sought compensation under NAFTA’s Chapter 11, the section that deals with foreign investors’ rights. The case was so fraught with dire implications for the right of NAFTA states to regulate for public health and safety that the arbitration panel made the precedent-setting decision to allow the International Institute for Sustainable Development (IISD) to file an amicus brief.

“It was the Methanex decision that really got the ball rolling on transparency in investor-state arbitration,” says Janet Mills, arbitration law specialist at Bay Street Chambers in Toronto. She was on the team representing Methanex.

The new transparency

But the real earthquake in arbitration transparency law was the drafting of the new United Nations Commission on International Trade Law (UNCITRAL) rules, which came into effect in April of this year. The rules provide for the publication of documents exchanged in hearings — from written statements to transcripts to awards. They allow for third-party submissions, and they require that most hearings be public.

There’s a catch, of course — several, in fact. First, the UNCITRAL rules reserve for the panel the right to withhold information that might be considered commercially sensitive, or might threaten a state’s security interests.

Second, the new UNCITRAL rules do not affect any treaty that came into effect before the new rules did — almost all of them, in other words.

“The revised UNCITRAL rules seem almost to have been designed for minimal impact,” says Van Harten. “UNCITRAL was in a position to fix the transparency problem in all existing treaties, but it stopped short. It was a compromise, of sorts, and my sources tell me the arbitration industry itself played a big role in pushing that compromise.

“When Egypt is saying it wants more transparency and Germany is saying it likes things fine the way they are, well, you have to wonder.”

Of course, the existence of much more transparent arbitration rules increases the political pressure on governments to play along. As National went to press, the final text of the Canada-E.U. Comprehensive Economic and Trade Agreement (CETA) still hadn’t been released to the public. But it’s widely expected to include an arbitration transparency clause that goes beyond the UNCITRAL standard. Canada and Europe may be expected to offer new trading partners what they offer each other.

“Transparency was very much a North American approach at first, owing to the effects of political pressure. But the Canada-E.U. CETA may very well be the first E.U. investment treaty, and that makes it important in terms of the spread of transparency rules,” says Andrew Newcombe, associate professor of law at the University of Victoria and an arbitration law practitioner.

Staying behind closed doors

Still, the march toward greater transparency in arbitration law won’t be steady, or swift. Much depends on the party across the table. When Canada signed its Foreign Investment Promotion and Protection Agreement with China in 2012, it left a ‘carve-out’ on transparency.

“Documents and hearings are open to the public only to the degree to which the countries agree to let them in,” says VanDuzer. “This is a significant deviation from the Canadian model, one we can only assume the Chinese insisted on.”

Newcombe adds: “States like China that have no real democratic traditions have not bought into the whole concept of transparency, so there are going to be compromises, and the compromises are going to be along the lines of the Canada-China deal.”

And investor claimants have options; by setting up a shell company in the jurisdiction of a particular investment treaty, a corporation can avail itself of a set of arbitration rules that provide for much more privacy. They can shop around, in other words.

“The key limitation of the new UNCITRAL rules is that most investment treaties give investors a choice of which set of rules they want the arbitration to operate under,” says VanDuzer. “So they can go with UNCITRAL, or ICSID, or some other set of rules which offer more or less transparency.”

Still, with the new UNCITRAL rules on the books and CETA pointing the way, arbitration law specialists are already warning their corporate clients to get ready for a brave new world of transparency. Howard Mann, IISD’s senior international law adviser, says the effects in the quality of work done by arbitration panels are already being seen.

“Once arbitrators knew their work was going to be made public, the quality of the judgments improved — they became better written, better reasoned,” says Mann. “This old notion that the people in the process are all brothers and sisters and they all have to agree — that has pretty much disintegrated. There’s more discipline in arbitration now, more attention being paid to potential conflicts of interest.”

What does it all mean for the people actually practising arbitration law? There’s a risk, of course; confidentiality is a “selling point”, says Van Harten — it’s one of the reasons investors prefer arbitration to suing through domestic courts. Newcombe suggests more transparency might lure in more competition, once other firms see the size of the fees in black-and-white. And VanDuzer thinks that allowing third-party players in might push up costs.

Mills doubts that enhanced transparency will drive away clients; given the alternatives, she says, “I’d be really surprised if this turned out to be some sort of tipping point with investors.” What it will do, she says, is change how arbitration lawyers operate. It’ll be less like a private process and more like a public trial.

“You’re going to have to respond now to third parties, NGOs, amicus briefs. You’re going to have to address questions you didn’t have to address before — questions  of politics, social justice, the environment.

“What it means for practitioners is getting used to litigating on multiple levels. It’s going to be more work, and it’s going to be a little distracting.”