Karl P. Sauvant, PhD
Columbia Center on Sustainable Investment*
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* Formerly the Vale Columbia Center on Sustainable international Investment.
“The negotiations of the United Nations Code of Conduct on Transnational Corporations: Experience and lessons learned” and K. P. Sauvant and F. Ortino, Improving the International Investment Law and Policy Regime: Options for the Future are available at http://www.works.bepress.com/karl_sauvant/.
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When is investor-state dispute settlement appropriate to resolve investment disputes? An idea for a rule-of-law ratings mechanism
John P. Gaffney*
Differences exist within the international community regarding the appropriate means of resolving investment disputes, with stakeholders divided over whether such disputes should be resolved by national courts or investor-state dispute settlement (ISDS) (especially by developed countries in the context of the Transatlantic Trade and Investment Partnership). This Perspective considers whether there is a role for the creation of a rule-of-law ratings mechanism – involving the issuance of ratings by a designated agency on the degree of respect for the rule of law by domestic courts in a given country or region – in mediating this division, and resolving which dispute-settlement model should be preferred.
The concept of sovereign rating offers a comparable framework for a rule-of-law ratings mechanism. Sovereign rating involves an opinion issued by a credit rating agency (e.g., Standard & Poor’s, Moody’s) on the creditworthiness of a country, and presented according to a ranking system. These ratings are not uncontroversial, of course, and international regulators are taking steps to reform them. Nonetheless, the sovereign ratings mechanism will remain part of the international economic superstructure.
Why would a similar mechanism be desirable for rule-of-law issues? It is suggested that such a mechanism could help determine when it is appropriate to have investment disputes with a given state resolved by ISDS rather than the domestic courts of that state, where the rating indicates that there is a substantial risk that the rule of law would not be upheld in relation to such a dispute by the domestic courts of the host country.
While credit rating agencies derive their authority solely from the confidence that lenders have in their ratings, a rule-of-law ratings mechanism would require agreement of all the parties to an international investment agreement (IIA). Future IIAs would therefore need to specify alternative investment-dispute mechanisms - comprising both domestic and international dispute-settlement mechanisms - and provide that the choice of appropriate mechanism would be determined according to the rule-of-law ratings system suggested in this Perspective.
In addition to playing a central role in determining whether ISDS is appropriate to resolve investment disputes for a given state, the rule-of-law rating could also serve to incentivize the development of domestic legal systems to a standard whereby investors could be assured that investment disputes would be resolved in accordance with the rule of law. Stakeholders could hardly complain if investors are entitled to invoke ISDS in circumstances in which the host country’s domestic courts are unlikely to respect the rule of law in accordance with international ratings by an independent agency.
Such a rating agency is not without precedent. The European Union (EU) Justice Scoreboard, for example, is an information tool published by the European Commission, which aims to assist the EU and member states to achieve more effective justice by providing objective, reliable and comparable data on the quality, independence and efficiency of justice systems in all member states.
The foregoing proposal presupposes that ISDS meets a minimum threshold whereby investors and states alike can be assured that disputes will be settled in accordance with the rule of law. Undoubtedly, the ISDS system suffers from flaws. Hence, the development of a rule-of-law rating would have to proceed hand-in-hand with ongoing reforms of the ISDS.
There would be a number of key issues to be considered in the establishment of such a mechanism, including:
· How would the objective, consistent and reliable criteria on which to base the rule-of-law rating be defined?
· How would the threshold level, beyond which ISDS would no longer be appropriate to resolve investment disputes, be determined?
· How would a ratings mechanism be incorporated into existing or, more likely, future IIAs, to govern the choice of dispute-settlement mechanism?
· Who would act as the relevant ratings agency? Would it be appropriate for a World Bank or United Nations agency to serve in such a capacity?
· How would a rule-of-law rating interact with claims based on denial of justice by the domestic legal system of the host country?
· What should happen in the case of profound political change (e.g., military coup, illegal invasion)? Should the rule-of-law rating be suspended for a defined preliminary period (so as to favor ISDS)?
Whatever the answers to these questions might be, a rule-of-law ratings mechanism could help mediate the current controversy over whether investment treaty disputes should be resolved by national courts or ISDS. Developed countries, whose court systems satisfied the rule-of-law ratings mechanism, would avoid being subjected to arbitration. At the same time, their investors would be entitled to pursue ISDS in developing countries (that failed to satisfy the same criteria), which would be incentivized to develop their domestic courts in a manner that respects the rule of law. Finally, the process of formulating appropriate criteria for a rule-of-law ratings system could in itself make an enormous contribution to the rule of law.
* John P. Gaffney is a Senior Associate at Al Tamimi & Company (United Arab Emirates). The author is grateful to Andrea Bjorklund, Alejandro M. Garro and O. Thomas Johnson for their helpful peer reviews. The views expressed by the author of this Perspective do not necessarily reflect the opinions of Columbia University or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “John P. Gaffney, ‘When is investor-state dispute settlement appropriate to resolve investment disputes? An idea for a rule-of-law ratings mechanism,’ Columbia FDI Perspectives, No. 149, June 8, 2015. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Alex Weaver, [log in to unmask].
Most recent Columbia FDI Perspectives
- No. 148, In Hyeock Lee, Shige Makino and Eunsuk Hong, “Outward FDI does not necessarily cost domestic employment of MNEs at home: Evidence from Japanese MNEs,” May 25, 2015.
- No. 147, Joachim Karl, “An appellate body for international investment disputes: How appealing is it?,” May 11, 2015.
- No. 146, Anna Joubin-Bret, “Why we need a global appellate mechanism for international investment law,” April 27, 2015.All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.
Other relevant CCSI news and announcements
- On June 8, 2015, CCSI and The Institute for Economic Research (IIEc) of the National Autonomous University of Mexico (UNAM) released the results of their sixth survey of Mexican multinationals. The survey, conducted during 2014, is part of a long-term study of the rapid global expansion of multinational enterprises (MNEs) from emerging markets. The present report, “Changing Characteristics of Large Mexican Multinationals during Legal Reforms,” focuses on 2013 data.
- On July 13-17, 2015, CCSI will host its first Executive Training on Investment Arbitration for Government Officials at Columbia University. Through an intensive week-long course, government officials involved in managing investment treaty disputes or negotiating investment treaties will increase their knowledge of crucial procedural and substantive aspects of investment law. Sessions will be taught by leading academics and practitioners and will be tailored to uniquely address issues relevant to governments. For more information about the program, please download the 2015 Executive Training Brochure here and application here.
- On June 15, 2015, CCSI and the Global Economic Governance Programme at Oxford University will launch a new online forum on New Thinking on Investment Treaties, a series of short presentations by academics, practitioners, and civil society on key topics in international investment law. All presentations will be posted at noon EST here. Please subscribe to the channel and visit our website for updates. For more information and for the schedule of speakers, please visit our website here.
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