International arbitration of FDI disputes

Facing FDI nationalisation in the 1960s-1970s, foreign investors were reluctant to invest without strict protection. Many Third World states felt the stultifying economic effect of reduced FDI and accepted investor-state dispute settlement (ISDS) under private international law as the binding FDI protection. Developing host states adopted their incentivised policies to attract FDI and abandoned regulation for fear of FDI flight. Amid such lacklustre domestic policing of FDI, foreign investors favoured international arbitration to circumvent host states' law and judiciary to maximise their corporate interest, which has also happened in Bangladesh.

International arbitrations of FDI disputes are quasi-judicial in nature and operate under BITs. FDI operations in host states cause wide-ranging socio-economic impacts generating national public interests. The resolution of exclusive national issues beyond national judiciary in privatised and confidential international arbitration gives rise to jurisdictional conflict. Different arbitrations by different arbitrators result in conflicts of the same law, contrasting interpretations, and dissimilar decisions. The UNCTAD International Investment Arbitration Issues Note, 'Reform of ISDS: In Search of a Roadmap' criticises these arbitrations (a) that 'have exposed recurring episodes of inconsistent findings', including 'divergent legal interpretations of identical or similar treaty provisions as well as differences in the assessment of the merits of cases involving the same facts', resulting in 'uncertainty about the meaning of key treaty obligations and lack of predictability of how they will be applied in future cases', and 'erroneous decisions' (No. 2, 26 June 2013, 3-4). There is no appeal to remedy these conflicts. Consequently, these arbitrations have become the embellisher of legal contradictions.

The seeds of jurisdictional conflict and interpretive inconsistency lie in the very act of arbitrating internationally FDI disputes that are essentially domestic in nature, falling squarely under the domestic law and judiciary of host states. The peripheral policy of such FDI-arbitration fails to address the perennial problem of skewed protection for corporate interests in total disregard for the competing interest of host states. National economic sovereignty, socio-economic goals, and the public interests of developing host states are the ultimate victims. Even developed host states now take a very cautious approach to international arbitration. The Australian Productivity Commission Research Report 2010 on the necessity of international arbitration clause in BITs found 'few benefits and considerable risks', which is an imminent challenge for the economic sovereignty of Australia (pp 265-74). In response in April 2011, Australia announced a policy not to accept any BIT arbitration that limits its ability to make laws to protect national interest and social, environmental and economic policies.

International arbitration of FDI disputes can have chilling effect on the freedom of domestic regulatory authority of Bangladesh. There may well be situations where Bangladesh may be reluctant, hesitant, and unwilling to enact legislation genuinely required by its national interest and citizens' welfare for fear of breaching BIT commitments and exposure to international arbitration incurring exorbitant compensation liability. The broad scopes going beyond investment-specific claims, inconsistent interpretations, and unpredictable outcomes of BIT-arbitrations make it very difficult for host states to understand the international legal implications of regulating and opt for the safest option of no regulation. This is how BIT arbitrations shift the investment risk from foreign investors to host states. This risk-shifting and regulatory chill can be triggered by only foreign investors by virtue of their minimum standard of treatment under BITs. This risk-shifting and minimum treatment standard are not extended to domestic investors, who are under strict domestic regulation, thus discriminated against.

Foreign investors regard the judiciary of developing host states corrupt, dilatory, and incapable of protecting investors by upholding the rule of law. There may well be sometruth in such claim, but what is at stake – inefficient judiciary or ruthless corporate interest? Australia enacted the Tobacco Plain Packaging Act 2011 to limit the branding freedom of tobacco companies to reduce smoking. Philip Morris Ltd (PM) found this Act a threat to its profit and sued Australia in the High Court of Australia arguing that the Act expropriated its intellectual property but lost(2012 HCA 43, 181). PM is a US company but restructured itself aHong Kong based Asian company. Australia and Hong Kong BIT 1993 had an international arbitration clause. PM mounted an arbitration action under this BIT on the identical ground that the Australian highest court rejected. The Permanent Court of Arbitration in Singapore held that PM was not a Hong Kong company and dismissed the action (PCA Case No 2012-12 award of 17 December 2015).

The international arbitration of FDI disputes can hamstring the jurisdiction of host states' courts. Such usurpation of judicial authority by BIT arbitrations against Bangladesh is evident. Saipem ignored the interim injunction order of HCD in 1999 and the Dhaka Sub-Judge court decision. Petrobangla had to withdraw its case for a stay of arbitration from a Bangladesh court for want of cooperation from Chevron. Petrobangla sued Niko in a Bangladesh Court for damages in 2008. Niko avoided this suit in favour of international arbitration, which disregarded the HCD injunction of 5 May 2010. The policymakers of Bangladesh must consider the effects of these arbitrations in which (a) foreign investors challenged the law of Bangladesh enacted by elected parliaments pursuant to its national policies and requirements; (b) foreign arbitrators showed no regard for the public interests and nefariously relied on BITs ostensibly to challenge the authority and legitimacy of the highest court whose decisions are binding under its constitution; (c) unfavourable decisions by the Bangladesh court have been ignored and overruled by foreign arbitrators; (d) arbitral awards were binding for Bangladesh, which had no right to challenge/appeal against unfavourable/inconsistent awards by foreign arbitrators; and (e) foreign arbitrators did not care to consider the previous interpretation and decision of the Bangladesh court as binding or at least a persuasive judicial precedent.

Mounting evidence of the exploitation of international arbitration of FDI disputes has resulted in a public backlash against it. Bolivia, Ecuador, and Venezuela have abandoned these arbitrations and adopted a policy of resolving FDI disputes under their domestic laws and courts. The EC is to establish an International Investment Court to replace ISDS and included in its free trade agreements with Canada and Vietnam. For ISDS, Bangladesh must choose its own judiciary first and international arbitration as the last resort. External arbitration should be excluded if it is inimical to the public interests in health, occupational safety, human rights, industrial relations, and the environment; and sensitive areas of national significance including fiscal interests, over-exploitation of natural resources, and land acquisition and resettlement.

Achieving these policy options requires measures to make domestic judiciary time-efficient, cost-effective, and corruption-free. Specialised courts with judicial capacity, like Bahrain and Myanmar, can be considered for speedy FDI dispute settlement. The functional capacity of the Bangladesh International Arbitration Centre, established in April 2011, may be increased to be a reliable non-governmental FDI arbitration forum. The establishment of the proposed SAARC Arbitration Council under the SAARC Agreement of November 2005 as a permanent neutral centre for arbitration in a SAARC country may also be a viable option worth pursuing. Other conciliatory and/or mediatory ADR by neutral good offices, such as UN Secretary-General or WTO Director-General, may be explored before embarking on international arbitration. Foreign arbitral FDI dispute settlement has compromised and will continue to compromise the sovereign regulatory and judicial authority of Bangladesh. It is in the best interest to reclaim its sovereign right to regulate and adjudicate, which should be prioritised over BIT arbitration.

The writer is Professor of Law and Director, Higher Degree Research (PhD), Macquarie Law School, Macquarie University, Sydney, Australia.