Developing Countries in Investment Dispute Arbitration

The bulk of the FDI flows into developing and former communist countries.17 _Dodge

observed that investment treaties have been until recently ‘reciprocal in theory but not in fact, for it is generally only the less developed country that bears the risk of being sued.’18 _{This research focuses particularly on the claims against host developing}

countries because foreign investors have made a large number of them, and their implications for these countries raise concerns. This concern is reflected in the statistics provided below.

Gallagher and Shresthra have produced a detailed and in-depth study that reveals the scope of the problem, providing statistics on claims and the economic effects of the compensation foreign investors have received.19 _{Their study responds in part to Susan}

Franck’s econometric analysis studying the relationship between the development status of the host government and awards, both in terms of win-loss and amounts in each

15 _{Dolzer and Schreuer, Principles of International Investment Law (n 3) 225.}

16 _{For disputes in various other institutions see e.g. Julian DM Lew, ‘Fundamental Problems in}

International Arbitration’ in Loukas A. Mistelis and Julian DM Lew (eds), Pervasive Problems in International

Arbitration, (Kluwer Law International 2006) 1-3.

17 _{Harten, Investment Treaty Arbitration and Public Law (n 1) 6.}

18 _{William S Dodge, ‘Investor-State Dispute Settlement between Developed Countries: Reflections on the}

Australia-United States Free Trade Agreement’ (2006) 39(1) Vanderbilt Journal of Transnational Law 1, 3.

Also see Philippe Sands, Lawless World: Making and Breaking Global Rules (Penguin 2006) 141.

19 _{Kevin P Gallagher and Elen Shrestha, ‘Investment Treaty Arbitration and Developing Countries: A Re-}

Appraisal’ (2011) 12 Journal of the World Investment and Trade 919. On an account of implications of financial burdens of the Awards against developing countries with particular reference to cases against Argentina see e.g., Bernard Hoekman and Richard Newfarmer, ‘Preferential Trade Agreements, Investment Disciplines and Investment Flows’ (2005) 39(5) Journal of World Trade 949, 965-966.

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award.20 _{Studying the data on awards up to 2007, she found no significant relationship}

between the development status of the host country, development status of the arbitrator, and the outcome of the arbitration. A number of scholars have disputed this finding,21 _{including Harten, who provides an account of elaborate statistics on the}

disputes initiated against the developing countries and the amount of the award rendered against them and their economic effect.22 _{Gallagher and Shresthra’s study is}

more recent, which is why this thesis uses it here, along with a recent study by the UN Conference on Trade and Development (UNCTAD) and a non-governmental organisation (NGO).23

Gallagher and Shresthra show that the average claim US investors have brought against host developed countries has been around 150 million USD, while the average claim against host developing countries is around 451 million USD.24 _{Furthermore, the}

available data and statistics from UNCTAD show larger numbers of investment claims against developing countries than developed countries.25 _{Similarly, Harten’s research}

shows that the primary target of the foreign investors in ICSID cases to date have been

20 _{Susan D Franck, ‘Development and Outcomes of Investment Treaty Arbitration’ (2009) 50 Harvard}

International Law Journal 435.

21 _{Gus Van Harten, ‘The Use of Quantitative Methods to Examine Possible Bias in Investment}

Arbitration’ in Karl P Sauvant (ed), Yearbook on International Investment Law and Policy (Oxford University

Press 2011) 859-882; Kyla Tienhaara, ‘Regulatory Chill and the Threat of Arbitration: a View from

Political Science’ in Kate Miles Chester Brown (ed), Evolution in Investment Treaty Law and Arbitration

(Cambridge University Press 2011) 606-627.

22 _{Harten, ‘Investment Treaty Arbitration and Public Law (n 1) 31-33.}

23 _{Press Release, Food and Water Watch, World Bank Court Grants Power to Corporations, 30 April}

2007 <http://www.foodandwaterwatch.org/pressreleases/world-bank-court-grants-power-to-

corporations/> accessed 25 August 2014; Also see e.g. Sarah Anderson and Sara Grusky, Challenging

Corporate Investor Rule : How the World Bank’s Investment Court, Free Trade Agreements and Bilateral Investment Treaties have Unleashed a New Era of Corporate Power and What to do About it, (Institute for Policy Studies

2007) < https://www.foodandwaterwatch.org/images/water/world-water/bank-

policy/ICSID_print.pdf> accessed 25 August 2014; Investor-State Disputes Arising From Investment

Treaties: A Review (UNCTAD, 2005) <http://unctad.org/en/docs/iteiit20054_en.pdf> accessed 27

August 2014; Latest Developments in Investor-State Dispute Settlement, IIA Issues Note, No.1 May 2013, 1, (UNCTAD 2013)<http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d3_en.pdf> accessed 27 August 2014.

24 _{Gallagher and Shrestha (n 19) 927. Also see e.g. Gus Van Harten, ‘Investment Treaties as a}

Constraining Framework’ in Shahrukh Rafi Khan and Jens Christiansen (eds), Towards New

Developmentalism: Market as Means Rather Than Master (Routledge 2011) 158.

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middle-size capital importing countries, especially Latin American countries and the former Soviet bloc.26

Gallagher and Shresthra describe the impact of investor’s claims thus:

‘such claims are in much larger proportion to the respective developing country share of foreign investment flows. “Upper middle income” developing nations only receive 10 percent of global FDI, but are subject to 46 percent of the claims. “Lower middles income” developing countries only receive 9 percent of global FDI inflows, but are subject to 29 percent of all claims. The “low income” developing nations receive less than one percent of FDI flows but are subject to five percent of the total claims.’27

Further they state,

‘[the] average award against developing countries relative to their annual government expenditure is 0.53% or 99 cents per capita. The average award amount Canada is liable for is 0.003% of its annual government spending and translates to 12 cents per capita. Thus compared to a developed country, the award amounts have a higher impact on the economy of developing countries.’28

A recent UNCTAD study shows that in 66 percent of the new cases filed in 2012, the respondent states were developing or transition economies.29 _{The study also shows that}

at least 95 governments have responded to one or more investment treaty arbitrations, among which 61 were developing countries, 18 were developed countries and 16 were countries in transition.30 _{The study reveals that some developing countries have faced}

26 _{Harten, ‘Investment Treaty Arbitration and Public Law (n 1) 32-33.}

27 _{Gallagher and Shrestha (n 19) 925.}

28 _{Gallagher and Shrestha (n 19) 927.}

29 _{UNCTAD, Latest Developments in Investor-State Dispute Settlement (n 23) 1.}

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multiple disputes; Argentina has responded to the most (52 cases), followed by Venezuela (34), Ecuador (23) and Mexico (21).31

The US based NGO Food and Water Watch has expressed concern on the increasing number of cases initiated against developing countries and their outcomes.32 _{As it}

stated, of disputes against national governments in 2007,

‘93 percent of the cases involve low- or middle-income developing countries…. ICSID tribunals have ruled in favor of the investor and ordered the government to pay compensation in nearly 70 percent of cases.’33

These statistics call attention to the importance of the treatment host developing countries receive from investment tribunals.34 _{Withdrawal from the ICSID system by}

some developing countries, including Venezuela35 _{and Ecuador,}36 _{is also suggestive of}

serious problems.