Supreme Court endorses investment treaties

Not quite, but the Court did side with UK investors against Argentina and Obama in a historic decision last week.

The decision paired an unusual alliance of the court’s most liberal and conservative justices, who ruled in favor of empowering transnational arbitrators  – not only to second guess national policies and judicial processes – but to decide when they get to second guess them. Two of the court’s swing votes (Chief Justice Roberts and Justice Kennedy) dissented, arguing for more deference to national institutions. This outcome could have been predicted from the tone of the court’s oral arguments back in December, which was fairly hostile to both governments’ arguments.

The dispute arose when Argentina’s financial crisis response in the early 2000s harmed a UK corporation’s investment in the country’s privatized natural gas distribution sector. The investor (BG Group) successfully brought a claim under the UK-Argentina investment treaty. The dispute was sited in the US, which meant that Argentina could (and did) ask US courts to vacate the award. The US phase of the dispute went all the way to the Supreme Court, making it the first time that the court has ruled on an investment treaty dispute.

The Obama administration sided with Argentina in alleging that the transnational arbitrators should not have accepted jurisdiction over the case, arguing that the treaty obligated BG Group to first seek recourse in Argentine courts for 18 months before launching the treaty complaint (which the company did not do). The US’ recent treaties put some similar procedural limits and preconditions on countries’ consent to be sued by investors; the solicitor general’s position in the case seemed motivated by ensuring courts respect those limits in future cases.

There are a lot of interesting and novel aspects of the Supreme Court’s decision. I’ll focus on just a few.

First, the case’s relevance to the debate over the appropriate role for national judges in a “globalized” economy. On one side, some investment treaty critics argue that national judges have legitimacy stemming from national constitutions, and foreign investors should have no greater rights and should have to go through the same processes as national investors – before national courts. On the other, fans of investment treaties argue that national judges don’t have the expertise or inclination to settle such disputes, and international arbitration provides a quick and unbiased alternative.

The USSC’s minority makes the first argument:

the majority “trivializes the significance to a sovereign nation of subjecting itself to arbitration anywhere in the world, solely at the option of private parties.. There are good reasons for any sovereign to condition its consent to arbitrate disputes on investors’ firstlitigating their claims in the country’s own courts for a specified period. It is no trifling matter for a sovereign nation to subject itself to suit by private parties; we do not presume that any country—including our own—takes that step lightly… But even where a sovereign nation has subjected itself to suit in its own courts, it is quite another thing for it to subject itself to international arbitration… Substantively, by acquiescing to arbitration, a state permits private adjudicators to review its public policies and effectively annul the authoritative acts of its legislature, executive, and judiciary.”

The majority makes the second (“International arbitrators are likely more familiar than are judges with the expectations of foreign investors and recipient nations regarding” these treaties).

To the critics that argue that we should be re-empowering national judges to take over the caseload that investment treaties may be taking away from them, the majority decision is a resounding “no thanks.” Indeed, the argument that national judges (either with a predilection for states’ rights or muscular regulation) might be allies in the fight against investment treaties (if they only knew!) takes a major hit from the decision.

Perhaps inadvertently, both sides actually demonstrated that investment treaty advocates may have a point about the relative treaty illiteracy of national judges. In the majority opinion, Justice Breyer essentially equated treaty disputes to normal contractual disputes, and didn’t see anything special about arbitrations where sovereign states were the respondents. Roberts’ dissent, on the other hand, likened investment treaty decisions to annulments of national policy – even though these arbitrators are not empowered to change national policy (only order that states pay compensation when they choose to regulate in certain ways).

Second, which sources the justices relied upon. The sources of international law are (according to the ICJ statute Article 38):

a. international conventions, whether general or particular, establishing rules expressly recognized by the contesting states;

b. international custom, as evidence of a general practice accepted as law;

c. the general principles of law recognized by civilized nations;

d. subject to the provisions of Article 59, judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.

The first three are the most important, and all relate to words and deeds of states. However, the USSC (much as the arbitrators themselves)  gave less weight to the arguments of actual state representatives (Argentina and the US executive branch) than to the fourth (subsidiary) source of international law: arbitral decisions and scholarly writings. Look at the sources the justices cite when scrutinizing the investment treaties: mostly academic textbooks, or other arbitral decisions. The statements of states are mentioned little if at all. This shows that even the world’s oldest court among democracies looks for primary guidance – not to democratically elected officials – but to the individual transnational intellectual entrepreneurs that are shaping the investment treaty doctrines and landscapes. This makes academic work in this area very influential. Nice work if you can get it!

The USSC’s decision also has implications for the relationship between law and politics. After its financial crisis, Argentina put waiting limits on investors’ access to national courts, and made relatively investor-friendly concession renegotiations available only to those firms that negotiated rather than litigated. In so doing, Argentina effectively prioritized politics over the law. The USSC likened this to a situation where the courts were totally shut down (which was not the case), and therefore local litigation could have been futile. The justices don’t make an absolute call on the question, but they say that arbitrators were in their rights to make that call. So, even as Argentina tried to put politics over law, law reared its head on the transnational scene (with now an endorsement from US justices).

Curiously, Justice Sotomayor (in a concurring opinion) suggested that Argentina couldn’t have genuinely objected to the jurisdiction of the arbitral panel, as it  participated in arguing its case before them. This raises an interesting question: should respondent countries simply boycott investor-state proceedings? In a sense, Sotomayor seems to be advocating that states – if they are serious about the illegitimacy of international arbitration – put their money where their mouth is and reassert politics above legal processes.

Finally, the USSC decision sends a signal to investment treaty negotiators to be as precise as possible. Even though Chief Justice Roberts made a case for interpreting vague language and omitted language to the favor of states, the majority opinion says that if local litigation requirements are to be actual barriers to state consent to treaty arbitration, they need to say this directly (as do recent US investment treaties). This poses a challenge to states like Argentina, who crafted dozens of investment treaties before the current vogue for precision really caught hold. Now, they can renounce or renegotiate the treaties if they want more precision, but I’m betting that developed country investors and states probably won’t make that a costless endeavor.

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