Breaking the Market Dominance of ICSID? An Assessment of the Likelihood of Institutional Competition, Especially from Asia, in the Near Future

Law and Economics utilizes economic concepts to explain legal processes and their effects. An economic analysis of law may be extraordinarily useful in identifying the economic dynamics that underlie legal institutions. Throughout the discussion, we use terms such as ‘market dominance’, ‘market share’, and ‘monopoly’ that may, at first blush, seem ill-fitted to describe investment arbitration. Conceptualizing the topic in such terms, however, provides a great deal of explanatory power, as we will show.

We use the terms ‘network externaities’ and ‘network effects’ interchangeably throughout the discussion.

William Page et al. (2000, pp. 952, 960). See also Schelling (1978, pp. 92–94, 98–99).

The use of the term ‘monopoly’ here is carefully deployed. ICSID may be understood as a monopoly in that the network externalities that inhere in the market for investment arbitration inhibit market competition, creating barriers to entry. For all intense and purposes the dynamic functions as a monopoly. ICSID is not, however, a monopoly in the strict sense of a firm strategically engaging in anti-competitive practices.

See Liebowitz et al. (1998, pp. 671, 671).

For a very good overview of other network effect examples in a wide range of contexts, see Ferrell and Klemperer (2006, pp. 46–54).

Lemley and McGowan (1998). (“Language, for example, is the fundamental medium of communication and could be said to have both negligible inherent value to the first speaker and increasing value over the range of additional speakers.”); see also Liebowitz and Margolis (1994, pp. 133, 136); Aviram (2003, p. 15). For a more in-depth analysis of the network effects of language, see, e.g., Church and King (1993, p. 337).

See Druzin (2009, pp. 131, 151) (arguing that network effects induce standardization in choice of law and choice of forum clauses in transnational commercial contracts).

Liebowitz and Margolis (1995a, b, p. 1).

https://​icsid.​worldbank.​org/​apps/​ICSIDWEB/​resources/​Documents/​ICSID%20​Web%20​Stats%20​2016-1%20​(English)%20​final.​pdf (p. 7).

For purposes of this article the term “ICSID cases” refers to cases submitted under the ICSID Convention and its accompanying arbitration rules, but does not encompass other cases administered by ICSID but submitted under other arbitral rules, such as the ICSID additional facility rules or the UNCITRAL rules.

Behn (2016).

UNCTAD (2015a, b, p. 5), available at http://​unctad.​org/​en/​PublicationsLibr​ary/​webdiaepcb2015d1​_​en.​pdf.

https://​icsid.​worldbank.​org/​apps/​ICSIDWEB/​icsiddocs/​Documents/​List%20​of%20​Contracting%20​States%20​and%20​Other%20​Signatories%20​of%20​the%20​Convention%20​-%20​Latest.​pdf.

https://​icsid.​worldbank.​org/​apps/​ICSIDWEB/​about/​Pages/​default.​aspx; https://​icsid.​worldbank.​org/​apps/​ICSIDWEB/​resources/​Documents/​ICSID%20​Web%20​Stats%20​2016-1%20​%28English%29%20​final.​pdf, (p. 10).

David and Shane Greenstein (1990, pp. 3, 6).

Weitzel (2004, p. 16).

Gillette (1998, pp. 813, 820).

Kemper (2010, p. 73).

Ibid 73–74. For this principle, see Economides and Himmelberg (1995a, b), Clement et al. (1998), Choi and Whinston (2000).

Economides and Himmelberg (1995a, b, p. 5).

David and Greenstein (1990, pp. 3, 9).

Farrell and Saloner (1986, pp. 940, 940).

Ibid 943.

Liebowitz and Margolis (2001, p. 227).

ibid 10. See Liebowitz and Margolis (2001, p. 1) (refuting the much cited QWERTY keyboard example of lock-in, claiming that evidence of the superiority of Dvorak, a keyboard competitor to the QWERTY layout, is lacking. See also Liebowitz and Stephen Margolis (2001, p. 205), William Cohen (1996, pp. 535, 539–546).

Liebowitz and Margolis (n 24) 110.

Aviram (2003, p. 15). See also Liebowitz et al. (2001, pp. 671, 672).

Bekkers (2001, p. 196).

Katz and Shapiro (1994, pp. 93, 106).

Comprehensive Economic and Trade Agreement (CETA) Between Canada, of the one part and the European Union, of the other part http://​trade.​ec.​europa.​eu/​doclib/​docs/​2014/​september/​tradoc_​152806.​pdf, Chapter 8, Section F—Resolution of investment disputes between investors and states (CETA); Free Trade Agreement between the European Union and the Socialist Republic of Vietnam (in negotiation), http://​investmentpolicy​hub.​unctad.​org/​Download/​TreatyFile/​3563, Section 3 (Resolution of Investment Disputes), Sub-Section 4: Investment Tribunal System (EU-Vietnam FTA).

Transatlantic Trade and Investment Partnership—European Union’s proposal for Investment Protection and Resolution of Investment Disputes, 12 November 2015 http://​trade.​ec.​europa.​eu/​doclib/​docs/​2015/​november/​tradoc_​153955.​pdf, Chapter 8, Section 3 (Resolution of Investment Disputes and Investment Court System), Sub-Section 4: Investment Court System (T-TIP proposal).

See EU-Singapore Free Trade Agreement, negotiations completed on 17 October 2014, http://​trade.​ec.​europa.​eu/​doclib/​press/​index.​cfm?​id=​961, Chapter 9.

See Daly and Ahmad (2015):

The EU may seek to propose an Asia-wide permanent investment court to resolve disputes arising under the FTAs that the EU is currently negotiating with some Asian States (Malaysia, Thailand, India, Philippines and Japan). While the EU-Singapore FTA, which is pending signature and ratification, does not provide for the creation of a distinct permanent investment court, it does establish a joint committee (known as the ‘Trade Committee’) comprised of the Parties’ Trade representatives with the task to, inter alia, oversee the implementation of the FTA, consider amendments to the FTA and issue binding decisions. With these wide powers, the creation of an Asia-wide permanent investment court is not entirely far fetched. The Trade Committee is tasked, after all, to examine whether an appellate mechanism could be created (Article 9.30(1) (c) of the EU-Singapore FTA).

See also Lester (2015):

[T]here’s the question of the yet to be ratified pre-ICS [ie ‘Investment Court System’] FTAs that still have old ISDS rules in them, such as (…) the EU-Singapore FTA. Can those really be ratified as currently written, when the new and improved version of ISDS is out there, being sold as a better alternative?

Schill (2016, pp. 1, 2):

The Commission’s proposal to create a permanent investment court is a strong vision and the text presented constitutes the first concrete step towards practical implementation. (…) The proposal breathes the right spirit: to transform investor-state arbitration into a truly public, fully transparent, more predictable and balanced system of global adjudication.

CETA (n 30), art. 8.29; European Commission, ‘Commission proposes new Investment Court System for TTIP and other EU trade and investment negotiations’, Press release (16 September 2015) (European commission 2015a), available at http://​europa.​eu/​rapid/​press-release_​IP-15-5651_​en.​htm.

The European Commission received approximately 150,000 comments when it called for public comment on the proposed inclusion of investor-state dispute settlement in the T-TIP. While a vast majority of those were ‘form’ comments generated by opponents of investor-state arbitration, some 3,500 were individualized. European Commission, Report—Online public consultation on investment protection and investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP) (Commission Staff Working Document, SWD (2015b) 3 final) 13 January 2015, 3, http://​trade.​ec.​europa.​eu/​doclib/​docs/​2015/​january/​tradoc_​153044.​pdf.

It is noteworthy, in addition, that the Netherlands recently demanded a referendum on the T-TIP. See http://​sputniknews.​com/​europe/​20160415/​1038074644/​ttip-deal-dutch-referendum.​html. and http://​www.​euractiv.​com/​section/​trade-society/​news/​dutch-voters-now-demanding-referendum-on-ttip/​.

For instance, Democratic presidential candidate Hillary Clinton said about the TPP: ‘I want to make sure that I can look into the eyes of any middle-class American and say, “this will help raise your wages”. And I concluded I could not’ (Grewal 2015); Bernie Sanders was also strongly opposed to the trade deal and stated that ‘[t]he Trans-Pacific Partnership is a disastrous trade agreement designed to protect the interests of the largest multi-national corporations at the expense of workers, consumers, the environment and the foundations of American democracy. It will also negatively impact some of the poorest people in the world’ (‘Senator Bernie Sanders: The Trans-Pacific Trade (TPP) Agreement Must be Defeated’ http://​www.​sanders.​senate.​gov/​download/​the-trans-pacific-trade-tpp-agreement-must-be-defeated?​inline=​file); Republic presidential candidates Donald Trump and Ted Cruz were also generally opposed to the trade deal. See Greenberg (2016) http://​www.​politifact.​com/​truth-o-meter/​statements/​2016/​mar/​10/​ted-cruz/​ted-cruz-i-always-opposed-tpp-trans-pacific-partne/​ and Clayton Youngman (2015), Blanchfield (2017)

Politico Pro’s Morning Trade: TTIP bogged down in feta cheese—CETA will be a ‘mixed agreement’, Politico (12 May 2016). The CJEU determined that the investor-state dispute settlement portion of the EU-Singapore investment chapter is subject to mixed competence, a decision applicable to the investor-state dispute resolution portions of other EU free trade agreements as well.  Opinion (C-2/15) (16 May 2017).  The CJE has yet to determine whether investor-state dispute settlement more generally is compatible with EU law.

Opinion No. 04/16 on the establishment of an investment tribunal in TTIP—the proposal from the European Commission on 16.09.2015 and 11.12.2015. For a commentary in English about the letter, see http://​canadians.​org/​sites/​default/​files/​tpp-deutsche-richterbund-opinion-0216.​pdf. See also ‘Germany’s judges and public prosecutors reject proposed investment court system in TTIP’, Investment Treaty News (29 February 2016) https://​www.​iisd.​org/​itn/​2016/​02/​29/​germanys-judges-and-public-prosecutors-reject-proposed-investment-court-system-in-ttip/​.

CETA (n 30) art 8.27(16).

T-TIP (n 24) Investment Chapter, Section 3, art 9.16; EU-Vietnam FTA (n 23) Chapter Eight, Section 3, Sub-Section 4, art 12(18).

How the EU Court proposal will be integrated with the current system of international arbitration, where the court in the place of arbitration has the potential to set aside the award on grounds specified under local arbitration law, is not altogether clear. The assumption is that once the appellate system is in place it will supplant review in local courts, yet it seems that those arbitrations will still have a ‘place’ for purposes of judicial assistance to arbitration, for example. CETA provides that the disputing party must not seek to set aside the award once the appellate body structure is fully in place: ‘Upon adoption of the decision [setting out the functioning of the Appellate Tribunal]: a disputing party shall not seek to review, set aside, annul, revise or initiate any other similar procedure as regards an award under this Section’. CETA (n 30) Article 8.28(9)(b). Whether parties will necessarily abide by this stricture, and whether local courts will necessarily dismiss a set-aside application if one is made, may well be put into question. Also unclear is the role that will be played by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) (concluded 10 June 1958, entered into force 7 June 1959, 330 UNTS 38; 21 UST 2517; 7 ILM 1046 (1968)), the usual enforcement mechanism in non-ICSID Convention arbitration. Will an award from the first-instance tribunal be enforceable under the New York Convention while an appeal is pending, or will only a post-appeal award (or an award that the losing party has declined to appeal) be enforceable? Will parties continue to resist enforcement on the grounds permited in the New York Convention, or will the language in the investment agreement be viewed as superseding the possibility of resisting enforcement? These questions will be answered by national courts.

Ibid art 52.

Ibid art 67.

Permanent Court of Arbitration, PCA Case Repository, http://​www.​pcacases.​com/​web/​allcases/​.

See Permanent Court of Arbitration, About Us, http://​www.​pcacases.​com/​web/​aboutus/​:

Established in 1899 to facilitate arbitration and other forms of dispute resolution between states, the PCA has developed into a modern, multi-faceted arbitral institution that is now perfectly situated at the juncture between public and private international law to meet the rapidly evolving dispute resolution needs of the international community. Today the PCA provides services for the resolution of disputes involving various combinations of states, state entities, intergovernmental organizations, and private parties.

See also Daly (2014, p. 3).

SIAC Investment Arbitration Rules, http://​www.​siac.​org.​sg/​our-rules/​rules/​siac-ia-rules-2017 .

According to the SIAC website, the reasons for Singapore’s success are as follows:

An independent neutral third-country venue consistently ranked in the top 5 for the least corrupt public sector in the world in the Corruption Perceptions Index. Singapore is also consistently ranked no. 1 for the least corrupt public sector in Asia in the Corruption Perceptions Index.

See Chaisse (2015, pp. 563–638). See also Choo (2015)[https://​singaporeinterna​tionalarbitratio​n.​com/​2015/​06/​15/​the-rise-and-rise-of-singapore-singapore-as-a-preferred-venue-for-international-arbitration/​].

See the official website here: http://​klrca.​org/​.

See http://​www.​aalco.​int/​Scripts/​default.​asp.

The 2009 ASEAN Comprehensive Investment Agreement is a multilateral investment treaty between all member States of ASEAN, which comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore and Thailand. Section B of the 2009 ASEAN Comprehensive Investment Agreement provides for the resolution of investment disputes between an investor and a member State. For a detailed commentary on the ACUA, see Chaisse and Jusoh (2016, p. 265).

The degree to which the KLRCA is wholly free from political influence remains, however, unclear—a point that should be noted.

See ‘UNASUR Arbitration Centre one step closer to being established’, Investment Treaty News (29 February 2016) 10, http://​www.​iisd.​org/​itn/​wp-content/​uploads/​2016/​02/​iisd-itn-february-2016-english.​pdf.

Ioan Micula et al . v Government of Romania, Case No. 15-3109-cv (2d. Cir.). The decision below is Ioan Micula v Government of Romania, Case No. 15-CV15 MISC 107 (Apr. 28, 2015). The U.S. District Court ordered enforcement of the award on an ex parte basis (which is the process applicable to court decisions of U.S. courts). The crux of the case is the procedure a judgment creditor needs to follow to enforce an ICSID award.  The Second Circuit decided a similar case in which it held that the Foreign Sovereign Immunities Act was the only appropriate vehicle for enforcement.  Mobil Cerro Negro Ltd. et al. v. Bolivarian Republic of Venezuela (2nd Cir. 2017).  The same result will ensue in the Micula case, likely obviating, for now, any deicsion on the applicability of the act-of-state doctrine.

Ioan Micula et al . v Government of Romania, Case No. 15-3109-cv (Brief for Amicus Curiae the Commission of the European Union in Support of Defendant-Appellant, 2d. Cir., Feb. 4, 2016).

http://​investmentpolicy​hub.​unctad.​org/​IIA. These 2,700 hundred are the BITs and international investment agreements that have entered into force. Others are pending. At the end of 2014, UNCTAD identified a total of 3,271 international investment agreements. See UNCTAD (2015a, b, p. 106): “The conclusion in 2014 of 31 international investment agreements (IIAs)—18 bilateral investment treaties (BITs) and 13 ‘other IIAs’—brought the total number of IIAs to 3,271 (2,926 BITs and 345 ‘other IIAs’) by year-end.” [footnote omitted].

An open question is the effect on investors’ rights if both states to the treaty terminate the treaty, and in so doing terminate the survival clause. Do states retain that power, or does the investor have vested rights that cannot be ousted by such an agreement? For a provocative study of this issue, see Roberts (2015, p. 353).

ICSID Secretariat, https://​icsid.​worldbank.​org/​apps/​ICSIDWEB/​about/​Pages/​Secretariat.​aspx (‘The Secretariat consists of approximately 70 staff of diverse backgrounds and nationalities’).

https://​icsid.​worldbank.​org/​apps/​ICSIDWEB/​Documents/​KLRCA%20​Agreement%20​Announcement%20​FINAL.​pdf?​Mobile=​1&​Source=​%2Fapps%2FICSIDWEB%2F_​layouts%2Fmobile%2Fview.​aspx%3FList%3D55947ab4-4786-48b9-803c-40abd126dbd5%26View%3D918f21b0-91dc-4b7b-88df-b8291b7c6282%26CurrentPage%3D1.

Lars and Titi (2015, pp. 401–435).

ICSID statistics indicate that overall, the basis of consent invoked to establish ICSID jurisdiction in registered ICSID cases was found in an investment contract between the investor and the host state in only 17.3% of the cases. The basis for consent was found in the domestic law of the host state in 9.3% of the cases while the basis for consent in the other cases was found in a BIT (60.3%) or another investment agreement. In 2015, the basis of consent invoked to establish ICSID jurisdiction in registered ICSID cases was found in an investment contract between the investor and the host state in only 8% of the cases. The basis for consent was found in the domestic law of the host state in 8% of the cases while the basis for consent in the other cases was found in a BIT (46%) or another investment agreement. See ICSID (2016, pp. 10 and 23).