Sebastian Sauter Odio*
I. Introduction
Investor-state dispute settlement (“ISDS”) is a mechanism for foreign investors to claim alleged damages caused by host states, primarily based on standards set by international investment agreements (“IIA”). The ISDS regime has been mostly analyzed from the perspective of the investor or the state, setting aside third parties affected by the investment projects. Beyond the investor-state relationship international investment law (“IIL”) implies a complex relationship with other stakeholders, thus obliging the reconciliation of commercial interests with social justice and environmental protection—areas related to human rights (“HR”).
HR of local communities, including indigenous peoples, workers, and consumers can be undermined by a foreign investment project, particularly concerning the extractives industry, the energy sector, and other large-scale projects. Forced displacement and material dispossession violate HR of third parties to an ISDS claim, including the right to housing, food, water, sanitation, education, and a healthy environment, as well as cultural human rights (see Bangladesh Accord Arbitrations, Bhopal Gas Case (Union Carbide Corp. v. Union of India), Myanmar Yadana Gas Field (Unocal Corp.), Nike Child Labor, Shell v. Nigeria, Philip Morris v. Uruguay, Philip Morris v. Australia, Lone Pine Inc. v. Canada, Vattenfall v. Germany, Spence v. Costa Rica, Methanex v. USA). More importantly, third parties affected by such projects are often unaware of the ISDS claims that impact their rights and thus unable to exercise such rights, including access to justice and public participation.
Even though third-party rightsholders can bring HR claims to domestic and international courts, arbitral tribunals have indirectly ruled on HR matters, especially in cases referring to climate change and the environment (see Urbaser v. Argentina, Bear Creek v. Peru, Allard v. Barbados, Burlington Resources v. Ecuador, Cortec Mining v. Kenya, S.D. Myers v. Canada, Perenco v. Ecuador, Biwater v. Tanzania). Thus, in this article, I explore the possibility of arbitrating HR in an ISDS procedure, thus providing third parties directly affected by an investment project with an ADR mechanism currently reserved for foreign investors.
II. A Systematic Approach to IIL
As Jean-Baptiste Racine observes in Arbitrage et droits de l’homme (2021), arbitration, as a creation of contract, is normally associated with business and trading, whilst HR pertain to humanistic, universal, and progressive values.[1] Commonly considered opposite areas of the law in the private-public spectrum, arbitrating a HR dispute may be regarded as incompatible. HR duties are, however, not only assigned to the state but also to private parties. Arbitration itself is a case of a private party making binding decisions between conflicting individuals, a power belonging to the right to justice that is generally reserved to state-court litigation. As such, arbitral tribunals shall comply with the public order and HR related to a private-led dispute resolution mechanism.
On this basis, businesses, including foreign investors, are more aware than ever of the HR implications of their operations and of their corporate social responsibility. They have adopted four main efforts to review substantive and procedural standards of IIAs from a holistic and systematic approach of the law. These efforts include incorporating provisions on sustainable development, environmental, health policy and national security in IIAs.
Firstly, the Business and Human Rights (“BHR”) movement addresses business-related HR abuses based on three main pillars that incorporate the United Nations Guiding Principles on Business and Human Rights (“UNGP”): the state’s duty to respect, protect, and fulfil HR, the role of businesses and their duty to respect HR, and the right to access to remedy of those affected by BHR violations.
Secondly, The Hague Rules on Business and Human Rights Arbitration (“The Hague Rules”) is a soft law instrument based on the UNCITRAL Arbitration Rules and the UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration that attempts to “lower barriers to access to remedy” by establishing procedural rules that respond to the unique nature of the interests involved in BHR disputes.
Moreover, the UNCITRAL Working Group III’s discussions on the reform of ISDS rules have considered a greater role for HR provisions in IIL, including the right to access to justice and its corresponding rights to trial and to due process. UNCTAD’S Work Program on IIAs also addresses the rulemaking of IIA by advising stakeholders to include sustainable development and inclusive growth provisions in IIAs.
Within this framework of increasing consciousness of the interconnectedness of the law, providing access to third-party rightsholders to bring their HR claims to ISDS arbitral tribunals would not only be compliant with recent efforts regarding the normative review of IIAs, but also address power imbalances in ISDS of investors with regards to third parties—especially the privilege of overpassing local state courts.
III. Addressing ISDS Disparities
ISDS provides investors a dispute settlement mechanism to claim reparations from breaches of IIA standards by host states, including non-compliance of most-favored nation treatment, fair and equitable treatment, and prohibitions to expropriation provisions. Meanwhile, affected third parties, including those whose HR have been violated by foreign investors themselves, must exhaust internal state mechanisms—for example, obtaining a court ruling with the effects of res judicata—prior to resorting to a standing international HR court. ISDS therefore affords foreign investors a privileged dispute resolution mechanism, to such an extent they can “bypass local courts” and directly resort to an international ad-hoc tribunal, whilst affected third parties must follow the cumbersome procedure of first exhausting internal state mechanisms. This restricts their right to access to justice in relation to the ISDS claim filed by the foreign investor.
In this sense, providing access to ISDS to affected HR third parties would not only rebalance the asymmetries this mechanism has in respect to the investor claimant and third-party rightsholders, but also reinforce their right to access to justice, in accordance with SDG Goal 16. Furthermore, the flexibility of arbitration as an ADR mechanism could enhance the parties’ procedural rights. For instance, if the tribunal is seated in the jurisdiction the HR violation took place, the affected party—usually being local communities—, the foreign investor, and local authorities relevant to the claim may have more access to the knowledge and the functioning of social and cultural relations of local communities, or even receive support from local organizations, and thus enjoy more equal access to communication and effective remedy adjusted to the particularities of the affected party’s reality.
That said, HR claims brought to ISDS cases shall at least comply with particular procedural standards, given the nature of HR and according to the recent normative reviews set forth in section II of this article.
IV. HR Arbitration
Provided the nature and the governing principles of universality, interdependence, indivisibility, and equality of HR, IIA must include special provisions for an ISDS to rule on HR. First and most importantly, parties must agree in good faith to an arbitration clause established in the IIA and/or eventually agree on a side-agreement once the dispute arises. As a product of contract, a dispute may be arbitrable only if the parties have reached such an agreement. Given that a HR dispute relates to fundamental rights, special consideration should be given to the will of the investor and the host state to resolve HR disputes through arbitration. In any case, to be arbitrable, the event that gives origin to the HR violation must be caused by the foreign state and relate to its duties set forth in the IIA.
That said, HR claims should be brought before an ISDS tribunal only if its members have specialized knowledge to interpret and rule on HR. Most ISDS cases are filed before the International Centre for the Settlement of Investment Disputes (ICSID), the Permanent Court of Arbitration, the International Chamber of Commerce, the London Court of International Arbitration, and the Stockholm Chamber of Commerce. Filing ISDS cases before unspecialized HR tribunals may result in investment and HR claims being heard separately by different tribunals, thus, fragmenting dispute settlement proceedings. For instance, local activists often file HR claims before national courts or international HR organizations, which are ruled separately from the investment claim.
Concerning transparency and publicity, the IIA shall include provisions that ensure public access to the award, hence, complying with the state’s international HR obligations regarding the respect, protection, and fulfilment of HR. Current efforts to improve the transparency and neutrality of ISDS include: (1) the creation of the Multilateral Investment Court, a permanent court of standing suggested by the E.U.; and, (2) the Mauritius Convention on Transparency, which provides parties to IIA executed prior to April 1st, 2014, to consent on the application of the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, setting procedural rules for making publicly available information on ISDS. Amici participation (non-party submissions), public hearings, allowance of observers, as well as the publication of the hearing recordings and transcripts, are other aspects that should be taken into account to guarantee the transparency and neutrality of an ISDS HR procedure.
In terms of remedies, ISDS focuses on economic reparations (compensation), whilst HR requires a broader set of reparations beyond compensation. HR requires, for instance, protective measures for the victim, restitution, rehabilitation, satisfaction and guarantees of non-repetition, as well as collective reparations, or even transitional justice.
On the other hand, the absence of precedent and of an appellate body in arbitration may threaten HR awards and the right to appeal of the parties to the claim. Although an arbitral award is final and binding on the parties (res judicata), it does not set a precedent applicable to other cases. This generates difficulty in predicting outcomes, added to the fact that ISDS tribunals have ruled differently on similar IIA provisions. Moreover, the lack of an appellate body also adds difficulty to the predictability and interpretation of the IIA, insofar as the review of awards sets rules on correcting first instance rulings and provides legal certainty.
Furthermore, the enforcement of an HR award will ultimately depend on the local jurisdiction of and the applicable law to the arbitration agreement. Despite awards being practically enforceable worldwide following the 1958 New York Convention (“NYC”), according to Article 1.3, State Parties may use reservations and hence limit the application of the NYC to commercial matters. As long as HR claims are not defined as commercial matters, states are free to exclude HR disputes from the scope of the application of the NYC and therefore reserve HR claims to domestic courts; as such, the enforcement of an HR award is often a matter of politics.
Even when IIAs respond to the matters mentioned above, the absence of precedent and of an appellate court, compounded by issues regarding the enforcement of the award and specialization of the ISDS tribunal, challenge the possibility of arbitrating HR of affected third parties to ISDS claims.
IV. Conclusion
While ISDS was initially created to protect foreign investors against arbitrary state measures, the increasing awareness of businesses of their corporate and social responsibilities, including HR violations caused by foreign investors, have resulted in exploring alternative ways of providing affected third parties with an ADR mechanism that corresponds to the privilege ISDS entails for foreign investors.
Arbitrating HR of local communities, workers, and consumers breached by foreign investors would not only conform to the systematic approach IIL demands and to the efforts on the normative review of IIAs (including UNGP, The Hague Rules, and UNCITRAL Working Group III and UNCTAD’S Work Program’ discussions), but also enhance the state’s international HR duties and the parties’ right to access to justice.
In this regard, arbitrating HR of third parties to ISDS cases can be feasible if (1) the investor and the host states have executed a valid arbitration agreement; (2) the tribunal is specialized in HR; (3) the publicity and/or transparency of the arbitration proceedings are guaranteed; and (4) the awards are enforceable in that they provide appropriate remedies to the claimant. If the arbitration procedure complies with these requirements, arbitral tribunals should be able to rule on HR claims. However, the absence of precedent and of an appellate tribunal remain tangible challenges to arbitrating HR of third parties to ISDS cases.
*Sebastian Sauter Odio is a Costa Rican associate attorney and editor-in-chief of the Costa Rican Journal of International Law. In 2022 he obtained his Licenciatura en Derecho (J.D. equivalent) with honors from the University of Costa Rica. He has special interests in Private and Public International Law, Human Rights, politics, and environmental matters.
[1] Jean-Baptiste Racine, Lecture presented at The Hague Academy of International Law Online Summer Course on Private International Law on “Arbitrage et Droits de L’Homme” (2021).