Many people fear that American investors, if the free trade treaty TTIP will be implemented, will sue our governments on a massive scale. But this so-called “ISDS” has been existing for years already. And the suing party, that’s us. A revealing look in the hidden world of investor-state dispute settlement.
This article has also been published in German by Der Spiegel Online, in French by Basta Magazine and in Dutch by De Groene Amsterdammer.
Caracás, the capital of Venezuela, is tropically hot. It’s 2006. Bernard Mommer sits at his desk, in an enormously ugly, grey-black building in the middle of town, looking at his correspondence. As deputy secretary of Oil he is in regular contact with the 41 foreign oil companies which are active in the country. They are entering a turbulent time, since the government of Chavez has decided to get more out of the oil which runs from the country by billions of barrels.
Mommer opens a peculiar letter that has been forwarded to him by his boss, the secretary of Oil. “We accept your arbitration offer”, it reads, “on the basis of the Dutch investment treaty with Venezuela.” Sender: the Italian oil company Eni.
The first thing Mommer thinks is: “What on earth have I done?” He knows that arbitration means that two companies which disagree about something may submit their dispute to a commercial jury, chosen by themselves, to judge who is right according to the terms of the contract. But Mommer has not proposed anything to anyone. That would not even be possible. The ministry is certainly not a company, is it? And what have the Netherlands got to do with it?
When Mommer dives into the archive, he makes a few disturbing discoveries. One: a previous government has signed, without too much publicity, an investment treaty with the Netherlands. It includes an open offer to all Dutch investors, who feel they are not treated properly by their host, to summon Venezuela before an arbitration panel. That has to happen at the Worldbank, where commercial arbitrators may levy a fine on Venezuela. There is no possibility to appeal.
And two: recently Eni hung its Venezuelan activities under a Dutch holding company, by which it effectively became a Dutch investor.
Mommer may have to prepare himself for hard times.
“The state is a villain with a high hat.” Investment lawyer Gerard Meijer is sitting at a terrace in the business district of Amsterdam, right in front of the entrance to his office at NautaDutilh. ”This is an old quotation, but honestly – there is still a ring of truth to it. Perhaps some people feel sorry if a country is levied such a big fine. The taxpayer suffers for it. But the people forget that their government has undeservedly enriched itself with the same amount.”
Meijer has a trendy beard, which gives him a youthful charisma, despite his fifty years of age. As president of the Dutch Arbitration Association he is an outright spokesman for the sector. He really believes in what he is doing.
Suppose, he says, that you are an investor in a developing country. You’ve put all of your money into a project – say an oil well in Venezuela, or a textile factory in Egypt. “If you end up in a conflict with such a country, where would you go? To the local judge? Do you think you would have any chance at all?”
Fortunately there is arbitration. “It’s something between mediation and a court case. If both parties agree, they choose an arbitrator, and these two arbitrators choose a third. Their verdict is binding.” This is fair and works very well. As an investor you know that your property will at least be respected whenever you put your money somewhere. “It’s a kind of independent jurisdiction, with judges which do not have to be loyal to the government. That is very important. After all there are many banana republics in the world.”
For most people the world of Mommer and Meijer is totally unknown. Sometimes arbitration suddenly reaches the papers, when the trade treaty TTIP is mentioned for instance, but it exists already for years. Until the end of 2014 there were 629 known cases of investors who had indicted states on the basis of a treaty, but probably there have been more.
What is particularly striking is the growth of the amount of cases, from only fifteen in 2000 to some sixty a year nowadays. Also the amount of megaclaims is growing. Ever bigger conflicts are being fought out through ISDS. More than half of these is submitted to the court of the World Bank, the ICSID (International Commission for the Settlement of Investment Disputes), which has its own rules and arbitrators.
Our data show that the Netherlands have become the country from with the biggest amount of claims originate. No less than 16 percent of the cases submitted in 2014 are proceedings which were instituted by Dutch companies. “Dutch” is a relative concept in this context. A detailed analysis of the investors shows that more than two thirds of them are mailbox-companies. Only one out of six is a genuine Dutch company.
The countries which have been indicted most frequently are developing countries and emerging economies, plus resource-rich countries like Canada. The biggest climber the last few years has been Eastern Europe.
A remarkable small group of western top-lawyers has been dominating the world of investment arbitration, according to our own analysis of the arbitrators. The top-15 of arbitrators is involved in 63 percent of the tribunals of which we could determine the members. In 22 percent of the cases, this top-15 provides even two members to the tribunal, which means that they can make or break the case. They are all white men – except two white women. They often have connections with law firms which profit from the extension of the market. A lot of money is at stake: a procedure costs $ 8 mln on average.
Critics say this is an unfair system. Last month Ecuador was levied a fine of $ 1.1 bln, due to a claim of Occidental Petroleum, which did not agree with an expropriation. The fine amounts to more than 3 percent of the country’s total budget for 2016.
Proponents object that this is a way to find apolitical solutions to conflicts. Judges and politicians don’t have to bother anymore. You don’t have to send in warships, like France and England did in 1902 when they had a conflict with Venezuela. Nowadays a letter to Caracas will do, with an invitation for a hearing in Washington.
The first letter was not a very big issue for Bernard Mommer. Eni was prepared to withdraw the complaint for a few hundreds of millions of dollars and a new concession. But very soon he had two similar letters on his desk. They came from two American petrol companies, ConocoPhillips and Mobil. They did not want a settlement. They demanded $ 42 bln.
And, by the way, these two Texan giants had recently become “Dutch” companies as well.
Originally Mommer is a German mathematician, who – because of his knowledge of oil contracts – ended up with Venezuelan state oil company PvdSA, until he became deputy secretary in 2005. Later on he would become the Venezuelan governor at OPEC in Vienna. These days he is retired. He still has one additional job: making for arbitration cases. “I was the one who was responsible for the contracts,” he says in an extensive interview. ”Therefore I am the chief witness in all cases against Venezuela in the field of oil.”
Since the government of president Chavez wanted to keep more of the profits from oil, it decided in 2006 to renegotiate all the concessions. Venezuela wanted half of the shares in all projects; the income tax went up and a tax on royalties was introduced. Mommer was the main negotiator.
If you expropriate projects, you have to pay, knows Mommer. “We never denied that. With 39 of the 41 companies we struck a deal, also with Eni. But not with Mobil, which has merged with Exxon, and not with ConocoPhillips. These companies were engaged in a long term plan to slowly get their tax bill down to zero. To that we objected. When they refused to negotiate we expropriated their projects.” Their reply was a series of complaints with the ICSID and the ICC, the International Chamber of Commerce in Paris. Their demand: a reimbursement of all missed profits.
There is a lot at stake. The point is that the oil price was undergoing a historic rise at the time, from 40 dollars a barrel in 2004 to a maximum of 150 dollars in 2008. Venezuela wants to compensate the companies at the price level which was prevalent during the negotiations. But if the expropriation would be ruled invalid, both oil giants calculate, they should be rewarded at the price level of 2008. That would amount to a difference of billions of dollars.
“These companies were fed up with Venezuela for a long time already,” says Juan Carlos Boue, a Venezuelan researcher with the Oxford Institute of Energy. “But they decided that they wanted to go home with as much money as possible. And especially for ExxonMobil the rule is that they want the world to know that they have unlimited resources to ligitate, so a country will think twice to challenge them.”
The fierce fights surrounding Venezuela contrast starkly with the painting by William Strutt above the door of the stately study of Brooks Daly. It is entitled Peace, and it shows the lion, the child and the lamb from the book of Jesaiah, peacefully together.
Daly is assistant secretary-general of the Permanent Court of arbitration in The Hague, which is situated in the Vredespaleis. “This court has been established to prevent war,” he says. “From the start there has been room for all kinds of peaceful conflict resolution, for instance in the case of border disputes. But the last few years the amount of investment cases has suddenly exploded. It often is too big for a law firm, and besides, people look for neutral territory. That’s why they end up here.”
Daly’s job is mainly keeping the guests happy, he says, “whether that means that they get the right information about the procedures or good coffee and tea.” This has become a big job nowadays, since the Court is hearing no less than a hundred cases at the moment. “These could be cases between states or between commercial parties, but more than half of them is currently related to ISDS, i.e. arbitration between an investor and a state on account of an investment treaty.”
At the beginning of the nineties nobody had ever heard of ISDS, says Bryant Garth, professor of law at the Southwestern Law School in Los Angeles. He has witnessed its emergence when he was working on his book about the arbitration scene, Dealing in Virtue, which was published in 1997.
Originally arbitration was a way of settling disputes between states, says Garth. It was only slowly adopted by companies. But during the decolonization period it became popular. “Arbitration became the norm in contracts and concessions between companies and the former colonies. From there a whole system of principles and doctrines developed.”
Even so, it still was commercial arbitration, based on contracts, and not investment arbitration, based on treaties. Until 1987. Then a British investor took his refuge with ICSID. In the civil war in Sri Lanka his shrimp farm was taken for a Tamil base and destroyed. The Englishman wanted his money back from the state and referred to the investment treaty between Great Britain and Sri Lanka, which stated that they had to treat each other’s investors properly.
This was a unique claim. Normally a company cannot refer to a treaty between states; until this very moment this is not even possible with the WTO, still less when the conduct of army commanders is at stake. Nevertheless the tribunal – with a vote of two against one – choose to declare itself authorized. A fundamentally new principle, which cost Sri Lanka a fine of $ 610.000.
In itself that was not a big deal, but it put the door ajar for much more, although cases were kept secret for a couple of years. At the same time, according to Garth, NAFTA – the free trade zone between the US, Mexico and Canada – was launched. That gave a strong impetus. “People from the commercial arbitration scene became negotiators for NAFTA. That way they were able to lift commercial principles to a higher level. In its turn NAFTA became a kind of template for the growing number of countries that concluded Bilateral Investment Treaties (BITs). In this fashion it spread around the globe.”
Whereas the number of treaties with an ISDS-clause, especially BITs, took off to almost three thousand, the room for investors to file complaints against countries increased. During the nineties only 43 proceedings were instituted. Now the figure is at least 60 a year.
The international law firms, often of American origin, with offices as far as Singapore and China, have enthusiastically jumped upon that. They have become the carriers of a global, privatized judicial system. They meet each other at congresses, teach at the law departments and advise governments about new treaties. They defend states, they indict states, and they deliver the arbitrators that issue the verdicts.
Toplists have appeared with the offices which have dragged in the biggest amount of arbitration cases. The lawyers themselves use this classification proudly on their websites. At the top are White & Case and Freshfields Bruckhaus Duringer, with caseloads of tens of billions, measured in claims.
Meijer’s firm, NautaDutilh, cannot compete with this top, but has profiled itself in a big case. A couple of years ago Meijer defended assurance company Eureko in proceedings against Poland. The country refused to give Eureko a majority stake in the largest Polish assurer, although the company claimed to be entitled to that. “We demanded $ 9 bln,” says Meijer. “That was the value of the block of shares. Some people feel sorry for Poland, but you have to view it differently: it wasn’t their money.” In this $ 9 bln the expected profit for the next few years was included. Eventually the case was settled for the unprecedented amount of € 6 bln.
There has to be a way for investors to defend themselves against the omnipotence of the state, thinks Meijer. “The state, with all its tentacles, is inherently mighty.” Even our own, democratic state. Meijer would have no scruples to start an arbitration case against the Netherlands. “To tell you the truth, we advised the Chinese investor Ping An to do so, after the nationalisation of ABN Amro, but Ping An has not acted upon that so far.”
“You can earn a nice living in arbitration,” acknowledges Meijer. “That does not make me feel ashamed, it is a nice role. We help to submit states all over the world to the law.”
The case of Venezuela shows that this submission is not always easy. The arbitration cases at the ICSID-court in Washington drag on for years on end. Apart from that Exxon was not lucky. Formally the company won the case, but the jury judged the expropriation legal and thought that Exxon shouldn’t get much more than what Venezuela had offered: around $ 1 bln. “It is still too much, but I am satisfied”, says Mommer.
But now something weird has happened. In the Conoco-case another jury is calling the shots, and this one has a different viewpoint. According to this jury Venezuela has not acted “in good faith” during the expropriation. That is not allowed, and therefore the jury decided that the expropriation was illegal. The fine still has to be determined, but it could easily be more than $ 20 bln, which is a tenth of Venezuela’s GDP. This would be the second highest fine in any investment case so far.
Mommer says such a verdict is unimaginable. “This was never brought forward by Conoco! The tribunal introduced the argument of “in good faith” all by itself, and we could not even defend ourselves against it.”
Exxon and Conoco do not reply when asked to do so. But meanwhile a juicy anecdote from 2008 was discovered among the cables of Wikileaks. In it the negotiator of Conoco informs the American ambassador in Caracas that the negotiations are going well and that Venezuela has made decent offers, whereas Conoco upholds before the tribunal that Venezuela stalled the negotiations. In other words: it seems that it is the investor that is not acting “in good faith”. But even now that the cable has been made public, the arbitrators do not want to reevaluate their decision. They do not have that privilege either, they say: their verdict is final.
The arbitrators have judged – at any rate, two of the three. The third one does not agree with his peers. Indeed, arbitrator George Abi-Saab writes in his minority view that he reviews the proceedings with horror. This is a “legal comedy of errors on the theatre of the absurd”, he says, a “mockery” for the whole world of arbitration, a “travesty of justice”.
Mommer is not surprised. He says this case is not an exception. “The whole system works this way. It has been established by the World Bank to benefit investors”. In slightly less diplomatic words: “It is there to screw us”.
George Kahale III doesn’t mince words. His firm, Curtis, Mallet-Provost, Colt & Mosle, with its headquarters in New York, is this year’s surprising number 1 on one of the lists, that of the magazine American Lawyer. The firm handles a record amount of 24 arbitration cases of more than a billion dollars, both investment arbitration and old school commercial arbitration. But there is a difference with Meijer: the American-Arabic lawyer and his colleagues defend in principle only states, whether they are banana republics or not.
The oil cases are an example of how badly the system works, says Kahale during an interview. “Too many mistakes are being made. Of course, a judge always takes his own view along to his work. But at this scale that becomes a serious problem. These are not ten million dollar cases. These are cases of billions of dollars, of one or five billion, or more. About issues of crucial importance to countries which often have only a small GDP. Any mistake has far-reaching consequences.”
Mistakes are almost impossible to correct. “You cannot appeal.” In certain cases you can send a request for annulment afterwards to a national judge in the country where the arbitration took place, but this judge will only investigate if it was a fair procedure. And with ICSID-cases not even that is possible. These verdicts can only be annulled by an ICSID-tribunal. Since 1987 this has occurred only four times (partially). “There are almost no checks and balances, so companies can easily try to put forward absurd claims.”
Look at the verdicts, says Kahale. “In the case of Exxon the tribunal thinks it was perfectly legal what Venezuela has done. But with the other tribunal, in the case of Conoco, two of the three judges have another opinion. So four out of six think that Venezuela was right.” Nevertheless Venezuela will be levied a fine of billions. “How is that possible? This is no ordinary dispute!”
The political view of the arbitrators is too important, according to Kahale. “Legally their decisions are sometimes untenable. Nevertheless they are being repeated in other cases, so new principles arise. It does not have to be wrong when a new legal field is developing. But where do these principles come from?” The answer: they come from a group of people that knows each other, that appoints each other and that meets each other time and again in other cases, sometimes as a lawyer and sometimes as a judge. “Their business background shines through in their decisions. Their background is commercial arbitration. The aim there is not to create correct legal precedents, but to get parties back to business again as soon as possible.”
Kahale’s remark about a small faction that dominates the world of arbitration is confirmed by our research. In 88 percent of the 629 cases we could determine who the arbitrators were.
“When I look at the list of names, I see the same men which I have interviewed during my research in the nineties,” says Garth. “This group has gradually expanded, but is still relatively small. A select few gets the lion’s share of cases. The newcomers adapt slowly.”
In a tintillating report from 2013, about possible conflicts of interests regarding arbitrators, critical organizations like the Corporate Europe Observatory talk of a “mafia”. The funny thing is that this metaphor originally stems from the study of Garth. He cites an anonymous arbitrator, who says: “It is a mafia, because people appoint each other. You always appoint your friends, people that you know.” This refers not so much to their meanness, but to their small world.
This is what strikes us at conferences as well, where arbitrators are present who also act as lawyers, and know each other well. “It’s so wonderful”, says an American top lawyer, partner with White & Case, at one of these conferences. “Everywhere I see lawyers, clients, opponents. So many friends together!”
What is also striking at these gatherings is the apolitical, almost technical way in which people speak about arbitration. That countries get into trouble because of this, well… They did sign themselves, didn’t they? Rules are rules.
At the seventh floor of a drab office building in Brussels – above another office from the upper echelons of global arbitration, Dechert – sits a firm that gets high marks on all the top lists. This firm is Hanotiau & Van den Berg, and was established by a Belgian and a Dutch arbitrator. These two are in the top-15 of most powerful arbitrators. Together they are sitting on 9 percent of all ISDS-tribunals of which we could detect the names. To prevent conflicts of interest they do not act as lawyers anymore, except in a few special cases. Bernard Hanotiau is willing to do an interview. “But only shortly, since I am extremely busy”.
Hanotiau, sitting at a big shining table, cuts it short. He clearly considers any criticism of ISDS stupid. “People don’t know what they are talking about. They think you cannot be an arbitrator if you have not been appointed as a judge by the state. But that is nonsense. Do you think that a judge who is appointed by his own state can be independent in a case against that state? No, of course not.”
Besides, the cases are too complex. “arbitrators often have an impressing academic background and are very specialized, more than ordinary judges. We deal with the largest projects in the world. I am the president of the court in a case about the Panama canal. There is an enormous amount of files, documents and witnesses. I have forty years of experience as a professor in international law. Without that knowledge it would be impossible.”
Both parties can choose an arbitrator, but that does not mean that Hanotiau can represent the party that chose him – in the case of Hanotiau usually the investor. “No, no, no, no! We apply very rigid ethics. We are fully independent. In that respect it is more rigorous than a court case. If I would not follow these rules, I would be kicked out of the community.”
According to Hanotiau it is not so strange that a few arbitrators dominate all arbitration in the world. They are simply the best. “You need a lot of know-how. If you are looking for lung cancer specialists in Belgium, you end up with a small group as well. We are specialists.”
He does not have any moral drive, he says. “I see myself purely as an arbitrator. I only do my job. I am a judge, but I am not appointed by the state. I am completely independent.”
Does he never have second thoughts when he is handing out such huge fines to countries? Like to Kazachstan, which he gave a fine of $ 165 mln? Does he sleep well? “I sleep perfectly well. We do a good job. We work with the three of us: three judges from three different countries, all with a lot of experience. Why would I not sleep well? It is never nice to be convicted. But these countries did sign themselves. They have to fulfill their obligations.”
According to Gus van Harten that is a bit more complicated. Van Harten is professor of investment law at the Osgoode Law School in Toronto, and investigates the decisions of the arbitrators with respect to content. It sounds very nice to be able to follow the rules independently, but the rules are extraordinary vague and leave all kinds of room for personal interpretation.
“My own extensive research into hundreds of decisions shows very clearly that arbitrators usually do not opt for a narrow interpretation. In three quarters of the cases they interpret the rules ‘expansively’, i.e. in a way that invokes more arbitration cases.” In short: they say they follow the rules, but they are certainly driven by a political view.
An important principle is for instance the prohibition of expropriation without compensation. That sounds clear, but in the course of time it has been decided that it also applies to “indirect expropriation”, or all costs which are the result of certain measures or new policies introduced by states. Another issue is the right to fair and equal treatment. “That principle has become notorious”, says Van Harten. “In the past it referred to a minimal standard. But in the meantime the arbitrators have extended it beyond recognition. Nowadays it also means that the ‘legitimate expectations’ of foreign investors have to be respected. Which could mean anything.” All in all, says Van Harten, “in some cases the arbitrators have changed the treaties into a kind of catch-all insurance for investors.”
Especially one arbitrator stands out in this respect, writes Van Harten in his new book on investment treaties, Sold Down the Yangtze. This arbitrator, a Canadian, pops up time and again in crucial arbitration cases, where the rules are “extended”, says Van Harten. For instance in a case against Argentina, in 2002, when it was decided that an investor can run two procedures at the same time, in different fora. “That opened the door for an explosion of ISDS-cases.” This is a habit of this particular arbitrator. He was also involved in the notorious fine that was levied on Russia. Former shareholders of Yukos wanted their money back because the company had been dismantled by Russia. That was not without justification. But although the European Court for Human Rights had put the price tag at $2.5 bln, the arbitration trio came up with the dizzying amount of $ 50 bln, the highest fine ever.
The name of this arbitrator is Yves Fortier. He is a former lawyer with an enormous network. He was a member of the Security Council, on behalf of the Conservative government of Canada. He is a member of the Privy Council, a club of personal advisers of Queen Elisabeth. Apart from that he was a board member with several multinationals like the mining company Rio Tinto.
Fortier shares the second place on our list of top arbitrators. It is no coincidence that he is one of the preferred choices of investors, and that ConocoPhillips has opted for him in their case against Venezuela.
He does well out of that. For the Yukos-case he sent a bill of $ 2.3 mln. Van Harten stresses that this says nothing about the integrity of the man. “But it is the same amount a judge in the Canadian High Court earns in seven years. Does that give the impression of an independent jurisdiction, with no strings attached?”
Fortier is prepared to talk, provided that he may approve the quotes. When we, after a few introductory questions, carefully lay the criticism in front of him that some countries have launched at ISDS, he resolutely cuts the conversation short. He advises us to read up on ISDS. He repeats that advice in an e-mail. He is willing to talk to people that are familiar with the subject, but not if that isn’t the case. “I could not detect that you were sufficiently familiar with the topic”, he writes. Therefore we are not even allowed to use the few sentences which we had written down already.
While the arbitrators are expanding their jurisdiction, and the amount of claims is increasing, there are also new players accessing this market: investors, or so-called ‘Third Party Funders’.
Mick Smith initially worked in the Capital Market team of Freshfields, the Anglo-German top firm with branches all over the world. But he noticed a business opportunity and decided to start on his own. Now he provides money to companies which want to indict a state, but cannot pay the legal costs themselves. Meanwhile Calunius Capital administrates £90 mln.
His method is simple, he explains after a conference on arbitration in Rome. “We pay the legal costs for a company that wants to indict a state. It could be $1 mln, but also more than $10 mln. In exchange we get a part of the fine that this state has to pay.” That part could be as large as 10 to 40 percent of the total fine. And when the case is lost, they get a fixed amount.
It is often the story of David against Goliath, says Smith. “Think of a mining company with only one asset, a mine. And that mine has been confiscated by a state. States often have inexhaustible means at their disposal, while an investor is left empty-handed.” What can you do? Calunius offers help, in order to enable David to fight on the same level as the evil Goliath. One of the Davids that Smith is helping is a Canadian mining company, which wants to have $400 million from Venezuela.
Critics describe the work of Smith in a slightly different way. They say that he is speculating on court cases against states.
It is unknown how many cases are being financed by external parties. Usually these parties do not make themselves known. But it is clear that even some arbitrators and lawyers are concerned about this. After all, the most important thing in a case is that the arbitrators do not have any interests in it. What if a funder has friendly relations with a law firm which provides an arbitrator in a case in which he invests?
Or what if the arbitrator himself is involved in the investment? Vannin Capital, a British funder registered on Jersey, reported last year that Bernard Hanotiau had joined the fund. As if a referee is going to work for a gambling house. Hanotiau now tells us that the news came out too early and that he eventually backed down because of potential conflicts of interest.
But not only conflicts of interest are at stake, says Eduardo Marcenaro, an Italian lawyer for a large building consortium. Every day he is involved in arbitration cases against other firms. “That is the reality: there are conflicts. But what is arbitration for? For us it is a way to reach an agreement, so that we can move on.” This is exactly what is being undermined by the funders. “I see it time and again: if there is a funder behind an opponent, it always leads to more aggression. It is no longer about a settlement, it is only about winning, against any price, sometimes up to the edge of what is still legal. Really, it is disgusting where funding is leading to in practice.”
If we look at the countries where most of the claims since 2012 originated, we see a small country sitting at the top of the list: the Netherlands. In 2014 the Netherlands were the country that gave rise to most of the claims, even more than the US. The Netherlands is an important hub in the world of ISDS.
That is the result of an active policy by the Dutch government to promote the Netherlands as an attractive place of residence for multinationals. One of the features of this policy was the construction of a large BIT-network. The Netherlands have – with 95 active BITs – almost the highest degree of coverage you can get. Besides, the BIT-model that is used by the Netherlands belongs to the broadest type available, for investors. For instance, you don’t have to show that you perform any substantial economic activities in the Netherlands to be able to claim the status of a Dutch investor.
According to the government, which bases itself on information from a UN-survey, 47 percent of the Dutch ISDS-cases is filed by a mailbox firm. A simple query in the database of the Chamber of Commerce shows that this should be at least 68 percent. Only 16 percent of all cases is filed by an actual Dutch company. This is what is being called the ‘Dutch Sandwich’: you put a Dutch holding between your companies and you can call yourself Dutch.
This does not mean that the Netherlands force countries to sign BITs. This is something these countries themselves want to do, since they still hope to attract investments this way. At this very moment there are requests by Iraq and Azerbaidzjan to sign a BIT with the Netherlands, since many oil companies are located there.
In conversations with officials, who do not want to be cited, the same apolitical, almost technical approach surfaces which we have seen among arbitrators: “We simply do our job, you have to protect investors, don’t you? Sometimes things go wrong, but if everything would really be that unfair countries would never have signed, would they?”
Have the Netherlands deliberately tried to achieve this position? We cannot prove it. But it is striking that the Netherlands have actively defended their own BITs, even BITs with EU-countries which sometimes conflict with EU-law. A juicy detail is that the official who has been responsible for negotiating the Dutch BITs the last few years, Nikos Lavranos, departed in 2014 to be able to lead EFILA, the European lobby-organization of investment lawyers. Also Gerard Meijer is registered in Brussels as a lobbyist for this organization. Until 2014 Lavranos had been a staunch defender of the Dutch BIT-regime, now he occupies a different position. He writes opinion pieces to advocate extensive rights for investors and a broad investment protection in the new free trade treaty with the US. He does not want to talk to us.
With his own consultancy firm, Global Investment Protections, he helps companies to register as a Dutch firm. This is called “restructuring of ownership under the strongest available BIT protection”.
But well, this is something that all law firms are advertising with.
And so we are, by way of the lawyers, the arbitrators and the officials, back at the beginning of this story: is this all still fair? “The Netherlands play a role in the investment world that looks like the role the Swiss play in the banking world”, sighs Mommer. “It is easier to establish a Dutch company than to get a tourist visum for Holland. Do you know which Dutch companies are active in Venezuela? ExxonMobil, ConocoPhillips and Chevron. Even CNPC, the Chinese state oil company, is Dutch”.
Officially this is not allowed, if the only reason is arbitration. But that is again a matter of deliberation for the arbitrators. Conoco and Exxon did put their Venezuelan assets in a Dutch holding company in 2006. Both of them contend that this was not because of the dispute. But another cable from Wikileaks shows that they only arranged for this after the dispute came up. And an employee of Conoco says in an interview at the American embassy that the company moved to the Netherlands “to safeguard its arbitration rights.”
“The Dutch Sandwich is an example of blatant misuse of the system,” says the New York lawyer Kahale. No, this is not a matter of misuse, says his client, Mommer. “This is the way the system has worked from the start. In the modern economy is is not accepted if countries say they are the owners of their resources. This private legal system is an answer to that. It’s a neo-colonial system.”
On the list of indicted countries also Canada and the US are present. This is because of NAFTA, but the US have never lost a case so far. However, if we create a list of countries which had to pay most fines and settlements (see image on the right), and we compare this with the list of countries from which most of the claims derive (see image above), a clear picture emerges. Whether we like it or not, arbitration is an instrument by which rich countries discipline poor countries. Globally, but also within Europe.
Ever more countries are getting fed up with this, and these are not only “banana republics” like Venezuela. Also Brazil, where Congress has never ratified an investment treaty, does not agree with the system. “It has big shortcomings”, Brazilian deputy secretary Carlos Márcio Cozendey tells us in the coridors of a conference in Geneva. “Foreign investors have more rights than domestic investors. And it is one-sided. The government can never sue an investor, it is only the other way around.”
“ISDS is unfit for its aim”, agrees Xavier Carim, permanent representative for South-Africa with the World Trade Organization. “There are very deep problems. We have signed many BITs in the past. Back then there was little knowledge about where that could lead. We really did not know what we signed.”
For lawyers this is unthinkable. “I simply call it laziness”, says Meijer, “if you don’t know what you have signed. You have been sleeping then.” Fortier does not even want to reply, as if this is too stupid to talk about.
But Nathalie Bernasconi-Osterwalder of the International Institute of Sustainable Development confirms the story of Carim. “We are following ISDS already for years, but really, until three years ago I did not even succeed to gain the interest of professors of Trade and Economy for this. Even western governments did not know what it was. A Belgian official once told me that he just grabbed a text from a drawer when a BIT had to be signed.”
Both rich and poor countries believed in all honesty, on the advice of lawyers and professors, but also of the Worldbank and UNCTAD (the UN Conference on Trade and Development), that BITs were a good way of welcoming investors and of gaining a positive reputation in the papers. Only now it is becoming clearer and clearer that these BITs had teeth as well.
Meanwhile UNCTAD speaks of a “crisis of legitimacy”. More and more countries want to get rid of BITs. This is tricky, since bilateral treaties remain in force for fifteen or twenty years after their annulment. Nevertheless Venezuela, Ecuador, Indonesia, South-Africa and India are in the process of annulling existing BITs. Russia and Argentina refuse to pay fines. Even Australia does not want BITs anymore, since it was confronted by a claim of billions from Philip Morris, that wants to be recompensed after the tightening of the anti-smoking legislation. And Italy, that has been confronted by claims from the energy sector lately, renounced the Energy Charter this summer – this treaty includes an ISDS-clause as well.
Arbitrators, investment lawyers and officials in western countries keep stressing that there is no legitimacy crisis. “Just the fact that some people do not think it’s fair does not mean it actually is not fair,” says Hanotiau.
“People don’t understand what they are talking about,” sneers Kaj Hobér, another top arbitrator that we interview in the corridors of a conference in Amsterdam. He is an arbitrator, lawyer, professor ánd the next secretary-general of the prestigious arbitration court in Stockholm. He thinks the criticism is simplistic. “There is no alternative.”
In our research we consider this the most remarkable fact. After all, the whole idea of arbitration is that it is a voluntary type of conflict resolution. If an ever larger part of the world does not experience that voluntariness anymore, don’t we have to talk about a problem of legitimacy? This is something that does not seem to matter to most players in the arbitration world. Rules are rules, they say, and: I am simply doing my job. It is an almost technical attitude, which is completely at odds with the ethical discourse about injustice.
It is a dichotomy which is easily recognizable for Garth. “Still both views form a perfect match. The arbitration system was made to protect investments, with the help of the law. From the perspective of the lawyer only these rules count. But the law is by definition in the interest of the well-off. That is no conspiracy theory, that is how law works. The haves accept the rules, since these deliver them legitimacy.” His point is that outside of power structures there is no universal law, which you can apply to all of the world. “Although some lawyers entertain an almost religious belief that there is such a thing.”
“Lawyers see arbitration only as a technical fight within the confines of a rule-based game. But that game is associated with a neo-liberal worldview. With the American ideal of a world of free trade, in which legal rules, lawyers and markets are crucial to provide multinationals with access to markets.”
When such a worldview is prevalent, it is very logical and fair that a fight of billions between Venezuela and a few oil companies will be brought to a conclusion in an American court room, based upon a Dutch treaty, and interpreted by a Canadian lawyer/businessman, in the full conviction that he is fairly applying the rules.
During a late drink for investment lawyers at the Amstel Hotel in Amsterdam, after the wine has dealt with political correctness, we interview Jeroen Luchtenberg, an investment lawyer based in Paris. “Of course you are right”, he says. “It’s an unfair system. There is a problem, even if everybody denies it. But who’s fault is that? I really don’t think it’s due to the lack of integrity of the arbitrators. Look, if a lion and a hare in the same pasture suddenly get the same rights, what will happen? Nothing. The lion keeps leering at the hare.”
Obviously it remains a vision, in Daly’s office, that beautiful biblical image of the lion.
“If the hare wants to leave for a new pasture, the lion says: okay, but first you have to sign this. And that’s what the hare does then. But it doesn’t change anything to the fact that the lion still wants to eat the hare.” That’s how the world operates. “The rich get richer, the poor get poorer.”
And after another nip of wine: “The lion, that’s us.”
(1) Trade ministers from US, Canada and Mexico on a NAFTA meeting. This free trade organisation has given a crucial boost to the development of ISDS. Picture by Reuters;
(2) Judas ‘Exxon’ is being burned during Easter in Caracas, Venezuela, March 2008. Picture by Howard Yanes / AP / HH;
(3) Demonstration by employees of the Venezuelan state oil company against ExxonMobil, 2 oktober 2008. Picture by Rafael Navarro / AFP / ABN;
A lot of things are said on investment arbitration, or ISDS, by both proponents and opponents. But a clear overview of all the claims that are filed, and what kind of awards are awarded, is almost impossible to get. That is why we started this research project. Our goal: mapping the world of ISDS, in both numbers and stories. We chose to highlight a few cases in Indonesia, Uganda and Venezuela to find out what ISDS means for developing countries.
The project was supported by the Innovation in Development Reporting Grant program from the European Journalism Centre. The media partners are OneWorld, De Groene Amsterdammer and Inter Press Service. Read more about our research project.
The research was done by journalists Frank Mulder and Eva Schram. Data research by Adriana Homolova. Additional field research by Edward Ronald Sekyewa in Uganda and Mitchell van de Klundert in Geneva.
The list with arbitration cases is based on a list by UNCTAD (end of 2014), supplemented with cases that were revealed by IAReporter after that time (until August 2015). Details on all the cases were acquired from different sources: UNCTAD, Gus van Harten, The American Lawyer, Italaw, IAReporter and media reports. In addition, we have spent four months talking to arbitrators, lawyers, third party funders, academics and civil servants, including from the countries that feel disadvantaged by ISDS, including Venezuela, South-Africa and Indonesia.
Our articles have been published De Groene Amsterdammer, Oneworld, Inter Press Service, and Der Spiegel, among others, in different languages. For a complete list of publications, see here.