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October 24, 2017

Judge Outlines Conflicting Interests Between Corporations and States

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With limited resources, developing states have had a hard time contesting claims against foreign investors in the legal regimes that underpin the international economy, argued Judge Abdulqawi Yusuf at a lecture Monday night.

Yusuf, who serves as the vice president and judge of the International Court of Justice — the main body responsible for adjudicating international disputes in the United Nations — in The Hague, Netherlands, detailed the pitfalls in balancing the interests between multinational corporations and sovereign states.

Considering that foreign direct investment to developing countries inflows totaled to $646 billion in 2016 alone, Yusuf said, the relationship between the corporations and states remains at the forefront for U.N. leaders.

Due to the large volume of money flow, certain agreements, known as Bilateral Investment Treaties, set the rules for private investment from one country to another.

Bilateral Investment Treaties, agreements between capital exporting countries and host countries, often have clauses which stipulate that any disagreements over enforcement of the treaty must go through international arbitral tribunals rather than local courts.

These arbitration proceedings can bring about an economic burden for the host country.

“In addition to paying for counsel, arbitrators, these states have to also pay for a delegation to travel around the world to present its case,” he said. “This creates a significant financial burden, particularly on the least developed countries which cannot afford such an expenditure.”

However, Yusuf said, there are wide disparities in BITs with regards to developing countries. Although 37 percent of the world’s total flow of foreign investment goes toward developing countries, these account account for 86 percent of the total BITs, he said.

To explain this disparity, Yusuf said that BITs were devised out of a lack of trust of the court systems of developing countries.

When formulating these trade agreements, developing countries can find themselves unable to successfully negotiate due to lack of trained personnel.

“Most developing countries and particularly least developed countries do not have trained investment lawyers or people who are skilled in the formulation of legal standards in BITs,” Yusuf said.

Yusuf also argued that developing countries are also disadvantaged when disagreements arise over the enforcement of the treaty.

“Most of the time developing countries do not appoint experienced arbitrators from their country to the arbitral tribunals,” he said. “As a result, perspectives from those countries are not brought to bear on the decision-making process.”

This causes the arbitration process to favor the rights of investors over the interests of developing countries. Yusuf argued that it is in the long-term interest of government and corporate parties to ensure that a fair arbitration process is conducted.

“If the arbitral tribunals overextend their hand and interpret the treaties in a way which is unbalanced towards host states, then there will be a backlash,” he said. “Therefore, it is in the interest of everyone that such an overreach should not occur.”

In ensuring that developing countries’ rights are advocated for, Yusuf said there needs to be proper training.

“Developing states need to have skills development and negotiators who can negotiate better terms and conditions with the capital exporting countries,” he said. “They also need to have lawyers who insist on a definition of standards included in BITs when they do not understand it and skilled arbitrators who can sit on investment arbitral tribunals.”