The proposed UNASUR court

On 23 May this year, the heads of 12 Latin American nations reached agreement establishing UNASUR - the Union of South American Nations. This is a significant development that could pave the way for further institutional reform in the region. UNASUR evolves from the South American Community, established by the Cuzco Declaration of 2004.

Meanwhile, earlier in May, the energy ministers from the same 12 nations (Venezuela, Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Peru, Paraguay, Uruguay, Guyana and Suriname) approved the creation of a judicial body to resolve conflicts with foreign companies working in those countries. Although no formal steps have been taken to establish the UNASUR court by any of the 12 countries, this is further indication of the possible abandonment of the World Bank's International Centre for the Settlement of Investment Disputes (ICSID).
"With this organisation, the countries of Latin America recover legal sovereignty, because now they can resolve legal conflicts in their own countries," Ecuador's oil minister Galo Chiriboga said.

What makes UNASUR so noteworthy is that when UNASUR's court has been discussed, the remarks from some officials have framed the court very much as an alternative to ICSID. This type of motivation - on the judicial plane - has not been seen before when other institutions have been established in Latin America.

Several Latin American countries have been reconsidering their participation in ICSID. Bolivia famously withdrew from the ICSID Convention last year. Ecuador has said it would not submit future oil and gas claims to ICSID. Venezuela's new contracts stipulate that disputes should be resolved in local, not international, courts, while it has also spoken of renegotiating its various bilateral investment treaties.

The idea of creating a regional court is not new. In 1949 when Winston Churchill spoke at the opening of the Council of Europe (that led to the establishment of the European Court of Justice and European Court of Human Rights), he said he hoped the "European unit in the world organisation of the United Nations [would]... become one of several continental units which will form the pillars of the world instrument for maintaining security, and be the best guarantee of maintaining peace".

Following the failure of the Free Trade Area of the Americas in 2005, it is arguable Latin America has yet to establish an effective regional organisation that could constitute one of Churchill's regional "pillars".

Latin American nations are renowned for institution building. Each institution also tends to entail a court or dispute resolution system. For example, within Latin America there already exists:
• the Permanent Review Tribunal of Mercosur;
• the Andean Court of Justice;
• the Caribbean Court of Justice;
• the Central American Court of Justice; and
• the Inter-American Court of Human Rights.

And those are in addition to an array of institutional and ad hoc methods of dispute resolution, including arbitration. However, few of the sitting courts have been very significant in terms of their reach or influence over foreign investors, compared to ICSID.

The UNASUR treaty, signed in Brasilia, specifically identifies two of the most prominent institutions in the region, Mercosur and the Andean Community (CAN). Both Mercosur and CAN have their own courts or tribunals. The UNASUR treaty states that South American integration should be achieved through an innovative process, which would include the progress achieved so far by the Mercosur and CAN processes, as well as the experiences of Chile, Guyana and Suriname, and which goes beyond the convergence among them.

Therefore, UNASUR is clearly meant to represent the next step, building on and almost merging Mercosur and CAN. Until now, only the Latin American Integration Association (LAIA, principally a trade association) whose membership comprises all South American nations, is truly representative of the region. But the LAIA has no court to speak of.

A few years ago, a government minister from a Latin American country spoke about the options available when designing an international dispute resolution system. The minister was responsible for designing a completely new dispute resolution process to be incorporated into a treaty.

Many Latin American countries that are dissatisfied with ICSID are clear on the "ingredients" they want to go into their international court of preference. First, it would differ from ICSID in terms of its founding institution, avoiding the profound conflict of interest between the World Bank and arbitral system that some countries perceive. Second, the system would meet their preferred standards of transparency. Third, it would allow its member states a certain degree of control and flexibility to enact the legislative reforms that are the platform for many left-leaning governments gaining power, without risking deep exposure to claims for compensation from foreign investors (although this has more to do with the governing law than the dispute resolution process).

Faced with such a list of ingredients, one has to ask whether some governments want to have their cake and eat it?

ICSID is now a scapegoat for the discontentment with international investment law, that is, the substantive law that is applied to resolve disputes before ICSID and other international arbitral bodies. But if any new Latin American court is founded on principles of international law, it is unlikely to offer member states the clean break they seem to desire.

Therefore, the only alternative is for any new regional court to be founded on separate principles of "regional law". This prompts a number of immediate reactions.

First, that has been done before without much success. Mercosur promotes "Mercosur law" and CAN promotes "Andean Community law". Yet the reach of these laws has not really extended to foreign investors investing in the territory of the respective member states, or displaced standards of international law.

Second, establishing a Latin American court with its own "law" will not rid countries of the perceived problem of ICSID until they denounce the ICSID Convention and terminate their bilateral investment treaties that are the source of international law rights for foreign investors. As long as foreign investors are left with a choice of how to resolve a dispute with a host state, one can rest assured that they will prefer (and may be obliged by their shareholders to prefer) the familiar option of ICSID. In any event, investors often have a choice of ICSID or another arbitral procedure (such as UNCITRAL).

To unwind the numerous international agreements already in place, and to ensure that the jurisdiction of any new court is exclusive will demand a Herculean international effort by each prospective member state. History has shown that beyond statements of political intent, Latin American governments have not consistently spoken with one voice nor unanimously followed through on the rhetoric. Regional rivalries have often undermined long-term initiatives.

Third, for UNASUR's proposal to succeed, the approval (or acquiescence) of capital exporting countries is probably necessary. Many Latin American countries are dependent on foreign investment, and they acknowledge it is a fine balancing exercise of progressing reform (to meet the social and economic demands of a government's constituency), while recognising the limit of foreign investors' patience for reform that adversely affects them.

Major corporations have not made investments in some countries because of governments' alleged failure to adhere to international law, and if any new UNASUR court tips the balance against investors too far, they will surely voice their concerns. Separately, a number of capital exporting countries (including the US) have maintained a policy in recent years of bilateralism over multilateralism. This has enabled them to court pro-foreign investment countries individually, to negotiate specific deals, such as the US's free trade agreements. While this form of bilateralism reaps rewards, it will always pose a potential obstacle to UNASUR's preferred multilateralism.

Winston Churchill continued his speech to the Council of Europe that Europe's regional initiative was: Not in any way the rival of the world organisation. We are a subordinate but essential element in its ultimate structure.

It is hoped that this ideal resonates with the ministers negotiating UNASUR's new court - particularly given UNASUR seems to want to model itself on the European Union. Some Latin American governments evidently have lost confidence in ICSID's function and its objective as part of the international community's legal regime. As a consequence, foreign investors are unsure of the region's priorities vis-à-vis the promotion and protection of foreign direct investment. Until drafts of the court's constitution are made available, uncertainty will deter some investors. Were it not for the options that continue to remain open to foreign investors in addition to ICSID, there would be even more cause for concern.

International investment law is entering a period of correction - starting with institutional reform. All the same, now is not the end of that correction period; it is not even the beginning of the end. But it is, perhaps, the end of the beginning.

(Source: LatinLawyer)

July 10, 2008

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