The hidden costs of law in the governance of global supply chains: the turn to arbitration

Abstract

This paper makes an important and unique contribution to the Special Issue by problematizing the neglected role of law in the governance of global supply chains and the hidden costs resulting from this neglect. In Part I we argue that existing efforts within domestic and international law are ineffectual in holding transnational corporations accountable along their supply chains. The turn to private transnational mechanisms of governance, such as arbitration, is a direct response to this governance gap. However, in Part II we criticize international investment law and arbitration for their one-sided nature that privileges corporations over states and civil society. Adopting a critical political economy approach, this paper examines how efforts to address corporate social responsibility through international investment law and arbitration do not substantively uproot dominant ontologies or restructure power relations between corporations, states, and civil societies. Instead, we argue that these reforms contain hidden costs to transparency, participation, and accountability by empowering private transnational governance through arbitration, while further locking-in states to the operations of foreign corporations and the dictates of transnational capitalism.

Keywords:

• Global supply chains
• corporate social responsibility
• arbitration
• investor-state dispute settlement
• capitalism
• new constitutionalism
• critical political economy

Acknowledgements

We are grateful to the Social Sciences and Humanities Research Council of Canada (SSHRC) for research funding to support this project.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 See Catá Baker (2016) for an important exception to this neglect.

2 The Bangladesh Accord on Fire and Building Safety was signed by over 190 global apparel brands, 2 million workers, 1600 factories, and several trade unions spanning the globe.

3 Note that there has been a tectonic shift in the status of individuals under international law with the recognition of individual criminal responsibility for egregious crimes in the Rome Statute creating the International Criminal Court and with the development of the European Court of Human Rights (Higgins, 1985). However, the uncertain legal status of individuals continues to plague efforts to frame climate migrants or refugees under statist international law. See, for example, Berhman (2014) and Pentikainen (2012).

4 In Re Union Carbide, 809 F. 2d. (2d.Cir. 1987), cert. denied. 105 S. Cr. (1987).

5 While it is beyond the scope of this paper to delve into the details of this case, this case aptly demonstrates the inability of states, such as India, to hold a powerful US-based corporation like Union Carbide accountable for major malfeasance resulting in an environmental disaster.

6 See Abdur Rahana v. JC Penny Corp., Inc., et. al., CA No15C-07-14 (Supr. Cr. Del.) Memorandum of Opinion on Defendants’ Motion to Dismiss, at. P. 13); http://courts.delaware.gov/Opinion/download.aspx?id=24038, where Delaware choice of law rules determined that Bangladesh’s statute of limitations barred suit against JC Penny for damages flowing from the Rana Plaza collapse.

7 In Kiobel v. Royal Dutch Petroleum Co. 569 US 108 (2013) (SC) Nigerian citizens claimed that Royal Dutch Shell and its Nigerian subsidiary cooperated with the Nigerian Government in extrajudicial killings and violence to subdue peaceful resistance to oil development in the Ogoni Niger River Delta. See also Colangelo (2013).

8 See LeBaron and Rühmkorf (2017) for analysis of the California Transparency in Supply Chains Act, the US Dodd-Frank Act, and the UK Bribery Act and Modern Slavery Act. The US initiatives are said to have had an uneven impact on corporate conduct, although the UK Bribery Act appears to be strongest in establishing extraterritorial corporate criminal liability for bribery in supply chains. See also Harris (2015).

9 Villiers (2018, p. 146) cites reports that an employee of a technology company revealed that it required more than a year to map its supply chain, while Apple had 785 suppliers in 31 countries worldwide contributing to the production of the iPhone.

10 See Centre for International Legal Cooperation (2019).

11 See Centre for International Legal Cooperation (2019) and Simma (2011).

12 On foreign investment arbitration, see Simma (2011) and for the inspiration for the Hague Rules see The Report of the Drafting Team available at https://www.cilc.nl/cms/wp-content/uploads/2020/02/The-Hague-Rules-on-Business-and-Human-Rights-Arbitration_Launch-Report-.pdf. This turn to arbitration is also evident in other contexts relevant to supply chain governance, such as the Bangladesh Accord that provides for arbitration under UNCITRAL Arbitration Rules and project financing initiatives involving resource supply chains. See also Cutler (2018); Verburg and Waverijn (2020).

13 Today the analytical links between the trade and investment regimes are fairly well-understood, notwithstanding the fact that they have evolved as distinct legal disciplines and regimes. However, our understanding of the analytical linkages of these regimes with global supply chain governance is in its infancy and only just being addressed through a diverse variety of literature. See Moran (2014), OECD (2018), and Verburg and Waverijn (2020).

14 IIAs include both bilateral investment treaties (BITs), signed between two states and addressing primarily investment, and, broader preferential trade agreements (PTAs) with investment chapters.

15 Guzman (1998) explains the paradoxical support by LDCs of agreements that severely limit their sovereignty as strategic competition to attract foreign investment. While this paper’s analytical focus is on the distribution of power between states and transnational corporations, there is research that considers the important geopolitical and North-South dimensions of IIAs. See Poulsen (2011); Sornarajah (2015); Morosini & Sanchez Badin (2017).

16 Typical rights protected within an IIA are market-friendly disciplines, which often include, but are not limited to, protection from direct and indirect expropriation by the host state; most-favoured nation, national treatment, and fair and equitable treatment protections; an umbrella clause; and, access for investors to ISDS. PTAs often include broader-spanning liberalization provisions in addition to those relating to investment.

17 This fact is particularly important in the context of ensuring that investment contributes to sustainable development goals, rather than further contributing to labor and environmental harms. See note 19 below.

18 According to UNCTAD’s (2020b) database, 653 of 1023 ISDS cases have been initiated since 2010.

19 A number of ISDS cases highlight the inherent conflict between a state’s right to regulate and investor rights within an IIA. This is evident in areas of environmental protection (Pacific Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12; Bilcon of Delaware Inc. v. Government of Canada, UNCITRAL, PCA Case No. 2009-04); public health (Philip Morris et al. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, UNCITRAL, PCA Case No. 2012-12); the right to water (Aguas del Tunari SA v. Republic of Bolivia, ICSID Case No. ARB/02/3; Suez, Sociedad General de Aguas de Barcelona, S.A.; Vivendi Universal, S.A. v. Argentine Republic, ICSID Case No. ARB/03/19); indigenous rights; (Chevron Corporation and Texaco Petroleum v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23; Border Timbers Limited, et. al v. Republic of Zimbabwe, ICSID Case No. ARB/10/25); and, social rights (Piero Foresti et. al v. The Republic of South Africa, ICSID Case No. ARB(AF)/07/01), amongst others.

20 Efforts to reform the International Centre for Settlement of Investment Disputes (ICSID) and UNCITRAL rules and procedures have aimed to increase the transparency of arbitration proceedings and to provide for greater public participation through amicus curiae. However, there is still considerable ambiguity and interpretive flexibility on the applicability of these changes within arbitration tribunals.

21 As examples, Bolivia, Ecuador, and Venezuela have all denounced the ICSID convention - the predominant institution dedicated to investor-state dispute settlement. Bolivia has terminated its BIT with the United States, Ecuador has terminated nine of its BITs, Venezuela denounced its BIT with the Netherlands, South Africa has terminated a number of its BITs with the EU, and Indonesia recently terminated 20 of its BITs. Further, Australia, Brazil, Mexico, India, and South Africa have all re-visited whether they would sign IIAs with ISDS into the future. Finally, dozens of states, including Argentina, Bolivia, Congo, Ecuador, and Venezuela have either refused to pay compensation to investors, or, have registered for the annulment of ISDS cases in protest.

22 Canada-Kosovo Foreign Investment Promotion and Protection Agreement 2018, Article 16.

23 EU-Ukraine Association Agreement 2014, Article 422.

24 OECD (1976); See also EU-Georgia Association Agreement 2014, Article 352.

25 See also EU-Moldova Association 2014, Article 35, which makes reference to the ILO (1978) Tripartite Declaration.

26 See Investment Cooperation and Facilitation Agreement Between the Federative Republic of Brazil and the Republic of Malawi, Article 9, 2(a-k).

27 For more detailed discussion, see Monebhurrun (2017); Levashova (2018); and Marcoux (2019).

28 See Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3; Inceysa Vallisoletana S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26; World Duty Free Co. Ltd. v. Republic of Kenya, ICSID Case NO. ARB/00/7; Robert Azinian, et. al v. The United Mexican States, ICSID Case No. ARB (AF)/97/2; Sealand Services Inc. v. Iran, Award No. 135-33-1; Repsol YPF Ecuador S.A. v. Petroecuador, ICSID Case No. ARB/01/10; and Kenya and Hesham Talaat M. Al-Warraq v. The Republic of Indonesia, UNCITRAL, 1976.

29 As discussed by Kreindler (2013), there is concern that this form of CSR accountability might actually encourage corruption by host states, as states may anticipate corruption as a useful defence within future arbitrations.

30 Urbaser S.A. and Consorcio de Agua Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, Award, paras. 34-35. See also David Aven and Others v. Republic of Costa Rica, ICSID Case No. UNCT/15/3.

31 Ibid., paras. 1156–1166.

32 Ibid., para. 1183.

33 Ibid., para. 1195.

34 Ibid., paras. 1207–1221.

35 Ibid.

36 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5. See also the case Perenco Ecuador Limited v. Republic of Ecuador, ICSID Case No. ARB/08/6, where a counterclaim was issued of USD$54 million for environmental damages.

37 Burlington Resources Inc. v. the Republic of Ecuador, Decision on Counterclaims, Feb 2017, paras. 79-82; paras. 890-905.

38 Ibid., para. 468.

Additional information

Notes on contributors

A. Claire Cutler

A. Claire Cutler is a Professor of International Relations and International Law in the Political Science Department, University of Victoria, Victoria, BC, Canada. Her teaching and research focus on the development of a critical political economy of private and public international law and the changing configurations of power in the world. Her publications include The Politics of Private Transnational Governance by Contract (Routledge 2017) and New Constitutionalism and World Order (Cambridge University Press 2014).

David Lark

David Lark is a Ph.D. Candidate in Political Science at the University of Victoria, B.C., Canada. His teaching and research focus on critical intersections (and contestations) of private and public power within the making and practices of international law.