IILJ Working Paper 2017/1 (MegaReg Series)

International Investment Law and Arbitration: A Conceptual Framework

Robert Howse

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Today, arguably, investor-state arbitration has become the most controversial form of international litigation. Arbitration under the International Centre for the Settlement of Investment Disputes (ICSID) or UNCITRAL (the United Nations Commission on International Trade Law) allows an investor to sue a host state before an ad hoc arbitral tribunal for violations of bilateral investment treaties (BITs) or trade and investment agreements (e.g., the North American Free Trade Agreement (NAFTA)). If successful the investor can enforce a monetary award against the host state in ordinary courts around the world. This regime has been characterized as a network of secret or “shadow” courts dominated by a clique of elite arbitrators motivated not by justice but by personal wealth acquisition, a system where multinational corporations unleash blue chip law firms on some of the poorest countries in the world, forcing multimillion dollar settlements or winning awards that are even larger, sometimes more than an impoverished nation’s entire annual budget for health, education, and public security. Reform proposals have included replacing arbitration with an investment court system, either based in bilateral agreements, or a separate multilateral institution (as now is proposed by the EU and Canada).

The aim of this essay is to develop a conceptual framework or model that could inform debate over reform proposals on ISDS as well as to evaluate critiques and defenses of the existing system of investor protection in international law. Unlike the case of trade law, until very recently there was little theoretical or empirical work in economics that could inform a rigorous scholarly approach. Most justifications for the investment regime invoke one or more of the following rationales: 1) treaty protection provides an incentive to foreign investors that results in an increase in the kind of FDI that has positive impacts on the countries concerned, including positive developmental impacts in the case of poor countries; 2) treaty protection can function as an incentive for countries to improve governance and the rule of law to meet international standards, or as a substitute for domestic rule of law where it is weak or based on a political or economic system unacceptable to investors and the countries they come from; 3) international justice (fairness in the treatment of aliens); 4 ) treaty protection disciplines inefficient discriminatory barriers to FDI just as WTO norms do in the case of trade, thereby allowing a continuity of legal disciplines on protectionism across external contracting (trade) and internal contracting (investment) of the firm.

I begin with a historical overview of international law protection of foreign investors. This overview suggests that such protection has always been controversial, but that the controversies have shifted along different ideological, institutional, and geopolitical axes over time, sometimes focusing on substantive legal norms or even where they should be negotiated, and at other times on the proper forum for settling disputes. After the historical overview, I next disaggregate (the often not clearly or well distinguished) rationales for giving foreign investors special protections under international law in their dealings with host states. I consider such economic theory and empirical work that exists on foreign investment as well as political economy approaches, theories about bargaining between governments and firms (e.g., Laffont and Tirole), and other relevant normative conceptions such as good governance, rule of law, and non-discrimination. I attempt a rough or preliminary evaluation of the strength of the various rationales, in light of possible downsides that have been identified in the literature. The third section examines what kind of dispute settlement is optimal based upon a given rationale and the kind of substantive norms that would be well-matched to that rationale. Here I address (admittedly stylized) options: the existing system, assuming widely criticized features of it are largely preserved; state-to-state dispute settlement, which over history has been the predominate model for settling disputes in international economic relations (and where the most highly developed form is represented by the WTO dispute settlement system); a bilateral Investment Court System (ICS) as proposed by the EU and featured in CETA and the EU-Vietnam Agreement; or a multilateral investment tribunal. My conclusion is that to the extent that any of the commonly stated rationales for the investment regime hold water, and the substantive norms of the regime fit with these rationales, a multilateral investment court is a superior forum to investor-state arbitration, or even bilateral adjudication; moreover, on some rationales, the availability not just of investor claims but of standing for other stakeholders and of state-to-state dispute settlement in the multilateral court may be of key importance.