What’s in a Meme? The Truth about Investor- State ...blogs2.law.columbia.edu/jtl/wp-content/uploads/sites/4/2014/10/52... · What’s in a Meme? The Truth about Investor-State Arbitration:

What’s in a Meme? The Truth about Investor-State Arbitration: Why It Need Not, and Must

Not, Be Repossessed by States

THE HONORABLE CHARLES N. BROWER & SADIE BLANCHARD∗

The current discourse on international investment law and investor-State arbitration is replete with inaccu-racies and hypothetical fears. Certain quarters are clamoring for sweeping changes that would under-mine the effectiveness of foreign investment protection by politicizing the existing neutral, juridical system for resolving investor-State disputes. With the impending expiration of over 1,000 investment treaties and the negotiation of two trade and investment treaties that would cover 65% of the world economy, the system stands at a watershed moment, calling for a compre-hensive rebuttal to critics. We argue that proposals to politicize dispute settlement—by giving states control over adjudicators, introducing self-judging defenses, permitting retroactive treaty amendment through state practice, or relaxing the rules of treaty interpreta-tion—should be rejected. The evidence demonstrates

∗ Charles N. Brower, Judge, Iran–United States Claims Tribunal, The Hague, Neth-erlands; Judge Ad Hoc, Inter-American Court of Human Rights, San Jose, Costa Rica; Arbi-trator Member, 20 Essex Street Chambers, London, England; formerly Acting Legal Advis-er, United States Department of State; Deputy Special Counsellor to the President of the United States; President, American Society of International Law (ASIL); Chairman, Institute for Transnational Arbitration (ITA); recipient of ASIL’s Manley O. Hudson Medal, Berke-ley Law’s Riesenfeld Memorial Award, the American Bar Association’s Section of Interna-tional Law’s Lifetime Achievement Award and the ITA’s Pat Murphy Award.

Sadie Blanchard is a Research Fellow at the Max Planck Institute Luxembourg for International, European, and Regulatory Procedural Law.

690 COLUMBIA JOURNAL OF TRANSNATIONAL LAW [52:689

that investment treaties and arbitration benefit poor states, are even-handed, enhance transparency, allow states ample regulatory leeway, and promote the rule of law.

INTRODUCTION ................................................................................. 691 I. THE MEME THAT INVESTMENT TREATIES AND

ARBITRATION ARE HARMFUL OR INEFFECTIVE ...................... 700 II. THE MEME THAT INVESTMENT ARBITRATION IS ONE-SIDED . 709 III. THE OPACITY MEME ............................................................... 716 IV. THE SOVEREIGNTY MEME ...................................................... 719

A. Limiting Political Discretion Is What Treaties Do ........ 720 B. Fear and the False Claim that International

Investment Law Is Incompatible with the Public Interest ........................................................................... 722

C. Reality Check: Case Study of Environmental Measures ........................................................................ 726 1. Environmental Measures and Indirect

Expropriation ............................................................ 727 2. Environmental Measures and Fair and Equitable

Treatment .................................................................. 737 V. RECONSIDERING “REGULATORY CHILL” ............................... 749 VI. ON THE RULE OF LAW ............................................................ 755 VII. THE MEME ARISING FROM SOME STATES’ REACTIONS .......... 759 VIII. ASSESSING PROPOSED REFORMS ............................................ 765

A. Proposals to Select Investment Arbitrators Through Political Channels .......................................................... 766

B. Post Hoc Interpretative Statements and De Facto Amendments .................................................................. 767

C. Proposals to Relax the Rules of Treaty Interpretation ... 772 CONCLUSION .................................................................................... 776

Words ought to be a little wild for they are the assault

2014] INVESTOR-STATE ARBITRATION 691

of thoughts on the unthinking.1 John Maynard Keynes

INTRODUCTION

In 1998, the book Dealing in Virtue chronicled the rise of in-ternational arbitration and a corps of arbitrators who, through private ordering and intense competition, established themselves as trustwor-thy to resolve high-stakes cross-border disputes with integrity and ri-gor.2 Nearly fifteen years after that study quietly noted incipient an-tipathy to international arbitration, a non-governmental organization (NGO) report entitled Profiting from Injustice broadcast its hostility to investor-State arbitration through an earsplitting bullhorn. The cover of that recent “exposé” features a group of faceless “suits” popping a bottle of champagne atop one side of the balance scale of justice as dollar signs waft up from a nearby briefcase; far overhead on the scale’s other pan perches a tiny white courthouse, evidently grossly outweighed by the sinister doings below. Driving home that graphic depiction of injustice, the report’s introduction quotes an Irish folk epigraph: “There is little use in going to law with the devil while the court is held in hell.” 3

This propagandistic screed is but one of the current assaults on international investment arbitration by NGOs, press, popular me-dia, academics, and various states, to wit:

• Bolivia, Venezuela, and Ecuador have denounced the

1. John Maynard Keynes, National Self-Sufficiency, 22 YALE REV. 755, 768 (1933).

2. See YVES DEZALAY & BRYANT G. GARTH, DEALING IN VIRTUE: INTERNATIONAL

COMMERCIAL ARBITRATION AND THE CONSTRUCTION OF A TRANSNATIONAL LEGAL ORDER

(1996). This Article expands on Judge Brower’s Keynote Address at the 2013 Harvard International Law Journal Symposium. See Charles N. Brower & Sadie Blanchard, From “Dealing in Virtue” to “Profiting From Injustice”: The Case Against Re-Statification of Investment Dispute Settlement, HARV. INT’L L.J. ONLINE (Jan. 28, 2014), http://www.harv ardilj.org/wp-content/uploads/2014/01/Brower_Blanchard_to_Publish.pdf.

3. PIA EBERHARDT & CECILIA OLIVET, PROFITING FROM INJUSTICE: HOW LAW FIRMS, ARBITRATORS, AND FINANCIERS ARE FUELLING AN INVESTMENT ARBITRATION BOOM 10

(2012), available at http://corporateeurope.org/publications/profiting-from-injustice (quoting HUMPHREY O’SULLIVAN, THE DIARY OF AN IRISH COUNTRYMAN (1831)). The report was published by two NGOs, the Corporate Europe Observatory and the Transnational Institute. See About CEO, CORPORATE EUROPE OBSERVATORY, http://corporateeurope.org/about-ceo (last visited June 12, 2013); About TNI, TRANSNATIONAL INSTITUTE, http://www.tni.org /abouttni (last visited June 12, 2013).


ICSID Convention4 or reduced the scope of their con-sent to settle disputes thereunder.5

• The previous Australian Government adopted a policy (now abandoned) of no longer agreeing to arbitration with foreign investors.6

• The then-Attorney General of Singapore (now its Chief Justice) opened the June 2012 conference of the International Council for Commercial Arbitration with a speech stating that international investment arbitra-tion “has the potential to constrain the exercise of domestic public authority in a manner and to a degree perhaps not seen since the colonial era” and character-ized international arbitrators as “modern-day uber-sophisticated ambulance-chasing plaintiffs’ law-yers . . . [because] rul[ing] in favor of investors from traditionally capital-exporting countries [is] the ‘price’ that has to be paid to gain credibility and access to the privileged club of elite international arbitrators.” 7

• South Africa has announced it will renegotiate or ter-minate its “first wave” investment treaties and will only enter into new treaties if there are “compelling

4. Convention on the Settlement of Investment Disputes between States and Nationals of Other States, as amended Apr. 10, 2006, Mar. 18, 1965, 17 U.S.T. 1270, 575 U.N.T.S. 159 [hereinafter ICSID Convention].

5. See, e.g., Press Release, ICSID, Bolivia Submits a Notice Under Article 71 of the ICSID Convention (May 16, 2007), available at http://www.worldbank.org/icsid/ highlights/05-16-07.htm; Press Release, ICSID, Ecuador’s Notification under Article 25(4) of the ICSID Convention (Dec. 5, 2007), available at https://icsid.worldbank.org/ICSID/ FrontServlet?requestType=CasesRH&actionVal=OpenPage&PageType=AnnouncementsFrame&FromPage=Announcements&pageName=Announcement9; Press Release, ICSID, Venezuela Submits a Notice Under Article 71 of the ICSID Convention (Jan. 26, 2012), available at https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&action Val=OpenPage&PageType=AnnouncementsFrame&FromPage=Announcements&pageNaMe=Announcement100.

6. See DEP’T OF FOREIGN AFFAIRS AND TRADE, GILLARD GOVERNMENT TRADE POLICY

STATEMENT: TRADING OUR WAY TO MORE JOBS AND PROSPERITY 14 (2011), available at http://pdf.aigroup.asn.au/trade/Gillard%20Trade%20Policy%20Statement.pdf.

7. See Sundaresh Menon, International Arbitration: The Coming of a New Age for Asia (and Elsewhere) (June 11, 2012), available at http://www.arbitration-icca.org/ AV_Library/ICCA_Singapore2012_Sundaresh_Menon.html. A report from a recent debate stated that Menon “seemingly [is] retreating from previously expressed views.” Sebastian Perry, Minds Meet over Regulation, 8 GLOBAL ARB. REV. 11, 13 (2013).


reasons” to do so.8 • Ecuador is in the process of auditing its 25 BITs in the

wake of several investor claims against it.9 • On April 22, 2013, the Hugo Chavez-inspired Bolivar-

ian Alliance for the Peoples of the Americas (ALBA) declared its support for the project of the Union of South American Nations (UNASUR)10 to establish its own arbitration center for trade and investment cases. The declaration’s preamble states that “recent events in various countries of Latin America, concerning dis-putes between states and transnational corporations have shown that there are still cases where the judg-ment violates international law and the sovereignty of the states as well as its legal institutions, due to the economic power of certain companies and deficiencies of the international systems of dispute settlement on

8. Xavier Carim, Columbia FDI Perspectives No. 109: Lessons from South Africa’s BIT Review, VALE COLUM. CTR. ON SUSTAINABLE INT’L INVESTMENT (Nov. 25, 2013), http://www.vcc.columbia.edu/content/lessons-south-africa-s-bits-review (explaining the Republic of South Africa’s current investment policy); XAVIER CARIM, UPDATE ON THE

REVIEW OF BILATERAL INVESTMENT TREATIES IN SOUTH AFRICA: PREPARED FOR THE

PARLIAMENTARY PORTFOLIO COMMITTEE ON TRADE AND INVESTMENT 8 (2013), available at http://www.safpi.org/sites/default/files/publications/dti_review_of_bits_ppc_20130215.pdf. South Africa has also released for public comment a draft bill on foreign investment that reduces investor protections and prescribed compensation as compared to existing South African BITs and does not offer recourse to arbitration, though it does not preclude the State from entering into arbitration agreements, either with individual investors or through treaties. Compare, e.g., Agreement between the Government of Canada and the Government of the Republic of South Africa for the Promotion and Protection of Investments arts. 2–5, 7–8, 13, Can.-S. Afr., Nov. 27, 1995 (setting out protections for establishment of investments, fair and equitable treatment in accordance with international law, most-favored nation treatment, expropriation, compensation standards, and recourse to investor-State arbitration) with Promotion and Protection of Investment Bill of 2013 §§ 6–8, 11 (S. Afr.), available at http://www.tralac.org/files/2013/11/Promotion-and-protection-of-investment-bill-2013-Invitation-for-public-comment.pdf (providing circumscribed investor protections, compensation, and dispute resolution options).

9. Mercedes Alvaro, Ecuador Plans to Audit Bilateral Investment Treaties, WALL ST. J. (Mar. 11, 2013), http://online.wsj.com/article/BT-CO-20130311-708469.html. This appears to be a softening of its position several years ago that it would withdraw from all of its BITs. see Ecuador to Denounce Remaining BITs, GLOBAL ARBITRATION REVIEW (Oct. 30, 2009), http://www.globalarbitrationreview.com/news/article/19251/.

10. UNASUR is an organization created in 2008 to encourage South American integration in various policy areas. See Historia [History], UNASUR, http://www.una sursg.org/ (last visited July 17, 2013).


investment.” 11 • In 2011, Ecuador initiated state-to-state arbitration

seeking a binding interpretation of its bilateral invest-ment treaty (BIT) with the United States, in order to undermine, if not effectively nullify, an unappealable partial award that had been issued against it by a sit-ting tribunal established under the same BIT.12

• The Director of Public Citizen’s Global Trade Watch argued at an April 2013 meeting at the Council on Foreign Relations that BITs, “which aim to protect foreign investors from unfair and inequitable treat-ment by governments, are themselves arbitrary and unfair.” 13

• Relying on Profiting from Injustice, the UN Confer-ence on Trade and Development (UNCTAD) pub-lished a report advocating reform of investor-State dispute settlement, citing concerns including “a per-ceived deficit of legitimacy and transparency” and “questions about the independence and impartiality of arbitrators.” 14

• Ecuador announced a plan to publish a blacklist of ar-bitrators who allegedly “have engaged themselves in

11. See Declaration of the 1st Ministerial Meeting of Latin American States Affected by Transnational Interests, MINISTRY OF FOREIGN POLICY AND HUMAN MOBILITY (ECUADOR) (Apr. 22, 2013), http://cancilleria.gob.ec/wp-content/uploads/2013/04/22abr_declaracion_ transnacionales_eng.pdf. The website for the ALBA Trade Treaty (ALBA-TCP), seeks “to separate [‘Our America’] from the other America, which is expansionist, and driven by imperial appetites.” What is ALBA?, ALBA-TCP, http://alba-tcp.org/en/contenido/alba-tcp-eng (last visited Mar. 7, 2014).

12. Rep. of Ecuador v. United States, (Perm. Ct. Arb. 2012), http://www.pca-cpa.org/showpage.asp?pag_id=1455 (case summary and documents). In a non-public award, the tribunal reportedly declined jurisdiction on the grounds that there was no dispute, or no dispute with “practical consequences,” between the two states. See Jarrod Hepburn & Luke Eric Peterson, US-Ecuador Inter-State Investment Treaty Award Released to Parties; Tribunal Members Part Ways in Key Issues, INVESTMENT ARB. REP. (Oct. 30, 2012), http://www.iareporter.com/articles/20121030_1.

13. See Terra Lawson-Remer, Effects of Investment Treaties in the Global South, COUNCIL ON FOREIGN RELATIONS (Apr. 23, 2013), http://blogs.cfr.org/development-channel/2013/04/23/effects-of-investment-treaties-in-the-global-south/.

14. IIA Issues Note No. 2: Reform of Investor-State Dispute Settlement: In Search of a Roadmap, UNCTAD, at 1–2, n.4 (May 24, 2013), http://unctad.org/en/PublicationsLibrary /webdiaepcb2013d4_en.pdf.


destroying our nations.” 15 • The President of the Center for International Envi-

ronmental Law testified before Congress urging the rejection of investor-State arbitration in the Transat-lantic Trade and Investment Partnership, a treaty cur-rently under negotiation between the United States and the European Union. He argued, “there is no pre-text for granting foreign investors superior rights to domestic firms or subjecting our judicial systems to tribunals empowered to put the American public in a lose-lose situation. The inclusion of such provisions would have a chilling effect on the future development of regulations for public health, safety and the envi-ronment in the EU and U.S.” 16

The unfortunate result of such attacks is that states are in-creasingly working to constrain investment tribunals’ adjudicative role through back door channels. The most striking of these efforts are calls for states’ control over the selection of all investment dis-pute arbitrators. Thus, at the same time that the Government of Sin-gapore has been promoting that country as a desirable venue for arbi-trations,17 its Chief Justice has called for global regulation that effectively permits states to vet the arbitrators that investors can choose.18 There even have been proposals to return to diplomatic protection.19

15. See Ecuador contactará con países para crear una "lista negra" de árbitros extranjeros [Ecuador contracted countries to create a “blacklist” of foreign arbitrators], FOX NEWS (July 6, 2013), http://latino.foxnews.com/latino/espanol/2013/07/06/ecuador-contactara-con-paises-para-crear-una-lista-negra-de-arbitros/.

16. Carroll Muffett, President, CENTER FOR INT’L ENVTL. LAW, Statement Before the U.S. House of Representatives Committee on Energy and Commerce (July 24, 2013), available at http://www.ciel.org/Publications/Muffett_Statement_24July2013.pdf. The statement cites to the work of Public Citizen’s Global Trade Watch, mentioned above, for its claims. See Lawson-Remer, supra note 13.

17. See Alvin Yeo & Chou Sean Yu, Singapore, ASIA-PACIFIC ARB. REV. 2013, 2013, at 65–67, available at http://www.wongpartnership.com/files/download/472.

18. See Menon, supra note 7. Menon was the Attorney General of Singapore when he made the abovementioned speech. He is now the Chief Justice of Singapore.

19. See, e.g., M. Sornarajah, Columbia FDI Perspectives no. 74: Starting Anew in International Investment Law, VALE COLUM. CTR. ON SUSTAINABLE INT’L INVESTMENT (July 16, 2012), http://www.vcc.columbia.edu/content/starting-anew-international-investment-law. Under diplomatic protection, investments are protected only by the diplomatic efforts of the


A wave of recent academic writings proposes various means by which states would exert greater control over the investment dis-pute resolution process to correct alleged flaws in the system. The most extreme proposals are appeals to eliminate investor-State arbi-tration entirely.20 Some suggest new rules of treaty interpretation that would effectively allow states to amend treaties retroactively, while others propose structures that would give states control over the eligibility of arbitrators who decide disputes, in line with the posi-tion taken earlier by the then Attorney General of Singapore.21 Still others propose rules of interpretation that give states heightened def-erence when they invoke particular values as the motivation for their actions.22 What all of these proposals by states, academics, and NGOs have in common is the urge to return investment dispute set-tlement to the control of states and thereby dispense with the present rule-based system of independent and impartial, hence apolitical, in-vestment dispute resolution.

The issue is far from academic. Negotiations are underway for two multilateral treaties that, if concluded, will govern the in-vestment relations of 65% of the world economy. The investment protections and investor-State dispute settlement provisions in those treaties—the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership—therefore have the potential to immedi-ately impact global governance of relations between foreign investors and host states as well as to influence future treaty negotiators.23

investors’ home countries.

20. See, e.g., Open Letter from Lawyers to the Negotiators of the Trans-Pacific Partnership Urging the Rejection of Investor-State Dispute Settlement (May 8, 2012), available at http://tpplegal.wordpress.com/open-letter/ [hereinafter Open Letter].

21. See GUS VAN HARTEN, INVESTMENT TREATY ARBITRATION AND PUBLIC LAW 153

(2007); Anthea Roberts, Power and Persuasion in Investment Treaty Interpretation: The Dual Role of States, 104 AM. J. INT’L L. 179 (2010); Sornarajah, supra note 19.

22. Brigitte Stern, The Future of International Investment Law: A Balance Between the Protection of Investors and the States’ Capacity to Regulate, in THE EVOLVING

INTERNATIONAL INVESTMENT REGIME: EXPECTATIONS, REALITIES, OPTIONS 174, 191–92 (Jose E. Alvarez, Karl P. Sauvant, Kamil Girard Ahmed & Gabriela P. Vizcaino eds., 2011).

23. The European Union accounted for nearly 26% of global GDP in 2010, while the United States accounted for 23%. See The EU in the World—Economy and Finance, EUROSTAT, http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/The_EU_in_the_ world_-_economy_and_finance (last visited Mar. 7, 2014). The countries negotiating the Trans-Pacific Partnership accounted for 40% of world GDP in 2011. See United States Trade Representative, Engagement with the Trans-Pacific Partnership to Increase Exports, Support Jobs, http://www.ustr.gov/about-us/press-office/fact-sheets/2011/february/engage

http://tpplegal.wordpress.com/open-letter/


Moreover, as of the end of 2013, an estimated 1,300 bilateral invest-ment treaties are eligible for renegotiation or termination under their sunset clauses, with a further 350 treaties becoming eligible by 2018.24

At this watershed moment, calls to turn back the clock on in-vestment dispute resolution should give particular pause. Over fifty years ago, states recognized that the political elements inherent in then-existing avenues of investment dispute resolution—domestic courts and diplomatic protection—inhibited vital capital flows and unduly strained international relations.25 Therefore, they created ICSID and other neutral fora for resolving investor-State disputes di-rectly between host states and alien investors. The innovation of in-vestor-State arbitration has fulfilled its promise of increasing foreign direct investment where it has been most acutely needed and curbing gunboat diplomacy. Reverting to a politicized system threatens such critical advances.

As against that great cost, the supposed benefits of repolitici-zation, or “re-statification,” are illusory.26 The alleged faults that re-statification seeks to remedy—the purported sacrifice of poor coun-tries, bias, and threats to public interest regulation—are supported by little more than endless repetition. What began as the refrain of New International Economic Order (NIEO)27 revivalists and globalization

ment-trans-pacific-partnership-increase-export (last visited Mar. 7, 2014).

24. IIA Issues Note No. 4: International Investment Policymaking in Transition: Challenges and Opportunities of Treaty Renewal, UNCTAD 1 (June 21, 2013), http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d9_en.pdf.

25. See ANDREAS F. LOWENFELD, INTERNATIONAL ECONOMIC LAW 291–493 (2002)

(describing the change in international investment law brought about by investment treaties).

26. For an extended discussion of the concept of re-statification, see Brower & Blanchard, supra note 2.

27. The NIEO movement began in the mid-20th century and had its heyday in the 1970s. See W. Michael Reisman, International Lawmaking: A Process of Communication: The Harold D. Lasswell Memorial Lecture, 75 AM. SOC’Y OF INT’L L. PROC. 101, 112–13 (1981). It advocated that international economic law recognize states’ absolute authority over foreign investment within their territory, including permanent sovereignty over natural resources, a right to nationalize or expropriate foreign property on the State’s desired terms, and a right to control the activities of foreign investors without limitation. See Declaration on the Establishment of a New International Economic Order, G.A. Res. 3201 (S-VI), U.N. Doc. A/RES/S-6/3201 (May 1, 1974). Its crowning achievements were the creation of UNCTAD as a specialist organization of developing states and the passage in the General Assembly of the Charter of Economic Rights and Duties of States in 1974. See Charter of Economic Rights and Duties of States, G.A. Res. 3281 (XXIX), U.N. Doc. A/RES/29/3281


opponents has pervaded the conversation so thoroughly that many accept the criticisms as gospel. In its most extreme form, the argu-ment made against international investment arbitration is that it is “poisoned at the root,” a farce that promotes entrenched capitalist in-terests at the expense of host states.28 A group of law professors is-sued a public statement on August 31, 2010 castigating foreign in-vestment treaties and investor-State arbitration on the same basic grounds, but more subtly recording their “shared concern for the harm done to the public welfare by the international investment re-gime, as currently structured, especially its hampering of the ability of governments to act for their people in response to the concerns of human development and environmental sustainability.” 29 Further along the continuum, UNCTAD baldly asserts that investor-State ar-bitration is antithetical to sustainable development.30 More recently, a group of “100 jurists” published an “Open Letter . . . to the Nego-tiators of the Trans-Pacific Partnership Urging the Rejection of In-vestor-State Dispute Settlement” expressing “concerns about how the expansion of this regime threatens to undermine the justice sys-tems in our various countries and fundamentally shift the balance of power between investors, states and other affected parties in a man-ner that undermines fair resolution of legal disputes.” 31 This vein of

(Dec. 12, 1974); A Brief History of UNCTAD, UNCTAD, http://unctad.org/en/Pages/ About%20UNCTAD/A-Brief-History-of-UNCTAD.aspx (last viewed Mar. 7, 2014). While the movement has failed to alter significantly the trajectory of international law, its advocates have become increasingly vocal in the last several years.

28. See Tolga Yalkin, International Investment Arbitration: Poisoned at the Root?, BLOG OF THE EUR. J. OF INT’L L. (June 24, 2009), http://www.ejiltalk.org/international-investment-arbitration-poisoned-at-the-root/. See generally B.S. Chimni, International Institutions Today: An Imperial Global State in the Making, 15 EUR. J. INT’L L. 1, 7 (2004) (arguing that the subjection of national law to international standards is an attempt to “remove the barriers to capital accumulation at the global level”); M. Sornarajah, Mutations of Neo-Liberalism in International Investment Law, 3(1) TRADE L. DEV. 203 (2011) (arguing that international investment law is an “instrument” of neoliberalism that provides “absolute protection” to foreign investment “without paying heed to prescriptions of law relating to the environment, human rights or labour standards”).

29. See Gus Van Harten et al., Public Statement on the International Investment Regime, OSGOODE SCH. OF L. 1 (Aug. 31, 2010), http://www.osgoode.yorku.ca/public-statement/documents/Public_Statement_(final)_(Dec_2013).pdf [hereinafter Osgoode Public Statement].

30. UNCTAD, WORLD INVESTMENT REPORT 2012: TOWARDS A NEW GENERATION OF

INVESTMENT POLICIES 90 (2004).

31. Open Letter, supra note 20.

http://www.ejiltalk.org/international-investment-arbitration-poisoned-at-the-root/

http://www.ejiltalk.org/international-investment-arbitration-poisoned-at-the-root/


rhetoric relies on ideological assumptions and hypotheticals rather than demonstrating any actual harm from international investment law.32

Despite overwhelming counterevidence, this “meme” (to borrow Richard Dawkins’s term) of a broken system continues to proliferate, with assorted variations.33 Through that process, objec-tions that began as ideologically driven polemics have come to be widely, but inaccurately, presumed as truths. Some international lawyers have advocated treating such uninformed and unsubstantiat-ed claims with the seriousness they warrant—namely by ignoring them.34 In the process of communication that undergirds internation-al lawmaking,35 however, memes can be powerful.

The objective of this Article is to destroy the meme that inter-national investment law is deeply flawed and in need of reform, so that misguided reform proposals will not destroy the beneficial mechanisms of international legal cooperation desired by much of the community of nations. We do not seek to argue that the current sys-tem is perfect, but rather to provide context and balance to a very skewed conversation, and therefore to provoke deeper thought and discussion. We do so primarily by shifting the focus from unex-amined, meme-engendered fears of hypothetical eventualities to ob-served experience with the existing system.

The Article proceeds as follows: Parts I through VII respond to the most pervasive memes about the international investment law regime. Part I counters the argument that the international invest-ment legal regime furthers the interests of multinational corporations at the expense of poor states. It does so by reference to the most re-cent and sophisticated empirical research, which shows that credibly

32. See infra text accompanying notes 128–141; James D. Fry, International Human Rights Law in Investment Arbitration: Evidence of International Law’s Unity, 18 DUKE J. COMP. & INT’L L. 77, 79 & n.8 (2007) (also observing that such arguments typically “rely[] on hypothetical situations and weak counterfactual reasoning” and listing examples).

33. A “meme” is a unit of cultural transmission that replicates itself through individuals by inducing repetition. RICHARD DAWKINS, THE SELFISH GENE 192 (2d ed. 1989). A meme’s success does not depend on its truth or on whether it improves the long-term welfare of its hosts. See generally AARON LYNCH, THOUGHT CONTAGION: HOW BELIEF

SPREADS THROUGH SOCIETY (1996).

34. Stephen M. Schwebel, A BIT about ICSID, in JUSTICE IN INTERNATIONAL LAW: FURTHER SELECTED WRITINGS 137, 145 (2011).

35. Reisman, supra note 27, at 113.


binding investment treaties increase inbound investment for states that need it most. Part II addresses the critique that the current re-gime is one-sided by examining the outcomes of actual arbitrations. Part III responds to the argument that investment treaty arbitration is opaque. Part IV disputes the contention that such arbitration unduly constrains state policy discretion, by assessing what BITs and arbitral awards actually say, and Part V addresses the related contention of “regulatory chill.” Part VI counters the argument that investment treaties and arbitration contravene the rule of law. Finally, Part VII responds to the argument that some states’ recent rejection of the cur-rent system demonstrates its crumbling legitimacy, through both a ra-tional choice analysis and a comparison with states’ behavior toward other international adjudicatory mechanisms. Part VIII assesses sev-eral proposed reforms of the international investment law system in light of the foregoing analysis.

I. THE MEME THAT INVESTMENT TREATIES AND ARBITRATION ARE HARMFUL OR INEFFECTIVE

To a great extent, the debate over BITs and investor-State ar-bitration is a debate about fundamental issues of political economy. It is a clash over the appropriate roles of the state and the private sec-tor, played out in NGOs, the media, and the academy. NGOs op-posed to globalization and international corporations publish polem-ics like Profiting from Injustice.36 The common message is encapsulated in the opening sentence of that paper: “The last two decades have witnessed the silent rise of a powerful international in-vestment regime that has ensnared hundreds of countries and put cor-porate profit before human rights and the environment.” 37 Sensa-tionalist exposés such as this appeal to mistrust of markets in order to

36. EBERHARDT & OLIVET, supra note 3.

37. Id. at 7; Cf. Chimni, supra note 28, at 1 (“[A] growing network of international institutions . . . constitute[s] a nascent global state, whose current task is to realize the interests of an emerging transnational capitalist class in the international system to the disadvantage of subaltern classes in the third and first worlds.”); Sornarajah, supra note 19 (arguing that the current system is “geared to promote the narrow interests of the rich,” rather than being a “truly justice-centered regime that shows concern for the interests of the poor,” ostensibly because it “restrict[s] the regulatory space of governments to take measures for the advancement of its people, their environmental and human rights interests and their economic development”).


impugn the integrity of the international investment law system. States seeking to roll back foreign investment protection by denounc-ing BITs, exiting ICSID, or taking other measures within their sover-eign prerogative adopt and perpetuate this rhetoric to legitimize their actions.38

Underpinning this foundational critique is the belief that for-eign direct investment harms host states and is forced upon them for the advantage of rich states and multinational enterprises.39 It has been argued that international law is “the means by which hegemon-ic States impose principles on the basis of a pretense such as a higher standard of civilization or better standards of governance.” 40 The ev-idence is overwhelming, however, that the current system of interna-tional protection for foreign investment benefits developing states.

One powerful indicator is the continuing growth in the num-ber of intra-South BITs, which now number over 1,000.41 Not only do intra-South BITs proliferate, but with the benefit of decades of experience with investment treaties and arbitration, developing coun-tries continue to enter into new treaties offering greater protection to foreign investors than their first-generation treaties. For example, in 2012, China concluded a trilateral investment agreement with Korea and Japan that promises stronger protection of foreign investment and strengthens its commitment to international arbitration for resolv-ing disputes with foreign investors.42 China had previously conclud-

38. See, e.g., Ecuador/Chevron dispute enters a new chapter: Correa calls for Latam support, MERCOPRESS (Feb. 26, 2013), http://en.mercopress.com/2013/02/26/ecuador-chevron-dispute-enters-a-new-chapter-correa-calls-for-latam-support (quoting President Correa of Ecuador as saying, “It’s the end of sovereignty, the end of our independence; we have become colonies with these rulings from international courts.”).

39. See Andrew T. Guzman, Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, 38 VA. J. INT’L L. 639 (1998).

40. Sornarajah, supra note 19; see also WILLIAM GREIDER, ONE WORLD, READY OR

NOT: THE MANIC LOGIC OF GLOBAL CAPITALISM (1997); David P. Fidler, The Return of the Standard of Civilization, 2 CHI. J. INT’L L. 137 (2001).

41. IIA Monitor No. 3, Recent Developments in International Investment Agreements, UNCTAD 3 (2009), http://unctad.org/en/Docs/webdiaeia20098_en.pdf.

42. See Agreement Among the Government of Japan, the Government of the Republic of Korea, and the Government of the People’s Republic of China for the Promotion, Facilitation and Protection of Investment (2012), available at http://www.mofa.go.jp/ announce/announce/2012/5/pdfs/0513_01_01.pdf; Press Release, Ministry of Foreign Affairs of Japan, Signing of the Japan-China-Korea Trilateral Investment Agreement (May 13, 2012), http://www.mofa.go.jp/announce/announce/2012/5/0513_01.html.

http://unctad.org/en/Docs/webdiaeia20098_en.pdf


ed a 1988 bilateral investment treaty with Japan and a 1992 treaty with Korea with more circumscribed rights. Under China’s former treaties with Japan and Korea, investors could submit claims to inter-national arbitration only in the case of expropriation and then only for a determination of compensation owed under national law.43 The new trilateral treaty firmly relinquishes national jurisdiction over in-vestment claims by Japanese and Korean nationals and prescribes in-dependent standards of compensation.44 Similarly, the 2009 ASEAN Comprehensive Investment Agreement provides for investor-State arbitration under ICSID or other institutional rules, at the investor’s option.45 Intra-South BITs as a whole are as protective of foreign in-vestors as older generation North-South BITs, typically offering for-eign investors access to arbitration through ICSID or equivalent channels.46 In addition, in response to criticism from first-world aca-demics of investor-State arbitration provisions in the Trans-Pacific Partnership (TPP),47 Malaysia issued a statement expressing its sup-port of investor-State dispute settlement in the TPP and more gener-ally as an important tool for its economic development.48 Develop-ing states in general recognize that inbound foreign direct investment is to their benefit, and they go to great lengths to attract it, including

43. Agreement on the Encouragement and Reciprocal Protection of Investments Between the Government of the Republic of Korea and the Government of the People’s Republic of China, S.Kor-China, arts. 5(3), 9 (1992), available at http://unctad.org/sections/ dite/iia/docs/bits/korea_china.pdf; Agreement Between Japan and the People’s Republic of China Concerning the Encouragement and Reciprocal Protection of Investment, Japan-China, art. 11(2) (1988) (“If a dispute concerning the amount of compensation . . . cannot be settled within six months . . . such dispute shall . . . be submitted to a conciliation board or an arbitration board . . . .”).

44. See Agreement Among the Government of Japan, the Government of the Republic of Korea, and the Government of the People’s Republic of China for the Promotion, Facilitation and Protection of Investment, arts. 11, 15 (2012).

45. See 2009 ASEAN Comprehensive Investment Agreement, arts. 27, 28 (2009), available at http://cil.nus.edu.sg/2009/2009-asean-comprehensive-investment-agreement-signed-on-26-february-2009-in-cha-am-thailand-by-the-economic-ministers/.

46. See, e.g., WORLD INVESTMENT REPORT 2012, supra note 30, at 90; MAHNAZ

MALIK, SOUTH-SOUTH BILATERAL INVESTMENT TREATIES: THE SAME OLD STORY? 3 (2010), available at http://www.iisd.org/pdf/2011/dci_2010_south_bits.pdf.

47. See supra text accompanying note 31.

48. Brief on the Trans-Pacific Partnership (TPP), MINISTRY OF INT’L TRADE AND

INDUS., GOV’T OF MALAYSIA 7–8, http://www.miti.gov.my/storage/documents/c94/ com.tms.cms.document.Document_62357eea-c0a8156f-2c11008e-9a1ecbed/1/TPP%20-%20Briefing%20Notes.pdf (last visited July 17, 2013).


by entering into investment treaties that provide for mandatory inves-tor-State arbitration.

In addition to the evidence of states’ behavior, empirical re-search confirms the economic benefits to poor states of the interna-tional regime of foreign investment protection. There has long been consensus that foreign direct investment increases national income and employment and accelerates development and modernization, in-cluding by establishing valuable tangible assets within the host coun-try, promoting the development of human capital, facilitating the ac-quisition of technical knowledge, and creating network effects that create opportunities for future market access abroad.49 Thus, to the extent that international investment law provides foreign direct in-vestment, it contributes to those positive consequences.

However, at least one critic of the foreign investment legal regime argues that it does not generate capital flows to poor coun-tries. He argues that BITs are unnecessary because states will treat investors fairly irrespective of such agreements in order to attract fu-ture foreign investment.50 But in practice, reputational effects and community pressure have proven inadequate against hostile actions of host states against foreign investors.51 While expropriation events became less frequent over the 1980s and early 1990s,52 the last five to ten years have seen an increase in both direct and indirect expro-priations against foreign investors.53 Experience thus shows that

49. See, e.g., Ilhan Ozturk, Foreign Direct Investment—Growth Nexus: A Review of the Recent Literature, 4 INT’L J. OF APPLIED ECONOMETRICS AND QUANTITATIVE STUD. 81 (2007); OECD, FOREIGN DIRECT INVESTMENT FOR DEVELOPMENT: MAXIMISING BENEFITS, MINIMISING COSTS (2002), available at http://www.oecd.org/investment/investmentfor development/1959815.pdf.

50. Jason Webb Yackee, Do We Really Need BITs? Toward a Return to Contract in International Investment Law, 3 ASIAN J. WTO & INT’L HEALTH L. & POL’Y 121, 125 (2008).

51. See ANDREW T. GUZMAN, HOW INTERNATIONAL LAW WORKS: A RATIONAL

CHOICE THEORY 88–90 (2008) (describing how in the 1970s and 1980s states expropriated foreign investment without regard to reputational effects because their governments were pursuing policies hostile to foreign investment anyway, making large future inflows of foreign investment unlikely). See generally id. at 71–117 (describing the complexity of the impact of reputation on State behavior, involving cost-benefit calculations of reputational versus non-reputational payoffs, the importance of the obligation at stake, and current reputation).

52. Michael S. Minor, The Demise of Expropriation as an Instrument of LDC Policy, 1980–1992, 25 J. INT’L BUS. STUD. 177, 178 (1994).

53. MULTILATERAL INVESTMENT GUARANTEE AGENCY, WORLD BANK GROUP, 2011 WORLD INVESTMENT AND POLITICAL RISK 7 (2012).


reputational effects alone cannot ensure legal stability and certainty. More importantly, the specter of reputational effects gives would-be investors no legal recourse if the reputational threat fails, and there-fore no certainty of protection. Thus, investors remain deeply con-cerned about political risk and expropriation abroad and actively seek ways to reduce their exposure. In 2011, at least 38% of respondents to the Multilateral Investment Guarantee Agency’s annual political risk survey had withdrawn existing investments or cancelled planned investments because of political risk in the previous twelve months.54

Of course, it is one thing to show that political risk hinders capital flows and another to demonstrate that the existing internation-al legal regime for foreign investment effectively mitigates political risk. Evidence also supports the latter proposition, however. Com-panies such as Dow Chemical identify investment treaties as the foundation of their foreign direct investment strategy.55 While one unreliably small survey of multinational companies and political risk insurers concluded that many do not take BITs into account,56 in a much larger survey, 67% of executives of multinational enterprises said that the existence of an investment treaty influenced their com-pany’s decisions on where to invest.57 That study discovered that in-vestors considered the existence of a BIT important when deciding whether to invest in developing countries, and considered it among the most significant factors when deciding whether to invest in transi-tional economies.58

54. Id. at 22, fig. 1.11.

55. Jennifer L. Tobin & Marc L. Busch, A BIT Is Better than a Lot: Bilateral Investment Treaties and Preferential Trade Agreements, 62 WORLD POLITICS 7 (2010); see also Advanced Manufacturing Plan for the U.S., THE DOW CHEMICAL CO., http://www.dow.com/advanced-manufacturing/pdf/Dow_amp_us.pdf (last visited June 17, 2013).

56. See generally Jason Webb Yackee, Do Bilateral Investment Treaties Promote Foreign Direct Investment? Some Hints from Alternative Evidence, 51 VA. J. INT’L L. 397 (2011) [hereinafter Yackee, Alternative Evidence] (basing its conclusion on answers from only fourteen survey respondents).

57. Lisa E. Sachs & Karl P. Sauvant, BITs, DTTs, and FDI Flows: An Overview, in THE EFFECT OF TREATIES ON FOREIGN DIRECT INVESTMENT: BILATERAL INVESTMENT

TREATIES, DOUBLE TAXATION TREATIES, AND INVESTMENT FLOWS, at lvi–lvii (2009) (discussing a survey of 602 corporate executives).

58. UNCTAD, THE ROLE OF INTERNATIONAL INVESTMENT AGREEMENTS IN

ATTRACTING FOREIGN DIRECT INVESTMENT TO DEVELOPING COUNTRIES 51–52 (2009), available at http://unctad.org/en/Docs/diaeia20095_en.pdf (further reporting on the survey presented in Sachs & Sauvant, supra note 57).


Other evidence supports this finding. The government politi-cal risk insurers of France and Germany refuse to underwrite invest-ments that are not covered by BITs.59 Other countries’ public politi-cal risk insurers take the existence of a BIT into account as part of their risk assessments.60 The World Bank Group’s Multilateral In-vestment Guarantee Agency considers the existence of an investment protection treaty a sufficient condition for coverage and factors it into its premium calculation.61 Some private political risk insurers con-sider BITs as relevant factors when assessing very risky countries.62 One writer downplays the importance of BITs to political risk insur-ers on the basis of a survey he conducted, drawing the conclusion that BITs are usually not dispositive to private political risk insurers when setting premiums “for developing countries that treat foreign investors fairly and in a non-discriminatory way.” 63 However, that the results had to be conditioned on that expansive caveat in fact demonstrates the value of BITs to countries facing reputational hur-dles.

A related argument is that BITs are not the only way for states to make a credible commitment to protect foreign investment, and that other means of protection that offer recourse to international ar-bitration might be equally effective.64 While some early studies showed weak or no correlation between BITs and foreign direct in-vestment,65 the majority of published studies find a positive correla-

59. Lauge Skovgaard Poulsen, Political Risk Insurance and Bilateral Investment Treaties: A View from Below, COLUM. FDI PERSPECTIVES (Aug. 2, 2010), http://www.vcc. columbia.edu/content/political-risk-insurance-and-bilateral-investment-treaties-view-below.

60. Kathryn Gordon, Investment Guarantees and Political Risk Insurance: Institutions, Incentives and Development, in OECD INVESTMENT POLICY PERSPECTIVES 2008, at 91, 120 (Michael Gestrin ed., 2008), available at http://www.oecd.org/finance/insurance/ 44230805.pdf.

61. Poulsen, supra note 59.

62. See id.

63. See id.

64. See Yackee, Alternative Evidence, supra note 57, at 413; Jason Yackee, Do BITs Really Work? Revisiting the Empirical Link Between Investment Treaties and Foreign Direct Investment, in THE EFFECT OF TREATIES ON FOREIGN DIRECT INVESTMENT, supra note 56, at 379, 381−82 [hereinafter Yackee, Do BITs Really Work?].

65. See UNCTAD, The Impact on Foreign Direct Investment of BITs, in BILATERAL

INVESTMENT TREATIES IN THE MID-1990S (1998), reprinted in The EFFECT OF TREATIES ON

FOREIGN DIRECT INVESTMENT, supra note 57, at 323; Mary Hallward-Driemeier, Do Bilateral Investment Treaties Attract Foreign Direct Investment? Only a Bit . . . and They Could Bite, WORLD BANK DEV. RESEARCH GRP. 19, 22 (Aug. 2003), http://www.wds.


tion between foreign direct investment (FDI) and international in-vestment agreements (IIAs).66 The most sophisticated studies con-

worldbank.org/external/default/WDSContentServer/IW3P/IB/2003/09/23/000094946_03091104060047/Rendered/PDF/multi0page.pdf.

66. See, e.g., Todd Allee & Clint Peindhardt, Contingent Credibility: The Impact of Investment Treaty Violations on Foreign Direct Investment, 65 INT’L ORG. 401 (2011)

(finding that entering into BITs significantly increases FDI unless the state is then charged with breaching the BIT by an investor in arbitration); Rashmi Banga, Do Investment Agreements Matter?, 21 J. ECON. INTEGRATION 40 (2006) (finding that signing BITs with developed countries increased FDI inflows); Matthias Busse, Jens Koniger & Peter Nunnenkamp, FDI Promotion Through Bilateral Investment Treaties: More than a Bit?, 146 REV. WORLD ECON. 147 (2010) (controlling for endogeneity and other statistical artifacts and finding that BITs increase FDI, with evidence that they may substitute for weak domestic institutions); Tim Büthe & Helen V. Milner, Bilateral Investment Treaties and Foreign Direct Investment: A Political Analysis, in THE EFFECT OF TREATIES ON FOREIGN

DIRECT INVESTMENT, supra note 57, at 171, 213−14 (finding a statistically significant increase in FDI as a percentage of GDP with each standard deviation in the number of BITs signed); Peter Egger & Michael Pfaffermayr, The Impact of Bilateral Investment Treaties on Foreign Direct Investment, 32 J. COMP. ECON. 788, 790 (2004) (finding a 30% increase in capital flows from a capital-exporting to a capital-importing country after they enter into a BIT); Kevin P. Gallagher & Melissa B.L. Birch, Do Investment Agreements Attract Investment? Evidence from Latin America, in THE EFFECT OF TREATIES ON FOREIGN DIRECT

INVESTMENT, supra note 57, at 295, 296−99 (2009) (finding a positive correlation between the number of BITs signed and foreign investment inflows to Latin American countries); Robert Grosse & Len J. Trevino, New Institutional Economics and FDI Location in Central and Eastern Europe, in THE EFFECT OF TREATIES ON FOREIGN DIRECT INVESTMENT, supra note 57, at 273 (finding a significant positive correlation between BITs and inward FDI); Andrew Kerner, Why Should I Believe You? The Costs and Consequences of Bilateral Investment Treaties, 53 INT’L STUD. Q. 73, 82–98 (2009) (controlling for endogeneity and finding that ratifying a BIT can result in a $600 million increase in foreign direct investment); Eric Neumayer & Laura Spess, Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?, 33 WORLD DEV. 1567, 1568 (2005) (finding that concluding BITs with a number of capital-exporting states could result in a near doubling of FDI, but that the effect diminishes as domestic legal institutions improve); Clint Peinhardt & Todd Allee, Devil in the Details? The Investment Effects of Dispute Settlement Variation in BITs, in YEARBOOK ON INTERNATIONAL INVESTMENT LAW AND POLICY 2010–2011, at 837, 854–56 (Karl P. Sauvant, ed. 2012) (finding that, controlling for country-specific characteristics that impact treaty negotiations and thus treaty language, international investment agreements that more strongly commit to investor-State arbitration by omitting reference to domestic dispute resolution are correlated with higher foreign direct investment inflows); Susan Rose-Ackerman, The Global BITs Regime and the Domestic Environment for Investment, in THE EFFECT OF TREATIES ON FOREIGN DIRECT INVESTMENT, supra note 57, at 311 (finding that BITs have a positive impact on FDI flows to developing countries in interaction with domestic political and economic factors); Jeswald W. Salacuse & Nicholas P. Sullivan, Do BITs Really Work?: An Evaluation of Bilateral Investment Treaties and Their Grand Bargain, 46 HARV. INT’L L.J. 67, 95−115 (2005) (finding that concluding a BIT with the United States correlated with increased incoming investment of 77 to 85%, but with other OECD countries had no significant effect); Kim Sokchea, Bilateral Investment Treaties, Political Risk and Foreign Direct Investment, 11 ASIA PAC. J. ECON. & BUS. 6


sider possible alternative explanatory variables and still find that IIAs that provide for investor-State arbitration are correlated with in-creased investment.67 These findings line up with the ways that one would expect investment treaties to operate. The strength of the cor-relation varies for a state according to factors such as its internal eco-nomic and political conditions, its economic characteristics relative to those of its treaty partners, the contents of the treaty, and the pro-cedural conditions it places on investor-State arbitration.68 The most sophisticated empirical analysis available thus confirms that strong BITs—particularly those with arbitration clauses that omit any refer-ences to local dispute resolution—are the most likely to increase for-eign direct investment.69 Thus, the weight of available empirical ev-idence bears out Wälde’s assessment:

It is the ability to access a tribunal outside the sway of

(2007) (controlling for endogeneity and finding significant correlation between BITs and FDI, with a stronger correlation as a country’s political risk increases); Deborah L. Swenson, Why Do Developing Countries Sign BITs?, 12 U.C. DAVIS J. INT’L L. & POL’Y 131 (2005) (finding that all BITs correlated with increased foreign investment but that for early 1990s treaties causation could not be established, whereas there is evidence that BITs signed in the late 1990s caused subsequent increased foreign investment); Jennifer L. Tobin & Susan Rose-Ackerman, When BITs Have Some Bite: The Political-Economic Environment for Bilateral Investment Treaties, 6 REV. INT’L ORG. 1 (2011) (finding that BITs attract FDI to developing countries as a complement to favorable domestic institutions). But see Emma Aisbett, Bilateral Investment Treaties and Foreign Direct Investment: Correlation Versus Causation, in THE EFFECT OF TREATIES ON FOREIGN DIRECT INVESTMENT, supra note 57, at 395, 421 (finding no significant correlation between concluding BITs and FDI when controlling for endogeneity, but failing to control for the strength of the BIT or whether it included an arbitration clause, factors that other studies have found significant); Axel Berger, Matthias Busse, Peter Nunnenkamp & Martin Roy, More Stringent BITs, Less Ambiguous Effects on FDI? Not a Bit!, 112 ECON. LETTERS 270 (2011) (finding that BITs with investor-State arbitration provisions providing for partial or full pre-consent to arbitration are significantly positively correlated with FDI, but that results do not hold when post-communist transitional economies are removed from the sample); Jason Webb Yackee, Bilateral Investment Treaties, Credible Commitment, and the Rule of (International) Law: Do BITs Promote Foreign Direct Investment?, 42 LAW & SOC’Y REV. 805 (December 2008) (analyzing BITs with and without investor-State arbitration clauses and finding no correlation between “strong” BITs and FDI); Yackee, Do BITs Really Work?, supra note 64, at 379, 381−82 (altering the methodology of Neumayer and Spess’s 2005 study, supra note 66, and finding no statistically significant relationship between BITs and FDI except for countries with low political risk); UNCTAD, supra note 65; Hallward-Driemeier, supra note 65.

67. See Busse, Koniger & Nunnenkamp, supra note 66; Kerner, supra note 66; Pein-hardt & Allee, supra note 66; Sokchea, supra note 66.

68. See Peinhardt & Allee, supra note 66, at 837, 854–56.

69. Id.


the host State which is the principal advantage of a modern investment treaty. This advantage is much more significant than the applicability to the dispute of substantive international law rules. The remedy trumps in terms of practical effectiveness the defini-tion of the right.70 The available data decidedly fails to support the claims that

IIAs and investor-State arbitration do not increase capital flows or that the benefits accrue solely to rich-country foreign investors.71 In-stead, it suggests that poor countries—in particular those with high levels of perceived political risk—stand to make large gains from IIAs and investor-State arbitration.72 The results of empirical studies of FDI flows comport with the findings of surveys of international investors discussed above.73 Interestingly, such investors are not concerned about political risk in stable non-democratic countries, which tend to have the lowest levels of political risk insurance cover-age for foreign investors. During the 2011 Arab Spring, many inves-tors in the Middle East and North Africa that had gone without cov-erage sought to obtain it.74 That dynamic illustrates the potential for IIAs with investor-State arbitration to play a powerful role at this critical point in history in helping those countries in transition to es-tablish political stability and realize economic growth.

In addition, these studies do not consider the additional effect of BITs and consent to arbitration on the cost of foreign capital, and consequently on domestic prices for the foreign investor’s goods and services as well as the portion of project costs that the host state pays. While political risk insurance may in some cases be an alternative to

70. Thomas W. Wälde, The “Umbrella” Clause in Investment Arbitration: A Comment on Original Intentions and Recent Cases, 6 J. WORLD INVESTMENT & TRADE 183, 190 (2005).

71. See Sornarajah, supra note 28, at 203; Yalkin, supra note 28.

72. Berger et al., supra note 66, at 272 (finding that the positive effect of the existence of a BIT disappears when Eastern and Central European transitional economies are removed); Busse, Koniger & Nunnenkamp, supra note 66, at 168 (finding that the positive effect of the existence of a BIT decreases, but is still significant, when transitional economies are removed); Sokchea, supra note 66, at 7 (finding that the correlation between BITs and FDI strengthens as a country’s political risk increases).

73. See supra notes 54–57 and accompanying text.

74. MULTILATERAL INVESTMENT GUARANTEE AGENCY, WORLD BANK GROUP, WORLD

INVESTMENT AND POLITICAL RISK 2012, at 8 (2013).


a BIT, the investor bears the cost of that insurance, which in turn translates into requiring more subsidies, tax breaks, or other conces-sions from the host state, and/or higher prices for the end product. The host state will bear part of the cost of its political risk in one way or another. Promising legal security enforced by neutral dispute resolution should be a way for a state committed to protecting foreign investment to reduce its financial contribution to development pro-jects.

II. THE MEME THAT INVESTMENT ARBITRATION IS ONE-SIDED

There are two variants of the argument that investor-State ar-bitration is one-sided: one contends that arbitrators are biased and the other that treaty protections and investor-State arbitration struc-turally favor investors. Neither stands up to the evidence.

Bolivia and Venezuela denounced ICSID in the late 2000s, and Ecuador reduced the scope of its consent to arbitrate disputes un-der the convention,75 alleging that ICSID arbitration is biased against developing states. Bolivian President Evo Morales charged, “Gov-ernments in Latin America and I think all over the world never win the cases. The transnationals always win.” 76 Venezuelan President Hugo Chávez characterized his country’s withdrawal as a refusal to “bow down to imperialism and it’s [sic] tentacles.” 77 His govern-ment issued a press release contending that ICSID tribunals harbored a pro-investor bias, having decided “232 times in favor of corporate interests in the 234 cases it has known throughout its history.”78 Other groups and individuals have claimed that “ICSID represents the inequities of an international system biased against the develop-ing countries” 79 and that “[i]nvestment treaty arbitration as currently

75. See supra note 5.

76. Susan Franck, Empiricism and International Law: Insights for Investment Treaty Dispute Resolution, OPINIO JURIS (July 3, 2008), http://opiniojuris.org/2008/07/03/ empiricism-and-international-law-insights-for-investment-treaty-dispute-resolution/.

77. Luis Britto Garcia, We Have to Get Out of the ICSID, VENEZUELANALYSIS.COM (Jan. 24, 2012), http://venezuelanalysis.com/analysis/6766.

78. Comunicado Oficial de Venezuela Sobre Su Salida Del Ciadi, EL UNIVERSAL (Jan. 25, 2012), http://www.eluniversal.com/economia/120125/comunicado-oficial-de-venezuela-sobre-su-salida-del-ciadi.

79. Bolivia Withdraws from World Bank Investment Court, FOOD & WATER WATCH (June 21, 2007), http://www.foodandwaterwatch.org/global/latin-america/bolivia/bolivia-


constituted is not a fair, independent, and balanced method for the resolution of investment disputes and therefore should not be relied on for this purpose.” 80

Such assertions have no discernible basis in reality. One of the authors has already thoroughly refuted contentions of systematic arbitrator bias, and we will not repeat that analysis here.81 Other points, however, remain to be made. First, Venezuela’s statistics are flat wrong. Tribunals convened under the ICSID Convention and Additional Facility Rules have upheld investor claims in part or in full in 46% of cases (far from 232 out of 234 cases, as Venezuela has declared).82 In 23% of cases, ICSID tribunals declined jurisdiction altogether; in 30%, they dismissed all claims; and in 1%, they con-cluded that the claims were “manifestly without legal merit.” 83 Fur-ther, in a rigorous analysis of fifty-two investment arbitration awards finally resolving treaty claims, Susan Franck found that of the twen-

withdraws-from-world-bank-investment-court/ (“On May 1, 2007, the government of Bolivia took a bold step and withdrew from the World Bank’s undemocratic court for investment disputes. The International Centre for the Settlement of Investment Disputes, or ICSID, is an undemocratic institution that allows the world’s largest corporations to sue poor countries for millions of dollars.”). See also Christian Tietje et al., Once and Forever? The Legal Effects of a Denunciation of ICSID, 6 TRANSNAT’L DISP. MGMT. 1, 5 (Mar. 2008) (reporting that Bolivia cited ICSID’s bias as a reason it withdrew from ICSID); Steve Josselon, Pro-North Bias Seen at ICSID, (June 19, 2007), http://www.troubledtimesblog. com/2007/06/pro-north-bias-seen-at-icsid.html (“[ICSID] is biased toward corporation[s] based in the Developed World.”).

80. Osgoode Public Statement, supra note 29; see also Andrea J. Menaker, What the Explosion of Investor-State Arbitrations May Portend for the Future of BITs, in THE FUTURE

OF INVESTMENT ARBITRATION 157, 162 (Catherine A. Rogers & Roger Alford eds., 2009) (discussing a Philippine government official’s contention that investor-State arbitration is biased in favor of developed countries); Fernando Cabrera Diaz, Bolivia Expounds on Reasons for Withdrawing from ICSID Arbitration System, INVESTMENT TREATY NEWS (May 27, 2007), http://www.iisd.org/pdf/2007/itn_may27_2007.pdf; Ecuador Says Won’t Extend U.S. Investment Treaty, REUTERS, May 6, 2007, http://www.reuters.com/article/ politicsNews/idUSN0626423520070507; Gabriela Molina, Ecuador Wary of World Bank Arbitration in Occidental Case, U.S.A. TODAY, May 11, 2008, http://usatoday30.usatoday. com/money/economy/2008-05-11-3404362337_x.htm.

81. Charles N. Brower & Charles Rosenberg, The Two-Headed Nightingale: Why the Paulsson-van den Berg Presumption that Party-Appointed Arbitrators Are Untrustworthy is Wrongheaded, 6 WORLD ARB. & MEDIATION REV. 7, 18 (2012).

82. ICSID, THE ICSID CASELOAD STATISTICS (ISSUE 2012-1), at 13 (2012), available at https://icsid.worldbank.org/ICSID/FrontServlet?CaseLoadStatistics (follow “publications” hyperlink; then follow “ICSID publications”; then follow “The ICSID Caseload –Statistics” hyperlink; then open “Issue 2012-1” PDF).

83. Id.

https://icsid.worldbank.org/ICSID/FrontServlet?CaseLoadStatistics


ty-one cases that investors won on the merits, damages were not high: thirteen resulted in damages being awarded between $1 and $5 million; in four cases, investors were awarded between $5 and $10 million; and in only four others were investors awarded more than $10 million.84 Furthermore, awards typically are well below the amount claimed: more than 80% of awards granted less than 40% of the damages sought.85 Two analyses by Franck revealed no statisti-cally significant relationship between a country’s development status and its likelihood of success in an investor-State arbitration or the amount of damages a losing state is ordered to pay.86 These statistics give the lie to the endlessly repeated bias argument.87

Another approach of critics is to argue that the outcomes of particular arbitrations evidence bias. Taking this approach, Sornara-jah contends that tribunals expansively interpret their jurisdiction to favor investors.88 He singles out the Tokios Tokelès v. Ukraine award for its definition of “investment,” Maffezini v. Spain for its in-terpretation of a most-favored nation (MFN) clause, Aguas del Tu-nari v. Bolivia for disagreeing with the respondent’s argument that a clause in a concession contract precluded changes in upstream own-ership of the concession company, and Fedax v. Venezuela for its finding that the claimant’s acquisition of a promissory note issued by the state constituted an investment.89 Declining to analyze the rea-soning of the awards, Sornarajah does nothing more than assert his

84. Susan D. Franck, Empirically Evaluating Claims About Investment Treaty Arbitration, 86 N. CAR. L. REV. 1, 59–61 (2007).

85. Id. at 61–62; Daphna Kapeliuk, The Repeat Appointment Factor: Exploring Decision Patterns of Elite Investment Arbitrators, 96 CORNELL L. REV. 47, 81 (2010).

86. Susan D. Franck, The ICSID Effect? Considering Potential Variations in Arbitration Awards, 51 VA. J. INT’L L. 825, 888–94 (2011); Susan D. Franck, Development and Outcomes of Investment Treaty Arbitration, 50 HARV. INT’L L.J. 435 (2009).

87. William W. Park, Arbitrator Integrity: The Transitory and the Permanent, 46 SAN

DIEGO L. REV. 629, 658 (2009) (discussing contentions of arbitrators’ “pro-investor” bias).

88. M. Sornarajah, The Retreat of Neo-Liberalism in Investment Treaty Arbitration, in THE FUTURE OF INVESTMENT ARBITRATION 273, 291–92 (Catherine A. Rogers & Roger P. Alford eds., 2009).

89. See id. at 279–81, n.26 (citing Tokios Tokelès v. Ukraine, ICSID Case No. ARB/02/18, Award, ¶¶ 41–49 (July 26, 2007); Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7, Decision of Tribunal on Objections to Jurisdiction, ¶¶ 38–64 (Jan. 25, 2000); Aguas del Tunari, S.A. v. Republic of Bolivia, ICSID Case No. ARB/02/3, Decision on Respondent’s Objection to Jurisdiction, ¶¶ 156–80 (Oct. 21, 2005); Fedax N.V. v. The Republic of Venezuela, ICSID Case No. ARB/96/3, Decision of the Tribunal on Objections to Jurisdiction, ¶¶ 18–29 (July 11, 1997)).


disagreement with the result and conclude bias therefrom.90 Without addressing those four cases, it should be obvious that a handful of in-dividual cases does not establish a pattern of bias. For that matter, mere disagreement with the results of a line of cases that similarly decide a legal issue also does not indicate bias; it may demonstrate nothing more than a consensus on the correct legal analysis of that issue. More is required to evidence bias than disagreement with the outcomes of arbitrations.

Arguments that the investment law regime is asymmetrical are similarly ill-conceived. “Foreign investors,” the argument goes, “are being accorded substantive rights under these treaties without being subject to any specific obligations.” 91 While it cannot be de-nied that an investor might renege on its promises or break the law of the host state, there is no institutional gap to be filled by memorializ-ing such obligations in a treaty or granting a state a treaty right to en-force them. Investors are bound by the law of the host state and by their contractual obligations. As sovereigns, host states have many tools at their disposal for responding to investor breaches, including civil and criminal penalties, legal actions for breach of contract in their own courts, and political pressure. The very nature of the rela-tionship means that the foreign investor will typically have assets in the host state, guaranteeing enforcement leverage. Further, invest-ment contracts almost universally provide for international arbitration of any dispute relating thereto, which provisions have been interpret-ed broadly to include not only breach of contract but also torts and violations of domestic law.92 If successful in such an international arbitration, a state can reach the investor’s assets abroad under the New York Convention.93 By contrast, resort to treaty-based arbitra-tion is often the sole lever available to an investor to enforce its rights if a host state treats it inequitably once the investor has expended

90. See id.

91. Patrick Dumberry & Gabrielle Dumas Aubin, How to Incorporate Human Rights Obligations in Bilateral Investment Treaties? INVESTMENT TREATY NEWS 9 (Mar. 2013), http://www.iisd.org/pdf/2013/iisd_itn_march_2013_en.pdf.

92. See, e.g., R. DOAK BISHOP, JAMES CRAWFORD & W. MICHAEL REISMAN, FOREIGN

INVESTMENT DISPUTES: CASES, MATERIALS AND COMMENTARY 226 (2005) (discussing the effectively identical language “arising out of or in connection with” in the ICC Model Arbitration Clause).

93. See generally Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 330 U.N.T.S. 38 (1958).


substantial resources in the host state’s territory.94 Given that the ac-tual power imbalance inherent in this institutional arrangement so glaringly favors host states, the persistence of the asymmetry argu-ment is baffling. One might just as well criticize the “asymmetry” of international human rights courts.

What is more, states are not excluded in principle from bring-ing either claims or counter-claims in investor-State arbitration.95 The ICSID Arbitration Rules do not preclude a state from bringing a claim against an investor if it has concluded an agreement (in a con-tract or a treaty) providing for two-way international arbitration.96 Indeed, ICSID has registered four claims initiated by states and state entities against foreign investors.97 That number makes up only a tiny

94. See Stephen M. Schwebel, JUSTICE IN INTERNATIONAL LAW: FURTHER SELECTED

WRITINGS 141–45 (2011); Christoph Schreuer, Why Still ICSID?, in 4 THE FUTURE OF

ICSID AND THE PLACE OF INVESTMENT TREATIES IN INTERNATIONAL LAW, BIICL CURRENT

ISSUES IN INVESTMENT TREATY LAW 203 (N.J. Calamita, D. Earnest & M. Burgstaller eds., 2013).

95. See generally Hege Elisabeth Veenstra-Kjos, Counter-Claims by Host States in Investment Dispute Arbitration “Without Privity,” in NEW ASPECTS OF INTERNATIONAL

INVESTMENT LAW 597 (Philippe Kahn & Thomas W. Wälde eds., 2006).

96. See ICSID Convention, supra note 4, art. 36; ICSID, REPORT OF THE EXECUTIVE

DIRECTORS ON THE SETTLEMENT OF INVESTMENT DISPUTES BETWEEN STATES AND NATIONALS

OF OTHER STATES, ¶ 13 (2006), https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/ basic-en.htm (“[T]he Convention maintain[s] a careful balance between the interests of investors and those of host States. Moreover, the Convention permits the institution of proceedings by host States as well as by investors, and the Executive Directors have constantly had in mind that the provisions of the Convention should be equally adapted to the requirements of both cases.”); Tanz. Elec. Supply Co. Ltd. v. Indep. Power Tanz. Ltd., ICSID Case No ARB/98/8, Final Award, ¶ 1 (June 22, 2001), available at https://icsid.worldbank.org/ICSID/FrontServlet (follow “cases” hyperlink; then follow “search cases” hyperlink; then sort by “view concluded cases;” then follow “ARB 98/8” hyperlink on page twelve) (claim by a State-owned power company against a foreign investor).

97. See Case Details, Republic of Peru v. Caravelí Cotaruse Transmisora de Energía S.A.C., ICSID Case No. ARB/13/24 (Dec. 26, 2013), https://icsid.worldbank.org/ ICSID/FrontServlet (follow “search cases” hyperlink; then follow “select all” hyperlink; then follow “ARB/13/24” hyperlink); Case Details, Gabon v. Société Serete S.A., ICSID Case No. ARB/76/1 (Feb. 28, 1977), https://icsid.worldbank.org/ICSID/FrontServlet (follow “search cases” hyperlink; then follow “select all” hyperlink; then follow “ARB/76/1” hyperlink); Case Details, Government of the Province of East Kalimantan v. PT Kaltim Prima Coal and others, ICSID Case No. ARB/07/3 (Dec. 28, 2009), https://icsid.worldbank. org/ICSID/FrontServlet (follow “search cases” hyperlink; then follow “select all” hyperlink; then follow “ARB/07/3” hyperlink) (provincial government in Indonesia against an Anglo-Australian joint venture); Case Details, Tanzania Elec. Supply Co. Ltd. v. Indep. Power Tanzania Ltd., ICSID Case No. ARB/98/8 (Mar. 24, 1999), https://icsid.worldbank.

https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/basic-en.htm

https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/basic-en.htm


proportion of all ICSID cases, but as explained above, that is likely because states prefer to avail themselves of one of the other avenues available to them for resolving foreign-investor disputes.

Few current investment treaties explicitly provide for coun-terclaims,98 but the language of many is broad enough to encompass jurisdiction over counterclaims. So far only one tribunal is known to have found that a treaty excluded counterclaims in ICSID arbitra-tion.99 In that case, however, W. Michael Reisman issued a Dissent-ing Opinion based on Article 46 of the ICSID Convention, which provides:

Except as the parties otherwise agree, the Tribunal shall, if requested by a party, determine any incidental or additional claims or counterclaims arising directly out of the subject-matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Cen-tre.100 Professor Reisman argued that when a host state offers con-

org/ICSID/FrontServlet (follow “search cases” hyperlink; then follow “select all” hyperlink; then follow “ARB/98/8” hyperlink) (Tanzania’s state-owned electricity supply company proceeded against a Malaysia-Tanzania joint venture).

98. One that does is the Investment Agreement for the COMESA (Common Market for Eastern and Southern Africa) Common Investment Area, which provides, “A Member State against whom a claim is brought by a COMESA investor under this Article may assert as a defence, counterclaim, right of set off or other similar claim, that the COMESA investor bringing the claim has not fulfilled its obligations under this Agreement, including the obligations to comply with all applicable domestic measures or that it has not taken all reasonable steps to mitigate possible damages.” Investment Agreement for the COMESA Common Investment Area, art. 28(9), May 23, 2007, available at http://vi.unctad.org/ files/wksp/iiawksp08/docs/wednesday/Exercise%20Materials/invagreecomesa.pdf. The COMESA treaty also expressly requires investors to comply with domestic law, which makes it clear that a host State may raise counter-claims for domestic law breaches; see id. art. 9.

99. See Roussalis v. Romania, ICSID ARB/06/01, Award, ¶¶ 868, 872 (Dec. 7, 2011), available at http://www.italaw.com/sites/default/files/case-documents/ita0723.pdf (refusing to hear a counterclaim under a BIT that provided for arbitration of “[d]isputes between an investor of a Contracting Party and the other Contracting Party concerning an obligation of the latter under this Agreement,” reasoning that the treaty imposed no obligations on the investor) (emphasis added). We refer of course to publicly available ICSID awards and those that have been summarized by ICSID. As explained below, we believe that universe to include virtually all ICSID treaty-based arbitrations. See infra notes 106–109 and accompanying text; note 142.

100. ICSID Convention, supra note 4, art. 46.

http://vi.unctad.org/files/wksp/iiawksp08/docs/wednesday/Exercise%20Materials/invagreecomesa.pdf

http://vi.unctad.org/files/wksp/iiawksp08/docs/wednesday/Exercise%20Materials/invagreecomesa.pdf


sent to ICSID arbitration through a BIT, the consent to arbitrate an-cillary claims set out in Article 46 is automatically imported into any ICSID arbitration brought against it.101 Just a few months later, Pro-fessor Reisman was vindicated when the ICSID tribunals in Inmaris v. Ukraine and Goetz v. Burundi reached the same conclusion as he had, finding that they had jurisdiction to hear the state’s counter-claims.102 It is thus somewhat premature to argue that investment ar-bitration is one-sided as permitting only investor claims.

Even where states may not bring counterclaims, they may—and often do—raise investors’ alleged violations of domestic law and breaches of contract before investment tribunals in their defense, and tribunals consider violations of legal obligations in deciding whether treaty breaches occur. For example, tribunals have rejected inves-tors’ contract and treaty claims on the grounds that the investments were secured by corruption in violation of domestic law and interna-tional public policy or that the investor violated its contractual obli-gations to the host state.103 States can also argue “set-off” claims,

101. Roussalis, ICSID ARB/06/01, Partial Dissent of Michael Reisman.

102. See Antoine Goetz & Consorts et S.A. Affinage des Metaux v. Republique du Burundi, ICSID Case No. ARB/01/2, Sentence, ¶¶ 278–79 (June 21, 2012), available at http://www.italaw.com/sites/default/files/case-documents/italaw1086.pdf (reasoning that the absence of an explicit provision in the BIT for counterclaims is irrelevant because, by agreeing to the ICSID Convention, Burundi accepted the possibility of counterclaims, and by accepting the State’s offer to arbitrate before ICSID, the investor also agreed); Inmaris Perestroika Sailing Maritime Services GmbH v. Ukraine, ICSID Case No. ARB/08/8, Award, ¶¶ 431–32 (Mar. 1, 2012), available at https://icsid.worldbank.org/ICSID/ FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC3296_En&caseId=C320 (basing its decision on the breadth of the BIT’s dispute resolution clause, which covered disputes “with regard to investments between either Contracting Party and a national or company of the other Contracting Party,” similar language is found in many BITs); cf. Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, ¶¶ 391–413 (Oct. 4, 2013), available at http://italaw.com/sites/default/files/case-documents/italaw3012. pdf (relying on Goetz and Roussalis and holding that in principle the tribunal would have jurisdiction over the State’s counterclaims if it had jurisdiction over the investor’s claims, but because the investment was “tainted by corruption,” the tribunal lacked jurisdiction over the entire dispute).

103. See Metal-Tech Ltd., Award, ¶¶ 278–390, 422–23 (rejecting an investor’s claims for lack of jurisdiction on the basis that the investment was “tainted by corruption” and thus violated Uzbek law); Vannessa Ventures v. Venezuela, ICSID Case No. ARB(AF)/04/6, Award, ¶¶ 52–71 (Jan. 16, 2013), available at http://www.italaw.com/sites/default/files/ case-documents/italaw1250.pdf (holding that Venezuela’s actions were justified by the claimant’s breaches of the parties’ contract); World Duty Free v. Kenya, ICSID Case No. ARB/00/7, Award, ¶¶ 137–88 (Oct. 4, 2006), available at http://italaw.com/documents/ WDFv.KenyaAward.pdf (rejecting an investor’s claims on the basis of international and


which reduce the value of any award rendered in the investor’s favor by amounts owed by the investor to the state for contractual or do-mestic law breaches. The ICSID tribunal in Occidental Petroleum v. Ecuador, for instance, reduced the damages awarded to the claimant on the basis that a breach by the claimant of Ecuadorian law had con-tributed to its losses.104

Thus, the contentions that investment arbitrators and the sys-tem of investor-State arbitration are biased against respondent states are nothing more than empty rhetoric.

III. THE OPACITY MEME

Contrary to the frequent charge that treaty-based investor-State arbitrations are secret,105 investor-State arbitration today in-creasingly shines the light of transparency not only on dispute resolu-tion, but also on the actions of foreign investors and host states. In-vestor-State treaty arbitration ceased to be hidden from public view long ago. Most awards are public and readily found on the internet and, increasingly, so are hearings, party submissions, and other data from proceedings.106 Browsing of any one of a number of web-sites107 that exhaustively collect publicly available investor-State ar-

Kenyan public policy, reasoning that Kenya had the right to void an investment contract procured through bribery).

104. Occidental Petroleum v. Ecuador, ICSID ARB/06/11, Final Award, ¶¶ 675–87 (Oct. 5, 2012), available at http://www.italaw.com/sites/default/files/case-documents/ ita0571.pdf.

105. See, e.g., Open Letter, supra note 20 (contending that arbitration is less transparent than national legal systems and that it excludes the right for third parties to participate); EUROPEAN PARLIAMENTARY RESEARCH SERVICE BRIEFING, INVESTOR-STATE DISPUTE

SETTLEMENT: STATE OF PLAY AND PROSPECTS FOR REFORM (2014); William Glaberson, NAFTA Invoked to Challenge Court Award, N.Y. TIMES, Jan. 28, 1999, at C6, available at http://www.nytimes.com/1999/01/28/business/nafta-invoked-to-challenge-court-award.html? pagewanted=print (“This is wrong and harmful to America because it substitutes for our judicial system a confidential arbitration panel that’s not open to public scrutiny.”).

106. See, e.g., Investment Treaty Arbitration, ITA LAW, http://www.italaw.com/ (last visited Mar. 14, 2014); ICSID Cases, ICSID, https://icsid.worldbank.org/ICSID/ FrontServlet?requestType=CasesRH&actionVal=ShowHome&pageName=Cases_Home (last visited Mar. 14, 2014); Cases, PERMANENT CT. OF ARB., http://www.pca-cpa.org/ showpage.asp?pag_id=1029 (last visited Mar. 14, 2014); Investor-State Dispute Settlement Cases, ENERGY CHARTER, http://www.encharter.org/index.php?id=213 (last visited Mar. 14, 2014).

107. See supra note 106 (listing several websites which provide access to investor-State


bitration documents dispels the myth of secrecy. Further, ICSID publishes, at a minimum, excerpts of the legal reasoning of all awards, even if the parties do not agree to publish pleadings, tribunal decisions, or awards.108 A growing number of investor-State arbitra-tions involve open hearings, sometimes live-streamed on the inter-net.109 These features make the proceedings more transparent than investor-State disputes played out in domestic courts, whose deci-sions typically are not publicly accessible worldwide.

Even where the parties have not agreed to publish documents from the arbitration, the existence of the case, the parties’ identities, and the subject matter of the dispute are usually reported in the press. The prevalence of reporting by both popular media and specialist ar-bitration news outlets of the existence of formally confidential treaty arbitrations and details about the underlying disputes demonstrates just how infrequently investment treaty arbitrations remain truly “se-cret.” 110

arbitration documents).

108. See ICSID ARB. R. 48(4) (“The Centre shall . . . promptly include in its publications excerpts of the legal reasoning of the Tribunal.”); ICSID Cases, supra note 106.

109. Luke Eric Peterson, The Expanding Audience for Open Arbitration Hearings, KLUWER ARB. BLOG (Feb. 6, 2012), http://kluwerarbitrationblog.com/blog/2012/02/06/the-expanding-audience-for-open-arbitration-hearings/.

110. The authors have observed this phenomenon during their experience as counsel and arbitrator. See, e.g., Bulgaria Disputes: German Investor’s BIT Claim Is Dismissed by Tribunal Chaired by Brigitte Stern; Meanwhile, Tribunal in Separate Treaty Case at ICSID Is Constituted, IA REPORTER (Dec. 12, 2013), http://www.iareporter.com/articles/ 20131212_1 (reporting the outcome of a completed non-public investment treaty arbitration and details of pending claim, EVN AG v. Republic of Bulgaria, in which the parties apparently have not yet agreed to release case documents); EVN prepares legal action on Bulgarian electricity dispute, REUTERS (Mar. 19, 2013), http://www.reuters.com/ article/2013/03/19/austria-evn-bulgaria-idUSL6N0CB6DU20130319; Case Details, EVN AG v. Rep. of Bulgaria, ICSID Case No. ARB/13/17, https://icsid.worldbank. org/ICSID/FrontServlet (listing case caption, arbitrators, and procedural details); Case Details, EVN AG v. Rep. of Bulgaria, ICSID Case No. ARB/13/17, http://italaw.com/cases/documents/2172 (identifying treaty basis for claim). The online specialist sources www.iareporter.com and www.globalarbitrationreview.com often go further and report the details of non-public arbitration decisions and awards. See, e.g., Luke Eric Peterson & Filip Balcerzak, In Jurisdiction Ruling, Foreign Investor Bidding in Privatization—but Failing to Acquire Assets—Is Entitled to Some Treaty Protection, INVESTMENT ARB. REP. (Dec. 10, 2013), http://www.iareporter.com/articles/20131210_2

(subscription required). The website of the Energy Charter Treaty also includes a list of investor-State arbitrations brought under the treaty, summary information for cases in which documents have not been publicly released, and links to media reports detailing facts about non-public arbitrations. See Investor-State Dispute Settlement Cases, supra note 106.


Nonetheless, even formal confidentiality is decreasingly common. A growing number of states have publicly affirmed their support for publishing arbitration documents, opening hearings, and including explicit transparency provisions in their treaties.111 In July 2013, United Nations Commission on International Trade Law (UNCITRAL) adopted Transparency Rules for treaty-based investor-State arbitration and a corresponding amendment to the UNCITRAL Arbitration Rules. Under the new rules, party submissions and tribu-nal decisions and awards must be published, hearings must be open to the public, and non-disputing parties must be permitted to make submissions.112

Like other international tribunals, investor-State tribunals amplify the reputational effects of treaty breaches, making it easier to detect and make known both investor and state violations.113 States and investors that behave badly may therefore be internationally ex-posed as a result of an arbitration. The transparency benefits accrue not only to other states and foreign investors; international tribunals that are directly accessible by non-state actors also provide infor-

111. See EUR. COMM., INVESTMENT PROTECTION AND INVESTOR-TO-STATE DISPUTE

SETTLEMENT IN EU AGREEMENTS 2 (2013), available at http://trade.ec.europa.eu/doclib/ docs/2013/november/tradoc_151916.pdf; Statement of the Free Trade Commission on non-disputing party participation, NAFTA FREE TRADE COMMISSION (Oct. 7, 2003), available at http://www.state.gov/documents/organization/38791.pdf; Statement on Open Hearings in NAFTA Chapter Eleven Arbitrations, U.S. TRADE REPRESENTATIVE (Oct. 7, 2003), available at http://www.ustr.gov/archive/assets/Trade_Agreements/Regional/NAFTA/asset_upload_ file143_3602.pdf; Notes of Interpretation of Certain Chapter 11 Provisions, NAFTA (July 31, 2001), available at http://www.sice.oas.org/tpd/nafta/Commission/CH11understanding _e.asp; see also United States-Singapore Free Trade Agreement, U.S.-Sing., art. 15.20, May 6, 2003, 117 Stat. 948; U.S. MODEL BIT, arts 28, 29 (2012); CAN. MODEL FOREIGN

INVESTMENT PROMOTION AND PROTECTION AGREEMENT, arts. 34–35 (2004).

112. See Press Release, United Nations Information Service, UNCITRAL Adopts Transparency Rules for Treaty-Based Investor-State Arbitration and Amends the UNCITRAL Arbitration Rules (Dec. 18, 2013), available at http://www.unis.unvienna.org/ unis/pressrels/2013/unisl186.html; UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, UNCTIRAL (Jan. 2014), available at http://www.uncitral.org/ pdf/english/texts/arbitration/rules-on-transparency/pre-release-UNCITRAL-Rules-on-Transparency.pdf.

113. See Andrew T. Guzman, The Cost of Credibility: Explaining Resistance to Interstate Dispute Resolution Mechanisms, 31 J. LEGAL STUD. 303, 304 (2002); cf. Andrew T. Guzman, A Compliance-Based Theory of International Law, 90 CALIF. L. REV. 1823, 1861–63 (2002) (arguing that the reputational cost of a violation of international law depends on several factors, including the extent to which other states know of the violation).


mation to domestic political actors.114 In addition, many investment treaties expressly require—and tribunals have interpreted the fair and equitable treatment obligation to require implicitly—that states be transparent in governance and decision-making.115 Such commit-ments benefit domestic actors as well as foreign ones. In short, the opacity meme, too, is simply that and no more.

IV. THE SOVEREIGNTY MEME

The most recent wave of criticism objects to the imposition of international discipline on states’ politico-economic decisions.116 This view seeks to chip away at investment protections by expanding the availability of self-judging exceptions for claimed public interest objectives.117 The argument has been formulated as an objection to interference with state sovereignty, democratic decision-making, public interest regulation, human rights protection, and environmen-tal preservation. For example, it has been argued that arbitration awards are affronts to sovereignty, that they threaten the right of self-determination,118 and that investment treaties undermine the ability of states to promote life, liberty, and equality.119

114. See Barbara Koremenos, Charles Lipson & Duncan Snidal, The Rational Design of International Institutions, 55 INT’L ORG. 761, 762 (2001). See generally KAREN J. ALTER, ESTABLISHING THE SUPREMACY OF EUROPEAN LAW: THE MAKING OF AN INTERNATIONAL

RULE OF LAW IN EUROPE (2001).

115. For treaties containing express transparency requirements, see Treaty Between the Government of the United States of America and the Government of the Republic of Rwanda Concerning the Encouragement and Reciprocal Protection of Investment, U.S.-Rwanda, arts. 10–11, Feb. 19, 2008, S. Treaty. Doc. 110-23; Treaty Between the United States of America and the Oriental Republic of Uruguay Concerning the Encouragement and Reciprocal Protection of Investment, U.S.-Uru., arts. 10–11, Apr. 4, 2006. S. Treaty Doc. 109-9. For an example of an arbitral award holding that the fair and equitable treatment standard requires a State to be transparent in its dealings with foreign investors, see LG&E Capital Corp. v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, ¶ 131 (Oct. 3, 2006), available at https://icsid.worldbank.org/ICSID/FrontServlet?requestType=Cases RH&actionVal=showDoc&docId=DC627_En&caseId=C208.

116. See generally VAN HARTEN, supra note 21.

117. See id.

118. Gabriel Bottini, Protection of Essential Interests in the BIT Era, in INVESTMENT

TREATY ARBITRATION AND INTERNATIONAL LAW 145 (TJ Grierson Weiler ed., 2008).

119. See Craig Forcese, Does the Sky Fall?: NAFTA Chapter 11 Dispute Settlement and Democratic Accountability, 14 MICH. ST. J. INT’L L. 315, 321–22 (2006); cf. Andrew Newcombe, Sustainable Development and Investment Treaty Law, 8 J. WORLD INVESTMENT


This Part points out the hidden assumptions underlying this critique and offers countervailing evidence. First, a number of fea-tures of international investment law that are criticized are not limited to this legal regime but are features of international law generally. Second, the posited conflict between the current system of foreign investment protection and the public interest is largely illusory; it stems from ignorance of how international arbitration operates, of the nature of the substantive obligations to which states agree in invest-ment treaties, and of the actual holdings of investment treaty arbitra-tions.

A. Limiting Political Discretion Is What Treaties Do

The broadly stated objection that investment treaties limit state discretion or “reduce sovereignty” 120 is actually a challenge that applies against the whole of international law. In the interna-tional investment regime, states agree to limit their discretion in the treatment of foreign investors in exchange for benefits that include increased attractiveness to foreign capital, a stable economic and le-gal environment, improved infrastructure and services to citizens, and more efficient and environmentally sound manufacturing and energy production. Similarly, via treaties, states have agreed to restrict their handling of environmental pollutants in exchange for a cleaner plan-et, to compel certain treatment of aliens within their borders in ex-change for reciprocal treatment of their own citizens abroad, and to improve the treatment of their own citizens by promoting human rights and the rule of law.

Thus, the voluntary acceptance of binding international obli-gations that constrain domestic actors is a basic principle of interna-tional law. The International Court of Justice (ICJ) held in the Nica-ragua case that a state may bind itself internationally to install a

& TRADE 357, 393–94 (2007).

120. See, e.g., Elizabeth May, Presentation to Trade and Environment Consultations of Canadian Government: Examining Canada’s Priority Interests at the WTO/FTAA Negotiations: Or, How Not To Promote Environmental Protection, SIERRA CLUB OF

CANADA (July 8, 1999), http://www.sierraclub.ca/national/programs/sustainable-economy/trade-environment/wto-brief-jul99.html (“The essence of trade liberalization agreements is a reduction of domestic sovereignty. As the state’s ability to protect its citizens is reduced, we need not cast those peoples and the biosphere to the faceless mercies of the global free-market free for all.”).


democratic government domestically: [T]he assertion of a commitment raises the question of the possibility of a State binding itself by agreement in relation to a question of domestic policy, such as that relating to the holding of free elections on its territory. The Court cannot discover, within the range of sub-jects open to international agreement, any obstacle or provision to hinder a State from making a commit-ment of this kind. A State, which is free to decide up-on the principle and methods of popular consultation within its domestic order, is sovereign for the purpose of accepting a limitation of its sovereignty in this field.121 Further, it is a fundamental rule of international law that

states may not override their international obligations by contrary na-tional law.122 The Permanent Court of International Justice (PCIJ) and the ICJ have affirmed repeatedly that treaty obligations should not be interpreted to permit a state party to be the judge of its own case.123 Some ICJ judges even have suggested that explicitly self-judging treaty clauses are legally ineffective.124 The rule that states cannot, absent rare circumstances, invoke even the most laudable domestic interests to override their international obligations is not

121. Military and Paramilitary Activities in and Against Nicaragua (Nicar. v. U.S.), Merits, Judgment, 1986 I.C.J. 14, ¶ 259 (June 27), available at http://www.icj-cij.org/docket/files/70/6503.pdf. The court concluded that Nicaragua had not so bound itself, having agreed only to an aspirational provision and not to any specific method of holding elections.

122. See Vienna Convention on the Law of Treaties, art. 27, (entered into force May 23, 1969) 1155 U.N.T.S. 331.

123. See José E. Alvarez & Kathryn Khamsi, The Argentine Crisis and Foreign Investors: A Glimpse into the Heart of the Investment Regime, in THE YEARBOOK ON

INTERNATIONAL INVESTMENT LAW & POLICY 2008/2009, at 379, 418–19 (Karl P. Sauvant ed., 2009) (citing to four PCIJ and ICJ cases going back to 1925: Interpretation of the Treaty of Lausanne (1925); South-West Africa Voting Procedure, at 68 (1955); Interhandel (Preliminary Objections) at 54–59, 95–119 (1959); and Military and Paramilitary Activities in and Against Nicaragua (1986) at 222, 282 (Judgment on the Merits of June 27)); See also

Case concerning Oil Platforms (Iran v. U.S.), 2003 I.C.J. 1, ¶ 43 (Nov. 6), available at http://www.icj-cij.org/docket/files/90/8624.pdf; Gabcíkovo-Nagymaros Project (Hung. v. Slovk.), 1997 I.C.J. 7, ¶ 40 (Sept. 25), available at http://www.icj-cij.org/docket/files/92/7375.pdf.

124. See Interhandel (Switz. v. U.S.) 1959 I.C.J. 6, ¶¶ 54−59 (Mar. 21) (Separate Opinion of Spender, J.); id. at 95−119 (Lauterpacht, J., dissenting).


unique to international investment law and was not formulated by in-vestment arbitrators.125 The increasing use of “sovereignty-constraining” rhetoric should concern international lawyers general-ly, because it is in fact a challenge to foundational principles of inter-national law that is the handmaiden of popular suspicions of interna-tional cooperation, “globalization,” and multilateralism.

On closer examination it becomes apparent that many “sov-ereignty-constraining” objections are actually objections not to the fact of binding international obligations, but to the content of those obligations. Thus, when environmental NGOs criticize BITs and in-vestor-State arbitration as “reduc[ing] . . . domestic sovereignty,” their actual objection is that they believe those policy tools threaten environmental values.126 This is clear from the fact that the same NGOs support treaties that bind states to particular environmental ob-ligations—thereby constraining their sovereignty.127 Looking past the red herring that IIAs and investor-State arbitration are “sover-eignty-constraining,” the next Section considers whether they com-promise the values that are actually at stake.

B. Fear and the False Claim that International Investment Law Is Incompatible with the Public Interest

In December 1999, the Canadian chemical company Me-thanex initiated arbitration under NAFTA’s investment chapter chal-lenging a state of California ban of MTBE, a gasoline additive that was feared to contaminate drinking water. The media reaction was acerbic. On-air personality Bill Moyers aired a documentary called Trading Democracy, branding NAFTA Chapter 11 a “sophisticated extortion racket” that permits foreign companies to say to the United States, “If you regulate me and make me less profitable, pay me

125. The doctrine of necessity elucidates the rare circumstances under which a State’s domestic interests may be invoked to override its international commitments. See JAMES

CRAWFORD, THE INTERNATIONAL LAW COMMISSION’S ARTICLES ON STATE RESPONSIBILITY: INTRODUCTION, TEXT AND COMMENTARIES 174 (2002).

126. See, e.g., May, supra note 120.

127. See, e.g., id. (Expressing tacit approval of multilateral environmental agreements including the Convention on the Trade in Endangered Species, the Basel Convention, the Montreal Protocol to protect the Ozone Layer, and the Kyoto Protocol, while criticizing NAFTA as constraining sovereignty).


off.” 128 The Moyers documentary featured an NGO lawyer who stated, “Essentially we see Chapter Eleven operate to reverse the globally accepted ‘polluter pays’ principle and we see it being turned into a ‘pay the polluter’ principle.” 129

There was a flurry of political response to Methanex and two other NAFTA claims against the United States.130 Methanex gar-nered particular attention because the claimant challenged Califor-nia’s enactment of a generally applicable environmental law. In re-sponse, members of Congress introduced an amendment to an appropriations bill reacting against the NAFTA arbitrations and blasted investor-State arbitration in floor debates.131 The United States reportedly suspended its trade and investment negotiations.132 After finding itself as respondent in several claims, it made major changes reducing the interpretive authority of investor-State arbitral tribunals in its 2004 model BIT.133 After the uproar subsided, the United States quietly won the Methanex arbitration, and Methanex

128. BILL MOYERS REPORTS: TRADING DEMOCRACY (Public Broadcasting Service Feb. 1, 2002), transcript available at www.pbs.org/now/transcript_tdfull.html.

129. Id.

130. The first three NAFTA Chapter 11 claims against the United States were Methanex, Mondev, and Loewen. See Methanex Corp. v. United States, Final Award on Jurisdiction and Merits (Aug. 3, 2005), 44 I.L.M. 1345 (2005); Loewen Grp., Inc. v. United States, ICSID Case No. ARB(AF)/98/3, Award (June 26, 2003), 7 ICSID Rep. 421 (2005); Mondev Int’l Ltd. v. United States, ICSID Case No. ARB(AF)/99/2, Award (Oct. 11, 2002), 6 ICSID Rep. 192 (2004).

131. 145 CONG. REC. H20151 (1999) (“If [Methanex] prevails, an important environmental protection would be overturned and U.S. taxpayers would have to foot the bill for any damages awarded.”).

132. See S. EXEC. REP. NO. 106-23, at 21 (2000) (“Some members of the [Senate Foreign Relations] Committee have expressed concern over the possibility that . . . the North American Free Trade Agreement may make it more difficult for the United States to protect itself from exposure to unforeseen claims under investor-state dispute resolution provisions.” Nonetheless, the committee recommended that the Senate advise and consent to ratify the treaties.); Kenneth J. Vandevelde, A Comparison of the 2004 and 1994 U.S. Model BITs, 2008−2009 Y.B. ON INT’L INVESTMENT L. & POL’Y 283, 283–85 (2009).

133. The 2004 BIT restricts arbitrators’ authority by, inter alia, setting out more precisely defined standards of treatment than in the 1994 Model BIT. For example, it specifies that fair and equitable treatment under Article 5 requires only the minimum standard under customary international law. It expressly states that expropriation is limited to interference with property rights or an interest in an investment, asserts that a mere loss is insufficient to show that expropriation has occurred, and specifies that generally applicable regulatory actions will rarely give rise to an expropriation claim (Annex B). See generally Vandevelde, supra note 132, at 290–98 (comparing 1994 and 2004 U.S. Model BITs).


was ordered to reimburse all of the United States’ legal costs and the entire cost of the arbitration.134 The award revealed that the tribunal had accorded expansive deference to the environmental interests and policy discretion of the state of California and the United States. In-deed, the fears prompted by the first wave of claims proved to be greatly exaggerated when the United States succeeded in all three of those initial NAFTA arbitrations against it. Years later, the United States still has not been found liable in an investment treaty arbitra-tion, despite being a party to investment treaties with at least one-third of the world’s states135 and hosting foreign direct investment valued at $11.7 trillion.136

Nonetheless, the vein of rhetoric that surfaced with early NAFTA claims grew and spread throughout the media, Capitol Hill, the halls of academia, and the platforms of NGOs, much of the dis-course assuming, rather than even attempting to prove, that there is a conflict between the system of foreign investment protection and values such as environmental protection. Similar movements have occurred elsewhere. In 2012, the same group of law professors that opposed the inclusion of investor-State arbitration in the Trans-Pacific Partnership Treaty argued that arbitrator “interpretations have prioritized the protection of the property and economic interests of transnational corporations over the right of states to regulate and the sovereign right of nations to govern their own affairs.” 137 In its 2012 World Investment Report, UNCTAD lists, without explanation, the absence of a “provision for investor-State arbitration” as a way to make an investment treaty “[s]ustainable-development-friendly.” 138 Another section of that publication offers the following explanation for the presumed conflict between sustainable development and in-vestment treaties:

[A]s the number of ISDS [(investor-State dispute set-

134. Methanex Corp. v. United States, Final Award on Jurisdiction and Merits, pt. V ¶¶ 11–12 (Aug. 3, 2005), 44 I.L.M. 1345 (2005).

135. See United States Bilateral Investment Treaties, U.S. DEPARTMENT OF STATE, http://www.state.gov/e/eb/ifd/bit/117402.htm (last visited May 6, 2014).

136. EXECUTIVE OFFICE OF THE PRESIDENT, COUNCIL OF ECONOMIC ADVISORS, U.S. INBOUND FOREIGN DIRECT INVESTMENT 1 (2011), available at http://www.whitehouse.gov/ sites/default/files/microsites/cea_fdi_report.pdf.

137. Open Letter, supra note 20, at 2.

138. UNCTAD, supra note 30, at 90.


tlement)] cases increases, questions have arisen with regard to the effectiveness and the [sustainable devel-opment] implications of ISDS. Many ISDS proce-dures are very expensive and often take several years to resolve. ISDS cases increasingly challenge domes-tic regulatory measures implemented for public policy objectives. Almost all ISDS cases lead to the break-down of the relationship between the investor and the host State. Due to the lack of a single, unified mecha-nism, different tribunals have issued divergent inter-pretations of similarly worded treaty provisions, re-sulting in contradictory outcomes of cases involving identical/similar factors and/or treaty language. Many ISDS proceedings are conducted confidentially, which has raised concerns when tribunals address matters of public policy.139 The UNCTAD report fails, however, to point to a single in-

stance in which an investor-State tribunal thwarted a legitimate envi-ronmental measure or to explain precisely how investor-State arbitra-tion undermines sustainable development.140 Instead, it merely reiterates the standard list of criticisms of investor-State arbitration: that it is expensive, confidential, and yields inconsistent decisions. We are not the first to observe that such arguments “rely[] on hypo-thetical situations and weak counterfactual reasoning.” 141

As against hypotheticals and bald assertions that investment tribunals are pro-polluter, a review of actual arbitral awards reveals great respect for environmental protection efforts and national policy

139. Id. at 152.

140. See generally id.; see also LUKE ERIC PETERSON & KEVIN R. GRAY, INTERNATIONAL HUMAN RIGHTS IN BILATERAL INVESTMENT TREATIES AND IN INVESTMENT

TREATY ARBITRATION 5 (2003) (“[H]ost states may wish to regulate the economy, including foreign investors embedded therein, in a manner which seeks to promote or protect certain human rights interests . . . . Where bilateral investment treaties are in place, foreign investors will often enjoy the ability to challenge these human-rights inspired measures through international arbitration.”); Ursula Kriebaum, Privatizing Human Rights: The Interface Between International Investment Protection and Human Rights, in THE LAW OF

INTERNATIONAL RELATIONS: LIBER AMICORUM HANSPETER NEUHOLD 165, 177 (August Reinisch & Ursula Kriebaum eds., 2007) (“[An] investor may use BIT provisions to challenge human rights-inspired regulations that interfere with its investment.”).

141. Fry, supra note 32, at 79.


discretion.142 Moreover, there is much actual evidence that interna-tional investment protection complements and promotes values such as human rights, environmental protection, and the rule of law. Therefore, states should think carefully before permitting inflamma-tory rhetoric and unrealized fears to drive their policies toward inter-national investment law.

C. Reality Check: Case Study of Environmental Measures

The argument that BITs and investor-State arbitration under-mine environmental and other values is grounded in a misspecifica-tion of the rights the treaties guarantee and the way they have been interpreted. Contrary to some popular and academic characteriza-tions, BITs do not grant investors the right to recover damages from a host state every time an investment is merely “interfered with” 143 or to “demand compensation when a government-initiated change low-ers the value of their assets.” 144 Nor, as has been asserted, do in-vestment tribunals “[strike] down host states’ environmental regula-

142. This analysis includes all publicly available investment treaty arbitration awards addressing measures that states have defended by invoking environmental protection concerns. As explained above, the incidence of truly confidential investment treaty arbitrations is rare, and even where the documents from an investment treaty arbitration are non-public, details about the case usually enter the public domain. That is especially true where the arbitration concerns politically sensitive matters that arouse the interest of the public, such as environmental disputes. It is thus possible to proceed with reasonable confidence that the publicly known environmental arbitrations comprise most or all such arbitrations. See supra notes 105–110 and accompanying text. Besides the awards analyzed here, press reports cover only one other concluded investment treaty arbitration concerning an environmental dispute. A claim by a Spanish investor against Mexico arising out of a planned waste management facility, it is factually nearly identical to the Metalclad and Tecmed cases discussed here. The investor was granted authorization to build and operate a waste management facility but was subsequently thwarted by local opposition, leading the investor to initiate the treaty claim alleging that its authorization to operate was arbitrarily revoked. The tribunal upheld at least some of the investor’s claims. See Katia Fach Gomez, ICSID Claim by Spanish Companies Against Mexico over the Center for the Integral Management of Industrial Resources, 2010 SPAIN ARB. REV., no. 8, at 129; Mexico Is Found Liable for Breach of Investment Treaty in Dispute with Spanish Owners of Waste Management Facility, INVESTMENT ARB. REP. (Apr. 23, 2013), http://www.iareporter.com/ articles/20130423_3.

143. Kriebaum, supra note 140.

144. Joseph E. Stiglitz, Regulating Multinational Corporations: Towards Principles of Cross-Border Legal Frameworks in a Globalized World Balancing Rights with Responsibilities, 2007 Grotius Lecture, 23 AM. U. INT’L L. REV. 451, 457 (2008).


tions”—not “on many occasions,” 145 and to date, not ever. Moreo-ver, investment treaties do not protect against all changes in the host state’s law. Investors are not guaranteed a particular level of profit, protected from their own bad business decisions, or promised an ab-sence of regulation.146 Rather, in a typical BIT a host state promises not to discriminate against foreign investors and their investments,147 to treat them fairly and equitably,148 to refrain from expropriating without prescribed compensation,149 and to provide full protection and security.150 Those guarantees stop far short of promising that the state will not change the law, regulate the environment, or protect human rights.

Because much of the opposition to BITs and arbitration fo-cuses on environmental concerns, it is instructive to examine the in-vestment treaty arbitrations to date in which investors have chal-lenged measures defended by states by reference to environmental protection. All publicly available151 investment treaty awards con-cerning environmental disputes to date have acknowledged that states have wide leeway to regulate the environment. In no case has a state been ordered to compensate an investor for enacting a generally ap-plicable environmental law or legitimately enforcing an environmen-tal regulation that caused an investor a loss.

1. Environmental Measures and Indirect Expropriation

Much of the concern surrounding IIAs and investor-State ar-bitration has centered on the fear that tribunals might use the doctrine of indirect expropriation to require states to compensate investors for generally applicable environmental regulations that cause a loss.152

145. Lisa Bennett, Note, Are Tradable Carbon Emissions Credits Investments? Characterization and Ramifications Under International Investment Law, 85 N.Y.U. L. REV. 1581, 1584–85 (2010).

146. See Feldman v. United Mexican States, ICSID Case No. ARB(AF)/99/1, Award, ¶¶ 112–14 (Dec. 16, 2002), 7 ICSID Rep. 341 (2005).

147. See, e.g., Treaty Concerning the Reciprocal Encouragement and Protection of Investment, U.S.-Arg., art. II, ¶ 1, Nov. 14, 1991, 31 I.L.M. 124 (1992).

148. See, e.g., id. art. II, ¶ 2.

149. See, e.g., id. art. IV.

150. See, e.g., id. art. II, ¶ 2.


152. See, e.g., Deborah Sy, Warning: Investment Agreements Are Dangerous to Your


This has never happened, and an analysis of existing arbitral deci-sions gives no reason to believe that it will. The three identifiable doctrines of indirect expropriation are discussed in turn below.

a. Sole Effects

Particular concern has been raised that an investment tribunal might use the so-called “sole effects” doctrine to require a state to compensate an investor for an environmental regulation.153 To de-termine whether an expropriation has taken place, this doctrine places less weight on the intention of the state than on the impact of its ac-tions on the property or investment.154 Courts and tribunals have in-voked the doctrine almost exclusively in cases where the state’s ac-tions at issue, although not formally seizing legal title, were targeted specifically against the foreign investment and severely interfered with its ownership or control. Resort to the doctrine has been quite infrequent in recent decades.155 No arbitral tribunal addressing

Health, 43 GEO. WASH. INT’L L. REV. 625, 636–37 (2011); Call for Papers, Sustainable Development and International Investment Law: Bridging the Divide, VALE COLUM. CTR. ON SUSTAINABLE INT’L INVESTMENT 1 (June 14, 2012), http://www.vcc.columbia.edu/files/ vale/content/Sustainable_Development_Call_for_Papers_6-14-12.pdf (The call for papers presumes a “divide” between sustainable development and investor protection: “[T]he rapid growth in the number of treaty-based claims filed by investors reflects investors’ increased willingness to safeguard their investments from any adverse state conduct . . . .”); INVESTMENT, FINANCE AND DEBT IN THE AMERICAS, AMERICAS CIVIL SOCIETY FORUM 6–7 (1999), available at http://www.ccic.ca/_files/en/archives/apg_1999_11_investment_ finance_debt.pdf (contending that NAFTA permits corporations to allege “that measures which fall under the normal regulatory sphere of government action, especially in the area of protection for the environment and human health, constitute indirect expropriations of their assets because they allegedly reduce their anticipated profits”).

153. See, e.g., Rudolph Dolzer, Indirect Expropriations: New Developments?, 11 N.Y.U. ENVTL. L.J. 64, 79−80, 91 (2002).

154. See Certain German Interests in Polish Upper Silesia (Ger. v. Pol.), 1926 P.C.I.J. (ser. A) No. 7, ¶ 44 (May 25).

155. See Sy, supra note 152, at 637. Dolzer’s detailed historical tracing of a handful of international court and arbitral decisions that he construes as having applied this doctrine makes its narrow application apparent. See Dolzer, supra note 153, at 81−90. An exception is the NAFTA tribunal’s decision in Pope & Talbot, which did not concern an environmental dispute, stated that the “sole effects” doctrine applied to a generally applicable regulatory measure. However, in applying the standard to the facts, the tribunal hewed to established jurisprudence in reasoning that the required interference would have to be quite egregious. It held that there was no expropriation because the investment was not nationalized, the regulatory regime was not confiscatory, the investor retained day-to-day control of the


measures defended by reference to environmental concerns has ever based a finding of expropriation on the sole effects doctrine. The tri-bunals in Unglaube v. Costa Rica and Santa Elena v. Costa Rica—both considering situations in which it was uncontested that an ex-propriation had occurred, and the dispute was over what compensa-tion was due—focused on the effects of various actions of the state to determine when the admitted expropriation took place and thus from what point to calculate damages.156 It was in response to that ques-tion that the tribunals placed their focus on the effect of the measures rather than on the state’s intention or the form of its actions.

As an interesting point of contrast, the Unglaube tribunal also considered whether various administrative and regulatory actions af-fecting different plots of the investor’s land amounted to expropria-tion. Those actions included the introduction of new permit require-ments, suspension of a permitting process, and a court decree temporarily prohibiting the claimants from developing those plots.157 Unlike with the other plots, Costa Rica did contest that it had expro-priated these plots and argued that it had only taken bona fide regula-tory measures to protect the environment.158 The tribunal found that Costa Rica had not expropriated the plots. In considering judicial es-tablishment of a “buffer zone” around a wildlife preserve, the tribu-nal examined the process by which the deprivation had been effected and expressed concern that there had been no scientific or technical basis given for the decision, particularly in light of the claimant’s

investment, no officers or employees had been detained, and the State did not supervise the work of employees or take any of the proceeds of company sales apart from taxes, interfere with the appointment of management, or take “any other actions ousting the Investor from full ownership and control of the Investment.” Pope & Talbot Inc. v. Canada, Interim Award, ¶ 100 (ICC Int’l Ct. Arb. 2000), available at http://opil.ouplaw.com/view/ 10.1093/law:iic/192-2000.case.1/IIC192(2000)D.pdf. Given that very high bar for establishing a generally applicable regulatory expropriation, this line of precedent poses no risk to legitimate environmental regulations.

156. See Santa Elena v. Republic of Costa Rica, ICSID Case No. ARB/96/1, Final Award, ¶¶ 76−81 (Feb. 17, 2000), 15 ICSID Rev. 169 (2000); see also Unglaube v. Republic of Costa Rica, ICSID Case Nos. ARB/08/1, ARB/09/20, Award, ¶¶ 128, 135–37, 209–21 (May 16, 2012), available at http://www.italaw.com/sites/default/files/case-documents/ ita1052.pdf (“‘Expropriatory environmental measures . . . are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies.’ . . . [T]he Treaty enunciates well established international obligations of a Contracting Party that proposes to conduct a lawful expropriation.”) (quoting Santa Elena, ¶ 72) (emphasis added).

157. Unglaube, ¶¶ 138–44, 145–48, 226–34.

158. Id. ¶¶ 138–40, 144.


careful adherence to applicable regulations in developing its proper-ty. It was also concerned that the court had issued a declaration cre-ating the “buffer zone” “without any attempt to obtain evidence or comment from the affected landowners.” 159 However, the tribunal did not conclude that those defects rendered the acts expropriatory. Most importantly, the tribunal did not apply the “sole effects” doc-trine in its analysis of those environmental regulatory measures.

In Metalclad v. Mexico, the tribunal stated obiter dicta that the issuance of an ecological decree creating a preserve for a rare cactus, which prohibited the operation of claimant’s landfill lying within the new reserve, would amount to an expropriation regardless of the motivation for the decree.160 However, as will be discussed in detail below,161 like the tribunal in Unglaube, the Metalclad tribunal applied a more nuanced test—decidedly not “sole effects”—when considering other regulatory actions that involved alleged environ-mental interests of the state.

These three cases highlight the instinctively differential treatment of regulatory acts as opposed to paradigmatic takings, par-ticularly of real property. In Santa Elena and Unglaube, the state acknowledged that it had expropriated the properties and that it was obligated under both national and international law to compensate. In Metalclad, with respect to the ecological decree, Mexico did not deny that the decree would be expropriatory if it had the effect of foreclosing forever the operation of the landfill. Instead, Mexico ar-gued that the decree did not foreclose the operation of the landfill.162 While it is understandable that earlier in the development of the law of expropriation some writers worried that the analysis for paradig-matic takings—and particularly the “sole effects” doctrine—might be transposed to regulatory actions taken in the public interest, that has not proven to be the case. The next two sub-Parts examine the distinct way in which tribunals have treated regulatory acts when considering whether they gave rise to indirect expropriation.

159. Id. ¶¶ 227, 231–34.

160. Metalclad Corp. v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, ¶ 109 (Aug. 30, 2000), available at http://www.italaw.com/sites/default/files/case-documents/ita0510.pdf.

161. See infra text accompanying notes 172–176.

162. Id. ¶¶ 110–12.


b. The Carveout for Regulatory Actions

The predominant view holds that it is a principle of customary international law that where economic injury results from a bona fide regulation within the police powers of a state, no compensation is re-quired.163 As the tribunal in S.D. Myers v. Canada reasoned,

Expropriations tend to involve the deprivation of ownership rights; regulations [are] a lesser interfer-ence. The distinction between expropriation and regu-lation screens out most potential cases of complaints concerning economic intervention by a state and re-duces the risk that governments will be subject to claims as they go about their business of managing public affairs.164 That tribunal looked to the “real interests involved and the

purpose and effect of the government measure” to determine whether an indirect expropriation had occurred and observed that “[t]he gen-eral body of precedent usually does not treat regulatory action as amounting to expropriation. Regulatory conduct by public authori-ties is unlikely to be the subject of legitimate complaint under Article 1110 of the NAFTA . . . .” 165 Even though Canada’s purportedly en-vironmental regulatory actions were pretextual, as they were actually motivated by protectionist objectives, the tribunal declined to find that they resulted in an indirect expropriation.166

One variation of the basic view carves out an exception where the state has made particular representations to a foreign investor to induce it to make an investment:

[A]s a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is

163. Methanex v. United States, Final Award on Jurisdiction and the Merits, ¶ 7 (Aug. 3, 2005), 44 I.L.M. 1345 (2005); S.D. Myers v. Canada, Partial Award, ¶ 281 (Nov. 13, 2000), available at http://italaw.com/sites/default/files/case-documents/ita0747.pdf; Chemtura Corp. v. Canada, Award, ¶ 266 (Aug. 2, 2010), available at http://italaw.com/ documents/ChemturaAward.pdf.

164. S.D. Myers, ¶ 285.

165. Id. ¶ 281.

166. Id. ¶¶ 194–95, 281.


not deemed expropriatory and compensable unless specific commitments had been given by the regulat-ing government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.167 The preservation of that principle permits states to retain the

capacity to make credible promises. In both of the cases in which an investor has challenged truly generally applicable regulatory measures as expropriatory, the tribunals applied this principle and declined to find that the state’s environmental regulation gave rise to any treaty breach.168

c. The European Court of Human Rights Approach

Another approach adopts the more investor-protective stance of the European Court of Human Rights (ECtHR), stating that there is no principle of customary international law that exempts regulatory action per se from giving rise to expropriation if “the economic value of the use, enjoyment or disposition of the assets or rights affected by the administrative action or decision have been neutralized or de-stroyed.” 169 Thus, even this more protective approach sets the very high bar of neutralization or destruction of the investment to ground an indirect expropriation claim. It also imposes a second hurdle: even if the investment has been destroyed, a proportionality test (also adopted from the European Court of Human Rights) then examines whether there is a “reasonable relationship of proportionality be-tween the means employed and the aim sought to be realized.” 170

167. Methanex, pt. IV, ch. D, ¶¶ 7–9 (emphasis added); see also Waste Management v. Mexico, ICSID Case No. ARB(AF)/00/3, Award, ¶ 98 (Apr. 30, 2004), 15 ICSID Rev. 214; Revere Copper & Brass, Inc. v. Overseas Private Investment Corp., 17 I.L.M. 1321, 1331 (cited in Waste Management).

168. Methanex, pt. IV, ch. D, ¶ 7; Chemtura, ¶ 266.

169. Técnicas Medioambientales Tecmed, S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, ¶ 116 (May 29, 2003), available at http://italaw.com/sites/ default/files/case-documents/ita0854.pdf.

170. Id. ¶¶ 121–22. Other investment arbitral awards adopting a proportionality test in analyzing indirect expropriation include: El Paso Energy International Company v. Argentina, ICSID Case No. ARB/03/15, Award, ¶¶ 241, 243 (Oct. 31, 2011), available at http://www.italaw.com/sites/default/files/case-documents/ita0270.pdf; Total S.A. v. Argentina, ICSID Case No. ARB/04/1, Decision on Liability, ¶ 197 (Dec. 27, 2010), available at http://italaw.com/documents/TotalvArgentina_DecisionOnLiabilty.pdf; Suez,

http://italaw.com/sites/default/files/case-documents/ita0854.pdf



d. A Second Look at Metalclad

Metalclad v. Mexico has been identified as an example of an expansive new interpretation of expropriation171 because of the fol-lowing passage:

[E]xpropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or inci-dental interference with the use of property which has the effect of depriving the owner, in whole or in sig-nificant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.172 Actually, however, Metalclad’s approach to regulatory tak-

ings stands comfortably within both of the two approaches discussed above: the “carveout” approach and the ECtHR approach. The above-quoted passage, on which other writers have zeroed in, only sets out the longstanding and uncontroversial principle affirmed in NAFTA that there are two forms of expropriation: direct and indi-rect.173 While the passage addresses the “taking” element of expro-

Sociedad General de Aguas de Barcelona S.A., & InterAgua Servicios Integrales del Agua S.A. v. Argentina, ICSID Case No. ARB/03/17, Decision on Liability, ¶¶ 147–48 (July 30, 2010), available at http://www.italaw.com/sites/default/files/case-documents/ita0813.pdf; Continental Casualty v. Argentina, ICSID Case No. ARB/03/09, Award, ¶ 276 (Sept. 5, 2008), available at http://italaw.com/sites/default/files/case-documents/ita0228.pdf; LG&E Capital Corp. v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, ¶¶ 177, 189–95 (Oct. 3, 2006), available at http://italaw.com/sites/default/files/case-documents/ita0460. pdf; Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Award, ¶¶ 310–12 (July 14, 2006), available at http://italaw.com/sites/default/files/case-documents/ita0061.pdf.

171. See United Mexican States v. Metalclad Corp. [2001] 89 B.C.L.R. 3d 359, 386, available at http://www.dfait-maeci.gc.ca/tna-nac/metalcladCorp-en.asp (Canadian court decision reviewing Metalclad); William S. Dodge, Comment, Metalclad Corp. v. Mexico and Mexico v. Metalclad Corp., 95 AM. J. INT’L L. 910, 917 (2001); Dolzer, supra note 153, at 88–91.


173. NAFTA Article 1110, quoted immediately prior to the above-quoted passage, states, “No party shall directly or indirectly . . . expropriate an investment . . . or take a measure tantamount to expropriation . . . except . . . .” See id. ¶ 102 (emphasis added); see also RUDOLF DOLZER & CHRISTOPH SCHREUER, PRINCIPLES OF INTERNATIONAL INVESTMENT

LAW 101–03 (2d ed. 2012); Rosalyn Higgins, The Taking of Property by the State: Recent

http://www.italaw.com/sites/default/files/case-documents/ita0813.pdf


priation, it does not deny that other factors are part of the considera-tion, including the purpose of the state’s action and whether it was taken in accordance with due process. It is therefore incorrect to characterize Metalclad as creating an expansive strain of the “sole effects” doctrine, as some have done.174 In the very next paragraph, the tribunal weighs the nature and the purpose of the challenged measures. It explicitly relies on their unlawful purpose and pretextu-al nature to reach its finding that they were expropriatory:

By permitting or tolerating the conduct of Guadalca-zar in relation to Metalclad which the Tribunal has al-ready held amounts to unfair and inequitable treat-ment breaching Article 1105 and by thus participating or acquiescing in the denial to Metalclad of the right to operate the landfill, notwithstanding the fact that the project was fully approved and endorsed by the federal government, Mexico must be held to have tak-en a measure tantamount to expropriation in violation of NAFTA Article 1110(1).175 Metalclad’s finding of expropriation thus relied on the fact

that, in response to political opposition, the challenged governmental measures sought to force the closure of the landfill, without any law-ful regulatory purpose and in spite of the operation’s compliance with the law.176

e. What Constitutes an Expropriation?

Tribunals’ reasoning on whether a deprivation has occurred is also noteworthy. In Chemtura, the tribunal held that the deprivation was not substantial even though Canada had effectively banned the investor’s product.177 Similarly, it is hard to imagine a more severe

Developments in International Law, 176 RECUEIL DES COURS 259, 324 (1982).

174. See Dolzer, supra note 153; Rahim Moloo & Justin Jacinto, Environmental and Health Regulation: Assessing Liability Under Investment Treaties, 29 BERKELEY J. INT’L L. 1, 13 (2011).

175. Metalclad, ¶ 104 (emphasis added).

176. Id. ¶ 106. This discussion excludes the tribunal’s obiter dicta conclusion that an environmental decree issued after the series of acts that amounted to the expropriation also constituted an expropriation.

177. Chemtura Corp. v. Canada, Award, ¶ 266 (Aug. 2, 2010), available at http://italaw.com/documents/ChemturaAward.pdf.

http://italaw.com/documents/ChemturaAward.pdf


generally applicable environmental regulatory measure than the one at issue in Methanex: an outright ban on the foreign investor’s prod-uct. Nonetheless, the tribunal did not find that an expropriation had occurred. It acknowledged the reasoning in Pope & Talbot v. Cana-da that “property” could not be construed in an outdated fashion as referring only to tangible assets. However, it rejected the notion that expropriation could be vastly expanded beyond its original under-standing:

Certainly, the restrictive notion of property as a mate-rial “thing” is obsolete and has ceded its place to a contemporary conception which includes managerial control over components of a process that is wealth producing. In the view of the Tribunal, items such as goodwill and market share may . . . “constitute[] an element of the value of an enterprise and as such may have been covered by some of the compensation pay-ments.” Hence in a comprehensive taking, these items may figure in valuation. But it is difficult to see how they might stand alone, in a case like the one be-fore the Tribunal.178 The Tecmed tribunal articulated an even stricter standard, re-

quiring that any business activity must have “disappeared” and the “economic value of the use, enjoyment or disposition of the assets or rights affected . . . [have] been neutralized or destroyed.” 179

f. Two Awards Finding Indirect Expropriation

Applying the aforementioned standards, tribunals have held states liable for expropriation for purportedly environmental measures only where the environmental rationale was pretextual or government officials violated domestic law. Neither of the two cases imposing liability on a state involved a bona fide environmental regu-

178. Methanex v. United States, Final Award on Jurisdiction and the Merits, pt. IV, ch. D, ¶ 17 (Aug. 3, 2005), 44 I.L.M. 1345 (2005).

179. See Técnicas Medioambientales Tecmed, S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, ¶ 116 (May 29, 2003). Similarly, the tribunal in LG&E v. Argentina held that there is no indirect expropriation “where the investment continues to operate, even if profits are diminished.” LG&E Capital Corp. v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, ¶ 191 (Oct. 3, 2006) available at http://italaw.com/sites/ default/files/case-documents/ita0460.pdf.


lation. In both cases, no governmental organ had identified any threat to the environment or public health that would have justified the impugned action.

In Metalclad, provincial and municipal officials took a num-ber of actions outside of their authority under Mexican law to thwart the investor’s continued operation of a landfill, despite the investor’s receipt of all required environmental approvals, compliance with en-vironmental laws, and repeated endorsements from the federal gov-ernment.180 The state did not even contend that the landfill posed any risk of environmental degradation; to the contrary, all investigations undertaken in response to local opposition showed the operation to be “consistent with, and sensitive to, [Mexico’s] environmental con-cerns.” 181

Similarly, in Tecmed v. Mexico, the claimant had purchased a landfill that had previously been run by a municipality for years without incident. It acquired all necessary environmental permits to operate the landfill. Shortly thereafter, newly elected local officials mounted a campaign against the landfill that resulted in such local opposition that the investor agreed to move it to a different location, despite the acknowledgment of the municipality and the federal gov-ernment that there was no “evidence of any risk to health and the ecosystem” and no “legal, ethical, or logical arguments” in favor of its closing.182 Thus, in response to purely political pressure, the claimant and the local and federal governments agreed to cooperate to relocate the landfill at substantial cost to the investor. Several months later, while steps were being taken to carry out that agree-ment, pressure from local authorities led the federal government to issue a resolution on pretextual grounds ordering the immediate clo-sure of the existing site.183 Throughout the entire process, the landfill operated in accordance with applicable laws and regulations with on-ly minor regulatory infractions, and no government authority had made any finding of a risk to human health or the environment that

180. Metalclad Corp. v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, ¶¶ 78–80, 85, 92 (Aug. 30, 2000), available at http://www.italaw.com/sites/default/ files/case-documents/ita0510.pdf.

181. Id. ¶¶ 76–105.

182. Tecmed, Award, ¶ 110.

183. Id. ¶¶ 127–32, 151.


justified a serious sanction, much less closure of the site.184 Thus, the jurisprudence emphatically does not support the

contention that investment tribunals have expanded the interpretation of expropriation so as to enable investment dispute tribunals “to or-der compensation for regulatory measures that incidentally reduce the value of investor assets.” 185 In contrast to the paradigmatic case of a taking of real property, the hurdles to establishing regulatory expro-priation are difficult for an investor to clear: either bona fide regula-tions do not give rise to expropriation, or they do so only where the investment is destroyed and that destruction is disproportionate to the interest pursued, or where the regulation contravenes an existing agreement of the state with the investor.

2. Environmental Measures and Fair and Equitable Treatment

Given the near impossibility of successfully challenging an environmental regulation of general application as expropriatory, fair and equitable treatment (FET) is the treaty standard most relevant to the impact of treaty protection and arbitration on states’ regulatory space.186 An examination of the FET standard and how it has been applied gives the lie to the claim that treaties and arbitration restrain states from taking legitimate regulatory measures.187

What is fair and equitable is difficult to ascertain in the ab-stract; the jurisprudence demonstrates, and at times states expressly, that the determination is highly dependent on the facts of the case.188 While that apparent indeterminacy has been cited as a basis for con-

184. Id. ¶¶ 109–10, 124–32, 161–64

185. Gus Van Harten, Private Authority and Transnational Governance: The Contours of the International System of Investor Protection, 12 REV. OF INT’L POL. ECON. 600, 604 (2005).

186. FET is the standard most often invoked and most often found to have been breached in investment treaty arbitrations. See DOLZER & SCHREUER, supra note 173, at 130 (2012).

187. See Menon, supra note 7 (arguing that the most significant impact of investment treaty arbitration “has been that national governments have increasingly found their freedom to act in their own domestic space being curtailed by the interpretations placed by arbitral tribunals on investment treaties”); Open Letter, supra note 20, at 2 (“Some of these interpretations have prioritized the protection of the property and economic interests of transnational corporations over the right of states to regulate and the sovereign right of nations to govern their own affairs.”).

188. Id. at 139.


cern vis-à-vis future environmental regulation,189 in practice, when the facts of the case do involve regulation in the public interest, FET has uniformly been interpreted to give states very broad leeway. The very expansive deference that has been accorded to states is evident in both the legal doctrines that tribunals have employed and the way they have applied them to the facts.

a. On Fears of Freezing the Regulatory Framework

Statements of the FET standard in three arbitral awards—Metalclad v. Mexico, Tecmed v. Mexico, and Occidental v. Ecua-dor—are frequently cited as examples of expansive interpretations that risk preventing states from altering their regulatory frame-works.190 Tecmed states, and Occidental relies on, the following ex-plication of FET:

[T]he foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives . . . .191 Metalclad states: [A]ll relevant legal requirements for the purpose of in-itiating, completing and successfully operating in-vestments made, or intended to be made, under the Agreement should be capable of being readily known to all affected investors of another Party. There should be no room for doubt or uncertainty on such

189. See Open Letter, supra note 20, at 2. See generally Roberts, supra note 21, at 179, 190–91.

190. See, e.g., Roberts, supra note 21, at 214–15; Open Letter, supra note 20, at 2; Zachary Douglas, Nothing if Not Critical for Investment Treaty Arbitration: Occidental, Eureko and Methanex, 22 ARB. INT’L 27, 28 (2006) (“The Tecmed ‘standard’ is actually not a standard at all; it is rather a description of perfect public regulation in a perfect world, to which all states should aspire but very few (if any) will ever attain.”).

191. Técnicas Medioambientales Tecmed, S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, ¶ 154 (May 29, 2003); Occidental v. Ecuador, LCIA Case No. UN3467, Final Award, ¶¶ 190–91 (July 1, 2004), available at http://www.italaw.com/sites/ default/files/case-documents/ita0571.pdf.


matters. Once the authorities of the central govern-ment of any Party . . . become aware of any scope for misunderstanding or confusion in this connection, it is their duty to ensure that the correct position is prompt-ly determined and clearly stated so that investors can proceed with all appropriate expedition in the confi-dent belief that they are acting in accordance with all relevant laws.192 Roberts argues regarding these three awards that: [S]ome tribunals have adopted idealized standards of perfect governmental conduct and regulation divorced from any real consideration of state practice. Scrutiny of the internal practices of the treaty parties or states as a whole would demonstrate that these standards are unrealistic and inappropriate for use as the threshold for review.193 Notwithstanding that just three cases provide a thin basis at

best for assertions of systemic overreach,194 the discussion of these cases has divorced these individual paragraphs from the context of the facts at issue. In each case, the state made specific promises or assurances directly to the investor to induce the investment and then violated them. In Metalclad, the investor worked with the Federal Government of Mexico, which assured it that Federal officials had exclusive regulatory authority over its planned activities and that Metalclad possessed all necessary permits.195 In Tecmed, the inves-tor had purchased a landfill from a municipality and relied on its rep-resentations and the license it granted the investor to operate the landfill for an indefinite term. Thereafter, the license was revoked without explanation and replaced with a one-year, renewable license, and then renewal was refused on a pretextual basis discordant with


193. Roberts, supra note 21, at 223 (footnote omitted).

194. Other tribunals have disagreed with the standards articulated in those cases. See, e.g., Saluka Invs. BV v. Czech Republic, Partial Award, ¶ 304 (Perm. Ct. Arb. Mar. 17, 2006), available at http://italaw.com/sites/default/files/case-documents/ita0740.pdf (criticizing those formulations of FET as “inappropriate and unrealistic”).

195. Metalclad, ¶¶ 76–105.


Mexican administrative law and without due process.196 In Occi-dental, the state negotiated an oil production-sharing contract with the investor on the express basis of the existing tax regime. The con-tract included a tax stabilization clause promising that any change in the VAT tax regime would be offset by amendments to the contract to protect the investor’s expectations. The breach of FET was found in Ecuador’s breach of those express contractual promises.197 Thus, as broadly as the FET standard may appear to be articulated in these three cases, the actual holdings of the awards are not expansive. It is instructive to compare their reasoning in the factual scenario of spe-cific promises and assurances to the reasoning of tribunals consider-ing general regulatory measures. The remainder of this Section does so.

b. Due Consideration of the Public Interest

While some have characterized investment arbitrators as nar-row-minded commercial lawyers incapable of giving or unwilling to give thought to public interest considerations,198 this contention is empirically questionable.199 The jurisprudence also shows this char-acterization to be false, as arbitral tribunals considering environmen-tal regulatory matters have consistently demonstrated an understand-ing of public interest concerns and a commitment to giving them due weight. A clear example of this is the regulatory carve-out for bona fide regulation in the doctrine of expropriation, discussed above.200 The reasoning of awards addressing FET provides further illustra-tions.

196. Técnicas Medioambientales Tecmed, S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, ¶¶ 123–32, 154–66 (May 29, 2003).

197. Occidental v. Republic of Ecuador, LCIA Case No. UN 3467, Final Award, ¶¶ 27, 30–32, 96, 98–106 (July 1, 2004), available at http://www.italaw.com/sites/default/files/ case-documents/ita0571.pdf.

198. See, e.g., Suzanne Spears, Quest for Policy Space in New-Generation International Investment Agreements, 13 J. INT’L ECON. L., 1037, 1073 (2010); Menon, supra note 7, at 32.

199. For instance, the list of elite investment arbitrators in the anti-investment arbitration pamphlet Profiting from Injustice have among them extensive experience working in and advising governments and international institutions. See EBERHARDT &

OLIVET, supra note 3, at 38–41.

200. See supra notes 163–168 and accompanying text.


In Chemtura v. Canada, which involved a challenge to re-strictions imposed on lindane, a commercial pesticide, the tribunal began by affirming its deference to public concerns, regardless of their factual validity: “Irrespective of the state of the science . . . the Tribunal cannot ignore the fact that lindane has raised increasingly serious concerns” among the public.201 It listed countries in which public concerns resulted in restrictions on lindane, noted its inclusion on the list of substances designated for elimination in an international convention, and continued to recall these “public concerns” throughout the entire award.202

Similarly, in Unglaube v. Costa Rica, after paying tribute to the importance of the turtle-nesting habitat at issue, the tribunal af-firmed the state’s authority to take measures to protect the habitat:203

[T]he Claimants do not question the authority of the sovereign government of Costa Rica to expropriate land, pursuant to Costa Rican law provided that such action and its effects are also in conformity with Costa Rica’s obligations under the Treaty. Certainly this Tribunal is not empowered, nor does it have any inten-tion, to question or weaken the appropriate use of this authority by the government—an authority which has long been established and recognized by international law.204 As the following sub-Parts will show, the homage paid to

public concerns has been put into practice. The FET standard has not been used to second-guess states’ policy decisions and has been par-ticularly deferential to state acts relating to environmental interests.

201. Chemtura Corp. v. Canada, Award, ¶ 135 (Aug. 2, 2010), available at http://italaw.com/documents/ChemturaAward.pdf.

202. Id. ¶¶ 134–36, 184. Canada received a unanimous award dismissing Chemtura’s claim. See id. pt. V.

203. Unglaube v. Republic of Costa Rica, ICSID Case No. ARB/08/1, ARB/09/20, Award, ¶ 163 (May 16, 2012), available at http://www.italaw.com/sites/default/files/case-documents/ita1052.pdf.

204. Id. ¶ 166 (citing Santa Elena v. Republic of Costa Rica, ICSID Case No. ARB/96/1, Final Award (Feb. 17, 2000), 15 ICSID Rev. 169 (2000)). Costa Rica had conceded, as it had in Santa Elena, that it in fact had expropriated the property.


c. The Investor Takes the Host State as He Finds It

It is a widely recognized principle that an investor takes the regulatory and legal framework of the host state as it stands when the investment is made. This principle has been interpreted quite broadly to include the assumption that the investor takes an uncertain regula-tory framework as given. As the tribunal in Methanex recognized:

Methanex entered a political economy in which it was widely known, if not notorious, that governmental en-vironmental and health protection institutions at the federal and state level, operating under the vigilant eyes of the media, interested corporations, nongov-ernmental organizations and a politically active elec-torate, continuously monitored the use and impact of chemical compounds and commonly prohibited or re-stricted the use of some of those compounds for envi-ronmental and/or health reasons. Indeed, the very market for MTBE in the United States was the result of precisely this regulatory process. Methanex appre-ciated that the process of regulation in the United States involved wide participation of industry groups, nongovernmental organizations, academics and other individuals, many of these actors deploying lobbyists. Methanex itself deployed lobbyists.205 Similarly, in Unglaube, the tribunal gave weight to the fact

that although “the workings of the courts and administrative agencies of Costa Rica surely involve noticeable differences from those with which Claimants may be more familiar,” “governments are accorded a considerable degree of deference regarding the regula-tion/administration of matters within their borders” 206 and are re-quired only to refrain from actions that are arbitrary or discriminato-

205. Methanex v. United States, Final Award on Jurisdiction and the Merits, pt. IV, ch. D, ¶ 9 (Aug. 3, 2005), 44 I.L.M. 1345 (2005).

206. Unglaube, ¶ 258 (citing S.D. Myers v. Canada, Partial Award, ¶ 263 (Nov. 13, 2000), available at http://italaw.com/sites/default/files/case-documents/ita0747.pdf); Técnicas Medioambientales Tecmed, S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, ¶ 122 (May 29, 2003); RESTATEMENT (THIRD) OF THE LAW OF

FOREIGN RELATIONS OF THE UNITED STATES § 712(g) (1987); see also Saluka Investments B.V. v. Czech Republic, Partial Award (Perm. Ct. Arb.), ¶¶ 253–65 (March 17, 2006), available at http://italaw.com/sites/default/files/case-documents/ita0740.pdf.



ry, lack due process, or violate “elemental fairness.” 207 Similarly, the tribunal in Chemtura v. Canada stated that it

must “take into account the obvious fact that the operation of com-plex administrations is not always optimal in practice and that the mere existence of delays is not sufficient for a breach.” 208 The tribu-nal considered the “fact that certain agencies manage highly-specialized domains involving scientific and public policy determina-tions.” 209 Similarly, other tribunals have asked only whether a state action bears a reasonable relationship to some rational policy.210

Thus, the standard that has been applied to regulatory measures in general stands in stark contrast to the reasoning applied where specific assurances have been given. Notwithstanding the lan-guage of a few arbitral awards,211 tribunals have not required unreal-istic levels of bureaucratic competence and stability.

d. Very High Deference to Domestic Policy and Processes

The way FET has been interpreted tells an entirely different story from that recounted by critics about the way investment treaties and arbitration constrain state discretion. When assessing whether a state’s regulatory actions have breached FET, tribunals have declined to question the wisdom of policies or the efficiency of bureaucratic processes. Instead they have asked whether the state acted in good faith and in accordance with the rule of law, recognizing states’ sub-stantial leeway in the legislative, administrative, and judicial process-es through which environmental interests are pursued.

As a threshold matter, FET does not permit arbitrators to im-pose their own personal conceptions of fairness on the host state.212

207. Unglaube, ¶ 258.

208. Chemtura Corp. v. Canada., Award, ¶ 215 (Aug. 2, 2010), available at http://italaw.com/documents/ChemturaAward.pdf.

209. Id. ¶ 123.

210. Saluka Invs. B.V., ¶ 307.

211. See supra notes 174, 191–193 and accompanying text.

212. See Unglaube v. Republic of Costa Rica, ICSID Case No. ARB/08/1, ARB/09/20, Award, ¶ 242 (May 16, 2012), available at http://www.italaw.com/sites/default/files/case-documents/ita1052.pdf; Pope & Talbot, Inc. v. Canada, Award on the Merits of Phase 2, ¶ 155 (ICC Int’l Ct. Arb.), available at http://opil.ouplaw.com/view/10.1093/law:iic/192-2000.case.1/IIC192(2000)D.pdf; S.D. Myers v. Canada, Partial Award, ¶¶ 261, 263 (Nov. 13, 2000), available at http://italaw.com/sites/default/files/case-documents/ita0747.pdf (“It


Rather, widely accepted administrative law doctrines such as legiti-mate expectations have been employed to assess state actions toward foreign investors.213 One tribunal explained FET as follows:

[L]eading authorities indicate that to prove a breach of the standard, a claimant must show more than mere legal error. Instead, as stated by the Saluka Tribunal, the evidence must establish actions or decisions which are manifestly inconsistent, non-transparent, [or] un-reasonable (i.e., unrelated to some rational poli-cy) . . . . Where, however, a valid public policy does exist, and especially where the action or decision tak-en relates to the State’s responsibility “for the protec-tion of public health, safety, morals or welfare, as well as other functions related to taxation and police pow-ers of states,” such measures are accorded a consider-able measure of deference in recognition of the right of domestic authorities to regulate matters with their borders.214 The limit of that deference is that “[e]ven if such measures

are taken for an important public purpose,” “governments are re-quired to use due diligence in the protection of foreigners and will not be excused from liability if their action has been arbitrary and discriminatory.” 215

While adherence to domestic law is insufficient to establish that the state acted in accordance with international standards, tribu-nals accord domestic law and political structures substantial respect. For example, in Unglaube, the tribunal noted:

[T]he Tribunal would, without hesitation, have found that, under the Constitution and laws of Costa Rica, it

is not the Tribunal’s role, having appraised the evidence presented, to decide based on its own judgments of fairness. It is, instead, to assess whether investors have been subjected to arbitrary or discriminatory treatment, to legal arrangements which violate due process, and, in particular, whether the legitimate expectations of the investor . . . have been duly respected.”).

213. See generally Daphne Barak-Erez, The Doctrine of Legitimate Expectations and the Distinction between the Reliance and Expectation Interests, 11 EUR. PUB. L. 583 (2005)

(discussing the doctrine in various European jurisdictions).

214. Unglaube, ¶ 246 (internal quotation omitted) (footnote omitted).

215. Id. ¶ 247.


is the Attorney General and the Supreme Court who are empowered to give authoritative and final interpre-tation of the law. The construction of the 1995 Na-tional Park Law is a matter of Costa Rican law, and it is not appropriate for this Tribunal to substitute an opinion of its own or make any finding of liability un-less the Attorney General and the Court are found to have acted in a manner which is arbitrary, discrimina-tory or otherwise shocking to the conscience.216 Similarly, the tribunal in S.D. Myers confirmed ample leeway

for states in their treatment of foreign investors, finding that a breach occurs

only when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treat-ment rises to the level that is unacceptable from the in-ternational perspective. That determination must be made in the light of the high measure of deference that international law generally extends to the right of do-mestic authorities to regulate matters within their own borders.217 In Chemtura v. Canada, an arbitration in which the claimant

challenged an environmental review and eventual phase-out of a pes-ticide, the tribunal showed similar deference to Canada. It focused on whether Canada had acted in bad faith, unfairly, or without due process.218

216. Id. ¶ 253.

217. S.D. Myers v. Canada, Partial Award, ¶ 263 (Nov. 13, 2000), available at http://italaw.com/sites/default/files/case-documents/ita0747.pdf. This decision was rendered before the NAFTA parties issued their Note of Interpretation seeking to limit the NAFTA to protecting the international minimum standard of treatment. See Notes of Interpretation of Certain Chapter 11 Provisions, supra note 111.

218. See Chemtura Corp. v. Canada, Award, ¶¶ 123–47 (Aug. 2, 2010), available at http://italaw.com/documents/ChemturaAward.pdf. Like S.D. Myers, Chemtura cannot be distinguished as applying a more restrictive standard than that applied in most bilateral investment treaties pursuant to the NAFTA parties’ Note of Interpretation. The tribunal considered whether, through a most favored nation clause, Canada could be said to have breached a more rigorous FET standard and found that it could not. Id. ¶¶ 236–37.



e. The Precautionary Principle

Most national environmental regulatory frameworks incorpo-rate the precautionary principle in weaker or stronger forms.219 Be-fore many treaty challenges to environmental actions had been decid-ed, it was an open question how arbitrators would evaluate whether a state using the precautionary principle had violated its treaty obliga-tions, and there was understandable wariness about how arbitrators would assess “the reasonableness of the risk analysis used to justify regulatory action.” 220 However, the development of the jurispru-dence discussed above, with its emphasis on good faith and due pro-cess, shows deference to the precautionary principle in that tribunals have declined to assess the scientific foundation or wisdom of a state’s environmental policy decisions.221 In Chemtura v. Canada, the tribunal noted that “it is not its task to determine whether certain uses of lindane are dangerous . . . the role of a Chapter 11 Tribunal is not to second-guess the correctness of the science-based decision-making of highly specialized national regulatory agencies.” 222 Ap-plying a good faith standard, the tribunal also rejected the claimant’s contention that the review of the pesticide did not afford due process because it began with a foregone conclusion that it would be banned.223 Similarly, in Methanex v. United States, the tribunal ap-plied a good faith standard and declined to assess the scientific evi-dence, which was controversial even within the United States.224

S.D. Myers is the only award that has held a state liable for breaching FET through a measure the state characterized as a gener-ally applicable regulatory measure. Canada banned the export of a

219. The precautionary principle is invoked to permit environmental regulatory action on the basis of “possible risks” where there is no conclusive evidence of danger to human health or the environment. See David A. Gantz, Potential Conflicts Between Investor Rights and Environmental Regulation Under NAFTA’s Chapter 11, 33 GEO. WASH. INT’L L. REV. 651, 657 (2001); Communication from the Commission on the Precautionary Principle, at 7, COM (2000) 1 final (Feb. 2, 2000), available at http://eur-lex.europa.eu/LexUriServ /LexUriServ.do?uri=COM:2000:0001:FIN:EN:PDF.

220. Gantz, supra note 219, at 657.

221. See Methanex Corp. v. United States., Final Award on Jurisdiction and Merits, pt. III, ch. A, ¶¶ 4–102 (Aug. 3, 2005), 44 I.L.M. 1345 (2005); Chemtura, ¶¶ 134–36, 153.

222. Chemtura, ¶ 134.

223. Id. ¶¶ 145–46.

224. See Methanex, pt. III, ch. A, ¶¶ 4–102.


class of industrial waste chemicals called PCBs destined to be reme-diated at a facility just across the U.S. border.225 As in the two cases discussed above, the tribunal in S.D. Myers also applied a good faith test. It found overwhelming evidence that the ban was not imposed on legitimate grounds provided for under Canadian law but instead was motivated by a “desire and intent to protect and promote the market share of enterprises” that could carry out such remediation in Canada.226 The evidence included internal communications of envi-ronmental regulators showing that they believed that the export of the chemical posed no significant environmental risk, that export was supported by all jurisdictions within Canada, and that the Minister of the Environment had nonetheless promised certain companies that had lobbied her that she would close the border.227

In Unglaube v. Costa Rica, the tribunal held that the require-ment of fair and equitable treatment was not violated by a Supreme Court order suspending development of property for nine months, de-spite the tribunal’s finding that the order had no basis in the applica-ble law or any scientific evidence.228 To assess the claimants’ allega-tion that it was treated unfairly and inequitably, the tribunal applied a denial of justice standard, requiring the claimants to prove that “the laws of Costa Rica, taken as a whole, did not afford them an adequate opportunity, within a reasonable time, to vindicate their rights.”229 That standard required claimants to show procedural unfairness, such as a failure to ensure “reasonable advance notice, a fair hearing and an unbiased and impartial adjudicator.” 230 Similarly, the tribunal re-jected the claimant’s argument that it was denied justice by a delay of nearly four years in developing its previously approved project caused by two actions brought by environmental groups. The tribu-

225. S.D. Myers v. Canada, Partial Award, ¶¶ 194–95 (Nov. 13, 2000), available at http://italaw.com/sites/default/files/case-documents/ita0747.pdf.

226. Id. ¶¶ 162–89.

227. Id.

228. Unglaube v. Republic of Costa Rica, ICSID Case No. ARB/08/1, ARB/09/20, Award, ¶¶ 255, 286 (May 16, 2012), available at http://www.italaw.com/sites/default/ files/case-documents/ita1052.pdf.

229. Id. ¶ 272.

230. Id. (quoting ADC Affiliated Ltd. v. Republic of Hungary, ICSID Case No. ARB/03/16, Award, ¶ 435 (Oct. 2, 2006), available at https://icsid.worldbank.org/ICSID/ FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC648_En&caseId=C231).



nal reasoned that the cases had been conducted in accordance with Costa Rican law and there was no evidence of “impropriety, corrup-tion or discrimination.” 231

In summary, investment tribunals assessing environmental regulations have carefully limited their inquiry to the scope of the guarantees states have made to foreign investors in their treaties. Opponents of investor-State arbitration have made sweeping argu-ments that investment treaty protections and consent to arbitration constrain states’ “policy space.” For example, Van Harten argues that consent to arbitration

allows a wide range of regulatory issues to be resolved through private arbitration, giving arbitrators the pow-er to decide upon the permissible scope of public powers to tax business, deliver public services, estab-lish regulatory standards, control land use, and so on . . . . [T]he trade off for . . . states is that they will have fewer options to use public authority in order to address domestic priorities . . . . [T]he system permits multinational enterprises to resist public regulation.232 As the discussion above shows, that characterization is whol-

ly misleading. Arbitrators have nothing to say about the “permissi-ble scope of public powers.” The authority to regulate remains in-tact, and arbitrators decide only whether an investor is entitled to compensation because a state breached an obligation it undertook—in an exercise of its sovereign capacity—by concluding a treaty.233 There is no foundation for the characterization that investment tribu-nals are a back door to dismantling environmental regulations or that they substitute their own policy judgment for that of democratically elected governments.234

231. Id. ¶ 286.

232. Van Harten, supra note 185, at 608–12.

233. See Rosalyn Higgins, The Taking of Property by the State: Recent Developments in International Law, in 176 RECUEIL DES COURS 259, 388–89 (1982).

234. See Michelle Sforza & Mark Vallianatos, Chemical Firm Uses Trade Pact to Contest Environmental Law, GLOBAL POLICY FORUM (Apr. 1997), available at http://www.globalpolicy.org/component/content/article/212/45381.html (“If Ethyl wins its case, a precedent will be set whereby the legal right of corporations to be compensated when public health regulations affect a company’s bottom line is given the same weight as the public’s right not to be harmed by industrial toxins. This could send the message to investors that seeking compensation from the public for the cost of complying with


V. RECONSIDERING “REGULATORY CHILL”

The previous Part analyzed the content of specific investment treaty awards addressing purported environmental measures to show that tribunals have not demanded that states freeze their regulatory frameworks as of the time of investment in order to avoid liability. This Part responds more generally to the argument that the mere pos-sibility of a future investment treaty claim will discourage states from making policy changes in the public interest, leading to regulatory chill.235 That argument is made in the abstract and is based on un-tested assumptions. It is mere speculation that the specter of damag-es claims by foreign investors on balance negatively impacts the quality of host state regulation rather than improving it. After all, that specter could stop a government from enacting misguided, dis-criminatory, and harmful policies.

Advocates of the regulatory chill critique contend that even if investors have been unsuccessful in challenging environmental regu-lation, they have proven willing to use treaty arbitration as a weapon to challenge states’ authority to enact legitimate environmental regu-lation if such regulation causes them any loss. For example, a recent call for papers stated:

[T]he rapid growth in the number of treaty-based claims filed by investors reflects investors’ increased willingness to safeguard their investments from any adverse state conduct . . . . [A] wide variety of do-mestic measures relevant to sustainable develop-ment . . . have also been challenged under the agree-ments. Such claims by investors, whether successful or not, can cause a state to think twice before adopting

environmental regulations constitutes a legitimate business strategy. Thus, in pacts like NAFTA, groups opposed to strong environmental regulation may find an effective mechanism for advancing the radical ‘takings’ agenda for which they have not been able to build public or legislative support.”); see also discussion of Ethyl v. Canada, infra notes 241–243 and accompanying text.

235. See Bruno Simma & Theodore Kill, Harmonizing Investment Protection and International Human Rights: First Steps Towards a Methodology, in INTERNATIONAL

INVESTMENT LAW FOR THE 21ST CENTURY: ESSAYS IN HONOUR OF CHRISTOPH SCHREUER 678 (Christina Binder et al. eds., 2009); Sforza & Vallianatos, supra note 234 (“If such cases were to become commonplace, governments would have to give due consideration to the potential fiscal costs before passing needed regulations.”).


legitimate regulations, suggesting that treaties may in fact impede states’ policy space to promote sustaina-ble development domestically.236 Given states’ hitherto undefeated record in arbitrations chal-

lenging bona fide environmental regulations, it is understandable that criticism has shifted focus to the very incubation of regulations. However, it is quite a stretch to characterize the challenges that have been made as opposing any adverse state conduct. Successfully arbi-trating investors have uniformly had to make out a case that the state’s actions were pretextual, discriminatory, or lacking in due pro-cess.237 The clear message of cases decided so far has been that an investor challenging public interest regulatory action faces a forbid-ding, if not impossible, climb. The high cost of pursuing an arbitral claim238 will tend to deter resort to arbitration where the probability of success is low. As if to further drive the point home, some tribu-nals have required the unsuccessful claimant to bear the entire cost of the arbitration and some or all of the state’s fees for defending against the claim.239 The possibility of settlement does not signifi-cantly alter the analysis. Where the environmental measure is not pretextual, discriminatory, or lacking in due process, a state is unlike-ly to settle a claim challenging the legitimate measure by taking a step as drastic and politically difficult as reversing its laws or regula-tions.

Ethyl v. Canada has been a favorite example of critics, who argue that Ethyl successfully used an arbitration claim to coerce Can-ada to revoke an environmental law.240 The truth, however, is strik-

236. Call for Papers, supra note 152 (emphasis added).

237. See supra text accompanying notes 153–185.

238. See Susan D. Franck, Rationalizing Costs in Investment Treaty Arbitration, 88

WASH. U. L. REV. 769, 774 n. 21, 785 (2011); John Y. Gotanda, Note, Consistently Inconsistent: The Need for Predictability in Awarding Costs and Fees in Investment Treaty Arbitration, 28 ICSID REV. 420, 420, 423 (2013).

239. See Methanex Corp. v. United States, Final Award on Jurisdiction and Merits (Aug. 3, 2005), 44 I.L.M. 1345, pt. VI (2005) (ordering the claimant to pay the United States $2.9 million for its legal costs and to bear the entire cost of the arbitration itself); Chemtura Corp. v. Canada, Award, pt. V (Aug. 2, 2010), available at http://italaw.com/ documents/ChemturaAward.pdf (ordering the claimant to bear the costs of the arbitration and 50% of Canada’s legal costs).

240. See PUBLIC CITIZEN, NAFTA CHAPTER 11 INVESTOR-TO-STATE CASES: BANKRUPTING DEMOCRACY 9–10 (2001), available at http://www.citizen.org/documents/ ACF186.PDF; Connie de la Vega, Human Rights and Trade: Inconsistent Application of




ingly different. In Ethyl, a NAFTA investment tribunal found it had jurisdic-

tion to hear a claim challenging a Canadian statute that prohibited (1) imports of the gasoline additive MMT and (2) the interprovincial transportation thereof. (The only source of MMT was in the United States and only one Canadian Province had any related MMT facili-ty.)241 The claimant alleged that the challenged statute was a dis-criminatory trade measure because it did not outlaw the production and sale of MMT, but only banned its importation into Canada and any interprovincial movement.242

While the NAFTA arbitration was pending, and before a hear-ing on the merits, four Canadian provinces succeeded in a challenge against the legislation before a Canadian public interprovincial tribu-nal. That Canadian tribunal held that the legislation was invalid un-der Canadian law as an illegitimate restraint on interprovincial trade unjustified by the environmental interests invoked. Thus, Canada re-pealed the legislation and settled the NAFTA arbitration only after the MMT trading ban had been invalidated domestically,243 and it was not Ethyl’s NAFTA claim that pushed Canada to change its law.

Moreover, while Canada has been the most frequent respond-ent in treaty claims arising out of purportedly environmental regula-tions, there is no indication that the challenges have chilled environ-

Treaty Law in the United States, UCLA J. INT’L L. & FOREIGN AFF. 1, 20–21 n. 97 (2004); Marisa Yee, The Future of Environmental Regulation After Article 1110 of NAFTA: A Look at the Methanex and Metalclad Cases, 8 HASTINGS W.-NW. J. ENVTL. L. & POL’Y 85, 107 (2003); Daniel R. Loritz, Comment, Corporate Predators Attack Environmental Regulations: It’s Time to Arbitrate Claims Filed Under NAFTA’s Chapter 11, 22 LOY. L.A. INT’L & COMP. L. REV. 533, 546 (2000). Other, more developed, scholarly sources pick up and repeat this misinformation. See Mary E. Footer, BITs and Pieces: Social and Environmental Protection in the Regulation of Foreign Investment, 18 MICH. STATE J. INT’L

L. 33, 39–40 (2009); Rahim Moloo & Justin Jacinto, Environmental and Health Regulation: Assessing Liability Under Investment Treaties, 29 BERKELEY J. INT’L L. 1, 29–30 (2011).

241. Ethyl Corp. v. Canada, Award on Jurisdiction (June 24, 1998), 38 I.L.M. 708, ¶ 5 (1999).

242. Id. ¶¶ 5–6.

243. See Report of the Article 1704 Panel Concerning the Dispute Between Alberta and Canada Regarding the Manganese-Based Fuel Additives Act, 3 ASPER REV. INT’L BUS. &

TRADE L. 347, 361 (1998) (holding in favor of complainants Alberta, Quebec, Nova Scotia, and Saskatchewan that the MMT legislation is inconsistent with Canadian law because it creates barriers to internal trade not justified by the applicable “legitimate objectives” test and recommending that Canada remedy the inconsistency and suspend the legislation in the meantime).


mental regulation there. After Dow AgroSciences notified Canada of its intent to seek arbitration under NAFTA in 2009 because the prov-ince of Quebec banned a chemical used for cosmetic lawn care, five other provinces enacted similar bans.244 Additionally, Canada has enacted several new federal environmental laws in recent years.245 Thus, past awards indicate that if the specter of investor challenges risks “chilling” anything, it is the misuse of regulatory authority.246 Indeed, a recent study of all concluded ICSID arbitrations found that investors have rarely challenged legislative acts; over 90% of cases involved challenges to executive branch measures.247 It is also to be expected that future claims will be even more circumscribed

244. See DAVID SUZUKI FOUNDATION, PESTICIDE FREE? OUI!: A COMPARISON OF

PROVINCIAL COSMETIC PESTICIDE BANS 4 (2011), available at http://www. healthyenvironmentforkids.ca/sites/healthyenvironmentforkids.ca/files/pesticide-free-oui-2011.pdf. Dow AgroSciences instituted NAFTA arbitration against Canada after the province of Quebec banned the chemical 2,4-D, used in cosmetic lawn care. Dow pointed out that the government had itself concluded after a review that there was no evidence that the chemical was harmful to the environment or humans. Ultimately Canada settled the claim quite favorably to itself, paying Dow no compensation and maintaining the ban. Canada’s only concession in the settlement was to acknowledge publicly its finding that products containing the chemical do not pose an unacceptable risk to the environment or human health as long as the instructions on the label are followed. See Canada Welcomes Agreement with Dow AgroSciences, FOREIGN AFFAIRS, TRADE AND DEVELOPMENT CANADA (May 27, 2011), http://www.international.gc.ca/media_commerce/comm/news-communiques/2011/145.aspx?view=d.

245. See List of Acts, ENVIRONMENT CANADA, http://www.ec.gc.ca/default.asp?lang= En&n=E826924C-1 (last visited July 17, 2013).

246. Others analyzing this issue have concluded that there is no reason to expect that any impact on regulation will be negative. See Vicki Been, NAFTA’s Investment Protections and the Division of Authority for Land Use, 20 PACE ENVTL. L. REV. 19, 59–60 (2003)

(“Each of these potential implications-towards greater centralization and less localism, and towards more comprehensive and less discretionary regulatory regimes—carries both risks and benefits. There is enormous controversy about the benefits of more decentralized regimes, and about the tradeoff between flexibility and comprehensiveness. The implications of NAFTA’s investor protection provisions upon the distribution of authority between the federal, state and local governments and between environmental and land use regulatory schemes therefore are not necessarily undesirable.”).

247. Jeremy Caddel & Nathan M. Jensen, Columbia FDI Perspectives No. 120: Which Host Country Government Actors Are Most Involved in Disputes with Foreign Investors?, VALE COLUM. CTR. ON SUSTAINABLE INT’L INVESTMENT (April 28, 2014), http://www.vcc.columbia.edu/content/which-host-country-government-actors-are-most-involved-disputes-foreign-investors. Among the fourteen concluded ICSID arbitrations in which investors have challenged legislative actions, many were initiated in response to the same legislative changes, indicating an even lower likelihood of an investor challenge to any one change in the law.

http://www.vcc.columbia.edu/content/which-host-country-government-actors-are-most-involved-disputes-foreign-investors

http://www.vcc.columbia.edu/content/which-host-country-government-actors-are-most-involved-disputes-foreign-investors


given that tribunals have been so firm in confirming states’ authority to regulate environmental issues (and considering the high cost of ini-tiating an arbitration), further reducing the risk that even unsuccessful claims will deter beneficial regulation.

Luke Nottage offers an instructive example of a rashly enact-ed policy change toward solar energy in New South Wales (NSW), Australia. In 2011, the NSW government announced that it would not honor its promise to ensure electricity providers a particular feed-in tariff on electricity generated by solar panels installed by house-holders. It cut the price offered by one-third, upending the expecta-tions of householders who had invested in solar panels in reliance on the promised rate.248 Popular outcry ultimately led to the restoration of the originally promised tariff. The government had failed even to consider the potentially devastating impact of its hasty policy change on foreign (not to mention domestic) investment in the fledgling solar power industry. To flourish, the industry required a clear, predictable legal and political environment, not one in which “government-backed contracts can be reneged on at will.” 249 The NSW policy shift caused at least one major foreign investor in solar power to postpone planned expansion in Australia.250 Nottage observes that if an international investment treaty had been applicable, the govern-ment may have more carefully considered the impact of its actions, thereby potentially improving the quality of regulation not only for foreign investors but also for domestic investors and consumers.251 Thus, the discipline imposed by international obligations can help even a generally well-governed state to institutionalize a forward-looking, long-term view of governance that inoculates domestic po-litical institutions against shortsighted or populist proclivities.252 The granting of privately enforceable rights against states has been shown

248. Luke Nottage, The Rise and Possible Fall of Investor-State Arbitration in Asia: A Skeptic’s View of Australia’s “Gillard Government Trade Policy Statement,” Sydney Law School Legal Studies Research Paper No. 11/32, at 8–9 (June 2011), available at http://ssrn.com/abstract=1860505.

249. Id. at 9 (internal quotation omitted).

250. Id.

251. Id. at 9–10.

252. See generally SANTIAGO MONTT, STATE LIABILITY IN INVESTMENT TREATY

ARBITRATION: GLOBAL CONSTITUTIONAL AND ADMINISTRATIVE LAW IN THE BIT

GENERATION (2009).


to improve domestic governance.253 The positive impact would only be amplified in countries with histories of poor governance.254

The NSW case study illustrates that the posited dichotomy between the public interest and the protection of investment is a mis-conception. Rather than facing a tradeoff between “corporate profit” and “human rights and the environment,” 255 States must balance various objectives that serve the public interest, including the maintenance of a stable legal environment necessary for healthy eco-nomic functioning and other political and regulatory objectives. Be-yond discouraging foreign investment, an unstable political and legal environment hampers domestic development and the ability of citi-zens to plan their futures. It is no accident that economic develop-ment is strongly and positively correlated with all major indicators of human well-being and other fundamental values, including health, education, social welfare, environmental protection, and respect for human rights.256

It also should not be overlooked that creating a predictable environment for foreign direct investment has helped developing states to advance other values such as environmental protection. In-flows of foreign capital and know-how—which depend on a stable legal and economic environment—have been crucial to reducing en-vironmental degradation in manufacturing and mining and a driving force behind adoption of greener technologies.257

253. See generally MICHAEL GOLDHABER, A PEOPLE’S HISTORY OF THE EUROPEAN

COURT OF HUMAN RIGHTS (2007) (discussing the European Court of Human Rights and the European Court of Justice); THOMAS W. WÄLDE, NEW ASPECTS OF INTERNATIONAL

INVESTMENT LAW, HAGUE ACADEMY OF INTERNATIONAL LAW REPORT (2004).

254. Cf. Zachary Elkins, Andrew T. Guzman & Beth A. Simmons, Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000, 60 INT’L ORG. 811, 843 (2006) (concluding, tentatively, that countries with histories of poor governance may be driven to sign BITs by the need to compete for FDI with countries capable of providing more credible domestic investment protection).

255. EBERHARDT & OLIVET, supra note 3, at 7.

256. See, e.g., Daniel W. Sacks et al., SUBJECTIVE WELL-BEING, INCOME, ECONOMIC

DEVELOPMENT AND GROWTH, NATIONAL BUREAU OF ECONOMIC RESEARCH WORKING PAPER

(2010), available at http://www.nber.org/papers/w16441.pdf.

257. See, e.g., Turkey’s Energy Reforms Make Way for Renewable Future, WORLD

BANK (Mar. 29, 2010), http://www.worldbank.org/en/news/feature/2010/03/29/turkeys-energy-reforms-make-way-for-renewable-future (reporting that by opening energy production to foreign investment Turkey has reduced blackouts by more than half, improved access to power for 4.6 million households, and through renewable energy generation averted emissions of 1.01 million tons of carbon dioxide per year). Turkey’s reform of its


VI. ON THE RULE OF LAW

Some opponents of investment treaties and investor-State ar-bitration have argued that these institutions are “corrosive of the rule of law,” although this objection has been made less frequently than the others considered so far. 258 Because investment treaties and arbi-tration are in fact powerful tools for advancing the rule of law, both internationally and domestically, this argument calls for a brief rebut-tal.

Domestically, developing countries use investment and trade agreements as mechanisms for improving human rights and entrench-ing democracy.259 Investment treaties can work complementarily with a stable political environment and respect for human rights to create a welfare-enhancing virtuous circle.260 The mechanism has been explained as follows:

[T]he increased number of arbitrations may also moti-vate developing host countries to improve domestic administrative practices and laws in order to avoid fu-ture disputes; this would further strengthen the pre-dictability and stability of the legal framework that the conclusion of IIAs was supposed to produce in the

energy sector has relied heavily on attracting foreign direct investment, and a major component of its inbound FDI strategy was the conclusion of BITs providing for investor-State arbitration. REPUBLIC OF TURKEY, PRIME MINISTRY, UNDERSECRETARIAT OF TREASURY, FOREIGN DIRECT INVESTMENTS IN TURKEY 2010, at 70–71 (2011), available at http://www.economy.gov.tr/upload/40C115B8-D799-9F69-CA2BD0F9B716E5B2/FDI ReportTurkey2010.pdf.

258. See Open Letter, supra note 20 (“The current regime’s expansive definition of covered investments and government actions, the grant of expansive substantive investor rights that extend beyond domestic law, the increasing use of this mechanism to skirt domestic court systems and the structural problems inherent in the arbitral regime are corrosive of the rule of law and fairness.”).

259. JON C. PEVEHOUSE, DEMOCRACY FROM ABOVE: REGIONAL ORGANIZATIONS AND

DEMOCRATIZATION (2005); Emilie M. Hafner-Burton, Trading Human Rights: How Preferential Trade Agreements Influence Government Repression, 59 INT’L ORG. 593 (2005); cf. Recommendation, AM. BAR ASS’N SECTION OF INT’L LAW (2008), available at http://www.abanet.org/leadership/2008/annual/adopted/OneHundredEightB.doc (pertaining to international trade agreements).

260. Bruno Simma, Foreign Investment Arbitration: A Place for Human Rights?, 60 INT’L & COMP. L.Q. 573, 576 (2011); Jennifer L. Tobin & Susan Rose-Ackerman, When BITs Have Some Bite: The Political-Economic Environment for Bilateral Investment Treaties, 6 REV. INT’L ORGS. 1, 25-26, 30-31 (2011).


first place.261 Moreover, in contrast to international arbitration, “internal”

political methods for resolving disputes, whether through recourse to dependent judicial systems or attempts to settle with domestic politi-cal actors, open doors for the entrenched corruption that exists in many states with weak rule of law. There is occasionally a fine line between a state’s offer to settle a politically driven dispute with a for-eign investor and a demand for a bribe. During the 2011 Egyptian revolution, foreign investors were notified, at times through unoffi-cial channels, that they were under criminal investigation for alleged-ly underpaying for land; although the charges against them remained secret, they could settle their cases by agreeing to make large pay-ments to the extant ruling authorities (who were ostensibly tackling past corruption).262 When investors have recourse solely through domestic dispute settlement, only domestic constraints stand in the way of officials imposing new hurdles at will and then demanding extra-contractual payments from investors to “settle” resulting dis-putes.

Internationally, investor-State arbitration frees up diplomatic channels for higher concerns and has replaced gunboat diplomacy with formalized legal dispute resolution. That objective was a foun-dational goal of the ICSID Convention, as expressed in Article 27.263 Similarly, a stated objective of the U.S.-Argentina BIT was to elimi-nate the need for the United States to intervene to protect U.S. na-tionals as it had done repeatedly in the face of Argentina’s frequent declaration of national emergencies.264 Before the advent of invest-ment arbitration by consent, states occasionally took truly sovereign-

261. UNCTAD, INVESTOR-STATE DISPUTE SETTLEMENT AND IMPACT ON INVESTMENT

RULEMAKING, at ix (2007), available at http://unctad.org/en/Docs/iteiia20073_en.pdf.

262. See Briefs: Disputes To Be Settled, AL AHRAM WEEKLY (Sept. 8–14, 2011), available at http://weekly.ahram.org.eg/2011/1063/ec3.htm.

263. “No Contracting State shall give diplomatic protection, or bring an international claim, in respect of a dispute which one of its nationals and another Contracting State shall have consented to submit or shall have submitted to arbitration under this Convention, unless such other Contracting State shall have failed to abide by and comply with the award rendered in such dispute.” ICSID Convention, supra note 4, art. 27.

264. See Bilateral Investment Treaties With: Argentina, Treaty Doc. 103–2; Armenia, Treaty Doc. 103–11; Bulgaria, Treaty Doc. 103–3; Ecuador, Treaty Doc. 103–15; Kazakhstan, Treaty Doc. 103–12; Kyrgyzstan, Treaty Doc. 103–13; Moldova, Treaty Doc. 103–14; and Romania, Treaty Doc 102–36: Hearing Before the S. Comm. on Foreign Relations, 103d Cong. 15 (1993).


ty-threatening actions against other states to protect the interests of their nationals abroad.265 In spite of its recent criticisms of investor-State arbitration,266 UNCTAD has expressed its support for this mechanism as a development that has contributed to the international rule of law, to the benefit of less powerful states:

[S]ince most developing countries lack the economic and political power of developed countries, they should be particularly interested in pursuing the fur-ther legalization of the international investment sys-tem. They benefit from further strengthening of the rule of law at the international level.267 Another way that investor-State arbitration has enhanced the

international rule of law is that the grant of an enforceable right di-rectly to the foreign investor decouples his ability to obtain redress for a wrong from his influence within his home state. Investors have no right to the diplomatic protection of their home state.268 Thus, under diplomatic protection, unpopular or powerless persons such as ethnic minorities and aboriginal tribes, or simply those who had no sway with their governments, were left without a remedy.269

Investment tribunals further contribute to international and domestic rule of law by relying on and developing human rights ju-risprudence when interpreting treaties.270 To offer just a few exam-

265. See Thomas W. Wälde, Improving the Mechanisms for Treaty Negotiation and Investment Disputes: Competition and Choice as the Path to Quality and Legitimacy, in YEARBOOK ON INTERNATIONAL INVESTMENT LAW & POLICY 2008–2009, at 505, 509–510 (Karl P. Sauvant ed., 2009).

266. See supra notes 14, 30, 138, and accompanying text.

267. INVESTOR-STATE DISPUTE SETTLEMENT, supra note 261, at 93. Since its inception as part of the NIEO movement, UNCTAD appears to have evolved ideologically to recognize at least some of the benefits of international protection of investment for poor States. See supra note 27.

268. See Barcelona Traction, Light and Power Company, Ltd. (Belg. v. Spain), 1970 I.C.J. 3, ¶¶ 44–45 (Feb. 5). Most domestic legal systems do not oblige the State to pursue claims of its nationals by means of diplomatic protection. See Charles N. Brower & Stephan W. Schill, Is Arbitration a Threat or a Boon to the Legitimacy of International Investment Law?, 9 CHI. J. INT’L L. 471, 480–81 (2009).

269. Cf. Cayuga Indians (Great Britain) v. United States, 6 Rep. Int’l Arb. Awards 173 (U.S.-Brit. 1926). During the American Revolution, the property of the Cayuga tribe had been confiscated by the political entity that would become the United States. The tribe was dependent on Great Britain and then Canada to espouse its claim and was unable to persuade either State to do so for 150 years.

270. See Sadie Blanchard, State Consent, Temporal Jurisdiction, and the Importation of


ples: The tribunal in Lauder v. Czech Republic relied on European Court of Human Rights (ECtHR) cases to determine the content of indirect expropriation, and the tribunal in Tecmed relied on Inter-American Court of Human Rights cases for the same purpose.271 The tribunal in Saipem v. Bangladesh looked to ECtHR jurisprudence to determine whether a judicial act could be expropriatory.272

The characterization of foreign investors’ rights as being op-posed to human rights ignores the fact that the rights protected in BITs overlap substantially with the rights protected in human rights treaties. Some investor-State disputes could just as fittingly be heard by a human rights tribunal as by an investment tribunal (and some claims have indeed been brought in both types of forum). For exam-ple, in Sovtransavto Holding v. Ukraine, the ECtHR heard claims of violations of due process, protection of property, and discriminatory treatment arising out of the treatment of a corporation operating in the transport sector.273 The corporation alleged that the Ukrainian President had pressured a local arbitration tribunal to “defend the in-terests of Ukrainian nationals” in the dispute. More recently, foreign investors have pursued similar claims against Russia relating to its treatment of the corporation Yukos before both investor-State and human rights tribunals. Before the European Court of Human Rights, investors have alleged that Russia violated the European Conven-tion’s prohibitions on unlawful expropriation, arbitrary treatment, and denial of justice by instigating tax and criminal investigations to destroy and eventually nationalize Yukos.274 They have alleged

Continuing Circumstances Analysis into International Investment Arbitration, 10 WASH. U. GLOBAL STUD. L. REV. 419, 441 (2011); Fry, supra note 32, at 83.

271. See Técnicas Medioambientales Tecmed, S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, ¶ 116–19 (May 29, 2003) (citing Ivcher Bronstein v. Peru, Merits, Reparations, and Costs, Judgment, Inter-Am. Ct. H.R. (ser. C) No. 74, ¶ 124 (Feb. 6, 2001)).

272. Saipem S.p.A. v. Bangladesh, ICSID Case No. ARB/05/07, Decision on Jurisdiction and Recommendation on Provisional Measures, ¶¶ 131–32 (Mar. 21, 2007), available at http://italaw.com/sites/default/files/case-documents/ita0733.pdf.

273. Sovtransavto Holding v. Ukraine, 2002-VII Eur. Ct. H.R. 133; see also Marius Emberland, The European Convention on Human Rights as a Means for the Protection of Foreign Investment: A Look at Sovtransavto Holding v. Ukraine, in INTERNATIONAL

INVESTMENT PROTECTION AND ARBITRATION 107, 108–09 (Christian Tietje ed., 2008).

274. See Oao Neftyanaya Kompaniya Yukos v. The Russian Federation, Judgment, Eur. Ct. H.R. App. No. 14902/04 (Sept 20. 2011), available at http://hudoc.echr.coe.int/ sites/eng/pages/search.aspx?i=001-106308.


similar breaches under investment treaties.275 The present system of international investment law therefore

complements and builds on international human rights law and strengthens the rule of law domestically and internationally. As Wälde explains, it is part of a shift from “pressure, power, politics, and corruption” as the major tools of dispute resolution to “juridified and heavily ritualized procedures.” 276

VII. THE MEME ARISING FROM SOME STATES’ REACTIONS

A final meme about IIAs and investor-State arbitration is that the recent behavior of some states demonstrates that it is time to abol-ish or fundamentally reform the current system of foreign investment protection. For example, arguing that “[t]he legitimacy of invest-ment arbitration becomes increasingly questioned, with liberal states like Australia moving away from the regime,” Sornarajah has pro-posed that the existing regime should be scrapped and an entirely new one created.277 The argument that Australia stopped agreeing to investor-State arbitration because it questioned the regime’s legiti-macy is a facile characterization of how states decide whether to par-ticipate in international adjudicatory mechanisms. The truth is that state behavior toward such mechanisms is complex, depending on a number of fluctuating international and domestic political factors. First, states sometimes make decisions based on short-sighted con-siderations or on unique domestic factors. (For its part, Australia abandoned after only two years the policy of not agreeing to investor-

275. See Quasar de Valores SICAVS.A. v. The Russian Federation, SCC Case No. 24/2007, Award (July 20, 2012), available at http://cisarbitration.com/wp-content/uploads/ 2013/02/Quasar-de-Valores-SICAV-S.A.-et-al-vs-Russian_Federation.pdf; RosInvestCo U.K. Ltd. v. The Russian Federation, SCC Arbitration V (079/2005), Final Award (Sept. 12, 2010), available at http://www.italaw.com/sites/default/files/case-documents/ita0720.pdf; Luke Eric Peterson, Exclusive: Arbitrators Hold Russian Federation Liable for Expropriation of Yukos Shareholdings: Modest Damages Owed to Affiliate of Prominent U.S. Hedge Fund, INVESTMENT ARB. REP. (Dec. 19, 2010), http://www.iareporter.com/ articles/20101220 (discussing additional arbitration brought by Yukos majority shareholder Menatep under the Energy Charter Treaty).

276. Thomas W. Wälde, Improving the Mechanisms for Treaty Negotiation and Investment Disputes: Competition and Choice as the Path to Quality and Legitimacy, in YEARBOOK ON INTERNATIONAL INVESTMENT LAW & POLICY 2008–2009, 505, 513 (Karl P. Sauvant ed., 2009).

277. Sornarajah, supra note 19.

http://www.iareporter.com/articles/20101220

http://www.iareporter.com/articles/20101220


State arbitration, signing a free trade agreement with Korea in late 2013 that grants recourse to arbitration.)278 Second, the actions of a minority of States do not necessarily justify dismantling or radically altering a widely used legal mechanism. It should not be thoughtless-ly concluded that the actions of a few states call for structural chang-es to the existing investment law regime that would impact all states.

A state may exhibit reticence about the investment law re-gime based on fear of hypothetical outcomes. Australia’s recent short-lived pivot away from investor-State arbitration evokes the sim-ilar risk aversion that surfaced in the United States when the first NAFTA claims were initiated.279 The previous Australian Govern-ment’s Trade Policy Statement announcing a decision to “discontin-ue [the] practice” of agreeing to investor-State dispute arbitration specifically cited concern that its anti-tobacco initiatives would sub-ject the state to liability, stating, “The Government has not and will not accept provisions that limit its capacity to put health warnings or plain packaging requirements on tobacco products.” 280 Australia is a party to twenty-one bilateral investment treaties containing investor-State arbitration clauses going back as far as twenty-five years,281 but it has only recently become a respondent in an investment treaty arbi-tration for the first time. The tobacco company Philip Morris has brought a claim objecting to the country’s new plain tobacco packag-ing law,282 but it remains to be seen whether the company will pre-vail.

States also express their displeasure with international adjudi-catory mechanisms when those bodies reach decisions with which states are dissatisfied. The most notorious instances of this dynamic

278. See Korea-Australia Free Trade Agreement, Fact Sheet: Investor-State Dispute Settlement (ISDS), DEP’T OF FOREIGN AFFAIRS AND TRADE, http://www.dfat.gov.au/fta/kafta/ downloads/fact-sheet-isds.pdf (last visited Mar. 2, 2014).


280. See DEP’T OF FOREIGN AFFAIRS AND TRADE, GILLARD GOVERNMENT TRADE POLICY

STATEMENT 14 (2011), available at http://www.dfat.gov.au/publications/trade/trading-our-way-to-more-jobs-and-prosperity.html#investor-state.

281. See generally Investment Instruments Online, Australia Bilateral Investment Treaties, UNCTAD, http://www.unctadxi.org/.

282. See generally Philip Morris Asia Limited (Hong Kong) v. The Commonwealth of Australia, PCA Case No. 2012-12, (Perm. Ct. Arb. 2012), available at http://www.italaw.com/cases/851 (providing publicly available information regarding arbitration).

http://www.italaw.com/cases/851


have been state reactions to decisions of the International Court of Justice. As a prominent example, the Israeli Prime Minister made public statements against the ICJ’s advisory opinion holding that Is-rael’s security fence violates international law.283 Before that, the United States had issued statements condemning the International Court’s decision to accept jurisdiction in the Nicaragua case over what it called an inherently political problem and then terminated its acceptance of the court’s compulsory jurisdiction.284 Similarly, France revoked its consent to compulsory jurisdiction in 1974 when the Nuclear Test Case was decided against it, as did South Africa in 1967 in anticipation of feared further ICJ involvement in its refusal to abide by international law in its control over and governance of South West Africa (now Namibia).285 States have engaged in similar signaling with respect to the WTO Appellate Body.286 While a state’s withdrawal or criticism of an international institution may be an occasion for examination, it is by no means a clear signal that the institution or mechanism is in crisis. To the contrary, as of this writ-ing the ICJ docket lists eleven cases, as compared to a maximum of three in 1967 and five in 1974.

Indeed, states, such as Ecuador and Argentina, that have ex-perienced repeated claims or dramatic losses in investment treaty ar-bitrations287 have an especially strong incentive to vocalize their dis-

283. See Laurence R. Helfer & Anne-Marie Slaughter, Why States Create International Tribunals: A Response to Professors Posner and Yoo, 93 CAL. L. REV. 899, 952 n.184 (2005) (quoting Benjamin Netanyahu, Why Israel Needs a Fence, N.Y. TIMES, July 13, 2004, at A19).

284. See U.S. Withdrawal from the Proceedings Initiated by Nicaragua in the ICJ, Department Statement, Jan. 18, 1985, DEP’T ST. BULL, No. 2096, Mar. 1985, at 64; U.S. Declaration of Termination, 1408 U.N.T.S. 270 (1985).

285. See Declarations Recognizing as Compulsory the Jurisdiction of the International Court of Justice Under Article 36, Paragraph 2, of the Statute of the Court, Status, (Oct. 15, 1946), http://treaties.un.org/doc/Publication/MTDSG/Volume%20I/Chapter%20I/I-4.en.pdf; Peter Wilson, Imperialism by Another Name? C.A.W. Manning, Apartheid and International Society, Paper presented at the Annual Meeting of the ISA’s 49th Annual Convention, Bridging Multiple Divides (June 3, 2012), available at http://www.allacademic.com/meta/ p254053_index.html.

286. Richard H. Steinberg, Judicial Lawmaking at the WTO: Discursive, Constitutional, and Political Constraints, 98 AM. J. INT’L L. 247, 266–67 (2004).

287. Argentina is the most frequent respondent in investment treaty arbitrations, having been the subject of fifty-two claims as of the end of 2012. IIA Issues Note, Recent Developments in Investor-State Dispute Settlement (ISDS), UNCTAD 4 (May 2013), http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d3_en.pdf. While it has fared

http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d3_en.pdf


satisfaction. Losing an investment arbitration reduces a state’s attrac-tiveness to foreign investors to a level lower than it would have been had the state never signed a BIT.288 States that have lost arbitrations therefore may conclude that they have nothing to lose by attacking the system’s credibility.

Another factor is that capital-importing states with well-developed and trusted legal institutions, such as Australia and the United States,289 likely do not attract significant additional inbound investment by agreeing to arbitration.290 The United States and Aus-tralia invoked the mutual credibility of their respective legal systems as the reason they chose not to include investor-State arbitration in their free trade agreement.291 Moreover, given the broad coverage of today’s network of BITs, highly developed states that are home to significant volumes of outbound investment (which includes the United States and Australia despite their status as net capital import-ers)292 have less reason than they did historically to be concerned

quite well overall, Argentina has lost a number of cases. See Luke Eric Peterson, Argentina by the Numbers: Where Things Stand with Investment Treaty Claims Arising out of the Argentine Financial Crisis, INVESTMENT ARB. REP. (Feb. 1, 2011), http://www.iareporter. com/articles/ 20110201_9. In October 2012, Ecuador was ordered to pay the highest ever damages award in investment treaty arbitration, almost $1.8 billion. See Occidental Petroleum Corp. & Occidental Exploration & Production Co. v. The Republic of Ecuador, ICSID Case No. ARB/06/11, Award, ¶ 876 (Oct. 5, 2012), available at http://italaw.com/sites/default/files/case-documents/italaw1094.pdf.

288. Todd Allee & Clint Peinhardt, Contingent Credibility: The Impact of Investment Treaty Violations on Foreign Direct Investment, 65 INT’L ORG. 401, 426 (2011).

289. See Net Capital Account (BoP, Current US$), WORLD BANK, http://data.worldbank.org/indicator/BN.TRF.KOGT.CD (last visited Mar. 3, 2014).

290. Cf. Sokchea, supra note 66 (finding that the correlation between BITs and FDI weakens as a country’s political risk decreases); Neumayer & Spess, supra note 66 (finding that the positive effect of BITs diminishes as domestic legal institutions improve).

291. See Summary of the U.S.-Australia Free Trade Agreement, OFFICE OF THE UNITED

STATES TRADE REPRESENTATIVE, http://www.ustr.gov/about-us/press-office/fact-sheets/ archives/2004/february/summary-us-australia-free-trade-agreement (last visited May 6, 2014) (“In recognition of the unique circumstances of this Agreement—including . . . shared legal traditions, and the confidence of their investors in operating in each others’ markets—the two countries agreed not to adopt procedures in this FTA that would allow investors to arbitrate disputes with governments. This issue will be revisited if circumstances change.”).

292. See Australian Bureau of Statistics, Balance of Payments and International Investment Position, at 27, tbl. 3 (Mar. 2013), available at http://www.ausstats.abs.gov.au/ ausstats/meisubs.nsf/0/E4417CF94B17D93BCA257B7F0012EDBE/$File/53020_march%202013.pdf; Bureau of Economic Analysis, U.S. Net International Investment Position: End of Third Quarter 2013, U.S. DEP’T OF COMMERCE (Dec. 30, 2013), http://www.bea.gov/news releases/international/intinv/intinvnewsrelease.htm.

http://www.iareporter.com/articles/20110201_9

http://www.iareporter.com/articles/20110201_9

http://italaw.com/sites/default/files/case-documents/italaw1094.pdf

http://data.worldbank.org/indicator/BN.TRF.KOGT.CD

http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/E4417CF94B17D93BCA257B7F0012EDBE/$File/53020_march%202013.pdf



http://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease.htm

http://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease.htm


about the treatment of their nationals abroad, since would-be inves-tors can structure their investments to take advantage of a prospective host state’s BITs with other countries. For example, an Australian national that wished to invest in Malaysia would not benefit from the protection of a bilateral investment treaty if it makes its investment directly. However, the Australian individual or company could es-tablish and execute its investment through a corporation in the United Kingdom and thereby gain the protection of the UK-Malaysia in-vestment treaty, which provides for ICSID arbitration.293

The increase in criticism of the investment law regime has occurred in tandem with a cyclical cooling of certain states’ attitudes toward foreign direct investment generally. That trend suggests that opposition to investor-State arbitration and BITs is driven not by ob-jections to the way the investment law regime functions specifically, but rather by other factors that are causing some states to shift their positions on foreign investment. After decades of nearly universally increasing openness toward foreign investment, the last several years have brought an uptick in investment protectionism and a return to the discourse from the 1960s and 1970s about a “New International Economic Order” and “permanent sovereignty over natural re-sources.” 294 Sauvant has documented a movement of nationalistic opposition to foreign direct investment in a number of more devel-oped states over the past five years. This trend has manifested itself in coercive attempts to regain control over previously privatized nat-ural resources and nationalistic protectionism.295 In the face of eco-nomic downturn, the political rhetoric in developed countries reveals an increased hostility towards capital, spurring calls for restrictions on offshoring and other forms of outbound investment.296 Domestic

293. See United Kingdom of Great Britain and Northern Ireland and Malaysia: Agreement for the Promotion and Protection of Investments, Gr. Brit.-Malay., art. 1(4), May 21, 1981, 1579 U.N.T.S. 11 (defining “companies” that are “nationals” of the United Kingdom as “corporations, firms or associations incorporated or constituted under the law in force in any part of the United Kingdom”).

294. See, e.g., G.A. Res. 1803 (XVII), U.N. GAOR, 17th Sess. (Dec. 14, 1962); G.A. Res. 3016 (XXVII), U.N. GAOR, 27th Sess. (Dec. 18, 1972); Charter of Economic Rights and Duties of States, supra note 27; Declaration on the Establishment of a New International Economic Order, supra note 27.

295. See Karl P. Sauvant, Driving and Countervailing Forces: A Rebalancing of National FDI Policies, in YEARBOOK ON INTERNATIONAL INVESTMENT LAW AND POLICY 2008–2009, at 215, 242, 254–57 (2009).

296. Id. at 256–58.


forces such as these may also be driving states’ rhetoric and policy decisions toward international investment law.

In contrast to states with strong positive reputations for gov-ernance, other states face the prospect that watering down their treaty protections will render them comparatively less desirable for foreign investors than competitor states that are otherwise similarly attractive investment destinations but are willing to make more credible prom-ises. Such a state will be loath to proclaim that it is cutting back on investor protection in order to reclaim its sovereign prerogative to treat foreign investors as it sees fit. If a state decides, for whatever reason, to shift its policy toward less protection for foreign invest-ment, it may seek to avoid or offset adverse signals by calling for a change to the entire investment arbitration regime. If it succeeds in diminishing not only its own commitment but also that of other par-ticipants, a state may reduce its perceived costs of participation in the system without jeopardizing its position relative to competitor states as a desirable investment location in the short term.297

If a state’s domestic political dynamics lead it to pull out of investor-State arbitration or sign treaties that expressly reduce the discretion of arbitrators, that is its sovereign prerogative. However, in light of research showing that countries with less credible domestic institutions stand to receive the greatest benefits from the credibility commitment offered by investor-State arbitration, movements to weaken the entire system are troubling.298 As discussed above, Allee and Peinhardt found that transitional economies may benefit from BITs by signing stronger treaties than their peers.299 Other studies confirm that BITs are most valuable for countries that face the high-est barriers to investor trust, such as those that have recently experi-enced regime change.300 That unsurprising but little-noted dynamic has important implications for international investment policy. States with little at stake should not destroy a valuable tool available to

297. Cf. ANDREW T. GUZMAN, HOW INTERNATIONAL LAW WORKS: A RATIONAL

CHOICE THEORY 98–99 (2008) (discussing how states manipulate the content of information in the international politico-legal sphere to influence the perceptions of state and non-state actors and thereby reduce the reputational consequences of their violations of international law).

298. Neumayer & Spess, supra note 66; see also supra Part I.

299. See Allee & Peinhardt, supra note 66.

300. Berger, et al., supra note 66, at 270–72.


emerging economies by undermining their ability to commit to pro-tect foreign investors. Proposals to politicize the appointment of ar-bitrators, to universally restrict the scope of their adjudicative author-ity, and to develop rules of treaty interpretation that give states wide or self-judging discretion to derogate from their commitments all threaten the efficacy of arbitration as a tool of credible commitment. The next Part will consider several proposed reforms in light of these dynamics.

VIII. ASSESSING PROPOSED REFORMS

The memes discussed above have spurred a number of reform proposals designed to resolve presumed problems with the current system.301 While most of those proposals have not progressed be-yond academic journals and conferences, opportunities to advance them are in view. As noted above, over 1,000 BITs are eligible for renegotiation as of the end of 2013, and negotiations are underway for two trade and investment treaties that together would govern 65% of the world economy.302 Further, as the European Commission im-plements a “comprehensive E.U. investment policy,” 303 which in-cludes the current and pending negotiations of a number of E.U.-wide investment treaties with non-E.U. countries, it has stated that future investment agreements should “better balance . . . the right of states to regulate and the need to protect investors.” 304 Based on the cur-rent state of investment arbitral jurisprudence,305 it is not obvious that such an objective would indicate a shift in priority or necessitate any departure from past treaty standards. Nonetheless, based on the con-

301. For example, Menon has called for a “systemic overhaul” “to put in place a regulatory regime” of international investment arbitration “that will act as a much needed check and balance against . . . failures.” Menon, supra note 7.


303. Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions: Towards a Comprehensive European International Investment Policy, at 6–10, COM (2010) 343 final (July 7, 2010), available at http://trade.ec.europa.eu/doclib/docs/2010/july/tradoc_1463 07.pdf.

304. EUR. COMM’N, TRADE, FACT SHEET, INVESTMENT PROTECTION AND INVESTOR-TO-STATE DISPUTE SETTLEMENT IN EU AGREEMENTS 1–2 (Nov. 26, 2013), available at http://trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151916.pdf.

305. See supra Part IV.C (discussing protection of host state rights).


cern about policy space, the Commission has proposed a number of new features that it will seek to include in future E.U. investment treaties.306

Proposed reforms should not undermine the efficacy of inves-tor-State arbitration as a tool for demonstrating credible commitment to protecting foreign investment. States delegate lawmaking authori-ty to international courts and tribunals as trustees to make their treaty commitments credible. Thus the key feature of international tribu-nals is that they be independent and impartial. Independent tribunals raise the real possibility that a state’s violation of its promise will re-sult in material and reputational harm “where compliance generates short-term political losses but long-term political gains.” 307 With that principle in mind, the remainder of this Part will assess three re-cent reform proposals.

A. Proposals to Select Investment Arbitrators Through Political Channels

Proposals to politicize the selection of those who decide in-vestor-State disputes include the creation of an official panel of in-vestment arbitrators from which not only states but also investors must choose and the establishment of a permanent court for deciding investor-State disputes.308 Sornarajah proposes a dispute settlement system “manned by designated government lawyers” and through which foreign investors could “plead . . . through a nominated body of lawyers.” 309 Van Harten advocates for the creation of an interna-tional investment court staffed by state-appointed judges.310 These proposals would give states substantial control over the body of in-vestment disupte adjudicators.

When their interests are at stake, there is evidence that states tend to select officials for international adjudicatory mechanisms who

306. See EUR. COMM’N, TRADE, FACT SHEET, supra note 304, at 2.

307. See Laurence R. Helfer & Anne-Marie Slaughter, Why States Create International Tribunals: A Response to Professors Posner and Yoo, 93 CALIF. L. REV. 899, 904, 933 (2005).

308. See, e.g., Menon, supra note 7.

309. Sornarajah, supra note 19, at 2.

310. VAN HARTEN, supra note 21, at 180.


have demonstrated reliability and government-friendly attitudes.311 Where the dispute at issue is between two states, there is less of a concern because each party’s appointee will balance the other one out. However, that dynamic does not carry over to investor-State dispute settlement where only one party to the dispute—the state—is given a gatekeeper role.312 Helfer and Slaughter have explained the credibility problem thereby posed:

It is states who create the tribunal, define its jurisdic-tion, appoint and reappoint its members, fund its oper-ations, and decide whether it will continue to exist . . . . Aware of these . . . retained powers, a decision maker serving on a dependent tribunal can anticipate a negative reaction from states if she consistently rules in favor of private parties, even assuming their claims are meritorious. An independent tribunal, by contrast, faces far fewer pressures “to pander to the govern-ments at whose sufferance it exists.” 313 Thus any proposal to “regulate” arbitrators in a manner that

makes states the gatekeepers of who is eligible for appointment will undermine the very purpose of investor-State arbitration and should be rejected.

B. Post Hoc Interpretative Statements and De Facto Amendments

Some have advocated wider use by states of—and deference by arbitral tribunals to—mechanisms to remove issues from the con-sideration of investor-State tribunals post hoc. Two paths have been proposed for reaching this objective. The first is through express provisions found in recent model investment treaties that would per-mit the contracting states to agree to remove an issue from an arbitral

311. SHABTAI ROSENNE, THE WORLD COURT: WHAT IT IS AND HOW IT WORKS 44 (1995). Although defenders of the ICJ argue that states have shielded the process of choosing judges from politics by having candidates nominated by national groups of the Permanent Court of Arbitration, others argue that the process is highly political; see STEPHEN M. SCHWEBEL, The Creation and Operation of an International Court of Arbitral Awards, in JUSTICE IN INTERNATIONAL LAW: FURTHER SELECTED WRITINGS OF STEPHEN M. SCHWEBEL 246 (2011).

312. See Brower & Rosenberg, supra note 81, at 642–49.

313. Helfer & Slaughter, supra note 283, at 940.


tribunal’s consideration during an investor-State dispute.314 The sec-ond, at least equally insidious, path seeks universal shifts in treaty in-terpretation under which arbitral tribunals would be required to ac-cept as retroactively effective states’ post hoc expressions of opinion as to how their treaties should be interpreted, even if the ostensible interpretations are really de facto amendments.315 Ecuador has at-tempted (and failed) to pioneer an offshoot of this approach that would permit a state to use state-to-state arbitration to obtain a bind-ing interpretation of a provision contradictory to the interpretation al-ready made in an award by a tribunal established under the treaty be-ing interpreted.316

The argument attempts to find grounding in Article 31(3) of the Vienna Convention on the Law of Treaties, which requires that states’ subsequent agreements and practice on interpretation be taken into consideration when a treaty is interpreted. Article 31(3) pro-vides that in interpreting a treaty,

[t]here shall [also] be taken into account, together with the context: (a) any subsequent agreement between the parties re-garding the interpretation of the treaty or the applica-tion of its provisions; (b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; (c) any relevant rules of international law applicable in the relations between the parties.317

The Methanex tribunal and the ICJ have reasoned that such an agreed

314. See U.S. MODEL BIT art. 30(3) (2012) (“A joint decision of the Parties, each acting through its representative designated for purposes of this Article, declaring their interpretation of a provision of this Treaty shall be binding on a tribunal, and any decision or award issued by a tribunal must be consistent with that joint decision.”); CANADA MODEL

FOREIGN INVESTMENT PROMOTION AND PROTECTION AGREEMENT arts. 40(2), 51 (2004). The European Commission has announced its intention to negotiate for such provisions in future E.U. investment treaties, and states that a recently concluded free trade agreement with Canada includes such a provision. See EUR. COMM’N, TRADE, FACT SHEET, supra note 304, at 9.

315. See VAN HARTEN, supra note 21, at 131–32; Roberts, supra note 21, at 210.


317. Vienna Convention on the Law of Treaties, art. 31(3), May 23, 1969, 1155 U.N.T.S. 331.


interpretation by the state parties does not require any particular method of agreement.318

However, Roberts seeks to expand subsequent agreement and practice “regarding interpretation” or “application” to permit de fac-to amendments, “interpretations” that in fact change the meaning of the treaty.319 To further lower the systemic barriers to authoritative interpretation and amendment, she advocates expanding the range of expressive acts that would constitute an interpretive agreement, argu-ing that “joint statements and actions are not required.” 320 Relevant acts would thus include not only issuing NAFTA-style joint interpre-tive statements but also pleading as a respondent in an arbitration, publishing a new model treaty, and making public statements about the state’s view of treaty provisions.321

Roberts offers three primary arguments in defense of accept-ing after-the-fact state actions, loosely defined, as authoritative inter-pretations and even amendments of investment treaties. First, she observes that investment treaties do not include explicit exceptions to the Vienna Convention’s provision on subsequent practice as a means of interpretation.322 Second, to the objections based on the rule of law and predictability, she asks the following rhetorical ques-tion: Why should states be prevented from retroactively amending their treaties when they can withdraw from them?323 Third, she ar-gues by analogy that international law permits states to revoke or modify rights they have granted through a treaty to third states unless it is established that it was intended that they not be able to revoke or modify those rights.324

The recommended expansion should be rejected. First, the

318. Methanex Corp. v. United States, Final Award on Jurisdiction and Merits (Aug. 3, 2005), 44 I.L.M. 1345, 1354 (2005) (quoting Kasikili/Sedudu Island (Bots.v. Namib.), 1999 I.C.J. 1, ¶ 49 (Dec. 13)).

319. Roberts, supra note 21, at 210.

320. Id. at 217.

321. Pursuant to Article 1131(2) of NAFTA: “An interpretation by the [Free Trade] Commission of a provision of this Agreement shall be binding on a Tribunal established under this Section.” North American Free Trade Agreement, U.S.-Can.-Mex., art. 1131(2), Dec. 17, 1992, 32 I.L.M. 289 (1993); see also Roberts, supra note 21, at 203–05, 221, n.200.


323. Id. at 211.

324. Id.


Vienna Convention treats amendments and interpretations different-ly, and for good reason. Unlike amendments, interpretations are within the realm of reasonable understanding of a treaty and thus are less likely to frustrate the reliance of third parties and the principles of notice and legality. For that reason, amendments have only pro-spective effect, while interpretations may be retroactively effec-tive.325 That is also why the Vienna Convention sets out no specified form for an agreement on treaty interpretation but requires the same formalities to amend a treaty as to conclude one.326 Dispensing with the formal requirements for treaty amendment would dramatically lower the transaction cost of amending a treaty, undermining the principle of legality and encouraging short-term thinking by states, particularly where the treaty grants rights to third parties.

Second, most investment treaties include a sunset clause that maintains the treaty’s applicability to investments made while it was in force for some time period after a state withdraws. However, even absent a sunset clause, withdrawing from a treaty and negotiating an amendment are formal, recognizable state acts that differ in critical ways from the acts of pleading as respondent in a dispute or publish-ing a new model treaty. Political, institutional, and diplomatic barri-ers are in place to make amending or withdrawing from a treay diffi-cult and rare. Thus, while it is correct to say that foreign investors “cannot legitimately expect that their treaty rights will be absolute and irrevocable,” 327 they must expect better than absolute subjection to the whims of the treaty parties.

Particularly where a treaty includes mechanisms that make it difficult or even temporarily impossible for a state to revoke the promises made therein, it is legally unsound to interpret the treaty so as to contravene those mechanisms. The very existence of a sunset clause for the benefit of existing investors evidences an intent to permit them to rely on the treaty, including, if applicable, a commit-ment therein to dispute resolution unfettered by state interference.

325. Id. at 201–02; see also Access to German Minority Schools in Upper Silesia, Advisory Opinion, 1931 P.C.I.J. (ser. A/B) No. 40, at 19 (May 15) (interpretations by courts have retrospective effect).

326. See Vienna Convention on the Law of Treaties, art. 39, May 23, 1969, 1155 U.N.T.S. 331 (providing that a treaty may be amended or modified under the rules in Part II of the Convention for concluding a treaty unless the treaty itself provides otherwise).



Apart from including a sunset clause, states may express their inten-tions to impede the easy disposal of their agreements by setting out an amendment or withdrawal process. Further, by expressly delegat-ing the interpretation of a treaty to a tribunal in a matter of dispute with a foreign investor, treaty parties can be said to have evidenced an intention to restrict their ability to modify or revoke rights granted therein. Thus, when a treaty grants rights to third parties, imposes barriers to revoking those rights, and omits any explicit reference to binding subsequent agreement and practice, recognizing subsequent agreements, loosely defined, as binding risks undermining predicta-bility and the rule of law.

That is particularly so when a wide range of possible state ac-tions are accepted as grounds for finding a subsequent agreement. Roberts’ threshold for the scope of official acts that can justify sub-sequent agreements is excruciatingly low. For example, she criti-cizes one investment tribunal for declining to find that a single re-sponse by a government minister to an internal query evidenced an interpretive agreement.328

Roberts also places much emphasis on the idea that states, as sovereigns, retain a right to change their minds, unlike commercial parties, which are more definitively bound when they induce third parties to rely on their promises.329 However, the very reason states enter into treaties is to be bound in exchange for some value they wish to promote. To cavalierly wave aside that function of treaties by invoking sovereign prerogatives is to replace international law with pure politics. The potential impact of such a rule of interpreta-tion does not stop at investment treaties.

Roberts proposes a framework for assessing the authoritative-ness of subsequent practice and agreements, based on when they are issued in relation to the commencement of the arbitration and how reasonable they are.330 In principle those are sensible criteria that may be capable of balancing stability with states’ ability to steer the interpretations of their treaties. However, many of the proposed ap-plications of this framework are problematic.

For instance, she and others argue that tribunals should give

328. Id. at 216–17.

329. Id. at 209–15.

330. Id.


special weight to state interventions in ongoing arbitrations as a means of interpreting the treaty retroactively.331 There are a number of issues with this proposal. It reintroduces the problems associated with diplomatic protection, allowing states to use their international political power either in favor of their nationals or, potentially, in fa-vor of the disputing state party to further other political objectives. Additionally, a state may advance an interpretation as a disputing party that is in its short-term interest as a respondent in other arbitra-tions rather than its long-term interest in the development of interna-tional law and in furthering the interests of its own nationals abroad. The lawyers who plead for a state in a dispute are frequently not the officials authorized to represent the state’s international lawmaking position.

More generally, attempts by states such as the NAFTA Parties and the European Union to issue binding interpretations in pending and even concluded disputes compromise “fundamental tenets of procedural justice: (1) equal treatment of the parties, and (2) the principle that ‘no one may be the judge of his own cause.’” 332 State interventions in ongoing arbitrations have low credibility as actual “interpretations” and can too easily devolve into political interfer-ence that undermines the purpose of investor-State arbitration.

C. Proposals to Relax the Rules of Treaty Interpretation

Some states have advanced the position that “necessity” or “essential security” provisions in bilateral investment treaties are self-judging.333 Others have argued for something approaching a

331. Id. at 219; VAN HARTEN, supra note 21, at 131–32. The NAFTA tribunal in ADF Group v. United States adopted this approach, giving special weight to the United States’ interpretation because the other NAFTA parties had agreed with the United States in interventions. ADF Grp. Inc. v. United States, ICSID No. ARB(AF)/00/1, Award, ¶ 177, (Jan. 9, 2003), 6 ICSID Rep. 470 (2004).

332. Charles H. Brower, II, Beware the Jabberwock: A Reply to Mr. Thomas, 40 COLUM. J. TRANSNAT’L L. 465, 485–86 (2002).

333. See, e.g., Sempra Energy Int’l v. Argentina, ICSID Case No. ARB/02/16, Award, ¶ 378 (Sept. 28, 2007), available at http://www.italaw.com/sites/default/files/case-documents/ita0770.pdf (annulled on other grounds); CMS Gas Transmission Co. v. Argentina, ICSID Case No. ARB/01/8, Decision on Application for Annulment, ¶¶ 308, 382 (Sept. 25, 2007), 46 I.L.M. 1136 (2007); LG&E Capital Corp. v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, ¶¶ 245–58 (Oct. 3, 2006), 21 ICSID Rev. 203 (2006); see Sempra Energy Int’l v. Argentina, Decision on Annulment (June 29, 2010), 49 I.L.M. 1445


self-judging exception, under which a state could invoke fundamental values such as human rights to justify derogating from the obligations of other treaties to which it is party.334 A related approach would de-part from the rules of interpretation set out in the Vienna Convention and aspire to “reach compromise policy solutions that are acceptable to all” when interpreting investment treaties.335 However, changes that introduce vague or self-judging public interest, environmental, human rights, or necessity carve outs risk making states’ obligations illusory and undermining the effectiveness of investor-State arbitra-tion.

As Alvarez and Khamsi point out, proposals to rely on pre-ambular text referring to values such as “economic development,” and “effective use of economic resources” take these concepts out of context.336 The concepts are mentioned as the consequences of achieving the treaty’s object and purpose of protecting foreign in-vestment rather than as freestanding objectives.337 They thus cannot be legitimately employed to override substantive treaty obligations.

The dangers of self-judging treaty provisions are obvious, particularly where the beneficiaries of the treaty are not other states but individuals, with limited means of redress, who have accepted the treaty’s invitation to rely on its guarantees.338 Self-judging excep-tions certainly should not be recognized where they are not expressly provided for in a treaty, and in a treaty providing for international ad-judication, the question has been raised whether such exceptions are legally effective.339 Self-judging exceptions open the door to abuse, as states inevitably assert that their human rights or other internation-al law obligations excuse or justify their breaches of the investment treaty. Thus, we stand with Sloane in calling for “sustained reflec-

(2010)) (quoting a U.S. State Department official who described U.S. support for self-judging essential security clauses); José E. Alvarez, The Return of the State, 20 MINN. J. INT’L L. 223, 246 (2011).

334. See, e.g., Barnali Choudhury, Exception Provisions as a Gateway to Incorporating Human Rights Issues into International Investment Agreements, 49 COLUM. J. TRANSNAT’L

L. 670 (2011); Bruno Simma, Foreign Investment Arbitration: A Place for Human Rights?, 60 INT’L & COMP. L.Q. 573, 581 (2011).

335. Stern, supra note 22, at 185–86.

336. See Alvarez & Khamsi, supra note 123, at 469–70.

337. See id.

338. See supra Part IV.A.

339. See supra note 124 and accompanying text.


tion before general international law adopts [defenses] authorizing exceptions to international obligations in what is, already, a charac-teristically unstable legal system.” 340

Some academics and arbitrators, however, propose interpre-tive devices that would favor such arguments, such as a rule that treats human rights obligations as taking “priority” over obligations to foreign investors.341 For instance, it has been argued that “while human rights are ‘fundamental’ to human dignity, investment rights are ‘instrumental’ to the achievement of certain policy objectives which, presumably, are not indispensable for human dignity.”342 Contrary to that breezy dismissal of their significance, investment treaties and neutral international arbitration promote the rule of law and other fundamental values.343 More importantly, it is questionable how often there will be a true conflict between a state’s obligations to an investor under a BIT and its human rights obligations. An in-vestment treaty will not bar a state from taking actions necessary to fulfill its human rights obligations, but it will require that, if those ac-tions violate the specific obligations the state has undertaken in the treaty toward a foreign investor, it compensate the investor for its consequent loss. As with the doctrine of necessity, the question is who should bear the cost.344

Two hypotheticals begin to clarify the picture. First, imagine that a foreign investor commits acts against the domestic population which violate the latter’s human rights. A failure of the state to re-spond—to stop and punish the actions—would violate its human rights obligations. The state responds appropriately by terminating the investment contract, imposing sanctions, and pursuing criminal charges. The investor’s violation of the law justified the state’s re-sponse.345 The result is that the investor pays for the loss it caused by

340. Robert D. Sloane, On the Use and Abuse of Necessity in the Law of State Responsibility, 106 AM. J. INT’L L. 447, 508 (2012).

341. See, e.g., Simma, supra note 334, at 591.

342. Id. (quoting Report of the High Comm’r for Human Rights, Human Rights, Trade and Investment, E/CN/4/Sub.2/2003/9, ¶ 24 (July 3, 2003)).

343. See supra Part VI.

344. Cf. Sloane, supra note 340, at 506–07 (demonstrating that the underlying question where necessity is raised in a dispute between states is which state bears the loss).

345. Cf. Vannessa Ventures v. Venezuela, ICSID Case No. ARB(AF)/04/6, Award, at 52–71 (Jan. 16, 2013), available at http://www.italaw.com/sites/default/files/case-docu ments/italaw1250.pdf (holding that Venezuela’s actions were justified by the claimant’s


its unlawful actions. We borrow the second scenario from Simma, who observes

that according to the comments to the International Covenant on Economic, Social and Cultural Rights (ICESCR), a state could vio-late its obligations under the right to water by failing “to effectively regulate and control water services providers” or failing “to take into account its international legal obligations regarding the right to water when entering into [international] agreements.” 346 If, in entering into an investment contract with a foreign investor, a state has disregarded its obligations under the ICESCR (to which all but a handful of states are already party) or promised substandard regulation to induce the investment, should the investor then be required to bear the loss of its expected return if the state later decides to abide by its obligations? The state, not the investor, is in the best position to assess whether its regulatory framework complies with its human rights obligations, and the investor is entitled to rely on the state’s representations in that regard. If, on the other hand, the investor violates the regulatory framework, resulting in an appropriate state response that results in a loss to the investor, current rules of interpretation would not hold the state liable. Finally, as discussed in detail above, bona fide regulato-ry changes will not subject a state to liability under existing rules and jurisprudence.347 As these examples help demonstrate, it is unclear what is sought by expanding deference to states beyond that already afforded. Indeed, holding states accountable for both their promises to foreign investors and their human rights obligations incentivizes them to ensure that their regulatory framework is human rights com-pliant at the time a foreign investment is made and thus that the in-vestment operates compatibly with human rights from the outset. Such planning and transparency eliminate the risk of claims arising from later breaches of the investor’s legitimate expectations created by host state misrepresentations.

breaches of the parties’ contract).

346. Simma, supra note 334, at 589–90 (quoting General Comment No. 15 (2002), The Right to Water (arts. 11 and 12 of the International Covenant on Economic, Social and Cultural Rights), E/C.12/2002/11, Jan. 20 2003, available at http://daccess-dds-ny.un.org/ doc/UNDOC/GEN/G03/402/29/PDF/G0340229.pdf?OpenElement.

347. See supra Part IV.C.


CONCLUSION

In the discussion of the current investment protection regime, certain criticisms have been repeated so often that they have come to be accepted by many as fact. We have sought to challenge untested assumptions and show that criticisms are by turns exaggerated, one-sided, and based on inaccurate information. They all drive a move-ment away from international discipline on state relations with for-eign investors, largely targeted at eradicating or eviscerating inves-tor-State arbitration. That movement threatens to undermine the continuing economic development, improved governance, and en-hanced rule of law promoted by investment treaties that allow for in-vestor-State arbitration.

There is not a single, monolithic international investment law regime.348 Instead, over 3,000 bilateral investment treaties and addi-tional regional trade agreements with investment chapters form a network that promotes foreign investment and protects it once made. In addition to choosing the substantive standards to which they wish to bind themselves, states can agree to arbitrate under any of various institutions and rules and can specify particular procedural mecha-nisms in their investment treaties. Competing regimes offer the ben-efit of experimentation that can lead to best practices over time or, more likely, various options suitable to certain states. For this “com-peting systems” approach to work, however, states must be aware that one size does not fit all. A more contingent commitment to arbi-tration that works for a well-governed state will not be effective for a country facing reputational hurdles to attracting foreign investment. For many of the neediest states, neutral arbitration is indispensable to the efficacy of foreign investor protection, whether through treaties, contracts, or host state law. The impact on such states should thus be a central consideration in assessing any proposed reform of arbitra-tion.

A number of states are actively engaged in reviews and rene-gotiations of their BITs,349 and many more have the opportunity to

348. Thomas Wälde, Improving the Mechanisms for Treaty Negotiation and Investment Disputes: Competition and Choice as the Path to Quality and Legitimacy, in YEARBOOK ON

INTERNATIONAL INVESTMENT LAW & POLICY 2008–2009, at 505, 516–17 (2009).

349. Alvarez, supra note 333, at 237–38.


amend, replace, or even exit existing BITs.350 Some of those states might curtail the investor-State arbitration clauses and narrow the substantive protections in their treaties, changes that will, for some, increase the cost of capital or shrink investment flows. However, those are policy changes the contracting states to each treaty are free to adopt. The three systemic reform proposals discussed above, by contrast, risk destroying for all states the availability of a credible commitment to neutral dispute resolution by permitting states to in-terfere politically with the arbitration process.

350. See supra note 315 and accompanying text.

Documents

What’s in a Meme? The Truth about Investor- State ...blogs2.law.columbia.edu/jtl/wp-content/uploads/sites/4/2014/10/52... · What’s in a Meme? The Truth about Investor-State Arbitration: