Yale Law School’s Seminar in Private Law: Outcomes and Authority in International Investment Law

Post by Sadie Blanchard, Research Fellow Yale Law School

In the last meeting of the Seminar in Private Law, Jan Paulsson and Diane Desierto reflected on their experience in the field of international investment law and how that experience informs their views of the legitimacy questions facing the field. Participants also considered the theoretical basis of authority of international investment protection and asked about possible deleterious effects of this legal regime. Desierto cut her teeth as a government attorney for the Philippines while it was defending against its first investment treaty claim. She now represents investors and states in disputes and is a top advisor on investment treaties to the Association of South East Asian Nations (ASEAN). Paulsson is one of the most-appointed arbitrators in the field and has represented states and investors in disputes and advised states on treaty design.  

Paulsson and Desierto agreed that the ultimate purpose of investment protection treaties and investor-state arbitration is not to protect investors but to permit states to attract higher-quality investment at lower cost than they could do otherwise. Paulsson pointed out that developing states’ policy preferences have converged to prioritizing the attraction of foreign capital. States that once pursued a more autarkic economic policy now woo and rely heavily on foreign investment. Desierto discussed more specifically the institutional gap that investor-state arbitration is designed to fill. She argued that the private-law-tinged system of investor-state arbitration was created to handle disputes with strong public-law dimensions because public-law mechanisms failed to function. Less developed judicial systems face widespread bribery and undue political control of judges. While foreign investment does not disappear in the absence of political risk protections such as those offered in investment treaties, states with weak domestic institutions tend to attract investors with a high risk appetite who are more likely to act in morally hazardous ways. The investments are more likely to be procured and maintained by cronyism and corruption. In her view, the availability of credible international protections allows states with weak governance to draw from a deeper and healthier pool of foreign capital.

The speakers and other participants were asked to consider the basis of authority of international protection of foreign investment apart from any consideration of its outcomes. In the SS Wimbledon case, the Permanent Court of International Justice held that the right to enter into international agreements is an attribute of state sovereignty. But where the sovereign is not the state itself but the people, who authorize the government to act as their agent to bind the state through international agreements, are there limits to the government’s authority to bind the state or the sovereign? Some moral philosophers think that persons, a fortiori states acting as agents of persons, do not have the capacity to bind themselves unless they are acting in a system that is already legitimate at the time they bind themselves.

After noting the query’s applicability to much of international cooperation, Paulsson stated that the logic of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards—to which nearly all states are party—is that the legal authority of an arbitral tribunal rests not on the authority of the state that signed the arbitration agreement but on the authority of the state or states willing to enforce the resulting award. A similar argument could be made of the ICSID Convention. Those treaties could therefore be seen as forming a broader system of cooperation within which a state binds itself when it later agrees to submit to investor-state arbitration through any of the available instruments: a contract, its own law, or a bilateral or multilateral investment treaty.

Desierto agreed that international cooperation in this field, as in others, raises questions about democratic representation, especially with respect to states with democracy deficits. With that issue in mind, the discussion turned toward the importance of publicity or transparency to the authority of decisionmaking regimes. There was consensus in favor of the greater transparency in investor-state arbitration that began under NAFTA and has lurched forward in the last five years, though there is still progress to be made. ICSID’s decision to permit third-party submissions in arbitrations and the adoption in 2015 of the UNCITRAL Convention on Transparency in Investor-State Arbitration have placed investor-state arbitration in the minority of international dispute settlement mechanisms that permit private non-disputing parties to participate in proceedings, though their participation remains limited.

It was asked whether the broad language of “fair and equitable treatment” protections in investment treaties has given rise to a variety of interpretive approaches that is so unsettled as to erode the consent of states in deciding what they are giving up when they agree to these provisions. Paulsson argued that when he advises a state considering regulatory actions, he is quite confident that the state can immunize itself from liability under existing doctrine by affording reasonable process. The case law makes it difficult, he said, for a competently run administration to run afoul of an investment treaty through regulatory action. Desierto relayed the concern that states she has advised have expressed about fair and equitable treatment provisions and argued that the standard should be specified in greater detail in new treaties.

The next questioner asked whether the existence of an international mechanism that allows capital-importing states to forego their own courts removes an incentive to improve their own judicial systems. Under the ASEAN treaties, domestic courts are the first dispute resolution mechanism listed. USAID and the EU have programs that train national courts  to handle investment disputes, but the judicial systems in many countries are so dysfunctional that it is unlikely that many investors will use them in the near future.

The final comment brought the discussion back to the issue of whether an arbitral tribunal has authority to make decisions that bind a sovereign. It was observed that both speakers primarily defended the system by reference to its outcomes and the absence of alternatives. If the defense of the system is a default position rather than a claim of justice, are we not obliged to imagine the creation of an international tribunal that might have a stronger claim to authority? The speakers discussed the practical difficulties of achieving this and the inefficiency of existing international courts. Four thousand different investment treaties are in force, and states proved unable to reach a multilateral agreement on investment when they tried to do so in the 1990s.

The discussion’s vacillation between issues of outcome and of authority raises the question whether good outcomes can generate authority. If it could be shown empirically that investment protection treaties and investor-state arbitration substantially improve outcomes on one or more measures—such as incomes (per capita or of the poorest), employment, access to infrastructure, technological progress, or the quality of domestic governance—would such results have any bearing on the authority of these mechanisms? The discussion of the emergence of transparency in investor-state arbitration evoked the discussion during the session on international commercial arbitration of that field’s move toward professionalization. In both instances, the perception by those inside the field of a need to increase external legitimacy drove major changes. In the next session, we will have the opportunity to consider whether a similar dynamic has been at work in a quite different case of transnational cooperation, this time in the field of public health. Professor Amy Kapczynsi will speak together with Dr. Nancy Cox, who was responsible for the CDC’s cooperation with other national flu labs in the global network that selects the virus strains used in flu vaccines. The papers that will be discussed are available here.