Investment Treaty Law and the Fear for Sovereignty: Transnational Challenges and Solutions
| Author | Jan Kleinheisterkamp |
| DOI | http://doi.org/10.1111/1468-2230.12144 |
| Published date | 01 September 2015 |
| Date | 01 September 2015 |
Investment Treaty Law and the Fear for Sovereignty:
Transnational Challenges and Solutions
Jan Kleinheisterkamp*
This article addresses the vagueness, and the interpretative challenges associated with, international
investment agreements (IIAs) and develops a new normative framework for interpreting these
treaties. It focuses on the historical embedding of investment protection as a means of facilitating
economic development as well as upon its synthetic public law nature. The analysis shows that a
teleological approach to interpretation imposes boundaries on the meaning of substantive IIA
provisions. The article then elaborates how the transnational dimension of IIAs provides a
benchmark, which is the level of protection offered to economic actors against interference by the
state in countries with the highest rule of law standards. The article then shows how the resulting
challenges of comparative public law could be addressed through the methodology of re- and
pre-statement of transnational uniform ‘principles’: sophisticated and detailed rules striking the
proper balance between private economic interests and the public regulatory interest, so as to
provide more legal certainty for both investors and host states.
INTRODUCTION
Investment treaty arbitration is growing steadily – and so are the public voices
questioning its legitimacy and its impact on sovereignty. A key feature of
international investment agreements (IIAs) is that they delegate judicial review of
public acts affecting foreign investors to international arbitral tribunals and allow
foreign investors to bring claims directly against host states.1But it is the
combination of this procedural mechanism with the substantive law established
by these IIAs that really gives rise to concern. IIAs establish international
substantive standards of protection of foreign investors against state action or
inaction. These standards constitute the yardstick against which the acts of the
host state are measured in order to determine its liability to the foreign investor
under international law. It is largely uncontroversial today that the degree of
*Associate Professor of Law in the Law Department of the London School of Economics. Earlier
versions of this paper have been presented at the LSE Transnational Law Project Workshop on
‘Paradigms, Methods and Analogies in Investment Treaty Law’ on 1 September 2010 and at the IALS
WG Hart Legal Workshop on ‘Sovereignty in Question’ on 30 June 2011. I would like to thank Jacco
Bomhoff, Jonathan Bonnitcha, Vladislav Djanic, Christian Djeffal, Monika Hlavkova, David
Gaukrodger, Geoffrey Gertz, Noel Johnston, John Kline, Jan Komarek, Lauge Poulsen, Anthea
Roberts, Joanne Scott, Taylor St John, Chris Thomas, Stephan Schill, Pallavi Sengupta, as well as all
participants in the 2nd Investor-State Workshop at Essex Court Chambers on 24 March 2014, especially
Toby Landau and Daniel Bethlehem, and finally the two anonymous reviewers for valuable comments.
Any opinions or errors remain exclusive mine.
1 For the conceptualisation, see F. Ortino, ‘The Investment Treaty System as Judicial Review’
(2013) 24 American Review of International Arbitration 437; for a leading critique of investment
arbitration, see G. van Harten, Investment Treaty Arbitration and Public Law (Oxford: OUP, 2007).
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© 2015 The Author. The Modern Law Review © 2015 The Modern Law Review Limited. (2015) 78(5) MLR 793–825
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vagueness of these standards of judicial review such as fair and equitable treat-
ment, full protection and security, and indirect expropriation, ‘creates an espe-
cially difficult challenge’.2A strong case can be made that these standards grant
virtually unfettered discretion, if not ‘quasi-legislative authority’ to arbitrators,3
who are neither bound by any precedent4nor have to fear any meaningful
review of their awards.5Issues of consistency and predictability become all the
more problematic in view of the uncertainty not only regarding the rules applied
but also the methods for applying them.6
These concerns, exacerbated by the ever increasing magnitude of claims, have
given rise to strong criticisms and challenges to the legitimacy of the investment
treaty system.7The question of legitimacy is also linked to the view that
investment treaties have eroded the ‘policy space’ and the regulatory authority of
countries hosting foreign investments, undermining their sovereignty. What is
striking in this regard is the very limited awareness of policy makers in the past
of the degree to which the exercise of national sovereign powers of host states
might actually be affected,8given that virtually every aspect of public regulation
2Suez, Sociedad General de Aguas de Barcelona SA and InterAguas Servicios Integrales del Agua SA v
Argentine Republic ICSID Case No ARB/03/17, Decision on Liability of 30 July 2010 at [196]. See
also Saluka Investments BV vCzech Republic (UNCITRAL), Partial Award of 17 March 2006 at
[297] (‘The “ordinary meaning” of the “fair and equitable treatment” standard can only be defined
by terms of almost equal vagueness’); CMS Gas Transmission Company vArgentine Republic ICSID
Case No ARB/01/8, Award of 12 May 2005 at [273] (‘Argentina’s concern about [the Fair and
Equitable Treatment standard] being somewhat vague is not entirely without merit’). See also Z.
Douglas, The International Law of Investment Claims (Cambridge: CUP 2009) at [150]; A. von
Aaken, ‘International Investment Law between Commitment and Flexibility’ (2009) 12 J Int’l
Econ L 507, 514 and 527–531; S. Schill, ‘Enhancing International Investment Law’s Legitimacy:
Conceptual and Methodological Foundations of a New Public Law Approach’ (2011) 52 Virginia
J Int’l Law 57, 66–67.
3 See, eg, C. H. Brower II, ‘Structure, Legitimacy, and NAFTA’s Investment Chapter’ (2003) 30
Vanderbilt J Transnat’l L 37, 66; A. Stone Sweet, ‘The New Lex Mercatoria and Transnational
Governance’ (2006) 13 Journal of European Public Policy 627, 641; W. M. C. Weidemaier, ‘Towards
a Theory of Precedent in Arbitration’ (2009–2010) 51 Wm & Mary L Rev 1895, 1940.
4 But see Weidemeier, ibid, 1895 and T. H. Cheng, ‘Precedent and Control in Investment Treaty
Arbitration’ (2006–2007) 30 Fordham Int’l LJ 1014; rejecting such claims convincingly, I. M.
Ten Cate, ‘The Costs of Consistency: Precedent in Investment Treaty Arbitration’ (2013) Colum
J Transnat’l Law 419; and T. Schultz, ‘Against Consistency in Investment Arbitration’ in J.
Pauwelyn, J. Viñuales and Z. Douglas (eds), The Conceptual Foundations of International Investment
Law (Oxford: OUP, 2014) 297.
5 cf ICSID Convention, Arts 52(1) and 53(1); UNCITRAL Model Law on International Com-
mercial Arbitration, Art 34 and the UN Convention on the Recognition and Enforcement of
Foreign Arbitral Awards, Art V(2)(b).
6 T. Wälde, ‘Interpreting Investment Treaties: Experiences and Examples’ in C. Binder, U.
Kriebaum, A. Reinisch, and S. Wittich (eds), International Investment Law for the 21st Century:
Essays in Honour of Christopher Schreuer (Oxford: OUP, 2009) 724, 725 (‘Confusion, rather than
clarity, prevails in today’s practice of investment arbitration’).
7 For many of these challenges, see S. Frank, ‘The Legitimacy Crisis in Investment Treaty
Arbitration: Privatizing Public International Law Through Inconsistent Decisions’ (2005) 73
Fordham L Rev 1521, 1584–1587; M. Sornarajah, ‘A Coming Crisis: Expansionary Trends in
Investment Treaty Law’ in K. Sauvant (ed), Appeals Mechanisms in International Investment Disputes
(Oxford: OUP 2008) 39, 41; S. W. Schill, International Investment Law and Comparative Public Law
(Oxford: OUP, 2010) (ILL and Comparative Public Law) 4–7.
8 See L. Poulsen and E. Aisbett, ‘When the Claim Hits: Bilateral Investment Treaties and Bounded
Rational Learning’ (2013) 65 World Politics 273.
Investment Treaty Law and the Fear for Sovereignty
© 2015 The Author. The Modern Law Review © 2015 The Modern Law Review Limited.
794 (2015) 78(5) MLR 793–825
is rendered susceptible to scrutiny and potentially sanctioned through damages
awards that are directly enforceable worldwide.
It is unlikely that the investor-state-arbitration mechanism, as presently imple-
mented by IIAs in combination with the ICSID Convention, will be funda-
mentally overhauled or generally abandoned in the short or medium term.
Investment treaty arbitration is here to stay for quite some time, not least because
of the ‘survival clauses’ in most of the existing 3000 plus IIAs that provide for
continued protection for 10–20 years after their termination.9Meanwhile the
existing regime will have a significant influence on the development of substan-
tive investment law and is likely to raise more fears over its potential impact on
host countries’ sovereignty and potentially on the notion of sovereignty itself.
Accordingly, the central question is, can – and how can – arbitrators in their
decisions square the international investment regime with the public concerns
relating to sovereignty in terms of content?
This article does not aim to explore the actual meaning of notions like
sovereignty and legitimacy. Entering into IIAs is, in itself, certainly an exercise of
sovereignty, irrespective of the doubts already mentioned as to their meaning and
consequences.10 Rather, this article focuses on the underlying object and purpose
of investment treaties as a means of addressing the shortcomings that give rise to
much of the concern. The central premise is that the perceived clash between
investment treaty law and sovereignty can and must be resolved by integrating
the logic of public law, as a proxy for sovereignty, into investment treaty law,11
and by capturing its transnational dimension.
Furthermore, this article concentrates on solutions de lege lata and does not
address solutions de lege ferenda in the sense of rewriting existing treaties or
replacing them by new treaties, such as is now beginning to happen, particularly
in the context of the European Union. The analysis and solutions proposed here
primarily relate to the interpretation and application of existing treaties. The vast
majority of these basically follow the simple lines of the 1967 OECD Draft
Convention on the Protection of Foreign Property, and are thus characterised by
remarkably general and open-textured provisions which require interpretation to
give specific meaning to those provisions.12 That said, the approach developed
here would also provide a more scientifically grounded and reliable basis for the
drafting of future IIAs.13
The first section proposes paying attention to the intuitions – rather than
rationales – that give rise to fears for sovereignty. It highlights some historic
9 A. Carska-Sheppard, ‘Issues Relevant to the Termination of Bilateral Investment Treaties’ 26 J
Int’l Arb (2009) 755.
10 See n 8 above and n 89 below.
11 For the comparative public law dimension, see the seminal passage by T. Wälde in International
Thunderbird Gaming Co vMexico Award (UNCITRAL/NAFTA), Wälde, Separate Opinion 31
December 2005 at [27]–[29]; also Schill, IIL and Comparative Public Law n 7 above, 10–17.
12 For a comprehensive historical analysis see K. J. Vanvelde, Bilateral Investment Treaties – History,
Policy, and Interpretation (Oxford, New York: OUP, 2010) especially 195–199, 217, 287,
416.
13 See, for the European context, J. Kleinheisterkamp, ‘Financial Responsibility in European Inter-
national Investment Policy’ (2014) 63 ICLQ 449, 471–473.
Jan Kleinheisterkamp
© 2015 The Author. The Modern Law Review © 2015 The Modern Law Review Limited. 795(2015) 78(5) MLR 793–825
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